Q2 2020 Graphic Packaging Holding Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the graphic packaging holding company second quarter of 2020 earnings call. At this time, all participants are any listen only mode. After the speaker presentation. There will be a question and answer session to ask the question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to Melanie Skijus Vice President of Investor Relations. Thank you. Please go ahead ma'am.
Learning and welcome to graphic packaging holding companies conference call to discuss our second quarter 2020 result.
On the call will be my daughter companies, President and CEO, and Steve Scherger Executive Vice President and CFO help you saw what today's call we will be referencing our second quarter earnings presentation, which can be accessed on the investor section of our website at www graphic he kg dot.
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I would like to remind everyone that statement of our expectation plans estimates and beliefs regarding future performance and events constitute forward looking statements such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results could differ materially from.
The company's present expectations information regarding these risks and uncertainties is contained in a copy periodic filings with the securities and Exchange Commission undue reliance should not be placed on forward looking statements as such statements speak only as of the date on which they are made and the company undertakes no obligation to update such statement.
Except as required by law, Mike I'll turn it over to you.
Thank you Melanie.
Good morning, Thank you for joining us on the call today I'm pleased to be would you discuss our actual results were delivered in the second quarter of 2020.
Before we focus on financial results I'd like to take it seems to update you on the initiatives to keep employees and partners thing.
Well, continuing our central operation supporting HM beverage consumer in foodservice markets globally.
Well, it's come first the graphic packaging.
Continue to invest an attitude you protocols, including plexiglass barriers on production lines based mass for employees temperature scanners, and enhance claiming in sanitation protocols designed specifically to prevent spread to viruses, including influenza and overtime.
Well, we have established and implemented safety protocols for frontline employees. We also executed technology solutions to enable our nonproduction employees to conduct their rules effectively from that.
Workforce productivity in collaboration across our organization. During these challenging times has exceeded my expectations.
We have managed through the cold 19 environment exceptionally well today and it remain agile approaching everyday with can do attitude.
Portion of the last few months, we've often been recognized by customers for flexibility best in class service and support through these folks times, we attribute exemplary customer service or can't provide directly to the focus we placed on the walking of our employees.
Our teams have continued to perform for our customers and have gone above and beyond to provide continuity of supply I think every one of the graphic packaging for their ongoing and tireless efforts.
I would also like to take them on to discuss it very important topic graphic packaging diversity and inclusion we believe the diverse and inclusive working environment encourages creativity innovation and collaboration it enhances our ability to serve global customers and is why it is vital that our global organization, we plan to arrest study of the King.
In Houston, which we operate.
Oh diversity and inclusion has been a longstanding practice it is more important than ever that we listen to our 19000 employees worldwide have conversations necessary to ensure all the employees have a sense in place and inclusiveness as members of the graphic packaging change.
We benefit as an organization from a truly collective and diverse viewpoint I commend all our employees around the globe and her team work and care and support everyone continues to provide to one another every day.
Organization has committed to driving positive change for employees customers and the communities in which we operate.
Meaningful sustainable change starts with listening and we are encouraging voices of many across the company and specifically with our human resources teams globally to ensure her words and actions are concluded with the values of the company.
Turning now to our financials on slides five and six I will walk through some of the highlights for the second quarter sales.
Sales increased 4% year over year, we'll adjusted EBITDA of $260 million declined slightly from Q2 last year.
Adjusted EBITDA was impacted by approximately $25 million and incremental planned maintenance downtime, we incurred compared to the second quarter of 2019 was largely offset by positive price commodity input cost inflation and strong productivity during the quarter.
We're all execution was excellent.
Net organic sales growth increased one half percent compared to the second quarter of 2019 positive at home consumption trends and new product development initiatives more than offset the declines in our foodservice business.
Net organic volume as measured in tons actually increased more than net organic sales dollars due to the market mix in the quarter that significantly impacted net organic tons sold on a favorable basis. We believe net organic sales growth in dollars is the best indicator of how we're performing versus.
And our vision 2025 goals, excluding the impact of pricing foreign exchange net organic sales growth for the first half in 2020 was 3% year over year strong start to achieving our long term 100 to 200 basis points protocol inherent in our vision 2025.
Our paperboard integration rate improved 200 basis points from 68% in 2019% to 70% year today.
Well, Steve will talk in greater detail on quarterly financial results and our outlook for the year I'm pleased to report we are reinstating full year 2020 guidance today.
After evaluating multiple scenarios as it relates to consumer demand and likely spending consumption patterns in the second half for the year, we're reinstating our full year adjusted EBITDA guidance in the range from 1.05 $1.19 billion, representing a 4% growth year over year at the midpoint.
And adjusted cash flow guidance in the range of too.
And $75 million.
The operating environment remained relatively healthy in the second quarter, particularly in the food and beverage and consumer markets. We serve backlogs were five plus weeks for C., you can see ERP and four weeks for Sps operating rates for Bossier begun Sps as reported by the NPV were 97% our estimate.
Operating rate foresee UK continues to be very strong at 95 plus percent.
We continue to closely monitor demand specifically talk demand for the food service markets one of our paper machines and Texarkana is essentially dedicated to making SBS paperboard, which we subsequently convert into paper cups.
Due to declines and pickup man, we've taken 14 days of market downtime. So far in July on this paper machine.
We intend to extend our planned maintenance downtime on the same line in September, adding 14 days Mark downtime scheduled maintenance outage, we have plans.
We will continue to align our Sps supply weather forecaster recovery rate foodservice Mark currently market downtime in our Sps Cup paperboard production as expense the older reduction of 20 to 30000 tons in the third quarter.
In addition to taking the market downtime where needed we have successfully transition in annualized 100000 tons of integrated folding cartons from sea UK Sps Paperboard. This has the dual benefit of meeting increased demand for our see UK beverage packaging as well as leveraging our low cost Sps mill.
Platform.
As a producer all three paperboard substrates CRB see UK Nsps, we're well positioned to new products. Among the end use markets to meet changing volume requirements by market when needed.
Moving to slide seven you can see the progress we made in 2019 and year to date in 2020 and pricing commodity input cost recovery.
We remain committed to price offsetting commodity input costs overtime and are pleased that we've been able to fully recover the dislocation that took place from 2016 2018.
New product development continues with our customers even during these challenging times the paper steel trade solution as a product we're very excited about and you'll see the details on slide eight.
We began development a few years ago on the hermetically sealed paperboard trade as well position to serving a wide range of food applications, including proteins cheeses salad fruits and frozen foods.
We formally introduce pay per sale in 2019 and are making products for customers in Europe, and Australia today, we expect to be commercial with customers in North America. Early in 2021, we are encouraged about this opportunity to move into new markets, including protein packaging with our innovated paper based trades solution.
As we discussed envision 2025 last September and our Investor day, we.
We are well positioned to capture sustainability supported organic sales growth and benefit from new product development for years to come work with new and existing customers and more sustainable packaging products, including paper steel is reflected the continued opportunity we see to bring new paper based packaging solutions to the marketplace.
Well some coven related delays had been factored into the near term outlook multiyear sustainability supported sales growth opportunities remain intact, and we continue to see a path to our 100 200 basis points net organic sales growth for the next several years, we are executing multiple beverage packaging instead.
Relations in Europe, and will support organic sales growth in 2021 and beyond notably the first Copeland machines had been installed for Coca Cola European partners and we are excited that commercial production will begin soon for this important customer.
Teams are also progressing on alternatives for polyethylene coated containers and Cubs and we're confident in the development with customers to stay for conversions in 2021.
Premiumization and custom structural packaging design, our additional areas, we're seeing increased interest from customers as they look to differentiate their products in the marketplace with end use consumer safety in mind.
We're working closely with customers and continuously finding opportunities to develop innovative packaging solutions to refresh our pipeline and strengthened long term partnerships to.
To date. This has been an incredible year of changing adaptation our teams hedge quickly mobilize and operate under the realities of the cobot 19 pandemic, our production employees from nimble and adjust quickly to changing demand patterns importantly, they maintained our continuity of supply to our vital food beverage consumer foods.
Service markets amid uncertainties wood and dynamic logistics challenges and an occasional severe weather event.
We ended the second half year with resolve to continue learning and improving from these events of this year and have confidence our teams will successfully managed business during the current uncertain economic times.
Steve I'll hand, the call over time for more detailed discussion of our financial results.
Thanks, Mike and good morning.
Turning to slide nine in our sales performance waterfall.
Net sales in the second quarter increased 4% from the prior year to $1.6 billion, driven by acquisitions and organic sales growth.
Can you flow through positive pricing.
Reported earnings for the quarter were 19 cents per diluted share compared to 22 cents and the second quarter 2019.
Second quarter 2020, net income was negatively impacted by in that $21 million a special charges.
Nearly half of which was a onetime settlement accrual for multiemployer pension plan.
When adjusting for these charges adjusted net income for the second quarter was $72 million or 26 cents per diluted share an increase of 8% compared to 24 cents per diluted share in the second quarter of 2019.
Turning to slide 10 focused on our EBITDA waterfall.
Second quarter 2020, adjusted EBITDA was $260 million.
Adjusted EBITDA was positively impacted by $5 million higher pricing.
$15 million of net productivity improvement.
$10 million in commodity input cost deflation.
$2 million a favorable foreign exchange.
These benefits were offset by $2 million, an unfavorable volume mix.
$30 million and other inflation, primarily labor and benefits.
$25 million and planned maintenance outage expense incurred during the quarter.
Turning to commodity input costs, we experienced a benign inflationary environment across most commodity categories with the exception of secondary fiber.
ODC costs fell dramatically higher in the months of February through May and reported lower in the months in June and July.
As Mike mentioned, we are committed to price offsetting commodity input costs over time, and we will continue to actively monitor inflationary environment.
On Slide 11, you will see the decisive actions, we're taking to position our business for success, both current and long term business environment.
We are optimizing our network mills, and converting facilities and integrating acquisitions with the goal of increasing paperboard integration right expanding market participation and driving profitability and cash flow.
The closures, we announced last quarter I've been successfully completed.
The integration of the great assets has exceeded our expectations today.
Synergy achievement is on track included rationalization of to converting facility into lower cost locations.
The Kalamazoo project also remains on time and on budget and is expected to yield $100 million, an annualized EBITDA improvements in the 2022 to 2023 timeframe.
Moving to liquidity and our balance sheet.
Total available liquidity $1.4 billion.
Balance sheet remains strong.
We ended the quarter with $3.4 billion of net debt reflected an increase in $54 million during the quarter.
Net leverage was 3.26 times at the end of second quarter compared to 3.18 times at the end of the first quarter.
We expect to be within our two and a half to three times targeted range as we exit 2020.
Moving to a discussion on our return of capital stakeholders.
Given recent volatility in the dislocation in our stock price relative to our view the long term intrinsic value the company.
We continue to repurchase shares in the second quarter of 2020.
We repurchased $38 million common shares at an average price of $12.59 per share.
Bringing our total open market shares repurchased in the first half of 2000 $20 million to $157 million.
In addition to the capital return to stakeholders. We also continue to invest in the business.
Capital expenditures in Q2 were $154 million and include progress on our 600 million dollar strategic CRB platform investment in Kalamazoo.
Turning now to our partnership with international paper.
You can see on slide 12, an illustration of the Optionality, we have on monetizing international paper's partnership units.
While we do not have anything to report to you today relative to ongoing monetization.
You can see in this hypothetical calculation.
Non dilutive nature of the conversion if we were to utilize gbk stock as part of a monetization.
And that we have significant flexibility in how we create value for stockholders.
Before turning to our outlook one housekeeping items.
Our existing shelf registration statement expires later this month.
Consistent with past practices, we will file a new on any normal course this quarter.
Turning now to a discussion of the current business environment our outlook.
We're pleased with our performance in the second quarter.
Team continued to execute well to meet to changing demand needs or customers.
Even sustain patterns of add on consumption solid first half financial results and assumed gradual pickup in our foodservice business, we're reinstating full year guidance.
Adjusted EBITDA for 2020 is projected to be in the range $1.05 billion to $1.09 billion.
Adjusted cash flow for the years projected to be in the range of 200 $275 million.
On Slide 13, you will find updates to the components of our guidance for the full year.
Thanks for your time today, I'll turn the call back to Mike Mike.
In closing the first half of 2020 has been eventful, but as a results reflect we've met increased demand needs of our customers and successfully overcome challenges presented by the global pandemic net sales and adjusted EBITDA are both up 5% in the first half of the year versus the same period one year ago.
We were operating the business from position of financial strength and flexibility with a keen focus on customer service carefree employees and return for stakeholders.
We have reinstated our annual guidance that includes adjusted EBITDA growth in healthy cash flow for the year maintained our dividend and share repurchase programs, all while continuing to invest for the long term growth and achievement of our vision 2025 goals.
Thank you again for your interest in graphic packaging ill now turn the call back over to the operator to begin today.
As a reminder, as he would like to ask a question you may do so by pressing Star then the number one on your telephone keypad again that is star one if you would like to ask a question.
For just a moment to compiled acuity roster.
Your first question is from Mark will <unk> of bank of Montreal.
Good morning, Mike Good morning, Steve.
Hi, My remark.
I wondered if you can just give us some sense of kind of activity levels.
In July by kind of business lines, what you're seeing in kind of food beverage consumer versus what you're seeing and kind of food service as we move through July here.
And also maybe a little more color on just the a.
Point between kind of organic sales in organic volume.
Okay, what do I take the first part of that Stephen you can handle the second.
So mark the way I'd characterize it if we look at the second quarter, we would say that our food and beverage business was up roughly kind of 6% Thats again as you know, it's about 77% of our portfolio in the foodservice business was actually down about 20% as we look at what we are seeing here in July and what we.
Essentially expect for Q3, we see that range on the food and beverage probably being somewhere between five to eight.
Based on the various verticals that we operate in foodservice, probably being somewhere in the neighborhood of 15 to 20. So it's it's improved a little bit but not materially as you'd expect given all the all the information that's been out to you on the news around some challenges and some of these states and doesn't go staggered restarting so.
That's what we're seeing right now on the ground Steve cover the volume and sales yeah. Thanks, Mike Good morning, just with regards to organic sales growth.
150 basis point of growth that we saw that's the topline numbers and we felt that it was the rights and actually conservative approach to how we look through our business given the mix change that we're experiencing if you actually stepped back and look at it on a tons basis.
Our organic volume tonnage our integrated tonnage was actually up 6% in the quarter, so quite material, but there was a pretty significant mix changes happening inside of there just to kind of put into context, our traditional food and beverage folding cartons like a beverage package would be $1500 plus.
Return on average, whereas a foodservice on balance product a cup that includes a lid for example might be in the $4000 per ton range. So we wanted to step back from the results and stare through the topline consistent with our vision 2025 expectations.
Very pleased that the net result is up 1.5% growth in the quarter, 3% year to date on a topline organic sales basis integrated organic tons are actually higher than that but it's Mike was just saying as we see some return them to the foodservice volume that.
Got a natural given take those two changes in mix I will start the level playing field over time. So we're very pleased with 1.5% than the 3% year to date in terms that actual topline.
Okay, and then I want to just make sure I understand what you said about.
Sps downtime I think I heard you say you took 14 days in July Texarkana on one machine in that you're going to take another 14 days along with a maintenance outage in September is that correct.
You got that right Mark and so if you put that together the incremental market. Your downtime is somewhere between 25 and 30000 tons that will occur in Q3, and thats lining our our supply with our demand as we talked about and that's on top of the planned outage, we're putting a new head box on that machine that was already planned and that's that's all in.
The September Okay is there anyway, Mike to just take some of that.
Foodservice oriented SBS volume and just move it to other businesses I mean, it would seem.
With that second quarter operating rate of 97% that you you noted.
From the front P.A. that you know SBS supply would be pretty tight right now and then maybe you could just you know swing volume on that machine.
Okay.
That's an uncoated machine the cup machine itself, but you're correct in fact actually correct with what we've done in the second quarter. As you heard my prepared comments, we talk about 100000 tons run rate of you'll see UK business and put it in Sps. Our teams did an exceptional job of video making that transition very very fast.
In order to service customers and capture the growth that you heard Steve talking about so in fact part of what you're seeing in terms of those strong operating rates on on the base Sps business is the fact, we made that shift and as you know, we're pretty uniquely positioned to be able to do that being the manufacturer of all three grades.
With that factors into our integration work that.
Steve also mentioned about going from 68% to 70% here year to date. So it's all part of our strategy and it's working and then being tested at a pretty big mix change, which I think shows our resiliency of the end markets that we participate in.
Our customers are performing through what most would consider pretty big disruption.
Okay last one from me I'm just curious.
Our code related restrictions on on things like travel like.
Sending technicians over to install lines for Coke and other beverage companies in Europe is that slowing down sort of.
One element of your organic growth this year.
It is mark I mean, we've lost a quarter or too as we alluded to on our first call and that continues to be indicates we've gotten pretty good at being able to do things via zoom and face time and that but there are some some things that just has to be done by our technicians and what I would point to and I had that in my prepared comments too is that we've got our IR.
Really our first line in Europe, there will be operational here towards the end of Q3 and into Q4, we expect that to continue to accelerate as we go into 2021. The interest for that particular specification Copeland continues to be incredibly strong.
It's really an issue about getting getting the machines installed in operational and we expect.
We'll have this delay, but theres no no loss of interest as a matter of fact I would argue it's building yes, Mark this is Steve.
That said the delays that Mike referenced are kind of timing delays the what we haven't seen as any change in the interest level or the number of placements. So it's a little bit of a delay, but theres no change in the actual number of installations consistent with our expectations.
Okay. That's helpful I'll turn it over guys.
Thank you thanks Mark.
Your next question is from Mark Connelly of Steven.
Thank you.
If we look at your slide seven and your recovery of price cost I'm curious what has changed other than just the lag. If we were to experience that kind of inflation scenario that we saw in 16 to 18 today.
How much difference would the recovery period be would it just be a third faster or is there more challenging than just that lag.
Mark It's Steve I think I'll start and Mike and that can add on I think you touched on one of the key components. If we were to experience.
Significant inflation.
In on a go forward basis, clearly the lags would be tighter and so that's obviously a critical part of our ability to recover you've seen as you mentioned on slide seven we now have fully recovered the dislocation that we did experience which is.
Important to see I think overall, though to mikes point.
Reality of the operating rates in the overall supply demand environment is of course, the critical relative to our view of that and so that to play into a recovery going forward and so the overall three substrates and the operating rates backlogs of those is obviously relevant.
Mark I'd add to Steves comment just again and you know this we didnt even own Sps mill till January Onest of 2000 name right now, we've got already substrates and our ability to balance those three substrates across the portfolio business. As we are doing right. Now if you think about what we're doing on Sps with 100000 tons. We moved Odyssey UK in that that's a big deal for us so.
So that helps us balance our supply in our demand by being able to manufacture all three substrates, which is clearly different.
Right.
Just a philosophical question when you when you announced the CRB hike a while back.
The trade rags recording customers, who seem to upset that you wanted to avoid getting into the same mess that we're just talking about does that sort of reaction from customers is that pervasive and does it does it have you know that this is a bad time for a price like attitude.
Does that shifted their preference or yours for how these contract terms work.
Either you know.
Referring the cost escalator or maybe maybe the customers do prefer though the price index.
I think.
You know this I mean really no customers looking forward to a price increase so the timing is what the timing is I think in terms of but our resolve this and you saw us do that when owes you see was going up dramatically. We didnt know where it was going to go we're very aggressive and making sure that we're out in front of recovering that because we want to avoid having to have another slide like the one that you just got.
Done talking about and so that's that's how we're looking at it at graphic.
I would say that the other part of that with customers that they want to be able to plan and so cost models give them, probably a little bit more ability to plan, where they kind of no in the last six months, what's happened and we can kind of keep up to speed on as I can build that into their forecasts up or down.
Some of our customers find that helpful.
That's that's obviously something that we offer them and then we'll continue to do so.
Okay, and if I could just squeeze one small one in in your a strategic action slide you Didnt highlight to to Coaters at West Monroe is that still on track and.
Yes. Thank you for doing that we probably should have had something in there. We do we are putting our curtain coater in in September on our find our west Monroe number six MACI.
And so excuse me on our number seven machine and that will be done in September. So we'll start getting the benefit to that in Q4.
And then we're going to take about a year off.
And then in early 2020.
Two will install down the last and final one on the other machine, we want to get it up and running in West Monroe and really make sure that we understand the operating parameters around it and then come in behind it finished the last one.
Very good thank you.
Thank you thanks Mark.
Your next question is from Brian Maguire of Goldman Sachs.
Hey, good morning, guys.
One of the follow up on the ER, the reporting metrics, which just from a the net organic volumes you had talked about the floor to the net organic sales and I.
I guess last quarter East you reported net organic volumes were up about 4%, excluding cove and leap year, I think five including Kobe, but it's going to disappeared and so are you, saying that that same number would have been up 6% in twoq. So there's actually a little bit better in QQ and related.
That or you are you now sort of committing to even offsetting the negative mix impact that you might have going forward to get.
He did a 100 200 basis points growth range on a on an organic sales basis. In addition to organic volume basis.
Yes, Brian. Thank you for that the answer is yes, the four and 5% that you referenced last quarter. This quarter was six so overall year to date organic volume growth is up pretty materially as we mentioned driven by very strong demand for our traditional core food and beverage.
Business, particularly beverage as Mike mentioned that also created the opportunity to pivot fair amount of volume from the UK to Sps to service, primarily food based customers moving them into that product category.
Yes, we would expect over time that both volume and.
Sales growth would both be in that 100 to 200 basis points of organic growth over time. So no change whatsoever. We just felt that years you look at it today because of this pretty significant change in the mix of our products and we actually didnt want to kind of if you will over what we believe over the long term might be a temporary over over.
We're statement that we actually stepped back and said, let's look at this through the sales lens, but very specifically volume is up materially.
Through the first half driven by the 77% of the business, where we're seeing the at home consumption patterns.
Very heavy and positive relative to volume if you think about Brian what we're trying to do is make sure that you've got more of a look through to so we're actually trying to run. This for vision 2025, as opposed to a one quarter, which was exceptional from a tonnage standpoint, and but we do expect overtime and we don't know what that timeframe is.
We see that cup business come back and Thats the value per ton that Steve talked about being $4000 a ton versus $1500 a ton of today, it's a big shift and so we're just trying to give you a better better look through on the narrative based on would call that a bit conservative but with.
Right.
Yeah that makes sense I just I just ask that you would take some of the pricing out of it as we you do need to recover cost inflation and pricing will move up and down but how do you know kind of a volume mix blended number makes that makes total sense just to switch gears show that the right.
Brian Let me for clarity just so that on that that depth that sale definition exclude price and FX. So it's in the same definition. If you will have the volume mix category. So it is a sales associated with that so we did remove price.
We did remove FX, so that again, it's very apples to apples and the way to look through the company relative to the role that.
All you above our business as measured in sales rolls forward.
Okay, Yes, I think that's a very good metric then I'm just a switch gears to Sps and yes, yes, and the slides it looks like you talked about the operating rate for the industry improved a little bit to 97% somebody like 95, and one Q and the backlogs.
I think you talked about them being four weeks I think last quarter's lives, it's kind of more three to four.
And recognizing a lot of things have changed on the foodservice side, but it sounds like some of the industry data has somewhat improved but then.
On your own converting operations, you're having to take some downtime and I think that's going in I think you say 20 to 30000 tons of board sort of impact. So yes. It seems like some some some inconsistencies between.
Some of the industry data and the backlogs improving yet the need to take some downtime. So if you could kind of Oh, yeah reconcile those and talk about whether you think you know the industry needs to take some capacity out in SBS, whether there's a need for sun somebody or the upstream werent capacity to come out.
So Brian I'll take that one let me just tell you what we're doing a graphic so I graphic what we're doing is we moved on equivalency of about 100000 tons I mentioned earlier see UK predominately see UK business into our general Sps coded Sps.
Business and were those conversions occurred in the second quarter.
There are all done now and we're using that to balance out our multi mill system.
Specifically, where we have the we this is on that Uncoated Cup machine, because if demand profile of food service and down that 15% to 20% that I referenced to a previous question. So what we're doing about that in addition to having a normal planned maintenance pretty significant maintenance outage to take.
Sure that you head box that we're putting on on that machine.
Is taking an additional think about it this way 28 days.
Downtime in Q3 to balance our supply in our demand and so that's how we're looking yet at solving for that the general Sps market for us that we're participating into strong and it's it's evidenced by the fact those operating rates year to date.
Okay number 95.3 versus 91.7.
Last year and that reflects the closure of one of our competitors, taking a mail out and the incurred obviously the bump on that so within those numbers. The weakness is the foodservice grade that we bake. It's about 400000 of our 1.2 million tons, and we're managing our supply and our demand by.
Taking some economic downtime I just outlined that for you. So I'd I'd ask you to think about it that way.
Okay that makes sense.
One for me, maybe a little unfair to compare the the EBITDAC I Didnt components, both the line items to the original guidance, but but just looking at it it looks like rice is at 25 million dollar on favorable commodity cost deflation is a 45 million dollar favorable swing. So I just wonder if you could kind of talk about universes.
The original plan for the or white light prices, a little weaker and what's driving the commodity costs to be quite a bit stronger more favorable.
Yes, Brian Steve from the original guide that we provided though when we announced in Q4 earnings.
We had the modest movement down that was on on the CRB and Sps, which we took into consideration and then there's been obviously in this deflationary environments all of our cost models. So thats why we have the new range of price in the zero to $20 million range. When we originally guided we do.
Those are pretty modest inflation for the year, 1% roughly on the two and a half a billion dollar spend we actually are now guiding to modest deflation into $10 million to $30 million range. Obviously, we're in a recessionary environment, we are experiencing some actual deflation and most.
The net of that it's occurring in the areas of fiber related costs associated costs have moved up and have now moved down but as we talked quite a bit last year was a major inflationary items for us last year would as normalized in the south back to more historic levels and AG.
And that's creating deflation year over year on the wood basket the rest of the infrastructure costs logistics chemicals, resins et cetera pretty neutral.
Overall, the deflation net is generally fiber based with would be in the predominant reason for that.
Okay, Thanks, very much quicker.
Thanks, Brian.
Your next question is from George Staphos of Bank of America.
Hi, everyone. Good morning. Thanks for taking my question Hope you guys are doing well. Thanks for the details I guess I have three questions. We'll go from sort of process and operations to kind of a bigger picture. One so I guess first of all when we look at paper seal. We also look at.
In somewhat related way the shift of the C UK tons to SBS.
What kind of changes in run ability are you seeing.
At either you're converting location or in the case of pay per sale for your customers can the customer use that paper trail with existing.
Equipment that they have or would they have to make modifications and youre converting areas are you seeing any change at all any tweaks any loss of throughput doesn't seem that way by the way.
And moving from Q case to bleached board.
Okay. Thanks, Georgia, I'll I'll take that in terms of paper seal, that's a new line that the customer would actually purchase and our interest there is supplying the traced the pay portray that goes in their predominantly as you know it a lot of those it's been polystyrene foam, so replacing polystyrene foam.
Paper.
Fiber based packaging, which is what we do so that's our interest there and we're working with a number of different people that actually sell those lines and Doug we're seeing a lot traction on that in Europe, and Australia as we referenced there it's pretty big addressable market. So we find that interesting for us in our ability to manufacture that is pretty straightforward with existing equipment that.
We've gotten really all of our converting plants in regards to the C UK to SBS shift.
That we run all three of those substrates all the time at our in our facility. So we know how to convert them.
I missed the vast majority of what we moved into SBS Odyssey UK came from there and so it started.
There is some frozen pizza and there's some other things in there that used to be no I'd, Sps and and we moved it to see UK and now we moved back in order to balance out our broadband with work for those customers make sure. We can meet their heightened demand levels and they've worked with us on that so it performs well in their lines it doesn't require material.
Segments.
To be able to do that.
So Paul it all the overall execution on that has been pretty seamless as you referenced.
Thanks, Mike.
Hi, its fourth Kalamazoo goes I know one of the intense Lisa is what a recall one of the attention to that machine was to have greater fiber flexibility given.
The variability.
In the different grades are recovered fiber with graphic paper demand being down so much and implicitly there being no longer term more inflation in sorted office papers does that change at all probably not but does that change will any of the return assumption that you have with new Kalamazoo machine and more broad.
Finally, with this machine coming on are you seeing many increased interest from your customers recognizing you're going to its really just replacing older capacity and using more CRB and their their business mix from what had been previously the case.
Yes. Thanks for the question on Kalamazoo as there are two weeks ago I have to tell you our team there's two and outstanding jobs, we referenced in the materials. We're on plan.
Both in terms of the timeline as well as the budget for that project. So I. Appreciate the question in regards to the actual input cost and paper that we would use.
We're going to have a lot of flexibility there that machine light like our K one machines could have curtain coater on it so the amount of white paper that we have to use close to the surface.
Flexing up coding if you will I'm, just going to be materially better than anybody else in the space well have a lot more flexibility to be able to do it we've anticipated that that's how we built a machine so yes, the the down.
The smaller market size of the printing and writing paper well certainly something we watch is not material impact to the overall economics in terms of what we put on the project as a matter of fact, it hasnt impacted at all we'll be able to deal with those kind of disruptions and dislocations much better than anybody else in the space and Thats part.
So why we're doing the project. In addition to the fact, we were taken a lot of older capacity as you talked about in regards to how customers are feeling about it.
Look you see all the sustainability goals and targets our customers put out there. So when you look at what that machines, Kevin do you know as I as a reference to few times and we're going to use 300 million gallons less water a year, we're going to by 20% less electricity, we're going to generate 18% less greenhouse gas across our CRB platform.
And these are real material numbers that will help our customers actually accomplish their sustainability goals. So when people are looking to.
Find a solution to meet those targets, we've got an answer it's a different answer there really than anybody else has so in addition to having the lowest cost highest quality material. We've got a great sustainability story, there and they like that.
Thanks, Mike My last question I'll turn it over.
Brian touched on this in one way in terms of your guidance you know it in some ways that we step back it's remarkable what we've seen over the last quarter, you are more or less back to your prior guidance, both on EBITDA and on free cash flow yet there's been this.
Immense amount of volatility in demand in the economy and ultimately yet you know.
Not with a lot of without a lot of effort I'm sure you skating through it so.
So when you think about.
How ultimately graphic packaging.
Maybe this isn't the term you'd use.
Filled the whole.
You know and kept guidance and got to performance, where it needs to be where it had been what was the biggest driver is it that we've gone through this period and the consumer now has a greater appreciation for paperboard and you've seen we've seen a sustainable increasing demand for view.
Just a one off where there's a lot of pantry loading and yes, we got through this year, but next year, there's going to be a chicken come home to roost effect on volume.
How do you think you got through this and the sustainability of that.
Moving into 21 and 2000 can be on thank you guys. Good luck in the quarter.
Thanks, George I. Appreciate the question I think I'd have you look at our market participation strategies and how we have over the last decade really built this business and if you look at our big food business and you look at our beverage business and you look at our consumer products business and all that comprises about 77% of the company, we add food service on to adjust.
Food services down now, but look what's up we've got the food and beverage out because people are eating and provisioning more at home to your point. So we'll food service come back we believe it will come back to what level. We don't know for sure and we don't know what period of time, but I'd ask you to think about that as a little bit of a teeter totter as foodservice comes up you'll see a little bit of kind of the food and beverage.
Go down, but the net impact of that balances out for graphic and what we're able to do that as use our our new product innovation.
And our low cost investments that we've made to continue to grow the business and that's what gives us confidence and then under 200 basis points growth and so this year has been exceptional in terms of how that is all performed and we netted out well I appreciate the comment and as I referenced I think our team has done an excellent job executing through a pretty pretty.
Amit backdrop, but it shows the resiliency of our customer portfolio and the operating model that we've got in place and George just add to that because it was an exceptional effort across entire organization to manage significant increases in demand as well as obviously the areas of weakness but at what.
The things that hasn't been touched on but I will touch on is on volume mix that resulted in a modest headwind on volume mix, because we were scrambling in a significant way to obviously take out.
Capacity in our coke, making business appropriately to match the needs of making actual cups, but more importantly, moving that SBS from sea UK moving production into facility that maybe you havent made a beverage carton, but now or.
Shifting the actual.
Portfolio in a pretty material way, which cost a little bit on the volume mix, but we've now achieved that and as we continue to roll forward, we can optimize from there. So our overall and I think it's critical to what Mike, saying, our overall belief relative to the organic growth profile of the business kind of seen.
Through that and 100 to 200 basis points remains intact with a different mix and some phenomenal work being done across the organization to manage both the ups and downs.
Through this environment of people needing to eat and drink.
Thank you very much.
Thank you.
As a reminder to those in the queue. Please limit yourself to one question and one follow up question.
Next question is from fielding of Jefferies.
Hey, good morning, everyone. Congrats on a really solid quarter in a tough environment.
Appreciate you're taking the downtime to kind of balance supply demand, but curious how does the pricing environment and competitive landscape for your customers This and food service business.
So I feel that walk back as in terms of our customers.
Are you referring to our customers.
Oh, well just trying to get a better sense of how the competitive landscape is in terms of who you compete with on the Cup side.
Is everyone behaving nicely the pricing environment in terms of what you're selling your products trying to get just to be demand, obviously down quite a bit.
So it's Mike and again welcome back are you were not going to talk about the competitive rivalry out in the market I mean.
What I want you to know is what we're doing to actually compete in that space in meet those requirements and as you heard Steve What do you just got done talking about we've we've right sized our converting platform in terms of the amount of people in the amount of lines that were running to match up with the actual demand we have and then in Q3 here.
Excuse me, we're taking a fair amount of market related downtime at our cup machine to balance that out and that's all reflected in the competing numbers you know year to date. So it's pretty healthy operating rates. So I think I'd point to that as reflected by guide as well.
Got it.
Really helpful and appreciating if you choose to use gbk stock, it's not that diluted that all but the potential incremental 250 million stake from IP potentially becoming available in the back half are you comfortable use that utilizing your cash flow and balance you. The Sunday that certainly had a lot liquidity.
Yes, Thanks, Phil I think what we were trying to do on page 12 is to just remind us that we do have incredible flexibility on how we monetize at IP stake obviously, they begin that process in the first half and the next opportunity to begin to do so.
Tomorrow actually in terms of the next potential for them to begin to.
Potentially monetize and what we were conveying was just that we've got a great balance sheet.
Excellent flexibility and I'll remind you know this weve actually bought back $157 million of the company a year to date prices in the mid 12.
We've got line of sight to leverage that's in that to an after three times range. Our original guidance indicated that we could acquire back the second $250 million and still be at the high end of our to an after three times, that's only modest lead changed mostly because we've acquired back.
Business.
Acquiring our own Gbk shares. So we really continue to like the flexibility we have in the context, our capital allocation strategies in the context of the value of our currency that being gbk shares so excellent flexibility depending upon how they choose to continue with their monetization assuming they choose to do.
So.
Okay. That's that's really helpful. Thanks, a lot to looking forward.
Yes, thanks, Phil.
Your next question is from Debbie Jones of Deutsche Bank.
Hi, Good morning. My first question is I was wondering since your your free cash flow rain, a little wider than your EBITDA range.
What has to happen for you to hit the high end of your your thinking in terms of free cash flow range.
Hey, Steve I think the high end, if you kind of look at the variability will be around working capital I think overall.
That would be in terms of the cash flow we've got very.
The plans for inventory coming out of the business and the second half of the year, we have materially more natural plan market related downtime in the second half in addition, or excuse me plant natural maintenance downtime and then as Mike mentioned, the incremental market related downtime so driving.
Inventory out of the business first half the second half will be a key indicator for being at the higher end of the range, assuming kind of if you will kind of a natural midpoint omni adjusted EBITDA I think thats really the for the most part our interest expense and taxes and pension will be in line with.
The midpoint of the range roughly that we have for you.
Okay. Thanks, that's helpful. And then second question, Mike You mentioned, helping your past various hit their sustainability goals can you help us understand what percentage are ballpark of your customer base is leaning on you to help improve their their value chain metrics.
And what the on the new mail that you can do to help them with that.
You know Debbie I'd say over 90% I mean to be so really the most the smallest customers that we have maybe perhaps some of them aren't as.
Aggressive on some of those goals, but if you look at our top 25 accounts for sure every one of them very ambitious goal for cost takeout, well not dramatic overjoyed carbon take out a few do you think about it over over that period of time in terms of what they want to greenhouse gases and electricity and water and those types of things and so this.
We have answers that moved the needle that's part of how we're making those investments and really looking back into it. So I'd I'd say, it's the majority of them.
Okay. Thanks, I'll turn it over.
Thanks, Kevin.
Your next question is from Mark Weintraub Seaport Global.
Thank you you had mentioned that teeters harder between cartons, and foodservice and hopefully that's going to Peter back the other way.
It is foodservice more profitable is not one of the issues on the on the impact to mix as well and so does that become a favorable if it does go back the other way.
Market, Steve No I wouldn't necessarily go down that path overall as you know our economics big platforms have commonality to them, we've been improving the overall economics of the SPF platform in the Cup business and.
Acquiring that business, two and a half years ago.
So I don't think you'll see material movements in terms of that impacting volume mix. It really goes back to what we talked about a moment ago. We had a lot of activity here in the quarter adjusting to both the ends and the out.
But overall, we still we would expect over time to earn volume mix positive across the portfolio of products.
As we look out over the next several years, so I wouldn't characterize it as a difference in profitability. It's more a difference in the kind of the topline mix and the tons that are utilized to support that business, Denmark. The only thing idea of course, we're going to spend $12 million or expect to spend $12 million in the quarter in terms of end market economic downtime. So.
Obviously that would go away foodservice comes back, but that's not our guide okay and.
Two other real quick ones when she had a couple of acquisitions, which presumably would've been in your original EBITDA of course, you didn't have FX is a negative either but order of magnitude.
On the acquisition, how much might that be contributing to.
The 2020 numbers.
Consistent with what we original originally guided Mark overall, the in terms of what we acquired and committed to were on that on the trajectory. So its debt net favorable EBITDA.
In our kind of early guidance. If you will based as we as we put those out there I think announced after Q1. So we're really pleased as I mentioned in the commentary with the synergy capture.
Consolidating some facilities into lower cost facilities were capturing logistics.
Improvements across the CRB platforms, and so overall were in line with the commitments for both the Greifs business and the.
The quad businesses that we acquired to meet the couple of your expectations we had for.
EBITDA and synergy capture okay. So quad was in the original guide back in January I understand I didn't really.
And then it was.
Thanks, and then lastly.
So with the commodity input costs, having been a favorable.
Our their contractual give back or is would treated differently somehow perhaps than some of the other input items, where it's not something that you know you worked to offset in other ways, but how should we think about that.
The vast majority of our contracts that would use urgent our market base. So that has not impacted by any any reduction there nor if it runs like it did last year is covered bonds. So I'd ask you to think about it that way those kind of contracts are more in our recycled business on our CRP business across.
Buys super Thank you.
Thanks for question is from Anthony Pettinari City.
Good morning.
There's there's been some commentary in the trade press about slightly more input pressure in SBS and CRB. It sounds like most of your Sps markets are strong and you're taking adjustments where you need to just wondering if you had any thoughts on on imports or whether that's something that you're sort of recently coming up against.
Yes, Thanks, a lot Anthony for the question I, let's break down really into all three substrates in terms of working off the census data, which is the best we have in terms of imports into if you start with a you'll see or be in the beginning.
When you look at sea or be most to the CRP historically has come from either Canada or Korea.
Little bit from China, but not much of any recent time and actually those numbers are down year to date on the CRP in terms of imports and come to us.
So on that one that would be the case in of course, we operate one of those mills you in Canada. The makes ERP. So some of that could be us just shift in our business around overtime.
If we look at KFC UK equivalents.
Specifically from South America, the combined production and imports last year.
Roughly 50000 tons.
Year to date, it's up 2000 tons, so pretty small family less than 2% of the overall market.
If you think about it that way in regards to SBB. That's been the biggest one as you know principally coming out of Europe, you've got Finland, and Sweden year to date best we can tell are up about 30000 tons, that's consistent with really what our expectations would have been but that's been partially offset by a pretty significant drop off.
In Ivory Board from China.
So the net net of all that is it's it's very de Minimis in terms of importance.
Okay Thats extremely helpful detail.
And then just following up maybe on Georges earlier question I mean in your view is any of the food and Bev demand that you saw onto Q, which seem to be strong was any of that sort of pantry loading or stockpiling or channel fill that it doesn't show up in Threeq Q or do you think I mean, roughly that weight of demand should be.
Fairly consistent through Q.
You know, it's a great question and I don't know if we have a perfect answer but what we can tell you is we're seeing a similar trend here in July and to what we saw in Q2.
So I'd answer it that way I mean, best we know.
It's holding up both the same people have worked through that stuff at home I would think and they're just there's more meals being eaten at home right now and less meals being eight now and it shows that our numbers, but the great thing about the resiliency of our our portfolio is that balances out in a way that we're still able to generate economic value here for our shareholders yes.
Anthony it's tough to argue a pantry load five six months into a pandemic.
Good things do turnover pretty naturally.
Great that's very helpful I'll turn it over.
Your next question is from Ghansham Panjabi of failure.
Hey, guys. Good morning, I guess as just as a follow up to the last question, let a lot of food companies I've been talking about.
Just purely matching point of sale just given the elevated sales at the retail level and inventories are pretty low as it is I guess on the flip side of what you just said, we setting up for a period, where the 77% a portfolio that is non foodservice continues to grow their legacy baseline, even as foodservice normalizes I mean.
What's your what's your sense just talking to customers.
Yes got him as Steve I think as we were just talking Mike and I were just talking with you and others here earlier I think yes, there'll be some natural normalization of volumes as people to earn eventually out into a work base and away from home environment, but that being said.
The.
Organic volume growth commitments, we have through sustainability related conversions, so beverage growth on a global basis Cup conversions Bowl conversions, that's really was the catalyst or our vision 2025, and so you kind of have to look through the realities of NN.
Now if you will have this difficult not unusual time and look through our view of the actual net organic volume initiatives that we're executing on which give us the confidence that organic volume and sales growth will be consistent and available based upon the actual innings.
And as we have underway.
Okay, and then I'm sorry, if I missed this but you know can you touch on how your performed during the quarter I mean, let a lot companies have been talking about beverages, being particularly weak in Europe, especially southern Europe.
What did you see in the second quarter and what are your expectations for the back up for that region.
Our business in Europe, with strong Ghansham and again, we're running a little different race and some because see we're replacing a lot of shrink wrapped film and other plastics, you with fully enclosed fiber and clip and those kind of project. So we're driving some real growth every year on year, it's a strong business for us.
Got it thanks, so much.
Yep.
And at this time I'd like to turn the call back to Microsoft for any closing remarks.
Thank you for joining us on our earnings call today, we'll look forward to talking to you again in October.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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