Graphic Packaging Holding Co (GPK) 2017 Q4 法說會逐字稿

Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Graphic Packaging quarterly earnings conference call. Alex Ovshey, Vice President, Investor Relations of Graphic Packaging, you may begin your conference.

Thanks, Denise. Good morning, and welcome to Graphic Packaging Holding Company's conference call to discuss our fourth quarter and full year 2017 results. Speaking on the call will be Mike Doss, the company's President and CEO; and Steve Scherger, 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 Webcasts and Presentations link on the Investors section of our website at 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 obligation to update such statements, except as required by law.

Mike, I'll turn it over to you.

Thank you, Alex. Good morning, and thank you for joining us to discuss our fourth quarter and full year 2017 results. Fourth quarter adjusted EBITDA met our expectations at $192 million compared to $175 million in the prior year period. Net tons sold were up 1.9%, driven by acquisitions and the continuation of modestly positive core volume. Solid productivity, the benefits of the acquisitions and positive core volume were partially offset by higher commodity input costs. While recycled fiber cost moderated significantly during the quarter, we incurred escalating logistics and chemical input costs. We remain focused on offsetting our commodity input cost inflation with pricing initiatives over time. Full year 2017 adjusted EBITDA was down 6.8% as the benefits from acquisitions, modestly positive core volume and productivity were offset by significantly higher commodity input costs and lower pricing. In 2017, our pricing-to-commodity input cost relationship was a $98 million headwind, reflecting lower pricing and significant commodity input cost inflation. Pricing was negatively impacted by the 2016 reductions in the RISI CRB price index, partially offset by the realization of our CUK and CRB price increases in 2017. Commodity input costs were significantly impacted by escalating recycled fiber costs in the first 3 quarters of 2017 and higher logistics and chemical input costs in the second half of the year. We remain committed to recovering our negative pricing-to-commodity input cost relationship, which impacted 2017 results. The recently announced price increases for CRB, CUK and SBS are an important step in the recovery process. Supply-demand dynamics across our paperboard grades are healthy. In 2017, the AF&PA reported the average industry operating rate for CRB was 95% and for CUK and SBS, it was 96%.

Cash flow was solid as we generated $365 million in 2017. Our focus on growing our cash flow and allocating it effectively is unchanged. We continue to make progress on all our key strategic capital allocation priorities.

Before I discuss the progress we're making across our key strategic priorities and the details of the quarter, I would like to provide high level 2018 financial guidance. We closed the transformative combination with International Paper's North American Consumer Packaging business on January 1, and our 2018 guidance reflects the expected full year benefits from the transaction. We expect to generate approximately $1 billion of EBITDA in 2018. Steve will provide more details in his remarks, but our 2018 guidance reflects $235 million of EBITDA from the IP transaction, including the first-year synergies, a relatively neutral pricing-to-commodity input cost relationship, strong productivity and the benefits of 3 tuck-under acquisitions we completed in 2017. We expect 2018 cash flow to increase significantly to approximately $475 million.

Now let me provide more detail on the key operational trends from the fourth quarter and discuss our 3 strategic capital allocation priorities and how we executed against them in 2017. Core organic volume in our global paperboard business was up 0.7% in the fourth quarter and has been positive for 3 consecutive quarters. Our core organic volume was up 0.5% for the full year in 2017, outperforming the market trends as reported by ACNielsen, reflecting the continued success of our new product development pipeline. Our global beverage market remained relatively healthy in the fourth quarter. Our global volume was up low single digits in the quarter and for the full year despite the softness in the North American mega beer market. As we've discussed in the past, we expect our new product development efforts to drive about 100 basis points of organic volume growth per annum.

Let me highlight one important new product commercialization in the quarter. We have partnered with JBS Foods, one of the largest protein processors in the world, to introduce our patented microwaveable tray and bowl technology, MicroRite, into Brazil. As a reminder, the technology enables traditional oven-baked quality to be achieved in the microwave while maintaining reduced microwave cooking time. The product is produced at our Wausau, Wisconsin facility and is exported to Brazil. The product was launched in Brazil in late 2017 and will generate several million dollars of annualized revenue, with significant potential for growth in 2019 and beyond. The tray and bowl both utilize our SBS paperboard.

Turning to operations. We closed our Santa Clara, California coated recycled paperboard mill as planned on December 1, 2017. This action was enabled by strategic capital investments at our Midwest coated recycled paperboard mills as well as our West Monroe, Louisiana and Macon, Georgia coated unbleached kraft paperboard mills over the last several years. We have quickly and successfully integrated these mills into our West Coast supply chain. Our mills ran well and our backlogs improved 5-plus weeks for CUK and CRB, reflecting modestly improved demand and the closure of our Santa Clara mill. As a reminder, our CUK and CRB mill operations are highly integrated with our converting platform, consuming approximately 86% of all the paperboard we produce for these grades.

Shifting to performance. Continued emphasis on improvement initiatives, variable costs and operating efficiencies contributed the majority of the cost savings in the quarter. We operated well and generated $24 million of net performance in the fourth quarter. We generated $57 million of net performance in 2017. Our performance was solid in 2017, but was negatively impacted by significantly planned maintenance downtime at our West Monroe mill in Q1, the hurricanes in Q3 and the closure of Santa Clara in Q4.

Moving to costs. While recycled fiber input costs moderated significantly in the quarter, we incurred escalating logistics and chemical input costs. In 2017, we incurred $71 million of commodity input cost inflation. More than half the inflation was driven by higher recycled fiber input cost in the first 3 quarters of 2017. The remainder was driven by higher logistics and chemical input costs, which accelerated in the second half of the year. We expect to incur elevated logistics, chemical and resin input costs in 2018. As we've stated previously, we remain focused on offsetting our commodity input cost inflation with pricing over a reasonable time frame. We recently announced a $50 per ton price increase for both -- for CRB, CUK and SBS to our open market paperboard customers, an important step in the process to recover and offset our commodity input cost inflation.

I will now review our 3 strategic capital allocation priorities and how we executed against them in 2017. Our first strategic priority is to reinvest in our business where we can generate compelling rates of return on capital projects across our mill and converting systems. We invested $260 million in capital expenditures in 2017, which will drive a significant portion of our 2018 productivity. In the first quarter of 2017, we invested $40 million to upgrade 2 headboxes at our #6 CUK paper machine in West Monroe, Louisiana. The project has lowered variable costs at the mill and has resulted in improved sheet quality, which is driving lower costs in our downstream converting operations. Looking ahead to 2018, we expect our capital expenditures will be approximately $380 million. In 2018, we will install a curtain coater on the #2 paper machine at our Macon, Georgia CUK mill. We added a curtain coater on the Macon #1 paper machine in 2016. The curtain coater enables a significantly more efficient application of coating chemicals to the paperboard. As a result, we will continue to materially reduce our consumption of TiO2, the price of which has significantly escalated since 2016. We expect to invest about $30 million in the project and generate approximately $10 million of EBITDA on an annualized basis. We will also invest about $30 million to rebuild a recovery boiler at the new Augusta, Georgia SBS mill. This is an extensive project that was driven by the need to rebuild critical parts of the boiler. The project will drive significantly improved reliability at the mill. The project will require approximately 40 days of planned maintenance downtime, which will take place in late October through the end of this year. International Paper began the planning and engineering of this project in 2017, and we were fully aware of the investment when we were evaluating the combination. We will also continue to invest behind our food and beverage converting plants in 2018 to drive lower costs. We'll provide more details on those projects as we execute against our internal plans. We expect the capital investments related to these projects will allow us to continue to deliver productivity benefits in the mid- to high end of our targeted $60 million to $80 million range, separate from the $25 million in synergies we will capture from the IP integration.

Our second strategic priority is to execute on acquisitions at post-synergy multiples that are well below our trading multiple. We had a busy second half of the year. We closed the Carton Craft, Norgraft and Seydaco acquisitions. The acquisitions we closed in 2017 met key strategic priorities we look for in potential opportunities, specifically, an enhanced product, customer and geographic profile and further run rate to reduce our costs. The integration of these acquisitions is on plan. We spent $203 million on these acquisitions in 2017, and we estimate that we paid approximately 6.5x forward EBITDA, taking into account the synergies we expect to achieve.

Now let me briefly discuss our acquisition strategy in the context of the transformative combination with International Paper's North American Consumer Packaging business. The combination creates a compelling platform for Graphic Packaging to grow in SBS food service and folding carton converting, organically and through acquisitions. Looking ahead to 2018, we see a solid pipeline of acquisition opportunities that will allow us to further integrate our SBS mills and increase our scale in SBS food service and folding carton converting. Our focus is on acquisition opportunities in North America and in Europe.

Our third strategic priority is to return capital to shareholders to drive long-term shareholder value. We returned $156 million in cash to shareholders in 2017 through $93 million in dividends and $62 million in share repurchases.

And with that, I'll turn the call over to Steve Scherger, our Chief Financial Officer. Steve?

Thanks, Mike, and good morning. We reported fourth quarter earnings per share of $0.56 per diluted share, up compared to $0.11 in the fourth quarter of 2016. Fourth quarter 2017 net income was negatively impacted by an after-tax charge of $14.9 million for business combinations and other special charges.

The quarter was positively impacted by a $136 million benefit related to the Tax Cuts and Jobs Act of 2017. The $136 million benefit was primarily related to a reduction in our deferred tax liability, reflecting the impact of the tax reform legislation. When adjusting for these charges, adjusted net income for the fourth quarter was $52.8 million or $0.17 per diluted share. This compared to the fourth quarter 2016 adjusted net income of $44.7 million or $0.14 per diluted share. For full year 2017, we reported earnings per share of $0.96 per diluted share, up compared to $0.71 in 2016. Full year 2017 net income was negatively impacted by an after-tax charge of $32.5 million for business combinations and other special charges. The full year was positively impacted by the $136 million tax benefit recorded in the fourth quarter. When adjusted for these charges, adjusted net income for full year 2017 was $196.7 million, or $0.63 per diluted share. This compares with the full year 2016 adjusted net income of $233.4 million, or $0.73 per diluted share.

Focusing on fourth quarter net sales. Revenue increased 5%, driven primarily by $37 million of volume from our acquired businesses, modestly positive core volume and a $16 million benefit from foreign exchange. Price turned slightly positive in Q4.

Turning to fourth quarter EBITDA. The $17 million increase to $192 million was driven by solid performance of $24 million, positive volume from acquisitions and core volume of $7 million, slightly positive pricing and a $3 million foreign exchange benefit. These benefits were partially offset by $11 million of commodity input cost inflation and $6 million of labor and benefits inflation. We ended 2017 with over $1.1 billion of global liquidity and $2.2 billion of net debt. Total net debt decreased $51 million during the quarter. During the quarter, we contributed an incremental $82 million to our pension plans, which I'll elaborate on shortly. We generated $365 million of cash flow in 2017 before the additional $82 million pension contribution. We invested $260 million in capital, completed $203 million in acquisitions and returned $156 million to shareholders via dividends and share repurchases. The year-end 2017 net leverage ratio was 3.1x adjusted EBITDA compared to 2.76x at the end of 2016. In conjunction with the combination on January 1, we assumed $660 million of International Paper debt and concurrently amended and extended our senior secured credit agreement to 2023. We remain committed to our long-term net leverage target of 2.5x to 3x.

Before I provide more detail on our 2018 guidance, I'd like to briefly discuss the impact of the recent tax reform legislation and our pension.

Starting with tax reform. Graphic Packaging is a significant beneficiary of tax reform with approximately 85% of earnings generated in the U.S. We expect our effective tax rate will be reduced to the 24% to 27% range from the 35% to 37% range previously. Prior to tax reform, we expect that our NOLs will allow us to be a minimal U.S. federal cash taxpayer through year-end 2019. We will continue to assess the overall impact of tax reforms. Currently, we expect that we'll not be a material U.S. federal cash taxpayer through 2020. We expect total cash taxes will be in the $20 million to $40 million range per year from 2018 to 2020. The key driver in the extension of the NOLs is the 100% expensing provision for capital expenditures in the new legislation, which reduces taxable income and extends utilization of the NOLs.

Turning to pension. Our aggregate funded status improved significantly in 2017. The improvement reflects continued strong performance of the plan assets and an additional $82 million contribution we made to the plans in the fourth quarter. In 2017, we contributed $119 million to our plans, significantly above the $30 million to $40 million we initially communicated. The $82 million contribution was made given the opportunity to derisk the U.S. plan and significantly reduce our expected pension contributions on a go-forward basis. Post the $82 million contribution, we further shifted the U.S. plan away from risk-seeking assets. We continue on a path to derisk the plan. We expect our pension contributions to decline to the $5 million to $10 million per year range on a go-forward basis compared to $40 million to $60 million per year over the last 7 years.

Turning to full year 2018 guidance. As Mike referenced, we expect our EBITDA will be in the $1 billion range in 2018, excluding approximately $25 million of onetime costs associated with the planned Augusta recovery boiler rebuild. We expect the pricing-to-commodity cost inflation relationship to be relatively flat in 2018. Pricing will be roughly a $20 million positive as we benefit from previously realized CRB and CUK price increases during 2018 and the flow-through of higher prices for business tied to cost models. We expect commodity input costs will offset known pricing based on current inflationary trends. We've factored in a modest tailwind from lower recycled fiber input costs. We expect OCC prices in our Midwest OCC fiber basket will average $15 to $20 per ton lower in 2018 versus 2017 average level. Given the inflation we experienced in Q4, we have factored in higher logistics, chemical and resin input costs into our 2018 guidance. We expect our labor and benefits inflation to be $25 million to $30 million in 2018. On performance, we're well positioned to achieve at least the midpoint of our targeted $60 million to $80 million range, excluding the expected $25 million in synergies from the IP combination.

Shifting to volume. We expect core volume to, again, be relatively flat, consistent with our performance over the last several years. We remain focused upon outperforming the market through new product development, customer and geographic expansion and substrate substitution, also all consistent with prior years. We expect to earn $35 million of EBITDA from the International Paper combination, including the targeted $25 million of year-1 synergies. As we manage through the January cold weather and ramp up the synergies, we expect first quarter EBITDA to be in the $225 million to $235 million range.

Finally, turning to cash flow. We expect cash flow will be in the $475 million range. The bridge from approximately $1 billion of EBITDA reflects interest expense of $125 million to $135 million, cash taxes of $20 million to $30 million, pension contributions of $5 million to $10 million, capital expenditures of $380 million and positive working capital of $15 million to $20 million. The remainder of our guidance is contained on the last page of the presentation on our website.

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

Thanks, Steve. While we incurred a significant pricing-to-commodity input cost inflation headwind in 2017, we executed on our key capital allocation priorities and announced the combination of -- with International Paper's North American Consumer Packaging business, which closed on January 1. In 2018, we are keenly focused on recovering commodity input cost inflation through pricing. We will plan for flat volume and have targeted plans in place to outperform the market through new product development and substrate substitution, consistent with previous years. We will continue to be well positioned to generate productivity that is well in excess of our labor and benefits cost inflation. And the transformative International Paper transaction significantly increases the opportunity set we have to deploy capital across our 3 strategic capital allocation priorities to drive shareholder value in 2018 and beyond.

I'll now turn the call back to the operator for questions.

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

My 2 questions will be as follows: First, in terms of new product introductions, where are you seeing the most benefit, if you can specify by end market? You mentioned you have a new oven-ready microwavable, but are there other things like that? Is there any increase in volume and backlog because of prebuying, do you think? If you can answer that question as well? And then separately, I just wanted to check, Steve. The $475 million of free cash flow or cash flow, as you're guiding it, just to be clear, does that include the payments that you'll be making to IP? My guess is they don't because it's not part of that bridge, so whatever we come up with in that number, ultimately, we should then back out the minority interest to get to our free cash flow versus your free cash flow.

George, it's Mike. I'll take the first part of that question and then let Steve comment. In regards to new product, I'd characterize the real focus for us right now is on our Strength Packaging platform, which is really, again, around eliminating tertiary packaging with many of our customer products, and those are the disappearing pallets, corrugate substitution, those types of products, and we've seen a steady demand for those types of initiatives and new product development activities, and we've been pretty successful in bringing several of those to the market here over the course of the last 12 months. The other area where we're shifting gears and really amping up our efforts in conjunction with the new resources that joined our company on January 1 is on this whole area of what I'll call bowl pressing, replacing CPET -- traditional CPET bowls with paperboard bowls with various coatings that provide some grease and water barrier and yet tend to be more recyclable and compostable. So those would be 2 real areas I'd point you to. I mentioned the microwave product, that's been an ongoing focus, as you know, for many, many years and it will continue to be so as we go forward with an extended base. In regards to prebuying, I'm assuming you're talking about paperboard. We don't see that right now in a material fashion, at least. I mean, I'm sure there could be some minor amounts around the edges. But that's not something that I'd characterize as being anything we're seeing at this point. And I'll defer it to Steve now to comment.

Yes, George, it's Steve. With regards to the $475 million of free cash flow, that's our traditional definition for 100% of the business. And you may recall, the only cash that we'll be moving to International Paper this year would be the dividend equivalents from the partnership interest, and there'll be 3 of those payments this year to them for the equivalent of the roughly 80 million share equivalents multiplied by our quarterly dividend, and there'll be 3 of those. And that's within the context of what would be our overall dividend payments that you'll see for the year.

Your next question comes from Mark Wilde with BMO Capital Markets.

I'd like to just come back to sort of the guidance around price and just EBITDA for the full year because it seems like you're not really recouping sort of the combination of kind of cost pass-through from last year, plus price increases that were announced last year, if we look at your kind of pricing guidance for 2018. And at the same time, it's kind of related to that, it seems like all you're really doing in terms of the core EBITDA is getting back to kind of the 2016 level. And since then, you've made acquisitions and you've invested a lot of capital. So I'm just -- I wonder if you can help us reconcile that.

Yes, Mark, it's Steve. I'll start, then Mike can add in some context. I think relative to the pricing guidance of $20 million, let me just take you through that. That has all known pricing activities in it. So that includes the net $15 on CRBs, the net $30 on CUK from last year as well as the cost model pass-throughs. And it also has in it, as you know, we're -- we negotiate with customers on a multiyear basis throughout the year, and so it has some of the net impact of those negotiations in it. And so it has everything that's known. What it doesn't have in it at this point is, of course, the price increase announcements that we've made, the $50 on all 3 substrates. As you know, most of that will be a late 2018, early 2019 recognition, assuming that it -- that those are recognized. And I think to your point around price cost, I mean, we're keenly aware that we have about, as Mike mentioned, about $100 million price cost headwind that we navigated through here over the last really 18 months, and that's what we're obviously very focused on recovering to get back to the kind of margin profile that you were recognizing in really '16 and beyond in terms of what we're continuing to aspire to do with the recovery that needs to happen on price versus cost.

Yes, Mark. I mean, your comment is spot on. I mean, as I mentioned in my prepared remarks, we've got a $98 million price cost spread and right now, the guidance that we've provided here, it's basically a neutral price cost spread. So we've got to go initiate pricing activities and go recoup that over the next 12 months. That's where we're going to be focused on going after it.

Okay, and if I could, for a follow-on. I'm just curious if you could talk a little bit about sort of puts and takes in the sort of the packaging business, because I noticed over in Europe, in particular, it seems like there are some good things and some potential challenges for you. We're seeing some stories about pressure on sort of single-service cups. But at the same time, we're also seeing a lot of stories about kind of pressure on plastic consumer packaging. So I wondered, Mike, if you could help us kind of talk a little bit about those crosscurrents.

All that's very accurate, and we see the same things and are heavily involved in many of those products, as you well know. We continue to believe that fiber-based products are actually a good story. They're made from a renewable resource. They are recyclable and compostable, and that's obviously on a positive side. On the other side of that ledger, we need to do a better job working with our customers to really kind of close the loop in terms of our ability to capture some of that material and bring it back and get it -- more of it recycled. So kind of a 2-part effort: we want to do the new product development work, but we also need to make sure that we're advocating with our customers to figure out how to capture that material and get it back so that it can be reused again, Mark.

Your next question comes from Mark Connelly with Stephens.

This is Ashish Gupta for Mark. Just first question. So the modestly positive core volume kind of sounds really positive to us, it's almost like a blowout level after the last couple of years. Kind of looking aside from like the new product development, can you share some more details on sort of what's going on in the processed food markets? How you think about soft drink demand as we look out a little bit further?

Well, I think, even when you look at the individual verticals, there's obviously some up and some down, and we talked about some of the different verticals in the past so I won't spend a bunch of time on that this morning. But what I will say, what we saw in 2017 was it seemed and felt more like we were able to kind of bounce along the bottom in the terms of our core volumes, and our new product development activities really were accretive in that regard and really helped us drive that 100 basis points that you saw in terms of volume gain year-over-year, and that's how we started January as well. So look, every quarter, it's something that we watch very carefully. We're working closely with our customers to help them win in the marketplace. It's a challenged marketplace, as you well know. But we expect that, that trend will probably continue here in 2018, and that's how we're building our business and focusing our new product development efforts.

Okay, just a follow-up on that. So is there a sort of a way to parse through kind of what the acquisitions from the last couple of years have helped contribute to that organic volume growth versus -- I mean, obviously, anything acquired recently isn't organic, but looking further back, how the -- maybe anecdotally, how the acquisitions have contributed to this organic volume growth versus the new product development?

Yes, let me -- this is Steve, I'll take a cut at that. As you see, what we -- when we portray our results, we always call out the acquisitions a bit separately from core volume. And then once we get into a full one-year overlap on those acquisitions, of course, that becomes core. What we've seen from that is, over the last 3 quarters and really through the year, is we've had very modest net growth from that, 0.5% for the year -- for this year. Once we get into a full year of ownership for the acquisitions, yes, they've played a good important role because we have been investing in markets and geographies with those acquisitions that have a little better growth profile. So it's been part of the remixing of the portfolio towards businesses that are more local in orientation, regional businesses that are serving food service applications, that are serving craft beer, for example, that are winning in some of the applications that are better for you, good for your foods. And so, yes, it's played a role along with new product development.

Your next question comes from Anthony Pettinari with Citi.

I had a follow-up question on the outstanding price hikes that aren't baked into the $1 billion guidance. Assuming they are successful, can you remind us how long you'd expect it to take for those to show up in earnings? I think CRB and CUK have taken up to 9 months, but you've been trying to kind of accelerate that. Any comments you can give there? And then, can you compare that to SBS, what you've seen from IP's history and your experience as an SBS buyer?

Yes. Thanks, Anthony. It's Steve. Just to kind of take you through that. You're right, 9 months is still roughly right relative to CRB and CUK. About 6 months has been the norm for SBS, that's what we would have experienced previously and what we see with the team now relative to SBS, so a little bit of a combination of 9 and 6. Assuming some natural recognition here, late Q1, you -- we would see, predominantly, a 2019 positive impact, but we would estimate that we might see 25% of it rolling through 2018, kind of coming out the back half of the year. We'll obviously continue to keep you informed of how that plays out once there is recognition. But that's how it would naturally play, given -- assuming some level of recognition.

Okay, that's very helpful. And then, just on the performance improvements. I think you indicated the closure of Santa Clara impacted performance improvements in 4Q. I'm wondering how much of a hit that was. Does any of it continue into 1Q? And then, I think in the past, you talked about Santa Clara was maybe a $10 million benefit to performance improvements. So just wondering if that's still the case and what the kind of timing of the realization of the benefit for Santa Clara would be.

Yes. Sure, Anthony. It's Mike. I think if you think about that, it was probably about a $5 million impact in Q4 in terms of EBITDA. We built about $10 million worth of inventory, which we're now relieving and will be really fully relieved by the end of Q1. And the $10 million of EBITDA improvement is intact for 2018, and it's really already started.

Your next question comes from Ghansham Panjabi with Baird.

Hello? Can you hear me?

Yes, we got you.

So first up, on the -- back to the core volume growth of 0.7% in 4Q. Did the quarter benefit, do you think, from some of the beverage customers having been disrupted during 3Q from the hurricanes and maybe kind of a normalization of production in 4Q? Maybe you can give us a sense as to how the beverage market specifically performed for you in the quarter?

Yes, I mean, our global beverage was actually pretty good. Our North American mega beer was actually down quite a bit, consistent with the trends that were well chronicled and reported there, Ghansham. So I wouldn't say that we saw a big correction or -- relative to what happened in Q3, relative to the hurricanes. It was kind of steady and as we expected.

Okay. And then, just in terms of your projects to reduce the usage of chemicals such as TiO2 that you referenced, Mike, was the time line sort of accelerated given the increase in raw material costs? Or are these part of your normal productivity project pipeline?

Ongoing. It's really all part of our ongoing productivity pipeline. We'll have to do that, as you know, during our annual outage in Macon, which will take place in September of this year. So we have to queue those projects up on a year-over-year basis to manage the downtime associated with the installation. The good thing for us on this one is it's the second one we're doing at the Macon mill, so we understand how to do it and what it's going to take, and we expect it to go well.

Your next question comes from Chip Dillon with Vertical Research.

First question is to do with the -- is with -- you've mentioned the $1 billion EBITDA guide for the year. And did you say that did not include about, what was it, $25 million-or-so for the impact of the outage at the Augusta mill, is that right?

That's right, Chip. It's Steve. Yes.

Okay. And then, the other thing is on the operating cash flow guidance. You mentioned the $380 million in CapEx. It looks like about every year, you spend roughly $20 million on these -- on the packaging machine capital. Is that sort of a good number to use?

Yes, that's a good number.

And Chip, it's Steve. Just kind of going back to your question on the Augusta recovery boiler rebuild, that $25 million won't be negative to our net cash flows as a corporation. We've got, as you know, a fair number of moving parts this year also on the closure of the Santa Clara mill. That's real estate that has some inherent value. So we're trying to look through that for you and so that the $475 million kind of takes the net impact of some of those onetime expenditures into consideration.

Got you. And then, as we look at the pricing for the -- let's just, for instance, say the SBS initiative, if successful, because that's a business you haven't really been in up till now, is it fairly safe to say that very little of that would be subject to the, what I'll call, a cost-plus model that would maybe limit that impact?

That's accurate, Chip. It would be predominantly driven off of a RISI index for pricing.

And is it probably still fair to say that the other 2 substrates, that it's -- kind of a good guess is 50-50 is subject to the pricing and 50% might be more tied to costs?

Yes. It's actually not a guess. You're accurate in your assessment on that.

Yes, Chip. There's about 2.5 million tons that are kind of linked more toward RISI, if you look at the total versus the 3.7 million tons of overall production capability.

I see. I got you. And then, just for our modeling, to make sure we're right on this. It sounds to me, since you will recognize the minority interest being half of your after-tax income -- I'm sorry, that made no sense, 20.5% of your after-tax income, there's no reflection of any share issuance until -- unless and until they decide to sell their interest in 2 years.

That's correct, Chip. Everything that we'll do when you see us reporting will be based upon roughly the 310 million shares that we have as GPK. They'll have, as you rightly said, a 20.5% interest in the partnership that'll be recognized as a minority interest after-tax on the P&L that you'll see in Q1.

Your next question comes from Brian Maguire with Goldman Sachs.

A question on the $1 billion EBITDA guidance. I know in the past, you've given a range, sometimes maybe a $20 million range, and this time I recognize $1 billion is a nice round number to use as a point estimate. But as you're thinking about it internally, when you communicate to the troops, is it -- would you say $1 billion is more at the low end of what you kind of view as a positive year for you guys this year? Or is that truly the midpoint? And then, if it was to slip a little bit below the $1 billion number, what sort of factors would you think would drive that?

Brian, it's the 1st week of February and so as we're kind of looking at that from $1 billion, we think that's the right number to put out there right now given some of the various puts and takes that are there. As you know, right now, in terms of some numbers for you, OCC is at $94. Our guidance we gave you is at $115. Last year, it was $130, so there's different continuums along those lines. The dollar's a little weaker now than it was last year. What's that going to be when we finish the year? I mean, those are all things that can move it, to your point, $10 million or $20 million, kind of around that $1 billion number. So that's why we did it the way that we did it and tried to waterfall it so you could kind of see how it was coming together.

Okay. And then, just a question on the price increase announcements that are out there. I guess that both the SBS and the CUK ones, it seems like last year, there was good support for that. CRB, I guess the question is, what's sort of different now versus November when RISI sort of surprised people with the $35 coming out there that gives you confidence you think you can get some of the $50 increase through now? Maybe just summarize what you think has changed in the market since November.

So what I think has changed in the market really over the last year, if you think about it, Brian, is 260,000 tons of capacity have come out. As we think about that capacity, I would kind of lump CRB and CUK together, so you got 4.5 million tons between those 2 grades that were made. You can take 260,000 tons out against that, it's about 5.7% of capacity that's been essentially removed. You're starting to see that in the CUK operating statistics. Both November and December, you saw, were quite strong year-over-year. I expect that trend to continue as we go into 2018, given the fact that we shifted 75,000 tons from our mill in Santa Clara into our CUK system. So really, I mean, if you think about it, it's really supply and demand and relative to how those substrates will actually perform, and that's really how we're looking at this as we enter 2018 and why we made the decision to implement pricing announcements.

Okay. Just one last one for Steve, for modeling. Is $380 million a good number for CapEx going forward? Or is it -- is there any -- you mentioned Augusta spending this year, is there anything temporarily boosting it this year? Or is that a good number to use going forward?

Yes. Thanks, Brian. I think, the way to think about that going forward, if you kind of take the new enterprise, I think, baseline CapEx, we used to be kind of in that 200 range pre the combination. I think if you look at kind of baseline now and given the acquisitions that we've done, I'd probably use in the $320 million range as kind of baseline CapEx. Anytime we spend above that, we'll continue to do what we've done in the past, which is to lay it out for you very specifically relative to those investments, just like we're doing this year, curtain coater, Augusta recovery rebuild, et cetera. So $320 million is probably baseline. I think you've seen from us that we always do have good, solid projects that we would tend to bring forward, they tend to be in that $30 million to $50 million range on a go-forward. So I wouldn't use $320 million necessarily. I'd step it up a little bit for the investments we're likely to make. But this year, we do have a little bit of the unique investment on the Augusta recovery rebuild at roughly $30 million.

Your next question comes from Debbie Jones with Deutsche Bank.

My first question is on volume. Second, just on the cost guidance. If you look kind of historically at the rate of shift from boxboard to plastic packaging, I know there's no precise answer for you, but do you think that that's exciting? Is there an argument to be made we're kind of plateaued here? And then, second question on volumes. Do you notice historically a change in consumer behavior when OCC prices stay materially lower over a period of time? Do you see customers maybe increasing their order volumes when they have that visibility?

Okay, Debbie. Let me just make -- I'm going to take these in sequence in how you asked them. In terms of shifts from cartons into plastic. As we've talked in the past, we see -- there is some natural migration that occurs around specifications, around all the different types of packaging substrates. But relative to our share on the folding carton side, and Alex tracks this pretty carefully against all the industry statistics, we do not see fundamental shifts out of plastic -- or out of paperboard and into plastic or vice versa. So we see that as kind of a steady margin that's reflected in our overall volume guidance that we just gave you. In regards to kind of prebuying when OCC is lower on the -- that would be primarily on the open market paperboard side. Again, we're 86% vertically integrated on that grade with that and CUK. So even if they did, it would be a small portion of our sales. And as I mentioned earlier on one of the questions, we just have not seen that so far this year.

Okay. And I guess, I'm just also asking about customers who are buying the folding cartons, if the price of that product is actually moving down materially, does that tend to have an impact just because these tend to be rolled through on an index and it has actually reduced their costs?

It tends to be very small and they've got finite areas to store this material. Most of our supply chains now tend to be just in time, so it's not like they want to buy, forward buy and fill the warehouse full of cartons. So their graphics change and the labeling changes, so they need to keep that pretty real-time.

Yes, Debbie. It's Steve. And we also don't tend to see movements among substrates either. And as we've talked in the past, most products are in the substrate that they should naturally be in.

Okay. That's helpful. Just a quick question on the $30 million to $40 million in higher costs. Can you just give me kind of an order of magnitude of where the pressure is coming from on the items that you called out?

Yes. I'd be glad to. It's -- kind of the net of it is, as we mentioned, we've made what we think is a prudent assumption around OCC that, as Mike just said a moment ago, kind of at $94, we've assumed $115 per ton throughout net OCC and that compares to $130 last year. So that'll be deflationary inside of the assumptions, $15 million to $20 million. And then, what we've really seen is we've seen it on chemical costs, logistics very specifically, as well as resin. We saw in Q4, on our core business, about $10 million of inflation from those items specifically. And so if we trend line those out, that's kind of the $30 million to $40 million of inflations very specifically from those items, logistics, chemicals and resin. And that kind of nets to the assumption, we think a good prudent assumption, around some net inflation in the business with some deflation on OCC, net inflation on those other costs.

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

It's actually Tom for Arun. On the guidance, what would the hypothetical EBITDA contribution be if you were 100% successful on all 3 substrate price increases?

Well, I think the theory of the case, if you just go -- just what we chatted about earlier would -- over time would be the $50 times the 2.5 million tons that has some attachment to that. So you're in the $125 million range. If you just do theory of the case, I would -- obviously, we wouldn't encourage you to do theories, but theory of the case, that would be the math, roughly the 2.5 million tons times the $50 across all 3 substrates.

Got it. Understood. And then my follow-up. In the event that you guys do buy back the IP stake, to what extent would that limit your ability from doing other M&A in the interim in terms of financial flexibility?

Well, I think the way to think about that, Tom, is we're 2 years out and that's really, it's their call, right? They make a decision on that and would talk to us at that point in time. And when you look at the free cash flow that we're generating, you'll see us pay down our debt this year and next year and get ourselves positioned there where, if that was something that they wanted to do, we'd be well positioned to be able to do it and still have flexibility to continue to grow our business and drive our strategic priorities that we've outlined.

Okay. And then, actually, lastly, on volumes. Is there a reason why your guidance doesn't include any volume growth if you've certainly outperformed the market?

What we tend to do, Tom, is plan for kind of what we see as the base case scenario. It forces us to be very prudent around spending and treat every dollar like a prisoner when it comes to cost reduction, and we think it just drives better business. I mean, if we build volume growth into our forwards and then it doesn't happen, then we have an issue. So we plan for flat volumes and try to outperform that, which we did in 2017.

Your next question comes from Adam Josephson with KeyBanc.

A couple of clarifications on the guidance, if you don't mind. The $50 across all 3 grades, you mentioned earlier the 2.5 million, not the 3.7 million, I just want to make sure I understand what the sensitivity is. I know you said you're 50% cost pass-through. I'm just trying to understand what the ultimate benefit could be if all 3 go through, you get 25% of it this year. Should I apply it to the 2.5 million or the 3.7 million?

Adam, it's Steve. I'd apply it to the 2.5 million, but the other roughly 1.2 million tons is what tends to flow through on cost models. Obviously, that would be matched up more with cost models. So I think if you're doing the math you just did, you'd do it off the 2.5 million.

So if you got -- if all 3 were recognized, you got 25% of it this year, you're talking maybe $15 million of potential upside to EBITDA. Is that about right?

Yes. That's in range. That would be right.

And then, just on OCC. I know what your OCC assumptions are. Should we assume that the 1.2 million tons of recycled fiber you're buying, that would also -- mixed paper is comparable to the OCC in terms of your assuming a $20 move higher on average for the full year relative to where we are now?

Yes. It's a basket, and that's a good assumption. The only point of clarification I'd make for you on that, Adam, is it's actually about 1.1 million tons now with the closure of the Santa Clara facility, and OCC would be about 500,000 of that.

Okay. So maybe -- if OCC and mixed stay exactly where they are, you're talking, call it, $20 million of upside to EBITDA. Is that in the ballpark?

In the ballpark, and that's a good number.

Your next question comes from Gail Glazerman with Roe Equity Research.

Going back to inflation. I appreciate your kind of commenting about the fourth quarter run rate. I'm just wondering, have you seen material incremental inflation carry into the first quarter? And have you seen any kind of negative weather impact on operations in the quarter?

Yes, Gail. It's Mike. I'll take that. I mean, we really did see freight escalate in January, but I would characterize it -- we had about 1.5 weeks period of time where, as you well know, there was some very extreme cold weather in the Gulf and Southeast of the United States, where our large virgin mills are located, and that really kind of impacted freight and both trucking and rail for that period of time. There was a point in time in the middle of all that where there were 11 truckloads for every 1 truck that was available. Now that's since improved since then. I think the last numbers I saw earlier this week were around 6:1 as we went into February. We expect that to get a little bit better here as we wind through first quarter. But that was really what we saw. And then we did have one of our mills impacted by that cold weather where we lost some production for a period of time and again, that's all reflected in the outlook that we gave for the quarter.

Okay. Helpful. And thinking about the M&A pipeline moving forward, can you just give some color on what you're seeing? Obviously, integrating the SBS is a top priority. I'm just wondering, geographically, where you see the best opportunities at this point or if it's really indifferent.

So the focus and our efforts will be aimed in both Europe and North America. I mean, we remain very focused on building out a converting business in Europe that -- it's $1 billion plus, as we talked about in the past. We now have another leg of that stool to work on with SBS. As we disclosed during our last call, around 22% of our sales is now on that food service side of the business, which is growing a little faster, the perimeter of the store. And our track record at being aggressive on tuck-in acquisitions is pretty well chronicled. And as you can expect, as we now have these new assets, that our pipeline is growing and people are talking to us, and we're looking at the right fits and valuation and all the things you'd expect us to do as we look to build out that integration level, which we said would be around 80% over the next 3 to 5 years is our target for SBS.

Your next question comes from George Staphos with Bank of America.

Just some follow-ons here. So back to the inflation question. I was just doing some rough math. So you're basically implying that in your nonfiber-based materials and -- or variable costs, including cams, including freight, that you're assuming more or less an average 30%, 35% increase in cost from what the fourth quarter average was, and that seems to be blended across chemicals, freight and so on. Is that an accurate figure? If not, could you provide a little bit more color there? And then, on the question of perimeter of store, Mike, are you seeing more opportunity in terms of brown? Or are you seeing more opportunity now with bleached in the toolbox -- bleached cartons having more opportunity versus CUK in terms of perimeter of store and convenience? And I had a couple of other follow-ons.

Yes, George. It's Steve. I probably want to work with you a little bit on that 30% number that you said. I think what we were trying to convey is, when we look at the actual costs we were incurring in Q4, we saw about $10 million of inflation in those categories, and we've assumed kind of a continuation of that year-over-year. That's what's driving that assumption. There are some things that are up in that zone, into that 30%, but I don't know that I would necessarily assume that as a number, if you will. So I would kind of defer a little bit to you on that in terms of let me do a little bit of work to make sure that we understand the cost base that you're referring to, but it was really trend line, Q4 into 2018.

That's fine, Steve. We'll talk about it off-line. I was just reverse engineering. You gave us the goal for the year or the expected negative. I took out or swung the fiber-based positive, divided by 4, and then compared that to the $10 million. That's how I got to the number, but that may be -- it's a change in the -- rate of change, not the absolute level, so I think that's where we may be off with the percentage now, as I think about it. In terms of perimeter of store, Mike, any thoughts on that?

Yes, I think -- look, it's a great question. The thing we have now with the company with all 3 substrates, as you know, is we're kind of agnostic whether the customer wants brown, and some do. And now, we also have the capability to supply them an SBS item. And as I mentioned, we're seeing a lot of traction on pressed bowls and provisioning around the perimeter of the stores as these stores continue to build out the selection that they have for consumers as they come in and grab meals that are ready, whether that's for lunch or dinner. So we've got a lot of our new product development activity focused in that regard. So I wouldn't really say it's one versus the other. And I think that's a great part of the product offering that we now have is that we can provide them all those products, George.

Is there a way to quantify what perimeter of store is growing for you overall, Mike, at this juncture? Recognizing it's not the majority of your business, but it's meaningful now.

Yes. I'd say the number is 1% to 1.5% in that particular category as we define it and a bigger base for us.

Okay. My last question and then I'll turn it over. One, if I saw it correctly, and advise me if I'm incorrect here, you have a working capital benefit in your free cash flow bridge. But obviously, you're guiding input costs higher, so I'm assuming that's on the fiber based. If -- said differently, if prices are going up and costs -- variable costs are going up, I would expect working capital to be a negative and not a positive. Explain to me why it's a positive to you in the cash flow? And then with PM2, did I hear correctly on Macon PM2 that the curtain coater goes in, in October?

I'll take a cut at both of those and then, Steve, you can sprinkle in any color. The curtain coater actually goes in, in September. So we'll be starting it off in October, George. And then regarding working capital, it's really relieving that paperboard that we built for the Santa Clara closure and also a little bit of the build that IP started, and we will continue, on the SBS side to take care of the outage at the Augusta Mill when we do the recovery boiler. So it's those 2 things.

The volume was inventory related, George.

That concludes today's Q&A session. I'll turn the call back over to Mike Doss for closing remarks.

Thank you for joining our earnings call today. We look forward to speaking with you again in April. Have a great day.

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