• Revenue: $2.2 billion for the third quarter.
• Adjusted EBITDA: $433 million.
• Adjusted EPS: $0.64.
• Adjusted EBITDA Margin: 19.5%.
• Volume Growth: 1% during the third quarter.
• Price Change: Down 2% year-over-year.
• Net Leverage: 3.1 times.
• Full Year Adjusted EBITDA Guidance: $1.68 billion to $1.73 billion.
• Full Year Adjusted EPS Guidance: $2.49 to $2.61.
• Capital Expenditure Increase: Project costs for Waco increased by $100 million to $1.1 billion.

• Warning! GuruFocus has detected 7 Warning Sign with GPK.

Release Date: October 29, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Graphic Packaging Holding Co (NYSE:GPK) reported solid financial results with sales of $2.2 billion and an adjusted EBITDA of $433 million, maintaining a strong EBITDA margin of 19.5%.
• The company is making strategic investments, such as the Waco, Texas recycled paperboard manufacturing facility, which is on track for a fourth-quarter 2025 startup, enhancing its competitive advantage in North America.
• GPK is actively transitioning customer contracts to more transparent pricing mechanisms, aiming to improve pricing predictability and customer confidence.
• The company is seeing positive volume growth, particularly in Europe, driven by innovation and regulatory changes favoring sustainable packaging solutions.
• GPK's innovation pipeline is robust, with significant customer engagement across its five innovation platforms, contributing to $54 million in sales growth in the third quarter and on track to deliver $200 million for the full year.

Negative Points

• Despite positive volume growth, overall volumes fell below expectations, impacted by uneven market conditions and softer September sales.
• The company experienced unexpected pressures from weather and power disruptions, reducing adjusted EBITDA by $25 million.
• Pricing was down 2% year-over-year, reflecting challenges in maintaining price levels amid market fluctuations.
• The demand recovery remains gradual, with promotional activities not translating into materially higher volumes as anticipated.
• GPK faces potential competitive pressures from increased exports into North America and new market entrants, which could impact pricing dynamics.

Q & A Highlights

Q: Can you explain the sales guidance for 2025, considering the lower exit from the second half of 2024 and the impact of price change mechanisms? A: Stephen Scherger, CFO, explained that the starting point for 2025 is an $8.8 billion top line, excluding the limited time Augusta was part of 2024. The innovation engine is expected to provide a couple of hundred basis points of growth, with the market evolving towards neutral or modest growth. The new price change mechanisms are being implemented, but they are not expected to have a material impact in 2025 due to the small nature of open market sales.

Q: How is the competitive landscape shifting between bleached and unbleached paperboard products versus recycled products, and how does this impact pricing and margins? A: Michael Doss, CEO, stated that the company has strategically positioned itself by divesting the Augusta Mill and focusing on integrated operations with Texarkana Mill. The company is the low-cost producer in North America for coated unbleached and recycled paperboard, generating excellent returns. The focus is on maintaining competitive advantages and investing in high-quality, low-cost production facilities.

Q: What caused the third quarter volumes to come in below expectations, and what is driving the recovery in October? A: Michael Doss, CEO, noted that while July was strong, September was more muted. The recovery in October is driven by customer expectations and promotional activities. The company is closely coordinating with customers to meet demand, but muted volumes from customers impacted the third quarter.

Q: How much of your packaging business operates on new contract structures, and what is the progress on transitioning away from index-based pricing? A: Stephen Scherger, CFO, mentioned that about half of the business is already on cost-based or annual models. The company is developing a new index attached to known commodities that correlate with their cost structure. This transition is part of a multi-year initiative to ensure pricing reflects the value of the packaging.

Q: What is the outlook for pricing given the increase in exports from Europe and Asia, and Suzano's entry into the market? A: Michael Doss, CEO, explained that imports into the US are a small percentage of the market, and the cost profile for European imports is high due to fiber costs and container expenses. While there could be short-term implications, the company focuses on maintaining a low-cost position and leveraging its integrated operations.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.