Ladies and gentlemen, thank you for standing by. And welcome to the Graphic Packaging First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today’s call is being recorded. After today’s presentation, there will be a question-and-answer session.

Thank you, Operator, and good morning, everyone. I will begin today’s call with a brief discussion of our first quarter 2020 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 have provided a slide presentation, which can be accessed on the Investors section of our website at www.graphicpkg.com. We will refer to certain pages of the presentation during our comments this morning. I would like to remind everyone that statements of our expectations, plans, estimates, and beliefs regarding future performance and events constitute forward-looking statements. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the company’s periodic filings. Undue reliance should not be placed on forward-looking statements as they speak only as of the date made. The company undertakes no obligation to update such statements except as required by law. Mike, I will turn it over to you.

Thank you, Melanie. Good morning. And thank you for joining us to discuss our first quarter 2020 results. I’d like to start off the call by offering our heartfelt condolences to all who have been affected by the COVID-19 crisis. I would also like to recognize our brave and talented healthcare workers and first responders who are taking care of our employees, friends, and neighbors impacted by the COVID-19 virus. At Graphic Packaging, we are doing everything in our power to take care of our employees and partners, while ensuring supply chain continuity to essential food, beverage, and food service markets. Our teams have been focused on safely delivering for our customers and ultimately consumers during these unprecedented times. We are proud to be in essential business and of the integral role we play with global consumer staple companies in providing food and beverage packaging products required to be on the store shelves every day. Our teams have been working together safely and effectively to date. We formed a Pandemic Committee at the onset of the crisis to develop and implement safety protocols. The committee meets daily to review the well-being of our workforce, developing community global safety protocols and ensuring that the company is fully supporting our employees. Actions have been taken to maintain continuity across our paperboard mills and converting facilities globally. The concerted efforts of frontline production employees in our manufacturing operations is critical to our ongoing success. In early May, we will be providing our frontline production employees, including the global hourly workforce and frontline production leaders with one-time payments of approximately $300 per employee to acknowledge their key contribution to our performance. This is a $5 million investment in our people reflecting our sincere appreciation for the critical role they are playing during this time of need. We are also making $5,000 contributions to food banks located in every community in which we have manufacturing operations to support local needs consistent with our philanthropic pillar of putting food on the table. We remain hopeful that we will see an abatement of the current crisis and a return to a more normalized business environment soon, but in the interim we will continue to actively manage the current environment with our employees and consumers in mind. Turning now to our quarterly materials on slide five, let me walk through some of the summary points for the quarter. We saw strong net organic volume growth pre-crisis and a modest acceleration in volume growth after the pandemic began. We surpassed our net organic volume growth goal of 100 to 200 basis points, delivering 500 basis points of volume growth in the quarter, excluding the positive impact of leap year. Excluding the modest net acceleration in volume post-crisis, net organic volume growth was 400 basis points in the first quarter, driven by customer growth initiatives in new product development. As a point of reference, we began to see the increase in demand for food and beverage packaging in March that was partially offset by a reduction in demand for some food service applications. The positive net impact in the quarter was roughly 100 basis points or approximately $15 million of revenue in the quarter. We operated well throughout the quarter across our mill and converting facilities, generating productivity of over $19 million while meeting increased volume demand. Backlogs for all three substrates are solid at five plus weeks for CUK, four weeks for CRB, and three to four weeks for SBS. Our global paperboard integration rate grew to 69% during the quarter, and operating rates of both CRB and SBS improved sequentially in Q1 to 98% and 95%, respectively. Our estimated operating rate for CUK continues to be very strong at over 95%. As a producer of all three paperboard substrates, we are well positioned to move products among the end-use applications to meet changing volume requirements by market. Our teams successfully utilized all three substrates to meet increased volume requirements for CRB and CUK in the quarter, a phenomenon that continues to play out nicely in the second quarter. In 2019, food, beverage, and other consumer packaging comprised 77% of company revenue, while the foodservice market made up the remaining 23%. Currently, increased demand for food and beverage and consumer markets is offsetting the declines we are experiencing in the foodservice markets. In early March, driven by an increased near-term demand for CUK and contractor work related implications associated with COVID-19, we made the decision to delay the significant planned maintenance outage in our West Monroe mill from Q2 to Q3. We will continue to focus on meeting the needs of our customers during these unprecedented times while also being proactive in accelerating strategic actions that will position our business for long-term growth consistent with our Vision 2025. Today, we are announcing the closure of our only containerboard mission PM1 in West Monroe, Louisiana. The closure reflects our long-term confidence in the strength of our CUK global beverage packaging platform. The action is similar to the move we made back in 2015, where we repurposed existing pulp from a paper machine closure to grow CUK volume. The short-term financial implications are modest, under $4 million in 2020, due to the current pricing environment for containerboard. We have also made the decision to close our White Pigeon, Michigan CRB mill effective June 30th. Our overall CRB network is operating very well in a steady demand environment, and we have entered into a new supply agreement with the right to acquire approximately 90,000 tons of CRB per year. The agreement provides flexibility to acquire 20% more volume per year if needed. Notably, over half of the annual tons we are committed to purchase as part of the supply agreement will be completed over the next 29 months. As you are aware, we are strengthening our leading position in the CRB market with investment in a new CRB paper machine in Kalamazoo, Michigan. We have significant optionality across our Kalamazoo CRB mill to effectively match our integrated supply of wood demand over the coming years, including utilization of our K3 paper machine. Given consumer demand uncertainty as we emerge from the current crisis, you can rest assured we will take the actions necessary to fully match supply with demand. We will be aggressive in driving working capital improvements and we will assess the timing of certain capital investments. All efforts are to ensure cash flow generation is robust and the balance sheet remains strong without significantly impacting our long-term commitments. Moving to a discussion of capital allocation and stakeholder return on slide seven. You see a summary of two strategic tuck-under acquisitions we have completed year-to-date, and integration of the folding carton facilities and onboarding of the new employees are well underway. While acquisitions will remain an active part of our long-term balanced approach to capital allocation, it is unlikely we will engage in additional acquisitions during the remainder of the second quarter. In the context of actively managing our strong balance sheet, we will continue to adhere to our fundamental approach through repurchasing shares, and we believe the intrinsic value of the company is materially higher than the current share price. Finally, because we are in a very solid financial position, I am pleased our Board of Directors has reviewed the existing dividend policy and remains committed to the current return of capital to our stakeholders via dividends and distributions. Steve will provide an update on our financial performance shortly, but I would like to emphasize we are positioning the business for continued growth in 2021 and beyond consistent with our vision 2025, and we remain committed to that vision. We will execute on the actions shared with you today while continuing our longstanding focus on productivity and cost containment. Steve, I will hand the call over to you now for a more detailed discussion of our financial results.

Thanks, Mike, and good morning. I would like to reiterate my comments to all those impacted by the COVID-19 crisis and express deep gratitude to our employees on the frontline for their dedication during these challenging times. Turning to slide eight for a review of the financials, net sales in the first quarter increased 6% from the prior year to $1.6 billion, driven primarily by net organic volume growth of 400 basis points, excluding the positive impact of both leap year and the COVID-19 crisis. This growth reflects the strong conversion trend we experienced in the first quarter to our paperboard packaging solutions. Reported earnings for the quarter were a loss of $0.04 per diluted share, compared to $0.19 in the first quarter of 2019. First quarter 2020 net income was negatively impacted by a net $104 million of special charges, including the net $90 million non-cash charge related to the settlement of our largest U.S. pension plan. We are adjusting for charges; adjusted net income for the first quarter was $91.2 million or $0.31 per diluted share, an increase of 48%, compared to $0.21 per diluted share in the first quarter of 2019. Turning to slide 10 focused on our EBITDA waterfall, first quarter 2020 adjusted EBITDA of $294.8 million was up $35.1 million or 13.5% from the first quarter of 2019. EBITDA margin expanded 110 basis points to 18.4% for the quarter, compared to 17.3% last year. Adjusted EBITDA was positively impacted by $14.1 million of higher pricing, $16.9 million in commodity input cost deflation, $7.6 million in favorable volume, and $19.2 million in improved operating performance. These benefits were partially offset by $14.1 million in other inflation, primarily labor and benefits, and $8.6 million in unfavorable foreign exchange. Turning to a discussion on commodity input cost, as I mentioned, results were favorably impacted by deflation across most commodity input cost categories. There have, however, been several increases in secondary fiber raw material input costs over the past four months. As a result, we announced a $50 per ton price increase for CRB effective May 7th. Turning to a discussion on liquidity and our balance sheet, we ended the first quarter with substantial global liquidity of approximately $1.5 billion. We further strengthened our balance sheet in the quarter with an all-time $450 million senior notes offering at an attractive 3.5% interest rate. Our debt profile is sound, with no financial covenant issues. As you can see on slide 11, we have no debt maturity or mature royalty in 2020. Our senior secured credit facility does not mature until 2023. We ended the quarter with $3.4 billion of net debt, and total net debt increased $672 million during the quarter, with net leverage at 3.2 times at the end of the first quarter, compared to 3.1 times at the end of the first quarter of 2019. We remain committed to our targeted 2.5 to 3 times range. Turning to slide 12 and the return of capital to stakeholders, given the dislocation in the stock price relative to our view of long-term intrinsic value of the company, we repurchased $119 million of common shares during the quarter at an average price of $12.90 per share. We continued our repurchase activity in the second quarter and have accumulated a total of $150 million of common shares year-to-date at an average price of $12.80 per share. In total, we returned $396 million during the first quarter in share repurchases, dividends, distributions, and partnership redemptions, including the initial $250 million partnership redemption to International Paper completed in January. Moving to a discussion of the current business environment and our outlook, we are currently operating at net neutral organic volume for the core business, with core food, beverage, and consumer volume up and foodservice volume down. Volume from recently acquired businesses is meeting expectations year-over-year. In addition, our teams continue to operate well, with pockets of minor productivity challenges related to the crisis being well managed. This too would indicate that our business is capable of performing well during economic downturns. At current volume levels, commodity input costs and operating run rates, our 2020 financial performance would fall within the adjusted EBITDA and cash flow ranges we have provided in January. Unfortunately, the depth and timing of this economic downturn is difficult to predict until more is known of our consumer behavior and spending patterns. Our customers share in the uncertainty associated with this health-driven crisis and global recession, with the majority of them withdrawing financial guidance. For these reasons, we have decided to suspend financial guidance until we have greater visibility into consumer behavior and spending patterns. The suspension will provide us time to observe shifts in consumer behavior and spending patterns and more clearly understand customer volume needs by market. On slide 14, you will find the adjusted EBITDA and cash flow components that we do have a viewpoint on today. We expect working capital will be a source of cash in 2020 and anticipate coming in at the low end of our previous capital expenditure range of $600 million to $625 million. The interest expense guidance has been reduced by $20 million at the midpoint of the range due to lower market interest rates. As it relates to adjusted EBITDA, pricing remains consistent with our expectation. We believe commodity input costs may be modestly more favorable for the year compared to prior expectations. However, we have widened the range given the current economic environment. Foreign exchange will be a modest EBITDA headwind at current exchange rates. In closing, we are confident the actions we are taking are resulting in solid cash flow generation for the year and position the company well for long-term growth. Thank you for your time this morning, and I will turn the call back to Mike.

Thanks, Steve. I am pleased and humbled by the leadership, dedication, and ingenuity our teams have displayed in managing through the crisis today. We will remain focused on running the business safely and effectively while positioning and preparing the company to capture the growth that lies ahead. The aggressive actions we are announcing today will drive cash flow, balance supply and demand, and position the business for strength in 2021 consistent with the goals we established with our Vision 2025. I will now turn the call back to the Operator for questions.

Thank you. Your first question comes from the line of Mark Connelly with Stephens, Inc. Mark, your line is open.

Thank you. Two things, Mike. It’s probably early to see movement in virgin fiber costs, but we have seen lumber shift down dramatically shipment-wise. Has your sourcing of virgin fiber changed yet, and is a higher virgin fiber cost part of your assumptions?

Yeah. Thanks for the question, Mark. To date, what we have seen is a slowdown in the lumber operations that you talked about, so the residual ships are in fact down from where they would have been a year ago. But over the last few years, we have made some pretty significant investments into our virgin metals that allow us to process a lot more round wood. And with some of the slowdown that we are seeing in the printing and writing space and some cases in the baskets, we are seeing pretty attractive round wood pricing for both hardwood and softwood come in. And we have also seen a normalization of the weather patterns that impacted us last year, particularly the wet weather. So, our wood costs are actually down pretty substantially year-over-year, and that’s partially offsetting some of the increases we are seeing on the secondary fiber side. Based on everything we can see right now, we believe that will be the case for the foreseeable future.

Yeah. Mark, it’s Steve. It’s one of the reasons we are seeing overall relatively modest inflation or deflation, if you will, because of pretty substantial deflation in work year-over-year, given it was a $40 million inflationary item last year.

Sure. Okay. And just one more question, how different was the seasonality you experienced in the first quarter versus what you think of as normal? And could you give us a reminder with your current business mix of what kind of seasonality in Q2 and Q3 you would think of as normal so we have some benchmark?

Yeah. It’s a great question. Normally, we would see a busier spring and summer season related to both beverage and foodservice business that we operate on. In fact, the beverage business is quite strong for us right now because on-premise is down; off-premise, as you can appreciate, is up probably in the neighborhood of 5% to 10%. I don’t think this year will be a great year for normal. What we saw in Q1 was things behaved like we thought if they were going to until about the middle of March, and then we saw some of the pantry loading, if you will associated with the COVID-19 virus, that drove that incremental $15 million of revenue we experienced largely in the last two and a half weeks of March.

Very helpful. Thank you.

You bet.

Your next question comes from the line of Mark Wilde with Bank of Montreal. Mark, your line is open.

Good morning, Mike. Good morning, Steve.

Hey, Mark.

Good morning, Mark.

I just wanted to kind of come around to the issue of organic volumes that you said the first quarter we excluded the leap year and the COVID, your organic volume growth was 400 bps, but Steve it sounded like more recently that organic volume is basically flat. So I wondered if you could just help us with the cadence as you have moved through the first quarter and into the second quarter and sort of how volume is moving in the businesses and if it’s possible to separate like foodservice versus beverage versus food?

Yeah. Mark, it’s Steve. I will take that on and then Mike can bring on additional color. You summarized it well, we had quite positive net organic volume growth through January and February, slight acceleration in March, driven by many of the successful conversions that we have talked about previously, foam cut conversions, beverage conversions, pull and plate conversions. Since the unfortunate crisis began, what we are seeing currently—and this is currently true literally yesterday—is that roughly 77% to 80% of the company, 77% specifically last year in food, beverage, and consumer packaging, is up 5% to 10%, so we are seeing some continuation. It’s being offset currently by our foodservice business being down 25% to 30%, as Mike just articulated, because that’s really where a lot of the slowdown has hit relative to consumption of cups, for example, which is where we were experiencing the growth. That has resulted currently, as of yesterday through the month of April here, in overall neutral net volume year-over-year.

Year-over-year.

Year-over-year in April.

And Steve, is there likely any inventory channel play in any of that? I mean, a lot of foodservice stuff isn’t necessarily one single step due to the food service provider but it might be moving through a distribution company and some things like that?

Yeah. That’s right, Mark. We saw that, and that actually is part of the reason why we saw the reduction at the end of March. The last two weeks of March on the foodservice business has, in fact, as you are suggesting, the DC channels basically relieved that inventory. And we are starting to see that again through the first 20 days of April incrementally move back up a little bit. But Steve summarized it well with 5% to 10% up on food, beverage, and consumer and then 25% to 30% down on the foodservice, and those are good numbers at least what we have seen so far in Q2.

Okay. The other question I had is that you can just help us in thinking about the roll-through of some of these recent pricing and cost moves that EPW changes in your increase announcements that were out last week and then the movement of waste paper cost?

Yeah. So at a very high level, you saw the risky move in February on CRB went down $30 a ton, SBS went down $30 a ton as well. But speaking specifically to CRB, that $30, it was a price reduction of open market board, that is tied to those open market contracts. Since January 1, we have seen probably $50 a ton movement on top of what our baseline secondary fiber costs were. So if you think about it in those terms, it’s about an $80 ton price cost spread, and so we, as Steve said, announced a CRB increase on May 7th for $50 to recover that. As we look forward, we do anticipate some incremental costs in May and potentially June; again, others have opined on that, we won’t other than beyond the comments that I am making there. But that’s why we announced that pricing action on CRB.

And Mark, just to add to that regarding some of the numbers we have discussed today, the price guidance of $10 million to $20 million has not changed and does not include the CRB announced price increase. This has not been accounted for and will likely see significant activity in the latter part of the year with our six-month legs. Additionally, as Mike mentioned, the broader guidance we provided is related to anticipated cost inflation, which involves $2.5 billion of spending. We are experiencing deflation generally across most categories, although we have seen significant increases in OCC and recycled fiber costs. The guidance captures a range of possibilities regarding OCC prices potentially increasing and remaining high or being less sustained in the long-term. We have taken this into consideration where we had visibility. However, we are suspending the guidance mainly due to consumer spending patterns, which we need to better understand to assess their impact on volume and productivity.

Okay. Great. I will turn it over.

Thanks, Mark.

Thanks, Mark.

Your next question comes from the line of Ghansham Panjabi from Baird. Ghansham, your line is open.

Thank you. Good morning. Hope everybody is doing safe.

Hi.

I guess, just a follow-up on those comments on the 77% of your portfolio that you are seeing the 5% to 10% volume increase thus far in April, I guess, year-over-year. What are customers sharing with you on their volume plans for the second quarter? I mean, obviously, we see big numbers in terms of category growth, et cetera. There’s been selling through their safety stock I would presume and they are going to have to ramp up production et cetera. Just curious as to what specifically they are sharing with you for Q2?

You summarized the situation very well, and that is indeed what is happening. As you know, many of those customers have removed their forecasts. They are experiencing real-time signals from the retailers as well. Therefore, I would expect that to continue. Beyond our current observations, it's challenging to predict what we will see for the remainder of the quarter. If you consider that, major banks are estimating that GDP might decrease anywhere from 8% to as much as 35% this quarter. People still need to eat and drink, which has been a positive factor. However, understanding how that will play out with 22 million people recently becoming unemployed and how their purchasing decisions affect our overall supply chain to our end-use customers presents a significant challenge for us in predicting future revenue. The mix and productivity will likely be impacted depending on how things return. This is why we are taking a moment to assess how everything will unfold.

Yeah. Mike’s point, our teams are doing incredible work servicing those needs both top and then managing where we see down. We just don’t have that line of sight to where will it come through relative to the broad spectrum of diversified products that we provide.

Okay. And I guess just following up with that, I mean, obviously, there’s a lot going on with your company, with the acquisition integration, the large capital project, your capacity cuts that, I guess, will be orchestrated by the end of the second quarter. Do you have meaningful disruptions with the supply chains, et cetera, with limited mobility? I guess, just take us through what gives you confidence on the execution side in context to what I assume will be very choppy demand and logistical patterns near-term? Thank you.

Thank you for the question. Regarding the two closures we are planning, we have a well-capitalized ERP system that we are investing significantly in, and it is performing effectively. This aspect is minor, and we will be able to redistribute the tons across our existing mill assets. We are confident in this approach. In Kalamazoo, our project is progressing. We previously mentioned a four-week delay due to the shelter-in-place order, but as an essential business, we have resumed construction. Currently, we are working on a substantial concrete floor. Concerning the shutdown of our West Monroe linerboard machine, it is our only linerboard machine. We have traded a significant amount of that tonnage with our box manufacturers. Looking ahead to the second half of the year, we believe we will not face economic disadvantages in purchasing boxes compared to using that supply chain. There is a lot happening, but we have a solid understanding of the situation, and this aligns with our long-term Vision 2025 plans. We are accelerating certain elements of our strategic plan to effectively leverage our free cash flow and maintain our strong balance sheet.

And the integration of the eight Folding Carton facilities, seven from Greif and one from Quad are also on track and is going very well, as Mike mentioned in his comments.

Perfect. Thanks so much, you guys.

You bet.

Your next question comes from the line of Brian Maguire with Goldman Sachs. Brian, your line is open.

Mike, I wanted to discuss the comments about April's volume being relatively flat. It reminds me of a six-foot person crossing a river that has an average depth of five feet, but there are spots that are deeper. There are many factors at play. When I consider the operating rates at the paper level, it seems that SBS volume has likely decreased significantly since a good portion of it goes to foodservice. However, you would expect CRB and CUK mills to be operating at nearly full capacity. Could you confirm if that's accurate? Additionally, what effect could this transition from foodservice to at-home have on profitability? We haven't focused much on this aspect before, but is there a substantial difference in profitability between the foodservice segment and the rest of the business that we should be aware of regarding this shift?

Yeah. Thanks, Brian. In regards to your question around utilization of all three paperboard substrates, that’s one of the strengths that Graphic Packaging has as you recall. We didn’t operate in an SBS mill system in 2008, the last time we saw a significant dislocation in the economy. And in fact, what we have been able to do here because of the strength of our customers’ demand for CUK, we are actually utilizing some SBS, and we anticipate we will use upwards of 50,000 tons of SBS this year to help meet that demand in certain categories and customer package applications. That really is one of the true benefits we have got now with all three substrates. So yes, we do expect costs to be down; in fact it is, but we are able to offset a portion of that with some of the things that we are doing to service other customers in the mix. And in regards to the question around overall mix profitability, I will take a stab and let Steve put a little more color on it. Our overall portfolio is reasonably balanced in terms of the margin profile, but we are speaking to as if we saw severe spike in one aspect of the business or the other. It can potentially impact your billing and downstream converting in a way that isn’t as balanced as we are currently seeing it today through 20 days in April. And that’s what we are talking about in terms of how the consumer comes back? How fast they come back? Where does it come in, and what does it look like? And Steve, maybe you want to?

Yeah. The one thing I would add is, just given a little bit of that uncertainty, the one thing that you are hearing is let’s be very clear about that we will match supply with demand in that environment. And so that’s why there’s a little bit of uncertainty around the mix of volume. We are very pleased, as Mike said, with the ability to move among and between the substrates. That’s something we couldn’t do in the past and are doing. But if we saw an ongoing dislocation of the consumer not getting back into the work environment consuming foodservice products, that could result in a need for us to be more assertive in managing supply and demand, and on the margin side which is where the cost can be more substantial. We are not seeing that today but we want to get a little visibility to that over the coming months as we begin to emerge from the crisis.

Okay. And then one question just on the capital reallocation, I guess, you never see the share price was lower in 1Q with the rest of the market. I am just a little surprised given the size of the buyback relative to the other commitments you guys had between the Kalamazoo mill and the IP stake. Obviously, you had good liquidity and the bond offering was well-timed. But should we think about this as maybe being a little bit of a pre-buy of what would have been, you repurchasing in the IP stake later when they decide to monetize that further, if they decided to monetize it further, would you think about letting some of those shares float on the market now to you maybe just pull forward the timing of the buyback effectively here?

I think you have effectively highlighted the options we have. We observed what we believe was a significant drop in our share price, which aligns with our previous practices. As a result, we decided to repurchase some shares, amounting to $150 million. We have favorable options available, especially if a national paper opportunity arises in July, though we cannot predict that currently. If it happens, we may consider bringing some units to market without it being dilutive for any GPK shareholders, as there are existing units representing company ownership. We believe it’s the right time to pursue our multi-year strategy of buying back shares. In just the first quarter, between the share repurchases and the partnership unit acquisition, we reduced our overall units by another 7%, returning nearly $400 million to our stakeholders.

Okay. That makes sense. Thanks and best of luck in the quarter.

Yeah. Thanks, Brian.

Thanks, Brian.

Your next question comes from the line of George Staphos with Bank of America. George, your line is open.

Hi, everyone. Good morning. Thanks for all the details and thanks for how you are doing on COVID and your support for your employees. My three questions. First off, I wanted to if you could a step back and comment if any of your customers or their customers or the consumers are showing any kind of any pushback against the sustainability maybe less interest in the fiber over plastic debate because obviously, there are more significant things occurring in the economy with COVID-19 or is it not a worry for you or maybe too early in that discussion? I had a follow-on for the mills.

Yeah. Thanks for that, George. We have not seen any pushback relative to the sustainability of our paperboard products, our paper-based products that we are pursuing with customers. I mean, Steve mentioned, we saw excellent foamed paper cup conversions early on in Q1. Those will be a little muted now until that volume comes back. The other thing that we have continued to see excellent traction on is our KeelClip technology. We have sold over 20 KeelClip machines. Now what we haven’t been able to do is install them and get them operational, we are in the process of building those. So we are going to see a little bit of a delay relative to our ability to actually get those operational for our customers because a lot of those are going to Europe. So traction over in Europe for that is really strong, traction in Europe out of shrink film and into paperboard solutions for beverage applications also very strong. In terms of people taking a step back on sustainability, I think it’s probably early for me to try to give you a point of view on that. All I can speak to is what we are seeing on the new product and innovations that we are moving forward with you know just as an example on KeelClip, we have not seen any cancellations on any POS that we had going into the crisis. So maybe that’s a point that helps you a little bit on that.

No, that’s great, Mike. I appreciate that. Regarding the closures and the operating factories this quarter, could you comment on whether the tornado caused any significant damage in West Monroe? Also, can you clarify if the winding board machine essentially allows you to free up pulp capacity for growth in other substrates? If you could provide a bit more detail on that, I would appreciate it. Thank you, everyone. Good luck this quarter.

Thank you. Again, thanks for that question. And first and foremost, in regards to the tornado in Monroe and Louisiana that occurred on Easter Sunday, fortunately, none of our employees were hurt or injured, and so that was a very, very positive in that regard. The mill itself and the converting operation we have in town there were not impacted other than losing power. We had a remote shipping operation at our mill that’s connected to the mill with a long track conveyor that had significant damage associated with it. And so what we have had to do is put some shorter-term solutions to get chips from the chipping operation over the mill. We lost about 48 hours in total at the mill of production between restoring power and setting up our ability to fiber the mill with woodchips in a way that worked, which would probably be the better part of six to eight weeks would be my guess right now relative to when we were back to fully operational the way we normally operate that mill. There will be an insurance claim associated with that, which is Steve maybe you can give George a little …

Yeah. The actual impact, and as Mike mentioned, our running team has done a great job of getting back to full run capability. We just incurred some incremental costs. It’s probably a $3 million to $5 million impact for us net. So not particularly material but relevant as we rebuild the conveyor, so a little bit of the capital that we put to work and right now we are working around that, which is costing us a little bit of forms, but it will be in the $3 million to $5 million range to do.

In regards to your question then on pulp, if you recall in 2015 we shutdown a multi-wall paper machine there that we had that was associated with the business we were operating at that time and freed up roughly 50,000 tons of capacity that we have now utilized in new operations and on Number 6 and Number 7 paper machines in Monroe and grown our global beverage platform both here in North America and in Europe and in other geographies as well and we anticipate doing that again. As I mentioned, we were trading a lot of that tonnage with people that were making boxes for us. It was slightly positive on an EBITDA and cash flow basis, but with the additional capacity that was coming online in the containerboard space, we don’t believe we will be disadvantaged in purchasing those boxes in the open market, which is what we will do and we are repurposing that pulp up in a more value-added way for our CUK demand as the next few years play out with our vision 2025.

Okay.

You bet.

Your next question comes from the line of Debbie Jones with Deutsche Bank. Debbie, your line is open.

Hi. Thanks for taking my questions. I got on, I think Mike right about the time you ended your opening remarks, so apologies for that. And I think I heard something around M&A, and I was hoping you could give us an update on how you kind of manage that side of your strategic focus right now in this environment, whether you would expect that to continue in the near-term or this is something that may take a while to play out given everything going on?

Thank you, Debbie. You summarized it well. As mentioned in our prepared comments, we don’t expect to take any action in Q2. However, we are still actively engaging with various parties and considering different options that align with our Vision 2025. I don't foresee any immediate changes, but in the medium to long-term, you can expect us to continue focusing on expanding into different geographies or niche markets to enhance our integration levels. The acquisition we completed last year was beneficial, as it added seven additional converting plants, generating over $200 million in revenue and 125,000 tons of paperboards, which will gradually be integrated into our operations as the supply agreement concludes. This is the kind of approach you can expect from us in the near future. Regarding your concerns about the challenges we face, we will take a brief pause to let things develop.

Okay. Thanks. And then a simple question on the leverage, do you expect you can get in comfortably into your targeted range by the end of the year or is the variability around your EBITDA a bit too much at this moment?

Yeah. No. Debbie our commitment to the 2.5 times to 3 times leverage remains. Historically, we were a little above that in Q1 because it’s not a strong cash generating quarter, we were 3.2 times this year, we were 3.1 times last year, and we put a lot of value behind, as I mentioned, the share repurchases and the IP redemption. So, no, we expect to be in that 2.5 times to 3 times range as we talked on the last quarter conversation. We would probably be at the higher end of it assuming that IP were to move to forward with $250 million exits as we talked a couple of minutes ago. But we still remain committed to the range and expect to be in it probably at year end.

Okay. Thanks. I will turn it over.

Thanks, Debbie.

Your next question comes from the line of Anthony Pettinari with Citi. Anthony, your line is open.

Yeah. Good morning.

Good morning.

Mike, you have a pretty sizable footprint in Europe, and I was just wondering if you could talk about how that part of the business performed in the quarter. Did you see the same stockpiling of staples that we have seen in the U.S? What the on-premise or foodservice mix is there? And given you operate in a number of European countries that are maybe at sort of different stages of the crisis any kind of general read for the U.S.?

Yeah. Thank you for that, Anthony. Look, our European colleagues did a really nice job in the quarter as you are well aware. They were two weeks, three weeks ahead of us in terms of the COVID crisis and they operated through that environment extremely well. And how I would characterize our European business is more indexed to food, beverage, and consumer products. We do a very small foodservice plant there in the U.K. But the majority of the business within the side of the customer subset that we see is in more demand for right now and I know it’s consistent with what we are seeing in the U.S. along those lines. And those facilities are doing a good job, operating with some of the increased protocols that we have in place to make sure our employees are safely operating in this environment.

Okay. That’s helpful.

You bet.

Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun, your line is open.

Great. Thanks. Good morning. Congrats on everything and thanks for your help with COVID. I guess, just a couple of questions if you think about the volume. You have laid it out as suspended, I guess, for the year. I just wanted to understand how that the margin profile works. If we are looking at a flat volume picture for the rest of the year, potentially with the foodservice being down and the on-premise consumption being up. Do you essentially lose all the profitability from foodservice, or how does that work? I mean what are some of the positive offsets just for us to help us size kind of the impact on EBITDA from that volume trajectory?

Yeah. Thanks, Arun. We are going to be a little bit less, putting a fine point on it, because we just, as we said earlier, we don’t know how that’s all going to play out. But as you heard in Steve’s prepared comments, he talked about, at our current run rates and flat year-over-year volumes that we saw—and that we would expect to be in the normal range. We could see from some of the previous financial crises aren’t excellent harbingers for us in this case because we saw such a complete slamming on the brakes. And as I mentioned earlier, we have got 22 million people that went on unemployment in the last three weeks. How does that impact what they come back to buy, and so it’s difficult to try to model all of that. But I won’t overthink it relative to the margin impact on that, because as I mentioned earlier, we are pushing 50,000 tons of SBS already for other beverage and food customers into that category. So, we have got some levers to pull to try to work through that. The reason we suspended the guidance is it’s difficult to see through that age and figure out with any degree of certainty how it all comes back.

Okay. That’s helpful. Thanks for that. And then I just also, I guess, wanted to understand the price-cost size. So in SBS maybe six months ago there was an expectation that we worked through the inventories on this GP across the closure and then potentially set up well for some pricing in the second half of 2020. I guess, A, is that still an opportunity that's possible? And then, B, on the CRB side, you guys have announced a price increase. Just want to gauge the thought process there. Operating rates have been relatively high for a little while, and pricing has been volatile and challenged sometimes. So, what's kind of the confidence level in achieving those increases as we go through the year? Thanks.

Sure, Arun. It's Steve. I'll address that briefly, and then Mike can provide additional input. If we take a moment to consider our position regarding price-cost through the first quarter, we've seen that with this quarter's results, prices remain elevated. Following a deflation of $17 million, we have successfully corrected the price-cost imbalance that occurred between 2016 and 2018, which has been a key objective for us. Our guidance on price costs for the remainder of the year suggests a relatively stable outlook for the next three quarters, with some price increases anticipated, excluding the impacts of the recent CRB price hike and some minor inflation in costs mainly due to recycled fibers. We are beginning to see the effects of prior deflation in other product categories, and this is our current perspective, keeping in mind a broad range of potential outcomes for recycled fiber. Overall, the recovery of price-cost has been favorable, and this applies well to CRB to date, aside from the present situation. CUK has also shown good recovery. As discussed previously, SBS has not recovered as much, which is why we've had conversations about operating rates and the need for gradual recovery. Overall, we are in a similar position regarding actual recovery by substrate, and the overall recovery has now reached the levels lost during the 2016 to 2018 period. Mike, do you have anything to add to that?

No. I think you have summarized it well.

Hi, Mike and Steve. Good morning.

Good morning.

Good morning.

I hope you and your families are well.

You as well.

Thank you. Regarding the volume trajectory and costs, I am trying to understand the 4% growth in the first quarter excluding COVID. If COVID contributed a one-point benefit in the first quarter, why did the pre-COVID outlook in the first quarter drop to zero in April? I find it a bit challenging to grasp that.

Yeah. So why don’t I handle that. I think, look, a lot of the growth and what we saw in January and February was on paper to or foam to paper conversions, Adam, and of course, those sales are pressured right now as we mentioned. Our foodservice business is down 20% to 25%. So, that’s a big explanation that I would point you right there.

Right. Okay. And related to just the cost situation, I think, Mike you talked about OCC is up 55%.

Adam are you there? You cut off. You cut off for a minute.

Sorry, Adam. You cut off for just...

Sorry, is this better?

Yes.

Yes.

Okay. Sorry about that. You mentioned that OCC costs have increased by $50 since January 1 and CRB prices dropped by $30 at announcement. Clearly, there is inflation on the recycled side while it appears there is significant deflation on the SBS and CUK side, given the substantial year-over-year decrease in costs. So, how do you view the relationship between price and cost for SBS and CUK considering the significant reduction in input costs for virgin grades compared to the recycled grades, which is why you are pursuing a CRB price increase?

Yeah, Adam, it’s Steve. I'll address this briefly, and then Mike can add. If you take a step back and consider our price-cost relationship through Q1, we're seeing that this quarter’s results show prices still up, despite a deflation of $17 million. We have successfully recouped all of the price-cost dislocation that occurred between 2016 and 2018, which has been a crucial goal for us. Looking ahead, our guidance on price costs for the remaining three quarters of the year is relatively neutral, with some price increases expected, excluding the CRB price increase and some modest inflation driven mainly by recycled fibers. We are beginning to see a good amount of deflation from other product categories, and this is our perspective on the situation. The overall price-cost recovery is solid, particularly with CRB performing well so far. CUK has recovered well, while SBS hasn't fully recovered yet, which is why we've discussed operating rates and the need for recovery over time. Overall, we are in a similar position regarding the recovery by substrate, and we have now regained what we lost from 2016 to 2018. Mike, do you have anything to add?

No. I think you have summarized it well.

Thanks. Good morning, everyone.

Good morning.

Good morning.

A kind of late in the call, but starting with a quick question on the 120,000 tons being shut at West Monroe, it sounds like you were trading that to corrugated suppliers, so will that have any impact whatsoever on your integration rates?

No. It does not. It was all non-integrated, and so our integration rates have always been around the paperboard, Steve, and we moved it up to 69%.

That was nice.

No change in that, Steve.

Got it. That was nice. And then with respect to the $5 million payments to your frontline employees and believe me I am not being critical, is that incorporated into the $50 million to $60 million labor and benefit guidance?

No, we did not change that. It really reflects a recognition of a one-time payment for the outstanding work being done, and we did not factor that into our ongoing labor and benefits inflation guidance.

Got it. Well, that’s a fair carve out. And then, finally, with respect to capital allocation, I want to kind of put that from maybe the perspective of one of the other analysts. With respect to share purchases and/or partnership redemptions. I mean, do you figure that there might be some quote upside because your shares are so low and so low your own assessment of intrinsic value that front-end loading is beneficial?

I would respond to the question this way, Steve. Since we started our share repurchase program in 2015, we have consistently stated that when we believe the current stock price is below the intrinsic value of our stock, we will decide to buy back shares from time to time. This quarter, we find ourselves in that situation. Additionally, the presence of these redemptions gives us further motivation to act, as we can purchase shares at favorable prices. We also have the flexibility to reintroduce those shares to the market in the future, as Steve mentioned earlier. Most of our shareholders appreciate this option, and they already anticipate that we will be opportunistic in taking advantage of such opportunities while maintaining our strong balance sheet.

Right. And that’s the key point, Steve, is to your question, of course there’s always optionality for some level of acceleration which you have seen us do with the share repurchases, but we will do it in the context of our balanced approach to both capital allocation and the balance sheet.

Okay. Thank you and stay safe. Okay. Thank you, Steve.

This concludes today’s conference call. On behalf of Graphic Packaging, thank you for participating. You may now disconnect.