Q2 2019 Earnings Call
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Good morning Conference I'd number for you.
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$10 million, we are pleased to report that our commercial teams had been successful in customer negotiations to reduce our pricing lags to six months compared to eight months previously.
This reduction is an important milestone as it provides the opportunity to adjust pricing two times per year on average to better reflect market conditions.
In Q2, we repurchased $18 million of shares at values, we estimate to be below the intrinsic value of graphic packaging over the last three quarters, we have repurchased $198 million of shares successfully reducing our share count by a meaningful 5% since inception of our share repurchase program in February of 2015, we have successfully reduced our share count by 10%.
Let me briefly discuss our current 2019 financial guidance and the artistic Carton Company acquisition, we announced this morning.
We expect 2019, adjusted EBITDA will be in the range of $1.01 billion to $1.03 billion up $15 million compared to the midpoint of our previous guidance. The increase reflects continued strong execution and a more favorable pricing to commodity input cost environment.
We continue to expect 2019 cash flow will be approximately $525 million compared to $469 million in 2018.
Shifting to the artistic carton acquisition. The business includes one CRB mill located in White Pigeon, Michigan with annual production capacity of approximately 70000 tons and two converting facilities located in Auburn, Indiana, and Elgin, Illinois, the business generated $63 million in revenue during the 12 month period ended June Thirtyth 2019.
We expect to generate approximately $10 million in annualized EBITDA, including anticipated synergies over the next 12 to 18 months.
The acquisition will provide compelling optimization and growth opportunities for our paperboard mill and converting platforms in North America. Moreover, the acquisition will drive converting end market diversification and enhance our converting platform. We expect to deliver significant synergies driven by paperboard integration mill and converting manufacturing optimization and supply chain efficiencies, we expect to complete the transaction in the third quarter of 2019.
Now, let me provide more detail on key operational trends for the second quarter.
Volume in our global Paperboard packaging business was up modestly in the second quarter driven by acquisitions Encouragingly, we continue to see the benefits from the consumer shift away from plastics and do our customized paperboard solutions. Moreover, several new customer wins position the business for 100 basis points of organic volume growth in the second half of 2019.
Let me now briefly discuss our new product development efforts as we highlighted last quarter customer interest in the queue clip beverage packaging solution remains very high we are actively building new packaging machinery for large customers that we expect will drive Q flip demand over the next several years.
In the prepared food categories, our proprietary pressed paperboard bowls are winning market share from plastic trays. According to the Nielsen data the prepared food categories continued to perform well and customers are actively innovating across the breakfast entre in neo categories customers are also increasingly choosing the SBS paperboard trays over plastic trays as paperboard solutions are viewed as a more sustainable offering.
Moreover, customers are incorporating graphic packagings proprietary microwave cooking solutions for superior consumer experiences.
There were new numerous new product launches across multiple categories in the quarter.
Turning to operations, our mills and converting assets ran well during the quarter. The Augusta SBS mill is benefiting from the extensive rebuild of the recovery boiler and significant upgrade to the mills mechanical and electrical systems, which we completed in Q4 of 2018.
The S&P reported Q2, 2019 operating rates, 97% or CRP and 92% for Sps graphic packaging Sea UK operating rate was over 95%.
Backlogs remain at a healthy five plus weeks for CRB and sea UK as a reminder, our CRB and sea UK mill operations are highly integrated with our converting platform consuming approximately 87% of the paperboard we produce for these grades.
Our SBS backlogs are currently approximately three weeks since the completion of the combination of the Sps and food service assets. In early 2018, we have successfully increased our Sps integration rate from 20% to 40%.
Shifting to performance.
Continued emphasis on improvement initiatives variable cost and operating efficiencies benefits from capital projects and execution on synergies drove strong performance in the quarter, we operated well and generated $22 million of NAV performance.
Moving on to costs, we incurred elevated would input costs and higher external paper costs, resulting in $14 million of net commodity input cost inflation during the quarter the impact from the terrorists enacted by the United States. In 2018 is at a limited inflationary impact on our cost structure year to date.
Let me now focus on how we are executing on our strategy for integrating the Sps and foodservice converting assets.
The addition of the Sps and foodservice assets in early 2018 has enabled us to optimize mill production across all three paperboard grades and as a result, we are driving meaningful efficiencies for the company.
We are also executing on growth opportunities tied to the positive trends in foodservice and shift into innovative paperboard solutions, specifically the shift away from plastic based comps trays and Clamshells. The integration of the led to acquisition remains on track and as highly supportive these growth initiatives.
And finally, we continue to have a high level of confidence in our ability to deliver $75 million and acquisition related synergies by the end of 2020.
And with that I will turn the call over to Steve Scherger, Our Chief Financial Officer, Steve.
Thanks, Mike and good morning.
We reported second quarter earnings of 22 cents per diluted share.
Up compared to 16 cents in the second quarter of 2018.
Second quarter 2019, net income was impacted by $5.8 million of special charges that are detailed in the reconciliation of non-GAAP financial measures table attached to the earnings release.
When adjusting for these charges adjusted net income for the second quarter was $69.6 million or 24 cents per diluted share.
This compares to second quarter 2018, adjusted net income of $54.5 million or 18 cents per diluted share.
Focusing on second quarter net sales revenue increased 3%, driven primarily by $40 million higher pricing and $16 million of volume related acquisitions.
These benefits were partially offset by $14 million of unfavorable foreign exchange.
Turning to second quarter adjusted EBITDA.
The $31 million increase to $267 million was driven by $40 million, the positive pricing and $22 million of performance.
These benefits were partially offset by $14 million of commodity input cost inflation primarily would.
$12 million of other inflation, primarily labor and benefits.
$3 million of unfavorable foreign exchange and $1 million of unfavorable volume mix.
We ended the second quarter with over $1.4 billion of global liquidity and $3 billion of net debt.
Total net debt decreased $121 million during the quarter.
In the second quarter, we invested $78 million in capital repurchased $18 million of shares paid $22 million in dividends.
I made a $6 million distribution through our GP IP partner.
Second quarter pro forma net leverage ratio was 2.91 times adjusted EBITDA compared to 3.13 times at the end of Q1.
We remain committed to our long term net leverage target of two and a half to three times and expect to be well into this range at year end, reflecting our strong cash flow generation.
Turning to full year 2019 guidance as Mike referenced we now expect our full year adjusted EBITDA will be in a range of 1.01 $1.03 billion.
Up $15 million compared to the midpoint of our previous guidance.
The increase reflects more favorable pricing to Macau commodity input cost relationship.
We continue to expect positive 2019 pricing of approximately $110 million.
We anticipate commodity input cost inflation of $70 million compared to our previous outlook of $85 million. The reduction reflects more favorable recycled fiber freight and energy input costs, partially offset by higher than expected wood costs.
We expect third quarter, adjusted EBITDA will be in the $235 million to $245 million range.
The key driver of the sequential decline in adjusted EBITDA from Q2 to Q3 is related to the timing of our annual maintenance outage schedule, specifically, we have an extended scheduled maintenance outage planned at our Texarkana SBS mill.
In addition to the routine annual work, we will perform at the mill, we will replace the bottom tubes section of their covered boiler.
We expect this additional work will result in improved safety and reliability of the mill.
Turning to cash flow, we continue to expect cash flow will be approximately $525 million in 2019.
The remainder of our guidance is contained on the last page of the presentation on our website.
Thanks for your time this morning, and I'll turn the call back to Mike Mike.
We are encouraged by our strong results in the first half of the year. We are executing on our strategy of building a highly integrated packaging company that is delivering profitable growth across all three paperboard substrates.
We are well positioned to drive benefits through our growth productivity and synergy initiatives that we anticipate will be in excess of our labor benefits and benefit cost inflation.
We expect to generate robust cash flow in 2019, and we will continue to focus on creating shareholder value through effective capital allocation. We believe these actions will create value for all our stakeholders in 2019 and beyond.
And I will now turn the call back to the operator for questions.
If anybody would like to ask a question. Please press star one on your telephone keypad.
And that does start with one on your telephone.
Please.
Mr for your questions to one and one follow up so everyone can get their questions answered you are more than welcome to the queue again after your first question.
Okay.
Your first question comes from George.
Staphos from Bank of America. Your line is open.
Hey, Good morning. This is actually John back on the line for George.
Just wanted to start out you talked a bit about this earlier, but could you elaborate on the new customer wins and how to shift from plastics to paperboard solutions is impacting your volumes.
And then also what.
Let me just add just also what gives you confidence in your volume outlook for the second half.
Thank you for that so in terms of our new customer wins as we talked about earlier this year, we're really seeing.
That kind of translate into wins on the foodservice part of the business, specifically transitions out of polystyrene into paper Cups trays clamshells those types of products as well as continued.
Acceleration on what I would characterize is our beverage business.
We talk about Q flip in here.
And move away from shrink wrap film.
In Europe and other other areas. So we've got a high degree of confidence in our 100 Bips that we outlined on the second half of the year and our business being 95% food and beverage tends to hold up pretty stayed stable.
During really.
Any type of economy, and we see that.
Well here in the second half of this year so thats.
Well all contained in our guide.
Okay. Thanks, and then also looks like backlogs are still quite strong and CK and CRB, but pulled back a little bit in Sps could you talk about the current market dynamics and is right.
Sure happy to do that so as you know operating rates are solid in both the UK and CRB on the SBS side, they are down a little bit in the 92% range and that's really driven by the factors a new entrant that's come into the market and Thats now fully contained in the actual numbers that the EPA is.
Posting and as we saw in the quarter.
One of our competitors announced that they were actually going to take capacity out. So if you look at kind of the net net of both of those things as it kind of plays out here into Q4 and into 2020, we'd expect operating rates.
Be moving up a little bit on a net net basis.
With the result of those two moves.
Okay, and then last question before I turn it over just with regards to the acquisition of artistic carton.
Could you talk about the logistical and other benefits you see from this transaction and how the CRB mill ultimately Petsense your existing plant network and then also it looks like the smell is at the upper end of the cost curve and CRB. So what opportunities are there to drive efficiencies out of this facility.
All right. So you've got a number of questions there I'm going to answer them here in order in terms of what we're excited about in terms of the artistic acquisition, we really see good customer diversification on the converting side of the business there in a number of segments.
That we're not in and we've talked in the past about.
The need in our goal to continue to diversify our product portfolio and mix. They are doing things on the retail side of the business are also.
And in certain industrial markets that we find interesting. So we think thats going to be a big opportunity for us and in regards to synergies on the CRB side, we've got a.
Reasonably.
Sizable CRB business, and we really see supply chain efficiencies being the biggest opportunity there where we can leverage some of the things, we do and drive some synergies.
Yes, Thanks a lot.
Your next question comes from Mark will be from BMO capital markets. Your line is open.
Good morning, Mike Good morning, Stephen Congratulations on a good quarter.
Benchmarks Mark.
I wondered just going back to John's questions around artistic we could add another one on there and just talk a little bit about the.
Timing on the synergies, but also the use of capital for this acquisition versus say growing the foodservice business or growing the European carton business, which both of which I would have guessed would be a little higher priorities.
Yes, so I think mark the way we look at it is.
Expectations around multiples are still pretty high in the space and as we've talked about we have to look at that and look through those to make sure that we find opportunities that create value over the long term for our shareholders and.
This is a good example of one that.
It was unique and we think devaluation is good for us.
Then it moves us into some verticals that were not if you are right you that from a priority standpoint.
Anything that we can do to drive our Sps integration up is going to be prioritized for those reasons, but we have to make sure that we get the valuations right on those kind of deals.
As well.
Europe were still interested in driving towards that billion dollar platform on the converting side that we've discussed with you in the past.
But then that market well, our business is holding up pretty well.
Because we are so index to both convenience and the beverage side of the business, we are going to be a little bit more cautious there as we look at that.
And probably prioritize.
North American specifically anything that you can drive our our integration levels off on the SBS side ahead of that market, Steve I think one of the things to its relatively modest overall allocation of capital and it's one that we can see very clear line of sight to the kind of pre and post multiples that we aspire to when we take on a decision to apply capital to an acquisition.
Okay, and then just the synergies and the timing of synergies.
On this one as we mentioned as we look out to 2020 . We would expect the majority of that $10 million of EBITDA, which is a post synergy number would be available to us for the majority of 2020, So thats a fair number as we look out obviously, we'll get some very modest improvement. This year depended upon close think of that as maybe a quarter.
Typically we spend those early months, making sure that we understand the business well and then work hard to operate and drive those efficiencies.
In this case, we would expect through 2020 as the primary line of sight to that $10 million. Okay. And then just for my follow on I just was struck when I looked at the slide deck, you're still buying.
100 million pounds of polyethylene and I'm just curious.
About where you're at in terms of coming up with alternative coatings for the paper comp than the the foodservice products.
Products to really make them kind of more easily recyclable, rather than having that polyethylene coating, which which complicates the issue.
It does thanks for that question it is a.
Strategic focus for us relative to our new product innovation side and as I've commented on in the past. It is a top priority for our foodservice business. We've got numerous different trial materials that we're working with customers and our bio base that would reduce that footprint.
The thing about our low density polyethylene as you know Mark is it's pretty cost effective in the barrier properties are high.
And so were up against a pretty optimized specification, but to your point. It's one of those things from a stain ability standpoint that we believe consist consumers ultimately will help hold that through the marketplace as we come up with these new options and innovations and over the next 12 to 24 months, we expect to make progress on that 100 million pounds. The other thing that I had mentioned to you that we're working on is we're working with our customers around the collection of those materials.
And the ability to get them back to our mills and others.
To be able to use because the fibers really good there.
Yeah, and we're probably a little behind in the US were certainly Europe and parts of the.
Asia are in that regard and thats, an opportunity for us as well.
Okay very good I'll turn it over.
Thank you Mark.
Your next question comes from Mark Connelly.
Your line is open.
Hey, Good morning, this is actually John rider on for Mark.
Hi, John .
So our first question is so should we assume that the reduction in the price pass through.
From eight to six months.
<unk> represents the majority of your response to addressing the price cost gap or are there other significant actions that you're taking to address the future.
So John you know that was a significant undertaking for us and multi year over the last couple of years. So we we believe that six months is where we're going to wind up on that.
Okay.
And so just as a follow up to that are there other ways that you can mitigate the risk of.
Felicia.
Yeah, John It's Steve as we've talked before I think in addition to compressing the time horizon, which has been a critical initiative for the last.
A couple of years for US. We've also taken several other actions around pricing so looking at ways to make sure that we're addressing any areas of potential leakage. For example, like freight cost pass throughs and the like so it's really been a multi dimensional approach which has allowed us.
To commit to the kind of pricing improvement year over year last year's $80 million. This year is 110, it's a combination of those negotiations and the compression of time lags as well as other initiatives to lock down areas, where you might have price leakage either during negotiations are in the normal course of the business.
Great Okay, and our second question is so if you guys could just talk a bit about mill productivity.
We've had some good improvement here last quarter, and we know you had an unusually high wood costs, but also.
Cc.
If you could just help us.
Put your overall productivity efforts into perspective.
Sure happy to do that John So really what you're seeing is a lot of benefit from the investments that we made in 2016 and 2017, specifically into our sea UK Mills, Macon and West Monroe.
With the curtain Coaters and the pressing section that we put into west Monroe, that's all coming.
You'll kind of through in terms of productivity right now.
On a year over year basis, we do see.
Productivity levels up.
Pretty substantially there.
In regards to your question as it relates to host Cc and wood costs, we expect would cost to remain elevated elevated here in 2019.
Well the weather is a little better in the southeast and the Gulf States, we're behind in terms of actual.
Building, our stockpiles for wood that we need going into the rainy season. So you will see a lot of effort by ourselves and I would assume others.
Two.
Build those piles back here well we can.
Because once we get into Q4 of course, we'd expect a more normalization of wet weather patterns, which is the historic patterns in those regions. So.
In regards dose you see you see what we see.
In terms of what that looks like they are down.
It is a commodity.
We'd expect it to move up and down as respect to supply and demand and right now demand is down a little bit on a global basis I think I saw the most recent anthem PA data on exports were down 3.5%.
In June as an example, so that's kind of how we're thinking about it.
But net net our fiber costs are up year on year, and it's driven primarily by wood.
Offset by secondary fiber to.
A degree and the combination of those things John or in the revised 70 million dollar guidance, some natural benefits from recycled fiber chemicals freight.
Partially offset by a continuation of inflation on wood as Mike mentioned.
Right.
Helpful. Thank you.
You bet.
Your next question comes from Chip Dillon.
Research Your line is open.
Hi, Good morning, Mike Good morning, Steve.
Hi, Joe.
Yes, it will.
Thanks for the details.
First question is just looking at.
Just one last one on sort of pricing.
I know you I believe still have some pricing tied to cost and we've seen not only LCC come down but more recently some of the the good white Pops up see grades come down as well pretty sharply and is that going to create any kind of.
Price give back in some of your contracts or in a material amount that we will see or notice in early 2020 lets say or at any point in the future.
Yes, chip, it's Steve, but those costs would be taken into consideration in our cost models, but those would also be offset by other inflationary dynamics. So if you think about overall, we still experienced inflation net in the business in total and so our cost models, where they apply would still have some modest inflation in them. Yes. If you are just purely on the CRB side as a customer you may get some benefits there will be offset elsewhere or.
Cost models that might apply for example on the on the Virgin side is the UK and Sps overall as we look out into 2020.
We'll talk about it later in the future we have line of sight now into the kind of pricing that we would expect in 2020 that will be something we'll talk about later currently it's a net positive.
But that will be something we'll talk about Q3 Q4.
Okay, and I guess have kind of a follow up would be a broad one.
Looking at the.
The water market what are the can companies. This talk about you know the fact that theres more plastic water bottles single serve then there are all.
There's the use of beverage cans in total for everything else and I do notice.
Not very often on aluminum can with water the stillwater in it but I probably notice as much if not more as sort of an Sps type package with water in it and I didn't know if.
If you think this is something that's more kind of a niche.
Situation or or because the cost differential so great.
You might also want to talk about weather, where an Sps water packets compares to aluminum can versus the the PTC or the plastic.
Yes, I mean, and Sps package is going to be higher substantially higher than than the aluminum cans.
In terms of total cost, we're not seeing a large amount of growth in that particular vertical as it relates to water and Sps. We've read the same types of announcements that are you referring to around water being in aluminum cans and I think thats, probably the more likely area that we we could get some pickup in that because if they ended up putting it in.
A paperboard package as an example.
That would be something that we currently do for those end use customers and probably the more likely area. We are anticipating that kind of a trend.
You mean, the beverage carrier.
Yes to find the individual cancer gotcha, okay. Thank you.
Yeah, you betcha.
Your next question comes from Anthony Pettinari from Citi. Your line is open.
Hi, good morning.
Hi, Anthony.
Just following up on the closing of the lags from eight months to six months is that on all your boxboard grades or just the legacy CRB and UK businesses and then you had a goal to shrink those legs for a number of years now it seems like you made really significant progress. This quarter is there something about the market environment or a large contract renewal or is there any kind of color you can give us on what allowed you to move those lag. So meaningfully this past quarter after years of trying to do it.
So Anthony it's an average of all our paperboard grades and all our all our packaging contracts if you will.
To six months that aggregates out to that movement. It has been a strategic focus for us for the last couple of years and I'll tell you that the inflation that we experienced and in 2017 and 2018 was a big part of that impetus as we went into renewals with customers that we had to shorten those lags and so it was a strategic focus of the those negotiations.
And we ended up where we did when we made progress on it.
Okay. That's helpful. And then on on sustainability are you seeing the pace of sustainability driven substitution into paperboard is that moving faster in Europe and it is in the us or has maybe some of the low hanging fruit maybe around polystyrene already been picked I'm. Just wondering if you could compare the pace of substitution and the market opportunity in sustainability in Europe .
And then if what learnings there are for the U.S. market.
Yes. Thanks for that question, we've got a pretty good size business in Europe as you know in one of the things we really like about operating in Europe is the packaging trends tend to be 12 to 18 months ahead of what we see here in North America, and I would tell you that.
You know they activity there around the elimination of single use plastics is always continues to be very very high.
And so we would see and expect that those trends would continue to.
Translate here and things that we will see in North America that were already seeing and things that we do expect to see with our global customers. Many of them operate in Europe , and so they operate in the us as well and as you've seen Anthony they're putting out targets for sustainability goals that they have enacted.
Into multiyear goals that translate into the reduction usage of certain materials over specific periods of time, so I expect that activity to remain remains quite high.
And Anthony to Mike's point to in Europe .
We're seeing probably a little more assertive shift for secondary packaging like in beverages into paperboard because of a long history of those packages being in other substrates film based substrates, whereas as Mike was also mentioned in the US in North America. There is an awful long runway for conversion of primary packages for comps like we were talking in trays.
That have more proximity to the end the end product those moving are probably commensurate with what we're seeing in Europe .
Okay. That's very helpful I'll turn it over.
Next question.
Comes from.
Gone Shaw.
Panjabi from Baird. Your line is open.
Hi, Good morning, this actually Matt Krieger sitting in for Ghansham.
Good morning, Matt.
Good morning, just wanted to ask so how do you intend to manage the execution risk associated with them more active been average maintenance schedule. During the third quarter of 2019 and are there any unique actions that you're taking from an inventory management or operational perspective that.
That we should know about.
Yes, Thanks, Matt for the question. The answer is we have build inventories on both our sea UK and Sps you can see that on a year over year basis those are up.
5% to 6% in terms of those grades.
So we got the material we need to take care of customers. We plan for these things.
In many many quarters in advance to make sure. We've got the board manufactured and Prepositioned. So that we can service customers in terms of the downtime that we're actually taking this is a what I'll call the usual or the normal annual outage in Macon. So we do this each and every year. This one actually is slightly less complicated because.
We're not installing a curtain coater like we've done in the last couple outages that we've done in Macon.
And then in Texarkana, we're actually doing the lower tube work that we talked about which is in line with what we did with our Augusta outage in Q4 of last year, but significantly less extensive so we've got the same vendor that's doing that work for us that did an excellent job in Q4 of last year.
We expect to be able to manage that outage.
Accordingly so.
We've got the inventory, we know where it is and.
Its position in the right spots.
And we've got good project management skills to take care of both of those outages and I think the other thing I'd add on that since you asked that question is that is why sometimes you see a little bit of dislocation in terms of what we actually produce on an individual month date basis.
Versus how it plays through because we actually happy with to SBS Mills, we have to build that inventory in order to run our business and take care of customers.
That that makes a lot of sense and Thats helpful. Thank you and then as you negotiated contracts to reduce the pricing lags.
During the quarter and prior to that what did you have to give up if anything the customers on the flip side to kind of shrink that that pricing gap, particularly given that your customers generally have kind of a one year pricing model with with their own retail customer base.
Yes, so I am not going to get into the individual pricing components, because there is wide range than variable depending on the actual contract, but I would just say it's part of the normal negotiation, we have with them. They have things that they want we have things that we need.
And that's where we wound up.
Okay, Okay makes sense.
Thats It from me thank you.
Thanks, Matt.
Your next question comes from Brian Maguire from Goldman Sachs. Your line is open.
Hi, Good morning, Mike Stevens, Alex Congrats on the good results here.
Thank you Brian .
Just a question of multipart question on volumes.
Hi, this is probably going to be hard to answer directly but hoping you could give some color on how much of the 100 basis points of organic volume acceleration you're expecting in twoq. How much of that you think is directly tied to the sustainability trend or the shift out of plastics versus just normal end market growth or market share gains and any reasons to think that that ends at the end of this year and doesn't continue into at least the first half of next year here.
Annualize those contracts.
And I guess, what I'm getting at is there any kind of like.
Large.
Infill.
Of of volume upfront on some of those contracts or should we think about it just.
Kind of taking a year to annualize and.
And just last one tied to volume is have you seen any customer destocking or activity along those lines either like late in twoq or so far in Threeq you. Thanks.
Sure.
Let me take a cut at that so in terms of our visibility out.
I don't want to go out further than.
Our year, because it just very difficult for us to have visibility beyond that but in terms of if you think about what we see relative to that 100 basis points of growth I'd say, there's a high correlation to the sustainability aspect to that and and really if you look back Brian over the last few years.
We haven't seen a lot of real organic growth as you know.
And so I believe it's got a high correlation to that and the types of products that we're selling are tend to be the ones that I've talked about the conversions into paper cups that trade the clamshells the.
Beverage packages out of.
Shrink film and icon rings, and that kind of stuff, so highly correlated and in that regard.
And.
Can you repeat the second part of your question. Please.
Yes, I was just asking.
I guess interested in that volume growth in the second half I know and the coffee space, you've got a new customer in particular, just wondering if there is some.
Inventory build happening there are some in fill that would make the 1% less of a more normalized number for that business.
A run rate basis, and then have you seen any destocking separately in late into Q4, so far in Threeq.
I can't speak to any major destocking that we experienced in Q2 or Q3 to this point our volume here as we've entered into Q3 is consistent with what we saw in Q2.
With the acceleration of some of the organic growth that we talked about already so.
I don't see a lot of that Brian Yeah, I think the banks point, we haven't seen Brian a shift in kind of the underlying.
Pull from our customers. If you think about it as core volume, which has kind of been that flat.
Flattish that we've seen for several years offset by our new product development activities to Mike's point. This is mostly driven by actual decisions to convert from other substrates into paperboard based solutions.
Okay got it and just to shift gears to the the artistic garden acquisition.
Any way to give a rough cut at the purchase price for those assets and.
There's obviously some consolidation already in CRB any expected DLJ issues, particularly related to the mill and then just other thoughts within CRB I know there's a.
One of the three other remaining players in that market the kind of exploring some strategic options for their assets and the.
Interest or do you think it would even be possible to get something done along those lines.
Brian just with regards to the valuation we haven't disclosed purchase price, but you can just expect that it fits the categories that we've done before in terms of.
Pre acquisition multiple and post this will be a five six times transaction on a post I think that can give you a sense for.
Where we are transacting relative to the multiple fit very very consistent with where we have acquired businesses in the past.
And then just to build on the second part of your question around some of the assets that may be for sale in the marketplace. I think the way I would answer that is look we routinely look at a wide range of capital allocation decisions investing in our business, making tuck under acquisitions, returning cash to shareholders and we've done all three of those things year to date here in 2019. So we'll continue to look at things that make sense for us and evaluate opportunities what we won't do though is speculate on what we would have when do.
In the marketplace before we get it.
Okay. Appreciate the color. Thanks.
Question comes from Adam Josephson from Keybanc. Your line is open.
Mike Stevens, Alex Good morning, and congrats on a good quarter.
Thank you Adam.
Just a two part one Steve just on your forgive me if I missed this on the commodity cost basket I know you went into the year, saying you thought there'd be about $85 million of inflation. What are your assumptions now along those lines just considering what happened in the first two quarters. So what is the 85 calm down by.
Relative to the 15 million guidance increase.
Yes, it is that Adam when we look at the change the 85 million we've moved to 70.
As we mentioned before at Q1, we had line of sight to about $60 million to $65 million of known inflation. That's still generally the case, we've seen some puts and takes so we've seen a little lower inflation across recycled fiber.
Chemicals as we've mentioned in freight, but it's been more.
More than offset in terms of just stick those cores by the continuation of woods. So think of it. The 15 reduction is primarily the net impact of freight chemicals recycled fiber $85 million go into 70 and that is the in essence, the 15 million dollar increase in our EBITDA guide.
Right got it that makes sense and just on a related matter. So last year, obviously, you and other producers experienced significant cost inflation, which you responded to by raising prices now your costs are for everyone's costs are falling.
Do you have reason to think that prices would follow suit just as they went up after costs rose because obviously, there's a clear relationship over time between prices and costs.
But there is actually a clear relationship around operating rates, Adam if you take a look at that on a historical basis and.
The operating rates as I mentioned on two of the three grades are 95% plus.
Not on the third one.
It's down a little bit, but there is some some changes that are going to happen in terms of.
Mills structure and your both some some capacity is going to go away as some capacity comes in so I think overall, we see a pretty balanced.
Operating environment for the three paperboard grades.
Thanks, Mike just Steve one last one on cash taxes. If you don't mind is your expectation still that.
Come 2021, your cash tax as well.
Approximate are closely approximate your book taxes or could it be longer than that until that happens.
I think it will be it will start to come in under our current structure in 2021. So there will be some modest uptick in 21 and more full in 22, it probably wouldn't mere all the way up to our 25% cash tax rate it probably be a couple of hundred basis points below that if you're doing long range modeling.
Thanks, Dave.
You bet.
Question will comes from Steve.
Sure cover from D.A. Davidson Your line is open.
Thank you and good morning, everyone.
Hi, Steve.
So.
I guess to some how factors into the guidance.
I noticed that.
The the Texarkana I guess is going to take four days longer than you anticipated.
In.
Q1, but your total lost production actually declined by 15 days to 134. So I would have thought that would be more of a benefit to you guys and I'm just wondering how.
There's anything that might be associated with the maintenance has impacted your full year EBITDA guide.
No I wouldn't really say that I think what happens here, Steve as you know as we go into the year with.
Incentive plans that we work as it gets closer to the outage to continue to fine tune of course, we're always trying to find ways to use less downtime to accomplish what we need to in any particular outage and so.
A couple of them were able to do.
Faster and Texarkana were actually got a few days to your point that we've actually added on but net net we are down from where we thought we were going to be in and thats kind of the normal process that we use for planning.
Sure and are there any startup expenses associated with the new product launches.
Should drive your second half volume growth up by 1%.
Yes, nothing that isn't in the guide.
Okay, and last real easy one I suspect, but I mean clearly would.
Despite.
Better weather in the southeast is going to be an ongoing headwind does it make you reconsider your procurement going forward, perhaps carrying higher inventories.
Yes, we've been spending some time talking about that I think there are some strategies there that we'll look to investigate in terms of having a little bit more inventory, particularly as we go into the wetter weather season. The first thing we've got to be able to do is build it back and that's what we're going to do here in Q3.
And Thats why we expect Q3 to be elevated as well.
Because we have to.
From a wider base and.
And in some cases shift further to get into our mills to build those.
Reserves back so that we can operate efficiently and effectively during the wet season.
Great. Thanks for taking my questions.
You bet.
Your next question comes from.
That's why Nathan from RBC capital markets. Your line is open.
Around.
Alright your line sorry about that guys I'm here I'm, sorry about that.
So I just wanted to understand about going back to the the commodity costs and pricing situation.
You did give up a little bit of a price situated in an Sps you were able to offset that with the UK.
The commodity costs are now a little bit lower and the Q2 performance was quite strong. So I guess just to confirm is there an element of conservatism I guess in the commodity cost outlook and if so is that because of the woodside and the recycled paper side or is it the chemicals and energy or anything.
Any detail you can provide on that thanks.
Yes, no rooted Steve overall, we believe that the $70 million guide is the appropriate one we've seen little over 30 million year to date.
And a lot of it is as we've talked quite a bit year around what we just we havent seen would step back yet as Mike said, we have to rebuild inventories that may keep some pressure up much longer than we would have anticipated earlier.
So I would just characterize it as we have a basket of cost as you know a couple of billion dollars worth of bye.
And the net of as we look through all of that.
Is the 70 million woods, playing a real role there.
Okay, and then on the volume side.
You know.
Congratulations on getting the wins I think thats encouraging and.
Just a <unk>.
Just wanted to get your thoughts on just overall end markets. The beverage markets are relatively robust at least on the can side.
You know it looks like there is some growth in foodservice. So just curious to get your thoughts on if at some point. If you start to think that there could be maybe one or two points of structural organic growth that you should see going forward or is this still.
Kind of a flat expectation is the most reasonable base case. Thanks, I think the base case remains we expect flat volumes relative to what we already have where we're going to be able to break out a little bit as you know weve always done around a 100 bips of new product development work and that went in many cases over the last few years to buttress up some secular blue decline in certain categories like carbonated soft drink or cereal. So what we're really saying is we're inflecting a little bit.
Here in being able to.
Bring that new product development back to a 100 bips of.
Organic growth and so thats change.
Thanks.
You bet.
Your next question comes from Mark.
Trough from Seaport Global your line is open.
Thank you good morning on the.
Pricing last congrats getting it down to six from eight months I'm curious is.
As a consequence of those successful negotiations was there any change in.
The makeup of cost push versus.
Ties to pricing indexes.
Not meaningful.
Okay, and so is it fair to say that.
CRB is still more cost push driven and Sps is still primarily price index and I guess see you and the coated beverage board more in the middle.
It'd be a fair statement.
Okay Super and then also I recognize it's just optics, but congrats on getting that dot positive cash from operations first time and lots of course I assume that that's a consequence of.
The way Youve rewritten contracts on on factoring is that correct and is there more change to come in that regard are we now on with that.
Yes, Mark thanks for raising that we appreciate it.
Yes, those were changes and the contractual language associated with our accounts receivable programs.
It we had.
It was down in the investing line and we've been able to address that effectively in Q2.
And so on a go forward basis, you will see that be more representative of the cash flows of the business from an operating perspective for the remainder of this year Q1. We were we had not completed the majority of the work that we have now completed so there will be a little bit of a hangover in Q1.
As you roll into next year it will be.
All in relative to that we continue to provide you with the reconciliation.
As well on where we are in free cash flow, which is $66 million year to date or 33 last year. So we're seeing net on an adjusted basis up 33, but thank you for for that note in terms of how Thats now being accounted for it. It is changed that resulted in the accounting change.
Great. Thank you and one last real quick one I apologize if it's just my not having on earth that properly, but that 6 million or 5.8 million nonrecurring I saw some kind of Vegas language about what it can can you provide a little bit more in the way of specifics or I may have just missed that I apologize.
No. It's just in the normal course of business related.
Activities couple of MSG in a related to a couple of them.
Associated with our recent acquisitions in terms of synergy capture.
End of <unk> and those are the primary there was really nothing unusual in that figure for the quarter.
Okay. Thank you.
Your next question comes from Daniel Rizzo from Jefferies. Your line is open.
Just one quick question you mentioned that one of the reasons for doing the acquisition was because of some interesting industrial end markets. I was wondering exactly what they were which looking at that seems to be good and there's more room for additional.
Acquisitions within that within that market.
Yes, Thanks, Dan I mean, there's some things they are doing relative to filtration, both air and Automative automotive categories that were not in retail to include things like retail boxes that were not largely in right. Now so we find that to be interesting and as I've talked about in the past. We we've got good market shares in some of the traditional folding carton.
Categories, and finding different options for us or different verticals that we can grow into.
It's something that we're pretty excited about and so we're really glad to have this acquisition and existing customer relationships that now we can build upon.
Okay, and then just one other so in the past with with the the price hikes you enacted.
The goal was to recover the higher cost than the current I think between 2015 in 2017 or thereabouts.
With everything that's occurred and with where would is and what other costs of doing with your price mix, you've already announced will you have achieved that goal by the end of this year.
Dan It's Steve no as we've talk to what we're really working to overcome that occurred in 2017 and 18 as about $125 million worth of price cost dislocation, we're making significant progress on that this year.
And as we look out over a two to three year time horizon, we would expect full recovery so our art.
Intent of recovering it holistically remains it will be a two to three year return to provide to cover all hundred $25 million.
And finally that would suggest that the additional pricing might be necessary.
Yes, so we're not going to top talk about forward pricing actions other than to just say that our intent is to continue to recover that inflation.
Okay. Thank you very much.
Thanks, Dan.
Your next question.
Come from ethylene Rodrigues from FBR. Your line is open.
Thank you guys just one quick one on the pricing lag reduction again very positive. If you believe that the blocks broad market is well positioned to higher prices going forward because otherwise you would have to give up some prices. So as of now do we think that the market is tight enough.
To be constituencies on prices.
So just a clarification, if I understand what you're saying around that timing if there was a.
A reduction I guess, it would flow through but I think the more relevant fact in one of the things that we really talk to our.
Investors around is that we want to make sure that we're dealing with inflation in the year that it occurs and now we have on average two openers that allow us to be able to do that as opposed to driving some of that into the next year upward down.
It's a more relevant picture for how the business is performing and it's tighter. So we view that is quite positive in that regard and in regard to the operating rates as I mentioned it will go off the EPA data. We've got a couple of those operating rates that are north of 95% and one that's a little below that.
There was some.
Actions that are going to happen later on this year that in our opinion will drive that one.
Up.
As we head into 2020 and Thats our view.
Okay that makes sense and one quick one on volume can you remind us again, what was the organic volume growth.
This quarter.
Atlanta It was flat organic was flat the modest growth was acquisition based as we expected.
Yes, exactly okay. Thank you guys.
Thank you.
Mark Wilde your line is open.
Yeah, Steve I, just wanted to chase down that organic growth a little bit further so so for the first half how much organic growth did you have.
A first half overall, it's basically flat as well we were down very very slightly in Q1 organically flat here. So it's.
Literally at the zero to minus a half point, if you look kind of look at it organically and that's the pivot that we're expecting mark in the second half towards organic growth of about 100 basis points. So thats kind of first half to second half.
Okay. So just.
You've talked.
I think pretty widely about.
No one Big Cup conversion, that's going I know that sounds to me.
Like Thats, a pretty big chunk of the overall organic growth in the second half would that be fair.
It's certainly a component of it mark.
And as you know there are always things that are up and things that are down but the net net positive of it gives us a lot of confidence to be able to make.
Make the guide be 100 Bips of.
Growth.
On our ore tonne of organic growth.
Okay, if I could Mike I think most of where you're picking up like foodservice at least in comps is in hot cups copy comps.
Is there any you know.
Thing to suggest that maybe you know you can do the same thing in coal comps or another niches.
We're certainly working on that you are correct. The majority of our gains to this point have been on the the Hot Cup side of the business, but Cold Cup is still.
Prevalent to polystyrene as a big option and these tend to be larger cups, as well and so we're working with several of our customers on options that would provide them innovative solutions to be able to use paper in paperboard as an option to polystyrene foam.
Okay, All right and then just finally on I know we want to be.
Careful about this on a on a public conference call, but the the trade paper over the last several weeks has been.
Pointing to a little bit of pricing weakness, both in SBS and in.
CRB I wonder if we could just get your perspective on that.
You know I can only work off the numbers and what we are seeing mark the numbers as you see our.
Very solid on a couple of the grades and then a little lower than that on Sps.
And again I can't really comment on what the trade at particular trade paper does in terms of their their process and who they talk to.
But if you look at some of the things that they reported on I mean, we were down they said 30 days in Kalamazoo.
And that just wasn't the case as an example, and so.
When you kind of look at.
What they say and how it kind of comes through they talk to certain people and that's what gets reported but when we look through and really look at the actual results.
The numbers that come out to the FDA and others.
Yes, I think it tells a pretty balanced and.
Story, yes, mark to that point and Thats one of the things we conveyed to you here today was that was RC UK operating rate, which was 95% plus so reiterating that because theres comingled information in there what we provided to you in terms of our operating rates will see UK, 95% plus CRB.
97% and obviously, we're working through as Mike said, a couple of times.
This little bit of.
Volume in volume out of that is taking place on Sps, which will play itself out here in this Q3 Q4.
Okay, all right sounds good good luck in the second half the year guys.
Yes, Thanks Lamar.
We have now reached the end of our twenties session I will turn the call back over to Mike.
Thank you for joining us on our second quarter call. We look forward to talking to you again in October .
I have a great day.
This concludes today's conference call you may now disconnect.