Q4 2019 Earnings Call
Welcome to the graphic packaging fourth quarter end to full year 2019 earnings call.
At this time, all participants have been placed any listen only mode and the floor will be opened for your questions. Following the presentation. If he would like to ask a question at that time. Please press star one on your Touchtone phone.
Anyway. Your question have been answered email removed yourself from the Q by pressing the pound key we ask that well posing a question that you. Please pick up your handset to allow optimal sound quality lastly, if you should require operator assistance. Please press star Zero I'll now turn the call over to Melanie Skijus Vice president of industry.
Relations to begin.
Good morning, and welcome to graphic packaging holding companies conference call to discuss our fourth quarter and Oh, you're 2019 result.
On the call will be Mike Doss, a company, President and CEO , and Steve Scherger Executive Vice President and CFO .
Help you follow along with today's call. We've provided a slide presentation, which can be accessed on the investor section of our website at www graphic paging dotcom.
I would like to remind everyone that statements of our expectations plans estimates and beliefs regarding future performance and that 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 companies.
Hi, this expectation.
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 statement as such statements speak only as of today on which they are made and the company undertakes no obligation to update such statements, except as required by law, Mike I'll turn it over.
Do you.
Thank you Melanie good morning, Thank you for joining us to discuss our fourth quarter and for your 2019 results.
Before we finished the year, having delivered on or exceeded targets. We established on our fourth quarter 2018 results call. We draw profitability improvement in 2019, primarily by our pricing actions and productivity initiatives, our EBITDA and cash flow performance met our raise targets for the year and were created share.
For older value by executing well and effectively allocating capital.
Importantly, our strategic initiatives are positioning us to achieved rose and return goals. We established in our September at our Investor Day with vision 2025 in 2019, we achieved many milestones that position us for the next several years, we fully integrated Dsps mill and food service assets.
Successfully achieving run rate synergies of $75 million at year end.
Well, let acquisition increased our mill to converting integration and we see continued opportunities to increase integration rates and improved profitability crossover S.P.S. and food service.
In 2000.
What's the main strategic investments in our integrated CRB platform that will further strengthen our position in the marketplace. The CRB transformational investment in Kalamazoo is underway and on track for early 2020 to start off our CRP platform will significantly benefit from scale city aren't automation and technology.
We expect to generate $100 million, an annualized EBITDA improvement upon the full ramp by the end of 2022.
In addition, during the year, we successfully completed the artistic carton acquisition, which expanded our market participation and growing segments.
Our two k. production in 2019 outpaced the industry and we achieved for your volume growth over 2% driven by strong global demand for see UK and beverage packaging.
Pan European accelerate driven by sustainable we supported growth of paperboard multi pack beverage somebody has a subs.
For other forms of.
Orders for our proprietary clip solution continues to meet the expectations. We finished with vision 2025.
Our investments in the mineral facility in the U.S.
And our snake facility in Europe fully support the organic volume growth trajectory, we see beverage packaging solutions and see you keep paperboard for the next several years.
Turning to the fourth quarter, we reported solid operating and financial results with volume up 2.6% and net volume up 0.7% on a year over year basis, adjusted EBITDA of $259 million improved $11 million from fourth quarter 2018 and was in line with.
Our expectations adjusted EBITDA margin of 17% improved 60 basis points from the same period a year ago.
Net organic volume growth well, a positive 20 basis points was below our 100 basis points growth targets for the fourth quarter as a significant customer conversion to our paperboard solution was delayed by one quarter to conversion was fully ramped at year end.
We continue to expect 100 to 200 basis points of sustainability supported net organic volume growth and 2020 as a result, multiple conversions to paperboard solutions already committed to by our customers.
The fourth quarter benefited from continued positive pricing of $25 million with our pricing to commodity input costs relationship a favorable $31 million as we experienced net commodity deflation of $6 million during the quarter.
For the full year 2019 financial results met our raised expectations net sales of $6.2 billion grew 2.2% driven by $131 million in pricing and $50 million and volume mix primarily from acquisitions.
Full year, adjusted EBITDA of $1.03 billion increased $59 million or 6.1% from the prior year and was driven by a 98 million dollar positive price to commodity input cost relationship and $74 million and improved performance.
2019, adjusted EBITDA margin of 16.7% improved from 16.1% in 2018.
We generated significant cash flow during the year with $528 million and adjusted cash flow an increase of $59 million from 2018.
He will discuss our financial results in greater detail during his prepared remarks.
Moving now to operational trends in the quarter, our mills and converting assets ran well during the quarter end for the full year, we successfully executed on multiple large scale capital investments, including the Texarkana recovery boiler and the final ramp of the large Monroe converting facility.
We are we're positioned well to service new volume opportunities in 2020 and beyond.
We continue we will continue to provide customers with the highest service and quality levels consistent with our expectations.
For the fourth quarter of 2019.
Reported operating rates is 97% for CRB, 92% for SBS graphic packaging see UK operating mains above 95% backlogs remain healthy at five plus weeks for see UK imbalance that three to four weeks for CRB and SCS.
Shifting to performance.
We achieved $74 million of operating performance in 2019. This solid improvement in productivity was partially offset by $36 million, an incremental incentive and pension expense.
Our continued emphasis on improvement initiatives operating cost efficiencies benefits from capital investments and synergy achievement drove strong performance for the full year.
Let me now focus on our capital allocation priorities are strong cash flow generation and solid balance sheet provides us with the financial flexibility to deploy a balanced approach to capital allocation, we executed well in 2019 and will continue this focus and 2020 during 2019.
Returned $242 million and two stakeholders through dividend distributions and share repurchases paid $53 million for the artistic carton acquisition and invested $353 million capital back into the business, including an initial 23 million dollar outlay to support the transformational.
Kalamazoo CRP investment.
Focusing briefly on 2020 guidance, we expect that we expect 2020 adjusted EBITDA will be in the range of $1.05 billion to $1.1 billion and adjusted cash flow to be in the range in $200 million to $275 million.
As we shared with you as part of our vision 2025 global shift to paperboard packaging solutions, coupled with our significant new product development activities is driving demand and provides us with confidence we can capture the 100 to 200 basis points of sustainability supported net organic volume growth in 20.
In the fourth quarter, we ramped up several new.
Several us customers into paper Cups from other substrates. We have also shipped our first Q clip packaging machines to a customer in Europe , and we are seeing increase interest from customers in North America. Our organization has relentlessly focused on capturing paperboard conversion opportunities and I am encouraged with our momentum as we enter 22.
Finally, let me take a moment to discuss three important announcements. We are also making today along with our 2019 highlight some results first international paper notified us of their intent to begin the process and reducing their ownership interest in our partnership per the agreement we will be purchasing approximately.
15.1 million partnership units from international paper for $250 million. Later this week the purchase will be funded from our domestic revolving credit facility and will result in a reduction of pipe piece ownership in the partnership from approximately 21.6% to 18.3%.
As you may recall.
It can redeem $250 million a partnership units every 180 days per our agreement, we're very pleased and R. 22018 transaction with international paper is playing out as originally intended creating value for our customers and stakeholders, while building a leading integrated paperboard packaging platform. We appreciate.
At the confidence international paper placed in us to build and growth business and look forward to creating value for our stakeholders for years to come.
Second we are announcing the settlement of approximately $900 million and obligations for our largest us pension plan through lump sum payments and the transfer the remaining pension obligation to an annuity provider.
The lump sum payments were completed in Q4 in the transfer the benefit obligations to the annuity provider will take place in Q1 2020, I'm very pleased with this outcome for our retirees, our pension participants and graphic packaging.
Finally, we are announcing the acquisition of a folding carton facility from Quad graphics for $40 million. This strategically located well capitalized folding carton facility in Omaha, Nebraska conveniently serves customers across the Midwest to converting operation consumes approximately 40000 tons of paperboard annually and will contribute.
An estimated $7 million, an annualized EBITDA, including synergies over the next 24 months.
With that I'll turn the call over to Steve for more detailed discussion on our financial results, Steve Thanks bike and good morning.
We reported fourth quarter earnings 11 cents per diluted share.
Fair to 15 cents in the fourth quarter of 2018.
Fourth quarter 2019, net income negatively impacted by net $34 million, especially chart.
Including a non cash pension plan charge associated with the settlement process for our largest us pension plan.
Fourth quarter 2018, net income was negatively impacted by in that $21.9 million special charges.
Including a charge related to the extended outage at our Augusta Sps metal.
Details can be found in the reconciliation of non-GAAP financial measures table attached to the earnings release.
When adjusting for these charges adjusted net income for the fourth quarter was $67 million or 23 cents per diluted share.
This compared to fourth quarter 2018, adjusted net income of $69.4 million or 23 cents per diluted share.
For the full year 2019, we reported earnings of 70 cents per share compared to 71 cents per share in 2018.
Net income in 2019, and 18 were negatively impacted by a net 48.9 and $30.2 million a special charges.
When adjusting for these items adjusted net income in 2019 was $255.7 million or 87 cents per diluted share. This compares to adjusted net income in 2018 $251.3 million or 81 cents per diluted share.
Fourth quarter 2019, adjusted EBITDA increased $10.7 million in 2000 $18 million to $258.8 million.
Adjusted EBITDA was positively impacted by $25.5 million higher pricing.
$5.7 million in deflation, primarily secondary fiber and energy.
$4.8 million, an improved operating performance.
$6 million unfavorable foreign exchange.
These benefits were partially offset by $15.4 million of unfavorable volume mix.
At $11.5 million of other inflation, primarily labor and benefit.
Full year 2019, adjusted EBITDA increased $58.9 million or 6.1% 2018.
Adjusted EBITDA was favorably impacted by $131.2 million by our pricing and $37.9 million have improved net operating performance.
These benefits were partially offset by $46.4 billion of other inflation, primarily labor and benefits.
$32.7 million of commodity input cost inflation, primarily would an external board.
$22 million of unfavorable volume mix and $9.1 million foreign exchange.
We ended 2019 with over $1.7 billion global liquidity and $2.7 billion of net debt.
Total net debt decreased.
Collars during the quarter.
Net leverage was 2.6 times at the end of 2019 at the lower end of our targeted two and a half to three times range.
Moving to our 2020 guidance as Mike referenced we expect full year adjusted EBITDA would be in a range $1.5 billion to $1.1 billion.
Key drivers of the adjusted EBITDA guidance.
Our $30 million to $40 million and positive pricing, partially offset by $20 million to $30 million of commodity input cost inflation.
And positive volume mix of $15 million to $25 million.
We expect performance improvements of $65 million to $75 million will offset higher labor benefit and other expenses, primarily insurance and property taxes.
$50 million to $60 million.
2020, adjusted cash flow is expected to be in a range of $200 million to $275 million reconciliation from adjusted EBITDA to cash flow includes 600 $625 million in capital spending $140 million to $160 million and cash interest.
$30 million to $40 million in cash taxes tend to $30 million in working capital and $10 million to $20 million and pension contributions.
Following up on Mike's comments on our partnership with International paper.
Assuming IP continues to reduce its ownership interest for the agreement, we do not expect to be a material us federal cash taxpayer until 2024.
For 2020, we will be providing adjusted EBITDA cash flow guidance for the full year and intend to provide updates to the annual guide during quarterly reports when necessary.
We will not provide specific quarterly adjusted EBITDA guidance in 2020, and instead, we'll be providing our expected year over year impact to EBITDA from major maintenance related events in our detailed guidance.
Which is available on slide 10 of the earnings presentation available on our website.
The annual view is consistent with how we operate the company and is in line with the long term goals outlined vision 2025.
Additional guidance details are included in the presentation on our website.
Thank you for a time this morning, I'll turn the call over to the operator for instructions on Q1 day. Thank you.
Thank you at this time I would like to remind everyone. If you would like to ask your question. Please press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the Q press the pound Keith we ask that you. Please limit yourself to one question and one follow up only and I'll turn to the key.
For any additional questions. Your first question will come from the line of Mark will de of BMO capital markets.
Good morning, Mike Steve Melanie.
Good morning, Mark.
I Wonder for my from my first question, if Mike can you just help us with how you're seeing kind of supply demand in the boxboard markets right now, especially SBS.
It seems like there or at least two or three big moving parts there with the GP closure the finished strike in the new entrant.
Yes, I think you summarized it actually pretty good Mark I mean, our overall demand as you saw held up well in Q4 in terms of key markets that we service.
And.
To your point I mean, a major competitors shutdown and bill effectively October 1st on the Sps side and at the same time, we've got another competitor a new entrant thats ramping up.
And that's to permission, we avid that'll be a year over year increase so on 100000 tons versus the 360 that came out of the market. So we would still expect to see.
That's the positive on operating rates up probably a couple of quarters into the year, usually takes a little while for were.
That inventory to kind of completely moved through the system has been our experience at least so we're going to continue to watch that and monitor that.
And see how that off lays out the other grades as we talked about RC UK its little hard to see that now because its commingled with the jipson, while facing board, but you are operating rates are above 95% as we said.
Global demand for that remains very strong driven by a lot of the beverage sustainability packs that we're talking about.
We've referenced a few of them on our call today and as part of our look forward on our 100 to 200 basis points growth that we believe that we can drive here in 2020, and CRB has been stable I mean, I know the operated the the backlogs are down year over year, but that's really more of a function as we've talked about is in 2018, they got to law.
And we weren't doing a great job servicing our customers and so.
We are doing a nice job, having the inventory, where we needed now to be able to take care of those customers and operating rates on CRB last year were very strong at 97%.
Okay, and then for Paul and I, just wondered if we could get a little more color.
On the on the Quad graphics deal because it looks to me like if you're saying.
With synergies Youre going to get that business up to 7 million in EBITDA that it must be essentially breakeven or maybe just a little above breakeven right now.
So I'm just.
I'm curious when you think about that synergy numbers I'd just.
Most of that just pulling more board volume.
Through your mills into that card and plan is there any way to actually improve profitability at the carton plan itself, either through kind of changing mix changing price et cetera.
Yeah. Thanks for that question, we're excited about having.
At facility joined our business those employees joined our business look the strategic location of that facility is excellent Omaha, Nebraska to service our Midwestern customers.
So we'll start with that that helps us optimize our business mix.
Across the Midwest platform for some savings from freight standpoint, both onboard and Don.
Yes and customers.
We do run a big system up in the Midwest. So we've got the opportunity to balance that across the larger platform. So there's some synergy opportunities there as well.
And this facility as is very well capitalized so the printing in cutting going.
Looking at this location are excellent and the other part of that that I'd add you referenced. This is it falls 40000 tons of paperboard, the majority of which CRB and you know the investment we're making in Kalamazoo, there, where we're going to have the better part of $130 per tonne you advantage. There. So when you put those things all together both on the.
Hurting in on the mill side.
It really makes sense why that yields a nice bolt on acquisition for us.
Your next question comes from the line of Mark Connelly of Stephens, Inc.
Hey, Good morning. This is John rider on for Mark.
John .
So.
As we see trends towards more sustainable products continued to fall.
Has your view shifted on which degrees specifically, we'll see the most benefit.
No not really John I think if you look at what we've been seeing and what we've messaged.
We expect CRB to be relatively stable.
There might be some growth opportunities as we have a higher quality sheet and come out the other end up our investment we're making in Kalamazoo. So that probably is a net net slight positive for us.
But then the C. UK, we expect that to continue to grow.
Both domestically and internationally and Thats was our experienced last year as well on we expect the SBS segments, where we compete and specifically that's folding carton and food service.
A little bit of liquid packaging to be actually slightly up.
Thats offset by a few of the other segments dsps market that are little bit pressured specifically tobacco packaging and some of the exports there so.
And it's completely in line with the view that we've got relative to our under 200 basis points of growth, we expect to achieve here in 2020 and job to Mike's point, specifically in 2020, we'll see that hundreds of 200 basis points of growth, primarily coming from the UK and Sps grades driven by those.
Very specific conversions beverage conversions from plastic into Paperboard Cup conversions from other substrates into paperboard and other bowls and trace so those three categories will drive it mostly through the two burgeoned paperboard grades.
Okay. That's helpful.
And then.
You guys could just kinda give a brief update on what's happening with this new facility.
Yes, so the state facilities.
For.
Your description purposes, a smaller version of what we're doing in Monroe. It's the same equipment that we're putting in there just on a much smaller scale. So we're going to have a global platform to service our beverage customers on that unique and different than really anybody else in the space.
And if you think about it we tend to service the large.
Brokerage companies and be able to have that balance and that international platform. That's consistent gives us unique.
Ability to compete for that business and service those customers. So.
As we referenced in my prepared comments the Monroe facility is pretty much at full ramp rate as we head into 2020 snake will be a.
A little bit behind that we expect the second half 2020.
To be really at almost a full run rate there so.
It's kind of a complete system that we've got across the globe.
Your next question comes from the line of George Staphos with Bank of America.
Hi, everyone. Good morning, Thanks for all the details.
Wanted to ask my first question largely around volume trends can you talk a little bit about what might have caused the customer delay. Although these things are our normal when you have conversions and what effect that might have had on the volume mix number and related Lee given the success that you're speaking about in terms of.
Winning these conversions are you seeing other substrates, Mike fighting back a bit more aggressively to regain share or perhaps even grow their share what are your thoughts there.
Hey, George its Steve just to address the first part of the question then Mike and add on specifically this modest kind of one quarter delay was just related to a large nationwide rollout and customer itself got to into a position where they just weren't able to migrate the volume as quickly as expected.
But as we mentioned it is fully ramped by year end, we believed that it had.
Just a little more than a 50 70 basis point impact on the quarter and so we were really heading towards that hundred basis points and then just a natural delay at with our customer or not in terms of our ability to service. It played out but it's now fully ramped and Mike touched on the other piece, yes just.
To build on that.
Steve relative to other substrates fighting pack look these are mature markets and we expect that we're going to compete or the business and the volume every day, specifically as it relates to the cold pumps, we do see some regional activity, where there are some plastic options that are being trials and explore.
Look we were not going to win every jump ball along those lines and we've been very straightforward and then Thats all factors in our 100 to 200 basis points that we're putting out their growth that we expect to achieve we are actually winning more than our fair share on the hatkoff side.
Where plastics really isn't an option if you think about it or as big an option. So I think that's how I'd ask you to think about a georges balanced view of what we think as possible and very targeted to other products where weve.
With a you have something that they desire to and into advantage.
I will make.
Good to see I'm sorry.
Yes, just concluding that to Mikes point is for 2020. These are known conversions with known customers I think thats whats critical to our our confidence in 100 to 200 basis points.
Understood and I appreciate the thoughts on that the other question I had just if you could go over if I Miss it apologies in advance, but if you could go or whats in your.
Price cost guidance in terms of assumptions on Nat gas chemical in resins recovered paper. Thank you and good luck in the quarter.
Yes, George its Steve just regards to price the $30 million to $40 million is.
Flow through of pricing actions that we've taken.
Known movements that will occur so there's nothing new information Thats all information in the marketplace relative to previous announcements in the flip over our contracts contracts with customers with regards to the 20 to 30 million of commodity input cost inflation, it's on a basket of about a $2.5 billion.
And it's a 1% increase lowest in many years, but overall it so its fleet. The midpoint is a 1% assumption across that basket don't want to feed into the specifics by line item because we don't know what will run. This year will we think we're making a very appropriate assumption for modest.
Pre but modest inflation of roughly 1% across that two and half billion dollar spend I think George just to put a little finer point on Steve's comments relative to why we're not going to give specific individual commodity.
Assumptions as if you take a look at oil for.
Two weeks ago based on geopolitical tensions it was closer to $60 a barrel yesterday was 50. So these things move around and so what we're telling you as we think we will have modest level of input cost inflation, we're not sure exactly where yet.
Really only of the January but thats our assumption.
Okay. That's great. Thank you guys I'll turn it over.
Thanks, George Your next question comes from the line of Ghansham Panjabi of Baird.
Hey, guys good morning.
I guess my first question on the volume mix that you cited in Fourq you as being unfavorable can you just give us some color as to what exactly that was due to and then just following up on Georges last question on the on the delay fourq into into one Q should we sort of looked at the benefit on one Q as being 80 basis points. Because you came in a 20 basis points of growth in.
Fourq you and you cited that being below your 100 basis points targeted that is otherwise wouldn't think about it for one Q.
Yes documents, Steve a couple of things there with regards to Q1, we would expect to be in our 100 to 200 basis points for the quarter and so our expectations will be as that we will be within our 100 to 200 basis points for for the quarter with regards to Q4.
Volume mix and it is relevant.
Some of the negativity things we've been working through here throughout the year in terms of the Onboarding of significant volume in some of the mix changes we've seen in places like big beer, but more importantly, the onboarding of the significant volume had some negative volume mix is we're working to earn on it we fully expect as you've seen in the guide to.
Also positively begin to earn on volume mix in Q1. The number Q4 was a little larger than normal because we had a bit of an unusual comp at the end of 2018, we had a very large amount of volume of open market paperboard that was built a bit of a onetime event that we sold into the marketplace.
Didnt repeat in Q4, and so that was a bit of a specific comp.
And so again just repeating it we expect in Q1 to be in the 100 to 200 basis points and expect to begin to earn positively on that volume mix in Q1, I think guns and the other thing I would add if you think about what we have been able to do on the pricing side. If you take a look at what we're forecasting gear for.
20 to 20, you added up its $250 million, where the pricing that we will achieve Dover about a three year period of time, we also shrank our our lag time from nine months to six months and you don't do that as you know without putting some business at risk and Thats in fact, what we did.
But we've got a lot of confidence is that being the setup as we head into 2020 as we've talked about that we did all that and we've got this growth trajectory that now we'll be able to a.
Kurt on so that's how I'd ask you think about it.
Okay and for my second question kind of putting 2019 perspective right. So we came in at 60.7% EBITDA margin.
In 2015, you at 18% the only big portfolio move is really be ESPN.
How much of that was you know how should we sort of bridge that margin gap and what are the big drivers of that.
So I guess the first thing is that the Sps platform came in at Atlantic, 13.1%, So that that would be a bit of math that you'd have to factor into that we delivered on the $75 million, where the savings as a run rate numbers. So thats flowing through you saw the step up last year from 16 wanted 18 to six.
Seven.
19, and if you take a look at the guidance that we provided here.
For the full year 2020, we expect to continue to.
You know expand them.
Got you did that into mikes point, the prior to the Onboarding of Dsps Cup business. The core business prior would be moving back towards those margins that you.
Just articulated with now SBS moving from Thirteens into the.
Low mid teens, and Thats, where it we've as we've talked before where last year. We saw a fair amount of the inflation and it's a place where we know that there's still opportunity to improve that return profile to get into at or above cost of capital returns and that's a big part of the prioritization.
For 2020 as well in terms of the overall performance of that part of the platform.
Thank you.
You bet.
Your next question comes from the line of Chip Dillon vertical research.
Good morning, everyone. Thanks for all the details.
My first question has to do with the.
And I might have missed any opening disclosures, but.
Can you talk a little bit about the process of buying in the.
The stake that IP has an in particular did did they ask for you to buy all of it.
Secondly.
What is sort of the financing arrangements, let's assume you know it is put to you every six months do you have a revolver that can handle the 250 every six months.
Yes, chip and see though with regards to this $250 million it will execute on that we announced today and what execute on tomorrow really that's just per our contractual agreements and so we have the ability.
I have the ability to execute pursue to 50, we executed on it leveraging our revolver as we mentioned in the remarks, we have a 1.4 billion dollar us based revolver, which is where most of this will apply to we have plenty of capacity to do this move as well as if there was a.
Next one in July .
We could pursue that as well, we'll look at the debt profile. The company this year as well to determine what mix will will have a in terms of the permanence of the of the financing, but a lot of confidence that our balance sheet is in a good spot to do this this year and you've probably done the math if you look at the guidance that we're providing.
The guidance, we're providing does assume that the second $250 million will take place is assumed with debt.
Guide the 140 to 160 of cash interest expense and if you kind of fast forward through we'd still be within our two and after three times leverage range, probably at the higher end of it assuming we would execute on the second to the if that occurred.
In the same scenario the same fashion that we're doing this to 50.
Okay very helpful quick follow up on one of the slides in mentioned.
Script, compress timing of moving pricing vis-a-vis costs from nine to six months, which is certainly a big improvement.
Zero and ultimate goal and.
I mean, what would be a practical goal in terms of even further narrowing if thats possible.
No chip thank you for that that.
Recognition of that but I mean from what we've said and we covered this at our Investor day as well I mean that was our target and Thats where were at.
So six months is again, how we'd ask you to think about it and that gives us a couple of moves every year. So we're not dragging inflation on a one year into the next which was our which was our goal and where they're now so.
That's where we're focused.
Understood. Thank you.
Your next question comes from the line of Anthony Pettinari upsetting.
Good morning.
Hey.
Mike I trying to announce the single use plastic then over the weekend that seemed very focused on foodservice and I'm. Just wondering you see any potential for this the kind of tighten the global market you either for Sps or see UK.
Either in the near term or the long term I know trend is not a major market for you, but I'm just wondering if there's any potential knock on effects.
I think it's consistent with the view, we talked about at our Investor day in terms of the trends we're seeing globally.
Certainly we see that acceleration in Europe , we talked about Anthony and now China's adding to that and as we mentioned we've got a lot of opportunities here in North America that we're working on specifically in number the product lines, It's Steven I've already outlined here. So it's kind of consistent with our view.
Okay.
And then just given the quarterly outage guidance for the year and I'm just wondering when you step back and look at 2020 come from a big picture, what you view as maybe potentially the biggest sources of execution risk and then looking at performance improvements what could drive I guess, either downside or upside to your your target.
Yes. Thank you for that so the biggest year over year changes you talked about this in our Q3 call is we've got a recovery boiler that we're going to do maintenance on significant maintenance on in Monroe and West Monroe.
I will take place in Q2.
So.
On a year over year basis.
I'm not going to have a huge impact on our EBITDA because we've done Texarkana as you know last year and as we said on our Q3 call to the best of our knowledge based on the testing that we've been done in the inspections that we've done. This is the last major recovery boiler work that we need to do for the better part of about a decade in.
And so that certainly is something we've got to manage managed well. We're we've built inventory to allow us to be able to take care of our business during that period of time. So you see that in some of our inventory numbers as we finished 2019, but we're set up well.
We believe based on the planning that we've done to take care customers during that.
Period of time I think the other thing that will continue to benefit from here 20, as we started up a facility in Monroe that big converting facility that many of you had a chance visit and on a year over year basis, we would expect to drive a significant amount of productivity.
With that asset and Thats, a fact, how we develop our plans for the year. So those two things are probably the biggest things that are on our mine Anthony just in terms of the new information, we're providing on year over year net maintenance outage costs.
The intent there is to provide you with some facts around what's occurring in terms of what quarters versus the prior year and as you can see from the information Q1 is pretty neutral and so natural improvement will just occur.
In the business consistent with our guidance improvement, whereas Q2, what Mike just articulated is taking place in Q2, this year rather than being spread more in Q3 Q4. So on a year over year basis will experience a fair amount of that maintenance related expense in Q2 tapping down.
Thank you do with more material improvement in Q3 to four on a year over year basis. So it's going to the year will flow a little different than last year, we're trying to provide a little bit of transparency into how the business will function. Given these large maintenance activities that that we undertake annually.
Got it got it Thats very helpful I'll turn it over.
Your next question comes from the line of Debbie Jones of Deutsche Bank.
Hi, Good morning, and maybe this question is on the volume outlook for next year. It does seem that there is one customer driving a significant portion of it so curious.
It did a handful of customers it drives the balance today to the hundred to 200 basis points of recruitment are we talking about.
Caremore Im just trying to understand.
Really how many conversions are happening.
With your customers and then.
Sit here today do you think your conversations about potential teacher conversions are increasing on or about the levels. They want to maybe at the right now.
Yes, Debbie its Steve I'll, I'll kick that off that $15 million to $25 million of EBITDA improvement year over year.
It does have the little bit of the acquisition that we just talked about from quad in there so that will be volume related but it is its own rockets a wide variety of customers. There are the large recognized customers that you will talk about that we've talked about before the dunkin' donuts or large beverage customers with conversions to.
Clip so those will get the headlines, but really across the enterprise, we have small medium and large conversions happening in those categories beverage conversions Cup conversions Bowl plate conversions. So it actually span small medium and large will tend to talk about it more though the headlines will read.
With some of the big ones, but we're pleased with the fact that it actually is kind of spanning across the enterprise small medium and large customers.
Okay. Thanks. That's helpful. My second question are you able to just update us on your recycled fiber.
Those are the 1 million how are you changing anything about the mix of recycled fiber just due to where pricing is right now.
Anything else recipes that are in your outlook related to recycled fiber.
The very least are able to telecity and expect pricing higher year over year.
In regards to any pricing moves that would be contained in.
The guide that Steve Kinda talk us through Debbie relative to input cost inflation, it's bouncing along the bottom right now could we see a little bit of an uptick given that yes, we think that that could happen, but we don't know for sure but what we are doing is with the investment we're making in Kalamazoo is one of the most modern stupidity art cleaning systems there.
So we'll be able to take an increasingly lower quality grade material and turn that into high quality paperboard and so the investments, we're making will in fact help us be able to do that over the long term medium and long term and we think thats the right investment for us to make.
Great. Thanks.
Q.
Your next question comes from the line of Brian Maguire of Goldman Sachs.
Hey, good morning, guys.
Just wanted to go back to the delay that customer delay appreciate it was only a one customer one quarter delay, but seems like it might be having a negative impact on the stock today. So just wanted to clarify your comments there Steve are you, saying that in.
January so far you're kind of already in that back on that 100 200 basis points.
Hi, a growth range, the kind of always talked about for for 2020. So you kind of sit here in one Q, where we're kind of already at that targeted targeted range.
That's correct, Brian just to repeat that for you we under the 200 basis points that we have line of sight to for 2020, we see line of sight to that in Q1.
And I apologize if I Miss in the prepared remarks, I think normally you gave some.
Color on on.
The forward quarter EBITDA guidance.
At the visit or or are there any comments you have on a one to kind of EBITDA.
Yes, Brian It would just at the end of the prepared remarks, but we are this year, we're going to move to annual guide with regards to EBITDA on kit.
We're providing as what we just talked about a moment ago, which is visibility into our year over year maintenance related outage costs, which will provide you with the appropriate line of sight into outlook quarters will likely play out as you look at prior year EBITDA this year as guidance and kind of the flow through of how maintenance costs will.
We'll provide toward substitute into it with a little more information that's granular on maintenance costs moving away from a quarterly specific guide relatively though.
Yes, sorry, I missed that I.
Just on the on the pension last thing for me some attention.
And just kind of question on why the decision to do this now and.
Didnt sound like you were talking about any cash impacts the PK from that I'm, assuming you're just transferred some assets for the pension fund itself, but just kind of confirm that in any.
If you could have on your own cash flows in the 2020 are going forward here.
Yes, Thanks, Brian .
In terms of this $900 million that that we've settled this has really been up five to seven year journey actually towards.
Using and then eventually get into a place a fully funding and removing the liability moving it into an annuity provider. So it's really been a long journey and it all culminated here at the end of the year adherence in January and so it's very good outcome for our retirees there with associated with that $900 million there are no cash.
Cash implications of that in 2020 , it's fully funded.
So there'll be no additional cash requirements. The cash that we are putting into our guidance is our ongoing remaining pension plans that we have around the globe about a half a billion dollars.
Around the planet we continue to.
Support financially they are all very well funded but thats consent that 10 to 20 is just now in kind of the normal course.
Got it thanks very much.
You bet.
Your next question comes from the line up around this one often of RBC capital markets.
Around your line is open. Please state your question sorry about that as an unmet sorry about that good morning, guys.
I guess my first question is is around pricing.
Looks like you have the flow through benefits of 18 and 19.
Still flowing through in 2020.
You know you cited kind of mid Ninetys operating rates in CRB into UK.
Do you think there's any opportunities to.
Go after further pricing in those two grades I know that you're still working through the inventories SPX and I'm, just curious where it seems pretty tight and those two grades and if there's any opportunity to take further pricing. Thanks.
So ruin. Thanks for your question I guess as you know, we're not going to talk about future pricing actions on a on a call but in terms of what we would or wouldn't not do having said that we're very focused as we've talked about in terms of the operating rates driving our integration levels up in today's acquisition. This tuck in acquisition continues to be.
Hold on that strategy to drive our integration levels across all three grades up which helps us drive and optimize our overall mix and so I'd I'd ask you to kind of just think about that continuation and good tuck in acquisition last year with artistic carton. We've done another one now here in Q1, and that's really where were placed in our emphasis in addition to our new price.
Stick development activities that are driving 100 to 200 basis points growth will continue to full paperboard through our low cost integrated platform.
So just to clarify.
Is there an opportunity it sounds like there is an opportunity for for continued mix improvement as you increase does.
That that integration level is that right.
Yes, that's right I mean, the mix so certainly improves as we continue to drive it to our own converting operations and it kind of smoothes out the demand profile.
So it helps us optimize our EBITDA on free cash flow and Thats why we like that is one of our keys.
And as that mix captured in your and your price outlook or.
Would that be additional upside in the volume mix outlook 15, Okay five not.
Great and then just lastly, just on on the the change in IP is ownership I, just I guess I just wanted I was just curious.
It seems like there was a potential for them to.
Remain owners for a little bit longer.
Was it was there any are you aware of any changes in their their view of their their ownership of the GP case stake.
Did that change over the last couple of months or was it.
No.
Relatively consistent with what their communication with you.
So I think you're going to have to asset specific question of international paper, but I can tell you from a graphic packaging standpoint. This played out the way that we plan to play out.
And what we talked about with our vision 2025.
We're very happy to have Dsps and food service platform integrated into our company to take about what we've done over the last two years, we drove integration up substantially by integrating our outside purchase of Sps. We've done a couple of tuck in acquisitions, including a major one with let it go to take those integration rates up we drove the synergies that we said that.
We were going to drive at $75 million in creating shareholder value. So you know as they're looking at it I'm sure they're thinking about it as a capital allocation decision and that's something better left for them to answer than me, but from a graphic packaging standpoint, we're very pleased with how this played out.
Okay, I'll turn it over a good luck in the year. Thanks.
Your next question comes from the line of Adam Josephson of Keybanc capital markets.
Hey, good morning, Thanks, everyone.
Mike one on hot versus coal costs, you talked about that earlier, but I know you mentioned Dunkin' donuts and and as a prominent case of customer going from farm to paper on the called Cup side, you talked about some customers are some companies trialing plastic.
So it seems as if perhaps you up customer some customers on cold side moving on the opposite to.
Direction as those on the hot Cop side. So can you just talked about kind of why you think perhaps you're seeing those disparate.
Situations.
Well like I said these are mature markets, Adam and so we have to compete every day for the on the ability to supply our customers and and in every customers got their own set of objectives in marketing strategies that they're looking for and how they want to build those brands and so they make those decisions based on a per wide.
The of factors.
The outcome of that is there are some opportunities for cold Cups to go on the plastic side, we see that and then as you've seen we've seen a lot of the phone come into a paper.
So it's a balance.
Sure and it just sounds like Kalamazoo project, Mike can you just give me an update on when do you expect to three older machines to get shot before you bring the new machine on and early 22.
So all of that that will occur really in 2020 too. So if you think about it is actually for paper machines, we have to take down.
Two and Battle Creek, one in Middletown, and the one in Kalamazoo and.
And so we have to get the new machine up an operational which we said we will do in Q1 of 2022, and then get the trials done to qualifications are complete.
Then systematically ramp the other machines down as the new new a machine as qualified and brought online. So that is really a 2022 phenomena and we'll do that Adam Steve gone on capacity neutral basis, while that's happening so we'll be ramping up ramping down as we as we bring the asset in.
Thank you.
Your next question comes from the line of Daniel Rizzo of Jefferies.
Hey, just one quick question guys and thanks for taking it.
So in the past you mentioned that you using price hikes to kind of recapture the lost or higher cost of 16, 17, and 18 I was wondering if you were able to do that or food contract structure to do that are where we always that kind of that process.
Yes, Dan we appreciate you raise in that if you look at the.
Roughly $125 million dislocation that occurred in 2016 18 off price cost with this year's positive $98 million positive price cost, which exceeded our original expectations. We've now going back the majority were not all the way there, but we're within 20 plus million Don.
Collars of calling back that dislocation that we'll get some additional we believe this year. So while it has been a journey that resulted in us compressing time lag so that we can do it faster.
Model of being able to do so is intact and we believe we will get into full balance here as we as we migrate through through 20 and 21.
And you've done a good job with compressing timelines I was wondering if there's additional stuff. So can you take into even go even further or is just not possible at this point.
Well look we're always looking at that but as I mentioned earlier, we are targeting six months and were there what I would say as we continue to build out our pricing.
To look at any forms of leakage on contracts to look for those opportunities.
Every year, we get a little better on that so that's really where our efforts are on the commercial side.
It's really a big shift this year, Daniel because we're focusing really driving this 100 to 200 basis points growth and that's that's what our business units are actively engaged on we see it as Steve said here in Q1, and we have we plan for with in terms of the.
The inventory and where we've got.
Our operations really position down so that's a bigger focused right now than than on the pricing side of it.
Thank you very much.
Your next question comes from the line of Steve Chercover of D.A. Davidson.
Thanks, Good morning, everyone.
Okay.
If they're not mistaken in the sales last year, you are dealing under kind of Noah's Ark conditions. So could you give us an update on where hardwood fibers are compared to last year and how that's incorporated into your commodity pricing.
Yes, Steve Thanks for the visual that's what it felt like but Ah, yes that as we as we went through Q3 and into Q4 things did normalize we were able to build our hardwood inventories back up you have to levels that we hadn't seen really for the previous two years. So we like where we rounded finished up the yard.
Rounded into Q1 of this year from an inventory standpoint of course, it's always difficult to forecast what kind of spring, we're going to half, but right now we feel good about where we're at and we're seeing those prices for wood hardwood in particular reflect that.
Okay, great and as my follow up.
I think mark will be kind of alluded to at some of the new business that you brought on stream isn't particularly profitable until you get synergies incorporated and I'm wondering is they're the same sort of dynamic with your organic growth are there startup expenses that you.
You know kind of fade away and then the profitability increases once you really operational for a period of time.
Yes, David Stephen as we've articulated before you're correct I mean, we do have startup startup activities with good new business wins have every expectation that those will be at the kind of margin profile that we have as a corporation and we'll we'll see that as we round into 2020, we went through some of that startup we had lot of.
Starting up happening in 2019, both at the manufacturing level, bringing.
Grove facility life, as well as making these conversions with significant customers and were very transparent about that in the numbers. We share with you in terms of the volume mix implications that as we onboard so that's where theres the confidence that the earning opportunity is there we have very high confidence that new products.
That we're bringing to life have a margin profile at or above the comp.
Okay. Thanks, Good luck your head.
Thank you.
Your final question will come from the line of Mark Weintraub Seaport Global.
Thank you kind of a follow up bringing together a number of the different questions. One of the thing that sort of just jumping out obviously, what's the 15 million negative volume mix.
Year over year in the fourth quarter and you've spoken to it.
But I was hoping maybe to get a little bit more specific because if it was such a big outlier from what we had been seeing and I know you'd referenced the open board paperboard sales the prior year in and you can see in the fourth quarter last year, yet I better volume number there you've talked about the startup costs and those showing up and perhaps the delay.
Somehow shows up in the volume mix. So can you could you bucket.
Approximate amount for for those numbers just so is.
One can better understand that magnitude about 15 million variance.
Yes, Mark at of the 15, a little little less than half would have been some of the new business transition that we've talked about.
Little less than half that was the was the significant non repeating open market paperboard sale and the rest of it is very much should approximate where Mike was chatting earlier on us taking some good part positions relative to price execution all of which.
Adds up to.
Quarter that we just articulated relative to volume mix more importantly, the important but that happens as we round in 2020 on volume mix and earning on it and that hundreds 200 basis points at organic volume growth that we have line of sight to for the year as well as for Q1.
Great and then so.
As we look into next year. The the start up volume mix is that still gonna be a drag or or put more positively. If we look at 2021, if there wasn't more.
Startup coming on that.
Would there be a positive.
In 2021.
Yes, I think that's probably difficult to estimate we expect to be in a good solid earnings position in Q1 of 20, which.
Indicates only modest improvement as you go all the way out to 20 watts.
Thank you.
Thanks Mark.
Thank you I'll now turn the call Michael Das for any closing comments.
Thank you for joining us on our earnings call. We had solid year in 2019 and look forward to building on the momentum as as we have entered 2020, we'll talk to you again in April to update you on our first quarter 2020 results. Thank you and have great days.
Thank you that does conclude the graphic packaging fourth quarter and full year 2019 earnings Conference call you may now disconnect.