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Edited Transcript of GPK earnings conference call or presentation 25-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Graphic Packaging Holding Co Earnings Call

Marietta May 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Graphic Packaging Holding Co earnings conference call or presentation Tuesday, April 25, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alex Ovshey

* Michael P. Doss

Graphic Packaging Holding Company - CEO, President and Director

* Stephen R. Scherger

Graphic Packaging Holding Company - CFO and SVP

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Anthony James Pettinari

Citigroup Inc, Research Division - VP and Paper, Packaging and Forest Products Analyst

* Arun S. Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* Deborah A.. Jones

Deutsche Bank AG, Research Division - Director

* Gail S. Susan Glazerman

Roe Equity Research, LLC - Senior Analyst – Paper, Packaging and Forest Products

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Matthew T. Krueger

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Philip H. Ng

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, my name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Graphic Packaging First Quarter 2017 Earnings Call. (Operator Instructions) I would now like to turn the call over to Mr. Alex Ovshey, Vice President, Investor Relations. Please go ahead.

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Alex Ovshey, [2]

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Thanks, Michelle. Good morning, and welcome to Graphic Packaging Holding Company's First Quarter

(technical difficulty)

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [3]

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Thank you, Alex. Good morning, and thank you for joining us to discuss our first quarter 2017 results.

Our first quarter adjusted EBITDA was lower as expected at $161 million compared to $193 million in the prior year period. Net sales were up 2.7%, reflecting acquisitions and stable core volumes consistent with the trends we experienced in 2016. The quarter was negatively impacted by accelerated -- accelerating commodity input costs, primarily recycled fiber; and the planned downtime costs associated with the successful upgrade of 2 headboxes on our #6 paper machine at the West Monroe, Louisiana mill.

Our pricing continues to be negatively impacted by the flow-through of the 2016 reductions in the RISI CRB price index. Adjusted earnings per share decreased to $0.14 compared to $0.20 in last year's first quarter. We are executing on announced pricing increases to offset the sharp recycled fiber input cost inflation that we are experiencing and expect the margins to improve from our pricing actions by the second half of 2017 and in 2018. We expect our pricing to commodity input cost relationship to be at least $40 million positive in 2018.

Our focus on meeting our cash flow commitments, growing cash flow and returning more of it to shareholders over time has not changed. We also continue to make progress on our key strategic capital allocation priorities. Before I discuss the progress we are making across our key strategic priorities and the details of the quarter, I would like to provide a high-level update to our 2017 financial guidance.

We expect our 2017 adjusted EBITDA will be in the $725 million to $745 million range. This compares to our previous guidance of EBITDA up modestly in 2017 relative to our adjusted EBITDA of $764 million in 2016. Steve will discuss in more details in his remarks that our updated 2017 guidance reflects the sharp increase in recycled fiber costs in February and March of this year, which was not factored into the guidance we provided on the fourth quarter earnings call. While recycled fiber costs have declined slightly in April, the published U.S. National OCC average is up 88% year-over-year in April.

We successfully implemented the first announced $50 per ton open market CRB price increase during the first quarter. The increase will be a slight offset to the negative impact from higher recycled fiber costs in 2017. However, given the lag between changes in open market paperboard prices and our folding carton prices, we expect to see the majority of the benefit from the first open market CRB price increase in the first quarter of 2018. We are currently implementing a $50 per ton open market CUK price increase and a second $50 per ton open market CRB pricing increase. We expect to see a significant positive benefit from these pricing initiatives in 2018. We also expect that our cost models to benefit our folding carton pricing in the second half of 2017 and in 2018. As we have stated in the past, we remain confident that our pricing initiatives will offset commodity inflation over time.

Importantly, we see a path to achieving our previously-provided 2017 cash flow guidance range of $380 million to $400 million despite the reduced EBITDA guidance, driven by more favorable working capital.

Let me now provide more detail on the key operational trends we experienced during the first quarter before discussing our 3 strategic capital allocation priorities and how we are executing against them in 2017. Core organic volume in our global paperboard packaging business was flat in first quarter, consistent with the volume trends we experienced in 2016. We continue to outperform the end market trends reported by A.C. Nielsen, driven by the ongoing success of our new product development pipeline. The global beverage market remained relatively healthy in the first quarter. The U.S. beverage market continued to be led by growth in specialty drinks, bottled water and craft beer. Our global beverage volume was up low single digits in the quarter.

New product development remains an essential component of our organic growth strategy. Let me highlight one important new commercialization in the quarter. In the pet care market, we grew our position with a significant win that leverages our brand enhancement and strength platforms. We redesigned the folding carton for a leading pet care supplier to incorporate better graphics and improved strength. We expect these improvements will differentiate the product on the shelf and increase the durability of the product through the supply chain and at home. We began production in January and expect to utilize 8,000 tons of paperboard on an annualized basis to produce these cartons.

Shifting to performance. Our backlogs remain stable at 5 weeks for CUK and 4-plus weeks for CRB. As a reminder, our mill operations are highly integrated with our converting platform as we consume 85% of the paperboard we produce.

Continued emphasis on improvement initiatives, variable cost and operating efficiencies contributed to the majority of the cost savings in the quarter. We generated $7 million of net performance during the first quarter. The $7 million includes an $18 million headwind related to the planned downtime cost at West Monroe.

Moving to cost. Commodity input cost inflation continued to accelerate in the first quarter as we experienced higher secondary fiber, energy-related and chemical costs. We incurred $19 million of commodity input cost inflation in Q1. Published recycled prices were up sharply in the quarter. Notably, OCC prices were up $94 per ton year-over-year in March of 2017.

I will now move to our 3 strategic capital allocation priorities and how we are executing against them. Our first strategic priority is to reinvest in our business where we can generate compelling rates of return on capital projects across our mill and converting systems. We will invest approximately $250 million of capital back into our business in 2017. In the first quarter of 2017, we invested $35 million to upgrade 2 headboxes on our #6 paper machine at the West Monroe, Louisiana mill. The project will result in a higher quality paperboard sheet produced, which will drive significant cost savings at our downstream converting facilities. The project was well executed, and we are very encouraged by the results we have seen since startup. We expect our overall capital investments will help us to continue delivering productivity benefits at the mid to high end of our targeted $60 million to $80 million productivity range annually.

Our second strategic priority is to execute on acquisitions at post-synergy multiples that are well below our trading multiple. While we did not complete any acquisitions in the first quarter of 2017, the M&A pipeline is solid, and we remain focused on continuing to find and execute acquisitions at compelling post-synergy multiples to enhance our geographic, customer and product profiles.

Finally, our third strategic priority is to return excess capital to shareholders to drive long-term shareholder value. We returned $64 million to shareholders in the first quarter of 2017 through $24 million in dividends and $40 million in share repurchases. We completed the $250 million share repurchase plan authorized in early 2015 during the quarter and are currently working through a second $250 million share repurchase plan which was authorized by the board in January. We are confident in our cash flow and remain focused on returning cash to shareholders through dividends and share repurchases. And with that, I'll turn the call over to Steve Scherger, our Chief Financial Officer. Steve?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [4]

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Thanks, Mike, and good morning. We reported first quarter earnings per share of $0.12 per diluted share, down compared to $0.18 in the first quarter of 2016. First quarter results were impacted by an $8.6 million pretax or $5.7 million after-tax charge related to business combinations and other special charges. For the remainder of my comments this morning, references to EBITDA and earnings per share will be to adjusted numbers.

Focusing on first quarter net sales, revenue increased 2.7%, driven by volume from our acquired businesses. Prices lower by $14 million, and the strong U.S. dollar negatively impacted sales by $15 million.

Turning to first quarter EBITDA. $32 million decrease to $161 million was driven by $19 million of input cost inflation and $14 million of lower pricing. We ended the first quarter of 2017 with over $1.1 billion of global liquidity and $2.2 billion of net debt. Total net debt increased $122 million during the quarter. Capital spending in the quarter was $76 million, and we returned $64 million to shareholders via share repurchases and dividends. At the end of the first quarter, our net leverage ratio was 3.1x adjusted EBITDA compared to 2.8x at the end of 2016. We remain committed to our long-term net leverage target of 2.5x to 3x. As Mike mentioned, we are executing a balanced approach to capital allocation, which includes returning excess capital to shareholders. Since initiating the share repurchase program in the first quarter of 2015, we've allocated $268 million to acquire 21 million shares or approximately 6% of the fully diluted shares at inception.

Turning to full year 2017 guidance. As Mike referenced, we've updated our adjusted EBITDA guidance to a range of $725 million to $745 million. This reflects the net impact of sharply higher recycled fiber input cost inflation. We have successfully implemented the first open market CRB price increase. We are now executing a $50 per ton open market CUK price increase and a second $50 per ton open market CRB price increase, which we expect will have a meaningful positive impact on our results in 2018. Importantly, we continue to see a path for our 2017 cash flow to be in the $380 million to $400 million range as we expect our reduced EBITDA guidance will be offset by improved working capital performance.

Key drivers of our EBITDA and cash flow include the following: We expect the 2017 pricing to commodity cost inflation relationship to be negative $60 million to $90 million. This compares to the previous negative $30 million to $60 million. The updated range reflects the first quarter increase in recycled fiber prices, slightly offset by the benefits of pricing. We continue to expect our labor and benefits inflation to be $20 million to $25 million. On performance, we are well positioned to achieve at least the midpoint of our targeted $60 million to $80 million range.

Shifting to volume. We expect core volume to be relatively flat, consistent with the first quarter of 2017 and full year 2016. We remain focused on outperforming the market through new product development, customer and geographic expansion and substrate substitution, all consistent with prior years. Lastly, we continue to expect foreign exchange will be a negative $5 million to $10 million due to the strength of the U.S. dollar.

We expect second quarter 2017 EBITDA will be in the $165 million to $175 million range. The impact of the recycled fiber cost increases will be most pronounced in the second quarter. We will also have our biannual maintenance cold outage at the West Monroe mill in June. And we have scheduled most of the annual maintenance at our CRB mills in the second quarter. We expect EBITDA will improve significantly in the second half of 2017 as commodity input cost inflation comparisons ease on a year-over-year basis, our pricing improves and productivity is strong due to the limited downtime in the second half.

As we have previously noted, the paper machine upgrade at West Monroe in the first quarter of 2017 marks the end of planned capital investments at our CUK mills that require meaningful production downtime to complete. Hence, in 2018 and '19, we do not expect to incur meaningful production downtime at our CUK mills related to capital investment.

Finally, returning to cash flow. We see a path for free cash flow to be in the $380 million to $400 million range compared to the $358 million we generated in 2016. Despite the reduction to our EBITDA outlook, we expect to be within our initial cash flow guidance range due to improved working capital performance. The remainder of our guidance is contained on the last page of the presentation on our website. Thank you for your time this morning. I will now turn the call back to Mike.

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [5]

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Thanks, Steve. We remain confident in our business model and our ability to execute with excellence in a complex operating environment. We are keenly focused on recovering commodity input cost inflation through pricing and expect to make significant progress on this initiative in the second half 2017 and in 2018. We will plan for flat volume and have targeted initiatives in place to outperform the market through new product development and substitution -- substrate substitution, consistent with prior years. And we will continue to be well positioned to generate productivity that is well in excess of our labor and fixed cost inflation.

Lastly and importantly, we continue to execute on our key strategic capital allocation priorities, specifically reinvesting in our business to drive strong cash returns on cash invested, executing and integrating strategic acquisitions at compelling post-synergy multiples and returning cash to shareholders through dividends and share repurchases, all of which drive long-term shareholder value.

I will now turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from George Staphos from Bank of America Merrill Lynch.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [2]

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I'll ask a few questions and turn it over. I guess, the first question I had, interesting comment that you made about the price cost benefit you expect in '18. I think you said $40 million or better in '18. Can you give us some additional parameters in terms of why you're comfortable with that figure? How much of the pricing increases that have been announced this year are embedded in that? My other 2 questions. With working capital improving to offset the EBITDA reduction seems interesting in that obviously costs are up, your prices are up, normally that would argue for working capital being a negative, not a positive. And then lastly, can you give us a little bit of the cadence on your performance improvement and why you're still comfortable being able to get to the 70 to 80 over the rest of the year?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [3]

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Sure, George, this is Steve, and thanks for the questions. With regards to the $40 million of positive price cost for next year. And one, we're just trying to provide some context for you as you look out into 2018. But the assumption there is that we are executing on the price increases that we've announced. So the initial $50, the second $50 for CRB and the $50 for CUK. So we're executing on those, and we're assuming those -- that we will execute on those price increases. We have, however -- for 2018, we tempered that back with an appropriate assumption around some modest ongoing inflation. So it's really a combination of the price increases that we've announced, that we're executing on, tempered back, of course, by just an assumption around some ongoing inflation. So that's on the $40 million. Just touching on your other questions, for working capital, for us we've had -- as we've mentioned, we've got a significant amount of energy and emphasis on working capital this year. It's a high priority for us, and it's really focused on accounts payable and inventory. And with the results that we're seeing, we see some very good positive cash flow generation this year on the working capital front, working with our suppliers primarily on terms. And secondarily, we continue to have confidence that we can actually operate the business with less inventory than we have in the past. And we have very specific initiatives in place to drive out both raw material inventory but also finished goods inventory through our integrated model. And finally, on performance, our confidence in our range remains high. As you note, in the first quarter, we netted out $7 million of productivity, but we had $18 million of downtime. So we've performed in the 20s. And as I mentioned, with the very limited amount of downtime we'll have in the second half of this year, having completed the investments in the first half including the cold outage, most of the CRB downtime, our productivity in the second half of the year will be quite positive on a year-over-year basis, giving us confidence in the full year numbers.

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Operator [4]

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The next question comes from Chip Dillon of Vertical.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [5]

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First question is just a clarification on the -- you mentioned your cost headwinds from $30 million to $60 million, to $60 million to $90 million. Was that just the cost headwind on raws, or does that include any offset for pricing?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [6]

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It includes the modest offsets on pricing, as Mike mentioned in his comments. The vast majority, as you know, of our pricing will be a 2018 impact as we execute on the increases that we have in the market. That increase was heavily driven by the movement in recycled fiber costs that occurred from our original guidance to you based on January to where OCC and overall recycled fiber costs are in April. And our assumption going forward for guidance purposes is that the April recycled fiber prices remain.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [7]

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Got you. And so when we're looking at that, just to make sure I hear this right, is if I take that midpoint of $75 million and I look at your comment that you expect at least $40 million of price cost tailwind next year, that $40 million, if that's all you got, would basically mean that your customers are asking you to eat a lot of this cost inflation if it's held just to $40 million? And -- is that a right way of looking at it?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [8]

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No, Chip, I don't think so. I mean, as we've talked in the past and as Mike mentioned in his comments, over time, we expect that our pricing will in fact offset commodity input cost inflation, and we're in that inflection point this year with, as you rightly stated, about a $75 million negative that actually puts us over the last 5 years modestly negative as well, slightly less than the $75 million. What we're conveying is some line-of-sight to the initial $40 million of clawback with some inflation assumed in that. But over time, we would expect to recover that. And these things take, as you know, a couple of years sometimes for the inflections to play themselves out. But it's not a statement with regards to our belief system around price offsetting commodity input inflation. That model still holds and is the model we're executing on.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [9]

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Okay, that's helpful. And you've told us the maintenance and you told us earlier for the West Monroe project was $18 million of sort of a maintenance cost impact in the first quarter. And you mentioned you're going to have a cold shut -- more maintenance, I guess, in the CRB mills and the cold shut in the second quarter. Does that mean that sequentially we should see that maintenance stay flat, should it go up? And then I assume it goes close to well down into single digits or close to 0 in the second half. Is that fair?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [10]

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Yes, I think the way to think about that -- I mean just -- and Chip, it's Mike. The outage we had here in February and into early March in West Monroe is really a strategic capital upgrade of 2 headboxes. And so what we're going to do now is the cold shut in West Monroe, which we have to do biannually. That will occur in the month of June. And as Steve mentioned, we pulled in a number of our CRB outs here in second quarter, too. So really, the second half of this year, we're going to be running fairly wide open.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [11]

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But again, the second quarter should be similar, like is $18 million a good guesstimate for the impact of all the maintenance?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [12]

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It's in the ballpark. It might be slightly less than that.

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Operator [13]

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The next question comes from Adam Josephson from KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [14]

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Just a couple of clarifications, Steve. On recycled fiber, it sounds like you're not assuming any decline in prices in May, even though one of your paperboard peers said last week they think OCC is going to be down $15 or so. Is that right that you're not expecting any decline?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [15]

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Yes, Adam, it's Mike. I mean, from our standpoint, we're just not in the business of trying to predict what happens with OCC. So what we've done is basically just assume what we're at in April and kind of use that for the rest of the year, which is -- the national average, I think, is $152 a ton if you use RISI's index.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [16]

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Sure. Just a further clarification on the price cost of plus -- at least plus 40 next year. Can you walk us through how much of that is the pass-through piece of your business versus the piece that's tied to RISI?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [17]

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Yes, Adam, it's Steve. We won't -- we don't want to try to nail it to that level of specificity other than to say that we're assuming that the open market price increases that we've announced, the 2 CRB and the CUK, that we would execute on those and that our cost models as we round the corner into 2018 would be doing an effective job of offsetting the increases that we've seen in overall commodity cost heavily influenced by the recycled fiber cost. And so I don't want to break it into the fineness of those 2 because we're a year out -- we're looking out into 2018 at this point. But our cost models are working effectively at offsetting this significant increase that we've seen in recycled fiber costs.

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [18]

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And just to build on Steve's comment, Adam, you recall that about 50% of our contracts on internal paperboard are tied to RISI and 50% are tied to the cost model as we sit here today. So you can kind of model how that flows through that way as well.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [19]

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Sure. And just 2 others. Steve, can you just help us with your sense -- you buy 1 million tons a year of recycled fiber and roughly half is OCC, half is mixed paper. And can you just help us with how much less inflation you're seeing on the mixed paper side than on the OCC side?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [20]

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And I'll handle it Adam. I think if you look at -- I mean, OCC is the one that's really escalated this here along with double lined kraft. I mean, box cuttings and some of the mixed paper at least to date has been more modest in terms of the increases that we've seen. We actually buy a little more than the 1 million tons. It's actually close to 1.2 million tons, of which half of it's OCC.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [21]

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Okay. Got it, Mike. -- on the CUK, so it sounds like you're assuming that the 50 goes in on CUK as well as on the second CRB in terms of the '18 guidance. Just on the CUK specifically, considering that's a craft business, not a recycled business, prices there have been flat for a while. Your backlogs are unchanged from where they were 3 months ago. So why the price increase exactly? I get why you're raising CRB prices. I don't quite answer understand the timing of the CUK increase. So if you could help me with that, that would be great.

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [22]

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Sure. Happy to do it. I think if you really look at global beer demand, it continues to grow year-on-year. Operating rates are actually very solid. They're a little distorted in the AF&PA data. I saw someone wrote on that. And it's really all a function of the fact that we took 25,000 tons of downtime in February and into March. So if you add that 25,000 tons of downtime back into those numbers, actually production is up year-on-year. And we haven't had an increase on that grade since -- in the fall of 2013, and we've experienced inflation. So you put all those things together, that's why we're pushing $50 a ton increase on our CUK.

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Operator [23]

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The next question comes from Ghansham Panjabi from Robert W. Baird.

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Matthew T. Krueger, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [24]

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This is actually Matt Krueger sitting in for Ghansham. Understanding that you don't want to get too specific on the dynamics of the price cost for 2018, could you just give us a broad assumption on what you're expecting from price and then what you're expecting from the underlying cost to kind of net out to that $40 million positive for 2018?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [25]

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Yes, Matt, it's Steve. I think if you run the math on an assumption around the price increases as announced, you'd be up in that $70 million range. And then if you put a $20 million or $30 million inflation assumption there, you are in the $40 million range. And I think that's really the way to think about it. Obviously, the cost models would be more of a direct offset. But I think if you look at the mix of it, it's plus $70 million and then the $20 million or $30 million -- $30 million on the inflation, just again an appropriate assumption at this point in time given how we're in April, is how we were thinking about it in terms of the mix of those 2 items.

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Matthew T. Krueger, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [26]

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Okay, that's helpful. And then your ability to offset kind of the shortfall in EBITDA relative to the initial guidance with working capital is pretty impressive. How does that compare to your initial 2017 assumption for working capital, and can you give us any early look on 2018?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [27]

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It's actually pretty like-for-like relative to the EBITDA movement. So it's $20 million, $30 million of improvement versus our original thinking on working capital. And I don't really have a sense of how to provide that to you on '18. We feel very good about the progress we're making. You have to get working capital improvements and then you've got to sustain them, you've got to hold them. And at this point, I think we'll just stay focused in on the capture that we're going to find in '17.

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Matthew T. Krueger, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [28]

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Okay, great. And then finally, can you give us any update on the status of the NOLs? When do you guys expect to start paying U.S. cash taxes according to your current projections?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [29]

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Yes -- no, no real change there, Matt. We're still out into 2019 before we expect to be a material U.S. cash taxpayer and our strategies around pension derisking and the like have continued on. And so really those strategies around the NOLs and other tools that we're using to make sure that we continue to improve our cash flows, no change to those philosophically.

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Operator [30]

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The next question comes from Anthony Pettinari from Citi.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging and Forest Products Analyst [31]

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Following up on Adam's question on the CUK price increase, there's also an SBS price increase out there. And I was wondering if it was possible to say whether your guidance assumes you're going to be paying a little but more for SBS. And then just moving back to CRB, understanding it's very early, I was wondering if it was possible to kind of compare the implementation or the sort of environment in implementing the second CRB hike versus the first one?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [32]

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Okay, Anthony. So on the SBS side, I would -- how I would characterize that is, as you know, our contracts are structured that we're basically a quarter in arrears on movement. So if price goes up, within 1 quarter, we recapture that movement. So that's how that plays out from an EBITDA standpoint for us. Little bit of a timing issue, but not really material. On the CRB increase, what I would tell you is this, on the second one I'm assuming you're asking, operating rates again will continue to improve in the mid-90s, backlogs continue to improve. Inventories are down. Costs are up. So I can't speak to what others are doing. But what Graphic is doing is we're pushing that increase.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging and Forest Products Analyst [33]

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Okay, that's very helpful. And then you've got pretty clear view on U.S. demand and how you're performing against the market. Europe is about 15% of your sales. I was wondering if you could just say a few words about how European demand is trending, if you think you're similarly outperforming there and then just any kind of update on the amount of CUK you might be able to ship to Europe in 2017?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [34]

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Sure. Europe has held up pretty darn well. We have been pleased with our demand in Q1. It would replicate really what we've seen here in North America, and it's been evenly balanced between what I'll call the U.K. and Mainland Europe. And as you know, we're primarily in the Western European countries there. So our backlogs are good. Our plants are running well. There is some inflation there, too, on what they call GD board, which is the equivalent of CRB board. So we've got some pricing actions that we are out recovering those pricing increases that we have to go get. So very similar in terms of the dynamics in both those markets.

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Operator [35]

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Your next question comes from Mark Wilde from BMO.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [36]

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Is it possible, Mike, to get some sense of where you think kind of underlying volume is for the overall U.S. folding carton market as we move through '17?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [37]

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We see the RISI data like you do, Mark. And what I can tell you is that it at least feels to us like some of the extremes on both sides tend to be a little bit, for whatever reason, the way it plays to our business, bigger in magnitude than what we actually experienced. For example, the highs don't necessarily equate to those kind of numbers and the lows aren't unnecessary quite as pronounced as what we actually experience in our business. So we would say that the overall market was down probably on the consumer side, 1%, 1.5%. And as you know and has been our model for a number of years now, we spend a lot of time and effort on our new product development initiatives and we've been able to make up that shortfall, if you will, on what I'll call just core organic growth with our new product development initiatives. And that scenario, we continue to spend money on, resources and we plan to continue to do it in the future, because our pipeline and the visibility on the pipeline we have is very good and growing.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [38]

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Okay. Just related to that, Mike, you guys have been kind of quietly growing a foodservice dimension to your business. And I'm wondering if you could give us some thoughts on that as a target area for kind of M&A going forward or how much runway you might think you might have in foodservice?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [39]

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That's a great observation you got there. I mean, that is a core part of our business. When you look at actually what's been growing, foodservice is one aspect of it, and the other is kind of around the perimeter of the store. Both those areas we've been investing resources and new product development time. And the reason for it and why we're actually more interested in it now than even maybe 5 years ago, is we are able to use more of our SUS in those applications. You've heard us say in the past, brown is the new green. We continue to see customers who want to talk to us around opportunities to substitute our SUS paperboard into those kind of applications, and that's why we've been pursuing it.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [40]

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Okay. And then last question I had, Mike. Just we had news a few months ago that 2 of your bigger competitors are combining here. Any thoughts on the impact of that on Graphic?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [41]

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Look, I mean, those were 2 competitors. We competed with one of them on the beverage side. We competed on the other one primarily on the consumer side. Now they're together, we compete against them in both those markets. But structurally, it's been a mature market for a long time. It's been characterized as being very competitive, and I expect that'll continue to be the case here as we go forward.

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [42]

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And Mark, were you referring to more recent MPS or you were referring to prior?

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [43]

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I was referring -- no, no, no -- to Westrock and MPS.

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [44]

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Okay, thank you, thank you.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [45]

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And I guess, Mike, kind of along those lines, though, MPS was in much sort of higher value-added kind of in a lot of cases shorter-run consumer business. Do you have much of a presence there now, or is that something you'd like to grow?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [46]

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From our standpoint we find that, that sale is a little different than our typical consumer or beverage sale. We do, do a little bit around the edges, but it's not a core part of our enterprise as we sit here today. Would it be something we would look at in the future? I guess we look at any of those opportunities, Mark, but we have to make sure it's a business we can run and operate and provide some value to customers with our ability to look at a business like that. So that's how we would look at that.

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Operator [47]

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Your next question comes from Philip Ng from Jefferies.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [48]

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Are you seeing any deceleration of end markets from a demand perspective, just because, for you, it's been pretty stable. It sounds like innovation's part of that. But the Nielsen data did see a step-down in core, just wasn't sure if that was noise around Easter?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [49]

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I would say, Phil, all I can really speak to is what we're seeing month to date here in April, and I would characterize it as being right on top of what we saw in Q1.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [50]

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Okay. No real big shifts. Okay, that's helpful. And then on foodservice, I think piggybacking on Mark's question, you've obviously expressed some interest there. That's a nice growth market. And in the past, you've talked about potentially looking at [bleached foil], which is a market you're not in. Had some hesitation just due to some of the capacity that's coming abroad. What's your assessment of the market now, because obviously there's a price hike out there? Just feels optically a little more firmer.

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [51]

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I don't think it's materially changed from what we've talked about in the past. The thing I would comment on, on SBS, and you've seen the data the same as we have, is their export markets are actually up a little bit year-on-year. I mean, there are some imports that are coming in here on FBB that have been fairly well chronicled, but they appear to be doing reasonably well and backlogs, particularly on foodservice and liquid packaging, for them seem to be pretty good.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [52]

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Okay. And just one last one from me. I don't think this impact you guys materially, but there's some big lumber tariffs on Canada. Does that impact your fiber basket costs on the virgin side at all?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [53]

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No. No Phil, it does not, because really if you think about making in West Monroe, our fiber basket is within about 100-mile radius of those mills.

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Operator [54]

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Your next question comes from Brian Maguire, Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [55]

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A lot has changed since the last earnings call, a lot of movement in raw materials obviously and prices. And just piggybacking on some of the earlier questions, wondering if you could just step back -- and we don't usually talk about 2018 this early in 2017. But just as you sit back and think about how all of this will net out and the impact to 2018, is it -- it sounds like it's largely a push to me. You've got $30 million coming out this year, but $40 million next year that presumably you probably wouldn't have had before all these moves. Is that the right way to think about it, or is that a little too naive?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [56]

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No, Brian, I think as we mentioned earlier, our fundamental belief system that over time that pricing should offset commodity cost is a fundamental for us. And yes, we're dealing with a bit of an unprecedented run in recycled fiber cost, which has -- that will stress test the philosophy, if you will, because of the size of the movement. And that's why moving on a couple of price increases has been required. But the over time, if we look back over the last 5 years, what you just described is how we've executed on the business, price offsetting commodity input cost over time. We're in a dislocation in 2017 to the negative that we've talked about, and we would expect to return that into 2018 and beyond time horizon. So no, it's not a naive question. It's actually one around that is a validation of how we think about price cost over time. And the size of this variation is larger than we would have experienced in quite some time, given the unprecedented nature of the recycled fiber cost. But the philosophy hasn't moved relative to how we think about price cost.

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [57]

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I think the only thing I'd add, Brian, to that is 2 factors were going on here. You have $70 a ton going down on pricing then you had $50-plus a ton going up on input cost almost at the same time in Q4 and into Q1. That's really unprecedented. So that's why we're spending time really going through these price cost spreads to make sure they can get modeled properly. We've pressure tested them back in our model as we modeled them out. And we look at the pricing, as Steve has mentioned here in some detail. Our model works, but there is a lag there. And that's really what we wanted to spend some time making sure that people could understand, because to your point, there's been a lot of movement and it's difficult to model.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [58]

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I appreciate the context there. Just wanted to ask about the -- in the CRB markets, you had a big competitor announce they're going to shut one of their mills down. Just wondering how you're hearing the timing of that play out and any impact on volume. As we look towards the second half of '17, any opportunity to pick up some of the tons that, that mill was servicing and do you think there could be any upside to your flat core volume assumptions?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [59]

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Well, I think the way I think about this is -- this way, is RISI reported last year that mill closed permanently. And what usually happens when a mill shuts down is they've run a fair amount of inventory to customers who have bought it. So it takes a quarter, maybe even 2 quarters to burn through that inventory as customers build a little bit in advance to make sure that they don't caught without what they need to run their business. We saw that when the Fusion mill shut down in 2014 as well. So I expect that, that would be similar in that regard this time, too. I think the thing you've got to remember for Graphic and how we're a little different maybe than others is we are 85% integrated with our own paperboard. So it's not like we're actively out there trying to chase open market tons. And we talked about that last year when the tail got a little bit soft. Could there be some opportunities to service customers that we could pick up that makes sense for us strategically as a result of that closure? Certainly, we'll look at that. But it's not a core focus for Graphic.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [60]

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Okay, one last one if I could just on the M&A pipeline. You said it still seems like it's pretty robust, but it has been a while since we've kind of executed a deal here. Just wondering, your sense, is the market becoming a little bit closer on bid-ask spreads there. And maybe with some of the geopolitical uncertainty settling in a bit, any sense that we're getting a little bit closer to having a few deals announced?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [61]

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Yes, thanks, Brian. I'm going to go back and add one more comment to your question on CRB. I do think what will be the end result of all that activity, though, is that operating rates and backlogs will continue to grow. So that's one aspect of it that will impact us positively even if we don't pick up any of the actual tons. So just to complete my answer there. The other thing I'll mention on M&A is, you're right, we didn't do anything in the quarter, but that doesn't mean we're not active looking at a number of different things. I mean, as we talked about geography, product niches, things that help us build out our manufacturing system in a unique and different fashion, we're always looking at stuff, primarily in North America and Europe, as we talked about. It's not to say we won't look at something in New Mexico if it came available. But we're principally focused right now in North America and in Europe. There really isn't a month that doesn't go by where Steve and I aren't looking at something. But again, what we're trying to do consistent with what we've done in the past is make sure valuations are right, synergies are real and that when we transact, we're able to generate post-synergy numbers that are below our trading multiple. So that's really how we think about it, and we're continuing to do that as we move into the balance of 2017.

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Operator [62]

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Your next question comes from Debbie Jones from Deutsche Bank.

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Deborah A.. Jones, Deutsche Bank AG, Research Division - Director [63]

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I wanted to ask another question about M&A if we could just focus on Europe for a minute. You've talked in the past about wanting to get about $1 billion in converting sales before potentially backward integrating. Do you need to stick to that plan? I mean, is there a reason to think that you might look at mill systems prior to getting the converting assets? How should I think about that? Just trying to think about kind of how this has taken a bit longer than maybe we would have anticipated, if not you? And how your strategy might change or stay the same?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [64]

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No, I think it's really unchanged, Debbie. We believe that we need to have $1 billion business here before we would contemplate backward integrating. And again, as we've outlined on previous calls, it's not a strategic imperative that we have to backward integrate. It would be -- we'd have enough critical mass at that point in time to be able to cover the tons and drive our integration levels up, similarly to what we do in the U.S., for it to make strategic sense. So that's how I would have you think about that.

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Deborah A.. Jones, Deutsche Bank AG, Research Division - Director [65]

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Okay. And then you talked about pretty much being done with CapEx investment at the CUK mills. Can you give us a sense of what really needs to be done at your CRB mills or in your converting assets that you would be expecting to drive those performance benefits?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [66]

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Well, I think the thing that Steve was trying to communicate there is, if you think about last year where we had a major capital investment into our paper machine #7 in West Monroe and it was about a 25-day down, in this year, we had another one on West Monroe #6 where we replaced 2 of the headboxes. Those are very big capital upgrades that help keep those paper mills in world-class shape. I mean, we're competing on the CUK side on a global basis and we need to make sure that our quality and our productivity is commensurate with all the mills around the globe. And that's really why we've made those decisions over the last couple of years to make those kind of expenditures. We continue to have capital opportunities at our mills to take cost out, and we'll do that into the future. It's just not going to require significant downtime in 2018 and 2019, because it's expensive. As we talked about here, it was $18 million in this quarter. It was almost the same last year -- in April of last year. So would have been in our second quarter. So that will be something that we don't have to experience in 2018 and 2019. That's what we're trying to articulate.

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [67]

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Yes, Debbie, just emphasizing that point that Mike's making. It wasn't a statement that we don't need to make ongoing and capital investments. It really was more of a conversation around investments that require the depth of downtime that we've had to incur here in the last couple of years, because our investments that give good return profiles, you should expect us to continue to invest prudently in all of our mill infrastructure. It was really a statement of the kind of the cost that we incur when we do in fact have to take downtime in order to make those investments. It's downtime beyond that which we would normally take in our mills.

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Deborah A.. Jones, Deutsche Bank AG, Research Division - Director [68]

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Can you just remind me, you might have stated this earlier, what the expected impact of the downtime is and then just kind of confirm that we would just assume that you get all of that back in 2018?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [69]

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Yes. The Q1 downtime associated with the headboxes was about $18 million impact.

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Deborah A.. Jones, Deutsche Bank AG, Research Division - Director [70]

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Okay. And just last question quickly. I was wondering if you could just give us a sense of how volumes have been in Mexico?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [71]

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They've been good. We have been really steady there.

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Operator [72]

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Your next question comes from James Armstrong from Armstrong Investment.

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Unidentified Analyst, [73]

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The first one is following up on an earlier question. You said you outperformed the market in U.S. food and consumer. Do you see any reason to be optimistic that the center of the store will bounce in the near term? Or is that likely to remain lackluster for a while?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [74]

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I mean, if I was that good to be able to predict that, I'd probably be doing something different, James. But look, I love to see real organic growth of 1%, 2%, and that would be fantastic. But we're planning for flat volumes, given the slight assumption around some downward pressure on the center of the store. And as I've mentioned here a couple of times now, we're making that up with our new product development activities. And that's a model that's really stood the test of time over the last 3 years to 4 years. And I've got every belief that we continue to execute on that going forward here.

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Unidentified Analyst, [75]

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Perfect. And then switching gears a little, could you remind us of how your cost basket pass-through contracts work? Is it a cost at certain point in time, trailing average, just -- could you walk us through that a little bit?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [76]

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Yes, James, it's Steve. I mean, just in general, the way that the programs work is if we're in a 2-year or 3-year contractual commitment with a cost model customer, once we've earned the right to have that business or reearned it to keep it, then the cost model mechanisms are in place typically on a quarterly or half year basis where a basket of costs that are representative of our overall costs are utilized, we track them and utilize those costs to then make price movements on either a quarterly or half year basis with those cost model customers. So it's on a basket of costs that you would expect or the critical ones that move inside of our cost structure like wood, recycled fiber, chemicals, energy, freight, et cetera. So we have a basket of costs that are representative of ours, and those are the -- that's the tool, if you will, that is utilized to make the price movements.

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Unidentified Analyst, [77]

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So you would say it's probably an average over a period of time, it sounds like. Would that be accurate?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [78]

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Well, I think what -- how you want to think about it is it's always -- it's moving based upon the starting point with that relationship. And then if a quarter later, we look at those costs, and they move, then we will pass that through to them. So I'm not sure that average would be the right concept. But I think you want to think about it as the actual percentage movement in those costs as we play out the life of that contractual relationship with the customer.

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Unidentified Analyst, [79]

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Okay, that helps. And then lastly, what do you think the main drivers are between the high end and low end of your guidance range?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [80]

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I think it's April.

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [81]

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For one thing. I mean, it's tough to have real visibility into recycled fiber beyond a month or 2 -- and so there is some ability there. As we mentioned, we assumed a $152 national average for OCC. But the only thing I know about that number is that is wrong. And so that's a little bit what gives us that range, James.

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Operator [82]

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The next question comes from Gail Glazerman from Roe Equity Research.

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Gail S. Susan Glazerman, Roe Equity Research, LLC - Senior Analyst – Paper, Packaging and Forest Products [83]

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Maybe picking up that last point. Appreciate you don't want to forecast with paper. But can you give any perspective on what you've seen in the last couple of weeks since prices started -- were reported down in the beginning of April.

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [84]

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Yes, I think the thing that we've seen and you've seen some of this too, Gail, PPW wrote a little bit about this is that there are -- there is a little bit of rebuilding back some of the inventories at some of the mills. But I think the other point that is important to mention here is that when April prices went down, it was really a phenomenon on the coast, principally related to exports. And I know you know those markets very well. What really wasn't talked about a lot is in the Midwest, we saw a $5 a ton reduction on OCC. In the Southeast, it was a $10 ton reduction on OCC. And the reason for that is, as you know, is that's where the majority of the tons are produced. And so those mills had to build those inventories back and they were competing against tons that were going out to the coast -- in February and March, certainly that was the case. And so I would say that, that's probably the biggest phenomenon that we've seen. Now what that does to May and June numbers, again, I think that would be outside of our pay grade to try to forecast. But what we would say is that with all the buildout of containerboard machines, both in North America and in Europe, and that's pretty sizable -- I mean, Europe, they're adding roughly almost 2 million tons of incremental testliner capacity over the next couple of years. There's probably going to be more upside pressure on OCC than downside pressure, and that will get magnified a bit when China comes in and out of the markets.

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Gail S. Susan Glazerman, Roe Equity Research, LLC - Senior Analyst – Paper, Packaging and Forest Products [85]

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Okay and just also on wastepaper, I don't know if you've had a chance to kind of think it through. But China is looking at implementing a new ban on mixed waste, similar to what they did a few years ago. And I'm just wondering if you have any thoughts on how that might impact the market or if it's an opportunity that you might be able to take advantage of?

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [86]

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Will they see -- based on everything we can read and find, they import about 5.7 million tons. About 2.4 million of those tons come from the U.S. So if they're banned, that has to be made up with some other type of fiber over time. And so that's again why -- when we think about our limited visibility out 1 month, 2 months, we throw that right into the crux of it as well.

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Operator [87]

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Your next question comes from Arun Viswanathan from RBC Capital Markets.

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Arun S. Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [88]

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Yes, so just on the last point again, just talk about price cost. Given that OCC was down in April, if we do see another decline in May, do you still feel confident in the implementation of the second CRB price increase in the U.K. because of tighter supply-demand?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [89]

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Yes, Arun, it's Mike. I mean, as I said -- I mean, our backlogs are growing. Our operating rates are up. Our costs are up. Inventory is down. What Graphic Packaging is doing, which is all I can speak to, is we're implementing that price increase.

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Arun S. Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [90]

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Okay, fair enough. And then on '18, you've given us the $40 million potential benefit from the price costs. And would you also include the $60 million to $80 million gross productivity offset by the $20 million to $30 million inflation again on top of that? And is that kind of how look at '18? Or what are the swing factors going forward?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [91]

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Yes. I mean, I think you touched on the -- again, we're not here to provide guidance on '18 and April next year. But the 2 primaries that you just touched on would be accurate. The $40 million that we touched on in terms of line-of-sight and then, of course, our traditional productivity more than offsetting labor and benefits inflation. Those would be the 2 primary parameters as you would look out year-over-year.

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Arun S. Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [92]

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Great. And then lastly, just on the cash use, you gave us some color on the M&A pipeline. Maybe you can just give us your priority on that versus buybacks, and more specifically, how much you expect to complete in buyback authorization this year?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [93]

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I think our priority clearly is trying to find good tuck-in M&A opportunities that have compelling post-synergy multiples. So that's really our priority. And as I mentioned, it's in North America and in Europe. So that would be #1. And then absent of finding something that we think has those types of synergies and can be accretive, we do have the ability, based on the authorization from our board, to continue to do share buybacks. And you saw in Q1, we did $40 million. And that's kind of the run rate we'll look at if it makes sense based on how the price is -- of the stock is.

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Stephen R. Scherger, Graphic Packaging Holding Company - CFO and SVP [94]

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And valuations.

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Operator [95]

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And your next question comes from the line of George Staphos from Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [96]

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I just wanted to drill back into the Chinese ban on potentially on recovered paper. Do you think that was one of the reasons why there was such a pull from China late last year and early this year as perhaps people were trying to stock up ahead of any potential supply disruption?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [97]

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I mean, George, it could have been, I just don't know.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [98]

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Okay. Let's leave it there. Just thought maybe you had some thoughts, given your trade contacts. When we switch gears here, when we look at your ability to run with less working capital, it's impressive. What are you finding from a process standpoint, Mike, that you're able to do more efficiently now that allows for that? I know this will be proprietary obviously, but if you can us a little more color in terms of what's allowing for that, that would be great.

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [99]

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No. Thanks for that, George. I think the biggest thing is, as you know, we added a number of facilities in North America, which includes Canada and how we think about at Mexico and facilities we bought in the U.S. as well. And many of those had their own operating systems that were not the same as ours. So we're working to implement our SAP system. We're tying those facilities back into our centralized supply chain, which includes our logistics and warehousing operations. And what we're able to do by doing that is drive a level of sophistication across a much larger platform than any one individual company can do on its own. So it's really a synergy, considered a working capital synergy, that we wean out over time. The reason we don't hit it right out of the gates is we want to make sure that we're servicing customers well on their terms and really understand what that supply chain looks like for the businesses that we buy. And then as we get comfortable with it, learn more and start coming behind with our systems, we can wring working capital out. So that's what we do.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [100]

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Sure. You don't want to risk the business you just bought before you sort of look at it for a little while. I mean, if we think about it in the -- in a baseball innings cliche analogy, where do you stand in terms of implementing the systems and processes on what you've acquired?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [101]

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We're in the mid-innings.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [102]

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Okay, okay. My last one and I will turn it over. I kind of remember the last discussion from the company on integration being around 80%, correct me if I'm wrong. At 85%, it seems like it's certainly come up a little bit maybe not this year but certainly over the last year or so. Can you remind us relative to that, where would you be uncomfortable in terms of your vertical integration? Would it be at 90%, or do you think 85% to 90% is a good range for you to be for all of the reasons you've talked about in the past?

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [103]

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Yes, thanks, George. Just to answer that, we're comfortable with approaching 90% vertical integration. That's really our strategy. As you know, we've got a pretty large open market position. And so we can adjust that accordingly as we need to, to service our carton customer accounts. So we like where we're at, and we're going to continue to drive our integration up, at least another 5% or so.

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Operator [104]

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And there are no further audio questions at this time.

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Michael P. Doss, Graphic Packaging Holding Company - CEO, President and Director [105]

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Okay. Thank you for joining our earnings call. We look forward to speaking with you again in July.

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Operator [106]

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And this concludes today's conference call. You may now disconnect.