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Graphic Packaging Holding Company Reports Fourth Quarter and Full Year 2019 Results

Press release from the issuing company

Announces Initial $250 Million Acquisition of International Paper's Minority Ownership Interest in Partnership, Settlement of Approximately $900 Million in U.S. Pension Plan Obligations and $40 Million Acquisition of a Folding Carton Facility from Quad/Graphics, Inc.

Atlanta, Ga. –

2019 Highlights

  • Net Sales were $6,160.1 million versus $6,029.4 million in the prior year period.
  • Earnings per Diluted Share were $0.70 versus $0.71 in the prior year period.
  • Adjusted Earnings per Diluted Share were $0.87 versus $0.81 in the prior year period.
  • Net Income was $206.8 million versus $221.1 million in the prior year period.
  • Adjusted EBITDA was $1,029.9 million versus $971.0 million in the prior year period.
  • Introduced Vision 2025, focused on long-term goals for the Company, including a shift to 100 to 200 basis points of sustainability supported net organic volume growth.
  • Fully integrated the SBS mill and foodservice assets; achieved run-rate synergies of $75 million at year-end.
  • Announced and started execution of a $600 million transformational investment in a new coated recycled paperboard (CRB) machine to achieve best-in-class quality and lowest cost production in the industry.
  • Completed the acquisition of Artistic Carton Company for $53 million.
  • Returned $242 million to stakeholders through dividends, distributions and share repurchases.

Announcements

  • Acquiring initial $250 million of International Paper's minority ownership interest in partnership.
  • Settling approximately $900 million in pension obligations related to largest U.S. pension plan.
  • Acquiring folding carton facility from Quad/Graphics, Inc. for $40 million.

Graphic Packaging Holding Company, (the "Company" or "Graphic Packaging"), a leading provider of packaging solutions to food, beverage, foodservice, and other consumer products companies, today reported Net Income for fourth quarter 2019 of $33.0 million, or $0.11 per share, based on 291.7 million weighted average diluted shares. This compares to fourth quarter 2018 Net Income of $47.5 million, or $0.15 per share, based on 306.8 million weighted average diluted shares.

Fourth quarter 2019 Net Income was impacted by a net $34.0 million of special charges, including a non-cash pension plan settlement charge, that are detailed in the Reconciliation of Non-GAAP Financial Measures table attached. When adjusting for these charges, Adjusted Net Income for the fourth quarter of 2019 was $67.0 million, or $0.23 per diluted share. This compares to fourth quarter 2018 Adjusted Net Income of $69.4 million, or $0.23 per diluted share.

For the full year 2019, Net Income was $206.8 million, or $0.70 per share, based on 294.8 million weighted average diluted shares. This compares to 2018 Net Income of $221.1 million, or $0.71 per share, based on 310.1 million weighted average diluted shares.

Full year 2019 Net Income was impacted by a net $48.9 million of special charges that are detailed in the attached Reconciliation of Non-GAAP Financial Measures table. When adjusting for these items, Adjusted Net Income for full year 2019 was $255.7 million, or $0.87 per diluted share. This compares to Adjusted Net Income for the full year of 2018 of $251.3 million, or $0.81 per diluted share.

Michael Doss, the Company's President and CEO said, "We are very pleased with our performance and execution in 2019, as well as the positive momentum we have entering 2020. In 2019, we continued to build on our paperboard packaging leadership position by investing in our operations and in our people, successfully executing strategic M&A, capturing performance gains and setting the stage for net organic volume growth. Full year 2019 Adjusted EBITDA increased 6.1% to $1.03 billion, driven primarily by pricing actions and our performance initiatives. We expect to generate 100 to 200 basis points of sustainability supported net organic volume growth in 2020, driven by conversion of new and existing customers to our paperboard packaging solutions. Graphic Packaging is well-positioned to achieve another year of improved profitability and growth."

Initial $250 Million Acquisition of International Paper's Minority Interest in Partnership

Graphic Packaging Holding Company announces today that International Paper has notified the Company of its intent to begin the process of reducing its ownership interest in Graphic Packaging International Partners, LLC (the "Partnership"). Per the agreement between the parties, Graphic Packaging will purchase approximately 15.1 million partnership units from International Paper for $250.0 million. As a result, International Paper's ownership interest in the Partnership will decrease from approximately 21.6% to 18.3%. The purchase will be funded with a draw on Graphic Packaging's domestic revolving credit facility. At the end of 2019, the Company had availability under the domestic revolving facility in excess of $1.4 billion. International Paper has the contractual right to continue to reduce its minority ownership interest in the Partnership every 180 days with the next potential transaction date in July 2020, subject to modification by the parties.

Michael Doss added, "Our strong cash flow generation and healthy balance sheet provide us the flexibility to purchase the initial $250 million of minority interest from International Paper. The 2018 transaction with International Paper has successfully created value for our customers and stakeholders while building a leading integrated paperboard packaging platform. We appreciate the confidence International Paper placed in us to build and grow the business. The transaction significantly increased our addressable market and vertical integration opportunities, while accelerating our presence in fiber-based packaging solutions."

Settlement of Approximately $900 Million in U.S. Pension Plan Obligations

The Company is also announcing the settlement of approximately $900 million in pension obligations related to its largest U.S. pension plan. The benefit obligations will be settled through a combination of lump sum payments made in the fourth quarter of 2019 to plan participants electing such payments and the purchase of a group annuity contract to transfer the remaining pension benefit obligations to an annuity provider in the first quarter of 2020. The Company took a non-cash settlement charge of $39.2 million in the fourth quarter of 2019 related to the lump sum payments. The Company anticipates taking a non-cash settlement charge of approximately $150 million in the first quarter of 2020 related to the transfer of the liability to the annuity provider.

$40 Million Acquisition of a Folding Carton Facility from Quad/Graphics, Inc.

Finally, the Company announces that it has reached an agreement to acquire a folding carton facility from Quad/Graphics, Inc. for $40.0 million, subject to standard closing conditions. The approximately 400,000 square foot converting facility is strategically located in Omaha, Nebraska, close to many existing food, beverage and industrial customers. The business generates approximately $75 million in revenue, consumes roughly 40,000 tons of paperboard, and is expected to generate approximately $7 million in annualized EBITDA including synergies over the next 24 months. The anticipated close date for the transaction is January 31st.

Operating Results

Net Sales

Net Sales increased 0.7% to $1,519.8 million in the fourth quarter of 2019, compared to $1,509.3 million in the prior year period. The $10.5 million increase was driven by $25.5 million of higher pricing partially offset by $10.8 million of unfavorable volume/mix and $4.2 million of unfavorable foreign exchange.

Net Sales increased 2.2% to $6,160.1 million for the full year 2019, compared to $6,029.4 million in the prior year period. The $130.7 million increase was driven by $131.2 million of higher pricing and $50.2 million of improved volume/mix related primarily to acquisitions. These benefits were partially offset by $50.7 million of unfavorable foreign exchange.

Attached is supplemental data highlighting Net Tons Sold by quarter for 2019 and 2018.

EBITDA

EBITDA for the fourth quarter of 2019 was $205.6 million, a decline of $5.0 million from the fourth quarter of 2018. After adjusting both periods for charges associated with business combinations and other special charges, primarily the pension plan settlement charge in 2019 and the extended Augusta mill outage charge in 2018, Adjusted EBITDA increased $10.7 million to $258.8 million in the fourth quarter of 2019 from $248.1 million in the fourth quarter of 2018. When comparing against the prior year quarter, Adjusted EBITDA in the fourth quarter of 2019 was positively impacted by $25.5 million of higher pricing, $5.7 million in deflation (primarily in secondary fiber and energy), $4.8 million in improved net operating performance and $1.6 million of favorable foreign exchange. These benefits were partially offset by $15.4 million of unfavorable volume/mix and $11.5 million of other inflation (primarily labor and benefits).

EBITDA for the full year 2019 was $952.0 million, or $43.9 million higher than the full year 2018. After adjusting both periods for business combinations and other special charges, Adjusted EBITDA increased 6.1% to $1,029.9 million in the full year 2019 from $971.0 million in the full year 2018. When comparing against the prior year, Adjusted EBITDA in 2019 was positively impacted by $131.2 million of higher pricing and $37.9 million of improved net operating performance. These benefits were partially offset by $46.4 million in other inflation (primarily labor and benefits), $32.7 million of commodity input cost inflation (primarily wood and external board), $22.0 million of unfavorable volume/mix and $9.1 million of foreign exchange.

Other Results

Net Cash Provided by Operating Activities was $665.8 million for the full year 2019, compared to a Net Cash Use of $373.8 million during the full year 2018. Adjusting for the new GAAP guidelines related to the classification of certain cash receipts and payments associated with our receivables securitization and sale programs and the cash payments associated with special charges, Adjusted Net Cash Provided by Operating Activities was $880.4 million for the full year 2019, compared to $814.5 million for the full year 2018. Adjusted Cash Flow was $527.5 million for the full year 2019, compared to $468.7 million for the full year 2018.

Total Debt (Long-Term, Short-Term and Current Portion) decreased $130.0 million during the fourth quarter of 2019 to $2,872.8 million compared to the third quarter of 2019. Total Net Debt (Total Debt, net of Cash and Cash Equivalents) decreased $234.2 million during the fourth quarter of 2019 to $2,719.9 million compared to the third quarter of 2019. The Company's year-end Net Leverage Ratio was 2.64 times Adjusted EBITDA compared to 2.98 times at the end of 2018.

At December 31, 2019, the Company had available liquidity of $1,710.2 million, including the undrawn availability under its global revolving credit facilities.

Net Interest Expense was $34.2 million in the fourth quarter of 2019, up compared to the $33.6 million reported in the fourth quarter of 2018. For full year 2019, net interest expense was $140.6 million compared to $123.7 million in 2018.

Capital expenditures for the fourth quarter of 2019 were $123.0 million compared to $125.2 million in the fourth quarter of 2018. For full year 2019, capital expenditures were $352.9 million compared to $395.2 million in 2018.

Fourth quarter 2019 Income Tax Expense was $15.4 million, compared to a $13.3 million expense in the fourth quarter of 2018. Full year 2019 Income Tax Expense was $76.3 million compared to a full year 2018 Income Tax Expense of $54.7 million.

Please note that a tabular reconciliation of EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income, Adjusted EPS, Adjusted Net Cash Provided by Operating Activities, Adjusted Cash Flow and Total Net Debt.

Earnings Call

The Company will host a conference call at 10:00 a.m. EST today (January 28, 2020) to discuss the results of fourth quarter and full year 2019. The conference call will be webcast and can be accessed from the Investors section of the Graphic Packaging website at www.graphicpkg.com. Participants may also listen via telephone by dialing 800-392-9489 from the United States and Canada, and 706-634-2372 from outside the United States and Canada. Telephone participants are required to provide the conference ID 6976486 and should call at least 10 minutes prior to the start of the conference call.

 

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