Good morning. My name is Marcella, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Earnings Conference Call. [Operator Instructions] Thank you. Alex Ovshey, Vice President of Investor Relations, you may begin your conference. Alex Ovshey Thanks Marcella.

Good morning, and welcome to Graphic Packaging Holding Company's conference call to discuss our fourth quarter and full year 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. Mike Doss Thank you, Alex.

Good morning and thank you for joining us to discuss our fourth quarter and full year 2018 results. We are very encouraged by the progress we made in 2018 creating a market leading North American highly integrated packaging company well positioned for ongoing profitable growth in all three paperboard substrates.

Our momentum heading into 2019 is accelerating. Notably we successfully integrated the SBS mill and food service assets generating $35 million in synergies. Profitability improved in our CRB and CUK mill and global converting assets in the face of significant commodity import cost inflation.

Fourth quarter adjusted EBITDA of $248 million was up $56 million year-over-year. The SBS mill and food service assets including Letica acquisition generated $56 million of adjusted EBITDA. We are driving improved profitability across these new assets by successfully executing our synergy and integration plans.

The pricing to commodity input cost relationship for CRB and CUK mill and global converting assets was $8 million positive during the quarter and $14 million positive in the second half of 2018 as we executed on multiple price increases across the business.

In the fourth quarter, we successfully executed and planned an extensive 41 day outage at our Augusta, Georgia, SBS paperboard mill and started up a new folding carton facility in Monroe, Louisiana. In addition, we repurchased $119 million of shares in the fourth quarter at value we estimate to be below the intrinsic value of Graphic Packaging.

We have repurchased an additional $31 million of shares year-to-date in 2019 successfully reducing our share count by 4% over the last four months. Pricing improved during the quarter reflecting the benefits of multiple pricing initiatives.

Importantly, we successfully implemented a third open market price increase this year in December for our CRB paperboard. The multiple open market paperboard price increases we achieved across our CRB, CUK and SBS paperboard grades over the course of 2018 and our cost models drove $80 million in pricing.

And in 2019 we now expect to drive an additional $110 million of pricing. While we continue to anticipate significant commodity input cost inflation, we are well positioned to generate continued profitability improvement in 2019 driven by our pricing, new product development and productivity initiatives.

Cash flow was solid as we generated $469 million in 2018. Our focus on growing our cash flow and allocating it efficiently is unchanged. We continue to make progress on our overall key strategic capital allocation priorities.

Before I discuss the progress we're making on the key strategic priorities and the details of the quarter, I like to provide high level 2019 financial guidance. We expect 2019 adjusted EBITDA will be in the range of $995 million to $1,015,000,000 up $971 million in 2018.

Our 2019 guidance reflects a $25 million positive price to commodity input cost relationship. Our productivity and synergy capture will again exceed our labor and benefits inflation. We expect 2019 cash flow to be approximately $500 million up compared to the $469 million in 2018. Steve will provide more color during his remarks.

Now let me provide more detail and key highlights from the fourth quarter and discuss our strategic capital allocation priorities and how we executed against them in 2018.

Organic volume in our global paperboard packaging business was up slightly in the fourth quarter and flat for the full year in 2018 despite weakness in big beer brands in North America. Our organic converting volume trend continues to outperform the markets as reported by the A.C.

Nielsen reflecting the ongoing success of our new product development pipeline. Turning to operations, our paperboard mills ran well during the quarter. Backlogs remain at five plus weeks for CRB and CUK and are at four plus weeks for SBS.

As a reminder, our CUK and CRB mill operations are highly integrated with our converting platform consuming approximately 87% of the paperboard we produce for these grades. Industry operating rates according to the American Forest and Paper Association across all three boxboard grades, remain above 95% as of year-end 2018.

Now let me discuss our strategic capital allocation priorities. We completed three significant strategic capital projects in 2018. We successfully - a new folding carton facility in Monroe, Louisiana and successfully executed a recovery boiler upgraded at Augusta, SBS paperboard mill in the fourth quarter.

We also installed a second curtain coater on our Macon, CUK paperboard mill during the third quarter. We are excited to announce the start-up of our new Monroe, Louisiana folding carton facility.

The Monroe facility which we believe will be one of the most productive and flexible folding carton facilities in the world will replace our existing converting and warehouse infrastructure in the region.

The Monroe facility is highly flexible food and beverage folding carton manufacturing operation that is well positioned to service evolving consumer needs. The facility is strategically located near the West Monroe paperboard mill to reduce logistics costs.

We plan to consolidate our two existing manufacturing facilities and three outside warehouses into this site. Overtime, we expect to absorb an additional $75 million of volume from other high cost operations.

We anticipate we will drive significant reduction in our fixed costs across our folding carton platform utilizing world-class print, cut, glue and automation capabilities at this facility.

Total invested capital in Monroe will be approximately $178 million, $82 million of capital expenditures mostly equipment related have and will be incurred over the 2017-2019 timeframe and our balance sheet reflects a $96 million capital lease for the new facility. Once fully operational, we expect Monroe will contribute $30 million in annual EBITDA.

We anticipate the facility will be relatively EBITDA neutral in 2019 due to the start-up and restructuring costs with the benefits ramping up materially in 2020 and 2021. Let me now discuss the SBS mill upgrade we completed this quarter. The extensive project was executed on plan and was completed in 41 days.

The total investment in the project was $68 million. We successfully rebuilt significant portions of the recovery boiler. The project also entailed a significant upgrade to the mills electrical and mechanical systems. The mill started up well in the second week of November following the completion of the project.

Our team performed exceptionally well on this project. As a result of the investment, we are confident the long-term liability and efficiency of the mill will be significantly improved. Early results have been very promising.

Let me now shift to acquisitions, we completed two additional strategic acquisitions in 2018 for total consideration of $129 million. We closed the PFP acquisition in the second quarter of 2018 and the Letica Foodservice acquisition at the end of Q3, 2018. Let me briefly touch on the PFP acquisition which we completed in June.

We acquired two converting plants located in Tennessee and Texas. The acquisition expands our leading position in the growing paperboard-based air filter frame market which we entered with our acquisition of Carton Craft in July of 2017.

The business converted approximately 18,000 tons of paperboard primarily CUK and generated strong EBITDA margins on an LTM basis. Synergies from the acquisition will be driven by integration of additional CUK paperboard tons and cost efficiencies. Shifting to the recent Letica Foodservice acquisition, we completed the acquisition on September 30.

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 from paper cups resulting in the ongoing shift into paperboard solutions.

The transaction is consistent with strategy we outlined after the combination with the SBS mill and foodservice assets. Specifically, our intent to grow our foodservice business organically and through acquisitions to drive improved profitability and higher integration rates across our SBS mills.

Shifting to our third strategic capital allocation priority returning cash to shareholders. We returned $230 million to shareholders in 2018 through dividends and share repurchases. We repurchased $119 million of our shares in Q4. And today 2019 we've repurchased an additional $31 million in shares.

This $150 million in share repurchases was done at an average price of $11.35 and has reduced our fully diluted shares outstanding by 4%. We announced our first formal share repurchase authorization in early 2015. Since then we have returned $440 million to shareholders through share repurchases.

Our fully diluted share count had declined by nearly 10% since January 2015. Today we are pleased to announce our Board of Directors has approved a new $500 million share repurchase program.

We will continue to repurchase our shares opportunistically when Graphic Packaging shares are trading below our estimate of intrinsic value and the returns of share repurchases compare favorably to other capital allocation alternatives. Lastly, let me provide a recap on how we are executing on the SBS mill and foodservice integration.

We completed the combination on January 2nd, 2018. The integration of the SBS mill improved service assets has exceeded our expectations today. The SBS mill and foodservice assets including Letica acquisition generated adjusted EBITDA of $233 million in 2018.

This figure represents a significant improvement compared to the $210 million of pro forma LTM EBITDA the assets generated in 2017. We captured $35 million in year-one synergies which exceeded our original one year target of $25 million. We have a high level of confidence that we will deliver $75 million in synergies by the end of year three.

We have positioned the business well for organic growth in 2019. We expect growth will be driven by the ongoing shift to our paper based solutions for polystyrene phones and other substrates. As I noted earlier, we successfully completed the plant and extensive outage at Augusta, which will drive significantly improved reliability at this mill.

We also implemented two open market SBS cup stock and folding carton price increases in 2018 to mitigate commodity input cost deflation. Lastly, we completed Letica acquisition which increased our mill to converting plant integration rates.

SBS integration rates are now approaching approximately 40% which compares to approximately 25% for the assets before the combination. Over time we will continue to pursue acquisition opportunities in North America and Europe to further increase our SBS mill and converting plant integration rates.

And with that, I'll turn the call over to Steve Scherger, our Chief Financial Officer. Steve? Steve Scherger Thanks, Mike, and good morning. We reported fourth quarter earnings of $0.15 per share compared to $0.56 per share in the fourth quarter of 2017.

Fourth quarter 2018 net income was negatively impacted by a net $21.9 million of special charges and credits that are detailed in the reconciliation of non-GAAP financial measures table. Fourth quarter 2017 net income was positively impacted by $136 million benefit related to 2017 tax legislation.

When adjusting for these items, adjusted net income for the fourth quarter of 2018 was $69.4 million or $0.23 per diluted share. This compares to adjusted net income for the fourth quarter of 2017 of $52.8 million or $0.17 per diluted share. For the full year 2018, we reported earnings of $0.71 per share compared to $0.96 in 2017.

Net income in 2018 was negatively impacted by a net $30.2 million of special charges and credits that again are detailed in the reconciliation of non-GAAP financial measures table. Net income in 2017 was positively impacted by $136 million benefit related to the 2017 tax legislation.

When adjusting for these items, adjusted net income in 2018 was $251.3 million or $0.81 per diluted share. This compares to adjusted net income for 2017 of $196.7 million or $0.63 per diluted share. We ended 2018 with over $1.2 billion of global liquidity and $2.9 billion of net debt. Total net debt decreased $7 million during the quarter.

Adjusted for the GAAP classification change related to our receivables securitization and sale programs that we previously discussed, cash flow from operations was a positive $815 million in 2018.

We invested $395 million in capital, completed two acquisitions for a total consideration of $129 million, and returned $230 million to shareholders via dividends and share repurchases. We ended 2018 within that leverage ratio slightly below 3x adjusted EBITDA, within our 2.5x to 3x range.

Before I discuss our 2019 guidance, I'd like to review the 2018 price-to-commodity input cost relationship and our expectation for the relationship in 2019. In 2018, our business in total including the SBS and foodservice assets captured approximately $80 million in price.

In 2018, the combined business incurred approximately a $100 million in commodity input cost inflation. The $100 million represents approximately a 5% rate of inflation on the total commodity input cost spent. The key drivers of inflation in 2018 were freight, chemicals, and external paper.

Fright and chemicals inflation were significant $46 million and $34 million respectively. In 2019, we expect to achieve positive price-to-commodity input cost relationship. We anticipate approximately $110 million in price in 2019, which reflects the realization of multiple price increases recognized in 2018.

The $110 million does not include the recently announced $50 per ton open market CUK paperboard increase. We expect commodity input cost inflation of approximately $85 million in 2019, representing a 4$ rate of inflation. We continue to experience inflation across our freight spend albeit below the rate we experienced in 2018.

We anticipate modest inflation for wood fiber, recycled fiber, external paper, chemicals and energy in 2019. The wet weather in the U.S. South is significantly exacerbating wood inflation in the near term. Now turning to full year 2019 guidance.

As Mike referenced, we expect our full year adjusted EBITDA will be in a range of $995 million to $1,015,000,000. The key drivers of our 2019 guidance now reflect our entire CRB, CUK and SBS platform. As I just detailed, we anticipate the pricing to commodity input cost relationship to be a positive $25 million in 2019.

On performance, we expect base performance and year-two synergies will be an $85 million benefit in 2019. We anticipate base performance to be $60 million and year-two synergies to be $25 million. We anticipate our labor and benefits inflation will be approximately $45 million.

We will incur modestly higher non-cash pension costs and a normalization of long-term incentive expenses which will negatively impact EBITDA by $20 million. Based on current foreign exchange rates, we expect FX will be a $10 million headwind in 2019. We forecast first quarter adjusted EBITDA will be in the $235 million to $245 million range.

Finally turning cash flow, we expect cash flow will be approximately $500 million in 2019. The bridge from EBITDA reflects interest expense of $140 million, cash taxes of $35 million, pension contributions of $10 million, in capital expenditures of $320 million. Our guidance is contained on the last 3 pages of the presentation on our website.

Thank you for your time this morning, and I'll turn the call back to Mike. Mike? Mike Doss Packaging had a transformative year in 2018. We completed the combination with the SBS mill and foodservice assets at the start of the year.

This combination significantly increased our scale across the mill and converting footprint, provide the platform to grow in SBS foodservice and folding carton, converting organically and through acquisitions, and a loss for significant synergy capture. We exceeded our one year integration synergy capture expectations.

In 2019 we're focused on driving profitability improvement. We expect to benefit from the previously implemented pricing initiatives. We are also well positioned to drive benefits from our productivity in year-two synergy initiatives that we anticipate will be in excess of our labor and benefit cost inflation.

We expect to generate robust cash flow in 2019 and we will continue to focus on creating shareholder value through effective capital allocation. We believe these actions will create value for all our stakeholders in 2019 and beyond. With that, I will now turn the call back to the operator for questions.

Question-and-Answer Session Operator Q - George Staphos Congratulations on the year and thanks for all the details. I’ll ask two questions and turn it over to be fair.

First of all Mike, when we look at productivity for 2019 and the base business being at $60 million, that would tend to be at the lower end of your normal range of $60 million to $80 million.

And I was curious as to what is driving that when considering the fact over the last couple of years, you've been spending on a lot of what appear to be relatively high return projects we recognize inflation that has gotten in the way but what's driving that? The second question I have before I turn it over when we look at return on capital for the company and we can do this a couple of different ways, 2018 you saw a net assets grow excluding goodwill and tangible about 60% obviously that was from the acquisition.

EBITDA grew 35%. How do you intend to over time close that return on capital GAAP, which are the tools you’re going to use the most to try to improve return on capitals from here given those metrics? Thank you. A - Steve Scherger George it's Steve, so I’ll start then Mike can add some additional color.

I think if you look at core productivity for next year, I think of it as an $85 million capture productivity 60 in our core and 25 additionally and synergy capture. And some of that synergy capture does kind of flow through our core business as well as we optimize the entire footprint.

So I would encourage you to think of it as more of a $85 million productivity capture and yes it is on the lower end of what we historically talked about. But I would actually raise it up to a conversation more around $85 million of productivity a combination of the 60 and 25 and we have a lot of confidence in our ability to achieve that.

I think you raised an appropriate question on return on capital which we agree with and so much of what we’re pursuing on a margin enhancement basis to move margins up over time so that we are returning cost of capital type returns, margin enhancement over the next couple of years is critical.

And as you’ve seen the price cost relationship moving that into a positive position this year and continuing that over time is really critical in addition to ongoing productivity above labor benefits inflation to our ability to get to cost to capital type returns.

A - Mike Doss And the only I thing I would add to that George relative to capital and thanks for the question there is we have to - now that we’re kind of through the Augusta outage and some of the things we had to do to kind of position the business to handle 41-day outage.

We've got to become more efficient in our overall working capital specifically inventory and you'll see us continue to have that be an area of focus in 2019 and beyond. Operator Your next question comes from the line of Chip Dillon from VRP. Your line is open.

Q - Chip Dillon My questions have to do with the Augusta project - I’m sorry Monroe project, and you mentioned that it would save about - or you would receive a 30 million in annualized EBITDA by 2021 into a 178 million in spend.

Does that include the loss EBITDA from whatever the old facility had or is that all incremental? A - Mike Doss Right, that's a net number, Chip. Thanks for that. We're really excited about what we're doing in Monroe.

And really what as I talked about there, we're consolidating two existing converting facilities and three pretty large offset warehouses and putting it all under one roof. And we've made investments in machinery, book printing, cutting, gluing and high-level of automation. That's going to result in significant variable cost and fixed cost reduction.

We're not going to operate as many facilities. We're going to produce more or convert more material closer to our West Monroe mill. So, we're going to have less structural logistics cost as you saw.

We're pulling around $75 million of business from other facilities and over the course of the next couple of years, our headcount across our system will go down roughly 250 people.

So, it's a big deal for us and it's going to also be able to give us a lot of flexibility to meet evolving consumer needs kind of going away from some of the traditional beer printing processes we have into a much more nimble and flexible flexography process, which we're very excited about.

A - Steve Scherger And Chip, it's Steve, as part of the components we have in out year productivity 2020, 2021 kind of that steady state of productivity, we were just talking about on the previous question.

Q - Chip Dillon And just a comment, I know, that it sound - it seemed kind of dour days when your stock was down around 10, but it was great that you took advantage of that in such a big way. My second question has to do with the CapEx at Monroe.

You're missing the investments of $178 million, but a lot of it is capitalized leases, and maybe I should have bone up on my accounting, but does that portion of it flow through the cash flow statement.

In other words you count the capitalized lease portion of that as CapEx or is that not going through the cash flow statement? A - Steve Scherger Yes, Chip, it's Steve. It was not part of CapEx, but roughly $95 million shows up on the balance sheet in the form of debt as we account for it as a capital lease.

And then there is inherent interest cost associated with it. So think of it as a $95 million investment shows up on the balance sheet as appropriately relative to debt. We pay no net interest, if you will on that debt.

And as Mike mentioned then we see the significant EBITDA advantage of that to the $30 million as part of the return on the total investment. Operator Your next question comes from the line of Mark Wilde from BMO. Your line is open. Q - Mark Wilde Couple of questions. First, is it possible on that $110 million of price benefit this year.

Is there any way to just help us parse at least roughly the amount that's kind of contractual pass-throughs versus market base price increases? A - Steve Scherger Yes, Mark, It's Steve.

If you kind of back up from it all of the increases are of course contractual in nature in terms of they occur because we have successfully raised prices either in the open market or our incurring inflation.

If you stand back from that where that doesn't apply is in our open market sales, which would be a - the open market sale of paperboard which would be a relatively modest component of the $110 million.

So, the majority of it is contractual pass-through on converted product through to our customers probably well in the 60% to 70% of the total with the remainder being the increases we have passed through for the sale of open market paperboard, if that helps with your question, Mark.

Q - Mark Wilde The second question I had just a little broader picture. I'd like to get your thoughts on whether these rising prices are inviting new capacity globally. You know we've had Stora talk about potentially converting a peg machine in Finland to CUK type board.

We've got Norske Skog talking about carton board up in Norway and we've got I think Klabin talking about another carton board machine down in Brazil. So I would just like to get your thoughts on, if you're - if that's a piece of your thinking when you think about pricing strategy? A - Mike Doss Yes, thanks for that, Mark.

It certainly is and I guess if you just take a step back and think about last year and this year and what we're talking about, we will have incurred about $185 million of inflation, and we're going to have about $190 million of pricing.

So, yes, prices are going up, but input cost inflation is also going up and anybody that would make those types of products would feel that kind of inflation. So, that would be the first point I'd make along those lines.

I guess the other part of it is, if the decision is made for those assets to be built and put into service, we're probably talking two to three years between start and finish of getting it done. And as you know sometimes things are announced and they get delayed a little bit.

So, it's hard to know exactly when those would come online, if in fact they do.

And then the other part of that, that we think through is certainly there'll be some portion of that, that could wind up in the North American market, but the more likely scenario particularly for the producers you talked about in Europe is that - those tons stay in Europe or probably wind up in Asia and some spots.

So, look we continued to track the FBB increases in terms of imports. Alex does that through U.S. census and year-over-year it's up 10,000 to 20,000 tons on FBB net. And so we're just not seeing a lot of imported paperboard come into this market at least at this time.

Q - Mark Wilde Mike, is there any CUK produced right now in Europe? A - Mike Doss There are some lightweight for things that would be probably 18 point and under. There are some producers that would do that, it doesn't have the same strength and terror characteristics of us, but it's good paperboard.

I mean it's printable and we use it on certain applications ourselves as you know we buy a fair amount of tons in Europe. Operator Your next question comes from the line of Anthony Pettinari from Citi. Your line is open.

Q - Anthony Pettinari I was wondering if it's possible to talk a little bit more about market conditions in boxboard and maybe kind of a customer response to the recent CRB and CUK hikes. I think you've had eight hikes since last year and then maybe just following up on Mark's question.

You know you identified $110 million in 2019 benefit from price given you have some longer lags. Is it possible to say we just kind of marking the market what level of price benefit from the announced hikes might flow through in 2020? A - Mike Doss Why don't I go ahead and take the first part of that question.

I mean from customer response standpoint, of course as we've talked about in the past, I mean, anytime you raise prices those are challenging conversations, but we're doing it with operating rates that are very good on CUK, CRB and SBS.

And the other part of that is, it's supported by the amount of inflation we're seeing flow through the business as I just kind of outlined for Mark.

So, that's kind of part and parcel of the conversations we're having with those customers as you know some of our pricing is driven by cost models and that inflation is flowing through that as well, so that's how we're approaching those conversations with customers and over the course of a two year period we will raise our prices to them by a $190 million.

A - Steve Scherger And Anthony it's Steve, it's early to talk about flow through into - 2020 from - quantifying that, but clearly we will see price benefit roll through 2020 based upon the lags and the more recently announced increases.

I think a couple of quarters from now that will probably be the right thing to begin to give line of sight to, but yes there is flow through into 2020 that we know will occur at this point.

Q - Anthony Pettinari And then Mike just following up on your comments, I mean, you've talked about getting customers pulp and paper week and more on to cost indices, and you talked about shortening lags. I'm just wondering kind of in the beginning of 2019 where are you in that process, both in the legacy business and the SBS business.

Have those efforts kind of run their course or is there an opportunity to make meaningful progress in 2019 and is 2019 a year where you have maybe a larger number or maybe a smaller number of contracts that are up for renewal relative to recent years or a normal year? A - Mike Doss Look from our standpoint - every year we've got a portion of our business as you well know that comes up for contractual renewal.

In this year there is no different in that regard, I won't call it heavier than normal. Having said that, as I mentioned on our last call, our real focus is trying to drive those lags down to that six month timing.

We need to get in a position where we can be getting a couple of increases a year to recover inflation, and so that would be probably over-weighting in terms of our commercial efforts in terms of where our focus is versus cost model versus open market. Operator Your next question comes from the line of Mark Connelly from Stephens. Your line is open.

Q - Mark Connelly Just following up a bit on that. How sensitive is your price mix assumption to fiber cost inflation. So, if we saw OCC prices move back up was that closed the price cost gaps and recreate the problem. And I'm trying to get a sense of you've already made some changes to how these contracts are working and they've been helpful.

How much better could that situation be, if you found yourself in that problem in '19 versus the lack that we saw in '17-'18? A - Steve Scherger Mark, it's Steve.

I think just in terms of the mix between fibre, if you will recycled versus virgin et cetera, what we've assumed in the $85 million is some modest inflation across all of the fiber both virgin and recycled fiber, as I mentioned we're seeing some inflation in wood.

If OCC were to accelerate, we would see that and we would of course appropriately take action as we have in the past.

I think what you're seeing us do on the pricing front though is working to actually get ahead of the inflation, so that we do recover beyond the current inflation given that we still have the shortfall that we've talked about quite extensively. And on the, Mark, the second question.

Q - Mark Connelly So the second part was how much better you've made some significant progress going from nine months to eight months.

But how much better could that be overall in 2019, if you get to where you want to be? A - Mike Doss We are pushing very hard on the open contracts we have this year, Mark, and the ones we finished up last year to try to drive toward that six month timing that I mentioned, it's a key strategic commercial focus for us.

Q - Mark Connelly So the follow up question is your big productivity projects are done.

Are there any new projects we should be looking out for in the next 12 months to 18 months that might get announced or are we more likely to see a shift back in spending to M&A? A - Mike Doss I think if you look at what we're doing right now and what we're excited about 2019 is, this is a year we really get to run the business and you take a look at the investments we made in our SBS platform, what we've done in West Monroe, Monroe, I should say, and we're starting that facility up this year.

It's a great opportunity for us to focus on commercial and operational excellence and our combined platform, and that's really our focus here in 2019. In regards to M&A we'll continue to look at those kind of opportunities as they come up.

There are - one of the things we have to look at there is comparing that against some of the other strategic priorities that we outlined here and you saw us pivot in Q4 to buy more shares back given the intrinsic value of our stock, and what it was trading at.

And so we've got the levers that we need to be able to do that and be able to be pretty responsive and adaptive to things as they occur, in terms of the M&A that we would look to do, Mark, I think you would expect us to focus more on SBS integration than other types of bolt-on acquisitions.

We're pleased with the progress we've made in one year, we're up to almost 40% now on the integration level. But as you recall we laid a goal out there when we announced that deal on the combination that we wanted to be and 70% to 80% range over a three to five year period. So, we're down that journey and that's really going to be our ongoing focus.

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

Q - Brian Maguire I just had a question on the relationship between the prices CUK and SBS historically because SPS has been higher, but with the proposed $50 ton increase you guys have out there that could put CUK as much as the $60 ton premium to SBS.

Just wanted to see how you're thinking about the sustainability of that longer term, you mean, do you think that there will be opportunities or need to increase SBS prices to get back into line with where we've been historically or do you expect or anticipate customers to maybe switch between CUK to SBS because of the lower price there? A - Mike Doss Just what I would tell you about our CUK in particular, I mean, 80% of really the business that we run on that grade or so is really all driven by performance based specifications that we've got established with our customers.

As you know it's got outstanding strengths and terror characteristics, the sustainability profile of it is very good, people like the brown, you look that it has got an global demand, that's been pretty good.

We saw our global beer grow again last year driven by some of the conversions out off of a shrink film and into pulling closed and ramps, and so that part of our business continues to be very, very positive.

And relative to the spread of SBS, we've kind of been the guys over the years that have converted SBS into CUK, if it makes sense for us to - for whatever reasons where the customer to move some back into SBS where it makes sense, we can do that as well. So we've really got with all three grades now in leading positions in all three grades.

A lot of flexibility to serve as customer needs and really drive ongoing profitability and that's how I would ask you to think about that.

Q - Brian Maguire And just a follow-up question on the performance in the quarter - for the year it was, I think, if you take out the integration benefits from the SBS, as it look like performance was only up $42 million or so this year and it looks like next year you're getting for base to be up maybe 60 - contribution is a little bit lower than kind of where it had been in the last couple of years.

I think maybe like - somebody performance issues at Augusta might have factored in there a little bit, but just wondering sort of this year, if you look back on it where there - might have there been some shortfalls on that performance line, and if you think about 2019 or beyond opportunities to pick that back up again? A - Steve Scherger Brian, it's Steve.

With regards to the $42 million that you're referencing and what we call core productivity we - if you look underneath that number we operated at about a $60 million clip for productivity. There were two headwinds in that $42 million, one as we talked earlier in the year.

We did incur more cost than we anticipated to start up the West Coast supply chain associated with the Santa Clara mill shut down that probably cost us $5 million to $10 million. That was a headwind in the first half of last year that has now stood up. We feel very good about that supply chain.

What's been stood up there, but we did it in the face of - if you recall a running freight inflationary environment last year when we kicked that off and then year-over-year 2017 to 2018, we had a very difficult and poor incentive compensation year 2017.

It's below expectations again in '18, but that was actually a headwind from 2017 to 2018 that kind of tapped that number down relative. So there's some incentive payments that long term specifically that drove a headwind in that $42 million.

So, incentives in the Santa Clara, our confidence in the $60 million run rate is high hence the $60 million we talked about earlier for 2019. Operator Your next question comes from the line of Ghansham from Baird. Your line is open. Q - Matt Krueger This is actually Matt Krueger sitting here for Ghansham.

So, given that you now have a full year of SBS asset contributions and you could potentially benefit from say sustainability focused substrate shifts. Can you talk a bit about the underlying volume outlook baked into your guidance and then the reasoning behind this assumption.

I guess I'm just trying to get a sense for if we could see any sort of volume benefit from a substrate conversion or the inclusion of the foodservice assets that are growing nicely? A - Mike Doss Yes, I think, if you take a look at how we performed in Q4, our overall volumes were up 0.5% of 1% as we kicked off the New Year here in January, that is consistent with what we saw in Q4, and the overall demand profile is held up pretty well in the face of our pricing actions, and so that's really what we're looking at here in 2019, as we start the year and how we built our plan as you know, Matt, we've talked about this before, we plan for flat volumes and work really hard on new product development to be able to beat that we did in Q4.

We're seeing gains as we've talked about particularly on the foodservice side of the business around that perimeter of the store conversions out of polystyrene foam. CPET trays that are being replaced with paperboard trays and also some of the conversions that we've seen in Europe out of shrink film and do our fully enclosed and wraps.

So, that's pretty much the momentum we've gotten and how we've built this operating plan for 2019. Q - Matt Krueger And then switching gears a little bit to the cash flow side of things.

Where did working capital come in for 2018 on a full year basis, and can you talk about some of the projects that drove bad performance? And then looking ahead what do you expect from 2019 and what sort of efforts do you have under way there? A - Steve Scherger Yes, Matt, it's Steve.

I mean, overall, we didn't have any, what I'd characterize as material movement in working capital. Once you look at it on a post-acquired basis, the numbers which added about, for example, $1 billion on inventory and the like our SBS platform ended roughly where it began. We built some inventory, but came back down pretty neutral.

Now the rest of working capital did not have what I'd characterize as any significant movement. What is important in the guide, we've assumed neutral again for working capital.

As Mike mentioned earlier, that is an area of emphasis for us in terms of looking for opportunities to improve the overall return profile of the company by driving cash flow particularly out of inventory. That's an initiative for us, that we're very focused on this year. We haven't provided it in the cash flow as a net positive for us.

But the overall guide that's in the cash flow is working capital neutral. Operator Your next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open. Q - Debbie Jones I wanted to follow-up on Matt's question.

So, the volume assumption is flat in your guidance, I mean, you're just being - you might perform a little bit better that, I just wanted to confirm that? A - Mike Doss Yes, I think, right now the way we built that plan for 2019, our volume assumption is flat, and you see that really on the waterfall.

Q - Debbie Jones And then the substrate, so can you walk us through just - first, are you seeing an uptick in conversation with their customers and just kind of the mechanics or timing if some of your customers wanted to shift more aggressively in some of the product you offer - that they're going to do in response? A - Mike Doss Yes, I think, Debbie, I just build on the comments that I was making, I mean, we're seeing a lot of new product development activity particularly on the foodservice side of the business and conversions out of some of the products I talked about, CPET trays and shrink wrap film into paper-based solutions that we provide.

And so that's the biggest source of growth that we see.

We drive it to our new product development initiatives and as we were able to do in Q4 we saw 0.5% to 1% increase and we're excited about the momentum we've got in 2019 as we enter the year here on those types of initiatives, and if we continue to make progress there that will be above what we built our plan for, but right now we've got an assumption there relatively flat volume.

Q - Debbie Jones I guess I'm also trying to understand, if there's like a switching costs or whatever as a barriers for your customers more aggressively move out of plastic substrates into some of your product offerings. Is it cost? A - Mike Doss Yes, I mean, the paper solutions in general as a general rule are more expensive than plastic.

So, this comes down to a decision they're making around sustainability or the image of their products or how they want to position their brands and you - like we see the announcements that have been coming out around goals and targets that our major customers are putting out there relative to getting out of single use plastics.

And in some cases, paper provides an opportunity for them to be able to do that. And that's where we're replacing our new product development activities. A - Steve Scherger And Debbie, it's Steve. It also, to your question for our customers, it does take time for them to execute on that.

As Mike said, they have to make a decision to invest more in essence their raw material a cup or a plate or a folding carton, but also then they have to work through the transition time of actually bringing the product into the marketplace, and sometimes that means either they may have to buy equipment, machinery to do the packaging or we may be investing with them.

So it's a bit of a, there is a timeline there that can be measured in six, 12, 18 months depending upon the complexity of the conversion, Dunkin Donuts being a good example. That's a multi-year transition.

So, there we see a lot of activity, but the transitions themselves kind of come when they come and when the customers can in fact make the investment themselves as well. Q - Debbie Jones And just one last quick one.

On your Q1 guide, could you tell us what you've embedded in there for your price cost assumption and any other big levers caught out? A - Steve Scherger Yes, just at a high level on the - will be price cost positive in Q1. Pricing will be in the low - probably low $30 million range in terms of as you look at the pricing.

So, a good start to the year on pricing, and we would expect under that scenario to be modestly priced cost positive consistent with the overall guidance for the year. Operator Your next question comes from the line of Adam Josephson from KeyBanc. Your line is open. Q - Adam Josephson I have one on your commodity cost inflation guidance.

You're guiding to 4% inflation this year compared to 5% last year. Obviously last year was a heavy inflation year. We're all seeing signs of a slowing global economy.

Can you just give us a little more detail about what assumptions you're making in terms of percentage increases in those cost baskets and whether you think that guidance is perhaps on the conservative side or kind of more realistic than conservative? A - Steve Scherger Yes, Adam, it's Steve.

I mean we believe it's the appropriate assumption for the business based upon all of the negotiations that we've had with our suppliers as well as just the view into the marketplace you certainly recognized too that there could be movements obviously given the economy.

But if you stand back from the $85 million, we've got pretty good line of sight that there's $20 million to $25 million of inflation on freight and logistics not off of last year's 10% increase, but probably into that 4% zone is where it's heading. We know we're going to have external paper inflation in the $20 plus million range. Those are done.

We pass those increases through to our customers, but that's going to happen. And we're seeing very real inflation on virgin fiber particularly hardwoods in the south. This is a very difficult time right now. Just given the weather. And we've saw for example $14 million of wood inflation last year, and we're seeing that continue into the first quarter.

So, our line of sight to that first $60 million, $65 million of inflation for this year is very high. The rest of it will come from modest inflation net from chemicals and energy, secondary fiber for example. So, we've got very strong line of sight to probably that first $60 million, $65 million.

The rest was - is obviously to be determined but we feel $85 million is the right assumption for the business. Q - Adam Josephson That helps a lot, Steve. Thank you. And just back to Brian's question for a moment about the CUK, SBS price gap. I just want to try to better understand your answer.

So, historically there's been a clear tight price gap between the two and SBS has almost always been higher. And now that's flipped and is about to flip even further potentially - would you have us think about - should we think about SBS being a higher price grade over time or should we think about CUK being a higher.

I'm just trying to, again, understand. Do you think the historical relationship between the two grades still holds or is it kind of out the window from your vantage point? Thank you. A - Mike Doss I wouldn't say it's off the window, Adam.

But I'd say that it's definitely converging a little bit on those two, I mean, the demand for CUK on a global basis is really, really good. And as you know, the 1.5 million tons that we manufacture when we shut down Santa Clara we transferred 65,000 of those tons into that mill system. And so operating rates are very high.

It's in demand, consumers like it. It's got that brown look that great sustainability feel and I think right now we're seeing ongoing support for that and you know we expect that will be the case here as we go into 2019. Operator Your next question comes from the line of Arun Viswanathan from RBC. Your line is open.

Q - Arun Viswanathan Just maybe I can ask this in a different way. I just want to understand the confidence level around the $1.5 billion, you know, last couple of years you've had significant inflation.

Could you remind us where you are behind on the price cost side? If I remember correctly, it was around $300 million and this the '19 price cost should take you to about $100 million whole. I'm just surprised the industry hasn't been able to push more pricing just given the rationalization and high operating rates.

I mean is there a possibility that we could see more price actions across all three grades that would allow you to narrow that gap in 2020? A - Steve Scherger Yes, Arun, it's Steve.

Certainly, wouldn't want to speculate on future price actions, but what you have seen us do is through a very significant number of price actions that we did execute on 2018. We've put ourselves in a position to be price cost positive in 2019. If you assume 2019, it's positive $25 million.

You're correct there's still another $100 million plus or minus gap that we need to close to return the business to the profitability and margin levels that we have aspired to and relative to the kind of return profile that we want to see for the business.

So, we certainly recognized there is more to do to recover fully on our long-term commitment to price offsetting inflation over time.

A - Mike Doss And I think the only thing that I would add to that, Arun, to your question around being aggressive, I mean, in the last twelve months there's been now eight price increases on these three substrates that have been announced and seven of those have been - have some form of recognition. And then we've got the CUK went out there now.

And so I think in terms of Graphic, we've been very aggressive to try to close that gap and recover the inflation that we're seeing flow through the business.

Q - Arun Viswanathan And is there any concern that if freight or if any of these others kind of pull back the - that you have to kind of forfeit some of that achieved pricing or is it kind of a tight enough environment that you can hold onto that? A - Mike Doss I just point to again our overall volumes have held up well.

Operating rates are high and you know that the pricing that we're pushing through is contractually driven with the exception of a small amount of open market tonnage. So you know it tends to be pretty sticky.

Q - Arun Viswanathan And then just as a quick follow-up on your uses of cash obviously the buyback is encouraging, and I imagine you would be opportunistic there.

Maybe you could also elaborate on the M&A pipeline, what's your preference for size of deals and location and do you expect it to continue that activity and should we expect more deals consummated in '19? A - Mike Doss Certainly, it remains a focus for us from a strategic - allocate capital allocation pillar that's unchanged.

Having said that you know we've have to take a look at what multiples have done in the space, and obviously in the overall packaging space, those have come down a little bit.

And we're going to be pretty diligent in terms of what we do as you've seen us do historically here where we've been pretty focused on what makes sense for us to overly go after, and in terms of the markets that we're looking at North America and Europe tend to be the two biggest ones that we would go for, that's where we have the biggest positions already as you know, and specifically even the sharpest - sharpen that point a little bit, as I mentioned earlier, we would look to drive SBS integration opportunities first, just given our strategic priorities.

So, hopefully that helps you a little bit. Operator Your question comes from the line of Steve Chercover of Davidson. Your line is open. Q - Steve Chercover First question, I appreciate the color that you gave us on the strategy to repurchase the shares.

I'm just wondering, is the recent activity have any impact on your ability to repurchase the IP shares once the lock-up expires? A - Steve Scherger No. Steve, it's Steve. It certainly doesn't, our balance sheet remains in a very good place, we were very pleased with our cash flow generation.

We're still under three times levered, and if you look at the cash flow generation that will be capable of over the next 12 months to 24 months, we're still very well-positioned to successfully repurchase that partnership, if IP were to choose to begin that process roughly a year from now.

So, we have that certainly in mind overall from a capital allocation perspective, but we feel good about where the balance sheet is on our cash flow generation and our ability to execute on that at the right time. Q - Steve Chercover Perfect. And as a follow up - it's along the line of Debbie's questions.

Nestle, the customer of yours is really making a push for sustainability they're going to get. The Nestle is quick out of plastics into paper.

Do you guys have any aseptic capabilities or would you go there? A - Mike Doss So, I'm not going to talk about individual customer specifications the one you mentioned, the customer you mentioned and there's multiple others out there that have talked about again single use plastics and trying to find alternatives by various timing that they've laid out in terms of their objectives.

But we do make some paperboard that could wind up in a aseptic package, per se we don't actually convert in a aseptic type package at Graphic. Operator Your next question comes from the line of Daniel Rizzo of Jefferies. Your line is open.

Q - Daniel Rizzo You mentioned that it cost - it's expensive to switch from or it's expensive - more expensive for paper versus plastic.

I was wondering if that still hold true for recycled plastic that these companies are now pushing toward? I can understand the single use in commoditized plastic is a lot cheaper, but as they go to a higher substrate for them, it is just a little bit more I don't know the same or is it a little more equal? A - Steve Scherger Dan, it's Steve.

Generally speaking, when we see a conversion in our business, it's from a polystyrene cup to a paper-based cup or it's from a wrap - a plastic wrap into a paperboard solution. Generally, where we participate which is not in single use at all, but where we participate tends to be they're moving to a slightly higher cost solution.

A - Mike Doss If you think about it Dan, just to put a little bit more on that, those tend to be on the plastic side recycled or virgin tend to be pretty thin gauge. Paperboards got more material there, but it's also much more sustainable. Q - Daniel Rizzo Thank you for the clarification.

And then just one other question, with your freight costs and how they've been fluctuating. Are you locked in like is there really - like a yearly contract or is it just a piece of spot prices? A - Mike Doss No, we play in both those arenas, but the majority of our freight is under contract and tends to be one year contract that we would negotiate.

Operator Your next question comes from the line of Mark Weintraub of Seaport Global. Your line is open. Q - Mark Weintraub Two questions. One, a quick one, small technical one. DD&A was about $10 million lower in the fourth quarter than it had been running anything in particular to account for that? A - Steve Scherger Yes, it's Steve.

We were just working through our final purchase accounting work associated with IP, and it was an adjustment to bring it in line and for our - the full year mix between depreciation amortization goodwill. So, that was all associated with getting final on the purchase accounting for the international paper related, the SBS and foodservice assets.

Q - Mark Weintraub And then bigger picture. So, I saw last quarter you talked about a 100 million of visibility on pricing. You gave the 110 obviously we had the code of recycle board increase in December probably playing a role.

And then bigger picture though there seemed to be two issues with what's happened in the last couple of years, one is the timing, and it takes a while for the pricing and the cost inflation to catch up.

And then there does also seem to have been this systemic slippage on contract renewals, and so that the timing part can take care of itself and you're taking actions to improve that. On the systemic slippage, are there actions that you have under way that can help to mitigate that and/or how important is the inflationary environment.

And if we're in a lower inflationary environment then that actually can start turning to your favor and you can start making up ground whereas in the higher inflationary environment it was working against you? A - Mike Doss Yes, Mark, so I'll take that, I mean, to your point around timing is spot on, obviously what we're trying to do there, I talked about it earlier in the call, in regards to some of the leakage or slippage as you talked about, this is a highly competitive industry, it's been that way, we compete for the business on ongoing basis, as I mentioned we've always got every year some portion of our business that comes up for contractual renewal.

We've been able to navigate those fees and in total over this two year period now we'll drive $190 million of pricing which is significant to those customers.

We're looking at the rules of engagement on all different aspects of our commercial activities down through freight, down through ordered quantities, down through inventory holding requirements to make sure that we're improving our overall pricing position and we're investing at Graphic to put additional resources in that part of our business to make sure that we're being very aggressive along those lines.

So, that's how I think again I would have to think about that and remains as I mentioned in 2019 our commercial activities are a key strategic focus for us.

And to your point, if inflation did abate that would endure to our benefit, but we're not planning on that when you have Steve gave you the guidance there, we gave you the buckets that we took it through there and we expect to see $85 million of inflation this year. Operator Your next question today comes from the line of Edlain Rodriguez of UBS.

Your line is open. Q - Edlain Rodriguez Just one quick point on volume and mix like the revenue side, it's been quite OK, but that hasn't been translated into like positive EBITDA contribution.

Is that something we should expect to improve going forward or is mix going to remain a headwind for you? A - Steve Scherger As you saw we did see a little bit of mix erosion in 2018, as we saw some movement out of some of the big beer brands and some of the mix did was a negative as you kind of get from the earlier conversation on our guide for the year.

We're not assuming a net negative, if you will on mix, our overall volume flat, mix should be relatively neutral and when we look through the mix of business that we believe will come through in the coming year, we don't expect that to be a negative. Operator And that does conclude our time for question and answers today.

I now turn the call back to the presenters. End of Q&A Mike Doss Thank you for joining us on our earnings call. We look forward to speaking with you again in April. Have a great day. Operator This concludes today's conference call. You may now disconnect..