By the numbers: Q3 2024
Net sales: $2.22B
Down 5.7% year over year
Net income: $165M
Down 2.9% year over year
- Return to positive volumes: Executives on Tuesday morning’s third-quarter earnings call detailed a return to growth for packaging sales volumes, although demand is recovering at a more measured pace. Net sales were down compared with the prior year. Severe weather and power outages presented an unexpected $25 million impact on earnings before interest, taxes, depreciation and amortization. Executives also said sales volumes in September were softer than anticipated.
- Divestituture aftermath: Part of the net sales dip was due to a $109 million impact from the May sale of its Augusta, Georgia, bleached paperboard mill, which manufactured bleached paperboard, to Clearwater Paper. Following that divestiture, 95% of GPI’s sales are for consumer packaging — specifically cartons and cups — and only 5% for paperboard. This aligns with the company’s previously discussed strategy shift to focus more on consumer packaging.
- Pricing model shift: GPI announced that in the first quarter of 2025 it will eliminate third-party pricing indexes as a factor in new sales contracts with paperboard customers. Market movements “have become far more challenging for third parties to assess, and so perhaps not surprisingly, their results are increasingly inconsistent with what we see in the market,” said CEO Mike Doss. That makes good on GPI’s promise to reevaluate pricing models following controversy this year about leading index Fastmarkets RISI not fully recognizing producers’ price hikes. “What’s next for us is the development of a new index ... that's attached to known commodities that correlate nicely with our cost structure,” said CFO Stephen Scherger.
- Open market move: Executives said the pricing change shouldn’t have a significant impact on GPI’s bottom line in 2025, considering third-party indexes solely examine materials sold into the open market, which only accounts for 5% of GPI’s business. The company typically renegotiates with 25% to 35% of its overall customer base each year. The indexes increasingly get their information from paperboard brokers, “and there’s a disconnect,” Doss said, noting that two years ago GPI stopped selling off-grade materials to brokers.
- Innovations: “Plastic substitution is one of the more common themes across many of our innovations,” Doss said. He disclosed that GPI is a packaging supplier for the recent McDonald’s launch of four-flap, paperboard-based cups for McFlurry frozen treats, which eliminate plastic lids. That project came to fruition in about six months, whereas development and testing for others takes a year or more. “You’ve got to have a steady stream of these things, to be working on them all the time, because it’s not linear how it plays out,” Doss said.
- Waco update: Building on the announcement earlier this month that construction is advancing well at GPI’s forthcoming recycled paperboard mill in Waco, Texas, Scherger said preparation is underway for major equipment installations. GPI recently made its first permanent hires for that location, with more to come. Startup is still expected in the fourth quarter of next year.
- Consumer sentiment: As consumers continue to curtail purchasing and seek deals following years of inflation pressure, GPI’s customers, such as quick-service restaurants, continue their promos. “Whether increased promotional activity will help restore sustainable volume growth remains an open question so far,” Doss said. The company saw strength in the private label and club warehouse sectors as consumers similarly seek those options for better value over name-brand products.
- Outlook: Graphic Packaging expects that promotional activity will be one factor further improving volumes in Q4. But “the strength and timing of that recovery has become more difficult to estimate,” Doss said. Graphic Packaging now expects 1% to 2% volume growth in the second half of 2024, down from the previously stated 3% to 4%. Executives have referred to 2024 as “peak CapEx” for the company; they anticipate an approximately $300 million spending decline next year.
