Ladies and gentlemen, thank you for standing by and welcome to Graphic Packaging's Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.

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

Good morning and welcome to Graphic Packaging Holding Company's conference call to discuss our third 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 will be referencing our third quarter earnings presentation, which can be accessed through the webcast via self-directed slides and also 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 period of filings with the Securities and Exchange Commission.

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

Thank you, Melanie. Good morning and thank you for joining us on the call today. We continue to successfully meet growing customer demand in 2020. The third quarter was a continuation of solid financial performance, driven by over 4% organic sales growth, exceptional customer service and strong operational execution.

We remain on track to meet or exceed our organic sales growth projections for the full year. As an essential business, our teams continue to adapt to changing consumer demand patterns, while providing continuity in the supply chain during these tumultuous times. We are doing this while focusing on the safety, health and well-being of our employees.

I'm very proud of our people and the service levels we continue to provide our customers. Our execution on behalf of customers and focus on innovation is reflected in the strong results year-to-date and a robust new business pipeline.

The pandemic has brought new changes to our daily lives including the necessity to do more from the protective environment of our homes, whether that be working or conducting meetings remotely, helping children with virtual learning or hosting smaller get together to stay connected with family and friends.

Increased time spend in our homes has elevated demand for food and beverage packaging since the end of the first quarter. While we do anticipate an eventual return to more normal activities outside of the home, modest long-term behavior changes in both how and where we consume food and beverages is very supportive of our organic sales growth goals.

Importantly, interest from customers for more sustainable fiber-based packaging solutions remains very robust. Our planning with customers on their packaging conversion programs including machinery installations for our beverage customers is proceeding nicely with numerous strategic projects in motion over the next 18months.

Our product development team is meeting customer demand for innovation and packaging solutions that offer greater recyclability, enhanced safety and hygienic advantages, along with premiumization opportunities to standout in the marketplace.

We see strong demand for our packaging solutions across existing customers as well as prospective customers in new end markets including protein packaging and ecommerce. Our teams are operating very effectively, and I'm very pleased with what has been accomplished year-to-date.

We completed a number of strategic initiatives in the quarter on-time and on-budget including the installation of a curtain coder at our West Monroe mill and a new head box at our Texarkana mill. In addition, integration of the converting volume of the two credit facilities closed in the third quarter is largely complete.

Another 100,000 tons of CRB paperboard integration will take place over the next couple of years as supply agreement rate unwinds. This will further benefit integration in our CRB business and drive our rates higher for the Company. During the quarter, we also executed decisions to match our paperboard supply wood demand.

This included the continued substitution of an annualized 100,000 tons of CUK-based packaging to SBS folding carton grades in order to meet increased CUK demand. We also made the decision to take 30,000 tons of market downtime on our uncoated SBS Cupstock paper machine at our Texarkana mill to align the production to lower cost demand.

As a reminder, our uncoated SBS paper machine in Texarkana is highly integrated with over 85% of the cupstock produced converted by us for customers in our five cup converting facilities. Turning to paperboard backlogs, operating rates and inventory levels, our backlog either held steady or increased during the quarter.

In fact, backlogs for all three substrates had to be SBS, CRB and CUK are currently at five plus weeks. As reported by the AF&PA, SBS industry operating rates were 85% during the quarter due to maintenance and market downtime.

Industry inventory levels in SBS dropped by 86,000 tons during the quarter, and CRB, industry operating rates consistently improved each month during the quarter and were at 96.5% in September. Industry inventory levels in CRB dropped 21,000 tons during the quarter.

Our estimated operating rate for CUK continues to be very strong above 95%, and our CUK inventory levels also declined during the quarter. Driving our integration rate higher over time remains a strategic priority and we are delivering.

Our year-to-date integration rate is 70% across all 3 substrates we produced, up 200 basis points from 68% last year. Focusing now on the financial performance of the quarter, you can see the details on slides 4 and 5. Our sales grew 7% year-over-year, driven primarily by impressive organic growth sales of over 4%.

This is the fourth consecutive quarter of organic sales growth. Confidence in our ability to profitably capture growth opportunities continues to increase given the traction we are seeing in plastic substitution, cooking solutions and strength packaging solutions we are bringing to the market.

It is good to see our customers remain resolute in meeting their own sustainability goals while converting to packaging that is preferred by the consumer. Adjusted EBITDA in the third quarter of $250 million, improved $6 million. We delivered EBITDA growth by positive volume and improvements in productivity.

Steve will go into more detail during his discussion, but productivity improvements were partially offset by the previously mentioned $12 million unfavorable impact from market downtime in our SBS Cupstock line.

Before turning the call to Steve, I'll spend a few minutes highlighting the expanding addressable markets we see on our fiber-based packaging solutions. Our three growth platforms outlined on Slide 6, plastic substitution, cooking solutions and strength packaging provides significant runway to capture ongoing organic sales growth.

We've talked to you a great deal over the last several quarters about conversion and plastic packaging to our paperboard solutions. While this remains a competitive market, our solutions are winning as evidenced by the momentum we are experiencing.

In beverage packaging, we are rapidly expanding our proprietary technology with customers through installations of our highest speed and efficient machinery solutions around the world. Our planned beverage machinery placements are up close to 40% versus a normal baseline year.

Our KeelClip solution, which debuted this year, offers compelling sustainability advantages and merchandising benefits compared to other packaging options. ABI Inbev, Coca-Cola and other large global beverage companies are converting to KeelClip given the consumer appeal of our new solution.

We are seeing growing recognition from industry associations like the Paperboard Packaging Council, Pro Carton and the European Carton Manufacturing Association on the merits of packaging innovation to support sustainability efforts and improve the consumer experience.

Last week, Graphic Packaging KeelClip was the winner of the top two accolades at the Paperboard Packaging Council's 2020 Carton competition, Paperboard Package of the year and the innovation award. I am proud of our teams that work diligently to commercialize the KeelClip for our customers.

PaperSeal product we discussed last quarter was also acknowledged at the competition taking home the Paperboard Packaging Council Sustainability Award. Notably, PaperSeal is now commercial in Europe and Australia with many new trials underway globally.

Our PaperSeal trade for chilled protein, powders and fruit is a significantly less plastic resin than traditional foam and is being well received in the marketplace. Finally, within the foodservice market, we see ongoing conversions to paper-based cups and bowl solution.

We continue to actively work with customers to commercialize the polyethylene-free cup solution. In cooking solutions, we are benefiting from the enhanced microwave technology and superior packaging functionality.

Frozen foods represent an attractive and expanded market opportunity for consumers' growing desire for ease and speed, along with the availability of more gourmet and organic frozen meal options creates a compelling market dynamic. We offer an improved sustainability profile and competitive economics versus the current plastic tray options.

Finally, in strength packaging, we are working on new opportunities in e-commerce and with club stores in mass retail channels. We are winning business on this platform as we expand strength packaging solutions for different distribution channels.

We are introducing solutions that can reduce excess packaging requirements while maintaining packaging integrity. To wrap up, I'm pleased with our financial performance and agility demonstrated year-to-date. I look forward to talking to you again in February when we provide full year results and the outlook for the New Year.

Consistent with our Vision 2025 goals, we expect to achieve both organic sales and EBITDA growth again in 2021. Steve, over to you..

Thanks, Mike, and good morning. Turning to Slide 7 on our sales performance waterfall, net sales in the third quarter increased 7% from the prior year to $1.7 billion, driven primarily by positive volume mix from net organic sales growth and acquisitions.

Reported earnings for the quarter were $0.23 per diluted share compared to $0.18 in the third quarter of 2019. Third quarter 2020 net income was negatively impacted by a net $9 million of special charges. When adjusting for the special charges, adjusted net income for the third quarter was $72 million.

Adjusted earnings per diluted share grew 30% to $0.26 compared to $0.20 in third quarter of 2019, benefiting from a lower effective tax rate and fewer shares outstanding. Turning to Slide 8 on our EBITDA waterfall, third quarter 2020 adjusted EBITDA increased $6 million to $250 million.

Adjusted EBITDA was positively impacted by $15 million of volume mix, $7 million of positive performance, $3 million of commodity input cost deflation and $3 million of favorable foreign exchange. These benefits were partially offset by $10 million in unfavorable pricing and $12 million in other inflation, primarily labor and benefits.

As you can see on the waterfall, net performance would have been approximately $19 million, before taking into account our decision to execute SBS Cupstock market downtime. During the third quarter, we again experienced a benign inflationary environment across most commodity categories.

We are seeing some pockets of inflation in areas like trucking and chemicals, but these areas were offset by modest declines in other commodities. On Slide 9, you'll see the robust list of strategic projects we've completed over the last 24 months.

Notably, the maintenance of recovery boilers completed in 2018, '19 and '20 will not need to be repeated for roughly a decade. The capital and resource allocations necessary to complete these projects are behind us, and we will benefit from the safety cost and environmental improvements moving forward.

These projects increase operational effectiveness and underpin our goal of achieving $50 million to $70 million in net performance each year. Looking ahead, we will complete the recapitalization of our converting facility in the Netherlands during the fourth quarter.

The $600 million Kalamazoo CRB investment is progressing well and remains on-time and on-budget for an early 2022 start-up. Moving to liquidity and our balance sheet, we have total available liquidity of $1.6 billion. Our balance sheet remained strong.

Last week, we've addressed our $425 million bond maturing in April 2022 by entering into a delayed draw term loan with a number of banks of the farm credit system. We closed the $425 million loan last week, but will not fund the loan until January 2021, the date which corresponds with our call date of the maturing bond.

The new loan is a fixed rate, 7-year non-amortizing loan that is patronage eligible, which should make the net interest rate of the loan less than 2% annually, a meaningful improvement, compared to the 4.75% rate for the maturing bonds. We ended the quarter with $3.7 billion of net debt.

Net leverage was 3.4 times at the end of the third quarter compared to 3.3 times at the end of the second quarter. Based on the guidance we're providing today, year-end net leverage will be just slightly above our targeted 2.5 times to 3 times range.

Moving to a discussion on our return of capital to stakeholders, we've returned $367 million to stakeholders during the quarter in share repurchases dividends, partnership distributions and partnership redemptions.

This included the acquisition of $90 million worth of common shares during the quarter, bringing our total open market shares repurchased in 2020 to $247 million at an average price of $13.30. Capital expenditures in Q3 were $119 million and include the ongoing work with our CRB investment in Kalamazoo, Michigan.

Turning now to our guidance on Slide 10, we have tightened our adjusted EBITDA range for 2020 to $1.06 billion to $1.08 billion, reflecting 4% year-over-year growth at the midpoint. We are increasing our free cash flow guidance range. Last quarter, we guided to a range of $200 million to $275 million.

Our new cash flow guide is a range of $275 million to $300 million, reflecting the progress we have made to decrease paperboard inventory levels year-over-year across all 3 substrates. As Mike noted, we look forward to in you on our full year achievements and 2021 outlook, when we speak to you again in February.

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

Thank you. [Operator Instructions] Your first question comes from Debbie Jones from Deutsche Bank. Please go ahead..

Hi. The first question I wanted to ask about is just the -- in your bridge, where you talked about the $10 million lower pricing.

Can you just walk us through the drivers there? And then how you think about that sequentially?.

Yes, Debbie, it's Steve. Good morning. Yes, the pricing that rolled through in Q3 was as expected and was driven by the $230 per ton price reductions for CRB and SBS that occurred earlier this year. So that was the natural progression along with -- from the market models and then along with some of the pass- through of the deflation.

So it was expected, and we'll probably see that again here in Q4. Most of that will then be behind us. We'll see a little bit of it roll through the beginning parts of next year as well..

Okay. Thanks. That's helpful. And then you did comment that you are seeing some inflation across your system. And I'm curious, if you look back a couple of years ago where you did experience a pretty significant inflationary headwind.

Can you walk us through how you may be positioned differently during the last kind of inflationary period? Are there things that we should look to around your contracts or pass-throughs that maybe we didn't see the set time around? And then comment on your ability to kind of recover it through pricing as well as we think about 2021, if we were to see more material cost inflation?.

Yes, Debbie, let me start and then Mike can add in that. Certainly, you summarized the inflationary environment well. It's been very, very benign. We do see some pockets of modest inflation. If the world stopped today, there would be modest inflation in our business next year.

Obviously, that's something that we're monitoring very closely overall relative to price offsetting cost overtime. And certainly, I'll let Mike --Mike can comment here as well, but we've taken significant actions since the last time we had material inflation relative to our contracts and price recovery mechanisms.

So overall, price offsetting commodity cost inflation is an absolute priority for us. We know where we are today based upon known pricing. We're obviously in the market today with a price action for CRB.

And overtime, having those offset with the progress that we've made over the last several years remains a priority as we move out of this year and into next.

Mike?.

Yes. I think, Debbie, just to put a little more point on the comment around the contracts. As you know, coming out of that last period, '16 and '17, we made a strategic decision to shrink or collapse, if you will, the lags on the contracts that we got from nine months to six months.

So, we essentially get a couple of openers a year to recover inflation, as Steve just described. So, that's materially different than the last time we saw that as well..

Your next question comes from Mark Wilde from Bank of Montreal. Please go ahead..

I wondered, Mike, if we could dig in a little bit on the dynamics in the SBS market because it seems like we've had a lot of closures announced over the last 12 to 18 months with GP and more recently with WestRock. We've had a lot of big players taking market downtime, and the market still seems to be struggling.

So, can you just take a minute or two and sort of unwind the pieces for us? And can you also help us kind of reconcile all of that with you reporting five plus week backlog in SBS?.

Yes, happy to do that, Mark. So, I mean, if you think about from graphic packaging standpoint, we operate 4 SBS paper machines. And as you heard Steve say, in this quarter, we actually are at a run rate basis of running almost 100,000 tons of our CUK production on three of those folding cart machines. The fourth machine is the uncoated cup machine.

In the case of Graphic, our uncoated cup machine is a highly integrated machine to our own cup operations. As we said, it's over 85% integrated into our own cup making process for customers.

So, if you kind of look at SBS and what we're seeing, we're seeing strong demand on our coated machines because we're converting the CUK production on those SBS machines. We're selling that to customers. We're managing our supply and demand to our demand requirements on our uncoated machine.

And so operating rates, if you look at what happened in Q3, SBS as an industry was down around 85%, but it was a very busy maintenance season, as you saw in graphic saw 30,000 tons of economic downtime coming out of that, as you saw here in September, inventories went down by 86,000 tons.

And when you look at the backlog report as reported by the AF&PA that grew to 5 weeks, so that's the math how we think about it..

Okay, and Mike, is it possible for you to talk a little bit about this concept of potentially converting some SBS capacity over the CUK at a point?.

Yes. And so if you really take a step back and look at what we've done with CUK growth, and I'll go back to 2014 and kind of wind that forward to today. We've actually grown our CUK production by over 200,000 tons in that period of time. You don't see that in the AF&PA data because it's co-mingled with chips and wall facing.

But it's grown 2% to 3% easier based on solid global beverage sales and other carton sales that we've seen manifesting itself into this year where because of the growth we've seen on our global beverage platform, we need to actually run some of that production over on our SBS machines.

So, when we take a step back and look at what optionality we have for the Company, what we want to do is take advantage of our low-cost virgin pulp. We want to make the substrates that have the highest growth potential and the highest profitability.

And so what you'll see us do over time is evaluate, how do we push more of that pulp into the grades that we need, and what we're looking to do is do that in a capacity neutral way. Because it's basically a shift if you think about it that way, out of one substrate and into the other.

And that's, those types of CapEx projects, Mark, they're very manageable. It's nothing like what you doing in Kalamazoo. It's kind of what you'd see us do as a strategic project on top of our normal maintenance CapEx and so it's very manageable.

It would be something that we're looking at and evaluating kind of what the right allocation of that looks like and how to best meet that need over time. But it's a high-class problem. I mean, we've grown CUK consistently time year-on-year, it's a great substrate.

It's growing globally and we've got options to be able to meet it in a very cost-effective way..

Your next question comes from Ghansham Panjabi from Baird. Please go ahead..

This is actually Matt Krieger filling in for Ghansham. I just wanted to start with a question on volumes. I was hoping that you could provide some added detail behind the drivers of the 4% increase in organic sales growth.

And then if you could put a particular emphasis on how much of that improvement was driven by the current stay at home orders or the consumption at home backdrop? That would be really helpful..

So Matt, if we kind of take a step back and talk about the concept we shared with you in our second quarter, we see on our food and beverage business, which is about three quarters of the volume that we got out there in a quarter of the in food service. There's a bit of that teeter totter effect, as we talked about in terms of our core volumes.

This, we continue to see our core beverage and food up in this quarter was up almost 8%, and then, the foodservice business down in this quarter, roughly 14%, which was sequentially better than what we saw in the second quarter as well. And so on the core volumes, we expect that phenomenon to continue to be that way a food service grows a little bit.

We would expect to see a little bit of a reduction on the beverage on beverage and food side of the business. But where the growth is really coming from and I'd point to our Slide 6 and in the materials we provided to you on our growth platforms.

And we are seeing good organic growth on our plastic substitution platform, our cooking solutions platform and our strength packaging platform. And we've shown you some pictures and some examples of things that we're seeing. We've profiled a couple of things in the comments, in our prepared remarks around what we're seeing with KeelClip as an example.

And we sold over 20 machines that are ramping up as we speak, some are already in service. So, we've got really good momentum on the new product, our new product innovation. And our backlogs and pipelines are full on those kind of things.

So, the core volumes think about it a bit is that teeter totter, but where the growth is going to come, the organic growth is going to come is on those platforms and that's really where we're centered in..

And then flipping over to pricing.

With some of the price hikes creeping into a variety of the adjacent kind of product categories across the paper-based packaging space, can you provide some updated thoughts on the outlook for pricing across your various paperboard grades over the next several months? And even kind of into the medium term, are there any areas where you feel that the industry is under earning even more than usual or most at current?.

So Matt, I'm not going to talk about forward-facing pricing decisions other than the fact you're aware, publicly, we were out with an increase on our CRB grade of $35 a ton.

So beyond that, as Steve said in his prepared remarks, as we see inflation flow through the business, we're going to be aggressive in recovering that inflation, so that it offsets over time..

Next question comes from George Staphos from Bank of America. Please go ahead..

I wanted to take a different approach on the growth outlook question, if we could, Mike. Can you -- you mentioned e-commerce as being something that you're trying to leverage.

Can you talk about, aside from maybe just the pantry load that's occurring as a consumer is ordering direct-to-consumer? Is there anything specifically that you're doing to leverage e-commerce? And then I think maybe back to Matt's question, relatedly, can you talk about -- I think in the past, you said sustainability, the growth platforms could add one to two points of organic growth going forward.

Are we getting to a point where maybe you should be increasing? If I refer to it correctly in the first place, the growth outlook from these platforms and from sustainability?.

Thanks for that. I think if you kind of look at a couple of the examples we showed you on strength packaging, what you're seeing us really go after in that space are kind of what we'll call routine replenishment type products.

So if you think about the pet food and some of the consumer staples, these things tend to be on ordered and they're pretty consistent in terms of how the consumer really needs them and how they use them.

And so as we look at the types of products that we're able to provide in that relationship that the customer wants to have with the end-use consumer in an e-commerce channel, we're providing excellent graphics and merchandising capabilities to kind of keep that connection tight and you can see some of the examples that we shared with you there that do just that.

And on the other side of things, as other types of packaging continue to increase in cost, we're replacing tertiary packaging with a carton and that results in a cost reduction for the retailer in this case or the end-use consumer. So that's how we think about e-commerce.

We think we've got a bit of a tailwind there, as we talked about in the past, George, and we're pretty focused in terms of where we're going after those niches and looking for that growth. And relative to the 100 to 200 basis points. Look, I think we've told you in the past that growth can be a little lumpy. This was a very good quarter for us.

Our teams are executing well. Our backlogs are good. But Steve and I are holding to the 100 to 200 basis points of growth over the horizon because we put that out there for our Vision 2025. So I'd ask you guys to keep that as the target. As we kind of go-forward here, realizing, of course, there's going to be some quarters like the 1 that just had.

And then obviously, there'll be some where the conversions may not happen quite as fast, but over time, we've got a lot of confidence in that 100 to 200 basis points and I think 2 to 3 quarters of growth in a row. That, quite frankly, exceeds that validates that, that's the right goal for us..

George, this is Steven. One thing to add to Mike's point is, one thing we do see is the confidence in the 100 to 200 driven by what for us appears to be increasing addressable market.

When we look at where we're participating from what and where we're participating from what we would have articulated a year ago, our confidence is that the addressable market is of substance and that optionality in places like new categories like proteins represent more potential for us.

So, the addressable market is certainly there in total, which is why we have the confidence in the overall 100 to 200 basis points over time..

Thanks, Steve. My other question and I'll turn it over. And you mentioned looking out to next year you expect to see organic sales growth. Obviously, the comps are tough and organic EBITDA growth or EBITDA growth.

I know you're not going to be able to provide a lot of line item detail beyond those points, but can you give us some thoughts in terms of what kind of growth, what kind of mixture between foodservice and traditional food and beverage you might see in terms of volume growth? And most importantly, as food service comes back, what kind of lift you get in mix? Thank you, guys..

So George, I'll start with your question and Steve can add some commentary as well. But I think, look, we would expect and we saw, as a matter of fact, your sequential growth in food service in our Q3. We would expect that to continue into 2021. It's going to take some time for that category to completely recover.

As you can appreciate, there's a lot of verticals there like off-premise consumption of those products, ovens, hotels, sporting events and that kind of stuff. So it will take a while for that to really come back.

But as we kind of look at what we're seeing even within that category, we're seeing opportunities where we're continuing to win share and expand the pie through foam conversions on our comps. And so we'll be in a good position as that comes -- and it will be a source of growth for us, again, going into the future.

And Steve, I'll let you handle this question on mix?.

Yes. George, the only thing I think I'd add to that is, obviously, we'll provide details in February. But when we look at the potential for organic sales and EBITDA growth next year, earning on volume mix and driving productivity are going to be the two primary categories that we'll share with you in February.

We expect to have a strong productivity here next year. We'll have less downtime, particularly on the maintenance side, as we talked in the comments, not doing -- not needing to do some work around recovery boilers, as an example that drives year-over-year productivity improvement for us because of the need not to make those investments.

So it's going to be a volume mix and productivity discussions that we'll be having as we share those details with you coming up in February..

Your next question comes from Mark Connelly from Stephens. Please go ahead..

Thank you. So the number seven, curtain coders is the second of three. How quickly do you know whether you've gotten the savings that you targeted? And I think you also talked about improving sheet quality.

Does that expand your customer potential? Or is that really just sort of keeping the margins where they were?.

Yes. Thanks Mark. So we're actually now -- it's the third of four. So, both curtain coders are done in making. We did number seven in West Monroe just we mentioned. We have number six still to do over in Monroe.

Relative to the savings that we see, it's pretty instantaneous within 30 days basically, and we've got these pretty well dialed-in, as you'd expect. This is third of four.

So the latex and TIO2 reductions, we see the material reductions occur very quickly and start showing up in our performance result and so you'll see that in our comp year-over- year on that.

And relative to the fiber usage, in particular, in the case of what we did in Texarkana on that the head box there, we actually see a reduction in the amount of fiber that we need to use now to make our comp and we'll dial that in.

That's a little longer period of time as you got to run through trials and kind of work through that through our own integrated cup operations, but it increases the consistency of our formation and the profile of the sheet, which then, in turn, allows us to run with a lighter basis way over time..

Okay. And just a question on alternative beverage carriers. This summer, we started to see more of those heavier plastic six-pack carriers where the plastic covers the top of each can. And now we're starting to see trade press about bioplastic green carriers that will bio degrade.

I was hoping you could talk about where those two fit against a system like yours, which is geared towards more higher volume because we're really only seeing that plastic stuff in low volume applications? Is this -- given the sort of business you do, how competitive are these new products that we're starting to see?.

Yes. So, it's a competitive market for sure. But I think you've got the read on it the right way. I mean the high-volume production really needs to go down an integrated line like the ones that we make that allows our customers to do this at incredibly high speeds with high levels of efficiency given how they have to run their operations.

And our throughput does, in fact, do just that. You'll see different types of options, kind of one-offs, particularly on the craft side, where these are hand assembled and kind of put together. And again, we compete with those types of products and expect to compete with those types of products.

But from a volume standpoint, those are relatively small in nature..

Your next question comes from Adam Josephson from KeyBanc. Please go ahead..

Mike or Steve, good morning, I hope you and your families are well. Mike or Steve, just on commodity costs.

I know you gave the annual consumption in the supplementals in the presentation, but can you give us a sense just in light of the deflation you're guiding to this year of $10 million to $30 million, where your input cost basket is relative to normal? In other words, are your -- is your input cost basket in its entirety at normal levels, below average, above average? Just trying to get a sense of where you are input cost-wise versus whatever you consider normalcy?.

Adam, it's Steve. Obviously, it varies by category, the categories well. There are certainly some categories that are at what would be considered historic low levels like you've seen OCC moved toward but appears to be there for the foreseeable future given the global dynamic.

As OCC would very steady and has returned to more normalized levels, we would say you are seeing, as you mentioned, logistics cost truck, particularly does have volatility in it, and we've seen some of that in the short-term, well chronicled. There's been some movement up in spot rates.

So right now, it would be moving up above the norms in the short -term here. Energy, I would characterize, you've got to get a sense for that gasoline it's now kind of more normalized and consistent levels.

So, the net of all of that for us, as you mentioned, this year, modestly deflation area was pretty neutral in Q3, we would expect it to be neutral to modestly inflationary in Q4.

As we mentioned earlier, when you take the entire basket and if the world stopped rotating, on an instantaneous basis, it would, we'd be in a modestly low inflationary environment next year based upon a full basket of those commodity costs..

I appreciate that, Steve. And just to follow-up on that, on the CRB increase. So if you're not really seeing much inflation across the business, I guess I wonder, why the need for the CRB increase and relatedly I'm just trying to understand the timing and the amount of it. So you announced a $50 on the spring. Obviously, Racy did not recognize it.

I don't know how much you implemented of the $50.

So I'm just wondering how that translates to your announcing a $35 a ton increase versus the previous $50? Why the timing of it in August? I'm just trying to understand the timing and the magnitude of that increase versus the previous attempted increase, how much you realize and if any of this has to do with cost inflation, given that you're experiencing input cost deflation this year?.

Yes. So Adam, I guess the way I would answer that, if you look at our Q3 AF&PA data, as we talked about, I think the operating rates are quite strong, finished in September at 96.5%. And demand actually outstrips production in the quarter by 21,000 tons, and backlogs are strong at five-plus weeks.

So when you look at all of that together, supply and demand has a bearing on pricing, as you know. And so that's why we did what we did..

Your next question comes from Brian Maguire from Goldman Sachs. Please go ahead..

Just was hoping to get some more real-time color, if you could provide it on trends in the foodservice business. I know this was weakening through most of the summer.

I just wonder if you're seeing any kind of improvement in October or do you think that more economic downtime might be needed in 4Q, if passing any increase in that market?.

So as you saw, we saw sequential improvement, albeit slight in our Q3, but over our Q2. And we continue to see that trend continue on here relative to any downtime that we would take relative to our cub stock line. We're not planning on any right now in our fourth quarter.

But as we said in the past, we'll match our supply with our demand based on what we're seeing there, it's a highly integrated machine that is over 85% integrated in our own comp operations. So if you think about that for a minute and just kind of parse it out of it, we make 3.8 million tons as a corporation.

And of those 3.8 million tons of, around 10% of that would be that cup machine in Texarkana. The rest of our portfolio is quite busy. Our CRB is busy, our CUK is busy, and the pre-coated SBS machines are busy. So that's how I would have you think about that.

And what we're doing to balance our supply and demand on the cupstock line you just saw us do in Q3, and we'll continue to monitor that as we go forward..

Okay. And then just a question on the EBITDA guidance components, it looks like the performance bucket is kind of going the wrong way by about $20 million.

Just wondering, if you could comment on what the drivers are there versus the prior guide? And then related to that, just any kind of initial thoughts on where 2021 CapEx might fall?.

Yes, Brian, all we were doing on the guide was just tightening up all of the numbers. We were very pleased that we were earning on the volume mix. And so we moved that up a little bit. We recognize in the guide on performance, but we took the economic or the market downtime for SBS. That's now in there.

There 's a little bit of year-over-year comp that is in net performance numbers. So we were really just cleaned those up in total. There was no move, and then obviously will come forward, and you know the major projects that we have underway with Kalamazoo and kind ofour core CapEx, we'll get more definitive on CapEx as we roll into February..

[Operator Instructions]. Your next question comes from Steve Chercover from D.A. Davidson. Your line is open..

Thanks. Good morning everyone.

Steve, first question, did the hurricanes that hit Louisiana and other parts south have any impact on your operations or log costs in the third quarter? And going forward, might there be a benefit from expensive salvage logs?.

Yes. So Steve, we incurred a very, very modest amount of downtime, as precautionary downtime in our converting plant in West Monroe that we shut down as a result of one of the hurricane preparations, but we did not lose any time in our West Monroe mill or our Texarcana mill. Relative to salvage log recovery, we were in those markets every day.

A lot of that was south of where we're at. As a reminder, we buy all softwood material in Monroe. We do buy hardwood obviously in Texarcana. But I think our costs for -- would have been very good this year, and we expect, based on what we see right now as we go into Q4 for that continue to be the case..

Great. And then with respect to Kalamazoo, it's good to hear that, it's on time and on budget. Since the models will soon to be looking into 2022, can you help us to understand how that $100 million benefit is going to flow through. I think some savings might start from Battle Creek and Middletown might start to accrue in 2021.

So, if you can kind of tell us the cadence, so to speak..

Yes. Steve, it's Steve. At a high level, what we've made previously is that of the $100 million of expected EBITDA improvement, roughly half of it would come in '22 with the other remaining $50 million coming into '23. Then right now, it's the right operating and modeling assumption to your question, no real benefit in '21..

Your next question comes from Anthony Pettinari from Citi. Please go ahead..

Good morning. Just following up on George and Brian's questions. You mentioned a number of customer channels that may have to come back before you can run more fully in SBS.

Is there one or two that are particularly important or that we should watch, whether it's coffee chains or institutional or big events that we should focus on? And when you think about sort of a post-COVID recovery, we've seen a lot of retail closures, big coffee chains closing, a big chunk of stores.

Just wondering if you think there could be any sort of permanent impact to cup demand even if we get somewhere back to normal in 2021? Or how are you thinking about offsets?.

Yes. Again, I think what I'll go back to is talk about of the four SBS machines we operate, three coated machines actually are quite busy because we're running a lot of our CUK material over there.

In regards to our cup line, in particular, you said it, we're seeing some declines, obviously, in some of those verticals that we talked about already relative to a year-over-year comp basis. And it is true, if you think about on a coffee channel, while the drive-through window remains quite robust.

The actual consumption within some of those stores is down and some of those stores just have not reopened. And so, we're anticipating that to be the case as we go into the fall year and into 2021. We expect that, that would recover here as there's a vaccine and a treatment plan that works and that people get comfortable with.

When that is, it's very hard to actually point finger on. But we would expect that particular vertical to be a source of growth in the future again. But it's going to take some time for it to recover.

In the meantime, the good news for us is we've got a highly integrated paper machine into 5 integrated plants, and we've demonstrated an ability to grow our top-line quite well, even with that as a headwind. So we think we're positioned very well to respond through this pandemic..

Okay. That's helpful. And then you have a fairly sizable European business, and we're seeing some of those markets go into increased restrictions or walk downs.

I just wondering if you could talk about your exposure there, whether it's sort of on-premise or consumer/grocery? And how current conditions are or maybe are not impacting your business in Europe?.

Yes. Our business in Europe is actually much lower indexed food service, and it's much more indexed to food and beverage. Beverage is a very big business for us in Europe as a matter of fact.

And so, when you think about kind of the pandemic what we saw in Q1 and early Q2 of this year, when Europe was a little bit ahead of where North America was relative to the COVID-19 pandemic. We saw solid volumes. And we would expect in that kind of situation for that to be the case again here going into the fall..

Your next question comes from Neel Kumar from Morgan Stanley. Please go ahead..

Hi. Good morning. Thanks for taking my questions. You talked about moving 100,000 tons from CUK to SBS.

What has the customer receptivity been to switching grades given the perception that the CUK is a more sustainable product? And could you just remind us following the closure of the medium machine at West Monroe, how much incremental CUK volumes can you get out of this and the timing of that?.

Yes Neel. So I guess, if you think about customer receptivity, what our customers have been thrilled that we've run a robust supply chain for them, particularly as you look at what happened in Q2 and into Q3, we've been able to keep them in products. In some cases, their volumes have grown dramatically. And we've been able to supply their needs.

And so we did that in a way that it kind of used our substrates that we manufacture in a way that kept them in business. And obviously, they've been able to excel with our support. So it's been very high in that regard.

In regards to pull in Monroe, as I mentioned, if you look at the pulp machine, we shut down in 2015, which was a bag machine and now the liner machine, liner medium machine.

We've consumed the vast majority of that pulp in fact we've grown 2% to 3% from a creep standpoint, every year, over 200,000 tons between Macon and West Monroe with West Monroe being the largest gaining item. So, we've been quite active in taking advantage of that pulp that we have..

Your next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead..

Great. Thanks. Good morning. Congrats on the quarter. I guess I just wanted to ask about food service to begin with.

So maybe you could characterize where you are in that recovery on a down year-on-year basis? Have your monthly trends kind of slowly, steadily improved? And how do you see that business kind of trending over the next little while? And do you think there's been any structural damage there that would require that you kind of shift your focus? I know you highlighted potentially moving some SBS into CUK, but what are some of the things you're considering there? And how should we think about your foodservice evolving over the next, say, 6 months or so?.

Arun, it's Steve. But Mike touched on a fair amount of that just a moment ago. I think 14% down in the quarter was modestly improved. We're down 11%. And year-to-date, we would expect for a slow and consistent improvement, but it will take some time.

And as such, we're taking the actions that we've talked about, we'll map supply and demand on that singular one machine that's 85% integrated to match it with our cup production, those are actions that we'll clearly take.

And then we'll consistently assess the other three machines which are very busy today, 5-plus week backlogs on them driven by CUK conversions. And as Mike articulated earlier, we're obviously exploring options for investing in pulp capabilities on those other machines as well to create very cost-effective solutions in growing applications..

Okay. And I also want to ask about I guess, longer term, if you're thinking about this business and I just lost my train thought here. But yes, so maybe we can just add some pivot towards M&A then are you seeing any opportunities for bolt-ons in Europe and on the converting side? Or you kind of solely focused internally on your organic investment.

What should we expect on that front?.

So, if you really look at the two acquisitions we did earlier this year both Quad and the Grief converting assets, we're thrilled with those acquisitions. And they're largely integrated into our operations, as you heard, Steve say in his prepared remarks.

We shut down two facilities our two converting facilities, and we've largely completed those activities. That business is where it belongs in its new location, and we're driving synergies through the business. We've got a supply agreement and will unwind over the next couple of years.

And so that whole part of how we thought about the business driving our integration rates up is really working to plan and as we expected it to. Relative to ongoing M&A, as we said last quarter, the bar is really high. We've got a lot to do here already. We're executing well. We're growing organically.

We're investing in our R&D and new product development activities. We're investing heavily back into our Home corporation, our converting operations. If you think about what we've done in Monroe and how differentiating that is from anything else anybody else is doing in the industry or what we're doing in Kalamazoo.

It's going to have a whole different profile for us. And so, we like our, our ability to drive this organic growth for the next few years, for sure, as part of our vision 2025 and that 100 to 200 basis points. So, what we'll compare and contrast against is more investment organically versus M&A. And like I said, it's a really high bar.

Not to say we don't look because we do, but we're very thoughtful in terms of how we'll allocate capital in that kind of an environment..

Your next question comes from Mark Weintraub from Seaport Global. Please go ahead..

Just a couple kind of cleanup questions. One was, last quarter, you had an outage cost impact table, I don't see that this quarter.

Is what we saw last quarter still relevant for what would be in Q4? Or is there going to be downtime at Texarkana to factor in?.

Yes, Mark, it's Steve. We eliminated table because it was kind of there more to help with the quarters, so apologies for that. All was there was to help with quarter since we're now talking about Q4, there's been no real change. And as Mike articulated earlier, we don't have plans for downtime across the cup machine in the quarter..

Okay. Great. And then lastly, as you point out on Slide 9, lots of projects in 2019 and 2020, which would have impacted maintenance.

How much higher would you say as maintenance expense has been this year and/or last year versus what would be more normal or kind of reasonable, recognizing perhaps you haven't fine-tuned it, but as we think about next year?.

Yes, Mark, I think about it and we touched on it, significant investments that we have been making, certainly in recovery of boilers and the curtain coaters and the head back think of it as probably a $20 million year-over-year improvement opportunity by not having to do as much of that from '20 to '21.

We'll come back and talk about that in more detail, but it's in that kind of a range..

Your next question comes from Phil Ng from Jefferies. Please go ahead..

If I heard you guys correctly, it sounds like you're not taking any downtime in bleach port in the fourth quarter.

So curious if the WestRock EBITDA line closure, is that a big deal for you because I don't have a great feel for the overlap that line may have, whether it's foodservice or folding cards?.

So Phil, I mean, we had a competitor that announced they were taking a machine down, a 200,000 ton machine, 5.2 million ton market. So when you do the math on that the capacity that comes out. We talked about, in the case of Graphic, how we're operating our three folding carton grade machines and our cup machine.

So when you expect over time is that operating rates would improve if the denominator gets adjusted on them..

Now any color from your perspective you're intelligence, whether was there a lot of overlap in like folding cartons or cups as it relates to that line that they, you don't have a good deal for you?.

We don't know..

Okay. That's fine. And then the Anthony guys called out in your business and backlogs, part of that is driven by some conversions and some of these growth platforms.

So I'm curious, are you seeing more wins come through recently? Or is this more of the wins that you had last year that's actually finally flowing through?.

We're seeing more wins and we're seeing more opportunities. I mean, the addressable market, as Steve said, continues to grow. And we'll put a little bit more emphasis on that when we talk to you again in February. We're doing a lot of work on this.

We're investing, as I said, in terms of resources that will help drive new product development growth and commercialization. So, you're going to see us really get over our skis here.

And we're going to lead, be the clear leader here on fiber-based consumer packaging, and we're investing behind it to make sure that, that happens both in terms of people and in terms of our capabilities, and that's pretty exciting..

Our next question comes from Mark Wilde from Bank of Montreal. Please go ahead..

Yes, just a couple of follow-ons, again, over on foodservice, Mike.

I wonder, if you guys can give us a sense of where you're at with volumes just in the cup business versus where you expected to be at this point? And then is the kind of stress in foodservice, could that be creating some opportunities to maybe consolidate and rationalize in the space. It's a space you've long wanted to grow in..

Yes. So I'll start and then Steve can comment. I guess in terms of, like I said, the drive-through windows, Mark, remained quite busy as we've seen the economy open back up again. Where we're seeing the issue or the reduction is the event-based on on-premise stuff and that's a wide range of category.

You think about movie theaters, you think about sporting to think about hotels and that kind of stuff. So it's difficult to know exactly how that comes back, or how fast it comes back. As we said, we still believe that this will be a source of growth for us again in the future, but it's going to take some time.

Relative to conversion opportunities, I mean, we talked a little bit about what we see on the SBS side of the business for CUK. So, I believe that's where you were talking about, so I won't repeat my comments on that.

But the other part of it is, we're pretty aggressive, as you know, taking a look at our footprint every year, our converting footprint every year and making sure that we're lined up with where our customer demand is coming from. So, we'll continue to make -- be very thoughtful in terms of what that looks like.

But when you're driving the kind of growth that we're driving now, we need that capacity to help us make sure that we're ensuring customer service and meeting their demand needs. So, we're repurposing some of that capacity maybe a little differently and how it was originally intended to be used..

And Mark, to your question on consolidation, M&A-type consolidation, as Mike said, we have a high barm but certainly we're always opportunistic and thoughtful if there was an opportunity for consolidation. It would be something we would take a serious look at.

There is the possibility, of course, businesses being disrupted and may have a need for a change. So that's always on our radar as you'd expected. And generally, our integrated comp business is down in very similar percentage as what we articulate for the whole foodservice business. So there's not a material change there.

As Mike said, it's really that last 15%, 14% is driven by theaters, airlines, hotels, events that's kind of what is really driving that component. It's a pretty long tail..

Your next question comes from George Staphos from Bank of America. Please go ahead..

Thanks for taking my final question. Hey, guys. I want to take another approach to that question that market teed up. You see 1 of the other traditional B2B packaging companies in the market in a different substrate, developing a consumer cup business with a very large investment.

You have some potentially excess capacity right now in bleach board in your cup business for obvious reasons within foodservice.

I recognize you don't want to make a decision for the next three years based on the last two quarters, but is there an opportunity to creatively use maybe your bleached capacity in your cup making for a consumer offering, either at retail or direct-to-consumer.

Have you looked at that at all? And what's the return payoff if you have? Thanks you guys and good luck in the quarter..

George, just for clarification, are you talking about kind of moving out of institutional cups and into retail cups?.

Yes, that's what I was thinking about. I don't know if you have available cup making capacity, but my guess is you might, because of what's been happening in foodservice volumes overall.

So is there an opportunity to take that capacity and offer it either to retail for the consumer or direct to the consumer in some way to fill up that capacity, not knowing what investments you'd have to make on web platforms web platforms, marketing and so on, maybe it's not worth it, but just to figure to tee the question up?.

Yes. So thank you for that. I understand it. From our standpoint, as you know, we're over-indexed on the institutional side, which is really where we're set up, and we've got the ability to really have scale and drive cost efficiencies through our business there. So relative to building the brand, you won't see us do that.

Relative to a customer that comes to us and maybe 1 in private label consumer as an example and wanted to cups made, we could absolutely and would look at those kind of opportunities. So that's how I believe we would approach that in the marketplace and it would happen..

We have no further questions. I'd like to turn the call over to Mike Doss for closing remarks..

Our solid results in 2020 are reflective of the long-term value our packaging solutions provide to food, beverage and foodservice industries. We are delivering on our promises, advancing our strategic priorities, posting growth in both organic sales and EBITDA.

We're excited about the business and extending our clear leadership in fiber-based consumer packaging through new product rollouts, system execution and service to customers. Our dedication to employees and partners is unwavering as we pivot to a growth culture.

Our role in advancing the global sustainability endeavor is nothing short of exciting and energizes our employees and partners. And with that, we look forward to talking to you again in February..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..