Graphic Packaging Holding Company

Thank you for standing by. And welcome to the graphic packaging first quarter earnings call. At this time, all participants are in a listen-only mode. Please be advised that today's call is being recorded.

After this presentation, there will be a question and answer session.

If you have a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Melanie Skeeters, Vice President Investor Relations. Please go ahead.

The first quarter 2020 results. Speaking on the call will be 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 have provided a slide presentation which can be accessed on the investor section of our website at www.graphicpkg.com. We will refer to certain pages of the presentation during our comments this morning. I would like to remind everyone that statements of our expectations, plans, estimates, and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the company's periodic filings for Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements, as such statements speak only as of the day on which they are made, and the company undertakes no obligation to update such statements except as required by law. Mike, I'll turn it over to you.

Thank you, Melanie. Good morning, and thank you for joining us to discuss our first quarter 2020 results. I'd like to start off the call by offering our heartfelt condolences to all who have been affected by the COVID-19 crisis. I would also like to recognize our brave and talented healthcare workers and first responders who are taking care of our employees, friends, and neighbors impacted by the COVID-19 virus. In geographic packaging, we are doing everything in our power to take care of our employees and partners while ensuring supply chain continuity to essential food, beverage, and food service markets. Our teams have been focused on safely delivering for our customers and ultimately consumers during these unprecedented times. We are proud to be an essential business and of the integral role we play with global consumer state companies in providing food and beverage packaging products required to be on the store shelves every day. Our teams have been working together safely and effectively to date. We formed a pandemic committee at the onset of the crisis to develop and implement safety protocols. The committee meets daily to review the well-being of our workforce, develop and communicate global safety protocols, and ensure that the company is fully supporting our employees. Actions have been taken to maintain continuity across our paperboard mills and converting facilities globally. The concerted efforts of frontline production employees in our manufacturing operations is critical to our ongoing success. In early May, we will be providing our frontline production employees, including the global hourly workforce and frontline production leaders one-time payments of approximately $300 per employee to acknowledge their key contribution to our performance. This is a $5 million investment in our people, reflecting our sincere appreciation for the critical role they are playing during this time of need. We are also making $5,000 contributions to food banks located in every community in which we have manufacturing operations to support local needs, consistent with our philanthropic pillar of putting food on the table. We remain hopeful that we will see an abatement to the current crisis and a return to more normalized business environments soon. But in the interim, we will continue to actively manage the current environment with our employees and consumers in mind. Turning now to our quarterly materials on slide five, let me walk through some of the summary points for the quarter. We saw strong net organic volume growth pre-crisis and a net modest acceleration in volume growth after the pandemic began. We surpassed our net organic volume growth goal of 100 to 200 basis points, delivering 500 basis points of volume growth in the quarter, excluding the positive impact of leap year. Also excluding the modest net acceleration in volume post-crisis, net organic volume growth was 400 basis points in the first quarter, driven by customer growth initiatives and new product development. As a point of reference, We began to see the increase in demand for food and beverage packaging in March that was partially offset by a reduction in demand for some food service applications. The positive net impact in the quarter was roughly 100 basis points or approximately $15 million of revenue in the quarter. We operated well throughout the quarter across our mill and converting facilities, generating productivity of over $19 million while meeting increased volume demand. Backlogs for four weeks for CRB, and three to four weeks for SPS. Our global paperboard integration rate grew to 69% during the quarter. Operating rates of both CRB and SPS, as reported by the AFNPA, improved sequentially in Q1 to 98% and 95%, respectively. Our estimated operating rate for CUK continues to be very strong at 95 plus percent. As a producer of all three paperboard substrates, We are well-positioned to move products among the end-use applications to meet the changing volume requirements by market. Our team successfully utilized all three substrates to meet increased volume requirements for CRB and C-UK in the quarter, a phenomenon that continues to play out nicely in the second quarter. As you can see on slide 6, we have diversified across the consumer staples markets. In 2019, food, beverage, and other consumer made up the remaining 23%. Currently, increased demand from food and beverage and consumer markets is offsetting the declines we are experiencing in the food service markets. In early March, driven by an increased near-term demand for CUK and contractor work-related implications associated with COVID-19, we made the decision to delay the significant planned maintenance outage at our West Monroe Mill from Q2 to Q3. You can see an updated outage cost impact schedule, including the Westman row change on slide 15 of the earnings materials. We will continue to focus on meeting the needs of our customers during these unprecedented times, while also being proactive and accelerating strategic actions that will position our business for long-term growth consistent with our vision 2025. Today we are announcing the closure of our only container board machine, PM1, in West Monroe, Louisiana. The closure reflects our long-term confidence in the strength of our CUK global beverage packaging platform. The action is similar to the move that we made back in 2015, where we repurposed existing pulp from a paper machine closure to grow CUK volume. We are well-positioned to do this yet again. The short-term financial implications are modest at under $4 due to the current pricing environment for container board and our perspective on pending capacity additions to the container board market. We have also made the decision to close our White Pigeon, Michigan CRB mill effective June 30th. Our overall CRB network is operating very well in a steady demand environment, and we have entered into a new supply agreement with Greif to acquire approximately 90,000 tons of CRB per year. The agreement provides flexibility to acquire 20% more volume per year if needed. The Greif Mills are well located to serve portions of our current and recently acquired portfolio of converting operations. Of note, over half the annual tons we are committed to purchase as part of the supply agreement will be completed over the next 29 months. As you are aware, we are strengthening our leading position in the CRB market with the Kalamazoo, Michigan. We have significant optionality across our CRB, Kalamazoo CRB mill to effectively match our integrated supply with demand over the coming years, including utilization of our K3 paper machine. Given consumer demand uncertainty as we emerge from the current crisis, you can rest assured we will take actions necessarily to fully match supply with demand. We will be aggressive in driving working capital improvements And we will assess the timing of certain capital investments. All efforts are to ensure cash flow generation is robust and the balance sheet remains strong without significantly impacting our long-term commitments. Moving to a discussion of capital allocation and stakeholder return on slide seven, see a summary of two strategic tuck-under acquisitions we've completed year to date. Integration of the folding carton facilities and onboarding of the new employees are well underway. The transactions expand our consumer base and will drive integration rates meaningfully higher over time. While acquisitions will remain an active part of our long-term balance approach to capital allocation, it is unlikely we will engage in additional acquisitions during the remainder of the second quarter. In the context of actively managing our strong balance sheet, we will continue to adhere to our fundamental approach to repurchasing shares when we believe the intrinsic value of the company is materially higher than the current share price. Finally, because we are in a very solid financial position, I am pleased our board of directors has reviewed the existing dividend policy and remains committed to the current return of capital to our stakeholders via dividends and distributions. Steve will provide an update on our financial performance shortly, but I would like to emphasize we are positioning the business for continued growth in 2021 and beyond, consistent with our vision 2025, and remain committed to that vision. We will execute on the actions shared with you today while continuing our long-standing focus on productivity and cost containment. Steve, I'll hand the call over to you now for a more detailed discussion of our financial results. Thanks, Mike, and good morning.

I would like to reiterate Mike's comments to all those impacted by the COVID-19 crisis and in expressing deep gratitude to our employees on the front line for their dedication during these challenging times. Turning to slide 8 for review of the financials, net sales in the first quarter increased 6% from the prior year to $1.6 billion, driven primarily by net organic volume growth of 400 basis points, excluding the positive impact of both leap year and the COVID-19 crisis. This growth reflects the strong conversion trend we experienced in the first quarter to our paperboard packaging solutions. Reported earnings for the quarter were a loss of 4 cents per diluted share, compared to 19 cents in the first quarter of 2019. First quarter 2020 net income was negatively impacted by a net $104 million of special charges, including a net $90 million non-cash charge related to the settlement of our largest US pension plan. When adjusting for charges, adjusting net income for the first quarter with $91.2 million or $0.31 per diluted share, an increase of 48% compared to $0.21 per diluted share in the first quarter of 2019. Turning to slide 10 focused on our EBITDA waterfall. First quarter 2020 adjusted EBITDA of $294.8 million was up $35.1 million or 13.5% from first quarter 2019. EBITDA margin expanded 110 basis points to 18.4% for the quarter compared to 17.3% last year. Adjusted EBITDA was positively impacted by $14.1 million of higher pricing, $16.9 million in commodity input cost deflation, $7.6 million in favorable volume mix, and $19.2 million in improved operating performance. These benefits were partially offset by $14.1 million in other inflation, primarily labor and benefits, and $8.6 million in unfavorable foreign exchange. Turning to a discussion on commodity input costs, as I mentioned, results were favorably impacted by deflation across most commodity input cost categories. There have, however, been several increases in secondary fiber raw material input costs over the past four months. As a result, we announced a $50 per ton price increase for CRB, effective May 7th. Turning to a discussion on liquidity and our balance sheet. We ended the first quarter with substantial global liquidity, approximately $1.5 billion. We further strengthened our balance sheet in the quarter with a well-timed $450 million senior notes offering at an attractive 3.5% interest rate. Our debt profile is sound. We do not have any financial covenant issues, nor do we require any modifications. As you can see on slide 11, we do not have any debt maturities of materiality in 2020. Our senior secured credit facility does not mature until 2023. We ended the quarter with $3.4 billion of net debt. Total net debt increased $672 million during the quarter. Net leverage was 3.2 times at the end of the first quarter compared to 3.1 times at the end of the first quarter of 2019. We remain committed to our targeted 2.5 to 3 times range. Turning to slide 12 and the return of capital to stakeholders. Given the dislocation in the stock price relative to our view of the long-term intrinsic value of the company, we repurchased $119 million of common shares during the quarter. at an average price of $12.90 per share. We continued our repurchase activity in the second quarter and have accumulated a total of $150 million of common shares year-to-date at an average price of $12.80 per share. In total, we returned $396 million during the first quarter in share repurchases, dividends, distributions, and partnership redemptions, including The initial $250 million partnership redemption to international paper completed in January. Moving to a discussion of the current business environment and our outlook. We are currently operating at net neutral organic volume for the core business with core food, beverage, and consumer volume up and food service volume down. Volume from recently acquired businesses is meeting expectations year over year. In addition, our teams continue to operate well with pockets of minor productivity challenges related to the crisis being well managed. History would indicate that our business is capable of performing well during economic downturns. At current volume levels, commodity input costs, and operating run rates, our 2020 financial performance would fall within the adjusted EBITDA and cash flow ranges we provided in January. Unfortunately, the depth and timing of this economic downturn is difficult to predict until more is known about how consumer behavior and spending patterns will evolve post the crisis, along with the timing of when overall economic activity will revert back to more normalized levels. Our customers share in the uncertainty associated with this health-driven crisis and global recessions, with the majority of them withdrawing financial guidance. For these reasons, we have decided to suspend financial guidance until we have greater visibility into consumer behavior and spending patterns. The suspension will provide us time to observe shifts in consumer behavior and spending patterns and more clearly understand customer volume needs by market. In addition, it will allow us time to value the positive impact our aggressive strategic actions have on our financials. and assess any timing modifications to organic volume growth projects scheduled for implementation this year. On slide 14, you will find the adjusted EBITDA and cash flow components that we do have a viewpoint on today. As discussed, we are actively pulling levers to drive strong cash flow generation. This was reflected in our updated working capital and capital spending expectations. We expect working capital will now be a source of cash in 2020 and anticipate coming in at the low end of our previous capital expenditure range of $600 to $625 million. In addition, our interest expense guidance has been reduced by $20 million at the midpoint of the range due to lower market interest rates. As it relates to adjusted EBITDA, pricing remains consistent with prior expectations. We believe Commodity input costs may be modestly more favorable for the year compared to prior expectations. However, we have widened the range given the current economic environment. Foreign exchange will be a modesty without headwind at current exchange rates. In closing, we are confident the actions we are taking will reserve a solid cash flow generation for the year and position the company well for long-term growth. Thank you for your time this morning. I'll turn the call back to Mike.

Thanks, Steve. I'm pleased and humbled by the leadership, dedication, and ingenuity our teams have displayed in managing through the crisis today. We will remain focused on running the business safely and effectively while positioning and preparing the company to capture the growth that lies ahead. Aggressive actions we are announcing today will drive cash flow, balance supply with demand, and position the business for strength in 2021, consistent with the goal I will now turn the call back to the operator for questions.

Thank you. At this time, we will be conducting our question and answer session. To allow for as many questions as possible, we ask that you please limit your questions to one question with one related follow-up. You may then re-enter the queue for any additional questions. Your first question comes from the line of Mark Connolly with Stephen Fink. Mark, your line is open.

Thank you. Two things, Mike. It's probably early to see movement in virgin fiber costs, but we have seen lumber shift down dramatically shipment-wise. Has your sourcing of virgin fiber changed yet, and is a higher virgin fiber cost part of your assumptions?

Thanks for that question, Mark. To date, what we've seen, we have seen the slowdown of the lumber operations that you've talked about, so the residual chips are in fact down from where they would have been a year ago. But over the last few years, we've made some pretty significant investments into our virgin mills that allow us to process a lot more roundwood. And with some of the slowdowns we're seeing in the printing and writing space and pulp, in some cases in the baskets where we operate, We're seeing pretty attractive roundwood pricing for both hardwood and softwood come in. And we've also seen a normalization of the weather pattern that impacted us last year, the wet weather in particular. So our wood costs are actually down pretty substantially year over year. And that's partially offsetting some of the increases we're seeing on the secondary fiber side. And based on everything we can see right now, we believe that'll be the case for the foreseeable future.

Yeah, Mark and Steve, it's one of the reasons we're seeing overall relatively net modest inflation, deflation, if you will, because of pretty substantial deflation in wood year over year, given it was a $40 million inflationary item last year.

Sure. Okay, and just one more question. How different was the seasonality you experienced in the first quarter versus what you think of as normal seasonality? And could you give us a reminder with your current business mix of what kind of seasonality in Q2 and Q3 you would think of as normal so we have something to benchmark against?

It's a great question. You know, normally what we would see is, you know, a busier spring and summer season related to both the beverage and the food service business that we operate on. In fact, the beverage business is quite strong for us right now because they're, well, on-premises down, off-premises you can appreciate is probably in the neighborhood of 5% to 10% we're seeing along those lines. So I don't think this year will be a great year for normal. What we saw in Q1 was things behaved like we thought they were going to until about the middle of March. And then we saw, you know, some of the pantry loading, if you will, associated with the COVID-19 virus. And that drove that incremental $15 million of revenue we experienced largely in the last two and a half weeks of March.

Very helpful. Thank you.

Your next question comes from the line of Mark Wilde with Bank of Montreal. Mark, your line is open.

Good morning, Mike. Good morning, Steve. Good morning, Mark. You know, I just wanted to kind of come around to the issue of kind of organic volumes. You said the first quarter, if we excluded the leap year and the COVID, your organic volume growth was 400 bps. But, Steve, it sounded like more recently that organic volume is is basically flat. So I wondered if you could just help us with the cadence as you moved through the first quarter and into the second quarter and sort of how volume is moving in the businesses and if it's possible to separate like food service versus beverage versus food.

Yeah, Mark and Steve, I'll take that on and then Mike can bring on additional color and You summarized it well. We had quite positive net organic volume growth through January and February, slight acceleration in March, driven by many of the successful conversions that we have talked about previously, foam cup conversions, beverage conversions, bowl and plate conversions. Since the unfortunate crisis began, what we're seeing currently, and this is currently true literally yesterday, is that roughly the 77% to 80% of the company, 77% specifically last year in food, beverage, and consumer packaging is up 5% to 10%. So we're seeing some continuation. It's being offset currently by what in total across the roughly 23% of the company that is food service being down 25% to 30%. as Mike just articulated, because that's really where a lot of the slowdown has hit relative to consumption of cups, for example, which is where we were experiencing the growth. That has resulted currently, as of yesterday through the months of April here, in overall neutral net volume. Year over year. Year over year in April.

And, Steve, is there likely – Any inventory channel play in any of that? I mean, a lot of food service stuff isn't necessarily one single step due to the food service provider, but it might be moving through kind of distribution companies and things like that.

Yeah, that's right, Mark. We saw that, and that actually is part of the reason why. We saw the reduction the end of March, the last two weeks of March in the food service business as, in fact, as you're suggesting, the DC channels basically relieved that inventory. And we're starting to see that, you know, again, through the first 20 days of April, incrementally move back up a little bit. But Steve summarized it well with, you know, 5 to 10 down on food, beverage, and consumer. And then, you know, or 5 to 10 up, excuse me, on food, beverage, and consumer, and then 25% to 30% down on the food service. And those are good numbers, at least what we've seen so far in Q2.

Okay. The other question I had is if you could just help us in thinking about the roll-through of some of these recent pricing and cost moves that PPW changes, your own increase announcements that were out last week, and then the movement in waste paper costs.

Yeah, so at a very high level, you know, you saw the RISC move in February on CRB went down $30 a ton. SPS went $30 a ton as well. But speaking specifically to CRB, that $30 was a price and reduction of open market board that is tied to those open market contracts. Since January 1, we've seen roughly $50 a ton of movement on top of what our baseline secondary fiber costs were. So if you think about it in those terms, it's about an $80 ton price-cost spread. And so we, as Steve said, announced a CRB increase on May 7th for it's time to recover that. As we look forward, we do anticipate some incremental costs in May and potentially June. Again, others have opined on that. We won't, other than beyond the comments that I'm making there. But that's why we announced that pricing action on CRP.

Mark, just to add to that, relative to some of the numbers we've shared with you today, the $10 to $20 million in price guidance hasn't moved and it does not contain the CRB announced price increase. Obviously that hasn't been recognized and that will be heavily a late year activity with our six month lags. And as Mike mentioned, the little bit of broader guide that we did provide with regards to commodities cost inflation. As a reminder, that's two and a half billion dollars of spend We're seeing deflation generally across most of the categories. We've seen a move up of materiality with OCC and recycled fiber costs. The range captures a range of possibilities there in terms of OCC continuing to move up and stay there, or potentially this being less longer term. So we tried to take that into consideration where we did have visibility. Obviously, we're suspending the guidance-driven mostly because of the consumer spending patterns that we want to get a better line of sight to impact volume and productivity. Okay, great. I'll turn it over. Thanks, Mark.

Your next question comes from the line of Ganshan Punjabi from Baird. Ganshan, your line is open.

Thank you. I hope everybody is doing safe. I guess You know, just to follow up on those comments, you know, on the 77% of the portfolio that you're seeing, the 5% to 10%, you know, volume increase thus far in April, I guess, year over year, what are customers sharing with you on their volume plans for the second quarter? I mean, obviously we see big numbers in terms of, you know, category growth, et cetera. There's been selling through their safety stock, I would presume, and they're going to have to ramp up production, et cetera. Just curious as to what specifically they're sharing with you for QQ.

You summarized the phenomenon very well. That's, in fact, what's going on. As you know, most of those customers have withdrawn their guidance. So they're seeing that real-time, those impulses that are coming in from the retailers as well, Gansham. So I would expect that will be the case. So beyond what we're currently seeing today, it's difficult for us to speculate what we would see for the remainder of the quarter. I think if you think about that and just put it in context, You know, the big banks have basically said in the neighborhood that GDP could be anywhere between down 8% and maybe as high as 35% in the quarter. You know, people need to eat and drink, you know, so that's a positive. But how that comes back in the context of 22 million people going on unemployment in the last three weeks and what they buy and how that all plays through, you know, our overall supply chain to our end-use customers, is really the difficult challenge that we've got in front of us in trying to predict what that revenue looks like. Because it can have some impact on our mix and productivity, depending on how that all comes back. And that's why we're taking a step back to take a look at how that's all going to play out.

To Mike's point, our teams are doing incredible work servicing those needs, both up and then managing where we see down. We just don't have that.

Okay, and I guess just following up with that, I mean, obviously there's a lot going on with your company, you know, with the acquisition integration, the large capital project, your capacity cuts that I guess will be orchestrated by the end of the second quarter. You have meaningful disruptions with the supply chains, et cetera. There's limited mobility. I guess just take us through what gives you confidence on the execution side, you know, in context of what I assume will be very choppy demand and logistical patterns near term. Thank you.

Yeah. Thanks for the question. If you look at the two closures we're going to orchestrate, we've got a very well capitalized CRB system, as you know, that we're investing a fair amount of money into. It's operating very well. So that's a very small and we'll be able to take those tons and redistribute them across the remaining base of mill assets that we're operating. So we've got a high degree of confidence in that. In Kalamazoo, our project continues to move forward. We talk about four weeks due to the shelter in place, but as an essential business, we're back up with construction. As a matter of fact, we've got a very big concrete port that's happening as we speak, and so we're continuing to execute on that project. In the case of shutting down our West Monroe liner board machine, that is the only liner board machine we operate. We actually had taken a fair amount of that tonnage and traded it with trades for people that made boxes for us. And in the current environment that we anticipate in the second half of this year for corrugated materials and boxes, we believe that we will not be economically disadvantaged utilizing that supply chain. So yeah, there's a lot going on, but we feel we've got a pretty good beat on it. And again, this is all consistent with our long-term vision 2025 and our long-term plans. And so we're just accelerating certain aspects of our strategic plan to move aggressively in the context of this environment to leverage our free cash flow generation and secure the strong balance sheet that we have.

And the integration of the eight folding carton facilities, seven from Greif and one from Quad, are also on track and going very well, as Mike mentioned in his comments.

Perfect. Thanks so much, you guys. You bet.

Your next question comes from the line of Brian McGuire with Goldman Sachs. Brian, your line is open.

Mike, I just wanted to unpack the comments around April volume sort of being flattish. You know, it kind of reminds me of the story of the six-foot guy who's walking across a river that, you know, averages five foot of depth, but, you know, you've got some periods that are a lot higher than five foot in depth here. So there's a lot of things moving there. I guess when I think about the operating rates at the paper level, then, you know, I would guess SPS volume is off quite a bit, given a decent amount of that goes into food service. But DRB and C-UK, you'd expect the mills to be running pretty full and hard. Maybe you can just kind of confirm if that's true. And then, you know, also what impact this could have on profitability, this shift from food service to at home. You know, I don't think it's something that we've thought too much about in the past, but the profitability of you know, that food service component versus the rest of the business? Is it materially different that we would, you know, notice some profitability impacts from the shift here?

Yeah, thanks, Brian. In regards to your question around utilization of all three paperboard substrates, that's one of the strengths that graphic packaging has. As you recall, we didn't operate an SBS mill system in 2008, the last time we saw, you know, a significant dislocation in the economy. And, in fact, what we've been able to do here because of the strength our customers' demand for CUK. We're actually utilizing some SPS, and we anticipate we'll use upwards of 50,000 tons of SPS this year to help meet that demand in certain categories and customer package applications. And that really is one of the true benefits we've got now with having all three substrates. So, yes, we do expect cup to be down. In fact, it is. But we're able to offset a portion of that with some of the things that we're doing to service other customers in the mix. And in regards to the question around overall mix profitability, I'll take a stab at it and let Steve answer. put a little more color on it. Our overall portfolio is reasonably balanced in terms of the margin profile. What we're speaking to is if we saw a severe spike in one aspect of the business or the other, it could potentially impact our bills and downstream converting in a way that isn't as balanced as we're currently seeing it today through 20 days of April. And that's what we're talking about in terms of how the consumer comes back, how fast they come back, Where does it come and what does it look like? And Steve, maybe you want to?

Yeah, no, the only thing I would add is just given a little bit of that uncertainty, the one thing that you're hearing us be very clear about is that we will match supply with demand in that environment. And so that's why there's a little bit of the uncertainty around the mix of volume. We're very pleased, as Mike said, with the ability to move among and between the substrates. That's something we couldn't do in the past and are doing. But if we saw an ongoing dislocation of the consumer not getting back into the work environment and as such consuming food service products, that could result in a need for us to be more assertive in matching supply and demand on the middle side, which is where the cost can be more substantial. We're not seeing that today, but we want to get a little visibility to that over the coming months as we begin to emerge from the crisis.

Okay. And then one question just on the capital reallocation, I guess, you know, obviously the share price was, was lower in, in one queue with the rest of the market. I just a little surprised given the, the size of the buyback relative to the other commitments you guys have between the Kalamazoo mill and the IP stake. Obviously, you know, you have good liquidity and the bond offering was well-timed, but again, Should we think about this as maybe being a little bit of a pre-buy of what would have been you repurchasing the IP stake later when they decide to monetize that further, or if they decided to monetize it further, would you think about letting some of those shares float on the market now to maybe just pull forward the timing of the buyback effectively here?

Yeah, Brian, I think you've done a nice job of laying out the kind of real optionality that we have. And so given that we did see what we believe was a real dislocation in the share price consistent with our past practices, we did elect to acquire back some of those shares, $150 million worth. And we do have very good optionality relative to if an international paper comes our way in July, which we don't have a point of view on, obviously, but if they choose to, We have optionality, one of them being what you described, to potentially put some of those units into the market and shares, keeping in mind, and it's very important, that that is not a dilutive event for any GPK shareholders. Those are already units that represent the ownership of the company. So we have very good optionality, and we felt like it was timely to continue with the multi-year path we've now had to continuing to buy back the company and Between the share repurchases and the partnership unit acquisition, we took another 7% of the overall units of the company out in the first quarter, returning almost $400 million to stakeholders.

Okay, that makes sense. Thanks. Best of luck in the quarter. Yeah, thanks, Brian.

Your next question comes from the line of George Sassos with Bank of America. George, your line is open.

Hi, everyone. Good morning. Thanks for all the details, and thanks for all you're doing on COVID and your support for your employees. My two questions, first off, I wanted to, if you could take a step back and comment, if any of your customers or their customers or the consumers are showing any kind of maybe push back against sustainability, maybe less interest in the fiber over plastic debate, because obviously there are more significant things occurring in the economy with COVID. Or is it not a worry for you, or maybe too early in that discussion? I'd follow on the middle.

Yeah, thanks for that, George. We have not seen any pushback relative to the sustainability of our paper board products, our paper-based products that we're pursuing with customers. I mean, Steve mentioned we saw excellent foam to paper cup conversions early on in Q1. Those will be a little muted now until that volume comes back. The other thing that we've continued to see excellent traction on is our Now what we haven't been able to do is install them and get them operational. We're in the process of building those. So we're going to see a little bit of a delay relative to our ability to actually get those operational at our customers because a lot of those are going to Europe. So traction over in Europe for that is really strong. Traction in Europe out of shrink film and into paperboard solutions for beverage applications also very strong. In terms of people taking a step back on sustainability, I think it's probably early for me to try to give you a point of view on that. All I can speak to is what we're seeing on the new product innovations that we're going forward with. And just as an example, on Q-Clip, we've not seen any cancellations on any POs that we had going into the crisis. So maybe that's it at a point that helps you a little bit on that.

No, that's great, Mike. I appreciate that. And then on the closures and the operating factors in the quarter, it could be common a bit if the tornado created any significant damage for you in West Monroe. And in total, I caught only a part of this given the connection. It sounds like on the liner board machine, you're basically looking at it as a freeing up of pulp capacity that you can use ultimately as you grow in other substrates. Is that fair? And if you could put a bit of a finer bill on that, that would be great. Thank you, guys. Good luck in the quarter.

Thank you, George. Again, thanks for that question. Yeah, and first and foremost, in regards to the tornado in Monroe, Louisiana that occurred on Easter Sunday, fortunately, none of our employees were hurt or injured. And so that was very, very positive in that regard. The mill itself and the converting operation we have in town there were not impacted other than losing power. We had a remote chipping operation at our mill that's connected to the mill with a long track conveyor that had significant damage associated with it. And so what we've had to do is put some shorter term solutions in to get chips from the chipping operation over to the mill. We lost about 48 hours in total at the mill of production between restoring power and in setting up our ability to fiber the mill with wood chips in a way that worked, which will probably be the better part of six to eight weeks, would be my guess, right now, relative to when we're back to fully operational in the way we normally operate that mill.

There'll be an insurance claim associated with that, which, Steve, maybe you can give George a little... Yeah, the actual impact, and as Mike mentioned, we're running... The team's done a great job of getting back to full run capability. We're just incurring some incremental cost. It's probably a $3 to $5 million impact for us net. So not particularly material, but relevant as we rebuild the conveyor. So there'll be a little bit of capital that we'll put to work. And right now, we're working around that, which is costing us a little bit of funds.

But it'll be in the $3 to $5 million range total. In regards to your question then on Paul, If you recall, in 2015, we shut down a multi-wall paper machine there that we had that was associated with the business we were operating at that time and freed up roughly 50,000 tons of bulk capacity that we have now utilized in our operations on number six and number seven paper machine in Monroe and grown our global beverage platform both in North America and in Europe and in other geographies as well. And we anticipate doing that again. And so, as I mentioned, we were trading a lot of that tonnage with people that were making boxes for us. It was slightly positive on an EBITDA and cash flow basis, but with the additional capacity that's coming online in the container board space, we don't believe we'll be disadvantaged in purchasing those boxes in the open market, which is what we'll do. And we'll repurpose that pulp in a more value-added way for our CUK demand as the next few years play out with our Vision 2025.

Thank you, Mike. Thank you, Steve.

Your next question comes from the line of Debbie Jones with Deutsche Bank. Debbie, your line is open.

Hi. Thanks for taking my question. I got on, I think, Mike, right about the time you ended your opening remarks, so apologies for that. And I think I heard something around M&A, and I was hoping you could give us an update on how you kind of manage that side of your strategic focus right now in this environment, you know, whether you would expect that to continue in the near term or if this is something that, you know, may take a while to play out given everything going on.

Yeah, thanks, Debbie. You summarized it again well. As we said in our prepared comments, we don't anticipate doing anything in Q2. That doesn't mean we're still not, you know, actively, you know, talking with people and planning and looking at different options, you know, over time consistent with our vision 2025 that we've laid out. But I wouldn't anticipate anything in the near term. longer term, medium to longer term, you could expect more of the same where we're focused on driving different geography or niche markets that help us grow our integration levels towards that 80% to 90% level that we talked about. The acquisition we did in the quarter here was a good one where we added seven additional converting plants, a little over 200 million worth of revenue and 125,000 tons of paperboard that over time will be integrated into our business as the supply agreement winds down. So that's the type of thing you can see us continue to work on. Just in the near term, you know, to your point, because of some of the challenges associated with things and just letting things play out a little bit, you could expect us to take a little pause.

Okay, thanks. simple question on the leverage. Do you expect that you can get in comfortably into your targeted range by the end of the year or is the variability around EBITDA a little bit too much at this moment?

Yeah, no, Debbie, our commitment to the two and a half to three times leverage remains historically are a little above that in Q1 because it's not a strong cash generating quarter. We were 3.2 this year. We were 3.1 last year. And we put a lot of value behind, as I mentioned, the share repurchases and the IP redemption. So, no, we expect to be in that two and a half to three times range as we talked about. on the last quarter conversation, we'd probably be at the higher end of it, assuming that IP were to move forward with two $250 million exits, as we talked a couple of minutes ago. But we still remain committed to the range and expect to be in it, probably at the high end, at year end.

Okay, thanks. I'll turn it over.

Thanks, Debbie.

Our next question comes from the line of Anthony Pettinari with Citi. Anthony, your line is open.

Good morning. Mike, you have a pretty sizable footprint in Europe, and I was just wondering if you could talk about how that part of the business performed in the quarter. Did you see the same stockpiling of staples that we've seen in the U.S., what the on-premise or food service mix is there? and given you operate in a number of European countries that are maybe at sort of different stages of the crisis, any kind of general read-throughs for the U.S.?

Yeah, thank you for that, Anthony. Look, our European colleagues did a really nice job in the quarter, as you are well aware. They were two, three weeks ahead of us in terms of the COVID crisis, and they operated through that environment extremely well. And how I would characterize our European business is it's more indexed. to food, beverage, and consumer products. We do have a small food service plant there in the UK, but the majority of the business is inside of the customer subset that we see more demand for right now. It's consistent with what we're seeing in the US along those lines, and those facilities are doing a good job operating with some of the increased protocols that we have in place to make sure our employees are safely operating, you know, in this environment.

Okay, that's helpful. And then, you know, just switching to the full year guidance, I mean, when I look at the guidance items, you suspended guidance on volumes, which makes sense. and then guidance on net performance. And I'm just wondering if you could provide any kind of further detail on the puts and takes that could drive that performance number, you know, higher or lower, understanding you're not, you know, giving a formal range.

Yeah, no, Anthony and Steve, I think, as you know, and you know the business well, there's just a direct linkage for us in terms of our productivity initiatives being driven by and supported by our volumes. Variability and volume has a direct impact on our ability to drive productivity. Just like we saw in the quarter, positive organic volume growth helps support strong productivity. And so that's when we step back from it, we really step back from both of them just because of that very strong linkage between volume mix and productivity for us as a business.

Got it. Understood. I'll turn it over.

Your next question comes from the line of Arun Siklumnathan with RBC Capital Markets. Arun, your line is open.

Great, thanks. Good morning. Congrats on everything, and thanks for your help with COVID. I guess just a couple questions. If you think about the volume, you know, you've laid it out as suspended, I guess, for the year. I just wanted to understand, you know, how the margin profile works. If we're looking at a flat volume picture for the rest of the year, potentially with food service being down and the on-premise consumption being up, do you essentially lose all the profitability from food service, or how does that work? I mean, what are some of the positive offsets just for us to help us size kind of the impact on EBITDA from that volume? trajectory.

Yeah, thanks, Arun. We're going to be a little bit less putting a fine point on it because we just, as we said earlier, we don't know how that's all going to play out. But you heard in Steve's prepared comments, he talked about at our current run rates and at flat year-over-year volumes that we saw there, we'd expect to be in the normal range. We could see from some of the previous financial crises aren't excellent harbingers for us in this case because we saw such a complete slamming on the brakes, and as I mentioned earlier, you've got 22 million people that went on unemployment in the last three weeks. How does that impact what they come back to buy? And so it's difficult to try to model all that, but I wouldn't overthink it relative to the margin impact on that because, as I mentioned earlier, we're pushing 50,000 tons of SPS already for other beverage and food customers into that category. So we've got some levers to pull to try to work through that. The reason we suspended the guide is it's just difficult to see through that haze and figure out with any degree of certainty how it all comes back.

Okay, that's helpful. Thanks for that. And then I just also, I guess, wanted to understand the price-cost side. So In SBS, maybe six months ago, there was an expectation that we would work through the inventories from the Savvy Mill and the GP CrossFit closure and then potentially set up well for some pricing in the second half of 20. I guess, A, is that still an opportunity that's possible? And then, B, on the CRB side, you guys have announced a price increase recently. Just want to gauge the thought process there. You know, operating rates have been relatively high for a little while, and pricing has been volatile and challenged sometimes. So what's kind of the confidence level in achieving those increases as we go through the year? Thanks.

Yeah, thanks, Arun. Of course, I'm not going to talk about specific pricing on the call here, but what I will tell you is on SPS, What we've seen from the AF and PA data is, in fact, you know, with the removal of one of our competitors, you know, shutting down a mill, you see production down 6%, you know, and operating rates higher. You know, we saw operating rates in Q1 at 95%. As a matter of fact, SPS was at 97% in March, which was up substantially, you know, from where it was yesterday. a year ago this time. So, you know, that capacity has gone away. Now, there'll be some dislocation here going forward as we talked about that we've got to let play out on the SPS side because that is more indexed to food service. So that's part of why we're removing our volume guide in that regard. In regards to CRB, you know, in our case, what we're doing is we're, you know, operators have been strong and we have, you know, some inventory that we built to service our customers that now with our closure of the White Pigeon Mill, we'll be able to take those inventory levels down, lean on the supply agreement that we've got with Greif, and really optimize our working capital, which is why we increased the guide on working capital in that regard. So I'd have you think about it that way. Operating rates have been good on both those substrates. Capacity was removed on SPS. It's showing up in the data because we see production down in that regard, and in our case on CRB, operating rates have been really high. We're taking one of our mills down because we don't need it with the existing footprint that we have and the plans we have for the future in Kalamazoo, and it's going to allow us to harvest a fair amount of working capital.

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

Our next question comes from the line of Adam Josephson with KeyBank. Adam, your line is open.

Mike and Steve, good morning. Morning, Adam. I hope you and your families are well.

Thank you as well.

Thank you. One on the volume trajectory and then just one on cost. I'm just trying to make sense of the 4% growth in 1Q X COVID. If COVID was a 1.3%, benefit in one Q and it's neutral in April, then I guess why would the up for pre-COVID in one Q go to zero in April and potentially thereafter? I'm just having a little difficulty understanding that.

Yeah, so why don't I handle that? I think, look, a lot of the the growth in what we saw in January and February was on foam-to-paper conversions, Adam. And, of course, those sales are pressured right now. As we mentioned, our food service business is down 20% to 25%. So that's a big explanation, you know, that I would point to right there.

Right. Okay. And related to just the cost situation, I think, Mike, you talked about the OCC is up 50 bucks. Adam, are you there?

You cut out. You cut out for a minute. Sorry, Adam. Sorry.

Is this better?

Yes.

Okay. Sorry about that. So you talked about OCC costs being up 50 bucks from Jan 1 and CRB prices getting hit by 30, thus the announcement. And so obviously you're seeing inflation on the recycled side, and it sounds like you're seeing quite a bit of deflation on the SPS and CUK side, just based on wood costs being down substantially year over year. So I guess, how do you think the price-cost, what do you think about the price-cost relationship for SPS and CUK, given the extent to which the input costs are down for the virgin grades versus being up for the recycle grades, which is why you're going for a CRV price increase?

Yeah, Adam and Steve, I'll take that on a little bit, and then Mike can add on. But if you kind of step back for a moment, and look at where we are on price cost through Q1. We've now, with this year, with this quarter's results, with the price still up and we saw the deflation of $17 million, we've now successfully recovered all of the price cost dislocation that we saw in kind of the 16 through 18 time horizon, which has been a very critical goal for us, as you know. The little bit of guide that we are providing on price costs going forward is relatively neutral for the three months, three quarters remaining this year, with a little bit of price still to come, excluding the announced CRB price increase, and some net modest inflation across the basket of costs driven primarily by recycled fibers. We're starting to lap a fair amount of deflation from other product categories. But that's how we're thinking about, and as I mentioned earlier, a relatively wide range of potential outcomes for recycled fiber. So overall, price-cost recovery is very good. It applies overall with CRB very good to date, setting aside the current run. CUK, well recovered. As we've talked in the past, SBS isn't as recovered, and hence some of the conversations we've had about operating rates and the need for that to recover over time. So we're still in a similar spot relative to actual recovery by substrate. Overall recovery is now at which we lost in the 16 to 18 timeframe. Mike, anything you'd add to that? No, I think you summarized it well.

Thanks a lot, Steve.

Your next question comes from the line of Steve Chipover with Davidson. Steve, your line is open.

Thanks. Good morning, everyone. Kind of late in the call, but starting with a quick question on the 120,000 tons being shut at West Monroe. Sounds like you were trading that to corrugated suppliers. So will that have any impact whatsoever on your integration rates?

No, it does not. It was all non-integrated. And so our integration rates have always been around the paperboard, Steve. And we moved it up about 100% to 69%. That was my understanding. No changes to that, Steve.

Thank you for clarifying that. And then with respect to the $5 million payments to your frontline employees, and believe me, I'm not being critical, is that incorporated into the $50 to $60 million labor and benefit guidance?

No, we did not change that for that. It's really a bit of a... Mike mentioned it's a recognition of a one-time payment for the outstanding work that they're doing, and we didn't factor that into our ongoing labor and benefits inflation guide.

Got it. Well, that's a fair carve-out. And then finally, with respect to capital allocation, I want to kind of flip it from maybe the perspective of one of the other analysts. With respect to share purchases and or partnership redemptions, I mean, do you figure that there might be some, quote, upside because your shares are so low and so below your own assessment of insurance value that front-end loading is beneficial?

Well, I guess I'd answer the question this way, Steve. As we've done since we initiated the share repurchase program back in 2015, We have said and continue to do, as I said in my prepared comments, when we believe the intrinsic value is below the current stock price is below the intrinsic value of our stock, we will make a decision to buy back from time to time. And that's what we did this particular quarter. I think what gives us a little bit even more impetus along those lines is the fact there are these exemptions that are out there. So if we can do it at really good prices, we should do it. And then we've got optionality. you know, to put those shares back into the market, as Steve outlined earlier, you know, at a point in time in the future. And I think, you know, what we hear from the majority of our shareholders is they like that optionality and they expect that we'll be opportunistic along those lines when those opportunities prevent themselves within the context of managing our strong, you know, balance sheet.

Right. And that's the key point, Steve, is to your question, of course, there's always optionality for some level of acceleration, which you've seen us do with our share repurchases, but we'll do it in the context of our balanced approach to both capital allocation and the balance sheet.

Got it. Okay, thank you, and stay safe.

Thank you, Steve.

Your final question comes from the line of Mark Wilde with Bank of Montreal. Mark, your line is open.

Yeah, Steve and Mike, I wondered, a couple things. Can you Give us some detail on the financial impact and any costs from the two closures.

Yeah, Mark and Steve, I think the way to think about that is to put it into context of the multiple announcements and things we're bringing to you today. The net impact of both the Greif assets coming in, PM1 coming out, White Pigeon coming out, From an EBITDA perspective, relatively neutral for the year. What it drives for us, as we mentioned, is some very real working capital improvement. So we're accelerating decisions. EBITDA implications are relatively modest, pluses and minuses. And the working capital improvement is in the guide that we provided moving towards positive as we drive in primarily inventory out of the system relative to PM1.

in relative to CRP. I'm just a little surprised given where container board prices still seem to be. You can take 120,000 tons out and still have it be a neutral impact.

Yeah, well, it works that way because we're going farther to get that wood, as you know, and so that, you know, every time, you know, the capas are the same as what we see on, you know, the SUS. So, you know, we're buying a fair amount of green wood, and that tends to be the marginal wood that we have to go farther for, the most expensive wood. We won't have to do that anymore. And we've done this before, as you know. We basically, we get to the point where we don't want to make investments in pulp. because it's very expensive for us to do that, and we want to have the higher value add associated with the CUK demand, and those types of projects can come on in lumpy format. We can do that over time as we need it. It doesn't have to be something we have to do overall, but the balance on the back end of the operation is very good at West Monroe, and we have the optionality to be able to do that, so that's That's how we want to operate the business over the medium to long term. It certainly makes sense for us, and it's consistent with our long-term plan, Mark.

Okay. And then the other one I had, Mike, was in the past, you know, you've mentioned that, you know, SBS has really been kind of the laggard in the box board sector in terms of returns. In fact, I think you've talked about how much of the industry is kind of below cost of capital in that business. Is that actually, you know, getting worse given the weakness in food service right now?

Yeah, it would be. I mean, now in our case, we've got more options than perhaps others to be able to push, you know, tonnage around to our, as I've mentioned, you know, into our integrated folding garden operations. But there is some reduction of wood costs. We talked about at least that's what we're experiencing. I can't speak to what others are experiencing, but we've been pretty vocal about that point. On the positive side, as I mentioned, the production's come out. You see it in the operating rates. The question is, how does that perform over the next quarter? Because it'll be impacted here, in my opinion, based on what we're seeing on the food service side. But we play a long game here, and we're making Texarkana and Augusta lower cost with the capital we're putting into it. We're driving our integration rates up, and that's That's how graphics are going to win over the medium to long term there. Okay. Good luck in the last three quarters of the year, Mike. Yeah, thank you very much, Mark. And I want to thank everybody for joining us today. Have a safe and healthy day.

This concludes today's conference call. On behalf of Graphics Packaging, thank you for participating. You may now disconnect.