Q3 2020 Graphic Packaging Holding Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to profit.
<unk> third quarter 2020 earnings call.
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With him conference over to your speaker today.
He just vice President Investor Relations. Thank you. Please go ahead.
Good morning, and welcome to graphic packaging holding company's conference call to discuss our third quarter 2020 result.
Speaking on the call will be Mike Doss, the company's President <unk>, CEO, and Steve Scherger Executive Vice President and CFO.
Oh people along with today's call.
Our third quarter earnings presentation, which can be accessed through the webcast via self directed slide and also on the Investor section of our website www dot graphic tee kg dot com.
I would like to remind everyone that statements or expectations plans estimates and beliefs regarding future performance and events constitute forward looking statements.
The statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations information regarding these risks and uncertainties.
And in the company.
Filing secure.
Securities and Exchange Commission undue.
Undue reliance should not be placed on forward looking statements and such statements speak only as of the date on which they are made and the company undertakes no obligation to update such statements, except as required by law, Mike I'll now turn it over to you.
Thank you Melanie good morning, and thank you for joining us on the call today Rick.
Successfully meet growing customer demand and 2023rd quarter was a continuation of solid financial performance driven by over 4% organic sales growth exceptional customer service and strong operational execution, we remain on track to meet or exceed our organic sales growth projections for the full year.
There's no central business, our teams continue to adapt to changing consumer demand patterns are providing continuity in the supply chain through multiple times.
We're doing this while focusing on the safety health well being of our employees I'm very proud of our people and the service levels. We continue to provide our customers our execution on behalf of customers and focus on innovation is reflected in the strong results year to date and a robust new business pipeline.
The pandemic has brought many changes to our daily lives, including the necessity to do more from the protected environment of our homes.
Whether that be working we're conducting meetings remotely helping children with virtual learning for hosting smaller get togethers to stay connected with family and friends.
Increased time spent in our homes is elevated demand for food and beverage packaging since the end of the first quarter well, we do anticipate an eventual return to more normal activities outside of the home modest long term behavior changes simple, how and where we can see food and beverages is very supportive organic sales growth goals.
Importantly interest from customers for more.
Sustainable fiber based packaging solutions remains very robust our planning with customers on their packaging conversion programs, including machinery installations for beverage customers is proceeding nicely with numerous strategic projects in motion over the next 18 months.
Our product development team is meeting customer demand for innovation and packaging solutions that offer greater recyclability enhanced safety anti genic advantages along with Premiumization opportunities to stand out in the marketplace, we see strong demand for our packaging solutions across existing customers as well as perspective.
Customers and new end markets, including protein packaging and ecommerce.
Our teams are operating very effectively and I'm very pleased with what has been accomplished year to date, we completed a number of strategic initiatives in the quarter on time and on budget, including the installation of a curtain coater at our West Monroe Mill, and a new head box at our Texarkana.
In addition, the integration of the converting volume of the two right facilities closed in the third quarter is largely complete.
Another 100000 tons of CRB paperboard integration will take place over the next couple of years supply agreement right on wise. This will further benefit integration in our CP business and drive our rates higher Southern company.
During the quarter, we also executed decisions to match, our paperboard supply with demand. This included the continued substitution of an annualized 100000 tons with UK based packaging to Sps folding carton grades in order to meet increasing demand. We also made the decision to take 30000 tons of market downtime.
On our uncoated Sps Comstock paper machine at our Texarkana mill to align production with lower copper demand as a reminder, our uncoated Sps paper machine in Texarkana is highly integrated with over 85% of the Comstock produced converted by us for customers and our five.
Cost converting facilities.
Turning to paperboard backlogs operating rates and inventory levels, our backlog either held steady or increase during the quarter. In fact backlogs for all three substrates SBS CRB and she UK are currently at five plus weeks.
That was reported by the S. and P.A.S.P.S. industry operating rates were 85% during the quarter maintenance end market downtime.
Industry inventory levels, and Sps dropped by 86000 tons during the quarter and CRB industry operating rates consistently improved each month during the quarter and we're at 96.5% Tempur industry inventory levels and CRP dropped 21000 tons during the quarter our.
Our estimated operating rate for CDK continues to be very strong above 95% and our sea UK inventory levels also declined during the quarter.
Driving our integration rate higher over time remains a strategic priority and we're delivering our year.
Our year to date integration rate is 70% across all three substrates, we produce up 200 basis points from 68% last year.
Focusing now on the financial performance of the quarter you can see the details on slides four and five our sales grew 7% year over year, driven primarily by impressive organic growth sales of over 4%. This is the fourth consecutive quarter organic sales growth confidence in our ability to profit we captured grow.
These opportunities continues to increase given the traction we are seeing in plastic substitution cooking solutions strength packaging solutions, we're bringing to the market.
It's good to see our customers remain resolute meeting their own sustainability goals well converting to packaging that is preferred by the consumer.
Adjusted EBITDA in the third quarter of $250 million improved $6 million.
We delivered EBITDA growth by positive volume and improvements in productivity, Steve will go into more detail during his discussion, but productivity improvements were partially offset by the previously mentioned $12 million on favorable impact of market downtime.
And our Sps Comstock line.
Before turning the call to Steve I'll spend a few minutes highlighting the expanding addressable markets, we see for fiber based packaging solutions.
Our three growth platforms outlined on slide six plastic substitution cooking solutions and strength packaging provide significant runway to capture ongoing organic sales growth.
We've talked to you a great deal over the last several quarters about conversions from plastic packaging to our paperboard solutions well. This remains a competitive market our solutions are winning as evidenced by the momentum we are experiencing.
Beverage packaging, we are rapidly expanding our proprietary technology with customers through installations of our high speed and efficient machinery solutions around the world. Our planned beverage machinery placements are up close to 40% versus the normal baseline year.
Our Q clips solution, which debuted this year offers compelling sustainability advantages and merchandising benefits compared to other packaging options.
Maybe I am that Coca Cola and other large global beverage companies are converting to clip given the consumer appeal of our new solution we're seeing.
We're seeing growing recognition from industry associations like the paperboard packaging Council pro Carton and the Europe and Carton manufacturing Association on the merits of packaging innovation to support sustainability efforts and improve the consumer experience last week graphic Packagings Peel clip was the winner of the top two achal.
Ladies paperboard packaging councils Twentytwenty card to competition.
Paperboard package of the year and the Innovation Award.
I am proud of our teams that worked diligently to commercialize the Q1 for our customers.
Hey, procedural products, we discussed last quarter was also acknowledged that the competition taking on the paperboard packaging Council Sustainability award, notably in Brasil is now commercial in Europe, and Australia with many new trials underway globally, our paper steel trade for chilled protein produce and fruit uses significantly less.
So rather than the traditional phone and is being well received in the marketplace. Finally within the food service market, we see ongoing conversions to paper based comps in both solution.
We continue to actively work with customers to commercialize the polyethylene three cups solution in cooking solutions, we are benefiting from the enhanced microwave technology and superior packaging functionality frozen foods represent an attractive and expanded market opportunity for consumers growing desire for ease and speed along with the availability of more.
Core may inorganic frozen meal options creates a compelling economic.
We offer an improved sustainability profile and competitive economics versus the current plastic tray options.
Finally strength packaging, we are working on new opportunities in E commerce and with clubs tours in mass retail channels, we are.
We are winning business on this platform as we expand strength packaging solutions for different distribution channels. We are introducing solutions that can reduce excess packaging requirements, while maintaining packaging integrity.
To wrap up I'm pleased with our financial performance and agility demonstrated year to date I look forward to talking to you again in February when we provide full year results and the outlook for the new year consistent with our vision 2025 goals, we expect to achieve organic sales and EBITDA growth again in 2021, Steve over to.
Are you.
Thanks, Mike Good morning.
Turning to slide seven and our sales performance waterfall.
Net sales in the third quarter increased 7% from the prior year to $1.7 billion, driven primarily by positive volume mix from net organic sales growth and acquisitions.
Reported earnings for the quarter were 23 cents per diluted share compared to 18 cents in the third quarter of 2019.
Third quarter 2020, net income was negatively impacted by a net $9 billion, especially targets.
When adjusting for these special charges adjusted net income for the third quarter was $72 million.
Adjusted earnings per diluted share grew 30%.
26 cents compared to 20 cents in the third quarter of 2019.
Benefiting from a lower effective tax rate and fewer shares outstanding.
Turning to slide eight and our EBITDA waterfall third quarter 2020, adjusted EBITDA increased $6 million to $250 million.
Adjusted EBITDA was positively impacted by $15 million of volume mix $7 million, a positive performance $3 million in commodity input cost deflation.
$3 million a favorable foreign exchange.
These benefits were partially offset by $10 million in unfavorable pricing and $12 million and other inflation, primarily labor and benefits.
As you can see on the waterfall.
That performance would have been approximately $19 million before taking into account our decision to execute SBS Cup stock market downtime.
During the third quarter, we again experienced a benign inflationary environment across most commodity categories. We are.
We are seeing some pockets of inflation in areas like trucking and chemicals.
These areas were offset by modest declines in other commodities.
On slide nine you will see the robust list of strategic projects, we have completed over the last 24 months.
Notably the maintenance of recovery boilers completed in 2018, 19, and 20 will not need to be repeated for roughly a decade.
The capital and resource allocation is necessary to complete these projects are behind us and we will benefit from the safety cost and environmental improvements moving forward.
These projects increased operational effectiveness and underpin our goal of achieving $50 million to $70 million and that performance each year.
Looking ahead, we will complete the recapitalization of our converting facility in the Netherlands during the fourth quarter.
$600 million Kalamazoo, CRB investment is progressing well and remains on time and on budget for an early 2022 startup.
Moving to liquidity on our balance sheet, we have total available liquidity of $1.6 billion.
Balance sheet remains strong.
Last week, we get dressed star $425 million bonds maturing in April 2022 by entering into a delayed draw term loan with number banks of the farm credit system.
We closed the $425 million alone last week, but will not fund the loan until January 2021.
The date, which corresponds with par call date, the maturing bonds.
The new loan has a fixed rate seven year non amortizing loan that is patronage eligible which should make the net interest rate of the loans less than 2% annually, a meaningful improvement compared to the 4.75% rate for the maturing bonds.
We ended the quarter with $3.7 billion of net debt net left.
Net leverage was 3.4 times at the end of the third quarter compared to 3.3 times at the end of the second quarter.
Based on the guidance, we're providing today.
Right and that leverage will be just slightly above our targeted two and a half to three times range.
Moving to a discussion on our return of capital to stakeholders, we returned $367 million to stakeholders during the quarter and share repurchases dividends partnership distributions and partnership redemptions.
This included the acquisition of $90 million worth of common shares during the quarter, bringing our total open market shares repurchased in 2000 $20 million to $247 million at an average price of $13.30.
Capital expenditures in Q3 were $119 million and included the ongoing work with our CRB investment in Kalamazoo, Michigan.
Turning now to our guidance on slide 10.
We have tightened our adjusted EBITDA range for 2000, $21.06 billion to $1.08 billion, reflecting 4% year over year growth at the midpoint.
We are increasing our free cash flow guidance range.
Last quarter, we guided to a range of $200 million to $275 million.
Our new cash flow guide is a range of $275 million to $300 million, reflecting progress. We have made decreased paperboard inventory levels year over year across all three substrates.
As Mike noted, we look forward to updating you on our full year achievements and 2021 outlook when we speak to you again in February.
I will now turn the call back to the operator for questions.
Thank you he would like to ask a question. Please press star followed by the number one on your telephone keypad. We ask that you. Please limit yourself to one question and one follow up question. Thank you your first.
Your first question comes from Debbie Jones from Deutsche Bank. Please go ahead.
Hi, good morning.
Hi, Debbie.
Hi, I took the first question I would ask about it just the the in your bridge, where you talked about the $10 million lower pricing can you just walk us through that.
The drivers there and then how you think about that sequentially.
Yeah, Debbie its Steve good morning, yes, the pricing that rolled through in Q3 was as expected and was driven by the two.
$230 per ton.
Price reductions for CRB and SBS that occurred earlier this year. So that was the natural progression along with the from the market models and that along with some of the pass through of the deflation. So it was expected we will probably see that again here in Q4 most of that will then.
Be behind US, we'll see a little bit of it rolled through the beginning parts of next year as well.
Okay. So that's helpful. And then you did comment that you are seeing some inflation across your system. Then I'm curious if you look back a couple of years ago, where you did experience a pretty significant inflationary headwind.
Can you walk us through how you may be positioned differently.
During a lot the last kind of inflationary period are there things that we should look to around around your contract pass or is it maybe.
Pass through that maybe we didn't see the second time around and then no comment on your ability to kind of recover it through pricing as well as they think about 2021, if we would see a more material cost inflation.
Yes, let me start and then Mike can add in that certainly you summarize the inflationary environment well, it's been very very benign we do see some pockets of modest inflation, if the world stopped to date.
Would be modest inflation in our business next year, obviously, that's something that we're monitoring very closely overall relative to price offsetting cost over time and so.
Certainly I'll, let Mike Mike can comment here as well, but we've taken significant actions since the last time, we had material inflation relative to our contracts and price recovery mechanism. So overall price offsetting commodity cost inflation is an absolute priority for us we know where we are today.
Based upon known pricing, we're obviously in the market.
Today with a price action for CRB and over time, having those offset with the progress that we've made over the last several years remains a priority as we move out of this year and into next Mike Yeah, I think Debbie just to put a little more.
Point on the comment around the contracts as you know coming out of that last period 16, and 17, we made a strategic decision to shrink or collapse. If you will.
Legs on the on the contracts that we have from nine months to six months. So we essentially get a couple openers a year to recover inflation as Steve just described so that's.
Thats materially different than the last time, we saw that as well.
Your next question comes from Mark well being from Bank of Montreal. Please go ahead.
Good morning, I wondered Mike if we could dig in a little bit.
<unk> dynamics in the market because you know we.
Seems like we've had a lot of.
Closures announced over the last you know 12.
12 to 18 months with GP and more recently West rock.
Not a lot of big players take the market downtime in them.
And the market still seems to be struggling. So can you just take a minute or two and a sort of unwind the pieces for us and could you also help us kind of reconcile all of that with you reporting my last week backlog in SBS.
Yes.
Happy to do that Mark So I mean, if you think about from graphic packaging standpoint, we operate.
For SBS paper machines and.
As you heard Steve say in this quarter, we actually already at a run rate basis of running at almost 100000 tons of RC UK production on three of those folding carton group the machines. The fourth machine as the Uncoated Cup machine in the case of graphic our Uncoated Cup machine, it's highly integrated machine into our own.
Up operations as we said, it's over 85% integrated into our own cup, making process for customers. So.
If you kind of look at.
Sps and what we're seeing we're seeing strong demand on our coated machines because were converting real soon.
Okay production on those Sps machines were selling that to customers, we're managing our supply and demand to our power.
A man requirements on our uncoated machine.
And so operating rates if you look at what happened in Q3.
SPS has an industry was down around 85%, but it was a very busy maintenance season as you saw and graphic took 30000 tons of economic downtime coming out of that as you saw here in September.
Inventories were down by 86000 tons and when you look at the.
The backlog report as reported by the Big you know that grew to five five weeks. So that's that's the math, how we think about it.
Okay, and Mike is it possible for you to talk a little bit about this concept of potentially converting some SBS capacity over to see UK at a point.
Yeah, and so if you really take a step back and look at what we've done with CDK growth and I'll go back to 2014 and kind of wind that forward to today, we've actually grown our UK production by over 200000 tons in that period of time, you don't see that in the S&P a data because its co mingled with gypsum.
While facing but it's grown in 2% to 3% a year based on solid global beverage sales and other carton sales that we've seen manifesting itself into this year, where because of the growth we've seen on our global beverage platform, we need to actually run some of that production over on our Sps machines. So when we.
Take a step back and look at what Optionality, we have for the company. What we want to do is take advantage of our low cost version, Paul when we want to make the substrates that have the.
The highest growth potential and the highest profitability and so you'll see us do over time is evaluate how do we push more of that pulp into the grades that we need and what we're looking to do is do that in a capacity neutral.
Okay, because it's basically a shift if you if you think about it that way out of one substrate and ended the other and that's those types of Capex projects Mark they're very manageable. It's nothing like what you. What we are doing in Kalamazoo mich kind of what you would see US do as this strategic project on top of our normal.
Maintenance Capex.
So it's very manageable would be something that we're looking at and evaluating kind of what the right allocation of that looks like and how to best meet that need overtime, but its a high class problem I mean, we've grown our sea UK consistently on year on year to great substrate is growing.
Globally, and we've got options to be able to meet it and a very cost effective way.
Your next question comes from Ghansham Panjabi from Baird. Please go ahead.
Hey, Good morning, this is actually Matt Krieger sitting in for Ghansham.
Hey, good morning, So just wanted to start with a question on volumes I was hoping that you could provide some added detail behind the drivers of the 4% increase in organic sales growth and then.
If you could put a particular emphasis on on how much of that improvement was driven by the current stay at home orders or the consumption at home backdrop.
That would be really helpful.
So Matt if we kind of take a step back and talk about the concept we shared with you at our second quarter, we see it.
On our food and beverage business, which is about three quarters of the volume that we've got out there in a quarter, but be in food service, it's a bit of that teeter totter effect as we talked about in terms of our core volumes. This we continue to see our our core beverage and food up in this quarter. It was.
And this quarter it was up almost 8% and then the foodservice business down in this quarter, roughly 14%, which was sequentially better than what we saw in the second quarter as well and so on the core volumes, we expect that phenomenon to continue to be that way of food service grows a little.
We would expect to see a little bit of a reduction on the beverage or on the beverage and food side of the business, but where the growth is really coming from what I'd point to our slide six and in the materials, we provide a treatise on our growth platforms and we are seeing good organic growth on our plastic substitution platform our cooking solutions.
Form and our strength packaging platform and we've shown you some pictures and some examples of things that we're seeing we pro.
We profiled a couple of things in the comments.
Prepared remarks around what we're seeing with guilt placed as an example, and we sold over 20 machines that are ramping up as we speak some are already in service. So we've got really good momentum on the on the new product our new product innovation.
Backlogs and pipelines are full and those kind of things. So the core volumes think about it a bit is that teeter totter, but where the growth is going to come the organic growth is going to come is on those platforms and that's a that's really what we're seeing in it.
Great Great. That's helpful and then flipping over to some pricing with some of the price hikes creeping into a variety of these.
A variety of the adjacent kind of product categories.
Cross.
Based packaging space can.
Can you provide some updated thoughts on the outlook for pricing across your various paperboard grades over the next several months and even even kind of into the medium term are there any areas.
Where you feel that the industry is under earning.
More than usual or in both the current.
So Matt I'm not going to talk about forward facing pricing decisions other than the fact, you are aware and publicly we were out with an increase on our CRB grade.
$35 a tonne so.
So beyond that.
Beyond that as Steve said in his prepared remarks, as we see inflation flow through the business, we're going to be aggressive in recovering that inflation so that it offsets.
Overtime.
Our next question comes from George Staphos from Bank of America. Please go ahead.
Hi, everyone. Good morning.
For all the details hope you're doing well.
I wanted to take a deferred.
A different approach on on the growth outlook question, if we could Mike can.
Ken You mentioned E commerce as being something that you're trying to leverage can you talk about aside from maybe just the pantry load thats occurring.
The consumer is ordering direct to consumers or anything specifically that you are doing.
To leverage ecommerce and then I think you know maybe back to Matts question related Lee can you talk about I think in the past you said sustainability the growth platforms could add one to two points of organic growth going forward.
We get to a point, where maybe you should be increasing if I refer to it correctly in the first place the growth outlook from these platforms and from sustainability.
Thanks to that I think if you kind of look at a couple of examples. We showed you on strength packaging, what you're seeing us really go after in that space as our kind of.
Kind of what we'll call a routine replenishment type products. So if you think about a lot of the pet food and some of the consumer staples.
These things tend to be on ordered and they're pretty consistent in terms of how the consumer really needs them and how they use them.
So as we look at the types of products that we're able to provide and that relationship that the customer wants to have with the end use consumer in ecommerce channel, we're providing excellent graphics and merchandising capabilities to kind of keep that connection tight.
You can see some of the examples that we shared with you there that do just that and on the other side of things as you know other types of packaging continue to increase in cost, we're replacing a tertiary packaging with a carton.
And that results in a reduction cost reduction for the retailer, but in this case or the end use consumers. So that's how we.
That's how we think about E. Commerce, we think we've got a bit of a tailwind there as we talked about in the past George and we're pretty focused in terms of where we're going after those niches and looking for that growth and relative to the 100 to 200 basis points look I think we've told you in the past that growth can be a little lumpy.
This was a very good quarter for us our teams are executing well our backlogs are good, but Steve and I are holding to the one.
Hold into the 100 to 200 basis points of growth.
Over our over the horizon, because we put that out there first our vision 2025, So I'd ask you guys to keep that as the target.
As we kind of go forward here realizing of course, there is going to be some quarters like the one we just had and then obviously there'll be some where the conversions may not happen quite as fast, but overtime work. We've got a lot of confidence in that 100 to 200 basis points and I think through the quarters of growth in a row that quite frankly exceed that validates that thats the right goal.
For us thanks, Steve.
One thing to add to Mikes to Mike's point is one thing we do see is the confidence in the under the 200 driven by what for US appears to be increasing addressable market. When we look at where and how and where we are participating in what we would have articulated a year ago I'm more confident with the addressable market.
It is of substance in that Optionality in places like new categories like proteins represent.
Represent more potential for us so the addressable market is certainly there in total which is why we have confidence in the overall 100 to 200 basis points over time. Thanks.
Thanks, Steve My other question alternate over.
And you mentioned looking out to next year, you expect to see organic sales growth, obviously, the comps are tough and organic EBITDA growth.
EBITDA growth.
No you're not going to be able to provide a lot of line item detail beyond those points, but can you give us some thoughts in terms of what kind of growth.
Kind of mixture between foodservice and traditional food and beverage you might see in terms of volume growth and most importantly, as foodservice comes back what kind of lift in mix.
Mix. Thank you guys.
So George I'll start with your question there and then Steve can add some commentary as well, but I think look we would expect and we saw as a matter of fact your sequential growth in food service and our Q3, we would expect that to continue into 2021.
It's going to take some time for that category to completely recover as you can appreciate there is a lot of verticals there like off premise concern.
Consumption of those products events hotels.
Sporting sporting events and that kind of stuff. So it will take a while for that to really come back but.
But as we kind of look at what we're seeing even within that category, we're seeing opportunities, where we're continuing to win share and expand the pie through phone conversions.
On our comps and so we'll we'll be in a good position as that comes and it will be a source of growth for us again going.
Going into the future and Steve I'll, let you handle the question on that is yeah. George Joint thing I think I'd add to that is obviously, we'll provide details in February but when we look at the potential or.
Organic sales and EBITDA growth next year, earning on volume mix and.
Driving productivity, you're going to be the two primary categories that we'll share with you in February we expect to have a strong productivity year next year, we'll have less downtime, particularly on the maintenance side as we talked in the comments.
Not doing it and not needing to do some work around recovery boilers. As an example that drives year over year productivity improvement for us because of the need not to make those investments. So it's going to be a volume mix and productivity discussion that we will be having as we share those details with you coming up in February.
Your next question comes from Mark Connelly from Stephens. Please go ahead.
Thank you I'm showing should the number seven curtain coaters. The second of three how quickly do you know whether you've gotten the savings that we targeted and and I think you also talked about improving sheet quality does that does that expanding your customer potential.
Or is that really just sort of you know keeping keeping the margins where they were.
Yes, thanks, Mark So we're actually now it's.
It's a third of four so both curtain coaters are gone and Macon, We did number seven in west erosion. Just mentioned, we have number six still to do.
Over in Monroe relative to the savings that we see it's pretty instantaneous within 30 days I mean, basically we got these pretty well dialed in as you'd expect as a third of four so.
So the latex and Tio two reductions we see the material reductions occur very quickly and start showing up in our performance results and so you'll see that in our comp year over year on that and relative to the fiber usage in particular in the case of what we did in Texarkana on that.
Head box there, we actually see a reduction in the amount of fiber that we need to use now to make our cob and we'll dial that and thats a little longer period of time. So you got to run through trials and kind of work through that through our own integrated Cup operations, but it increases the.
Consistency of our formation in the profile of the sheet, which then in turn allows us to run with a lighter basis weight overtime.
Okay and just.
The beverage carriers just summer we started to see more of those heavier.
Plastic six pack carriers with that with the plastic covers the top of each can and now we're starting to see trade press about bio plastic ring carriers that will buy it great.
I was hoping you could talk about where those two fit against our system like yours, which is geared towards more higher volume we're really.
We're really only seen that plastic stuff in low volume applications.
It is this.
Given the sort of business you do how competitive are these new products that we're starting to see.
Yes, so it's a competitive market for sure, but I think you've got to read on it the right way I mean, the high volume production really needs to go down and integrated line like the ones that we made that allows our customers to do this had incredibly high speeds at high levels of efficiency, given how they have to run their operations and Archeo clip.
Does in fact to adjust that you will see different types of options kind of one offs, particularly on the craft side, where these are all hand assembled.
And kind of put together and again, we compete with those types of products and expect to compete with those types of products, but from a volume standpoint, those are relatively small in nature.
Your next question comes from Adam Josephson from Keybanc. Please go ahead.
I can see good morning, Hope you and your families are well.
Thank you Adam.
Mike or Steve just to on commodity costs.
I know you give the annual consumption in the supplemental in the in the presentation, but can you give us a sense just in light of the deflation you're you're guiding to this year of 10 to 30 million, where your input cost basket is relative to normal in other words are your is your input costs.
Cost basket in its entirety at.
At normal levels below average above average just trying to get a sense of where you are in.
Input cost wise versus whatever you consider normalcy.
Adam It's Steve, but obviously it varies by category as you know the categories well there are certainly some categories that are at what would be considered historic low levels like you've seen.
The move toward but appears to be there for the foreseeable future given the global dynamics.
Auto Cc would very steady and as return to more normalized levels. We would say you are.
You are seen as you mentioned.
Just six cost truck, particularly does have volatility in it and we've seen some of that in the short term well chronicled that there has been some movement up in spot rates. So right now it would be moving up above the norms in the short term.
Here.
NRG I would characterize you've got to get a sense for Nat gas being it's now kind of more normalized and consistent level. So the net of all of that for us.
As you mentioned this year modestly.
Deflationary it was pretty neutral in Q3, we would expect it to be neutral to modestly inflationary in Q4, as we mentioned earlier when you take the entire basket and if the world South rotating.
On an instantaneous basis, it would be we'd be in a modestly low inflationary environment next year based on a full basket of those commodity costs.
I appreciate that and just to follow up on that on the CRB increase so if if you're not really seeing much inflation across the business I guess I wonder why the need for the CRB increase in related Lee I'm, just trying to understand that the timing and the amount of it. So you you announced a 50 dollar one in the spring obviously.
Receded not recognize that I don't know how much you implemented the 50. So I'm just wondering how that translates to your announcing of 35 to $35 per ton increase versus the previous 50, why the timing timing of it in August I'm, just trying to understand the timing and the magnitude of that increase versus the previous.
Tempted increase how much you realize and if any of this has to do with cost inflation given that you're experiencing input cost deflation. This year. Thank you.
Yeah, So Adam I guess, the way I would answer that if you look at our Q3 at the PK data as we talked about I mean, the operating rates quite strong finish in September at 96.5%.
Demand actually outstripped production in the quarter by 21000 tons Ambac backlogs are strong at five plus weeks. So when you look at all of that together supply and demand has.
Bearing on pricing as you know and so that's why we did what we did.
Our next question comes from Brian Maguire from Goldman Sachs. Please go ahead.
Hey, good morning, Thanks for taking the question.
I'm, just hoping to get some more real time color. If you could provide it on trends in the foodservice business and what it means.
We can do most of the summer season are you seeing any signs of improvement in October or do you think that more economic downtime might be needed in fourq you its.
I'm not seeing any.
Increase in that market.
Hey, good morning, Brian So as you saw we saw sequential improvement, albeit slight in our Q3 over Q2.
And we continue to see that trend continue on here into Q4 relative to any downtime that we would take relative to our.
GAAP stock line, we're not planning on any right now in our fourth quarter, but as we said in the past we'll match our supply with our demand it based on what we're seeing there its a highly integrated machine that.
That is over 85% integrated in our own Cup operations. So if you think about that for a minute and just kind of parse that out a bit we make 3.8 million tons as a corporation.
Those 3.8 million tons of around 10% of that would be that cuts machine in texarkana. The rest of our portfolio is quite busy.
Our CMBS busy RC UK as busy as to three coded Sps machines are busy so thats, how I would have you think about that and what we're doing to balance our supply and demand on the Cup stock line you just saw us to in Q3 by Endo will continue to monitor that as we go forward.
Okay, and then just a question on the.
The EBITDA guidance components, it looks like the performance stuck it is.
Going the wrong way by about $20 million just wonder if you could comment on what the drivers are there versus the prior guide and then.
Related to that just any kind of initial.
Initial thoughts on where 2021 capex might that might fall.
Yes, Brian all we were doing on the Guy was just tightening up all of the numbers were very pleased that we were earning on the volume mix and so we moved that up a little bit we recognized in the guide on performance that we took the economics or the market downtime for Sps Thats now in there there's a little bit.
Year over year comp that is in the net performance numbers. So we're really just clean knows.
In total there was there was no move.
And then obviously, we'll come forward and you know the major projects that we have underway with Kalamazoo and kind of our core Capex will give more definitive on capex as we.
As we roll into February.
As a reminder, we asked that question I ask one question and one follow up question. Your next question comes from Steve Chercover from D.A. Davidson. Your line is open.
Thanks, Good morning, everyone.
Your first question did the Hurricanes hit, Louisiana and other parts so to have any impact on your operations or log cost. This third quarter in going forward might there be a benefit from inexpensive salvage logs.
Yes, so Steve we incurred a very very modest amount of downtime most precautionary downtime at our converting plant in west Monroe that we shut down as a result of.
One of the hurricane preparations, but we did not lose any time at our west Monroe mill or Texarkana mill.
Relative to salvage log recovery, we're in those markets every day a lot of that was south of where we were at Mr reminder, we buy all softwood.
Material in Monroe, we do buy hardwood obviously in Texarkana, but no I think our cost or would have been very good this year and we expect based on what we see right now as we go into Q4 for that to continue to be the case.
Great and then with respect to Kalamazoo, it's good to hear that it's on time and on budget. Since the models will soon be looking into 2022 can you help us understand how that 100 million benefit is going to flow through I think some of the savings might start from.
From Battle Creek in Middletown might start to accrue in 2021. So if you can kind of tell.
Tell us that the cadence so to speak.
Yes, Steve its Steve at a high level, what Weve conveyed previously is that of the $100 million of expected EBITDA improvement roughly half of it would come in and 22 with the other remaining 50 million coming in at 23. That's right now is the right operating in modeling assumption to to your question.
No real benefit in 21.
Your next question comes from Anthony Pettinari from Citi. Please go ahead.
Good morning.
Yeah, So hey, just.
Hey, just following up on Jorgen and Brian's questions, you mentioned, a number of customer channels that may.
May have to come back before you can run more fully in SBS is there one or two that are particularly important or that we should watch whether its coffee change or institutional or big events that that that we should focus on and when you think about sort of a postcode recovery, we've seen a lot of retail closures big coffee chains CLO.
Dosing.
A big chunk of stores just wondering if you think there could be any sort of permanent impact the cup demand even.
Even if we get somewhere back to normal 2021 or older cars.
Think about offsets.
Yes, again, Anthony what I'll go back to his talk about before Sps machines. We operate three you quoted machines actually are quite busy because we're running a lot of our CDK material over there.
In regards to our top line in particular, you said it.
We're seeing.
Some.
Clients, obviously in some of those verticals that we talked about already relative to a year over year comp basis and it is true. If you think about on the coffee channel while the drive through window remains quite robust.
The actual consumption within some of those stores down in some of those stores just have not reopened and so we're anticipating that to be the case as we go into the fall here and into 2021, we expect that that would recover you'll hear is theres a vaccine at day treatment plan that works and people get comfortable with when.
That is always very hard to actually put your finger on it but we would expect that that particular vertical to be a source of growth in the future again, but it's going to take some time for it to recover in the meantime, the good news for US is we've got a highly integrated paper machine into five integrated plants and Weve demo.
Is traded and ability to grow our top line.
Well, even with that as a headwind so we think.
We think we're positioned very well to respond to this pandemic.
Okay. That's helpful. And then you have a fairly sizable European business and were seeing some of those markets go into increased restrictions or walk down. So just wondering if you could.
Talk about your exposure there, whether it's sort of on premise or consumer slash grocery and how current conditions or maybe are not impacting your business in Europe.
Yes, our business in Europe is actually much lower index to food service as much.
It's much more indexed.
Beverage average is a very big business for us in Europe as a matter of fact, and so when you think about kind of depending what we saw in Q1 and early Q2.
This year, when Europe was a little bit.
Head of where North America was relative to decode 19 endemic we saw solid volumes and we would expect it and that kind of situation.
For that to be the case again here going.
Going into the fall.
Your next question comes from Neel Kumar from Morgan Stanley. Please go ahead.
Hi, good morning, Thanks for taking my question.
You talked about moving 100000 tons from UK debt, yes.
What has the customer receptivity been just switching grades given the perception that UK it'd be more sustainable profit and can you just remind us following the closure of the medium machine at West Monroe, how much incremental you cable and can get out of there was a time.
The timing of that.
And Neal So I guess, if you if you think about customer receptivity, what our customers have been thrilled that we've run a robust supply chain for them, particularly as you look at what happened in Q2 and into Q3, we've been able to keep them in and products in some cases their volumes have grown dramatically.
And we've been able to supply their needs.
So we did that in a way that kind of used car substrates that we manufacture in a way that kept him in business and obviously they've been able to excel with our support so its been very high in that regard in regards to pull in Monroe as I mentioned.
If you look at the paper machine, we shut down in 2015, which was a bag machine and now they have a lighter machines liner medium machine. We've consumed the vast majority of that Paul in fact, we've grown to get 3% from creep standpoint every year over 200000 tons between Macon, and West Monroe with West Monroe.
Being the largest gaining items so we've been.
Quite active and taking advantage of that but that we have.
Your next question comes from Aaron just when they move from RBC capital markets. Please go ahead.
Great. Thanks, good morning.
Congrats on the quarter I guess.
I guess I just wanted to ask about foodservice to begin with so maybe.
Maybe you could characterize where you are in that recovery.
On a down year a year on year basis have you have your monthly trends kind of.
Slowly steadily improved and how do you see that business kind of trending over the next little while and do you think theres been any structural damage there that would require that you kind of shift your focus.
You know I know you you highlighted potentially moving some SBS and this UK, but what are some of the things you're considering there.
And how should we think about your foodservice evolving over the next say six months or so.
Yeah, we're going to see that Mike touched on a fair amount of that.
Just a moment ago, I think 14% down.
The quarter was modestly improved were down 11%.
Year to date, we would expect for rate slow inconsistent.
Improvement, but it will take some time and as such we are taking the actions that we've talked about we'll match supply and demand on that singular one machine that it's 85% integrated to match it with our current production those reactions that will clearly take and then.
And then we'll consistently assessed the other three machines, which are very busy today five plus we backlogs on them driven by sea UK conversions and as Mike articulated earlier, we're obviously exploring options for it.
For investing in pulp capabilities on those other machines as well to create very cost effective solutions and growing applications.
Okay. Thanks for that and I also.
I also wanted to ask about.
You know I guess longer term if you if you're thinking about this business and.
And I just lost my train of thought here, but but yes. So I mean, maybe we can just asked and pivot towards M&A then.
Are you.
Seeing any opportunities for bolt on.
For bolt ons, you know in Europe, and the converting side.
You know or you can you kind of solely focused internally on your organic investment.
When should we expect on that front.
So if you really look at the two acquisitions, we did earlier this year both quad in the grave converting assets were thrilled with those acquisitions and they are largely integrated into our operations as you heard Steve say in his prepared remarks.
Two facilities to come.
Two converting facilities and Weve largely completed those activities that business is where it belongs in its new location and will drive.
And we're driving synergies through the business, we got a supply agreement that will unwind over the next couple of years.
And so that that whole part of how we thought about the business driving or integration rate. So is.
It's really working to plan and as we expected it to relative to ongoing M&A as we said last quarter you know the bars really high yes.
We've got a lot to do here already.
Executing well, we're growing organically, we're investing in our R&D and new product development activities, where we're investing heavily back into our own corporation. Our converting operations. If you think about what we've done in Monroe and how differentiating that is from anything else anybody else is doing in the industry.
Or in what we're doing in Kalamazoo, it's going to have a a whole different profile for us and so we like our our ability to drive this organic growth for the next few years for sure as part of our vision 2025, and that 100 to 200 basis points. So what we'll compare and contrast against is more invest.
Smith, you organically versus M&A and like I said, it's a really high bar not to say, we don't look because we do but we're very thoughtful in terms of how how we'll allocate capital in that kind of environment.
Your next question comes from Mark Weintraub from Seaport Global. Please go ahead.
Thank you just a couple kind of clean up questions.
One was low.
Last quarter, you had an outage cost impact table I don't see that this quarter is what we saw last quarter still relevant for what would be in Q4 or is there going to be downtime at texarkana to factor in.
Yes, Hey, Mark its Steve we eliminated table because it was kind of they are more to help with the quarters. So apologies for that all it was there with quarters. Since we're now talking about Q4, there's been no real change and as Mike articulated earlier, we don't have plans for downtime across the cult.
Machine in the quarter.
Okay, Great and then lastly as.
As you point out on slide nine lots of projects in 2019, and 2020, which would have impacted maintenance how much higher would you say as maintenance expenses Ben.
This year end or last year versus what would be more normal or kind of reasonable recognizing perhaps you havent fine tune it but as we think about next year.
Yes, Mark I think about it and we've touched on it significant investments that we have been making.
Certainly in recovery boilers in the curtain coaters.
The head back think of it as probably a $20 million year over year improvement opportunity to buy.
Not having to do as much of that from 20 to 21 will come back and talk about that in more detail, but it's in that kind of a range.
Your next question comes from Phil Ng from Jefferies. Please go ahead.
Hey, guys. Good morning, everyone. If I heard you guys correctly it sounds like you're not taking any downtime in bleach board in the fourth quarter. So curious if the west Rocky Dell line closure is that a big deal for you because I don't have a great feel for the overlap that line may have whether its foodservice on or fourth quarter.
So Phil I mean, we had a competitor that announced they were taking a machine down to 200000 tons machine 5.2 million ton market. So you do the math on that 3% to 4% of the capacity that comes out.
We talked about in the case of graphic how we are operating.
Our three folding carton grade machine at our Coke machine. So what you would expect over time is that operating rates would improve as the denominator gets adjusted on them.
Okay.
No any color from your perspective your intelligence whatever it was was there a lot of overlap in like folding cartons or cups as it relates to that that line that I just.
Don't have a good deal for it.
No.
Okay, that's fine and then.
And then then.
The momentum you guys called out in your business.
Backlog part of that you have the diabetes conversion.
It's a growth platform I was I'm curious are you seeing more wins come through recently or is it just more of the wins that you had last year last year, that's actually flowing through.
We're seeing more where we're seeing more opportunities I mean, the addressable market as Steve said continues to grow.
And we will put a little bit more emphasis on that when we talk to you again in February we're doing a lot of work on this we're investing as I said in terms of resources that will help drive new product development growth in commercialization, so you're going to see us really get over our skis here and we're going to lead will be the clear leader here on fiber based consumer packaging and.
Investing behind it to make sure that that happens both in terms of people and in terms of our capabilities and that's pretty exciting.
Your next question comes from Mark Levine from Bank of Montreal. Please go ahead.
Yeah, just a couple of follow ons again over on foodservice Mike.
I Wonder if you guys give us a sense.
Where you were at lip volumes just in the Cup business versus where you were expected to be at this point.
And then is the kind of stress in foodservice could that be creating some opportunities to maybe consolidate and rationalize in the space. It's a space.
Loan wanted to grow when.
Yes, so I'll stay.
Ill start and then Steve can comment I guess in terms of like I said the drive through windows market to remain quite busy as we've seen the economy open back up again, where we're seeing the issue.
Issue or the reduction is the event based on the on premise stuff.
That's a wide range of category think about movie theaters, you think about sporting event, you think about hotels and that kind of stuff. So it's difficult to know exactly how that comes back.
Or how fast comes back as we said we still believe that this will be a source of growth for us again in the future, but it's going to take some time.
Relative to version opportunities I mean, we talked a little bit about.
Yes.
What we see on the SBS side of the business for CK. So I believe that's where you're talking about so I won't repeat my comments on that but the other part of it is is we're pretty aggressive as you know taking a look at our footprint.
A year converting footprint every year and making sure that.
We're lined up with where our customer demand is coming from so we'll continue to make be very thoughtful in terms of what that looks like but when you're driving the kind of growth that we are driving now we need that capacity to help us make sure that we're ensuring customer service and.
Meeting their demand needs. So we're re purpose seeing some of that capacity may be a little differently and how it was originally intended use and mark to your question.
Solider nation M&A type consolidation as Mike said, we have a high bar, but certainly we're always opportunistic and thoughtful if there was an opportunity for consolidation that will be something we would take a serious look at.
There is the possibility of course businesses being disrupted it may have a need for a change. So that's always on our radar as you'd expect it and generally our our integrated comp business is down in very similar percentages as what we articulate for the whole food service business. So there's not a material change there as Mike said.
Really that last 15%, 14% is driven by theaters airlines hotels events, that's kind of what is really driving that components pretty long tale.
Your next question comes from George Staphos from Bank of America. Please go ahead.
Thanks for taking my my final question how guys.
I want to take another approach.
Approach to that question that that market teed up you see one or the other.
Traditional a and b to B packaging companies in the market in a different substrate developing a consumer cup business with a very large investment.
You have some potentially excess capacity right now.
And Bleach Board in your Cup business for obvious reasons within foodservice.
Second as you want to make a decision for the next three years based on the last two quarters, but is there an opportunity to creatively use maybe your belief capacity in your cup, making for a consumer offering either at retail or direct to consumer.
Have you looked at that at all and what's the return payoff. If you have thank you guys and good luck in the quarter Joe.
George just for clarification are you talking about kind of moving out of institutional cups and into retail comps. Yeah. That's what I was thinking about I don't know if you have available cut making capacity, but my guess is you might because of what's been happening in foodservice volumes overall, so it was an opportunity to take that capacity.
And offer it either to retail for the consumer were direct to the consumer in some way to fill up that capacity not knowing what investments you'd have to make on you know web platforms marketing and so on maybe it's not worth it but just I figured it out to the question on.
Yes, so thank you for that I understand it.
From our standpoint as you know we are over indexed on the institutional side, which is really where we are set up and we've got the ability to really have scale.
Really have scale and drive cost efficiencies through our business there so.
Relative to building a brand you won't see us do that relative to a customer that comes to us and maybe once in private label consumer as an example, and wanted some cups made we could absolutely and would look at those kind of opportunities so thats how.
Thats, how I believe we would.
Approach that in the marketplaces would happen.
We have no further questions I'd like to turn the call over to Mike Doss for closing remarks.
Our solid results in 2020 are reflective of the long term value our packaging solutions provide the food beverage and food service industries.
We're delivering on our promises advancing our strategic priorities posting growth and fourth organic sales and EBITDA are excited about the business and expect the extending our clear leadership in fiber based consumer packaging through new product rollouts consistent execution and service to customers our dedication to employees and partners is unwavering as we pivot.
To a growth culture.
Our role in advancing the global sustainability movement is nothing short of exciting and energizes, our employees and partners and with that we'll look forward to talking to you again in February.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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