Graphic Packaging Holding Co (GPK) 2016 Q1 法說會逐字稿

Good morning. My name is Lindsay, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging first-quarter 2016 earnings conference call.

(Operator Instructions)

Thank you. Mr. Brad Ankerholz, Vice President and Treasurer, you may begin your conference.

Thank you, Lindsay, and welcome, everyone, to the Graphic Packaging Holding Co 2016 earnings call. Commenting on results this morning are Mike Doss, the Company's President and CEO, and Steve Scherger, our Senior Vice President and CFO. To help you follow with today's call, we have provided a slide presentation, which can be accessed by clicking on the webcast and presentations link on the Investor section of our website, which is www.graphicpkg.com.

I would like to remind everyone that statements of our expectations, plans, estimates, and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the Company's present expectations.

Information regarding these risks and uncertainties is contained in the Company's periodic filings with the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements, as such statements speak only as of the date on which they are made, and the Company undertakes no obligations to update such statements, except as required by law.

Mike, I will turn it over to you now.

Thank you, Brad. Our first-quarter results were in line with our expectations, and we are off to a solid start to the year.

This morning, we announced adjusted earnings per share of $0.20 versus $0.17 last year. Adjusted EBITDA increased 6.7%, and adjusted EBITDA margin increased 70 basis points to 18.7%.

The global macro trends in the quarter were consistent with what we've been experiencing. We continue to drive earnings growth through asset optimization, acquisition integration, and improved productivity.

We delivered strong results while executing on our three strategic priorities. This included investing $99 million of capital back into our core business, completing three strategic acquisitions; and returning over $60 million to our shareholders, including $45 million of share repurchases. We are doing what we committed to do, and are executing consistent with our strategic priorities.

Core organic volumes in our global paperboard packaging business increased nearly 1%, driven by stronger beverage demand and growth in our international markets. When including acquisitions in the extra day due to leap year, volumes from our ongoing business increased 5%.

As a reminder, we did close the Jonquiere, Canada thermomechanical pulp mill last year, and we also took out some non-integrated kraft paper production at our West Monroe mill. These tons were sold last year and will not repeat this year. The overall and market trends we saw in the first quarter were generally similar to what we have been experiencing.

The US food and consumer markets were challenging in the quarter, with A.C. Nielsen reporting industry volume declines in the low- to mid- single digits for some of our major categories, such as cereal, frozen pizza, and facial tissue. In the quarter, our US food business performed in line with the market, with core volumes down in the low single-digits.

The global beverage market was a much better picture in the first quarter. This strength in the US beverage market continued to be led by growth in specialty drinks, craft beer, and bottled water. Carbonated beverage volumes declined in the quarter, as reported by A.C. Nielsen. Graphic Packaging's global beverage business was solid in the quarter, increasing in the low single-digits, driven by US growth in beer, specialty drinks, and carbonated soft drink, as well as continued strength in Europe.

New product development remains an essential component of our organic growth strategy. Our microwave technology provides a superior cooking experience, with convenience of eating on the go. We launched several new microwave packages in the quarter, and focused on snacking, including a hand-held snack from Golden Krust, and a stuffed pretzel from J&J Snacks.

On the strength packaging side, we launched a new Power Tray product with Boulder Sausage. Our Power Tray solution, which is made from SUS paperboard, offers better performance and sustainability versus the standard polystyrene foam tray. This substitution is expanding the paperboard business into protein and produce categories around the perimeter of the grocery store.

Likewise, on our beverage side, our paperboard packaging solutions continue to replace plastic packaging. Juices and teas are transitioning out of corrugated tray and shrink wrap packaging into paperboard multi-packs to deliver a premium brand image at retail. Soft drink producers continue to diversify their size and pack options for greater appeal.

A major CSD brand recently launched a new eight-pack, mini can and paperboard carton versus the plastic alternative in the quarter. The water category continues to diversify with sparkling waters, and we launched several new sparkling water multi-packs.

Our manufacturing operations had another strong quarter, with our mills producing more tons of coated board compared to the first quarter of last year. This strong mill productivity, along with ongoing continued improvement programs, helped us generate over $16 million of performance improvements in the first quarter.

The improvements are a result of both our commitment to Lean and Six Sigma principles, along with targeted high return capital investments. In the quarter, our mills ran full, and our backlogs remained consistent with year-ago levels. As we indicated on the last earnings call, the West Monroe Cogen asset came online in late January, and energy savings are tracking to our expectations.

We also indicated on the last two calls that we would be adding a new press section head box to one of our SUS paperboard machines in West Monroe during the second quarter of this year. The work commenced earlier this month, and we expect to begin bringing the machine back online later this week. The project is expected to cost between $35 million and $40 million and should increase our SUS production capacity by approximately 30,000 tons per year. Overall, this investment is expected to generate approximately $12 million in annualized EBITDA.

We are also planning to install a new curtain coater and make other improvements to one of our Macon SUS paperboard machines in the second half of the year, most likely late in the third quarter. We installed a similar asset at our Kalamazoo CRB mill in 2014 and have been very pleased with the quality and cost reduction benefits of the project. The investment at the Macon mill will be approximately $30 million, and should drive approximately $10 million of annual EBITDA upon completion.

Since early 2015, we have completed six acquisitions in North America, including 11 converting facilities and two paperboard mills. As previously mentioned, we closed one of the mills and were able to consolidate a legacy converting facility in the Pacific Northwest. The integrations of Rose City and the Canadian-based Norampac Assets are now essentially complete, while the onboarding of Carded Graphics, which we acquired last October, is well underway.

In 2016, we have completed three more tuck-under transactions, including Mexico-based G-Box; W.G. Anderson in the upper Midwest; and Metro Packaging and Imaging, a New Jersey-based single plant operation focusing on food and away-from-home markets. These six acquisitions have added approximately $450 million in top line revenue, and $54 million in EBITDA, which we will expect to ultimately grow to $70 million to $80 million annually within 12 months to 24 months. These transactions represent a continuation of our strategy to grow in key end markets and geographies, as well as optimizing our vertically integrated supply chain.

In January, we announced our intention to acquire Australian-based Colorpak. We have received Colorpak shareholder and other regulatory approvals and expect to close that transaction later this week. Colorpak has been our largest converting partner in Australia, and its three-folding carton manufacturing facilities allow us to expand our proven integrated supply chain in the Australia and New Zealand food, beverage, and consumer product markets. The acquisition is expected to contribute $5 million to $6 million in EBITDA in 2016, and $11 million to $13 million annually within12 months to 24 months.

Let me take a moment to address paperboard pricing. As you have seen on Friday afternoon, Pulp and Paper Weekly reported a pricing adjustment on several substrates, including SBS and CRB. They lowered SBS by $20 per ton, and CRB by $30 per ton. The SBS reduction will have a de minimis impact on Graphic Packaging; since we don't make the grade our contracts will reset, and price movements will be passed through to our carton customers.

With regards to CRB, we expect a modestly negative EBITDA impact of less than $10 million in 2016. As you know, we have a multi year track record of price offsetting commodity inflation, and we expect that relationship to continue over time.

And with that, I'll turn the call over to Steve Scherger, our Chief Financial Officer, to take you through the quarterly financial results in more detail. Steve?

Thanks, Mike, and good morning. As Mike shared, we delivered another strong quarter.

EPS, EBITDA, and EBITDA margin all improved, creating positive momentum for 2016. Let me share a few highlights for the quarter.

Adjusted EBITDA increased $12 million to $193 million. Adjusted EBITDA margin increased 70 basis points from 18% to 18.7%, and adjusted EPS increased $0.03 to $0.20. As Mike said, we closed three previously announced tuck-under acquisitions and announced a fourth, which we expect to close later this week.

And finally we've repurchased 3.7 million shares, or $45 million of our stock, in the first quarter. We've remained a disciplined buyer in April. References today to EBITDA, net income, and earnings per share will be to adjusted numbers. Pretax adjustments related to business combinations and other special charges were $10.5 million for the quarter.

Focusing on first quarter net sales, revenue increased 2.6%, driven primarily by volume from our acquired businesses and a modest increase in our legacy business. Price was lower by $8 million in the quarter, and the strong US dollar translated to lower sales of $9 million. Turning to first-quarter EBITDA, we posted a strong increase of 6.7%, or $12 million, driven by operating performance benefits of over $16 million and modest volume gains, which were partially offset by foreign exchange headwinds and labor and benefits inflation. Price and commodity inflation essentially offset one another in the quarter.

We ended the quarter with over $820 million in global liquidity and $2.24 billion of net debt. Our net debt grew by just over $400 million during the quarter. The increase was driven by nearly $290 million for acquisitions; $60 million in share repurchase and dividend activity; along with the typical first quarter seasonal increase in working capital. The higher debt level resulted in a first-quarter net leverage ratio of 2.93 times, up from 2.44 at the end of 2015. We remain committed to our long-term leverage target of 2.5 to 3 times.

We ended the first quarter with $386 million of NOLs for US federal income tax purposes. As we mentioned last quarter, we do not expect to be a material cash taxpayer until 2019.

As Mike stated, we remain focused on returning capital to our shareholders. During the first quarter, we repurchased $45 million, or 3.7 million shares. Subsequent to quarter-end, we repurchased another $8.2 million, or 630,000 shares.

Since we initiated the $250 million program in the first quarter of 2015, we have utilized $116.2 million to acquire nearly 9 million shares. We believe that share repurchases are an important tool for returning capital to our shareholders, and we expect to remain in the market utilizing a disciplined approach.

Now turning to full-year 2016 guidance. Our EBITDA and cash flow targets remain unchanged. We remain committed to a 4% to 7% improvement in EBITDA, versus 2015. A few of the components, however, have shifted modestly.

The US dollar has recently pulled back. At current FX rates, our currency impact should not be as significant of a headwind as we guided last quarter. However, this positive change will be offset by an unfavorable price, commodity, inflation relationship in 2016, as year-over-year commodity deflation comparisons begin to level off and the impact of a recently announced decrease in CRB pricing flows through.

Last quarter, we indicated a $15 million to $25 million negative impact from FX. That range at today's rate is $5 million to $10 million. The pricing and commodity relationship moves from roughly flat to a $15 million to $20 million negative for the full-year, inclusive of all known pricing and inflation outlooks.

Looking specifically at second quarter 2016 guidance. The upgrade to the West Monroe SUS machine and corresponding downtime will temper our typical pattern of seasonal improvement in Q2. We expect Q2 EBITDA to be modestly better than our first-quarter results.

The remainder of our guidance is unchanged and is contained in the presentation on our website. Take you for your time this morning and I'll now turn the call back over to Mike for some closing remarks.

Thank you, Steve. We had a good first quarter and the year is off to a solid start.

We are investing in our core business to drive organic growth and lower costs, making strategic acquisitions to enhance growth and expand channels, and returning capital to shareholders to drive long-term shareholder value. Regardless of some of the macro trends in our core end markets, we see plenty of opportunities to continue to deploy our capital to ride future profitable growth.

Thank you for participating on today's call we look forward to speaking with you again in July. I'll now turn the call back to the operator for questions.

(Operator Instructions)

Mark Wilby, BMO Capital Markets.

Good morning, Steve, good morning, Mike.

Good morning Mark.

I wonder if you could, first of all, talk about what you are seeing in terms of wastepaper costs right now? It looks to us like we are seeing a little pickup in the OCC market, and I wondered whether you are seeing the same thing, and whether you see this as seasonal alone, or whether there's something more to it?

Yes, Mark. We would agree with your statement that we are seeing a little modest upward pressure on wastepaper pricing. We have been in that $5 to $10 a ton this year, so we are seeing a little bit of pressure coming off of a pretty low base, as you well know.

Okay. And I have heard from some people in the upper Midwest that maybe it is a little more intense there. You've got that mill in southern Michigan. Can you just talk about what you're seeing there?

Yes. I think that would be fair, that there is more pull in the Midwest, but I wouldn't characterize it as just the only spot we're seeing that in. I think it is really pretty balanced across the board, at least what we have experienced so far, Mark.

Okay. And Mike, can you talk a little bit about how you are seeing the deal pipeline? You have been mainly buying converting assets, but there has been talk over time about whether you might broaden your mill portfolio, and I would like to get a sense of whether that is something you think we might see over the next two or three years?

Yes. I would be happy to do that.

We think about, and Steve and I spent a fair amount of time talking about this, here with the recent acquisitions we have made domestically, we really want to focus on integrating those operations into our business in North America now. We've got a fair amount of synergies, as you can see from the materials, that we plan to flow through our business, if we execute like we believe we are capable of doing over the next 12 to 24 months. In terms of converting in Europe, as we told you, we took 2015 off to let that team catch their breath a little bit after three acquisitions we did there.

They've executed very well and we are at a spot now where we can probably take more of a look if something came along the lines that we were interested in converting-wise in Europe. Relative to mill assets, I would assume you are specifically inquiring about SBS. We would continue to be interested to acquire an asset if it became available and we felt the synergies were real and we could integrate into our business.

And I think you gave the proper timing, arising over the next two or three years. It is certainly something we think that would be good for our business, but it is not a necessity in the short term.

Okay. And then just two other questions.

One is, there has been a lot of talk about the Chinese ivory board, and I was just talking with a privately held competitor of yours over the weekend. It sounded like there might be some issues for them about wanting to bring in non-certified food contact board into their plans, whether they were using it for food-related production for that product or not. Can you talk a little bit about some of the issues there?

Yes. My understanding, Mark, is roughly 11 million tons of ivory board, as you well know. We have seen a little bit of modest amount on the West Coast in particular, but the real challenge that they have, from our understanding, is that the majority of that material uses optical brighteners in their sheet and in their process, and from FDA compliant standpoint, we understand that to be one of the challenges they have to overcome.

Okay. And the last question I had is just -- this Metro Packaging that you bought? That was a minority-owned business, which I assume had some benefit to their volumes for being a minority-owned business.

Obviously it is not a minority-owned business now, its a Graphic-owned business, so when you bought that business how did you think about some of the potential volume downside from just change in ownership?

Yes. We handicapped that a bit. We understood that, but what we really were interested in, is we were a little underserved, underclubbed if you will, in the mid-Atlantic states from an asset point of view, and it is a very, very efficient and effective converting location, and we believe we can scale it over time and probably also have some capital avoidance as we build out our supply change into that region.

Okay. I'll turn over. Thanks.

Thanks Mark.

Ghansham Panjabi, Robert W. Baird.

Good morning.

Morning, Ghansham.

Mike, first off, what do you think is actually going on in the CRB market as it relates to the reported price decline. Is this a function of just weaker demand on the margin, a slight increase in supply? Maybe both? You are obviously the leaders in that grade. How should we think about price, for both CRB and CUK from your perspective as the year evolves?

Okay, you've got a couple questions there. I will handle them in sequence.

Ghansham, from our standpoint I'm going to speak about what Graphic Packaging is seeing. If you think about our CRB business, we are a highly-integrated business. So for 82% of our tons flow through our packaging sales, which is really how we run the business. And now we have actually made some domestic acquisitions here, that will allow us to have another 80,000+ tons of CRB and CUK, that over time, as it makes sense, to increase our integration levels and improve our footprint, we will look to do so.

So if you think about the first quarter in particular, our CRB inventories actually went down. Our mills ran full, and we bought tons to run our business, to grow our topline by the 1% in the core, and then the 5% when you add the tuck in acquisitions, so we were fairly busy. We were pleased with what we saw.

Now, in terms of what is happening in the overall market, again, the CRB market in particular is a highly integrated market in excess of probably 70% to 80%. And so, at some level, we can appreciate the challenge that the industry trade journals have in trying to figure out what is going on there with their channel checks.

We don't actively participate in any of those, and what they are really left with doing is trying to figure out with an increasingly smaller independent group of converters on that 20% to 30% that remains, really what their view is on what is happening in the market. Hopefully that gives you a little color in terms of what we are seeing and how we look at it. In regards to CUK, what I can tell you is this - operating rates in that space have been very solid, as you know, if you look at the AF&PA data.

We are heading into the beverage season. We just got done with a 20 day-plus outage on one of our machines in West Monroe. Our inventories are down, and we need that machine and expect it to start up smoothly in order for us to run and operate our Business.

Okay. That makes sense. And then, maybe a question for Steve.

Steve, I think last quarter you called out a 4% to 7% increase in EBITDA year over year for 2016. You called out FX, the variance there, and also price cost. First off, is that range still realistic for this year? And second, can you update us on productivity if at all any different from last quarter?

Thank you.

Yes, sure, Ghansham, be glad to. As mentioned in the comments, we remain committed to our guidance of 4% to 7%, so no change there. And as we mentioned, we are seeing a little bit of tailwind, if you will, relative to FX.

$20 million to $25 million last quarter is now probably $5 million to $10 million, so there is a little bit of a natural pick up there. And as I mentioned, we see that being offset a little bit by this year - our price and inflation relationship is likely to be a little bit negative, driven by the fact that we are starting to pass over some of the deflation that we -- that occurred last year, and as you know we passed that through to our customers on a lag. So we are going to see a little bit of negativity there, and then as Mike just mentioned it will have a little bit of an impact on the pricing with CRB.

We see that relationship this year being a negative in the $15 million to $20 million. The combination of those two has very little impact on our EBITDA, and as such we remain committed to the full-year.

On productivity, you saw $16 million as a good strong quarter for us. Our commitment to the $60 million to $80 million remains intact and as Mike mentioned, we have got a real critical startup happening in West Monroe that will be an imperative as we come out of the second quarter and drive productivity for the remainder of the year.

Perfect. Thank you so much.

Thank you.

Danny Moran, Macquarie.

Good morning, Mike, morning, Steve, congratulations on the quarter.

Thanks Danny.

Just had a question on the price cost outlook, sounds like pricing is going to be $10 million or a little less than $10 million more of a headwind that you initially thought given the CRB cuts? But what specifically changed on the [info] cost side and drive the remaining $5 million to $10 million headwind versus what you were initially expecting?

Yes. I think as we entered into the year, Danny, we of course none of us have perfect line of sight into inflation, deflation. So we really guided for flat, and knowing that, depending on where the inflation, deflation area environment went, it could have some impact, at the time we were thinking, plus or minus $10 million, which is why we guided just a flat and monitor in the year.

What we are seeing, as you mentioned, other than OCC up a little bit, is pretty benign relative to inflation and so that flatness, if you will, actually for us on, the current year results in a little bit of negativity on the relationship, because we are passing through the deflation to our customers a little bit later than it actually occurred. Over time, that will come back as we look out over time - 2017, 2018 - and we have a long history.

If you look back over the last four years, our price and inflation relationship is in check as a Corporation over the last four years in total, slightly positive for paperboard segment as previously described. So, we believe that the relationship will hold. This will be one of the years, which we do see on occasion, where we will have slight negativity driven by the nine-month lag in what we just talked about on CRB.

Okay. Thank you for that.

And then any concerns on future shifts to CRB productions from other paperboard grades? One of your competitors shifting that we heard through the quarter? Any future concerns here?

Hi Danny, its Mike.

The way I would answer that is this: in terms of us speculating on what another producer would do, we would not want to do that. Having said that, one of the sell side analysts had talked about potentially that being a swing machine, and if in fact that is a swing machine, that would make some sense to us given that they are in both of those markets and it is really in line with the industry's trend toward higher integration levels for integrated converters.

We have not seen any of those tons in the marketplace, yet. To the best of our knowledge they have not made any public announcements. So we are also watching and monitoring. But that would be our view as we sit here today.

Got it. Thanks Mike, and last question for me. How would you characterize volumes thus far in late April?

I think we characterize them as consistent with what we saw in Q1.

Okay. Great - good luck in the rest of the year.

Thanks Danny.

Debbie Jones, Deutsche Bank.

Good morning.

Hello Debbie.

Was wondering if you could talk about Mexico for a second. With your G-box acquisition -- I think you made Marcel Balden head of -- or general manager of Mexico. He seems to have a pretty good vision around the growth in that country. And I am curious -- your strategy there, because it is not really an integration play?

Do you imagine over time that you will be growing through capacity expansions, or do you think that there are still opportunities for you to buy, by converting assets down there? And how much of a priority is that for you?

First off, thank you for taking the time to visit the facility, Debbie. We really appreciate that and your comments are right on target. We actually think it is an attractive market for us to do both things you just described: build out the existing assets we have, as you know one of the facilities in Tijuana was largely built and has excess capacity, so we can grow into that one.

We can optimize our asset that we have in Monterey, with our existing facility in [Cuetro], and really balance out our Business and improve our overall supply chain over time. And we also think, as the market continues to grow that there will be further tuck-in acquisitions that we can do, as they make sense. But in the near term we want to optimize what we have and think that will give us plenty of work to do over the next 12 to 24 months.

And we agree with you that one of the things that we are excited about with acquiring G-box was having Marcelo join our team because he really has a nice vision on that market and understands it well.

Thank you, and I guess my second question, I know it is a smaller part of the market for you, but the reduction in SBS, were you seeing similar things for Graphic Packaging? Was that a surprise to you as well? Kind of what you're thinking for the Outlook for SBS?

I think we've talked a lot about the outlook for SBS, even at the end of Q4 call, particularly as it related to mezzo tons starting to come into the US. It was not a real surprise that there is some pressure on that grade. We have been talking about that for a while, so I would characterize it as consistent with our expectations.

Okay, great, thank you. I'll turn it over.

Thank you, Debbie.

George Staphos, Banc of America Merrill Lynch.

Hi guys, good morning. Thanks for all the details.

Although, I would ask if it is possible, I know this is no change from prior quarters, but it would be helpful at least to us if the slide deck was available a little earlier it would help us in terms of trying to figure out what the moving parts were in the quarter. If you can do that, great - if not, no worries.

First question I had is the return that you are getting in West Monroe in those incremental tons, is that being calculated on an -- a forward-integrated basis? That's not just the mill pick up that you are expecting? Would that be fair? And is there a way to -- maybe this is asking for too much -- slice that relative to the mill side rather than the carton side.

George, it is Steve. Thank you for the input on the slides. Certainly we will look at the timing of that to give it you a little more space.

With regards to the West Monroe investment, actually it does stand alone. When we think about that $35 million to $40 million investment and the $12 million of EBITDA improvement, those are the mill-based economics. So we, as you gather from our acquisitions and from other overall productivity, that we drive through those acquisitions, that is where we get the integrated benefits.

So we try to have these stand on their own, so that is a mill-based return, if you will, on the benefits that we will get from the 30,000 tons. Those tons are sold and so, there is an assumption for us inherent in there that those are tons that we have sold into the marketplace that we will get the benefits, and it does not include the forward integration.

And if I could, George, a little bit of color on that. One of the things that we are pretty excited about -- last year we did one of the head boxes in Macon and this year, as you know, this year with the pressing section and another head box. We will deal with the curtain coater later this fall and another headbox on one of our paper machines in Q4.

In addition to the benefit Steve talked about, the downstream impact on our converting is significant. We are making these tons, they are lower cost and we're able to process them more efficiently through our converting operations, and that really helps us drive those targets that we put out there of $60 million to $80 million of productivity into the outlying years. So lower cost tons and higher quality is a good combination.

Thank you for the additional commentary. Perhaps you mentioned it before and I'd missed it, but it was more than I would normally expect, kind of an incremental tonnage, profit per ton, so that is very good. I know the question has come up in the past, I think we have asked it as well -- could you update us in terms of what you think the runway is to the continued $60 million to $80 million productivity ramp that you see per year, these projects being inherent in that?

Can you do that for the next two years? Three years? Indeterminate? That would be helpful if you could cover that.

Sure, its Steve.

As we've talked in the past, we really take a multiyear approach to our productivity commitments and line of sight to that $60 million to $80 million in our current structure and size is important to us, as you know. On the capital front, we have ongoing detailed 3 to 5 year capital plans; very detailed at a three year level, that give us confidence that we can continue to make the kind of investments that we have been making to continue to drive the capital component of our productivity.

Obviously the acquisitions continue, (technical difficulties) incremental improvement as we drive integration and capture cost benefits from the tuck-under acquisitions. And then of course, our ongoing lean and six Sigma every day doing better and continuing to drive productivity. Yes, George, it is very important to us, as you know, that $60 million to $80 million is a multi- your commitment to us and a good line of sight to it overall.

Thank you for the reaffirmation. Two last questions and I'll turn it over. I want to piggyback off of some questions or topics that Mark had teed up.

First off, in terms of the bleach board market. I think you had begun answering that you are looking at potential investments here if they do become available on a multiyear basis. How does the trend in pricing and supply demand affect your view in terms of whether SBS would be a more attractive market for you to get into, over time, to a larger degree.

Then the other question I had, just the tons that have cropped up in box board broadly, both in Europe and Asia. Our understanding, from talking to our context, is that the European capacity was really more of a threat here in the US, whereas the ivory board in China - the issue is more than it might disenfranchise other tonnage that have been coming into Asia that now needs to find another home and you have a ripple effect. Can you comment a bit in terms of where you are seeing, if any, more pressure? And any additional thoughts that you have on the topic?

Thank you, I'll be back.

Thank you, George.

In regards to SBS as is an attractive business platform for us over time, if you think about it we make two of the three major substrates, where -- we don't make one of them -- that we buy a significant amount tonnage for, so our overall integrated model works really well. When we are able to have mill assets and backward integrated into our converting assets, and if you think about some of the tuck under acquisitions we have done, they have been really focused on assets that largely convert CRB and SUS and we avoid some of the markets that utilize SBS, as an example, because we don't manufacture that grade.

So having that asset, or assets, depending on what you are talking about, could create some good options for us down the road if in fact it became available, they were priced right, we were able to acquire them right, and we felt the synergies were real and we could deliver them to the bottom line. That is really the consistent message from a strategic standpoint, that we've talked about over time and that really hasn't changed.

We are actively in those markets -- we know the SBS market well. We buy 200,000 tons of SBS in North America. We buy 100,000 tons of FPB board in Europe. So we understand the dynamics and really what is going on in those markets. That's how I would answer the first part of your question.

In regards to ivory board versus FPB board into the United States, the ivory board has really been built out for a long period of time, as you know. As I mentioned earlier we have seen a small modest amount of that on the West Coast. To the best of my knowledge, that pressure has not materially changed really over the last six to 12 months.

We do, we would agree with your comment that it seems like more of the discussion tends to be on the Scandinavian producers, potentially being able to land FPB board into the US. And one of those producers, our understanding is, actually made that sheet in a way that it addresses the optical brightener requirement that I talked about earlier, so they obviously had that in mind. That being a point that is important to make.

So, I guess in that regard, George, it is really not different than what we talked about our Q4 call and our view hasn't changed on it.

George, this is Steve.

The only thing I would add to Mike's point there is we also have a pretty defined view around those markets relative to pricing, supply, demand and the like so that would be -- we would take all that into consideration from an evaluation perspective as we looked at those alternatives. So having -- being a large net buyer, visibility into the markets and we'd certainly be would be very disciplined in our approach on how we would pursue one of the strategic alternatives if there was one available.

Thanks for that, Steve. I'll turn it over.

[Stella Bain], Jefferies.

Thanks for the color on the potential EBITDA impact for this year. I think you said what, $10 million? Should the year-over-year impact be comparable next year?

And are you considering moving more of your contracts on the [phone] and garden side not tied to PBW? Just because as you pointed out, the spot market is not reflective of your business per se?

Good morning, its Steve.

I'll just take the first part. The under $10 million for this year on an annualized basis would be under $15 million, so we will get a little bit of bleed over next year.

We will take on the under $10 million this year and then annualize it to $15 million, so there might be a little $5+ million next year that would roll over.

Okay.

And in regards to the second part, Phil, we really haven't an answered that. As you know, we deal with some of the largest, most sophisticated purchasing organizations, on the CPG side, really, in the world.

Those are our customers, and what they really would want is a little more transparency into the process than a single data point, in terms of movement up or down in terms of pricing. And so the trend has been more in that direction over the last three or four years, and we have found that works well for us and they seem to find benefit in that, as well.

Okay. That's helpful.

And then in the 1Q data, there seems to be a pack mix shift from PET to cans in CSD. Are you seeing that dynamic play out, and is that a positive development for you, or are you pretty agnostic?

Cans is a big part of our CSD business, but I cannot say that trend is really driven our overall CSD markets materially. It might be a modest benefit, but I would not point it out as being a big shift in terms of the mix that we are seeing.

Only on the beer side, there has been a little bit that we are in both cans and bottles. So its really not material.

On the beer side we are agnostic. Soft drink -- obviously we'd benefit if that was happening.

Okay, that's helpful. And just one last one for me.

Based on your M&A pipeline and growth in your core business, do you anticipate the need to bring on a little more CUK capacity in 2017, or is it more of a 2018 event?

I think what we will do now -- we're doing some pretty major work in West Monroe and Macon, and we had a pretty major outage in Macon last year. So as we think about going forward here, we want to bring these machines up, let them run, stabilize them, and again, our strategy is not to make tons that we don't already have sold. If you think about the 30,000 tons we are bringing on in West Monroe later this year, we will increase our integration into our European business.

Last year we did 150,000 tons. We believe this year we will be pushing 175,000 tons, and then if you add some of these tuck under acquisitions we have done, we have clear visibility into that 30,000 tons of growth that we will be increasing in West Monroe. So as we continue to increase our demand through our packaging sales, and we still have 60,000 to 70,000 tons of pulp capacity down in West Monroe that we can bring online as we have the need for it to run our Business.

Okay. On the integration front, as you pointed out, with the tons that you bring on into the acquisitions that you've just made, how should we think about the integration level, all said and done?

Well, we will be thoughtful in terms of how we do it. We want to optimize our asset base and supply chain, and over time we will see our integration level continue to increase. That's part of our strategy, and it helps us to really deliver consistent value to our customers and from being a packaging company in terms of our core, selling folded cartons to CPGs, that's really the model we want to employ.

Okay, thank you.

Chip Dillon, Vertical Research.

Yes, good morning, Mike and Steve.

Good morning.

Hey, Chip.

First question is on the -- you gave a good rundown of the six converting -- I guess there was a mill that you shut down, but operations you'd acquired in 2015 and 2016, $450 million in sales, $50 million, $40 million EBITDA growing to $70 million to $80 million. I just wanted to know if you have an update on how the Australian acquisition - which I think you said was about to close - I assume that is not part of that - and I do know you said it was accretive, but do you have any rough numbers as to how much that would add, both on the top and the EBITDA lines?

Hi Chip, its Steve.

Just by way of a couple of the numbers there that you mentioned, and this is in the slide deck online as well. With regards to the North American acquisitions, the $450 million top line, the $54 million of core EBITDA growing to $70 million to $80 million -- for this year 2016, that is about a $30 million to $35 million increment for us for this year.

Because we acquired some of them back in 2015 so there is overlap. So just as you are doing year-over-year EBITDA, as we mentioned with Colorpak, we have about $110 million business there in dollars at a 70 exchange rate, I believe. We will see $4 million to $6 million of EBITDA from that this year, given that we will close it here at the end of this week.

We see that growing into the $11 million to $13 million range over time in total. We feel real good about -- as we're starting to get to know the business. There is a nice opportunity there both for integration and some consolidation of our converting needs.

Got you. So, this is very helpful.

So on this, obviously if we use $54 million as a base, some of that if you are saying $30 million to $40 million in 2016, I would guess the $14 million to $24 million that is remaining -- well, actually that's not true. A small part of this was obviously seen in 2015, and because some of these other three, the G-box, Anderson and Metro are closing in 2016, some of that $54 million carries over into $17 million, plus whatever you get of the upside you talked about?

That is right, Chip, you said it well.

Okay.

You want to be careful with the $54 million as not a 2016 number. Our increment in this year is $30 million to $35 million from those specific acquisitions, and then Colorpak on top of that.

Okay. Which sounds like that might add an incremental $3 million or $4 million next year, as you have four-months that you did not have this year, plus as you start to get to that $11 million to $13 million level.

That's correct.

Okay, and then on the volumes, I noticed the way I think you report your volumes is, it can be impacted by, I believe, it is folding carton sales plus your open market sales. And so obviously if you cut back on your -- if your mix changes, put it that way, and maybe that is because you might actually either -- . A way to say it is, - if you elect to sell less in the open market, and therefore you need to otherwise buy less in the open market, that can hold down that number and it seems like the 1% on that volume number, the 600 -- . I had it right here. $87 million, I think it was, versus $681 million, does that reflect any year-to-year change? And should we, as we get through the year, expect the open market component to come down?

Yes. Let me take you through that and do some bridging for you. If you move from the 681,000 tons to 687,000, that's the 1% that you mentioned, Chip. As Mike mentioned, our core volumes were up about 1%, so roughly 6,000 tons or so. Our acquisitions, and they impacted the leap year, added another 27,000 tons, or roughly 4%. Which, as Mike mentioned, our core ongoing business was up about 5%.

Offsetting that, which is the numbers you have just seen, we shut down the Jonquiere mill last year, which took tonnage out, along with, as Mike mentioned, the shutdown of the West Monroe machine, number five machine that was making some kraft paper. That actually was 27,000 tons of production that we don't have year-over-year. So there's three components of that 1%. It is a plus 1% on the core, plus 4% on the acquisitions and a minus 4% on some things we've shut down, and that is how you will reconcile the tonnage.

Okay, that's very clear. And just so I'm clear, when you say your volumes were up 5%, does that include the benefit of the extra day? Meaning that if you took the extra day out, that would knock it down a few percent?

Yes. It does include it and it is in that 4% that I mentioned from acquisitions in leap year. There is a few tons there from the extra day.

Okay, got you. All right, very helpful, thank you.

You bet.

Thanks, Chip.

Anthony Pettinari, Citi.

Good morning.

Hi, Anthony.

Just following up on the CRB impact - you talked about a $15 million annualized impact, and when you look at the flow-through of that to earnings, does a disproportional amount of that hit in Q2? Or is it more evenly spread out over nine months, or 12 months? Could you give any color on how we should think about the timing of that impact?

Yes. Sure, Anthony.

We will see very little impact in Q2. It will start to meter in Q3 and Q4, and it will be in by year end. Which is why we will see a little under $10 million of it this year, and then the remainder into next year.

Okay. That is helpful.

And then just switching back to M&A - you've talked about the pipeline for converting assets remaining attractive, especially in Europe. With your leverage at the higher end of your target range and just closing three acquisitions and Colorpak closes shortly - are you consciously pausing M&A, either to work down leverage a little, or just to absorb the assets into the organization? Or you do you not necessarily see those as constraints? Could you remain as active in M&A in Q2, Q3 if the targets are there?

Anthony, the way I'd answer that question, as I outlined a little bit earlier, we would really look at North America in particular that we want to integrate the acquisitions we recently made. That is not to say we won't continue to have dialogue with folks, and sometimes the timing comes up and its something that makes sense for us to pursue - the synergies are real and helps complete some aspect of our business that we think is beneficial, we could transact.

But right now with the amount of acquisitions we have done in North America, we really want that team to be able to absorb that and execute on those high-level synergies that we've outlined for you here. In terms of Europe, we think our capacity is back again in terms of converting assets in particular, towards our long (technical difficulties) all that we've outlined here publicly here over the last few quarters, to really get our converting sales in Europe over $1 billion in sales. So that is how we think about the markets and the geographies in terms of where we would pursue M&A activity.

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

Mark Wilby, BMO Capital Markets.

Thank you, just a few follow-ons. First, Steve, can you give us a little more insight into that business combinations and other special charges line. I think it was about $10.5 million this quarter?

Sure.

Its $10.5 million and most of that is associated with the acquisitions, so costs that we are incurring to acquire the businesses. As you can tell, we have been pretty active.

A lot of those are acquisition-related costs, and then we have a couple of one time SG&A related costs that we were taking on just to keep our cost structure in line, that were one-time in their orientation. So we will always make sure we call those out appropriately for you, but they fell into those two categories.

Okay.

Second one I had is, just come back to this SBS market for a minute. It just strikes me, Mike Doss, that there has actually been a lot of SBS capacity that has had to come out of the market over the last five to ten years in North America. You have got IP closing this big machine at Regalwood right now, but I think at Evadale, there are at least two bleach board machines that are not running and that is after [Kemp Lillin] probably spent a billion dollars at that mill.

And then from what I can tell right now, there are bleach board mills, good bleach board mills that are probably running some pulp. So what is going on in that market? Have you had any additional insights? And given all that, why is that a good business for you to invest in?

Well I think that is a fair question, Mark. And I won't debate the facts that you outline there, but really in our view, we would run a little bit -- our hypothesis is we could run a different race by vertically integrating the business back into an asset that we would have. To your point, the EBITDA associated with that asset we would acquire factors in the market things you've already described, in terms of what we would be transacting at. And as Steve said, we would not be looking to pursue a deal that would not be accretive to our shareholders there.

It is not something we absolutely have to do, certainly in the near-term. But it is something that strategically, if it became available we would give it a good look and I think that's really consistent with how we have answered that question over time.

Okay in that last one I had -- just another broader question. You have done a great job over the last several years on taking out costs and dropping it to the bottom line. I just wondered whether there is opportunity, Mike, over on the marketing and sales side to look a little more closely at how you are pricing business and maybe see if there aren't some opportunities to pick up some incremental margin from how you sell or how you price?

Yes. Of course we are always looking for those kind of upselling opportunities, and that is why we spend so much time and effort really on our new product innovation efforts to refresh our product portfolio, Mark, find opportunities to integrate more of our tons into value-added products that help our customers ultimately generate lift in the marketplace.

And so, those products tend to carry higher variable margins where we are able to come up with something new and different. So that has been and will continue to be a big strategic focus for us over time.

Okay very good. I'll turn over. Good luck in the second quarter and the balance of the year.

Thanks a lot, Mark.

George Staphos, Banc of America Merrill Lynch.

Thank you. Hello. Thanks for taking my question at the end. Just a grab bag at some one-off questions.

First of all, I noticed that the junk airmail assets are being liquidated, and that has been shown in some ads in the trade press. What ultimately happens to those mill assets, potentially? Could they somehow come back to running in North America again in grades that would compete against you? That's question number one.

Secondly, how is online purchasing affecting your customers' business, and what are the opportunities and what are the challenges both in terms of substrate production and then also carton design in that regard? And then lastly, it was nice to see the core growth be positive. I imagine, and you called it out, that beverage is a big driver of that.

Can you call out any specific new products or innovations that you have been working on over the last couple years that help drive that volume growth? Thanks and good luck in the quarter.

Okay. I am going to break those down, George. In regards to Jonquiere, we don't believe that those assets, even though certain aspects of the mill are being sold by a liquidator, are going to have the material impact, if any impact, really, in terms of the markets that we compete against.

We're thoughtful in terms of how we structure those sales, so we don't expect any challenges there. In regards to online - that is an interesting new avenue for us. We are actually learning a lot about that.

Many of our customers are spending some time with Amazon and Amazon Prime in particular, trying to understand what it could mean for their business and we are having some of those meetings, both with them, and with the e-retailers, to really understand what the supply chains will look like over a multi-year period of time. And we think that are some opportunities for us, although right now we are really more in the exploratory phase. But that would fall under new product development activity that I talked about in response to Mark's question, and it is something we will continue to work on.

Your last question, in regards to our core business, specifically beverage, the way I would answer that is -- our core beer, our global beer sales continue to be quite strong. I was up at our Crosby, Minnesota facility last week, which manufactures machinery for, primarily beer, but also some of our carbonated soft drink customers. And for the third year in a row, our demand will exceed the prior-year, and those were all record years for us.

So we continue to sell machines. This premiumization trend we've talked to you about putting beer into paperboard packaging is real, and something our customers continue to invest behind. That's really the biggest driver of what I would say our beverage volumes would look like.

Craft beer continues to be a good market. We invested in Carded Graphics. We are installing another gluer into Carded Graphics, which will allow us to manufacture even more baskets into that facility and that is a result of those markets continuing to grow. That is really where we are seeing the growth on the beverage side of the business.

Thank you, Steve. Thank you, Mike.

You bet.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you very much, and we'll look forward to talking to you again at the end of the second quarter.

This concludes today's conference call. You may now disconnect.