Alex Ovshey - Graphic Packaging Holding Co. Michael P. Doss - Graphic Packaging Holding Co. Stephen R. Scherger - Graphic Packaging Holding Co..

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker) Brian Maguire - Goldman Sachs & Co. Gail S. Glazerman - Roe Equity Research LLC Arun Viswanathan - RBC Capital Markets LLC Mark William Wilde - BMO Capital Markets (United States) George Leon Staphos - Bank of America Merrill Lynch Mehul M. Dalia - Robert W. Baird & Co., Inc.

(Broker) Philip Ng - Jefferies LLC Danny Moran - Macquarie Capital (USA), Inc. Debbie A. Jones - Deutsche Bank Securities, Inc..

Good morning. My name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Third Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Alex Ovshey, VP of Investor Relations, you may begin your conference..

Thank you, Heidi. Welcome to Graphic Packaging Holding Company's third quarter 2016 earnings call. Commenting on results this morning are Mike Doss, the company's President and CEO; and Steve Scherger, Senior Vice President and CFO. I hope you follow along with today's call.

We have provided a slide presentation which can be accessed by clicking on the Webcasts and Presentations link on the Investors section of our website at www.graphicpkg.com. 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 expectation. Information regarding these risks and uncertainties is contained in the company's periodic filings with the Securities and Exchange Commission.

Undue reliance should not be placed on forward-looking statements. As such, statements speak only as of the date 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, Alex. Our third quarter adjusted EBITDA was only modestly above prior year period as packaged food volume softened during the quarter and we incurred operating costs associated with the transferring volume to lower cost converting facilities and onboarding new business. In the third quarter, sales were up 3.1%.

Adjusted EBITDA increased 1.5% and adjusted earnings were $0.20 per share, flat with last year's third quarter. Free cash flow generation in the business remains strong. Our focus on growing free cash flow and returning more of it to shareholders over time has not changed.

We also continue to make progress on all our key strategic capital allocation priorities. Before I discuss the progress we are making across the key strategic priorities and the details of the quarter, I would like to provide an update to our 2016 financial guidance.

We now expect 2016 EBITDA to grow between 1% and 3% year-over-year compared with 4% to 7% previously disclosed. Steve will discuss the details behind the changes in his remarks but our reduced guidance is driven by a number of factors.

Specifically, the reduction reflects modestly incremental headwinds across the volume, performance, price cost and FX categories. We also now expect free cash flow to be in the $350 million to $360 million range compared with the previous range of $360 million to $380 million.

We expect to offset a portion of the EBITDA shortfall with improved working capital performance. While our third quarter results did not meet expectations due to soft packaged food volume and increased operating costs, we continue to generate strong free cash flow and to make progress on our key strategic capital allocation priorities.

We are pleased to announce that the company's board of directors has declared a 50% quarterly dividend increase to $0.075 per share from $0.05 per share.

The increased dividend reflects our confidence in the sustainability of our cash flows and our focus on a balanced capital allocation strategy which includes returning cash to shareholders through dividends and share repurchases.

We remain committed to reinvesting in the business where we can generate compelling returns and – compelling rates of return on capital projects across our mill and converting systems.

In 2016, we are on track to spend $280 million to $290 million in capital which is above our normalized spend of approximately $200 million to $210 million and is consistent with the outlook we provided on our second quarter call.

We've completed our capital expenditure planning for 2017 and expect that capital spending will not exceed $250 million next year. Now let me shift back to third quarter results. We continue to execute on our three strategic capital allocation priorities in the quarter.

We reinvested $72 million into the business, continue to make progress on integrating our recently closed acquisitions and returned over $42 million to our shareholders, including $26 million of share repurchases. We installed a new curtain coater on our number one paper machine at our Macon mill.

This was a $30 million project that will allow us to significantly reduce our consumption of coating chemicals, specifically TiO2. And as we have said in the past, the expected financial benefit is approximately $10 million annually. The project was completed on schedule and we are confident in the expected annualized savings.

During the quarter, we also successfully closed our Piscataway, New Jersey facility and are on track to close our Menasha, Wisconsin facility by the end of November. The closure of these two higher cost legacy facilities was enabled by the continued successful integration of previously completed acquisitions.

These two projects are consistent with our objective of reinvesting capital into our business and after-tax rates of return in the mid to high teens which we believe will allow us to deliver continued margin expansion over time.

We continue to make progress in our key performance initiatives and have generated $14 million of net performance improvements in the third quarter.

The net performance was impacted by operating costs associated with transferring volume to lower cost converting facilities from the two converting facilities we are closing and costs incurred with onboarding new business.

We've generated $52 million of net performance year-to-date and now expect full year performance to be in the $65 million to $70 million range. We are also deploying a rigorous capital allocation approach that balances the investments in the business with returning excess capital to shareholders to drive long-term shareholder value.

Through the first nine months of the year, we have paid $49 million in dividends. And through yesterday, we have repurchased approximately 8.9 million shares of our stock at a total cost of roughly $115 million.

Regarding recent business acquisitions, we completed the Colorpak Australian acquisition in late April and the integrations of the Carded Graphics, G-Box, WG Anderson and Metro Packaging acquisitions are well underway. The U.S.

acquisitions have enabled us to announce the closures of our existing higher cost Menasha, Wisconsin and Piscataway, New Jersey converting facilities.

While we did not complete any acquisitions during the quarter, our M&A pipeline is solid and we remain focused on continuing to find and execute acquisitions at compelling post synergy multiples within our folding carton business to enhance our geographic, customer and product profiles.

Core organic volume in our global paperboard business declined 1.4% in third quarter, a modest negative result relative to the largely flat volume environment we experienced during the first half of the year. The modest decline in our core organic volume was largely driven by incremental softness across our key end use markets. A.C.

Nielsen reported that U.S. food and consumer market volume declined in the low to mid single-digits for the majority for the majority of our categories such as cereal, frozen food, dry food and frozen foods which, on average, were modestly worse than the trend we experienced in the first half of the year. Our U.S.

food business performed in line with the market with core volumes down modestly versus prior year. The global beverage market remained relatively healthy in the third quarter. The U.S. beverage market continue to be led by growth in specialty drinks, craft beer and bottled water. Our global beverage volume was up low single-digits in the quarter.

New product development remains an essential component of our organic growth strategy. We had a number of new commercializations in the quarter. On the convenience side, we launched a number of newly designed cartons across our microwave platform, most notably the Contessa Premium Foods, a co-packer for Trader Joe's Shrimp Soft Tacos.

Graphic Packaging produced a PET laminated tray with dividers to hold three tacos which takes the product from its frozen state to ready to eat from the microwave. In strength packaging, we were recently awarded all of the business for a leading pet food brand to package heavyweight cans. The cartons will be converted using our SUS paperboard.

The cartons also have a dispensing feature for pantry convenience and handles for ease of lifting and carrying. Our mill operations had another strong quarter. Our mills ran full and our backlogs remain stable at five weeks for SUS and four weeks for CRB. As a reminder, our mill operations are highly integrated within our current converting platform.

And we sell 83% of the paperboard we produce internally. Hence, our backlogs tend to be highly stable on a quarter-to-quarter basis. Continued emphasis on improvement initiatives, variable costs and operating efficiencies contributed the majority of the cost savings in the quarter.

Commodity input inflation was a modest negative in the quarter as we experienced higher secondary fiber energy-related and chemical costs. Looking ahead, we expect a modestly decreased mill production during the fourth quarter to reduce our inventory levels, specifically in CRB.

With the continued rationalization of our converting footprint, less inventory is needed to service our internal and external demand. This will have a modest negative impact on EBITDA and a modest positive impact on cash flows in the fourth quarter and has been factored into our guidance.

And with that, I'll turn the call over to Steve Scherger, our Chief Financial Officer.

Steve?.

Thanks, Mike, and good morning. We reported third quarter earnings per share of $0.18 per diluted share, unchanged compared to the third quarter of 2015. Third quarter results were impacted by an $8.9 million pre-tax or $6.2 million after-tax charge related to business combinations and other special charges.

For the remainder of my comments this morning, references to EBITDA and earnings per share will be to these adjusted numbers. As Mike mentioned, adjusted EBITDA increased $3 million or 1.5% to $200 million, and adjusted EPS was $0.20, unchanged versus the prior year period.

Focusing on third quarter net sales, revenue increased 3.1%, driven by volume from our acquired businesses. Price was lower by $6 million and the strong U.S. dollar negatively impacted sales by $11.5 million. Turning to third quarter EBITDA.

A $3 million increase was driven by operating performance benefits of $14 million and earnings from our acquired businesses. These benefits were partially offset by lower pricing, reduced core volume, inflation and FX headwinds. We ended the third quarter with over $1.1 billion of global liquidity and $2.2 billion of net debt.

Our net debt decreased $22 million during the quarter. During the quarter, we spent $72 million in capital and $42 million in share repurchases and dividends. The net leverage ratio at the end of the third quarter was 2.89 times, slightly less than at the end of the second quarter of 2.93 times.

We remain committed to our long-term net leverage target of 2.5 times to 3 times. As Mike stated, we're executing a balanced approach to returning capital to our shareholders.

Since initiating the $250 million program in the first quarter of 2015, we've allocated $178 million to acquire nearly 14 million shares or 4.1% of the fully diluted shares at inception. Turning to full year 2016 guidance. As Mike mentioned, we are modestly lowering our EBITDA and cash flow targets.

We now expect 2016 EBITDA will be up between 1% and 3% compared to the 4% to 7% previously disclosed. The reduction reflects modest negative headwinds across the performance, price/cost, volume mix and FX components. Let me address each in more detail. On performance, we now expect to be in the $65 million to $70 million range.

The reduction reflects the increased operating costs we incurred during the quarter as we transferred volume to lower cost existing facilities, onboarded new business, considered the impact Hurricane Matthew had on our Lumberton, North Carolina, converting facility, lower fourth quarter CRB production and lower core volumes.

We've updated our pricing/commodity inflation range to negative $25 million to $30 million, compared to the negative $20 million to $25 million range last quarter. The update primarily reflects the recent uptick in recycled fiber and energy-related costs. We expect this incremental headwind will largely impact us in the fourth quarter.

The $20 per ton CRB price reduction reported by RISI in September will put pressure on the price/commodity inflation spread as we enter 2017. As Mike mentioned, we will be reducing inventory levels in Q4 to better match our internal and external demand.

As we have experienced over the past five years, we remain committed to pricing, offsetting commodity inflation over time. Shifting to volume. The modest incremental weakness in our food end markets, which was evident in the A.C. Nielsen data, had a several million-dollar impact on our EBITDA during the quarter.

We have continued to see similar trends in October.

While we remain encouraged by our food customers' continued focus on upgrading their product portfolios to offer healthier options to the consumer, we continue to plan for a flat to modestly down end consumer demand profile and are focused on outperforming the market through new product development, customer and geographic expansion, and substrate substitution.

We have updated our FX negative impact to $15 million to $20 million, primarily to reflect the continued decline of the British pound post Brexit. Finally, turning to cash flow.

We are modestly reducing our 2016 cash flow range to $350 million to $360 million, from $360 million to $380 million, to reflect our reduced EBITDA guidance, partly offset by improved working capital performance. The remainder of our guidance is contained in the last page of the presentation on our website. Thank you for your time this morning.

I will now turn the call back to Mike..

Thank you, Steve. While third quarter results only grew modestly, we remain confident in our business model and ability to execute with excellence.

We continue to execute on our key strategic capital allocation priorities, specifically reinvesting in our business to drive strong cash returns on cash invested, executing and integrating strategic acquisitions at compelling post synergy multiples and returning cash to shareholders through dividends and share repurchases, all of which drive long-term shareholder value.

We are a pure-play and low cost folding carton producer with leading market positions in the consolidated North American market. The 50% increase in our dividend and continued focus on share repurchases reflects our confidence in the free cash flow profile of the business.

We are focused on redeploying our strong cash flows across our three strategic capital allocation priorities I just outlined and remain confident in our ability to drive future profitable growth. I will now turn the call back to the operator for questions..

Your first question comes from Anthony Pettinari from Citigroup. Your line is open..

Good morning..

Good morning, Anthony..

Mike and Steve, if I look at the past five years or so, you've been able to grow EBITDA mid single-digits on a percentage basis or sometimes a bit above that pretty steadily.

And I know you're not giving 2017 guidance here, but when I think about the headwind you have to overcome this year, do you anticipate being able to return to that kind of earnings growth trajectory over the longer-term or kind of any thoughts you can give there?.

Yeah, Anthony, I mean our fundamental belief in the business model is unchanged. I mean we incurred some additional costs here in Q3, moving some of the business from some of the facilities. We're closing down Menasha and Piscataway as I mentioned That cost us roughly $4 million in the quarter.

And those were some execution issues that have been addressed and impacted us in Q3 and really don't carry over into Q4 in a material fashion. So I think the biggest challenge that we've got going forward and we outlined it here is really the core business volumes and some of the headwinds we see, particularly around the center of the store items.

We saw those relatively flat in the first two quarters of this year, and then Q3, we saw a modest decline in our core volume as we outlined roughly 1.4%. And if you think about our food business, it was actually a tale of a bit of two cities, between food and beverage.

We saw our core food business down in the 2% to 3% range and our core beverage business was actually up, North American beverage was up 1.2%. So you put it all together, that was about a 1.4% headwind to our top line revenues. And we, so far, here in Q4, have seen a similar trend on the food side of the business.

So, as Steve said, we're encouraged that our customers continue to work reformulation and make healthier options for our consumers. We believe that over time that'll have a positive impact on demand. But in the near- to medium-term, we planning on flat to modestly down in some of the sectors that we operate in..

And, Anthony, this is Steve. To Mike's point, our business model of price over time offsetting commodity inflation, we have not altered that approach and we go through periods as you know over the past five years.

We're in balance on price and commodity inflation, but we go through some periods of time where works both positive or negative and we're in one of those moments now given the deflationary environment that we've been working through.

And now with the return of modest inflation, this is that point where that – the mix of those can get out of sorts a little bit as we've articulated in the guidance.

But our absolute commitment to productivity at the $60 million to $80 million range and with the capital we've been deploying, being on the high end of that next year, more than offsetting our labor and benefits inflation, that component of the model and our commitment to pricing offsetting inflation over time, none of that has altered..

Okay. Okay. That's very helpful.

And sorry if I missed this but is it possible to quantify the reduction in production in CRB that you referenced for 4Q, either in terms of EBITDA or tons?.

Yeah, we're targeting in the neighborhood of 10,000 to 15,000 tons in Q4, and we've already taken about 5,000 tons of that here month-to-date in October..

And that'll be a couple million-dollar impact in the fourth quarter, Anthony..

Okay. That's helpful. I'll turn it over..

Your next question comes from Brian Maguire from Goldman Sachs. Your line is open..

Hey, good morning, guys..

Hey, Brian..

Good morning..

Just wanted to dig in a little bit more on the change in the productivity guidance. I think you started the year at $65 million to $70 million, and then took it up to $70 million to $80 million in – we started at $60 million to $80 million and then raised it to $70 million to $80 million, now we're back down to $65 million to $70 million.

Just want to get a sense how confident you are in the new range and then also how much of that slippage you think you might get back in 2017. I think you mentioned the $4 million from the hit in 3Q and a couple million more from the CRB inventory rundown into the end of the year.

But would you expect that you'd get a lot of that back in 2017?.

Brian, it's Steve. Let me kind of take you through those numbers. You did a nice job of it. Our original guidance was $60 million to $80 million. Last quarter, we took it up to $70 million to $80 million kind of on the high end, so midpoint of $75 million. We've just lowered the $65 million to $70 million.

So, if you go from last quarter to this quarter, roughly a $7.5 million impact. We saw about $4 million of that in the third quarter as we just shared, so about $4 million of that was in the quarter. The next roughly $3.5 million is in quarter four and a couple million dollars is an impact from the hurricane.

We have a significant converting facility in Lumberton, North Carolina, that was down for about 10 days. So we've got a couple million dollars there and then a couple million dollars from the CRB downtime. So much of that doesn't repeat itself as we flow into 2017, but it did have an impact on our overall productivity for this year.

But our confidence in the $65 million to $70 million is high and our confidence in the go-forward productivity also remains high given the capital we've deployed and the overall initiatives that we have in place..

Okay. And I just wanted to ask one more about the volume weakness.

Are you confident it's really just end markets that are slowing down? Or are you seeing any share shift? And just kind of along with that, we've just been hearing some industry reports of more competition in the CRB market, and the price obviously slipped a little bit more in September.

Maybe you could just kind of give us an update on competitive trends that you're seeing in CRB and how that might be impacting volumes. Thanks..

Yeah. I guess in regards – I'll split that apart – your question apart, Brian. In terms of the overall volume, we do see it competitive. I mean obviously if you look at CRB as a substrate in our case, we are integrated in over 83% of the material that we manufacture and sell to our converting operations.

There's a tail of 10% to 15% on the open market and I think that's been pretty well chronicled by PPW that that's a pretty competitive spot right now and they've reflected that in their pricing numbers that they've published. So I guess as we think about that going forward, what we want to do is match our supply with our demand.

And as we talked about here in our prepared remarks, with our supply chain being more efficient now and we have three less facilities, we actually can operate with less inventory and that's what we're going to choose to do going forward as we enter 2017..

Okay. Thanks. I'll turn it over..

Your next question comes from the line of Gail Glazerman from Roe Equity Research. Please go ahead..

Hi, good morning..

Good morning, Gail..

Just maybe to follow up on that. Can you dig a little bit deeper? You touched on it a little bit but the issue and the disconnect between rising waste paper costs yet increasing competitive dynamics in the CRB.

How – I mean are you seeing other changes in the market that might sort that out and maybe also put CRB in perspective with relative stability and reports of kind of increased backlogs in some of the other boxboard grades?.

Yeah, Gail, it's Steve. Let me just try to touch on it from a CRB perspective. You are correct. We have seen some inflation come back into the business after a pretty lengthy time of general deflation.

And I think, to your point, that created some of the competitive dynamic as deflation was rolling through the broad-based boxboard and paperboard markets but certainly relative to CRB. We have seen that turn a bit. And for the first time, we saw inflation, net inflation in our business in Q3 and we expect to see that in Q4.

And so that will have obviously impacts on the overall – on our cost structure specifically and that's – and we're certainly taking that into consideration. As we look at our actual backlogs and inventory levels, our backlogs, as Mike said earlier, very steady. We haven't seen any shift in our core backlogs of kind of four weeks to five weeks.

And if you strip out our acquisitions, our inventory levels are actually down year-over-year now at the end of September and we would expect them to be in balance or slightly down at year end. So we remain very committed to managing our supply demand dynamic, the things that we're responsible for.

And as we look at our flow through, it's been actually quite steady and consistent fairly for the totality of this year..

Okay. And just maybe the weakness that's coming up in CRB relative to reports of reasonably decent trends in some of the other grades. Do you have any sense of what's driving that? SUS and SBS seem reasonably healthy. And at one point, the SBS backlogs are actually quite high..

Gail, it's Mike. I think in continuation onto my answer to Brian there, it's really – if you look at the folding carton industry, it's a very integrated business. It's upwards of 85% integration. So there's a portion of that independent converter market that is a – what I would characterize as highly competitive right now.

We have seen those backlogs drop year-over-year, roughly 30%. Steve mentioned that input costs had been down over the last 12 months. Now they're starting to go up again. And if you look back historically over time, there's a pretty strong correlation between input costs and pricing both up and down.

And so our – that's really our view of the CRB market..

Okay. And can you talk a little bit about what you're seeing in Europe. You obviously mentioned shifting the FX impact given what's been going on the pound.

But just in terms of the market demand dynamics and are you seeing any openings? You guys have talked about maybe more willingness to look at – take capacity, look at acquisitions in Europe at this point.

Are you seeing any opportunities open up?.

Yeah, we're spending a lot of time looking at that. I've actually spent three weeks in Europe already this year meeting with principles. A number of these businesses, as you know, tend to be family-owned and they're smaller in nature.

But we're committed to the comments we made on our second quarter call and we reaffirm those again today that our goal is to drive a converting business in Europe that is in excess of $1 billion in sales. We're a little over $630 million right now.

We're looking for the right businesses, the right valuations, making sure that synergies are real and that we can take them to the bottom line and hold onto them. So we're very active in that regard but we're also making sure that we're making the right moves for the business..

Okay. And one just really quick one.

The hurricane impact, do you think it's over with, with the facility back up and running? Or are there some kind of lingering logistic issues or – and to what extent do you think your customers might have been impacted?.

Well, one of the reasons that – thanks for that question. Our facility was down for roughly 10 days, and obviously, numerous people's lives impacted as well which we certainly are respectful of as well. But, yes, we are back up and running.

We don't expect there to be any significant lingering impacts and part of the cost that we incur are actually supporting our customers. We redistribute volume around to other facilities in order to continue to service and support our customer relationships in the face of those types of events.

So some of those costs are actually us diverting production to other facilities which is not free. Some of it is the impact of being down for 10 days, and overall, we expect that impact to be – we're incurring it here in the fourth quarter but we don't expect it to linger on beyond the quarter at all..

Okay. Thanks very much..

Thank you..

Your next question comes from the line of Arun Viswanathan from RBC. Please go ahead..

Good morning. Thank you..

Good morning..

I just had a question on overall supply/demand and CRB.

Maybe you could just give me your assessment on where you think supply/demand is? Do you think there needs to be any kind of rationalization? What gives you the confidence that you could still employ this model of maintaining price/cost going forward?.

So, Arun, it's Mike. We're going to stick with our comments to our business. And as I mentioned, our plan is to match our supply and demand very closely. Our backlogs remain steady and solid. We ran solid here in Q3. We've just determined we don't need as much inventory in our system anymore.

And so we're going to take some downtime here in Q4 to more closely match that with our actual needs going forward..

So you're basically taking a leadership position within the industry and that's appreciated.

I guess the other question I had was just on your own volumes then, would you be in a position to shift more towards beverage if that market is doing a little bit better as you saw in Q3?.

Yeah, this is Steve. There's really not any natural shifting that takes place between our virgin SUS paperboard and CRB. And so really the supply demand dynamics tend to stand on their own within our supply demand for CRB and our supply demand for SUS. As Mike said, globally, our beverage volumes continue to grow.

We see very solid overall volume growth on the SUS side. Some of the investments that we've made there we see very high long-term value creation from that. So the beverage side has continued to show net growth, both here in North America and globally. And that supply/demand dynamic for us has been very good and our backlogs remain very solid there.

For CRB, it really goes to what Mike was referencing earlier on some of the softness we've seen in food. Our acquisitions continue to do a very good job, though, of winning in regional markets, winning in healthier, good-for-you product categories.

And so, while we saw some disruption this quarter, our movement towards regional, healthier, good-for-you product categories remains and our acquisitions continue to win heavily in those spaces. And we've seen some success in some other food service markets where we've onboarded some new business.

So our goals around offsetting some of that weakness so that we play to that kind of core draw remains our commitment in the face of what our – what has really been an ongoing, some of the core challenges in the center of the store..

Sure. And just lastly on free cash flow, appreciate the tidying up there, but maybe you can just discuss your expectations next year.

Are there any opportunities maybe to increase the contribution to free cash flow you get from working capital, given that you are running lower on the inventory side?.

Yeah, that's an excellent question and we'll certainly provide more significant guidance when we're on the call in February. But I think a couple things that you can take away from earlier comments. Our commitment to ongoing growth in our EBITDA and cash flow remains our strategic aspirations and history.

I think when it comes to next year, you can get a sense for our capital spending. We'll be down in some material ways off of this year's high water mark. That obviously generates year-over-year. And we, as Mike said earlier, we are working hard on our working capital and do see some opportunity there.

So that's something that we are spending time on and we'll get much more clarity for you in February, but you can rest assured that working capital is a high priority for us..

Great. Thank you..

Thanks, Arun..

Your next question comes from the line of Mark Wilde from BMO Capital Markets. Please go ahead..

Good morning, Steve. Good morning, Mike..

Good morning, Mark.

Good morning, Mark..

First question I had, Steve, you mentioned, I think, the impact of lower CRB prices in 2017.

Can you give us some sense of what that impact might be?.

Yes. Sure, Mark. If you take the accumulated $70 per ton reduction for the multiple moves that have been made, really, throughout the year, so I'll focus it on the entirety of the moves. That's about a $35 million impact for us. We will have seen about $10 million of that this year, and that's in the guidance that we provided.

We'll see the remaining $25 million roughly next year in terms of kind of the magnitude of the year-over-year..

And, Steve, is that something that you've thought about? Can we offset that and still kind of maintain this sort of mid single-digits EBITDA growth in 2017?.

Yeah, Mark, again, we'll come back with guidance as we round the corner on the year. Certainly, that'll be a headwind that we have to overcome, and it's one of the reasons that we have put some capital to work at the higher end of our guidance this year, the $280 million, $290 million that we've talked about.

That should give us confidence and does give us confidence in our ability to generate productivity near the high end of our range. And so, yes, we'll have some headwinds that we'll have to overcome, and obviously, FX, we've talked about as well, labor and benefits.

And so for us, executing near the high end of our performance range is something that we have some confidence in and we'll talk more about as we round the corner on the year.

But you've touched on it in the past; that's something that's important to us as we put capital to work, particularly capital this year to drive improvement levels that can put us on the high end of that range..

Okay. And is there any way, Steve, just kind of switching gears here to quantify the impact of the Brexit in the third quarter for Graphic in terms of pricing and volumes? Because as I recall, about two-thirds of your European business is in the UK..

Yeah, Mark, it's Mike. Your memory is correct. We've got about $300 million of our $630 million is in the UK.

And of course, when you see the impact on the top line of about $11.2 million in the quarter that was directly related to the weakness in the pound which, as you know, has continued here as we entered into October here and that's factored into our guidance as well for Q4..

Mike, has this had – has the Brexit had any effect on sort of on your – any of your customers or customers' volumes?.

Yeah, it's been a little bit down in the UK. We've seen some downward trend in terms of sales, not materially but it's modest. It's 1% to 2%, but it certainly has had an impact. We also have seen some inflation starting to come into that market as outside suppliers from outside of the UK have tried to deal with that impact on currency.

And of course, as I mentioned on our Q2 call, our approach to dealing with that is to fight that vehemently, but where we can't, then we're going to have to look to offset that with pricing..

Yeah. Okay.

And is there any change in how you're thinking about kind of expanding in Europe because of Brexit?.

Yeah, not so much Brexit because we have a large market share in the UK. We're around 25% market share. So it's not like we would look to naturally grow in that market. We're looking to grow more in Continental Europe, both Western and Eastern Europe..

Okay. Right. And then, finally, can you just – can you talk a little bit about sort of how the progress is on the integration of all these converting businesses because you've really, you've got a lot on your plate from an integration standpoint.

You're down in Australia, you've gone into Mexico, you're over in Europe and then you've got sort of the North American footprint where you've done a lot of small acquisitions. If you just add it all up, it's a lot of far-flung pieces for you to integrate right now..

Yeah, thanks for that question. I would – I mean your assessment is correct. We have done, we have been very active in terms of the M&A that we've done over the last 12 months to 18 months. And I characterize – our M&A is actually performing quite well.

If I have one disappointment, as I mentioned earlier here, our overall execution of the closure of two of our facilities didn't go as well as we had planned in Q3 and that cost us in the neighborhood of $4 million.

But when you look at the core EBITDA from the integrations, the customers that we're able to serve, the markets that we're in, we're really encouraged by the work that we've done and the potential for them as we go forward..

Okay. All right. I'll turn it over..

Thanks, Mark..

Thanks, Mark..

Your next question comes from the line of George Staphos from Bank of America Merrill Lynch. Please go ahead..

Hi, everyone. Good morning..

Good morning (40:14)..

Thanks for all the details. A lot of my questions, frankly, have been already asked, but let me dig into a couple of things.

So, Mike, last quarter as I recall, we talked about capital spending and the potential need to increase CapEx to generate productivity in light of what were some of the already existent headwinds as you go into the back half or as you were going to the back half of 2016 into 2017.

So the commentary that's in the guidance this quarter where CapEx will be no more than $250 million, while that's technically no different than your prior normalized range of roughly $210 million, it implies some increase in CapEx.

So can you help put a bow on that in terms of whether there is in fact some increase in CapEx implied in that guidance and I'm assuming if there is it's because of a need to drive productivity given the headwinds, but if you could confirm that and any, provide any additional color would be helpful..

Well, the investments that we made this year, as Steve mentioned earlier, are defiantly going to have a positive impact on our productivity as we head into 2017. We'll lapse, if you will, the big outage that we talked in West Monroe on Paper Machine Number 7 as an example on April of this year. We'll have the full benefit of the curtain coaters.

We'll have the benefit of the two plant closures, Piscataway and Menasha that were in the neighborhood of $10 million to $15 million. So the investments that we made this year will certainly pay big dividends as we round the corner into 2017 and beyond.

In regards to the $250 million we're spending next year, as you recall, the big projects tend to be as we do our big outages. And this year was a year that we did a number of those and had longer ones in West Monroe and in Macon.

So, as we look at that $250 million as we spend next year, we're identifying those projects that we think are great cash-on-cash investments that we mentioned in our prepared comments, have mid to upper teen returns. And those are the ones that we'll be transacting on or implementing over and above the $200 million to $210 million.

We think that it's the right amount of capital for us to spend next year. This year was a big year for us. We got a lot of really good work done. The business is well invested, and those assets, or those projects that we'll do next year will further build on that base..

Okay..

And just to that, our core ....

Good morning..

Good morning. Our core belief around the $200 million to $210 million required to operate the business hasn't changed. As Mike said, when we identify specific projects that we'll talk about going forward, that's when we head above that number, and it isn't a permanent move.

I think a little bit to your question what it does do, as Mike said, and we've said is it moves us towards the higher end of the ranges when we can in fact put that – when we chose to put that capital to work..

Yeah, Steve I understand that. So I guess what I'm really asking is would the number have been, let's say, $250 million for next year no matter what 2016, how that developed, or based on how things were developing over the last several months, you determined that it was prudent to increase capital spend to drive the productivity.

I have no problem with your CapEx. I just want to understand whether that was always the plan or whether you need to ramp it based on the environment you're in..

Well, I think, as we've said before, we run pretty rigorous three-year capital project plans. So we kind of know what's always ahead of us.

And as we look back over the last, to your question though and it's a very good one, as we look back over the last year and saw some of the softness that we've been – that we are managing through some of the impacts of a deflationary environment, yes.

As we look at our balanced capital allocation strategy, putting some cash to work to drive incremental returns and ability to take out cost, yes, we do – we'll lean towards emphasizing that as part of our overall balanced approach to capital acquisitions and dividends and share repurchases..

Okay. On inventory, would you have been taking the inventory down anyway in the fourth quarter, because in fact, the footprint had been changing? You had already announced Menasha and the other folding carton enclosure. Or is it really driven by the volume in terms of the reduction that you needed to do there? That's next question.

Secondly, on pricing, thank you for outlining for us based on what you know at the moment, what the negative effect from price will be next year.

When do you think you'll lap that from a quarterly perspective, if you have any perspective on that? And then my last question is on the high strength packaging, can you give us any more detail in terms of – you mentioned large can sizes, but if you can mention a little bit more color around the package and the conversion there. Thank you, guys..

Thanks, George. I'll handle the inventory and high strength, then Steve, you can handle pricing. In terms of inventory, we just look at what it takes to run our supply chain, and our approach has been to match our supply with our demand.

And as we have a smaller footprint, a more efficient footprint, a more integrated footprint now with the acquisitions that we've done, we think it's prudent to release that cash and take it from working capital in the form of a reduction. So that's really our thought process on that.

Again, we run a very integrated model, 83% of our tons as you know flows through our converting businesses and are sold directly to our customers. So it's pretty tight in that regard. In regards to high strength, on that particular package, we see a number of those.

Actually, our backlog for new product development on high strength continues to grow, particularly as we see opportunities for retail ready packaging, things that can be on disappearing pallets, elimination of corrugate and other things that really is a good utilization of our heavy caliper SUS.

So it's a little bit of a migration, George, as you and I've talked about, to on the lower end of our SUS calipers, and then on the higher end of our SUS calipers. And the higher end of our SUS calipers are really the ones that are focused on strength packaging..

And I'm assuming it's a conversion of corrugated? Would that be fair, or not fair?.

That's correct..

Okay. And then on the....

And George, on....

Yes, sir..

...on the pricing, George, we'll be lapping most of that as we move into the second half of 2017. So it'll kind of flow though as you've seen it come in, the $70 have come in over the year. We'll be lapping through most of that in the first half of 2017..

Yeah, and the inflation that we've talked about, the commodity inflation we talked about will start flowing through our cost models end of Q2 and into the latter half of 2017 as well..

Okay..

Which is an important one, George, as well. That we are seeing some inflation back in the business. So our cost models will start to pass that through as well as we round the corner into 2017..

Okay. Thank you very much for all that detail, guys. Good luck in the quarter..

Thanks, George..

Your next questions comes from the line of Ghansham Panjabi from Robert W. Baird & Company. Please go ahead..

Hi, good morning. This is actually Mehul Dalia sitting in for Ghansham.

How are you guys doing?.

Good, Mehul..

Good. Good morning..

Good morning. Going back to Europe, can you talk about core volume growth during the quarter there? Maybe parse it out by food, beverage, et cetera, similar to what you outlined for the U.S. earlier in the call..

Well, our particular experience with global beverage was solid as I mentioned. We actually saw similar trends in Europe as we saw in North America, the food business being slightly down on our global beverage, our European beverage being up a little bit, so very consistent in both geographies..

Okay. Great.

Was there any substrate conversions that may have impacted you during the quarter, especially considering the declines in resin over the last year?.

Nothing material..

Okay. Great.

And then lastly, can you talk about your new product pipeline for 2017? Anything exciting or worth mentioning being driven by customers or being developed by you independently?.

I think that the biggest thing that I comment there, Mehul, is that our pipeline is just very robust. We've got a lot of projects there, the queue is big and continues to grow. Customers are looking at all different options to try to sell their products in a relevant way that resonates with consumers. So, over time, that will benefit us.

That's our belief. And that's why we allocate the resources that we do to continue to work on those kind of initiatives, particularly back where it integrates into the substrates that we manufacture, either CRB or SUS..

Great. That's all for me. Thank you so much..

Thank you..

Your next question comes from the line of Philip Ng from Jefferies. Please go ahead..

Hey, guys. Just piggybacking off of George's question, I just want to make sure I understand the moving pieces for at least the price piece for next year. You called out, I guess, incrementally for 2017 it's going to be $25 million drag from the PPW cut.

But also I think, Steve, you were kind of alluding to the fact that you've got these cost plus agreements and you saw some inflation this year, so you should see some pricing on the pass-through side.

Can you kind of talk to some of the moving pieces there?.

Yeah, thanks, Phil. As we've talked before, our lag tends to be in that kind of nine-month timeframe generally for passing through price movements, whether that be a market-based model like CRB market-based, or cost-based models.

So now that we've seen some inflation come back into the business, we saw a hint of it in Q3, we expect to see some of it in Q4, as we round the corner into 2017, we'll begin to move that through to our customers. Again, it'll be on a lag basis.

So, as you kind of move into the middle of next year, we should start to see some positives come from us moving that inflation through our cost models, through our pricing. And we'll provide more guidance on that in February.

But as you know, pricing has complexity to it in terms of market-based movements, cost-based movements and then obviously the ongoing negotiations with customers..

Got you.

But I guess the way to think about it in terms of just the cadence for 2017, price/cost might be a little bit more challenging in the front half but a little less than back half just based on some of these moving pieces, right? Is that the right way to think about it?.

That's a fair way to think about it in terms of the more significant headwinds should be in the first half of the year..

Okay. That's helpful. And I guess just sticking with CRB, it's helpful you guys are taking a market leadership and taking a little downtime.

Have you seen any of your competitors do the same? And I just want to get your thoughts, are you starting to see pricing here stabilizing because you did call out input costs rising a bit?.

Hey, Phil, it's Mike. I mean all we really can comment on is what we're doing. And again, we're trying to match our supply and our demand and that requires us to take 10,000 tons to 15,000 tons out that we've mentioned here in the call, which we'll plan to do here in Q4..

Okay. And then switching gears to capital deployment, encouraging you raising your dividend here. You bought back a nice amount of stock.

How do you think about those two forms of cash being returned back to shareholders? And then are you planning to hit like a certain target for dividend yields? And just comment a little bit about M&A in terms of pipeline. Thanks..

Yeah. So a couple questions there. In terms of a target, we've not established one for the dividend and that really isn't something that we spend a lot of time talking about.

We felt that this allocation, if you will, is the right one for our shareholders and our board of directors is very supportive of that and that's why we elected to make that move that we're announcing here today. In terms of buybacks, I mean we've been in the market, really, all year long.

We tend to be more opportunistic when, obviously, the stock price is down. So, if there's dislocation or other transient factors that impact the stock value and we think it's a good bargain for us or a good deal for us to buy our stock, then that's what we do. And we'll plan to do that, remain active here in Q4 with a similar approach..

What about M&A, Mike?.

Backlog continues to be pretty solid. As I mentioned, our focus is on Europe. I've spent a fair amount of time over there. We're looking at a number of different options, both geography as well as product offerings and categories.

But a lot of those companies are privately owned and it takes a while to work through some of the social issues and valuation issues that make it worthwhile for them and for us to transact. But we'll continue to make that a priority here as we finish 2016 and 2017..

Okay. Appreciate that and good luck in the quarter..

Thanks, Phil..

Thanks, Phil..

Your next question comes from the line of Danny Moran from Macquarie. Please go ahead..

Hey, good morning, guys. Thanks for taking my questions. Just another one on packaged food volumes. Organic volumes for you has been pretty flattish or slightly down for some time with volumes underperforming in 3Q and it sounds like October is about the same.

Any risk this continues through 4Q and into 2017? And what would you attribute this weakness to?.

Danny, it's Mike. That is the question, right. I mean, if you look at the first half of the year, was consistent with what we'd experienced for the prior couple of years, pretty flat, a few of the sectors down a little bit.

But in Q3, in particular, we saw a deceleration on some of the key categories that we're in that was more than what we'd experienced in prior quarters.

Three of our largest customers actually have announced their earnings in the last week, week-and-a-half, and all of them forecasted lower Q4 volumes, as well as 2017 volumes that would be a bit challenged. So we're building our model based on that.

We're not expecting the volume to come back in a material way, and so we've got to be able to execute in an environment and outperform in an environment that has flat to modestly down volumes..

Okay. Great. Thanks, Mike. And then just one more. Have you noticed any pickup in substrate gains from other paper grades? You're exposed to some grades where RISI is reflecting price declines. Meanwhile, we just saw RISI move list prices up for linerboard prices over the weekend.

I know you had some success here in the past, but any reason – or has the widened spread led to any customer response?.

We haven't seen anything major that I would call material year-to-date, but I would expect that we'll see an uptick in the number of projects related to corrugated package -tertiary package conversions and disappearing pallets that utilize our SUS for retail ready applications.

We've seen that before when pricing on the linerboard sector moves up and we'd expect it to be the same here with this time..

Okay. Great. That's all for me. Best of luck for the rest of the year..

Thanks, Danny..

Thank you, Danny..

Your next question comes from the line of Debbie Jones from Deutsche Bank. Please go ahead..

Hi, good morning..

Hi, Debbie..

I wanted to go back to the capital spending.

You talked in the past about kind of, again, the $200 million to the $280 million, $290 million range, but with the increase in the dividend, do you think that $200 million to $250 million is now the right range for your guys over the next couple of years, also considering that you're still kind of targeting some M&A over the next two years? And then does that – if so, does that kind of change the targeted performance benefit range that we've kind of come to expect, the $60 million to $80 million?.

Debbie, it's Mike. I mean from – and I think Steve covered a little bit of this earlier. But in our opinion, the $200 million to $210 million of core CapEx spending is the right number to routinely drive our $60 million to $80 million worth of year-on-year productivity improvements.

That said, where we see good opportunities for us to get cash-on-cash returns that are in the mid to upper teens, we want to treat that as an allocation and we'll allocate more of our free cash flow into those projects. We did that in 2015, as you know with the Cogen that we put into West Monroe.

We did it this year with the project that we did on West Monroe Number 7, the pressing section headboxes, and most recently, the curtain coater on Macon. So I think you can expect that kind of approach for us going forward. We hold ourselves accountable to that $200 million to $210 million.

If we go above it, we'll call it out and that's what we plan to do in 2017 as well. And with all of that said, we believe we have the appropriate capital and capacity to continue to drive the M&A that we believe is important for our business.

So it really is truly a balanced capital approach, capital allocation approach when you look at what we're doing in investing in the business, making strategic tuck-in acquisitions in geographies and products that are important to us, and ultimately, returning cash to shareholders as we've outlined..

Okay. And then if I could just touch on a sales question as well.

You didn't state a specific dividend kind of focus going forward, but what is your preference between dividend increases and share repurchases? And then is there a reason to expect that we could at least see kind of a progressive dividend going forward?.

Debbie, it's Steve. I mean, as Mike said, we haven't set out a standard, if you will, or a set of percentages relative to the dividend or the share repurchases. It's an important part of our balanced capital allocation approach where we do see dislocations in share price. We'll tend to be more assertive on that side.

But we're really – we're involved in both, and I think what you've seen with the dividend is – and to your question a moment ago to Mike as he rightly said, it doesn't preclude us at all from the actions we're taking around putting capital to work or the M&A.

It's a modest percentage of our free cash flow now kind of in the $90 million range and doesn't preclude us from acting. And we don't have a stated preference between them. We allocate to both dividends and share repurchases where we believe it's a prudent use of our cash flow relative to the M&A and the capital..

Okay.

And last question just on Colorpak, are you able to provide the benefit in the quarter and what you're expecting for Q4 and just how that is progressing overall?.

Yeah, thanks for that, Debbie. We're very pleased with Colorpak. The earnings to-date have been at or even slightly above our expectations.

We've got an excellent team on the ground that's executing on some very good productivity enhancement initiatives there as we take full advantage of the business we had there and then consolidating into the manufacturing facilities there.

So we feel very good about Colorpak and expect to achieve, if not over time, exceed the run rate EBITDA commitment that we made when we acquired the business..

Okay. I'll turn it over..

Thank you..

And there are no further questions in the queue..

Thank you very much for joining our call today and we look forward to talking to you again in February..

This concludes today's conference. You may now disconnect..