Good morning. My name is Kylie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Company Earnings Call. All lines will be placed on mute to prevent any background noise. Mr. Alex Ovshey, Vice President of Investor Relations. You may begin your conference..

Thanks, Kyle. Good morning. And welcome to Graphic Packaging Holding Company’s Conference Call to discuss our First Quarter 2019 Results. Speaking on the call will be Mike Doss, the company’s President and CEO; and Steve Scherger, Senior Vice President and CFO.

To help you follow along with today’s call, we have provided 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 will turn over to you..

Thank you, Alex. Good morning. And thank you for joining us to discuss our first quarter 2019 results. We are very pleased with our performance in the first quarter reflecting 160-basis-point improvement in our adjusted EBITDA margin to 17.2%.

First quarter adjusted EBITDA of $260 million was ahead of our expectations, driven by strong execution on pricing, performance, growth initiatives and synergies. We reported $29 million of year-over-year improvement in adjusted EBITDA.

Pricing improved by $32 million during the quarter, reflecting the benefits of pricing initiatives executed throughout 2018. Importantly, our pricing to commodity input cost relationship was a positive $16 million. The business operated well in the quarter generating $31 million of performance improvements.

These benefits were partially offset by commodity input cost inflation, specifically increased wood fiber, external paper and freight, as well as labor and benefits inflation and unfavorable foreign exchange. As I mentioned, we generated $32 million of positive pricing during the quarter.

We expect our pricing will continue to remain strong as we move through 2019. We successfully implemented an open market $50 per ton CUK paperboard increase in February. Open market SBS folding carton grade prices declined $20 per ton in February.

We expect the impact of the February 2019 paperboard price changes will be neutral to our 2019 pricing outlook at a modest positive on an annualized basis. We continue to expect positive 2019 pricing of approximately $110 million. In Q1, we repurchased $60 million of shares at values we estimate to be below the intrinsic value of Graphic Packaging.

Over the last two quarters, we have repurchased $180 million of our shares, successfully reducing our share count by a meaningful 5%. Before I discuss the details of the quarter, I would like to briefly discuss our 2019 financial guidance.

We continue to expect 2019 adjusted EBITDA will be in the range of $995 million to $1.015 billion, up compared to $971 million in 2018. While we exceeded our Q1 adjusted EBITDA expectations, we are maintaining our current full year adjusted EBITDA outlook as it is early in 2019 and wood inflation remain stubbornly high.

We expect 2019 cash flow to be approximately $525 million up from our previous outlook of $500 million and compared to $469 million in 2018. The increase in our 2019 cash flow reflects a continued focus on managing our inventory levels. Now let me provide more detail on the key operational trends from the first quarter.

Volume in our global paperboard packaging business was up modestly in the first quarter driven by acquisitions. Encouragingly, we are starting to see the benefits from the shift away from plastics into our customized paperboard solutions. Notably, our European sales were strong in Q1.

Moreover, several new customer wins positioned the business for modest volume growth in the second half of 2019. In Europe, which represents approximately 10% of our total revenue, sales were up mid-single digits in Q1.

The growth is being driven by a continued penetration of multipack beverage in Europe, targeted conversions from corrugated into CUK paperboard, and the continued traction and shifting CPET plastic trays into our paperboard pressed bowl solutions.

We have also begun to migrates our customers from plastic and shrink wrap packaging into paperboard solutions. As we have discussed in the past, we expect our new product development efforts will drive approximately 100 basis points of organic volume growth per annum. Let me highlight one important new product commercialization in the quarter.

We recently commercialized the KeelClip, a new proprietary highly efficient solution, to replace plastic rings and shrink wrap for beverage cans. The KeelClip is displayed on page six of our presentation. The KeelClip is a paperboard wrap that securely connect four, six or eight cans, while also covering the top of the cans.

KeelClip offers excellent merchandising capabilities lining the cans up in a way that allows for maximum visibility of the brand on the retail shelving. Most of you know that we also manufacture the machines over which our paperboard packaging materials run.

We have seen significant interest in this solution from several multi-national beverage customers. Two customers have ordered our machines with sales of the KeelClip expected to commence in Q1 of 2020.

We anticipate significant runway for further growth as we expect plastic replacement opportunities to accelerate in 2020 in Europe and around the globe. Turning to operations, our mills and converting assets ran well during the quarter.

The Augusta SBS mill is benefiting from the extensive rebuild of the recovery boiler and significant upgrade to the mill’s mechanical and electrical systems completed in Q4 2018. The AF&PA reported operating rates of 95% plus for all three paperboard grades in the first quarter. Backlogs remain at a healthy five-plus weeks for CRB and CUK.

As a reminder, our CRB and CUK mill operations are highly integrated with our converting platform consuming approximately 87% of the paperboard we produce for these grades. Our SBS backlogs are currently approximately four weeks.

Shifting to performance, continued emphasis on improvement initiatives, variable cost and operating efficiencies, benefits from capital projects and the execution on synergies drove strong performance in the quarter. We operated well and generated $31 million of net performance in the first quarter.

Moving on to costs, we incurred escalating wood fiber costs and modestly higher external paperboard and freight costs resulting in $17 million of commodity input costs inflation during the quarter. Let me now focus on how we are executing on our strategic vision for integrating the SBS mill and food service converting assets.

Our scale position across the CRB, CUK and SBS paperboard grades allows us to optimize our mill production, and as a result, we are driving meaningful efficiencies for the company.

We are also executing on growth opportunities tied to the positive trends in food service and a shift into our innovative paperboard solutions, specifically the shift away from plastic-based cups, trays and clamshells. The integration of the Letica acquisition remains on track and is highly supportive of these growth initiatives.

And finally, we continue to have a high confidence in our ability to deliver on our acquisition related synergies by the end of year three. And with that, I will turn the call over to Steve Scherger, our Chief Financial Officer.

Steve?.

Thanks, Mike, and good morning. We reported first quarter earnings of $0.19 per diluted share, up compared to $0.10 in the first quarter of 2018. First quarter 2019 net income was negatively impacted by a net $3.8 million of special charges that are detailed in the reconciliation of non-GAAP financial measures table attached to the earnings release.

When adjusting for these charges, adjusted net income for the first quarter was $61.7 million or $0.21 per diluted share. This compares to first quarter 2018 adjusted net income of $58.1 million or $0.19 per diluted share.

Focusing on first quarter net sales, revenue increased 2%, driven primarily by $32 million higher pricing and $17 million of volume related acquisitions. These benefits were partially offset by $20 million of unfavorable foreign exchange.

Turning to first quarter adjusted EBITDA, the $29 million increase to $260 million was driven by $32 million of positive pricing and $31 million of performance.

These benefits were partially offset by $17 million of commodity input cost inflation, primarily wood, $11 million of other inflation, primarily labor and benefits, $4 million of unfavorable foreign exchange and $3 million of unfavorable volume mix. We ended the first quarter 2019 with over $1 billion of global liquidity and $3.1 billion of net debt.

Total net debt increased $229 million during the quarter. In the first quarter, we invested $80 million in capital. We also repurchased $60 million in shares, paid $23 million in dividends and made a $6 million distribution to our GPIP partner.

First quarter pro forma net leverage ratio was 3.13 times adjusted EBITDA compared to 2.98 times at the end of 2018. We remain committed to our long-term net leverage target 2.5 times to 3 times and expect to be well into this range by year end, reflecting our strong cash flow generation. Now turning to 2019 full year guidance.

As Mike referenced we continue to expect our full year adjusted EBITDA will be in a range of $995 million to $1.05 billion. Currently, we are not making any material changes to the key drivers of our full year adjusted EBITDA outlook. We expect second quarter adjusted EBITDA will be in the $250 million to $260 million range.

We expect our third quarter adjusted EBITDA will be modestly below second quarter levels. The key driver of the mild sequential decline from Q2 levels is related to the timing of our annual maintenance outage schedule. Specifically, we have an extended scheduled maintenance outage at our Texarkana, Texas SBS mill in Q3.

In addition to the routine annual work that we will perform at the Texarkana mill, we will replace the bottom tube section of the recovery boiler. We expect this additional work will result in an improve safety and reliability of the boiler. Turning to cash flow.

We now expect cash flow will be approximately $525 million in 2019, up from our previous $500 million outlook. The $25 million increase is driven by our plan to reduce inventory levels.

Finally, we have revised our depreciation and amortization estimate to $450 million from $435 million to reflect a higher depreciation and amortization allocation for the SBS mills and foodservice assets, including the Letica acquisition. The remainder of our guidance is contained on the last page of the presentation on the website.

Thanks for your time this morning and now I will turn the call back to Mike.

Mike?.

Thanks, Steve. We are encouraged by our strong start to the year. We are executing on our strategy of building a highly integrated packaging company that is delivering profitable growth across all three paperboard substrates. We expect to benefit from previously implemented pricing initiatives.

We are also well-positioned to drive benefits from our productivity, growth and synergy initiatives that we anticipate will be in excess of 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 stakeholders in 2019 and beyond. And with that, I will turn the call back to the operator for question..

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

Hi, everyone. Thank you for taking my questions and thanks for all the details. One shorter term question and one longer term question for Mike too.

Mike, you might have mentioned and if you did I apologize in advance, but with the volume growth that you reported, recognizing a lot of that was acquisition, I noticed that the tons shipped were down a couple of percentage points.

If you could talk about what was driving that, if I framed it correctly and what some of the underlying drivers by the end market or what have you were there, and then I will come back with my second question..

Hey, George. Good morning. It’s Steve..

Hi..

Just briefly -- good morning. Briefly on the volume, the volume I am referring to on the supplemental material. Keep in mind too, we have a fair amount of internalization of paperboard that we have been doing as we have internalized paperboard at the beginning of a year ago when we started the international -- with the SBS and foodservice asset.

We have been aggressively internalizing paperboard, which actually kind of impacts that number when you stand back from it.

When you stand back from our core volumes, George, in the first quarter at the converting level, the finished product level volumes excluding acquisitions were fundamentally flat, and as Mike mentioned, we see some positive momentum as we move towards the second half of the year relative to core volume..

So, Steve, just a quick follow on.

You could say yes or no, I mean, so in your key end markets, there is nothing that’s degraded that’s in that 2%, it’s largely the volume internalization, is that fair?.

I think, George, just to put a little final point. I am Steve Scherger. It’s largely the year-over-year integration. The only other thing I’d add and you know this is we have been very aggressive in 2018 on pushing price on all three of the substrates that we use.

And as such, when you push price that hard, you are going to take a few nicks here and there, but it’s all in the numbers that you see the biggest portion of that is really the internalization. We internalize the better part of 140,000 tons, and of course, as you know, we have got to eliminate that..

Understood. Thanks for that color, Mike. My other question and I will turn it over. Certainly, everyone on the phone understandably talks a lot about conversions out of graphic paper into various substrates, whether it’s containerboard or box board and that’s certainly something that Graphic Packaging has to contend with as well.

What are the in your view the things that make you most comfortable about your ability to manage against that potential risk, is it performance improvements that are now seemingly coming to the bottomline from your investment activity the last couple of years, is it you are finding more and more opportunity to really focus on packaging and innovation which kind of obviates somebody who shows up with just paperboard supply.

I know the answer is going to be kind of a combination of all that, but what do you think the key things are and what are we missing in that discussion and thanks for your time..

Yeah. Thanks, George. I appreciate the question. I think the first thing I’d point to and you alluded to this a little bit in your question is, we have got a highly integrated packaging business with 75 converting plants geographically distributed across North America, Europe and other geographies where our customers sit.

And that drives a high level of integration often allows us to really be at the touch point with the end-used customer figuring out what they need to make customized packaging solutions. We identified one in here that’s come up in the last six months, the KeelClip that’s replacing plastic rings, as a great example.

We have that knowledge, we have those relationships that uses our paperboard, of course our SBS we have got the same thing going on, on the foodservice side.

So I think the biggest thing that differentiates us from just an open market seller of paperboard for sure is the fact we view ourselves as a packaging company first and we are kind of driving those relationships and that value back through the end use supply chain in a way that differentiates us..

All right. Thank you..

Yeah. Thank you..

Thanks, George..

Your next question comes from the line of Anthony Pettinari from Citi. Your line is now open..

Good morning..

Hi, Anthony..

One -- hey. The Q1 EBITDA came in, I think, $20 million above guidance and I think you referenced the pricing and better operations and performance improvements as driving that.

And understanding there’s a few moving pieces there, is it possible to parse out how much of that be -- relative to your expectations were from those different buckets?.

Yeah. Anthony, it’s Steve. It’s really two primary drivers. We have really performed and operated very well during the quarter across our mill and converting assets, as Mike was just referencing. The integrated platform operated exceptionally well that’s probably half of the improvement.

And then we had a steady quarter of very little disruption in areas like weather -- which for the last few years we have had some difficulty in Q1, weather related non-controllable, we factor that into some of our thinking, if you will and it didn’t occur. So we had a good clean quarter from an uncontrollable perspective, which is good for us.

The one thing that was a bit disruptive as we have already talked is on the inflation side with wood, with all of the rain, that’s something that is staying up stubbornly high for us on the inflationary front. But overall very strong operations from the quarter and no real major disruptions that’s non-controllable weather related..

Okay. Okay. That’s helpful. And then I was wondering, Mike, maybe if you could talk a little bit about the divergence that we are seeing between SBS folding carton grades and cup stock grade in terms of demand and now prices. Can you talk about your split between the two grades, how easy is it to switch over production from one to the other.

Can you push some customers from CUK, which seems tighter towards SBS, which is maybe a little bit looser, just your kind of general thoughts on SBS and the two grades?.

Sure. Thanks for that. The first thing I’d point out, Anthony, is that we manufacture all three grades. So we are a little bit agnostic with our end-used customers around what grade we are actually making for them.

We want to make packaging for them that is best suited for the needs that they have, be those with the commercial needs or the performance needs of the specifications and how they hold up for them in the marketplace. So I’d start with that. The demand on CRB and CUK, which I think is what you are getting has been very solid.

On SBS, if you take a step back, it’s just the biggest market, it’s 5.4 million tons that are manufactured on SBS and there’s kind of four verticals that it goes into at a really high level and you have got general folding carton, you have got cup and plate, you have got liquid packaging and you have got bristles.

We really don’t play in bristles or liquid packaging. The majority of our effort the 1.2 million tons that we manufacture, our capacity to manufacture really falls into cup and plate and general folding, the splits about little over 400,000 tons of cup and plate and the rest is general folding. Do you know that cup and plate has been very strong.

So that demand has held up very good and we are continuing to see conversion opportunities on a polystyrene foam and into paper, and that will continue to play itself out here through 2019 and 2020 with some of the wins that we have. On the general folding carton, it’s been steady.

There are a few verticals like tobacco that are down and then some others that are up. So, overall, the overall demand of SBS has been okay, but we do have opportunities to convert things from CUK and SBS, and back from SBS into CUK where it make sense for customers.

So, again, really focusing on being a packaging company and giving customers what they need for them to be successful in the market..

Okay. That’s helpful. I will turn it over..

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

Good morning, Mike. Good morning, Steve..

Hi, Mark..

Good morning, Mark..

I wonder Mike if you could talk about some of these new customer wins that will drive volume in the second half and if there’s any way to just help us think about order of magnitude on those wins?.

Yeah. Sure. I mean they continue to be in the categories that we have talked about Mark.

I mean it’s really about in Europe you getting out of -- we identified you that the range the plastic range in some shrink wrap going to fully enclosed and ramps for beverage cartons, substituting on a keypad trays and into press paper board trays continues to be a trend that’s accelerating that we see and then obviously some strength packaging applications where they are -- we are able to ship directly to the unused consumer in a carton as opposed to having that carton go into an over wrap package.

So those are the types of things that we are working on.

In terms of kind of order of magnitude, as you know, you have been following us a long time, Mark, our goal has always been to generate about 100 basis points of year-on-year growth due to our new product development efforts and for the last few years a lot that has kind of gone towards buttressing up our overall demand where to kind of play to a drawer play flat.

So the way I have to think about in the second half of the year is that, that 100 basis points can be accretive. It can be up 1% or so on a run rate basis. This is kind of how we are thinking about it as we sit here at the end of Q1..

And Mark, the only thing to add on the growth front is we have some good cup conversions to happening on the foam and plastic side, and the use of paper-based solutions as well and that’s what gives us good visibility into the second half of the year..

Yeah. I guess, just as my follow-up, Steve, I will go on that one. I picked up a cup of coffee and a donut this morning, and donut was in that, the coffee was in a paper cup.

Can you talk about sort of how much volume you think you will pick up year-over-year in the cup business this year and also where you are at in terms of moving toward a polyethylene-free paper cup?.

Yeah. And both of those, first, appreciate your support with the paper cup, Mark, always appreciate it.

I think the other part of that is, if you think on a year-over-year basis, our volume really starts to come on that Steve alluded to in the second half of this year sort of we split a little bit between the second half of this year and into next year, obviously, there’s more opportunities that we are working on.

But we can see that 25,000, 30,000 tons of SBS that come our way over the next year or so. So it’s meaningful for us.

And in terms of the replacement for low density polyethylene that’s a very active set of projects for us with a very distinct set of market requirements that we are working through with our R&D folks and with outside suppliers who manufacture those coatings and our customers, because there are certain requirements that some have and they are different than others.

But over the next 12 months to 24 months we feel very confident we can continue to make progress to find coatings that are more composed to loan recycle approval than the current offering..

Okay. Very good. I will turn it over..

Thank you..

Thanks Mark..

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

Thanks. Mike. Just two questions, first, how far along are you in internalizing the Board on the polystyrene foam side.

And can you give us a sense of how different the synergies you still have ahead of you are versus what you have already picked up so far?.

Yeah. Thanks Mark. I would tell you that as of the end of really this quarter, we are all in on our conversions, they are complete the ones that we plan to do, so those cycle through and second and third and fourth quarter on a comp basis there. We were actually able to do that faster than what we had planned.

So that I will start with that as being kind of an upside relative to what that looks like. We have done very well against the SG&A targets that we put out there for sure.

Some of the targets on the procurement side we have gotten what we thought we would get but then we got some inflation in some other areas like hardwood, so it’s a little bit more of a mixed bag, but we have got a lot of confidence in our ability to deliver the full $75 million that we committed to by the end of the year three and we will make meaningful progress on that here in 2019.

I think you can kind of see the firepower we have when we are able to run all our mills wide open as we did here in Q1, as Steve alluded to, with some of the actions that we talked about last year really showing up here from productivity standpoint in Q1..

And Mark, specifically we are operating at about 40% integration level across the SBS platform since we moved through with the integration, so from 25% to 40%, on our way to the longer term goal of 70% to 80%. So we are at 40% run rate today..

Okay. That’s helpful. And just one last question, you have talked about looking at tuck-in M&A against the value of buying back your stock.

Has your view of the economics available in one versus the other changed much in the last quarter or two quarter, I am just curious if the market for asset is changing?.

Thank you for that question. I mean as we talked about at the end of the last quarterly call valuations remained in our opinion high and as a result of that when we compare those against buying our own stock, I think, our actions kind of spoke for ourselves in terms of what we did there.

Having said that our pipeline for acquisitions in both North America and in Europe remain strong, we remain active there, but we are going to be very thoughtful in terms of the valuations that we pay to ensure that we create value as we worked really hard to drive our integration levels up on SBS..

Super. Thank you..

Thank you..

Thanks, Mark..

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

Hi. Yes. And good morning, Mike and Steve..

Hi, Chip..

Hi. Yes.

My first question is, it deals with the performance savings, which seemed quite strong at $31 million in the first quarter and can you just help us understand how we should think about that for the full year and how that splits up between the synergies from the SBS acquisition and just other initiatives?.

Yeah. Chip, it’s Steve. We added a new slide to page 12 of the materials to try to provide some insight into kind of our couple of metrics, one of them being mill maintenance schedule.

And what we are going to find this year is the majority of our productivity will occur in the first half of this year, because our -- we have much more limited down time, very modest in Q1, a little bit more in Q2.

But as I mentioned in the remarks, we have a pretty significant amount of downtime particularly focused at Texarkana that will be in Q3 and so we will have a bit of a step down in terms of our EBITDA down from Q2 to Q3 driven by the additional maintenance downtime, Q4 will be somewhat consistent year-over-year.

As such the majority of our productivity will be driving in the first half of the year, because we have got about a $20 million headwind in Q3 associated with the incremental downtime in Texarkana.

In that context the -- that’s in the context of the $85 million of productivity that combination of $60 million of core and $25 million of additional synergies..

Okay. So you are saying $85 million all in.

And then when you are done with the $25 million this year how many more -- how much will be left on synergies would you say from the acquisition of SBS?.

Yeah. We -- that would be with $35 million last year and $25 million. So we will be at $60 million, there will be a little bit left in 2020 about another $15 million..

Oh! Okay. And there’s been mixed, I guess, signals in terms of what some of us have seen and when we look at paperboard in general, it seems like the market you mentioned the 95% operating rate and the market has shown some strength certainly in the lower two substrates.

But in the highest substrate, we have seen some mix picture and was it fair to say most of the competitive activity is more domestic versus export.

And in other words, if you were to split it between a new domestic player versus export competition, would you say it’s more of a domestic source of where there might be a bit more competition there than or competitive pressure, I have to use that term than what we have seen in some of the other grades?.

Yeah. I will take that one, Chip. Here’s what I would tell you just by a few data points that might be helpful to put a finer point on that. The -- as we look at imports in 2018 for FBB, as Alex monitors that for us every month. The census data would suggest that imports were a modest 20,000 tons in 2018. So it was fairly small relatively speaking.

We do have a new competitor that has converted a coated free sheet machine as you are alluding to and they are entering the market. And we know what you know relative to that, they publicly said it’s going to be a swing machine and they are going to swing back and forth between SBS and coated freesheet.

So we will have to kind of track that as that goes along.

I think the thing I would suggest though, because we have gotten a few questions in on this, as well as operating rates for SBS have been up actually year-to-date around 100% and people look at that say well, what’s going on? We have two competitors that have publicly talked about the fact that they have got big outages in Q2 of this year.

Steve just got done talking about that we have got a very big outage in Q3. And so what ends up happening, we have to run and build the inventory in order to make through those outages in order to service customers during that period of time. And so I think it can create some misinterpretation or some mysteries of monthly production data.

You really got to look at it you know even through a quarter or even better through a six month period of time because in order to take care of customers you really end up having to operate your business in a run mode, when you are actually producing and obviously you have some big outages in then that you release some of that inventory side.

That’s how I would really ask you to think about that..

Okay. I will. Thank you. That’s very helpful..

Thanks, Chip..

Next to your next question comes from the line of the Ghansham Panjabi from Baird. Your line is now open..

Hi. Good morning. This is actually Matt Krueger sitting in for Ghansham..

Hi, Matt..

I just wanted that touch base on volumes for my first question, so given the strong performance in Europe during the quarter up mid-single digits.

Can you talk about some of the related offsets elsewhere across the portfolio by region or maybe by product line that yielded the flat overall organic volume performance during the first quarter?.

Well, I think, Matt, the first thing to remember is that Europe is about 10% of our volume. So it’s a pretty small portion of our overall revenue basis.

And then, as Steve alluded to, the real reason if you kind of look at that is kind of the elimination of the internalization of the SBS tons are converting volumes in North America were essentially flat..

Okay..

I think we have seen that -- and at the market level what we have chided about before is some of the challenge is the Mcbeer, the big beer we continue to see some modest erosion there on a year-over-year basis that kind of brought the total to flat.

So somewhat consistent with what we would articulated before in terms of small areas where there’s been some erosion yielding more flat converting volume for the quarter..

That’s helpful. And then understanding that we talked a little bit about what costs already and then the extended downtime in the third quarter.

Can you provide some added detail on why we are reiterating the full year guidance versus the free cash flow kind of guide upwards? Are there any other kind of conservative assumptions baked into guidance what are you expecting from overall rise versus just paper, any puts and takes like that would be very helpful?.

Well, so, again, if you kind of take a step back, we are one quarter into a four quarter game, if you think about 2019. So we will start with that.

And wood cost remain stubbornly high, and yes, it’s getting warmer outside, the day is getting longer, but in some of our baskets like, if you think at Texarkana and Monroe the end of last week they got another 4 inches of rain that fell in there.

And so it’s going to take a while for those to completely dry out and our wood cost to kind of go back to where they were. Oil touched $70 a barrel here earlier this week. So there’s a lot of variability that still goes in here. Steve’s talked about this on our last call.

I mean we have got true line of sight to $60 million to $65 million of year-over-year inflation and given that we are one quarter in that seems to be a very prudent guide in terms of how that goes and I wouldn’t look at it as conservative..

Okay. That’s fair..

Yeah. Mike too. And to Mike’s point and the movement on cash flow was entirely inventory driven that is us taking a view that we can’t take some inventory out of the system by year end and so no EBITDA implications, no change to the metrics in our guide. The improvement in cash flow was inventory driven..

That’s fair. That’s very helpful. That makes a lot of sense. Thank you..

Thank you..

Your next question coming from the line of Brian Maguire from Goldman Sachs. Your line is now open..

Hi. Good morning, guys..

Hey, Brian..

Hi, Brian..

Just a quick question back to the sustainability and plastic substitution and kind of conversation, the KeelClip looks like a pretty cool solution there and it looks like that picture is pretty much a 100% recyclable from what I can tell looking at it which is obviously a pretty cool innovation.

But as I understand it most, in most every application or case the paper based packaging is going to be more expensive than the plastic that it’s trying to replace. Just wanted to know like how are those conversations with people going obviously I think everyone sustainability is on everybody’s mind.

But is it a trade-off in terms of cost for that performance.

Since you are having those conversations, should we think about these products coming in as a little bit of a lower price point than your average for the company and are there kind of maybe something like introductory lower prices that might be necessary to help kind of spur the penetration here or just in general kind of how are you kind of overcoming that cost difference between paper and plastic in these applications?.

So -- thanks Brian for the commentary on KeelClip. I appreciate that. I think the -- if you kind of think about what’s happening in the retail space and with the big CPGs, they are coming out with some pretty significant goals that they are putting out there and targets around sustainability and recyclability of their products.

And what that’s really being driven by is the end-use consumer who’s kind of pushing and prodding them to make sure that the stuff that they are purchasing fits what their beliefs are relative to sustainability. Papers got a great story to tell in that regard.

It doesn’t work for everything but it works for a lot of things including some of them we are talking about here and you have summarized it well. Paper is always -- the paperboard is always going to be more expensive than the shrink wrap or plastic rings. But the sustainability story is better.

And so what we have got is a positive end-use consumer pull through that’s actually creating some of that demand in that interest, which gives us a platform then to really show our end-use customers what we can do and how we can put together our innovative solutions to help them accomplish their objectives.

And so, yeah, I won’t characterize that those are going in at lower prices than the rest of our materials, because in many cases, they are proprietary and we have machinery solutions that go behind them in the case of KeelClip and so we are trying to obviously get a good return on capital invested on those like the rest of our portfolio..

Okay. Yeah. It makes sense. Just to switch gears to sort of the input cost, yeah, we have seen a lot of them sort of deflate a little bit and the level of inflation at least that we saw last year seems to be moderating. I am thinking about OCC freight pops up, things like that.

Is there a way for you to kind of update us on what sort of embedded in the guidance at this point for a couple of those factors.

I think freight you had talked about that been up kind of 5% or 6% before and pulp up and OCC being kind of flat with where they were a couple of months ago, but we know those were lower now, just kind of update us on what you are expecting for those items?.

Yeah. Brian, it’s Steve, I would be glad to. Our assumption overall, as Mike mentioned, is still the $85 million of overall inflation for the year, line of sight to about $65 million of that at current rates, if you will, and the secondary fiber at the latest rates would actually be a tailwind of $10 million.

But wood overall, hard and soft wood, right now this is operating at a rate that would be $35 million plus for the year. So those both combined end up in that $20 million, $25 million range that we have talked.

Logistics costs are coming in a little better than we articulated, it’s been $15 million to $20 million range and then external paper that we buy is absolutely where we expected it to be.

Some of the variability as you referenced is in the chemicals and energy area, obviously, oil moving pretty aggressively here quite recently hasn’t played out in inflation but has potential. Hence why we believe sitting here after Q1 that $85 million is still the right the right guide..

Okay. Make sense. I will turn it over. Thanks..

Thank you..

Your next question comes from the line of Debbie Jones from Deutsche. Your line is now open..

Hi. Thanks. Good morning..

Hi, Debbi..

Good morning, Debbie..

My first question, I wanted to ask about European M&A and whether or not you see any kind of subtle or big changes in that market, whether it would be valuation or assets available for sale and kind of your thoughts on the strategy there?.

Hey, Debbie. I really wouldn’t characterize there is any change. I mean it like all regions evaluations needed to adjust as I alluded to earlier, and obviously, that’s in the process of occurring.

But our pipeline remains very solid, we remain in active dialogue with the number of potential OEM prospects, and obviously, as we did this last quarter those competed against buying our own stock back and you saw what we did.

But that doesn’t mean that we are not committed to it, it just becomes a timing and an allocation decision, and as we continue to find evaluations that we find attractive and synergies that are real, we want to do those particularly in the area that allows us to drive our SBS integration level up..

Okay.

And thanks for the clarity on the level of maintenance and my question on that there was, I don’t have a history of days per quarter that you have done historically, but it just seemed a little surprising that you had so much in Q3 and perhaps one to see if there is any way that change there? And then just if there is any way you can give kind of like the specific financial impact just in Q3 that you are expecting versus the prior year?.

Yeah, I will handle the days and I will have Steve kind of take you through the economics. Really what we are doing this year that is a change, we have always done our make an outage which is between, call it, approximately 10 days on both our machines there in Q3. This year we are doing both of our machines in Texarkana in Q3.

As Steve talked about in his prepared comments, we are doing also some in addition to the annual maintenance we are doing some the extensive work on the recovery boiler. Certainly, not the extent that we did at Augusta last year, but meaningful in terms of what its impact will be in Q3 in terms of days down.

And then what I think you can expect of both Augusta and Texarkana going forward here in 2020 and beyond is amore normalization of what you would see in your annual outages to be having completed the big work that we want to do on our recovery boilers at both those mills.

So it just manifests itself in Q3 this year, because of that Texarkana additional time, but again we always have a fairly significant amount of time there because making is always in Q3..

Debbie as we mentioned earlier the cumulative impact kind of Q2 to Q3 of that is about $20 million..

Okay. Thanks and congratulations on a strong quarter. I will check over..

Thank you, Debbie..

Thank you, Debbie..

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

Mike and Steve, good morning..

Good morning, Adam..

Good morning, Adam..

Steve just one on the guidance, your 2Q guidance implies about a $5 million sequential decline in EBITDA, obviously, normally 1Q to 2Q you are up call it $10 million, $15 million, is that delta entirely because of the 16 days of additional maintenance sequentially or are there any other factors at work there?.

Yeah. The sequential as you said it well Adam. You can in our materials we are up about 16 days quarter one to quarter two so that plays a role. We had very limited downtime in Q1.

And overall, I think, we are going to see inflation be at least at or even slightly higher than where we saw it Q1 as we look through the realities of kind of wood not abating it’s actually potentially up even a little bit.

So a little bit of a combination of inflation at or above where we were in Q1 and then the additional downtime Q1 to Q2, so that would be correct..

Thanks, Steve.

And just on your core volume outlook just given the plastic substitution that you are talking about, do you expect an inflection in your core volume trends come next year or compared to the flattish that they have been over the past few quarters and in few years for that matter or do you think you will stay in that flattish range even with this plastic substitution benefit?.

Yeah. It’s a it is a very good question, Adam, and I think, as I alluded to, I think, it was Chip who asked the question on that or maybe it was Mark.

The way we are asking you to think about that right now is our new product development that 100 basis points growth that we have consistently delivered for many years, we should be able to be accretive and sort of feel like it’s up 1% with core volume basically being flat. That’s how we are looking at it right now.

We will have a couple more data points this year. So we will be able to maybe put a finer point on that, but as we sit here today that that would be how we would guide..

Thanks a lot Mike..

You bet..

Thanks Adam..

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

Thank you, and good morning, everyone..

Hi Steve..

So, yeah, I just wanted to stay on the sustainability theme as well, if I could.

I just want to know how far ahead of North America is Europe when it comes to the shift from plastic packaging to paperboard?.

I guess, Steve, what I would how I would answer that is, we historically see Europe as a bit of a harbinger for trends on packaging and that’s usually in the neighborhood of 12 months to 18 months before we see some of those trends would translate here in North America. It’s not perfect, but it tends to be a pretty good rule of thumb.

So that’s, that’s why we kind of profiled the slide on Europe here to kind of show you some of the early reads and some of the things that we are seeing start to develop over there and we will see how that plays out into North America. But we got interest in similar technology here. So we will continue to keep you updated as the year grinds on..

Okay. And as my follow on, some of your competitors in foodservice and I am kind of using a broad brush suggest that they make the world a better place by reducing spoilage.

So I am just wondering, do you guys have solutions that help food stay fresh longer?.

As I mentioned in previous answer, we are not suggesting that paperboard is for every packaging solution. It’s got specific opportunities on things like the stuff that I profiled. Getting out of the rings, that aren’t really related to trying to protect food or a shrink wrap film, those types of things.

Plastic plays a vital role as they are saying in terms of the protection of material and we are certainly not trying to suggest otherwise. But there is an opportunity for us to expand the pie in terms of the addressable market for our products and what we are trying to do is to make that pie as big as possible and grab the biggest share that we can..

Yeah. As a reformed beer drinker, I’d say that KeelClip looks really cool, because there’s got to be some hygiene in the actual marketing element as well. Thank you..

And it is, Steve, you look at it from a merchandising point of view, it gives you a nice placard on the top. We have got optical liners on those cans so that every one of the brands is perfectly positioned. So you think about the end of aisle display or even on the shelf, there’s some pretty neat things you can do with.

Our team has done a nice job on that. We are pretty excited about the prospects..

Great. Thank you..

You bet..

Your next question comes from the line of Dan Rizzo from Jefferies. Your line is now open..

Hey, guys.

How are you?.

Good, Dan..

Good, Dan..

To continue on the last topic list, would a less stringent, I guess, regulatory environment in the U.S.

kind of delay the switch from plastic to paper or customers kind of already moving in that direction regardless of, I don’t know, just again the regulatory environment here?.

I wouldn’t say that is the actual regulation is having an impact on it materially that I can see. It’s really all about the unused consumer pulling it through, Dan. I mean, we have been able to recycle materials since I started in the business 30 years ago.

But it’s the last 18 months where that really seems to be of great importance to the end-user consumer, which in turn has been impacting you know the retailers and CPG’s in terms of some of the objectives that they are setting out there. So I think it’s really more around consumer demand than anything else..

Okay.

And then just one quick unrelated question, could you just remind us when IP can redeem their joint venture interest?.

Yeah, Dan, it’s Steve.

Just for reminder, our partnership with International Paper, their first opportunity where they have a put, as we have discussed their first opportunity to begin to exit from the partnership is in January of 2020 and contractually the actual contractual relationship is a metered exit of $250 million of share equivalents every six months.

And so kind of the metered approach would be roughly $500 million of share equivalents, which would take two years to three years for a natural exit beginning as early as January of 2020..

Thank you very much..

Thanks, Dan..

Your next question comes from the line of Mark Weintraub from Seaport Global. Your line is now open..

Thank you. One question, I hear a lot that foodservice business being in better shape than the folding carton side of things for SBS. Just be interested in your color on that and as to if that continues to be the case is there the potential to get pricing in one part of the business i.e.

first foodservice at a different rate, let’s say, then folding carton, or is there too much crossover and production capabilities, et cetera, for that to really happen?.

Yeah. Thanks, Mark. I will take a shot at that. This is Mike. There is real strength on the foodservice side of the business. We have talked a little bit about that. As I mentioned, we make over 400,000 tons that go specifically into that market.

And if you kind of look at what’s happened to pricing on cup and plate versus general folding, in fact in February, general folding went down 20 and your cup and plate did not. And so there is a differentiation in terms of what’s occurring there on those grades of paperboard.

And I would expect that as those as demand for that grade continues to be solid, we could expect that that would continue to be the case. So that’s it -- and in fact what we are actually seeing in the marketplace..

And I don’t think that historically we have ever seen a situation where there has been an increase just say in foodservice and not the complete category.

I mean, is that -- personal is that accurate and is that necessarily the way it has to be or is it or not necessarily?.

It’s accurate relative to our experience since we have owned the assets. I would have to go back and do some work to answer your question completely and what we can do that now, it’s a follow up I just don’t know as I sit here today..

Okay. Thank you. And then one quick one, KeelClip does look like a great product.

And curious have you been able to scale what the addressable market for something like a KeelClip could be in terms of tons, if it were to rollout very successfully?.

Yeah. We were actually having a little discussion on that this week and I mean you think there’s a lot of plastic rings out there right, obviously, it’s not going to replace everything. There’s going to be you know different solutions that are out there.

But it could be meaningful, it could be 25,000 tons to 50,000 tons over time depending on the application and a quite few machines that we manufacture as well, because it’s our machine and our packaging material that has --it’s a kind of a two part equation that goes together for our customers..

Super. Thank you..

Thank you..

Your next question comes from the line of Edlain Rodriguez from UBS. Your line is now open..

Hi. This is Sati [ph] on for Edlain.

How are you?.

Great.

How are you?.

Doing well.

I am just wondering on slide 10, is it possible to parse out how much let-to-go was in -- is it on the volume bucket or the performance bucket on this one?.

The core economics for Letica were in the volume mix, so that the acquired EBITDA was in volume mix. The synergies that we would capture from internalizing or improving upon that business would be in performance..

Okay. Thank you. And then, how much is remaining on the authorized share repurchase program..

Well, we have the $500 million that we gained approval for plus the $30 million, so we have got $500 million plus, because we are still working through the prior approval. So we are just think of it in the $0.5 billion range..

Okay. Thank you..

Okay..

Your next question comes from the line of George Staphos with Bank of America. Your line is now open..

Hi, guys. Thanks for taking the follow on, I will make it quick. With the progress that you are seeing in Europe, I think, it’s relatively small in terms of your overall revenue.

Are you seeing any kind of competitive response to you either from your paperboard peers in Europe or maybe the plastic companies in Europe, because you are now losing some share may be coming a little bit more competitive on pricing or anything else relative to their offerings? And then secondly, on Texarkana, you obviously you have spent a little more time or spent some time talking about what you are doing there in terms of recovery boiler.

When Texarkana comes back, will it be able to do additional things or run differently than what you have been seeing today or is it just for the next few years you won’t have a big recovery boiler outage there? Thank you guys and good luck on the quarter..

Thanks, George. I can handle those. I think, in Europe, with packaging in general has always been a very competitive marketplace and we don’t expect that to change. So we compete with other paperboard people. We compete with other plastic packaging people for the ability and the right to service customers and that’s not going to change.

What we have to do is come up with innovation, like the one we are profiling here that’s unique and different and differentiates ourselves and when we do that we tend to be rewarded by giving the nod versus someone else.

We have a little bit of a tailwind for us right now, George, relative to the preference on sustainability for paperboard, so that’s helping us, but we still got to earn it and we are really focused on doing that. And you expect that we will continue to make progress here as we have alluded to over the course of 2019 and into 2020.

In regards to Texarkana, the big thing we are doing there is driving our reliability up as we talked about when we did the Augusta outage. There were just investments that needed to be made in these two mills. We knew it when we did the diligence on it. We are making them.

As I have talked about in the past, the recovery boiler tends to be the heart of the mill and you want to have reliability that’s consistent and very capable, and at the end of this, we are going to wind up with a mill that’s got incredibly high reliability as we are seeing here in Augusta and also it doesn’t really require significant maintenance back into the recovery boiler for the next decade or so.

So we are very excited about that..

Thank you very much..

Thanks, George..

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

Yeah. I have got just a couple of quick follow ups.

One, I wondered, Steve, if you could just update us on the tax status of the tax shield for cadence to burn off? And then, secondly, on the lockup expiring on IP, can you give us some sense of whether you or we may know before year end what IP is intentive?.

Mark, it’s Steve, I will touch on it and then Mike can add. We are still -- we don’t believe we will be a material U.S. cash tax payer until 2021. So think of us as being limited modest in kind of $35 million to $50 million range for 2019 and 2020.

And of course, we don’t have a point of view with regards to when IP will bring forward their perspective relative to the exit..

So there’s no kind of point at which they have to let you know like three months, six months ahead of time what they might do?.

No. They have got the ability to kind of inform us with the put here at the end of the year, that’s their desire and obviously we will continue to have dialogue with them at a periodic basis. But they really want us to focus on the same thing, all our stakeholders do.

They are making good investments back in the business, trying to drive our integration levels up, and obviously, create shareholder value. So that’s what we are focused on. When they do -- if and when they do decide, as you have seen, Mark, we have got the balance sheet in good spot.

In between now and then, if there’s a dislocation in the stock, we will continue to execute on specific buybacks, if it makes sense for us to do it relative to our other capital allocation priorities. So that’s how we are thinking about it..

All right. Well, fair enough. They and you want to be pretty happy today..

Thank you, Mark..

There are no question at this time, please continue..

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

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