Good morning. My name is Regina, 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.

[Operator Instructions] I would now like to turn the conference over to Alex Ovshey, Vice President of Investor Relations. Sir you may begin..

Thanks, Regina. Good morning, and welcome to Graphic Packaging Holding Company's conference call to discuss our third quarter 2018 results. Speaking on the call will be Mike Doss, the company's President and CEO; and Steve Scherger, Executive Vice President and CFO.

To help you follow along with today's call, we have provided a slide presentation, which can be accessed by clicking on the webcasts and presentations link on the Investors section of our website at www.graphicpkg.com.

I would like to remind everyone that statements of our expectations, plans, estimates and beliefs regarding future performance and events constitute forward-looking statements.

Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present 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..

Thank you, Alex. Good morning and thank you for joining us to discuss our third quarter 2018 results. We are encouraged by our overall progress in the quarter. The integration of the SBS mill and foodservice assets is on track.

For the legacy CRB and CUK mill and global converting assets, the pricing to commodity input cost relationship turned $6 million positive during the quarter. Third quarter adjusted EBITDA $256 million was up $68 million year-over-year. The SBS mill and foodservice assets generated $63 million of EBITDA.

We're driving improved profitability across the platform by successfully executing against our $75 million synergy target. Our CRB and CUK mill and global converting assets generated $6 million of year-over-year growth. The improvement was driven by increased pricing and the benefits talk under acquisitions.

The improvement was partially offset by commodity cost inflation specifically increased freight, chemicals, wood, purchased external paper and polyp substitute recycle fiber cost along with labor and benefit inflation.

Well profitability and margins are clearly improving, our Q3 adjusted EBITDA was impacted by accelerating inflation FX and reliability challenges at our SBS mills. We experienced $7 million of higher commodity input cost and hurricane related disruption as wood fiber, chemical cost accelerated during the quarter.

We incurred $4 million of costs related to reliability at SBS mills. We expect to previously announce and plan Q4 recovery boiler rebuild at Augusta which - will address the issues which occurred during the second and third quarter at Augusta mill. Lastly, FX was on [indiscernible] $3 million in the quarter.

Pricing improved during the quarter reflecting the benefits of recent pricing initiatives. Importantly with successfully implemented the second $50 per ton open market increase this year for our CUK paperboard during the quarter and implemented $20 per ton of the announced second open market price increase for our SBS paperboard.

We expect the successful open market paperboard increases we achieved across CRB, CUK and SBS paperboard grades over the course of 2008, would drive strong pricing momentum as we enter 2019. We have line of sight to at least $100 million pricing year-over-year as we exit 2018 and head into 2019.

We've also made progress reducing our average pricing recovery lag to approximately eight months. Reducing this lag along with tightening freight terms will remain a key commercial area focus on contract renewals going forward. Before I discuss the details of the quarter, I would like to discuss our current 2018 financial guidance.

We continue to expect to generate $475 million of cash flow in 2018 and are now targeting $970 million of adjusted EBITDA.

The reduction of our full year adjusted EBITDA outlook reflects our Q3 results and the recent acceleration in hardwood fiber, chemicals and resin cost most notably in our SBS mill and foodservice business along with the hurricane impacts and unfavorable FX.

The integration of the SBS mill and foodservice assets is on track, we expect to generate $35 million in year one synergies exceeding our $25 million target. However, we expect the business will experience a negative pricing to commodity input cost relationship this year of approximately $14 million.

We've also incurred approximately $10 million reliability and performance issues at the SBS mills year-to-date. As I mentioned earlier, the recovery boiler rebuild and electrical system upgrades currently being completed at our Augusta mill will result in a much more robust and stable operating environment.

The Augusta mill is planned to be down for approximately 42 [ph] days through the second week of November and we'll invest $40 million into the upgrades. We remain confident in our ability to meet our original three-year commitments for this business as we execute price increases to offset commodity inflation and address reliability issues.

Now let me provide more detail in the key operational trends from the third quarter. Organic volume in our global paperboard business was again flat in the third quarter despite weakness in big beer brands in North America. Our organic converting volume trend continues to outperform market trends as reported by A.C.

Nielsen reflecting the ongoing success of our new product development pipeline. Let me highlight one important new product commercialization in the quarter. In the quarter, we introduced a sustainable fully enclosed paperboard carton to replace shrink film multipacks for European pet care customer.

The collaboration has the potential to eliminate the use of approximately 6.4 million square meters of plastic wrap per year. The fully enclosed carton is 100% recyclable and is the first of its kind in the pet care market to be manufactured in the United Kingdom. Turning to Operations; and our CRB and CUK mills ran well during the quarter.

Backlogs remain healthy at five plus weeks for our CRB and CUK and SBS grades reflecting solid demand. As a reminder our CUK and CRB mills are highly integrated with our converting platform consuming approximately 86% of the paperboard we produce for these grades.

Industry operator's rates according to the America Forest and Paper Association along with across the three box board grades are north of 95% September year-to-date. Continued emphasis on improvement initiatives, variable cost and operating efficiencies contribute to the majority of the cost savings in the quarter.

We generated $9 million of net performance in the third quarter across the CRB and CUK mill and global converting assets. Let me now briefly discuss the LETICA Foodservice acquisition. We completed the LETICA Foodservice acquisition on September 30 with funds settling on Monday, October 1.

The acquisition extends our leading position in the growing paperboard base foodservice markets in North America. The transaction will further diversify our customer base significantly enhance our geographic footprint and provide needed capacity to meet incremental demand for paper cups resulting from the ongoing shipped paperboard solutions.

The transaction is consistent with the strategy we outlined after the combination of the SBS mill and foodservice assets specifically are intend to grow the foodservice business organically and through acquisitions to drive higher integration levels across our SBS mills.

Lastly, I'd like to highlight the successful installation of a second curtain coater at our Macon mill. And briefly touch on capital expenditures outlook for 2019. We completed the installation of curtain coater on the No. 2 paper machine at our Macon CUK paperboard mill during the quarter.

It was $30 million investment and we expect it will add $10 million of annualized EBITDA driven by significant reduction in coating chemicals consumption. This is the third curtain coater project we've completed over the last several years. Our previous experience gives us high confidence in the return profile project.

In 2018, the Augusta recovery boiler rebuilds and curtain coater will drop our capital expenditures to the $390 million range. This compares with our baseline spend of approximately $325 million which allows us to maintain our assets and offset fixed costs in benefit inflation.

Over the last several years, our capital spending has been elevated primarily reflecting the large cost reduction projects at our virgin paperboard mills. With these projects now largely behind us, we've completed our preliminary planning for 2019 capital spending and expect it to be approximately $325 million in 2019.

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

Steve?.

Thanks Mike and good morning. We reported third quarter earnings per share of $0.30 per diluted share, up compared to $0.15 in the third quarter 2017.

Third quarter 2018 net income was positively impacted by net $25 million of special charges and credit that are detailed in the reconciliation of non-GAAP financial measures table included in our earnings release. When adjusting for these charges and credits, adjusted net income for the third quarter was $69 million, or $0.22 per diluted share.

This compares to third quarter 2017 adjusted net income of $55 million or $0.18 per diluted share. Focusing on third quarter net sales. Revenue increased 35%, driven primarily by $353 million of revenue from the SBS mill and foodservice assets and $26 million of volume related primarily from acquisitions. Price was $18 million positive in the quarter.

Foreign exchange was $6 million negative. Turning to third quarter adjusted EBITDA. The $68 million increase to $256 million was driven by $63 million of EBITDA from the SBS mill and foodservice assets, pricing of $18 million and $9 million of performance.

These benefits were partially offset by $11 million commodity input cost inflation, $7 million of other inflation, primarily labor and benefits and $1 million related to foreign exchange. We ended the third quarter with over $1 billion of global liquidity and $2.9 billion of net debt.

Total net debt decreased $33 million, reflecting solid cash flow generation. Adjusted for the GAAP classification change, related to our receivables securitization on sale programs we've previously discussed. Cash flow from operations was a positive $210 million in the quarter.

We invested $97 million in capital and returned $23 million to shareholders via dividends. The third quarter pro forma net leverage ratio was slightly below three times now within our 2.5 to three times range.

We remain committed to our long-term net leverage target of 2.5 to three 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 full year adjusted EBITDA will be $970 million with fourth quarter EBITDA expected to be approximately $245 million.

Finally turning to cash flow, we're maintaining our 2018 free cash flow of outlook of $475 million reflecting the higher than expected proceeds from the Santa Clara mill site sale which [indiscernible] offset the reduction to our full year 2018 adjusted EBITDA outlook.

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

Thanks, Steve. 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 continue to plan for flat organic volume and have targeted plans in place to outperform the market through new product development and substrate substitution, consistent with prior years. We continue to be well positioned to generate productivity that is in excess of our labor and benefits cost inflation.

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

[Operator Instructions] our first question will come from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead..

Mike, two questions will be around pricing if you don't mind. So first of all Steve and Mike, if we go back to the slides where you bridge to revenue and then again to EBITDA.

Perhaps I'd missed it but could you comment a bit in terms of why the $28 million or so of volume mix revenue positive wound up with a nearly $10 million negative in terms of EBITDA, that's question number one.

Question number two, in terms of the pricing outlook for next year and recognizing it's very difficult to [indiscernible] to the left decimal point in terms of an outlook for next year.

Last quarter, you more or less said that you're looking for pricing of around $100 million for 2019 and that was before the implementation of pricing increases that you now said have occurred and yet in this release, in discussion you're saying you've line of sight to an excess of $100 million which was the case last quarter anyway.

So I'm just trying to see if there's been slippage in the net benefit you expect from pricing relative to what's been reflect in the trade publications. Thank you..

George, its Steve. Let me take both questions and then Mike can add some color. Just with regards to pricing, let me just provide an appropriate walk here for you and I'll talk in terms of GPK in total Graphic Packaging in total. This year, we'll successfully execute on $80 million of price in total.

We've been very aggressive in pulling price forward this year, to try to move and compress the lags that we've talked about. We've been quite assertive on the pricing front. So inheriting [ph] this year's pricing is $80 million of price - little over $50 million in our core business just under $30 million in the new SBS and food service.

Given that and we've looked out into 2019 and have looked at it literally on the 1,100 plus customers that we have and looking through that and all the price actions that we've taken, we see line of sight to about $100 million of very clear pricing through 2019.

So cumulatively we'll about $180 million of price in 2018 and 2019 driven by the execution of the six announced price increases that we've successfully execute on and then obviously other pricing mechanisms, our cost models, pulling freight forward [ph] and alike.

So a big part of the answer to your question is the pull forward into 208 which unfortunately as you know is being offset by very significant inflation, so it's [indiscernible] that we had expected for the year, but $180 million in the cumulative price, 2018 to 2019. And so that's to your second question.

With regards to the first, we did see in the quarter some negative mix as big beer volume was bit weak for us, cost and negative mix, the roll through.

In total our volumes were very steady in the quarter, flat which is continuation of longstanding ability to offset some of the headwinds, but we did have some negative mix in the quarter driven by some of our large big beer customers being relatively weak..

All right, thanks. I'll turn it over..

Our next question comes from the line of Anthony Pettinari with Citi. Please go ahead..

Just following up on SBS, with the $20 a ton implementation or realization from pulp and paper weak, it looks like it's trading at a discount the CUK, which I think historically we haven't seen.

Just wondering if you had any thoughts about how that's kind of playing out in the market, are you seeing substitution? Is there any risk for CUK, price erosion or alternately potential for SBS price improvement going forward? Just wondering if you can talk about that dynamic with the two penetrating very close to one another..

Thanks, Anthony. I guess, if we're going to take a step back and look a little bit at what we're seeing right now in all the paperboard markets. All the paperboard markets as I mentioned have operating rates that are, are north of 95% year-to-date as reported by AF&PA.

In the case of SBS in particular, we've announced we actually led both increases this year and we've realized partials on both of those increases and to your point that's really what's driven, the mismatch between SBS and CUK.

CUK and CRB are exceptionally strong right now, SBS is solid, but it's also a bigger market if you take a look at total tons it's roughly 5 million tons in the market. We had some questions around really the commentary that came out in Pulp & Paper weekly around some imports and what are the impact according to that.

As I go back and look at the data and that's really the best thing that we can do and if we look at the data year-to-date from the AF&PA imports from Europe are up about 14,000 tons in total and imports from Asia are actually down 12,000 tons. So we're not seeing a big structural change in the overall paperboard markets.

We're viewing those markets every day as you know Anthony. They're actually performing well along those lines.

In the case of Graphic Packaging as I mentioned we're going to be down at our Augusta mill for roughly 42 days that will pull roughly 70,000 tons of production out of the market as we're doing those repairs and to get ready for that, we actually built about 40,000 tons over the course of the last nine months and that'll be relieved as we go through that rebuild.

In our case, we've been very focused on taking care of our business, driving the integration levels up. As I mentioned in preparing for that overall outage..

Okay that's helpful and then just maybe a follow-up on capital allocation.

Given you're not seeing big structural changes and your markets are bit more defensive than some of the other public traded paper packaging names, with the weakness in the stock would you be potentially more open to share repurchases or just how do you think about balancing M&A versus deleveraging versus potentially buybacks going forward..

Yes, thank you for that. In terms of our share buyback plan we still have $210 million available on the actual plan that we have, as we've talked in the last couple of quarters. We've been focused on paying down our debt to create optionality here with our balance sheet.

We should IP [ph] approaches someone unwind our combination, but we're in dialog with our Board of Directors on a regular basis around appropriate capital allocation to drive long-term shareholder value and we'll certainly continue to take a look at buying shares back as well as part of that analysis..

Okay, that's helpful. I'll turn it over..

Our next question will come from the line of Chip Dillon with Vertical Research. Please go ahead..

First question is, as we take a quick look into 2019, I see three things and I guess you're kind of pointing to as we compare to that 970 and I just want to make sure I'm on target.

I would assume, we should assume prices are up at least $100 million, we will probably get another I would hope $25 million, $30 million in synergies from the two acquisitions the big one with IP and the one you just did in foodservice and then, I would suppose we're going to be a little bit of help from the lack of the downtime for example, the Augusta downtime will be repeated.

If we add all that together, that would maybe get you to maybe $150 million I guess and then otherwise, if you achieve that you would have to offset all you cost inflation with cost saves and would that be an aggressive use.

I guess what I'm asking you, if you can comment, is my math right? And do you think something in the order of 140, 130, 150 somewhere around there.

Is what would be a reasonable guesstimate based on what you see today for improvement next year?.

Chip its Steve. Let me just kind of take the components we're clearly not providing guidance on 2019. Today we'll do that in the quarter. But let me just touch on some of the things that are conveyed in the material. One is you're correct with regards to $100 million of price, we have line of sight to that. We're clearly in an inflationary environment.

We will have this year over $90 million of inflation in the business. We certainly see that continuing on as we roll through next year and we'll provide a point of view on that, in the quarter but inflation is absolutely in the business. We have very high confidence in the next $25 million of SBS Foodservice, synergy capture as you mentioned.

We continue to have appropriate confidence in our overall productivity initiatives that have always characteristically driven value greater than labor and benefits inflation.

And then finally of course from a capital allocation perspective we have done our work around capital spending and that move to $325 million next year, is also quite relevant relative to how we're allocating capital. I think relative to the Augusta recovery boiler.

What I would remind you is there's roughly $25 million of costs that we're taking on, this year we're taking below the line given the one-time nature of it, so it actually is not an add back for next year based upon what you were characterizing there..

Okay, that's super helpful. And just one more quick one.

On the whole, there's a lot of moving parts with taxes and I just didn't know if you had an update for us as to when you think, you'll be a significant cash tax payer at least to the federal government, just giving the moving parts and the fact that you can deduct CapEx immediately and you certainly had a lot this year..

Chip its Steve again. Thank you for that. Yes, it's important. Relative to becoming a material US Federal cash tax payer.

We're at least out into 2021, also 2019 and 2020 we'll look a lot like the past, so our cash taxes will remain quite modest in that $20 million to $30 million range and that could move out beyond that dependent upon some of the good work we're doing on the tax side.

We've also lowered our federal tax rate range to 23% to 25%, so when do become material Federal cash tax payer based to current rates. We've lowered that rate modestly as well, so there is some real material positive.

I think that's one of the thing certainly strategically for us over the next couple of years, drives very significant cash flow generation when you take a look at our desire to continue to improve EBITDA margins, capital spending more moderated and then obviously interest expense and cash taxes and pension that are all very common [ph] where we are because of the good work that we've done to fund our pension plans and remain basically an immaterial US Federal cash tax payer all driving very significant and strong cash flow generation for years to come..

Very helpful. Thank you..

Your next question comes from the line of Mark Connelly with Stephens. Please go ahead..

So Mike, so there's doesn't appear to be an import problem. You have five week backlogs and 95% operating rates and yet RISI says that, you don't have any pricing power and they implied that you're not even trying to raise the prices on bleached board, were you surprised by their comments and do you think that this $20 is all we're going to get..

First, we were surprised for the reasons that I talked about, there I mean. We have not seen imports to data [ph] support that as I mentioned. There is a new, as you know domestic producer of material, but that's relatively new in the process. We understand they've done some trials but not placed material tonnage.

The numbers are what the numbers are, the operating rates are high.

I can't really speak to what the process is, that RISI uses for channel checks that theirs, but I know what we did and I know that, we've gone out now twice and worked to implement our pricing and I know the types of price increases that we've struck through and are pushing through as we speak.

So I guess the long - short answer to your question is, there's a bit of mismatch between what we're seeing and what they reported..

Just one more question, with the sort of changes that you refer to making on the contract lag.

Container [ph] report producers work with the 30 to 90-day, what do you think a reasonable target in your business might be?.

Well you know it's a fair criticism of our model that it's taking almost on average nine months to reset our pricing and again this year, as you kind of take a look in when the inflation accelerated like it has, it's really caused us a challenge in terms of mismatch in the 2018 year. We've collapsed it now by 30 days, so we're down to eight months.

As I mentioned we're going to be looking at multi-prong approach to pricing across the board. Shrinking the lag, focusing on freight recovery, giving that faster as well as what I would call rules of engagement with our customers too.

All those things kind of come together to drive both pricing and work overtime to shrink the lag and that's really what our focus is..

Thank you..

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

I think we would all applaud some shorter lags.

I wanted to just first talk about SBS and how much overlap you see from that one conversion project that you mentioned to your own business and also if you could talk about the reliability issues at the SBS mills that you acquired and whether you found some things you didn't anticipate?.

Yes, thanks for that Mark. First let me just take a step back and tell you that we're very happy with the IP assets that we acquired both the SBS mills and the foodservice converting business. When you look at the waterfall that we provided in there and we did that for a reason.

You do see that we've experienced $10 million of kind of what I'll call one-time reliability issues this year. As I mentioned on our last call, we were aware of the recovery boiler challenges and IP had a plan to address those.

We picked up that project and we're actively in the process of fixing that now, so our expectation is going forward that those will not repeat. So it caused us $10 million this year and we're spending the capital to fix it and we expect that to be done. In terms of the price cost spread, on that business as we outline there.

We will be $14 million negative in 2018, but we expect as the remaining pricing flows through that we've announced and talked about that will go back to being slightly positive.

Inflation as Steve mentioned is going to be something that we have to deal with, we're in an inflationary environment and we're going to be have very aggressive and proactive with our pricing in order to stay in front of it because it's really just hitting us on a number of fronts, I don't expect that to change at least in the future, we've not seen anything that would suggest that to be the case.

In terms of the new capacity coming online. I think it's little too early to say for me, at least how they talked about that mill, it's going to be a swing machine, it's going to swing between coated free sheet and you have some of the packaging grades as you know coated free sheet has done pretty well this year.

Do I expect that there will be ongoing trials and some tonnage place, I do? But in total again as you all know this is five million ton market, so the impact on that should be fairly benign..

Okay and then Steve just as a follow-on, could you just talk about FX headwinds.

I mean you call out some of them in the release here, but I'm just curious as the dollar strengthens against other currencies, does this just, does this have other kind of second derivatives, where we're going to see more important pressure you're going to have a harder time, selling into offshore market, maybe just - walk us through some thoughts on that..

Sure Mark. I think a little bit of headwind in the quarter was more just the realities of the strengthening dollar and the $3 million impact that we've had, that will kind of roll through the rest of the year, but for us in terms of strategically.

As you know when we export paperboard, we're exporting it to ourselves and so we're sending it to ourselves for use in those markets, so it's really certainly for us, it isn't about market [indiscernible] or ability to sell, so we're in good solid shape there in terms of the integrated model that we drive and so really the financial implicate - tend to be just the translation and transaction base that we share with you financially.

Obviously there are implications on some of the import side that Mike talked about a couple of minutes ago and obviously the dollar when it moves can be positive or negative for someone trying to move paperboard into the US.

I think Mike's point was that he made around the realities of imports being fundamentally net neutral, speaks to the realities of challenges of moving paperboard into these markets outside of the US, given the cost competitive nature of ability to produce here locally..

Your next question comes from the line of Ghansham Panjabi with Baird. Please go ahead..

In previous calls, you called out roughly $100 million or so in higher [ph] inflation since 2016 that you're kind of focused on recovering for CRB and CUK.

Can you first off Mike - can you update us on that number just given the incremental inflation and then also on that same basis, how far do you think you're behind on SBS at this point? I know you have a bridge in here for about $14 million year-over-year between 2018 and 2017, but was there any sort of previous inflation that you need to recover as well, that's great..

Steve, why don't you take the first part?.

Ghansham, let me touch that and then Mike will add any additional color. In terms of the SBS and Foodservice business coming into the platform. There wasn't really, I don't think there was a material movement. If you think about it, we acquired 13% EBITDA margin business, is the way to think about it.

We're now operating that business at closer to EBITDA margins into 2016, so we've seen a very material move in terms of improvement of that business as Mike mentioned earlier it's something we feel very positive about $14 million price negative that we expect this year, we have another $20 million to $30 million price coming into that business next year with the SBS that should put that back into a more common place, on a price cost basis.

Overall price cost in our core business this year excluding SBS and foodservice will be relatively neutral in the $50 million range above price and cost.

Clearly that doesn't successfully recover the $100 million plus that we have seen in terms of negative and as we mentioned earlier, I think the realities of inflation are quite real for us, today we're going to experience 4% to 5% inflation across the business and so we have to stay very assertive on moving price through to our customers, to offset that inflation, recognizing that long-term we have to recover the gap.

Certainly you've seen us this year run very hard on price recovery $80 million in total, but it's been offset by an acceleration in commodity inflation at 90% plus, which has actually taken the total number if you will up about $10 million in terms to your reference point on the gap..

Just one thing to add there, Ghansham. I mean if you look at and we put this in the deck as well. I mean this quarter in our core CRB and CUK business was the first ones since the first quarter 2016 that actually went positive on price cost. So we did hit that milestone, we expect it to remain positive in Q4 and as we head into 2019.

But as Steve said we also expect there to be more inflation that's going to be coming and we don't know exactly which categories. Last year it was OCC that obviously abated but we've been, we've now seen significant freight, mill chemicals, some of our fiber cost and our wood baskets escalate primarily due to weather.

I mean that's the other point that I would make around the wood. It's really hardwood and in the Southeast baskets as you know with the two hurricanes that we've experienced here. The wood is just wet and so we're having to go further away and cut on wet weather tracks and that's driving up our cost a little bit here in the short to medium term..

Okay, thanks for that and then just as a follow-up. At least from your vantage point, at current.

Do you view 3Q 2018 as sort of the peak quarter for the rate of inflation kind of looking at it year-over-year? Are any commodity starting to decline obviously you're still cycling through some inflation across various grades that you just mentioned, but there are certain chemicals that [indiscernible] that have pulled back overseas, that you're starting to see some of that.

Thanks so much..

Thanks Ghansham. I think Q3 to Q4 inflation actually will be similar or even potentially a little higher because of the acceleration we've seen in the wood and particularly resin. And there are something that you mentioned that have abated.

The other thing you'll see from an inflation perspective in Q4 as you may recall, is that's when secondary fiber moved down and so that comparison actually is turns into less of a favorable in Q4. So I think we're going to see $20 million to $25 million of inflation in the business in Q4. We'll see $30 million of price in Q4.

So net positive, but I wouldn't characterize it as an abatement of net inflation of in Q3 to Q4, we have line of sight. Line of sight as I mentioned earlier till up $30 million of price coming in positive way in Q4..

Got it. Thank you..

Your next question comes from the line of Brian Maguire with Goldman Sachs. Please go ahead..

Just to go back to George's question on pricing, there's a lot of numbers moving forward, so just wanted to make sure I got it all straight. I think my notes I had from the last quarter, you were expecting about $55 million of benefit this year and $125 million next year, so net, call it $180 million.

I think that was after the second CRB increase but before the second CUK or SBS increase. It looks like now you're calling for $80 million this year, so $20 million higher this year, but $100 million next year, $25 million lower still net up $180 million. So I'm just trying to figure out what happened with the CUK and SBS increases.

Are those - there's some slippage on that or maybe there's some discounts or something you had to give up to shorten the lags that we're experiencing or maybe it's some of the mix impact that you were talking about on beer, but just any help you can give to kind of bridge that, for me it would be helpful..

Brian, its Mike.

As Steve summarized, really what we've done now is take that gross inflation number that we were talking about a quarter ago and really drive it through the 1,100 customers that we have, as we talked about we've been able to pull a portion of that forward into this year which we needed to do because inflation was obviously higher as well, we're trying to collapse those lags as I talked about earlier on the call.

And what we know based on our review as we're pulling together our plan for 2019 as we got clear line of sight to $100 million of pricing that will take effect based on the actions that we've already taken to-date..

Okay, just sort of as a follow-up. So I guess the pricing component of 2018 you're raising $25 million but you're cutting the guidance $30 million. Maybe you could just bridge that kind of $55 million delta there..

Brian, I think and that's where you do your right. Sometimes there's a few numbers floating around. The $50 million, $55 million that we conveyed in pricing before that was just in this year that is just the core business pre-SBS and Foodservice. We've been actively pursuing price on the SBS to the tune of the roughly $30 million.

So there's really no change there.

We've just broken it out for you now, so that you've got full line of sight to the entire company because as we mention when we talk about the SBS and foodservice platform is kind of one large EBITDA, you missed the price productivity synergy capture which we've laid out for you and just kind of repeating it earlier and the $80 million of price to something that we've been aggressively executing on during the year made up of roughly 50 in the quarter and 30 in the SBS and Foodservice platform.

So it's not a movement at all in our overall. The movement in the EBITDA guidance which is clearly on us, a year ago when we acquired the business and built the platform a year ago roughly now we had line of sight we believe $2 billion. We reaffirmed it in January. It clearly was too high and we own that, that's ours.

And that is something that we'll certainly factor into how we talk about the business on a go forward basis, as we guide. There has not been a move in the actual pricing expectations for the business, that's been an active part of what we have been pursuing all year.

And we've been aggressive about it and we'll continue to be assertive, we've announced six price increases, have successfully executed on all of them.

We're always in negotiations with our customers as you know, we turn over 20% to 30%, all of our business every year, we have to go re-earn it, re-earn it with our customers, compete for it and that's what we're doing and we're successfully executing on 3% of price, over a two-year time horizon in an environment that has inflation in it and we'll continue to do so, based upon the currently supply demand environment and the realities of inflation continuing the business and it's a relentless margin, it has to be..

Okay, appreciated. One last one, [indiscernible]. Just a quick one, is it right to think about $50 million of proceeds from Santa Clara be it in the $475 million guide this year, so before just thinking about bridging to 2019, we would start maybe 425 number more or like..

No, I think the way to think about that Brian, thank you for asking that.

As we mentioned in the original 475 guidance, we had the $25 million of the Augusta recovery boiler below the line and we had some proceeds from Santa Clara to offset that abruptly 25, that came in as a very positive sale about $48 million, so I would characterize it more from a cash flow perspective it's a little bit $23 million favorable that has allowed us to, along with some very good working capital, work that Mike mentioned earlier as we look at where we're going to end the year from a supply - demand perspective that's why we're able to maintain the 475 and you could think of it as you just mentioned as roughly, I would think of it more about $20 million net positive that wouldn't necessarily repeat next year so probably leap off point more toward 50..

Okay, that makes sense. Appreciated. Thanks..

Your next question comes from the line of Adam Josephson with KeyBanc Capital Markets. Please go ahead..

So just one on follow-up to Brian's question. So the total pricing contribution in 2018 and 2019, it sounds like it's unchanged from what you're expecting in 2Q even though you got another CUK price increase and you've got at least the $20 SBS increase.

So are you expecting any more of this current SBS increase and even if you don't, wouldn't your total pricing contribution in 2018 and 2019 be higher post another CUK increase in partial SBSM [ph] still confused by why your total pricing contribution for 2018 and 2019 hasn't gone up from last call..

So Brian here, as we said a bit here, I mean, we - I'm sorry Adam, my apologies. We got puts and takes that happen as we got across 1,100 as Steve talked about.

What we're telling you, is we've got that line of $100 million that we've got lined up for next year, on top of $80 million that we got this year, so your question is, is there more? Are always out there pushing for more pricing? Mixed improvements, freights, windows and recovery and those types of cost.

So that's going to be a continual theme that you see, but as we sit here right now in October and we think about 2019, we're point to go $100 million that we believe will show up in the revenue line next year..

Right, okay Mike.

And just one couple years ago, you talked about moving toward a cost plus model, you going from 50% cost base to 70% overtime you haven't said as much about that in the last couple of years or so, can you just update us on your progress there and where you are right now compared to where you were a couple of years ago and what you hope to get to, thank you..

Adam its Steve.

As Mike mentioned we have been very, very focused on reducing lags, part of that comes from contractual renegotiation and yes we continue to offer cost models to customers, where it makes good - to do so, we've seen some take up with some large customers who've moved to more cost models and keep in mind that 50% was pre-SBS and Foodservice business coming in.

so much of our emphasis is on reducing lags, bringing pricing faster, doing it with our customers in a way that allows us to capture the realities of inflation at a faster pace, move down to eight months we're targeted towards moving that down again in coming quarters, that's really where we are trying to place the emphasis.

Our customers are having a variety of models that we use with them, but for much of this is about faster pass through given the realities of the inflationary environment that we're in..

Thank you Steve..

Your next question will come from the line of Debbie Jones with Deutsche Bank. Please go ahead..

I've just two on Q4 guidance and shrink wraps slide that you put up as well. On the Q4 guidance can you give us a sense of the negative mix. Are we going to continue to see that in Q4? What's the performance not if that should accelerate from Q3? And then are we going to see lower utilization at Augusta that impacts the results as well..

Debbie its Steve. Just in terms of kind of the bridging from Q3 to Q4, we're operating today in a margin profile that's in the low 16% range that's where Q4 kind of lands. We have a little bit of step down in sales from Q3 to Q4 that's very normal from a seasonality perspective.

We should operate at or above levels that we've been there won't be incremental pull down if you will from the Augusta recovery boiler because of the $25 million we're taking below the line, but we're taking normal traditional downtime there.

And from a mix perspective we don't believe you'll see the level of mix that we felt in Q3, we were expecting some of that to snap back in Q4 as the kind of wind seasonally the beer business tends to operate, which tends to be heavier in the summer months..

Okay, thanks and then.

Can you just talk about the slide that you put in there, on the shipped away from shrink wraps? Are you seeing an acceleration in this trend? Could you talk about some of the end markets that you think are most amenable to the shift kind of beyond pets, food and if this is broad based? Are you seeing it from the large CPGs or also from you know your small and mid-sized customers?.

Thank you for your question Debbie. I appreciate that.

I would answer that this way is that, particularly in Europe we're seeing a lot of opportunities around shrink film replacement, so that can be carbonated soft drink, it can be beer, it can be in this case pet food that we profiled, we got a lot of new project underway here to replace here traditional shrink wrap type products just like the one that we profiled in this deck that we put out there today.

In terms of some of the things that we're seeing in North America we're very encouraged about, but we continue to see acceleration and the desire to get out of sea [ph] pet trays and then to more pressed paperboard trays that demand continues to grow exponentially and that's something that really sets us well now with our SBS assets we're able to do all that in-house with our own paperboard.

So that continues to be a good positive story for us well. So we're really seeing it in a number of different geographies and that's why we were able to largely offset the softness we saw in big beer with the projects that we got underway and we would expect that trend to continue into 2019..

Okay, thank you..

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

Just a quick follow-up.

So on the [indiscernible] guidance for 2018, it looks like you lowered the SBS outlook by $10 million and then the other $20 million, it seems like that's about $10 million from inflation and $10 million from productivity, is that right? And to clarify, recovery boiler rebuild at Augusta offset that $10 million loss this year, so next year are you looking to get back into the $70 million or so on net productivity?.

Arun, I guess the way I'd ask you to think about the Augusta is that outage has taken place right now and we'll start that recovery boiler up as we mentioned second week in November. So the way to think about that would be, our plan would be not to have those reliability issues repeated in 2019 that impacted us in 2018.

So it will be part of our productivity in year-over-year basis as you compare 2019 to 2018 next year..

Elimination of the reliability challenges that we've had this year, Arun would be the best, the best add back for 2019..

Great, so just looking out to 2019 then obviously lot of inflation this year and understanding that it's not easy to call inflation and [indiscernible] environment. What do you think there are biggest kind of headwinds as far as continued inflation next year? I mean do you expect OCC [ph] to go up and wood fiber to up, chemicals, freight.

How do you kind of look at that whole bucket? And similarly, when you look at 2019 productivity again, just to clarify it looks like labor and benefits this year has also been a little bit more, so are you guys encouraged by the option to offset some of this inflation with increased productivity or is that, is that going to be a challenge given that you're all working on the synergies as well, at the SBS operations.

Thanks..

To the first part of your question, Arun as Steve mentioned we clearly see, ongoing inflation as we go into 2019. I mean you're more the expert on chemicals than me.

So you see that a lot clear than even what Steve and I do, but we've seen it on a number of different components from resins, to caustic [ph] as one of the previous analyst you mentioned we have seen a little bit of reduction TiO2, but the point is, it comes and goes and overall the basket is going up.

We know we're going to see some hardwood costs that will continue well into next year because moving into the winter season it would be a while before those baskets really dry out, we expect that to normalize but the question is when and that probably is no sooner than the spring of next year.

In terms of secondary fiber, we just don't know it's been down at this level for a while, could it go up again? I think it could and I think the biggest one that we continue to expect to accelerate well or at least inflate I should say, is logistics. I mean freight just continues to be something is more expensive.

We're seeing rail rates also start to escalate a little bit here, on top of some of the trucking challenges we talked about earlier in the year and for us it's a big deal. At any given day, we've got 1,000 trucks on the road, 400 rail cars.

So when you start doing the math times that, the overall base is $450 million, if you get 4% to 6% increase in freight, its real money. That's kind of how we're seeing it right now, as we sit here. But as Steve indicated earlier it's very difficult for us with any precision to call 2019 at this time.

We try to do it in 2018 and quite frankly we missed and we went into the year thinking we'd see more modest inflation and it turned out to be anything but that. And so that's the reality of what we have and we responded well with that, as we talked about, we've gone out and gotten pricing, six different increases.

We're going to continue to be aggressive along those lines because we do believe that inflation at least for the medium term is here..

Okay, I understood. Well, good luck with the rest of the year. Thanks a lot..

Our final question will come from the line of Mark Wilde with BMO Capital Markets. Please go ahead..

Yes just a couple of follow ups.

One Mike, I know that Amazon is starting to mandate some changes from their suppliers in the consumer packaging and that some of the consumer packaging is now going to have to be able to serve as the transit packaging when they ship to the consumer, is that win or lose for you? Can you build folding cartons that will actually work for direct shipment to the home?.

Yes we certainly can and that's something that we're focused with them, with our end used customers that are going through those channels. I mean pet food as you know Mark is one of the biggest ones and we're seeing projects along those lines. So I think that's probably a tailwind for us as oppose to a headwind..

Okay, and then the other one I had just this, growth in the Mexican beer business and I'm seeing more Mexican beer come up in the multi packs, in cans. But it seems like your big competitor has an equity stake in a company that's investing very heavily and a lot of color print down in Mexico.

So I just - I wondered whether you're managing to kind of keep up your share of that business or whether you're actually losing share as we see the beer business migrate down to Mexico?.

Yes that's great question. I mean you're absolutely correct and your assessment of it. I mean they have a JV there with an established competitor in that space that does a nice job. Having said all that, we've actually as you know have talked a little bit about this.

We're making a fairly sizable investment in our West Monroe converting facility that is going to continue to position us to be very low cost and that will allow us in our opinion to be able to service parts of the Mexican market very cost effectively. So we're also gearing up to be able to take advantage of that.

We're just doing it within our existing manufacturing footprint with some of the investments we're making as our plant rebuild there in West Monroe..

Okay, very good. Thanks Mike..

I will now turn the call over to Mike for closing remarks..

Thank you for joining us today on our earnings call and we look forward to speaking with you again in January..

Ladies and gentlemen, this concludes today's call. Thank you all for joining and you may now disconnect..