Graphic Packaging Holding Company (NYSE:GPK) Q4 2023 Earnings Call Transcript

Graphic Packaging Holding Company (NYSE:GPK) Q4 2023 Earnings Call Transcript February 23, 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).

Melanie Skijus: Good morning, everyone. It’s great to see all of you here at the New York Stock Exchange. And in addition to all of you here live, we have a large number of investors joining us remotely. I think the number is now 150, but it’s climbing. So thank you everyone on the webcast. My name is Melanie Skijus, I’m the Vice President of Investor Relations. Before I kick it off today, for safety, I want you to be aware of 2 stairwells that you can exit if needed, directly behind me down the hallway is a stairwell as well as one by the elevator bay. Before we get started, I just — I told you about the exits — the presentation materials you have at your desk. We welcome you to walk through those with us today. On the webcast, you will see it in the webcast view as well as a PDF is available on our Investor Relations website.

The presentation this morning are being recorded so they will be available to listen in replay probably later this afternoon. We have a great agenda for you this morning. You’ll be hearing presentations from senior leadership. We’re going to kick off with 2 and then we’ll go into a 10-minute break. when we get back from the break we’ll have 3 more and then we’ll have a Q&A session. [Operator Instructions] Forward-looking statement. I encourage everyone to read through this. Our presentation today will contain forward-looking statements that will have — or subject to risks and uncertainties that could cause these statements to not come into reality. So please look through the list of risks, and they’re also available in our filings with the SEC.

And with that, I’m going to turn it over to our first speaker today, Mike Doss, our President and CEO. I’m sure most of you are familiar and know Mike. He’s been with the company since 1990, has been our CEO since 2016. And with that, I’ll turn it over to Mike.

Michael Doss: Great. Thank you, Melanie, and I also want to thank Alexandria, who’s over in the corner here, as all of you know it takes a lot of work to pull together one of these Investor Day. They’ve been working really hard to pull things — all the materials together that you see today, and we’re going to cover. So thank you guys for all that. I also want to acknowledge Mike Ryan, one of our senior designers who is — drove all the way down from Philadelphia — a lot of the samples you see here today out in the lobby. So Mike, I don’t know where you are, wave your hand. Thank you very much for doing that. Much appreciated. I’m going to start with a few comments around a few announcements we made last night, and then I’ll jump right into the presentation, and then I’m going to introduce our speakers that you’ll see today.

And then as Melanie said, we’ll go through that cadence and ultimately — we’ll have a few breaks in there. And then I’m sure there will be a very robust Q&A session, which we’re really looking forward to. Let’s start by talking a little bit around the first announcement that went out last night, and that’s the sale of the Augusta mill to Clearwater Paper Company. Now what you need to know is that really, over time, Arsen Kitch and I’ve had a number of conversations around kind of the overall fit of some of the mills that we’ve got. And for them in the vision of the future, they have for their company, it became pretty clear that the Augusta mill, which is an outstanding mill with excellent people and a very good infrastructure is a better fit for them and what they really want to do over the long term than it is for Graphic Packaging.

See also 15 Mailchimp Alternatives for Email Newsletters in 2024 and 25 Countries with Highest Tax to GDP Ratio in the World.

Q&A Session

And so as we kind of went through those dialogues, we worked through a deal. You saw it announced last night. We’re happy to go into whatever level of detail you’d like to do in terms of talking about that in the Q&A. But the reality of it is for Graphic Packaging, the Augusta mill, the Augusta manufacturing facility didn’t offer the same strategic benefits over the long term as some of our other wood fiber manufacturing facilities or our recycled manufacturing facility. So it’s the right thing to do for our shareholders to monetize that, which we’ll do. And again, we’ll talk a lot more in detail about what that means during Q&A. Second thing I want to hit on real quickly and there’s a few questions I got in the lobby here was the pricing declarations from RISI over the weekend.

And many of you know because I’ve expressed a fair amount of frustration on this over time in terms of how they do it. And I can absolutely tell you that on cupstock they got it wrong. We’re in that market every single day. It’s one of our strongest markets. If you look at over the last 3 years, what we’ve done with our Foodservice business, it’s grown every quarter, and it’s growing here in Q1. So that made no sense to us, it’s a 180 degrees out from what we’re currently experiencing. And really — and you’ve heard Steve and I talk about this, it just strengthens our resolve to continue to move away from third-party indices that really lack any level of what we believe to be accuracy as well as transparency. And so over time, third-party indexes that really aren’t accurate or have transparency hurt packaging companies and they ultimately hurt the customers as well.

So we are going to strengthen our resolve to continue to march away. We’ve been doing it for a number of years. It’s one of the reasons why several of the analysts in the room, you guys have had difficulty trying to track our pricing because we’ve been moving to a more value-added pricing model, which we’ll get into a lot of detail today in terms of how we look at that, and it’s going to continue to be the case. So third-party indices will be an increasingly smaller part of our business going forward, and our resolve is very high to make that happen. So with that as a backdrop, I’m going to pivot now and talk a little bit about our overall results, which also were released last night. Look, by any measure, if you’re a consumer goods company last year, food beverage or just actual goods, it was a very challenging year as consumers really pivoted in terms of their preferences in some cases, and our customers had to adapt to that in a real-time basis.

It really resulted in a fair amount of inventory destocking, which is well chronicled, you’re all aware of that. And against that challenging backdrop, Graphic Packaging held up very, very well. You see our results here on the page. I mean, a few high levels. Our sales were actually flat on a year-over-year basis. We had $200 million of innovation sales in that number. And our value-added pricing actually more than offset the volumetric decline that I talked about, which for the year was about 4%. Fourth quarter — third and fourth quarter, most pronounced down around 5.6%. Steve will get into those numbers in a little bit more detail. But what we’re really encouraged about here going forward is the fact that as we’ve rolled into 2024, our volumes actually — to date through today are flat on a year-over-year basis, which is actually a very good thing because as you recall, last year, in the first quarter, we were actually up.

So we’ve seen some stabilization. Fourth quarter was really most pronounced in the last probably 3 weeks of December. It was almost like many of our customers just threw in the towel. And that really manifested itself in Europe in a big way. We saw volumes that were down the last 3 weeks pretty substantially, and they bounced back really well here to start the year off. So that’s what really gives us confidence in the year, but — and a return to organic growth. But what I would also say — and this is — and you’re going to hear this thematically through my conversation is that our confidence is really more in what we do control versus what we don’t. And if you think about Graphic Packaging, and I’ll go into to a lot of detail on this, we’re just a fundamentally very different company than we were just a few years ago.

Our innovation is wide and deep. You will — [indiscernible] spend a lot of time talking about that. Our customer relationships are strong and growing, and we’re managing them different than we were before, and we’re getting paid for the value that we bring. So with all that is the backdrop. I’m really pleased with the results that we generated. Our EBITDA was up almost 20% on a year-over-year basis. You see EPS that on an adjusted basis is approaching $3. Remember, in 2019, when we talked to you about this, it wasn’t even $1. So we’ve made dramatic progress in a very short period of time and that momentum, I expect to continue to move on. Look, Graphic Packaging is a leader in sustainable consumer packaging. You all know that, and you really touch our products every day.

So think about the cup of coffee you have in the morning or the cereal box that your cereal comes in, the snack you have at lunch, maybe a frozen dinner you eat late afternoon, soft drink that you may have as an afternoon snack or hopefully a beer, you have later on in the evening. All of those things are things that we do. You literally touch our products each and every day. It’s rare that you’re a U.S. consumer of almost any demographic doesn’t, in some way, use our products within a 24- to 48-hour period of time. That’s the reach that we’ve got at Graphic. We really do package — life’s everyday moments for a renewable future. Thematically, you’ll hear us talk a lot about that. And again, that’s what gives us a lot of confidence in the company that we’ve built and that the one that we will build over the next 7 years as we roll out our Vision 2030 here to you today.

Look, you see our 100 facilities we’ve got around the globe there. We package thousands of different customers, but we also do it with some of the biggest brands in the world. In order to do that, you’ve got to have scale. You’ve got to make investments. And investments are much more than just physical assets. Yes, we’ve made those. A lot of those were done as part of our Vision 2025. Think about the investment we made in Kalamazoo, Think about the investment we’re making in Waco. Think about the investment we made in A&R. All of those were foundational to kind of build the company that we have today. And what you’re really going to see and what we’re going to talk about here is just how that will be leveraged as we bring 2030 to life — our Vision 2030 to life here.

The investments in people and capabilities, sometimes are much harder to see than the physical assets, but they’re very real, and they’re very important. You’ll see our speakers really bring those to life today with their comments as well. Okay. Look, that’s an impressive customer portfolio by anybody’s definition. The depth and breadth of that is really unmatched in the paper packaging world. If you take a look at — really all the different segments we’re in, we’ve trued those up now to really reflect the overall impact of A&R packaging at the year-end and what those sales are. So some of you may say some of those are slightly different. That’s really what we did there. But our customers — our customer base is really as diverse as our innovation portfolio, and that’s a big point to make.

And it wasn’t that way, just a mere few years ago. I’m going to show you that translation from one side to the other as we transform the company over that period of time here in a few minutes. Look, we’ve got a strong presence in the at-home markets. That’s always been kind of our core. It’s gotten stronger over the last few years. You see that in food, beverage, household products, health and beauty. All those things are strong businesses for us. But we also have an increasingly strong and growing position in the foodservice part of the market and really what — one of our key themes that we’re going to try to strike home today, today, and if I do my job right, I’ll probably hit it on about 5x is just how our portfolio moves with the consumer.

That’s a big part of what we purposely built over the last 7 years. All right. A little bit about our speakers today. In addition to getting Steve, who — many of you — all of you know, I should say, you probably know Steve better than anybody. Steve will come up in chat, but we’ve got 3 other speakers that are actually going to present today. The first one that’s going to talk to you is Maggie Bidlingmaier. She is our Executive VP and President of our Americas business. So Maggi really controls and manages those relationships with the customers that I’m talking about. And they’ve changed and evolved very dramatically over the last few years, a lot under Maggi’s leadership. She’ll talk to you about how we’re building deeper relationships with customers than we’ve ever had before.

And that’s really foundational relative to the innovation that we’re driving and the sustainability benefits that we bring that are valuable to customers in ways that we couldn’t even have those in conversations with them because it was just kind of a bid-ask situation, not anymore. So Maggie bring that to life. She leads our global innovation effort. Ricardo works for her, Ricardo where are you? Right there, Ricardo, many of you know Ricardo. And so she’ll actually give you a lot of insight and more depth into what we’re really doing there too. We have Jean-Francois Roche also here. Wave your hand, Jean-Francois. Jean-Francois, I would challenge you to find a more knowledgeable person in terms of the breadth of experience he has in the European market than Jean-Francois.

He is an expert in that market. He’s chaired the ECMA organization for the last 3 years. So that’s the European Carton Manufacturing Association. His knowledge around regulation in the EU as well as our large brands in Europe and the retailers, which is really important in Europe, and the intersection of the consumer are unmatched. So he’ll do a town hall, and we’ll bring some of that out for you and you’ll be able to ask him a lot of questions later on. Look, Europe is a great business in and of itself. But what we really love about Europe is it’s the most sustainable consumer in the world. So what that really allows us to do then is to take all we learn in Europe and export it all over the rest of the globe where we compete, including North America.

The trends there is we like to say, start 24 to 36 months before they wind up here, but almost invariably, they wind up here. We have that knowledge, and we’re able to take advantage of it much faster than many of our competitors are able to do. We think that brings real strategic advantage for us. Mark Connelly, is our newest member of the team, but he’s not new to Graphic Packaging, certainly not to Steve and I. For the last decade, Mark has followed our company as an analyst. And I would also say, and I think Steve, you’d agree with me that one of the analysts that really helped us frame some of our thought process relative to capital allocation and challenges along the way. Are you making the right decisions? Are you putting money to work to really drive ROIC.

He’s the key architect of what you’ll see today in terms of what we’re rolling out. We’re thrilled to have you on the team, Mark. Mark can facilitate that town hall discussion with Jean-Francois. And we have Michelle Fitzpatrick up here in the front. Michelle leads our sustainability efforts. You’ll get a presentation from her that will talk about all the different things we have to do to make sure we’re compliant in terms of sustainability and regulation that’s constantly evolving and changing. The good news is she will lay a plan out that you will be able to see that we actually have between now and 2032 to achieve all of the goals that we made for our — science-based target initiative goals that will be out there today. I challenge you to challenge any other packaging company to drive a proposal or to lay something like that out, like we’re going to lay out to you today.

We’re going to deliver on that, and it’s really important because what you’ll also hear from me today and talk a lot about from the speakers is — you’ll hear from the speakers on this is that not only do — are we going to reduce the amount of greenhouse gases we generate, the amount of fossil fluids that we use, the amount of water that is used in our facilities. Ultimately, almost every product we make helps our customers meet their sustainability goals. I’m going to say that again, every product we make helps our customers meet their sustainability goals. Not very many people can say that. That’s also one of the things that gives us a lot of confidence in our ability to grow our volumes over the next few years and really be a key part of the consumer packaging leadership position that we want to have because we’re at that intersection.

They need us to do that. You think about the ambitions they’ve laid out, some of the targets they put out there to be greenhouse gas neutral or carbon neutral by 2040 or 2050, they need people like graphic packaging to help them bring that to life, and we’ll be able to do that. Once we’re kind of — what I’m going to do now is actually lay out kind of the from to where we were, give you a little context on background in terms of the transition we’ve made over the last 7 years. Steve will come up later on in the presentation, and bring the financial targets to life in more detail. He’ll also talk about the large amounts of free cash flow that we’re going to generate and the optionality we have for value creation over the next 7 years, which is pretty exciting.

Okay. Let’s take a little step back. Look, many of you were here in September of 2019, and thank you for that when we rolled out our Vision 2025. It’s hard to believe that’s almost been 5 years now, and a lot has happened. If you think about it, it’s really been pressure tested over that period of time. And for us, that really was an opportunity to kind of revamp our growth and our ability to actually compete and transform the company. And as you look at the company we have today, it’s just very different than what it was in 2025. And as we look at some of what we’re laying out with Vision 2030, some of the targets that we had for Vision 2025 are no longer ambitious enough and in some cases, not as completely aligned with really the company we need to be and will be over that period of time.

So we’ll introduce Vision 2030 to you today, but maybe it’s helpful to take a little bit of a review around this journey we’ve been on really since 2017. So if you think about 2017 for Graphic Packaging, who are we? I’ve been CEO for 1 year. And the reality of it is, is we had a solid business. We had a good business in North America. We had a decent business in Europe, primarily focused on beverage in the U.S. It was more center of the store type stuff. We had a good position on recycled paperboard as well as unbleached paperboard. And we had a business in Asia that was principally focused also on the beverage business. We had high customer concentration. In our markets, we’re also pretty large. If you think about beverage as an example, as a percentage of our overall customer concentration, it was quite high.

There were starting to be some signs in the European market that sustainability was going to be something that could be an opportunity for us in the U.S., not so much yet. And yet we had a very big problem. Our problem was that we weren’t growing. We weren’t generating any real growth. and our margins really were quite economically sensitive and really more commodity-based through a cycle. And so that impacted our ability to really drive long-term sustainable shareholder value. Think about that for a minute. So what we were doing for customers was making a highly personalized branded product with excellent printing, in many cases, coatings, specialty thinning, unbelievable delivery terms. And yet in many cases, we were getting paid less because of the terms we had and the way the industry operated at that time than really what even a corrugated box was able to get, which is generic as it comes, right?

So we had to change that. That was a key initiative for our company at that time. So we look inward. What are the levers that we could pull. We saw this trend around sustainability. We knew we had to invest in innovation. We also looked at kind of what we have to do to expand our customer profile so that we reduce the amount of concentration we had with some of our largest customers as well as we had to make our portfolio move more with the consumer. We didn’t know exactly how we were going to do it, but that — we knew it needed to be done. And then we started doing some work as far back as been around what we thought would be a pretty interesting value creation idea for a large investment in coated recycled paperboard. And so kind of that is the backdrop.

You wind the clock forward to 2018, we had the opportunity to partner with International Paper and get their Consumer Packaging business. That was a huge deal for us because it gave us a whole bunch of options we didn’t have then. And so it was a great transaction. I think IP would say it was great for them. It turned out excellent for us, key milestone for us. 2019, we rolled out our Vision 2025. And our Vision 2025 was broad in a lot of ways to be transformative and has exceeded our expectations in many ways. If you think about the financial goals that we — targets we put out there, we’ve largely exceeded all of those and then some. I went through some of the results today. I think Steve, as an example, we had $2 for EPS, which obviously, we’ve well since surpassed.

So a lot of those targets were done. We made real good progress on the other nonfinancial goals as well. But again, many of those targets just aren’t ambitious enough or consistent with how we want to run the company going forward. But what I would tell you is that within Vision 2025, there were really 4 main objectives we laid out there. First, we knew we had to expand our innovation capability in a big way because we wanted to take advantage of being able to leverage the sustainability movement, which was now starting to take place here in the U.S. too. Our speakers will talk a lot more about how we’re doing that on Vision 2030 today, but that was a key initiative for Vision 2025. We had to realign our portfolio to move more with the consumer, which meant that we had to make some acquisitions of different businesses that would allow us to actually do that.

We had to capture a more reasonable value — for reasonable share, I should say, of the value that we are providing to our customers. And we had to invest in both our people and our assets. So those were the big things that we laid out there. If you look at Vision 2025, I think there were 21 targets that we assigned to it. But there were really 4 big things, strategic steps that we took that transformed our company during Vision 2025. The first, and I mentioned it already, was the IP consumer business. That was big for us. Because if you think about it, we had no exposure of any scale to the Foodservice business, which I think about Americans, they love mobility, they like being on the go. We didn’t have exposure that drive-through window. We didn’t even make a cup.

So you put that all together, that created a huge optionality for us in a whole new part of our business that we didn’t have before. Secondly, we need to grow our U.S. And European manufacturing capabilities. And what I mean by that was we put out a target as part of our Vision 2025 in terms of integration. And integration back when we laid out Vision 2025, kind of post the IP acquisition, was around 67%. We finished this year around 80%. So we’ve kind of grown that integration. But integration is really more was a yardstick for us in terms of how we measure. There were 2 things that we were really looking for in terms of building out our business and how we want to invest in it. First, we wanted to acquire businesses and markets that ultimately move with the consumer different than what our core business did.

The most recent example I can give you that is Bell. Maggie and her team have integrated that business now well into our business, but Bell brought consumer mailers. That was something we didn’t have before. And if you look at the prior 10 different acquisitions, every one of them brought something along those lines that helped us build out our portfolio, and I’ll show it to you in a minute and why it’s transformed the way that it has. Secondly and importantly, any business that we could find that had innovation capabilities that we could lever across a wider group of customers, both domestically or internationally was prioritized. The best example I can give to you of that was AR packaging. It was an absolute home run for us. Yes, it was a good business in its own right.

And it helped us get into Eastern Europe and build out our portfolio in a way that we couldn’t do on our own. But they were excellent at driving innovation and had a lot of new products there that you’re going to see as profile today that have allowed us to really scale across the globe. And that’s really what we need to be able to do as a consumer packaging company. So those 2 things were really what we were looking for there. Our customer relationships had to change. As I mentioned earlier, we bring more than just basic design elements and manufacturing. That’s what we were getting paid for before because that’s what we were charging them for. But when you think about the security supply we bring, the sustainability benefits, the innovation benefits, our customers know that what we bring is more than just raw materials and freight.

I had a boss one time who said, you don’t want your product to be treated like the commodity, stop acting like it is. And that’s really what we did and so we put this value-based pricing methodology in place. You guys know we’ve done it because the pricing has flowed through our P&L in a way you can’t follow based on just movements of paperboard. Maggie you go in a lot more detail there. So that balance is much more important for us going forward and something that is kind of core to our DNA, and you’ll see us continue to leverage that as part of our Vision 2030. Lastly, we saw a significant opportunity to generate an unmatched cost position in the most attractive part of the paperboard packaging market, and that’s really the recycled packaging, CRB.

And when you look at what we’ve done with Kalamazoo and the start up on that, it’s been nothing but a home run. Our cost position is unmatched. The grades that we have come off that machine are fantastic, and it’s integrated well into our business, and we’re leveraging those opportunities with customers as we speak. So listen, all of that really transformed the business very dramatically. And what I’m excited about with Vision 2030 today is that now as we lay this out, our ambitions will line up more with how we’re running the company and give you a framework so that you can hold us accountable going forward in terms of what we’re going to do. Very exciting for us. Now I’d like to tell you that everything we did with Vision 2025 really worked out the way we thought it.