Alex Ovshey – Vice President, Investor Relations Mike Doss – President and Chief Executive Officer Steve Scherger – Senior Vice President and Chief Financial Officer.

George Staphos – Bank of America Merrill Lynch Chip Dillon – Vertical Adam Josephson – KeyBanc Matt Krueger – Robert W.

Baird Anthony Pettinari – Citi Mark Wilde – BMO Philip Ng – Jefferies Brian Maguire – Goldman Sachs Debbie Jones – Deutsche Bank James Armstrong – Armstrong Investment Gail Glazerman – Roe Equity Research Arun Viswanathan – RBC Capital Markets.

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to Graphic Packaging First Quarter 2017 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.

[Operator Instructions] I would now like to turn the call over to Mr. Alex Ovshey, Vice President, Investor Relations. Please go ahead..

Thanks, Michelle. Good morning and welcome to Graphic Packaging Holding Company’s first quarter 2017 earnings call [indiscernible].

Thank you, Alex. Good morning and thank you for joining us to discuss our first quarter 2017 results. Our first quarter adjusted EBITDA was lower as expected at $161 million compared to $193 million in the prior year period. Net sales were up 2.7% reflecting acquisitions and stable core volumes, consistent with the trends we experienced in 2016.

The quarter was negatively impacted by accelerating commodity input costs, primarily recycled fiber, and the planned downtime costs associated with the successful upgrade of two headboxes on our number six paper machine at the West Monroe, Louisiana mill.

Our pricing continues to be negatively impacted by the flow-through of the 2016 reductions in the RISI CRB price index. Adjusted earnings per share decreased to $0.14 compared to $0.20 in last year’s first quarter.

We were executing on announced price increases to offset the sharp recycled fiber input cost inflation that we’re experiencing and expect that margins to improve from our pricing actions by the second half of 2017, and in 2018. We expect our pricing to commodity input cost relationship to be at least $40 million positive in 2018.

Our focus on meeting our cash flow commitments, growing cash flow, and returning more of it to stockholders over time has not changed. We also continue to make progress on our key strategic capital allocation priorities.

Before I discuss the progress we’re making across our key strategic priorities and the details of the quarter, I would like to provide a high level update to our 2017 financial guidance. We expect our 2017 adjusted EBITDA will be in the $725 million to $745 million range.

This compares to our previous guidance of EBITDA of modestly in 2017 relative to our adjusted EBITDA of $764 million in 2016. Steve will discuss in more details in his remarks.

Our updated 2017 guidance reflects the sharp increase in recycled fiber costs in February and March of this year, which was not factored into the guidance we provided on the fourth quarter earnings call. While recycled fiber costs has declined slightly in April, the published U.S. National OCC average is up 88% year-over-year in April.

We successfully implemented the first announced $50 per ton open market CRB price increased during the first quarter. The increase will be a slight offset to the negative impact from higher recycled fiber cost in 2017.

However given the lag between changes in open market paperboard prices in our folding carton prices, we expect to see the majority of the benefit from the first open market CRB price increase in the first quarter of 2018. We’re currently implementing a $50 per ton open market CUK price increase and a second $50 per ton open market CRB price increase.

We expect to see a significant positive benefit from these pricing initiatives in 2018. We also expect that our cost models to benefit our folding carton pricing in the second half of 2017, and in 2018. As we have stated in the past, we remain confident that our pricing initiatives will offset commodity inflation over time.

Importantly, we see a path to achieving our previously provided 2017 cash flow guidance range of $380 million to $400 million despite the reduced EBITDA guidance driven by more favorable working capital.

Let me now provide more detail on the key operational trends we experienced during the first quarter before discussing our three strategic capital allocation priorities and how we are executing against them in 2017.

Core organic volume in our global paperboard packaging business was flat in first quarter consistent with the volume trends we experienced in 2016. We continue to outperform the end market trends reported by AC Nielsen, driven by the ongoing success of our new product development pipeline.

The global beverage market remained relatively healthy in the first quarter. The U.S. beverage market continued to be led by growth in specialty drinks, bottled water, and craft beer. Our global beverage volume was up low-single digits in the quarter. New product development remains an essential component of our organic growth strategy.

Let me highlight one important new commercialization in the quarter. In the pet care market, we grew our position with a significant win that leverages our brand enhancement and strength platforms. We redesigned the folding carton for a leading pet care supplier to incorporate better graphics and improved strength.

We expect these improvements will differentiate the product on the shelf and increase the durability of the product through the supply chain and at home. We began production in January and expect to utilize 8,000 tons of paperboard on an annualized basis to produce these cartons.

Shifting to performance, our backlogs remained stable at five weeks for CUK and four plus weeks for CRB. As a reminder, our mill operations are highly integrated with our converting platform as we consume 85% of the paperboard we produce.

Continue to emphasis on improvement initiatives variable cost and operating efficiencies contributed to the majority of the cost savings in the quarter. We generated $7 million of net performance during the first quarter. The $7 million includes an $18 million headwind related to the planned downtime costs at West Monroe.

Moving to costs, Commodity input cost inflation continue to accelerate in the first quarter as we experienced higher secondary fiber, energy-related, and chemical costs. We incurred $19 million of commodity input cost inflation in Q1. Published recycled prices were up sharply in the quarter.

Notably, OCC prices were up $94 per ton year-over-year in March of 2017. I will now move to our three strategic capital allocation priorities and how we’re executing against them. Our first strategic priority is to reinvest in our business where we can generate compelling rates of return on capital projects across our mill and converting systems.

We will invest approximately $250 million of capital back into our business in 2017. In the first quarter of 2017, we invested $35 million to upgrade two headboxes on our number six paper machine at the West Monroe, Louisiana mill.

The project will result in a higher quality paperboard sheet produced, which will drive significant cost savings at our downstream converting facilities. The project was well executed and we are very encouraged by the results we have seen since startup.

We expect our overall capital investments will help us to continue delivering productivity benefits at the mid to high end of our targeted $60 million to $80 million productivity range annually. Our second strategic priority is to execute on acquisitions at post-synergy multiples that are well below our trading multiple.

While we did not complete any acquisitions in the first quarter of 2017, the M&A pipeline is solid and remain focused on continuing to find and execute acquisitions at compelling post-synergy multiples to enhance our geographic, customer and product profiles.

Finally, our third strategic priority is to return excess capital to shareholders to drive long-term shareholder value. We returned $64 million to shareholders in the first quarter of 2017 through $24 million in dividends and $40 million in share repurchases.

We completed the $250 million share repurchase plan authorized in early 2015 during the quarter and are currently working through a second $250 million share repurchase plan, which is authorized by the board in January. We are confident in our cash flow and remain focused on returning cash to shareholders through dividends and share repurchases.

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

Steve?.

Thanks, Mike, and good morning. We reported first quarter earnings per share of $0.12 per diluted share, down compared to $0.18 in the first quarter of 2016. First quarter results were impacted by an $8.6 million pre-tax or $5.7 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 adjusted numbers. Focusing on first quarter net sales, revenue increased 2.7% driven by volume from our acquired businesses. Price was lower by $14 million, and the strong U.S. dollar negatively impacted sales by $15 million.

Turning to first quarter EBITDA, $32 million decrease to $161 million was driven by $19 million of input cost inflation and $14 million of lower pricing. We ended the first quarter 2017 with over $1.1 billion of global liquidity and $2.2 billion of net debt. Total net debt increased to $122 million during the quarter.

Capital spending in the quarter was $76 million and we returned $64 million to shareholders via share repurchases and dividends. At the end of the first quarter, our net leverage ratio was 3.1 times adjusted EBITDA, compared to 2.8 times at the end of 2016. We remain committed to our long-term net leverage target of 2.5 times to 3 times.

As Mike mentioned, we’re executing a balanced approach to capital allocation, which includes returning excess capital to shareholders. Since initiating the share repurchase program in the first quarter of 2015, we’ve allocated $268 million to acquire 21 million shares or approximately 6% of the fully diluted shares at inception.

Turning to full year 2017 guidance, as Mike referenced, we’ve updated our adjusted EBITDA guidance to a range of $725 million to $745 million. This reflects the net impact of sharply higher recycled fiber input cost inflation. We have successfully implemented the first open market CRB price increase.

We’re now executing $50 per ton open market CUK price increase and the second $50 per ton open market CRB price increase, which we expect to have a meaningful positive impact on our results in 2018. Importantly, we continue to see a path for a 2017 cash flow to be in the $380 million to $400 million range.

As we expect our reduced EBITDA guidance will be offset by improved working capital performance. Key drivers of our EBITDA and cash flow include the following. We expect the 2017 pricing to commodity cost inflation relationship to be negative $60 million to $90 million. This compares to the previous negative $30 million to $60 million.

The updated range reflects the first quarter increase in recycled fiber prices slightly offset by the benefits of pricing. We continue to expect our labor and benefits inflation to be $20 million to $25 million. On performance, we are well positioned to achieve at least the midpoint of our targeted $60 million to $80 million range.

Shifting to volume, we expect core volume to be relatively flat, consistent with the first quarter 2017 and full year 2016. We remain focused on outperforming the market through new product development, customer and geographic expansion, and substrate substitution, all consistent with prior years.

Lastly, we continue to expect foreign exchange will be a negative $5 million to $10 million due to the strength of the U.S. dollar. We expect second quarter 2017 EBITDA will be in $165 million to $175 million range. The impact of the recycled fiber cost increases we most pronounced in the second quarter.

We will also have our biannual maintenance cold outage at the West Monroe mill in June. And we have scheduled most of the annual maintenance at our CRB mills in the second quarter.

We expect EBITDA will improve significantly in the second half of 2017, as commodity input cost inflation comparisons ease on a year-over-year basis our pricing improves and productivity is strong due to the limited downtime in the second half.

As we’ve previously noted the paper machine upgrade at West Monroe in the first quarter of 2017 marks the end of planned capital investments that are CUK mills that require meaningful production downtime to complete. Hence, in 2018 and 2019, we do not expect to incur meaningful production downtime at our CUK mills related to capital investments.

Finally, returning to cash flow, we see a path for free cash flow will to be in the $380 million to $400 million range compared to the $358 million we generated in 2016. Despite the reduction to our EBITDA outlook, we expect to be within our initial cash flow guidance range due to improved working capital performance.

The remainder of our guidance is contained on 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..

Thanks, Steve. We remain confident in our business model in our ability to execute with excellence in a complex operating environment. We’re keenly focused on recovering commodity input cost inflation through pricing and expect to make significant progress on this initiative in the second half of 2017, and in 2018.

We plan for flat volume and have targeted initiatives in place to outperform the market through new product development and substitution – substrate substitution consistent with prior years. And we continue to be well positioned to generate productivity that is well in excess of our labor and fixed cost inflation.

Lastly and importantly, 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.

I will now turn the call back to the operator for questions..

Thank you. [Operator Instructions] Your first question comes from George Staphos from Bank of America Merrill Lynch. Your line is open..

Thanks, everyone, good morning. Thanks for all the details. I’ll ask a few questions and turn it over. I guess, the first question I had interesting comment that you made about the price cost benefit you expect in 2018 I think you said $40 million or better in 2018.

Can you give us some additional parameters in terms of why you’re comfortable with that figure? How much of the pricing increase that have been announced this year are embedded in that? My other two questions with working capital improving into to offset the EBITDA reduction seems interesting in that obviously costs are up, your price are up, knowing that would argue for working capital being a negative, not a positive.

And then lastly can you give us Steve a little bit of the cadence on your performance improvements and why you’re still come from being able to get to the $70 million to $80 million over the rest of the year. Thank you..

Sure, George. This is Steve and thanks for the questions.

With regards to the $40 million of positive price cost for next year, in one, we’re just trying to provide some context for as you look out into 2018, but the assumption there is that we are executing on the price increases that we have announced, so the initial $50, the second $50 for CRB, and the $50 for CUK.

So we’re executing on those and we’re assuming those that we will execute on those price increases. We have, however, for 2018, we tempered that back with an appropriate assumption around some modest ongoing inflation.

So it’s really a combination of the price increases that we’ve announced that we’re executing on tempered back of course by just an assumption around some ongoing inflation. So that’s on the $40 million.

Just touching on your other questions for working capital, for us we’ve had as we’ve mentioned we’ve had a significant amount of energy and emphasis on working capital this year. It’s a high priority for us and it’s really focused on accounts payable and inventory.

And with the results that we’re seeing we see some very good positive cash flow generation this year on the working capital front working with our suppliers primarily on terms.

And secondarily, we continue to have confidence, we can actually operate the business with less inventory than we have in the past and we have very specific initiatives in place to drive out both raw material inventory, but also finished goods inventory through our integrated model.

And finally on performance, our confidence in our range remains high as you note in the first quarter we netted out $7 million of productivity, but we had $18 million of downtime. So we performed in the 20s.

And as I mentioned with the very limited amount of downtime will have in the second half of this year having completed the investments in the first half including the cold outage most of the CRB downtime. Our productivity in the second half of the year will be quite positive on a year-over-year basis giving us confidence in the full year numbers..

Thank you, Steve. I’ll turn it over..

Your next question comes from Chip Dillon from Vertical. Your line is open..

Hi, good morning, Mike and Steve..

Good morning, Chip..

Hi, there..

First question is just a clarification on the – you mentioned your cost headwinds from $30 to $60, to $60 to $90.

Is that just the cost headwind on raws, or does that include any offset for pricing?.

It includes the modest offsets on pricing as Mike mentioned in his comments the vast majority of – as you know of our pricing will be a 2018 impact as we execute on the increases that we have in the market.

That increase was heavily driven by the movement in recycled fiber costs that occurred from the original guidance to you based on January to where OCC and overall recycled fiber costs are in April. And our assumption going forward for guidance purposes is that the April recycled fiber prices remain..

Got you. And so one way of looking at that just to make sure I hear this right, if I take that midpoint of $75 million and I look at your comment that you expect at least $40 million of price cost tailwind next year.

That $40 million if that’s all you’ve got would basically mean that your customers are asking you to eat a lot of this cost inflation if it’s held just a $40 million.

And is that a right way of looking at it?.

No. Chip I don’t think so.

I mean as we’ve talked in the past as Mike mentioned in his comments over time we expect that our pricing will in fact offset commodity input cost inflation, and we’re in that inflection point this year with, as you rightly stated, about a $75 million negative that actually puts us over the last five years modestly negative as well slightly less than the $75 million.

What we’re conveying is some line of sight to the initial $40 million of clawback with some inflation assumed in that.

But over time we would expect to recover that and these things take as you know a couple of years sometimes for the inflections to play themselves out, but it’s not a statement with regards to our belief system around price offsetting commodity input inflation that model still holds and is the model we’re executing on..

Okay. That’s helpful. And you told us the maintenance and you told us earlier for the West Monroe project was $18 million sort of a maintenance cost impact in the first quarter. And you mentioned you’re going to have cold shot more maintenance I guess the CRB mills and the cold shot in the second quarter.

Does that mean that sequentially we should see that maintenance stay flat should it go up? And then I assume it goes close to well down into single-digits or close to zero in the second half.

Is that fair?.

Yes. I think the way to think about that I mean just – and Chip, it’s Mike. The outage we had here end of February into early March in West Monroe was really a strategic capital upgrade of two headboxes. And so what we’re going to do now is the cold shot in West Monroe which we have to do by annually that will occur in the month of June.

And as Steve mentioned, we pulled in a number of our CRB outs here in second quarter too. So really the second half of this year we’re going to be running fairly wide open..

But again the second quarter should be similar, like is $18 million a good guesstimate for the impact of all the maintenance?.

It’s in the ballpark. It might be slightly less than that..

Okay. That’s helpful. Thank you..

Your question comes from Adam Josephson from KeyBanc. Your line is open..

Thanks a lot. Good morning, everyone..

Good morning, Adam..

Just a couple clarification Steve on recycled fiber it sounds like you’re not assuming any decline in prices in May, even though one of your paperboard peers said last week they think OCC is going to be down $15 or so.

Is that right that you’re not expecting any declines?.

Yes. Adam, It’s Mike. I mean from our standpoint, we’re just not in the business of trying to predict what happens with OCC. So what we’ve done is basically just assume while we’re at in April and kind of use that for the rest of the year, which is in the national average I think is $152 a ton if you RISI’s index..

Sure.

It just further clarification on the price cost of plus at least plus 40 next year, can you walk us through how much of that is the pass-through piece of your business versus the piece that’s tied to RISI?.

Yes, Adam. It’s Steve.

We won’t – don’t want to try to nail it to that level of specificity other than to say that we’re assuming that the open market price increases that we’ve announced for two CRB and the CUK that we would execute on those and that our cost models as we around the corner into 2018 would be doing an effective job of offsetting the increases that we’ve seen an overall commodity cost heavily influenced by the recycled fiber costs.

And so I don’t want to break it into the finest of those two because we’re a year out – looking out into 2018 at this point, but our cost models are working effectively at offsetting this significant increase that we’ve seen in recycled fiber costs..

And just to build on Steve’s comment Adam, you recall that about 50% of our contracts on internal paperboard are tied to RISI and 50% are tied to the cost model as we sit here today. So you can kind of model how that flows through that way as well..

Sure. Thanks. And just to others Steve, can you help us with your sent – you buy a million times a year recycled fiber and roughly half as OCC, half as mixed paper. And can you just help us with how much less inflation you’re seeing on the mixed paper side than on the OCC side..

I’ll handle it Adam. I think if you look at I mean OCC is the one that’s really escalated this year along with doubled-lined kraft. I mean box cuttings and some of the mixed paper at least to date has been more modest in terms of the increases that we’ve seen. We actually buy a little more than $1 million tons.

It’s actually closer to the $1.2 million tons of which half of this OCC..

Okay, yes. Got it. Mike, thank you. And just one last one on the CUK, so it sounds like you’re assuming that the fifty goes in on CUK as well as on the second CRB in terms of the 2018 guys. Just on the CUK specifically considering that’s a kraft business not a recycle business. Prices there have been flat for a while.

Here backlogs are unchanged from where they were three months ago. So why the price increase – I get the why you’re raising CRB prices. I don’t quite understand the timing of the CUK increase. So if you could help me with that that would be great. Thank you..

Sure, happy to do it. I think if you really look at global beer demand it continues to grow year-on-year. Operating rates are actually very solid. They’re a little distorted in the AF&PA data. I saw someone wrote on that. And it’s really all of the function of the fact that we took $25,000 tons of downtime in February and into March.

So if you had that $25,000 tons of downtime back into those numbers actually productions up year-on-year. And we haven’t had an increase on that great since the fall of 2013 and we’ve experienced inflation. So you put all those things together. That’s why we’re pushing $50 a ton increase on our CUK..

Thank so much Mike. Appreciate it..

The next question comes from Ghansham Panjabi from Robert W. Baird. Your line is open..

Hi, this is actually Matt Krueger sitting in for Ghansham.

How are you doing today?.

Good, Matt. Thanks..

Good, good. Understanding that you don’t want to get too specific on the dynamics of the price cost for 2018, could you just give us a broad assumption on what you’re expecting from price and then what you’re expecting from the underlying cost kind of net out to that $40 million positive for 2018..

Yes, Matt. It’s Steve. I think if you run the math on an assumption around the price increases as announced you’d be up in that $70 million range and then if you put a $20 million or $30 million inflation assumption there. You’re in the $40 million range.

And I think that’s really the way to think about it obviously the cost models would be more of a direct offset, but I think if you look at the mix of it plus $70 million and then the $20 million or $30 million on the inflation just again an appropriate assumption, at this point in time given now we’re in April is how we were thinking about it in terms of the mix of those two items..

Okay, that’s helpful. And then your ability to offset kind of the shortfall in EBITDA relative to the initial guidance with working capital is pretty impressive. How does that compare to your initial 2017 assumption for working capital.

And could you give us any early look on 2018?.

It’s actually pretty like for like relative to the EBITDA movement. So it’s $20 million, $30 million of improvement versus our original thinking on working capital. And I don’t really have a sense of how to provide that to you on 2018. We feel very good about the progress we’re making.

We have to get working capital and improvements and then you’ve got to sustain them. You’ve got to hold them. And at this point I think we’ll just stay focused in on the capture that we’re going to find in 2017..

Okay, great. And then finally can you give us any update on the status of the NOLs? When do you guys expect to start paying U.S.

cash taxes according to your current projections?.

Yes. No, no real change in there, Matt. We’re still out into 2019 before we expect to be a material U.S. cash tax payer in our strategies around pension derisking in the like of continued on.

And so really those strategies around the NOLs and other tools that these around the NOLs and other tools that we’re using to make sure that we continue to improve our cash flows and no change to those philosophically..

Okay, great. That’s it for me. Thank you..

You betcha..

The next question is comes from Anthony Pettinari from Citi. Your line is open..

Good morning..

Hi, Anthony..

Following up on Adam’s question on the CUK price increase, there’s also a SBS price increase out there. And I was wondering if it was possible to say whether your guidance assumes you’re going to paying a little bit more for SBS. And then just moving back to CRB understanding it’s very early.

I was wondering if it was possible to kind of compare the implementation or the sort of environment in implementing the second CRB hike versus the first one..

Okay, Anthony. So on the SBS side what I would characterize that is as you know our contracts are structured that were basically a quarter in arrears on movement. So price goes up, within one quarter, we recapture that movement. So that’s how that plays out from an EBITDA standpoint for us, little bit of a timing issue, but not really material.

On the CRB increase what I would tell you is this on the second one I’m assuming you’re asking operating rates continue to improve in the mid-90’s, backlog continued to improve. Inventories are down. Costs are up. So I can’t speak to what others are doing. But what Graphic is doing is we’re pushing that increase..

Okay. That’s very helpful. And then you’ve given a pretty clear view on U.S. demand and how you are performing against the market. Europe’s about 15% your sales. I was wondering if you could just say few words about how European demand is trending if you think you are similarly outperforming there.

And then just any kind of update on the amount of CUK you might be able to ship to Europe in 2017..

Sure. Europe is actually held up pretty darn well. We’ve been pleased with our demand in Q1. It would replicate really what we’ve seen here in North America. And it’s been evenly balanced between what I’ll call the UK and Mainland, Europe and as you know we’re primarily on the Western European countries there. So our backlogs are good.

Our plans are running well. There’s some inflation there to on the what they call GD board which is the equivalent of CRB board. So we’ve got some pricing actions that we’re out recovering those pricing increases that we have to go get, so very similar in terms of the dynamics in both those markets..

Okay, okay. That’s helpful. I’ll turn it over..

Thanks, Anthony..

Your next question comes from Mark Wilde from BMO. Your line is open..

Good morning, Mike. Good morning, Steve..

Good morning, Mark..

Hey, Mark..

Is it possible Mike to get some sense of where you think kind of underlying volume is for the overall U.S.

folding carton market as we move through 2017?.

We see the RISI data like you do Mark and what I can tell you is that at least feels to us like some of the extremes on both sides tend to be a little bit for whatever reason the way it plays to our business bigger in magnitude than what we actually experience.

For example the highs don’t necessarily equate to those kind of numbers and the lows are necessarily quite as pronounced as what we actually experienced in our business. So we would say that the overall market was down probably on the consumer side 1%, 1.5%. And as you know it has been our model for a number of years now.

We spend a lot of time and effort on our new product development initiatives and we’ve been able to make up that shortfall if you will on what I’ll call just core organic growth with a new product development initiatives.

And that’s an area we continue to spend money on resources and we plan to continue to do it in the future because our pipeline – in the visibility and the pipeline we have is very good in growing..

Okay. Is related to that Mike? You guys have been kind of quietly growing food service dimension to your business. And I wondered if you could give us some thoughts on that as a target area for kind of M&A going forward or how much runway you might think, you might have in food service..

That’s a great observation you got there. I mean that is a core part of our business. When you look at actually what’s been growing food service is one aspect of it and the other is kind of around the perimeter of the store.

Both those areas we’ve been investing resources in new product development time and the reason for why we’re actually more interested in it now than even maybe five years ago is we’re able to use more of our sauce in those applications. You’ve heard us say in the past, brown is the new green.

We continue to see customers want to talk to us around opportunities substitute RSUs paperboard into those kind of applications and that’s why we’ve been pursuing it..

Okay. And then last question I have Mike just we had news a few months ago that two-year your bigger competitors are combining here and any thoughts on the impact of that on Graphic..

Look, I mean those were two competitors we competed with one of them on the beverage side we competed on, the other one primarily on the consumer side. Now that together we compete against them in both those markets, but structurally it’s been a mature market for a long time.

It’s been characterized being very competitive and I expect that will continue to be the case here as we go forward. And Mark we were referring to more recent MPS or you referring to acquire….

I’m referring to – no, no, no to WestRock in MPS..

Okay, thank you. Thank you..

Yes. And I guess Mike kind of along those lines MPS was in much sort of higher value-added kind of in a lot of cases short run consumer business. You have much more presence certain hours that’s something you’d like to grow..

From our standpoint we find that that sales a little different than our typical consumer or beverage sale would you do a little bit around the edges, but it’s not a core part of our enterprise as we sit here today. It would be something we would look at in the future.

I guess we look at any of those opportunities Mark, but we have to make sure it’s a business we can run and operate and provide some value to customers with our ability to look at a business like that. So that’s how we would look at that..

Okay, fair enough. Good luck in the second quarter and through the balance of the year..

Thanks, Mark..

Your next question comes from Philip Ng from Jefferies. Your line is open..

Hey guys. Are you seeing any deceleration of end markets from a demand perspective just because for you it’s been pretty stable sounds like any additions part of that, but the Nielsen data did see a step down the core just wasn’t sure if that was noise around Easter..

I would say Phil all I can really speak to is what we’ve seen month to date here in April. And I would characterize it is being right on top of what we saw in Q1..

Okay. No real mix shifts. Okay, that’s helpful. And on food service I think piggybacking on Mark’s question and you obviously expressed some interest there that’s a nice growth market. And in the past you’ve talked about potentially looking at bleach forward which is market you’re not in.

How to meditation just due to some of the capacity that’s coming on a broad, what’s your assessment the market now because obviously there’s a price hike out there just to feel optical it will more firmer..

I don’t think it’s materially changed from what we’ve talked about in the past the thing I would comment on SBS and you’ve seen the data same as we have is export markets are actually up a little bit year-on-year.

I mean there are some imports that are coming in here on FBB that have been fairly well chronicled, but they appeared to do reasonably well and backlogs on – particularly on food service and liquid packaging for them seem to be pretty good..

Okay. And just one last one for me, I don’t think, this is impact you guys materially, but you some of the lumber tariffs on Canada. Does that impact your fiber basket cost on divergence side at all. Thanks..

No. No, Phil. It does not, because really if you think about making in West Monroe our fiber basket is within about 100 mile radius of those mills..

Okay, great..

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

Hi, good morning, Mike, Steve and Alex..

Hey, Brian..

Brian..

A lot of changes since the last earnings call, lot of movement in raw materials obviously and prices. I just piggybacking on some of the earlier questions. I wondered if you could just step back and we don’t usually talk about 2018 that’s early in 2017, but just as you sit back and think about how all of this one that out and the impact to 2018.

Is it – it sounds like it’s largely a push to me got $30 million coming out this year, but $40 million next year that presumably, you probably wouldn’t have had before all this moves. Is that the right way to think about it or is that a little too naïve..

No, Brian. I think as we mentioned earlier our fundamental belief system that over time that pricing should offset commodity cost is a fundamental for us. And yes we’re dealing with a bit of an unprecedented run in recycled fiber costs which as that will stress test the philosophy if you will, because of the size of the movement.

And that’s why moving on a couple of price increases has been required, but the over time if we look back over the last five years, what you just described is how we executed on the business price offset in commodity input costs over time.

We’re in a dislocation in 2017 to the negative that we’ve talked about and we would expect to return that in the 2018 and beyond time horizon. So no, it’s not a naïve question. It’s actually one of around that that is a validation of how we think about price cost over time.

And the size of this variation is larger than we will have experienced in quite some time given unprecedented nature of the recycled fiber cost, but the philosophy hasn’t moved relative to how we think about price cost..

I think the only thing I’d add Brian to that is, two factors are going on here you had $70 a ton going down on pricing then you had $50 plus a ton going up on input costs. Almost at the same time in Q4 and into Q1. That’s really unprecedented.

So that’s why we’re spending time really going through these price cost spreads to make sure they can get model properly. We pressure tested them back in our model. As we model them out and we look at the pricing as Steve has mentioned here in some detail. Your model works, but there’s a lag there.

And that’s really what we wanted to spend some time making sure that people could understand, because to your point there’s been a lot of movement and it’s difficult to model..

Okay, thanks. Appreciate the context there. Just wanted to ask about – in the CRB markets you had a big competitor announced they’re going to shut one of their mills down. Just wondering how you’re hearing the timing of that play out and any impact on volume as we look towards the second half of 2017.

Any opportunity to pick up some of the times that that the mill was servicing and couldn’t there could be any upside to your kind of flat core volume assumptions..

No, I think the way I think about this – this way is which we reported last week that mill closed permanently. And what usually happens when a mill shuts down, they run a fair amount inventory to customers who have brought it.

So it takes a quarter may be even two quarters to burn through that inventory as customers build a little bit in advanced to make sure that they don’t get caught without what they need run their business. We saw that when Fusion mill shut down in 2014 as well. So I expect that will be similar in that regard this time too.

I think the thing you got remember for Graphic and how we’re a little different maybe than other is we’re 85% integrated with our own paperboard. So it’s not like we’re actively out there trying to chase open market times and we talked about that last year when the tail got a little bit soft.

Could there be some opportunities to services customers and we could pickup that make sense for us strategically as a result of that closure certainly we’ll look at that, but is not a core focus for Graphic..

Okay, one last one if I could. Just on the M&A pipeline you said it still seems like it’s pretty robust but it has been a while since we’ve kind of executed a deal here.

Just wondering your sense is the market becoming a little bit closer on bid-ask spreads there and maybe with some of the geopolitical uncertainty settling in a bit any sense that we’re getting a little bit closer to having a few deals announced?.

Yes. Thanks, Brian. I’m going to go back and add one more comment to your question on CRB. I do think what will the end result of all that activity though is that operating rates in backlogs it will continue grow. So that’s one aspect of – will impact us positively, even if we don’t pick up any of the actual time, so just complete my answer there.

The other thing I’ll mention on M&A is you’re right, we didn’t do anything in the quarter but that doesn’t mean we’re not active looking at a number different things. I mean as we talk about geography, product niches things that help us build out our manufacturing system in a unique and different fashion. We’re always looking at that stuff.

Primarily in North America and Europe as we talked about, just not to say, we won’t look at something in the Mexico if it came available. We’re principally focused right now in North America and in Europe, there really isn’t a month, it doesn’t go by where Steve and I are looking at something.

But again what we’re trying to do consistent with what we’ve done in the past just make sure evaluation are right, synergies are real and that when we transact we’re able to generate post-synergy numbers that are below our trading multiple. So that’s really how we think about it. And we’re continuing to do that as we move into the balance of 2017..

Okay. Thanks very much..

Thanks, Brain..

Your next question comes from Debbie Jones from Deutsche Bank. Your line is open..

Hi, good morning..

Good morning, Debbie..

Good morning, Debbie..

I’m going to ask another question about M&A, if we could just focused on Europe for a minute. You’ve talked in the past about wanting to get about $1 billion in converting sales before potentially backward integrating.

Do you need to stick to that plan, I mean is there a reason to think that you might look at mill systems prior to getting the converting assets. How should I think about that? Just trying to think about kind of how this has taken a bit longer than maybe we would have anticipated [indiscernible] you.

And how your strategy might change or stay the same?.

No, I think it’s really unchanged, Debbie. We believe that we need to have $1 billion business here before we would contemplate backward integrating.

And again as we’ve outlined on previous calls, it’s not a strategic imperative that we have to backward integrate it would be, we have enough critical math at that point in time to be able to cover the times and drive our integration levels up similarly to what we do in the U.S. forward to make strategic sense.

So that’s how I would have you think about that..

Okay. And then you talked about pretty much being done with CapEx investment at the CUK mills.

Can you give us a sense of where it needs to be done at your CRB mill doing your converting assets that you would be expecting to drive this performance benefits?.

Well, I think the thing that Steve was trying to communicate there is, if you think about last year where we had a major capital investment into our paper machine number seven in West Monroe and it was about a 25 day down. And this year we had another one on West Monroe number 6 where we replace two of the headboxes.

Those are very big capital upgrades that help keep those paper mills in world-class shape, I mean we’re competing on the CUK side on a global basis and we need to make sure that our quality and productivity is commensurate with all the mills around the globe.

And that’s really why we made those decisions over the last couple of years to make those kind of expenditures. We continue to have capital opportunities at our mills to take cost out and we’ll do that into the future.

It’s just not going to require significant down time in 2018 and 2019 which is the expensive as we talked about here it was $18 million in this quarter it was almost the same last year in April of last year. So it would have been in our second quarter. So that will be something that we don’t have to experience in 2018 and 2019.

That’s what we trying to articulate..

Yes. Debbie just emphasizing that point that Mike’s making. It was in the statement that we don’t need to make ongoing in capital investments it really was more of a conversation around investments that require the depth of down time that we’ve had to incur here in the last couple of years.

Because our investments that give good return profiles, you should expect this to continue to invest prudently in all of our mill infrastructure. It was really a statement of the cost that we incur, when we do in fact have to take down time in order to make those investments it’s down time beyond that which we would normally take in our mills..

Can you just remind me, you might have stated this earlier, what the expected intact of the down time is and then just kind of confirm that we would just assume that you’ve got all of that back in 2018..

Yes. The Q1 down time associated with the headboxes was about $18 million impact..

Okay.

And just last question, I was wondering if you could just give us a sense of how volumes have been in Mexico?.

They’ve been good. We’ve been really steady there..

Okay, great. I’ll turn it over..

Thanks, Debbie..

Your next question comes from James Armstrong from Armstrong Investment. Your line is open..

Good morning. And thanks for taking my question..

James it’s been a while..

Yes. Great to talk to you again..

Thank you..

The first one is falling upon an earlier question, you said you outperform the market in U.S. food and consumer, do you see any reason to be optimistic that the center of the store will bounce in near-term or is that likely to remain lackluster for a while..

If I was that good to be how to predict that I’d probably be doing something difference James. But, look I love to see real organic growth of 1%, 2% and that would be fantastic. But we’re planning for flat volumes given them a slight assumption around some downward pressure on the center of the store.

And as I’ve mentioned here a couple of times, now we’re making that up with our new product development activities. And that’s a model, that’s really stood the test of time over the last three to four years. And I’ve got every belief that we continue to execute on that going forward here..

Perfect. And then switching gears a little, could you remained us how you cost basket passthrough contracts work. The cost at certain point in time trailing average just could you walk us through that a little bit..

Yes, James its Steve. I mean just in general the way that the programs work is if we’re in a two or three year contractual commitment with a cost model customer once we’ve earned the right to have that business or re-earned to keep it.

Then the cost model mechanisms are in place typically on a quarterly or half year basis were a basket of cost that are representative of our overall cost or utilized we track them and utilize those cost to then make price movements on either a quarterly or half year basis with those cost model customers.

So it’s on a basket of the cost that you would expect or the critical ones that move inside of our cost structure like wood, recycled fiber chemicals, energy, freight et cetera. So we have a basket of cost that are representative of ours and those are the – that’s the tool if you will that is utilized to make the price movements..

So you would say it’s probably an average over a period of time, it sounds like.

Would that be accurate?.

Well I think average, I think what tail you want to think about it is its always it’s moving based upon work the starting point with that relationship and then a quarter later we look at those cost and they move then we will pass that through to them.

So I’m not sure that average would be the right concept, I think you want to think about it is the actual percentage movement in those cost as we play out the life of the contractual relationship with the customer..

Okay, that helps.

And then lastly what do you think the main drivers are between the high-end and low-end of your guidance range?.

Yes. I think its April, for one thing I mean it stuff to have real visibility into recycled fiber beyond a month or two..

Right..

And so there is some ability there. We mentioned we assumed $152 national average for OCC, but the only thing I know about that number that it’s wrong. And so that’s a little bit what gives us that range, James..

Perfect, that helps. Thank you very much..

Thank you..

Your next question comes from Gail Glazerman from Roe Equity Research. Your line is open..

Hi, good morning..

Good morning, Gail..

Maybe look in the last point, appreciate you don’t want to forecast with people, but can you give any perspective on what you’ve seen the last of couple of weeks since prices started were reported down in the beginning of April?.

Yes, I think the thing we’ve seen and you’ve seen some of this to Gail, PPW wrote a little bit about is that. There is little bit of rebuilding back some of the inventories at some of the mills.

But I think your other point that is important to mention here is that when April prices went down, it was really a phenomenon on the coast principally related to exports. I know those markets very well. What really wasn’t talked about a lot is in the Midwest, we saw $5 a ton reduction on OCC. In the Southeast it was a $10 a ton reduction on OCC.

And the reason for that as you know that’s where the majority of the tons are produced. And so those mills had to build those inventories back and they were competing against tons that we’re going to the coast in February and March certainly that was the case. And so I would say that’s probably the biggest phenomenon that we’ve seen.

Now what that does you want to May and June numbers. Again I think that the outside of our pay grade try to forecast, but what we would say is that with all the build out of container board machines both in North America and in Europe, and that’s pretty sizable.

I mean Europe we’re adding roughly almost $2 million tons of incremental test liner capacity over the next couple of years. It’s probably going to be more upside pressure on OCC than downside pressure. And that will get magnified a bit when China comes in out of the markets..

Okay. Just also on wastepaper, I don’t know if you’ve had a chance to kind of think it’s through, but China is looking at implementing a new ban on mix waste..

Yes..

Similar to what they did a few years ago and I’m just wondering if you have any thoughts on how that might impact the market or if it’s an opportunity that you might be able to take advantage of?.

Well, they see based on everything we can read and find, they import about $5.7 million tons and about $2.4 million of those tons comes from the U.S. So if it there banned, that has to be made up with some other type of fiber over time.

And so that’s again why when we think about our limited visibility out 1, 2 months, we throw that right into the cross of it as well..

Okay. Thanks very much..

You bet, Gail..

Thanks, Gail..

Your next question comes from Arun Viswanathan from RBC Capital Markets. Your line is open..

Great, thanks. Yes, so just on the last point again, I will talk about price cost. Given that OCC was down in April, if we do see another decline in May, do you still feel confident in the implementation of the CRB price increases in the U.K.

because of tighter supply-demand?.

Yes. Arun, it’s Mike. I mean as I said, I mean our backlogs are growing. Our operating rates are up. Our costs are up, inventories down. What Graphic Packaging is doing which is all like and speak to as we’re implementing that price increase..

Okay, fair enough. And then on 2018, you have given us the $40 million potential benefit from the price costs. And would you also include the $60 million to $80 million gross productivity offset by the $20 million to $30 million inflation again on top of that and is that kind of how look at 2018.

Or what are the swinging factors going forward?.

Yes. I mean think you touched on the again we’re not here to provide guidance on 2018 and April of next year. But the 2 primaries that you just touched on would be accurate. The $40 million that we touched on in terms of line-of-sight and then, of course, our traditional productivity more than offset in labor and benefits inflation.

Those would the two primary parameters as you would look out year-over-year..

Great. And then just lastly just the cash use, you gave us some color on the M&A pipeline. Maybe you can just give us your priority on that versus buybacks and more specifically how much you expect to complete in buyback authorization this year? Thanks..

I think our priority clearly is trying to find good tuck-in M&A opportunities that we have compelling post-synergy multiples. So that’s really our priority. And as a mentioned, it’s in North America and in Europe that would be number 1. And in the absent of finding something that we think has those types of synergies and can be accretive.

We do have the ability is based on the authorization from our board to continue to do share buybacks. And you saw on Q1 we did $40 million and that’s kind of the run rate we will look at if it makes sense based on how the prices of the stock is..

Evaluations..

Thank you..

Thank you..

And your next question comes from line of George Staphos from Bank of America. Please go ahead..

Thanks guys, and for taking my follow on. I just wanted to drill back into the Chinese ban on potentially on recovered paper.

Do you think that was one of the reasons why there was such a pull from China late last year and early this year as perhaps people are trying to stock up ahead of any potential supply disruption?.

I mean George it could have been I just don’t know..

Okay. Lastly, just maybe you had some thoughts, given your trade context. When we switch gears here, when we look at your ability to run with less working capital, it’s impressive. What are you finding from a process standpoint.

Mike, that you’re able to do more efficiently now that allows for that? I know this will be proprietary obviously, but if can give us a little bit more color in terms of what’s allowing for that, that would be great..

Thanks for that George. I think the biggest thing is as you know we added a number of facilities in North America – which Canada and how we think about Mexico and facilities you bought in the U.S. as well. And many of those had their own operating systems that we’re not the same as ours. So we’re working to implement our SAP system.

We’re tying those facilities back into centralized supply chain, which includes our logistics and warehousing operations. And what we were able to do by doing that is drive a level sophistication across a much larger platform than any one individual company can do on its own.

So it’s really a synergy consider to working capital synergy that we lean out over time. The reason we don’t hit it right of the gates is we want to make sure that we’re servicing customers well on their terms and really understand what that supply chain looks like for the businesses that we buy.

And then as we get comfortable with that, learn more and start coming behind with our systems, we can ring working capital out. So that’s what we do..

Sure.

You don’t want to risk the business, you just buy before you sort of look at for a little while? I mean if you think about it in the – in a baseball innings cliche analogy, where do you stand in terms of implementing the systems and processes on what you acquired?.

We are in the mid innings..

Okay, okay. My last one and I will turn it over. I kind of remember the last discussions from the company on integration being around 80%, correct me if I’m wrong, at 85% it seems like it’s certainly come up a little bit maybe not this year, but certainly over the last year or so.

Can you remind us relative to that, where would you be uncomfortable in terms of your vertical integration? Would it be at 90%, or do you think 85% to 90% is a good range for you to be for all of the reasons you talked about in the past? Thank you and good luck in the quarter guys..

Yes. I think George, just to answer that, we are comfortable with approaching 90% vertical integration. That’s really our strategy. As you know we’ve got a pretty large open market position. So we can adjust that accordingly as we need to service our current customer accounts.

So we like where we’re at and we’re going to continue to drive our integration up at least another 5% or so..

Okay. Thank you very much..

You bet, take care..

Thanks, George..

There are no further audio questions at this time..

Okay. Thank you for joining our earnings call. We look forward to speaking with you again in July..

This concludes today’s conference call. You may now disconnect..