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

Mark Wilde - BMO Capital Markets George Staphos - BOA Merrill Lynch Mark Connelly - Stephens Brian Maguire - Goldman Sachs Chip Dillon - Vertical Ghansham Panjabi - Baird Adam Josephson - KeyBanc Debbie Jones - Deutsche Bank Arun Viswanathan - RBC Capital Markets Steve Chercover - D.A.

Davidson James Armstrong - Armstrong Investments Gail Glazerman - ROE Equity Research.

Hello. My name is James and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Conference Call. [Operator Instructions] I would now like to turn the call over to Alex Ovshey, Vice President of Investor Relations..

Thanks, James. Good morning and welcome to Graphic Packaging Holding Company’s conference call to discuss the combination of Graphic Packaging and International Paper’s North America Consumer Packaging business and third quarter 2017 results.

Speaking on the call will be Mike Doss, the company’s President and CEO and Steve Scherger, Senior Vice President and CFO. To help you follow along with today’s call we have provided two slide presentations, which can be accessed by clicking on the Webcast 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 expectations. 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 will turn it over to you..

Thank you, Alex. We are excited to announce that Graphic Packaging will combine with International Paper’s North American Consumer Packaging business to create a $6 billion integrated paper-based packaging company.

This transaction – this transformative transaction for Graphic Packaging that will drive greater scale and efficiencies across our mill and converting footprint meaningfully increased our exposure to the faster growing food service market, provide a runway to achieve significant synergies, create a compelling growth platform to increase SBS mill to converting integration through organic growth and acquisitions and we expect that to be accretive to earnings and to create shareholder value.

Before I review the transaction in further detail, I would like to briefly discuss the recently announced closure of our Santa Clara CRB mill as well as the recently completed Norcraft acquisition in Europe, I will then turn the call over to Steve Scherger who will provide a brief overview of our reported third quarter results and then I will return to discuss the transaction in more detail.

We announced the closure of the Santa Clara mill in early September. It was a difficult decision given the impact on the employees and the community, the one that we made after a thorough assessment of the mill’s cost structure and operating capabilities in the broader context of our CRB and CUK mill system.

As we have discussed many times on these calls, we have strategically invested capital into our CRB and CUK mills over the last several years to reduce cost and improve the quality of the paperboard that we produce.

These investments also allowed us to modestly increase our production capability at our Midwest CRB mills and to continue to tap our unused pulp capacity at our world class CUK mills. As a result, we have tremendous flexibility in our current mill system.

We are now able to redistribute most of the 135,000 CRB tons annually produced at the Santa Clara mill into our Midwest CRB and CUK mills, about half of the Santa Clara tons will now be produced at CRB mills in the Midwest and half will be produced at our CUK Mills.

Post-closure which should occur by year end we will benefit from lower labor, fixed recycled fiber and chemical costs which will be partially offset by increased freight costs to ship tons to the West Coast. Overall, the reduction in cost is expected to drive a net $10 million savings in 2018.

This decision along with other investments we have made give us confidence that we will achieve our targeted $60 million to $80 million annual productivity range in 2018. Let me now very briefly discuss the Norcraft acquisition, which we completed in early October.

The acquisition moves Graphic Packaging one step closer to achieving our strategic objective of generating $1 billion of folding carton converting revenue in Europe.

Importantly, the Spanish acquisition expands our footprint in stable and modestly growing Southern European food and beverage markets, improves their cost position and will provide an opportunity to increase our mill to converting plant integration levels over time. I will now turn the call over to Steve to discuss third quarter results.

Steve?.

Thanks, Mike. Third quarter adjusted EBITDA $188 million met our expectations. Net sales were up 3%. The benefits of an acquisition, modestly positive core volumes and favorable FX were slightly offset by lower pricing.

The quarter was negatively impacted by elevated commodity input costs, primarily recycled fiber as well as higher cost for freight and chemicals which significantly accelerated during the quarter due to hurricane-related disruption. The hurricanes also disrupted operations in a few of our facilities during the quarter.

We estimate that the negative impact of the hurricanes on our cost during the quarter was $3 million. For providing details on the quarter, let me update our full year 2017 adjusted EBITDA and cash flow guidance.

We now expect 2017 adjusted EBITDA will be in the $715 million range compared to our previous guidance range of $715 million to $735 million.

The reduction reflects costs related to the closure of our Santa Clara mill $10 million and the estimated full year impact of hurricane-related costs of approximately $10 million, specifically higher mill chemicals, resins and freight costs.

These costs will be offset by $10 million of net benefit from lower recycled fiber costs assuming current prices. Santa Clara costs are largely related to an inventory build approximately 25,000 tons at our Midwest CRB mills and our CUK mills to support customer transitions.

We expect to recover approximately half of the $10 million as inventory is sold in the first half of 2018. Our 2017 pricing to commodity input cost inflation relationship was unchanged as higher freight chemical costs related to hurricane disruptions are offset by the net benefit of lower recycled fiber costs.

Our 2017 productivity outlook is $10 million lower due to the Santa Clara mill closure costs, which drives a $10 million reduction to our full year 2017 EBITDA guidance.

We are reducing our cash flow guidance to approximately $360 million from the $370 million to $390 million range to reflect the reduction to our full year EBITDA guidance and higher working capital related to the 25,000 ton inventory build we are completing to support the closure.

Looking ahead to 2018, we continue to expect results to improve materially year-over-year. At current CUK and CRB pricing levels and at current recycled fiber costs, we would expect $40 million positive price to commodity input cost relationship in 2018. Having said that recycled fiber volatility remains high and could impact short-term results.

As we have said in the past, we remain committed to offsetting input cost inflation with pricing over time.

We also expect to generate a positive $40 million productivity to labor cost relationship in 2019 reflecting the benefits of our targeted capital investments, limited mill maintenance downtime, continued cost reductions as well as the expected cost savings from the closure of the Santa Clara mill.

Looking at the quarter, we recorded third quarter earnings per diluted share of $0.15, down compared to $0.18 in the third quarter of 2016. Third quarter 2017 net income was negatively impacted by $7.5 million, net of $3.8 million tax benefit of charges associated with business combinations and other special charges.

Focusing on third quarter net sales, revenue increased by 3% as the benefit from an acquisition to modestly positive core volume and slightly positive FX was partially by lower pricing. We are encouraged by the volume trends in the business, with core volume up 1.3% in the quarter and core volume now positive for second consecutive quarter.

Price was lower by $4 million during the quarter.

While still negative, price in the quarter was an improvement compared to the first half of 2017 as we lapped the negative impact from the reported RISI CRB price index reduction in 2016 and began to benefit from the implemented price increases in CRB and CUK recognized earlier this year along with our cost models.

Third quarter adjusted EBITDA declined $12 million to $188 million. The decrease was driven by $18 million of input cost inflation and $4 million of lower pricing partially offset by $10 million of productivity and $6 million of positive volume mix. Thanks for your time this morning.

I will now turn the call back to Mike to discuss the International Paper transaction in more detail..

Thanks, Steve. Let me start by discussing the key terms of this exciting and transformative transaction. The transaction value for International Paper’s North American Consumer Packaging business is $1.8 billion.

Graphic Packaging and International Paper will form a partnership into which Graphic Packaging will contribute all of its businesses and International Paper will contribute its North American Consumer Packaging business. Graphic Packaging will own 79.5% of the partnership and will be the sole operator of the partnership.

There will be no change to Graphic Packaging’s current Board of Directors or leadership team. International Paper will own 20.5% of the partnership equivalent to $1.14 billion. International Paper will transfer $660 million of debt to the partnership.

The transaction structure provides a compelling 8.6 times enterprise value to EBITDA multiple for Graphic Packaging’s shareholders. As importantly, Graphic Packaging will have a strong balance sheet that will allow us to grow the newly created platform on an integrated basis.

Specifically, we will do this by growing the converting food service and folding carton business organically and through acquisitions. Let me provide a brief overview of International Paper’s North American Consumer Packaging business.

The business is the leading producer of solid bleached sulfate known to market as SBS, paperboard and paper-based food service products in North America. The business includes two SBS mills located in Augusta, Georgia and Texarkana, Texas, with annual production capacity of 1.2 million tons. The three converting facilities in the U.S.

and one in the UK have the capacity to convert 250,000 tons of SBS paperboard into 24 billion units of paper-based cups and cylindrical containers. The business generates revenue of approximately $1.6 billion and is projected to generate adjusted EBITDA of $210 million in 2017.

Let me now shift to discussing the compelling business and financial rationale for this combination. The assets are low cost and scaled. We will broaden our leading CRB and CUK mill production footprint to include SBS assets. The transaction will materially increase our exposure to the growing food service mark.

We expect to achieve $75 million of synergies by the end of the third year. The transaction creates a platform for Graphic Packaging to grow in the SBS food service and folding carton converting markets organically and through acquisitions. The pre and post synergy EBITDA multiples are compelling at 8.6 and 6.3 times respectively.

And finally, we expect the transaction will be accretive to earnings in year one and creates real shareholder value. Let me now provide more detail on three critical characteristics of the combination. First, we are extending our leading position in CRB and CUK paperboard mill production to include scaled and low cost SBS mill assets.

We expect this will allow us to service customers with expanded and new product offerings, provide opportunities for optimization of production across all three substrates and drives significant synergies through spending and cost reduction, mill optimization and procurement and paperboard integration.

Second, the transaction will materially increase our exposure to the growing food service market to approximate 23% of total combined sales compared with 10% currently. As you know, with the evolving consumer preferences, this market has expanded at a much faster rate than our core food segments.

We will expand our market participation in the paper-based food service packaging with what we expect will be the most innovative and scaled platform in North America. Lastly, integration levels of International Paper’s Consumer Packaging business is 20% currently.

We expect the integration level will increase to roughly 35% as we integrate our existing SBS paperboard purchases. More importantly, we will be laser focused on materially driving integration level higher for the SBS mills.

We expect the integration level for the SBS assets will rise to approximately 80% over time consistent with our current levels in the CRB and CUK businesses as we execute on our organic growth and acquisition strategies. So, let me provide more color on synergy opportunity.

As I mentioned earlier, we expect to generate $75 million of synergies over the next 3 years. Key synergies will be driven by SGA and cost reductions, paperboard integration and mill optimization and procurement. We expect general spending and cost reductions, including SG&A will drive $40 million of annual savings.

We expect increased SBS paperboard integration will drive $20 million in annualized savings by increasing integration range from 20% to 35% and improving mix as we in-source currently purchased SBS paperboard. We expect procurement and mill optimization will drive $15 million of annual savings.

We have significant overlap with International Paper’s North American Consumer Packaging business on chemicals, coatings and freight purchases. We also see the potential to optimize paperboard trends and freight to drive additional cost savings.

Let me provide more color on the strong combination – of strong combined financial profile for the business.

Based on our 2017 adjusted EBITDA guidance, the expected 2017 adjusted EBITDA for International Paper’s North American Consumer Packaging business and $75 million in synergies, we expect the partnership will generate nearly $6 billion in revenue and $1 billion of EBITDA.

On a combined basis and including synergies, we see strong EBITDA margin potential for the business. The transaction is also leverage neutral which will give us the flexibility to drive growth organically and through future acquisitions.

Let me now provide more detail in our plans to grow by increasing the mill to converting integration level for the SBS mill assets. Currently, SBS industry integration rates are in the mid-20% range. We see significant opportunities to materially increase that integration rate of the SBS business.

We are targeting an 80% integration rate on the SBS assets over time consistent with our current levels for our CRB and CUK businesses.

As we have noted earlier, we believe increasing immigration rates will provide us with further opportunities to improve our product offering, reduced our cost structure, leverage our balance sheet and drives shareholder value. Let me discuss how this transaction fits into our existing and longstanding operational and strategic objectives.

As a company, we have long been focused on materially increasing our exposure to growing end markets, new product development, increasing integration through organic growth in bolt-on acquisitions and a relentless focus on driving improved mill profitability through productivity and cost optimization.

We believe this transaction will extend our run-rate to achieve all of these objectives. So, let me briefly provide more color on the structure of the transaction. As I noted earlier, Graphic Packaging will own 79.5% of the partnership and International Paper will own 20.5%.

Importantly, Graphic Packaging will be the sole operator of the partnership and International Paper will have no operational involvement running the combined business.

International Paper will have a 2-year lockup on the monetization of their partnership interest and will also have a standstill that would preclude them from purchasing GPK common shares for the next 5 years. Lastly, let me conclude with a summary of how we expect to create value from the combination.

The transaction increases scale across our mill and converting footprint and we believe strengthens our financial profile, broadens our growth opportunities with significant increase to the growing food service market provides a meaningful run-rate to drive synergies, gives us a platform to drive growth by increasing our SBS mill to converting levels through organic growth and acquisitions, and lastly, we expect it to be accretive to earnings to increase significant shareholder value.

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

[Operator Instructions] Your first question comes from the line of Mark Wilde from BMO Capital Markets. Go ahead please. Your line is open..

Good morning, Mike. Good morning, Steve..

Hi, Mark..

Congratulations on this deal. Actually, it looks like a pretty well structured deal to make.

Can you give us, Mike, some perspective on kind of timing on these synergies?.

Yes. As we stated in the announcement, Mark, we are confident we can get them over a 3-year period of time. Of course, we are obviously going to be look into, get them to the bottom line as fast as can.

There are certain parts of like SG&A that because this is a carve-out we have TSAs that will have in place at least initially to help us make sure that we operate the business as we stand up our own structure and system to kind of take on those functions.

So, again I pointed the 3 years, but understand that we will be deniably focused to try to drive it as fast as we can..

Would you want to try and kind of cadence that for us kind of year 1, year 2, year 3?.

Hey, Mark, it’s Steve.

I think realistically brought this as Mike said we will be standing up to the business here in the first year, but somewhere in the third, third, third is an appropriate expectation for the business as we kind of think about it knowing that we can get after as Mike stated in the comments some of the mix enhancements and some of the integration value on the paperboard side while we put the appropriate structure in place to drive the cost structure of the SG&A and overall cost structure of the business to where we want to be..

Okay. And then I am just kind of curious about the synergies on the SBS integration, because it looks like it’s about $100 a ton and one of your competitors in the deal recently was pointing to a much, much bigger kind of per ton synergy from kind of integration of board to converting.

Any thoughts on that?.

Well, I think Mark the way to think about that is right now these assets are running full. And so they are loaded with existing business. So, what we are looking to do is mix enhance that. And as a result of the mix enhancement, the net on that we believe is closer to about $100 for us..

Okay.

And then finally just in terms of kind of growth going forward, Mike, can you talk about sort of what your leverage level would be? And then just your priorities, you mentioned Europe, but I also wonder with kind of the push in food service whether you are going to want to expand sort of your range of offering in the food service area?.

Yes, I think the initial part, it’s a great question. For us, we are really excited about having these assets, because as you know, Mark, food service has been growing at 2% plus around the perimeter the store, away from home.

And these are markets that we participated in, in a small way with some of our existing offerings, but now we have a much more scaled and expanded profile. So, we want to build out and drive that integration level up.

As you know, there are certain tuck-under acquisitions that we just didn’t pursue in the food service, because we did not have SBS assets to actually backward integrate into.

So, I think what you can expect us to do as we have been doing over time is to continue to look for that $100 million to $200 million of annual tuck-in acquisitions that will drive our integration level up and continue to be focused on building our platform out in Europe towards that $1 billion dollar of converting that we have talked about many, many times to gives us a scale that we need there to have some optionality potentially backward integrate there as well.

We also believe there is some opportunities to able to ship some of our SBS material into Europe as you know we are buying upwards of 100,000 tons of FBB board in that markets. So, it gives us a lot of really great optionality as a business..

Alright. Well, listen good luck and I will turn it over. Thank you..

Thank you..

[Operator Instructions] Thank you. Your next question is from the line of George Staphos from BOA Merrill Lynch. Go ahead please. Your line is open..

Thanks. Hi, guys. Good morning. Thanks for the details and good luck with the transaction. I wanted to follow-up on the discussion on vertical integration.

As you sit here today, how much of that, the capture of 80% vertical integration is or is comprised of things that you think you really have in your own control and how much really requires M&A, because it’s obviously from our experience kind of difficult to basically go purely on M&A as there are other folks listening to your goals and it becomes perhaps based on M&A multiples more difficult thing to see that integration.

So, how much is under your control and how much is driven by M&A and how much is driving a bigger machinery capability, one of the things we are hearing from a recent conference part of that integration goal?.

Yes. Thanks, George. I will take a stab at it and Steve can add his comments as well. I mean from our standpoint as you know we have got a very robust new product development process that is really focused on driving on a net basis at least 1% real growth year-over-year.

And we have been very successful on that over the last few years in being able to do that. We see a lot of opportunity on the NPV side or these SBS assets as well, things like pressed bowls to replace CPET trays, those kind of things are all actively being worked by our folks.

And now with these assets, we will be able to even go at a faster pace on an integrated level. They have got a machinery group that comes with this business that are experts on taking SBS paperboard and forming it into cylindrical cups and bowls and those kind of products. And so we think we can go farther faster and accelerate that organic side.

You are right on the inorganic side, the acquisitions, they tend to be a little lumpier, but our track record is really good at being able to do that. If you go back the last 4 to 5 years, we have been able to transact in that 7.5x to 8.5x range and after synergies being net down in 6x. So, we think that, that’s a model that is still available to us.

We have done a fair amount of research, as you can imagine, on the market making sure that we had a path that allowed us to have confidence that we could do that. And we have set a goal of over the next 3 to 5 years to get there.

You will recall that on CRB and on CUK, when we first brought the business together in the early 2000s, our integration levels were much lower in the 50% range. So, it’s actually doing the same type of thing that we have done into a market that’s actually growing a little faster. So we are excited about that..

I mean, that’s fair, Mike. I guess the other question I had and I’ll turn it over, is a lot of this deal seems to be premised on the growth of boxboard, in this case, more so bleached board, in a number of markets, particularly in food service.

Yet when I look at our industry data, which is a combination of AF&PA and plastics industry data that we get, frankly, the bleached side has been pretty weak, whether it’s liquid packaging, plate and in addition, tray cup stock relative to CUK, which has been – continued to do well and even versus plastics.

So for all of the discussion about the halo that paper has versus plastics, plastics in food service have outgrown paper this year. So how did you, when you looked at the mosaic on initial trends, reconcile that role as to why this was an acquisition that would make GPK a better company going forward? Thank you..

So, you got to parse through that data and see there is a number of different verticals on the SBS side. Liquid packaging, as you talked about, is down a little bit, as is some of the plate dish and tray. But cup stock is actually up year-on-year and exports are up for food service. So, we take some confidence in that.

We also have a very full CUK system, as you know, with the closure of the Santa Clara mill and that tonnage coming into both Macon and West Monroe. So, what we see a real opportunity to be able to do now with all three substrates is really mix manage across a broad portfolio of very low cost mill assets to create value here..

George, this is Steve. That’s an important component, as Mike is mentioning. Now with all three substrates, we had to have – and only having two of them, we were moving oftentimes things into our two.

We now get to actually contemplate how we mix enhance across all three substrates and we see some nice opportunities there that will, I think, broaden the scope with which we can manage the optimization of those mill assets..

Okay, thank you. Now, in each containerboards just kidding, I will turn it over..

Your next question comes from the line of Mark Connelly from Stephens. Go ahead please. Your line is open..

Thank you.

So, can you give us a little more color on the core volume improvement? I am just curious what kinds of customers are driving that? You have talked a lot about small customers and smaller customers, but are the moves that the big players making to fix their mix showing up in your numbers yet?.

Yes, Mark, it’s Steve and welcome back to the call. Yes, I think what we have seen and you have seen us do it a bit, our core fundamental food business, it continues to have some of the natural pressures that it has had over the last couple of years, so very consistent, even though we are seeing a lot of those major players trying to combat that.

But what we have really seen and through our participation strategies, as Mike touched on earlier, through our new product development activities, our growth around beverage platform, investments like Carton Craft, investing into the filter frame business, really our participation strategies are widening out, which has shown up in the volumes.

And so it’s really in some respect it’s participation strategy as you mentioned. Yes, we’ve got some good strong core food business that has some pockets of weakness in the center of the store, but we’ve been able to more than offset that through participation in some of the other segments.

And CRB is a great example of that where we’re now participating more outside of food where there actually is growth that we had, and that’s where a lot of our NPD work and our sales and commercial activities have been focused..

That’s super helpful.

One more question, you mentioned the FBB that you are buying, is there significant customer overlap in IP’s bleached board exports and your overseas business?.

The answer to that would be, no, Mark, it’s Mike..

Okay, very good. Thank you..

Your next question comes from the line of Brian Maguire from Goldman Sachs. Go ahead please. Your line is open..

Hey, good morning Mike and Steve and my congratulations on the transaction here..

Thank you, Brian..

Just wanted to ask about the structure of it, maybe you could just kind of comment on why that makes sense from Graphic’s point of view.

It seems like it would have been maybe a little bit cleaner with all cash or all debt deal, but if you could just comment a little bit on how that came together, and whether you got the right to buy out IP’s interest at any point or how you kind of see that equity stub getting cleaned up at some point in the future?.

So Brian, I am going to talk a little bit about why the deal and I’m going to let Steve go through a few of the mechanics that you asked about there. I mean, for us – and we have long said this, for us to get into SBS, there were a couple of tenets that were nonnegotiable. We didn’t want to overpay, and we needed to be able to run a different race.

And for us, that really all came down to taking a look at our balance sheet and making sure that we had the flexibility to drive the backward integration that we believe is important for all the reasons that I’ve been talking about in terms of driving the synergies and leveraging our balance sheet that way.

So this transaction is highly tax-efficient for both parties and really accomplishes those two objectives that were very critical for us in terms of taking a look at acquiring SBS assets..

Brian, it’s Steve. Just structurally as you picked up on the partnership, we will have a 79.5% ownership of the partnership.

And in terms of structure after a 2-year lockup in terms of if there was a monetization, structurally how that functions, because we will be – from an accounting perspective, we will be handling this as a minority interest in terms of how, for us as Graphic Packaging how you will see it in the P&L and we can walk through that obviously as we work through the modeling.

But after a 2-year lockup if International Paper elected to sell their position, how it would occur is that of the 20.5%, 16.6% of that can be converted into either Graphic Packaging stock or cash at our discretion. If it is converted into Graphic Packaging stock, International Paper will sell that over a period of less than 10 days.

And so if it’s an exit, it will be an exit and then the remaining 4% is convertible into cash. So after a 2-year lockup, there are clear options for an exit if that was pursued at that time. And then you also have the 5-year standstill relative to an ability to purchase additional GPK or partnership interest positions during the 5-year period..

Okay, that’s helpful.

And then on the accretion in year 1, just wondered if you could help, is it something in the low to mid-single digit cents per share kind of range that you are targeting? And then just one on the CapEx pro forma for the company, I think IP had allocated maybe $125 million to the segment, but it seems like maybe you are not getting 100% of the segment reporting there.

So maybe just some guidance on where pro forma CapEx would go?.

Sure. Let me take that on. You said it actually quite well.

If you take the $210 million of EBITDA and apply – well, obviously it works through this in detail, but apply the $80 million to $90 million of depreciation and amortization and appropriate interest assumption on the borrowing of the $660 million and effective tax rate in the 35% to 37% range that will get you into very modest levels of accretion.

And then obviously, we will pickup more of that based upon the synergy capture that we talked about earlier. So your overall assumptions there were quite reasonable. There is a core CapEx for the business that’s – that we think is in the $100 million range from the kind of a core.

That being said, the team has some pretty strong thoughts around investments to drive good productivity in the business that a few of us as we talk about the business going forward. As we have always done in the past, anything that we would spend above that, we will talk about very specifically as an investment back into the business.

But I think that would be a fair baseline assumption, as you just kind of are doing the initial modeling, recognizing that we’ll come back to you after the first of the year, once we’re in an ownership position of the business to actually provide more color on the overall utilization of cash and capital back into the business..

I think the only thing I’d add, Brian, is that as Steve said, the base transaction is accretive, but where we really see real opportunities going forward, is the runway that we’ve got to further build out the integration levels that we’ve been talking about.

And you know the types of economics we’ve been able to drive on these tuck-in acquisitions over time. So it’s kind of a two-part equation for us in terms of value creation..

Okay, that makes sense. Thanks, guys..

Thanks, Brian..

Your next question comes from the line of Chip Dillon from Vertical. Go ahead please. Your line is open..

Hi, good morning Mike and Steve and congratulations..

Thank you, Chip..

A couple of post deal questions. One is, in terms of the post 2-year situation, you mentioned that you can – your option that 16.6% could be issued IP in stock – to IP in stock and they could sell it.

Could they also spin it or pay it out as a dividend to their shareholders and still maintain the tax integrity of what you are proposing?.

No, Chip. I don’t think that’s a part of the structure. Obviously, there will be a tax event. This is, in many respects, a deferred tax event in terms of some of the efficiency of it, but that isn’t necessarily the structure that’s likely to play out in the event of a conversion and eventual monetization..

I understand. And yet even though that there is a deferred tax event, it sounds like community assets are being written up.

As you said that DD&A will stay at 100 and – so just confirm that and also what interest rates should we assume on the $660 million of debt that’s going to be now in the new company?.

Yes. We will likely have – what’s likely to occur is the Term Loan A will be coming our way. That tends to be in the similar structure as what you see on the $2.4 billion that we have with our senior secured. So I would expect that of the $2.5 billion, excuse me that we have.

So I would think of it as the $660 million coming over in a structure very similar to that tranche that we have. There won’t be a mod coming along with this. So it’s very similar to what the interest expense that you’d see that we have today on that..

And what is that?.

Low 3s..

Low 3s, got it. Low 3s, got it. Okay. And then the last question is, it mentioned in the – somewhere that they have a standstill of buying your stock in the next 5 years with some exceptions.

And can you just let us know what those exceptions are?.

They are very limited exceptions that would have to do with dilution if we were to actually issue shares for another purpose. There are just some very limited new losses under which that they would have the ability to be in an anti-diluted scenario..

I understand, just standard stuff. Great. Thank you so much..

Thanks Chip..

Your next question comes from the line of Ghansham Panjabi from Baird. Go ahead please. Your line is open..

Hi, guys. Good morning and congrats again.

First off on the Santa Clara mill closure, how should we think about the impact on productivity on legacy GPK going forward? And also with the addition of IP’s assets, how does your previous sort of $60 million to $80 million in productivity target change, given that you have a near 50% increase in tons produced across your mill system?.

Thanks, Ghansham. It’s Mike. I think the way I would answer your question around productivity on our existing base with the Santa Clara closure is we have got a high degree of confidence in our $60 million to $80 million of productivity next year.

Our mills, both the CRB Midwest mills as well as our CUK mills, will be absorbing a better part of that 135,000 tons. So our operating rates in those mills are going to be very high. And as you know that helps us ensure that we are able to drive ongoing productivity and cost reduction. So that’s how we think about it on the base business.

In terms of what we would do on a pro forma basis, I want to hang that question out there and talk to you about that in February when we actually have the assets in terms of ongoing productivity. For now, I’d point to the $75 million in synergies.

We are going to be getting our people into these facilities, working with their folks and really putting together a lot of that work. And between now and the next time we talk to you, we will have a lot cleaner sight into how you should be thinking about that, but the same model applies.

We are going to look to drive year-on-year productivity through every asset we own. We have to do that..

And then in terms of both the transaction, how should we expect your capital allocation to evolve, if it all – as it relates to share buybacks, given the already significant IP ownership in your company pro forma?.

Yes, Ghansham, it’s Steve. I think overall, the balanced approach to capital allocation that we have been driving will really maintain itself. There are no levers that are removed from that with this structure.

And so I think you would expect to see us to continue to put capital to work very prudently in the business to tuck-unders and the acquisitions to drive integration and then the dividend and the capacity to do share repurchases. So we’ll have all of the levers available to us, no real change there.

And as Mike said earlier, in many respects, this is the continuation of those strategies, just on a larger platform that we can really apply the same techniques over onto the SBS side..

Okay, perfect. Thanks so much..

Okay, got it..

Your next question comes from the line of Adam Josephson from KeyBanc. Go ahead please. Your line is open..

I can say good morning..

Hi Adam..

Just a few – one, just to be clear on the NOLs, so they will – you will hold on to what you have. You’ll have to run through most or all of them by the end of next year. And then there will be little if anything left thereafter.

Is that right or is that not right?.

Yes, Adam, I think looking at this now holistically our – the appropriate assumption is that we won’t be a material cash taxpayer until 2020. So we’ll get through ‘19, we believe, roughly with a structure that would now be in place. And then we would begin to convert over to a traditional cash taxpayer in 2020..

We will feel one more year of being a minimal cash taxpayer now..

‘18 and ‘19..

Right, right. Can you talk at all about your price cost guidance for next year? Obviously, you’d previously talked about $40 million plus.

And maybe I missed it earlier, but can you just help us there?.

Adam, it’s Mike. I mean as Steve talked about in his prepared remarks, I mean right now today, October pricing and October OCC and secondary fiber pricing, that $40 million is intact.

I think the bigger challenge for us, as you well know, is just as there’s going to be a lot of volatility potentially between now and the end of the year, relative to what ends up happening with these China import licenses and whether or not mixed paper is able to go in there.

If mixed paper is able to be imported at what percentage of contaminants, how much those licenses are going to be. Are they going to be up or are they going to be down? And so we expect to see a fair amount of volatility between now and the end of the year.

And we don’t have a clear view I don’t think anybody does, in terms of what actually happens with OCC over that period of time. We do believe that over the medium term, there will continue to be an upward bias on secondary fiber.

That’s one of the reasons why as we evaluated our mill system in the Santa Clara closure, we took out a mill that has the highest fiber cost because of its location on the West Coast, the most volatile if you will. And over half of that production is now going to our CUK mills, which as you know, are much less volatile in terms of input costs.

So we’re taking some actions there. We are also taking some actions in our Midwest CRB mills to continue to allow us to use alternative types of secondary fiber in greater percentages like mixed paper and our own SUS. These aren’t huge projects, but they’re incremental projects that drive ongoing savings and give us flexibility down the road.

So it’s kind of a two-part equation. We have got to get through and see what ends up happening with secondary fiber. And at the same time, we are taking actions internally to try to mitigate the volatility of that critical commodity for us that we purchase..

Right. Thanks. And just a couple of others. Just on the SBS markets, you are making a pretty big bet on that market. It’s obviously been volatile over the last 3 years or so. It was fairly weak in ‘15 and ‘16. It’s gotten much better year-to-date, partly on the weaker dollar, partly on food service being better.

Obviously, IP itself cut a significant amount of SBS production a couple years ago given the pressures on that market.

So what gives you confidence in the long-term outlook for the SBS market and why?.

Look, we like food service. We like perimeter of the store. All the data supports that ongoing trend of consumer preferences. This allows us to really have the right substrates to be able to do it. We have got a scaled cup manufacturing operation with over 250 machines spread across the North America.

It’s sizable, and it’s very difficult to replicate something like that in a very short period of time. So we think that we can scale that and run a different race as I talked about, driving our integration levels up to 80%-plus over the next 3 to 5 years. So that’s really what we’re really going to focus on, Adam..

And just one last one, in terms of being a one-stop shop, why would a customer want to be so exposed to one supplier?.

Well, I mean there are a number of suppliers out there. I think we tend to believe that we earn the business that we have. And now we have got additional assets, low cost assets that allow us to continue to provide offerings to expand our relationships with them, and quite frankly, go into new verticals that we’re not.

So it’s been that way for a while. We’ve operated in that kind of an environment with high market share with a number of our customers. And what we know is that we have to create value for them each and every year because they’ve got a lot of choices outside of Graphic..

Thanks so much. I appreciate it..

Your next question comes from the line of Debbie Jones from Deutsche Bank. Go ahead please. Your line is open..

Hi, good morning. I was hoping you could talk about the comment you made about mitigating OCC volatility. I am assuming you are referring to shifting more contracts to cost based.

Can you just talk about where you are with that strategy? What your target is? And when you think you can get there?.

Yes, two things, Debbie. When I would talk about mitigating OCC volatility, I am certainly not talking about influencing the market.

What I’m talking about is our ability to not have to buy as much OCC, which as you know, when you transfer 75 – or about 70,000 tons into our CUK system, about half that volume from Santa Clara, that’s in a much more stable input cost scenario, as well as some of those projects I talked about in our Midwest mills which would allow us to use our own SUS clippings and mixed paper and not quite as much OCC, which tends to be the more – most volatile of all the secondary fiber grades.

So that’s the first part to your question. The second part, yes, we continue to work on migrating our pricing more towards a cost-based model. We are still in roughly that 50% range on business that we produce the paperboard for. So that focus remains intact and something we’re in active negotiations with a couple of our customers.

Now as you know, those contracts come up every 2 to 4 years. So it’s not like every quarter, we’ve got one of those going on. This tends to be more of an annual impact that you’d see us move the needle on that..

Okay, thanks. Just two quick questions.

One on the deal, I am assuming that the leadership team from the consumer business at IP will be coming with the transaction?.

That’s correct..

Okay. And then you mentioned, this doesn’t really delay your European strategy.

Is that kind of a just longer term or should we expect that near term, there’s a bit of a pause in focus on this integration?.

Look, we have got to do a good job on this integration. We have to nail these $75 million of synergies plus. But relative to the actual deal, I would actually argue it helps us – it’s actually complementary to what we are doing in Europe.

As I mentioned earlier, it gives us options to export some of the – our low-cost SBS paperboard into those markets to support our existing converting plants that we have there.

So I think you can expect that as we look at tuck-in acquisitions over the next 3 to 5 years, it will be a combination of building on our SBS assets as well as continuing to move towards that objective of $1 billion of converting volume in Europe..

And Debbie, it’s Steve. I think one of the other things that the structure gives us is the balance sheet flexibility to that.

And so that’s really, as Mike mentioned earlier, by having the balance sheet be in a strong position, we can execute on those next phase of investments that can drive out the integration levels and improve economics, both here in North America and in Europe..

Great. Thanks. I appreciate the color. Turn it over..

Your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Go ahead please. Your line is open..

Great. Thank you. Good morning..

Hi, Arun..

Congratulations on the transaction, definitely a transformation deal for you guys. Maybe you can just give us a little bit of color on your evaluation of this opportunity versus some other opportunities you had out there? I mean, you’ve completed some international acquisitions.

Is that still a focus? And where do you stand on kind of the portfolio overall? Thanks..

Yes. And I think, Arun, it’s Mike. I mean, from our standpoint, when we look at the transaction multiple here at 8.6x and getting scaled, low-cost, well-capitalized assets with synergies that we can drive down to do a 6.3x net and the runway to build out over time, this is pretty powerful and transformative for Graphic.

So from an allocation point of view, when this opportunity came up, we spent some real time studying it, making sure that we like the end-use markets, that we could run a different race. And quite frankly, we’re thrilled with the opportunity to be able to do it. So that’s how I would answer the first part of your question.

And as Steve mentioned our balance sheet, on a pro forma basis at 2.8x levered, still gives us all kinds of flexibility to continue to pursue our other objectives and ambitions as we grow this combined company..

Okay, that’s helpful. And then also just real quickly, I hate to ask the question, but I might as well. So maybe if you could just give us your thoughts on how OCC plays out over the next 6 months or so.

Do you expect it to continue to go down, and then potentially rise early next year or – and what’s driving your view and then as the corollary, what your expectations are on CRB and CUK pricing? Thanks..

Right. And so that is the big question. And I guess the way I’d answer that, Arun, is I don’t have any clearer insight into that than you do. I mean, I read the same articles. The bulls talk about OCC taking off, because China opens up and the import licenses are there.

Some of the bears talk about there is going to be less imported and the contaminant ratios are going to be a lot smaller and that creates more fiber here in the U.S., puts downward pressure on fiber here. I just don’t know. And so that’s why we answer the question the way that we did. At current prices, that $40 million spread works.

We are going to be monitoring over the next couple of months. And as I said, by the time we talk to you again in early February, we will have a clearer view into what that looks like. But having said all that, over the medium term, we still do see an upward bias on secondary fiber for all the reasons we talked about in the past.

The build-out of the recycled containerboard systems both in North America, Europe and China, there is going to be demand how it all moves. Right now isn’t totally related to supply and demand balance given some of the things that the Chinese government, are doing relative to their import licenses.

So I guess that’s a long answer to really just saying, we don’t know for sure..

And Arun, this is Steve. I think to Mike’s – one of Mike’s earlier points too, our absolute commitment over time, the price offsetting input cost inflation remains intact. And so as this obviously plays out over time, what we believe is an upward bias, we will offset that with pricing over time and we are taking the actions necessary to do so.

And that’s what you see us doing with actions like the Santa Clara mill to help manage our overall cost structure and obviously match our supply demand with customer relationships that we have..

And just to build on that point, Arun, I mean as I mentioned earlier, our operating rates in – at our mills are going to be very high, in the high 90s..

Great, yes. That was my question. Essentially, with these closures now, 12% of the industry out next year.

Is it possible that the industry can actually achieve a little bit more pricing that’s independent of OCCs?.

Look, I am not going to forward speculate on pricing. That wouldn’t be appropriate for me to do. But all I would say is that we’re taking actions internally on the things that we can control to position our business for success over the long-term..

Okay, right. Got it. Thanks Mike..

Your next question comes from the line of Steve Chercover from D.A. Davidson. Go ahead. Your line is open..

Thank you and good morning. I hope this isn’t a silly question, but I just want to understand how you report it.

Will GPK continue to report 100% of the partnership, and then there’ll be a 20.5% minority interest?.

Yes, Steve, it’s Steve. That’s correct. You’ll see us report the totality of the $6 billion enterprise and the EBITDA and all that comes along with that. And then there’ll be a 20.5% minority interest call out at the GPK level.

So no change to the – it will be equity-based, equity method, the full enterprise with 20.5% minority, non-controlling minority interest call out..

That’s what I thought. I just wanted to make sure and then....

I am glad you asked..

My bonus question would be I assume that any additional acquisitions or even divestitures, whether it’s mill or converting, will occur at the partnership level..

That’s correct. It will occur at the partnership level. We’re putting the combination of all of our businesses and IP’s business into the partnership. Future activities that take place acquisition would be a part of the partnership. That’s correct..

Great. Thanks and congratulations..

Right, thank you..

Your next question comes from the line of James Armstrong from Armstrong Investments. Go ahead please. Your line is open..

Good morning and congrats on the transaction.

First question is on the pension, is any of the IP pension coming along with the deal or is this basically going to be a fresh start for the people that come along with IP? Just wondering how that works for modeling?.

There won’t be any pension assets or liabilities coming over with the transaction. So with all of existing IP folks will have those provided by IP up to that point. And then, of course, we’ll stand up appropriate long-term defined-benefit, defined-contribution plans on a go-forward basis for those employees.

But there’s nothing coming over in the form of those assets, but we’ll obviously be standing up what is necessary and appropriate for the team that’s coming relative to those long-term benefits..

Okay. And then just a cleanup question, on Slide 6 where you talked about food service growing from 10% to 23%, a other segment of 13% shows up.

Could you help us describe what’s in that other segment?.

Yes, James. It’s Mike. There is an open market, big open market presence right now. And as you can imagine, there are some other verticals there like tobacco and pharmaceutical and other things like that, that would be a catch-all for other right now.

Over time, I think what you’d expect us to do is to drive that more into our kind of more traditional buckets that are outlined there on the pie chart..

Perfect. That helps. Thank you..

You bet..

Your next question comes from the line of Gail Glazerman from ROE Equity Research. Go ahead please. Your line is open..

Hi, good morning. Going back to the negotiation for cost pass-throughs, I realized only a portion of the contracts come up at any one time.

But has the exceptional volatility that we’ve seen this year changed the tenor of those negotiations and the customers anymore are less willing to agree to a pass-through?.

Gail, it’s Mike. Not really. I mean, we just haven’t had a lot of contracts come up in the last 6 months. So we have got some that will come up next year and we will be focused on that. We have already started some of those discussions with those customers. So I know, sometimes it seems like it takes a while for that to move.

It really is a function of the fact as I mentioned earlier that our tenders or our contracts tend to be more 2 to 4 years in duration. So it’s a queuing thing..

Okay. And then just in terms of CRB, obviously between Santa Clara and the Paperworks closure about 6 months ago, you’ve got over 12% of the CRB market coming out. You’re pushing some of that into CUK. And I’m just wondering where you think the rest of it is? Because it’s obviously well in excess I imagine of where demand is going..

Well, I guess the way I’d answer that question factually is I’d look at the AF&PA data and point that coated recycled paperboard’s down from a production standpoint about 12,000 tons year-on-year. That’s on a 2.1 million ton market, so it’s pretty small. What essentially producers have done is take some capacity out.

In our case, we did it, because we’ve had the ability to absorb that capacity or that reduction back at our lower cost mills and drive net cost reduction and kind of make sure that our operating rates are going to be very high. So that, in our case – I can’t speak to what others are doing, but that’s certainly in our case, what we did..

Okay. And then just quickly just on broad demand perspective outlook, I guess you’re seeing a teeny bit of growth.

Is there any material change, anything that’s going to occur as you start looking – encouragement as you start looking out to ‘18?.

I guess the only thing I’d say on that, Gail, is we’ve got a couple of quarters now of what I’ll call core business modest growth. I mean, we are not going to jump up and down around 0.5% of 1% and 1%, but it’s certainly better than being down, which it was early last year. So we take that with a grain of salt. We’re looking at that.

We continue to plan for flat volumes. We build our business on that model. And look, I’m really excited about being able to go after food service in a lot more material way, because as you know, all the data supports that that’s growing faster than our core food markets. Our core food markets are always going to be important for Graphic Packaging.

It’s a lot of volume, those are very important customers and they are well capitalized. They have got big R&D budgets and I know they are very focused on trying to drive products that are relevant for these evolving consumer trends.

But we will have now the ability to basically not only be in the center of the store, but much more around the perimeter of the store, which creates a lot more optionality for us..

Okay. Thank you..

Thanks, Gail..

And your next question comes from the line of Mark Wilde with BMO Capital Markets. Go ahead please. Your line is open..

I’ve got a couple of follow-ons.

First of all, on Santa Clara, what do you think the real estate is worth underneath the mill, Steve?.

Yes, it’s – thanks, Mark. It’s a valuable piece of property. We’re assessing that right now. Obviously, it’s got a paperboard mill on it today. So we’ve got to work through the logistics of what it takes to actually take that down once we get to our closure.

It will certainly be valued at a level that will be – that will more than offset the onetime cost that we’ll incur there. So we certainly don’t expect it to be – that closure will be probably cash, slightly positive. But it will be led – measured in low millions of dollars.

I wouldn’t assume any significant positive cash generation, but it certainly will be net cash, modestly positive..

Okay, alright. The second question I have is, on that food service business that you’re getting from IP. They have a couple of very large international customers. And I’m just curious about the ability to kind of supply them with kind of paper cups on a more global basis..

Mark, it’s certainly something we’ll look at hard. I mean as we kind of think about Europe and the customer relationships that you’re talking about are already existing customers of ours. So on a combined basis, we’ll have even more options and more scale.

And as these large global customers continue to try to drive growth, it really partners up well with someone like Graphic that then has those capabilities to operate in multiple geographic markets..

Are those two big customers using kind of an IP Paper Cup outside of North America and Europe or are they using a different product in other parts of the world?.

No, Mark. I don’t have all the details on a specification-by-specification basis. As you can appreciate, we’re still competing separately as of today. So we’ll give you a lot more color on that as we get go into February and have this deal closed..

Okay, sounds good, Mike. Thanks a lot and good luck..

Mark, thank you very much..

And with that, I’d like to turn the call back over to Mike for some closing remarks..

Thank you very much. I’d like to thank everybody for joining us today to talk about Q3 and our transformative deal. And we look forward to talking to all of you again very soon..

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