Graphic Packaging Holding Company Price & Performance (GPK)

Now, let me turn the call over to Mike.

Thank you, Melanie. Good morning, everyone. Thank you for joining our call today. Graphic Packaging is a global leader in sustainable consumer packaging. 2024, we demonstrated the strength of our business model delivering strong and steady margins in challenging market conditions. We are well positioned for 2025 and to meet our Vision 2,030 aspiration in the years ahead. For the full year 2024, Graphic packaging sales were $8,800,000,000 Adjusted EBITDA was $1,700,000,000 Margins were 19.1% adjusted EPS was $2.49 In the 4th quarter, Graphic packaging sales were $2,100,000,000 Adjusted EBITDA was $404,000,000 Margins were 19.3% and adjusted EPS was $0.59 Turning to Slide 3. 2024 marked the start of our transition from our Vision 2025 plan to Vision 2,030 which we presented at our Investor Day last February, our transformation to a leading consumer packaging company will be largely complete later this year. Will come back to Vision 2,030 later in my remarks. In May of 2024, we divested our Augusta, Georgia bleach paperboard manufacturing Facility along with most of our open market 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 stock 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 helping our customers minimize theirs fundamental to our mission. During the Q2, we applied $200,000,000 to the Augusta divestiture proceeds to repurchase approximately 2% of our common shares outstanding And during the full year 2024, we paid dividends of $122,000,000 After the close of 2024 and in recognition of 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 strong 19.1 percent 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, 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 flow 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 retails are just as committed as our branded customers to plastic production and to a more circular, more functional and more convenient packaging that consumers prefer. And finally, we delivered innovation sales growth of $205,000,000 2024. Turning to the Q4 on Slide 4. Our Waco, Texas recycled paperboard investment is moving ahead well in remains on schedule for start up in the 4th 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 2nd pillar of our vision 2,030. And keeping our team safe and focused on delivering results for customers is essential to our success. We continue to have one of the industry's best safety records and in the 4th quarter we saw improvement in employee engagement. We had 87% global participation in our recent employee survey which is really outstanding and we saw a meaningful improvement in 11 of 12 categories we measure. Engagement and safety go hand in hand and are 2 of my highest priorities. In the 4th quarter, volume was up 1%. Price was down 2%, consistent with the 2nd and third quarter results. Results in beverage, foodservice and household were relatively steady overall while food was modestly weaker health and beauty remained mixed. We saw further 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, prepared ready to eat foods, we are seeing volume gains with our convenience channel customers. The European convenience channel is a high service rep turnover refrigerated food market our extensive packaging and logistic capabilities are a critical competitive advantage.

As I noted, innovation sales growth is $63,000,000 in the quarter brought our full year innovation sales growth to $205,000,000 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 packaging solutions and no one has invested as much or built as powerful platform as we have more functional and more convenient packaging solutions that consumers prefer. Slide 5 is a reminder of just how broad our portfolio really is 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 4th quarter and full year packaging sales roughly flat with a relatively steady performance in beverage, foodservice and household of modestly weaker results in food. Food represented approximately 38% of our packaging sales in 2024 and here we saw a continuation of the uneven results we experienced all year. We saw significant gains in pasta which is seeing growth from consumers looking for simple and less expensive alternatives paired meals and takeout. We were also participating in the growth in mac and cheese. Always an affordable choice, Mac and Cheese is also benefiting the new gourmet varieties which are taking a classic comfort food off market while remaining relatively affordable. Is worth noting that in both the Americas and in Europe, privately the biggest share of the growth we are seeing in both pasta and mac and 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 Confectionery continues to see weakness in Europe as a result of high cocoa prices the U. S. Demand has been more stable, coffee and tea saw significant gains thanks in part to our board of product innovation but also from a shift in coffee consumption to 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 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 coming back at a time when consumers are increasingly visiting more stores but spending less than each one. The market will continue to shift Graphic Packaging is one of the very few companies with the capabilities to execute [indiscernible] 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, we've doubled the size of our facility and built a world class innovation center. Foodservice represented 21% of our packaging sales in 2024. After 11 consecutive positive quarters, 9 in a row, with over 5% year over year growth we saw stability in the 4th quarter against a very strong comp last year.

Multiyear outperformance of the foodservice 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 and foam replacement and the demand for better, easier to use and easier to recycle containers. Promotional activity by Quick Service Restaurants remains 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 best solutions for their strategies. Household products represents 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 as part of the portfolio in both the Americas and in Europe. And finally, Hilton 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 to part to Paysetter 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 majority of the destocking is over. If you'll turn with me to Slide 7, we present typical seasonal patterns on the left and our actual and expected experience on the right Seasonality in the 4th quarter was relatively normal in beverage where we saw the usual dip, but as I noted after 11 quarters of impressive gain our foodservice results were relatively flat in the 4th 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 consumer search 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 incremental impact from the timing of the holidays this year. As expected, I have already summarized our 4th quarter experience Looking ahead to the Q1, we expect the consumers' focus on value to remain And importantly, as you were hearing from many of our 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 in and we are encouraged by the level of engagement we are experiencing. Slide 8 outlines the company's 5 packaging innovation platforms and notes the scale of the opportunity we see in each one. Each of these 5 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 multipacks, to toothpaste to razor blade 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, can see from the picture that our Waco, Texas recycled paperboard investment is moving ahead nice Our decision to accelerate equipment purchases has helped us derisk key elements of 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 start up setting up the logistics to bring trimmings from our own packaging plants to Waco and and talking to a wide range of sources to collect, and recover paper cups. We designed Waker to be able to recycle up to 15,000,000 paper cups per day because cups are an outstanding fiber source. Our ability to process paper cups generated in the Texas Triangle [indiscernible] Dallas and San Antonio is one of the many competitive advantage that we've designed into support strategic investment. Stepping back for just a moment, Vision 2025 was about transformational investment.

Investment capabilities to drive greater top line consistency. Investments in innovation to drive growth and create the kind of packaging that consumers prefer in 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 in quality and economics that started with our Kalamazoo investment and will soon be in place throughout North America. Turning to Slide 11, Vision 2,030 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 We focus our resource to deliver outstanding results for customers stockholders and all our stakeholders. We are already making excellent progress towards our Vision 2,030 goals and aspiration. 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 $8,800,000,000 4th quarter sales were $2,100,000,000 Volumes which turned positive in the 3rd quarter, were up 1% in the 4th 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 2nd and third quarters. Prices are stable as we begin 2025. The divestiture of Augusta and lower open market bleeds paperboard sales reduced reported sales by $389,000,000 for the year and by $103,000,000 for the quarter. Other M and A excluding Augusta was a $27,000,000 positive for the year and a $14,000,000 negative for the 4th quarter. The 4th quarter reflects 2 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 $15,000,000 sales headwind in the 4th quarter. Taking the full year to an approximately $24,000,000 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 $1,700,000,000 and $404,000,000 for the 4th quarter. Adjusted EBITDA margins remained strong and steady at 19.1% for the full year and 19.3% for the 4th quarter. Net performance was an outstanding $270,000,000 full year $80,000,000 for the 4th quarter.

Offsetting lower pricing and inflation. The adjusted EBITDA impact of the adjusted divestiture and lower bleached paperboard sales, was a negative $164,000,000 for the full year and a negative $39,000,000 in the 4th quarter. Power issues in the 3rd quarter and the decision to accelerate digester maintenance into the 4th quarter reduced 2024 adjusted EBITDA by approximately $30,000,000 for the full year and $5,000,000 in the 4th quarter. These items should not repeat in 2025. Other M and A excluding Augusta was a positive $10,000,000 for the year and a negative $3,000,000 in the 4th quarter. Foreign exchange was a $9,000,000 adjusted EBITDA headwind for the year $5,000,000 in the 4th 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 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 are anticipating as we move toward 2026 and beyond We have no debt maturities in 2025 and only modest maturities in 2026. During 2024, we reduced out or approximately 2% even as the company invested $1,200,000,000 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 2,030 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 a year not very different from the one 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 6 years of Vision 2,030, 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 $120,000,000 sales headwind and an approximately $20,000,000 adjusted EBITDA headwind in 2025 as compared to 2024, Our largest currency exposure is to the Europe but we also have meaningful exposure to the peso pound Swedish krona, Canadian Dollar, our base financial model and our 2025 core guidance as presented on Slide 14 exclude the foreign currency impact. The column on the right adjusts 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 4th quarter, we successfully accelerated capital spending again. Taking total capital expenditures in 2024 to approximately $1,200,000,000 versus our previous estimate $1,100,000,000 20 24 was peak CapEx for Graphic Packaging, and we are now targeting 2025 capital spending in the range of $700,000,000 down $100,000,000 from our previous estimate.

As a reminder, beginning in 2026, we expect capital spending to be roughly 5% sales. With 2% of that representing maintenance capital spending and the rest available for growth projects greenhouse gas emission projects, and other productivity initiatives. [indiscernible] Slide 15 summarizes the company's Vision 2,030 based financial model and our capital allocation priorities. Once the Wayco investment is completed later this year, our priorities turn to a more normal level reinvestment for growth.

Which is included in our 5% of sales CapEx target growing the dividend opportunistic share repurchase deleveraging and tuck under M and 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 of a multi year cash flow expansion cycle and we intend to deploy incremental cash to generate outstanding returns to stockholders while we further strengthen Craft Packaging's 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 and A. [indiscernible] Your first question for today is from Louis Merrick with BNP Paribas Exane.

Good morning, Mike. Good 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 we've had mentioned from President Trump both via sales 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, Louis. I'll start with some of the macro on that and then I'll turn it over to Steve to make commentary perhaps on the financial side of that. I guess if you just think 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 in 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 $300,000,000 of paperboard in some cases that's flowing in some cartons that would flow out of the U. S. And into Canada as an example. So it's relatively small, I think around 3 percent 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 strengthening these currencies and Steve gave a pretty good explanation of what that looks like. Foresees 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 out for certainly that's Canada and Mexico.

But that's how we're thinking about it. And we do have some actions as things get clear 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. 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've have that played out in January? Yes. Thanks for the question on that. If you kind of look macro, 2024, the first half we were down 2%, the second half we were up 1%. We delivered $205,000,000 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 deck remains very, very high. So as we look at 2025, we've given you a guide of 1% to 3%. It's early in the year. If you look at January, we saw it's our weakest quarter. As you can see on on Slide 7 relative to kind of how the timing plays out with our customers. But we actually expect it will grow 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. 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 the divestiture with Agustin? Well, 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 us on our our solid bleached paperboard, has made fully cartons in our unbleached [indiscernible] [indiscernible] uncoated paperboard that we use for Cubstock 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, is 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 CRB, recycled paperboard and the leashed paperboard, those grades continue to be strong and in demand. We're investing heavily on coated recycled paperboard. As you know, and what we're doing in Waco and ultimately we've publicly said that the ultimate most likely result is we will close our smaller undercapitalized facilities in Ohio and once that machine is up and running, which we expect to be making commercial paperboard on it in Q4 of this year. So when you kind of think about how where that positions us, we're going to have 5 incredibly well capital assets that are making the paperwork that we need and that flow through our 120 converting facilities spread around the globe.

And 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 25%. I'm just wondering if you 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 RECE index?

Yes, Anthony, it's Steve. Good morning. Just a couple of things there. Overall in our 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 manage through in 2024 are fundamentally behind us. So we've got price neutrality heading in to 2025 and that's pretty consistent with what we're seeing on the input cost side as well, which is pretty neutral over 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 to lead developed index for price changes with our long term customers who are on multiyear contracts And so overall, interested receptivity has been high and we're with our customers. So we're actually very pleased with the momentum 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 Jefferies.

Hey guys.

I was curious to get your latest thoughts on The core itself is a little softer than we expected. Little noise with some of the movements. Can you kind of help us flush 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 Phil, it's Steve. You broke up a little. You were referring to Q4 Yes, Q4. I mean, I thought volume and price largely came in line. EBITDA lease relative consensus was a little lighter. Help us think through were there any big surprises in the quarter?

That we should be buying 12 Yes. Thanks, Bill.

Really two things. First, our expectations. 1, volume came in at 1%. 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 So about 1% was volume driven, 1% of the top line. Of course, that flows through our EBITDA. And then really it was FX. This move post the election was kind of an $8,000,000 to $10,000,000 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 sub very high at 19.3%. So a little bit of a late FX move and 1% volume versus an expectation of modestly higher were the two things that caused a little bit of shortfall versus our expectations in Q4.

Okay. And when we think about 25%, your 1% to 3% bond growth, that's kind of largely assuming 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 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 have [indiscernible] Talked about maybe dying back to those sustainability ambitions as consumers dealing with inflation. So just kind of give us a little more perspective where are some of the wins, where you're super excited, And then any way to kind of quantify perhaps any wins you've picked up on the Rainier side, because it's a low cost, really high quality product?

Yes. Why don't I start, Phil, and then Mike can bring some [indiscernible] 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 or market neutral, so market neutrality. Keep in mind 2024, we were down 1% on volume, We were part 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 context around that. Mike played 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 and baseball terms. And I'll let Mike talk about Rainier, where we're actually feeling 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 were near with Rainier continues to accelerate. We're very pleased with what we've seen. We've got commercial sales on that paperboard 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 paper.

That compete with leached 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 it as one of the innovations as part of what Steve just referenced.

Okay. Appreciate all the color guys. Thank you.

Your next question is from Gabe Hadi with Wells Fargo Securities.

Mike, Steve, good morning.

Morning, Gabe.

I had a question about inventory levels I'm looking at inventory days that have kind of jumped up since 2018. And I I suspect part of that might be related to the cups business maybe holding a little bit more inventory QSR to make sure that they have what they need. But it also kicked up a little bit in 2023 [indiscernible] Just curious if there's anything that's intentional, number 1. And then number 2, on the on the production side, the paper side or maybe folding cartons, I don't What that might imply for your own operating rates and in 2025, meaning it matched up with what you expect to be 2% -ish volume rates Your rate is good. Appreciate that the question you're asking there. I mean, in some cases, we did. Have inventories that were bit completed coming out of the the rush through the pandemic, if you will, And so our customers wanted us to get those back to contracted levels, which we've done. The biggest impact on a year over year basis, Phil gave some of the planning for our doing to get ready for the Waco startup. As you can appreciate, we've got a couple of big wood 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 that working capital. It's something we've got an eye on. We want to normalize our paperboard and the levels that we have. But when you're going through a big 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 to it than that.

Got it. Okay.

Then maybe Steve, you talked about kind of price it sounded like price cost neutrality and maybe that includes productivity. We've only heard from a couple of companies thus [indiscernible] seems like labor and some of these indirect costs are still rising. And so I'm curious, what may be assumption you have for the more visible direct inputs that we can track in the outside world, versus maybe where you guys are doing better on the indirect side? [indiscernible] spot on there. Yousef summarized it well. Overall, our pricing as we mentioned, pretty stable heading into 2025 along with accumulation of our input cost, the input commodity cost We continue to have labor and benefits and other inflation. It's in that 3%, 4% range as we've seen in the the past, maybe a little higher than historical. But it's in that $100,000,000 range for us on a total basis. And as such, our confidence that our productivity initiatives will more than offset that again [indiscernible] 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 that we've shared with you.

So no, those overall fundamental components of business all around very high levels of margin stability as we head out of 2024 into 2025 really remain intact.

Thank you. Your next question is from Ghansham Panjabi with Baird.

Yes. Hey, guys. Good morning. Mike, kind of thinking back to 2024, it's clear that you have major customers. Started ramping promotional activity higher, but frankly, 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, etcetera? Well, you certainly heard it in my prepared remarks that we're seeing a lot of activity around new products and try position things. Some of that is tied to the GLP-one 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 this right, look 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 the category. We saw it on foodservice too, where some of those promotional and were really high, the $5 value meal as an example.

Where you saw mix that improved, but then a portion of the mix actually [indiscernible] as opposed to growing the overall pie. So I guess 2025 as you heard Steve say, we've got a pretty neutral market assumption there. I am pleased by the amount of activity we see and the engagement we have with customers. Our confidence level is high and our our innovation pipeline. So I guess it's got to play out here over the next quarter or 2, but that's kind of how we're thinking about and what we saw last year.

Okay. And then for a second question as it relates to you made some comments on tariffs and the direct impact you, but if we kind of zoom out on the supply chain, including your customers, etcetera, just based 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 is kind of war room set up trying to game theory this thing out because as you well know, it's moving pretty quickly. And so I think they're all trying to get a pretty good beat on what 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 from both Canada and Mexico. But to your point, it's something that we're most likely going to have to deal with. There are a fair amount of consumer goods applications that are important into the U. S. And any of that stuff that would be made domestically ultimately benefits us. And so so I think that we looked at that I already kind of mentioned imports, paperboard, something I guess we get asked about what does it mean to you if you heard my explanation in terms of how we compete in the marketplace, but it's probably a modest tailwind for us net net if that actually happens.

So we're trying to think through all that stuff leveraging a large platform that we have in North America. And again, we've got 85 converting facilities spread across North America. That gives us a lot more options than most packaging companies and we'll obviously work really hard with our customers. Optimize our supply chain and theirs too. Once we've got a clear line of sight into terms of how it all It gets implemented, it plays out assuming it does. Yes, Gotcha. It's Steve. Just to add to Mike's commentary, I think the [indiscernible] potential tailwind is just a little more of a localization, if you will, of of raw material production and ability to produce packaging in our 100 Facility network is nicely positioned to be, as you know, close to those customers and in reasonable proximity.

In the vast majority of the paperboard that we produce for our own package is our pork consumption here quite locally as well.

Okay, perfect. Thank you guys.

You bet.

Your next question is from Matt Roberts with Raymond James.

Hey, Mike, Steve, good morning. Steve, you touched on this a little bit earlier, but I want to dig into the ongoing contract and this was just a bit more So last quarter, you announced you did address the remaining five percent of open market contracts. And so the open market portion is now addressed. Is there some type of natural price benefit [indiscernible] 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 were 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 5 year journey of really being compensated appropriately for the value of our package and we've made a lot of progress in that that regard and hence the margin stability of the business.

On the open market 5% of the company, yes, we we've made those transitions and we're being compensated appropriately for the 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 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 and our ability to be compensated appropriately for the packages we produce and maintain those long standing relationships with our customers.

I think Matt, one other thing I'd point out on that at Slide 13, you can really see the material benefit that we're already experiencing from that effort that Steve just referenced over the last 5 years. The stability of our margins in and out of quarters And if you look back 5 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 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 shares 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 there would be helpful. 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 sell very little of that into the open market and it's very good grade paperboard. So So, and of course, you know what we think about coated recycled paperboard. We've made 2 very large scale investments, 1 in Michigan and now one in Texas. To increase our capabilities, the quality where it will generate and ultimately the cost position that our customers are always looking for. So those two grades are fantastic grades of paperboard and we'll continue to sell them through our converting facilities and facilities to customers.

Thanks, Mike. Appreciate it.

Thanks, Matt.

Your next question for today is from George Staphos with Bank of America.

Hi, everyone. Good morning. Thanks for the details and taking the question guys. I guess, I had 3 questions, I'll ask them in sequence. So first of all, as we consider 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 of all the risks from the consumer, are there other factors that work as well? And that's question number 1. Question number 2, Foodservice obviously up against a tough comp. And you were flat The industry data shows some pickup in foodservice volume recognizing its production not consumption, have you seen any pickup in your data looking out into 25 on the foodservice 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 1 and 3 and I'll handle 2 there, Steve.

All right. Thanks Mike.

So George, on the on one, on the guidance risk, in terms of the if you will, the closer in controllables I mean, overall, of course, volume will be critical there. And we're assuming [indiscernible] 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 that reasonably stretched consumer. So I think it really kind of there evolves around around volume. Our productivity, [indiscernible] pipeline, a lot of confidence in price and margin stability, contract negotiations, are kind of in front of us. Obviously, FX, George, 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 both basically it's the volume in the consumer variability that's in the guide that you're you're calling out? That's correct.

That's correct, George. Yes, thank you.

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 an enabler for earnings capacity as well as cash flow generation. We're looking forward to the startup of Waco. Obviously, a difficult decision 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 for doing so and for that being significant enabler for earnings and 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 terms of EBITDA improvement, cash flow improvement, and how we allocate capital going forward.

In regards to foodservice growth, George, and you referenced it right, we have outperformed in that space pretty dramatically. So we do have tough comps that we have to meet. But having said that, we're investing heavily in innovation Profiled on our last earnings call, one really great one that we in place with McDonald's. That actually I really like it because it's course it's on a paperboard application. But for them, it ultimately eliminated 2 SKUs in it into 1. We got a couple of sizes out there. Seeing the roll through of that, [indiscernible] 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 Markets.

Great. Thanks for taking my question guys. 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 or 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? You also I think built some inventory ahead of Augusta closure. So maybe you can just update us on that first?

Yes. So as I kind of mentioned Naroom, 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 cost [indiscernible] Our on time deliveries 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 the start of the 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 have a little work to do on our raw material side. 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 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 [indiscernible] 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 FPD Board that's coming into the North American market from Europe, which is 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 paperwork facility and manufacturing facility in Texarkana. 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. So 4,500,000 tons. And again, I'd encourage you to ask the major producers of that paperboard grade what their thoughts are on that. They'll have more view than me. As it relates to people, converting into coated on bleach scrap, I think you're referencing. We've got that question Again, as I mentioned, we run a highly integrated process [indiscernible] 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 run at incredibly high speeds and are intolerable of any variation that isn't 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 the 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. Arun, it's Steve. I think and just there are no low cost alternatives for converting some from a bleached paperboard into an unbleached cooked coated that is our product category. So as Mike said, it's highly integrated and there are no low cost alternatives. Do that. It's just an idea Great.

Thanks.

We have reached the end of the question and answer session. And I will now turn the call over to Mike Doss for closing remarks.

Thank you, operator. Thank you for joining us on our call today. There's no doubt that 2024 was a challenging year for Consumer Product and quick service restaurant customers Graphic packaging. It was challenging, but an exciting year. We harvested capital from the business that lacked competitive advantage we delivered significant packaging innovations to new and existing customers and we made outstanding progress at Waco. And despite the headwinds, returned to growth in the second half and delivered exceptional margin stability. Graphic Packaging is demonstrating the strength of its [indiscernible] 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 [indiscernible] Thank you for your participation.