Q1 2020 Earnings Call
Yes.
Any pie and welcome to the graphic packaging this quarter earnings call.
Hi.
And they listen only mode.
Yes, I see that today's call is being recorded [laughter] since I will do you watch.
Sure.
Okay.
Especially.
Oh, one on your telephone.
Require any.
If you require any further assistance. Please press star zero I would not likely to conference over to your speaker today.
Vice President Investor Relations. Please go ahead.
First quarter 2020, Brazil.
Thinking on the call will be my daughter companies, President and CEO, Steve Scherger Executive Vice President and CFO.
How people along with today's call. We have provided my presentation, which can be accessed the investor section of our.
Www <unk>.
He kg dotcom before Bert certain pages in the presentation during our comments this morning.
I would like to remind everyone that statements of our expectation plans estimates and belief regarding future performance.
Constitute forward looking statements such statements are based on currently available information and are subject to various risks and uncertainties.
Actual results to differ materially from the company's president expectation.
Information regarding these risks and uncertainties is contained in the Companys periodic filings with Securities and Exchange Commission.
Undue reliance should not be placed on forward looking statements.
Statements speak only as of today on which they are made and the company undertakes no obligation to update such statements.
Acquired by law, Mike I'll turn it over to you. Thank you Melanie good morning. Thank you for joining us to discuss our first quarter 2020 results I'd like to start off the call by offering her talk condolences to all affected by the corporate banking crisis.
Recognized her brain talented healthcare workers and first responders weren't taken care of our employees friends neighbors are impacted by the cold chain virus.
Graphic packaging, we're doing everything in our power take care of our employees partners, while ensuring supply chain continuity to essential.
Average foodservice markets.
Our teams have been focused on safely delivering for our customers and ultimately consumers. During this unprecedented times, we're proud to be an essential business and up to anticipate role, we play global consumer steep companies and providing food and beverage packaging products.
And he and the store shelves everyday.
Our teams have been working together safely and effectively today, we found a pandemic committee at the onset of the crisis development <unk> safety protocols Committee meets daily we view, the well being of our workforce developing Cherokee global safety protocols and insurance companies fully supporting our points.
Actions have been taken to maintain continuity across your paperboard Mills earnings.
<unk> <unk>.
Okay.
[noise] keep.
[laughter].
Okay.
Oh.
Concerted efforts to frontline production employees and our manufacturing operations is critical.
Yes in early May, we'll be providing or front mine production employees, including global hourly workforce in frontline production leaders onetime payments approximately $300 5.2 it now.
Our key contribution to.
This is 5 million dollar investment or people, reflecting our sincere appreciation critical role the airplane during this time.
We're also making 5000 dollar contribution food banks located in every community in which we have manufacturing operations to support long beach consistent with our philanthropic pillar putting food on the table.
We remain hopeful that we will see an abatement to the current crisis and a return to more normalized business environment soon but anyway. We will continue to actively manage to current environment with our employees and consumers are buying.
Turning now to our quarterly materials on slide five let me walk through some of the summary points for the quarter. We saw strong net organic volume growth pre crisis any net modest acceleration in modest volume.
Volume growth after the pandemic yeah.
We surpassed our net organic volume growth goal of 100 to 200 basis points, delivering 500 basis points by quarter, excluding positive impact leap year also excluding modest acceleration in volume post crisis net organic volume growth was 400 basis points in the first quarter driven by cost.
Gross initiatives and new product development.
As a point of reference we began to see the increasing demand for food and beverage packaging March that was partially offset by a reduction in demand. Some food service applications a positive net impact in the quarter was roughly a 100 basis points or approximately $15 million revenue in the quarter.
We operated well throughout the quarter across her milling hurting facilities generating productivity over $19 million or meeting increased volume demand backlogs for all three substrates are solid five plus weeks for CK four weeks for CRB and three to four weeks for Sps.
Our global Paperboard integration rate grew to 69% during the quarter operating rates, both CRB and SBS as reported by the <unk> improved sequentially in Q1 to 98% and 95% respectively. Our estimated operating rate for see UK continues to be very strong at 95 plus per se.
Uh huh.
As a producer of all three paperboard substrates, we are well positioned to products. Among the end use applications to meet changing volume requirements by Mark.
James successful utilized all three substrates meet increased volume requirements for CRB and you can a quarter phenomenon that continues to play on nicely in the second quarter.
I can see on slides.
Fine across the consumer Staples markets in 2019, food beverage and other consumer packaging comprise 77% of company revenue.
The food service market made up the remaining 23% currently increased demand from food and beverage and consumer markets is offsetting the declines we are experiencing than the food service markets.
In early March driven by an increased near term demand for CKD and country contractor work related implications associated with Cobot 19, you made the decision to delay the significant planned maintenance outage at our West Monroe Mill from Q2 Q3.
Can see an updated outage cost impacts schedule, including the West Monroe change on slide 15 of the earnings materials.
We will continue to focus on meeting the needs of our customers. During these unprecedented times, while also being proactive and accelerating strategic actions that will position us our position our business for long term growth consistent with our vision 2025 today, we're announcing the closure of our only containerboard machine.
On the West Monroe, Louisiana Implosion reflects our long term confidence on the strength of our CDK global beverage packaging platform. The action is similar to move and made back in 2015.
Purpose existing pulp <unk> paper machine closure to gross UK volume, we are well positioned to do this yet again the short term financial implications are modest at under $4 million in 2022 to the current pricing environment for containerboard in our perspective on pending capacity additions to the containerboard Mark we have.
Also made the decision to close our weight Pigeon, Michigan CRB mill effective June Thirtyth. Our overall CRB network is operating very well in a steady demand environment and we have entered into a new supply agreement with right to acquire approximately 90000 tons of CRP per year. The agreement provides flexibility to acquire 20 person.
More volume per year if needed.
Mills are well located to serve portions of our current and recently acquired portfolio converting operations.
No no over half annual tons were committed to purchase as part of the supply agreement will be completed over the next 29 months as you are aware, we're strengthening our leading position in the CRB market with the investment in a new CRB paper machine in Kalamazoo, Michigan, we have significant optionality across our CRB.
Kalamazoo CRB mill to effectively match, our integrated supply with demand over the coming years, including utilization of our K three paper machine.
Kevin consumer demand uncertainty as we emerge from the current crisis you can rest assured we will take actions necessarily to fully match supply with demand will be aggressive and driving working capital improvements and we will assess timing of certain capital investments. All efforts are to ensure cash flow generation is.
Robust and the balance sheet remains strong without significantly impacting our long term commitment.
Moving to a discussion of capital allocation and stakeholder return on slide seven see a summary of two strategic tuck under acquisitions, we've completed year to date integration of the folding carton facilities and Onboarding of the new employees are well underway the transactions expand our consumer base and will drive integration rates meaningfully higher.
Over time.
While acquisitions will remain an active part of our long term balance approach to capital allocation. It is unlikely we will engage in additional acquisitions during the remainder of the second quarter.
In the context of actively managing our strong balance sheet, we will continue to adhere to our fundamental approach to repurchasing shares when we believe the intrinsic value. The company is materially higher than the current share price finally, because we're in a very solid financial position I am pleased our board of directors has reviewed the existing dividend.
Let's see in remains committed to the current return of capital to our stakeholders via dividends and distributions.
It will provide an update on our financial performance shortly but I would like to emphasize we are positioning the business for continued growth in 2021 and beyond consistent with our vision 2025 and remain committed to that vision, we will execute on the actions shared with you today, we'll continuing our longstanding focus on productivity and cost okay.
Steve I'll hand, the call over to you now for more detailed discussion on our financial results.
Thanks, Mike and good morning.
I would like to reiterate mikes comments to all of those impacted by the 19 crisis expressing deep gratitude to our employees on the front line. So dedication during these challenging times.
Turning to slide eight for review of the financials.
Net sales in the first quarter increased 6% from the prior year.
$1.6 billion, driven primarily by net organic volume growth of 400 basis points, excluding the positive impact both leap year and the code 19 crisis.
This growth reflects the strong conversion trend we experienced in the first quarter, two or paperboard packaging solutions.
Reported earnings for the quarter were lost four cents per diluted share compared to 19 cents in the first quarter of 2019.
First quarter 2020, net income was negatively impacted by a net $104 million a special charges.
Including the net $90 million noncash charge.
The settlement of our largest us pension plan.
When adjusting for charges.
Adjusted net income for the first quarter was $91.2 million or 31 cents per diluted share.
An increase of 48% compared to 21 cents per diluted share in the first quarter 2019.
Turning to slide 10 focused on our EBITDA waterfall.
First quarter 2020, adjusted EBITDA of $294.8 million was up $35.1 billion or 13.5% from first quarter 2019.
EBITDA margin expanded 110 basis points to 18.4% for the quarter compared to 17.3% last year.
Adjusted EBITDA was positively impacted by $14.1 million higher pricing.
$16.9 million in commodity input cost deflation.
$7.6 million unfavorable volume mix.
$19.2 million, an improved operating performance.
These benefits were partially offset by $14.1 million and other inflation, primarily labor and benefits.
And $8.6 million and unfavorable foreign exchange.
Turning to discussion on commodity input costs as I mentioned.
Results for Favourably impacted by deflation across most commodity input cost categories.
There have however, several increases in secondary fiber raw material input costs over the past four months as a result, we announced a $50 per ton price increase for CRB effective may seven.
Turning to a discussion on liquidity and our balance sheet.
We ended the first quarter with substantial global liquidity approximately $1.5 billion.
We further strengthened our balance sheet in the quarter with a well time 450 million dollar senior notes offering at an attractive 3.5% interest rate.
Our debt profile it sounds.
We do not have any financial covenant issues, nor do we require any modification.
As you can see on slide 11, we do not have any debt maturity of the materiality in 2020.
Our senior secured credit facility does not mature until 2023.
We ended the quarter with $3.4 billion of net debt.
Total net debt increased $672 million during the quarter.
Net leverage was 3.2 times at the end of the first quarter compared to 3.1 times at the end of the first quarter 2019.
We remain committed to our targeted to an after three times range.
Turning to slide 12, and the return of capital to stakeholders.
Given the dislocation in stock price relative to our view long term intrinsic value of the company.
We repurchased $190 million common shares during the quarter.
At an average price of $12, a 90 cents per share.
We continued our repurchase activity in the second quarter.
Related a total of $150 million common shares year to date at an average price of $12, an 80 cents per share.
In total we returned $396 million during the first quarter share repurchases dividends distributions and partnership redemptions.
Including the initial $250 million partnership redemption to international paper completed in January.
Moving to a discussion of the current business environment and our outlook.
We're currently operating and net neutral organic volume for the core business with core food beverage and consumer volume up and foodservice volume down.
Volume from Weve recently acquired businesses is meeting expectations year over year.
In addition, our teams continue to operate well with pockets of minor productivity challenges related is the crisis. Meanwhile, manage.
If you would indicate that our business is capable of performing well during economic downturns.
At current volume levels commodity input costs and operating run rates.
2020 financial performance would fall within the adjusted EBITDA and cash flow ranges, we provided in January.
Unfortunately, the depth and timing of this economic downturn is difficult to predict until more known about how consumer behavior and spending patterns will evolve post the crisis.
Along with the timing of when overall economic activity revert back to more normalized levels.
Our customer share in the uncertainty associated with this helped driven crisis and global recession.
With the majority of them withdrawing financial guidance.
For these reasons, we have decided to suspend financial guidance.
We have greater visibility into consumer behavior and spending patterns.
The suspension will provide us time to observe shifts in consumer behavior in spending pattern.
And more clearly understand customer volume needs by market.
In addition, it will allow us time devalue the positive impact our aggressive strategic tag actions have on our financials.
NSS any timing modifications to organic volume growth projects scheduled for implementation this year.
On slide 14.
Finally, adjusted EBITDA and cash flow components that we do have a viewpoint on today.
As discussed we are actively pulling levers to drive strong cash flow generation.
This was reflected in our updated working capital and capital spending expectations.
We expect working capital obvious source of cash in 2020 and anticipate coming in at the low end, our previous capital expenditure rage of 600 $625 million.
In addition, our interest expense guidance has been reduced by $20 million at the midpoint of the range due to lower market interest rates.
As it relates to adjusted EBITDA.
Hi seen remained consistent with prior expectations.
We believe commodity input costs, maybe modestly more favorable for the year compared to prior expectation. However, we have widened the range given the current economic environment.
Foreign exchange will be a modest EBITDA headwind at current exchange rates.
In closing we are confident the actions, we're taking or solid cash flow generation for the year and position the company well for long term growth.
Thank you for Tom This morning, I'll turn the call back to Mike.
Thanks, Steve I'm pleased to normal by the leadership dedication in ingenuity, our teams have displayed in managing through the crisis today.
We will remain focused on running the business safely and effectively while positioning in preparing the company to capture to growth that lies ahead.
The aggressive actions, we're announcing today will drive cash flow.
Balanced supply with demand and position the business for strength in 22.21, consistent with the goals. We established with our vision 2025, I will now turn the call back to the operator for questions.
Thank you at this time, we will be conducting our question answer session.
To allow for his many questions as possible. We ask that you. Please limit your questions. Just one question with one related follow up made that reenter the queue for any additional questions. My first question comes from the line of Mark Connelly with Stephens, Inc. Your line is open.
Thank you.
Two things Mike.
It's probably early to see movement and Virgin fiber costs, but we have seen lumber.
If down dramatically shipment wise.
As you are sourcing of Virgin fiber changed yet and is higher.
It's a higher Virgin fiber close part of your assumptions.
Yes. Thanks for that question Mark we today, what we've seen we have seen the slowdown of the lumber operations that you've talked about so the residual chips are in fact down from where they would have been a year ago, but over the last few years, we've made some pretty significant investments into into our Virgin mills that allow us to process a lot more roundwood.
And with some of the slowdowns were seeing in the printing and writing space in pulp in some cases in the baskets, where we operate we're seeing pretty attractive roundwood pricing for both hardwood and softwood command and we've also seen a normalization of the weather pattern that you impacted us last year. The wet weather in particular, so are you are.
Quick costs were actually down pretty substantially year over year and net so you'll partially offsetting some of the increases we're seeing on the secondary fiber site based on everything we can see right now we believe that will be the case for the foreseeable future market, Steve. It's one of the reasons, we're seeing overall relatively.
Net.
Modest inflation deflation, if you will because a pretty substantial deflation in would year over year given it was up 40 million dollar inflationary items last year.
Sure, Okay, and just one more question how different was seasonality you experienced in the first quarter versus what you think of this normal and could you give US a reminder, with your current business mix of what kind of seasonality in Q2. In Q3, you would think of as normal. So we have something does.
The benchmark against.
It's a great question I normally what we would see is.
A busier.
Spring and summer season related to both the beverage and the foodservice business that we operate in fact, the beverage business is quite strong for US right now because they are well on premises down off premise as you can appreciate it.
Probably in the neighborhood of 5% to 10%, we're seeing seeing along those lines.
So I don't think this year will be a great year for normal what we saw in Q1 was things behaved like we thought if they were going to till about the middle of March and then we saw some of the.
The pantry loading if you will associated with the Govan 19 virus and that drove that incremental $15 million revenue, we experienced largely in the last two and a half weeks in March.
Very helpful. Thank you.
You bet.
Your next question comes from the line of Mark will be with bank of Montreal.
Your line is open.
Good morning, Mike Good morning State.
Remark.
Yeah, I just wanted to kind of come around to the issue of kind of organic volumes that you.
He said the first quarter, if we excluded the leap year in the co bid your organic volume growth was 400 bets, but Steve it sounded like more recently that organic volume is is basically flat. So I wondered if you could just help us with the cadence if you have moved through.
The first quarter in into the second quarter and sort of how volume is moving in the businesses and if it's possible separate like foodservice versus beverage versus food.
Yeah, Mark it's Steve I'll take that on that might can bring on additional color you summarized it well we were.
Quite positive net organic volume growth through January and February slate acceleration in March driven by many of the successful conversion that we have talked about previously foam Cup conversions beverage conversions Boland plate conversions.
Since the the unfortunate crisis began what we're seeing currently and this is currently through literally yesterday is that roughly the 77 day, 80% of the company's 77% specifically last year in food beverage and consumer pack.
Gene is up 5% to 10%. So we're seeing some continuation it's been offset currently by what in total across the roughly 23% of the company that is food service being down 25% to 30% as Mike just articulated because that's really where a lot of the slowdown.
Yes.
Relative to consumption of.
Comps for example, which is where we were experiencing the growth that has resulted currently as of yesterday through.
The months of April here.
Overall neutral net volume year over year year over year in April.
And it keeps Steve is there likely.
Any inventory channel play in any of that I made a lot of foodservice stuff isn't necessarily one single step you to the food service provider, but it might be moving through kind of distribution companies and things like that.
Yes, that's right Mark we saw that and that actually as part of the reason why we saw the reduction the end of March the last two weeks in March and the foodservice business has in fact, as you're suggesting the DC channels basically relieved that inventory and we're starting to see that again through the first 20 days of April.
Incrementally move back up a little bit, but Steve summarized it well with a five to 10 down on food beverage and consumer and then.
Or five to 10 up excuse me on food beverage and consumer and then 25% to 30% down on the food service and those those are good numbers at least what we've seen so far in Q2. Okay. The other question I had is if you could just help us thinking about the roll through some of these recent pricing and cost moves that PPW change.
As the on your own increase announcements that were out last week and then the other.
The movement in waste paper costs.
Yes, so at a very high level you saw the risky move in February on on CRB went down $30, a ton Sps $130, a ton as well, but speaking specifically to CRP.
That $30.
It was a pricing reduction of open market.
That is tied to those open market contracts since January one we've seen roughly $50 a ton of movement.
On top of what our baseline.
Secretary fiber costs were so if you think about it in those terms, it's about an $80 per ton price cost spread and so we as Steve said announced a CRB increase on May seven for $50 time to recover that are as we look forward we do.
Dissipates some incremental.
Costs in May and potentially June again, others have opined on that we won't other than beyond.
The comments that are making there, but thats why we announced that pricing actions here and mark just to add to that.
Relative to some of the numbers we've shared with you today, the 10 to 20 million in price guidance.
As a group and it does not contain.
Our be announced price increase obviously that hasn't been recognized.
It will be heavily up late year activity with our six month lags and as Mike mentioned, the little bit of broader guide that we did provide with regards to commodity.
Relation as a reminder, that two and half billion dollars of spend we're seeing deflation generally across most of the categories. We've seen a move up materiality with.
With those CCN recycled fiber costs the range captures a range of possibilities. There in terms of go see see continuing to move up and stay there or potentially this being less longer terms. So take that into consideration, where we did have visibility obviously, we're spending.
Guidance, driven mostly because of the.
Consumer spending patterns that we want to get better line of sight to impact volume and productivity.
Okay, Great I'll turn it over.
Thanks Mark.
Your next question comes from the line have gone from some job isn't there that's what's your line is open.
Thank you Matt.
I hope everybody has different Dave.
I guess.
Just a follow up on those comments on the 77% to be portfolio that you're seeing that 5% to 10% volume increase thus far in April I guess year over year, what our customers sharing with you on their volume plans for the second quarter I mean, obviously, we see big numbers in terms of.
Category growth et cetera.
There's been telling so theres safety stock I would presume and they're going up to ramp up production et cetera, just curious as to what specifically, they're sharing with you for twoq.
You summarize the phenomenon very well that's in fact, what's going on as you know most of those customers have withdrawn their guidance. So we're there there are seeing that real time, those impulses that are coming in from the retailers as well ghansham.
So I would expect that would be case, so beyond what we're currently seeing today, it's difficult for us to speculate what we would see for the remainder of the quarter.
I think if you think about that and just put it in context.
The big banks, and basically said in the neighborhood that GDP could be anywhere between down 8% and maybe as high as 35% in the quarter.
People need to eat and drink.
Thats a positive but how that comes back in the context of 22 million people go to employment in the last three weeks in what they buy in how that all plays through.
Our overall supply chain to our end use customers, it's really difficult.
How is that we've got in front of us try to predict what that revenue looks like as you can add some impact on our mix and productivity depending on how that all comes back and that's why we're taking a step back to take take a look at how thats all going to play out.
Mikes point, our teams are doing incredible work servicing those needs both up and then managing where we see down we just don't have that line of sight to the where will it come through relative to the broad spectrum of diversified products that we provide.
Okay, and I guess, just following up with that I mean, obviously theres lots going on with what's your company with the acquisition integration large capital projects.
Capacity cuts that I guess, we'll be.
But by the ended the second quarter, you have meaningful disruptions with with the supply chains et cetera, There's limited mobility I guess just take us through what gives you confidence on the execution side context, what I assume will be very choppy demand it logistical patterns near term. Thank you.
Thanks for the question I think the.
If you look at the two closures were going to orchestrate, we've got a very well capitalized ERP system. As you know that we're investing a fair amount of money into its operating very well. So that's a very small bolt and we'll be able to take those times and we distribute them across the remaining base of mill assets that were operating.
So I've got a high degree of confidence in that in Kalamazoo.
Our project continues to move forward.
We talk about four weeks of due to the shelter in place, but as an essential business. We're back up with construction as a matter of fact, we've got a very big concrete report that's happening as we speak and so we're continuing to execute on that project in the case of shutting down our west Monroe.
Linerboard machine that is the only linerboard machine, we operate we actually had taken a fair amount of that tonnage.
Traded it trades for people that may boxes for us and the current environment that we anticipate in the second half of this year for corrugated materials and boxes. We believe that we will not be economically disadvantaged to purchase the boxes versus utilizing that supply chain. So yes, there's a lot going on but we feel.
Got a pretty good beat on it and again this is all consistent with our long term vision 2025 at our long term plans and so we're just accelerating certain aspects of our our strategic plan to.
Move aggressively in the context of this environment.
Leverage our our free cash flow generation and secure the strong balance sheet that we have and the integration of the eight folding carton facility seven from great.
But are also on track and going very well as Mike mentioned in his comments.
Perfect. Thanks, so much you guys.
You bet.
Your next question comes from the light and Brian Maguire with Goldman Sachs. Brian Your line is open.
I'm.
Mike I just wanted to unpack the comments around April volumes sort of being flattish.
It's kind of reminds me the story of the six like Guy is walking across the river. That's averages five slate of a depth, but you got some periods that are a lot lot higher than five foot in depth here.
So this is a lot of things move and move in there.
I I guess, what I think about the the operating rates at the end. The paper level, then I wouldn't I would guess Sps volume is off quite a bit given a decent amount of that goes into foodservice, but CRB and see UK you'd expect that needs to be running pretty fall in hard maybe you can just kind of confirm if that's true and then.
Also that what impact this could have on profitability this shift from foodservice to at home.
I don't think it's something that we've thought too much about in the past split the profitability of that foodservice component versus the rest of the business is it materially different than we would notice and profitability impacts from the shift there.
Yeah. Thanks, Brian in regards to your question around utilization of all three paperboard substrates. That's one of the strength of the graphic packaging as you recall, we didnt operating Sps mill system in 2008 last time, we saw.
Significant dislocation in the economy and in fact, when we've been able to do here because of this strength our customers demand for C. K, we're actually utilizing some Sps we anticipate will use upwards of 50000 tons of Sps This year to help meet that demand in certain categories and customer.
Package applications.
And that really is one of the true benefits. We've got I would have it all three substrates. So yes, we do expect come to be down in fact it is.
But we're able to offset a portion of that with some of the things that we're doing.
Service other customers in the mix.
And in regards.
So the question around overall mix profitability ill take a stab and let's see put a little more color on it. Our overall portfolio is reasonably balanced in terms the margin profile. What we're speaking to as if we saw us appears like and what aspect of the business or the other it could potentially impact our bills and downstream converting.
In a way that isn't it's balanced as we're currently seeing it today through 20 days of April and that's what we're talking about in terms of how the consumer comes back how fast they come back where does it come in and what does it look like and see maybe you want to know the only thing I would add is just given a little bit of that uncertainty. The one thing that you're hearing us be very.
Clear.
We'll match supply with demand in that environment and so that's why there's a little bit of the uncertainty around the mix of volume. We're very pleased as Mike said with the ability to move among and between the substrates. That's something we could do in the fast and are doing but if we saw a ongoing dislocation of the consumer not getting back.
Back into the work environment and as such consuming foodservice products that could result in a need for us to be more assertive in matching supply and demand I know on the mid Unbilled side, which is where the where the cost can be more substantial we're not seeing that today, but we want to get a little visibility to that over the.
Over the coming months as we begin to emerge from the crisis.
Okay and then one question just on the capital reallocation I guess.
Obviously the share price was was lower in one Q with the rest of the market I just little surprised given the size of the buyback relative to the other commitments you guys had between the Kalamazoo mill and the IP stake. Obviously you have good liquidity in the bond offering was well timed but Dan.
Yeah. It should we think about this as maybe being a little bit of a pre buy of what has been you repurchasing. The IP stake later when they decide to monetize that further if they decided to monetize it further would you or do you think about letting some of those shares fluid on the market now to maybe just pull forward the timing of the buyback effectively here.
Yes, Brian I think you've done a nice job of laying out the kind of real optionality that we have high end so given that we did.
What we believed was real dislocation in the share price consistent with our past practices, we did elect to acquire back some of those shares.
$150 million worth we do have very good optionality relative to if international comes our international paper comes our way in July we don't have a point of view on obviously, but if they choose to we have optionality one of them being what you described to potentially put some of those units into the market in shares.
Keep in mind, and it's very important that is not a dilutive event.
For any gbk shareholders already units that represent the ownership of the company. So we have very good optionality and we felt like it was timely to continue with the multiyear path. We've now had to continuing to buyback the company between the Sherri between share repurchases and the partnership unit.
At acquisition, we took another 7% of the overall units of the company out in the first quarter, returning almost $400 million too.
Stakeholders.
Okay that makes sense. Thanks best of luck in the quarter.
Yes, Thanks, Brian.
Your next question comes from the like George Staphos with Bank of America, Sorry. Your line is open.
Hi, everyone. Good morning, Thanks for all the details and thanks, while you're doing on kind of it and your support for your employees.
My two questions first off I Wonder if you could take a step back and comment if any of your customers for their customers for the consumers are showing any kind.
Any pushback against sustainability, maybe less interest in the fiber over plastic debate because obviously they are more significant things occurring in the economy with coded right or is it.
Not to worry for you or maybe too early in that discussion that follow on on the mills.
Yes, thanks for that George.
We have not seen any pushback relative to the sustainability of our paperboard products. Our paper based products that we're we're pursuing when customers I mean, Steve mentioned, we saw excellent foamed paper.
Cup conversion so early on in Q Q1.
Those will be a little muted now until that volume comes back.
The thing that we've continued to see excellent traction on is our Q technology. We've sold over 20 clip machines now what we haven't been able to do this install them and get them operational and the process of building. Those so we're going to see a little bit of delay relative to our ability to actually get those operational at our customers.
Because a lot of those are going to Europe. So traction over in Europe for that is really strong traction in Europe out of shrink film and into.
Paperboard solutions for beverage applications also very strong.
In terms of.
People, taking a step back on sustainability I think it's probably early for me to try to give you a point of view on that all I can speak to is what we're seeing on the new product innovations that we are we're.
Going forward with and just as an example on cost reduction any cancellations on on any peos that we had going into the crisis. So maybe that's a data point that helps you a little bit on that.
No thats, great Mike I appreciate that and then on the closure is and the operating.
Factories in the quarter, if you could comment a bit if.
The tornado created any significant damage free and west Monroe and in total can you.
I caught on your part of that given the connection it sounds like on the on the Linerboard machine, you're basically looking at and has a freeing up the pulp capacity that you can use ultimately as you grow in in other substrates is that fair and if you could put a bit as a finer bowling that that would be great. Thank you guys. Good luck in the quarter.
Thank you George again, thanks to that question, yes in first and foremost in regards to the tornado in Monroe, Louisiana that occurred on Easter Sunday.
Fortunately, none of our employees were hurt or injured.
And so that was very very positive in that regard the mill itself and the converting operation we have in town there were not impacted other than losing power we had a remote shipping operation at our mill that's connected to the mill with a long track conveyor that was that had significant damage associated with it.
And so what we've had to do is put some shorter term solutions and to get chips from the chipping operation over to the mill, we lost about 48 hours in total at the mill production between restoring power and and setting up our.
Our ability to.
Fiber the mill, which ships in a way that word of which will probably be the better part of six day weeks would be my guess right now relative to when we're back to fully.
Operational the way, we normally operate that mill, there will be an insurance claim associated with that which Steve maybe you can give georgia the actual impact.
Mike mentioned, we're we're running.
Teams done a great job of getting back to full run capability. We're just incurring some incremental cost is probably $3 million to $5 million.
Packed for us net as so not particularly material, but relevance as we build the conveyors will be a little bit capital that will put to work and right now we're working around that which is costing us a little bit of little bit of falls, but it will be in $3 million to $5 million range, though in regards to your question then on Paul.
If you recall in 2015, we shutdown a multi well paper machine there that we add there was associated with business. We're operating at that time and freed up roughly 50000 tons of capacity that we have now utilized in.
Operations on number six number seven paper machine in Monroe and grown our global beverage platform, both North America, and in Europe, and other geographies, well and we anticipate doing that again.
So as I mentioned, we were trading a lot of that tonnage with people that were making boxes for us. It was slightly positive on an EBITDA and cash flow basis, but with the additional capacity is coming online in the containerboard space. We don't believe will be disadvantage purchasing those boxes in the open market, which is what we'll do and worry purpose that pulp in a more value added.
Wait for our UK demand as as the next few years play out with our vision 2025.
Thank you Mike.
You bet.
Your next question comes from the line of Debbie Jones with Deutsche Bank. Your line is helpful.
Hey, Thanks for taking my question I got on I think Mike right about the time you ended you're opening remark so apologies for that and I think I heard something.
Around M&A and I was hoping you could give us an update on how you manage that side your strategic focus right now in this environment and you know whether you'd expect that to continue in the near term and this is something that may take a while to play out given everything.
Yes, thanks to have yet you summarize it again well as we said in our prepared comments, we don't anticipate doing anything in Q2 that doesn't mean, we're still not actively talking with people in planning and looking at different options overtime consistent with our vision 2025 that we've laid out but I wouldn't anticipate anything in the near term.
Longer term medium to longer term you could expect more the same we're focused on driving different geography or niche markets that help us grow our.
Integration levels.
Towards that.
90% level that we talked about the acquisition we did in the quarter audio here was a good one where we added seven additional converting plants little over $200 billion, where the revenue at 125000 tons of paperboard that overtime will be integrated into our.
Business as a supplier payments of winds down. So that's the type of thing you can see us continue to work on just in the near term.
Point because of some of the challenges associated with things and just letting things play out a little bit you could expect us to take a little pause.
Okay. Thanks, and then.
Simple question on the leverage you expect the beginning comfortably into targeted range by the end the year as the variability around EBITDA little bit too much of this model.
Yes, no Debbie our commitment to the tune after three times.
Average remain.
Historically, our little above that in Q1, because it's not as strong cash generating quarter.
Were three two this year, we were three one last year and we put on off of.
Value behind as I mentioned the share repurchases in the IP.
Demolition so no we expect to be in that joint after three times range as we talked on the last quarter.
Conversation, we'd probably be at the higher end of it.
Assuming that IP were to move forward with too.
250 million dollar exits as we talked a couple of minutes ago, but we still remain committed to the range and expect to be.
In edge, probably at the high end at year end.
Okay. Thanks, I'll turn it over.
Steady.
Your next question comes from the line of Anthony Pettinari with Citi. Anthony Your line is open.
Hi, good morning.
Good morning, Mike you have a.
Yes, you have a pretty sizable footprint in Europe and I was just wondering if you could talk about how that part of the business performed in the quarter.
Do you see the same stockpiling of staples that we've seen in the us what the on premise foodservice mix is there and given you operate in a number of European countries that are maybe it sort of different stages of the crisis any kind of general read throughs for us.
Yes. Thank you for that Anthony I look our European colleagues Didnt really nice job in the quarter. As you are well aware there were two three weeks ahead of us in terms of decoded crisis and.
Operated through that environment extremely well and what I would characterize how I would characterize our European business is more index.
Food beverage and consumer products. If you do have a small foodservice plant there in the UK, but the majority of businesses and side of the.
The customer subset that we see.
Demand for right now.
It's consistent with what we're seeing in the U.S. along those lines in those those of facilities are doing a good job operating with some of the increase protocols that we have in place to make sure our employees are safely safe be operating.
Environment.
Okay. That's that's helpful. And then just switching to the full year guidance I mean, when I look at the.
The guidance items, you suspended guidance on volumes, which makes sense and then guidance on net performance and I. Just wondering if you could provide any kind of further detail on the puts and takes that could drive that performance number higher or lower understanding you're not giving a formal range.
Yes, no Anthony it's Steve that I think as you know when you know so the business well, there's just a direct linkage for us in terms of our productivity initiatives being driven by and supported by our volume and so we stepped back from both of them because of variability in volume has a direct impact on.
Our ability to drive productivity, just like we saw in the quarter.
Causative organic volume growth help support strong productivity.
And so thats when we step back from it we really step back both of them just because of that very strong linkage between volume mix and productivity for us as a business.
Got it understood I'll turn it over.
Your next question comes from the line.
Makes sense with RBC capital markets I really nice open.
Great. Thanks, good morning.
Congrats on everything and thanks for your help with some of it I guess just a couple of questions. If you think about the volume.
You've laid out is.
Spend and I guess for the year.
I just wanted to understand.
How does the margin profile works, if we're looking at flat volume picture for the rest of the year potentially with foodservice being down.
The on premise consumption being.
Do you.
Actually lose all the profitability from foodservice or or how does that work I mean were what is it some of the positive offsets.
Just just for us.
Help us size kind of the impact on EBITDA from from that volume trajectory.
Yes, thanks, a rune, we're going to be a little bit.
Less.
Putting to find point on it because we just as we said earlier, we don't know how thats all going to play out, but you heard and stage prepared comments you talked about at our current run rates in it flat year over year volumes that we saw there we'd expect to be in the normal range, we could see dislocations as we talked about that we just can't anticipate right now.
Because the read throughs from some of the previous financial crisis is art excellent harbinger is for US in this case, because we saw such a.
Complete slamming on the brakes and as I mentioned earlier, you got 22 million people that went on unemployment in the last three weeks, how does that impact what they come back to buy in so it's difficult to try to model all that but I I want over thinking relative to the the margin impact on that because.
As I mentioned earlier, we're pushing 50000 tons of Sps already for other beverage and.
Food customers into into that category. So we've got some levers to pull to try to work through that.
The reason we suspended the guide is it's difficult to see through that Ace and figure out with any degree of certainty how it all comes back.
Okay. That's helpful. Thanks for that and then.
Also I guess wanted to understand the price cost side. So.
In SBS.
Yes, maybe six months ago, there was an expectation that we work through the inventories from the SAP no in the GP Cross the closure and then potentially set up well for some pricing in the second half of 20, I guess a is that still you know an opportunity that's possible and beyond the CRB side.
You guys have announced a price increase yes, just want to gauge the thought process their operating rates have been relatively high for a little while and pricing has been.
Volatility challenged sometimes so.
What's kind of the confidence level in achieving those increases as we go through the year. Thanks.
Yeah. Thanks are of course, I'm not going to talk about specific pricing on on on the call your but what I will tell you is on Sps what we've seen from the agent PK data is in fact with the removal of one of our competitors shutting down until you see production down 6% and operating rates higher we saw operating rates and.
Q1 at 95% has met affect US, yes was at 97% in March which was up substantially from where it was a year ago. This time, so that capacity has gone away now there will be some dislocation you're going forward as we talked about that we've got to lift play out on the Sps side, because that is more index to foodservice. So thats part of why.
Hi, we're we're removing our volume guide in that regard in regards to CRB in our case, what we're doing is where operators have been strong and we have some inventory that we built to service our customers that now with our closure of the way Pigeon mill will be able to take those inventory levels down lead on this.
Hi agreement that we've got with right and really optimize our.
Working capital, which is why we increased the guide on working capital in that regard. So I'd have to think about it that way operating rates of any good on both those substrates capacity was removed on Sps is showing up in in the data because we see production down in that regard in our case on CRP operating rates have been really high we're taking one of our mills.
Down because we don't need it with the existing footprint that we have in the plans we have for the future in Kalamazoo, and it's going to allow us to harvest a fair amount of working capital.
Thanks, I'll turn it over.
Thank you.
Your next question comes from the line item consistent with Keybanc. Your line is open.
I can Steve good morning.
Morning, Adam.
I Hope you and your families are well.
Good.
Thank you.
One on the volume trajectory and then just one on cost. So yes, I'm just trying to make sense of the 4% growth in one Q acts cobot, so if coal, but it was a one point benefit in one Q and it's neutral in April and I guess why would the opt for pre Covidien one Q go to zero.
So in April and potentially thereafter, I'm, just having a little difficulty understanding.
Yes, so unlike handled that I think looked a lot of the the growth in what we saw in January February was on paper to or phone to paper conversions, Adam and of course those sales are pressured right now as we mentioned our foodservice business is down 20% to 25%. So that's a big explanation that I would point to right there.
Right, Okay and related to just the cost situation I think Mike you talked about Otcs up 50 by Adam are you there you put up.
You can put on permitted I'm sorry.
Got off to sorry.
Does this better.
Okay, sorry about that so you talk about.
We are Oh cc cost being up 50 box from Jan one and CRB prices getting hit by 30, thus the announcement and so obviously, you're seeing inflation on the recycled side and it sounds like you're seeing quite a bit of deflation.
On the SBS and see UK side, just based on what cost being down substantially year over year. So I guess, how do you think the price cost what do you think about price cost relationship for SBS.
And see UK, given the extent to which the input costs are down for the Virgin grades versus being off for the recycle grades which is why are going for a CRB price increase.
Yes, Adam it's Steve I'll I'll take a lot that on a little bit and Mike can add on but if you kind of step back for a moment and look at where we at where we are on price cost through Q1.
We've now with this year with this quarter's results with the price still up and we saw the deflation of $17 million. We've now successfully recover all price cost dislocation that we saw in kind of the 16 to 18 time horizon, which has been a very critical goal for us as you know.
The little bit of guide that we are providing on price costs going forward just relatively neutral for the.
Three months three quarters remaining this year with a little bit of price still to come excluding the announced ERP price increase and so some net modest inflation.
Cross the basket of cost driven primarily by recycled fibers are starting to lap a fair amount of.
Deflation from other product categories.
But thats how were thinking about and as I mentioned earlier, a relatively wide range of potential outcomes for recycled fiber. So overall price cost recovery is very good it applies over all.
With CRB very good to date setting aside the current Ron see UK well recovered as we've talked in the past SBS isn't as recovered.
And hence some of the conversations we've had about operating rates and the need for that to recover over time. So we're still in a similar spot relative to actual recovery by substrate. Overall recovery is now at App, which we lost in the 16 18 timeframe, Mike and things that no I've been summarized it well.
Thanks, a lot safe.
Yes.
Your next question.
Right.
Well thank you Stephen.
Your line is open.
Thanks, Good morning, everyone.
Kind of late in the call but.
Starting with a quick question on the 120000 tons being shot at West Monroe.
Sounds like you were trading.
Corrugated suppliers, so that had any impact whatsoever on your integration rates.
No. It does not it was all non integrated and so our integration rates have always been around.
Paperboard pasties, and we moved it up yellow enterprise.
69% that was mostly okay no change it.
Thank you for clarifying that and then with respect to the 5 million dollar payments to your front line employees and for recruiting I'm not being critical.
Corporate didn't to the $50 million to $60 million labored guidance.
No we did not change that for that.
Is really a bit of it.
Mike mentioned that so recognition of a onetime.
Payment for the outstanding work, they're doing that we didnt factor that into our ongoing labor and benefits.
Inflation guide.
Got it will that's that's a fair carve out.
And then finally with respect to capital allocation and I want to kind of from maybe the perspective of one of the other analysts.
With respect to share purchases and or partnership were done redemptions I mean, do you figure that there might be to quote upside.
Uh huh.
Because your shares are so low so well below your own assessment of intrinsic value.
Front end loading.
Beneficial.
Well I guess I'd answer the question. This way Steve are as we've done since we initiated the share re purchase program back in 2015, we have said and continue to do as I said in my prepared comments. The when we believe the intrinsic value is below.
Yup.
The current stock prices below the intrinsic value of our stock we will.
Make a decision to buy back from time to time and that's what we did this particular quarter I think what gives us a little bit even more impetus along those lines is the fact or are these redemptions that are out there. So if we can do it at really good prices, we should do it and then we've got Optionality to put those shares back into the market Steve.
Outlined earlier.
At a point I'm in future and I think what we hear from the majority of our shareholders as they like that Optionality and they expect that we'll be opportunistic along those lines when those opportunities present themselves within the context of managing our strong.
Balance sheet.
Thats the key points, Steve is to your question of course, there's always optionality for some level of celebration, which you've seen us do with their share repurchases, but we'll do it in the context of our balanced approach to both capital allocation and the balance sheet.
Got it okay. Thank you and stay safe.
Thank you.
Your final question comes from the like Mark Davis Bank of Montreal, Mark Your line is open.
Yes, Stephen Mike I wondered a couple of things can you.
Give us some detail on any kind of financial impact than any costs from the two closures.
Yeah market, Steve I think the way to think about that is to put it into context of of the multiple.
Announcements and things were bringing to you today.
Net impact of both of the gripe assets coming in.
One coming out white pigeon coming out.
From an EBITDA perspective relatively neutral.
For the year, what drives for US as we mentioned is very real working capital improvement. So we're accelerating decisions EBITDA implications are relatively modest pluses and minuses and we're going to and we've used the working capital improvement is in.
The guys that we provided moving towards positive as we drive in primarily inventory out of the system relative to PMN, one and relative to just ERP.
Okay, and I, just I'm, just an ROE I guess I'm, just a little surprised.
Given kind of where.
Our board prices still seem to be.
Given that you've got kind of an integrated mill complex, there where that you know pulp mill in the energy system are all tied together you can take a 120000 tons.
And still have would be kind of a neutral impact.
Yeah, but works that way, because we're going farther to get that would issue, though and so that that every time you know the cap as are the same as what we see on the S.U.S. So there were buying a fair amount of Greenwood and that tends to be the marginal would that we have to go farther for the most expensive wouldn't be won't have to do that anymore and we've done this before as you know.
Basically we get to the point, where we don't want to make investments and Paul.
Because it's very expensive for us to do that and what I have the higher value add associated with the seat UK demand and those types of projects can come on.
In lumpy format. When can we can do that overtime as we needed it doesn't have to be something we have to do overall, but the balance on the back end of the operations very good at West Road.
The optionality and be able to do that so that's that's how we want to operate the business over the over the medium to long term. It certainly makes sense for us and it's consistent with our long term landmark.
Okay and then the other one I had.
Mike was in the past you've mentioned that.
SBS has really been kind of the laggard.
In the a in the Boxboard sector in terms of returns like Youve I think you've talked about not much of the industry is kind of below cost of capital in that business is that actually getting worse, given the weakness in food service right now.
Yeah, I would be I mean, now in our case, we've got more options and perhaps others to be able to push.
Tonnage around to our because I've mentioned into our integrated folding carton operations, but.
There is some reduction it would cost we talked about at least that's what we're experiencing I can't speak to what others are experiencing but we've been pretty vocal about that point.
On the positive side.
As I mentioned the reductions come out you see it in the operating rates. The question is how does that perform over the next quarter because it will act. It here in my opinion based on what we're seeing on foodservice side, but we play along long game here.
And I agree, we're making texarkana in Augusta lower cost with the capital we're putting into it we are driving our integration rates up and that's that's how graphic is going to win over the medium to long term there.
Good luck in the last three quarters of the year Mike.
Yes, thank you very much mark.
And I want to thank everybody for joining us today have a have a state.
Today.
This concludes today's conference call on behalf of rapid packaging. Thank you participating you may now disconnect.
[music].