Q4 2020 Graphic Packaging Holding Co Earnings Call
Thank you for standing by and welcome to the graphic packaging holding company's fourth quarter and full year 'twenty 'twenty earnings call.
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After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your speaker today, Ms. Melanie <unk> Vice President of Investor Relations. Thank you. Please go ahead ma'am.
Good morning, welcome to graphic packaging holding company's conference call to discuss our fourth quarter and full year 'twenty 'twenty results.
Oh, My gosh, the company's president and CEO, and Steve Scherger, Executive Vice President and CFO.
The follow on with today's call, we will be referencing our fourth quarter earnings presentation, which can be accessed through the webcast via self directed slide and also on the investors section of our website at Www graphic P. K G Dot com.
I would like to remind everyone that statements of our expectations plans estimates and beliefs regarding future performance and events constitute forward looking statements.
Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations.
Information regarding these risks and uncertainties is contained in the company's 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 obligations to update such statements except as required.
By law, Mike I'll turn it over to you.
Thank you Melanie and good morning, and thank you for joining us on the call today I am pleased with the results we delivered in 2020 and I'm looking forward to executing on growth opportunities in front of us from 2021 and beyond.
On successfully achieving the milestones established with our vision 2025 goals, specifically, we are executing strategic growth initiatives driven by innovation and supported by sustainability.
Providing exemplary service to customers further strengthening our long from partnerships allocating capital to growth initiatives and ensuring strategic projects remain on time and on budget on prudently managing our balance sheet, lastly, investing and developing our most important asset our people.
2020 was an unprecedented year for the world and our industry, creating unique challenges that our team met head on in March we were designated an essential business and our 19000 employees saw for every challenge our customers placed on US we delivered exceptional service and quality throughout the year and we accomplished this while.
Our focus on long term goals turning to slide three I will expand on some of our 2020 highlights.
Yes.
We achieved our EBITDA guidance and exceeded cash flow guidance that we provided before the COVID-19 crisis began we successfully pivoted the company to growth increasing net organic sales by 4%, which was well ahead of our 100 to 200 basis point target operational we accelerated strategic business decisions too.
After the changing environment and invested in tools to keep our employees healthy and safe.
Continued growth in integrated volume two tuck under acquisitions, and our proactive conversion of customers from C. U K to SBS folding carton grades resulted in a two percentage point increase in our total company integration rate for the year to 70%.
This number will continue to grow as integrations progress on supply agreements on one.
Our balance sheet was prudently managed as we borrowed effectively where needed successfully worked inventory out of the business and exceeded guidance for cash flow. As a result, we continued our significant return of capital on the stakeholders with over $900 million distributed in dividends share repurchases partnership distributions and redemption.
As Steve will discuss these reactions are accelerating value creation for stakeholders.
We also enhanced disclosure on elevated our communication platform around the company's corporate and social responsibility programs with our comprehensive ESG report, which can be found in the Investor Relations section of our website.
You can expect to hear much more about our programs and our progress on our critical environmental social and governance initiatives in the future.
As we turn to 2021 I'm confident in our ability to continue to grow net organic sales EBITDA and ROIC consistent with the goals established the vision 2025 on slide four let me walk you through our roadmap to capture continued growth this year, while strengthening our leadership position in the industry. We will continue our unwavering.
Bring focus on winning and growing markets and I will share with you today. Some part of the latest innovation in new product developments. In addition to the organic sales growth. We expect to capture this year. We will continue to closely match, our paperboard supply with demand and manage the commodity input cost environment.
During the year, we intend to deliver productivity improvements that will more than offset labor and benefit inflation with annualized net performance improvements, resulting from continued execution on strategic projects true that Ed we are announcing today that our new CRB machine in Kalamazoo, Michigan is expected to begin producing paperboard and Q4.
This year ahead of schedule. The acceleration provides increasing confidence we will achieve the first $50 million EBITDA benefit in 2022.
Today, we are also providing details on our plans to convert an Sps machine in Texarkana, Texas to a swing machine and an overall capacity neutral investment.
This will provide production capacity necessary to meet demand for global <unk> UK beverage packaging solutions, while increasing our long term flexibility across our paperboard substrates.
I'll cover both of these in greater detail shortly.
Slide five is a brief recap of our Q4 performance total net sales, including acquisitions were $1 7 billion.
This was an impressive 9% increase over the prior year period, excluding acquisitions of course, food beverage and consumer sales roughly $100 million or 9%, our foodservice business improved sequentially declining 10% year over year on the quarter compared to a 14% decline in Q3 as a.
The result, net organic sales growth for the quarter was 5% over the prior year period.
Net performance was $25 million during Q4 benefiting from the completion of several strategic projects and implementation of ongoing productivity initiatives.
Proactive decisions made in 2020 to manage inventory levels helped to align our supply with demand.
This included market downtime on our SBS Cup stock line and the substitution of 90000 tons of C. U K SBS folding carton grades to accommodate increased food and beverage demand for C U K.
<unk> industry operating rates from Q4 in SBS and CRB, we're 96%, 92%, respectively, and our company C. U K operating rate remained above 95% industry inventories declined across all three substrates and are now below historical averages backlogs in all grades remain at.
Five plus weeks.
Steve will discuss the financials and capital allocation in greater detail during his remarks, but I would like to quickly highlight stakeholder returns. We continue our return of capital during the quarter with $90 million distributed dividends partnership distributions and share repurchases as I mentioned earlier for the full year, we returned over 900 million.
On the stakeholders of debt share repurchases were $316 million and were executed at an average price per share of $13 48.
As stewards of your capital this reflects our commitment to achieve the best return for investors allocating capital to our share repurchase program. When we feel the G. P K share prices below the intrinsic value of the company.
Turning now to slide six new business across the three growth platforms is increasing and our innovative offerings continued to support growth opportunities with customers. The addressable market from fiber based packaging solutions has grown from the initial estimates provided at our Investor day in September of 2019.
With demand for fiber based packaging solutions expanding across markets. We now believe the children of addressable market is closer to $7 5 billion as compared to the initial $5 billion market opportunity. We were focused on in 2019.
Witnessed the rapid adoption of our <unk> beverage packaging solution and innovative fiber based packaging that secures cans from the center keel and replaces plastic rings and shrink wrap while offering merchandising benefits packages being rolled out across Europe by major global soft drink and beer brands. In addition, the paper steel trade <unk>.
<unk> on hermetically sealed trade designed to replace existing plastic and foam tray packaging alternatives continues to penetrate the meat poultry and other protein markets. We are seeing significant growth and additional market opportunities with each of these unique solutions.
On slide seven we provide an example of integra flu, our proven strength packaging solution with the shifts and on container <unk> designed this.
This solution helps reduce overall packaging, while providing supply chain efficiencies, including ease of storage and extends customers' marketing programs with striking branded cartons and benefits the overall consumer experience with efficiency and delivery.
The branded carton provides a seamless packaging solution from doorstep to pantry to recycling bin the package arrives ready to use with easy carry handles and its sturdiness provides a well kept our parents in the pantry.
Trademark solution is currently being tested by customers and is used in omni channel distribution environments, including mass retailers and Amazon today, while still early days customer tests are having extremely favorable results and interest is expanding.
Moving to slide eight and nine and a discussion on strategic initiatives. We are undertaking in 2021, and 2022 to position us competitively for growth.
<unk> remains a growing global paperboard substrates, we are the leading provider of C. U K and have been growing production consistently at a 3% CAGR over the last 12 years. We're currently running 90000 tons of C. U K packaging on Sps assets on our purchasing an additional 50000 tons externally to services.
Global Sea UK demand in 2021.
In order to optimize our paperboard mill infrastructure increased strategic Optionality improved margins and capture growth, we're adding a capacity neutral C. U K production capability to our network in early 2022. This will be done with an estimated $100 million investment in our Texarkana, Texas SBS mill.
Over the next 15 months the investment to an existing SBS machine will convert it to a swing machine capable of producing both C. U K and Sps is expected to drive $20 million on annual EBITDA growth over the next three years, primarily from margin improvements supporting the growing C U K platform the <unk>.
Wing machine will provide exceptional flexibility support demand, both SBS and the U K, we are over 95% integrated in our C. U K business day, when including one large converting customer with a long term contractual agreement with our current substitution to SBS folding carton grades and the external purchases necessary to meet near term C U K.
We already consume over half machines future potential C. U K production importantly, with this strategic investment will be servicing our own in terminal C. U K demand with flexible production capacity.
On slide nine we provide an update to our well chronicled CRB platform consolidation investment in Kalamazoo, Michigan, we remain on budget and I'm pleased to report. We are ahead of the original schedule with startup timing for the new CRB machine as a result, we expect to begin producing paperboard in late 2021. This provides.
Confidence in our estimates of the first $50 million of EBITDA realized in 2022, and the remaining $50 million in 2023.
We have an outstanding team managing this transformational project for the company. The beneficiaries of this project or wide range. It may include our employees, we have the opportunity to learn and grow with new automation and world class Paperboard technology, our customers with a greater quality cycled paperboard and opportunities for new applications.
And the environment as we reduced greenhouse gases water usage purchased energy and the world's lowest cost and most environmentally friendly CRB production platform.
Turning to slide 10, I will conclude my remarks with thoughts on industry positioning in creating value through leadership with our vision 2025.
We are running a different race, we're focused on innovative sustainable fiber based packaging solutions and continue to create and commercialize valuable safe and circular packaging solutions that help customers achieve their sustainability goals, while providing preferred solutions demanded by today's consumer.
Densify strategic investments and improve our long term competitive positioning and value proposition to the market.
Our focus as a leading integrated provider of all three paperboard substrates CRB C. U K in SBS sets us apart, we focus solely on providing the lowest cost highest quality fiber based packaging solutions in the industry. We continue to increase our integration rates overtime through downstream strategic acquisitions and organic.
<unk> sales growth.
Our dedicated vertically integrated model creates a competitive advantage that provides significant flexibility and results and best in class paperboard margins for the company.
We will continue to enhance our differentiated model with targeted and strategic investments we are hitting the milestones that enable us to achieve our vision 2025 growth goals as we drive value to the market and for our customers.
2020 was an unprecedented year for all of us and I'm very proud of what we accomplished importantly, we moved quickly to ensure employees had the resources necessary to perform their jobs safely. Our team successfully completed multiple strategic projects managing a year that also had significant capital investment and growth.
We took care of customers and met rapidly changing demand patterns.
In closing with the promise of the vaccines on the horizon, we look forward to the ongoing recovery in our foodservice business. We also expect continued solid performance in our food and beverage markets as consumers work and do more from low in addition to push by consumers from war sustainable packaging solutions has only strengthened.
While we aren't out of the woods, yet as it relates to the impact from COVID-19. It is clear the value we provide the end use consumer Israel.
We will build on our sustainable portfolio of packaging solutions and continue to deliver innovation through fiber based packaging. Our teams are motivated and with perseverance and passion exemplified by our employees. In 2020, we are set up for yet another strong year in 2021 and be on Steve over to you.
Thanks, Mike and good morning.
Turning to slide 11 focused on full year 2020 results net.
Sales increased 6% from the prior year to $6 6 billion.
Driven by 4% net organic sales growth and acquisitions.
Adjusted EBITDA grew 4% year over year to $1 $7 billion.
Demand patterns changed overnight near the end of Q1 2020.
And we responded rapidly to meet the needs of our customers.
On above and beyond to keep customers in supply.
Expediting production and delivery as necessary.
In addition, we took market downtime and cup stock and shifted scheduled maintenance until the fourth quarter to match supply with the changing demand environment.
Total revenue and EBITDA growth during the year reflected the healthy increase in volume from conversions to paperboard.
And greater at home consumption.
EBITDA margins were modestly impacted by the actions I, just mentioned that were necessary to fulfill fluctuating supply chain requirements and match supply with demand.
The timing of synergy achievement related to the two acquisitions. We completed in 2020 was also a factor.
Full year adjusted EPS was $1 12.
An impressive 29% increase from 2019.
We delivered significant stakeholder value as we acquired $500 million of the international paper partnership interest and continued our share repurchase program.
Turning to slide 12, and our full year net sales waterfall.
Net sales increased $400 million in 2020.
Driven by $408 million of improved volume mix, resulting from a combination of 4% organic sales growth and acquisitions.
Our full year EBITDA waterfall can be seen on slide 14.
Adjusted EBITDA increased $40 million to one point to $7 billion in 2020.
Adjusted EBITDA was positively impacted by $30 million of favorable volume mix.
$22 million of commodity input cost deflation.
$42 million of positive performance.
These benefits were partially offset by $52 million on other inflation, primarily labor and benefits and.
And $1 million on pricing.
Foreign exchange impact was essentially flat for the year.
As you can see on the waterfall net performance would have been $57 million from the full year before taking into account our decision to execute Sps Cup stock market downtime and moderately higher expenses associated with maintenance downtime as we moved the timing of outages to meet increased customer.
Demand.
Adjusted EBITDA in Q4 increased $6 million from Q4, 2000 $19 million to $265 million.
As seen on slide 15, adjusted EBITDA during the quarter was positively impacted by $9 million of favorable volume mix.
$25 million of improved performance and $4 million of favorable foreign exchange.
These benefits were partially offset by $11 million on pricing $8 million of commodity input cost inflation and $13 million of other inflation, primarily labor and benefits.
Turning to cash flow.
Our adjusted cash flow was over $300 million in 2020.
But the guidance we provided at the beginning of the year.
We invested $646 million and capital expenditures, including capital for our transformative CRB platform consolidation project.
We ended 2020 with over $1 7 billion of global liquidity and $3 $5 billion of net debt.
Total net debt in Q4 decreased $171 million sequentially due to strong cash flow generation.
Our net leverage ratio at the end of 2020 was $3 two six times.
We expect our year end 2021, net leverage ratio to be in a range of 335 times on.
Our long term leverage target of two and a half to three times remains unchanged.
Last quarter, we mentioned the completion of a $425 million delayed draw term loan with the farm credit system intended to refinance our $425 million bond maturing in April 2021.
As an update we funded the farm credit loan in mid January and called the bonds at par on January 15th.
With this backdrop, let's turn to slide 16 to discuss 2021 guidance.
We expect full year adjusted EBITDA to be in a range of one point on nine to 1.15 billion.
Our year over year increase of 5% at the midpoint.
Key drivers of adjusted EBITDA growth this year.
Positive volume mix productivity gains.
We expect $10 million to $40 million and favorable volume mix from 100 to 200 basis points of net organic sales growth.
Net performance improvements are anticipated to be in a range of $70 million to $90 million this year.
Large recovery boiler projects completed over the last three years.
Not repeat in 2021.
Net performance is expected to more than offset labor benefit and other inflation primarily property insurance.
<unk> to $60 million.
At current rates foreign exchange is not expected to have a material impact on results.
Finally, we expect price actions will offset commodity input cost inflation for the year.
Adjusted cash flow is expected to be in a range of $175 million to $250 million from 2021.
The reconciliation from adjusted EBITDA to cash flow includes $690 million to $710 million and capital spending, including the remaining portion of capital deployed in our CRB platform consolidation project, along with the investment we're making in Texarkana.
$120 million to $130 million in cash interest $35 million to $45 million on cash taxes $10 million to $30 million on working capital.
And $10 million to $20 million in pension contributions.
Importantly, as we look ahead to 2022.
We expect to see a significant improvement in cash flow as capital spending returns to more normalized levels and we earn on these critical projects.
I will end my remarks. This morning on slide 17, with an illustration of the value creation, we are providing our stakeholders.
We combined our operations with international paper's consumer packaging business in January of 2018.
As can be seen on the slide the.
The combination was immediately accretive to stakeholders and after accounting for the combination of adjusted EBITDA has grown at an attractive 5% compound annual growth rate over the period ending 2020.
Over that same period.
Adjusted EBITDA per ownership unit, which includes both Ip's partnership units and GP K shares.
At an impressive 15% compound annual growth rate.
We look forward to continuing our focus on growth and driving returns to stakeholders.
I'll now turn the call back to the operator for Q&A.
At this time, if he would like to ask a question Press Star then the number one on yet.
And keep that.
I would like to advice to limit your questions to one and one follow up questions.
Your first question comes from the line of Mark Wilde from BMO. Please.
Your line is open please ask your question.
Good morning, Mike morning, Steve Melanie.
Hi, Mark Hi, Mark.
I wanted to talk a little about the.
Pull forward of the CRB machine and then just kind of follow on question around the.
Go to market strategy on what you've seen so can you give us a little color first of all on what's allowing you to kind of pull the timing forward.
Yeah, Thanks for that Mark.
Bottom line is we just executed well I mean as you can appreciate with project debt size, we give ourselves some contingency.
And even with the backdrop of Covid and some of the issues, we had with the shelter in place.
In April of last year in Michigan, we were able to execute well through the summer we had good weather. The construction went well and our teams are continuing to make real progress on that the facilities closed in Steve and I were there last week.
With the team look through kind of where things are at and.
Relative to the timing of commissioning the machine, we feel good that we'll be able to do that in Q4. This year and I'd have you think about making kind of commercial material probably towards the end of Q4 youll be in on the REO and being able to you'll.
You'll be sending that downstream to our carton plants.
Late this year.
Okay, and then just as a follow on Mike I mean, this is a much newer and more sophisticated machine that any of its appears on the CRB market in North America.
I'm, just I'm curious about how youre going to position this.
Product within the market channel.
So you know, how you're thinking about sort of day.
Pricing strategy here as best you can kind of talk about that on a public call you price. This against like this other CRB or can this really be price as a kind of a C. N K alternative because it's a multi blackboard, presumably it has better a better what strength characteristics.
So it's a three play machine. So we'll start with that so it is consistent with our K one machine and those are the only two machines and.
The U S that obviously have that capability to your point, it's going to have the widest caliber range, meaning that we will be able to specifically go to the low end of the caliber range that others won't be able to.
Still we don't get our tons per hour, so relative to pricing, what we really want to do is have that capability and afford our customers those types of.
Products that allow them to continue to grow their business and see lift in the marketplace. So.
We're excited about that I mean, it really is from a positioning standpoint to your point unique and different we justified it as you know on cost, but theres going to be a number of commercial capabilities that are going to allow us to.
To drive our growth and specifically drive our integration rates up on on that machine because our goal is to sell finished packages to our customers. So it'll be part of our overall portfolio of offerings to our customer set.
But will it.
Are you just pitching.
CRB product or are you positioning a little bit differently is this potentially.
C N K substitute at least in some years.
Some uses I mean as you saw what we did on C. U K youre in Texarkana. So I mean, we're doing both and maybe that's a great lead in Mark from me to just comment a little bit on all three substrates. Just so that it's clear on I. Appreciate the question. When you look at what we're doing on CRB, we're going to have the lowest cost highest quality CRB platform.
In North America by.
Make a little over a million tons you know in terms of how that all kind of comes together.
If you look at sea UK now what we're doing there and you saw the growth that we've been able to generate on our ups U K platform at roughly 3% CAGR for the last 12 years, our global beverage franchise continues to grow so much. So we're having to run as we set 90000 tonnes on Sps right now and we're buying another 50.
So we're gonna have now with three mills that are capable of producing our high quality low.
Low cost C U K or our trademark name S U S and debt and flex about 150000 to debt 300000 ton machine is already sold we want to sell that to ourselves.
And as we stated in our prepared comments, we've got a 95% integration rate on that machine and if you just kind of do the math forward over the next few years you know over the next three to four years Max our growth on key U K will actually approach 2 million tonnes. So that's one of the reasons why we needed to do that and then what that Lee.
<unk> on our SBS platform, which right now it's about a million two in terms of total tonnage is about 900000 tons and above that 900000 tons roughly 400 of that is our uncoated Cup stock line. That's a highly integrated line as we've talked about roughly 85% of our production goes down.
On stream into our plants and.
And then we'll have the coated material, which is about 500000 tons and for a business our size that allows us to utilize that and also service our external customers, which are important but we've got a clear path to drive our integration rates up towards that 80% range.
A range over the next 24 months and that's when.
When you think about how were repositioning the business I'd ask you to think about it in that context, it's really part of an overall approach to all three substrates for graphic packaging on our end use customers.
Okay. Thanks, Mike I'll turn it over.
You bet. Your next question comes from the line of Mike Tunneling from Stephens. Your line is open. Please ask your question.
Mike.
He is the cost it's just texarkana on C U K could it be materially different from your larger mills.
No and that's why we're actually investing the money we are there because as you know you can convert any machine to make just about any product that it comes down to where youre going to be on the cost curve and we're the largest producer of.
C U K and that's really in the world as I mentioned on my previous comment we have two two mills in four paper machines that are already doing it. So we know how to make high quality low cost.
So U K S U S for us and that's why we're spending the money there. So it won't have a it's going to have a.
Quality profile on our cost profile, that's consistent with what were already doing and we're really excited about that because it's allowing us to take advantage of really great on fiber basket. They are around our Texarkana mill, we've got low cost pulp and as you know that's something that's really important to have in terms of where you are going to be from a cost structure standpoint.
Sure.
A quick follow up question on kill Cliff.
As we see craft beer proliferating.
It is kill Cliff catching on in the U S.
Every time I go to the supermarket and see the four packs of craft beer, they've got those heavy plastic carrier things on top that never get recycled.
I look at kill Cliff.
Is there a problem getting that product on with smaller brands, because really only the bigger craft beer brands at our supermarkets show up in C. U K at this point. So I'm just curious how you see the domestic opportunity and whether there's a volume limitation that will keep some of these smaller craft gears away.
Yeah. Thanks for that so really if you think about Q clip, what we targeted initially mark and specifically in Europe.
We went after the high volume.
Carbonated soft drink and beer with our own integrated machine solution because those dose.
Bottlers need to be able to run at an incredibly high speeds and throughput and of course, that's where a lot of the volume is so it makes sense why we would go after that first we're seeing good traction here in the North American market. We've got a lot of interest from customers. As this continues to be more rolled out I would say are larger.
Craft customers could consider that as an option for them as well as other key U K packages to smaller craft.
So those are going to be more of those kind of hand setup cartons. They snap those things on those plastic tops youre talking about that really hasnt been our focus up to this point for the reason I just described but you'll see it continue to penetrate the north American market here in 2021.
The North American market for kill Cliff is as big as the European market.
Yes, I do I mean, it's all of that size.
What's really drove Europe quicker from an adoption standpoint, as they were heavily indexed into plastic more so than the U S true.
Between shrink wrap film and a lot of the euro.
Hi, cone rings, and so there was more urgency over that and we actually wanted to go fast there to get the adoption rates and places you know when you install those machines that makes it pretty sticky.
And so now that that's been proven improving proving out well we've run on a number of accolades as you know for that particular package. We're seeing more interest here in North America, which is a logical extension of the debt.
<unk>.
Super helpful. Thank you.
You bet.
Your next question comes from the line of George Staphos from Bank of America. Your line is open. Please ask your question.
Good morning.
Congratulations on on the progress in the quarter.
Wanted to come back to Texarkana first if we could Mike So co.
Could you tell us are you going to be converting the machine that makes the Bristol at Texarkana currently and.
Is that machine going to have any practical limitations in being able to swing from bleach to see U K R. S. U S could you in theory run the entirety of I think it's the 300000 tons on S U S.
And my.
My last of the multi part first question.
What are your assumptions that you have baked in to the $20 million benefit that you had pegged for us.
Yeah. So I'll take a couple of those and then Steve you can you can comment with additional color I mean first off when we think about that particular machine. It's a 300000 ton machine, we didn't manufacture any Bristol. So this was all coded.
And as I said in my prepared comments, George we're already using roughly 90000 tons of that material to service customers and allow us to drive the growth that we drove last year.
So what this machine will really be targeted at for us and what I'm really excited about is it's going to be a single ply machine and that's going to allow us to really target those lower caliber ranges, which continue to grow while freeing up some additional capacity in both on Macon and.
West Monroe to really do what they do great, which is those medium and high caliber ranges. So it's an integrated approach that gives us a lot of optionality and relative to the margin profile what the real driver of that is as we're selling SBS right now to customers at a C. U K price because we have to do that to service to <unk>.
So as this machine comes on line, our cost structure and flexing that margin is something that we were able to capture our strategy was grab the growth and you saw we did that this year, you know 9% between acquisitions and organic.
Organic growth and as you know our DNA is pretty darn good when it comes to driving cost out over time and that's what this investment is really going to allow us to do and I'm really excited about it.
Yeah, George Good morning, Steve just relative to the financials as Mike mentioned in the commentary, we will take a little bit of downtime in Q1 to kind of complete the investment but in terms of the returns themselves because roughly half of the volume is already sold if you will meaning that we already have the volume.
Generate roughly half probably just a little under half roughly half of the economic value pretty quickly because it will generate margin improvement from existing volume and then you can think about this asset has really been highly supportive of the growth of C. U K. So over the next couple of years. If you are in that kind of traditional 3%.
Zone, you drive 30, 40, plus 50000 tons of growth in C. U K this machine will be capable than of ramping up.
To be at some point fully.
C U K and that would be the long term goal is as Mike also mentioned earlier, so we will get a little under half the benefits early and then the rest coming over the next couple of years.
That's very helpful guys. Thanks for that I wanted to switch gears a little bit.
Can you talk a bit about what assumptions you have for inflation currently and your guidance. Obviously, we're not going to hold you to this you don't have a crystal ball, but what do you have baked in in terms of inflation, whether it's on recycled fiber freight and energy and can you discuss the relative progression on.
On net price cost over the quarters and you've given us some directional guidance. If you had any additional color that would be great. Thanks, guys and good luck in the quarter.
Thanks, George and I'll kind of back up a little bit to respond to your question and then hit the detail that you're asking for.
Overall, the guidance that we're providing in total for EBITDA.
Midpoint is a continuation of our goals of improving EBITDA on at the midpoint is up 5% a year and when we step back and look at the year, there's really three things that really matter relative to achieving that and that's successfully earning on our organic growth of two one to 200 basis points, having productivity more.
Offset labor and benefits inflation.
We've got clear line of sight, too and then having our priority and offset commodity input cost inflation over time and in here. It's a relatively tight band as you've seen us do we want any dislocation to be shallow and temporary and that's really what we've been working hard on for the last couple of years.
In terms of the inflation assumption that's inherent in there.
As we've talked before we have about a two and a half billion dollar commodity input cost stand and our high level assumption for now is about a 1% to 2% inflation on that $2 $5 billion, and so roughly $25 million to $50 million of inflation is what's inherent in our in our initial guide as you were.
Referencing we do have some pockets of inflation, obviously freight specifically truck some resin some energy some recent movement.
But when we stand back and look at where we're at a $25 million to $50 million per 1% to 2% inflation assumption on the $2 $5 billion basket.
Feels appropriate to us just by way of fact, because just talked about a lot our entire fiber basket, both hard and softwood and OCC is about a $550 million spend it.
If we were at pricing, where it is two day that actually would be modestly deflationary, even though theres actually been some obviously some movement in OCC or wood basket is in a very good position on a price basis, and I know youll recall OCC ran pretty significantly from about a four month period last year, starting in primarily in Q2.
The $25 million to $50 million is the inherent assumption there.
As such as you've seen from US we have a similar assumption around pricing.
In total pricing is as you know more complex than just the market models. We have cost models. We have market models. We have ongoing negotiations that were always embarked on we're always working to.
On top leakage or compressed where we can and when we look through the totality of our pricing initiatives, including pricing thats been recognized as well as pricing that we're executing on currently and were assuming some level of success in those endeavors as well, we see a similar $25 million to $50 million range.
On pricing specifically to your question, we will have some price cost dislocation in the first half of the year I would expect Q1 of 'twenty one to look a fair amount like Q4, just given that the pricing is coming in we would then see some improvement in Q2, and then as we articulated.
In the appendix.
A positive price cost environment.
In Q.
Q3, and Q4, so a lengthy answer but I know it is important to fill in the blanks, where certainly encourage you all to come along for the journey of us being a packaging company and us having the ability to offset.
Price and commodity input costs over time keep those compressions short keep it plus or minus $20 million. That's what we're committed to but we do want to provide you with some of the facts that you were just asking for it.
Yeah.
Again, I would like to remind everyone to limit your questions to one question and one follow up.
Next question comes from the line Ghansham Panjabi from Baird. Your line is open. Please ask your question.
Good morning, everyone.
Hey, good morning, guys on Jim.
So Mike just kind of reconciling all the numbers you laid out by substrate.
They would be roughly 50% pro forma from a ton standpoint.
And so U K is obviously disproportionately beverage.
Is it sort of relates to your organic growth initiatives as the beverage market, where you're seeing the most incremental momentum and foresee that for the next X number of years and if so will it become a bigger portion of your end market matrix overtime in your opinion.
So beverage is certainly been strong over the last 18 months for sure and we expect it to be strong again here in 2021, I mean, you can tie that out ghansham to really also demand in cans that youre seeing there in every one of those cans for the most part agent cart and so we're participating on that side of it but it's not just limited to beverage were also.
I mean that is a great substrate from a sustained strength in the standpoint that really does a nice job on lower caliper profiles from many of our end use customers and so that's really if you go back like we did in 2008 and trying to get people comfortable with the fact that this growth is something that has been.
System and a real trend over that 12 year period of time, which gives us confidence then to make that kind of a capital allocation into texarkana.
And I think got it.
To your point.
And where might it was also discussing earlier is as we do see growth in our targeted substrates like Sps on cup with ongoing conversions from foam and plastic into our solutions. Obviously, there is a return to some of the norms post pandemic, but those conversions are still real strong and as we are.
Particularly on it as well strength packaging solutions tend to be a combination of both the U K and even CRB.
So U K will play a significant role as Mike said and then the other substrates to are very supportive.
Okay. That's helpful. And then Steve I think I heard you mentioned 100 to 200 basis points of organic growth for 2021.
How does that split between call. It CPG end markets as you've been kind of characterizing in your last few earnings calls book.
As foodservice, what what do you have embedded for 2021, and how do you how should we sort of sequence those two end markets as the year unfolds. Thank you.
Yeah, I'll jump in and Mike can add. Some addition, I think the way we're thinking about it is really our growth platforms. So the three growth platforms plastic substitution things, we've talked about here around strength packaging around microwave cooking solutions day.
They can drive the net hundreds or 200 basis points of growth and we have line of sight to multiple installations in innovation and new business development.
Projects that are really the net result in the outcome, we do expect to see some reversion if you will.
On food and beverage coming down from some of the growth rates foodservice moving up but the net of those as we've discussed before we don't expect to be net material on a volume basis really it's the 100 to 200 is driven.
By the by the new product development and innovation initiatives I think the only other thing I'd add Steve to that is we saw a sequential improvement in foodservice on Q4, which was an important start on inflection and we'd expect that to continue in 2021.
We're not anticipating debt.
We're back to that being a growth platform.
On a net basis in 2021, but we would expect it to be in 2022. So.
Kind of on the portfolio as we've talked about it's very balanced around beverage food and consumer products and food service and so we think that gives us a lot of optionality as to consumer comes back and we learn new habits. I mean, it's kind of an undeniable trend that theres going to be more worked on at home well, that's going to have different implications for our food and beverage biz.
This long term it will also have some implications for foodservice and we think the investments we're making on the.
Substrates Ghansham are really supportive of those kind of structural trends that we're seeing.
Awesome. Thank you.
Thanks, Ken.
Your next question comes from the line up Anthony Pettinari from Citi. Your line is open. Please ask your question.
Hi, good morning.
Hey on the operating performance target of 70% to $90 million you don't have the boiler projects. This year I'm just wondering if there if there were any particular projects that you would highlight as driving.
On a large portion of those operating performance improvements and then just longer term I mean, you're transitioning from a company that was really seeing flattish growth to.
Sustained positive growth, how does that kind of changed volume profile change how you think about the potential for operating performance improvements in the future if it if it does.
Yes, so in regards to productivity all point to a couple of things first.
Our investment in Monroe, Louisiana, our beverage investment road, Louisiana, and Snake, Netherlands R. R. One is fully ramped and operating on a year over year basis. So there'll be positive generation of productivity there and the other is in the early ramp up stages, and so and that'd be snake, we're starting to see some benefits from that.
On the mill side of things in addition to the $20 million of non repeating a recovery boiler work that you've mentioned recall that we put a current encoder on our number seven paper machine in West Monroe, and that's got about a $20 million annualized benefit and that happened in in the August timeframe. So we'll get on.
Three quarters of the year benefit from that so a lot of the investments. We've made are there and that's where it's really given us confidence to be at the upper end of that range that we outlined for you in terms of the overall inflection towards growth I appreciate that question Anthony.
Last year was an exceptional year for us I mean, we.
We had organic growth of 4% and as we said look some of this is going to be a little bit lumpy. Obviously COVID-19 has some impact on net positives and negatives as we've been outlining this morning, but if you look our confidence in our ability to drive that 100 to 200 basis points.
As part of our vision 2025 goals that we put out there is high and that's why we're pointing to that is on you.
Kind of the target realizing of course that there will be some puts and takes along that journey here relative to how all of these consumer trends.
Lay out, but what is also true and what we really believe and I think it's evidenced by the fact that these paperboard markets continue to grow is that the end use consumer values fiber based packaging sustainability is real it's part of their decision making process around the brands and the products they want to support and we're positioning our business to be able to really capture a disproportionate.
A portion of that amount of debt that you're increasing pie as it as it plays out over the next couple of years.
Okay. That's very helpful. And then just a quick follow up on that the price to commodity cost outlook that you gave and sorry, if I missed this but.
There are price hikes that have been announced for C. U K CRB SBS, some of which have been recognized by pulp and paper weak some of which have not but maybe it will be recognized this month does the outlook that you gave on price cost.
Is it just assuming hikes that have been recognized by pulp and paper weak are you on the Sps hike are you assuming some of that goes through or is there any kind of finer point you can put on that.
Yes, Anthony as I mentioned, just a moment ago, we are assuming some execution some positive execution from the SBS and the second CRB.
This increase in that range and so obviously, it's a range but.
We are executing on them and we expect to have some success. There. So if you kind of worked through that midpoint of that range from $37 $5 million on that does have some some execution successful execution of things that are in motion as well as other pricing initiatives that we're taking on as one example of that for example.
On a go forward basis as we are.
Working through contracts with customers, what new initiatives, we're bringing forward is that for freight rates from us to our customers.
I have four openers a year rather than two for example, so that we're able to capture a inflation or deflation on freight faster. So it's those kind of initiatives along with all of our other activities that.
Debt resulted in the guide the 25% to 50 that we've talked about for both price and commodity input cost inflation.
Okay. That's very helpful. I'll turn it over thank you.
<unk>.
Your next question comes from the line of Kyle White from Deutsche Bank. Your line is open. Please ask your question.
Hey, good morning, hope everyone's doing well wanted to address the the sustainable packaging that you talked about on the total addressable market. I think you said it increased to $7 5 billion I think it before is around $5 billion.
Just kind of curious what drove this increase as the plastic substitution opportunity being greater than initially expected or strength packaging and a bigger opportunity any color you can give there.
Yeah. Thanks for the question Kyle I mean, it's really a combination of all three of those things on a little bit more experience and work that we've been able to do in those verticals as we look at the wide range of products that we can actually you'll you'll provide to customers and I'll give you. One specific example, that's really helped expand it or work that we're doing with pay per sale when I talked about that in my prepared comments for pro.
<unk>.
In particular, we're seeing a lot of traction on that on a global basis.
That's much bigger than we initially thought and it's one that we will continue to work towards same thing I'd say around price.
Trace and bowls.
On the debt progress continues to accelerate.
As we see more and more demand from customers along those lines. So it's really a combination of really looking at those addressable markets with a finer point and Youre doing a little more work around how deep they arent broad they are on a customer by customer basis.
Yeah.
Got it and my next question I just want to focus then on leverage you did this year above three times, which is above the long term target you have obviously you have the IP partnership sales or like a clinical upcoming here. This year. You also bought a decent amount of your own shares. This year I'm just curious how do we think about this leverage again, when you're guiding to being above your long term target once the.
Again for this coming year, how do we.
Thinking about that and in terms of your repurchases that we should expect for this coming year as well.
Yeah, Kyle it's Steve that we really like the flexibility that we have here in 2021 as we mentioned three to three five times, we have complete flexibility on how best to handle.
Ongoing international pay per partnership per debt redemptions, assuming that those occur. So we have flexibility to do so either like we have done with cash for debt or in other forms and so.
We really like that flexibility, we have it all fits inside the three to three and a half times and so.
So we've really got them a borrowing obviously very effectively within that if you forward beyond it we are committed to the two and a half to three times and if you look out to 2022, just by way of example, and you look at where we're guiding this year and you assume the good return on the investments that we're making in round figures.
On a 22 year on an EBITDA that's in the.
$1 $2 billion range and $400 million of cash capital.
Another couple hundred million dollars in interest and taxes and pension you've got $600 million cash engine that we can deploy and.
And obviously, we can put it to work on multiple strategic ways, but that alone. If it were applied to debt is a half a turn roughly so our confidence in our ability to get back into the two and a half to three times range is high.
And it gives us flexibility obviously to invest further in the business if we choose to.
Sounds good good luck in the year.
Hey, Scott.
Your next question comes from the line up Adam Josephson.
Yes.
From Keybanc. Your line is open please ask your question.
Steve Good morning, Hope you're well.
Thank you Adam.
Steve just a couple of follow ups.
Following up on Kyle's question about leverage can you be a little more specific in terms of.
What you're planning to buy from my assuming IP puts more of its stake to you. This year call. It 500 million worse are you expecting that and are you expecting to pay with cash or debt or with stock as part of that three to three to three five times you're on target.
Yeah.
Obviously, we don't know what action IP will take so we want to hypothesize on that other than the actions that they have taken previously.
We won't comment on how we'll do it because really that's a decision that we'll make when that decision is made based upon other strategic options that are available you know the math, if we were to the three to three five times with the midpoint of our guidance on the low end of three wouldn't have one assumption at three and a half it'd be another and it's really.
That simple and so we're going to make those decisions as they come we'll make them when we hear.
Well, obviously articulate that path forward, but I wouldn't want to pre suppose either we make those decisions once we engage with with IP on their strategic intent.
Sure No I appreciate that and one.
One more Steve on the cost inflation can you just be a little more specific in terms of the buckets composing that 25 to 50. So you break out in your presentation, obviously wood fiber recycled fiber and Nat gas cost et cetera, et cetera, freights, one that you don't break out, but it's obviously a big component. Nonetheless can you just talk about what exactly.
<unk>, you're expecting from those various buckets are you assuming deflation and wood fiber for example, as part of that 25 to 50.
And we really take a more holistic view then then that I mean, we have a two and a half billion dollar spend we see inflation happening in certain categories. They are well chronicled we do expect truck inflation.
10% of that is in the areas of truck.
Could that inflate, 5% to 8% clearly based on what we're seeing relative to the market that being said spot rates are down as I mentioned earlier wood costs are currently down we don't assume those necessarily it will stay down but currently today they are.
Obviously, we know and it's well chronicled where there are some pockets of inflation in resin and chemical so we really look at it as a true basket of costs, we think the 1% to 2% range is appropriate knowing where were experiencing inflation.
Currently as well as where we have pockets of modest deflation, obviously OCC moved up more recently that certainly could move up further and that's within the guide that we're providing so I think we're really trying to not move away from this.
Specific $5 $10 type move, but the basket of commodity input costs at 1% to 2%. We believe this is a very prudent impractical assumption here in February based upon all that we know and all that we're negotiating with our suppliers.
Thanks, so much Dave.
Your next question comes from the line of Ireland. These one on one atone from RBC capital markets. Your line is open.
Please ask your question.
Great. Thanks for taking my question congratulations on the progress on 'twenty.
I guess I just wanted to ask first on.
The long term growth rate you know you discussed a little bit larger addressable market for some of these sustainable products now.
$5 billion with a conversion.
What do you think what would you estimate that adds to your organic growth profiles that maybe 50 basis points in and does that.
Also imply that maybe over the next couple of years, you could see that accelerate above the 1% to 2% range that you're considering right now.
Yeah. Thanks, Arun It look I think what it really does is it gives us a lot of confidence in the 100 to 200 basis points that we're talking about right now and of course last year was as I mentioned earlier on a great year at 4% on there.
There was some some dislocations to know that helped us obviously drive that and so as we kind of look forward here, we've got a steady backlog of and growing backlog quite frankly of projects debt.
Or are in each one of those three growth platforms that we've outlined for you here. So I think look we went on to get into 2021 and see how things are doing see how.
The economy opens up in a post vaccine world in probably by mid year, we'll be in a position, where we can talk a little bit more clearly around kind of how that all plays out but for now.
You know the walkaway should be we've got confidence in the 100 to 200 basis points off of a challenging comp in 2020 to be fair. So.
That's a that's a pretty solid outcome for for graphic.
Okay and then also just a quick question on.
The cadence of your price cost outlook.
It sounds like you expect.
No debt to switch positive in the back half of 'twenty one.
Could you just walk us through some of the assumptions there is that dependent on.
Getting further price in CRB and SBS or is it more a result of.
Inflationary pressures subsided.
Yeah, Arun I think we've touched on that previously we are assuming some successful execution on the SBS and CRB that would be at the midpoint.
On the guide there that we're providing.
We've obviously been successful in the U K in CRB already and that's assumed in there as well and so.
As we've talked earlier, that's when the pivot will occur with more positive net pricing as we lap beyond the reductions that occurred early in 2000.
And then just lastly on Capex it looks like Youre, calling for a $300 million reduction in 'twenty two.
Are there any other projects like the texarkana or anything that you envision coming up.
Or are you pretty confident in that reduction of Capex.
And.
Subsequent increase in free cash flow.
Yes, thanks for that look I think as we said our target as part of vision 2025 is around 5% of sales and will approach $7 billion in sales here. This year with guide that we gave you. So you know that's kind of on a $3 50 ish number we got a little carryover protects our cana in CRB in Kalamazoo that'll. It you got a net 400.
Number for next year, but.
Look we like our profile on the investments. We've made we think we've outlined them really well and that's a that's a good guide for what we know to be true at this time.
Thanks.
Your next question comes from the line open Winco from Seaport Global Your line is open. Please ask your question.
Question on Integra flu.
Is that does that give the capability potentially for it to be a box that gets delivered straight to the consumer through the E Commerce channel.
Yeah. Thanks, Mark It does and Thats one on one of the reasons why we wanted to profile it and we've got a number of customers in certain verticals not all those that are interested in that as well and you know one of the tailwind we're seeing around paperboard. There. It's just the printing capabilities and the ability to merchandise the material of course, it's got a tertiary.
Packaging reduction implication for it at the same time, where that debt corrugated boxes going up in price. So we've got a number of our.
Customers that are pretty interested in taking a look at that for us to be fair.
We're not trying to point to say that's going to be a massive source of growth, but it's another another base hit that adds to our total is here relative to the other platforms that we've got we're pretty excited about that.
And so would it be.
Actively replacing the corrugated box and giving marketing capability.
Or are there situations, where you already have the package that is in.
C U K oar.
Debt. You then just won't have to have the cargo box around debt.
So why don't I speak to that particular product I mean that particular product was in a multi wall flexible bag and so in a corrugated case and now it's going to be on a cartoon with an inch liner that we put it inside the package. So there is a source of production there and those are the types of things that we're looking at debt, where we can play a role where we've got.
You know kind of a unique value proposition for the end use customer and consumer.
And then on the past you've given us.
Can you bracket. It for instance, co clips what you thought that could potentially engender in volume growth and any early estimates on.
Integra fluid products like this.
Like I said, that's what it's going to be.
A smaller component of our 100 to 200 basis points, but every every base. It helps and Doug we continue to find more opportunities to find those find those abilities to drive that organic growth and that's what really gives us the confidence from that 100 to 200 basis points Mark.
Okay. Appreciate it thanks.
You bet.
I know, we're going to Covid here in a moment, our apologies for not being able to get to everybody. Today, we had a lot to cover but we'll make sure we have appropriate follow ups.
Okay. Thank you for joining us on our call today momentum is strong and our business and we were well positioned for another growth year. In 2021, we look forward to updating you next quarter with our progress on our vision 2025 goals.
Have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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