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graphic packaging holding co (gpk) q2 2019 earnings call transcript

by:Top-In     2020-07-27
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Graphic Packaging Holdings Limited (NYSE: GPK)
Income CallJul 23,209, 10: 00. m.
Content: Opening remarks: Good morning.
My name is Michelle. I will be your conference operator today.
At this time, you are welcome to call the quarterly earnings report of Graphic Packaging. [
Operation instructions]
I would like to transfer the call to Sir now.
Alex Ovshey, vice president of investor relations.
Please continue. Alex Ovshey --
Vice President of Investor Relations, Michelle.
Good morning, welcome to the second quarter 2019 performance conference call of Graphic Packaging Holding Company.
Mike dos, President and CEO of the company and Steve Scherger, executive vice president and chief financial officer, will speak on the phone.
To help you keep up with today\'s call, we offer a slide presentation that can be accessed by clicking on the webcast and demo link in the investor section of our website. graphicpkg. com.
I would like to remind you of our statements about our expectations, plans, estimates and beliefs [
Technical issuesOperator --
Excuse me, our meeting will resume soon. Alex Ovshey --
The vice president of investor relations has no obligation to update these statements unless required by law.
Mike, I\'ll give it to you. Michael P. Doss --
Thank you Alex, president and Chief Executive Officer.
Good morning, thank you for discussing with us the 2019 performance for the second quarter.
As the adjusted EBITDA profit margin increased by 160 basis points year on year, we reported strong results in this quarter --over-year to 17. 2%.
The adjusted EBITDA was $0. 267 billion, which exceeded our expectations, thanks to strong execution in pricing, performance, growth plans and synergies.
We report $31 million a year. over-
Annual improvement of adjusted EBITDA.
Pricing increased by $40 million this quarter, reflecting the benefits of the pricing plan.
It is important that our pricing for the cost-of-commodity input relationship is $26 million in the current quarter and $41 million in the year --to-date.
Overall, we have been operating well this quarter and our performance has increased by $22 million.
These benefits are partially offset by commodity input cost inflation, particularly increased timber, and Labor and Welfare inflation and unfavorable foreign exchange.
Wet weather in the United States, Southeast and Gulf states continues to drive up wood costs.
As I mentioned, we created a $40 million positive pricing this quarter.
We continue to expect a price of about $2019 for 0. 11 billion.
We are pleased to report that our business team has been successful in customer negotiations compared to eight months ago, reducing our pricing lag to six months.
This cut is an important milestone as it provides the opportunity to adjust pricing twice a year on average to better reflect market conditions.
In the second quarter, we bought back $18 million of stocks at a value lower than the intrinsic value of the graphic packaging.
Over the past three quarters, we have managed to buy back $0. 198 billion in stock, reducing our stock count by 5%.
Since the establishment of the fund, our stock repurchase program in February 20, we have successfully reduced our total stock by 10%.
Let me briefly discuss our current 2019 financial guidance and the art carton company acquisition we announced this morning.
We expect the 2019 adjusted EBITDA to be within the $1 range.
Between $1 billion and $1.
3 billion, an increase of $15 million over the midpoint of our previous guidance.
This growth reflects continued strong execution in pricing that is more favourable to the commodity input cost environment.
We continue to anticipate that 2019 of cash flow will be approximately $0. 525 billion compared to $0. 469 billion in 2018.
Turning to the art carton acquisition, the business includes a CRB plant located in White Pigeon, Michigan with an annual production capacity of about 70,000 tons, and two conversion plants located in Auburn, Indiana, and Elgin, Illinois.
The business generated $63 million in revenue over the 12-year period.
For the one-month period ended June 30, 2019.
We expect the annualized EBITDA to generate approximately $10 million, including expected synergies over the next 12 to 18 months.
This acquisition will provide compelling opportunities for optimization and growth for our cardboard mills and conversion platforms in North America.
In addition, this acquisition will promote the diversity of the switching terminal market and enhance our conversion platform.
We expect to achieve significant synergies driven by cardboard integration, plant and conversion manufacturing optimization, and supply chain efficiency.
We expect the transaction to be completed by 2019.
Now, let me provide more details on the main operating trends for the second quarter.
Driven by the acquisition, the number of our global cardboard packaging business grew modestly in the second quarter.
It is encouraging that we continue to see the benefits of consumers moving from plastic to custom cardboard solutions.
In addition, in the second half of 2019, several new customers won the business position with organic growth of 100 basis points.
Now let me briefly discuss our new product development work.
As we highlighted last quarter, the customer\'s interest in KeelClip beverage packaging solutions remains high.
We are actively building new packaging machinery for our big customers and we expect these machines to drive KeelClip\'s needs in the coming years.
In the prepared food category, our proprietary cardboard bowl is gaining market share from plastic pallets.
According to Nielsen\'s data, the prepared food categories continue to perform well, and customers are actively innovating in breakfast, main courses and meal categories.
As cardboard solutions are seen as more sustainable products, customers are increasingly choosing SBS cardboard pallets instead of plastic ones.
In addition, customers are integrating the proprietary microwave cooking solutions for graphic packaging for an exceptional consumer experience.
There are multiple categories of new product launches this quarter.
Turn to operation.
Our factory and conversion assets worked well this quarter.
The Augusta SBS plant benefited from the expensive rebuilding of the recycling boiler, as well as a major upgrade of the plant\'s mechanical and electrical systems that we completed in 2018.
AF & PA reports a CRB with a 2019 action rate of Q2 97%, and a SBS of 92%.
The CUK rate of Graphic Packaging is more than 95%.
Backlog in a healthy five-
CRB and CUK have a few weeks left.
As a reminder, our CRB and CUK mill operations are highly integrated with our conversion platform, consuming about 87% of the cardboard we produce for these grades.
Our SBS backlog is currently around three weeks.
Since the completion of the merger of SBS and catering services assets in early 2018, we have successfully increased the integration rate of SBS from 20% to 40%.
Steering performance.
Continued emphasis was placed on improvement plans, variable cost and operational efficiency benefits from capital projects, and synergies to achieve strong performance during the quarter.
We are operating well and have created a net performance of $22 million.
Go to cost.
This quarter, we increased the cost of wood inputs and external paper costs, resulting in a net increase of $14 million in commodity inputs.
The tariffs set by the United States in 2018 have limited inflation impact on our cost structure yearto-date.
Let me now focus on how we implement the strategy of integrating SBS and catering services to convert assets.
At the beginning of 2018, the addition of SBS and food service assets enabled us to optimize factory production for all three cardboard grades.
Therefore, we are improving meaningful efficiency for the company.
We are also taking advantage of growth opportunities associated with positive trends in food services to move to innovative cardboard solutions, particularly from plastics to plastics
Based on cups, trays and flip covers.
The integration of the Letica acquisition is still in progress and is highly supportive of these growth initiatives.
Finally, we continue to be confident in our ability to offer US $75 million in acquisitions.
Relevant synergies will be achieved by the end of 2020.
With that, I\'m going to transfer the phone to Steve Scherger, our chief financial officer. Steve? Stephen R. Scherger --
Thank you Mike, executive vice president and chief financial officer. Good morning.
We report a second-quarter gain of $0.
After dilution, $22 per share, up from $0.
The second quarter of 2018.
Affected by $5, net income for the second quarter was $2019.
Special costs of 8 million are detailed in the reconciliation
GAAP Financial Indicators Table attached to revenue release.
In adjusting these costs, the adjusted net income for the second quarter was $69. $6 million or $0.
24 per share after dilution.
In contrast, adjusted net income for the second quarter was $2018. $5 million or $0.
18 per share after dilution.
Focus on net sales for the second quarter.
Revenue increased by 3%, mainly due to a $40 million increase in pricing and an increase of $16 million in related acquisitions.
Those benefits were partially offset by the unfavorable foreign exchange of $14 million.
To the Adjusted EBITDA for the second quarter.
The $31 million increase to $0. 267 billion was driven by $40 million in positive pricing and $22 million in performance.
These benefits are partially offset by $14 million in commodity input cost inflation, mainly timber, $12 million in other inflation, primarily labor and welfare, and $3 million in adverse foreign exchange, and an unfavorable volume of $1 million.
We ended the second quarter with more than $1.
4 billion of global liquidity and $3 billion of net debt.
Total net debt fell by $0. 121 billion this quarter.
In the second quarter, we invested $78 million in capital, bought back $18 million in stock, paid a dividend of $22 million and allocated $6 million to our GPIP partners
The net leverage ratio is expected to be 2 in the second quarter.
Compared to 3, the Adjusted EBITDA is 91 times.
13 times at the end of Q1
We are still committed to our long term
Net leverage target 2. 5 times to 3.
0 times, it is expected to enter this range well this year
Our strong cash flow is reflected. Turn full-
Guidance in 2019.
As Mike mentioned, we now expect our integrity
The adjusted annual EBITDA will be within the range of $1.
Between $1 billion and $1.
3 billion, an increase of $15 million over the midpoint of our previous guidance.
This increase reflects more favorable pricing for the relationship between commodity input costs.
We continue to expect positive 2019 pricing of about $0. 11 billion.
We expect the commodity input cost inflation rate to be $70 million compared to our previous $85 million.
The reduction reflects more favorable cost of recycled fiber, freight and energy inputs, partially offset by higher coststhan-
Estimated cost of wood.
We expect the Adjusted EBITDA for the third quarter to be between $0. 235 billion and $0. 245 billion.
The key drivers of the adjusted EBITDA continuous decline from the second quarter to the third quarter are related to the timing of our annual maintenance downtime schedule.
Specifically, our Texarkana SBS plant plans to extend the scheduled maintenance downtime.
In addition to the regular annual work that we will be doing at the factory, we will also replace the bottom tube section of the recycled boiler.
We expect this additional work to improve the safety and reliability of the mill.
Turn to cash flow.
We continue to expect cash flows of approximately $0. 525 billion in 2019.
The rest of our guide is included on the last page of the demo on our website.
Thank you for your time this morning.
I will transfer the phone to Mike now. Mike? Michael P. Doss --
We are encouraged by the strong results achieved in the first half of the year.
We are implementing our strategy to build a highly integrated packaging company to achieve profitable growth on all three cardboard substrates. We are well-
Benefits are driven by our growth, productivity and collaborative initiatives that we expect to exceed our labor and benefit cost inflation.
We expect strong cash flow in 2019 and we will continue to work to create shareholder value through effective capital allocation.
We believe that these actions will create value for all of our stakeholders in 2019 and beyond.
I will now transfer the phone back to the operator to ask questions.
Q & A: Operator [
Operation instructions]
Your first question comes from George Staphos of Bank of America.
Your line is open. John Babcock --
Bank of America--
Good morning, analyst. This is actually George\'s phone call.
I just wanted to start, you talked about this earlier, but could you elaborate on the success of new customers and how the shift from plastic to cardboard solutions can affect your sales?
Then let me add, what is it that gives you confidence in the volume outlook for the second half of the year? Michael P. Doss --
Thank you, President and Chief Executive Officer.
So as far as our new customers are concerned, as we talked about earlier this year, we really saw the triumph of this transformation into the food service business, in particular, the conversion of polystyrene into paper cups, trays, flip covers.
These types of products, and the continued acceleration of our beverage business, I think.
We talked about KeelClip here and transferred from shrink wrap films in Europe and elsewhere.
Therefore, we have a high degree of confidence in the 100 basis points we outlined in the second half of the year.
Our 95% catering business will remain fairly stable in any type of economy.
We saw this here in the second half of this year.
So this is all included in our guide. John Babcock --
Bank of America--AnalystOkay.
Thank you.
Also, in CUK and CRB, the backlog still looks strong, but has fallen back in SBS.
Can you talk about the current market dynamics in this grade? Michael P. Doss --
The president and Chief Executive Officer are pleased to do so.
As you know, the rate of surgery is stable in both CUK and CRB.
On the SBS side, they fell a little bit in the range of 92%.
This is really driven by the fact that there is a new entrant into the market and is now fully included in the actual numbers released by AF & PA.
As we have seen in this quarter, one of our competitors has announced that they will actually take out their capacity.
So if you look at the kinds of networks
Deducting these two factors, since it is working in both the fourth quarter and 2020, we expect operating rates to rise a little bit online --
The result of these two moves is a net basis. John Babcock --
Bank of America--
Before I turn it over, analyze the last question.
In terms of the acquisition of art cartons.
Can you talk? -
The benefits you see from this deal, and how does the CRB plant really fit into your existing plant network?
Also, it looks like the factory is at the top of the CRB cost curve.
So, what are the opportunities to improve efficiency from these facilities? Michael P. Doss --
Okay, so you have a lot of questions to ask.
I will answer them in order.
In terms of our excitement about art acquisitions, we do see a good diversity of customers in business transformation.
They are in some areas where we are not.
In the past, we have talked about the needs and goals that continue to diversify our portfolio and portfolio.
They are doing retail.
There are also some industrial markets that we find interesting.
So we think this is a great opportunity for us.
Regarding the synergies on the CRB side, we have quite a large CRB business and we really see supply chain efficiency as the biggest opportunity where we can take advantage of some of the things we do, and promote some synergies. John Babcock --
Bank of America--
Okay, thank you.
The next question comes from Mark Wilde of BMO Capital Markets.
Your line is open. Mark Wilde --
Capital Markets--
Good morning, Mike.
Good morning, Stephen.
Congrats you for a good quarter. Michael P. Doss --
Thank you Mark, president and Chief Executive Officer. Mark Wilde --
Capital Markets--
Analysts want to know that back to John\'s question about art, we can add another one there.
Just a little talk about the timing of synergies, and also about the capital use of this acquisition, such as the development of food services business or the development of European carton business, I think the priority of both methods is a little higher. Michael P. Doss --
President and Chief Executive Officer
So, I think, Mark, the way we look at it is that the expectation of multiples is still high in this area.
As we have already talked, we must look at this and look closely at these issues to ensure that we find opportunities to create value for our shareholders over the long term.
This is a good example, it is unique, we think that valuation is good for us, it puts us into some vertical areas that we are not in.
You are right, and from a priority perspective, anything we can do for these reasons will be prioritized.
But we have to make sure that we get the right valuation in these kinds of transactions as well.
In Europe, we are still interested in driving the $1 billion platform in terms of conversions that have been discussed with you in the past.
But that market. -
Well, our business is progressing very well because we have a close connection in terms of convenience and beverage business.
When we see this, we will be more cautious and may give priority to North America, especially anything you can push, which is our level of integration in SBS . . Stephen R. Scherger --
Yeah, Mark. I\'m Steve.
I also think one of the things is that this is a relatively mild overall allocation of capital, which is a very clear front and back multiples that we can see when making decisions to apply for capital from acquisitions. Mark Wilde --
Capital Markets--AnalystOkay.
Then is the timing of synergies and synergies. Michael P. Doss --
As we have mentioned, as we look ahead to 2020, we expect EBITDA to account for the bulk of $10 million, a post-synergies figure that we will provide for the most part of 2020.
This is a fair number.
As we have seen, it is clear that this year we are going to get some very modest improvements based on the closing situation and think about it that could be a quarter.
Normally, we will make sure we understand the business in the first few months and then work hard to operate and improve efficiency.
In this case, we expect to be the main sight of $10 million by 2020. Mark Wilde --
Capital Markets--AnalystOkay.
And then for my follow-up.
I was surprised when I looked at the slide where you were still buying 100 million lb polyethylene.
I\'m just curious where you are, coming up with alternative coatings for paper cups in food service products and really making them easier to recycle instead of making polyethylene coatings complicate the problem? Michael P. Doss --
President and Chief Executive Officer.
Thank you for your question.
This is our strategic focus relative to our new product innovation.
As I have commented in the past, this is the top priority of our food service business.
We have many different test materials and we are working with biotech customers
This will reduce this footprint.
About our low
As you know, Mark, the density polyethylene is very cost-effective and has a high variable performance.
So, we are facing a very optimized specification.
But as far as you are concerned, this is one of them in terms of sustainability, and we believe that consumers will eventually hold this through the market when we propose these new options and innovations.
Over the next 12 to 24 months, we expect progress on this 100 million.
Another thing I mentioned to you is that we are working with our customers to collect these materials and have the ability to bring them back to our factory and elsewhere to be able to use, because the fiber is very good there.
We may be a little behind in the United States, and parts of Europe and Asia are certainly behind in this area, which is also an opportunity for us. Mark Wilde --
Capital Markets--AnalystOkay. Very good.
I turned it over. Michael P. Doss --
Thank you, President and Chief Executive Officer. Stephen R. Scherger --
Mark, executive vice president and chief financial officer.
The next question comes from Mark Connelly of Stephens.
Your line is open. John Ryder --Stephens Inc. --
Good morning, analyst.
This is actually Mark\'s John Ryder. Michael P. Doss --
Good morning, John, president and chief executive. John Ryder --Stephens Inc. --
Our first question is whether we should assume that a price drop from 8 months to 6 months represents a large part of your response to resolving the price/cost gap, or are you taking other important actions for future addresses? Michael P. Doss --
John, this is a big task for us in many fields.
The past year.
So we believe that six months is the end of our lives. John Babcock --
Bank of America--AnalystOkay.
Therefore, as a follow-up to this point.
So, do you have other ways to mitigate the risk of inflation? Stephen R. Scherger --
Yes, John, executive vice president and chief financial officer. I\'m Steve.
As we discussed before, I think in addition to compressing the time frame, this is an important initiative for us in the past few years, and we have taken several other actions around pricing.
So take a look at how we can ensure that we address any areas of potential leakage, such as shipping, passing, etc.
So, it\'s really more than one
Let\'s commit to the dimension approach of the year of price improvement-over-year.
It was $80 million last year and $0. 11 billion this year.
This is a combination of negotiation and time lag compression, as well as other initiatives to lock in areas where price leaks may occur during negotiations or during normal business processes. John Ryder --Stephens Inc. --
Good, good.
Our second question is if you can talk about the productivity of the factory.
We saw some good improvements here last quarter, we know your wood cost is very high, but the OCC is also very low.
If you can help us take a look at your overall productivity effort. Michael P. Doss --
The president and Chief Executive Officer are pleased to do so, John.
So seriously, what you see is that our investment in 2016 and 2017 brought a lot of benefits, especially in the CUK factory we made in ximenro, we installed curtain coating machine and pressing part in ximenluo, which made a breakthrough in productivity. On a year-over-
We do see a significant increase in productivity there.
With respect to the issues you raised relating to the cost of OCC and wood, we expect that the cost of wood here will continue to rise in 2019.
The weather in the Southeast and Gulf countries is a little better.
From a practical point of view, we are behind. -
For the timber reserves we need to enter the rainy season.
So, you will see that we have put a lot of effort on our own, and I will assume that others are building these piles here when we can, because once we get into the fourth quarter, we expect more normalization of wet weather patterns, which are historical patterns in these areas.
So, with regard to the OCC, you will see what we see, from what it looks like. They are down.
This is a commodity.
In terms of supply and demand, we expect it to move up and down.
Now, demand is down a bit on a global scale.
I think I saw the recent AF & PA data and the exit dropped by 3.
5% take June as an example.
So that\'s what we think. But net-
Our cost of fiber is rising year by yearon-
One year, driven mainly by Wood offset by secondary fibers. Stephen R. Scherger --
Executive vice president and chief financial officer and the combination of these things, John, in the revised $70 million guide, some of the natural benefits of recycling fiber, chemicals, shipping costs, as Mike mentioned, rising timber prices partially offset inflation. John Ryder --Stephens Inc. --AnalystGreat.
Really helpful. Thank you. Michael P. Doss --
President and CEO.
Your next question is the Dillon chip from vertical research.
Your line is open. Chip Dillon --
Vertical Research-
Good morning, Mike. Good morning, Steve. Michael P. Doss --
President and CEO of the chip company. Chip Dillon --
Vertical Research-
Thank you for your details, AnalystWell.
The problem is just looking at the last question about pricing.
I know you, I believe there are still some prices related to the cost.
Not only did we see the decline in the OCC, but we also saw some recently-
Pulp replacement grades have also fallen sharply.
Will this create any kind of price?
Go back to some of your contracts, or in important amounts that we will see or notice in early 2020, say, or at any time in the future? Stephen R. Scherger --
Yes, Chipp, executive vice president and chief financial officer. I\'m Steve.
Our cost model will take these costs into account, but they will also be offset by other inflation dynamics.
So if you think about it-
In general, we will still experience net inflation throughout the business, so there will still be some moderate inflation in the cost model we apply.
Yes, you may get some benefits if you are just a pure CRB client.
They will be offset elsewhere or may apply to cost models for Virgin, CUK and SBS.
In general, when we look forward to 2020, we will discuss it later and in the future.
We have now seen the price we expected in 2020.
We will discuss this issue later.
At the moment, this is a net positive factor, but this will be the issue that we will be discussing in Q3, Q4. Chip Dillon --
Vertical Research-AnalystOkay.
I think I just have a follow-up that will be an extensive action.
In terms of the water market, a can company has talked about the fact that there are more plastic bottles than there are and the service is single-
The use of beverage cans is everything else.
I do often notice an aluminum can with water and distilled water, but I might notice, if not more, an SBS type package with water.
I don\'t know if you think this is a more niche situation or because the cost difference is too big.
You may also want to talk about the location of the SBS water pack compared to aluminum cans, PET or plastic. Michael P. Doss --
President and Chief Executive Officer
The packaging of SBS will be very high. -
In terms of the total cost, much higher than the aluminum tank.
We have not seen a significant increase in specific vertical areas related to water and SBS.
We have read the same type of announcement as the water in the aluminum tank you mentioned.
I think this is probably the more likely area where we can get some pick-up, because if they end up with cardboard packaging as an example, it will be what we are doing for these purposes at the moment
Using customers may be a more likely area for us to be involved in this trend. Chip Dillon --
Vertical Research-
Are you referring to the beverage carrier? Michael P. Doss --
President and Chief Executive Officer. Chip Dillon --
Vertical Research-Analyst[Speech Overlap]
Individual cans. Got you. Okay. Thank you. Michael P. Doss --
President and Chief Executive Officer. You bet, Chip.
The next question comes from Citi\'s Anthony pitinari.
Your line is open.
Anthony petelli-Citi --
Good morning. Michael P. Doss --
Anthony, president and Chief Executive Officer.
Anthony petelli-Citi --
Analysts have just followed up on the end of the lag from 8 months to 6 months.
Is this all of your boxboard grades, or is this a traditional CRB and CUK business?
Then you have a goal to narrow those lags in the next few years.
You seem to have made great progress this quarter.
Is there any problem with the market environment or large contract renewal? Or in the past quarter, after years of hard work, what color can you give us to be able to move these lags so meaningfully to do it? Michael P. Doss --
President and Chief Executive Anthony, the average level of all our cardboard grades and all packaging contracts is six months if you wish.
It has been our strategic focus for the last few years, and I want to tell you that the inflation we experienced in 2017 and 2018 was a big part of the drive for us to renew our contract with our customers, we must shorten these lags.
That is, therefore, a strategic focus of these negotiations, which we have finally achieved.
We have made progress in this regard.
Anthony petelli-Citi --AnalystOkay. That\'s helpful.
Then sustainable development.
Have you seen the pace of sustainable development?
Replacement of cardboard?
Is this growing faster in Europe than in the United States?
Or maybe some low.
May hang fruit around the already picked polystyrene?
I\'m just wondering if you can compare the alternative speed and market opportunities for sustainable development in Europe.
So, what are the lessons of the US market? Michael P. Doss --
Thank you to the president and the chief executive for your questions.
As you know, we have a fairly large business in Europe.
One thing we really like to operate in Europe is that the packaging trend is 12 to 18 months ahead of what we see in North America.
I will tell you that the activity about eliminating disposable plastics is--
It continues to be very, very high.
So we will see and expect that these trends will continue to be translated here, and we will see what we are looking forward to seeing in North America.
Many of our global customers operate in Europe.
So they also have business in the United States.
As you can see, Anthony, they are setting goals for sustainable development goals that have been translated into multi-year goals and into reductions and use of certain materials at specific times.
So, I hope this activity stays at a fairly high level. Stephen R. Scherger --
Executive vice president and chief financial officer and Anthony, as far as Mike is concerned, in Europe we may see a more confident shift in secondary packaging like drinks in cardboard, because these packages have a long history in other substrates and films
And as Mike also mentioned, in the US and North America, the runway for converting primary packaging is long for cups like we said and pallets closer to the final product.
These changes may be comparable to what we have seen in Europe.
Anthony petelli-Citi --
This is very helpful.
I turned it over.
The next question comes from Ghansham Panjabi of Baird.
Your line is open. Matt Krueger --Baird --
Good morning, analyst.
Actually, Matt Kruger is sitting in the seat of Gansham. Michael P. Doss --
Good morning, matt. President and Chief Executive Officer. Matt Krueger --Baird --AnalystMorning.
Just wanted to ask, how are you going to manage with more active-than-
Average maintenance plan for the third quarter of 2019?
From the point of view of inventory management or operations, do you have any unique actions that we should know? Michael P. Doss --
President and Chief Executive Officer
Thank you, Matt.
The answer is that we have built stock on our CUK and SBS.
You can see. On a year-over-
According to these scores, the scores rose by 5% to 6%.
So, we have the materials and we need to take care of the customers.
We plan these things multiple quarters in advance to ensure that we have manufactured and pre-positioned the board in order to serve our customers.
In terms of the downtime we actually take, this is what I call a normal or normal annual outage for Macon.
So we do this every year.
This one is actually a little less complicated because we don\'t have the curtain coating machine installed as we did in Macon\'s last few downtime.
And then at Texarkana, we\'re actually doing the downpipe work that we\'re talking about, which is consistent with what we did with the power outage in Augusta in the fourth quarter of last year, but the range is much smaller.
So, we have the same vendors doing great work for us in the fourth quarter of last year, and we want to be able to manage the power outage accordingly.
We have stock.
We know where it is.
It is in the right position.
We have good project management skills to handle these two interruptions.
The other thing I think I\'m going to add is that since you asked this question, that\'s why sometimes you see that what we actually produce in a month is a bit confusing compared to how it works, because we are very satisfied with the two SBS factories, we have to build stock in order to run our business and take care of our customers. Matt Krueger --Baird --
This is a very meaningful analysis, which is helpful. Thank you.
Then, when you negotiate a contract to reduce the lag in quarterly and previous pricing, what do you have to give up to close the price gap if there is any problem?
Especially considering that your customers usually have
Annual pricing model with its own retail customer base? Michael P. Doss --
Yes, so I\'m not going to involve the individual pricing section because it\'s a broad-
Scope and variables depending on the actual contract.
But I just want to say that this is part of our normal negotiations with them.
They have what they want.
We have what we need.
That\'s where we ended. Matt Krueger --Baird --AnalystOkay. Okay. Makes sense.
I gave it to you. Thank you. Michael P. Doss --
Thanks to Matt President and Chief Executive Officer.
The next question comes from Brian Maguire of Goldman Sachs.
Your line is open. Brian Maguire --Goldman Sachs --
Good morning, Mike, Steve and Alex.
Congratulate you on the good results here. Michael P. Doss --
Thank you, Brian, president and Chief Executive Officer. Brian Maguire --Goldman Sachs --
Analysis is just more
Part of the question about the volume, because it is likely to be difficult to answer directly, but hopefully you can give some color of how many of the 100 basis points are the organic volume acceleration you expect in 2Q.
How much of this you think is directly related to sustainability trends, or to steering plastics when compared to normal terminals
Market growth or market share growth?
Is there any reason to think that this will end at the end of this year and will not last until at least the first half or next year when you annualize these contracts?
I guess I mean, is there a similar amount of pre-fill in these contracts, or should we consider annualized for a year?
I guess the last issue related to the quantity is, have you seen any customer
Store or move along these routes, or later like 2Q, or so far, in 3Q? Thanks. Michael P. Doss --
The president and the chief executive, let me talk about this.
So in terms of our visibility, I don\'t want to go out for more than a year because it\'s hard for us to have visibility outside of here.
But if you think about the growth of the 100 basis points we see, I would say that this is highly relevant in terms of sustainability.
Brian, if you look back, we haven\'t seen a lot of real organic growth in the last few years.
So I believe it has a high correlation with this, and the types of products we sell tend to be the ones that I \'ve talked about, converted into paper cups, tray, flip cover, beverage packaging, shrink film and high cone ring and more.
So, highly relevant in this regard.
Can you repeat the second part of your question? Brian Maguire --Goldman Sachs --
I\'m just asking--
I want to be interested in the sales growth in the second half of the year.
I know you have a new customer in the coffee field.
Just wondering if there is some inventory built there, and some padding would make the business cut the standardized quantity by 1% on the basis of running rates?
And then did you see any
Stored separately so far in 2Q or 3Q? Michael P. Doss --
The president and the chief executive can\'t talk to any major German-
Inventory we experienced in the second or third quarter.
So far, the number of US entering the third quarter is consistent with the number we saw in the second quarter, as we have discussed some acceleration of organic growth.
Brian, I don\'t see much. Stephen R. Scherger --
Executive Vice President and Chief Financial Officer yes, I think as far as Mike is concerned, we haven\'t seen Brian yet, and if you look at it as a core volume, the potential appeal of our customers will change, which is a bit flat, we have seen this offset by new product development activities for several years.
As far as Mike is concerned, this is mainly driven by the actual decision to convert other substrates into cardboard --Based on the solution. Brian Maguire --Goldman Sachs --AnalystOkay. Got it.
In order to transfer the gear to the art carton acquisition, is there any way to give a rough discount on the purchase price of these assets?
It\'s clear that CRB already has some integration.
Any expected issues with the Department of Justice that are particularly relevant to the factory?
Then, just other ideas within the CRB, I know that in this market, there are one of the other three remaining participants exploring some strategic options with their assets.
Are you interested? Or do you think it is possible to do something along these lines? Stephen R. Scherger --
Brian, executive vice president and chief financial officer, regarding valuation, we have not disclosed the acquisition price yet, but you can expect it to be in line with our previous pre-
Get multiple and post.
This will be 5 or 6 transactions on a post.
I think this should make you feel where our deals are relative to multiples.
Very consistent with where we used to buy business. Michael P. Doss --
President and CEO, and then just build on the second part of your question around some assets that may be sold in the market.
I think my answer is, you see, we often look at all kinds of capital allocation decisions, invest in our business, and do Tucker-
Return cash to shareholders through acquisitions.
We did these three things a year. to-
Here in 2019.
So we will continue to look at things that make sense to us and assess opportunities.
However, what we will not do is to guess what we will or will not do in the market before doing it. Brian Maguire --Goldman Sachs --AnalystOkay.
Enjoy the color. Thanks.
The next question comes from Adam Josephson from KeyBanc.
Your line is open. Adam Joseph. -KeyBanc --
Good morning, Mike, Steve and Alex, congrats for a good quarter. Michael P. Doss --
Thank you, Adam, president and Chief Executive Officer. Adam Joseph. -KeyBanc --
Analysis is just two-Part one SteveJust on your --
Forgive me if I miss it.
In the commodity cost basket, I know you said you think the inflation rate is going to be $85 million.
Given what happened in the first two quarters, what are your assumptions now?
So, how much is the $85 million drop relative to the $15 million guidance increase? Stephen R. Scherger --
This is the case with executive vice president and chief financial officer, Adam.
When we saw a change of $85 million, we had moved to $70 million.
As we mentioned earlier in the first quarter, we have foreseen a known inflation rate of approximately $60 million to $65 million.
This is still the case in general.
We have seen some performances and performances.
So, as we mentioned in the freight, we have seen a slight decrease in the inflation rate of recycled fiber, chemicals, but in terms of these cores, the continuation of wood has been offset.
As a result, the reduction of $15 million was primarily seen as the net impact of freight, chemicals, recycled fiber, and $85 million continued to decline to $70 million.
In essence, our EBITDA guide has increased by $15 million. Adam Joseph. -KeyBanc --AnalystRight. Got it.
This makes sense.
Last year, it was clear that you and other producers experienced huge cost inflation and you responded by raising prices.
Now your cost is-
Everyone\'s cost is falling.
Do you have reason to think that prices will follow as they go up after the cost rises, because over time there is clearly a clear relationship between prices and costs? Michael P. Doss --
The president and CEO looks like there is actually a clearer relationship around operating rates.
Adam, if you look at it from a historical point of view, the opening rate I mentioned on two of the three levels is more than 95%.
In the third one, it dropped a bit.
From the structure of the mill, there will be some changes, including--
Some abilities will disappear and some will come in.
So, I think in general, we see a very balanced operating environment for the three cardboard grades. Adam Joseph. -KeyBanc --
Thank you. If I could--
Steve, there\'s the last cash tax if you don\'t mind.
Your expectation is still 2021, will your cash tax be close to or close to your book tax, or will it be longer than that? Stephen R. Scherger --
Executive Vice President and Chief Financial Officer-
It will begin to enter our current structure in 2021.
As a result, there were some modest increases in the 21 th and more in the 22 th.
It may not always reflect our 25% cash rate.
If you do remote modeling, it could be a few hundred basis points lower than that. Adam Joseph. -KeyBanc --
Thank you, Steve. Stephen R. Scherger --
Executive vice president and chief financial officer.
Your next question will come from D. Steve ChercoverA. Davidson.
Your line is open.
Steve lid. -D. A. Davidson --
Thank you all. Good morning, everyone. Michael P. Doss --
President and Chief Executive Officer Steve. Stephen R. Scherger --
Good morning, executive vice president and chief financial officer.
Steve lid. -D. A. Davidson --
Analyst, I think this is a guiding factor to some extent.
I noticed that I think Texarkana is four days longer than you expected in q1.
But your total loss of production actually dropped by 15 days to 134.
So I would think it would be more beneficial for you guys, I\'m just wondering if there\'s anything that might be related to maintenance that affects your overall development
Annual EBITDA guide? Michael P. Doss --
I really wouldn\'t say that, president and chief executive.
I think what happened here, Steve, as you know, we went into the year and worked out a set of plans that we will continue to work on as the blackout approaches --tune.
Of course, we always try to find ways to take advantage of less downtime to do what we need to do at any particular downtime.
So, some of them, we were able to do it faster, Texarkana, where we actually had a few days to reach your point of view and we actually added that. But net-
Net, we \'ve started where we think we\'re going, and this is the normal process we use to plan.
Steve lid. -D. A. Davidson --AnalystSure.
What\'s starting?
Increased costs associated with new product launches, which will drive your sales growth of 1% in the second half of the year? Stephen R. Scherger --
Executive Vice President and Chief Financial Officer yes, there is nothing in the guide.
Steve lid. -D. A. Davidson --AnalystOkay.
I think it\'s really easy for the last one.
But I mean, although the weather is better in the southeast, it is clear that it will be a constant headwind.
Will this allow you to reconsider future purchases and perhaps bring higher inventory? Michael P. Doss --
Yes, it took us some time to discuss the issue.
I think there are some strategies there that we will look into, especially when we get into the wet weather season, there will be more inventory.
The first thing we have to do is rebuild it, and that\'s what we have to do in the third quarter, and that\'s why we expect the third quarter to rise as well, because we have to withdraw from the larger basin, in some cases we will go further into our factories and re-establish these reserves so that we can operate efficiently during the rainy season.
Steve lid. -D. A. Davidson --AnalystGreat.
Thank you for answering my question. Stephen R. Scherger --
Executive vice president and chief financial officer.
The next question comes from Arun Viswanathan of RBC Capital Market.
Your line is open. Michael P. Doss --
President and Chief Executive Officer?
Your line is open.
Allen in Vistula Nathan-
RBC Capital Market-
Guys, I\'m sorry. I\'m here.
I\'m sorry.
So I just want to understand-
Back to the commodity cost and pricing situation, you did give up a little price in SBS.
You can offset this with CUK.
Commodity costs are now a little lower, with a fairly strong second-quarter performance.
So, I guess, just to confirm, do I want to have a conservative component in the commodity cost outlook?
If so, is it because of wood and recycled paper, or is it because of chemicals and energy or something?
Can you provide any details? Thanks. Stephen R. Scherger --
Executive Vice President and Chief Financial Officer
I\'m Steve, Allen.
In general, we think the $70 million guideline is appropriate.
We see more than $30 million a year. to-date.
As we have talked about here, a lot is around the wood.
We haven\'t seen Wood step back yet.
As Mike said, we have to rebuild our inventory, which may be much longer than we had expected before.
So, I\'ll describe it as we have a basket of costs, and as you know, billions of dollars worth of purchases.
Then, as we went through all this $70 million, Wood played a real role there.
Allen in Vistula Nathan-
RBC Capital Market-AnalystOkay.
Then in terms of volume, congratulate you on winning.
I think this is encouraging.
I just want to hear what you think about the entire terminal market.
At least in terms of cans, the beverage market is relatively strong.
It looks like there has been some growth in catering services.
So, just curious to understand what you think, at some point, if you start to think that you should see one or two structural organic growth points, or, as the most reasonable basic case, is this still a unified expectation? Thanks. Michael P. Doss --
The president and the chief executive believe that the basic situation remains.
We expect a flat volume relative to what we already have.
We don\'t want to break a little.
As you know, we have been working on new product development for about 100 basis points.
Over the past few years, this has in many cases been done to support a decline in long-term flow in certain categories, such as carbonated soft drinks or cereals.
So, what we really want to say is that we have a little bit of a role here to be able to bring new product development back to 100 basis points of organic growth.
So this is a change.
Allen in Vistula Nathan-
RBC Capital Market-AnalystThanks. Michael P. Doss --
President and CEO.
The next question comes from Mark Weintraub, a global seaport.
Your line is open. Mark Weintraub--
Global Harbor--
Thank you. Good morning.
Congrats, on the issue of pricing lag, from 8 months to 6 months.
I\'m curious, is there any change in the relationship between cost push and pricing index due to these successful negotiations? Michael P. Doss --
There is no point in President and CEO. Mark Weintraub--
Global Harbor--AnalystOkay.
It can be said that the cost of CRB is still higher --
Is the price index still the main driving and SBS?
I guess there are more coating plates in the middle? Stephen R. Scherger --
This is a fair statement. Mark Weintraub--
Global Harbor--
Super analyst.
Then I also realized it was just an optical system, but congratulated on getting positive cash from operations for the first time in many quarters.
I think this is the result of your rewrite of the factoring contract.
Are there any more changes in this regard?
Are we over now? Michael P. Doss --
Yes, Mark.
Thank you for asking this question.
We appreciate it.
Yes, these are changes in the contract language associated with our accounts receivable program.
We have moved, it has fallen on the investment line and we have been able to address this effectively in the second quarter.
So, on the journey
Forward basis, from an operational point of view, you will see that it is more representative of the cash flow of the enterprise.
For the rest of the year, in the first quarter, we have not completed most of the work we have done now.
So, there will be a little hangover in q1.
When you get into next year, it\'s going to be-
Relative to this.
We continue to provide you with reconciliation and our free cash flow of $66 million per year --to-
It was $33 million last year.
As a result, we see an adjusted net value increase of $33 million.
But, thank you for the instructions on how to explain this.
What causes accounting change is change. Mark Weintraub--
Global Harbor--AnalystGreat. Thank you.
The last one is really fast, I\'m sorry if it\'s just that I didn\'t dig it right, but $6 million [
Technical issues$5. 8 million non-
Repeatedly, I see some vague language about what it is.
Can you provide more details?
I may have missed it. I apologize. Michael P. Doss --
President and Chief Executive Officer, just in the normal business process
Related activities.
Several related to SG &.
Several of them are related to our recent acquisition in collaborative capture.
These are the main ones.
This number is really nothing unusual this quarter. Mark Weintraub--
Global Harbor--AnalystOkay. Thank you.
Daniel Rizzo OperatorYour\'s next question comes from holding this view.
Your line is open. Daniel Rizzo --Jefferies --
A simple analysis of a problem.
One of the reasons for the acquisition, you mentioned, is some interesting industrial terminal market.
I would like to know exactly what they are, as you can see, it seems good if there is more room for additional acquisitions in this market? Michael P. Doss --
President and Chief Executive OfficerThanks, Dan.
We are doing something related to filter air and car categories that we are not in the retail industry, including retail boxes that we are not in the retail industry now.
So we thought it was interesting.
As I have said in the past, we have a good market share in some of the traditional folding carton categories, finding different choices for us or for different vertical industries that we can grow is something we are very excited about.
So we are very happy with this acquisition and the existing customer relationships we can build now. Daniel Rizzo --Jefferies --AnalystOkay.
And one more.
So in the past, as the price you implemented goes up, the goal is to recover the higher costs that I think occurred between 2015 and 2017.
With everything that happens, where is the wood, and the other costs of the price increases that you have already announced, will you achieve this by the end of this year? Stephen R. Scherger --
Executive vice president and chief financial officer, this is Steve.
No, we have talked about our true commitment to overcoming the price/cost misplacement that took place in 2017 and 2018, valued at about $0. 125 billion, and we have made significant progress in that this year.
When we saw two or three
After a year, we will look forward to a full recovery.
Therefore, our intention to recover as a whole remains.
Two or three-
Annual returns to pay all $0. 125 billion. Daniel Rizzo --Jefferies --
Finally, analysts believe it may be necessary to increase prices. Michael P. Doss --
The president and the Chief Executive Officer are, so we won\'t talk about the forward pricing action, just saying that our intention is to continue to restore inflation. Daniel Rizzo --Jefferies --
Thank you very much. Stephen R. Scherger --
Dan, executive vice president and chief financial officer thank you.
The next question for OperatorThe Edlain Rodrígues is from UBS ).
Your line is open.
Ed Lan Rod Ritz-UBS --
Thank you guys.
There is only one quick reduction in price lag.
Again, this is very positive if you think the market for yellow crates is good --
You will have to give some price because otherwise.
So, so far, do we think that the level of market tension is enough to have a constructive impact on prices? Michael P. Doss --
Edlain, president and Chief Executive Officer, just clarify.
I understand what you are talking about, and if it is reduced, it will flow, I think.
But I think the more relevant fact and one of the things that we really talked to investors is that we want to make sure that we are dealing with inflation in the year that it happened.
Now we have two openers on average, allowing us to do that instead of dragging some of them to next year.
Whether it\'s up or down, it\'s a more relevant picture of business performance, and it\'s closer.
We therefore believe that this is very positive in this regard.
As for operational speed, it will be removed from AF & PA data as I mentioned.
We have several operating rates north of 95% and one is slightly lower.
With some of the actions that are going to take place later this year, it seems to us that as we move into 2020, those actions will push this forward.
This is our point of view.
Ed Lan Rod Ritz-UBS --AnalystOkay.
This makes sense.
A roll.
Can you remind us again, what is the growth in organic sales this quarter? Stephen R. Scherger --
Financial edlain, executive vice president and chief Financial officer of the company, has a flat attitude. Organic flat.
The moderate growth, as we expected, was based on acquisitions.
Ed Lan Rod Ritz-UBS --
Analysis, to be precise.
Okay, thank you. Stephen R. Scherger --
Thank you to executive vice president and chief financial officer.
Your lines are open. Mark Wilde --
Capital Markets--AnalystYeah.
Steve, I just wanted to chase this organic growth further.
So, how much organic growth did you have in the first half? Stephen R. Scherger --
Overall, the executive vice president and chief financial officer were basically flat in the first half.
We had an organic, flat year in the first quarter, very, very slight decline.
So, it\'s actually from zero to negative 0.
If you look at it organically, that\'s the turn we\'re looking forward to in the second half, Mark, about 100 basis points of organic growth.
So this is the first half to the second half. Mark Wilde --
Capital Markets--AnalystOkay.
So, it\'s just that you \'ve talked about it, and I have a fairly broad view of a big comp conversion that\'s going on.
In my opinion, this accounted for a large part of the overall organic growth in the second half of the year.
Is that fair? Michael P. Doss --
Mark, the president and Chief Executive Officer are, of course, an integral part of it.
As you know, there\'s always something up there, and there\'s something down there. But the net-
Its net positive gives us a lot of confidence to be able to make a guide to 100 basis points of growth. -
Organic growth. Mark Wilde --
Capital Markets--
Analysts say, if you can, Mike, I think most of the things you buy at food service or at least in cups are in hot cups, coffee cups.
Is there any suggestion that maybe you can do the same in a cold cup or other niche? Michael P. Doss --
We are certainly trying to solve this problem.
You\'re right.
So far, most of our revenue has been on the Hot Cup side of the business.
But for polystyrene, cold cups are still a big choice, and they tend to be larger.
So we are working with several of our customers to provide them with innovative solutions that enable them to use paper and cardboard as an option for polystyrene foam. Mark Wilde --
Capital Markets--
Okay, okay.
Then, just at the end, I know we want to be careful with this on the public call, but the trade papers of the past few weeks point out that the prices of SBS and CRB are a bit weak.
I wonder if we can look at this from your perspective? Michael P. Doss --
Mark, the president and Chief Executive Officer can only figure out what we see.
As you can see, the numbers are very reliable on several levels and then a little lower than the numbers on SBS.
Again, I can\'t really comment on what that particular trade document did in terms of their process and who they talked to, but if you look at some of the things they reported, they said, we spent 30 days in Kalamazoo, but this is not the case, as an example.
So, when you look at what they say and how that goes through, they talk to certain people and that\'s when it\'s reported.
But when we look closely at the actual results, the numbers that AF & PA and others have come up with, I think this tells a very balanced story. Stephen R. Scherger --
Executive Vice President and Chief Financial Officer
Mark, at this point, this is one of the things that we are communicating to you here today, that is, our CUK start rate is over 95%.
So, reiterate this because there is some mixed information in it.
We will provide you with CUK 95% plus, CRB 97% based on our operating rates.
Obviously, as Mike said, we are working on solving several times the volume input and volume output on SBS, which will work here in the fourth quarter of the third quarter. Mark Weintraub--
Global Harbor--AnalystOkay. All right. Sounds good.
Guys, good luck in the second half. Michael P. Doss --
Mark, thank you very much, president and chief executive.
Our Q & A session is over.
I transferred the phone to Mike. Michael P. Doss --
President and Chief Executive Officer thank you for attending our conference call for the second quarter.
We look forward to talking to you again on October.
Have a good day. Operator[
Operator\'s concluding remarks
Participant: Alex Ovshey--
Vice President of Investor Relations. Doss --
Stephen R. President and Chief Executive OfficerScherger --
John Babcock, executive vice president and chief financial officer--
Bank of America--
Analysis of Mark Wilder-
Capital Markets--
Analyst John Ryder-Stephens Inc. --
Analysis Chip Dillon--
Vertical Research-
Petina--Citi --
Analysis of Matt Kruger-Baird --
Analyst Brian Maguire-Goldman Sachs --
Analyst Joseph Johnson-KeyBanc --
Analyst Steve lid-D. A. Davidson --
RBC Capital Market-
Analyst Mark Weintraub--
Global Harbor--
Analysis by Daniel Rizzo-Jefferies --
Analysis of Rod Ritz-UBS --
All the revenue phone records are more from Motley Fools. This article is a record of this conference call made for Motley Fools.
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