Q1 2021 Graphic Packaging Holding Co Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time. Your line is well it can be placed on Paul. Thank you for your patience.
[music].
Good day, and thank you for standing by welcome to the graphic packaging first quarter 2021 earnings conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question answer session.
Ask a question during the session you will need to press star one on your telephone.
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I would now like to hand, the conference over to your Speaker today, Melanie Ski just vice President Investor Relations. Please go ahead.
Good morning, and welcome to graphic packaging holding company's conference call to discuss our first quarter 2021 results.
Speaking on the call will be Mike Doss, the company's president and CEO, and Steve Scherger Executive Vice President and CFO.
To help you follow along with today's call, we will be referencing our first quarter earnings presentation, which can be accessed through the webcast via self directed slides and also on the investors section of our website at Www Dot graphic PK 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 obligation to update such statements except as required by law.
Mike I'll now turn the call over to you.
Thank you Melanie and good morning to everyone joining us on the call and webcast today.
I am pleased to report a solid start to 2021 and what can be described as a truly unique operating environment. We continued to deliver organic sales growth capturing new real opportunities in growing markets with our innovative fiber based packaging solutions globally.
Global adoption of paperboard, multi packs and kill Cliff packaging solutions for beverages, paperboard trays, including our new paper steel and probes pack lines from food packaging and integra affluent as ship in own container package for Omni channel Commerce. All are examples of products that are driving our results.
We remain encouraged by the traction we are seeing from our innovative packaging solutions existing and new customers and growing markets around the world.
Aligned with vision 2025, and supported by our history of successful acquisitions, we are announcing today, our intent to acquire them aircraft curtain. The proposed transaction will provide benefits to our customers employees and stakeholders I will provide additional details on this development shortly.
Turning to slide three let me update you on a high level of financial and operational highlights for the quarter growth continued in the first quarter of 2021 with net organic sales, increasing 2% year over year, notably this follows a very strong first quarter of 2020, where net organic sales growth was 7%.
Over the last 12 months, we've exceeded our targets delivering 3% net organic sales growth stronger than forecasted sales growth as a result of the ongoing conversions to more sustainable fiber based packaging options across our food beverage foodservice and consumer goods markets. In addition, our businesses benefit.
From an increased at home consumption.
Importantly, we continue to have confidence in our 100 to 200 basis points call for annual net organic sales growth established efficient 2025, achieving consistent year over year organic sales growth is supported by the strengthening global trend to more sustainable packaging alternatives as we look out.
Specifically at the year to the anticipated volume from our innovation pipeline, coupled with return to growth in foodservice. We expect 2021 net organic sales growth will be at the high end of our 100 to 200 basis point range.
Adjusted EBITDA in the quarter, a $240 million met our expectations before the $29 million of costs, we incurred associated with winter storm Yuri.
During the quarter, we did see a return of inflation across some of our commodity input cost categories, such as logistics recycled fibers resins and chemicals, we are executing multiple price initiatives with our customers to fully recover the current inflationary environment, our commitment to price offsetting commodity input costs remain.
Z pillar of our overall value creation model for stakeholders.
Also during the quarter, we made further progress on the vision 2025 goal of achieving 80% to 90% paperboard integration across our consolidated business. We exited the first quarter of 2021 at 71% improving from 70% in the full year of 2020 and 68% in 2000.
19.
We expect to benefit from a meaningful increase in our paperboard integration rate as we start up the new CRB paperboard machine in Kalamazoo later, this year and we're winding down a portion of the existing supply agreements. In addition, we will drive paperboard integration rate higher as we grow our converting volumes both organically and through acquisitions.
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Our partnership with International paper continue to wind down during the quarter as we acquired another $400 million of minority partnership interest reducing their interest of 7% from the initial 21% held at the inception of the partnership. In addition work on our CRB platform consolidation project in <unk>.
Kalamazoo continues ahead of schedule with the new K two machine set to begin paperboard production in the fourth quarter.
Planning related to our more recently announced investment in Texarkana to convert an existing Sps machine to swing capacity capable of also producing C. U K is tracking on time and on budget. This represents a very efficient path to meet increased global demand for CK and further advances our efforts to closely.
Match supply with areas of strengthening demand.
Continuing the capital allocation discussion, let's move to slide four where I will provide an overview of our intent to acquire them aircraft carton.
We have entered into an agreement to acquire them aircraft carton for approximately $280 million the company as one of the largest remaining independent converters in North America with over $200 million in annual sales operating seven well capitalized and high quality converting facilities. The company has a great reputation with customers.
<unk> has been in business for over 100 years and generates approximately $30 million of annual EBITDA, we see 300 basis points of paperboard integration opportunity across all three substrates and expect an additional $10 million of synergies over 24 months. Following the close the transaction is expected to close in the net.
Next few months.
Turning now to slide five and a discussion of innovation and new product development I will focus my comments. This morning, it projects and work underway in our plastic substitution growth platform. One of the three growth markets, we are targeting with a $7 $5 billion total addressable market opportunity.
We have discussed with you in past calls the significant ongoing conversions to paperboard solutions, we are seeing in our beverage and foodservice markets an additional area of expansion for us is into food categories around the predator at the grocery store, we have targeted and are seeing success in new categories as we align our global innovation.
Resources and have established frameworks to execute on the biggest opportunities.
On slide six I will provide details on our pay per sale innovation with the launch of the paper steel in 2020, we targeted a 1 billion dollar addressable market opportunity to replace phone trades and shrink wrap alternatives, commonly found in the grocery store and meat departments around the world our pay per steel packaging innovation.
<unk> offers producers and retailers significantly increased food tray, recyclability as well as enhanced branding opportunities.
We are seeing traction in Europe, and Australia with the list of retailers, including all day.
Pat Little marks <unk>, Spencer and Woolworths, adopting our packaging from meat and poultry products. We have tests underway in North America and are on track to be commercial in the region in 2021.
Building on early momentum of paper steel, we are executing a profit expansion with the launch of pay per steel slice in pay per sale wedge.
Cyclable barrier line paper packaging format now offers the same ease of use and sustainability benefits for sliced deli meats and cheese categories. The.
The packaging ensures hygienic and shelf life characteristics that match existing packaging alternatives.
The design allows for enhanced branding and meets the requirements for high speed food manufacturing license.
Turning to slide seven we are also targeting an expanding in another category found at the perimeter of the store produce with our produce pack line. We are offering a variety of fully sustainable shelf ready solutions for protecting and preserving fresh fruit and vegetables.
<unk> offer significant branding advantages in an eco friendly container versus existing alternatives.
Leading Michigan Apple distributor belt harvest recently switched to produce pack from Fuji Honey crisp and Gila apples in response to consumer preference for fiber based packaging.
With the launch of our new put in train line, we are extending our offerings to new categories like buried in snacking sides vegetables.
Our global marketing sales and innovation and sustainability team members are working closely together and are focused on winning in todays market sustainability is a key part of every new product development and discussion and is central to our go to market strategies.
We are engaging with external stakeholders to learn more about consumer preferences product direction and the evolving needs in the marketplace as we move to a more environmentally conscious society, providing packaging enhancements for consumers that included 100% recyclability and reduced carbon footprint.
Would be the key to our new product development roadmap moving forward.
Let me conclude on slide eight revisiting my comments made at the end of what was an incredible year in 2020.
We are creating value through leadership with our vision 2025 simply put we are running a different race. The investments we have made to advance our capabilities engage employees and optimize our mill and converting infrastructure differentiate us we are leaders in sustainability, because we have built our business on it are packaging.
<unk> solutions are made primarily from renewable wood fiber from sustainably managed wood baskets in the United States and the vast majority of our fiber based packaging can be recycled today.
As a result of prudent capital management and strong cash flow generation, we have invested back into the business and have continued to enhance our service offering to meet global demand and consumer preferences, we are delivering on new product development opportunities with customers and achieving our sustainability supported growth goals.
With the proposed acquisition of America, we are positioned to further strengthen our growth outlook, adding new customers and end markets, while driving greater paperboard integration. We are confident in the pipeline in front of us to achieve 100 to 200 basis points of annual net organic sales growth and expect to be at the high end of that.
<unk> in 2021.
Our ability to help customers reduce their environmental impact and elevate their brands through continued innovation and improvements in packaging is expanding opportunities and driving growth.
Steve I'll now turn it over to you.
Thanks, Mike and good morning.
Moving to slide nine and focused on key financial highlights from the first quarter of 2021 net sales increased 3% from the prior year to $1 $65 billion.
Driven by 2% net organic sales growth and acquisitions.
Adjusted EBITDA declined from the prior year quarter, primarily related to $29 million and costs associated with interest from Yuriy and maintenance downtime.
As a result.
Adjusted earnings per share were <unk> 23.
As compared to 31 from the first quarter of 2020.
Global liquidity remained significant at 144 billion.
Additional financial and market detail can be found on slide 10.
Solid sales performance was driven by continued strength in food beverage and consumer markets, where sales before acquisitions increased 5%.
Partially offsetting this performance was our foodservice business, where sales declined 10% versus the prior year period.
Importantly.
Foodservice sales improved to flat performance year over year in the month of March and are inflicting positive for month to date April versus the prior year.
This is encouraging and largely as expected as we see a return to more away from home consumption as vaccinations are rolled out and as we anniversary the beginning of the COVID-19 pandemic.
On slides 11, and 12, you will see our year over year revenue and EBITDA waterfalls.
Net sales increased $50 million in the first quarter of 2021, driven by $33 million of improved volume mix, resulting from a combination of 2% organic sales growth and acquisitions, partially offset by fewer selling days when compared to leap year observed in the prior year.
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As well as $20 million of favorable foreign exchange.
Adjusted EBITDA decreased $55 million to $240 million from the first quarter of 2021.
Adjusted EBITDA benefited from $21 million and improved net productivity and $5 million from favorable foreign exchange.
EBITDA was unfavorably impacted by $3 million of pricing $2 million of unfavorable volume mix.
$34 million of commodity input cost inflation $13 million of other inflation and $29 million of costs related to winter storm Yuri.
Excluding storm related costs, adjusted EBITDA was $269 million consistent with our expectations.
As Mike mentioned in his remarks, we.
We experienced higher inflation across certain commodity categories. During the first quarter and we are successfully executing multiple price initiatives to offset inflation.
Back on slide nine.
You will see that industry operating rates remained strong and backlogs are quite elevated across all of our paperboard substrates.
In addition, <unk>.
<unk> first quarter data reflects declines in industry inventory levels with balances significantly below historical five year average.
<unk> industry operating rates at the end of Q1 for SBS, and CRB, where 92% and 94% respectively.
Our C U K operating rate was over 95% as we remain in an oversubscribed environment.
Backlog increased from last quarter and were six plus weeks in SBS and CRB and <unk> eight plus weeks in the U K at the end of the quarter.
We ended the quarter with net leverage at three seven times.
While leverage is above our long term targeted level of two and a half to three times and our 2021 target of three to three and a half times.
We remain confident in our cash flow generation commitments, an increase in expected cash flow generation in 2022.
Referring back to slide three and highlights in the quarter.
Since the beginning of 2021, we have strengthened our balance sheet debt maturity and interest rate profiles through very effective borrowing arrangements.
We issued $800 million in two senior secured notes offerings.
What is notable about these transactions are the annual interest rates 2024 notes at <unk>, 8% in the 'twenty to 'twenty six notes at one 5%.
We also retired $425 million of maturing higher interest rate bond with an attractive farm credit system level.
And earlier this month, we completed an amend and extend to our bank credit facility, which notably extended the maturity date from January 2023 to April 2026, and increased the availability under the domestic revolving line of credit by $400 million.
Our significant liquidity balance sheet flexibility and strong cash flow generation remains a source of strength for the company.
We have excellent optionality and as Mike detailed for you we are executing a balanced approach to capital allocation.
Turning now to the guidance on slides 13 and 14.
Underlying demand for our fiber based packaging solutions remained strong.
As Mike mentioned, we expect 2021 net organic sales growth to be at the high end or 100 to 200 basis points target range.
We are meeting demand, introducing new products and grow inorganically.
We remain steadfastly focused on achieving the growth goals, we established envision 2025.
We are executing multiple price initiatives to offset commodity input cost inflation we.
We continue to expect that our volume mix and net performance will be in line with our original expectations for the year as we earn on organic sales growth at the high end of our expectations and execute performance countermeasures to offset winter storm related costs.
While some components from adjusted EBITDA changed given the operating environment, we are managing.
Our full year adjusted EBITDA guidance range of 1.19 to 1.15 billion provided at the beginning of 2021 remains unchanged due to the numerous pricing volume and productivity initiatives. We are committed to successfully executing throughout the remainder of the year.
All of which will result in stronger adjusted EBITDA performance in the second half of 2021.
As such there is also no change to our full year cash flow guidance range.
Thank you for your time this morning, I'll I'll turn the call back to the operator for questions.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press the pound key.
Could you please limit yourself to one question and one follow up question. Thank you.
Your first question comes from Mark Connelly from Stephens. Please go ahead. Your line is open.
Mike.
Newer sustainable packaging.
Represents one two categories first new customers, and then second new rather than replacement business with existing customers.
Hey, good morning, Mark Yeah. So it's a mix of both of those things I mean, if you think about co clip as an example, that's a new product to an existing customer for the most part.
And if you look at some of what we're profiling today with some of the protein packaging and fruit packaging that we've outlined those would represent in many cases new customers.
We are selling new products too. So it's I'd ask you to think about.
100, 200 basis points and again as we said this year, we're going to be at the high end of that range based on what we see in our new product development pipeline and commitments, we already have from customers, it's almost half and half.
That's great that's great.
Steve You mentioned.
The return to away from home consumption.
I'm curious is it too early for you to be able to see headwinds coming on the business as it benefited from the shutdown away from home. So clearly you've got a lot of organic growth growth that is more than offsetting but I'm. Just curious if you're at a position yet to quantify any headwinds.
Yeah. Thanks, Mark Good morning, as we mentioned in the remarks, we have seen is a good positive pivot.
From flat to growth in the foodservice business from March to April what gives us some of the confidence that we're conveying to you around the high end of the overall volume range as we haven't yet seen anything material in terms of moving away from the at home consumption. Obviously, that's something we've talked about in the past you've talked about kind of the teeter totter.
The fact that we've shared with you previously, but we haven't really seen indications of that materializing in some of the ongoing at home consumption and some of the trends around where people work even in a post <unk> environment, we haven't seen anything that we characterize as material our customers remained quite quite confident in their volumes as they kind of look through the.
Certainly through the next couple of quarters on anything to add to that Mike No I think mark just that adds up to what you saw in terms of the backlogs on the paperboard side I mean, if you normalize February four.
For the outages you incurred.
Due to the storm.
Got the operating rates from the mid Ninety's mid to upper 90 day actually really across all three substrates.
Backlogs that are at historical highs relative to the five year average and inventories that are substantially down.
Against the five year average as Steve you had talked about at all according to the SBA statistics, and so that creates a very favorable operating environment for us.
Sure. Thank you very much.
Thanks Bart.
Your next question comes from George Staphos from Bank of America. Please go ahead. Your line is open.
And good morning, joining me Okay. How are you doing thanks for the details.
I want to go to the first question used first question for America wrap so doing some very rough calculations. It seems like the business realizations and mix is pretty comparable to two graphic packaging, but could you talk a little bit about where the end market weightings might be somewhat different than yours, what kind of mix of business does it have.
Relative to yours, and what kind of retention do you expect or retention loss do you expect that we should be trying to model into our into our numbers.
Yes. So thanks for the question I would characterize it this way, it's food and consumer packaging. It just tends to be a little bit more of a regional focus of your book of business. There is very little overlap with our existing customer set virtually none as a matter of fact and.
Our expectations are that we won't see material loss of business.
Okay. Thanks for that Mike and then I wanted to come back to guidance and you mentioned youre maintaining your forecast.
<unk> the multiple price increases additional productivity actions that may have left out some things that you had mentioned.
But could you point to one or two things in particular the.
The emphasis that you are putting in applying that makes you comfortable in the guidance and Relatedly can you to the extent possible talk about.
What pricing increases that had been announced are in your guidance and is there any price increases that you've announced that are not in your guidance. Just so we know how to.
Size our forecast.
Based on what ultimately happens in the market one way or another thank you guys.
Yes, Thanks, George it's Steve I'll take that on and then we can add any additional color I think on the pricing front are inherent in the guide for the price cost spread.
Based upon recognized pricing known and recognized pricing in the marketplace as well as very specific initiatives that we're pursuing we have line of sight to $90 million of price. This year in 2021, and that's what's in the guide that which is known and.
And recognize we're executing on and pursuing pricing that adds up to over $200 million that would obviously in our benefit later this year and into 2022, but in terms of the guide there was $90 million of price in the guide.
Most of that in fact, the vast majority $80 million of that we will see in the second half of the year.
Which really speaks to the changes and the things that we've done to compressed timelines and be able to execute on pricing in a way that keeps any dislocation relative to the inflation will talk about the moment no shorter and shallower.
On the inflation front, we saw $34 million of inflation in the quarter, a little over 5% of our commodity input cost spend.
Our guide as that continuing in the four 5% range or roughly $100 million to $120 million of inflation and so that's hence the modest change to the price cost spread that we provided in the guidance. So just repeating that 4% to 5% on day $120 million.
Inflation 90 of known price 200, plus that we're pursuing which results George just to finish that off in a pretty significant inflection first half to second half financials and the first half of this year, we incurred almost $40 million of maintenance downtime and weather related.
Added costs that will alert to a positive <unk> 30 in the second half so almost a plus $70 million on pricing similar very modest pricing in the first half under $10 million upwards of 80 in the second half, hence the $90 million. So again up $70 million type inflection. So those are the very specifics to provide you with.
Regards to what we're executing on what's in and not in our guide.
Steve Mike Thanks, I'll turn it over.
Thanks George.
Your next question comes from Mark Wilde from Bank of Montreal. Please go ahead. Your line is open.
Thanks, Good morning, Mike Good morning, Steve.
Mark.
First question I just wondered.
If you could give us a little more color.
On mirror craft are you know some sense of who the seller is some sense of asset quality and whether you see any opportunities for you know facility rationalization coming out of this and what percentage.
America apps bored you were providing going into this process.
Yes, thanks for that so I'll cover those points first off just.
Our solid.
Shout out to the Johnson's who are the owners of this business and have been for a long time. They built an incredible business. We're very pleased to be able to have their company joining ours as we go forward here. The basic statistics, we walked through in the script I mean, it's a little over $200 million in sales Theres, a 110000 tons of paper.
Lord we had about 35000 to that.
So it's kind of across the CRB and SBS grades, there's a little bit of C. U K and there they've got seven.
Well capitalized facilities that quite frankly are all.
Track the markets for us and attractive location. So look we every year as you know mark are always looking at our asset footprint.
And to make decisions around how best to utilize and optimize that footprint, but as we go into it.
We're going into it that if anything we'll look to scale these facilities and it worked to enhance them over time.
The synergies that we pointed out the $10 million, that's largely through board integrations and procurement savings just given the size that we have but this is a nice bolt on and tuck under part of this is actually relatively straightforward really really excited to have from aircraft joining our company.
That's helpful. Just as a follow up Mike I Wonder if you can talk briefly about sort of what the sustainability proposition is for some of those paperboard packaging thats laminated with barrier film I'm, just I'm very aware that over in Europe, particularly the UK.
Products like the composite can have come under a lot of player.
Because they arent recyclable and I'm just wondering whether we've got some of the same issue here with some of this you know.
Paperboard laminated wood plastic.
Yes. It certainly is the same issue unless you've got institutional way of recycling, which is really what you are referencing relative to some of the concerns there and again Mark that's why we're so focused on our eliminating low density polyethylene coatings on the inside of our Cups as an example in pursuing that.
Water based coatings, which we're making very good progress on here with our customers because we want to position the business to.
Increasingly become more.
Mentally conscious with the products that we provide I mean, the end use consumer has spoken they appreciate fiber based packaging to your point, what we have to do is find ways to provide those functional barriers in a way that still readily recyclable and that's something we're actively working on really all the time with our new product development team.
Okay Fair enough I'll turn it over thanks, Mike. Thank you thanks Mark.
Your next question comes from Gabe <unk> from Wells Fargo. Please go ahead. Your line is open.
Mike Steve Good morning.
Good morning day.
I had a question about I guess, the organic volume commentary and then kind of shifting towards the upper end of what you were kind of expecting coming into the year.
And quite frankly, it seemingly at odds I mean, I know that you talked about transitioning away from maybe discussing tonnage or absolute volume figures, but kind of what was reported in the first quarter and part of it might be housekeeping. If you can give us maybe steve in them.
Impacts from the days that the shipping days from the leap year and the prior year.
On volume is maybe that'll help us and then again I guess kind of revisiting that commentary.
On volumes anything from your customer perspective that you can share with us that gives us confidence in the volume outlook.
Yeah Gabe good morning, Let me just start and then Mike can add on with the back half of your question, but yes. You are correct. If you look at it on a raw tonnage basis, a couple of things to keep in mind, a quarter to quarter year over year.
We closed the white pigeon mill, we exited from some of the corrugated small volume that we did so those that volume was taken out of the company.
When you factor in the leap year, you've got a 15 to 20000 tons that kind of comes from the realities of less true production days, but also importantly, we had almost 40000 tons of production impact.
In the quarter associated with winter storm, Yuri and so that's one of the reasons that our open market sales were down as we didn't have the tons to sell our inventory levels have come down materially obviously service all of our customers effectively.
But we had 40000 tons of actual production.
Remove from the quarter. So those kind of those four things added up we'll give you a sense for what as you said kind of at a headline level on that particular slide that you're referencing is why there is some modest down what we look through and all of that are our integration rates and the actual volume we're seeing on our integrated platform, which was the 2%.
We convey to you today, maybe Dave just to build a little bit on that talk about the momentum here as Steve said I mean, if we would've had more tons than we could have sold more in the quarter and we can be selling more right now too we're having to actually be very thoughtful in terms of how we.
Allocate our tons, both internally and externally relative to demand.
While that we've got right now given the inventories are down as I mentioned over 100000 tons year over year for graphic.
And in some cases, that's caused us to have to do more trucking paperboard two converting plants.
Our confidence in being in the higher end of that range you know it's hot.
And this is a very good paperboard market right now as I mentioned earlier, the operating rates adjusted for the storm or.
At least in the mid to upper Ninety's and.
You've got your backlogs that are growing and that's a function of growth in the overall folding carton sector and again as I clarified here inventories not only for us per for the industry are down according to the S&P.
<unk> data so.
So very healthy healthy and growing market right now.
Thanks for the detail there guys and then a two part question as a follow up.
I know you guys are not in the business of providing quarterly guidance, but if we were to adjust for the.
$29 million of your hit and call. It kind of Q1 would have come in I think you guys will say Directionally 270 would you expect kind of Q2 taking into account.
Year over year basis, similar level of maintenance outage, and I think what's implied of up $10 million a favorable price.
So if you can kind of be directionally in that range or a little bit better for the second quarter or is there anything else that I should be thinking about that I'm missing.
Yeah again, we don't provide it on a quarterly basis, but you've got most of the parts are correct. I mean, I think Q2 will look more like last year's Q2, maybe modestly better and then as we've talked the inflection that we spoke about relative to actual maintenance downtime run strategies as well as price execution.
Most of the benefits in Qs three and four.
Great. Thank you guys.
Thank you.
Your next question comes from Adam Samuelson from Goldman Sachs. Please go ahead. Your line is open.
Yes, thanks, good morning, everyone.
Yeah.
Right.
Was hoping to maybe continue on that line of questioning on the demand environment and I know from the prepared remarks, you talked about April improving versus year ago levels on the foodservice side, maybe can we talk relative to 2019 and your key channel and feel like it's a more appropriate kind of baseline.
Given the comps get really wonky over the next few months.
Think about it kind of did some of your different consumer channels foodservice kind of how far are we back to normal or above normal in some cases as we think about the world continuing to normalize moving forward.
Yeah, Adam it's Steve It's a very very good question I don't have the facts sitting in front of us on that but just to kind of give you a sense for what we're seeing what we are pleased with is that foodservice business here in April is inflicting back to levels that are approaching where we were in 2019.
In terms of moving back into that kind of a trend line. So if youre doing a true multiyear look through we're pleased with what we're seeing in that business in April we're not all the way there obviously back as things happen completely returned.
To norm and what's positive around traditional.
Food beverage consumer packaging is that a lot of the organic growth innovation oriented products are making their way through the market relative to 2019 into ear into 'twenty. One so those would be naturally up driven by the actual organic sales growth that we've had that we've shared with you.
You've got to look through 19 into 'twenty. One you would have a net step up in growth from organic sales driven by innovation efforts and.
New product developments.
Okay. That's really helpful. And then a clarifying question on the pricing comments that you.
You made in terms of the 90 day, you've got direct line of sight to and I think it was over 200 of actions that are underway.
To make sure I understand the scope of that does that include the contracts that you have with customers that our raw material day, so that theres, a more contractual pass through or the or the actions that are contractual with customers outside of that.
Discussion.
Yeah. Thank you Adam it's an all inclusive number so it includes the multiple price initiatives and actions that we have underway at any point in time and these are the known ones that we're executing on so it would be known risky and recognized pricing it would be how our cost models are playing out with customers. It was the actions were taking to it.
Increased prices with non contract customers. It would be freight initiatives that we have to go to for openers a year rather than two it would be other terms and conditions that we're modifying so that was an all inclusive.
$90 million of things that we know we're executing on and then the 200 is would be what lies ahead of us in terms of either announced or other initiatives that we're pursuing but are not in the guide.
Got it that's all that's all really helpful. I'll pass it on thank you.
Sure. Thanks.
Got it.
Your next question comes from Mark Weintraub from Seaport Global. Please go ahead. Your line is open thank.
Thank you just following up on the last question can you give us a sense as to how much of the $200 million, where you have actions in motion might be.
It might be cost pass through so where you can have a really pretty high degree of certainty even at this point.
Well I guess Mark that is largely based on what goes into effect in may.
So it would follow a similar algorithm to what we've been saying on these other increases that we've done and had been scored through April. So I think that's how you need to think about it and I guess, what I would add to that relative to pricing as you know if you look at.
It was marketed as I've said a couple of times here. This is a really good paperboard market in them.
As Steve just outlined.
A number of the Ts and CS really across the board with our customers because we actually have leverage.
Given the high demand profile that we're seeing here and what we're doing is making sure that we're going out and getting paid and recovering from the input cost inflation that you're seeing come through the business and the value that we're providing customers in order to do that you know how it works we've got to be willing to put some business at risk and that in fact is what we're doing here at <unk>.
As it relates to these pricing initiatives that we've got out there. So as Steve mentioned, we've got 90 already recognized and we've got the initiatives are well over 200, the vast majority of that as he mentioned we will be.
Kind of a late Q4 because of the lag that we see but strong momentum as we head into 2022, not knowing what you know the inflationary environment will be so we feel we're getting out in front of.
That in a good way and really positioning the business for success over a multiyear period of time.
Right and to make sure I fully understand it if I can just one so even if we have another.
Highly inflationary year, such as we're having this year, where you're suggesting 100 to 120. If you were to get this full amount you would you would expect that price cost spread to be favorable to $80 million to $100 million in and then if it's even less inflation and assuming success on all the various initiatives it can even be a bigger number.
Is that the way to think about it.
Well it would over time Mark.
Station moves up materially from the kind of 4% to 5% inflation that we've talked about that obviously the cost models would pass that through.
The reduced flags that we've been referring to and so obviously there are things move along the way and if we saw incremental inflation of substance continuing in the business.
Would continue then to take other price actions across the other mechanisms that we have with with market based models as well. So this is a point in time based on all we know specifically that we're trying to provide to you and then obviously.
<unk> is variable depending upon what we actually see relative to inflation over the coming quarters understood. Thank you and one quick.
Other one if I could.
Now, obviously, all that the customers see the price increases coming.
And so to the extent they were able to I would imagine they would want to increase inventory ahead of time at the same time I am not sure that there is much.
They are carrying converted inventory can you provide a little bit of color or.
Should one be thinking that customers are trying to build inventory or do they really not do that <unk> cannot do that.
It's a small component of it mark if it happens at all to tell you the truth and the reality of it is as I mentioned, we lost 40000 tonnes due to winter storm Yuri our supply chains are actually disrupted in our inventories are low as.
And as a result of that as I mentioned, we're having to allocate towards both internally and to external customers. So yes. There is.
Don't see this as inventory building.
Thank you.
Your next question comes from Anthony Pettinari from Citi. Please go ahead. Your line is open.
Good morning.
Yes.
On the U K, you talked about backlogs eight plus weeks, which is pretty remarkable I'm wondering if you could talk about if there's a couple of categories where in markets that are really driving that continued strength versus SBS.
And then on the Texarkana conversion I think you had talked earlier about 300000 ton machine, you'll be able to swing production in <unk> of next year. If you had that capability today with that I'll go to see U K I'm. Just wondering if you could talk about how you'll be able to use that asset.
Appreciate the question Anthony it's.
It's a very good one relative to whats driving the global growth to see U K, it's largely beverage and get.
This movement on a global basis to kind of replace plastic solutions with our paperboard are fiber based solutions things like kill Cliff and fully enclosed.
Not just here, but also in Europe, and really around the globe and so as we mentioned at the at our last call to run our business. This year, we are buying over 50000 tons from various suppliers globally to make sure. We have what we need so relative to what we'd be doing if we are in texarkana mill that optionality, we'd have having a fit.
Yes.
The UK machine capable of going on that growth, yeah, that'd be excellent and that's really why we wanted to make that investment.
And we're on track as we mentioned here our plan is to have it done in Q1 of next year. We boarded the major components are correct Dakota and are sizing breasts are on order were finishing up the engineering work on that but I'm really excited about the optionality it'll give us to be able to swing back and forth between coated Sps ANC U K, it's going to be.
Unique capability that we have will be able to with the investments, we're making to be able to have our C U K with cost.
Cost parity with what we're doing in Macon, and West Monroe. So we liked that investment in between that what we're doing in Kalamazoo given the demand in these markets those capital investments look quite fortuitous and Anthony just to add onto that as we share.
Conversations as well we've converted.
Above the run rate.
From the UK to SBS, so as part of this swing machine that too.
Be converted back into C U K, most likely and so between that and the purchases I think you could think of it as half of the machine is probably easily convertible upon when we.
When we complete the work.
Okay. Okay, that's very helpful.
And then you highlighted the impact from the winter storm to your tons I'm. Just wondering if there is a lingering impact from a raw material perspective, specifically around things like adhesives in Glu have you lost sales because you haven't been able to procure materials from some of those Gulf coast suppliers is that a risk.
And <unk> is there any other kind of color you can give there.
Yes happy to do it so we did not incur any more downtime for an inability to get materials to operate our mills other than the 40000 tons related directly to the store and that was again in Texarkana in West Monroe, having said that we had to substitute.
Certain latexes in adhesives in order to manage.
Manage supply chains, and ensure that customers got what they needed.
And again being a global company, we were able in adhesive side to actually get some ideas from Europe and bring that in to keep all of our converting plants up and operational.
As of May 1st the vast majority of the supply chain are restored.
Meaning we're getting the material from our existing.
Existing.
Suppliers prior to the storm.
Be it at higher prices as we outlined in the inflation comments from Steve put forward. So you know we didn't lose materials sales on the converting side related to that as Steve mentioned, if we would've had the 40000 tons, we could add more external paperboard sales for sure.
Okay. That's helpful I'll turn it over thanks.
Thanks Anthony.
Your next question comes from Ghansham Panjabi from Baird. Please go ahead. Your line is open.
Hi, Good morning. This is actually Matt Krieger sitting in for Ghansham. How are you guys doing today.
Good Matt.
Great.
Given the emphasis on passing price through to customers not only across your own footprint, but across the consumer supply chain. Overall, how do you believe that these hikes will impact consumer spending from a product category perspective in terms of branded versus private label and then does this have any does this sort of shift have any.
Impact on your business in any particular fashion from a margin or a volume perspective.
So that trend on private label versus branded it's been kind of well underway for a period of time, Matt. So I would expect that to continue to be the case as consumers look for value.
And quality quite frankly, I think the bigger trend that's going to be interesting for us to watch.
And we view it as a as a tailwind here is the fact that more people are going to be working from home for longer yes. The returned to work will bring some office workers back in but as you've seen and it's been really well chronicled in the journal. Another other news agencies here is that there is an expectation that more people will be working from home.
95% of what we do is food and beverage and so if people are at home.
A reasonable belief that you could have that we would see.
Ongoing demand that would be different than what we saw before and on the other side of that we could see some foodservice it maybe not quite as strong but as Steve mentioned, we're seeing a nice bounce back there here in April which was really our low watermark last year at this time. So I think that's how I'd have you think about it obviously the retailers are going to have to do their work relative to this.
Store brand.
Brands and versus you know consumer brands, but you've seen some of those consumer brands.
We have released their results already announced theyre going to take price because they are seeing things come out of them. So I think that's that'll play out here over the next six to nine months.
Great. That's helpful. And then I just wanted to dig into some of the volume mix impact our expectations for the year from my next question. So can you talk a little bit about how you expect full year volumes to perform by product category during 2021, and if theres any particular mix benefits or impacts.
That we should consider as consumer mobility improves throughout the year I guess I'm kind of aiming this at foodservice versus non foodservice type policies.
Yeah, I wouldn't Matt I mean overall, our profitability levels have a lot of commonality across the whole portfolio. So I wouldn't expect you to see anything that is particularly mix oriented I think what we have confidence in is that at 2% organic growth. There's a good strong solid top line that comes along with that.
That will earn on at margins pretty consistent with where we aren't on and as a company and so if you kind of look at a 2% growth.
$140 million range and we earn on it appropriately. It gets you into the range that we're talking about setting aside a little bit of a headwind in Q1, plus we have a little bit of acquisition based year over year earnings in their early this year. So I wouldn't focus too much on the mix component I'd focus more on the.
Actual volume organic growth component.
Great that makes sense that's it from me. Thank you.
Thanks, Matt ex Pat.
Your next question comes from Phil <unk> from Jefferies. Please go ahead. Your line is open.
Hey, guys.
With your leverage now at the higher end of your target.
A lot of the excess cash is going to be used to delever, but can you talk about how you prioritize buybacks and M&A.
Call. It the next two years.
Yeah, Phil Steve.
And our long term commitment here to a balanced approach to capital allocation and I think it proves itself out quarter to quarter.
And we take those decisions as we see them in front of us relative to our strategies. So there are times, where we're putting capital to work in a more intensive way like we're finishing up this year with the Kalamazoo investment there are times, where the M&A is timely and the right thing to do we put that to work there are times, where we've been dislocated we believe from.
Share price perspective, and we bought back the company.
Material ways, and then obviously, we return value to shareholders in the form of the dividend. So it's always for US. We do know that this year will probably be it will be in the 3% to three five times range, we're probably on the higher end of that with everything that we've brought forward this year, but our confidence in the cash flow generation moving into 2022 is very.
Hi, which gives us the ability to speak with confidence around.
Getting the leverage ratio back into the kind of long term two to three over time.
And Phil the other thing I would add to that is if you think about and Steve kind of profile.
Financing events that took place over the quarter and in last year as well as we're borrowing money very efficiently and if you look at M&A in particular, it was a little lumpy right you don't control when quality assets come to the market and so we've got to have that kind of flexibility to be able to move and when an opportunity presents itself.
It's strategic and core to our overall vision.
We want to drive the business. So I think Thats a you know as we are.
<unk> said before if we see those types of things, we're willing to lever up a bit as long as we see a clear path to delevering very quickly.
As Steve outlined so hopefully that helps you give a little color yeah, that's great Michael So it sounds like it's not.
There's a good deal on the table or do you see a dislocation of your stock price or not.
Refraining from buybacks or M&A. So that's that's encourage given your confidence here free cash flow profile.
And I guess the product you talked about today on pay per sale it looks pretty interesting can.
Can you customers run run it on existing equipment is it agnostic to the film that you would use in any drop off in terms of performance like shelf life.
So we can run it on our existing equipment, which is important but the customer actually needs. The line and we've got a partner there.
We partnered with it actually makes the machine.
Okay is it a big capital investment for further customer I guess, if they didn't does okay no its not.
Okay, and then from a film perspective, you could pretty run pretty much run anything or has to be like a partner at film that you have for this product in particular.
We're agnostic on the phone.
Great Alright really exciting thank you.
Yes.
Your next question comes from Kyle White from Deutsche Bank. Please go ahead. Your line is open.
Hey, good morning during the quarter, you pointed to the $15 million to $20 million headwind related to the storm and he came in higher than that just curious what drove the increase relative to your initial expectation and then following up on that.
What is offsetting this impact that is allowing you to maintain your net performance guidance in that $70 million to $90 million range.
Yeah, Steve just very briefly for you with regards to the $29 million versus the 15 two.
'twenty, we had to announce that early we were in the market with the $800 million of secured bonds that we are successfully executing on so we convey that as a material event, but it was very early in the process and so as such as it played out.
Worked through some of the challenges that Mike talked about earlier overall the costs just went up but it was a function of us needing to be in the market with that material knowledge early in the process. As you may recall, we were pretty early in it.
What gives us confidence on the overall productivity is that we don't have the recovery boiler downtime. This year, we have less downtime in our overall confidence in our productivity going into the year was quite high. Unfortunately, the weather impact took away what we felt was the potential for upside, but it's why we believe we can see.
We'll maintain our overall commitment to productivity and net net performance in that $70 million to $90 million range for the year.
Got it that's helpful and then youre highlighting pay per sale in your new produce produce produce Tac are you seen market penetration for products.
Things such as these in your kicked up in the U S or are you deliberately focus more on the international and European market.
And then related why might be USB slower to adopt these products. Despite everything we're hearing from consumer packaging brands on sustainability.
Yes, so it's a little bit of a mix. So co clip has definitely been more Europe centric up to this point, although we have a number of applications and sales that would take place here in North America towards the end of this year.
We're right on track with where we thought we'd be we've got over 20 of those machines installed in Europe already we're learning a lot about how those are running optimizing their performance and again as you know Kyle we're selling these two large.
CPG and beverage companies and they've got global footprint. So if we're successful in one market. They will look to bring that into other markets as well we're highly confident in that we've seen that before with other packages that we've done in regards to some of the produce packaging. That's here in the U S. As I mentioned.
Yes.
On a tray here's for a and Apple producer in Michigan as an example, and so you put those together those are a lot of base hits, but that's really what gives us confidence in the $7 5 billion dollar addressable market. We pointed out two in the three main platforms, there and that particular, one being neoplasty substitution it used to.
In a bag now it's going to be.
In a trade that's made out of a solid fiber.
Yeah.
Your next question comes from Arun Viswanathan from RBC capital markets. Please go ahead. Your line is open.
Great. Thanks for taking my question guys.
Good morning, and congrats on the results.
I guess first off.
You laid out the $90 million of price that you expect in the one to 120 of commodity cost inflation. So if you look at that one to $1 20, what are the components.
That have inflated the most.
Do you expect any moderation any of those components as we go move forward here is that what's embedded in your outlook.
Yeah, just briefly on that obviously, we're not going down to the by category level, but as Mike mentioned secondary fiber chemicals energy logistics drove the $34 million and we would expect it for the quarter and we would expect that those to be the primary drivers on a pretty consistent basis four quarters.
<unk> for the remainder of the year, that's inherent in the one hundreds of $120 million. So.
We don't see different categories necessarily but we do see some inflection up.
For some categories like logistics that would maintain that over the year. The hence the range, obviously things can move inside of that but that's how we're thinking about it.
Okay.
Just wanted to revisit the price commentary as well.
It looks like you know you mentioned very high operating rates across most of the substrates.
Have you do you guys feel that the price cost.
Dynamic has improved over the last couple of years I know you've shortened the last six months.
But I know theres been some capacity additions also in SBS, but maybe if you just look at the three grades.
Can you just comment on each one to see again, if you feel that the price cost dynamic is improved.
I imagine so in C U K, just given the demand strength, but.
What about CRB and SBS.
Yeah. So.
I'll answer that I mean relative to all three grades as a basket, which is how we need to look at those given some of the substitution around the edges.
I'll characterize it as one of the strongest paperboard markets that I can remember <unk> been doing this a long time so.
So relative to.
How that looks.
And what what gives us confidence in our pricing.
It is really the strength of those markets and relative to the lags and Steve mentioned this I mean, the algorithm from pricing in our business is substantially different than it was in 2016 and 17. The last time, we saw a big relative inflation as youre seeing mid year here, we've got the better part of $80 million worth of pricing that's going to take place here in the second half.
Half of the year that substantially faster and as Steve mentioned, it's going to result in a.
Shorter and shallower dislocation and if we see additional inflation, we're going to take more price. That's just how we need to deal with it in the marketplace and again, we can't predict what inflation will do we've given you our best.
Analysis is.
We have around 4% to 5% of our our Cogs here roughly on average around $110 million of inflation, which is what we're expecting right now as we sit here today, but if its more we will have to take more price.
Again with these markets and the strength of those.
We will continue to push those graphic because we have to offset our input cost inflation.
We are out of time for questions today, I would now like to turn the call back over to graphic packaging CEO, Mike Doss for closing remarks.
Thank you everyone for joining us this morning during the fourth quarter, we met strong demand with our fiber based packaging solutions and capture continue organic growth. We remain intensely focused on achieving the pricing growth goals and performance improvements we shared with you today and we look forward to updating you on our progress. The next time, we speak at the end of the quarter. Thank you.
Day.
Okay.
This will conclude today's conference call. Thank you for your participation you may now disconnect your lines.
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