Good day, everyone, and welcome to the Graphic Packaging Third Quarter 2024 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host. Ma'am, the floor is yours.

Good morning, and welcome to Graphic Packaging Holding Company's third quarter 2024 earnings call. Joining us on our call today are Mike Doss, the company's President and CEO; and Steve Scherger, Executive Vice President and CFO. To help you follow along with today's call, we will be referencing our 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 and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission. With that, let me turn the call over to Mike.

Thank you, Melanie. Good morning, everyone and thank you for joining our call today. Graphic Packaging is a global leader in sustainable consumer packaging with a portfolio constructed to deliver consistency and growth across a wide range of economic conditions.Considering the uneven market conditions we have experienced in 2023 and 2024, we are indeed delivering solid results. In the third quarter, Graphic Packaging sales were $2.2 billion. Adjusted EBITDA was $433 million and adjusted EPS was $0.64 We saw clear but muted pivot to volume growth, up 1% during the third quarter after Europe's return to growth last quarter. Price was down 2% roughly the same as last quarter. The company's adjusted EBITDA margin despite the modest volume growth and some weather and power disruptions was a very solid 19.5% in line with our expectations. That speaks to the strength of the business we have built. In a challenging environment, we are delivering strong and consistent margins you should expect from a consumer packaging leader. Turning to Slide 3, the Waco, Texas recycled paperboard manufacturing facility investment remains on track for the fourth quarter 2025 startup. We have recently begun the hiring process and made our first hires. The pool of applicants we are seeing is excellent as expected. An attractive labor pool is one of the key reasons the company selected Waco for this important strategic investment. Once Waco is up and running, we'll be able to service the entire North American market with the highest quality coated recycled paperboard from two locations in Michigan and Texas. Waco we will further expand the company's long-term competitive advantage in both cost and quality. During the quarter, we also made a number of packaging facility investments, and I'd like to highlight one in particular at our Poznan packaging facility in Poland.…

Thank you, Mike. Turning to Slide 10, in the third quarter, we again executed very well, generating a solid 19.5% adjusted EBITDA margin despite volumes that fell below expectations. All reported sales were down $133 million, $109 million of that decline represented the impact of the Augusta divestiture and the dramatic reduction in our participation in open market bleached paperboard sales. Volume mix in our packaging business was up 1%, modestly below our expectations after an encouraging start in July. Price in the quarter was down 2%, similar to last quarter, with the North American and international businesses experiencing similar outcomes. Sales impact from other M&A and foreign exchange were a combined $11 million net positive in the quarter. There were two unexpected sources of pressure on our adjusted EBITDA results in the quarter. The first was the impact of weather and power disruptions that we disclosed mid quarter, which reduced adjusted EBITDA by $25 million. The second was softer September sales, which left volumes below our expectations. Even so, excluding the weather and power disruption impact, strong net performance fully offset the price and inflation headwinds we experienced during the quarter. Adjusted EBITDA impact from other M&A, excluding Augusta and foreign exchange was an $8 million tailwind. The Bell acquisition was completed in September of 2023, and as such, this is the last quarter that Bell will be included as M&A. As a reminder, the Russia divestiture took place in November of 2023. Net leverage at 3.1x is at an acceptable level, and the company's current average cost of debt is approximately 4.7%. We expect to end the year with net leverage below 3x. Slide 11 puts the strength of the company's business model into perspective. In the past seven quarters, we have experienced a negative impact of a…

[Operator Instructions] Your first question's coming from Matt Roberts from Raymond James.

My first question is on the sales guide into 2025. So clearly exiting second half ‘24 lower and united low-single-digits off, I believe it was 2024, less $144 million from August in the first few months there. So while early, and maybe you could help me bridge that in terms of overall volume expectations by end market, any change in timing on innovation sales and in regard to the price change mechanisms you mentioned, should we expect a price benefit from that in 2025 or is that more of an evolution that will take time as contracts come up for renewal?

It’s Steve. Why don't I start and then Mike can add some color there. I think it just in terms of the leap off point for next year in terms of the top line, I think Page 14 does a nice job of adjusting for the limited time, we have Augusta in 2024, so about an $8.8 billion top line will be the starting point. And what we're indicating is that our innovation engine should continue to provide a couple 100 basis points of growth next year. And overall the market evolving this year being down a little bit at the market level that kind of evolving towards neutral or very modest growth. I mean that's kind of the enabler for low-single-digit top line growth. I'll let Mike talk about the mechanisms that we're putting in place, but we're very excited about the new price change mechanisms that we're executing on in the open market and with customers. And so we'll talk about that probably a little bit separately, but that's the overall kind of the enabler for low-single-digit top line growth next year. Mike?

I think maybe just to expand a little bit on what Steve said, well, it was below our expectations. The pivot to growth was important in the quarter and so that gives us confidence in terms of the jump off point as we head into 2025. That's consistent with what we've seen at least through the month of October here, as we head into 2025 in the new year. Steve covered the innovation, so I won't go into more detail on that. But in regards to the pricing mechanism, you have to remember that on the open market paperboard side, really only about 5% of what we do is selling paperboard to customers. So the vast majority flows through cartons and cups where we've been on a multi-year journey of modifying those proprietary customer relationships in terms of pricing that we have. Moving away from third party indexes, so this is really just the ongoing transition that we've been on over several years to move away from those types of mechanisms. And I wouldn't expect that to be a material impact in 2025 just given the small nature of what we sell on the open market. But it's an important step and we believe over time helps give our customers more confidence in their ability to predict their pricing, because they want that to be fair. They want it to be transparent and they don't want to be surprised. And all those things are really what we're aiming to do with our customers.

For my second question, looking out into 2025 and even maybe beyond there, how is the competitive landscape shifting or maybe even bifurcating between your bleached and unbleached paperboard products versus recycled products. And how does that impact either price, ROIC or margin in recycled versus other parts of the business? And if one side is generally more favorable than the other, are there alternatives that you would consider that could further accelerate that shift towards recycled products?

Look, in terms of how we're positioning the company, you saw us make a big move with the sale of the Augusta mill. And again, the Augusta mill was a largely open market seller of coated bleached paperboard, where we just didn't have a competitive advantage. It was different or distinct from other market participants. So what we did and as we talked about this, and I think there's still maybe some confusion around why it was so important, but it's incredibly strategic for us to have the Texarkana mill that's largely integrated into our own operations. The vast majority of what we make in Texarkana is cup stock. We don't sell cup stock in a material way to the open market. We're selling cups. And we have the ability to make our own coated bleached where we need to. And so that really fits us really well and allows us not to have to participate in the open market side of the bleached paperboard market, which is the most fragmented and quite frankly where the biggest challenges are in the market. Certainly, if that market gets messy, we get some secondary knock on benefit but we don't have the type of exposure we used to have when we had the Augusta mill. We've really focused our investments back in where we can make exceptional returns for our shareholders on the grades that we choose to make and that being coated on bleached paperboard as well as coated recycled paperboard. Both of those grades were the low-cost producer in North America. We generate excellent returns on those. And of course, as you know we've been making significant investments into both of those systems with the biggest being the new paperboard manufacturing facilities we've invested in both Michigan and Texas. One in Texas will come to life next year this time in the fourth quarter, as we've committed to. And we'd expect to see some real growth opportunities for us to be able to win with the high quality and low cost position that we have. Steve, maybe you can talk a little bit about the arbitrage and margins.

Yes. The only thing I'd add to that Matt, is that when you look at coated unbleached or unbleached participation or coated recycled board participation, you've got our facilities there incredibly well capitalized and are actually positioned to support the packaging growth algorithm that's a couple of 100 basis points of growth year-after-year. So where we choose to make paperboard, it's competitively advantaged and supports our growth as a consumer packaging business. And I think that's really the critical imperative. It's obviously very constructive from a competitive dynamic and our margin profiles there allow us to generate the above cost of capital returns that you've seen us pivot to and that we can continue to exercise on with incredible margin stability. And that really is, you're seeing this year in a pretty tough volume environment, margin stability in that 19% to 20% range that really speaks to the competitive advantage of choosing to make paperboard, where we're competitively well positioned to make the packaging.

Again, we'll be down Steve to five paperboard manufacturing facilities when we're done with this capital expenditure that we're making in Waco. And as you stated, all these are incredibly well-capitalized, low-cost paperboard manufacturing facilities. So we think we're uniquely positioned, Matt to win in the marketplace based on that.

Your next question is coming from Lars Kjellberg from Stifel.

I'm just going to start with a short-term question. Your third quarter volumes came in below your expectations. Can you provide any color where that happened in geography wise in end markets? And also you call out continued growth in Q4. With the slow down, you called out in September specifically, I think you mentioned that October was looking better, but what is happening in that market? What happened in September and then that recovery you're now seeing in October, I guess, what is driving that and markets and geographies, please?

I'll take the first part of it and Steve can add on anything that I missed. I think and Steve talked about this in his prepared comments. We started off the quarter very strong in July. August was pretty average in September was a little bit more muted, and when we kind of look at what fourth quarter looks like, we see it kind of being more that one to around that 1% to 2% volumetric number, based on what our customers are telling us now. Now, based on what we heard coming out of the second quarter, we were hearing from them that we would see stronger sales. That was their plan. They were initiating a number of promotions and things like that. And you have to remember, the vast majority of everything we do is customized printed packaging. So when they say that they're going to grow, they have to have us ready to make those packages. So we have to be prepared to be able to do that. Or they have supply chain issues, out of stock issues which cost them money with retailers. So we have to take that stuff very seriously. As the third quarter played out, we didn't see as much of that as we were expecting or what they were expecting. You've seen a number of our customers have already released and they've talked about some of these muted volumes. So that's really the dynamic that drives it. We've got to be very tight with them, very closely coordinated with them to make sure that we're there when they need us, but when they fall short, it does impact us and that's what hurt us in the third quarter.

Yes, Lars, the only thing I'd add is geographically we continue to see positive volume growth from Europe, driven by our innovation activities there. Last quarter, our European and international operations were 50% of our innovation this quarter was 40%, so still very substantial. And then we saw the improvement for the quarter. But as we've shared, I mean, sometimes it's a bit uneven. We've got pockets of good strong, steady growth and then expectations will be set by customers and they don't necessarily see as much sell through. But the actual pivot, as Mike said to real volume growth in the quarter was important below what we expected, but it's a positive and gives us some of that confidence heading into Q4 and then of course heading to the 2025.

My follow-up question was actually related to sustainable packaging, you seem to have better visibility in that business. You delivered in line with what you had called out in spite of slower overall market. Again, highlighting that importance of that business for you and you've currently talking about this as something that will repeat itself over the years ahead. So what gives you the confidence that should be a continued growth driver for you? What are you seeing in terms of innovation that you can talk to and/or increase adoption of your solutions down the line that would going to give this benefit for the years ahead?

I'll take a step, Steve you can jump in here if I miss anything. But I mean, if you take a step back and take a look at really this year, we're telling you we're going to be on track to make the 2%, which would be about $200 million of a commercial sales through our innovation pipelines and you go back three additional years. So four years now, we'll hit that mark.So that informs some level of confidence that the overall algorithm we've got out there is generating those kind of sales and consistency as we kind of look at the market and the opportunities we have in front of us. In the deck, you saw a profile of kind of what we call a modified TAM. Remember the way we define TAM, it's either something that we already have sold or we're very close to selling, and that number has grown quite a bit. It's now almost $15 billion in total. So the market, the addressable market as we look at it with the products that we make and manufacture has got a bigger and that creates more opportunities for us, Lars to continue to drive those kind of projects. When I look at the funnel that I see in front of us and the interest from customers, it's hot. Now I will say it's a bit lumpy from time to time. You have a product like the one we profiled here in the third quarter like the McFlurry and that was one that came in and in about six month period of time they knew what they wanted. They wanted to get in the marketplace and it flowed through really fast into the national launch both in the U.S. and Canada.

Your next question is coming from Lewis Merrick from BNP Paribas.

As you've talked about before, you're currently transitioning your customers away from contracts prices based on risk indexes. One's index is more representative of your cost base. Can you just give us an update roughly how much of your packaging business is operated on these new contract structures. And I've got a follow-up after that, if that's okay.

Yes, Lewis, it's Steve. I'll kind of back up a little bit. As Mike mentioned, we've really been in a multi-year journey of making sure that our contractual relationships with our customers are representative of the value of the packaging. So we're well along in making sure that we're pricing our products for the inherent value of the package. And keep in mind that every year we're renegotiating with a good 25% to 35% of our customers. So we have to re-earn their business very routinely. And so that's a great opportunity for us to always make sure that we're pricing our products, packages for their value. About half of our business is already in a spot where it's attached to either more cost-based models or more annual type models. And what's next for us is the development of a new index, that's actually an index that's attached to known commodities that correlate nicely with our cost structure. We've got a couple of large negotiations underway right now with some very large global customers, where we're bringing that into this multi-year relationship. So as we've talked before, it will be a journey. But we don't want to imply that it's a new journey. We've been well along in value-based pricing for multiple years. This is kind of the next step. As Mike mentioned, transitioning our open market paperboard that remaining 5%, moving that away from a third-party index is just all part of a multi-year initiative that is well on. But the current large-scale customer negotiations where we're bringing this to life will be a nice proof point that our interest and our customers' interest in the consistency and transparency of an alternative price change mechanism is high.

I think maybe just one thing to expound upon a little bit. And Lewis, Steve did a nice job outlining that. What he outlined was the price change mechanism. Remember, we have to earn this business with tenders and RFPs. So we know we're market competitive at that point in time. All we're talking about is the movement in between the period of time between the tender.

And just on the technicals. On the change to leverage guidance. We were previously 2.7x, I believe last quarter on the guidance, now less than 3x. I understand the CapEx guidance has been raised and EBITDA guidance adjusted somewhat. But just taking into account those effects, it seems like there's possibly some other items contributing that must be working capital. Is there anything to call out on that movement?

There's nothing to call out. I think it's really the combination of a midpoint guide that was -- went from $1.78 billion in the low $1.7 billion and an extra $100 million on the CapEx. So sub-three is, we think, a good place to end. And obviously, we're going to keep the balance sheet in a good spot but nothing unusual to call out.

Your next question is coming from Arun Viswanathan from RBC Capital Markets.

So I guess my first question would be just a clarification. So I think on one of the guidance slides, you note that the updated range for '24 includes the contribution from Augusta. Then on the subsequent slide, it says $1.7 billion. So when you say that the base is $1.7 billion for '24, does that include $40 million for EBITDA contribution from Augusta in '24? And so the real base should be something like $1.66 billion. And I guess the reason I'm asking is because you have called out mid-single-digit growth for '25 on EBITDA. And so if we apply it to the $1.66 billion, maybe we would only get to say, $1.7 billion or $1.72 billion. And if we applied it to the $1.7 billion, we get more into the $1.75 billion or $1.76 billion range. Could you just clarify that for us?

Yes. I'd be glad to, Arun. I think on Page 13, the guide for 2024, of course, includes everything that was in 2024, which would have a little bit of Augusta in the first four months of the year. Page 14 is a bit intentional. It is where is the leap-off point as you do to what the work you just did. So $8.8billion would exclude a little bit of Augusta from this year, the $1.7 billion is roughly where we see the business kind of functioning as the leap off point for next year that will be low $1.7 billion tier in the guide. There's a little bit of Augusta. We've got a couple of headwinds this year that obviously, we grew chronicled here for you. But generally speaking, for modeling purposes right around $1.7 billion or very slightly below it would be the leap-off point for the math that you're doing, not back to $1.66 billion.

And then another question I had was just on the pricing outlook. We've noticed, obviously, that there's been some increase in exports out of Europe into North America from some of the Northern European players because of weakness in demand in Europe. I think we've seen some exports from Asia into Europe of paperboard. And then we've also seen Suzano, who is making some strong remarks about entering foodservice and cupstock in a big way. So does that kind of worry you on the pricing outlook? I mean we did see down [30] in CUK one month or two months ago, and I understand that the indices may not necessarily be getting the same read on the market dynamics as you are from your customers. But just wanted to get your thoughts on that, especially in light of the fact that we are seeing some inflation that may push some of your CapEx requirements a little bit higher. But just wanted to see what your thoughts are on some of these differences in supply/demand that we're seeing.

I'll take a stab at this. I'm going to unpack some numbers here because you've asked kind of a broad range of questions there. And I think it's important we use some of the data to help us inform our decision. Before I start, I will say that I think this is the 35th call I've done as CEO, and this question around imports has come up on almost every single call. And yet imports into the U.S. right now in total across all three grades are just a few percent. But if you kind of look at the census data, which is the best data we have to look at that and you unpack it a bit because paperboard tends to be kind of a catch-all for a number of grades. The Scandinavian imports are the ones that we would look at as the most relevant for us. And when you kind of drop through that and look at coated unbleached paperboard, it's a 2.5 million ton market. There's been 140,000 tons of imports. So call that 5% roughly, pretty small. You look at SBS, which is what FBB would go after. It's a 6 million ton market in the U.S. And in the case of imports that's about 450,000 tons year-to-date. So again, about 7.5%. That's the most that's come into that. And again, I already talked about the fact that we divested our Augusta mill. So we're not really in the open market sale of bleached paperboard in a material way at all. Then you've got recycled paperboard being about a 2.7 million ton market, with imports largely from Canada, I might add, being about 2%. So it's pretty small. You put that all together and you even look at the 2024 data and compare it to…

I really appreciate that. The only quick follow-up I had was just on the CapEx. Looks like you're still guiding to $800 million to $1 billion in '26. Do you still see that as likely, especially in light of some inflation on that CapEx? Or still pretty confident in that?

Arun, it's Steve. No, our confidence in the free cash flow inflection from today's limited free cash flow given the Waco investment next year step down to $800 million. And then in 2026, a clear step down to sub-5% to 5% of sales, which would be sub-$500 million is quite high. And so our confidence in that $800 million to $1 billion of cash flow in 2026, it's absolute. We're reviewing our long-range capital plans literally again this week. As you know, we always have those in place. We know the projects. We know the step down. We know where this is going, $1.1 billion, $800 million, sub-$500 million. And that's the path to the cash flow generation that we're committed to. We know it by project. So I think that confidence in the multiyear free cash flow step up is exceptionally high and we know the projects and we know what we'll execute on. These things can move around the edges with growth projects or what have you. But overall, we know where and how we'll invest our CapEx to support the low and mid-high single-digit growth agenda for the financial model for the company.

Your next question is coming from Ghansham Panjabi from Baird.

Yes. I guess going back to Slide 11, where you have packaging volumes and the adjusted EBITDA margins and very nice charts by the way. What is the base case for 2025 as it relates to market conditions, as it relates to your low single-digit sales guidance? Is it just basically your innovation that's going to drive that and you're assuming the market is kind of flat? What's the base case at this point?

Yes. You said it well, Ghansham. I think the base case would be a couple of hundred basis points from our innovation engine and a flat to very modestly up consumer given that this year, if you kind of step back from it with innovation up 2% and overall, our volumes are going to be zero to minus 1. You've got a consumer that's kind of in the minus 2%, minus 3% range. So the base case for us were low-single-digit top line is a couple of hundred basis points of innovation, 0 to 1 on the rest, which gives us low single-digit top line volume growth, which is what we were trying to convey on the left side of Page 11. And thanks for recognizing the chart. It is a good add.

And then as it relates to the promotional activity and that's been throw around. And we are seeing signs of that as consumers in foodservice and to some extent, food, et cetera. Is that dynamic, is it building on itself? Has it sort of plateaued? What are your customers thinking as it relates to going into next year? Because obviously, the consumer affordability component on that chart is not going to change near-term, right?

It's a really great question, Ghansham. I mean we're trying to figure that out, too. I'll give you a few examples. Like on the foodservice side, these well chronicled value meals that have been out there. We haven't seen an overall lift. We've seen mix changes. So what they're promoting sells quite well and that means something else doesn't sell quite as well. We see that, too, on the branded side, where we're seeing promotions on some of the categories that maybe are a little bit down like serial case bars, some refrigerated products. But what we'll see is that one of our branded customers will promote and the other won't. Meaning there will be a shift to, obviously, where the promotion is and maybe the other one doesn't sell as well. But the overall category doesn't really change too much in terms of the numbers that are out there. So it is the right question. I wish I had a better answer for you today. That's just what we're seeing right now. What I feel good about is the inflection of growth that we've seen to this 1%. And if we can keep that market relatively stable like that and use the innovation, which we've got a high degree of confidence on, our ability to drive low single-digit revenue numbers into 2025 is strong.

Your next question is coming from George Staphos from Bank of America.

The question I had related to the last one. Is there a way, Mike, that you can -- obviously, you're very, very integrated with your customers and that's the lifeline and where you get your innovation from. But if your customers are still perhaps not pricing promoting where they need to, is there information you can relate to them and that you could get from leveraging further downstream, talking to retailers, getting their suggestions back not only on packaging but the price points on promotion? How do you manage that? And the related question there, if we think about pricing. You talked a lot about what you're doing as you're navigating your model to being more of a consumer packaging commercial model. A lot of the other consumer packaging companies over the years have moved their terms to adjust for where their customers take at the level that they indicated. And if they don't, building that into some additional pricing or volume in subsequent periods. How are you managing that in terms of your journey in terms of your contracts?

So you can appreciate that our large CPGs are pretty tied into the retailers that kind of market their materials and sell their materials. We are as well. Some of those retailers are customers of ours in terms of store brand items and private label items that we make for them, too. So within the confines of what's appropriate, we try to move any trends that we can to help our customers win in the marketplace. That's a big part of our innovation design. A big part of the focused marketing activities that we have here at Graphic Packaging and a service we really try to provide our customers. Are they quite capable marketeers, as you can imagine? No. But there's always room for challenging existing norms and ideas and that's really what we're trying to do. In regards to the pricing part of your question, yes, I think what you're referencing, and it's true for us, this is a high fixed cost business. So if the volume goes down, those costs are under absorbed. So I'm not going to get into individual pricing mechanisms, but you're right. That is a factor we consider and have in these proprietary relationships we have with our customers around making sure that we're getting a fair deal as are they. The other part of that pulls through, too. If their volumes are up quite dramatically, then they should expect more favorable offering from us. And those are the things, when I talk about transparency and value and fairness that our customers are really looking for.

Mike, if I could, as we look to next year, you've got the digester reversal that's '25, you have the power outage issue from the third quarter, that's '25. Those are bridge items. If you hold pricing constant with where it is today, would pricing be a net positive or negative? And are there any other things that we should be sort of building in for our preliminary analysis for '25?

George, it's Steve. Just briefly, overall, right now, all the pricing flow through in the next year on kind of a mark-to-market basis is pretty neutral and traditional commodity inflation, pretty neutral and labor and benefits inflation probably look similar to past practices just as you're thinking through those models. So much of the improvement for us will come from earning on positive volume growth in our traditional strong commitment to driving productivity every year that offsets other inflationary items. So pricing and commodity inflation in traditional terms are both pretty neutral right now.

Thank you. That concludes our Q&A session. I will now hand the conference back to Mike Doss for closing remarks. Please go ahead.

Thank you, operator. and thank you, everyone, for joining us on our call today. 2024 is a challenging year for consumer products companies and for quick service restaurants. But despite these headwinds, Graphic Packaging is delivering solid results. I'm very proud of our team, excited about our innovation pipeline and optimistic about our outlook. Thank you, and have a great day.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.