Michael Doss: Well, thank you, Steve. I really thank you all — I took this off. I don’t like having a mic on when I’m not talking General Counsel advises against it. SP999 There we go. Look, now is the part of the presentation where I’m usually supposed to say, “Boy, I hope you’re excited about our future as all of us are here at Graphic Packaging.” But what I’m really hoping you took away from our presentation today is just how much stronger we become in the last 7 years. And that you can begin to appreciate what it really means to have the ability to provide real lasting value for our shareholders, our customers and our employees. Look, we aren’t just a paperboard packaging company anymore. Steve kind of talked about that, 95% of everything we do is some kind of package.
We don’t sell paperboard. We are a global consumer packaging company. That’s a big shift from where we’ve been in the past, and a big shift from many of the conversations that we’ve had with a number of you over time. I hope you’ve been able to see that today. We believe that paper packaging is really the most sustainable median of packaging out there, and ultimately, would become a partner of choice for many of the biggest brands in the world. They understand that both in the packages that they’re making today and the ones that we believe we’ll package again in the future for them. Look, we package consumer staples. We do it well, and we get paid for that, which means, as Steve just outlined, you can have confidence when we outline the types of gains in free cash flow and overall profitability, both in terms of sales growth and what you’ll see on the bottom line in the years to come.
It’s a proud moment for me to stand up here in front of all of you today as we kind of look back over the last 7 years. Look, 7 years ago, I couldn’t have stood up here and made the types of commitments that we’re making you today. I just couldn’t. We didn’t have the investment in capabilities. We didn’t have the investment in innovation. And certainly, we didn’t have the investment in people that we bring to the party today. I can stand here and make these commitments to you today with a lot of confidence, and I’m even more excited about what the next 7 years looks like for our company. Hopefully, really, as you kind of think about this, and kind of put it in context. The last 7 years has been an incredible period of time of heavy investment, strategic change and transformation.
And what’s really going to become apparent over the next couple of years is just all the results that are going to be generated from the investments that we’ve made with the hard work that we put in today. Actually, you have seen and touch our products every day. You’ve got many of them in front of you right now. And I love our tagline that basically says we package everyday moments for a renewable future. And then shareholders, you’ve had the opportunity to benefit in that, and you’ll continue to have the opportunity to benefit in that from what is truly a fantastic company that we’re building here. With that, thank you for listening, and I’m going to ask my team to come up here and join us on the stage, and we’re to that part where we get to take questions now.
Michael Doss: Melanie, I think you are going to handle Q&A.
Melanie Skijus: Alexander in the blue jacket, they will be carrying on microphones. We’ll start here in the room, and then we’ll go to the questions coming in from the webcast.
Q – Philip Ng: Phil Ng from Jefferies. Thanks for the awesome presentation. You talked about spending a lot of capital the last few years, and it’s going to be pretty elevated still — so it give us a sense of how much of that drops off in 2025 and 2026? Could it be more normalized in that 5% range? And I guess the bigger picture question I have is you guys have invested a lot. I think you guys should have a pretty substantial lead versus the industry and most of your competitors. Give us some perspective what you can do as a Graphic Packaging company with all the investments you’ve made that your competitors perhaps can’t do, would be helpful?
Stephen Scherger: Let me start and then [indiscernible] I mean I think cadence-wise, as we just talked, here in 2024, high watermark probably into the [9s]. We spent about $300 million last year, by the way, on Waco. So well along, which is great. And so it’s our expectation. If you kind of cut it in the middle, I don’t have the exact numbers, but in the 9s, probably moves into the 7 range and then back to 5%. And that will be 5%. So we think about that. If we continue to grow the company, obviously, the math there is pretty obvious. $400 million, $500 million a year. So it’s a good cadence down. We’ll generate good cash flow, obviously, still generating cash flow here in 2024. And then in 2025, we’ll start to really see that accelerate, and then 2016 and beyond, it really drives. So that’s a little bit of just the cadence piece of it. I think capabilities-wise — You want to touch on that?
Michael Doss: Yes. Look, our package manufacturing facilities are incredibly well capitalized. And if you think about our paperboard manufacturing facility, they are as well, particularly with what we’ve done with Kalamazoo and with Waco, we’ve got a significant cost advantage, as I mentioned, in the most attractive parts of the market. And really where our growth will come from Phil, in terms of the gains we make is all about innovation and driving this whole sustainability message that we have and what we talked about. You heard Maggie go through a lot of the different examples in the markets where we compete. And that’s why we broke that chart out because we want to talk more about the markets and how we’re actually going to win in those different verticals because where the consumer goes, we go and we built that business purposely to allow us to be able to do that.
Melanie Skijus: Okay. I’ll go ahead and take one from the remote audience. The first question is from Ghansham Panjabi of Baird. Would you establish Vision 2025 targets back in 2019, you gave a specific threshold for EPS. Vision 2030 is more of an algorithm on EPS. Why is that? Is it basically now an acknowledgment that margins have reset higher. And going forward, earnings will be more correlated towards end market growth than perhaps internal improvement initiatives.
Michael Doss: Steve, why don’t you go ahead and take it.
Stephen Scherger: Yes. Yes. I mean, thanks, Ghansham, for that. I think part of it is a little bit of what Ghansham was raising is with Vision 2025, we were setting margin goals and targets and EPS came along with that. I think one of the things we’re very excited about is now that we’ve gotten to that level of margin capabilities. So I think plus or minus 20%, that we can actually — because of the value-based pricing, because of the organic growth, we can actually consistently operate the company in a pretty narrow band of margins. And as such, we’re pivoting more towards an ability to maintain good, strong margin capability and allowing the top line growth to provide steady and consistent EBITDA growth as well as EPS growth. And so I think it’s an important pivot to the model. around earning the right, if you will, earning — having the margin profile that we can build upon and having the top line generate EBITDA growth consistently.
Michael Doss: It’s really true. We got a lot of levers to pull there, too, with the cash flow that you outlined. And I was joking with George at the break. I said, I’ll know that we’ve really established ourselves as a consumer packaging company when we move off the paper packaging list and we move into the packagers portion of it. And so that’s also part of how we’re thinking about the goals that we laid out there today because you think about it, our goals and targets, our aspirations, the algorithm really lines up well with the customers that we’re servicing.
Michael Roxland: Mike Roxland, Truist Securities. I want to go with what Phil said. Thank you for the great details in the presentation. Can you help us frame some of the bigger moving pieces around your EBITDA guidance of $1.75 billion to $1.95 billion. Does it reflect organic sales growth, does it reflect the $40 per ton decline in SBS comp stock. Does it also reflect the $50 per ton increase that you guys announced last month in CUK and CRB. Just trying to get a sense of what you’re embedding within that guidance, that’s for my first question. And then the second question is on free cash flow for 2024. Can you help us frame some of the larger pieces there in terms of free for cash flow conversion, working capital, just give us a sense of what type of — level of free cash flow you think you could generate this year, realizing that it is a peak CapEx year.
Stephen Scherger: Sure. Yes. No, let me take that. I think obviously, in terms of the cash flow generation, I think the modeling that we provided pretty good clarity that there’s still positive cash flow generation, $300 million to $500 million if you kind of just stack through the EBITDA and the like. One of the things you’re going to see us do a lot more of is kind of change the dialogue, too, on how we respond to your first question. And we’re not going to talk about whether RISI’s $40 up or down is in the numbers because at the end of the day, we’re operating a value-based pricing mechanism, and we have an enormous number of initiatives underway always with our customers in terms of the value we’re getting paid for our products.
Obviously, when you manage through like the $40 you’re referencing, obviously, that works through our economics, we’re executing on other price initiatives that we’ve announced. We are executing on those. And so overall, the algorithm for the business next year is really what you said. We’re going to grow organically and earn on it. We expect to have a good strong productivity year with our manufacturing facilities in a growing environment, the innovation we’re bringing, we will earn on. And as such, the overall top line growth from the packaging that we have will be good. We are because of some of the things that we’re managing through on matching, doing the right thing on supply and demand for the paperboard sales that we still have. That’s a little bit of the early headwind that we conveyed to you.
But really, the model for the business, as we talk about it, we’re going to talk more about sales, and we’re going to talk about it in a way that provides you and us the confidence that we’re growing that top line through the totality of how we’re investing in the business, value-based pricing, the volume that we’re growing and the like. But in essence, the guidance has in it the full portfolio of what we’re working on today on the pricing front, on the volume front and our ability to earn on it. And as such, the business this year, in many ways, as currently configured, which includes Augusta has margins and top line that are quite similar to the year we just completed.
George Staphos: George Staphos, BofA. Echoing everybody else, thanks for all the detail and thought you put into your Analyst Days, they’re not just a bunch of slides or a bunch of goals that we forget about in 3 years, and we come back and have new goals. I had a bunch of questions on vertical integration, but I’ll leave this to the side.
Michael Doss: Thank you for that.
George Staphos: Yes. So growing low single digits is hard. Right? I mean, we can do the math on your addressable market, if I take 1% on that, I drop that into your revenue growth, you get your 2% [indiscernible] end of Analyst Day. But the reality is there’s churn, right? You’re not going to win every jump all as you said. And so where in your markets, do you feel the other substrates have the best opportunity to compete against paperboard? Where do you feel really through innovation, sustainability you’ve got more tailwind incrementally and you can separate and talk to us about Rainier, which said isn’t really in the goals, but could be important in terms of — at next Analyst Day in terms of what the growth is. So if you can talk to those points, that would be great.
Second question is near term. So obviously, foodservice is a wonderful business for Graphic Packaging. What we’ve seen in recent months is the CPO on foodservice products generally has far outstripped what you’ve seen for center of store. What are your thoughts about how that might — I’m pretty sure what — I know what you’re going to say, but what do you think that’s going to mean in terms of your business this year in terms of mix, in terms of volumes, in terms of the shifts across your 5 categories.
Michael Doss: Thank you for the question, George. Maggie, would you like to give us a little insight into some of the attractive markets that you’re seeing and some of the growth we see along those verticals?
Maggie Bidlingmaier: Yes. I think to your question around our papers relative to other materials. Clearly, a lot of the key markets that we’ve highlighted here as part of these innovation platforms and some of those examples. Obviously, many of those are in plastic substances today, but obviously, the consumer demand for more sustainable and consumers looking as paper as the primary driver of that. They’re really leaning in, our customers are leaning in as paperboard is that solution. And when we look at the total cost of ownership, it’s not always on the unit price, but on that total cost of ownership for some of those innovations, it becomes clear in terms of those being a solution that they’re moving forward with. So we feel good about our overall portfolio relative to other material alternatives.
George Staphos: And where do you feel less [indiscernible].
Michael Doss: Well, look, why don’t I take a piece of that. I think, George, you sum that question up perfectly. It’s a competitive landscape out there. We compete every day for the right to win. And really, when you look over the last 7 years, the fact we’ve been able to post that 2% stack average over that period of time, I think, should give investors confidence that we’ve got some really good momentum in being able to do it. Our confidence level that we can deliver the $200 million of innovation growth that you heard Maggie and Jean-Francois talk about for 2024, is high. Because as Steve said, we kind of know that locked in going into the year. The conversions have happened, so it kind of flows through — Ricardo is smiling because he always has to give that to us in advance so that we can kind of go on it.
And we’ve done that in some very different economic environments. ’22, arguably a lot easier than ’23, but we got it done in both years. So I think that’s there. To your question around foodservice and it’s a good one, and that’s really why I opened up with my comments about the price declarations for RISI. We expect our Foodservice business to be very busy this year. Again, there’s less than 4% unemployment here in the U.S. market. The American consumer loves mobility. They love being on the go. They got a lot of things they’re doing, and they appreciate the drive-through window a lot and the convenience that provides. We’ve given you some good insights into some of the trials we’ve got going on with Chick-fil-A and others. And that we expect to be a flywheel for us for years to come.
And that’s why our Texarkana paperboard manufacturing facility is so important to us because we’ll have the raw material that we’re able to use all the way through that whole supply chain. And it’s another great example around the differentiation we make around where we choose to be backward integrated and where we don’t because we can provide good growth to our customers and ultimately higher ROICs in cash flow.
Melanie Skijus: Okay, I’ve got the next question here from the audience. And Steve, you’ve talked a little bit about price, but Mark Weintraub at Seaport wants to ask about different component items as we bridge EBITDA from 2023 to 2024 volume. Again, we’ve talked about price, labor productivity.
Stephen Scherger: Yes. And this is not going to be easy, but we’re just not going to go there. And what I mean by that is, we’re going to grow organically, we’re going to earn on it. Yes, of course, the fundamentals of what we’ve shared with you in the past, they are the fundamentals. And so as we look out to 2024, of course, we’re going to earn on organic sales. We’re going to continue to be highly productive. We’ll have labor and benefits inflation. We’ll be running more than we ran this year. So we’ll be — we’ll have the opportunity to earn and take less of the natural downtime that we take across our manufacturing facilities. Right now, that pricing environment relative to the commodities, it isn’t very different from the last time we talked.
We’ve got a lot of activity underway on as we value-base price and work with our customers and move through some of the pricing. Not much has happened on the commodity cost front. So the fundamentals of how you came in the room are still the fundamentals, and it’s why our midpoint is — looks like it is in terms of the expectations we’ve set. But we’re going to go down a path where that language is going to change, and I know that, that will be challenging, but we’re going to. And so it’s just important. And the algorithm for the company, important. It’s on us to earn the value for our products in environments where costs move so that our margins are able to maintain themselves at the kind of levels that we’re at today. So the fundamentals of the midpoint of our guide are very similar to the last time we’ve talked about the company, not much has changed, but we are going to change the dialogue along the way, and I look forward to those conversations.
