Breaking Down Graphic Packaging Holding Company (GPK) Financial Health: Key Insights for Investors

Understanding Graphic Packaging Holding Company (GPK) Revenue Streams

Understanding Graphic Packaging Holding Company’s Revenue Streams

The revenue for the three months ended March 31, 2024, totaled $2,259 million, a decrease from $2,438 million in the same period of 2023, representing a 7% decline year-over-year.

Breakdown of Primary Revenue Sources

The revenue breakdown by segment for the first quarter of 2024 is as follows:

Year-over-Year Revenue Growth Rate

The year-over-year revenue growth rate shows a significant decline, with a decrease of $179 million or 7% from the previous year. The factors contributing to this decline include:

• Lower open market paperboard sales: $93 million
• Divestiture of packaging facilities in Russia: $28 million
• Lower packaging volumes due to seasonal factors and fewer shipping days.
• Pricing declines including pass-through of lower input costs in Europe.
• Partially offset by acquisition impacts and innovation sales growth.

Contribution of Different Business Segments to Overall Revenue

In the first quarter of 2024, the contributions of different business segments to overall revenue were:

• Americas Paperboard Packaging: 68% of total revenue
• Europe Paperboard Packaging: 21% of total revenue
• Paperboard Manufacturing: 10% of total revenue
• Corporate/Other: 2% of total revenue

Analysis of Significant Changes in Revenue Streams

Significant changes in revenue streams include:

• The acquisition of Bell in September 2023 contributed $43 million to revenue.
• Innovation sales growth accounted for $37 million, driven by sustainable consumer packaging solutions.
• Overall packaging sales in food and household markets decreased, while foodservice and beverage markets experienced growth.

Overall, the financial data indicates that while there were efforts to innovate and acquire, external pressures and operational adjustments significantly affected revenue performance in early 2024.

A Deep Dive into Graphic Packaging Holding Company (GPK) Profitability

Profitability Metrics

Gross Profit Margin: For the three months ended March 31, 2024, the gross profit was calculated as follows:

Operating Profit Margin: The operating profit for the same period is as follows:

Net Profit Margin: The net profit metrics are detailed below:

Trends in Profitability: Over the past year, the profitability metrics indicate a slight decline:

• Gross Profit Margin decreased from 13.5% in 2023 to 23.8% in 2024.
• Operating Profit Margin decreased from 13.5% in 2023 to 12.3% in 2024.
• Net Profit Margin decreased from 8.5% in 2023 to 7.3% in 2024.

Comparison with Industry Averages: The profitability ratios are compared with industry averages:

Operational Efficiency Analysis: Key metrics related to operational efficiency are analyzed below:

In summary, the profitability metrics for the three months ended March 31, 2024, reveal a mixed performance with a notable decline in net income and operating profit margins compared to the previous year. However, the gross profit margin exhibited a significant improvement, reflecting effective cost management strategies implemented by the company.

Debt vs. Equity: How Graphic Packaging Holding Company (GPK) Finances Its Growth

Debt vs. Equity: How Graphic Packaging Holding Company Finances Its Growth

The total debt of the company as of March 31, 2024, is $5,686 million, which includes both short-term and long-term debt. The breakdown is as follows:

The debt-to-equity ratio of the company is calculated as follows:

This ratio indicates that for every dollar of equity, the company has approximately $1.99 in debt, which is above the industry average of approximately 1.5 for similar companies in the packaging sector.

Recent debt issuances include:

• On March 22, 2024, the company entered into an Incremental Facility Amendment to the Fourth Amended and Restated Credit Agreement for $250 million of new incremental term loans.
• This consists of a $50 million Incremental Term A-5 Facility and a $200 million Incremental Term A-6 Facility.

The company's credit ratings are as follows:

• Moody's: B1
• S&P: B+

As of March 31, 2024, approximately 24% of the company's total debt is subject to floating interest rates, which can lead to fluctuations in interest expenses based on market conditions.

The company balances its debt financing and equity funding through strategic capital management. The recent issuance of incremental term loans is primarily aimed at refinancing existing obligations and funding capital expenditures, particularly the construction of new manufacturing facilities.

In summary, the financial structure of the company reflects a significant reliance on debt financing, with a debt-to-equity ratio that indicates a leveraged position compared to industry peers. This approach supports growth initiatives while managing the associated risks of higher debt levels.

Assessing Graphic Packaging Holding Company (GPK) Liquidity

Assessing Liquidity and Solvency

Current and Quick Ratios

The current ratio, which measures the ability to cover short-term liabilities with short-term assets, stands at 1.23 as of March 31, 2024. This is calculated using current assets of $2,923 million and current liabilities of $2,366 million. The quick ratio, which excludes inventories from current assets, is 0.56, calculated using quick assets of $1,221 million (current assets minus inventories of $1,702 million).

Analysis of Working Capital Trends

Working capital, defined as current assets minus current liabilities, is $557 million as of March 31, 2024, reflecting a slight decrease from $556 million in the previous quarter. This indicates stable liquidity, although the decrease in working capital suggests potential pressures in managing short-term obligations.

Cash Flow Statements Overview

For the three months ended March 31, 2024, the cash flow statements reveal the following:

• Net Cash Provided by Operating Activities: $3 million
• Net Cash Used in Investing Activities: $311 million
• Net Cash Provided by Financing Activities: $287 million

Comparatively, for the same period in 2023, the figures were:

• Net Cash Provided by Operating Activities: $60 million
• Net Cash Used in Investing Activities: $273 million
• Net Cash Provided by Financing Activities: $177 million

The decline in cash provided by operating activities is mainly attributed to lower income from operations, while increased investing activities are driven by capital expenditures related to new facilities.

Potential Liquidity Concerns or Strengths

Despite a stable current ratio, the decrease in cash flow from operations raises concerns about ongoing liquidity. The company’s reliance on financing activities, with $287 million raised in Q1 2024, indicates a strategy to bolster cash reserves. Additionally, the total debt as of March 31, 2024, is $5,697 million, with interest expenses totaling $59 million for the quarter, highlighting the need for careful debt management.

Is Graphic Packaging Holding Company (GPK) Overvalued or Undervalued?

Valuation Analysis

As of March 31, 2024, the following key financial ratios and metrics are essential for assessing the valuation of the company:

• Price-to-Earnings (P/E) Ratio: 15.3
• Price-to-Book (P/B) Ratio: 1.3
• Enterprise Value-to-EBITDA (EV/EBITDA) Ratio: 9.2

The stock price has shown the following trends over the last 12 months:

The dividend yield and payout ratio are as follows:

• Dividend Yield: 1.75%
• Payout Ratio: 18.5%

Analyst consensus on the stock valuation indicates:

• Buy: 5 analysts
• Hold: 8 analysts
• Sell: 2 analysts

These metrics provide a comprehensive view of the company's valuation in the context of its financial health and market performance as of 2024.

Key Risks Facing Graphic Packaging Holding Company (GPK)

Key Risks Facing Graphic Packaging Holding Company

Overview of Internal and External Risks:

The company faces several internal and external risks that may impact its financial health:

• Competition within the packaging industry, which has intensified, affecting market share and pricing strategies.
• Regulatory changes that may increase operational costs or restrict business practices.
• Market conditions influenced by global economic trends, fluctuating demand for packaging products, and supply chain disruptions.

Operational Risks

Operational challenges have emerged, particularly in production and supply chain management:

• Income from operations decreased by $52 million or 16% to $278 million for Q1 2024 compared to Q1 2023, primarily due to lower production and higher accelerated depreciation costs of $10 million related to facility closures.
• Lower packaging volumes have been noted, particularly in the food and household markets.

Financial Risks

Financial risks include liquidity and debt management concerns:

• As of March 31, 2024, total long-term debt stood at $4.93 billion, up from $4.61 billion at the end of 2023.
• Interest expense was $59 million for Q1 2024, reflecting a stable interest burden despite rising rates.
• Approximately 24% of the company’s total debt is subject to floating interest rates.

Strategic Risks

Strategic decisions also present risks, particularly regarding acquisitions and divestitures:

• In September 2023, the company acquired Bell for $262 million, which added three packaging facilities.
• The divestiture of two packaging facilities in Russia in 2023 resulted in a loss of $28 million in net sales.

Mitigation Strategies

To address these risks, the company has implemented several strategies:

• Focus on continuous improvement and cost-saving initiatives to enhance operational efficiency.
• Investment in new technologies and facilities, such as the new recycled paperboard manufacturing facility in Waco, Texas, with an investment of approximately $1 billion.

Future Growth Prospects for Graphic Packaging Holding Company (GPK)

Future Growth Prospects for Graphic Packaging Holding Company

Analysis of Key Growth Drivers

Key growth drivers for the company include product innovations, market expansions, and strategic acquisitions. Notably, the acquisition of Bell in September 2023 for $262 million added three packaging facilities to the company's portfolio. This acquisition is expected to enhance the company's operational capacity and market reach.

Future Revenue Growth Projections and Earnings Estimates

The company reported a net sales decrease of 7%, totaling $2,259 million in Q1 2024 compared to $2,438 million in Q1 2023. Future earnings estimates remain optimistic, with anticipated recovery in the beverage and foodservice sectors, which are expected to drive revenue growth. Analysts project a compound annual growth rate (CAGR) of approximately 5% over the next five years.

Strategic Initiatives or Partnerships That May Drive Future Growth

The company plans to invest $1 billion in a new recycled paperboard manufacturing facility in Waco, Texas. This strategic initiative is anticipated to significantly increase production capacity and efficiency, positioning the company favorably in the sustainable packaging market.

Competitive Advantages That Position the Company for Growth

The company benefits from several competitive advantages, including:

• Strong Market Position: The Americas Paperboard Packaging segment generated $1,531 million in net sales for Q1 2024.
• Innovation in Sustainable Packaging: The company has seen innovation sales growth of $37 million driven by conversions to sustainable consumer packaging solutions.
• Operational Efficiency: Cost-saving initiatives have resulted in an increase in income from operations, which totaled $278 million for Q1 2024.

Financial Overview

The following table summarizes the financial performance and projections for the company, highlighting key financial metrics:

This financial data underscores the challenges faced in the current market while also highlighting the strategic initiatives in place to foster future growth.