Hello and welcome to today's Graphic Packaging First Quarter 2023 Earnings Call. My name is Bailey, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions].

I would now like to pass the call over to our host, Melanie Skijus, Head of Investor relations. Melanie, please go ahead..

Good morning, and welcome to Graphic Packaging Holding Company's First Quarter 2023 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 first quarter earnings presentation which can be accessed through the webcast, and also on the investor 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 us on the call today. Graphic Packaging is off to a great start 2023. We continue to advance our proven strategy centered around running a different race as we build our leadership in fiber-based consumer packaging.

Our strategy is focused on driving growth by executing differentiated strategic capital investments and enhancing long-term partnerships with customers, while expanding consumer packaging expertise and innovation capabilities.

During the first quarter, strong execution by our global team enabled us to deliver on the strategy, create value for customers and shareholders while positioning the business for the future. Let's start with this quarters key highlights on slide three.

Amid a challenging macroeconomic backdrop, we drove continued net organic sales growth and margin expansion during the first quarter. This performance is a testament to the resiliency of our business model, as well as the strong and growing consumer demand for renewable recyclable fiber-based packaging.

As part of our differentiated strategy, we continue investing to capitalize on this clear consumer preference by building new capabilities and driving innovation.

As we will discuss in further detail, our recycled paperboard investment in Kalamazoo is exceeding expectations and we are making progress to build upon our distinctive competitive advantage with new mill in Waco, Texas. Importantly, we're not the only ones investing in response to the consumer preference for more sustainable packaging.

Leading brands and manufacturers recognize this consumer trend and the solution, our new capabilities and innovations can provide. We are pleased to announce today that Chick-fil-A, is going to mark better this month with our new highly insulated double wall fiber-based cups as a potential long-term solution for their beverage program.

This is the latest example of the significant opportunity for us within the food service space. Given our strong start to the year and confidence in the path ahead, we are raising our full year EBITDA guidance by $100 million to $1.9 billion at the midpoint of the range and updating other guidance metrics as a result.

In 2019, we established our original Vision 2025 goals. With the increase outlook for 2023 we are providing today we are on-track to achieve those original targets two years early and have a clear path to meet the enhanced Vision 2025 financial goals we announced in February of 2022 at our Investor Day in New York.

Slide four captures our key financial metrics for the first quarter. Sales increased 9% over $2.4 billion driven primarily by positive pricing and organic sales growth. Adjusted EBITDA of $484 million grew at a faster pace and sales as our margin expanded by 430 basis points to 20%.

This represents a new high for adjusted EBITDA margin and provides further confidence in achieving our Vision 2025 financial goals. Taken together our strong sales and EBITDA performance lead to adjusted earnings per share of $0.77, an increase of 60% versus the prior year quarter.

As we deliver on our near term financial goals, we are continuing to invest in new capabilities to build on the strong performance in the future. Most notably, we are making considerable progress on our CRB platform optimization, which is detailed on slide five.

Our new K2 machine in Kalamazoo results in Graphic Packaging operating the world's lowest production cost, highest quality coated recycled paperboard mill. The largest capital investment we've made to date K2 came to life in early 2022 as we successfully ramped production on the machine.

Now that we are fully ramped, the capability of K2 is exceeding our expectations in several ways. First is quality. We are now capable of producing a new innovative higher quality CRB grade that meaningfully expands opportunities for the substrate and our network overall. I will elaborate more on this exciting development in a moment. Second is yield.

We now expect K2 to deliver 550,000 tons of annual production compared to the 500,000 tons we previously announced. And finally, financial benefits. We had previously announced the investment would drive approximately $130 million of incremental annual EBITDA improvement over three years.

I'm pleased to report that we now expect to reach that target in only two years of full year ahead of schedule. The outstanding execution of the K2 ramp is a testament to the great work and dedication of our Kalamazoo team.

Additionally, the success of the investment provides us with the expertise and confidence to continue to strategically invest to redefine the fiber-based consumer packaging landscape, as we are doing in Waco.

We announced the Waco investment less than three months ago and we have already made meaningful progress excavating the site, ordering equipment, completing the foundation and recruiting key employees. We remain on-track to meet our previously communicated timeline, including the startup of the machine in the first quarter of 2026.

Taken together, these investments helped us meet the increased demand for CRB at an unmatched cost compared to our competitors. The investments in Kalamazoo, in Waco will allow us to optimize our network further by closing higher cost mills, while still expanding capacity strategically over time.

Due to the better than expected production from K2, we have decided to close our CRB mill in Tama, Iowa during the second quarter, earlier than we had previously anticipated. Among our recycled paperboard mills, Tama has the smallest capacity and the highest cash production costs per ton.

As closure advances our strategy to simplify our paperboard network well strategically expanding capacity and lowering cost. Factoring in both Waco and plan mill closures, our optimized mill network will net proximately 5% more capacity than we currently have today with flexibility to adjust capacity in line with demand.

As I mentioned a moment ago, our CRB investments don't simply deliver cost and production advantages, they enable us to make an entirely new grade the highest quality coated recycled paperboard available.

By utilizing K2 state-of-the-art technology, we can produce the new grade of recycled paperboard with enhanced appearance and performance characteristics as well as superior economics.

The improved quality expands the breadth of our opportunities for CRB-based packaging to new consumer end markets that have historically only been served by virgin substrates, such as FBB or SBS or other materials. Slide six illustrates a few examples of where we expect CRB to play over time.

In short we expect to see CRB and more products and consumer experiences. We're in the early innings and are currently conducting trials of our higher quality CRB grades. We look forward to sharing more on these opportunities in the coming year as part of our ongoing innovation story.

The adoption of CRB for certain packaging applications historically require a virgin fiber will enable continued substrate optimization across our mill network. This is important as it frees up virgin capacity in our other mills to capture growing global demand without the need for additional capital investments.

Our CRB investments in paperboard great innovation are clear examples of what I mean by running a different race. We are creating opportunities for ourselves and for our customers to deploy fiber-based consumer packaging options in places where that simply hasn't been possible in the past.

This is a key factor in driving not only the depth of our customer relationships, but also our growth and performance. Slide seven is a great example of innovation at our virgin substrates and the enormous opportunity to replace packaging created from non-renewable resources not as widely recycled as fiber-based packaging.

Illustrated on this slide is our proprietary highly insulated double-wall fiber-based cup solution developed as an outstanding alternative to the foam cup.

Our new cup boasts a number of features that set it apart from others available at quick-service restaurants providing consumers a dual cup solution that sweats less, is more durable and has enhanced insulation properties, delivering added appeal to consumers are the improved sustainability features.

The result is a better beverage experience for the consumer. Chick-fil-A, is the largest quick-service chicken restaurant chain in the United States and an existing Graphic Packaging customer.

Today, we are announcing an expansion of that relationship with the launch of our proprietary cup innovation in Chick-fil-A, locations from California to Maryland. Stage one of that launch is focused on approximately 10% of the customer's restaurant footprint.

Over time, our innovation can be a potential long-term solution for Chick-fil-A beverage program, including the ability to work in both cold and hot beverages.

Driving innovation with industry leaders like Chick-fil-A is a great example how leading brands are investing to transition toward more sustainable packaging solutions and how we are partnering with them to effectively manage that transition.

While progress has been made to transition away from foam and plastic, Americans still use roughly 45 billion of these cups each year. Consumers are calling for change and environment less ways. Our customers are looking for us to help.

We believe our new insulated cup innovation has tremendous potential to win and what we estimate is a $2 billion addressable foam and plastic cup market in the U.S. To put that in different terms, our $2 billion addressable market opportunity equates to roughly 600,000 tons of SBS paperboard demand.

We are uniquely positioned to service this demand by leveraging our integrated platform as our customers meet to call from consumers. Our CRB mill project underway in Waco, with its enhanced cleaning of separation system will provide increased cup recycling capabilities.

We look forward to partnering with QSR customers like Chick-fil-A and enhanced cup recycling programs and support on move to a more circular economy. And with that, I'll turn the call over to Steve to provide more detail on the quarters financials..

Thanks, Mike and good morning. Turning to slide eight, and the key financial highlights for the first quarter. As Mike mentioned, it was a great start to the year.

Net sales increased 9% year-over-year to over $2.4 billion driven by positive pricing execution and 1% in organic sales growth, partially offset by planned lower open market paperboard sales and foreign exchange impact. As you can see on the right side of the slide, our sales performance benefited from the diversity of our portfolio.

Our food, beverage and consumer markets, which together represent approximately 80% of our portfolio increase sales 8% year-over-year. The foodservice market, which represents approximately 20% of our portfolio grew by 13% compared to the prior year period. Adjusted EBITDA was $484 million, up $134 million over Q1 last year.

The 38% year-over-year increase was driven by price execution, organic sales growth and net performance. We're very pleased to see adjusted EBITDA margins at nearly 20% during the quarter consistent with our goal for Vision 2025. Adjusted EPS continued to expand growing 60% year-over-year to $0.77.

As a reminder, our sales and EBITDA waterfalls are available for reference in the appendix of today's presentation. Liquidity remains very strong at over $1.2 billion. Our paperboard integration rate increased to 75% during the quarter, up 200 basis points from the prior year period.

Meanwhile, we are pleased that our backlogs and operating rates remain healthy. Our backlogs were down slightly to six weeks across all substrates. This level is more in line with historic norms and supports our growth, while allowing us to provide exceptional service to our customers.

Operating rates across the business remained high in the mid 90s in the first quarter. We continue to return cash to shareholders consistent with our balanced capital allocation approach. During the quarter, we paid a quarterly dividend of $0.10 per share totaling $31 million.

We also repurchase $28 million of shares to offset dilution related to long-term incentive compensation. Slide nine features our current guidance targets for 2023.

Given our strong start in outlook for the balance of the year, we're pleased to be in a position to increase our 2023 guidance for adjusted EBITDA by $100 million to $1.9 billion at the midpoint of our guidance range.

As a result, we've also increased expectations for adjusted EPS by $0.20 to a range of $2.70 to $3.10, and updated our year end net leverage ratio target to be at or below 2.5 times. We're also reiterating our guidance for sales and cash flow.

Robust cash flow generated from our business this year will result further pay down of debt while providing flexibility for continued investment in the business. Turning to slide 10. You can see the substantial progress we've made since announcing our original Vision 2025 goals in 2019.

As Mike already noted, the improved 2023 guidance we are announcing today puts us on track to achieve our original Vision 2025 financial goals two years early. We remain confident in the path ahead and our ability to achieve our enhanced Vision 2025 financial goals provided last year. Thank you for your time this morning.

With that, let's turn the call back to the operator to begin the question-and-answer session.

Operator?.

Thank you. [Operator Instructions] Our first question today comes from the line of Ghansham Panjabi from Baird. Please go ahead. Your line is now open..

Yes. Thank you, operator. Good morning, everybody.

Could you just start off by giving us more detail on what you exactly saw across the major verticals that you have exposure towards breakdown between foodservice, packaged food, beverage? And also if there's any notable divergence across your two major geographies? I'm just asking because there's a lot going on with inventory destocking and so on..

Yes. Ghansham, good morning, Steve. Just to start that, I think if you look at our organic sales growth, the 1%, we saw continued organic sales growth in Europe, which was driven by the innovation engine that we have there. We saw growth again in our foodservice platform.

And all that was partially offset by a very slight decline in kind of the core food, beverage and consumer businesses in the Americas. So, as we've seen, in the past, the portfolio held up extremely well, some positives, and then obviously, some of the places to destocking as you mentioned, we're not immune to.

Those very small and a slight decline in the Americas for food, beverage and consumer..

Got it. Perfect. And then to my second question, obviously, a very, very strong year in 2023 from an earnings standpoint. And I know it's incredibly early.

But as we think about our earnings outlook for 2024, should we expect productivity to be in the vicinity of what you're projecting for this year? And at this point, do you foresee a path for earnings growth in 2024, despite to be up, despite what will be a very difficult comparison?.

Yes. Ghansham, I'll start. Then Mike can add some additional color. Obviously, you said it well, it's very early. Yes, we've finished the first quarter. But as we look out in 2024, we would expect our model to continue to advance forward. We would expect to see 100 -- 200 basis points of organic sales growth that we can earn on.

And we would expect very strong productivity again, in 2024.

We'll have our normal $50 million to $70 million of productivity, we would expect that we would always have line of sight too, but it is noteworthy, we would expect to have less, both planned and unplanned maintenance downtime next year, as we look at it, both based upon some of the unplanned downtime that we've had here in the first quarter, as well as less planned downtime next year.

So to your question, yes, productivity should be on the high end of our historical norms. And then overall, the balance sheet will be in a great spot. Obviously, if we continue to take that down, interest costs would move down relative to EPS, or the balance sheet will be in a place, that drives strategic optionality.

And Mike, do you want to add anything to that?.

Yes, I think that's right. Ghansham, if you look at the fine point we put on guidance having debt-to-EBITDA ratio down at 2.5 times or below the end of the year, while we're investing in Waco. We've got a tremendous amount of optionality as we go into 2024 to continue to deploy capital in a way that benefits shareholders and customers..

Okay, fantastic. And congrats on the Chick-fil-A lunch as well. Thank you..

Thank you, Ghansham..

Thank you. The next question today comes from the line of Cleveland Rueckert from UBS. Please go ahead. Your line is now open..

Good morning, everybody. Thanks for taking my question. Just a couple of brief ones from me, because story is pretty clear at this point. I guess start, can you maybe give us some more color on what's driving that $100 million increase in EBITDA, the midpoint of the guidance? You didn't take revenues up. So there's something on the margin.

Is that really just the productivity you're getting out of K2 as of sort of the input cost there? What's kind of driving that change?.

Yes. Cleveland, its Steve. I'll be glad to do that. If you kind of look through the guidance, the incremental $100 million is primarily driven by an improvement. Overall to our price execution, we took the midpoint of that up $50 million. And we took the midpoint of our inflation guide down $50 million.

So the net of that is the $100 million overall, the Kalamazoo positive is driving incremental productivity. It was offset by the first quarter unplanned downtime that we had at West Monroe, those two negate out to roughly zero. So the net improvement is a improvement in overall price cost..

Got it. Okay. That's very clear. And then just quickly following up on the sort of the longer term Vision 2025. I guess, the area that maybe got some work to do on is in the integration side.

Just be curious if you can get to that 90% plus integration level with your existing platform? Or if the strategic options that you opened the door to discussing a second ago, would be sort of an area of focus downstream in terms of integration?.

Cleve, thanks for the question. I think if you go back to 2018, and really look at it on combined basis when we acquired the consumer packaging business international paper, our combined integration rate at that time was 62%. And we just announced this quarter that we increased 200 bps over where we finished last year, we're now at 75%.

So we made tremendous progress really over the last five years along those lines. And as you know, that's been a combination of both inorganic, some tuck under acquisitions that we've done, as well as our organic growth, which is three years stack coming into this year was roughly 10%. And we continue to grow here in the quarter.

So it's going to be a combination of both of those things. But if you just kind of wind the clock forward as in supply agreements that we talked about at the end of last year unwind, we'll be pushing towards 80% by the end of this year as we head into 2024.

So our confidence is high that will be in that range and be heading towards 90% over the next couple of years..

Got it. Thanks very much for that. I'll hand it over..

Got it..

Thank you. The next question today comes from the line of George Staphos from Bank of America. Please go ahead. Your line is now open..

Hi, everyone. Good morning. Thanks for the details, and congratulations on the progress so far this year. I guess the first question, on CRB and broadening the application that CRB can get into including some food and market.

Can you explain how you're getting around the food contact issues with recycled material and the substrate? Is there anything that you need to add that would ultimately take away from the sustainability of that packet? And I had a follow on..

Yes. Thanks, George. I appreciate the opportunity to talk a little bit about that new grade, which by the way, we're trading, we're going to call renoir [ph] as we put in the materials there.

And the reason for that is if you look at the appearance properties of that particular graded paper that we're going to manufacture, the brightness and the smoothness are substantially similar to SBS grade.

So, when we think about that grade, how we're going to position in the marketplace, it'll compete for some food applications, for sure, both here and in Canada.

But the real area that we believe we can push that was in some of the health and beauty pharmaceuticals, anything that has a bottle or a blister pack that's kind of encapsulated with carton, historically, those have been operating products. And so, by definition, they were patched in SBS, and we did some of that as well.

But now that we've got a CRB that can compete with CRB sheets that can compete with the appearance properties there, we see a lane there that's quite large that over time that we're going to continue to find ways to penetrate. And so, that's really where our focus is going to be with that particular grade.

We've got some other grades that we're able to make in Kalamazoo that have high sizing that can work well in freezers, making dough, we've got the ability to make grades and package beverage, that's really what that slide was trying to point out, is that you're going to see more CRB in more places.

And it's a couple of $100 on advantage over SBS when you look at it, what it is. And so, you can imagine customers if they can give the appearance capabilities, there's a lot of interest there. So, we'll be in trials here in the second quarter in a pretty heavy way.

Your focus initially on Kalamazoo with paper cost, though, we committed that we would do that, as you heard Steve saying in his prepared remarks, we're on track to deliver the $130 million of EBITDA improvement one year early.

So now our focus has turned to how do we take advantage of what is a very unique formation, back end, and for front end of the machine, our calendaring capabilities and our coding capabilities, which really no one else except for us have in North America here. And we've got them in Kalamazoo and in Waco as well. So that's what we're doing..

Thanks for that Mike. I had a couple of other follow-ons on that. But I'll say for the offline. I guess, the other question I had. So again, I think so far not many companies that we track had organic revenue growth in this quarter.

Having said that, at least from our math, your organic revenue that you put up was a little bit under 1%, 0.6%, 0.7% nothing to sneeze at, but a little bit below what you'd been targeting.

Can you talk about whether there were any variances that were a bit surprising to you in terms of your key end markets maybe going back a little bit to Ghansham's question.

And kind of what the exit rate is in 2Q relative to that 100 to 200 basis points, and relatedly, whether or not we're in a recession, it's obviously a tougher environment out there.

Is there anything else that you're rolling out of the playbook as we go through the next couple of years to prepare for this sort of volume uncertainty that a lot of companies are dealing with? Thank you guys..

Yes. So I'll start by saying, look, we were really pleased with our performance of Q1 as relates to volume. When you compare it against kind of the rest of the packaging world, we showed positive growth. And it's really a testament to our diversified and use market participation strategies that we've grown on how we built the company.

You heard Steve talk about both Europe and foodservice grew. Food services quite strong, and you'd expect it to be with unemployment at 3.6%. And people wanting mobility and convenience. We expect that to continue to be the case. There was a little destocking in the Americas side of the business, as you said, we're not immune to that.

But what you have to remember for most of the products that we packaged, they've got an expiration date. They've got a born on date. And so those things have to be used within a pretty defined period of time. So, we're not as quite as exposed as maybe some industrial segments are along those lines.

So that actually gives us confidence that we'll continue to find ways to grind out 100 to 200 basis points over the medium to long-term. And if you look at how we exited Q1 and Q2, I'd say it's substantially similar to what we saw in Q1..

Okay. I will turn it over. Thank you..

Thanks, George..

Thank you. The next question today comes from the line of Kieran de Brun from Mizuho. Please go ahead. Your line is now open..

Hey. Kieran..

Please ensure you are unmuted locally..

Sorry about that. I was on mute. I apologize. Good morning..

Hey good morning..

It seems like pricing is still trending better, even though commodity prices are actually coming down.

So, can you just talked a little bit more about how we think about that relationship into the back half of the year? And if we see raw [ph] subside further how, and I know it's preliminary, but maybe how we should think about that into 2024?.

Yes. Kieran, it's Steve, You touched on it, I mean, price execution in Q1 was very good, very contractual as we've committed and a lot of the changes in overall terms and conditions and the relationships that we've established with our customers short, medium and long-term.

Obviously, given that we don't have any incremental new increases in the marketplace, you'll see some step down on the pricing as you would expect $230 million will step down into the ones and then down into the under $100 million to kind of get that path towards $500 million, the roll through obviously wouldn't be substances you got to roll into 2024, because most of it would have been realized.

That being said, overall inflation, commodity input cost inflation, while lower than the original expectations we established at the beginning of the year, are still net inflationary. And so, it's pretty neutral in terms of the pricing implications of that overall across the portfolio.

And so, to your question as we kind of roll it in 2024 we'll continue to be extremely mindful of monitoring inflation and making price adjustments as needed to offset inflation if we continue to see it come through the business. So that part of the model wouldn't at all expect to be changed as we marched through 2023 and into 2024..

Great. Thank you. And then, maybe just one quick follow up, and this was discussed a little bit before, but clearly you're generating strong cash. You have a very strong liquidity position.

So, how do we think about capital deployment priorities as we go into 2024? I mean, specifically, if you were to think about M&A or any investments along those lines, and I think it was discussed, like is that? Is it focused on integration? Are there any places where you want to see further growth, where there's geographic or in terms of health and beauty or some other areas where you maybe have a little bit less exposure?.

Yes. Thanks, Kieran. So, look, our focus in 2023 is really to make sure that we are at or below the 2.5 times lever in years you've talked about at his prepared remarks. So that's our focus this year. For 2024, we'll continue to run a balanced capital allocation process like we've been doing for really the last year five to seven years.

In that there's a variety of levers we can pull there. And we do those in order to maximize shareholder value. And the good news for us is we're going to have a lot of cash to be able to do that with in terms of above what we're generating as debt balances continue to go down. And we're able to do that even with what we're doing in Waco.

So we're quite excited about it..

Great. Thank you very much. I'll turn it over..

Thank you. The next question today comes from the line of Mark Weintraub from Seaport Research. Please go ahead. Your line is now open..

Thank you. One just quick clarification. So you've obviously you raised the EBITDA guidance by $100 million, EPS also nice raise there. You didn't make an adjustment to the adjusted cash flow. I apologize if I missed it.

But why no adjustment there?.

Yes. Mark, it's Steve. We are really just providing ourselves with good flexibility, primarily focused on Waco, the project is off to an outstanding start. We've got a billion dollars to invest over the next three years. As Mike mentioned in his prepared remarks, we're off and running.

So we're just giving ourselves some flexibility that if we can keep that project on-track, and in steady state, there might be a little more CapEx that would take us to the high end of the range there. The more EBITDA we earn, we've got a little bit of cash taxes. So, we're just really being appropriate around flexibility.

Obviously, debt pay down is job one this year. We're on that path into the mid fours roughly on a debt balance, which will drive the leverage below two and a half times. But we're just trying to give ourselves some flexibility on Waco. We really liked the start, we're off to, we're investing, weather has been good.

And so we're just giving ourselves flexibility on the potential timing of the cash investment there. So, nothing to change of substance other than a positive around off to a good start in Waco..

Got it. And so, it's just you'd be moving the spend forward. It's not that the spend on Waco would be more..

That's correct. Yes, as Mike mentioned we are on track, no change to the $2 billion. It's just about the timing and spend..

Right. And just wanted to -- just hone in a bit on the open market sales. And I realized that your strategy is really focusing on the organic volume growth, and you're doing a terrific job there. But maybe just give us a little bit more color on what's going on in that part of your business.

And how much of that is export versus domestic? And how you are tactically working through that part of your business in the environment that we currently are facing?.

Yes. Thanks, Mark, and good morning. Appreciate the question. From our standpoint, our export open market sales are very, very small. So, we'll start with that.

And really, as you've seen us do over the last, really five years is we're systematically doing a strategic retreat from certain parts of the open market, your North American open market, your paperboard, your segments, because we need those to run our own businesses that continues to grow. And so, you saw that on the waterfalls there.

In all likelihood, you'll see it again in quarter two, because Q1 and Q2 last year were pretty, pretty strong quarters, basically, anything that was available was sold. And so, from our standpoint, we're being very thoughtful in terms of how we use those tons.

And they're really focused to help us grow our own -- you're converting income business and ultimately take care of long-term customers that we've got on the open market side. So that's what we're doing..

Okay, appreciate it..

Thank you. The next question today comes from the line of Mike Roxland from Truist Securities. Please go ahead. Your line is now open..

Thank you. Thanks, Mike, Steve and Melanie. Congrats in a very good quarter..

Thank you..

I want to get a sense, Mike from you, in terms of how do you think about your portfolio on a going forward basis? So obviously, you built out Kalamazoo ahead of expectations. You're building out Waco right now.

Is this something that we should expect to be ongoing? So that after you're done with Waco, maybe we should expect another capital spend period where you build out -- there's another CRB mill, low cost efficient and then basically that's all you got to keep doing on a go forward basis? And similarly, are there any significant enhancements that we should expect from you with respect to both SBS and CUK?.

Mike, can you repeat the last part of the question? I want to make sure I have it..

Sure. Sorry about that. Mike.

I just want to know, in addition to what you're doing in terms of CRB optimization, are there any other significant hazards we should expect from you guys on SBS and CUK?.

Got it. No, thanks, thanks for the question. I as I talked about in my prepared comments, and I appreciate you calling it out is what we're really excited about here at Graphic is kind of when we access [ph] the Waco startup. We're going to have six world class mills to the next CRB, to the next CUK, and to the next SBS.

So we've got the redundancy, we've got the cost structure we like. They are very focused on what they do, we can build strong leadership teams and very large, well capitalized complexes like we've got there.

In the net on adding Waco, as I said, in my comments, allows us to have roughly 5% additional tons, so we'll call it 200,000 tons across 4.4, 4.5 billion million ton network.

So you think about that, what we're really excited about is we're going to be able to kind of shift substrates around within that six-mill system within the substrates to really help us grow our business.

And so, we believe, actually, that the CapEx requirements into those mills, the CUK, and the SBS mills will actually be last, because we're going to be able to open up additional tons in order to balance out the CRB side.

So, that's really one of the reasons why we did what we did in Waco too, because it frees up those cones that will then be able to use.

And so, what we'll look to do it in those mills is cost reduction projects that structure to take out carbon, take out input costs, because we're going to have the tons already that we need to run and operate and grow our business..

And Mike, it's Steve, just to add to that, as we've talked from a modeling, long-term modeling perspective, once we are in beyond Waco year over that three year period of time, we can see CapEx moving back down into that 5% sale type range similar to the historical that allows us to maintain the assets at a very high level and support that 100 to 200 basis points of growth..

Got it. Very clear and appreciate the color there. And just one quick question on what you're seeing now with respect to demand in terms of April, and anything -- April trends, anything thus far and goes to the second day of May. But anything you can comment on in terms of trends post 1Q? Thank you..

Substantially, similar to what we saw in Q1..

Got it. Great. Thank you..

Thanks Mike..

Thank you. The next question today comes from the line of Adam Samuelson from Goldman Sachs. Please go ahead. Your line is now open..

Yes. Thank you. Good morning, everyone..

Good morning..

Good morning. So I guess the first question is actually, its a clarification. If I just want to go back to where you were in mid February at the time of fourth quarter results. It seemed like the price costs kind of benefit that you realized in the first quarter was considerably above what you you'd frame back in February.

And I just want to make sure that we're properly calibrated on kind of what the source of -- was it just natural gas that really fell and was weak through the first quarter? Or help us think about the key moving pieces that drove that to be such a positive surprise in the quarter?.

Yes. Adam, it's Steve. Price execution exceeded our expectations by a bit just because of strong overall commercial performance and execution of our pricing commitments. And then yes, overall, inflation in the quarter was modestly below expectations. Hence, the move in the full year guidance range down. And so yes, you touched on the pieces apart.

We've got some things moving down on the commodity fronts that are well chronicled net gap, some logistics costs most etc. But it is being offset by items that are moving up still, like the paperboard that we acquire and purchase like chemicals. And so, we've moved the range down of inflation down to the $100 million to $300 million range.

The current mark-to-market would be on the lower end of that range consistent with the conversations that we've seen and that you just were asking about relative to kind of the mix of commodity cost movements..

Okay. Now that's really helpful. And then a second question on K2 and thinking about the implications for Waco, and this partially got addressed earlier. But as you think about K2 kind of exceeding design capacity in terms of output, you've allowed you to make the actions of Tama earlier.

But how does that as you kind of get further along with K2 as it continues to kind of reach or exceed its investment case earlier than you thought, how is that informing Waco and how you plan for it and how you think about the potential returns and EBITDA were? Think some of the network optimization benefits that could come from Waco, where still kind of upside to the investment case?.

Thanks for the question. Adam, I guess I'll start by saying, the success we're seeing in Kalamazoo, here in terms of overall productivity continues to give us, increased confidence in our ability to execute the Waco project. And do so in a way that delivers $160 million of improved EBITDA that we announced when we announced the project.

So that's really an important aspect of that. What Kalamazoo ramping up to 550,000 tons annually does which is consistent with what we announced we would do on the Waco machine as well.

It really just allows us to pull forward a closure that we announced that we were going to do later on in the process and deliver additional $30 million of EBITDA here in 2023 that Steve outlined in his prepared comments. So, we're just a little ahead of the game. We're going to have the 5% of net tonnage that we talked about there.

200,000 tons still, that's our plan. Once weight goes, you're fully operational and ramp speed. And as I said earlier, with one couple of questions we got that gives us a lot of optionality to balance out across our existing six large mill system..

Yes. Okay. All right. That's all helpful color. I'll pass it on..

Thank you..

Thank you. Thank you. The next question today comes from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead. Your line is now open..

Great. Thanks for taking my question. Hope you guys are well. Congrats on a really good quarter and progress so far. I guess, I just wanted to drill down back on their price costs. So appreciating that you did bring down the cost side a little bit.

Was that kind of chemicals and wood and energy as well? Or what were some of the -- maybe the bigger categories that drove that? And so, I will stop with that. Thank you..

Arun, it's Steve. It's the items that are pretty well known, I think the 100 million to 400 million of original guide for inflation, we took top end down to from 400 to 300. And it's mostly because of a not necessarily seen yet a re-inflationary environment, which is why we had the original range.

And yes, some of the items that are down, nat gas, pretty well chronicle, some logistics costs and OCC, which was kind of occurring when we put the original guide together. So those are the items we look at annual basket of commodities, what our expectations around it.

And as I mentioned a moment ago, just repeating as the mark-to-market, as we sit here today would be on the lower end of the $100 million to $300 million of commodity input cost inflation..

Okay, great. Thanks. And then, as a follow-up it seems like the pricing environment is also holding up relatively well.

Could you just maybe walk through the three grades and just tell us what you're seeing from a supply demand perspective? It does appear that there may have been some looseness on the CRB side, but doesn't appear that it's affecting you. And then, is it also maybe because some of the consumer categories are doing better than industrial.

And that's why box words holding up a little bit better than containerboard? Thanks..

Arun, it's Mike. So, just working off facts with what the EPA released here on Friday is probably the best way to answer your question.

Look, it's at a high level, you saw that we talked about our backlog roughly six weeks across all three substrates on average, that's a very healthy backlog and it really allows us to service our customers extremely well, as we talked about over a year ago now, I actually went back and looked at that transcript.

And we said, nine to 10 weeks, we just don't have the ability to take care of our customers as well as we need to. And so now we do, and our customers are really pleased by that it's important.

Because many of them run just in time manufacturing processes, and they need to be able to respond to the needs of the consumer, which changed pretty wildly as you know. So, that's solid. The actual operating rate for CRB was 94.7% for the quarter, which is very healthy.

SBS was a little bit divergent in terms of liquid packaging, foodservice were up at 95%. General folding was down at 85% for a total of 90. But we also know because they publicly announced it that one of our competitors is removing a mill from the system, and at 360,000 tons going away, that'll be 5.5% of capacity that goes away.

So if you kind of normalized for that, it's obviously in the mid 90s, as well. And then on the other grade, which is combined with chicks [ph] and wall based, and clearly we had some unplanned downtime that factored into it, presumably chicks and wall pacing was also somewhat we just given the housing market. So that's how we're thinking about.

And I guess maybe since you opened the door for me to talk about it, I really want to spend a few minutes on this call, just saying that I think we're making a mistake as we kind of look at it, just trying to define us Graphic Packaging as backlogs and operating rates, because at a high level we're a packaging company that happens to make the raw material that we actually convert in our system.

And we've got the ability, given the market that we've got and the high level of integration that we do have to run that system to demand. And that's in fact, what we will continue to do here going forward.

So it's really more relevant for us and for you and Steve, in my opinion, to have you guys think about us in terms of how we're driving, overall package growth and cup growth, which was positive in the quarter. And then we happen to make the raw material that we made.

So it's not that those statistics are relevant, because they are, but sometimes I think they're just an over myopic focus on those two things. So I'd ask you guys to kind of consider that as you think about the company you're going forward..

Okay. Great. Thanks a lot..

Thank you. The next question today comes from the line of Gabe Hajde from Wells Fargo Securities. Please go ahead. Your line is now open..

Mike, Steve, good morning. Appreciating I'm not a paper maker. And I think it's really great that you guys are, I guess exceeding kind of nameplate capacity on K2.

But I'm just curious, it seems pretty early for a project of that size to maybe extrapolate out the fact that okay, maybe we exceeded productivity for a few months or six months or something like that. So, why not keep that.

I guess the question is the strategy behind maybe why not keep that in your back pocket and take a little bit of EDT across your CRB system if and when things do in fact slow, as opposed to take this more permanent adjustment to the system, kind of shortly after buying the Tama mill?.

Yes. I appreciate the question, Gabe. And look, we've had a lot of those discussions internally here, the bottom line is just the momentum we have is incredibly solid. And our confidence level that we can service the business and the optionality we have within the existing assets that we still have is very, very higher, we would do it.

The last thing we want to do is put our customers in situation where they don't have the material that they need to run their business. We just wouldn't do that. So look, I think relative to what we've done here, we do have a cautious lens on it, and we've got those contingencies covered.

So, we can make that announcement that we're making, have a lot of confidence that we're going to be okay..

All right. And then, I guess I appreciate you advise us kind of, maybe not spend too much time focusing on these statistics. I'll just ask the question. To the extent that we roll forward in the second quarter and maybe you tell us backlogs are at four and a half weeks.

When do you kind of start to, I don't want to say the alarm bells go off, but just make different decisions internally in terms of running the business when those backlogs start to compress? Or is that -- I am assuming that's the determining factor, but not end be all?.

It is and look, as I mentioned earlier, the great thing that we've got a Graphic given our high integration rates is we got the ability to run a demand. The last thing we're going to do is run a bunch of paperboard and stick it into inventory and type a bunch of working capital. And look, that's all in our outlook.

And it's all in how we're operating the business. And we do that as a matter of normal course. And you can expect us to be very thoughtful in terms of how we're operating the business here.

And that's why I think it's so relevant for you to look at the top line growth of the business relative to cartons and cups in the markets where we participate in which are holding up very, very well. And you can just understand that you happen to be a packager that makes her own material.

And so, yes, I think I've covered that topic as best as I can..

Appreciate it, thank you..

Got it..

Thank you. Our next question comes from the line of Kyle White from Deutsche Bank. Please go ahead. Your line is now open..

Hi, good morning. Thanks for taking the question. I wanted to focus on the foodservice opportunity you highlighted and the 600 ton addressable market from foam and plastic cups that could convert to fiber-based in the U.S.

Does your asset base and capacity situation allow you to take advantage of this opportunity? Or would you need to shift the cup stock versus folding partner improved mix while holding capacity constant? And maybe just what can you do to ensure that you maintain your market share here for this opportunity?.

Yes Kyle, it's Mike. Thanks for the question. The answer would be, it makes just take a step back to remind everybody we make almost 400,000 tons of uncoated cup stock in the vast majority that runs through our existing system. It's a highly integrated machine that we have in Texas and Canada.

We have the ability to make cups stock in August [ph], and we do and we have, you're already this year in 2023, in order to kind of service our business and take care of customers. So, as we have opportunities to grow our cup business, which is a stated strategy, we will absolutely ship SBS general folding cartons into cup stock.

It makes a lot of sense for us to do that. And you can continue to drive our integration rates up. And that's the platform we were talking about that we've got the ability to leverage and we're kind of uniquely positioned to be able to do that because we already have those capabilities.

If Chick-fil-A launches beyond where we currently are with roughly 10% of their stores, there will be investment that's needed in our company to make sure that we've got the capacity to take care of all their needs on a wide distribution, national profile that they operate in.

But again, that's all within the 5% of sales CapEx number that Steve talked about. And we'll just deploy the CapEx there because it's where we're growing. So from a modeling standpoint, really no change that just really supports the 100 to 200 bps of organic growth that we've got feel lot of confidence in here over the medium to long term..

Yes. Kyle, just add to that to Mike's point. We have the SBS capacity capability within the 1.2 million tons to service those growing needs, and the only capital requirements would be on the converting the cup making side which we can do plant by plant. And so that's an excellent optionality.

And it's really in support of the 100 to 200 basis points of organic growth over the next several years..

Got you. That makes sense. And then on, sorry, on labor -- the labor and benefits inflation is running twice ahead when as it was two years ago. Now, obviously, it's on a bigger face with the AR Packaging acquisition, but still a pretty sizable increase.

Are there opportunities to kind of reduce this headwind using automation? Or is it just kind of new normal inflation rate for labor going forward?.

Yes. Kyle, it's Steve. Just briefly, it's generally the new norm. However, a lot of our ongoing capital tends to be around automation. And so taking labor, lower skilled labor out where it makes good sense to do, we've got a long-term, multi year strategy to do that within our capital spending expectations.

And the labor and benefits has also become a big other. So insurance and property taxes and other things that don't fall into the commodity category are fundamentally up.

And so, that's we're obviously attacking all of that in terms of the overall footprint, but yes, AR back, we came in and numbers moved up, probably modestly escalated because of higher labor rate inflation which might more stabilized over time, but I think about it more as the new norm which means that our overall productivity, commandments need to be at or above that same category as we talked at the beginning of the call..

Got you. Thank you. I'll turn it over..

Thank you. The next question today comes from the line of Phil Ng from Jefferies. Please go ahead. Your line is now open..

Good morning, Mike. Good morning, Steve. This is John on for Phil. Thank you for all the details and congrats on the good quarter. I want to just go back quickly to the Tama mill for a second. You talked about closing in the second quarter here.

Are there any cash costs associated with the closing that mill?.

John, it's Steve. They are modest. We had incentive programs in place for the team there with a longer-term in mind. But no, there's nothing that we've characterized as of substance relative to the cash cost there..

And I think that we're going to shut the mill down, as we announced. So it was just a move forward..

Right. Okay. And if I could just quickly jump to West Monroe in the second quarter. It's already back up and running.

But are there any lingering impacts from that in the second quarter?.

No..

Great. And then, if I could just squeeze one more. During the quarter, it was reported that Graphic had a new partnership with Fort Print Packaging in Bulgaria.

But I didn't really understand from the press release that what exactly the nature of the partnership was? Can you help us understand the nature of that? And maybe there any financial implication from that partnership?.

No. It's just an opportunity there with some converting partner that can help us grow our businesses. In Europe with some unique capabilities in an area that we don't have our own converting facility. So that's pretty small in terms of its overall impact on the corporation, John, but it's important for that growing segment of Europe..

And John, it's Steve. No cash investment, that's just the relationship with the converting partner, as Mike said, who can help us grow in that marketplace with assets that we don't have on the ground, but there's no cash investment..

Got it. Understood. Thank you guys very much. And I'll turn it over..

Thanks, John..

Thank you. Our final question today comes from the line of Anthony Pettinari from Citi. Please go ahead. Your line is now open..

Hey, thanks for squeezing me in. I just had a quick one. Understanding you don't give quarterly guidance, is there maybe a way to think about the cadence of how earnings might flow through over the course of the year in terms of maybe being a little second half weighted.

And as we think about the remaining three quarters of the year, are there any particular tough comps from a volume perspective, or outages that we should sort of keep in mind for modeling purposes?.

Yes. Anthony, it's Steve. Just briefly, we're executed on about 80% of our maintenance downtime here in the first half of this year. So, you're correct from an earnings cadence perspective, it's slightly edging towards the second half. But it's all planned. Maintenance downtime applications.

You'll see in the second half, in the details of our guidance that we pick up about $30 million in reduced planned, our maintenance downtime in the second half with some of those being headwinds in the first.

And you're correct, we don't provide quarterly guidance, I think you can get a sense for last year's EBITDA in the 400 range kind of stared through price cost and a little bit of net maintenance downtime headwind that we've chronicled in the details from to give you a good sense for where Q2 would be heading..

Okay. That's very helpful. I'll turn it over..

Thank you. That concludes today's question and answer session. So I'd like to pass the call over to Michael Doss for any closing remarks..

Thank you for joining us today and for your interest in Graphic Packaging. We look forward to talking to you again in August when we report our second quarter results. Thank you and have a great day..

This concludes today's conference call. Thank you all for your participation. You may now disconnect your line..