Alex Ovshey - Vice President of Investor Relations Michael Doss - President and Chief Executive Officer Stephen Scherger - Senior Vice President and Chief Financial Officer.

George Leon Staphos - Bank of America Merrill Lynch Anthony Pettinari - Citigroup Global Markets, Inc. Chip Dillon - Vertical Research Partners LLC Mark Wilde - BMO Capital Markets Mark Connelly - Stephens Inc. Mehul Dalia - Robert W. Baird & Co. Brian Maguire - Goldman Sachs Debbie Jones - Deutsche Bank Securities, Inc.

Adam Jesse Josephson - KeyBanc Capital Markets, Inc. Steven Chercover - D.A. Davidson & Co. Arun Viswanathan - RBC Capital Markets LLC.

Good morning. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging 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] Thank you. Mr.

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

Thanks, Lindsey. Good morning and welcome to Graphic Packaging Holding Company's conference call to discuss our first quarter 2018 results. Speaking on the call will be Mike Doss, 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 a slide presentation 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 constitutes 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'll turn it over to you..

a paper liner and paperboard cup. Integraflex is 100% wood-fiber based, which makes it natural and renewable. Integraflex targets growing markets, specifically the single-serve snacks and growing categories like oatmeal. Integraflex won the award for best new packaging innovation at NEXTY, leading Natural Products Expo.

It also won the Paperboard Packaging Council's 2017 Packaging Innovation of the Year Award. The product utilizes our SUS paperboard and flexible lamination technology from our North Portland converting facility.

Turning to operations, our mills ran well and our backlogs remain healthy at five-plus weeks for CUK and CRB, reflecting modestly improved demand and the closure of our Santa Clara mill.

As a reminder, our CUK and CRB mill operations are highly integrated with our converting platform, consuming approximately 86% of all the paperboard we produce for these grades. The closure of the Santa Clara mill was well executed and we are recognizing the benefits of this difficult decision.

The SBS mills were negatively impacted by winter weather in January, but finished the quarter running quite well. Our SBS backlogs also stand at five-plus weeks. Shifting to performance. Continued emphasis on improvement initiatives, variable costs and operating efficiencies contributed to the majority of the cost savings this quarter.

We operate well and generated $17 million of net performance in the first quarter, excluding the benefits realized from the SBS mill and foodservice converting assets.

Moving on to costs, while we benefited from lower OCC fiber input cost, we incurred escalating freight and chemical input cost, resulting in $15 million of commodity input cost inflation during the quarter. We expect elevated freight and chemical input costs will continue for the balance of 2018.

Let me now discuss how we are progressing on integrating our new SBS mill and foodservice converting assets. The integration is progressing to plan. As I noted earlier, the SBS mills finished the quarter running well. Core volume in foodservice converting business was up 2.5% year-over-year in the quarter.

We are executing on the $75 million in synergy target that we expect to achieve by the yearend - by the end of year three. Specifically in the quarter, we made significant progress on the SG&A reduction in paperboard integration initiatives.

As I noted earlier, adjusted EBITDA from the SBS mill and foodservice converting assets met our expectations in the first quarter and is tracking in line with our $235 million outlook for full year 2018.

We are continuing to actively look at acquisition opportunities in North America and Europe to further increase our SBS mill to converting plant integration levels. And with that, I'll turn the call over to Steve Scherger, our Chief Financial Officer.

Steve?.

Thanks, Mike, and good morning. We reported first quarter earnings per share of $0.10 per diluted share, down compared to $0.12 in the first quarter of 2017. First quarter 2018 net income was negatively impacted by a net $28.2 million of special charges that are detailed in the reconciliation of non-GAAP financial measures table.

When adjusting for these charges, adjusted net income for the first quarter was $58.1 million, or $0.19 per diluted share. This compares to first quarter 2017 adjusted net income of $42.7 million or $0.14 per diluted share.

Focusing on first quarter net sales, revenue increased 39%, driven primarily by $360 million of revenue from the new SBS mill and foodservice converting assets, $26 million of volume related primarily to other acquisitions, and $24 million benefit from foreign exchange. Price was a $6 million positive in the quarter, up from $0.5 million in Q4.

Turning to first quarter EBITDA, $70 million increase to $231 million driven by $59 million of EBITDA in the SBS mill and foodservice converting assets, solid performance of $17 million, $6 million of positive pricing and $6 million of foreign exchange benefit.

These benefits were partially offset by $15 million of commodity input cost inflation and $3 million of other inflation, primarily labor and benefits. We ended the first quarter 2018 with over $1 billion of global liquidity and $3.1 billion of net debt.

Total net debt increased $840 million, primarily reflecting the $660 million of debt we assumed as we combined with the SBS mill and foodservice converting assets.

Cash flow from operations was a negative $190 million and reflects the new GAAP guideline related to the classification of certain cash receipts and payments associated with our receivables, securitization and sale programs. As a result of these new guidance, we have changed the classification of these payments on the statement of cash flows.

Specifically, certain cash receipts that were previously reported cash from operating activities, we'll now be reported cash from investing activities. The change in classification will have no impact on our $475 million cash flow guidance, or on the cash available for acquisitions, dividends, and debt repayment.

We've reclassified the prior period cash flow statements to reflect the new guidelines. Adjusted for the classification change, cash flow from operations was a use of $19 million in the quarter. We've invested $92 million in capital and return $23 million to shareholders via dividend.

The first quarter pro forma net leverage ratio was 3.27 times adjusted EBITDA compared to 3.12 times at the end of 2017. We remain committed to our long-term net leverage target of 2.5 to 3 times, and expect to be in this range by year-end reflecting our strong cash flow generation.

Turning to full-year 2018 guidance, as Mike referenced, we expect our EBITDA will be at least $1 billion. We see upside potential to our previously communicated pricing to commodity input cost inflation guidance of relatively flat in 2018.

The upside potential could materialize from lower-than-expected OCC fiber input costs, and/or higher pricing given the implementation of the recently announced paperboard price increase. We continue to expect labor and benefits inflation will be in the $25 million to $30 million range.

On performance, we're well positioned to achieve our targeted $60 million to $80 million range, excluding the expected $25 million in synergies from the SBS mill and foodservice converting assets. Shifting to volume, we expect core volume to again be relatively flat in 2018, consistent with our performance over the last several years.

We remain focused on outperforming the market through new product development, customer and geographic expansion and substrate substitution all consistent with prior years. We expect $235 million of EBITDA from the new SBS mill and foodservice converting assets including the targeted $25 million in year one synergies.

We expect second quarter EBITDA would be in the $235 million to $245 million range. Finally, turning to cash flow.

We expect cash flow will be at least $475 million, a bridge from at least $1 billion of EBITDA reflects interest expense of $125 million to $135 million, cash taxes of $20 million to $30 million, pension contributions of $5 million to $10 million, capital expenditures of $380 million and positive working capital of $15 million to $20 million.

The remainder of our guidance is contained on the last page of the presentation on our website. Thank you for joining this morning. I'll now turn the call back to Mike.

Mike?.

Thanks, Steve. In 2018, we are keenly focused on recovering commodity input cost inflation through pricing and executing on integrating and generating the targeted synergies from the SBS mill and foodservice assets. We are planning for flat volume.

And if targeted plan is in place to outperform the markets with new product development and substrate substitution consistent with prior years. We continue to be well positioned to generate productivity that is well in excess of our labor and benefit cost inflation. I will now turn the call back to the operator for questions..

[Operator Instructions] Our first question comes from the line of George Staphos with Bank of America. Your line is now open..

Hi, everyone. Good morning. Thanks for the details. Maybe a quick one, just for clarification/confirmation to begin, so prior guidance for EBITDA was approximately $1 billion if I recall from the slide correctly last quarter and now it's at least $1 billion.

And the slight changing in the terminologies is just reflecting the potential upside and the approximately flat price cost commentary from earlier.

Would that be fair or am I missing anything there, guys?.

Yeah. George, good morning. It's Steve..

Hi, Steve..

Now, that's correct. I think what you're hearing from us is the level of conviction relative to the guidance $1 billion and $475 million.

And we do see some potential upside as we talked in the comments from some late year price realization, from price increases that we have successfully executed on and some potential for OCC, obviously depending upon where that plays out for the remainder of the year.

All that though in the context as we discussed of the ongoing increased freight inflation that we're seeing, as well as obviously it's been early days for us relative to the full integration of the SBS mill and converting - converting assets..

Okay. Thanks for that, Steve. A couple others and I will turn it over.

Are you seeing any reason in either your numbers or what your suppliers are suggesting to believe that freight will stop inflating or at the same rate you've seen in the first quarter, either decelerate or actually decline sometime 2Q or second half of the year? It doesn't sound like that's the case. But I wanted to confirm that.

And then, backlogs being where they are, do you think there is any kind of pre-buying in those figures? And then last, what is the one or two key observations you've had with the IP assets and the opportunity there as we look out the rest of the year? Thank you..

Good morning, George. This is Mike..

Hey, Michael..

In regards to freight, I would say that we expect to see similar trends as we saw in Q1 for the balance of the year. Now, keep in mind, we'll start to lap an easier comp in Q4, as we started to see freight inflation after the hurricanes as you well know last year.

But we're planning on seeing a similar level of freight inflation for the entire year, which would be high-single-digits for us, which is really consistent with the roughly $10 million of freight inflation we saw here in first quarter on a span of about $450 million combined now with the SBS and foodservice assets.

So that's how we're planning for it right now. In regards to pre-buy, we've not really seen that. I mean, backlogs have remained pretty steady here for some time now at 5-plus after the closure of our Santa Clara facility. If there is, it's pretty modest in nature. And it really isn't something that we're factoring into our planning process at all.

In regards to some of the initial observations with the newly combined SBS and foodservice assets, look, our volumes were up year-on-year 2.5%, which is consistent with our investment thesis on why we were so interested in completing that combination, as the growth around the [perimeter storing] [ph] on the foodservice side of business continues to grow faster than some of the center store products that we've historically manufactured.

So I'd say it's really in line with our investment thesis and through one quarter it's playing out the way that we planned for and anticipated it would..

Thank you. I'll turn it over..

Thank you..

Thanks, George..

Our next question comes from the line of Anthony Pettinari with Citibank. Your line is now open..

Good morning..

Hi, Anthony..

Just following up on George's question on the input cost inflation, I think you called out $10 million for freight.

Is it possible to maybe put a kind of a finer point on the inflation from chemicals and then the benefit from OCC? And then can you remind us what your OCC assumption is for the full year and kind of where you've been running year to date on OCC?.

Sure, Anthony. It's Steve. Just to put the $15 million of input cost inflation, $10 million of it was freight. As Mike mentioned, we saw about $4 million of chemical inflation, things like cost like caustic [ph] CIO2. And then purchased paperboard, we buy paperboard in Europe. We have been buying SBS here in North America.

That was about $4 million as well. So those are the primary movement up. And then OCC or recycled fiber costs were only down $3 million in the quarter. As you will remember, much of the increase occurred kind of in the February/March timeframe last year. So $3 million was the deflation that we saw.

Relative to our full year estimates from the last time that we had talked, I think we were at an average of about $115 for OCC. If you assume the current, it was $75 average roughly. If that were to stay for the totality of the year, it certainly wouldn't be our assumption necessarily.

But, if you flat-line that there is $20 million difference between our guidance, and today flat-lined for the remainder of the year..

Okay. That's very helpful. And then just over the past few months, we've seen a lot of headlines about regulatory restrictions and environmental scrutiny on single-use plastics, especially in Europe and UK. And you have a pretty sizeable European business.

In terms of just sort of enquiries that you've gotten from customers, have you seen a meaningful pickup in that? Is there any way to maybe size that opportunity, understanding it may be a little bit early stages? And then, what kind of products you make that could potentially substitute some of the single-use plastics that seem to be kind of falling out of favor in Europe?.

Yeah, Anthony. It's Mike. I will comment on that. I think part of the growth in beer we've seen, particularly in Europe and on a global basis, is really coming at the expense of some of the high cone packages and shrink wrap films. So we're seeing some tailwinds associated with conversions into paperboard outside of the U.S.

And that's really driving our international beer growth. In terms of some of the other products that we're seeing, I think the one we profiled in the narrative today is a good example where you got a paperboard collapsible carton with flexible paper wrap on the inside. That could have been a plastic type package. In this case, it's not.

It's actually 100% fiber based. We're seeing a lot of traction on those kinds of products. As I mentioned on the last call, our backlogs around CPET conversions into paperboard pressed trays, specifically SBS paperboard pressed trays continue to grow.

So we see our backlog, our new product development backlog very healthy along those lines and would expect that to continue for the balance of 2018..

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

Thank you..

Our next question comes from the line of Chip Dillon with Vertical. Your line is now open..

Yes, good morning. I have a couple of questions. First one is sort of a housekeeping one, probably more for Steve. But you mentioned the net working capital being a benefit of $15 million to $20 million. And you also mentioned some of the changes of how you deal with selling receivables on your cash flow statement.

And I see two numbers with - two items, I guess, listed as beneficial interest.

Will the net changes of those also be involved in that $15 million to $20 million or is that a separate - is that separate?.

No, that's separate, Chip. It's Steve. Thanks for asking that question. We provided some supplemental information in the reconciliation of non-GAAP financial measures to kind of reconcile the cash flow for you, relative to our disclosures today. So - and we're more than glad to kind of walk you through that.

But for the quarter, specifically, actually our cash flow generation was slight use compared to a slight positive last year. But most of that was all deal related to cash, deal related cost that we incurred. That is very separate from the $15 million to $20 million of working capital improvement that we expect to see for the year.

For us, Chip, that's driven by some of the true improvements in inventory levels that we talked about at the end of last year as we exited out of the Santa Clara mill and looked for opportunities that we are executing on to carry less inventory across our entire system as well as some positive movements in accounts payable.

There's no positive cash flow assumed from the receivables securitization on a year-over-year basis..

Okay. And then, when - I know you've talked about this before, but one issue that we'd love some color on is the - what seems to be a pretty ambitious level of forward integration, you'd like to see in the SBS business. On the one slide, where you talk about it being or that is we have much more integrated than it currently is, in three to five years.

And I didn't know if you could talk a little bit about, I guess, 80% is a number. But where do you think that's going to come, and I guess, there's two ways to look at it. Will it come from folding carton more so than cups? And will it be more internationally driven or U.S.

driven?.

Chip, it's Mike. Hey, listen, it is an ambitious goal, which we said over the next three to five years, it's consistent with how we operate our CRB and CUK business as you know now at 86% integrated and few go back five to seven years, we've really driven that up quite a bit as well.

So we've got the experience and being able to do that in terms of how we look at it, where it would come from, it's really U.S. and Europe centric. And it is cups, foodservice type applications and folding cartons, so it's both of those.

So it's going to be a combination of traditional folding carton as well as foodservice to get to that level, I'll tell you that our acquisition pipeline is strong. We are working very hard in both those verticals that I just outlined to find opportunities, and our track record is pretty solid along those lines.

So people are talking to us around ideas that they have as well. So look, it's going to take some effort, as we mentioned on the first call, it's roughly 500,000 tons of integration that's required and that is a significant number, but when we do it, it will have a meaningful impact on our business. So that's why we're focused on it..

Yeah, Chip, just to add some context on Mike's comments. As we talked before, that 500,000 tons, some of it will come from organic growth as Mike talked earlier that we've seen from the cup business, specifically some movements out of other foam products for example and the paper-based.

But roughly over a five-year time horizon, it's probably $1 billion of acquisition to support that integration level of moving towards the 70% to 80%, in addition to some good consistent organic growth..

That's very helpful. And really quickly, I know on the $58 million adjusted net income there is embedded about 16% tax rate.

And does that mean to get to the 24% to 27% you'll average above that for the next three quarters, we look at it that way? And also, is it fair to say that the non-controlling interest is going to run around $18 million per quarter plus or minus? What happens in that business as it was in the first quarter of the bleach-board business?.

Yeah, Chip, it's Steve. Just on taxes, we had a positive benefit in the quarter from as we looked at state taxes across our new mix of where we reside with the SBS mill and converting assets that actually resulted about $4 million pickup that took the rate down, as you just suggested.

We believe that we may be a little bit more towards the low end of the range for the full year, and we'll provide - continue to provide an update to you. But I think the tax rate is likely to move a little bit towards the lower end of the range relative to the 24% to 27% that we provided at the end of Q2, we'll provide an update to you on that.

Specifically to just for your modeling relative to the minority interest that number, that 20.5% is generally going to look more or like 23.5%, because it's on a pre-tax basis generally, and the actual tax rate will be generally little lower.

There's going to be about 300 basis point shift between what you'll see for the minority interest and what you'll see for the expected tax rates. Because as a partnership, we actually convey the partnership interest to our partners generally on a pre-tax basis, certainly for most federal - for federal and most state tax purposes..

Very helpful. Thank you..

Thanks, Chip..

Our next question comes from the line of Mark Wilde with BMO Capital Markets. Your line is now open..

Good morning, Mike. Good morning, Steve..

Hey, Mark..

Mike, just to start out. I wonder if you or Steve could kind of just speak to kind of priorities for capital deployment this year. I am sure that, that production is kind of top of the list.

But if we think beyond that is it kind of European carton businesses? Is it foodservice? Just how would you have us think about that? Then I have a couple of follow-up..

Yeah. Thanks for the question. I - in terms of how we're looking at the year, we've got capital projects that our guides around $380 million, and our core CapEx as we talked about at the end of Q1 was around $320 million to run on pro forma basis the combined entity.

So we are putting some capital to work with strategic projects that drive costs out over time and we got a big one this year, as you well know, which is the Augusta recovery boiler at roughly about $30 million.

So we've got as we've done in the last couple of years a little higher allocation to some of these cost reduction capital projects that expand our margins over time. We will, as Steve mentioned, utilize and find the right opportunities and are convinced synergies are there.

Some of the cash flow to do tuck-in acquisitions, to drive our integration levels are specifically on the SBS side of the business to move towards that 80% target that we've established out there over the next three to five years.

And as you said, getting our balance sheet and our debt reduction in line here over the next 18 to 24 months is top of mind as we prepare for optionality at it relates to what IP decides they want to do..

Okay, all right. That's helpful. Just a couple of other ones. One, I wonder if you could talk about how you capture kind of the growth in that Mexican beer market. The Mexicans are exporting a lot more beer to the states, I know that your main competitor has sort of baked in volume growth via its position in Gaandi [ph].

And I just like to know how you guys pickup kind of share portion of that Mexican beer growth.

Then also is it possible to get any update on sort of net proceeds out of Santa Clara, at least as it stands right now?.

Yeah, I'm just making a couple of notes here, Mark. In regards to the Mexican beer market, it's been great story as you know. I mean, in addition to Constellation growing very well, others have done so - also, and we participated in that, that's been a key part of our growth down in Mexico.

So without getting into individual customer strategies, if you kind of look at how we've been able to drive our growth in Mexico, a big portion of it is come with beer.

But also some consumer products is that economy continues to grow, and we have three very well capitalized facilities now in Mexico that really are able to service that growth quite well. In regards to Santa Clara, I'd answer the question this way. We've had a lot of interest in that property, we are actively marketing it.

And we expect that we'll be able to have a good outcome on that yet here in 2018. But we're not going to provide any guidance on that right now, it won't be right. But hopefully here, as Steve indicated at the end of second quarter, we are in a position to provide a little better read on that..

Okay. And then, just one other one. Just can you give us some sense on how you might leverage the latent capacity down at Augusta? I mean, IP shutdown a mill about six or seven years ago, I think, pulp mill has extra pulping capacity.

Can you just help us think about how you might take advantage of that over time?.

Yeah, thanks for the question. I mean, it's part of what we're doing with rebuild of the recovery boilers, making sure that our steam and pulp generation has the capability to actually scale over time as we sell those tons out.

We're looking at a number of different options that would allow us to expand in a way that, that's thoughtful for our business. To include being in a position over time to supply our European operations, so with a larger percentage of what they buy.

By way of reminder, we are purchasing in excess of 120,000 tons of FBB board right now from various external suppliers in Europe, Augusta 70 miles away from the Port of Savannah. And as you know, Mark, we export 170,000 tons of our CUK paperboard very profitably to our international operation.

So it's not reach for us to be able to think about, could we do the same thing with SBS paperboard over time. So we're looking at number of those different scenarios, seeing what makes the most sense and how to capture value with those assets that we bought. And the early reads on what we have is, there is options and optionality for us there..

Okay. Very good. Thanks, Mike..

Our next question comes from the line of Mark Connelly with Stephens. Your line is now open..

Thank you, Mike. Probably the most common question, we are getting these days about carton is why it takes three to four quarters to implement the price hike, when the business is become so concentrated on your side. Do you see that relationship changing and related to that, if we did see market deterioration in the second half of this year.

How much of that price hike success, do you think might be a risk?.

Yeah, thanks, Mark. I understand the question, and that's a historical way that we've got to that level in terms of the lag on pricing pass-through, particularly for integrated suppliers for ourselves. We obviously actively work that issue whenever we're in contractual negotiations, and we'll continue to do so.

Having said that, as you know, we don't play to an empty chair there. We have competitors. And so our ability to impact that is a function of negotiations that we have with our customers.

But it's certainly on our list and something that we are actively working to improve the lag time there to get it tighter to win the pricing and/or the inflation in the case the cost models actually flows through. In regards to your second part of the question around risk as it relates to the pricing.

Most of our pricing is contractually driven and we have multiyear arrangements and contracts that provide for the pass-through that on the way up as it is on the way down as it started in mid-2016.

So we're going to be actively implementing those price increases on all three grades on the contracts we have and on new business that we're going after, and expect to achieve the vast majority of those increases. Having said that, as you know, raising prices is never an easy process, and we expect to - this will be no difference.

So that's where our commercial teams are focused and we'll continue to keep you post that on how that goes as we go through the year. I guess, one thing I might add that might provide a little context to that, that might be helpful here is the actual backlog and production data from the APA [ph] I think tells an interesting story.

When you look at unbleached kraft paperboard through the first quarter of this year, it's up 56,200 tons year-over-year. SBS is essentially flat, of course, that's on a 1.3 million ton base for the quarter. And CRB is down ironically enough 56,200 tons.

And that's all being done with two less mills, one that we closed down in Santa Clara and one that our competitors closed down on CRB side. So essentially there has been some shifting of where the substrates are manufactured in our case, when we drove the majority of that into more CUK grades.

If you figure, Santa Clara generated a little over 130,000 tons a year, we're over a half of that shift. And of course, that gets into a substrate that from inflation standpoint tends to be more stable, given the wood baskets that we're in, and where we operate.

So we think in some ways, that's helping us, and that markets are actually fairly positive right now, and operating backlogs are up, because there is less mills producing those tons..

Sure. That's helpful. I think, it's easy to overlook that these are pretty challenging markets out there overall and a lot of competition. One other question, just to keep it simple. Now that you've got IP, you're starting to get more familiar there. The tax law changes are in place.

Has your view of the relative returns on domestic versus international acquisitions changed much, or made you think differently about your priority between the two?.

Mike, it's Steve. I don't think, it's materially impacted our priorities, but they do stand - they have to stand on their own. And so we certainly look at the potential positive implications of the tax law changes and the potential positives that can come from that relative to our North America - our U.S. based acquisition strategy.

But we have had a good strong success in Europe on an after-tax basis relative to the returns we've invested in there. I think, what you heard from Mike earlier is the priorities will generally be closer to home, if you will, in terms of more mature markets, North America very specifically.

But we've got a very good platform in Europe, we still see opportunity to invest there to particularly on the converting side to move towards that $1 billion of top line that we believe is relevant for us in terms of scale.

So it hasn't materially changed our strategic view of the return profile, but we certainly take the latest tax considerations into account, when we're looking at critical investments like assessing some of the things that Mike talked about earlier relative to Augusta for example..

Very helpful. Thank you both..

Thank you..

Thanks, Mark..

Our next question comes from the line of Ghansham Panjabi with Robert W. Baird. Your line is now open..

Hi, good morning. It's actually Mehul Dalia sitting in for Ghansham.

How are you doing?.

Hi, Mehul, good morning..

Great. Just going back to the pricing commentary.

And obviously given the long lag times to sit in your P&L, is there any early reads that you can give us on what kind of pricing contributions you're expecting in 2019, just from what's been implemented so far?.

Yeah, from the last time, we spoke Mehul, and thanks for bringing that up, with the $50 for CRB and CUK, and $30 and $50 across the SBS substrates, along with cost models that we're executing on that's an annualized pricing - price total opportunity set of around $120 million.

We'll start to see some benefit from that as we mentioned in the commentary into Q3, Q4. So probably no more than in the $20 million range as we kind of exit out of the year, importantly though it's in that $120 million range on a fully executed basis, as inform with the 50, 50, 30, and 50 across the four categories..

Okay, great. Thank you. And then, for the SBS business, volume seems strong at up 2.5% during the quarter.

Was that better than what you're expecting for the quarter? And I guess, what's the outlook for the rest of the year for that business?.

Yeah, look, it was a solid quarter for sure. But as we communicated when we actually announce the combination those markets have historically out grown, the center and store activities, and that's our investment thesis behind that combination.

So it was largely in line with what we expected to happen, it was nice to see it occur consistent with those expectation in Q1. And we expect to continue to build on that momentum, is that we continue to work away to 2018..

Okay, great. And just one last one. In that business, I think you mentioned one, there is weather impact in the first quarter.

Can you quantify that? How much of an impact there was for the business due to weather?.

Mehul, it's Steve. In January within the SBS mills is about $4 million impact during the January timeframe..

Okay, great. Thank you so much..

Thank you..

Our next question comes from the line of Brian Maguire with Goldman Sachs. Your line is now open..

Good morning, guys..

Good morning, Brian..

Just back to the guidance, just following on the last question.

I just wanted to confirm that the $20 million pricing potential benefit, that's not in the $1 billion roughly guidance? And the commentary you made on OCC, I guess, you said if it stays at the current level that would be another $20 million upside, probably doesn't stay at the current levels.

But I just wanted to make clear that those were both sort of relative to the $1 billion guiding point?.

Let's Steve handle the pricing, and I make the comment on the fiber brand..

Yeah, just Brian, that's correct in terms of the pricing as the potential for roughly $20 million as we execute on those price actions now through the remainder of the year.

And the $20 million on OCC as Michael talked about this year in a moment, is the reason that's $20 million as opposed to something higher is really only impact, OCC as opposed to all of our recycle to fiber costs, it's about 500,000 tons there. So those are relative to your question, that's correct..

And just build on, Brian, we buy as you know, really high levels about 1 million tons of secondary fiber. As Steve mentioned, 500,000 of that is OCC and double-lined kraft, which is down materially. And if it continues to be at the $75 level it will generate, as he just stated, about another $20 million.

Within the remaining portion of the 500,000 tons, are about 200,000 tons of high grades pulp subs if you will that actually have - or at least flat year-over-year. In some cases have gone up, principally, because they compete with pulp in the manufacture of tissue. Those are used on our top layer that we - when we generate CRB.

And so, it's not all going down. I think that's just an important distinction to call out here as you think about secondary fiber..

Okay. That's very helpful. And, Mike, I think you mentioned earlier that the execution of the pricing is going to be an important first step in recovering your raws.

Just wondering if - as you kind of look at it, how you will be exiting 2018 and entering 2019, do you think you will be fully caught up on the raw inflation that we had in 2016 and 2017 and 2018 or do you still have a little bit of work to go on pricing to get back to where you think the starting point was there?.

Yes, it plays out the way that Steve outlined. We'll be implementing pricing in early 2019. And we'll still be lapping that comp if you will. So it's 2018, 2019 initiative to clawback that $100 million. But we're very focused on doing that. And we got the setup as we just outlined, over the next 12 months to do that..

Okay. Just one last housekeeping one for Steve. Just I think you mentioned earlier the change in accounting and the receivables not impacting the free cash flow guidance. I was just wasn't sure, that was because it was already in the guidance or if there is some other kind of offsetting factors there..

We didn't have any receivable based improvement in our original guidance and we still don't. So there is nothing on the securitization side that is impacting working capital for us. You've seen it in different categories on the cash flow statement. And we can take you through that from a modeling perspective, but no change there.

As I mentioned earlier, inventories and payable are going to drive the improvement that we plan to see on a full year basis..

Okay, got it. Thanks a lot..

Bye, Brian..

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

Hi, good morning. You just talked a bit about some pulp substitute being higher. But it also seems like you might think that OCC prices could move up a bit, maybe typical seasonality. You have a pretty good vantage point.

Is there anything you're seeing that suggest that OCC 11 should move up? And then do you have any thoughts on how the introduction OCC 12 impacts anything? It seems more optical, but I just wanted to check in on that..

Debbie, I got your question is related to OCC. What was the second part of your question? It broke up a little bit..

I just asked, is OCC 12, the introduction of that has any impact or if it's just optical..

OCC 12, okay, so the grade change between 11 to 12, I got it. I think, look, in terms of what we're seeing for OCC right now, we're seeing it stay at that $75 level, at least as we go into next month. That's kind of how we're looking at it. Beyond that, our visibility is really no better than yours.

Things change dramatically as you know in terms of what the Chinese will along those lines and whether they adjust their contaminate levels or start to import more, which will have an impact on pricing. And so I don't really want to opine on what that will do in the short-term, other than I think it's going to be volatile.

And I guess, the other part of that, 11 versus 12, we're not really in the recycling business. So it's hard for me to actually comment on that. I think cleaner fiber in general is going to be the trend here. And I think that's a good thing. It's good for us. The products we make as you know are largely food and beverage related.

And so the cleaner fiber we get, the more consistent fiber we get, actually helps us on our business and the same is true in those international destinations. So I think that trend will continue for the short-term..

Okay. Thanks. That's helpful. And then my second question on organic growth. Thank you for providing that 100 basis point information.

I was wondering if you have a number for us on which portion of your overall business is actually growing and what percentage of your business is kind of something that we should look as a flattish business going forward? Because it just seemed like you gained some more opportunities in certain categories over the last year or two..

Well, foodservice is going to grow at the quickest rates as compared to consumer and - the consumer business or the beverage business. But we do see a number of opportunities in both of those businesses as well. I guess, it's how you split the needle on CPET trays for example.

Those are currently in our consumer business and we're seeing a lot of growth, as I mentioned, interest along those lines. And then on the beverage side, particularly on the international, you're going to see us generate some additional growth year-on-year as it relates to plastic substitutions..

Yeah, and just to add to that, Debbie, in terms of areas where we have seen headwinds, they're headwinds that we've been managing for multiple years as you know. And so the cereal business, the traditional carbonated soft-drink business, both of those, yes, they've been in multiyear consistent declines.

But for us in total now, those tend to be $200 million to $400 million categories as of - which are modest in scope and size relative to the totality of our enterprise. So just keeping that in mind, yes, there are categories that have some decline in them.

But for us now, they tend to be categories that have - that are manageable in size, driven a lot by the strategies we've been executing for the last five years to move into higher growth overall categories, good-for-you, healthier products and the like..

If I can just follow up on that, do you sense that there is an uptick in your customers coming in and saying, hey, please work with us to design a new product in a brown package? Just - there is a lot of discussion on plastic versus brown, fiber based packaging and just trying to get a sense of - it that's changed in the last six months, last year.

What are your impressions around that?.

Yeah. I think we would say that our backlogs have been strengthening on those product lines. And it's a little agnostic whether it was brown or white, because as you know we have both now with SBS and CUK. So we're working on both sides of that ledger.

Definitely driven little bit more by virgin substrate, so for some of the reasons that we've talked about in the past as it relates to the direct food nature of many of those products that we're manufacturing. And we expect to see that trend continue, Debbie..

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

Thank you..

Our next question comes from the line of Adam Josephson with KeyBanc. Your line is now open..

Mike and Steve, good morning..

Good morning, Adam..

Hey, Adam..

Just one question on guidance and one on price/cost.

Steve on guidance, just to clarify something, so if you picked up relative to your guidance three months, about 20 on OCC and 20 on pricing, just based on what we see recognized, is there anything offsetting that $40 million of benefits compared to - in other words, are chemical costs higher than you thought three months? Are freight costs higher than they were three months ago, anything offsetting that $40 million?.

Yeah, Adam, it's Steve. We're seeing a little bit of acceleration beyond the last time we spoke. If you look across freight specifically chemicals is probably about where we expected, board about where we expected. So if there is any little bit of a tick up, it's on the freight side.

And I think little bit inherent in your question that we're early on relative to our integration efforts, they're going extremely well and we feel very positive about that as we look at what lies forward.

But we do have some large activities this year that are going to play out as the year plays on, which kind of kept us in the conviction zone as opposed to movement.

Mike?.

And just to build on that, Adam, I think the piece that I want to call out is with that recovery boiler rebuild that we got, as we mentioned at the end of 2017 when we gave our guidance for this year, we're down for approximately 40 days at the Augusta facility with that rebuild.

So we got to reposition and get the material to paperboard where it needs to go for both our customers and for internal operations to make sure we're able to service them properly during that period of time. And we're one quarter into that. We expect to have a lot of that planning finalized by the end of Q2.

But there are some costs we incur to kind of build that inventory and reposition it where it needs to go, particularly in the context of higher freight and to a lesser degree warehousing cost.

So we'll have that work largely done by the end of Q2 and that's why we wanted the extra quarter to give a little more visibility into this to make sure that we got it, a clean read on it..

Sure, now thanks for that, Mike. And just one on price/cost longer term. I think long-term you've been pretty flat price/cost wise. Obviously last year there was a big drag. And I think you said earlier that it will take this year and next really to recover on what you lost last year.

Do you still think over time flat price/cost is a reasonable expectation or would you say industry conditions have just become perhaps more challenging such that price/cost overtime might not be a realistic expectation?.

Our view, as we sit here today and our focus is to get back to price/cost neutral. It's taken us longer this time actually than it has in the past. It's not really just 2017, because it started in the middle of 2016. So that's out point of view.

As we've consistently said over time, our focus is to make sure that our pricing offsets our input cost inflation. We got that up now. We got to go execute on that over the next couple of quarters and really show that its value goes to the bottom line. But that's our focus..

Thank you, Mike..

Thank you..

Our next question comes from the line of Steve Chercover with Davidson. Your line is now open..

Thank you and good morning..

Hi, Steve..

My question is also on your maintenance schedule. So clearly you did Augusta and West Monroe in Q1.

What's in the queue for the remainder of the year? And I was also hoping you could tell us, are the new mills or maybe even all of your mills on an 18 month schedule or how do you plan that?.

Yeah, thanks, Steve. It varies a little bit. We've got some mills on 12, some ones 18 months schedules. And when we say Augusta that we did in the quarter, and we say West Monroe. We did one machine in the case of Augusta. We did one machine, in the case of West Monroe.

We got an outage that will occur in September in Macon, which is consistent with our annual outage in September. We'll do the second machine in West Monroe in Q4. And we did a machine in Augusta here in Q2.

So that's kind of schedule that we got right now and it - with the exception of the big outage for the recovery boiler in Augusta, I'd expect that to be substantially similar as we go into 2019..

Okay.

Is the objective to get all of your mills on an 18 month schedule? Or is that for someone reason no feasible?.

No, we actually - we live the schedule that we run. It allows us to run our business quite well. We've got different reasons for doing 12 versus 18. Some of it has to do with batch digesters as opposed to continuous digesters and how we run the mill during those outages. So that schedule really won't' materially change..

Understood. Thank you..

Thanks, Steve..

Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Your line is now open..

Great. Good morning. Thank you..

Hi, Arun..

Hi. So a couple of questions. So on the guidance first off, I guess, I just wanted to clarify. So, I guess, there is an opportunity for OCC benefits to be around $20 million for the year. And on the price, I guess, more of the $50 increase on CRB and CUK would be tilted towards 2019.

Is that right? And maybe is there any way you can help us quantify what the potential opportunity for 2018 would be on the price increases recently realized?.

Yeah, Arun. It's Steve. As you mentioned, I think for this year, given we're roughly typically nine month lags for CRB and CUK, a little close to six on a fair amount of the SBS. That's where we kind of move towards roughly $20 million of potential for this year. I think it's also important on your OCC.

That $20 million is - and this would require an assumption of the $75 current pricing for the remainder of the year. So there will be no inflation in that $20 million. But, yes, those are the two figures from price/cost, as well as OCC..

Great..

And there are no further questions in queue at this time. I'll turn the call back over to the company for closing remarks..

Thank you. Thank you for joining us on our earnings call. We look forward to speaking with you again in July. Have a great day..

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