Graphic Packaging Holding Co (GPK) 2015 Q1 法說會逐字稿

Good morning, my name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the Graphic Packaging first quarter 2015 conference call. All lines have been placed on mute to prevent any background noise. After presenters' remarks, there will be a question and answer session. (Operator Instructions). Thank you. Mr. Brad Ankerholz, VP and Treasurer, you may begin your conference.

Thanks, Rob, and welcome everybody to Graphic Packaging Holding Company's first quarter 2015 earnings call. Commenting on results this morning are David Scheible, the company's Chairman, President, and CEO, Mike Doss, our Chief Operating Officer, and Steve Scherger, the Senior Vice President and CFO. To help you follow along with today's call, we've provided a slide presentation which can be accessed by clicking on the Webcast and Presentations link on our Investors section of our website which is graphicpkg.com.

I would like to remind everyone the statements of our expectations, plans, estimates, and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the company's periodic filings with the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements, as such statements speak only as of the date on which they are made and the company undertakes no obligation to update such statements.

David, I'll turn it to you.

Thanks, Brad. Good morning, everyone. We had a solid first quarter and results were in line with our expectations. We continued to execute well in a difficult and changing operating environment. We produced over 20,000 more tons in our US paperboard mills and sold nearly 57,000 more tons through our global system compared to the first quarter of last year. Sales in our ongoing businesses increased by about 5% in the quarter and were driven predominantly by acquisitions, new product launches and some substrate substitution.

Comparing against Q1 of last year our adjusted EBITDA increased by $24 million, benefiting from our global performance initiatives and of course lapping a $15 million weather-related impact in last year's first quarter. We've invested in the past several years, transforming the business into a pure play global paperboard packaging company with what we believe is a clear gross strategy. We think the first quarter of 2015 was a good example to deliver top and bottom line growth in the face of foreign currency headwinds and what was a pretty challenging period for many of our customers in end use markets, particularly here in the US.

Many of you know the conditions across the US's food and beverage markets have been difficult for some time so this quarter was nothing new. Consumers are managing spending very closely and buying only what they need, and some of their preferences are changing. Fresh and healthier choices, along with smaller specialty brands, are trends in the market and large US food and beverage companies are having to adjust their businesses. These trends been in place for some time and we're managing our business accordingly going forward. Q1 was no exception with some end use markets like craft beer and frozen pizza doing very well, but others like cereal and soft drink continued to be challenged.

We built this business historically around the US food and beverage categories but we're now a global operator with a more diversified portfolio of customers and products. Weakness in some of our end markets is being offset by the strength in others and we believe that our market share up slightly on a global basis. That's really the plan we manage this business these days and it's all part of our global paperboard strategy.

Margins and EBITDA were again very strong in the quarter, adjusted EBITDA was $181 million and we grew margin by 330 basis points to 18%. Mike and Steve will give you plenty of details about those trends but the macro trends this quarter were in line with what we have seen for a few periods now -- low inflation, solid operating performance, and good contribution from our acquisition drove our results. The only real outlier this quarter was foreign exchange, which was higher by $8 million. We expect to continue to shorten our supply chain. We're going to lower our input costs and we'll improve our operating efficiencies across the organization to drive margin and cash flow growth.

Last quarter we also told you about a capital allocation plan our board of directors had approved. This plan included a nickel per share quarterly dividend and a $250 million share repurchase program. Steve will discuss this a little more in his section but we paid our first dividend in April and made our first share repurchase in March. This is something I'm incredibly proud of and hard to believe only five or six years ago we'd be in this position.

Looking forward, we have not made any changes to our full-year guidance or operating outlook. Steve will provide you with more details in a few minutes, but we are targeting EBITDA growth of 5% to 6% and free cash flow between $350 million and $375 million in 2015. Currency will likely be a much bigger headwind than we initially expected but we will be aggressively pursuing costs, improvement opportunities, and initiatives to achieve our targets.

I'm going to turn the call over to Mike Doss, our Chief Operating Officer to discuss the business in more detail and he'll turn it over to Steve.

Thanks, David and good morning. Volumes in our global paperboard packaging business increased by 9.1% in the first quarter. The increase was driven primarily by our European expansion and the Rose City packaging and Cascades' Norampac paperboard acquisitions. This is partially offset by declines in our US business. Our core business was essentially flat as we successfully offset weakness in some of our US end use markets with targeted gains in other areas. The integration of Europe is progressing well and we are seeing strong growth if that market.

As we've outlined in the past our SUS paperboard offers better performance characteristics than competing substrates and is gaining acceptance and market share. In the first quarter we integrated an incremental 20,000 tons of our SUS board in Europe and expect to ship nearly 150,000 tons to Europe in 2015. Our European strategy is clearly gaining traction and growth in that business further supports the internalization of our paperboard mill tons.

Outside of Europe, our international businesses were positive in the quarter. Premiumization, particularly in the beer category, is an important trend in emerging market such as China and Brazil and is driving increased demand for our packaging machines and cartons in these regions. As David discussed, demand across our US consumer products and beverage folding carton market was challenging in the first quarter but there were some bright spots such as frozen pizza, craft beer, and strength packaging. Fresh and healthier choices, convenience packaging, sustainability, and specialty brands are some of the prevalent trends that continue to reshape the US food and beverage markets. Many of our largest US customers are adjusting their businesses around some of these trends. In particular, cereal and certain frozen food applications were challenged in the quarter as certain customers addressed their mix to address these consumer trends.

New product development remains the key driver to the business. In the first quarter we launched several new strength-based products with our heavyweight SUS and our proprietary Z-Flute and Litho Flute carton designs. Our plastic replacement strategy also continues to gain momentum as we saw solid growth in the specialty beverage category in the first quarter.

The operating side of our business had another very strong quarter. Our US mills ran well across the system and we produced 20,000 more tons than in the first quarter of last year. If you will recall, severe weather unexpectedly shut down and production virgin mills by around 16,000 tons in the first quarter of last year. While this skews the first quarter comparison, we still increased our yield and production levels after adjusting for those lost tons last year. Fortunately, we didn't see a repeat of last year's severe winter weather but the southeastern US had a particularly wet Q1, which pushed wood prices moderately higher in the quarter and we expect these higher costs to continue into Q2.

The higher production levels in our US mills helped drive the $28.4 million of performance-based achievements we achieved in the quarter. The improvements were the result of strong performance across our entire integrated platform as well as the negative impact of weather in the first quarter of last year. We continue to utilize Lean and Six Sigma resources to lower input cost, shorten our supply chain and improve operating efficiencies throughout our business.

Last quarter we told you about Rose City Packaging and Cascades' Norampac Paperboard acquisitions. Our work to integrate these assets is progressing to plan and we continue to believe there's potential to integrate 20,000 to 25,000 tons of graphic paperboard and generate $10 million to 15 million in synergies from these two acquisitions over the next 24 months. Some of the work in 2015 is required to achieve this goal and our net incremental EBITDA projections are around $10 million in 2015 and in the $20 million to $25 million range in 2016. Integration of the Benson Group acquisition is also on plan and our synergy targets of $6 million to $8 million this year remain unchanged.

Last quarter we told but a $30 million cogen energy project that is expected to generate $10 million in annual energy savings at our West Monroe mill. Early work on this project is in line with plans and the new energy sources targeted to come online in early 2016.

Looking at the sequencing of the business this year, I want to remind everyone about the impacts of weather in the first and second quarters last year. We estimate that the severe weather negatively impacted first quarter EBITDA last year by nearly $15 million. This came in the form of lost production, higher operating costs, and lost performance. Conversely we estimate that about half the weather-related EBITDA was recaptured in the second quarter last year. In addition to the weather, we also have some shifts in our planned maintenance downtime schedule this year, specifically $3 million to $4 million of additional downtime costs will shift into Q2 from what we experienced in the second half of last year.

Steve Scherger, our Chief Financial Officer, will take you through Q2 and full year guidance in more detail, and now I'll turn it over to Steve.

Thanks, Mike, and good morning. As Mike and David have shared, our Q1 results show strong improvement versus prior year. Consistent with past practices when I refer to EBITDA, net income, and EPS today I'll be referring to adjusted numbers. Adjustments this quarter were modest at $2.2 million pretax, and related to M&A activity, integration costs for Europe and North America, and other special charges. For those of you on our website please refer to page nine to follow along.

Focusing on Q1 results, our reported net sales were down $64 million compared to Q1 2014. Excluding net sales from divested businesses net sales from our ongoing business were up 5.2% to $1 billion. EBITDA increased 15% to $181.3 million, as margins improved to 18% from 14.7% a year ago. Net income increased $12.2 million to $56.7 million, while diluted earnings per share for the quarter was $0.17 up $0.04 from a year ago.

Turning to the Q1 sales bridge, the key contributor to the 5.2% increase was improved volume and mix which was primarily driven by our acquired businesses. Price was modestly positive at $2.2 million as we cycled through all of the 2013 paperboard price increases and commodity inflation recovery. We expect pricing and commodity inflation/deflation to remain in balance throughout 2015 consistent with our guidance. The strength of the US dollar versus global currencies in which we conduct business resulted in lower sales of over $29 million, as foreign currency-denominated sales are translated back into fewer US dollars in prior year.

Focusing on the strong improvement in EBITDA in Q1 the ongoing business increased almost 19% to $181.3 million. As Mike mentioned $15 million of the improvement was weather-related. Modifying for this, our year over year EBITDA was up over 8%. Drivers of the increase include strong performance of $28.4 million driven by global improvement initiatives, acquisition synergies, SG&A reductions, and producing and selling significantly more tons in the quarter. Given the Q1 2014, $9 million favorable weather comparison for performance, our full year view on performance benefits remains in the $70 million to $80 million range. Volume contributed nearly $11 million to EBITDA as the incremental benefits from the Benson, Cascades, and Rose City acquisition flowed through our results. Slightly higher pricing and moderating commodity costs contributed to just under $5 million. Energy and secondary fiber were the key drivers of the commodity deflation while wood prices were slightly higher than a year ago. Please keep in mind that $5 million of the nearly $15 million weather impact in Q1 2014 was commodity inflation related, Hence, price and inflation were in balance for Q1 2015. Other costs, primarily in labor benefits were up almost $8 million, in line with our expectations.

Finally, given that we export SUS paperboard to our international affiliates, and translate their local earnings back to US dollars, FX negatively impacted EBITDA by nearly $8 million this quarter. Given the continued strength of the US dollar, we expect the full year FX impact will be in the $30 million to $35 million range at today's FX rates.

Our balance sheet and liquidity profile remain strong. Net debt was up approximately $170 million during the quarter. In addition to our traditional seasonal Q1 working capital bill we invested approximately $118 million in the Rose City and Cascades acquisitions. We contributed $12 million to our pensions and repurchased $4 million of our shares. Considering the Q1 2015 pension contribution, which was not made in Q1 2014, Q1 operating cash generation was modestly better than last year, and we continue to target full year free cash flow available for debt, M&A and return to shareholders to be in the $350 million to $375 million range. We ended the quarter with $2.06 billion of net debt, leaving our net leverage ratio at 2.81 times versus that 3.27 times this time last year and strong domestic liquidity, in excess of $900 million.

As an update on our new capital allocation plan we repurchased $4 million of GPK shares during our first quarter and our first quarterly dividend of $0.05 per share was paid on April 6.

Before we turn to full year guidance let me discuss our expectations for Q2. Mike spoke about the mill maintenance downtime we expect to take this quarter which will drive a $3 million to $4 million negative EBITDA versus prior year and the Q2 2014 weather recovery that will not repeat in the quarter. Currency rates and seasonally higher Q2 volumes will drive the FX impact somewhat higher than what we experienced in Q1. As such, we expect Q2 2015 to be roughly in line with last year's Q2 EBITDA, or a more normalized $10 million sequential increase over Q1 2015. Our overall guidance for 2015 is essentially unchanged from last quarter. We see full year EBITDA growth in the 5% to 6% range, and free cash flow available for M&A and/or return to shareholders to be in the $350 million to $375 million range.

Thank you for your time this morning and I'll turn the call back to the operator. Thank you.

(Operator Instructions). Your first question comes from George Staphos from Bank of America. Your line is open.

Thanks and good morning everyone. Appreciate all the details. I guess first question I had for you is given the persistent weakness in some of your markets and obviously that's not your fault, it's what's happening ultimately with the end consumer -- how, to the extent that you can comment, are you thinking about changes in your strategy in domestic markets, if any at all, in changes in your operating stance and how you go to market? And then I had a couple of follow-ons.

Yeah, George, I don't really think we're changing our strategy for the end use markets. You know, we've got ups and downs in new sectors. Beer is continuing to be strong and of course we made the acquisition with Sierra Pacific a couple years ago and so that's paid benefits. Our global expansion in Europe is -- has been a great win for us. The volume growth over there has been significant in beer and actually in SUS substitution. So we continue to see that going forward.

Pasta has been strong. Cereal was a tough quarter for us. It was down -- we were even down greater than what Nielsen showed, but some of that is obviously our customers adjusting to their inventory flow as well. So I think our domestic volume we expect to be flat still up maybe a percent in total volume, and then we end up with the acquisitions driving another percent, 1.5% half, we sort of into that 2.5% growth sort of number, and that sort of fits our strategy because we -- we're producing incrementally more tons, supporting that business globally.

Okay. So then at this juncture, you don't see any need to adjust your manufacturing footprint specific to markets like cereal or frozen foods? Trying not to be too short-term in our thinking -- these trends tend to be long-term.

That's -- there you go. There you go, George. You got it. That's exactly right. Not that I would accuse you guys of quarter to quarter short-term evaluations by any means, but, no, we're not going to adjust our manufacturing strategy based on a quarter's worth of change. So what we will do, what we have done over years, is if we end up with converting capacity that we do not -- that it gets estranged, we'll make those adjustments.

I think since I've been here, Mike would know better, I think we've shut down, what, 17 -- 19 converting facilities, right? So relative to that, but I think you have to look through and you know this about graphic, the profit engine for us is integrating and pulling back through those board mills and, as I said, with the acquisitions and with the global growth in the end-use sectors, we sold 57,000 more tons of board year on year. So I think if you think about the profit engine of the corporation, I think it's pretty -- it's pretty well in -- in place as we -- as we go forward.

So I'm not getting overconcerned about individual quarterly ups and downs, right? In fact right now if you look at the pull for what we're starting in the second quarter, you've clearly, even in some of those end use markets you start to see some strength returning. So I think we need a little bit more data before we make significant strategic shifts in the business.

Understood, understood, and that's why I was giving the context before the question. Appreciate the call -- or the comment.

One other question I'll turn over, over the first few quarterly reports that we've had thus far, one observation we've had is there's certainly ongoing fixed cost inflation, if you have to think about it that way, that we need to, as investors and analysts, think about for the businesses that we evaluate. And it sounds like one of the ways that you've been dealing with it pretty well is through Lean. Can you comment at all in terms of how that might help you specific to that normal performance improvement target that you have? And are there any potential other things that you can do to manage against that, again, not in just the next quarter, but over the next two to three years? And I'll turn it over after that.

Yes, so if you're thinking fixed costs, I guess part of that question you and I answered initially, which is fixed -- part of the fixed costs will be in the converting side of the business, in which case if there's not volume you take out the roofs, right? That's part of it.

The second part, and Mike talked about it, is that our capital plan this year is very much aimed back at some fixed cost reductions or investments that drive variable costs. He mentioned the investment in West Monroe, Lousiana, for example, where we're going to put a cogen down there. That $30 million investment saves $10 million a year at least based on current energy costs. So there are clearly ways within our paperboard mills and our converting business to facilitate better fixed cost utilization across the process. And, I don't know, Mike, if you've got --

No, I'd just add George, and we talked about this that even in Q4 last year after we had sold a number of these businesses, we took a hard look at our SG&A across the business and took out a pretty sizable portion what have we deemed to be stranded SG&A, and you see that reflected in our Q1 numbers, pretty well from an SG&A percentage in terms of total sales.

So it's something we're always looking at. What's our manufacturing footprint? How are we running the business? What costs do we need to service the business with we have? It's really in our structural DNA, as we outlined, to some of the Lean and Six Sigma work that we do.

And, Mike, you would affirm the continued $60 million plus performance improvements for the foreseeable future in the next few years? Would that be fair?

Yes. I think if you slip out the -- we did a little dashed line there, $9.2 million I think we called Weather and just subtract that out and multiply that pretty close to four we're comfortably in that range here for 2016 -- or for 2015, I'm sorry. For 2015.

George, this is Steve, consistent with Mike's comments, our $70 million to $80 million in performance commitment remains intact as we kind of look through the full year in terms of that guidance.

Yes, understood on that one, Steve. Okay, guys, let me turn it over. Thank you very much.

Thank you.

Your next question comes from line of Alex Oveshy from Goldman Sachs. Your line is open.

Thank you, good morning, everyone.

Hey, Alex.

Couple questions. On the Cascades acquisition, you've had in the business for a little bit, can you talk about what's going on with the mills? Are those running? How are you utilizing the paper there?

They're -- both mills, Alex, have run fine. We're using the paperboard in various parts of our business. We're starting to take a look at how do we optimize trims and calipers, David talked about that on the last earnings call that we had. That's part how we optimize a multi-mill system. So I would characterize it as on plan from what we characterized and heading toward those synergy numbers that we've outlined for you.

Got it, Mike. On the SPS side I know one of the mills had ability to do something like to that type of product. Are you buying a little less SPS as a result?

Not yet. That's really more of a TMP machine, thermo-mechanical pulp, it can be used for some of those applications but we haven't really started, displacing any SPS in our business right now.

Understand, Mike. And then you talked about share gains from other substrates. Would you be able to elaborate that a little bit? What substrates and maybe examples of product where you guys are winning in the market?

I'll give you two examples. I mean, the strength packaging really has been a big driver for us, and we've talked about that in the past, where that really displaces, litho [lamps], and some of the corrugated applications. These are heavily caliber SUS products we make for club stores and other channels, and that's kind of an ongoing base hit type thing that we do.

And then the other part of it is, and I commented on this in my prepared remarks, that substrate, the SUS substrate has really found a nice home in certain applications in Europe, and that is -- the characteristics are different. There's the strength and the lighter grammage that allows it to perform well in those applications and being able to make it available through our converting plants and the customers we have over there, we've seen some nice -- some wins at the expense of other substrates. And that's evidenced by the trend that we've got now with -- that we believe we'll ship, 150,000 tons to Europe this year of that product.

And, Alex, that's kind of what -- your question is an extension of George's, which is sort of where -- how has the business continued to grow? And as Mike said, we're going to be up, what, 50,000 tons or so of SUS since the first acquisition we made in Europe, maybe a little more?

Little more than that, yeah.

So we clearly see a path to 200,000 tons of paperboard being sold in Europe, and that's paper that we were not producing two years ago. And that drives incremental EBITDA. And we could argue that's not growth, but it's growth relative to our model because our model is an integrated model. So if we're in Europe and we're selling cereal and pizza and we're buying board on the outside but we now integrate that into SUS because it makes a better application, that's growth. I mean that's Graphic Packaging's growth because of the integrated model. So I think you have to think of Graphic's growth on a couple different planes, not just are you selling an extra carton. The question is on the carton you're selling is this greater value and greater EBITDA growth because your integrated approach and your mix, and quite frankly that's exactly what we're seeing.

Understood, Dave. And just last one for Steve on FX -- the head wind seems more meaningful, the $30 million to $35 million than what would be implied by the revenue number. Maybe can you provide a little bit more detail? What currencies are having the most impact and whether there's any transaction FX exposure in the business, which is making that number higher than what we would think -- what -- sort of a base case assumption would seem to be?

Yes, Alex. And it's a good question. The reason that it moves a little bit beyond the -- just the top line is that we do have both transactional and translational impact. And so the translational component comes of course as we translate primary European and Japanese earnings as well as our global footprint but those are the primaries. And then of course we do have translational as Mike and David have both articulated, 150,000 tons of paperboard, for example, into Europe gets transacted back at -- due to the currency impact. So that's why we want to try to provide pretty good clarity on both transaction and translational and the primary currencies for us, as you know, are the euro, the pound, and the yen, and we've got it at today's rates that's that $30 million to $35 million of both transactional and translational impact we'll see on a full year basis, slightly higher than what we shared with you last quarter.

Yes, right. Got it thank you very much. We'll turn it over.

Your next question comes from line of Ghansham Panjabi from Baird. Your line is open.

Hey, guys. Good morning. Back to the reference on the consumer changing preferences and customers changing your product mix. David, is that just an affirmation what have you've been seeing over time or do you sense a new sense of urgency from your customers? I guess a related question is how -- philosophically how does the paperboard market get impacted over time as the packaging needs change as well with those new products?

If you're asking me whether the first quarter was a huge structural change, no. And as I said in my prepared remarks, we've been seeing that change for a while, which is -- we didn't sort of wake up on third and thought we hit a triple. The acquisitions that we made were specifically focused on end-use sectors and geographies to offset some of those declines and some of those processes. So the acquisitions in Europe with the Contego and with A&R were specifically the largest players in their end-use spaces. Same thing in Cascades, we felt strongly there was an opportunity to grow in Canada but we did not have the converting base through which to pull our paperboard. The acquisition of Sierra Pacific and Rose City were a geographic expansion but a pull through in our mill system as well because in the case they're in some regional businesses.

Rose City is a great example. They're in the food business but they're selling to some of the regional guys, regional people that we don't necessarily see -- that aren't necessarily the large consumer goods companies. But those guys are growing regionally. So what I'm saying is that, yes, although the people that seem to be struggling on the food side happen to be the large consumer goods companies. We absolutely get that. But we're working to the -- not only through new products and acquisitions to offset that and you're kind of seeing that. While those guys struggled materially with their volumes, we overall were pretty flat.

So what I would say is that as those large consumer goods companies sort of figure out their mojo and change their approach then we're going to be buoyed by that change. In the meantime we're doing global expansion and regional expansion and smaller regional player food guys to be able to help that -- keep that volume going. And that has been our strategy for a while. And that's why these acquisitions have been, I believe, on point with trying to deal with kind of where the puck was going and not where the puck was.

Okay, that makes sense. Thanks so much. Then a question for Steve. Just on the FX, I mean it looks like another $15 million to $20 million head wind versus your initial guidance for the year. Just curious are there any other offsets on the plus side or the minus side we should think about as we model off the back half of the year?

That's really the most significant movement that we've seen in terms of overall guidance. The rest of the key attributes remain as we suggested. Price and commodity inflation, we believe, will be in balance as we've suggested. The numbers will move around a little bit, but in balance. And, overall, those commitments that we shared with you from a guidance perspective remain intact.

I think what we would say is that despite those head winds, we're going to deliver the same EBITDA and cash flow growth that we talked to you about the start of the year. We haven't changed our numbers a bit. This quarter was a perfect example, we had $8 million worth of FX but nonetheless we were able to overcome it and we would expect the same thing the rest of the year. We're countermeasuring out that. If the currency changes positively that would be great but in the meantime we're expecting to overcome that in -- and still deliver the forecast that we gave you.

Okay, awesome. Thanks so much.

Your next question comes from the line of Philip Ng from Jeffries. Your line is open.

Good morning. Congratulations on a strong quarter. Sounds like demand has firmed up recently but can you comment on the inter-quarter trends in 2Q and how your backlogs are shaking out? Do you think 1Q was negative in any way by Easter and just the weather in general?

So the short answer is no, we're not going to provide inter-quarter forecast because it's irrelevant until -- until the end of the quarter. If I could tell you what our orders are doing right now it would have nothing do, essentially, with what would happen at the end of the quarter.

What I will tell you is that the quarter in second quarter, which is seasonally higher for us traditionally, is following historical trends. It's stronger than it was in the first quarter from those end use markets that you would expect to be better. Soft drink, beer, even cereal is better, so you're seeing that and it's what you would expect to see in this quarter.

Okay. I guess the value proposition of your European business in part is just due to the low cost structure on your board and just your broad product offering. Doesn't sound like it's impacting it much but how did the strengthened dollar kind of impact your business going forward.

$8 million. The -- in the quarter alone, and $30 million to $35 million for the year. But what it doesn't affect is the strategy. What I will tell you in our European operations despite the fact most of that headwind in foreign exchange was predominantly in Europe, through the growth that they had, their operating improvements, they overcame that headwind just in pure good operations.

So you talk about low cost mills but I'll tell you what if you went to Sierra converting facilities in Europe, they're as good as anything on the continent. We -- the acquisitions that we purchased in Contego and in -- and A&R and Benson are great operating processing. We're actually using that to expand what were legacy Graphic operations in the uk. We're busy in Europe. We've been incredibly successful in growing that business and in substitution of the board over there predominantly because we have good teams on the ground and we have great assets on the ground.

So I'm optimistic about our European business because despite the headwinds they've been able to operate through it. Those are our expectations for them, so that's not a surprise. It's just -- I'm pleased that they're able to do that.

Okay. And just one last final one for me. I know the trade publication has lowered pricing and such for GPK and SUS. Can you help frame the near-term impact, since on the offset you were buying bleach board on the market. But from a headwind perspective on your converting side it's not going to impact you on the margin going forward but just kind of help frame it for us? It would be helpful.

This is Steve. The impact this year will be very modest and was in -- inside of really the guidance that we had provided. There's most of what we saw with those small numbers we'd really kind of had factored into our thinking. It was a very minor net movement, and on the SPS front, those costs we of course transact with our -- when we purchase then those things tend to flow through to our customers so no real impact there, as well. Mike, anything you'd add to that?

No, I think that's right.

You got to remember too, guys, in our contracts with our end use customers, we don't really move around on $10 a ton up or down because you'd be changing invoice pricing forever on folding cartons. So there's a range at which it just has no impact on the carton side of the business and that's -- we're kind of comfortable in that range.

Okay. That's actually very helpful color. Thanks.

Your next question comes from the line of Mark Wilde from BMO Capital Markets. Your line is open.

Good morning, guys.

Good morning, Mark.

Mark.

Dave, I wondered if we could just talk about sort of the acquisition market. Financially you're in great shape right now, you've been growing through acquisitions. I guess the first question is just whether you'd be willing to tackle more in the short-term given that you've just closed on Norampac and Rose City.

Mark, you know us long enough to know we're serial acquirers and investors. So if you give the teams so time off they get rusty. So that is not our plan, and we have a number of things that we're looking at right now. As you -- as you would expect we're keeping some powder dry because I still think there's some potential dislocations in the North American and European market and we want to have -- be prepared.

I will tell you that -- you and I have had this conversation before. The only regrets I've really had since I've been in this job is that a couple of assets became available at one point in time that I would have loved to have but we just did not have the balance sheet to be able to do them and I don't want to be -- I don't want to be caught watching the paint dry. So we're trying to keep ourselves in a place where good acquisitions are available, then we can do it quickly. People know we're serious, and they know we're capable, and that's -- that's kind of what we're doing at this point in time.

Okay, Dave, just any general thoughts on what you're seeing right now in terms of both flow and value expectations on assets that might be for sale?

That's a good question. Mark, a lot of times it depends upon who owns those assets, right? Certainly, in a private equity, a lot of time -- the, all the European assets that really Mike and Steve purchased, those things were all done from private equity and they were exit plans and the numbers on those things were on average, what, 6.5 or something like that? They were accretive the day we bought them and then with the synergies they're probably on average 3.5 or four times so that's different. If it's a strategic purchase, typically, Mark, the multiples tend to be up a little bit. But our multiples are in a good place right now as well. So we can do something and still be accretive to our business if we're buying good assets, Mark.

And just -- Dave, in terms of geographic, I mean, we've talked about Mexico in the past, we've talked about North America, and we've talked about Europe. Can you just give us some sense of where you'd be kind of most interested at this point? Because it sounded like maybe you were going to back off of Europe for a little while and you've raised the issue of Mexico several times in the past.

Yeah, I mean, Mark, I think you've got it right. It depends upon the asset, right? If we were going to buy -- if the world is your oyster and you were going to buy board assets then predominantly that's going to be a North American purchase for us, right, and that would be different. If we're going to buy converting assets, and I think all those geographies are open, and that includes Mexico. Mike and I have said publicly we'd love to find a asset in Mexico and build on our base. We have a great little plant down there. We have a really nice business down there. But we don't have all the critical mass that we want.

But in Mexico you have to know what you're buying, and that takes a little bit more time and a little bit more diligence just because that market is a little less transparent relative to the financials. So I think long-term we're going to end up with more assets in Mexico but I want to make sure we don't make mistakes.

In Europe, yes, Mike said last time that we were probably looking at the second half of 2015 or early part of 2016 before we made another European asset but you also know timing is what it is. If a great asset comes up that's in an end use space that we need to be in and we think that asset will fit we'll lean over our skis a little bit and ask Mr. Yost to buck it up and buy it and go do it. And every Graphic Packaging manager sort of knows, I mean, that's really our DNA, that's really what we do, and that's kind of the expectation if you're going to be here. So I'm not calling off anything because of really management capacity at this point in time. It's the right asset in the right place at the right place.

Okay. Just two other quickies. One is there any chance, Steve, that the -- that deflation could actually be a bigger benefit this year?

You know, no. I think as we kind of look forward at least obviously, assuming rates and inflation/deflation activities are about where they're at, we don't really see it. We've got some inflation as Mike mentioned that we're managing on the wood side. Transportation costs, we don't tend to get enormous benefit out of the reduced gas prices because of inflation on drivers and lanes and so I think we've got it about right. And of course we do have hedging activities that are in place as well that keep us pretty consistent and so our hedging strategies also tend to flatten it out. So we have less variability than the natural what would appear to be the inclinations of the market. So, no, I think we've got it narrowed in reasonably well. We wouldn't expect too much in the form of variability off of the guidance.

Okay. The last question -- Dave, when we were down in December, we saw that new tight-pack beer pack that you were doing for one of the smaller brewers in North America and you were talking about potentially introducing that to one of their other breweries and also more broadly, have you gotten any more pick up on that?

Hey, Mark, it's Mike. We actually do -- have introduced it to the second brewery as we had indicated that we believed we would, and we're in the process of actually getting some additional sales from another customer here in this quarter, quarter two.

Any way to size on that, Mike, just what the impact is for you guys?

I think when you were down here we indicated on an annualized basis that could be 15,000 to 20,000 tons all in, of course we're in the infancy stages of that so it takes a while for it to materialize and go through the qualifications.

Okay. I assume that's something also you could look at introducing in Europe as well?

Yes, we could. And we are.

Okay. All right. Sounds good. Good luck in the second quarter and through the balance of the year, guys.

Thanks, Mark.

Your next question comes from the line of Anthony Pettinari from Citi. Your line is open.

Good morning. I had a question on spare pulping capacity. Given you've had more demand from Rose City and Cascades and you've been operating well, is there any upside to the incremental pulping capacity you could bring to market? I think you guided 150,000 to 200,000 tons last year. Is there any potential upside to that maybe with the Cascades mills or just better operating performance?

Well, what we were speaking about, Anthony, when we actually made that comment was we have in the 150 -- well, between 100,000 and 150,000 tons of SUS pulping capacity. And the way to think about that is we convert that pulp obviously into paperboard. As David said these acquisitions actually drive our SUS demand up internally, thereforE we're able to get benefit of that pulp. It really tends to be specific relative to the mill system as opposed to the two mills we've got up in Canada. That would be a little different deal.

I guess what we would say, Anthony, we still have plenty of runway on pulping capacity. We do a fiber balance every month and then every quarter we look backward through the mills. We haven't done a pulp capacity necessarily look, but at this point in time if you look at the way our digesting capacity is running and the efficiency, and the back end of those mills, I am absolutely 100% positive we have generated incremental pulping capacity through the efficiency and the investments.

And I think I mentioned earlier, most of our capital investment right now is not necessarily on the converting side. We're continuing to buy new presses and cutters, so all the customers are listening on, we're going to continue to upgrade those. But the fact of the matter is most of our real improvement capacity for -- in capital is back in those paperboard mills and ultimately that does incrementally add to our pulping -- our pulping capacity. So we've got plenty of runway over the next two to three years for sure in making pulp and turning it into paperboard, assuming we can continue to grow the business successfully as we've been doing.

Okay. Okay, that's very helpful. And then just a question on folding carton markets. I think you said that you might be flat up organically, if I heard that correctly. Do you see yourself gaining share this year? I wonder if you can just talk a little bit about the competitive nature of folding carton markets in North America and are you seeing any share shift or market moves ahead of the merger of two of your largest competitors and potentially a merger of two of the largest buyers of box board?

Yeah, I guess the way I'd answer that is globally, Anthony, if you look at our numbers in Q1 as we outlined, our core markets are flat. We saw some sectors that are actually down a bit, as David outlined, and we actually had winds and sectors that were up a little bit. Things like frozen business, craft beers, for example -- those were up year on year and that helps makeup for some of the shortfalls we saw in things like carbonated soft drink or cereal. So that's kind of the way to think about it.

In terms of major share shifts we have not seen that. We participate in ongoing bids like pretty much everybody else in the space does, and we win some, we lose some, in terms of overall -- overall share, but it's been pretty steady, and we don't anticipate that being a big issue going forward.

Yes, I think the thing you have to remember is we competed against both the MWV and Rock Tenn, whatever they're going to end up calling themselves, prior to the merger as well. So we know those businesses pretty well, and we expect we'll continue to compete against them.

Okay. That's helpful. I'll turn it over.

Your next question comes from the line of Al Kabili from Macquarie.

Hi, thanks, good morning, thanks for taking the questions. I guess the first question is if the euro for whatever reason were to fall to parity to the US dollar, would that materially change your outlook on the opportunity for SUS conversion in Europe? And conversely, as well, do you think the value proposition is high enough for SUS that you might be able to charge more for it in local terms to offset some of the FX headwinds over time? Thanks.

Okay, so now -- now we're into the total hypotheticals, huh? Look, at the end of the day, the SUS -- the SUS value proposition is one that's going to survive the euro moving to parity, as you can well imagine we model on a go-forward basis. And the fact of the matter is, a lot of it may depend upon what actually drives that. Somebody asked a earlier question, Steve, would you see some positives out there? We're sort of looking, saying if the euro is sort of where it is, it's because the input materials and the global economies are sort of where they are right now.

If there's a major change in those things, probably something else is going on underneath, and those things, like TiO2 and caustic soda and input are probably going to drop as well. So you end up, since some of it is translational and some of it is transactional you end up sort of offsetting that because we buy raw materials to make SUS on a global basis, right, we bring barges of caustic soda up to West Monroe to do so. So I'm not as much concerned about those dislocations of the dollar moving to parity.

I'd be a lot more concerned on that if it was some global meltdown that had nothing to do with the -- with the actual cost, but it had something to do with global demand changes or something that was really structurally changing in the end-use markets would be more difficult to overcome as opposed to a transitory change in input costs or currency flows.

Okay. That's helpful. I appreciate it. That's good to hear. I guess the second question is on -- it sounds like you're targeting about 150,000 plus tons of SUS expansion this year. Any -- any thoughts in North America in terms of growth for tight-pack and your other growth initiatives in terms of tonnage, in terms of target growth and tonnage there that you could help us with?

Well, a clarification or correction, I guess first. We are not targeting 150,000 tons of SUS in 2015. What we've talked about is we've got 100,000 to 150,000 tons of available pulp that we can turn into paperboard as we need it. We've started doing that this year. We'll continue to do that in years to come. As we add additional acquisitions or have customer demand for that, that's really the model.

We're not going to produce -- we're not going to produce pulp or board that we cannot sell. So as we've said, those targets are sort of over -- and we said this, are over a two to three year period of time we expect to be at because based on our growth tons we'll need that capacity in terms of board. But our growth this year is -- I mean, is pretty -- has been pretty consistent in tons.

Okay. That helps. And then the growth on tight-pack, any -- can you give us just a sense in terms of tons or volume rate, how that's looking the first part of the year here?

It's a great product, and we've seen the growth that we sort of talked about before, as Mike said that's probably a 15,000 to 20,000-ton all-in market. In some cases it's -- we're using that to fill volume in something -- in cereal or some other process. We only use that example not to suggest that it's end-all. It's just to show that there are ways that when parts of the market are struggling, if you have some innovation and you have the tools, then you can offset some of those declines in other businesses and still gain market by making products that substitute.

So what I would tell you is that those kinds of things right now are going, and that's why Michael said on a global basis we were sort of flat because all that new product stuff sort of went in and kept our global markets on those core businesses flat in the quarter. And that's against a pretty -- pretty difficult first quarter relative to some of the end use markets like soft drink and cereal, which you would not expect to see the kind of declines we saw year on year on an ongoing basis. So I was optimistic that there's some growth in those core markets as we -- as we go out, but I'd sort of out of the forecasting business for cereal, soft drink, frozen pizza, macaroni and cheese because it's a little difficult to figure out within a quarter the clarity on those kinds of demand.

Okay. Thanks. I appreciate it. The last question, just housekeeping on the maintenance and the sequencing, the $3 million to $4 million timing on the maintenance in 2Q year over year, is that a favorable, then, in the third quarter? Or do we have a little bit more higher maintenance spending overall for the year? Thanks.

Yes, this is Steve. Yes, just as Mike mentioned, the $3 million to $4 million is maintenance we will incur in Q2 that's in our normal course on an annual basis but it was -- last year it would have been in the back half of the year. So think of it as a shift which is why we wanted to provide a little more clarity on Q2 given all of the weather activities as well as the maintenance movement. So it is not an increase in total. It's more of a shift into Q2 and out of the second half of the year in terms of when we did it last year.

Okay. Thanks. I appreciate it. Good luck.

Thank you.

Your next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open.

Dave, on the last call you mentioned that Graphic, you feel that Graphic spent too much money storing and moving things around in warehousing and that could be an opportunity for you over time over the next couple of years. I was just wondering if you could elaborate this and maybe kind of size up what that opportunity might be.

Since I ask Mike about it every month I'll let Mike size up that and talk to you about it.

Yeah, it remains an opportunity. As you know, Debbie, line haul rates continue to go up even though diesel prices are down. We want to make sure that we're as efficient and effective as we possibly can be. We're shipping a lot of tons to Europe, more tons now than we ever have before so we've invested in a lot of people and processes to help us really drive that out.

But I think the way to think about that is that's really embedded in this ongoing performance that we talk about, the $70 million to $80 million a year that we've got to get out. I wouldn't think about it as on top of that. We get a lot of questions, how do you view 2016, 2017, 2018. These are the types of things that really help us build a multi-year platform and really drive that performance year in and year out.

Okay, that's helpful. And just ask a quarterly question here -- is there any specific reason for the shift in downtime from Q3 to Q2?

It really just comes down to the fact, as you know, when you have one of these outages you've got a lot of specialized vendors, maintenance vendors that come in, contractors, if you will, that do the work, and from a scheduling standpoint it was most favorable for them and for to us do that in Q2 this year.

Debbie, to that point you've got to remember that those specialists tend to be the same people that shift around to every other company's mills. In the Midwest where a lot of this work is going to be done there are quite a few recycled board mills of some size up there, so you kind of get into queue and you do it in (inaudible) because you want the right people in those spots, and that's really where -- and I've said this before, we don't really manage it to a quarterly basis. What we want to make sure is we got it done within the year, which is why we tend to give you annual guidance but not quarterly guidance because we just don't really manage the company to a quarter by quarter -- a quarter to quarter basis. It makes no sense to do so for a paperboard company.

No, I agree. I just wanted to understand if there's something else there.

Yes.

Thank you very much. That's helpful.

Sure, Debbie. I'm glad you finally got on the call. I know the last time we kind of cut you off and I'm glad you were able to get in this time.

All right, thank you.

Your next question is a follow-up from George Staphos from Bank of America. Your line is again open.

Hi, guys, I'll try make it quick, I know we're getting late in the call. I guess, first of all, if we think about the frozen food category longer term, Dave -- if we are to see more growth in the future, do you think it's going to come from susceptor technology getting better or do you think the, if you will, offering and delivery is really good as it is right now and it's just a function of consumer spending patterns and tightness in the wallet so to speak that's keeping frozen food languishing right now as an end market.

A lot of it depends upon a shift in the Millennial thing. If you looked at it right now for the first time ever, the baby boomer is not the predominant age limit, 22-year-olds are. So they consume slightly differently, and you can see that in some of the frozen stuff. So the microwave stuff is doing really well. Also so are smaller servings. So that's not bad for us, it's just a shift. Because they still make more boxes if we're doing more frozen and you're seeing smaller units. But I still feel pretty good about the frozen food market because you still see the Millennials using that kind of product as an augment to all the fresh and -- around the store -- the peripheral of the store. So I think ultimately we feel pretty good about frozen food but it's going to have to be functional in that it's making the food better and that's one of the reasons that microwave tends to -- tends to end up in that space.

Okay. Second question. How would you gauge your ability versus your main line competitors to commercialize new product and come back to customer with prototypes in a very limited time span? When we visited your facilitate we've actually been very impressed with your ability to turn around things very quickly. Would you say GPK is more or less in line with all the other mainly competitors or do you think you're a notch above or perhaps trending blow the other larger carton guys?

What I would say is this. Is you got to sort of measure the results and if you look at our new product growth opportunities it's been -- it's been solid. Our customers do gravitate towards coming here but I'm sure our competitors, which are well -- well capitalized and they know the market as well, I'm sure they've got very, very capable new product activities and processes. All I know is that our resources are paying us dividends and you can see it in our new product development activity and substitution work so I'm comfortable that we're invested appropriately.

Two last ones and I'll turn it over. So at the end of the day if FX was more negative than you'd expected and you're not changing guidance on the other line items, nor are you changing guidance on EBITDA, I might have missed it, but what was the offset then that allows you to maintain your guidance? And then the other thing --

To -- it was input costs for the most part.

Okay. Okay. And then -- thank you for that. And then the last thing, I kind of remember on a maintenance spending standpoint that last year you had a cold outage in the fourth quarter and that shouldn't replicate this year. So does that help your comparisons or is that just a timing factor as well? Thanks, guys, and did good luck in the quarter.

I think it was only the one mill. I think we'll have a cold outage this year in a different -- virgin mill.

Yeah, it's just a shorter one.

Okay. Thanks, guys.

Some total days are not changing dramatically.

Okay, very good.

We've got one minute. Alex, I understand you're in line for another question.

Alex Oveshy, your line is again open.

Thanks, Dave. Just on hedging, if you can just update us on what you guys are hedging on the energy side and the -- the timing around when those roll off or when you think about renewing those? That's really it. Thank you.

Yes, we have ongoing hedging strategies as -- as you know, and we're about 75% hedged on natural gas for 2015 and we're pretty materially hedged into 2016 as well. And so those are the two majors. And on the board side, where we hedged as we discussed on the paperboard side, we roll those through on more of an annualized basis

And I would imagine the hedging on 2016 is below where you are on 2015. Is that fair?

That's fair.

That is correct.

Thanks very much, guys. Appreciate it.

Thank you.

All right, guys. Look, we're going to have to go, thanks for all your questions and we'll talk to you at the end of next quarter.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call and you may now disconnect.