Ladies and gentlemen, thank you for standing by. And welcome to the Graphic Packaging First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today’s call is being recorded. After today’s presentation, there will be a question-and-answer session.

[Operator Instructions]I would now like to hand the conference over to your speaker today. Melanie Skijus, Vice President of Investor Relations. Please go ahead..

… first quarter 2020 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 on the Investors section of our website at www.graphicpkg.com.

We will refer to certain pages of the presentation during our comments this morning.I would like to remind everyone that statements of our expectations, plans, estimates and beliefs regarding future performance and events constitute forward-looking statements.

Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company’s present expectations.Information regarding these risks and uncertainties is contained in the company’s periodic filings with the Securities and Exchange Commission.

Undue reliance should not be placed on forward-looking statements as such statements speak only as of the date on which they are made and the company undertakes no obligation to update such statements except as required by law.Mike, I will turn it over to you..

Thank you, Melanie. Good morning. And thank you for joining us to discuss our first quarter 2020 results. I’d like to start off the call by offering our heartfelt condolences to all who have been affected by the COVID-19 crisis.

I would also like to recognize our brave and talented healthcare workers and first-responders who are taking care of our employees, friends and neighbors impacted by the COVID-19 virus.At Graphic Packaging we are doing everything in our power to take care of our employees and partners, while ensuring supply chain continuity to essential food, beverage and food service markets.

Our teams have been focused on safely delivering for our customers and ultimately consumers during these unprecedented times.

We are proud to be in essential business and of the integral role we play with global consumer staple companies in providing food and beverage packaging products required to be on the store shelves every day.Our teams have been working together safely and effectively to-date.

We formed a Pandemic Committee at the onset of the crisis to develop and implement safety protocols.

The committee meets daily to review the well-being of our workforce, developing community global safety protocols and ensure that the company is fully supporting our employees.Actions have been taken to maintain continuity across our paperboard mills and converting facilities globally.

We have [Technical Difficulty] The concerted efforts of frontline production employees in our manufacturing operations is critical to our ongoing success.In early May we will be providing our frontline production employees, including the global hourly workforce and frontline production leaders with one-time payments of approximately $300 per employee to acknowledge their key contribution to our performance.

This is the $5 million investment in our people reflecting our sincere appreciation for the critical role they are playing during this time of need.We are also making $5,000 contributions to food banks located in every community in which we have manufacturing operations to support local needs consistent with our philanthropic pillar of putting food on the table.We remain hopeful that we will see an abatement of the current crisis and a return to more normalized business environment soon, but in the interim we will continue to actively manage the current environment with our employees and consumers in mind.Turning now to our quarterly materials on slide five, let me walk through some of the summary points for the quarter.

We saw strong net organic volume growth pre-crisis and a net modest acceleration in volume growth after the pandemic began.We surpassed our net organic volume growth goal of 100 basis points to 200 basis points delivering 500 basis points of volume growth in the quarter, excluding the positive impact of leap year.Also excluding the modest net acceleration in volume post-crisis, net organic volume growth was 400 basis points in the first quarter, driven by customer growth initiatives in new product development.As a point of reference, we began to see the increase in demand for food and beverage packaging in March that was partially offset by a reduction in demand for some food service applications.

The positive net impact in the quarter was roughly 100 basis points or approximately $15 million of revenue in the quarter.We operated well throughout the quarter across our mill and converting facilities generating productivity of over $19 million, while meeting increased volume demand, backlogs for all three substrates are solid at five plus weeks for CUK, four weeks for CRB and three weeks to four weeks for SBS.Our global paperboard integration rate grew to 69% during the quarter, operating rates of both CRB and SBS as reported by the AFPA improved sequentially in Q1 to 98% and 95%, respectively.

Our estimated operating rate for CUK continues to be very strong at 95%-plus.As a producer of all three paperboard substrates, we are well-positioned to move products among the end-use applications to meet the changing volume requirements by market.

Our teams successfully utilized all three substrates to meet increased volume requirements for CRB and CUK in the quarter, a phenomenon that continues to play out nicely in the second quarter.You can see on slide [Technical Difficulty] across the consumer staples markets.

In 2019 food, beverage and other consumer packaging comprise 77% of company revenue, while the foodservice market made up the remaining 23%.

Currently increased demand for food and beverage and consumer markets is offsetting the declines we are experiencing in the foodservice markets.In early March driven by an increased near-term demand for CUK and contractor work related implications associated with COVID-19, we made the decision to delay the significant planned maintenance outage in our West Monroe mill from Q2 to Q3.

You can see an updated outage cost impact schedule including the West Monroe change and slide 15 of the earnings materials.We will continue to focus on meeting the needs of our customers during these unprecedented times, while also being proactive in accelerating strategic actions that will position us our -- position our business for long-term growth consistent with our Vision 2025.Today we are announcing the closure of our only containerboard mission PM1 in West Monroe, Louisiana.

The closure reflects our long-term confidence in the strength of our CUK global beverage packaging platform. The action is similar to the move we made back in 2015, where we repurposed existing pulp from a paper machine closure to grow CUK volume.

We are well positioned to do this yet again.The short-term financial implications are modest at under $4 million in 2020 due to the current pricing environment for containerboard in our perspective on pending capacity additions in the containerboard market.We have also made the decision to close our White Pigeon, Michigan CRB mill effective June 30th.

Our overall CRB network is operating very well in a steady demand environment and we have entered into a new supply agreement with right to acquire approximately 90,000 tons of CRB per year. The agreement provides flexibility to acquire a 20% more volume per year if needed.

The Greif Mills are well-located to serve portions of our current and recently acquired portfolio of converting operations.Of note, over half of the annual tons we are committed to purchase as part of the supply agreement will be completed over the next 29 months.

As you are aware, we are strengthening our leading position in the CRB market with investment in a new CRB paper machine in Kalamazoo, Michigan.We have significant optionality across our CRB Kalamazoo CRB mill to effectively match our integrated supply of wood demand over the coming years, including utilization of our K3 paper machine.Given consumer demand uncertainty as we emerge from the current crisis, you can rest assured we will take the actions necessary to fully match supply with demand.

We will be aggressive in driving working capital improvements and we will assess the timing of certain capital investments.

All efforts are to ensure cash flow generation is robust and the balance sheet remains strong without significantly impacting our long-term commitments.Moving to a discussion of capital allocation and stakeholder return on slide seven.

You see a summary of two strategic tuck under acquisitions, we have completed year-to-date and integration of the folding carton facilities and onboarding of the new employees are well underway.

The transactions expand our consume base and will drive integration rates meaningfully higher overtime.While acquisitions will remain an active part of our long-term balance approach to capital allocation, it is unlikely we will engage an additional acquisitions during the remainder of the second quarter.In the context of actively managing our strong balance sheet, we will continue to adhere to our fundamental approach through repurchasing shares and we believe the intrinsic value of the company is materially higher than the current share price.Finally, because we are in a very solid financial position, I am pleased our Board of Directors has reviewed the existing dividend policy and remains committed to the current return of capital to our stakeholders via dividends and distributions.Steve will provide an update on our financial performance shortly, but I would like to emphasize we are positioning the business for continued growth in 2021 and beyond consistent with our vision 2025 and we remain committed to that vision.

We will execute on the actions shared with you today while continuing our longstanding focus on productivity and cost containment.Steve, I will hand the call over to you now for more detailed discussion of our financial results..

Thanks, Mike, and good morning.

I would like to reiterate my comments to all those impacted by the COVID-19 crisis and expressing deep gratitude to our employees on the frontline for dedication during these challenging times.Turning to slide eight for a review of the financials, net sales in the first quarter increased 6% from the prior year to $1.6 billion, driven primarily by net organic volume growth of 400 basis points, excluding the positive impact of both leap year and the COVID-19 crisis.

This growth reflects the strong conversion trend we experienced in the first quarter to our paperboard packaging solutions.Reported earnings for the quarter were a loss of $0.04 per diluted share, compared to $0.19 in the first quarter of 2019.

First quarter 2020 net income was negatively impacted by a net $104 million of special charges, including the net $90 million non-cash charge related to the settlement of our largest U.S.

pension plan.We are adjusting for charges, adjusted net income for the first quarter was $91.2 million or $0.31 per diluted share, an increase of 48%, compared to $0.21 per diluted share in the first quarter of 2019.Turning to slide 10 focused on our EBITDA waterfall, first quarter 2020 adjusted EBITDA of $294.8 million was up $35.1 million or 13.5% from first quarter 2019.

EBITDA margin expanded 110 basis points to 18.4% for the quarter, compared to 17.3% last year.Adjusted EBITDA was positively impacted by $14.1 million of higher pricing, $16.9 million in commodity input cost deflation, $7.6 million in favorable volume and $19.2 million in improved operating performance.

These benefits were partially offset by $14.1 million and other inflation primarily labor and benefits, and $8.6 million in unfavorable foreign exchange.Turning to a discussion on commodity input cost. As I mentioned, results were favorably impacted by deflation across most commodity input cost categories.

There have, however, been several increases in secondary fiber raw material input cost over the past four months. As a result, we announced a $50 per ton price increase for CRB effective May 7th.Turning to a discussion on liquidity and our balance sheet, we ended the first quarter with substantial global liquidity for approximately $1.5 billion.

We further strengthened our balance sheet in the quarter with an all-time $450 million senior notes offering at an attractive 3.5% interest rate. Our debt profile is sound, we do not have any financial covenant issues nor do we require any modifications.As you can see on slide 11, we do not have any debt maturity or mature royalty in 2020.

Our senior secured credit facility does not mature until 2023. We ended the quarter with $3.4 billion of net debt. Total net debt increased $672 million during the quarter.

Net leverage 3.2 times at the end of the first quarter, compared to 3.1 times at the end of the first quarter 2019, we remain committed to our targeted 2.5 to 3 times range.Turning to slide 12 and the return of capital to stakeholders, given the dislocation in the stock price relative to our view of long-term intrinsic value of the company, we repurchased $119 million of common shares during the quarter at an average price of $12.90 per share.

We continued our repurchase activity in the second quarter and have accumulated a total of $150 million of common shares year-to-date at an average price of $12.80 per share.In total, we returned $396 million during the first quarter in share repurchases, dividends, distributions and partnership redemptions, including the initial $250 million partnership redemption to International Paper completed in January.Moving to a discussion of the current business environment and our outlook, we are currently operating at net neutral organic volume for the core business, with core food, beverage and consumer volume up and foodservice volume down.

Volume from recently acquired businesses is meeting expectations year-over-year.In addition, our teams continue to operate well with pockets of minor productivity challenges related to the crisis being well managed.

This too would indicate that our business is capable of performing well during economic downturns.At current volume levels, commodity input cost and operating run rates, our 2020 financial performance would fall within the adjusted EBITDA and cash flow ranges we have provided in January.Unfortunately, the depth and timing of this economic downturn is difficult to predict until more is known of our consumer behavior and spending patterns will evolve post the crisis, along with the timing of when overall economic activity will revert back to more normalized levels.Our customers share in the uncertainty associated with this health driven crisis and global recession, with the majority of them withdrawing financial guidance.

For these reasons, we have decided to suspend financial guidance until we have greater visibility into consumer behavior and spending patterns.The suspension will provide us time to observe shift in consumer behavior and spending pattern, and more clearly understand customer volume needs by market.

In addition, it will allow us time to value the positive impact, our aggressive strategic actions have on our financials and access any timing modifications to organic volume growth projects scheduled for implementation this year.On slide 14 you will find the adjusted EBITDA and cash flow components that we do have a viewpoint on today.

As discussed, we are actively pulling levers to drive strong cash flow generation. This has reflected in our updated working capital and capital spending expectations.We expect working capital will be a source of cash in 2020 and anticipate coming in at the low end of our previous capital expenditure range of $600 million to $625 million.

In addition, our interest expense guidance has been reduced by $20 million at the midpoint of the range due to lower market interest rate.As it relates to adjusted EBITDA pricing remains consistent with our expectation. We believe commodity input cost maybe modestly more favorable for the year compared to prior expectation.

However, we have widened the range given the current economic environment.

Foreign exchange will be a modest EBITDA headwind at current exchange rate.In closing, we are confident the actions we are taking are resulting solid cash flow generation for the year and position the company well for long-term growth.Thank you for your time this morning and I will turn the call back to Mike..

Thanks, Steve. I am pleased and humbled by the leadership, dedication and ingenuity our teams have displayed in managing through the crisis today.

We will remain focused on running the business safely and effectively while positioning and preparing the company to capture the growth that lies ahead.Aggressive actions we are announcing today will drive cash flow, balance supply and demand and position the business for strength in 2021 consistent with the goals we established with our Vision 2025.I will now turn the call back to the Operator for questions..

Thank you. [Operator Instructions] Your first question comes from line of Mark Connelly with Stephens, Inc. Mark, your line is open..

Thank you. Two things, Mike. It’s probably early to see movement in virgin fiber cost, but we have seen lumber shift down dramatically shipment wise.

Has your sourcing of virgin fiber changed yet and is a higher virgin fiber cost part of your assumptions?.

Yeah. Thanks for the question, Mark.

We to-date what we have seen, we have seen the slowdown of the lumber operations that you talked about, so the residual ships are in fact down from where they would have been a year ago.But over the last few years, we have made some pretty significant investments into our Virgin metals that allow us to process a lot more around round wood and with some of the slowdown that we are seeing in the printing and writing space and pulp and in some cases in the baskets where we operate, we are seeing pretty attractive round wood pricing for both hardwood and softwood come in.And we have also seen a normalization of the weather pattern that impacted us last year the wet weather in particular.

So our wood costs are actually down pretty substantially year-over-year and that’s partially offsetting some of the increases we are seeing on the secondary fiber side. And based on everything we can see right now and we believe that will be the case know for the foreseeable future..

Yeah. Mark, it’s Steve. It’s one of the reasons we are seeing overall relatively net modest inflation deflation if you will because of pretty modest inflation and deflation if you will because of pretty substantial deflation in work year-over-year given it was a $40 million inflationary item last year..

Sure. Okay. And just one more question, how different was the seasonality you experienced in the first quarter versus what you think of is normal.

And could you give us a reminder with your current business mix of what kind of seasonality in Q2 and Q3 you would think of as normal, so we have some to benchmark against?.

Yeah. It’s a great question. Normally what we would see is a busier spring and summer season related to both the beverage and the foodservice business that we operate on.

In fact, the beverage business is quite strong for us right now, because they are well on premise is down, off premise as you can appreciate is up probably in the neighborhood of 5% to 10% we are seeing along those lines.So I don’t think this year will be a great year for normal.

What we saw in Q1 was things behaved like we thought if they were going to till about the middle of March and then we saw some of the pantry loading if you will associated with the COVID-19 virus and that drove that incremental $15 million of revenue we experienced largely in the last two and a half weeks of March..

Very helpful. Thank you..

You bet..

Your next question comes from the line Mark Wilde with Bank of Montreal. Mark, your line is open..

Good morning, Mike. Good morning, Steve..

Hey, Mark..

Good morning, Mark..

I just wanted to kind of come around to the issue of kind of organic volumes that, you said the first quarter we excluded the leap year and the COVID, your organic volume growth was 400 bps, but Steve it sounded like more recently that organic volume is basically flat.

So I wondered if you could just help us with the cadence, if you have moved through the first quarter and into the second quarter and sort of how volume is moving in the businesses and if it’s possible to separate like foodservice versus beverage versus food?.

Yeah. Mark, it’s Steve. I will take that on and then Mike can bring on additional color.

You summarized it well, we were -- had a quite positive net organic volume growth through January and February, slight acceleration in March, driven by many of the successful conversion that we have talked about previously foam cut conversions, beverage conversions, pull and plate conversions.Since the unfortunate crisis began, what we are seeing currently and this is currently true literally yesterday, is that roughly the 77%, 80% of the company, 77% specifically last year in food, beverage and consumer packaging is up 5% to 10%, so we are seeing some continuation.It’s been offset currently by awarding total across the roughly 23% of the company that is foodservice being down 25% to 30%, as Mike just articulated, because that’s really where a lot of the slowdown has hit relative to consumption of cups, for example, which is where we were experiencing the growth.

That has resulted currently as of yesterday through the month of April here in overall neutral net volume..

Year-over-year..

Year-over-year in April..

And Steve, is there a likely any inventory channel play in any of that.

I mean a lot of foodservice stuff isn’t necessarily one single step due to the food service provider but it might be moving through kind of a distribution company and some things like that?.

Yeah. That’s right, Mark. We saw that and that actually is part of the reason why we saw the reduction at the end of March, the last two weeks March on the foodservice business has, in fact as you are suggesting the DC channels basically relieved that inventory.

And we are starting to see that again through the first 20 days of April incrementally move back up a little bit.But Steve summarized it well with 5% to 10% down on food, beverage and consumer and then -- 5% to 10% up, excuse me, on food, beverage and consumer and then 25% to 30% down on the foodservice, and those are good numbers at least what we have seen so far in Q2..

Okay.

The other question I had is that you can just help us in thinking about the roll through of some of these recent pricing and cost moves that EPW changes your own increase announcements that were out last week and then the movement of waste paper cost?.

Yeah. So at a very high level, you saw the risky move in February on CRB went down $30 a ton, SBS went $30 a ton as well.

But speaking specifically to CRB, that $30, it was a price reduction of open market board, that is tied to those open market contracts.Since January 1 we have seen probably $50 a ton of movement on top of what our baseline secondary fiber cost were.

So if you think about it in those terms it’s about an $80 ton price cost spread and so we as Steve said announced a CRB increase on May 7th for $50 time to recover that are -- as we look forward we do anticipate some incremental costs in May and potentially June, again others have opined on that, we won’t other than beyond the comments that I am making there.

But that’s why we announced that pricing action on CRB..

And Mark just to add to that relative to some of the numbers we have shared with you today, the $10 million to $20 million in price guidance doesn’t -- hasn’t moved and it does not contain CRB announced price increase.

Obviously that hasn’t been recognized and now that will be heavily of late year activity with our six month legs.And as Mike mentioned the little bit broader guide that we did provide with regards to probably cost inflation. As a reminder that $2.5 billion of spend. We are seeing deflation generally across most of the categories.

We have seen them move up materiality with OCC and recycled fiber cost, the range captures a range of possibilities there in terms of OCC continuing to move up and stay there or potentially this being less longer term.So we try to take that into consideration where we did have visibility.

Obviously, we are suspending the guidance driven mostly because of the consumer spending patterns that we want to get better line of sight to impact the volume and productivity..

Okay. Great. I will turn it over..

Thanks, Mark..

Thanks..

Your next question comes from the line of Ghansham Panjabi from Baird. Ghansham, your line is open..

Thank you. Good morning. Hope everybody is doing safe..

Hi..

I guess, just a follow up on those comments, on the 77% of your portfolio that you are seeing the 5% to 10% volume increase thus far in April, I guess, year-over-year. What are customers sharing with you on their volume plans for the second quarter? I mean, obviously, we see big numbers in terms of category growth, et cetera.

There’s been selling through their safety stock I would presume and they are going to have to ramp up production et cetera.

Just curious as to what specifically they are sharing with you for 2Q?.

You summarized the phenomenon very well, that’s in fact what’s going on. As you know, most of those customers have withdrawn their guidance. So, we are -- they are seeing that real time those impulses are coming in from the retailers as well, Ghansham.

So I would expect that would be the case.So beyond what we are currently seeing today it’s difficult for us to speculate what we would see for the remainder of the quarter.

I mean, I think, if you think about that and just put it in context, the big banks basically said in the neighborhood that GDP could be anywhere between down 8% and maybe as high as 35% in the quarter.People need to eat and drink, so that’s been positive.

But how that comes back in the context of 22 million people going on unemployment in the last three weeks and what they buy and how that all plays through our overall supply chain to our end use customers is really the difficult challenge that we have got in front of us and trying to predict what that revenue look like.

It’s just going to have some impact on our mix and productivity depending on how that all comes back. And that’s why we are taking a step back to take a look at how that’s all going to play out..

Yeah. Mike’s point, our teams are doing incredible work servicing those needs both top and then managing where we see down. We just don’t have that line of sight to the where will it come through relative to the broad spectrum of diversified products that we provide..

Okay. And I guess just following up with that, I mean, obviously, there’s a lot going on with your company, with the acquisition integration, the large capital project, your capacity cuts that, I guess, will be orchestrate by the end of the second quarter. Do you have meaningful disruptions with the supply chains, et cetera, there is limited mobility.

I guess, just take us through what gives you confidence on the execution side in context to what I assume will be very choppy demand and logistical patterns near-term? Thank you..

Yeah. Thanks for the question. I think the -- if you look at the two closures we are going to orchestrate, we have got a very well capitalized ERP system as you know that we are investing a fair amount of money in too, it’s operating very well.

So that’s very small and we will be able to take those tons and redistribute them across them across the remaining base of mill assets that we are operating. So we have got a high degree of confidence in that.In Kalamazoo, our project continues to move forward.

We talk about four weeks due to the shelter in place, but as an essential business, we are back up with construction as a matter of fact, we have got a very big concrete floor that’s happening as we speak and so we are continuing to execute on that project.In the case of shutting down or West Monroe linerboard machine that is the only linerboard machine we operate.

We actually had taken a fair amount of that tonnage and traded it with trades for people that made boxes for us.In the current environment that we anticipate in the second half of this year for corrugated materials and boxes, we believe that we will not be economically disadvantaged to purchase the boxes versus utilizing that supply chain.So, yeah, there’s a lot going on.

But we feel we have got a pretty good beat on it and again this is all consistent with our long-term Vision 2025 and our long-term plans.

And so we are just accelerating certain aspects of our strategic plan to move aggressively in the context of this environment to leverage our free cash flow generation and in secure the strong balance sheet that we have..

And the integration of the eight Folding Carton facilities, seven from Greif and one from Quad are also on track and is going very well, as Mike mentioned in his comments..

Perfect. Thanks so much you guys..

You bet..

Your next question comes from the line of Brian Maguire with Goldman Sachs. Brain, your line is open..

Mike, I just wanted to unpack the comments around April volume sort of being flattish, it’s kind of reminds me store of six-foot guy who’s walking across the river that’s averages five-foot of depth, but you got some periods that are a lot higher than 5 foot in depth here. So there is a lot of things move in there.

I guess, when I think about the operating rates at the paper level then I would guess SBS volume is off quite a bit, given a decent amount of that goes into foodservice, but CRB and CUK, you would expect the mills to be running pretty fall and in hard.

Maybe you can just kind of confirm if that’s true? And then also that -- what impact this could have on profitability, this shift from foodservice to at home.

I don’t think it’s something that we have thought too much about in the past but the profitability of that foodservice component versus the rest of the business, is it materially different then we would notice some profitability impact from the shift here?.

Yeah. Thanks, Brian. In regards to your question around utilization of all three paperboard substrates. That’s one of the strengths the Graphic Packaging has as you recall.

We didn’t operate in SBS mill system in 2008, last time we saw a significant dislocation in the economy.And in fact, what we have been able to do here because of the strength, our customers demand for CUK, we are actually utilizing some SBS and we anticipate we use upwards of 50,000 tons of SBS this year to help meet that demand in certain categories and customer package applications, and that really is one of the true benefits we have got now with, I mean, in all three substrates.

So, yes, we do expect cost to be down, in fact, it is, but we are able to offset a portion of that with some of the things that we are doing to service other customers in the mix.And in regards to the question around overall mix profitability, I will take a stab and let Steve put a little more color on it.

Our overall portfolio is reasonably balanced in terms of the margin profile, but we are speaking to as if we saw severe spike in one aspect of the business or the other.

It can potentially impact your bills and downstream converting in a way that -- isn’t as balanced as we are currently seeing it today through 20 days in April and that’s what we are talking about in terms of how the consumer comes back? How fast they come back. Where does it come in and what does it look like.

And Steve, maybe you want to?.

Yeah.

The one thing I would add is, just given a little bit of that uncertainty, the one thing that you are hearing is let’s be very clear about that we will match supply with demand in that environment and so that’s why there’s a little bit of the uncertainty around the mix of volume.We are very pleased, as Mike said, with the ability to move among and between the substrate that’s something we couldn’t do in the past and are doing.

But if we saw an ongoing dislocation of the consumer not getting back into the work environment and as such consuming foodservice products that could result in a need for us to be more assertive imagine supply and demand, and on the mid side, which is where the cost can be more substantial.

We are not seeing that today but we want to get a little visibility to that over the coming months as we begin to emerge from the crisis..

Okay. And then one question just on the capital reallocation, I guess, you never see the share price was lower in 1Q with the rest of the market. I am just little surprised given the size of the buyback relative to the other commitments you guys had between the Kalamazoo mill and the IP stake.

Obviously, you had good liquidity and the bond offering was well timed.

But, should we think about this as maybe being a little bit of a pre-buy of what would have been, you repurchasing in the IP stake later when they decide to monetize that further, if they decided to monetize it further would you think about letting some of those shares float on the market now to you maybe just pull forward the timing of the buyback effectively here?.

Yeah. Brian I think you have done a nice job of laying out the kind of real optionality that we have and so given that we did see or what we believe was a real dislocation in the share price consistent with our past practices.

We did elect to acquire back some of those shares, $150 million worth and we do have a very good optionality relative to if national -- a national paper comes our way in July, which we don’t have a point of view on obviously, but if they choose to, we have optionality one of them being what you describe to potentially to put some of those units into the market and shares.Keeping in mind and it’s very important but that is not a dilutive event for any GPK shareholders as there are already units that represent the ownership of the company.

So we have very good optionality and we felt like it was timely to continue with a multiyear path we have now had to continuing to buy back the company. Between the share repurchases and the partnership unit acquisition we took another 7% of the overall units of the company out in the first quarter returning almost $400 million to stakeholders..

Okay. That makes sense. Thanks and best of luck in the quarter..

Yeah. Thanks, Brian..

Thanks, Brian..

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

Hi, everyone. Good morning. Thanks for all the details and thanks for how you are doing on COVID and your support for your employees. My three questions.

First off, I wanted to -- if you could a step back and comment if any of your customers or their customers or the consumers are showing any kind of any push back against the sustainability maybe less interest in the fiber over plastic debate because obviously there are more significant things occurring in the economy with COVID-19 or is it not a worry for you or maybe too early in that discussion and I had a follow-on the mills?.

Yeah. Thanks for that George. We have not seen any pushback relative to sustainability of our paperboard products, our paper-based products that we are pursuing with customers. I mean, Steve mentioned, we saw excellent foamed paper cup conversions early on in Q1.

Those will be a little muted now until that volume comes back.The other thing that we have continue to see excellent traction on is our KeelClip technology. We have sold over 20 KeelClip machines. Now what we haven’t been able to do is install them and get them operational, we are in the process of building those.

So we are going to see a little bit of a delay relative to our ability to actually get those operational at and our customers because a lot of those are going to Europe.So traction over in Europe for that is really strong, traction in Europe out of shrink film and into paperboard solutions for beverage applications also very strong.

In terms of people taking a step back on sustainability, I think it’s probably early for me to try to give you a point of view on that.

All I can speak to is what we are seeing on the new product and innovations that we are going forward with it you know just as an example on KeelClip we have not seen any cancellations on any POS that we had going into the crisis. So maybe that’s it at a point that helps you a little bit on that..

No. That’s great, Mike. I appreciate that. And then on the closures and the operating factories in the quarter, if you could comment a bit in the tornado created any significant damage for you in West Monroe and in total can you -- I thought only a part has given the connection.

It sounds like on the -- on winding board machine you are basically looking at -- as a freeing up of pulp capacity that you can use ultimately as you grow in other substrates, is that fair and if you could put a bit of a finer bill on that, that would be great. Thank you, guys. Good luck in the quarter..

Thank you. Again thanks for that question. Yeah.

And first and foremost in regards to the tornado in Monroe and Louisiana that occurred on Easter Sunday, fortunately none of our employees were hurt or injured and so that was a very, very positive in that regard.The mill itself and the converting operation we have in town there were not impacted other than losing power.

We had a remote shipping operation at our mill that’s connected to the mill with a long track conveyor that was -- that had significant damage associated with it.

And so what we have had to do is put some shorter term solutions in to get chips from the chipping operation over the mill.We lost about 48 hours in total at the mill of production between restoring power and setting up our ability to fiber the mill with woodchips in a way that worked, which would probably be the better part of six to eight weeks would be my guess right now relative to when we were back to fully operational the way we normally operate that mill.

There will be an insurance claim associated with that, which is Steve maybe you can give George a little ….

Yeah. The actual impact, and as Mike mentioned, we are running, team has done a great job of getting back to full run capability. We just incurred some incremental cost. It’s probably a $3 million to $5 million impact for us net.

So not particularly material but relevant as we rebuild the conveyor, so a little bit of the capital that we put to work and right now we are working around that, which is costing us a little bit of forms, but it will be in the $3 million to $5 million range to do..

In regards to your question then on pulp, if you recall in 2015 we shutdown a multi-wall paper machine there that we had that was associated with business we are operating at that time and freed up roughly 50,000 tons of capacity that we have now utilized in new operations and Number 6 and Number 7 paper machine in Monroe and grown our global beverage platform both here in North America and in Europe, and in other geographies as well and we anticipate you know doing that again..

Okay..

And so, as I mentioned, we were trading a lot of that tonnage with people that were making boxes for us. It was slightly positive on EBITDA and cash flow basis, but with the additional capacity that was coming online in the containerboard space.

We don’t believe will be disadvantage in purchasing those boxes in the open market, which is what we will do and we are repurpose that pulp up in a more value-added way for our CUK demand as the next few years play out with our vision 2025..

Thank you, Mike and Steve..

You bet..

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

Hi. Thanks for taking my questions. I got on -- I think Mike right about the time you ended your opening remarks, so apologies for that.

And I think I heard something around M&A and I was hoping you could give us an update on how you kind of manage that side of your strategic focus right now in this environment, whether you would expect that to continue in the near-term or this is something that may take a while to play out given everything going on?.

Yeah. Thanks, Debbie. You just summarized it again well, as we said our prepared comments, we don’t anticipate doing anything in Q2.

That doesn’t mean we are still not actively talking with people and planning and looking at different options overtime consistent with our Vision 2025 that we have laid out.But I wouldn’t anticipate anything in the near-term, longer term -- medium-term to longer term you can expect more of the same where we are focused on driving a different geography or niche markets that help us grow our integration levels, of course, that 80% to 90% level that we talked about of the acquisition we did in the quarter a year was a good one where we added seven additional converting plants a little over $200 million worth of revenue and a 125,000 tons of paperboards that over time will be integrated into our business as the supply agreement winds down.So that’s the type of thing you can see as we continue to work on just in the near-term.

To your point which was some of the challenges associated with things and just letting things play out a little bit, you can expect us to take a little pause..

Okay. Thanks.

And then a simple question on the leverage, do you expect you can get in comfortably into your targeted range by the end of the year or is the variability around your EBITDA a bit too much at this moment?.

Yeah. No.

Debbie our commitment to the 2.5 times to 3 times leverage remains historically are little above that in Q1 because it’s not a strong cash generating quarter, we were 3.2 times this year, we were 3.1 times last year and we put a lot of value behind, as I mentioned, the share repurchases and the IP redemption.So, no, we expect to be in that 2.5 times to 3 times range as we talked on the last quarter conversation.

We would probably be at the higher end of it assuming that IP were to move to forward with $250 million exits as we talked a couple of minutes ago, but we still remain committed to the range and expect to be in it probably at the high end -- at year end..

Okay. Thanks. I will turn it over..

Thanks, Debbie..

Your next question comes from the line of Anthony Pettinari with Citi. Anthony, your line is open..

Yeah. Good morning..

Good morning..

Mike, you have a pretty sizable footprint in Europe and I was just wondering if you could talk about how that part of the business performed in the quarter. Did you see the same stockpiling of staples that we have seen in the U.S.

What the on premise or foodservice mix is there? And given you operate in a number of European countries that are maybe at sort of different stages of the crisis any kind of general read for the U.S.?.

Yeah. Thank you for that, Anthony. Look, our European colleagues did a really nice job in the quarter as you are well aware.

They were two weeks, three weeks ahead of us in terms of the COVID crisis and they operated through that environment extremely well.And what I would -- how I would characterize our European business is more indexed to food, beverage and consumer products. We do a very small foodservice plant there in the U.K.

But the majority of the business within the side of the customer subset that we see more demand for right now and I know it’s consistent with what we are seeing in the U.S. along those lines.

And those facilities are doing a good job, operating with some of the increased protocols that we have in place to make sure our employees are safely -- safe be operating in this environment..

Okay. That’s helpful. And then just switching to the full year guidance, I mean, when I look at the guidance items, you suspended guidance on volumes, which makes sense and then guidance on net performance.

And I just wonder if you could provide any kind of further detail on the puts and takes that could drive that performance number higher or lower understanding or not giving a formal range?.

Yeah. No. Anthony, it is Steve. I think as you know and you know, though the business well, there is just a direct linkage for us in terms of our productivity initiatives being driven by and supported by our volume.

And so we stepped back from both of them because of variability in volume has a direct impact on our ability to drive productivity.Just like we saw in the quarter positive organic volume growth helps supported strong productivity.

And so that’s when we step back from it we really step back from both of them just because of that very strong linkage between volume mix and productivity for us as a business..

Got it. Understood. I will turn it over..

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

Great. Thanks. Good morning. Congrats on everything and thanks for your help with COVID. I guess, just a couple of questions if you think about the volume. You have laid it out as suspended, I guess, for the year. I just wanted to understand how that the margin profile works.

If we are looking at a flat volume picture for the rest of the year, potentially with the foodservice being down and the on-premise consumption being up. Do you essentially lose all the profitability from foodservice or how does that work.

I mean what are some of the positive offsets just for us to help us size kind of the impact on EBITDA from that volume trajectory?.

Yeah. Thanks, Arun. We are going to be a little bit less, putting a fine point on it, because we just as we said earlier we don’t know how that’s all going to play out.

But as you heard in Steve’s prepared comments, he talked about, at our current run rates and flat year-over-year volumes that we saw -- that we would expect to be in the normal range.We could see from some of the previous financial crisis aren’t excellent harbingers for us in this case because we saw such a complete slamming on the brakes.

And as I mentioned earlier, we have got 22 million people that went on unemployment in the last three weeks.How does that impact what they come back to buy and so it’s difficult to try to model all of that.

But I won’t over think it relative to the margin impact on that, because as I mentioned earlier, we are pushing 50,000 tons of SBS already for other beverage and food customers into that category.So, we have got some levers to pull to try to work through that.

The reason we suspended the guide is it’s difficult to see through that age and figure out with any degree of certainty how it all comes back..

Okay. That’s helpful. Thanks for that. And then I just also, I guess, wanted to understand the price cost size. So in SBS maybe six months ago there was an expectation that we worked through the inventories from the -- on this GP across the closure and then potentially set up well for some pricing in the second half of 2020.

I guess, A, is that still an opportunity that’s possible, and then, B, on the CRB side, you guys have announced a price increase. Just want to gauge the thought process there, operating rates have been relatively high for a little while and pricing has been volatile and challenged sometimes.

So, what’s kind of the confidence level in achieving those increases as we go through the year? Thanks..

Yeah. Thanks, Arun. Of course, I am not going to talk about specific pricing on the call here.

But what I will tell you is on SBS, what we have seen from the AF&PA data is in fact with the removal of one of our competitors shutting down the mill, you see production down 6% and operating rates higher.We saw operating rates in Q1 at 95%, as a matter of fact SBS was at 97% in March, which was up substantially from where it was a year ago at this time.

So, that capacity has gone away. Now, there will be some dislocation. You are going forward as we talked about that we have got to let play out on the SBS side because that is more indexed to the foodservice.

So that’s part of why we are moving our volume guide in that regard.In regards to CRB, in our case what we are doing is, we are operating have been strong and we have some inventory that we built to service our customers that now with our closure of the White Pigeon mill will be able to take those inventory levels down lead on the supply agreement that we have got with Greif and really optimize our working capital, which is why we increased the guide on working capital in that regard.So I had think about it that way.

Operating rates have been good on and both those substrates, capacity was removed on SBS showing up in the data, because we see production down in that regard, in our case on CRB, operating rates have been really high.

We are taking one of our mills own down because we don’t need it, with the existing footprint that we have and the plans we have for the future in Kalamazoo and it’s going to allow us to harvest a fair amount of working capital..

Thanks. I will turn over..

Thank you..

Your next question comes from the line of Adam Josephson with KeyBanc. Adam, your line is open..

Mike and Steve, good morning..

Good morning, Adam..

Good morning..

I hope you and your families are well..

You as well..

Thank you. One on the volume trajectory and then just one on cost, so if -- I am just trying make sense of the 4% growth in 1Q ex-COVID.

So if COVID was a 1 point benefit in 1Q and its neutral in April and I guess why we would the opt for pre-COVID in 1Q and go to zero in April and potentially thereafter, I am just having a little difficulty understanding that?.

Yeah. So why don’t I handle that. I think, look, a lot of the growth and what we saw in January and February was on paper to -- or foam to paper conversions, Adam, and of course, those sales are pressured right now as we mentioned our foodservice business is down 20% to 25%. So that’s a big explanation that I would point you right there..

Right. Okay. And related to just the cost situation, I think, Mike you talked about OCC is up 55%….

Adam are you there? You cut off? You cut off for a minute….

Sorry, Adam. You cut off for just….

Sorry, is this better?.

Yes..

Yes..

Okay. Sorry about that. So you talked about CR -- OCC costing up $50 from January 1 and CRB prices getting hit by $30 that’s the announcement. And so obviously you are seeing inflation on a recycled side and it sounds like you are seeing quite a bit of deflation on the SBS and CUK side just based on what cost being down substantially year-over-year.

So, I guess, how do you think the price cost -- what do you think about price cost relationship for SBS and CUK, given the extent to which the input costs are down for the virgin grades versus being after the recycle grades which is why you are going for a CRB price increase?.

Yeah. Adam, it’s Steve. I will take that on a little bit and then Mike can add on, but if you kind of step back for a moment and look at where we are at -- where we are on price cost through Q1.

We have now with this year -- with this quarter’s results with the price still up and we thought the deflation of $17 million, we have now successfully recovered all of the price cost dislocation that we saw in kind of the ‘16 to ‘18 time horizon, which has been a very critical goal for us as you know.So a little bit of guide that we are providing on price costs going forward is relatively neutral for the three months -- three quarters remaining the year with a little bit of price still to come excluding the amounts of CRB price increase and some net modest inflation across the basket of cost driven primarily by recycled fibers.

We are starting to lap a fair amount of deflation from other product categories, but that’s how we are thinking about, and as I mentioned earlier, a relatively wide range of potential outcomes for recycled fiber.So overall price cost recovery is very good. It applies overall with CRB very good to-date setting aside the current run. CUK well recovered.

As we have talked in the past SBS isn’t as recovered and hence some of the conversations we have had about operating rates and the need for that to recover over time. So we are still in a similar spot related to actual recovery by substrate, overall recovery is now at which we lost in the ‘16 to ‘18 timeframe. Mike, anything to add to that..

No. I think you have summarized it well..

Thanks a lot, Steve..

You bet..

Your next question comes from the line of Steve Chercover with Davidson. Steve, your line is open..

Thanks. Good morning, everyone.

A kind of late in the call, but starting with a quick question on the 120,000 tons being shut at West Monroe, it sounds like you were trading that to corrugated suppliers, so will that have any impact whatsoever on your integration rates?.

No. It does not, it was all non-integrated and so our integration rates have always been around the paperboard, Steve, and we moved it up….

Okay. That was nice..

… a lot of that -- 69%..

That was nice..

No change in that, Steve..

Thank you clarifying that.

And then with respect to the $5 million payments to your frontline employees and believe me I am not being critical, is that incorporated into the $50 million to $60 million labor and benefit guidance?.

No. We did not change that for that, that’s really a bit of a -- as Mike mentioned, it’s a recognition of a one-time payment for the outstanding work that they are doing and we didn’t factor that into our ongoing labor and benefits inflation guide..

Got it. Well, that’s a fair carve out. And then, finally, with respect to capital allocation, I want to kind of put that from maybe the perspective of one of the other analysts. With respect to share purchases and/or partnership redemptions.

I mean do you figure that there might be some quote upside because your shares are so low and so low your own assessment of intrinsic value that front-end loading is beneficial?.

Well, I guess, I’d answer the question this way, Steve. Our -- as we have done since we initiated the share repurchase program back in 2015, we have said and continue to do, as I said in my prepared comments, the -- when we believe the intrinsic value is below -- or the current stock price is below the intrinsic value of our stock.

We will make a decision to buy back from time to time and that’s what we get at this particular quarter.I think, what gives us a little bit even in more impetus along those lines is the fact there are these redemptions that are out there.

So we can do it at really good prices we should do it and then we have got optionality to put those shares back into the market, as Steve outlined earlier, at a point and time in the future.And I think, what we will hear from the majority of our shareholders is they like that option and already they expect there will be opportunistic along those lines when those opportunities prevent themselves within the context of managing our strong balance sheet..

Right. And that’s the key point Steve is to your question, of course, there’s always optionality for some level of acceleration which you have seen us do with the share repurchases but we will do it in the context of our balanced approach to both capital allocation and the balance sheet..

Got it. Okay. Thank you and stay safe..

Okay. Thank you, Steve..

Thank you, Steve..

Your final question comes from the line of Mark Wilde with Bank of Montreal. Mark, your line is open..

Yeah. Steve and Mike, I wondered a couple of things.

Can you give us some detail on the kind of financial impact and any costs in the two closures?.

Yeah. Mark, it’s Steve. I think the way to think about that is to put it into context.

Of the multiple announcements and things we are bringing to you today, the net impact of both the great assets coming in, PM1 coming out, White Pigeon coming out.From an EBITDA perspective relatively neutral for the year, what it drives for us as we mentioned is compared via working capital improvement.

So we are accelerating decision, EBITDA implications are relatively modest, plusses and minuses, and we are going to -- and we feel the working capital improvement is in the guide that we provided moving towards positive as we drive in primarily inventory out of the system relative to PM1 and relative to CRB..

Okay.

And I just -- on West Monroe, I guess, I am just a little surprised given kind of where kind of containerboard prices still seem to be -- all tied together, that you can take 120,000 tons out, and still have it be kind of a neutral impact?.

Yeah. Well, it works that way because we are going farther to get that would as you know, and so that every time the campus are same as what we see on the SUS.

So we are buying a fair amount of green wood and that has to be the marginal wood that we have to go farther for the most expensive wood, we want them to do that anymore.And we have done this before as you know, we basically -- we get to the point where we don’t want to make investments in pulp, because it’s very expensive for us to do that and want to have the higher value add associated with the CUK demand and those types of projects can come on in lumpy format.

We can do that over time as we did. It doesn’t have to be something we have to do overall.But the balance on the back end of the operation is very good at West Monroe and we have the optionality to be able to do that.

So that’s how we want to operate the business over the medium- to long-term, it certainly makes sense for us and it’s consistent with our long-term plan, Mark..

Okay. And then the other one I had, Mike, was in the past you have mentioned that SBS is really been kind of the laagered in the box board sector in term of returns. In fact, you -- I think you have been talked about that much of the industry is kind of below cost of capital in that business. Is that actually….

Yeah..

… getting worst given the weakness in foodservice right now?.

Yeah. It would be. I mean, now in our case we have got more options, and perhaps, others to be able to push tonnage around to our -- as I have mentioned, into our integrated full garden operations. But there is some reduction in wood cost, we talked about, at least, that’s what we are experiencing, I can’t speak to what others are experiencing.

But we have been pretty vocal about that point.On the positive side, the -- as I mentioned, the production has come out, you see it in the operating rates.

Your question is how does that perform over the next quarter because it will be active here in my opinion based what we are seeing on the foodservice side.But if we play a long game here and we are making Texarkana in Augusta lower cost with the capital we are putting into it, we are driving or integration rates up and that’s how Graphic is going to win over the medium- to long-term there..

Okay. Good luck in the last three quarters of the year, Mike..

Yeah. Thank you very much, Mark. And I want to thank everybody for joining us today. Have a safe and healthy day..

This concludes today’s conference call. On behalf of Graphic Packaging thank you for participating. You may now disconnect..