Graphic Packaging Holding Co (GPK) 2015 Q3 法說會逐字稿

Good morning. My name is Ian and I will be your conference operator today. At this time I would like to welcome everyone to the Graphic Packaging third quarter 2015 earnings conference call. All lines have been placed on mute to prevent any back ground noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you.

Brad Ankerholz, Treasurer, you may begin your conference.

Thanks Ian, and good morning and welcome everybody to the Graphic Packaging third quarter 2015 earnings call. Commenting on results this morning are David Scheible, our Chairman and CEO, Mike Doss, our President and Chief Operating Officer, and Stephen Scherger, our Senior Vice President and CFO. To help you follow along with today's call we have provided a slide presentation, which can be accessed by clicking on the webcast and presentation links at 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 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 over to you now.

Thanks, Brad. Good morning everyone.

Another solid quarter as adjusted earnings per share increased 17% to $0.20 per share. We continue to execute well and deliver against our commitments in what remains a challenging consumer environment. We produced nearly 10,000 more tons of paperboard in our US mills, and we sold those tons through our global packaging network. Sales increased roughly 2% in the quarter and were driven by acquisitions, new product launches, and some substrate substitution into our products.

EBITDA and margins grew in the quarter driven by asset optimization, acquisition integration, performance improvements in both carton and mill operations. Adjusted EBITDA increased 3.4% to $197 million, and adjusted EBITDA margins increased to 18.4%. The macro trends this quarter were similar to what we have seen for the past several quarters. There were really no true surprises.

US markets were flat to down. Europe continues to be a positive for us. We improved our operating performance through investments back in the business and overcame continued currency headwinds and soft demand in some of our key end markets. Third quarter was another example of how we executed our strategy to drive top and bottom line growth.

Our three strategic investment priorities are simple. First, we invest in our core business to support growth and lower costs. Second, we make strategic acquisitions for growth and channel expansion and finally, we return excess capital to shareholders. This has been our capital investment strategy and continues to be the position long-term and we executed in all three areas in this quarter.

Our investment back in the business is a key driver which allows us to deliver ongoing performance improvement results. In Q3 we delivered $19 million of performance improvements in the quarter and we're on track to achieve $70 million to $80 million for the year. We are benefiting from investments we have made in our mile systems and ongoing upgrades to our converting network as well.

On the acquisition front, we have announced four tuck under acquisitions this year. The first two were Rose City and Cascades in Q1. The integration of these acquisitions and synergies are tracking to plan. And we continue to forecast solid progress here.

On October first we acquired the assets of Carded Graphics, a Virginia based folding carton manufacturer with a strong regional position in the food, craft beer and other consumer product markets and an excellent management team. Today we announced a definitive agreement to acquire G-Box, a Mexican based operator for two folding carton facilities in Monterey and Tijuana.

G-Box, along with Carded Graphics, expands our geographic foot print, manufacturing scope, customer base and range of products. G-Box will give us a strong platform in Mexico and Carded Graphics will allow us to better serve new and existing customers on the East Coast, specifically in the fast-growing craft beer market. Both of these are nice tuck under acquisitions to supplement growth and improve our position in the global marketplace.

We continue to see additional opportunities to support this strategic investment priority. Our third priority is returning excess capital to shareholders. Through the third quarter we have declared nearly $50 million in dividends and purchased $23 million of our stock including $15 million in the third quarter alone. You can expect us to follow a very disciplined and balanced approach to these three priorities and we see plenty of opportunities to deploy our capital going forward.

We have talked about the operating leverage that comes from the vertically integrated approach and the more than 150,000 tons of excess pulp capacity in our system. We are now focused on growing demand to fill this capacity and extrapolate the operating leverage in our market. The four acquisitions this year, combined with a growing platform in Europe, provides us with the incremental demand to begin ramping up our paperboard production to maintain our balance.

We will do this by adding a new press section and head box to one of our SUS paper machines in West Monroe, Louisiana during the second quarter of 2016. This will require some incremental downtime in April but we are taking steps to eliminate customer disruption by building the necessary roll stock inventor to run the business during this projected down time.

The inventory build will have a small impact on EBITDA and cash flow in Q4 as open market sales will be somewhat negatively impacted. This investment, however, will increase throughput, improve our quality and increase our yield. Resulting in approximately 30,000-tons of incremental SUS capacity. This should provide some added operating leverage as we move into the later part of 2016 and certainly as we move into 2017.

Mike and Steve will provide you with more details on the timing and the financial implications of the project in their comments. Summarize, despite some demand in foreign exchange headwinds in the quarter we executed well both operationally and strategically by running our facilities better and adding some great new businesses and management teams through acquisitions.

We are confident in our ability to continue growing the business and excited to be in a position to increase the board production and unlock additional operating leverage in our model.

I'm going to now turn the call over to Mike Doss, our President and Chief Operating Officer, to discuss the business in greater detail.

Thanks, David. Volumes in our global paperboard packaging business have reached almost 8% in the third quarter. The increase is driven by our continued European expansion in Rose City Packaging and Cascades Norampac paperboard acquisitions. Excluding these acquisitions, volumes were down slightly as we mostly offset demand weakness in some of our US end markets with targeted gains in new product development. Year-to-date volumes, excluding acquisitions, are up slightly as new product development and targeted share gains have offset weakness in certain end use market categories.

Demand across many of our US food and beverage end markets remain mixed. As we discussed before, some of the weakness is structural in nature while some is consumers managing spending. We have been seeing slow but steadily improving trends in the global beverage business led by strength in the beer market, most notably the specialty and craft segments.

The carbonated soft drink market remained challenging in the quarter as consumers continue to move away from carbonated soft drinks towards specialty drinks such as energy, water, and tea. Global beverage volumes were up slightly in the quarter. Other consumer products volume was more challenged in the quarter with dry foods, cereal, frozen foods categories all down low to mid single digits across the industry according to the Nielsen data. Frozen pizza and pasta were both positive so really a mixed bag on the consumer front.

The integration of Europe continues to progress as expect and we are gaining position in that market. In the third quarter we continue to integrate our SUS board in Europe and remain on track to ship nearly 150,000 tons to the region in 2015 with the ultimate target to ship 200,000 tons annually. This would more than double the volumes in Europe from just a few years ago when we were shipping less than 95,000 tons annually into the region.

The internalization of our US paperboard remains central to our strategy in Europe and growth in this region provides additional leverage to our vertically integrated model. This has certainly added to FX complexity but is clearly improving results. In North America the integration of our Rose City packaging and Cascades Norampac paperboard business is also progressing according to plan and we continue to target 20,000 to 25,000 tons of integration from these businesses within two years.

Our synergy and board integration targets remain unchanged for Norampac and Rose City and we are pleased with the progress we have made integrating both these acquisitions. The Rose City acquisition also allowed us to reevaluate our west coast manufacturing footprint. As a result we have decided to close the Renton, Washington converting facility and transition its production to the Rose City plant and other regional facilities. This change will allow us to further optimize our west coast cost structure.

New product development remains an essential component of our organic growth strategy. New product sales increased over 30% in the quarter and we had a number of product wins and commercial launches. In the beverage category we completed several plastic replacement projects for two long standing clients. Campbell's V-8 Fusion energy brand and Ocean Spray's Sparkling Cranberry beverages.

In the food category our proprietary press paperboard solution, Power Tray, is gaining significant traction with a number of new and existing clients in the protein and produce channels. On the strength solutions side we launched a litho-lam carton that offers superior durability in dispensing characteristics for Glad's Force Flex line of trash bags by Clorox.

In early August we implemented a $50 per ton increase on our CRB grades. We are executing this increase in the market and should begin to see benefits in the fourth quarter and in 2016. However, just reminder that the benefits will be modest given over 80% of our CRB production is consumed internally. Please recall, our carton sales are typically governed by contracts that contain price resetting mechanisms tied to board prices or commodity costs.

These pricing resets are designed to cover the cost of inflation over time and take an average of nine months to work their way through the system. As a reminder, board price increases are not typically margin enhancing over the long-term as they are a mechanism to recover commodity input inflation and carton contract renewal settlements over time.

Turning to operations we had another strong quarter. As David mentioned our US mills ran well and produced nearly 10,000 more tons over third quarter last year. The improvements in mill efficiency this year have been the result of our continued commitment to both Lean and Six Sigma principles along with targeted high return investments. We also made progress during the quarter on our West Monroe cogent project that we had previously announced. We're on track for startup in Q1 of next year and expect annualized benefits of $10 million from the approximately $30 million capital project.

Looking at paperboard demand, the mills remain full and our backlogs at quarter end were strong at four weeks for CRB and five weeks for CUK. David talked about our strategic decision to upgrade one of our SUS paperboard machines at our West Monroe mill to increase annual production by about 30,000 tons. The timing of this project is a little earlier than we had expected and this was driven by the increased demand for soft sets resulting from our acquisitions.

For project of this scope there are limited opportunities to take the amount of down time required to complete the work. We made the decision to schedule the installation of the new press section during the annual outage in April of next year. We expect to take approximately 25 days of down time to complete the normal maintenance and to install the new press section and head box. That's about 15 days extra compared to what we would normally take for annual outage.

To support the down time we will be building approximately 20,000 tons of SUS inventory in the fourth quarter so we have the necessary board to meet customer carton demand during the down time. The board would have normally been sold to open market customers and will therefore have a modest impact on EBITDA and cash flow.

We are very excited about this project and believe it is right in line with our number one strategic priority of investing back in the business to support our continued long-term growth. As David mentioned, we are excited about two additional acquisitions in Q4. We purchased the assets of Virginia-based Carded Graphics on October first and expect to close on the purchase of the shares of Mexico based G-Box later in the quarter.

We expect these acquisitions to generate approximately $15 million of EBITDA in 2016 with combined EBITDA increasing to $20 million to $25 million in 2017 as we integrate paperboard and grow key categories like craft beer and geographically in Mexico.

With that I will turn it over to Steve Scherger, our Chief Financial Officer, who will take you through the quarterly financial results in more detail. Steve?

Thanks, Mike and good morning. As Mike and David shared we delivered another very solid quarter. When I refer to EBITDA at income and EPS today I will be referring to adjusted numbers.

Adjustments this quarter were $8 million pretax, which related to M&A activity, integration costs and other special charges. For those of you on our website please refer to page eight to follow along. Focusing on Q3 results our net sales were up $20 million or 2% compared to prior year.

EBITDA increased $6.5 million or 3.4% to $197 million. Margins for the quarter improved 20 basis points to 18.4%. Diluted EPS for the quarter was $0.20 compared to $0.17 last year. Turning to Q3 sales, the 2% increase was driven by improved volume and mix, primarily from our acquired businesses. As expected, the price was negative at $6.3 million this quarter due primarily to contractual resets related to declining commodity costs and contract renewal settlements.

As I mentioned last quarter, we expect pricing and commodity inflation/deflation to remain relatively in balance in 2015 and over time. The strength of the US dollar versus Global currency resulted in lower sales of $30 million in the quarter. Turning to EBITDA, $6.5 million or 3.4% increase to $197 million was driven primarily by strong performance improvement of $18.9 million dollars. We've delivered almost $60 million in net performance benefits year-to-date, which puts us on track to achieve full year performance improvement in the $70 million to $80 million range.

Positive volume contributed $6.3 million to EBITDA as the benefits from Cascades and Rose City acquisitions flowed through our results. Partially offsetting the positive drivers were $4.1 million of lower price nets commodity deflation, flavor and benefits inflation of $7.3 million, in line with expectations, and FX losses $7 million.

We expect the full year impact of FX to be in the $25 million to $30 million range at today's rates. Our balance sheet liquidity profile remains strong. Net debt decreased $85 million during the quarter. We ended the quarter with $1.9 billion of net debt, our net leverage ratio declined to 2.58 times from 2.9 times that the time last year.

During the quarter we contributed $20 million to our pension plan and returned over $30 million to our shareholders with the quarterly dividend and share repurchases. Domestic liquidity remains quite strong at over $1 billion. Our 2015 guidance is essentially unchanged from last quarter but as David and Mike both mentioned planned down time for our mill capacity expansion in Q2 next year will require us to build inventory late in the fourth quarter and into the new year.

As a result, we expect full year EBITDA growth to be in the 5% range and free cash flow available for M&A and our return to shareholders to now be in the $340 million to $350 million range. We look forward to sharing more guidance regarding 2016 with you in February.

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

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

Thanks everyone. Good morning. A couple of questions to start. So, as we think about the downtime at West Monroe, and the incremental, I think you said Steve or Dave, or Mike, 15 incremental days then normal. Should that also not have a negative effect on EBITDA early in the year or how should we try to model for that? Thanks. And then I had a couple of follow-ons.

Yes, thanks, George, this is Steve. Just to kind of play that out for you a little bit and to even talk a little bit about this year. The incremental inventory build, as we mentioned, will have a modest impact on EBITDA this year and about a $10 million build relative to the inventory. We will then work through that in the first and second quarter so there will be some implications with the actual downtime that we will take in Q2 and that will be a $10 million to $15 million total impact in the quarter.

However, the benefits from the actual increase in capacity will start to show up in quarters Q3 and Q4. We will provide a little more guidance as we move forward, but there will be some impact in Q2 that will recover in Q3 and Q4 with the increased capacity utilization and availability.

I think a way to think about that is that net-net for the year since we are not really managing quarter on quarter will have not much of an impact at all.

Okay. Thanks for that, Dave. Now, again, not to get too sort of micro, but for the, I guess, free cash flow guidance or the cash build for net debt reduction, if there is a $10 million effect from the build in inventory in the fourth quarter, and I look at your slide now versus the presentation from second quarter, the variances at the high end more like $25 million. Are there other factors that are affecting your cash generation for the whole year relative to our expectation or is the variance purely the inventory build relative to West Monroe?

No, it's purely, it's the inventory build and a little bit of EBITDA. So we're at $10 million of inventory build and about a $5 million EBITDA impact. Which is why we're now in that, we were at the 5%, 6% range, we're at the 5% range, George, and so it is really just a combination that leads us into the $340 million to $350 million of cash flow expectation.

Okay. Appreciate that. And then to the extent that you can comment, I'll turn it over from here, again, and certainly you've been not unique in this, the trends at retail, the trends in the consumer have been very mixed. Can you comment at all in terms of what you are seeing early in the quarter, realizing that's pretty dangerous to extrapolate much off of five or ten days? And is there any change at all in the tone your customers are expressing, relative to their outlook for demand into the quarter, and really more importantly into 2016? Thanks, guys.

I will take the first part of that. And I think you answered your own question which is --

I'm good at that, Dave.

You are married, so you're well trained. What I would say is that two weeks in, we feel great. Two weeks in. What I think Mike would say, as well, is that hey look, our customers continue to be optimistic about their future. Having said that, we have not necessarily seen in the previous three quarters that translates into actual selling of additional product.

So while they talk great and they certainly believe that 2016 is going to be better than 2015, I think we are in that you are going to have to show it to us, and we are certainly not forecasting a major change in demand trends as we head into 2016. Maybe we will be up, positively surprised but that is not how we are planning our business.

It is the same old same old optimism, or is there something more tangible this time, recognizing that you still want to see it in the numbers before you believe it?

Well, we see them, George, obviously spending more time on new product development, and in some cases cost cutting. So that they're busy at work but to David's point, we just haven't seen anything that would give us any real confidence that there is a tailwind we are suddenly going to be able to ride. We are not expecting that and we're not building that into our forwards. And if it shows up that is a real positive for us.

I will tell you as Mike said, frozen pizza was a good quarter, and craft beer, beer overall was a good quarter around the globe. So that's really positive. I think predominantly our issue is really more in the cereal and dry food area specifically, as opposed to across the entire product line.

When you talk about it is the question is will the guys making cereal, for example, start to get some mojo back, but pasta was a good quarter. So a lot is just so end use market driven, and each one of those has a separate consumer trend, a millennial trend or a baby boomer trend, that driving those dynamics, and trying to find exactly, divine exactly how that's going to translate into selling more cereal, or center aisle product very, very difficult at this point.

Alright. Thanks. I'll turn it over, guys.

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

Good morning. Looking at the G-Box acquisition, you've talked about the attractiveness of the Mexican market for quite some time, but we've also talked about how it can be harder to do due diligence in Mexico, and concerns around asset quality. I'm just wondering if you could talk a little bit about why G-Box was more attractive than I'm guessing a lot of other assets you have looked at, and then is there any kind of meaningful capital investment in 2016 or 2017 to reach those targets you have on the slides?

Hi Anthony, it's Mike. First off we're really excited about the G-Box acquisition. As you correctly stated we've been working on that for several years now, really looking for a high quality asset that we could have confidence in, that we could bolt-on to our system, and really deliver on both what we were pay for as well as the synergies that we need to make it accretive, and we believe we found that with G-Box in many ways.

Now we will have a total of three facilities in Mexico. We already had one, so this gives us two more. We're in the right spots. These are well capitalized plants that we purchased, and as David mentioned, we acquired an excellent management team, and that management team is staying on with us.

So they're actually going, we're going to scale them, and they're going to help us run in that market. So yes, we believe that we purchased a very high quality assets and that our synergy targets are achievable, and we that we can grow now with three facilities as opposed to just having one. So we're quite excited about it.

Yes, Mike and I were down there ourselves. We went down there a month ago to visit the facilities and the management team, specifically, and it is a pretty small acquisition for us. But what we were trying to assess is, is this real, do we believe the numbers. They have been able to demonstrate growth, but it's a well-tested management team.

They've got some excellent background. They know their market, they know their financials, and so we came away feeling hey, we are confident enough in this acquisition, and it makes really good sense to put Graphic Packaging logo on the front of the building. So we're really optimistic about where that goes.

The other thing is that we have got a couple of customers who are relocating major manufacturing facilities down into Mexico, and they're very geographically located close to what we're acquiring, so I think there is a great opportunity for growth. And those acquisitions, their movement down there is not necessarily to export back to the United States, but it's also to address the growing Mexico market. So, I think, we believe there's a top line opportunity there and it is an investment that we felt we needed to be doing. We needed to have a better position in the entire North American market, and with Cascades and now G-Box we feel like we have done that.

Okay. That is helpful. Is the mix between food and bev and other consumer, and maybe industrials, durables, is that similar for G-Box to Graphic, or can you talk a little bit about the customer mix for G-Box?

Sure. I would characterize it as right on top of what we do. They're doing beverage in that plant as well as consumer and a little bit of industrial. So the mix of customers are customers we understand. Some of them are our customers currently. There are some new ones. As David said, some of our customers are scaling down there, so we'll be able to take advantage and they have the right equipment to do that, both in terms of carton and some litho-flute, which helps build out our strength platform assets. So very excited about it.

Okay. And just a last question. Do you have an updated view on the contribution from M&A in 2015, given that you will get a little bit of benefit, presumably from Carded and G-Box in 4Q?

The impact, Anthony, in Q4 will be very modest. We've just acquired Carded, we have to close on G-Box. It'll be into the November, December time frame. So really no material impact in Q4 at 1 million plus or minus. And really the key is standing up the relationships, and executing on the 2016 commitments that we shared with you.

Okay. I will turn it over.

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

Thank you. Good morning.

Good morning.

A couple of questions. So thinking about productivity, over the last couple of quarters you have given us a number of things to be thinking about in terms of 2016 versus 2015, the cogen project, the synergies at Rose City and Cascades. If you were to think about the 2016 productivity pipeline versus what you guys have been able to accomplish in 2015, how would you sort of compare the set of opportunities?

Well, Alex, it's Mike. We'll have our ongoing commitments for productivity improvements that we've always guided towards which is $60 million to $80 million a year. That remains unchanged. As you know, we have treated cogen as a bit of allocation project, given its size and we outlined the financials for you there.

We have got a big project with the pressing section in new head box on the paper machine in West Monroe that will drive 30,000 additional tons. But as David and Steve both commented on, we have to take some down time next year to get that. And then we get the benefits in Q3 and Q4 and into 2017. I think from your standpoint, if you kind of look at your model it is very consistent to what we have been doing the last couple of years.

I guess the bottom line of $60 million to $80 million is the way to be thinking about next year?

Yes. Absolutely. I mean, I think what we've said all along, Alex, is that we're getting it somewhat differently now. I think we've mentioned that we've put more capital back in the business to generate, because we have got some great capital plans. We just did not have the balance sheet to invest in previously. Now we are doing it.

It's not that there isn't ongoing improvement in Lean/Sigma Six, in the converting plans that are non-capital driven, but I think it is a higher leverage towards capital based projects right now, because we have got the money, and some of these projects have been out there not funded. I think the rate remains about the same. How we get there is a little bit different.

We stay committed to that range of productivity. We believe it is the right range to be targeting, given the size of the business and given the project pool that we have in place.

Appreciate it everybody's insight there. And then on the cap structures, even though you are aggressively reinvesting in the business, you're buying assets, essentially you could end the year maybe even below your target leverage of 2.5% to 3%, probably around that number. So as you are at the lower end, does that imply a share buyback, or is the M&A pipeline robust enough where it is more likely you will see more M&A than buyback? How would you help us think through that?

Well, I think what we have say is we have a very good view on the number one priority, which is investing back in the business, and we gave you some line of sight to the most significant projects. We continue to see a pipeline on M&A activity. That is about all I with really say relative to M&A today. I think where we are right now is that those will be the priorities in the fourth quarter. It doesn't say that as we get indo 2016 we won't increase or do more in the share buyback, if the other two buckets are filled. But as we look at the fourth quarter, that is not our number one priority.

Okay. Thanks for that. If I could just ask one last one. So boxboard markets, I think you said that the CUK backlog is longer than the CRB one. We saw a move up in CRB prices. So as you think about CUK, I mean, what do we need to see in that marketplace before maybe we have some price movement there? Given the backlogs seem to be in very good shape.

Alex, it's Mike, I mean our backlogs, as we outlined, are strong and solid, but it is our practice for all of the right reasons, antitrust, to not comment on what we would do in terms of pricing in the future.

I respect that, Mike. Thank you. I will turn it over.

Your next question comes from Chip Dillon with Vertical Research Partners. Your line is open.

Yes, thanks very much, good morning, Dave, Michael and Steve. My question has to do with, first one, you mentioned, I think I got these right, that you are now shipping about 150,000 tons annualized, I think you said to Europe, and your goal is to get to 200,000. Obviously to push through your folding carton system there. Could you give us an idea of how much of the 150,000 or the eventual 200,000 is in each of the three, or two major substrates you produce, CRB and SUS?

All SUS.

Hi, Chip, it's Mike Doss. Our first time to talk. Nice to meet you. I wanted to just clarify on that. It is all SUS. There is no CRB.

We do not ship CRB except for the most part to ourselves and somewhat locally we are a net buyer of CRB, and it is not a product we could consider exporting to Europe. To be clear.

Got you.

We will send it to Canada.

And Mexico.

Canada and Mexico but not to Europe.

Not across the water.

Got you. That makes total sense, by the way. And the second question is, if I heard you right, you said I know the down time at West Monroe will have a one-time impact. I guess the increment of about $10 million to $15 million on EBITDA and cash flow. I think I heard you say that the inventory bill would be about $10 million, and I just wanted to make sure I think about this the right way. If it is 20,000 tons you could actually assume that is about $500 a ton, which seems like a lot but there must be other issues there that would contribute to the $10 million in the fourth quarter?

Chip, this is Steve. Just for clarity, and as David mentioned as well, the down time that we'll incur next year in the second quarter will be offset by productivity and increased volumes in Q3 and Q4. So there won't be a net negative impact from that investment, and we will start to see some positive net benefits as we enter into the second half of next year and clearly into 2017.

The overall impact of the cash flow at the end of the year, we put the whole value up on the balance sheet, as you know, and some of, not all of it, not all of that value ends up being cash, as you said. But there are no other major movements we are dealing with. But the $10 million of cash you've got a little bit of EBITDA and a little bit of the actual inventory. A combination, Chip, to get to the $10 million.

You get some profit and inventory hung up, as you know, Chip. You've been following the industry long enough to know as you produce you got held up in your inventory, if you don't sell that inventory then you end up losing some of the EBITDA, and not necessarily the cash. So it's sort of a balance in that process and we're not perfect enough to estimate it, we're just saying in a range, so I don't think what you could do is do the math you just did, well 10,000-tons divided by this. I don't really think that is exactly the right math.

We are simply saying it is going to be in this range of that, and we won't be a perfect build on the inventory to be perfectly honest. We will have to manage to figure out which inventory and what mix of inventory we build, to make sure that the carton businesses are successfully supported as we head into Q1. 15 days of additional downtime is a lot of downtime in a mill the size of West Monroe that produces 3,000-tons a day.

2,500.

A day. So you can imagine is a lot of tons.

Again for clarity, there aren't any other movements of substance relative to the balance sheet. Our cash conversion cycles remain intact. Our overall capital expense, spending forecasts remain intact, so there is really nothing else moving. We are just, as we look at the impact of this we wanted to make sure that we were appropriating the guidance, we will steer the ship in at the end of the year, recognizing that we will sell that as we move right into the second quarter, return the cash to ourselves and to the shareholders as we move into next year.

Got you. That is very clear. Thank you. And then just the last one is it looks like both the acquisitions you announced on the folding carton side will be quite accretive certainly by 2017. And my question on that $20 million to $25 million of EBITDA improvement, how much of that is if you will getting an extra margin shipping board from, to your plants down there and in Virginia, versus selling on the open market?So just give us an idea if any of that $20 million to $25 million includes that? And then secondly, on the exchange rates your timing seems great in Mexico given how the peso has been, and I just want to make sure that you are assuming current exchange rates with Mexico when you come up with those numbers?

We are. We don't forecast any changes in exchange rates. And for us that integration value that $20 million to $25 million will come from a combination in the case of Carded and G-Box, it will be a combination of we will have some board integration that will come along with that. Carded, for example, almost immediately and G-Box, we will have some there. There is growth also that we are confident in that will come from Mexico, and then as Mike mentioned, one the things that these acquisitions are providing for us in some cases are integration opportunities of our folding carton operations like Rose City allowing for the closure of Renton, and so with the mid to long-term in mind it will be a combination of board cost and facility consolidation or cost takeout, and then in the case of Mexico some growth.

And Chip, I think the other side of the equation a little bit of what you saw in the same quarter is to some extent we are investing in those end use verticals that are growing, but we are still having to offset the ones that are not. We will talk specifically about soft drinks. Some of the acquisitions are to fill the hole that is inevitably being created by a change in consumer demand in soft drinks. Neither of the acquisitions were aimed at soft drink for example. They were in craft beer, or they were in other food areas that are growing geographically. Some of that is not, you don't add, it is not all truly incremental. There is some incremental portion of it. We are going to operate those facilities better, but we are still trying to make sure that we balance the corporation recognizing that some of our end use market verticals are not particularly positive in North America.

Very clear. And quickly last you mentioned craft beer, which as you guys move more in that area, are you finding that most of your solutions are tied to their bottles, or actually are you noticing a big increase in their use of cans, and you are following them there as well?

Chip, it is Mike. I mean 2015 has been the year of cans. I mean we have seen a, we have continued to gain some share on bottles for sure. But the transition to cans has been almost surprising for us, to include placement of machines that supports the craft brewers and to be able to get into the canned format. You have probably seen in the marketplace some of the decorating that they have done on those cans is pretty phenomenal. We are excited about that for those customers.

Chip, Mike could probably tell you, this is maybe one of our biggest machine-selling years in the last five years would you say, Mike?

Yes. Absolutely.

We sold a lot of machines that go directly into those brewers, so that they can pack multipack cans.

Got you. Thank you very much.

Thank you.

Your next question comes from Mark Wilde with Bank of Montreal. Your line is open.

Good morning, Dave. Good morning, Mike, Steve.

Mark.

Mark.

First question is just does G-Box tap out Mexico for you guys right now, or could we see you guys do anything else in that market?

I think it really starts a platform for us,. Mark, that has scale. We don't view ourselves as tapped out in Mexico.

One the things nice about the acquisition,Mark, is that they have a brand new plant in the Tijuana area, that they are just now bringing up. So we have got some growth capacity built in, that is why we don't feel like there is a whole lot of excess cash that we have to put in that business. We have got a pretty good platform down there. It may be a while before we actually need to, if we fill out their facilities there is plenty of upside.

I guess in Mexico, just interesting to kind of watch the growth in the beer business down there, and particularly watch the growth in cans, which traditionally has been a big market for you guys. Just wonder how much of that market growth you are capturing?

At this point in time, very little of it. And that is one of the, I think you and I talked about that on the call is that we get some of it but our facility in [Gethrow] is really focused predominantly on food. We do some beverage but it is not well designed for that. The facilities that we purchased are already in the can market. So the advantage we have is we have got a platform to build on that can market. So hopefully we will be able to, hope is not a strategy, I mean we will clearly be able to improve our position on beer can sales in Mexico.

Okay. All right. Another question just on offshore markets, Dave. I wondered with all of the currency moves that we have had, whether you seeing any more competitive pressure either from Europe, or from like the boxboard producers down in Brazil and Chile?

Mark, it is Mike. We characterize that as probably being about the same that we have experienced for the last 12 to 18 months. As I know you are aware, the big machine, or method doesn't come online until the first quarter of next year. I guess it is we don't know what impact that will have. They publicly stated they want to target the Americas, but that substrate competes with something that we don't manufacture. So, at that point in time we will have to address that if and when it becomes a challenge. In terms of what we are experiencing right now, it is pretty consistent with the last 12 to 18 months.

Mike, if I could just on these carton plants. I used to cover another company in Atlanta that bought a lot of carton businesses and didn't really integrate them very well, and it came out pretty badly. Talk about what you are doing to integrate all of the businesses to make sure they are really all tied together?

As you know, our model really operates from the core. And so we integrate them pretty quickly in terms of things like supply chain integration, board integration, how we are going to balance that supply and procurement into our overall processes. And in both these acquisitions that we announced, and the one that we did up in Canada, management came with us and has a role integrated right into our existing leadership team. And that is something we look for, as opposed to just buying assets and putting all of our people in there.

We feel there is local knowledge particularly in the markets is we brought in like Mexico and craft beer, where we are getting outstanding managers, and we test that during the diligence process, to make sure that the chemistry is going to be fit for how we want to run the business. We are pretty open about the fact that you are going to run our board, or the board that we tell you you are going to run, and the operating platforms and how we run the carton plants to drive productivity, we are always looking for new and better ideas, but we have got a way that we do it, and we don't deviate much from that.

Mark one of the things we have talked about before is that over time these converting plants need to be recapitalized, and when you get to that point, you have really two choices. One, put new capital in it yourself, or two, you look regionally and find out if somebody has already done that, and you can purchase their whole business which includes the customer interface and newer equipment, and then sort of decapitalize your business, and put your business in a new facility. That is exactly what happened with Rose City. Our facility out in Renton was in significant need of capital reinvestments. [Verpid] hadn't put a dollar in that thing for a decade and it made no sense, it wasn't really a great platform for us out there to do it ourselves. When you combine with Rose City which was new, better management team, great geographic location, with lots of capacity, it made a heck of a lot more sense to move it in there, and that is exactly what we did. If you think about the converting business not as an adjunct, but as an integral part of how you drive profitability back, and you look at your alternatives versus your investment strategies, that is the way we look at it. So some of these acquisitions are really built around improving our overall asset base, without a direct capital investment adding capacity or adding new capitalization to old facilities. So it is a mixed bag, and we make that decision on a holistic basis.

And do they go Dave, immediately on the same systems, the information systems that you guys are on?

For the most part we run SAP. It is a little less critical in the carton plants, the financials all end up on SAP. The floor-based are not so critical, relative to being on SAP. A lot of them are, but as you can imagine our carton plants, you have been in a bunch of them it is just not as critical. Financials we don't negotiate on that. They all have to blow out through SAP, so we have got direct visibility, we also integrate and take over the purchasing decisions centrally, so we immediately see all of the bills on their general ledger information, because we take that over from the center immediately upon acquisition of a converting asset. In this case, also in Cascades, we bought a mill system as well.

Okay. last two questions. One if you could comment on kind of price costs, as we look into kind of fourth quarter and 2016, and then just update us on de-bottlenecking opportunities over at Macon over time, and what a timeline might look like there?

This is Steve. Just on the price cost we really continue to see what we have been committed to, and what we work to execute on, which is that our price inflation/deflation will offset costs commodity costs inflation/deflation. This year as you know, we are rolling through some commodity deflation that is impacting price. You saw where we are at in the quarter, that will likely play itself out in a common way in the fourth quarter, and then as we execute on some of the CRB price increase and march into 2016, our expectations would be the same. And Mike said it well and we just keep repeating it because it is important, we just don't see it as margin accretive. It is really there to offset the realities of commodity costs, and the occasional contract resets that we do with our customers.

And I will take the question on Macon. I think the one thing we could comment on we just got done with the annual outage there, mark and installed a pollution control head mount on one of our Macon machines, which as Dave said, improves our quality and yield. These are the types of projects that help us year in and year out deliver that $60 million to $80 million worth of productivity that we talked about. And we have got projects identified in Macon that we can build it out for sure, but as we have stated, we don't want to make those investments until we are very confident we have got those sold. We are confident enough to do the pressing section and headbox in West Monroe, so you have got those 30,000 tons, and as we continue to find acquisitions or drive additional organic growth, that requires us to have more tons, we know exactly which levers we need to pull to take advantage of that pulse that we publicly talked about.

That is helpful. I will turn it over. Thanks, guys.

Thanks, Mark.

Your next question comes from Phil Ng with Jefferies. Your line open.

Hi, guys. Quick question on some of the acquisitions you made. Particularly on G-box. Are the contracts pretty similar to your business in North America, in terms of pass-through and pricing?

There is not much difference in most of the contracts. As Mike said, same customers so they don't typically maneuver differently in different geographies.

Okay. That is helpful.

And the only thing to add there, the team there has done a nice job of managing through currency in addition to that, so they have an appropriate balance of dollar denominated and local currency denominated, so that has been an important part of their value proposition.

They have done a pretty good internal hedge against currency by the way they constructed their business. The guys at G-Box are smart guys. They are probably listening in today, so I'm not telling them anything that they don't know. But I like working with those guys. They ask very hard questions about Graphic. Sometimes harder than the ones you guys ask, and I like the fact they were pushing back and understanding how they can grow their business, and how could they make it better by using the resorts of Graphic Packaging. That is really what you want to hear when you make acquisitions that are not right in your backyard, and I was very impressed with that.

The profitability at least the data you guys have provided is quite high, especially for a converted business only at 19% EBITDA margins. Has that been pretty stable throughout the cycle, I mean you have obviously expressed concerns in the past on Mexico, so I just wanted to get color on that front?

Phil, it is Mike. Yes, it has been very stable through the cycle. As David said, they have got a very capable leadership team and a methodology they have used that has been highly effective. In terms of what that looks like, as David commented earlier on, we are buying high quality assets, and as a result of that we are making very good returns, and we said look, we are willing to pay up, when we find those kind of opportunities where we believe that we can take advantage of both the EBITDA, as well as the synergy opportunities, and we think both of these acquisitions fit right in that wheelhouse.

Mark asked the question earlier too, about how do you guys do the integrations. Quite frankly, we tend to think of it asGraphic buying them and helping them understanding how Graphics works, but what we found in our European acquisitions and in Canada, is that we learn some things about how other people are operating their facilities, and sometimes on some verticals better than we are. So the key there is also translating back what we saw in the acquisitions in Europe, with some people that really knew how to run a sheet fed plant. They were doing better in their sheet fed plants than we were in many of ours here. Translating that learning back to Graphics is one of the reasons why you are seeing $80 million a year in productivity improvements. We are an equal opportunity offender when it many comes to finding better ideas across the space, we have done a better job of doing that in the last three or four years than we did in the previous four or five years, so I expectwe will find the same thing when we look in these most recent acquisitions. Carded is smart, too. Their margins are very good, they run a good business, there are some things that we will learn on the new product activity there. If we can duplicate what they were age to do there with their space across our lines, there is operating leverage as well. And that the key, and we don't always do it, but at least there is an opportunity set, and that is kind of the business management that you hope for.

In nature and on top of that we were able to see that in the Rose City acquisition too, in terms of how they went to market in the regional customer set, which is important, as we talked to you about. And we need to continue to leverage around what these acquisitions do well, and augment it with the scale that Graphic Packaging brings.

That is very helpful. And one last one from me. The potential AB ISAB Miller combination, can you help us frame what the impact it could have on the business? Is there a lot of overlap for you as well? Thanks.

You are asking me to define what you think the Department of Justice is going to do, and I have not been that good at that. What I would say is that the most likely scenario that has been proposed, is that Miller Coors Molson spins off as its own separate. I would tell you in North America the impact for Graphic Packaging would be virtually nothing. There is no combination there that changes our relationship with AB or with Miller Coors Molson. Not in North America. The rest of the world, I mean I guess we'll see how that plays out. That relationship is not big for us anywhere else, and of course, in China we are still a pretty small player in China. So no matter what happens in China, it is a round off right now in our financials.

Okay.

One thing to add to that, is AB has been very committed to premiumization, the premiumization of their brands which has resulted in move to paperboard, and if you take the long haul view of this, and in terms of investing in the brands and paperboard should be a net positive on a global stage.

Probably a 2017 question. To be perfectly honest by the time they get all of this resolved. Don't you think?

A long haul.

Thanks, guys.

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

Hi, guys. Good morning. On the additional SUS investment what is the total cash cost of the investment? I'm sorry if I missed that. And is the additional capacity something you see has the company grown into organically, or to support forward-thinking acquisitions out there in the future?

It is Mike. In the range of capital investment for the head box and pressing section will be between $35 million and $40 million of CapEx.

And we are making the investment because we are selling the tons.

Right. As we outlined in the call, these bolt-on acquisitions, we have done four of them this year, really they all have some need for SUS tons, and in addition to the progress we continue to make in Europe, we are confident that we need those 30,000-tons now, so we will build it out.

Is that capital specific to 2016, or is there some this year as well?

A little bit -- almost all --

Very small. Small this year and most the vast majority will be next year and we will provide, it is much like we have done this year, we will call that out very specifically for you, and you can think about it as an investment beyond the core $200 million that stayed committed to for maintenance and traditional spend. So we will call that out specifically, but it is in the $35 million to $40 million range.

On the new product activity you referenced, has that been impacted in any way by the drop in plastic prices, which at least for part of the portfolio could be a natural alternative for some of your customers, relative to paperboard prices, which have actually held up pretty well, or in some cases increased? Has that changed the dynamics in any way?

Ghansham, as you and I have kind of talked in the past on this. I mean, our customers really take a long-term view on their packages because, as you know, either just pegged, whether it was flexible application versus a paperboard application based on the price of oil, you'd always bet wrong. Paper is always going to be more expensive than flexible, but its got certain characteristics that allow them greater functional utility, graphics, and performance. So in terms of how we think about that, I mean, we compete pretty aggressively every day in those spaces for alternative packaging applications, and we are not seeing anything that would suggest that we are losing the share to those substrates.

Okay. Thanks so much.

Your next question comes George Staphos with Bank of America. Your line is open.

Thanks guys. Very quickly, as we're at the end of the call, first of all, in terms of West Monroe, is there anything unique to the press section that you're adding to the mill, and then in terms of just again, this increase in box board capacity that we've talked about over last several quarters in the industry, how is that adjusting, if at all, your strategy both on sourcing, and for that matter on M&A within the markets?

So that's the last question? Geez, that's a long one. Relative to the head box in West Monroe, it's certainly new for West Monroe but it's technology that has been applied around the world. It's part of that process that we've said that we need to, we want to continue to invest back into these mills, and now that we have the balance sheet to do it, we're trying to make sure that they stay world class, and that's exactly what we're doing in West Monroe. I think Mike would agree, too, that the quality required for Europe sometimes is a step up from what's required here, so this makes darn sure that both Macon and West Monroe stay current for our needs in Europe.

Relative to the box board changes around the world and I guess what you're saying is with the addition of all the ivory board, and those kinds of products does that change our view of the SBS market, or the potential practice that we use, no. I mean, we still remain, first and foremost, a converting business that backward integrates to generate cash, so our SBS converting business has continued to grow. Both of these acquisitions, we talked a little bit about SUS and CRB, but they also use SBS in their business, but we're going to have buy that SBS on the outside. Are we opportunistic about how we buy SBS? Heck yes. We are opportunistic about buying everything, so this would not be different. Does it give us a view that long term SBS is not a good market? We think if we can make it more converted, and we can build our network out around an SBS, that makes perfectly good sense for us if we own an SBS board mill, but today we don't and there aren't any for sale.

Okay.

So our view is unchanged but our ability to execute around SBS remains the same.

And Dave, just if possible, if you can remind us, the return on these investments, obviously you're not looking just at the ton of board you're producing, but ultimately the incremental value that you're adding, selling it on an integrated basis around the world. That return on something like West Monroe, how much ultimately is driven by the improvement at the mill, and the profitability of that board as it was produced, and how much is driven by the integration and the ultimate sale of that into a carton? Is there way to, 60/40, 30/70, or is it too hard to answer this late in the call? And if so we'll respect that answer too.

No, no, George, it's Steve. The short answer is, is the mill economics have to hold their own.

Okay.

So frankly, the economics are driven, we have to have confidence that the mill economics will hold their own, because then we've got economics to drive through our integrated model that lead us towards that 18% to 20% total. But the mill economic returns are there on this project, associated with selling the incremental tons, but that has to hold its own weight.

But those tons will all end up through our converting network hours. It's not really driven for exterior sales. So if you think about the mill, it's an investment behind the scenes for the converting business. As Mike said, we've sold those tons from a converting standpoint and that's why we're investing behind. But on a standalone basis will we make an investment to sell open market board in our mill system, no.

We stand up the converting -.

Yes.

And then we invest behind it.

Yes, I wasn't assuming you're making those tons to sell them on the outside market, Dave, I was assuming, again, I was going into conversion, so I was trying to get a sense for how much is from integration, how much is from just improving the cost structure at the mill?

I knew you got it.

But is sounds like you're getting the return at the mill in the first place.

Right. We want to hold the line on getting the return at the mill and then drive it through the whole integrated model.

Okay. Thank you, guys. Good luck in the quarter.

You bet. Thank you.

Thanks very much, guys. We'll talk to you next quarter.

And there are no further questions at this time. I'll turn the call back over to the presenters. This concludes today's conference call, you may now disconnect.