Greetings. Welcome to the Graphic Packaging Holding Company Fourth Quarter and Full Year 2024 Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Melanie Skijus, Vice President of Investor Relations. You may begin..
Good morning and welcome to Graphic Packaging Holding Company's fourth quarter and full year 2024 earnings call. We have with us on the call today, Mike Doss, the company's President and Chief Executive Officer; and Steve Scherger, Executive Vice President and Chief Financial Officer.
On today's call, we'll be referencing our fourth quarter and full year 2024 earnings presentation, which you can access through the webcast and also on the Investors section of our website at www.graphicpkg.com.
Today's beliefs 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. Now, 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. In 2024, we demonstrated the strength of our business model, delivering strong and steady margins and challenging market conditions.
We are well-positioned for 2025 and to meet our Vision 30 aspirations in the years ahead. For the full year 2024, Graphic Packaging sales were $8.8 billion, adjusted EBITDA of $1.7 billion, margins were 19.1%, and adjusted EPS was $2.49.
In the fourth quarter, Graphic Packaging sales were $2.1 billion, adjusted EBITDA was $404 million, margins were 19.3%, and adjusted EPS was $0.59. Turning to Slide 3, 2024 marked the start of our Vision 2025 Transformation Plan to Vision 2030, and which we presented at our Investor Day last February.
Our transformation to a leading consumer packaging company will be largely complete later this year. I will come back to Vision 2030 later in my remarks. In May of 2024, we divested our Augusta Georgia bleached paperboard manufacturing facility, along with most of our open market bleached paperboard sales exposure.
Augusta was a high-quality asset with a strong team, but did not have the level of competitive advantage we believe was required to support ongoing capital investment. We elected to put the capital to better use for our stockholders. After the divestiture, 95% of our sales come from high-value consumer packaging.
We made a number of moves during 2024 to improve our environmental footprint, including the execution of a virtual power purchase agreement, which significantly increases renewable energy use in our European operations, minimizing our environmental footprint and helping our customers minimize theirs despite the mantle [ph] to our mission.
During the second quarter, we applied $200 million of the Augusta divestiture proceeds to repurchase approximately 2% of our common shares outstanding. And during the full year 2024, we paid dividends of $122 million.
After the close of 2024 and in recognition of the strong results our business model is delivering as well as declining capital spending needs, the Board of Directors approved a 10% increase in our quarterly dividend to $0.11 per share effective with the April 2025 dividend payment.
Volumes did turn positive in the second half, up 1%, although the pace of normalization was slower than we and many of our customers had anticipated. Full year volumes were down approximately 1%.
We delivered a growing 19.1% adjusted EBITDA margin for the full year 2024 with outstanding quarter-to-quarter stability despite a challenging market environment, our financial performance demonstrates just how much Graphic Packaging has evolved.
When I became CEO back in 2016, our business which was about half the size, far less balanced than it is today, wasn't capable of generating the consistency that we now deliver.
Our team has done an outstanding job executing at a high level to build a consumer packaging business capable of generating strong and steady margins and cash flows across a variety of market environments.
2024 saw a clear consumer focus on finding value, significant growth in private label and more consumers shopping for groceries at club and superstores. Our portfolio which is designed to move with the consumer responded well to those trends.
We introduced new packaging innovations in all categories with significant new product innovations for our private label customers across the U.S. and Canada and Europe.
As our experience demonstrates, our private label customers and retailers are just as committed as our branded customers to plastic reduction and to a more circular, more functional, and more convenient packaging that consumers prefer. And finally, we delivered innovation sales grow to $205 million in 2024. Turning to the fourth quarter on Slide 4.
Our Waco, Texas recycled paperboard investment is moving ahead well and remains on schedule for start-up in the fourth quarter. On a smaller scale, but no less important strategically, we continue to make targeted investments in our packaging facilities to drive productivity and expand our capabilities.
Culture is the second pillar of our Vision 2030 and keeping our teams safe and focused on delivering results for customers is essential to our success. We continue to have one of the industry's best safety record and in the fourth quarter, we saw improvement in employee engagement.
We had an 87% global participation in our recent employee survey, which is really outstanding, and we see meaningful improvement in 11 to 12 categories we measure. Engagement and safety go hand-in-hand in our two my highest priorities. In the fourth quarter, volume was up 1%. Price was down 2%, consistent with the second and third quarter results.
Results in beverage, foodservice, and household were relatively steady overall, while food was modestly weaker and health and beauty remain mixed. We saw [Indiscernible] gains during the quarter with our private label customers and participated in the continued growth in grocery sales by club and superstores.
In Europe, where consumers tend to shop more often for prepared ready-to-eat foods, we are seeing volume gains with our convenience channel customers. The European convenience channel is a high service rest [ph] turnover refrigerated food market, where our extensive packaging and logistics capabilities are a critical competitive advantage.
As I noted, innovation sales growth of $63 million in the quarter, but our full year innovation sales growth of $205 million. We are well-positioned to achieve our goal of at least 2% innovation sales growth again in 2025.
Our customers are always looking for better, more sustainable matching solutions and no one has invested as much or built as powerful platform as we have to deliver the more circular, more functional, and more convenient package solutions that consumers prefer.
Slide 5 is a reminder of just how broad our portfolio really is and why we are able to generate strong results even in challenging market conditions. Turning to Slide 6, let's look at our sales in more detail.
Overall, year-over-year fourth quarter and full year packaging sales roughly flat with a relatively steady performance in beverage, food service, and household of moderately weaker results in food. Food represented approximately 38% of our packaging sales in 2024 and here, we saw a continuation of even results we experienced all year.
We saw significant gains in pasta, which is seeing growth from consumers looking for simple and less expensive alternatives to prepared meals and takeout. We are also participating in the growth in Mac N Cheese.
Always an affordable choice, Mac N Cheese is also benefiting from the newer gourmet varieties, which are taking a classic comfort food of market, while remaining relatively affordable.
This is worth noting that in both the Americas and in Europe, private label represented the big area of the growth we are seeing in both Pasta and Mac N Cheese, although branded is also doing well.
But these gains were not enough to offset the continued weakness in frozen and refrigerated prepared foods categories, which tend to come in at a higher price point. Confectionery continues to see weakness in Europe as a result of high cocoa prices, while the U.S. demand has been more stable.
Coffee and tea saw significant gains thanks in part to our [Indiscernible] product innovations, but also from a shift in coffee consumption home and office and away from coffee shops, driven in part by the consumer focus on value.
Categories like yogurt did well in both the Americas and Europe as consumers opt for this less expensive source of protein. As we think about shifting food purchasing behavior, it is important to consider the role retailers are playing. While growth in private label is significant, retailers are also creating and expanding loyalty programs.
Loyalty programs are designed to keep consumers come back at a time when consumers are increasingly visiting more stores, but spending less in each one.
It will continue to shift and Graphic Packaging is one of the very few companies with the capabilities to execute quickly and in scale for the largest CPGs, co-packers, and smaller regional customers. Beverage, which represents about 25% of our overall packaging sales, saw some modest improvement with continued solid growth in Europe.
Our European business is benefiting from regulatory requirements to eliminate plastic and we expect those regulations to support growth in the business for several years to come. We are well-positioned after the investments we have made in anticipation of this trend, including at Bristol in the U.K.
where we have doubled the size of our facility and build a world-class innovation center. Food service represented 21% of our packaging sales in 2024. After 11 consecutive positive quarters, nine in a row, with over 5% year-over-year growth, we saw stability in the fourth quarter against a very strong comp last year.
Our multiyear outperformance of the food service market has been driven by the growth in investments we've made and in innovations that are helping our customers meet their goals to reduce plastic consumption and improve functionality.
Foodservice continues to represent a big opportunity for us, driven by plastic reform [ph] replacement and the demand better, easier to use, and easier to recycle containers. Promotional activity by quick-service restaurants remained strong.
Our foodservice customers continue to focus on value options and are making other menu changes to drive volume, and we are working closely with them to develop the best solutions for their strategies. Household products represent approximately 12% of our packaging sales and the results were generally flat year-over-year.
Tissue continues to be one of the weaker year-over-year, but we are seeing better growth in cleaning products, particularly in Europe as we are in pet care. Over time, we see clear opportunities to expand this part of the portfolio in both the Americas and in Europe.
And finally, health and beauty, a small but promising part of our overall packaging sales, continues to show mixed results.
This is mainly a European business for us now, although we have some very exciting opportunities here in North America, thanks in part to PaceSetter Rainier, our 100% recycled paperboard that performs as well as more expensive bleached paperboard.
The high end of the cosmetics market remains challenged, but we are seeing improvement at the lower price points. Fine Fragrance is also showing encouraging gains. Healthcare remains challenging, but we suspect the majority of the destocking is over.
If you'll turn on to Slide 7, we present typical seasonal patterns left in our action and expected experience on the right. Seasonality in the fourth quarter was relatively normal in beverage where we saw the usual dip. But as I noted, after 11 quarters of impressive gains, our foodservice results were relatively flat in the fourth quarter.
Our other markets food, household, health and beauty performed broadly in line with normal seasonality patterns overall, with quite a bit of variation within those segments, driven by the consumers surge for value. Monthly patterns were also mixed.
October overall was not as strong as we typically see, November was fairly normal, and December followed the typical pattern, but with the incremental impact from the timing of the holidays this year as expected. I have already summarized our fourth quarter experience.
Looking ahead to the first quarter, we expect the consumers' focus on value to remain strong. And importantly, as you are hearing from many of our customers, driving volume is moving up and priority. Many of our food and beverage customers are rolling out more new products and new configurations to reach consumers in new and existing channels.
In foodservice, we continue to see focus on promotion with new menu choices emphasizing value and more limited time offerings designed to drive foot traffic. Each of these represent an opportunity for us to partner with our customers to create real value and we are encouraged by the level of engagement we are experiencing.
Slide 8 outlines the company's five packaging innovation platforms and notice the scale of the opportunity we see in each one. Each of these five platforms made important contributions to our innovation sales growth in 2024 and will again in 2025.
Alongside volume growth, plastic substitution is a top priority for many of our customers and we have outstanding, commercially-proven solutions for a very wide range of new applications. Turning to Slide 9, I thought it would be useful to step back and look at the breadth of the innovation we delivered in 2024.
Each quarter, I've been highlighting an innovation win, but there are dozens of exciting new packaging innovations that we haven't talked about. From trays and bowls to beverage multi-packs to toothpaste to [Indiscernible] packaging, we have introduced some of the most innovative, most functional, and most convenient new packaging available anywhere.
We are a clear global leader in sustainable consumer packaging innovation and we are excited about the opportunities we see in the year ahead. On Slide 10, you can see from the picture that our Waco, Texas recycled paperboard investment is moving ahead nicely.
Our decision to accelerate equipment purchases has helped us derisk key elements of the project. Today, we have all the major equipment on site and that gives our contractors more flexibility and more ways to stay on schedule.
We are signing recovered fiber contracts to coincide with the startup, setting up the logistics to bring trimmings from our own packaging plants to Waco and talking to a wide range of sources to collect and recover paper cups. We designed Waco to be able to recycle up to 15 million paper cups per day because of cups are an outstanding BioSource [ph].
Our ability to process paper costs generated in the Texas Triangle of Houston, Dallas, and San Antonio, is one of the many competitive advantage that we've designed into the support strategic investments. Stepping back for a moment, Vision 2025 was about transformational investment.
Investment and capabilities to drive greater top line consistency, investments in innovation to drive growth and create the kind of packaging that consumers prefer and investment in competitive advantage, which is what our Waco recycled paperboard manufacturing facility is all about.
Waco is the last major investment of Vision 2025 and will allow us to fully capture the competitive advantage and quality and economics that started with our Kalamazoo investment and will soon be in place throughout North America. Turning to Slide 11. Vision 2030 marks our transition from major transformational investment to innovation and execution.
We have built a world-leading sustainable consumer packaging company on a foundation of innovation, an exceptional team, and a commitment to protecting and preserving the plant. We focus our resources to deliver outstanding results for customers, stockholders, and all our stakeholders.
We are already making excellent progress towards our Vision 2030 goals and aspirations and I'm incredibly proud of the results our team delivered in the challenging market environment we and our customers faced in 2024. Now, let me turn it over to Steve for a review of our company's financials and operations.
Steve?.
Thank you, Mike. Turning to Slide 12. Sales for the full year 2024 were $8.8 billion. Fourth quarter sales were $2.1 billion. Volumes, which turned positive in the third quarter, were up 1% in the fourth quarter. Full year volumes were down 1%, a modest decline given the challenging market environment.
Price declines remained steady and relatively modest at about 2%, consistent with the second and third quarters. Prices are stable as we begin 2025. The divestiture of Augusta and lower open market bleached paperboard sales reduced reported sales by $389 million for the year and by $103 million for the quarter.
Other M&A, excluding Augusta a $27 million positive for the year and a $14 million negative for the fourth quarter. The fourth quarter of two months of sales impact from the Russia divestiture, which took place in November 2023. Recent currency movement has been noteworthy following the November election in the United States.
Foreign exchange was a $15 million sales headwind in the fourth quarter, taking the full year to an approximately $24 million headwind. I'll come back to the implications that a strong U.S. dollar could have on our 2025 results in just a few minutes. Adjusted EBITDA for the full year was $1.7 billion and $404 million for the fourth quarter.
Adjusted EBITDA margins remained strong and steady at 19.1% for the full year and 19.3% for the fourth quarter. Net performance was an outstanding $270 million for the full year and $80 million for the fourth quarter, offsetting lower pricing and inflation.
The adjusted EBITDA impact of the Augusta divestiture and lower bleached paperboard sales was a negative $164 million for the full year and a negative $39 million in the fourth quarter.
Power issues in the third quarter and the decision to accelerate digester maintenance into the fourth quarter, reduced 2024 adjusted EBITDA by approximately $30 million [ph] for the full year and $5 million in the fourth quarter. These items should not repeat in 2025.
Other M&A, excluding Augusta, was a positive $10 million for the year and a negative $3 million in the fourth quarter. Foreign exchange was a $9 million adjusted EBITDA headwind for the year and $5 million in the fourth quarter. The swing we saw in foreign exchange was the largest piece of the shortfall versus our Q4 expectations.
We ended the year with $5 million in net debt and net leverage of 3 times in line with our expectations. Net debt is at a reasonable level for us given the consistency of our sales and margins, our declining capital spending needs, and the rapidly rising cash flow generation we are anticipating as we move towards 2026 and beyond.
We have no debt maturities in 2025 and only modest maturities in 2026. During 2024, we reduced outstanding shares by $5.6 million or approximately 2% even as the company invested $1.2 billion of capital and kept leverage within the target range. Slide 13 highlights the impressive margins that our business delivered in a challenging volume environment.
Despite a broad-based customer and retailer destocking and consumers under pressure from inflation, both of which reduced our volumes, we are generating appropriate value for the packages we deliver and that is translating into strong and steady margins.
Turning to the outlook on Slide 14, we expect 2025 sales growth consistent with our Vision 2030 base financial model in the low single-digits. That, of course, includes our 2% of expected innovation sales growth.
Given the volume challenges our customers are facing, the bottom of our 2025 adjusted EBITDA range assumes the year not very different from the one we just ended. Even at that level, margins would be in the 19% range, which again speaks to the strength of the business model.
Over the next six years of Vision 2030, we are confident in our ability to achieve our base model of low, mid, and high single-digit growth for sales, adjusted EBITDA, and adjusted EPS. We have quantified the impact of the foreign exchange headwind that developed in late 2024.
At current forward rates from Bloomberg, foreign exchange is an approximately $120 million sales headwind and an approximately $20 million adjusted EBITDA headwind in 2025 as compared to 2024. Our largest currency exposure is to the euro, but we also have meaningful exposure to the peso, pound, Swedish krona, Canadian dollar, and yen.
Our base financial model and our 2025 core guidance as presented on Slide 14, exclude the foreign currency impact. The column on the right, adjust those core figures to incorporate the currency headwinds.
If we leave currency aside for a moment, our expectation for 2025 would call for a relatively normal overall quarterly cadence, broadly in line with the pattern outlined on Slide 7.
In the fourth quarter, we successfully accelerated capital spending again, taking total capital expenditures in 2024 to approximately $1.2 billion versus our previous estimate of $1.1 billion.
2024 was peak CapEx for Graphic Packaging and we are now targeting 2025 capital spending in the range of $700 million, down $100 million from our previous estimate.
As a reminder, beginning in 2026, we expect capital spending to be roughly 5% of sales, with 2% of that representing maintenance capital spending and the rest available for growth projects, greenhouse gas emission projects, and other productivity initiatives.
Slide 15 provides the company's Vision 2030 based financial model and our capital allocation priorities.
Once the Waco investment is completed later this year, our priorities turned to our normal level of reinvestment for growth, which is included in our 5% sales CapEx target, growing the dividend, opportunistic share repurchase, deleveraging, and tuck-under M&A. Turning to Slide 16.
Over the next several years, we expect to generate significantly more cash than we require for reinvestment.
2025 marks the beginning a multiyear cash flow expanded cycle and we intend to deploy that incremental cash to generate outstanding returns to stockholders, while we further strengthened Graphic Packaging position as the world's leading producer of sustainable consumer packaging.
On Slide 18, you will find supplemental information that may be useful for modeling purposes. That concludes our prepared remarks. We will now turn the call back to the operator to begin Q&A.
Operator?.
Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from Lewis Merrick with BNP Paribas Exane..
Morning Mike, morning Steve. Thank you for taking my questions.
Just to start, I was wondering if you could give us a bit of a flavor for how you're thinking through the impacts from any possible tariffs that have mentioned from President Trump both for yourselves and the wider industry? And if there are any potential second order effects that might entail? And now I've just got a quick follow-up..
Yes. Thank you, Lewis. I'll start with some of the macro on that and I'll turn it over to Steve to make some commentary perhaps on the financial side of that.
I guess if you just speak for a minute around what was announced here at the end of last week in terms of Canada and Mexico, kind of high level, we manufacture products largely for customers in those geographies and the facilities we have, both in Mexico and in Canada.
If you look at kind of the cross border in North America, we would estimate that around $300 million of paperboard in some cases that's flowing in and some cartons that would flow out of the U.S. and into Canada as an example. So, it's relatively small. I think about 3% of our total sales. We really don't have exposure to China in a material way at all.
And so as you kind of look through that, the biggest impact we've seen so far has really been on the translational impact on the strengthening of these currencies. And Steve gave a pretty good explanation of what that looks like. For these tariffs are now on hold for 30 days.
So, like everybody else, we're going to have to wait and kind of see how that plays off and certainly, that's Canada and Mexico. But that's how we're thinking about it.
We do have some actions as things get clearer where we could shift some production to probably minimize some of those things once we have clear line of sight, if, in fact, something does go in and we need to respond..
Perfect. Thank you. And then just focusing a bit more on the volumes. Clearly, we returned to positive volumes in the second half of 2024.
Have you seen that trajectory sort of continue as you -- as that played out in January?.
Yes. Thanks for the question. If you kind of look macro 2024, the first half we were down 2%. The second half, we were up on 1%. We delivered $205 million of innovation sales. I'm really proud of that. Our funnel for innovation remains very strong and our confidence level.
We continue at that kind of pace with what you see on Page 8 and 9 of our debt remains very, very high. So, as we look at 2025, we've given you a guide of 1% to 2%. It's early in the year. But if you look at January, we saw -- it's our weakest quarter, as you can see on Slide 7 relative to kind of how the timing plays out with our customers.
But we actually expect growth here in Q1, and that's consistent with what we saw here in January..
Great. Thank you. I'll pass it over..
Thank you..
Your next question is from Anthony Pettinari with Citi..
Good morning..
Morning..
Hey.
Mike, could you talk a little bit about kind of the relative strength in the different substrates that you produce maybe kind of industry operating rates and how your system is operating, obviously, post-divestiture with Augusta?.
Our system is operating very well, as you saw from the performance that we generated on a year-over-year basis. And I guess the relevancy of operating rates for us is a bit diminished as you know, Anthony, relative to how we think about the business.
Specifically, what I'm talking about on our solid bleached paperboard that's mid folding cartons and are unbleached, once our bleached uncoated paperboard that we use for cup-stock, that's almost 100% integrated into our own operations. So, it's really not as relevant for us anymore. We get a ton of questions on imports.
The reality of it is, as I've told you guys in the past, it really doesn't make my list of things that keeps me up at night because it doesn't impact our overall business. Relative to CRP, coated recycled paperboard and the unbleached paperboard, those grades continue to be strong and in demand.
We're investing heavily in coated recycled paperboard, as you know, and what we're doing in Waco. And ultimately, we publicly said that the ultimate, most likely result is, we will close or smaller undercapitalized facilities in Ohio and Pac once that machine is up and running, we expect to be making commercial paper board on it in Q4 this year.
So, when you kind of think about what where that positions us, we're going to have five incredibly well-capitalized assets that are making the paperboard that we need and that flow through our 120 converting facilities spread around the globe. That's the business we're running, really selling packaging, we're selling cups.
And that's why you've seen our disclosures really make more of a shift towards end-use markets, what's the consumer doing, how we're performing in those markets because it's really more relevant for how we're running the company and how we think investors should be looking at us..
Got it. Got it, that’s very helpful. And then you talked about volume assumptions for 2025.
I'm just wondering if you could talk a little bit about pricing assumptions -- or at least the pricing environment as you start the year, both in terms of just kind of the strength of the market, but also your efforts to move customers off of the RISI index?.
Yes, Anthony, it's Steve. Good morning. Just a couple of things there. Overall, in our guide, as Mike just said, we're assuming continued modest volume growth kind of in that 2% range, consistent with our innovation engine year-over-year.
Right now, pricing heading into 2025 is pretty neutral, the 2% price declines that we managed through in 2024 are fundamentally behind us. So, we've got relative price neutrality heading into 2025, and that's pretty consistent with what we're seeing on the input cost side as well, which is pretty neutral on a year-over-year basis.
And actually, we've been very pleased, Mike and I were talking about it this morning with the progress we're making with our customer negotiations, where we're putting in place our internal duly-developed index for price changes with our long-term customers who are all multiyear contracts.
And so overall, interested receptivity has been high, and we're executing on those on a proprietary business with our customers. So, we're actually very pleased with the movement on that front..
Okay, that’s helpful. I'll turn it over..
Thank you..
Thanks Anthony..
Your next question for today is from Phil Ng with Jefferies..
Hey guys. I was curious to get your latest thoughts on the quarter itself is a little softer than we expected. A little noise with some of the movements.
Can you kind of help us flesh out whether it was productivity or just how Augusta kind of shook out? Just give us a little more color and how that kind of plays into 2025?.
Phil, it's Steve. You broke up a little.
You're referring to Q4?.
Yes, Q4. I mean I thought volumes in price was largely in line.
EBITDA is relative to consensus was a little lighter, help us think through were there any big surprises in the quarter that we should be -- a loss?.
Yes. Thanks Phil. Really two things, first, our expectations. One, volume came in at 1% and we had kind of guided for the quarter inherently in the 1% to 3%. So, volume was a little bit lighter than we expected, a little bit less promotional, activity and volume from our customers. So, about 1% was volume-driven.
At 1% of the top line, of course, that flows through our EBITDA and then really was FX. This move post the election was kind of an $8 million to $10 million hit for us relative to what we expected it to be when we last chatted and put out our guidance.
So, really, it's those two things, Phil, nothing operationally of any substance margin overall at very high at 19.3%. So, little bit of a late FX move and 1% volume versus an expectation of modestly higher were the two things caused a little bit of shortfall versus our expectations in Q4..
Okay. And when we think about 2025, your 1% and 3% volume growth, that's kind of largely assuming the markets are still pretty muted and a lot of that's innovation.
Is that the right way to think about it, Steve? And I guess the reason why I'm asking is where are you seeing some of the biggest wins on the innovation side of things? Some of the CPG companies that have called, talked about maybe dialing back on those sustainability ambitions of consumers dealing with inflation.
So, just kind of give us a little more perspective? Where are some of the wins, where are you super excited? And in any way to kind of quantify perhaps any wins you've picked up on the Rainier side just because it's a low cost, really high-quality product?.
Yes. Why don't I start, Phil, and then Mike can bring some additional context. You summarized it well. In 2025, our primary assumption is that the 2% innovation growth will be the primary driver of volume growth for the year, which assumes pretty margin -- market-neutral, so market neutrality.
Now, keep in mind, 2024, we were down 1% on volume, we were inside of that up 2% innovation, minus 3% on the market. So the market goes from kind of a minus 3% to pretty neutral on a year-over-year basis, hence the 2% volume growth on the top line price relative stability. So, that's kind of the content around that.
Mike laid it out in his commentary extremely well. The portfolio of innovation is quite wide. And it's dozens and dozens of categories and they fall across the portfolio, which is good to see a lot of singles and doubles in baseball terms.
And I'll let Mike talk about Rainier, where we're actually really quite good about the testing and the momentum on that front..
I appreciate the question on that, Phil. I guess from our standpoint, our progress for Rainier continues to accelerate. We're very pleased with what we've seen.
We've got commercial sales on that import grade, primarily in the Health and Beauty segment that are in place, our trial activity remains quite high in interest around this high-quality coated recycled paperboard that beat with bleached paperboard continues to accelerate. We'll continue to give everybody an update on that.
We're just not going to break it out every quarter. We kind of see this is one of the innovations that -- as part of what Steve just referenced..
Okay, appreciate all the color guys. Thank you..
Your next question is from Gabe Hajde with Wells Fargo Securities..
Mike, Steve, good morning..
Good morning Gabe..
I had a question about inventory levels. And I'm looking at inventory days that have kind of jumped up since 2018. And I suspect part of that might be related to the cups business maybe in a little bit more inventory for QSR to make sure that they have what they need. But it also kicked up a little bit in 2023 and 2024.
I'm just curious if there's anything that's intentional, number one? And then number two, on the production side, the paper side or maybe folding cartons, I don't suspect you guys are holding a whole lot of inventory there.
What that might imply for your own operating rates in 2025, meaning it matched up with what you expect to be kind of 2%-ish volume rates?.
Yes, you read is good. I appreciate the question you're asking there. I mean, in some cases, we did have inventories that were a bit depleted coming out of the rush through the pandemic, if you will. And so our customers wanted us to get those back to the traffic levels, which we've done.
The biggest impact on a year-over-year basis to give some of the planning we're already doing to get ready for the Waco start up as you can appreciate, we've got a couple of paperboard manufacturing facilities that we need to take down and what we need to start up. So, we have to make sure we protect our customers during that process.
You'll see that wash through pretty quickly as Waco comes online, we expect to harvest that working capital. It's something we've got an ion, we want to normalize our paperboard and the levels that we have. But when you're going through a startup like that, you've got to make sure that you cover for some of the contingencies, that's what we're doing.
There's stuff more with that..
Got it. Okay. And then maybe, Steve, you talked about kind of -- it sounded like price cost neutrality and maybe that includes productivity. We've only heard from a couple of companies thus far. But seems like labor and some of these indirect costs are still rising.
And so I'm curious what made assumption you have for the more visible direct implementation that we can track in the outside world versus maybe where you guys are doing better on the indirect side?.
Yes. Okay, you're spot on there. You summarized it well. Overall, our pricing, as we mentioned, pretty stable heading into 2025, along with the accumulation of our input costs, the input commodity costs. We continue to have labor and benefits and other inflation.
It's in that the 3%, 4% range as we've seen in the past, maybe a little lower than -- historical. But it's in that $100 million range for us on a total basis. And as such, our confidence that our productivity initiatives will more than offset that again in 2025 remains high given the productivity initiatives that we have in place.
So, those fundamentals remain intact, which is why margin stability remains extremely high. And then, of course, we'd expect to earn on the volume growth that we've shared with you. So, no those overall fundamental components of the business all around very high levels of margin stability as we head out of 2024 into 2025 really remain intact..
Got it. Thank you..
Thank you..
Your next question is from Ghansham Panjabi with Baird..
Yes, hey guys. Good morning. I'm kind of thinking back to 2024, it's clear that you made your customers started ramping promotional activity higher, but frankly, it just was not enough to move volume velocity in a material way.
Do you sense any shift in terms of what they may do different in 2025, if anything, maybe in terms of packaging mix or lower price point architecture, et cetera?.
Yes. Well, we certainly heard it in my prepared remarks that we're seeing a lot of activity around new products and trying to position things. Some of that is tied to the GLP-1 drug set there that our customers are reacting to and that creates opportunities for us.
Anytime there's a change, as you know, Ghansham, that's an opportunity for us to have a conversation with our customers.
And we are seeking those, but you read is right to promotional activity, what we really saw in 2024 was 1 customer in a category promoted, the overall segment of the category didn't really grow, it shifted that producer or that promoter actually won that at the expense of somebody else, but didn't really expand category.
We saw it on food service, too. where some of those promotions were really high, the $5 value meal as an example, where you saw mix that improved, but then a portion of the mix actually declined. And so it was really just prioritizing mix as opposed to growing the overall pie.
So, I guess, 2025 -- you say we've got a pretty neutral market assumption there. I am used by the amount of activity we see the engagement we have with customers, our confidence level is high in our innovation pipeline.
So I guess, got to kind of play out here over the next quarter or two, but that's kind of how we're thinking about it and what we saw last year..
Okay. And then my second question as it relates to -- you made some comments on tariffs and the direct impact on you, but if we kind of zoom out on the supply chain, including your customers, et cetera.
Just in terms of your conversations with them, is there any consideration to change the network of production in any way to offset what looks like is going to be a secular issue in terms of tariffs?.
Yes, I think, look, every one of our customers has got a war room set up trying try this thing out because as you well know, we're pretty quickly. And so I think they're all trying to get a pretty good beat on what kind of the path is going to be and what it looks like.
Again, I mentioned, and we know there's a 30-day reprieve now for both Canada and Mexico, but to your point, it's something that we're -- going to have to deal with. There are a fair amount of consumer goods applications at the U.S. And any of that stuff that would be made domestically ultimately benefits us.
And so I think that we look at that I already kind of mentioned imports, paperboard, something, I guess, we get asked on what does that mean to you? You heard my explanation in terms of how we can in the marketplace, but it's probably a modest tailwind for us that actually happened.
So, we're trying to through all that stuff, leveraging a large platform that we have in North America. And again, we've got 85 converting facilities across North America. That gives us a lot more options than most packaging companies and we'll obviously work really hard with our customers to mine our supply chain.
And there is two, once we've got a clear line of sight in terms of how it all it gets implemented and plays out assuming it does..
Yes, Ghansham, it's Steve. Just to add to Mike's commentary.
I think the modest potential tailwind is just a little more of a localization, if you will, of raw material production and ability to produce packaging and our 20 facility network is nicely positioned to be, as you know, close to those customers and in reasonable property and the vast majority of the paperboard that we produce for our own packages are for consumption year quite locally as well..
Perfect. Thank you guys..
You bet..
Your next question is from Matt Roberts with Raymond James..
Hey, Mike, Steve, good morning. Steve, you talked this a little bit earlier, but I want to dig into the ongoing conduct initial just a bit more. So last quarter, you announced you did address the remaining 5% of open market contracts. And so the open market portion is now a direct.
Is there some type of natural price benefit we should see in 2025 from that? And being at the contract resets in the consumer pack products, I believe you've noted that 50% are still tied to the index.
Are you able to provide more color in terms of how many contracts have come up since the initiatives was undertaken? What is the conversion rate of those been or when we should start to see more of a material benefit flow through from that initiative?.
Yes, Matt, it's Steve. I think we might take a little different take on what you're asking. I mean, as you know, we've been on a five-year journey of really being compensated appropriately for the value of our patches, and we've made a lot of progress in that regard and hence, the market stability of the business.
On the open market, 5% of the company, yes, we've made those transitions and we're being compensated appropriately for paperboard at market rates and we'll have other mechanisms in place if there is a need to move that pricing with those that small section of the customers.
And as we've talked, we're in a step-by-step renegotiation of all of our natural packaging customer contracts. And we don't really have plans to kind of put that out in percentage terms and the like because this is a journey that we've been on, and we're going to stay on. What we like is that receptivity is high.
There's a general recognition that having a transparent price change mechanism that works with our customers is something that they want as well.
So, I think, overall, I would just put it into the context of the consumer packaging company that we've become in our ability to be compensated appropriately for the packages we produce and maintain those long-standing relationships with our customers..
And I think, Matt, one other thing I'd point out on that on Slide 13, you can really see the material benefit that we're already experiencing from that effort that Steve just referenced over the last five years, the stability of our margins in out of quarters.
And if you look back in five years before we started that process, there was a lot more variation in that process. So, it's clear it's working, and our investors are benefiting from that..
No, it's all very helpful, and it certainly makes sense. And maybe holistically, if I could ask another question on the unbleached side of the business.
Maybe can you talk about how your share has trended over time? Is that market relatively stable? And given the structure, are there any differences in the contracts there versus either bleached or recycled? Or any color you could give on kind of the different dynamics that would be helpful. Thank you again for taking the questions..
No, I appreciate the question. I think on the unbleached paperboard side, there's been a lot of risky about weakness there, and we just haven't seen that. I mean our overall beverage business, as you saw, has performed quite well. It's a global business. The vast majority of that material flows through our own converting facilities.
We saw very little of that into the open market, and it's a very good grade paperboard.
So, and of course, you know what we think about coated recycled paperboard, we've made two very large-scale investments, one in Michigan and one in Texas to increase our capabilities to quality where we able to generate and ultimately, the cost position that our customers are always looking for. So, those two grades.
That's grades of paperboard and we'll continue to sell them through our converting facilities to customers..
Thanks Mike. Appreciate it..
Thanks Matt..
Your next question for today is from George Staphos with Bank of America..
Hi, good morning everyone. Thanks for the details and taking the question guys. I guess I had three questions, I'll ask them in sequence. So, first of all, as we do the guidance for the year, and the fact that this juncture ex-FX will be a little bit below your normal target of mid-single digit.
What would be the biggest sort of risk factor you see in guidance and sort of the variance there? Is it just the fact that we're stepping off at a lower point from 2024 because all the risks from the consumer, are there other factors at work as well? And that's question number one.
Question number two, food service obviously up against a tough comp and you were flat. The industry data shows some pickup in foodservice volume recognizing production, not consumption.
Have you seen any pickup in your data looking out into 2025 on the food service side because that's been somewhat encouraging? And then last, help us understand how you'll be able to use cash flow and maybe the beginning of Waco and its production to support earnings perhaps in 2025? Thanks guys and good luck in the quarter..
So, I'm going to ask Steve to do one and three, and I'll handle two there, Steve..
Thanks Mike..
So, George, on one, on risk in terms of the -- if you will, the closer control I mean, overall, of course, volume will be vertical there. And we're assuming some modest volume growth that has a market assumption that is pretty neutral as we talked earlier.
And as we've described here, that just requires our customers to have some commitments to promotion and to managing through that day-to-day life of a really stretched consumer. So, I think really kind of there evolves around volume.
Our productivity, the initiatives we have in place, we have a lot of confidence in our innovation pipeline, a lot of confidence in price and margin stability, contract negotiations are kind of in front of us. On FX, George, it can move, and that's mostly just a translation activity, which is the reason we kind of called it out for you here..
I understand. I was asking before foreign exchange, but it's -- basically, it's the volume and the consumer variability that's in the guide that you're calling out..
That’s correct George, yes, thank you..
Thanks Steve..
Yes. And then obviously, FX is separate. And then your question on cash flow is an important one.
And one, our confidence in the cash flow inflection for the business is very high, particularly given the catalyst that it will provide for margin enhancement as we move out of 2025 and into 2026 as we bring Waco to life and really inflect on the cash flow front. And that is enabler for earnings capacity as well as cash flow duration.
We're looking forward to the start of Waco. Obviously, the difficult decisions to close down other facilities as part of that, but that is in motion.
And as Mike talked earlier to Gabe's question, we're doing some building on the inventory front in prep, and we're looking forward to having that capacity for doing so and for that being a significant enabler for earning cash flow generation.
And it also related to capital allocation, I mean, it's allowing us to have confidence in how we allocate capital. Today's announcement to increase the dividend, a good, steady, growing dividend, an important part of our capital allocation priorities. And then obviously, the other priorities that we've spoken about.
So, yes, they're all related in terms of EBITDA improvement, cash flow improvement, and how we allocate capital going forward..
In regards to foodservice growth, George, and you referenced is right, we have outperformed in that space pretty dramatically. So, we do enough comps that we have to meet.
But having said that, we're investing heavily in innovation, we profiled on our last earnings call, one really great one that we put in place with McDonald's that actually -- I really like it because it's, of course, it's on a paperboard application. But for them, it ultimately eliminated two SKUs and made it into one.
We got a couple of sizes out there. We've seen the roll through of that. McFlurry out there, and we've got a number of other things we're working on this year. So, I anticipate we're going to continue to grow in the foodservice space and that's our expectation as we go into 2025..
Thanks so much..
Your next question is from Arun Viswanathan with RBC Capital Market..
Great. Thanks for taking my questions guys. Hope you guys are well. I guess the first question, going back to the inventory side. So, it looks like you took quite a bit of action over the last half year. So, I know there was some downtime. There was also some downtime a year ago in the second half.
So, I guess as it stands, would you say that your inventories are balanced where you want to be? Or is there still some more work to bring those down I think, build some inventory ahead of the Augusta closure? So maybe you can just update us on that first..
Yes. So, as I kind of mentioned there, Arun, I mean, from -- we had some rebuilding we needed to do with our finished goods coming through the pandemic. We've done that. We have to be able to service our customers in a highly variable market. We feel about where we're at. Our on-time delivery is very high, and we're servicing them very well.
As I mentioned, we made a decision to build a little bit of paperboard inventory here as we prepare for start of Waco paperboard mill, but as I mentioned earlier in my comments, that will wash you pretty quickly as we bring that mill up and running. So, by and large, we like where we're at with our finished goods.
We've got a little work to do on our raw material side. It's a focus for us, but it's a balance to make sure that we're able to respond to customer needs in a highly variable market..
Okay, that's helpful. And then I was just hoping we could address some of the concerns in the market out there around new capacity as well as imports. So, several of us have seen the reports of imports coming in from Europe, given maybe a softer demand environment there.
Are you still seeing that? Is that a credible threat to oversupply? And then similarly, there were some announcements of new capacity in CRB. There were conversions from SBS and into the U.K.
So, maybe just give us your thoughts on, yes, new capacity as well as import threats?.
I think, Arun, and I'll make a few comments on it, but this question is much better for people that are actually in the marketplace selling paperboard, which is not Graphic Packaging, we're selling packages.
In particular, I think what you're referencing is some of the FBB board that's coming into the North American market, Europe, which was up, I think, modestly last year as I look at the numbers. But again, as I indicated, it really doesn't impact our business much, if at all.
We're integrated into that in our own paperboard facility in manufacturing facility in Texas or Canada. We use almost 100% of our own material. So, the impact on that really falls on others that are participating in that market. It's the biggest market out there. It's over 4.5 million tons.
And again, I'd encourage you to ask the major producers of that paperboard grid, what their thoughts are on that. They'll have a more view than me. As it relates to people, converting into coated unbleached scrap, I think you're referencing, we've got that question.
Again, as I mentioned, we run a highly integrated process with specifications that are very particular in terms of strength and tear and that's based on decades of experience that we have flowing through our own packaging operations and customer lines that run at incredibly high speeds and are intolerable of any variation that is met.
So, I like the way we're positioned on that. We're clearly the low-cost producer of uncoated material here in North America, and that will continue to be the case. And as I mentioned to a question I got earlier, our integration rates continue to go up on that grade. So, that's how we compete there. It's really not a big issue for us..
Yes. And Arun, it's Steve. I think just there are no low-cost alternatives for converting something from a bleached paperboard into an unbleached coated, that is our product category. So, as Mike said, it's highly integrated and there are no low-cost alternatives to do that. It's just an idea..
Great. Thanks..
We have reached the end of the question inter session, and I will now turn the call over to Mike Doss for closing remarks..
Thank you, operator and thank you for joining us on our call today. There is no doubt 2024 was a challenging year for consumer product and quick-service restaurant customers. For Graphic Packaging, it was challenging, but an exciting year. We harvested capital from the business that lack competitive advantage.
We delivered significant packaging innovations to new and existing customers, and we made outstanding for Waco. And despite the headwinds, we returned to growth in the second half and delivered exceptional margin stability. Graphic Packaging is demonstrating the strength of its business model.
I'm proud of our team, excited about our innovation pipeline, and optimistic about our future. Thank you and have a good day..
This concludes today's conference and you may disconnect your lines at this time. Thank you for participation..