Earnings Call: Q2 2021

Jul 27, 2021

Good day and thank you for standing by. Welcome to the Graphic Packaging Holding Company Second Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to your speaker today, Ms. Melanie Skijus, VP of Investor Relations. Please go ahead. Good morning, and welcome to Graphic Packaging Holding Company's conference call to discuss our Q2 2021 results. Speaking on the call will be Mike Doss, the company's President and CEO and Steve Scherger, Executive Vice President and CFO. To help you follow along with today's call, we will be referencing our 2nd quarter earnings presentation, which can be accessed through the webcast, via self directed slides and also 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, Melanie. Good morning to everyone joining us on the call and the web I'm excited to discuss quarterly results with you today and the positive developments that we are driving in our pursuit of Vision 2025. Introductions continue as our teams expand the new product pipeline and fuel our organic growth strategy. We are executing strategic M and A with transactions that are strengthening our capabilities, extending our geographic reach and positioning us in growing markets. And importantly, we are delivering on our commitments to stockholders. Notably, you saw us swiftly address The heightened inflationary environment with multiple price initiatives in the quarter that will play out in the second half of twenty twenty one and 2022 in order to limit the impact of the current price cost dislocation and ensure it is short lived. Turning to Q2 highlights on Slide 3. We delivered a meaningful 5% net organic sales growth in the quarter. Across all our markets, we continue to see significant demand for more sustainable packaging solutions. Our focus on innovation and our design for the environmental which is an integral part of our new product development process are providing continued opportunities to satisfy this demand. We are ahead of our 100 200 basis point organic sales growth goal for the first half of twenty twenty one, we expect to be at or above the high end of that range for the full year. Adjusted EBITDA in the 2nd quarter was $248,000,000 Importantly, EBITDA was positively impacted by $15,000,000 improved volume mix related to net organic sales growth and $36,000,000 of favorable net performance. Our teams did an excellent job of navigating the challenging operating environment to meet customer demand and deliver sales growth. The solid execution was however offset by $67,000,000 of accelerated inflation across a broad basket of commodities. This included paperboard price increases across all three substrates as well as positive modification of other business terms. One example is our move to shift freight recovery and contracts where we are responsible for product delivery costs to 4 openers per year. A second example is the date specific implementation of price increases for paperboard purchases in the open market, Replacing the linkage of price increases to industry trade publications. We committed to stockholders we would shorten the time period for price to offset Commodity input cost inflation, and we demonstrated that commitment in the second quarter. We have changed the pricing dynamics in our business since the last period of dislocation In 20162018 and this will be on full display as we progress through the second half of twenty twenty one. I will talk more about this shortly. While navigating the challenging supply chain environment, our teams worked tirelessly to meet strong customer demand. Our foodservice business increased sales by 20 2% year over year as consumer mobility picked up, while food, beverage and consumer sales improved to healthy 4% I'm excited to see the growing global interest for fiber based consumer packaging solutions. Growth in fiber based packaging is now being realized as we projected at our Investor Day in September of 2019. Since that time, we've continued to position the company To meet increased demand through ongoing investments in our leading paperboard platform, our teams and through strategic acquisitions. In May, we announced the acquisition of AR Packaging. And more recently, we successfully completed the acquisition of AmeriCraft Carton. These transactions are aligned with our growth ambitions and have us on a path to achieving our Vision 2025 goals. On Slide 4, Let me recap the compelling strategic rationale of the AR packaging combination and provide an update on timing. The transaction brings together 2 highly innovative workforces serving diverse but complementary customer sets. The acquisition expands our global scale and strengthens our presence in Europe, which is driving the world in a push towards a more circular economy. We see significant opportunities to expand and grow with global customers as the premier fiber based consumer packaging leader. We are encouraged that the regulatory approval processes are proceeding as expected and anticipate a close by the end Recognizing the impact to leverage from the announced AR Packaging transaction, it is important to reiterate that we are Fully committed to utilizing our significant cash flow generation to reduce leverage back to our targeted 2.5 to 3 times range. We intend to be back at targeted levels within 24 months following the close of the acquisition. Turning to Slide 5, innovation and new product development across our 3 growth platforms as we roll out packaging solutions designed to address retailer and producer calls for fiber based packaging alternatives. Last quarter, I discussed the rapid acceptance we are seeing for our paper seal line in the food tray packaging in Europe and Australia and the excitement Over the new punted tray line introduced for produce and snack sized vegetables. Last week, we introduced a new product line Opticycle To grow in our food service markets, our Opticycle line includes an innovative non polyethylene coating alternative to traditional PE and PLA coated products. On Slide 6, you can see the details of this latest innovation in the food service packaging. Octicycle uses a water based coating instead of polyethylene. The food service cups and containers featured here require less coating material versus traditional options And are designed to be more easily recyclable. When repulled, 98% of the fiber can be recovered and used to make other recycled products. We continue to push forward with our sustainability journey and Opticycle fits squarely with our ESG commitment to decrease our LVPE usage by 40% by 2025. With this non PE packaging solution, we are providing a new option for customers to evaluate as they to their own sustainability goals and meet the needs of today's consumer. We expect the line to be commercialized in North America in the next few months. As we enter the second half of twenty twenty one, I'm pleased with the path we are on. Employees have produced exceptional results and demonstrated commitment to customers as an essential supplier. We have rolled out new product innovations, provided outstanding customer service and captured additional demand. In addition, in support of our investments for growth and expansion, we have prudently and effectively raised and deployed capital. If you now turn to Slide 78, I will provide thoughts on our positioning within the packaging industry and how we are demonstrating leadership Through our initiatives and delivering on our commitments, we continue to differentiate ourselves by the investments we are making in our paperboard infrastructure. On Slide 8, you will see details of our transformational Kalamazoo recycled paperboard investment. This project is a pivotal case in point. We expect our new world class coated recycled board machine to be producing paperboard in a few short months. With it, we will serve existing and new customers, delivering the highest quality product in the marketplace at the lowest cost to produce. Furthermore, the investment provides environmental and Sustainability benefits through the reduction of greenhouse gases, purchased energy and water usage in the paperboard production process. We remain confident in the $100,000,000 of incremental EBITDA for this investment once it's fully implemented and expect to capture the first $50,000,000 of additional EBITDA in 2022. Another area where we are redefining leadership The industry is through our solid track record of execution and integration of strategic acquisitions. The announced acquisitions we have touched on today position us in new growing markets and allow us to further integrate our paperboard platform. Vertical integration This is a strategic priority and we expect meaningful increases in our integration rate in the quarters ahead as we grow organically, Internalize more paperboard from recent acquisitions and unwind existing supply agreements. Our vertically integrated model drives increased operating efficiencies Both stakeholders and customers. The final point I will make on Slide 7 is something I noted earlier and would like to spend a bit more time discussing Over the past couple of years, we have successfully implemented numerous pricing model revisions that are now flowing through the business During this time of accelerated inflation, realization of our pricing initiatives will be on full display over the next two quarters and into 20 This is the primary reason we expect to generate significantly stronger EBITDA in the second half of the year. Moving to Slide 9, I will talk through material price cost spread recovery that we expect will occur in the second half of the year and into twenty The stack bar on the left hand of the slide reflects the heightened inflationary environment we experienced in the first half of twenty twenty one and our expectations for inflation during the second half. The right hand of the slide shows pricing that has been successfully implemented And recognized and it's flowing through our contracts over the coming 6 months. We expect approximately $120,000,000 of pricing in the second half of 2021, which is intended to address the negative price cost spread experienced in the first half of twenty twenty one. The recovery occurring in just 6 months clearly demonstrates the more constructive pricing dynamics inherent in our model. Pricing will yield a cumulative $400,000,000 over the 2021 2022 time horizon as we actively address commodity input cost inflation. Overall, we are confident in the actions we are taking to address inflationary And more broadly, we remain confident in the fundamental drivers of our business and our ability to capitalize on the opportunities ahead. Simply put, We are running a different race. We are executing for customers, driving our growth strategy forward and strategically positioning the company to Capture global demand opportunities in fiber based consumer packaging. We are on track to achieve our Vision 2025 Growth goals. With that, I will now turn the call over to Steve. Thanks, Mike, and good morning. Moving to Slide 10, focused on key financial highlights in the second Quarter of 2021, net sales increased 8% from the prior year to $1,700,000,000 driven by 5% net organic sales growth. Adjusted EBITDA declined from the prior year due to the accelerated inflationary environment. Importantly, we earned on organic volume growth, which positively impacted EBITDA performance by $15,000,000 And we generated a favorable $36,000,000 in net performance. As Mike just discussed, we've implemented multiple pricing initiatives to offset current inflationary environment and we expect our adjusted EBITDA dollars and margins will improve in the second half of twenty twenty one and twenty twenty two, all consistent with our Vision 2025 financial goals. Additional financial and market detail can be found on Slide 11. AF and PA industry operating rates increased sequentially with SBS and CRB at 95% 98 respectively at the end of the second quarter. Our CUK operating rate was over 95%, reflective of the continued strong demand environment. AFMPAA's 2nd quarter data also reflected continued declines in industry inventory levels with balances at multiyear lows. Backlogs increased from the previous quarter And all three substrates were at 8 plus weeks at quarter end. On Slides 1213, you will see our year over year revenue and EBITDA Waterfalls. Net sales increased $126,000,000 a very solid 8% in the Q2 of 2021. Strong growth was driven by $76,000,000 of higher volume mix resulting from 5% organic sales growth, $14,000,000 in pricing and $36,000,000 of favorable foreign exchange. Adjusted EBITDA decreased $12,000,000 to $248,000,000 in the 2nd quarter versus the prior year period. Adjusted EBITDA benefited from $14,000,000 in price, dollars 15,000,000 in volume mix, dollars 30 $6,000,000 in improved net productivity and $4,000,000 from favorable foreign exchange. Adjusted EBITDA was unfavorably impacted by $67,000,000 of commodity input cost inflation and $14,000,000 of labor, benefits and other inflation. We ended the quarter with net leverage of 3.7 times. As we have previously shared, leverage is currently above our long term target of 2.5 to 3 times as we execute on critical investments to achieve our Vision 2025 goals. We have clear line of sight to The cash flow generation required to drive leverage down to our targeted levels of 2.5 to 3 times within 24 months following the close of the AR Packaging transaction. We have substantial global liquidity with $1,900,000,000 available acquisition activity had very effective interest rates below 2%. Dollars 250,000,000 was raised in a 7 year floating rate term loan from the Farm Credit System in a similar structure to the Farm Credit loan we raised earlier this year. In addition, we raised euro based debt with a €210,000,000 delayed draw term loan along with a €25,000,000 increase In our European line of credit, we funded the Farm Credit loan last week, while we anticipate drawing the Euro term loan in connection with the close of the AR Packaging transaction. Turning now to guidance on Slides 1415. We are updating our Full year EBITDA guidance to incorporate recent price actions, expected commodity input cost inflation and the close of the AmeriCraft Carton acquisition. 2021 adjusted EBITDA is projected to be in a range of $1,080,000,000 to 1,120,000,000 Components of EBITDA have changed modestly as higher contribution from volumemix and net performance are being offset by the transitory negative price cost spread that occurred in the first half of the year. Notably, on Slide 15, you'll see the significant increase in EBITDA we are projecting in the second half of twenty twenty one. Implemented price initiatives are expected to yield a material price cost recovery benefit to EBITDA in the second half of the year in a range of $80,000,000 to $120,000,000 compared to the first half. The AmeriCraft acquisition closed on July 1 and is expected to provide an incremental $15,000,000 The second half adjusted EBITDA. Turning back to the cash flow guidance on Slide 14. We anticipate a range of 175 $225,000,000 for the year. Guidance for capital expenditures in 2021 has been adjusted modestly higher As we are experiencing similar inflationary environment for materials and labor as we complete critical capital projects on time in 21. Interest and working capital components to cash flow have improved related to the attractive refinancing of our debt Completed this year at very low interest rates and the positive impact on working capital as we have worked down inventories on stronger demand. As we look through to 2022, we remain committed to capital expenditures returning to a more normalized range $450,000,000 and look forward to generating significant cash flow as we earn on the investments we have made to materially 2 includes both the AR Packaging and AmeriCraft acquisitions. Wrapping up my comments on Slide 16, and the conclusion of our successful partnership with International Paper during the quarter. The partnership was foundational Conclusion of the partnership with IP returns our ownership interest of the partnership back to 100%. Thank you for your time this morning. I will now turn the call back to the operator for questions. Hello, operator? Yes. We're ready for questions. One moment. And your first question comes from the line of George opoulos with Bank of America. Thanks, operator. Hi, everybody. Good morning. Thanks for the details. Mike, two questions. The first one is going to be on pricing. So if we were to look at your current guidance, which is $130,000,000 for 'twenty one and the $270,000,000 for 'twenty two, Just as a frame of reference, should we be comparing this to last quarter's, I think it was $90,000,000 $200,000,000 And if there are any puts and takes in that, we'd appreciate it. Relatedly, Steve or Mike, can you comment on whether there's any pricing Action that you've taken that is not in the cumulative $400,000,000 And I don't know if there'd be a way to quantify that Or not. And then I had a follow on. Yes. Good morning, George. It's Steve. Let me just hit on that very Specifically, the $400,000,000 in price over the 2021, 2022 time horizon is entirely based upon known and recognized Price actions. So three examples. These are recognized pricing for our contract customers that have recognized through third parties. And so that's clearly recognized in the market. It includes price increases for non contract customers that we have. It includes the price Increases for term changes that we talked about in our remarks. So that is all known. It's contractual and it's in motion. It does That include the remaining price increases that we are pursuing. They range from $50 to $70 across The substrates, that is not in the $400,000,000 and that is representative of probably another $150,000,000 of pricing that we are pursuing, but it is not in the $400,000,000 The 400 Compares, you're correct. For the last time we talked, I think importantly, we had about $90,000,000 in price This year, the last time we spoke with the actions that we've been taking with the acceleration in inflation, We took multiple additional price actions since the last time we spoke, and that has resulted in that $40,000,000 uptick For this year, from $90,000,000 to $130,000,000 So $400,000,000 is known and being executed on, an incremental $150,000,000 beyond that, that we're Doing based upon the unrecognized yet to be recognized price actions that we have in the marketplace. Thanks, Steve. And Kind of a blue sky question for next year and I realize it's not 4th quarter, you're just reporting 2nd quarter. But Considering the way the stock is active and frankly given all the moving parts, it would be helpful to think about what guardrails exist For the outlook for next year, what kinds of considerations, what kinds of Fundamentals would have to be in place for EBITDA perhaps to reach a 1 point $4,000,000,000 level. You're starting at $1,100,000,000 this year with guidance. You talked about the pricing that you've already put into place And you have additional on hand. We have Kalamazoo coming. We have AR Packaging presumably closing at the end of the year. What are your biggest considerations and concerns about being able to hit that type of EBITDA in 2022, Recognizing that inflation is the biggest wildcard. Thank you, and I'll stop here. Sure. I'll start and then Mike can bring additional color. I think you walked it Well, the components are quite clear. Running off of the $1,100,000,000 midpoint, we'll continue To earn on our 100 to 200 basis points of organic volume growth, we'll continue to be productive at the core, having those two things more than offset Commodity input cost inflation, so think of that as the traditional $30,000,000 to $50,000,000 of improvement from those items offsetting. We then have the $50,000,000 of Kalamazoo coming on next year, which we have confidence in. And then you have the $200,000,000 of Acquisition, that will come in as well from AR Packaging assuming successful close late This year along with the second half. And then of course, all of that is in the context of price offsetting commodity input cost inflation as we've articulated to you Today. And so that is, to your point, the critical path up towards $1,400,000,000 plus in terms of EBITDA next year. Obviously, price execution, as we've laid out for you is a big part of that. As we've laid out for you is a big part of that, depending upon, of course, where inflation goes and we'll take appropriate price actions to address that. Mike? No, I think you said it well, Steve. I mean, look, George, we're still executing on, as Steve said, another $150,000,000 worth of price. And One of the questions I'm sure we'll get here on the call is if the world stopped today, how much of that inflations carry over into 2022? And that number would be somewhere between $50,000,000 $75,000,000 Now it's like you said, it's the end of July. The last thing we're going to try to do is predict inflation But that gives you some pretty good guardrails to take a look at in terms of modeling, I would hope. Extremely helpful. Thank you, guys. Have a good quarter. Thank you. Next question, operator, please. Next question is from the line of Ghansham Panjabi of Baird. Your line is now open. Hi, good morning, everyone. This is actually Matt Krueger sitting in for Ghansham. How are you doing today? Good morning, Matt. How are you? Great, great. Thanks. So I guess I just wanted to touch on some of the volume components here. So can you give us an update on the volume outlook some of the key end markets across your business, just sort of a particular emphasis on how the more traditional kind of CPG or consumer type end markets are likely to trend versus the latest on the foodservice type outlook? Just the split there is helpful. Yes. So why don't I just revisit what we saw in the Q2 because I think it's informative of kind of our outlook a bit here too, Matt. But You saw our foodservice rebounded like we expected it would because it was up 22% in the quarter. That was an easy comp for us as you know because our That was the low watermark in 2020 in the Q2. We are encouraged to see our food business up, food and beverage up 4% in the quarter. And so they drove 5% in the 2nd quarter that we just went in. Now we'll as we kind of wind forward through the rest of the year, we'll see that food It will slow down a little bit because we started to see some recovery as you know in Last year, on the food and beverage side of the business, we continue to see those pretty strong markets. But the context you should really be looking at us 4 for growth, and we talked about this in the script is 100 to 200 basis points of true organic growth. We said in 2021 will be at the high end of that range, so 2%. And that number looks really good for us as part of our Vision 2025. And that's how we're Kind of looking to run the business as opposed to trying to predict end use markets by category, it's just difficult to do that. So think about us having positive growth. This year we'll be at that upper end of our 100 to 200 basis points. And we're on good track to do that because Through the Q2 here, we're up 3.2%. Great. That's very helpful. And then just switching over to kind of the inflation outlook. Can you break down some of the various components behind the substantial increase in cost inflation expectations for 2021? And then just kind of following up on that, what are you seeing in terms of customer understanding or willingness to accept your price increases versus some of the prior inflation cycles? Any update there is also helpful. Yes, Matt, it's Steve. I'll take the first and Mike can bring on the 2nd component with the customers, but it was very broad based. The $100,000,000 increase in our midpoint of our inflation assumption It really was across the big basket of our commodities. Wood and secondary fiber moved kind of late, as you've seen, but chemicals, energy, resin, Logistics, all really stayed at heightened levels as we kind of exited out of Q1 and into Q2. As we look at the full year, our assumption is that we'll have continued inflation for the major components, chemical, energy, resin, Logistics, we are factoring in a little bit of an accelerated inflation around wood and fiber, which moved the secondary Which moved a little bit later in the quarter. So that's how we built the band around the 190 to 230. But it is quite Pervasive across the totality of our commodity input cost purchase. And then just to build a little bit, Matt, on your question around Customer reaction. Look, they're seeing inflation in their business across a wide basket too. I mean, you've seen some of our customers have announced their results here in the last 30 days and they've been pointing to pretty And as you heard Steve talk about here, the vast majority of our pricing is contractually driven. So they know it's coming Next question please. Next question is In terms of your contract structures, I think in the past you talked about half of your converting volumes having a cost plus structure and the other half type of index. Is there an opportunity to further increase the percent of volume to cost plus just given the amount of inflation we're seeing this year? Dale, it's Steve. I mean, I think, obviously, when we talk to our customers about contractual renewals, We offer both alternatives today. Customers choose them based upon their confidence or beliefs in what is best for their mid to long term Contractual relationships, over time, both models have tended to a nerve similar price cost relationships over the mid So long term, I don't think, Mike, we've seen any material movement among customers as they think about the basket going forward. No, I think that's right. Look, Our cost models are working fine, Neil. Pick up the costs that we're experiencing here and we'll obviously give you a true up on that in October Yes, as we have into the quarter behind us and certainly a final one as we announced year end results in early February. But I think the bigger story here is Strength of these paperboard markets. If you look at these paperboard markets, operating rates are up on really all grades. Inventories are down And backlogs are higher. And so what that's really allowed us to do is be more aggressive on pricing to Our market pricing to go recover is inflationary costs, and that's in fact what we've done and what we're continuing to do. Great. That's helpful. And then in terms of the 2022 cash flow, I know it's early, but you Your anticipated cash tax rate in 2022 and beyond, is that expected to kick up at the completion of the Kalamazoo project? Yes, Neal. As we've talked, we don't really see any material movement in our cash taxes Next year, they might move up very modestly, but we're still out into the 2025, 2026 time horizon before we become a material U. S. Cash tax The completion of Kalamazoo, the exiting of the IP partnership are all supportive of that. And so you should expect The EBITDA, as we've articulated earlier, step up materially. Our CapEx at 4 $1,000,000 is a statement that we've made again today. Cash taxes not up material, pension not up material. And then obviously, we'll have Tristan, on the debt, which will be in that $5,000,000 $5,500,000 range upon completion of the transactions. And that will in there very significant cash flow generation in 2022 that we've talked about before in that $600 plus 1,000,000 range and Moving the debt profile down into that 3.5 time range by the end of 2022 is something that we shared with you previously upon announcement of the intended AR Packaging acquisition and that remains our intended goal with 2 years into that down back into the 2.5 to 3 times range. Next question please. Next question is from the line of Mark Connelly of Stephens Inc. Your line is now open. Hey, Mike. Two things. It looks like you're finally in a position to get bleachboard Pricing back to a better place. If you were to implement all of these hikes that have been announced so far, will you have restored that business Cost of capital, are we still a ways away from there? Yes, Mark, it's Steve. Obviously, we talk about that a lot, as you can imagine. And The answer is that if you look at it, it's kind of at the $200 level per ton of what we're executing on across really all the substrates by SBS. Speaking to that specifically, it would move it into that cost of capital type return profile, which is As we've talked about, it isn't there, and it's a critical priority for us. And so obviously, some of that will depend upon inflation, and then we'll have to take if There's a need for more, we'll do that if inflation were to be persistent. But that $200 goes a long way towards The cost of capital type returns for the SBS platform. Okay. That's super helpful. And then just a couple of quick questions on Octacycle. Can you talk about how quickly that product will roll out and whether those cups are going to be collected by the stores or whether they're recycled during normal Collection streams. Yes, Mark, thanks for the question. I mean, we're early days there, but we're working with our customers around being able to collect those It's really good fiber, as you know, it's high value and we can use it back our process. Opticycle is a water based dispersion coating, that has lower coat rates and As similar characteristics to low density polyethylene in terms of barrier, but the recovery of the fiber is actually higher up around 98% and much more readily Recyclable too by institutional recyclers. So we're pretty excited about it. We expect that we'll have some progress here In the second half of the year that's meaningful in gaining momentum into 2022. So it's a big step forward for us and consistent with our Vision 2025 goal of being able to reduce low density polyethylene usage at Graphic Gear by roughly 40%. We're on track. Super. Thank you. You bet. Next question please. Next question is from the line of Mark Wainwright of Seaport Research. Your line is now open. Thank you. I just wanted to quickly just go back over that preliminary component bridge you laid out when thinking about 'twenty two, make sure I got All the components right there. I think you said that volume and net productivity should be a +30 to 50, Kalamazoo 50, acquisitions 200. So 280 to 300 from those components And our starting point being roughly $1,100,000,000 this year. So that gets us close to not quite maybe, but close to that one point And then if I understand correctly, you've got $270,000,000 on Implemented and recognized pricing. And if we were just to look at the carry through on costs, that's $50,000,000 to $75,000,000 let's just say $70,000,000 That would be another $200,000,000 on top. And then of course, if there's more inflation, we got to think about that and whether you get this additional 100 and $3,000,000 in process on additional initiatives. Am I thinking about it right? Or did I get something wrong in that thought process? Mark, it's Steve. I mean, I think you got the fundamentals right. Obviously, what is very difficult to predict, which we won't, is where does inflation go As we move into 2022. And so the key components that kind of got you up into that 1.4, obviously, we've got price cost recovery that And will occur in 2022 as well. And so I think you were touching on the key components correctly. Right. And just to clarify, it sounded like that if we can get all that pricing that's been recognized, if we don't get hit by too, too much inflation Next year, we can actually potentially get a good bit above that type of number. Yes. I mean, look, that's the math. I think the bigger question is, and we said it, Mark, and just to caution, we are not trying to tell you what inflation is going to be like in 2022 because we don't know. Okay. Fair enough. I think the bigger story though is, as I mentioned earlier, the strength of these paperboard markets And how we've been aggressive going after recapture that input cost inflation with the pricing we've been taking, and we're not done. So the setup as we head into 2022, we like a lot better than some of the setups we've had in the past for sure. Right. I'm sure operating rates and all that and backlogs are way stronger than they were in 2017, 2018, if we look at where they are today. And just one last little one. DD and A for next year, you gave us kind of the updated CapEx number just for modeling purposes, including AR, what would DD and A likely be next year? Mark, we're still working through That, because I know my only caution with you is let us get through a little closer to the AR Packaging acquisition. The core without that It's going to be materially different than kind of where we're at, maybe up very slightly, up a little bit Because of Kalamazoo, but we'll do a refresh for you inclusive of AR Packaging. Obviously, on an EPS basis, AR Packaging, we believe, will be accretive on an all in basis, pre synergies, but let us come back to you probably in the October timeframe with a little more definition On where we think that's heading. But excluding that, it should be up just modestly. Got it. Thanks for that. You bet. Next question. Next question is from the line of Mark Wilde with Bank of Montreal. Your line is now open. Good morning, Mike, Steve, Melanie. Hey, Mark. Steve, I wanted just to start off, Can you give us some sense of kind of what your fiber assumptions are in the second half for OCC and also kind of Around pulpwood, there was this kind of troubling story in the trade paper over the weekend. And I think a lot of us remember back a couple of years ago when you did see some real pressure Sure. On hardwood costs. So maybe if you can just help us kind of quantify what your expectations is on both of those elements in H2? Yes. Mark, as we mentioned, kind of across the whole basket of our commodities, we expect continuation of kind of So the big components, chemicals, logistics, resins, etcetera, and some continued acceleration around wood And secondary fiber, now we like you are seeing some of the more recent articles, which appears to have to leave some impression that some of that could be Accelerating, but we do have a good $10,000,000 of acceleration baked into the second half of the year. But I think more importantly, we're just We don't expect to see an abatement of inflation as we march into the second half. We haven't made any assumptions along Okay. Just like specifically, Steve, I mean, there's been some talk about kind of OCC kind of spot deals being done like $200 range. If we were to see $200 OCC, would that be covered in your guidance? Or would we need to adjust No, we'd be adjusting up further, Mark, if we saw that kind of spike beyond kind of where the markets are at today. Obviously, it depends on when it would occur, whether it would make it within this year's. But if we saw a continuation of that kind of accelerated OCC, like we've spoken before, we would, of course, understand the value of that and then take additional price. I think that's the point, Mark, is as we see more inflation, and you've seen this coming out of Q1's call, said if we saw more inflation, we'll take more price. And that's in fact what we did. So you've got our best kind of forecast based on everything we're looking at now. But if we If things continue to run, we're going to have to go recover those input cost inflation with additional pricing. Okay. And for my follow on, Mike, I just wondered if it's Possible for you to kind of unpack that first quarter or that first half volume growth for us. I'm curious about, in particular, How much of that organic growth is being driven by the beverage can market? I mean, globally, beverage can volumes are very, very strong, Particularly here in North America. And then of course, you've got the introduction of the keel clip, I think particularly over in Europe. So just If we could get some sense of how important that overall kind of beverage growth is to your organic volume growth, It would be helpful. Yes. Thanks for the question. I would actually you're right. It's been strong in North America, but it's been Vintage Mark, even stronger in Europe, because of all the shrink-wrap film we're replacing on carbonate, some strength and beer. And so, we're seeing up materially in that market. And our numbers have kind of held along those lines where we talked at the end of our last quarter call That about half of that volume growth that we're seeing is truly, kind of new product development and new replacement for Plastic and other type applications and about half of it has just been overall markets being strong. And you can think about that in terms of that 3.2 Percent we saw year to date. And it's better to, I think, look at it in totality along those lines. But beverage has certainly been A key driver of that for the reasons I described. So is it possible, Mike, I mean, could we say that Half of that 3.2% is coming from just growth in the beverage market? Or is it a bigger portion even on that. No, I think beverage and food. I mean it's half of that 3.2 is beverage and food. Of the beverage and Food beverage is certainly a greater percentage of it. And then the other half of that is some of the recovery in these markets like particularly foodservice. Okay. All right. That's helpful. I'll turn it over. Operator, next question. Next question is from the line of Gabe Hajde of Wells Fargo Securities. Your line is now open. Hey, good morning. Thanks for taking the question. There's always kind of a delicate balance between recovering inflation with price and then kind of restoring profitability levels before you want them And certain grades and maybe with the exception of CUK, I think producers over time have largely rationalized More recently, there's a domestic producer that has kind of left themselves optionality to potentially convert In the Boxboard and over in Europe, I think even we saw an announcement today of some incremental capacity, maybe paying less attention to what's happening over in Asia, but higher level big picture Jim, how do you think about, I guess, returns and the potential to entice Unwanted capacity with some of these price increases. Well, look, I think the first part gave us We've got a fair amount of inflation we got to recover first. And as we said, we don't know exactly what inflation is going to look like in 2022 and nobody else does either. I think the other part of that that we're doing is we've got line of sight to our 80% integration rate on the low side of that. We said 80% to 90% as part of our vision 20 We're at 72% now over the next 24 months between AmeriCraft, unwinding the supply agreements and our organic growth. We can see that path to 80%. So we're making tons that are being downstream converted in our own converting operations. And strategically, that's really important for us. So Will there be the occasional announcement around additional capacity? Yes. But it takes a long time to bring it on. If you're talking about Reported material, as we look at the imported material here in the U. S. Through the 1st 5 months of the year because that's all the data we have. FBB is up slightly, roughly 50,000 tons year over year. It's all coming from the Scandinavian countries. But that's not a big market. That's It's on a 5,000,000 ton market. So as a total, it's pretty small. And it's something we always watch and we need to be aware of. But Yes, I think I've given you enough statistics there and rationale for how we're running a different race there by integrating it into our own operations. No, all fair points. Thank you. And then just a point of clarification on guidance, I guess, 2 parts. 1, I think AmeriCraft was expected to be roughly $30,000,000 annually with EBITDA. So I'm assuming you're embedding roughly $15,000,000 And if I missed it in the Slides, I apologize. And then you did tickle up productivity, I think, a little bit to be $80,000,000 to $100,000,000 Is that a function of Just running the mills a little bit more full out, given kind of what you're seeing on the demand side or is there something else there? Yes. Dave, it's Steve. Yes, we've got $15,000,000 in for the AmeriCraft acquisition, which closed in July. And we do have a little bit higher productivity as we'll run quite full between year year end. We've Got more limited downtime in the second half of the year and have good confidence in the productivity that we'll generate during the second half. Okay. And one last one, I'm sorry guys, for the avoidance of doubt. I guess AR Packaging, you do not have anything embedded in guidance for that? No, we do. We have $15,000,000 or for AR, no, 0. I apologize to you. No, there's nothing in any The 2021 guidance with regards to AR Packaging, the only reference to AR Packaging that does impact the materials is Our discussion around 2022 CapEx, which does include AR Packaging and AmeriCraft when we articulate $450,000,000 So nothing for 2021. And in 2022, we do have it embedded in our CapEx Discussions. Great. Thank you. You bet. The next question is from the line of Adam Samuelson Hi. So a clarification question just on the pricing actions and how we think about the 2022 kind of carryover benefits from And I wanted to make sure that that's encompassing both the cost plus and the legacy based Contracts. So I'm just trying to make sure what happens on the cost plus side, I mean, we're lapping some very significant inflation in a bunch of categories In the first half of this year, that might have been compounded by some of the winter storm impact and the disruptions The chemical change, for example. What happens if there's some year on year declines in some of those in 'twenty two? Does that $400,000,000 still stick? Or Is there a risk that some of that gets that would leak away as you move into the back half of 'twenty two? I'm just trying to frame it properly. Yes, Adam. The $400,000,000 is representative of everything that we know today, which is, of course, what we know with regards to inflation. And so that's Assumed, with the 6 month lags basically based upon known inflation. This is the accumulative impact of all pricing actions, cost Models, market models, changing conditions, etcetera. And that's what has us line of sight today to a known 400,000,000 To your question, if inflation moved up from here, we would pass more of that through in the form Cost models that would play out in the 2022, 2023 time horizon. If inflation moved down, the same would occur for a cross section of our Contractual relationship. So we'll continue every quarter to update kind of the full inclusive look at pricing, which is really what we've pivoted to Because it's much more complex as you know than just purely a market based or cost based discussion. So 400 is All known inflation, all known initiatives that would roll through if inflation moved up or down, The pricing would move commensurate with that over the 6 month time horizons post. All right. That's very helpful. And then just on the outlook on volumes, you kind of Confidence on the full year organic sales outlook. Given some of the capacity constraints that have been cited in the industry, I mean, Do you think any kind of customer innovation opportunities have been slowed by how tight the markets are? Or do you Are you prioritizing some of those new customers and maybe paperboard conversion opportunities that are more incremental. I'm just trying to think about kind of how the current market environment may be hindering or accelerating some of those Vision 2025 goals. Adam, we haven't delayed any innovation as a result of some of the tightness of the markets. What has really caused us to do is have more dislocated supply chains, meaning we're trucking More material than railing to some of our converting plants because we just need to get it there faster. That's got some implications in terms of cost. And we've taken a big chunk of our annual outages, as you know, here in the second quarter of this year and the first half of this year really. In the second or the second half of this year, there will be less. And so we'll be working hard. Our mills will be running hard to make all the tons that we Because we need to service customers as well as rebuild our supply chains. All right, great. That's really helpful color. I'll pass it on. Thanks. Next question is from the line of Kyle White of Deutsche Bank. Your line is now open. Hi, good morning. Thanks for taking the question. Do you have a sense of customer inventory levels here? Any concerns that customers may be looking to kind of get ahead of price actions or Concerns about potential destocking with customers trying to secure as much supply just given all the supply chain tightness in the market, kind of mostly focus on CRB here just with Markets reopening and maybe some declines on center of the food type of packaging? Yes. Thanks, Kyle. In terms of like pre builds, We just haven't had the material available. I mean, it's been very tight. As you've seen, inventories have dropped substantially across the entire space. In regards to some of the reopening, could we see some pressure on some of the CRB center of the store? Yes, that's certainly possible. But on the other side of that, our innovation, Our new product development activities really focused on the center or the outside perimeter of the store. So we're picking up opportunities there too. Got it. And then I wanted to go back to, I believe it was Neil's question earlier on some of the cost based models. Are you looking to push your SBS business to cost based model? Or are you happy with having that kind of fully market based? Yes. Kyle, right now, as you know, there's a fair amount of SBS that is still in the open market and those tend to move open market Sales tend to move more with the RISI type RISI based models, excuse me, the 3rd party models. When it comes to our integrated volume, of course, that's a conversation that we do have with our customers Around cost models versus market based models. And the cup business is a good example of that. And the cup business does have Pass throughs that tend to be cost based in areas like resins, for example. And so because The cup is a bit more complicated product than just you've got the lids and the resins that are a part of it today. So I think, Mike, I don't know if you had anything. No, I think that's right. Look, we kind of like the model the way it's set up and SBS is more market based and, yes, expect it to remain that way. Thank you. I'll turn it over. Next question is from the line of Arun Viswanathan of RBC Capital Markets. Your line is now open. Great. Thanks for taking my question. Congrats on the results. I guess, let me just ask a question maybe about 2022, if you can help us out. So, your productivity, it looks like you're at a little bit higher level, and maybe a little bit understandable just given the acquisition. So Is $80,000,000 to $100,000,000 kind of the run rate that you expect to achieve now on productivity? And then also on price, just to clarify, I think you noted that there is potentially $50,000,000 to $75,000,000 from further price initiatives. So would the 'twenty two look be those two items plus acquisitions, plus any of the 400 that you don't Realizing 2021? Or how are you thinking about what we should include for 2022? Thanks. Yes, Arun, it's Steve. I certainly want to caution you not to get ahead of yourself on kind of additive, additive, additive there. So that was my only reaction to your statement. Our core productivity excluding Kalamazoo, we've talked about as being more in that $60,000,000 to $80,000,000 range year over year, which is More than offsets our labor and benefits inflation to Net growth. So the earlier conversation was that we would expect net volume, mix, performance Minus labor and benefits inflation to be net positive for the year. We then would add to that Kalamazoo, And then the earlier discussion that we had on the call. And then obviously, as we talk, we have price initiatives that we're It says that we're pursuing beyond the $400,000,000 which is about another $150,000,000 that is yet to be in that Characterization of fully recognized. And then obviously, that would be there to offset any additional inflation That would come through the business beyond this year's 2021 inflation. Okay. Thanks for that, Steve. And then just as a quick follow-up, this year you're running organic growth above your kind of long term targets Also on a pretty impressive year last year. So when you look into the future, is there room to move up the 100 to 200 basis point Organic growth target, especially given some of the new product innovation? Or is that really the right range that we should think about? Yes, Arun, thanks for the question. It's Mike. I'd ask you to think about the 100 to 200 basis points as being the right goal for us as part of our Vision 2020 5, I appreciate your comments around the success we had in 2020 and then now 2021 where we're at. But there will be some different That comes in over time, I'm sure. And so we really don't want to get ahead of ourselves here. We're obviously excited about AR Packaging and the fact that it's going to bring Another insight into a very sustainably focused market, where consumer fiber based packaging does Well, so we're going to learn some things from that. It will help us. But the 100 to 200 basis points is the right goal for us as part of our Vision 20 Thank you, participants. This concludes the call.