Earnings Call: Q1 2021

Apr 27, 2021

Good day and thank you for standing by. Welcome to the Graphic Packaging First Quarter 2021 Earnings Conference Call. This time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Melanie Skijas, Vice President, Investor Relations. Please go ahead. Good morning, and welcome to Graphic Packaging Holding Company's conference call to discuss our Q1 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 Q1 earnings presentation, which can be accessed 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 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 The company undertakes no obligation to update such statements except as required by law. Mike, I'll now turn the call over to you. Thank you, Melanie. Good morning to everyone joining us on the call and webcast I'm pleased to report a solid start to 2021 in what can be described as a truly unique operating environment. We continue to deliver organic sales growth capturing new real opportunities in growing markets with our innovative fiber based packaging solutions. Global adoption of paperboard multipacks and KeelClip Packaging solutions for beverages, paperboard trays including our new paper seal and produce Packlines for Food Packaging and Integra Flute, a ship and own container package for omnichannel commerce, all are examples Products that are driving our results. We remain encouraged by the traction we are seeing from our innovative packaging solutions with existing and new customers in growing markets around the world. Aligned with Vision 2025 and supported by our history of successful acquisitions, we are announcing today Additional details on this development shortly. Turning to Slide 3, let me update you on a high level financial and operational highlights for the quarter. Growth continued in the Q1 of 2021 with net organic sales increasing 2% year over year. Notably, this follows a very strong Q1 of 2020 where net organic sales growth was 7%. Over the last 12 months, we've to more sustainable fiber based packaging options across our food, beverage, foodservice and consumer goods markets. In addition, our business has benefited from increased at home consumption. Importantly, we continue to have confidence And our 100 to 200 basis points goal for annual net organic sales growth established with Vision 2025, Achieving consistent year over year organic sales growth is supported by the strengthening global trend to more sustainable packaging As we look out specifically at the year to the anticipated volume from our innovation pipeline coupled with return to Adjusted EBITDA in the quarter of $240,000,000 met our expectations before the $29,000,000 of costs we incurred associated with winter storm Yuri. During the quarter, we did see a return of inflation across some of our Commodity input cost categories such as logistics, recycled fibers, resins and chemicals, we are executing multiple price Cost remains a pillar of our overall value creation model for stakeholders. Also during the quarter, we made further progress On the Vision 2025 goal of achieving 80% to 90% paperboard integration across our consolidated business. We exited the Q1 of 20 21% at 71%, improving from 70% in the full year of 2020 68% in 2019. We expect to benefit from a meaningful increase in our paperboard integration rate as we start up the new CRP paperboard machine In Kalamazoo, later this year, we're winding down a portion of the existing supply agreements. In addition, we will drive paperboard integration rate higher As we grow our converting volumes both organically and through acquisitions. Our partnership with International Paper continued to wind down during quarter as we acquired another $400,000,000 of minority partnership interest, reducing their interest to 7% from the initial 21% held at the In addition, work on our CRB platform consolidation project in Kalamazoo continues ahead of schedule with the new K2 machine AIM set to begin paperboard production in the 4th quarter. Planning related to our more recently announced investment in Texarkana to convert an Existing SPS machine to swim capacity capable of also producing CUK is tracking on time and on budget. This represents a very efficient path to meet increased global demand for CUK and further advances our efforts to closely match supply with areas of Continuing the capital allocation discussion, let's move to Slide 4, where I will provide an overview of our intent to acquire AmeriCraft Carton. We have entered into an agreement to acquire AmeriCraft Carton for approximately $280,000,000 The company is one of the largest The company has a great reputation with customers, has been in business for over 100 years and generates approximately $30,000,000 of annual EBITDA. We see 300 basis points of paperboard integration opportunity across all three substrates and expect an additional $10,000,000 of synergies Over 24 months following the close, the transaction is expected to close in the next few months. Turning now to Slide 5 and a discussion of innovation and new product development. I will focus my comments this morning on projects and work underway in our plastic substitution growth platform, one of 3 growth markets we are targeting with a $7,500,000,000 total addressable market opportunity. We have discussed An additional area of expansion for us is into food categories around the perimeter of the grocery store. We've targeted and are seeing success New categories as we align our global innovation resources and have established frameworks to execute on the biggest opportunities. On Slide 6, I will provide details on our Paper Seal innovation. With the launch of Paper Seal in 2020, we targeted a $1,000,000,000 addressable market opportunity to replace foam trays and shrink-wrap alternatives commonly to replace foam trays and shrink-wrap alternatives commonly found in the grocery store meat departments around the world. Our Paper Seal Packaging innovation offers producers and retailers significantly increased food tray recyclability as well as enhanced branding opportunities. We have seen traction in Europe and Australia with a list of retailers including Aldi, SF, ECA, Lille, Marks and Spencer and Woolworths adopting our packaging for meat and poultry products. We have tests underway in North America and are on track to be Commercial in the region in 2021. Building on early momentum of Paper Seal, we are executing a product expansion with the launch of Paper Seal Slice and Paper Seal Wedge, the recyclable barrier line paper packaging format now offers the Characteristics that match existing packaging alternatives. The design allows for enhanced branding and meets the requirements for high speed food manufacturing lines. Turning to Slide 7. We are also targeting and expanding in another category found at the perimeter of the store, And vegetables. Produce pack offers significant branding advantages and an eco friendly container versus existing alternatives. A leading Michigan Apple distributor, Bell Harvest, recently switched 2 produce pack for its Fuji, Honeycrisp and Gala Apples in response to consumer preference for fiber based packaging. With the launch of our new pun and tray line, we are extending our offerings to new categories like This is product direction and the evolving needs in the marketplace as we move to a more environmentally conscious society, providing packaging enhancements for consumers that include 100% recyclability and reduced carbon that include 100 percent recyclability and reduced carbon footprint will be the key to our new product development road Now moving forward. Let me conclude on Slide 8 revisiting my comments made at the end of what was an incredible year in 2020. We are creating value through leadership with our Vision 2025. Simply put, we are running a different race. The investments we have made to advance our capabilities, engage employees and optimize our mill and converting infrastructure differentiate us. We are leaders in sustainability because we have built our business on it. Our packaging solutions are made primarily from renewable wood fiber from As a result of prudent capital management and strong cash flow generation, we have invested back into the business and have continued to enhance Adding new customers and end markets while driving greater paperboard integration. We are confident in the pipeline in front of us achieved 100 to 200 basis points of annual net organic sales growth and expect to be at the high end of that range in 2021. Our ability to help customers reduce their environmental impact and elevate their brands through continued innovation and improvements in packaging is Good morning. Moving to Slide 9 focused on key financial highlights in the Q1 of 2021. Net sales increased 3% from the prior year to $1,650,000 driven by 2% net organic sales growth and acquisitions. Adjusted EBITDA declined from the prior year quarter, primarily related to $29,000,000 in costs associated with winter storm Yuri and maintenance downtime. As a result, adjusted earnings per share were $0.23 as compared to $0.31 in the Q1 of 2020. Total liquidity remained significant at $1,440,000,000 Additional financial and market detail can be found on Slide 10. Solid sales performance was driven by continued strength in food, beverage and consumer markets, where sales before acquisitions increased 5%. Partially offsetting this performance was our Foodservice business, where sales declined 10% versus the prior year period. Importantly, Foodservice sales improved to flat performance year over year in the month of March and are inflecting positive For month to date April versus the prior year. This is encouraging and largely as expected as we see a return to more away from home As vaccinations are rolled out and as we anniversary the beginning of the COVID-nineteen pandemic. On Slides 11 and 12, you will see our year over year revenue and EBITDA waterfall. Net sales increased $50,000,000 in the Q1 of 2021, driven by $33,000,000 of improved volumemix, resulting from a combination of 2% organic sales growth and acquisitions, partially offset by fewer selling days when compared to leap year observed in the prior year quarter, as well as $20,000,000 of favorable foreign exchange. Adjusted EBITDA decreased $55,000,000 to $240,000,000 in the Q1 of 2021. Adjusted EBITDA benefited from $21,000,000 in improved net productivity and $5,000,000 from favorable foreign exchange. $34,000,000 of commodity input cost inflation, dollars 13,000,000 of other inflation and $29,000,000 Cost related to winter storm Yuri. Excluding storm related costs, adjusted EBITDA was $269,000,000 consistent with our expectations. As Mike mentioned in his remarks, we experienced higher inflation across certain Back on Slide 9, you will see that industry operating rates remain strong and backlogs are quite elevated across all of our paperboard substrates. In addition, AFMPA First Quarter data reflects declines in industry inventory levels with balances significantly below historical 5 year average. AFMPA industry operating rates at the end of Q1 for SBS And CRB were 92% 94%, respectively. Our CUK operating rate Over 95% as we remain in an oversubscribed environment. Backlogs increased from last quarter And we're 6 plus weeks in SBS and CRB and 8 plus weeks in CUK at the end of the quarter. We ended the quarter with net leverage of 3.7 times. While leverage is above our long term targeted level of 2.5 to 3 times and our 2021 target of 3 to 3.5 times, we remain confident in our cash flow generation commitments and increase in expected cash flow generation in 2022. Referring back to Slide 3 and highlights in the quarter. Since the beginning of 2021, we have strengthened our balance sheet, debt maturity and interest rate profiles through very effective borrowing arrangements. We issued $800,000,000 in 2 senior What is notable about these transactions are the annual interest rates of the 2024 notes at 0.8% In the 2026 notes at 1.5 percent, we also retired $425,000,000 of maturing Send to our bank credit facility, which notably extended the maturity date from January 2023 to April 2026 and increased the availability under the domestic revolving line of credit by $400,000,000 Our significant liquidity, balance flexibility and strong cash flow generation remains a source of strength of the company. We have excellent optionality. And as Mike detailed for you, we are executing a balanced approach to capital allocation. Turning now to guidance On Slides 13 and 14. Underlying demand for our fiber based packaging solutions remains strong. As Mike mentioned, we expect 2021 net organic sales growth to be at the high end of our 100 to 200 basis points target range. We are meeting demand, introducing new products and growing organically. We remain steadfastly focused on achieving the growth goals We established Envision 2025. We are executing multiple price initiatives to offset commodity input cost deflation. We continue to expect that our volume mix and net performance will be in line with our original expectations for the year as we earn on organic sales growth at The high end of our expectations and execute performance countermeasures to offset winter storm Yuri related costs. While some components of adjusted EBITDA have changed given the operating environment we are managing, our full year adjusted EBITDA guidance range $1,090,000,000 to $1,150,000,000 provided at the beginning of 2021 remains unchanged due to the numerous pricing, All of which will result in stronger adjusted EBITDA performance in the second half of twenty twenty one. As such, Thank you. Your first question comes from Mark Connelly from Stephens. Please go ahead. Your line is open. Mike, How much of your newer sustainable packaging represents 1, 2 categories. 1st, new customers And then second, new rather than replacement business with existing customers. Good morning, Mark. Yes. So it's a mix of Both of those things. I mean, if you think about KeelClip as an example, that's a new product to an existing customer for the And if you look at some of what we're profiling today with some of the protein packaging and fruit packaging that we've outlined, those will represent in many cases That we're selling new products to. So it's yes, I'd ask you to think about 100 basis points to 200 basis points. And again, said this year we're going to be at the high end of that range based on what we see in our new product development pipeline and commitments we already have from customers. It's almost half and half. That's great. That's great. Nice percentage. And Steve, you mentioned the return to away from home Consumption. And I'm curious, is it too early for you to be able to see headwinds coming on the businesses that benefited from the shutdown away from home? Clearly, you've got a lot of organic growth that is more than offsetting, but I'm just curious if you're at a position yet to quantify any Yes. Thanks, Mark. Good morning. As we mentioned in the remarks, we have seen a good positive pivot from flat to Growth in the foodservice business from March to April, what gives us some of the confidence that we're conveying to you around the high end of the overall volume range is we haven't yet Anything material in terms of moving away from the at home consumption. Obviously, that's something we've talked about in the past. Kind of the teeter totter effect that we shared with you previously, but we haven't really seen indications of that materializing in some of the ongoing at home Some of the trends around where people work even in a post environment, we haven't seen anything that we characterize as material. Our customers Remain quite confident in their volumes as they kind of look through the certainly through the next couple of quarters. Anything to add to that, Mike? No. I think, Mark, That adds up to what you saw in terms of the backlogs on the paperboard side. I mean, if you normalize February for the outages incurred Yes. Due to the storm, you've got operating rates in the mid-90s, mid to upper 90s actually, really across all three substrates, Backlogs that are at historical highs relative to the 5 year average and inventories that are substantially down Against the 5 year average as Steve talked about all according to the AF and PA statistics. And so that creates a very favorable operating environment for us. Sure does. Thank you very much. Thanks, Mark. Your next question comes from George Staphos from Bank of America. Please go ahead. Your line is open. How are you doing? Thanks for the details. I want to go to the first question, Muse first question for AmeriCraft. So doing some very rough calculations, it Seems like the business realizations and mix is pretty comparable to Graphic Packaging. But could you talk a little bit about Where the end market weightings might be somewhat different than yours, what kind of mix of business does it have relative to yours? And what kind of retention do you expect or retention loss do you expect that we should be trying to model into our numbers? Yes. So thanks for the question. I would characterize it this way. It's Food and Consumer Packaging. It just tends to be a little bit more of a regional focus The book of business, there's very little overlap with our existing customers that virtually none as a matter of fact. And Our expectations are that we won't see material loss there. Okay. Thanks for that, Mike. And then I want to come back to guidance and you mentioned you're maintaining your forecast Considering the multiple price increases, additional productivity actions, I may have left out some things that you had mentioned. But could you Point to 1 or 2 things in particular, the emphasis that you are putting and applying That makes you comfortable in the guidance. And relatedly, can you, to the extent possible, talk about What pricing increases that have been announced are in your guidance? And if there are any price increases that you've announced that are not in your guidance, Just so we know how to size our forecast based on what ultimately happens in the market one way or another. Thank you, guys. Yes. Thanks, George. It's Steve. I'll take that on and then we can add any additional color. I think on the pricing front, inherent in the guide for the price cost Spread, based upon recognized pricing, known and recognized pricing in the marketplace as well as very specific initiatives that we're pursuing, We have line of sight to $90,000,000 of price this year in 2021, and that's what's in the guide, that which is known and We're executing on and pursuing pricing that adds up to over $200,000,000 that would obviously in our benefit Later this year and into 2022. But in terms of the guide, there's $90,000,000 of price in the guide. Most of that, Vast majority, dollars 80,000,000 of that we will see in the second half of the year, which really speaks to the changes and the things We've done to compress timelines and be able to execute on pricing in a way that keeps any dislocations relative to the inflation We'll talk about in a moment, shorter and shallower. On the inflation front, we saw $34,000,000 of Inflation in the quarter, a little over 5% of our commodity input cost spend. Our guide Has that continuing in the 4% to 5% range or roughly $100,000,000 to $120,000,000 of inflation. And so that's hence The modest change to the price cost spread that we provided in the guidance. So just repeating that 4% to 5%, 100 Finish that off in a pretty significant inflection first half to second half financials. In the first half of this year, We incurred almost $40,000,000 of maintenance downtime and weather related costs that will iner to a positive 30 $1,000,000 On pricing, similar, very modest pricing in the first half, dollars 110,000,000 upwards of $80,000,000 in the second half, hence the $90,000,000 So again, a $1,000,000 So again, a $70,000,000 type inflection. So those are the very specifics to provide you with regards to what we're executing on, what's Steve, Mike, thanks. I'll turn it over. Thanks, George. Your next question comes from Mark Wildebe from Bank of Montreal. Please go ahead. Your line is open. Thanks. Good morning, Mike. Good morning, Steve. Good morning, Mark. First question, I just wondered if you could give us a little more color On AmeriCraft, some sense of who the seller is, some sense of asset quality and whether you kind of see Any opportunities for facility rationalization coming out of this? And what percentage of AmeriCraft's So a solid shout out to the Johnsons who are the owners of this business and have been for a long time. They built an incredible business. We're very pleased To be able to have their company joining ours as we go forward here, the basic statistics we walked through in the script, I mean, it's a little over 2 $1,000,000 in sales, there's 110,000 tons of paperboard. We add about 35,000 to that. So when it's With kind of across the CRP and SPS grades, there's a little bit of CUK in there. They've got 7 well capitalized facilities that quite frankly are all In attractive markets for us and attractive locations. So look, we every year as you know Mark are always looking at our asset footprint Yes, trying to make decisions around how best to utilize and optimize that footprint. But as we go into it, we're going into it that if anything, we'll look to scale these facilities And work to enhance them over time. The synergies that we pointed out, the $10,000,000 that's largely through Board integrations Procurement savings, just given the size that we have, but this is a nice bolt on and the tuck under part of this is actually relatively straightforward. We're really excited to have AmeriCraft joining our company. Okay. That's helpful. Just as a follow-up, Mike, I wondered If you can talk briefly about the sort of what the sustainability proposition is for some of this paperboard packaging that's laminated with barrier film. I'm just I'm very aware that over in Europe and particularly the U. K, products like the composite can have come under a lot of fire Because they aren't recyclable and I'm just wondering whether we've got some of the same issue here with some of this paperboard laminated with plastic. Yes. It certainly is the same issue, unless you've got an institutional way of recycling, which is really what you're referencing relative to some of And again, Mark, that's why we're so focused on our eliminating low density polyethylene coatings on the inside of our COFs as an example and in pursuing the water based coatings, which we're making very good progress on here with our customers because we want to position the business We increasingly become more environmentally conscious with the products that we provide. I mean the end use consumers spoken. They appreciate fiber based packaging. To your point, what we have to do is find ways to provide those functional barriers in a way that's still readily Cycleable and that's something we're actively working on really all the time with our new product development team. Okay. Fair enough. I'll turn it over. Thanks, Mike. Thank you. Thanks Mark. Your next question comes from Gabe Hajde from Wells Fargo. Please go ahead. Your line is open. Mike, Steve, good morning. Good morning, Dave. I had a question about, I guess, the organic volume commentary and then kind of shifting towards the upper end of what you're kind of expecting coming into the year. Towards the upper end of what you were kind of expecting coming into the year. And quite frankly, it's seemingly at odds. I mean, I know that you Talked about transitioning away from maybe discussing tonnage or absolute volume figures, but kind of what was reported in the Q1 and part of it might be housekeeping. If you can give us maybe, Steve, an impact from the days, the shipping days from the week here in the prior year On volumes, maybe that will help us. And then again, I guess kind of revisiting the commentary On volumes, anything from your customer perspective that you can share with us that gives us confidence in the volume outlook? Yes. Gabe, good morning. Let me just start and then Mike can add on with the back half of your question. But yes, you're correct. If you look at it on a raw Tonnage basis, a couple of things to keep in mind. Quarter to quarter, year over year, we closed the White Pigeon mill. We exited from some of Corrugated small volume that we did, so those that volume was taken out of the company. When you factor in The leap year, you've got 15,000, 20000 tons that kind of comes from the realities of less true production But also importantly, we had almost 40,000 tons of production impact in The quarter associated with Winter Storm Yuri. And so that's one of the reasons that our open market sales were down as we didn't have the tons To sell, our inventory levels have come down materially. We obviously service all of our customers effectively, but we had 40,000 tons of actual production Removed from the quarter. So kind of those four things added up will give you a sense for what, as you said, kind of an ad line level on that The slide that you're referencing is why there's some modest down. What we look through in all of that are our integration rates and the actual volume we're seeing On our integrated platform, which was the 2% that we conveyed to you today. Maybe, Gabe, just to build a little bit on that, talk about the momentum here. As Steve said, I mean, If we would have had more tons, we could have sold more in the quarter and we could be selling more right now too. We're having to actually be very thoughtful in terms of how we Allocate our tons both internally and externally relative to demand profile that we've got right now given the inventories are down as I mentioned over 100 tons year over year for Graphic. And in some cases that caused us to have to do more trucking of paperboard to converting plants as Our confidence in that being in the higher end of that range, it's hot. And this is a very good paperboard market right now. As I mentioned earlier, the operating rates adjusted for the storm are in the at least in the mid to upper 90s. And you've got backlogs that are growing and That's a function of growth in the overall folding carton sector. And again, as I clarified here, inventory not only for us, For the industry are down according to the ASPPA data. So, it's a very healthy and growing market right now. Thanks for the detail there guys. And then a 2 part question as a follow-up. I know you guys are not in the business of providing quarterly guidance, but if we were to adjust for the $29,000,000 of Yuri hit and call it kind of Q1 would have come in, I think you guys will say directionally 270. Would you expect kind of Q2 taking into account year over year basis similar level of maintenance outage? And I think what's implied of $10,000,000 of favorable price, such that you can kind of be directionally in that range or a little bit better For the Q2 or is there anything else that I should be thinking about that I'm missing? Yes, Gabe, we don't provide it on a quarterly basis, but you've got Most of the parts, correct. I mean, I think Q2 will look more like last year's Q2, maybe modestly better. And then as we talked, the inflection That we spoke about relative to actual maintenance downtime, run strategies as well as price execution will endure most of the benefits in Q3 and 4. Great. Thank you, guys. Thank you. Your next question comes from Adam Samuelson from Goldman Sachs. Please go ahead. Your line is open. Yes, thanks. Good morning, everyone. Good morning, Adam. Good morning, Adam. Good morning. I was hoping to maybe continue on question on the demand environment. And I know in the prepared remarks you talked about April improving versus year ago levels on the foodservice side. Maybe can we talk relative to 2019 in your key channel? I feel like it's a more appropriate kind of baseline given the comps get really wonky over the next few months. As we think about kind of some of your different consumer channels, foodservice, kind of how far are we back to normal or above normal in some cases as we think about the world continuing to normalize Moving forward. Yes, Adam, it's Steve. It's a very, very good question. I don't have the facts sitting In front of us on that, but just to kind of give you a sense for what we're seeing, what we are pleased with is that foodservice business here in April It is inflecting back to levels that are approaching where we were in 2019 in terms of Moving back into that kind of a trend line. So if you're doing a true multiyear look through, we're pleased with what we're seeing in that business In April, we're not all the way there, obviously back as things haven't completely returned to norm. And what's positive around traditional Food, beverage, consumer packaging is that a lot of the organic growth innovation oriented Products are making their way through the market relative to 2019 into year end 2021. So those would be naturally up driven by the actual Organic sales growth that we've shared with you, if you kind of look through 2019 into 2021, you'd have a net step up In growth from organic sales driven by innovation efforts and new product developments. Okay. That's really helpful. And then a clarifying question on the pricing comments that you made in terms of the 90 that you've got direct line of sight 2 and I think it was over 200 of actions that are underway. I just want to make sure I understand the scope of that. Does that include The contracts that you have with customers that are raw material based and so that there's a more contractual pass through Are the actions that are contractual with customers outside of that discussion? Yes. Thank you, Adam. It's an all inclusive number. So it would be known receipt and recognized pricing. It would be how our cost models are playing out with customers. It would be actions We're taking to increase prices with non contract customers. It would be freight initiatives that we have to go to 4 openers a Rather than 2, it would be other terms and conditions that we're modifying. So that was an all inclusive $90,000,000 of Things that we know we're executing on and then the $200,000,000 is, would be what lies ahead of us in terms of either announced or other initiatives that we're Suing, but are not in the guide. Got it. That's all really helpful. I'll pass it on. Thank you. Sure, Sam. Thank you, Adam. Your next question comes from Mark Weintraub from Seaport Global. Please go ahead. Your line is open. Thank you. Just following up on the last question, can you give us a sense as to how much of the $200,000,000 where you have Actions in motion might be cost pass through, so where you can have a really pretty High degree of certainty even at this point. Well, I guess Mark, that is largely based on what goes into effect in May. And so it would follow a similar algorithm to what we've been seeing on these other increases that we've done and have been scored through April. So I think that's how you need to think about it. And I guess what I would add to that relative to pricing is, if you look at This is Mark. And as I've said a couple of times here, this is a really good paperboard market. And as Steve just outlined, we number of the Ts and Ts really across With our customers because we actually have leverage, given the high demand profile that we're seeing here. And what we're doing is making sure that, we're going out and get Paid and recovering for the input cost inflation that we're seeing come through the business and the value that we're providing customers. In order to do that, you know how it works, We've got to be willing to put some business at risk. And that in fact is what we're doing here at Grafex as it relates to these pricing initiatives that we've got out there. So As Steve mentioned, we've got 90 already recognized and we've got initiatives of well over 200. The vast majority of that, as he mentioned, We'll be kind of a late Q4 because of the lag that we see, but strong momentum as we head into 2022 not knowing what the inflationary environment will be. So we feel we're getting out in front of that in a good way and really positioning the business for Over a multiyear period of time. Right. And to make sure I fully understand, if I can just one. So even if we have another Highly inflationary year such as we're having this year where you're suggesting $100,000,000 to $120,000,000 If you were to get this full amount, you would expect that pricecost Spread to be favorable to $80,000,000 to $100,000,000 And then if it's even less inflation, and assuming success on all the various initiatives, It can even be a bigger number. Is that the way to think about it? Well, it would over time, Mark. I mean, if inflation moves up Purely from the kind of 4% to 5% inflation that we've talked about. And obviously, the cost models would pass that through On the reduced lags that we've been referring to. And so obviously there are things move along the way. And if we saw Incremental inflation of substance continuing in the business, we would continue then to take other price actions Across the other mechanisms that we have with market based models as well. So this is a point in time based on all that we know Specifically that we're trying to provide to you, and then obviously it variates or is variable Depending upon what we actually see relative to inflation over the coming quarters. Understood. Thank you. And one quick Other one, if I could. Now obviously, all the customers see the price increases coming. And so to the extent they were able to, I would imagine they would want to increase inventory ahead of time. At the Same time, I'm not sure that there is much in the way of carrying converted inventory. Can you provide a little bit of color or Should one be thinking that customers are trying to build inventory? Or do they really not do that and or cannot do that? It's a small component of it, Mark, if it happens at all, to tell you the truth. And the reality of it is, as I mentioned, we lost 40,000 Tons both internally and to external customers. So there's we don't see this as inventory building. Got it. Thank you. Your next question comes from Anthony Pettinari from Citi. Please go ahead. Your line is open. Good morning. On CUK, you talked about backlogs 8 plus weeks, which is pretty remarkable. I'm wondering if you could talk about If there's a couple of categories or end markets that are really driving that continued strength versus SBS. And then on the Texarkana conversion, I think you had talked Earlier about 300,000 ton machine, you'll be able to swing production in 1Q of next year. If you had that capability today, would that I'll go to CUK. I'm just wondering if you could talk about how you'll be able to use that asset. I appreciate the question, Anthony, it's a very good one. Relative to what's driving the global growth of CUK, it's largely beverage. And it's this movement on a global basis To kind of replace plastic solutions with our paperboard, our fiber based solutions, things like KeelClip and Fully Enclosed, not just here, but also in Europe and really around the globe. And so as we mentioned at the on our last call, to run our business this year, buying over 50,000 tons from various suppliers globally to make sure we have what we need. So relative to what we'd be doing if we had The Texarkana bill, that optionality we have, having a 5th CUK machine capable of going on that grade, yes, that'd be And that's really why we wanted to make that investment. And we're on track as we mentioned here. Our plan is to have Don, in Q1 of next year, we've ordered the major components. Our curtain coater and our sizing breasts are on order. We're finishing up the engineering work on I'm really excited about the optionality it will give us to be able to swing back and forth between coated SPS and CUK. It's going to be the capability That we have, we'll be able to with the investments we're making to be able to have our CUK with cost parity with what we're doing in Macon and West Monroe. So We like that investment in between that and what we're doing in Kalamazoo given the demand of these markets. Those capital investments look quite fortuitous. And Anthony, just to add on to that, as we Sure. Other conversations as well, we've converted about 5,000 tons of run rate Volume from CUK to SBS. And so part of this swing machine that too would be converted back into CUK most likely. And so Between that and the purchases, I think you could think of it as half of the machine is probably easily convertible upon when we complete the work. Okay. Okay. That's very helpful. And then you highlighted the impact The winter storm to your tons, I'm just wondering if there's a lingering impact from a raw material perspective, Specifically around things like adhesives and glue, have you lost sales because you haven't been able to procure materials from some of those Gulf Coast suppliers? Is that a risk in 2Q? Is there any other kind of color you can give there? Yes, happy to do it. So we did Not incurring more downtime for an inability to get materials to operate our mills other than the 40,000 tons related directly to the And that was again in Texarkana and in West Monroe. Having said that, we had to substitute certain latexes and adhesives In order to manage supply chains and ensure that customers got what they needed. And again, being a global company, we were able to on the adhesive side to actually get some adhesive from Europe and bring that in to keep all of our converting plants up and operational. As of May 1, the vast majority of those supply chains are restored, meaning we're getting The material from our existing suppliers prior to the storm, albeit at higher prices as we outlined in the inflation comments Steve, look forward. So we didn't lose material sales on the converting side related to that. As Steve mentioned, if we would have had the 40,000 tons, We could add more external paperboard sales for sure. Okay. That's helpful. I'll turn it over. Thanks, Anthony. Your next question comes from Ghansham Panjabi from Baird. Please go ahead. Your line is open. Hi, good morning. This is actually Matt So given the emphasis on Passing price through to customers not only across your own footprint, but across the consumer supply chain overall, How do you believe that these hikes will impact consumer spending from a product category perspective in terms of branded versus Private label. And then does this have any does this sort of shift have any impact on your business in any particular fashion from a margin or a volume perspective? So that trend on private label versus branded has been kind of well underway for a period of time, Matt. So I would expect that to continue to be the case Consumers look for value, and quality quite frankly. I think the bigger trend that's going to be interesting for us to watch, And we view it as a tailwind here is the fact that more people are going to be working from home for longer. Yes, the return to work will bring some office workers back in. But as you've seen, and it's been really well chronicled in the journal and other news agencies here, Is that there is an expectation that more people will be working from home. And again, 95% of what we do is food and beverage. And so if people are at home, there's A reasonable belief that you could have that we would see ongoing demand that would be different than what we saw before. Now on the other side of that, we could see Foodservice that may be not quite as strong, but as Steve mentioned, we're seeing a nice bounce back there here in April, which was really our low watermark last year at this time. So I think that's how I'd have you think about it. Obviously, the retailer is going to have to do their work relative to the store brand Brands versus consumer brands, but you've seen some of those consumer brands release their results already announced they're going to take price because they're seeing So I think that will play out here over the next 6 to 9 months. Great. That's helpful. And then I just wanted to Dig into some of the volume mix impact expectations for the year with my next question. So can you talk a little bit about How you expect full year volumes to perform by product category during 2021? And if there's any particular mix Benefits or impacts that we should consider as consumer mobility improves throughout the year? I guess I'm kind of aiming this at foodservice versus non Foodservice type volumes? Yes, I wouldn't, Matt. I mean, overall, our profitability levels have a lot of commonality across The whole portfolio, so I wouldn't expect you to see anything that is particularly mix oriented. I think what we have confidence in is that At 2% organic growth, there's a good solid top line that comes along with that, that we'll earn on at margins pretty consistent with We earn on it as a company. And so if you kind of look at the 2% growth in the $130,000,000 $140,000,000 range and we earn on it appropriately, it Into the range that we're talking about setting aside a little bit of the headwind in Q1, plus we have a little bit of acquisition based year over year Earnings in there early this year. So I wouldn't focus too much on the mix component. I'd focus more on the actual volume organic Growth component. Great. That makes sense. That's it for me. Thank you. Thanks, Matt. Thanks, Matt. Your next question comes from Phil Ng from Jefferies. Please go ahead. Your line is open. Hey, guys. With your leverage now at the higher end of your target, I assume a lot of the excess Gosh, you're going to be used to delever, but can you talk about how you prioritize buybacks and M and A in, call it, the next few years? Yes, Phil, it's Steve. We have in a long term commitment here to a balanced approach to capital allocation and I think it proves itself out Quarter to quarter, and we take those decisions as we see them in front of us relative to our strategies. So there are times when we're putting capital to work in a more intensive way like we're finishing up this year with Kalamazoo investment. There are times where the M and A is timely and the right thing to do. We put that to work. There are times where we've been dislocated. We believe from a share price perspective, we bought the company in pretty material ways. And then obviously, we returned some value to shareholders in the form of the dividend. So It's an always for us. We do know that this year we'll probably be in the 3 to 3.5 times range. We're probably on the higher end of that with everything We brought forward this year, but our confidence in the cash flow generation moving into 2022 is very high, Which gives us the ability to speak with confidence around getting the leverage ratio back into the kind of long term You have 3 over time. And Phil, the other thing I'd add to that is if you think about and Steve kind of profiled the financing events that took place Over the quarter and last year as well is we're borrowing money very efficiently. And if you look at M and A in particular, It's a little lumpy, right? You don't control when quality assets come to the market. And so we've got to have that kind of flexibility to be able to move. And when an opportunity presents So that's strategic in core to our overall vision for what we want to drive the business. So I think that's As we've said before, if we see those types of things, we're willing to lever up a bit as long as we see a clear path to delevering very quickly As Steve outlined, so hopefully that helps you give a little color. Yes, that's great, Mike. So it sounds like you're not if there's a good deal on the table or you see A dislocation in your stock price, you're not refraining from buybacks from M and A. So that's encouraging given that your confidence here, free cash flow profile. And I guess the product you talked about today on PaperSeal, it looks pretty interesting. Can your customers run it on existing equipment? Is it agnostic to the film that you would use? And any drop off in terms of performance like shelf life? No. We can run it on our existing equipment, which is important, but the customer actually needs a line and we've got a partner there that we partnered With it actually makes the machine. Okay. Is it a big capital investment for the customer, I guess, if they didn't have? No. Okay. No, it's not. Okay. And then from a film perspective, you could pretty run pretty much run anything or there has to be like a partnered film that you have for this product in particular? No, we're agnostic on the phone. Okay, great. All right, really exciting. Thank you. Yes, thanks, Kyle. Your next question comes from Kyle White from Deutsche Bank. Please go ahead. Your line is open. Hey, good morning. During the quarter, you pointed to the $15,000,000 to $20,000,000 headwind related to the storm and it came in higher than that. Just curious what drove the increase it's just your initial expectation. And then following up on that, what is offsetting this impact that is allowing you to maintain your Performance guidance in that $70,000,000 to $90,000,000 range. Dick, it's Steve. Just very briefly for you, with regards to the $29,000,000 versus $15,000,000 to $20,000,000 We had to announce that early. We were in the market with the $800,000,000 Secured bonds that we were successfully executing on, so we conveyed that as a material event, but it was very early in the process. And so as such, as it played out, as we've worked through some of the challenges that Mike talked about earlier, overall, the Just went up, but it was a function of us needing to be in the market with that material knowledge early in the process. As you may recall, we were pretty early in it. What gives us confidence on the overall productivity is that we don't have the recovery boiler downtime this year. We have less downtime and our overall Confidence in our productivity going into the year was quite high. Unfortunately, the weather impact took away what we felt was the potential More upside, but it's why we believe we can still maintain our overall commitment to productivity and net performance in that $70,000,000 to $1,000,000 range for the year. Got it. That's helpful. And then you're highlighting Paper Seal and your new Produce TACT, are you seeing market penetration for product offerings such as these in your kill clip in the U. S? Or are you deliberately focused more on the international and European market First. And then related, why might the U. S. Be slower to adopt these products despite everything we're hearing from Consumer Packaging brands on sustainability? Yes. So it's a little bit of a mix. So QClip has definitely been more Europe centric up to this point, although we have a number of applications And sales that will take place here in North America towards the end of this year, we're right on track with where we thought we'd be. We've got 20 of those machines installed in Europe already. We're learning a lot about how those are running, optimizing their performance. And again, as you know, Kyle, we're selling these to large CPG and beverage companies and they've got global footprint. So if we're successful in one market, they will look to bring that into other markets We're highly confident in that. We've seen that before with other packages that we've done. In regards to some of the produce pack stuff, that's here in the U. S. As I mentioned, The punit tray here is for an Apple producer in Michigan as an example. And so you put those together, those are a lot of base hits, But that's really what gives us confidence in the $7,500,000,000 addressable market we pointed out to in the 3 main platforms there. And that particular one being Neoplasty Substitution. It used to be in a bag. Now it's going to be in a tray that's made out of solid fiber. Your next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead. Your line is open. Great. Thanks for taking my question, guys. Good morning and congrats on the results. I guess, first off, you laid out the $90,000,000 of Price that you expect and the $1,000,000 to $1,200,000 of commodity cost inflation. So if you look at the $1,000,000 to $1,200,000 what are the components that have inflated the most? And do you expect any moderation in any of those components as we could move forward here? Is that what's embedded in your outlook? Yes. Just briefly on that, obviously, we're not going down to the by category level. But as Mike mentioned, secondary fiber, chemicals, energy, logistics drove The $34,000,000 and we would expect for the quarter and we would expect that those to be the primary drivers on a pretty But we do see some inflection up for some categories like logistics that would maintain that Over the year, hence the range. Obviously, things can move inside of that, but that's how we're thinking about it. Okay. And I just want to revisit the price Commentary as well. It looks like you mentioned very high operating rates across most of the substrates. Have you do you guys feel that the price cost dynamic has improved over the last Couple of years, I know you shortened the lags to 6 months, but I know there's been some capacity additions also in SBS, but maybe if you just look at the 3 grades, Just comment on each one to see again, if you feel that the price cost dynamic has improved In any of them, I imagine so in CUK just given the demand strength. But, what about CRB and SBS? Yes. So Arun, I'll answer that. I mean, relative To all three grades is a basket, which is how we need to look at those, given some of the substitution around the edges. I'll characterize it as one of the strongest Paperboard markets that I can remember have been doing this a long time. And so relative to how that looks and what gives us confidence in our Pricing is really the strength of those markets. And relative to the lags and Steve mentioned this, I mean the algorithm for pricing in our business Substantially different than it was in 2016, it's not the last time we saw a big run of inflation. As you're seeing mid year here, we've got the better part of $80,000,000 worth of pricing It's going to take place here in the second half of the year. That's substantially faster. And as Steve mentioned, it's going to result in a shorter and shallower dislocation. And if we see additional inflation, we're going to take more price. That's just how we need to deal with it in the marketplace. And again, we can't predict what inflation will We've given you our best analysis as we have around 4% to 5% of our COGS here, roughly on average around $110,000,000 of which is what we're expecting right now as we sit here today, but if it's more, we'll have to seek more price. And again, with these markets And the strength of those, we'll continue to push those graphic because we have to offset our input cost inflation. We are out of time for questions today. I would now like to turn the call back over to Graphic Packaging's CEO, Mike Doss, for closing remarks. Thank you everyone for joining us this morning. During the Q1, we met strong demand with our fiber based packaging solutions and captured continued organic growth. We remain intensely focused on achieving the pricing, growth goals and performance improvements we shared with you today, and we look forward to updating you on our progress the next time we at the end of the quarter. Thank you. Have a good day. This will conclude today's conference call. Thank you for your participation. You may now disconnect your lines.