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

We executed perfectly, there were no mistakes. But there were some things that we learned along the way there that really have helped us. Of course, this is September 2019, we dealt with COVID kind of — during that middle period of time. But even before that, we started having conversations with customers around innovation. We had some early success. And what ended up happening is customers will say, look, you did this good for us. So why don’t you do these 2 or 3 things, too. So we had to scramble in many cases, to add resources back into the company, something we did. Those are resources that are now part of our business and part of our innovation engine that you’ll hear Maggie talk a lot about. We also learned a lot of things during COVID.

Some of them were just heard. The first one I’ll point out to you was just kind of supply chain resiliency. I mentioned earlier that our customers care a lot about security of supply. More now than ever, the worst thing you can have if you’re a CPG is to have a stock outage. And our system had been optimized because for years, everything just kind of flowed nice and we were able to take costs down to the last penny, and our supply chain was long and expensive. You go through COVID. And then you add winter storm Uri in February of 2021, and we had a lot of challenges, a lot of force majeure letters, things we had to deal with. We had to build a more robust supply chain. And for a company that prides itself in execution, we talk that seriously.

And those are learnings that we will not forget. And our customers know it, too, and that is a part of what they buy, when they buy from Graphic Packaging. Also during COVID, we saw these massive shifts in overall demand, casual dining went way down. And after about a month or 2, you saw the foodservice side of the business really take off. Center of the store kind of came back. And again, we had run this kind of perfect [indiscernible] taking facilities down and optimizing our footprint to the point, our customers had some doing in that as well because they were pushing us for obviously, savings and things there as well, which is to be expected. But we learned that we got to have some flex capacity so that we can take care of customers’ demands as they shift and they will shift based on different demand pulses that they have to deal with out there.

And so you’ll see us not have everything on 3 shifts, we’re going to have some flex capacity that allows us to be able to do it. We’re not going to run everything 7 days a week because it doesn’t give us the ability to manage our business. We have 100 manufacturing facilities, and the balance on that will be reflected there. Sure, we’ll have some that run 7 days a week, 365 days a year. But there’s going to be a number of them that have that flex capacity. We also learned some things by spending $700 million in Kalamazoo essentially making and creating a brand-new mill. We went into that project thinking it was going to be totally an economic play. That’s how we introduced it. And we said, look, we had this unique opportunity to be able to take a bunch of costs out and drive a lot of really top line product through the marketplace, and we’re uniquely positioned because of the concentration we had with our Midwestern manufacturing facilities of paperboard.

But what we really found — we got those savings, but what we really found there was the grades and the quality coming off that particular manufacturing process is just superior to anything else that’s out there. You’ve heard us launch Rainier. Rainier is not even in a lot of the numbers you’re going to see today. I think it can be bigger than many of the innovations we have out there. It will compete with the very best paperboard out there and SBS is an example, the brightness, the coding characteristics, the smoothness, it’s fantastic. And we’ve got some early wins there. Maggie will talk about that when she’s up during her conversation. The point to make that around integration, though, and this is an important point to make, is integration for Graphic Packaging is a bit nuanced, and this is important.

If you think about what we’re doing in Kalamazoo, and you think about what we’re doing in Waco, if we have the opportunity to really grow with customers and generate excellent ROIC and consistent returns for shareholders, we are all in on integration. I’m going to say that again. We are all in an integration when it makes sense, consistency results in higher ROIC. However, when we don’t have a path to do that, like I just outlined with Augusta, then we’re better off putting that capital somewhere else. So you’ll see us put our capital where it will get the greatest return for shareholders, hard stop. So you’re not going to hear us talk a lot about our integration rates anymore because we’re really focused on our end-use markets. We’re a consumer packaging company.

But ultimately, that’s how I want you to think about our overall integration strategy in terms of how we’re building the business here going forward, and that’s exciting. And the implication for that really kind of comes in the form of — if you think about A&R packaging and that acquisition we made, for a minute. We got a lot of questions from a number of people, “Hey, you guys are going to integrate with AR.” And Steve and I answered it this way, at the time when we acquired that, we said, we have no plans to immediately do that, but over time, it could be — provide some optionality. The reality of it is, is as we’ve gotten deeper into this, and we’ve watched our European business, which generates outstanding results and excellent ROIC, we don’t need to integrate that business right now.

And it doesn’t make sense. Things would have to change very dramatically for us to see a scenario where we would have to backward integrate into Europe. That’s a big change. And I think the points I’m making on these things, we’ve learned through some of the things that we’ve come through is we form our opinions based on fact and how we actually generate returns for investors and shareholders over the long term. And that’s really why you want to buy a company that is constantly learning in that regard, and that’s Graphic Packaging. So I want to talk a little bit now about the company that we’ve actually built from the inside out. And I think if you look at the left-hand side, I think it’s — yes, on the left-hand side that you’re looking at there versus the right-hand side back to 2017, it’s a completely different company.

Look at that for a minute. Look at the different segments we have, and I talked about that march we were on and why we had to build the company out the way that we did. Our market participation strategies have just changed. We went from $4.4 billion to last year, $9.4 billion, and we’re going to build on that. And ultimately, if you think about that growth, some of that came from acquisitions, some of it came from innovation. We averaged about 2% sales growth over that period of time in our core markets and compare that against any other packaging substrate out there, whether it’s glass, aluminum, corrugated, that’s on par at the very best. And it’s really, really all driven by the innovation we see. And what you can see there and what I’m excited about is our ability to move with the consumer.

As the consumer moves, we’ll be there, and that’s the portfolio that’s really been generated and what we have. We have the scale to take care of the very biggest customers out there. If you’re a QSR operator and you have 7,000 stores in the — in North America. You’re probably going to do business with 2, maybe 3 packaging suppliers. That’s it. You don’t want to do it with 27. Why? You can’t control the quality. You can’t control the materials there. And we have the breadth and investment and the capabilities to take care of the very largest customers as well as take care of the regional business that we have. We’re uniquely positioned in that regard. That’s the company we’ve built over the last 7 years and it’s really going to be on display over the next few.

So let’s talk about what we’re doing and why. The bottom line is our core values have not changed. But we have, as we’ve transformed the business, our aspirations have grown alongside of our confidence. And that’s just — as you look at how that all kind of comes together, I’m going to introduce you a number of key elements of our Vision 2030 right now. And then the most important one, we start with this one here is really all around innovation. You’re going to be a global leader in consumer packaging. You have to be a leader in innovation. And we’re going to continue to invest in our people and our capabilities so that we’re the very best. Our Vision 2025 laid out some pretty big investments. I’ve already outlined what they were. But what will really define us with our Vision 2030 is the investments we’ve made in innovation and the people and capabilities that we execute on the scale that customers require.

We set 3 targets for this one, and they’re ambitious. The first one is 2% of our annual sales growth will come from innovation. We’ve done that over the last 2 years. You think about 2022 and you think about 2023, both those years, we grew over $200 million in innovation sales under very different market conditions. So we’ve demonstrated the ability to be able to do that. We’re pushing our teams to continue to find ways to build that funnel. And our confidence level here in 2024 to deliver the $200 million is high. If you think about the selling cycle for us, many of those things are already in the queue. And so we know exactly what they are, and they’re flowing through. And Maggie will talk about that in her prepared remarks a little bit as well.

Look, every new product we make needs to be more circular, functional and convenient than the existing product that it’s replacing. This is nuanced too. I mean there are certain things from a material science standpoint that obviously have to be met. But it’s also pretty simple in many ways. I’ve yet to ever have a customer say, “Hey, thanks for making that product that’s less sustainable, less convenient or functional.” They just won’t do it. They won’t put their customers into that. So that’s kind of the lens we put against and all these things are iterative to help us get better over time. And then the last one that I will put out there is that our multigenerational portfolio is really iterative to. And what I mean by that is if you think about things like KeelClip as an example, that product started over in Europe with carbonated soft drink.

And then it moved quickly to beer. And it also went to some food applications. And each time we did one of those, we learned some things different. In that particular case, we also made the machines that went into both those applications. Our Boardio product, which you saw out there started with infant formula. And now it’s gone to confectionery, gum, you see the Mentos out there as well as well as coffee. And again, Maggie will take you through that. And that’s really important. That iterative learning that we get there. And why it’s so important we have a big business in Europe and in the U.S. because those trends go back and forth, and we take that knowledge and we can do that a lot faster. And that’s what a leading consumer packaging company does, and that’s the company we have built.

Culture. Look, to be a leader in innovation, I can’t overemphasize the importance of culture. We’ve got an incredible team and we’ve done some really good work. But to stay the best, we’re going to have to continue to focus on our culture of safety, inclusion and take our customer focus to a whole new level. This is among my highest priorities as the CEO. We’ve set forward targets for this one as well. Zero life injuries is up first. Look, I’m proud of the safety record our company has. It’s by far one of the best in the industry, but we need to make it better. And that really starts with me and my executive leadership team and the tone and tenor we set from the top. We invest in well-run facilities. What we do is incredibly important, but it’s never important enough for someone not to go home hole at the end of the day.

That’s something we take real seriously. And as an investor in Graphic Packaging, you can rest assured that we do it the right way there. We also won’t really need — second bullet point here, 75% engagement score. So you say why is that important? It really comes down to the fact that, again, those 24,000 employees that we have, we have to have their very best every day. They come with ideas. We need them. We need them to get better. We need them to get better on safety. We need them to get better in terms of productivity. We need to get better in terms of innovation. And when we harness all of that and we can kind of bring that forward, they’re proud of what they do. They bring that energy to work. They’re part of a winning company and it’s infectious, and it really helps us drive our results.

So driving that is something that Elizabeth Spence, who is right there in the purple, who leads our HR organization. She and I work on all the time. So the other part of that, that I’ll also say is women in leadership is something that is really important for us at Graphic Packaging. Right now, our women leadership is around 25%. We’re going to take it up over 35% over this next 7 years. It’s an important element for us. We get a lot of — you think about what that’s like in my staff room, we have a staff meeting, and it’s kind of funny, and I joke about this sometimes is you look at women in terms of many family units out there. They’re the largest population in terms of making decisions around purchasing decisions as well as provisioning for families and they’re — the people that are part of their family.

And I’ll be railing on something I joke about and I say, this is — and I’ll look over and Elizabeth and Lauren and Maggie might be laughing like you really don’t work that way. And that’s important for me to know, and it’s important for all of our business to have insight like that because it helps us get better. It helps us stay very close to the consumer, and that’s insight that helps us drive our innovation. So it’s a big goal for us. Our ethnic diversity, we want to make sure that, that’s representative of what we see in the U.S. around 40%. And, we’ve made good progress on that over the last few years. We have more work to do. Some of our locations are harder than others, but this is an important goal. We want a very inclusive company and it’s one that, again, when we have that level of inclusivity and that diversity, we get better insights into what is going on in the marketplace and what we can do to take advantage of it to service customers better.

Last bullet point here is really enhancing the communities we operate in. This is really important. We’ve got 100 facilities around the globe. And what we want is that logo to mean something in each one of those towns. Of course, our employees are proud to work there. We want the community to be glad that Graphic Packaging is there. That — it’s seen and has a reputation as a safe, sustainable company that invests in its employees and in its facility. When we have a job opening, we want many people to apply because that’s a place where ultimately we want to — where they want to work. So that’s a key focus for us. We’ve made progress in this regard. We’re going to make more as part of our Vision 2030. Transitioning a little bit here to planet.

Consumers want more sustainable, functional and convenient packaging. I talked a little bit about that. And our brand owners and retailers know that we can deliver it, and so they’re coming to us more and more. Our commitment to you and to our customers is. And all our stakeholders is to steadily and measurably improve our environmental footprint of our consumer packaging. And really, as I said earlier, why is this so important? Because it’s not just the reductions that we’re driving in our business, but ultimately, what our customers need in order to hit their objectives and our goals our packaging helps them accomplish their goals and the commitments they’ve made out there. And that’s what a true consumer packaging company does that’s in a leadership position.

So a responsibility we take for — it’s a responsibility we take very seriously, and we’ve got a high level of confidence that we can hit the plans and targets when we roll out to you today. We have 4 targets for our footprint. First one up is the hit our SBTI targets. And you’re going to see Michelle take you through a very detailed look around exactly how we’re going to do that. And a big part of that for Graphic Packaging is the decarbonization effort of our wood manufacturing facilities. It’s about 75% of all the electricity that we make, as an example, comes from those operations. Right now, — that particular part of the business is around 67% we make our own. We’re going to take that number up over to 90%. And all that’s reflected the investment that’s required to do, that’s all reflected in the targets you’re going to see today.

We’re really excited about that. Again, that helps our customers hit their objectives. And as all of you know, the materials that we make tend to be some of the most recyclable out there. They start with trees, they go through our wood manufacturing facilities and then we’re able to recapture them anywhere between 5 and 10x. So it’s a circular loop that truly does have a sitting at the prominent spot on a circular economy, and that’s exciting. The remaining electricity that we don’t generate ourselves, we’re going to find ways, which is kind of a hedge, more than anything else, to buy renewable energy. There’s a lot of ways you can do that. We’re going to do it in Europe. We’re going to do it in the U.S., too. But the big part of it, I want you to walk away from Michelle will walk you through this is just how we’re going to do this ourselves with our biggest spend, which is at our wood fiber manufacturing mills.

We’re also going to ensure that 100% of all the fiber that we use is — goes through a sustainably sourced methodology. This one, I’ve got a lot of passion around. I actually sit on the sustainable forestry initiative or SFI. Some of you are familiar with that. I’ve been the Chair of that for last couple of years. Making sure that we can ensure and represent and certify to all of our customers that you can use our material, you can feel good about it and your end-use consumer can really feel good about what they’re doing is critical for our business. We’re very passionate around that, and it’s something that we’re really not only for ourselves but for the entire industry, take a leadership role in to make sure that they can feel good about them because it’s a great story.