Graphic Packaging Holding Company (GPK) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Suzanne and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Second Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Brad Ankerholz, you may begin your conference.

Thank you, Suzanne, and welcome everyone to the Graphic Packaging Holding Company's second quarter 2015 earnings call. Commenting on results this morning are David Scheible, the Company's Chairman and CEO; Mike Doss, our President, Chief Operating Officer; and Steve Scherger, Senior Vice President, CFO. To help you follow along with today's call, we have provided a slide presentation, which can be accessed by clicking on the Webcasts and Presentations link on our Investors section at the Web site, graphicpkg.com. I would like to remind everyone this morning, the statements of our expectations, plans, estimates and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the Company's periodic filings with the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements as such statements speak only as of the date on which they're made, and the company undertakes no obligation to update such statements. David, I'll turn it to you now.

Thanks Brad. Good morning everyone. We had a solid quarter and our results were in line with our expectations. We continue to execute well and deliver against our full year plan in what remains challenging operating environment. And we produced 14,000 more tons in our U.S. paperboard mills and sold and integrated those tons throughout our global system versus the second quarter of last year. Sales on our ongoing businesses increased about 5% in the quarter and were driven by acquisitions, new product launches and sub-straight substitution. EBITDA and margins were also strong in the quarter and we continue to be driven by ongoing asset optimization strategies, acquisition integration and strong operating performance. Adjusted-EBITDA was 190 million and adjusted-EBITDA margin increased over 100 basis points to 18.2% in the quarter. We're pleased with those results given that the second quarter was a particularly difficult comparison for Graphic Packaging. We are facing headwind from the strengthening U.S. dollar in Europe and Japan and we took more maintenance downtime at our mills for process upgrades in this year second quarter as compared to a year ago. Also you'll probably remember last year's second quarter benefited from a bounce back following the Q1 2014 severe weather impact. So some of the quarter, we delivered our expectations despite a difficult prior year comparison and some softness across key end use markets in U.S.. Overcoming and use market demand weakness is not new for us. We view our strong cash flow and balance sheet to augment growth and deliver what we say we were do, we’ve divestiture our non-core assets and businesses to free of capital, we’ve reinvested in our core business to optimize our assets and our manufacturing footprint in both the mills and the converting units to drive performance improvements. We required new assets to diversify our core portfolio of products, our channels and different customers and we have transform the corporation to a pure play global paperboard packaging company with the clear strategy to grow revenue and EBITDA. We continue to see opportunities to feel a lot of our global footprint and our pipeline for acquisitions remains as robust as we have ever seen. Mike and Steve will give you some details but the macro trends this quarter were pretty similar to what we have seen for the past several quarters and really were a lot of surprises. We had a little bit of growth, we had strong operating performance that help us overcome currency negative and overall pricing and inflation for mostly in balance. Most of you saw that we recently announced at $50 a ton price increased in our coated-recycled board products for August. As we have discussed before, our goal is to have price offset commodity input inflation overtime, this is done through open market lower price increases and price adjustment mechanisms in our current contracts. Over the long-term, these are not necessarily margin enhancing initiatives and it’s been almost two years since the industry is seen any price increase for coated-recycled board. As you may recall earlier this year, we told you about a capital allocation plan approved by our Board of Directors. Consistent with this plan, we repurchased 4 million shares of Graphic Packaging stock significantly below our current trading price in Q2 and we also paid a $0.05 per share of dividend in July first time ever. Looking forward, we have not at any significant changes to our full year guidance for operating outlook. Steve will provide you with plenty of detail in a few minutes, but we are still target in EBITDA growth of between 5% and 6% and free cash flow between 350 million and 375 million for 2015. Currency is going to continue to be headwind, we are aggressively pursuing costs and performance improvement initiatives to maintain our full year EBITDA and cash flow targets. I’ll now turn the call over to Mike Doss, our President and Chief Operating Officer to discuss the business in more detail. Michael?

Volumes in our ongoing global paperboard packaging business increased by almost 12% in the second quarter, the increase was driven primarily by our continued European expansion and the Rose City Packaging in Cascades’ Norampac paperboard acquisitions. Excluding this acquisitions volumes were up slightly as we successfully offset demand weakness in some of our U.S. and markets with targeted gains and other areas. The integration of Europe is progressing in-line with expectations and we are seen substrate gains in this market. In the second quarter, we continue to integrate our SUS board in Europe and are on track to ship nearly a 150,000 tons into the region in 2015 and ultimately our targeting to shift 200,000 tons annually. Please recall that prior to making the three acquisitions in Europe, we were shipping less than 95,000 tons annually into legacy operations. Internalization of our U.S. paperboard mills, you may incentive to our strategy in Europe and the growth in this business provides additional leverage for our vertically integrated model. Our synergy target the integration of the Benson Group remains in the $6 million to $8 million range for the year. In North America, the integration of Rose City Packaging and Cascades Norampac paperboard acquisitions is also progressing according to plan. And we see the potential to integrate 20,000 to 25,000 tons into these operations over a two year timeframe. If we recall the Cascades acquisition included three Canadian holds and carton converting facility of thermal mechanical pulp mill and CRB mill after a fair assessment we recently announced to shutdown of thermal mechanical pulp mill and [indiscernible]. This was the difficult position, no question, but one we thought was necessary given the high cost structure, lower operating rates and limited demand for specialty board. Our synergy and board integration targets remain unchanged by this action. Please recall that we expect to combine our impact in Rose City assets to generate $10 million of EBITDA in 2015, 20 million to 25 million of EBITDA in 2016 and 25 million to 30 million in 2017 and we are tracking to those figures. As David mentioned, demand across many of our U.S. food and beverage end markets has been weak for some time. Some of these are structural nature, while some of it is a result of consumers managing spending. However, there were some great spots in the quarter. Our frozen pizza packaging volumes were up significantly with the major customer win and our overall global beverage volumes were up slightly compared to prior year with craft beer and specialty drinks leading the way. New product development remains critical to offset demand weakness in certain markets. Numerous wins in the quarter included a major new UK cereal producer utilizing our SUF board. We also brought to market a new paperboard strength solution for a global brewer in Europe. In the fresh produce and away-from-home markets, we commercialized a new paperboard produce tray for the club store channel and a new clam shell for a fresh morning breakfast item. Capturing 1% to 2% sales growth per year for new product development remains our target. As David mentioned, subsequent to the quarter end, we announced the $50 per ton increase for our CRB grades effective August 7th. However, we will not begin to see the increase materially impact our results until 2016. While price announcements benefit our open market board sales immediately, these sales make-up the small amount of our top-line. As you know over 80% of our board production is consumed internally and turned into cartons which are predominantly sold under long-term contracts. And as we have said in the past, many of these contracts have price resetting mechanisms that are tight to publish price board. Once published these reassess have an average nine-month lag, so we will not begin to see the benefit of reassess until next year. As David mentioned, more price increases are not necessarily margin enhancing over the long-term. They are mechanisms for us to recover commodity input inflation in carton contract renewal settlements overtime. Turning to operations, we had another very strong quarter. Our U.S. mills run well across the system and produce almost 14,000 more tons in the second quarter of last year just taking more mill downtime this quarter for maintenance and production line upgrades. The improvements in mill efficiency this year have been the result of our continued commitment to both Lean and Six Sigma principals along with targeted high return investments. For example, our $30 million cogent energy project is expected to generate 10 million of annual energy savings at West Monroe mill beginning early next year. As David alluded, severe weather last year pushed some business out of the first quarter and into the second quarter. We estimate the incremental pick-up to EBITDA was around $8 million for the second quarter last year making for a rather difficult comparison this year. Looking to the third quarter, we have five additional planned downtime dates due to a number of production line upgrades at our Kalamazoo, Michigan CRB mill. However, our backlogs moving to third quarter remain strong at four weeks for CRB and four to five weeks for CUK. And now Steve Scherger, our Chief Financial Officer will take you through the Q2 financial results. Steve?

Thanks Mike and good morning. As Mike and David shared, we had another solid quarter. Results met our expectations, more of it continues to be a difficult operating environment. Consistent with fed practices when I refer to EBITDA, net income and EPS we're referring to adjusted numbers. Adjustments in this quarter were modest at $5 million pre-tax, which related to M&A activity, integration costs and other special charges. For those of you who are on the web site please refer to page 6, follow along. Focusing on Q2 results, our reported net sales were down $60 million compared to prior year. Excluding net sales from the best businesses however, net sales were up $48.1 million or 4.8% to 1.06 billion. Also excluding divested businesses, EBITDA increased $5.6 million or 3% to $192 million. Margins improved over a 100 basis points 18.2% to 17.1% a year ago. Diluted earnings per share for the quarter was $0.19; compared to $0.20 last year. Turning to Q2 sales 4.8% increased was driven by improved volume and mix primarily from our acquired businesses. Price turned slightly negative this quarter due primarily to contractual recess related to declining commodity costs and a couple of contract renewal settlements. As I mentioned last quarter, we expect pricing and commodity inflation deflation to remain relatively in balance in 2015 and overtime. The strength U.S. dollar versus global currencies resulted in lower sales of $28 million as foreign currency denominated sales that translated back in the U.S. dollars. Turning to the Q2 improvement and EBITDA, the ongoing business increased $5.6 million or 3% to $192 million. Drivers of the increase include improved performance at $12.7 million driven by our asset optimization strategies, acquisition synergies and strong operating performance. Including the $28 million of performance improvements of Q1 we remain on track to achieve our full year's performance improvement target of $70 million to $80 million. Positive volumes nearly $9 million, the EBITDA has the benefits from the Bensons, [indiscernible] 0:13:33.8 and Rose City acquisitions brought to our results, partially offsetting the positive drivers were $2.3 million of lower price, net off commodity deflation, labor and benefits inflation of $8.6 million which was in line with our expectation. And, the FX was $5 million. The 4 year FX impact which we have discussed previously will be in the $25 million to $30 million dollar range, at today's rates. Our balance sheet liquidity profile remains strong. Net debt increased $65 million during the quarter. We ended the quarter with just under $2 billion of net debt. Our net leverage ratio declined 2.7 times from 3.17 last year. During the quarter, we contributed $11 million to our pension plan and we turned over $20 million to our shareholders with the quarterly dividend share repurchases. Domestic equity remains quite strong at $960 million. Our guidance is essentially unchanged from last quarter was two minor exceptions. We've increased expected capital expenses to $10 million as a few high return projects later for 2016, will be started later this year. We're also lowered our interest of expenses forecast into the $65 million to $75 million dollar range, as short-term interest rates have continued to remain low. We expect full year EBITDA growth in the 5% or 6% range and free cash flow available for M&A and our return to shareholders to be in a $350 million to $375 million range. Thank you for your time this morning. I'll now turn the call back to the operator.

[Operator instructions] Your first question comes from the line of Philip Ng of Jefferies. Your line is open.

Historically its really been the virgin grades that have driven boxboard prices higher in the market, could you share that dynamic has changed in light of some of the recent consolidation in the market.

I don't know that I would say that's true. Over my career of the last 19 years, it's been a little bit above. I remember CRB pricing leading before maybe 3 or 4 years ago, it was CRB first and then the other grades followed. So, I don't know about that, but what I will tell you is that there has been no CRB increase for over 2 years. So probably this grade is the longest without a price increase. So it's really appropriate in light of input inflation and forward views that say it's an appropriate increase.

Could you share some of your views on the CNK side, if I heard you correctly, the backlog stands a even a little more extended on the CNK side.

You know, we will look at each one of these grades as they go along and what we feel right now is that if you look at the inflation and the things that we've seen its more imperative to get the CRB increase out there. We'll look at CNK next for sure.

That's helpful. And in terms of inflation, can you give us some color on how we should be thinking about it this year, both on the raw material and labor side, certainly some puts and takes you know with OCC prices noted tick up but not gas prices, you know still pretty low here.

I will let Steve get into detail but I would say overall it's going to be pretty flat for the remainder of the year as far as input inflation, you got some tradeoffs, but cost itself is kind of flat and other major chemical increases with oil at 50 bucks, they seem pretty flat as well. Labor inflation is averaging about 25, nearly to 30 a year. That has to be covered with our throughput improvement. We don't really get that back in pricing. So, overall I'd say it's a flat to slightly positive environment if in the pricing versus inflation category at this point.

This is Steve. Just to emphasize that, we haven't seen any changes in our assumptions around labor and benefit costs and that $30 million to $35 million range and as David said, it's really the trends we've seen, some modest deflation, yet other items that have inflation like wood and freight, those things are tending to balance out into flat or maybe slightly negative.

Ok, and I guess it's a longer term question. We're seeing a lot of the big brews making a big push into Mexico and shifting to cans and exporting a lot of their production in Mexico and the U.S. How does that impact your business and those M&A into Mexico become a higher priority down the road?

As I told you before, I don’t think it can be a higher priority than it's been. I think I have been pretty clear that Mexico is an area now that we sort of did an acquisition, north of the border. South of the border has been a priority for us. We have certainly seen that and we do a pretty good job of exporting actual cartons into Mexico. We have converged down there. We work to provide those products locally, and you're right. It's not just in Mexico you are seeing more cans but even in the craft beer segment we've seen more cans. And that's great, that means more take home. That means more machinery, more full packs. So we are finding it good with that change. As long as get wrap it in paper, I am kind of agnostic to whether it's in bottle or can.

Your next question comes from line of George Staphos, Bank of America Merrill Lynch. Your line is open.

Thanks for the details and congratulations on the quarter. Just some housekeeping, the productivity in the quarter versus first quarter, a little slow down there, I am assuming that's just because of the year-on-year comparison that was created by first quarter '14's weather. Can you confirm that or was there anything else ongoing in terms of deceleration of productivity, obviously you did not change your goal for the year.

Yeah, George. This is Steve. You said it right, as Mike mentioned there was about $8 million of kind of quarter-to-quarter comp. So really actual productivity was quite steady through both quarters. We have the weather Q1 versus Q2. So the $40 million year-to-date keeps us on track to 70 days for the year.

The other thing that is we did more maintenance downtime in this quarter than we did last year and that offset performance and when we're in maintenance we take that as a negative to performance. That's how we do it internally to keep ourselves on, just that we have actually improved the business, not just moved it from debit to credit.

Understood. And just on the maintenance side, I would imagine that, Dave, most of that is just to keep the business ongoing. But any of the maintenance downtime that was taken, was there anything else that would be incremental to returns looking out couple, or three years obviously at the Cogent project coming as well?

Yes. I think the maintenance downtime we saw in the mills really to keep the place operational. Every time we do that like every capable company in the world, we optimize some portion of that machine or some portion of that mill and you will see that in our productivity improve. But as you can well imagine, those things are well planned from the downtime as well as the improvement. So when we tell you there is 70 million to 80 million of improvement, some of it is because we need to do the maintenance and upgrades to be able to drive cost out for the rest of the year. So I wouldn’t say it's incremental upside. If there is a project big enough, it really moves the needles then Mike will do exactly what he said. It was say we're going to invest this above and beyond and you -- the things you should model in, but that's not what was this in this quarter. Having said that, I will tell the operations went very-very well from the tonnage standpoint. We ran our mills very well. We produced great board and we sold and integrated that board. So that part of the productivity improvements you saw in the quarter.

Appreciate the thoughts. And then Dave, could you all give us a bit of an update in terms of your ability to continue integrate with your CUK board and market's appetite for that board in light what seems to be fairly large capacity increase coming from the European producers, both in folding box both work and recycle.

Yes. I think the things that we talked about this in the past that really helps us is to strength the characteristics of our -- our sheets are just different than anything that's commercially available in Europe right now. And so we are really positioning it into niches be it beverage, some of the frozen application, similar to what we have done in the U.S. where there is a place for it that has a right for us to win. And that's really been the traction we have seen as we have been able to get some of these conversions done in some of the new business wins we have talked about.

George, we practice and you don’t. But all that board capacity that's coming on is not the same. A lot of it is very light caliper stuff, it's 10.0 board which is great for top-sheets and other sort of food service applications, not so great for making a cereal box or a frozen pizza box or anything like that because what happens there is you have to have lot more caliper in that grade to be able to get the strength and then you have to compete with SUS which is inherently with that pine sheet, a much stronger product. So I am concerned about competing with the stuff coming out of Scandinavia with SUS, that's not really what keeps us up.

I appreciate the additional thoughts and I take one housekeeping and I will turn it over. Did I hear you say that ex-acquisitions, your volume was actually up slightly in the quarter versus a year ago?

Yes.

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

Just a follow up on the CRB market. We have heard of course the market is fairly busy and you referenced four week backlogs, but on the other hand the large package food guys, haven’t really been saying that many good things about their underlying demand. Are you seeing substitution out of other grades in the CRB or can you give a little bit more color on where you are seeing in CRB right now in terms of demand?

Well, two things; one is I did see some of the comments on consumer product companies and they're right. Demand is not -- although if you look at in the quarter actually cereal demand itself was actually pretty good across board and we are seeing improving including cereal demand as well as a harbinger. The other thing is that you got to remember that even in the last 18 to 19 months there has been a fair amount of capacity that's come out of business as well, right. So it's a balance relative to backlogs. Because your question is why do we see backlogs, and they say well their business isn’t growing, but there've been a couple of paper board mills that shutdown and in fairness, the Jonquiere closure, while it is not a CRB sheet. There is no question that some of the tons out of that -- like a 100,000 tons?

Yes about a 105.

100,000 tons, some of that is going to end up being a substitute through CRB and our package goods customers may not see it, but others are going to, so just the overall industry backlog are up the four to five weeks right now. We're pretty busy on the CRB side of our operation.

Okay. That's helpful. And then just following up on Jonquiere, with that closure, will you be buying more SBS externally or sourcing more SUS internally or how does that impact your board mix?

There is small amount of additional SBS we will purchase, Anthony, but I wont characterize it as material.

Okay. That's helpful. And then just one last one. A follow up on the full year EBITDA growth target, you reiterated the 5% to 6% growth. Apologies if I missed this, but do you have an initial view on how you'd expect earnings to be weighted between 3Q and 4Q, maybe relative to last year?

We do not. We don’t give that kind of guidance on the individual quarter, I mean at this point in time, as we said in the business we don’t see material changes in the way the -- I mean the third quarter starts back to school, but we have got more European demand which is not the exact same demand that we would have had a year ago, because our mix would have been different. And less exposure North America than we had in the past.

Yes. Anthony this is Steve. To David's point, as Mike mentioned we've a little more downtime in Q3 than we did last year so there is a little bit of that that will flow through storage, but overall it won't be will materially different than traditional flows.

Your next question comes from line of Ghansham Panjabi of Robert W. Baird. Your line is open.

Hi, good morning. It's actually Mac Gregor sitting in for Ghansham. How are you doing? My first question revolves around productivity. So productivity results have been pretty strong once again during the first half of the year. How much of the productivity improvement is a contribution for an acquisition versus organic improvement? And then the second part of the question is, can you give us an early look at expectations for productivity in 2016?

2016, I have no clue. What I would tell you is this that we sit down do our annual operating plan, we will bottoms up that forecast and then we will lay them that against what our capital planning will be as well. Our targets -- we have been traditionally in that -- total we are doing $60 million to $80 million every single year. As I said in earlier call, it's been more weighted recently towards investments as opposed to incremental. However, with the acquisitions what you end up seeing there is some of the acquisitions are quite as efficient or as effective as we are in our current plans or, they are actually doing something that we haven’t done before and we apply that across to our business and that has incremental improvement on the operating side of the equation. We don't really breakout improvement within the acquisitions versus the core because in a very short period of time, they become a part of the course, you can well imagine, the [indiscernible] acquisition, we started moving paper, we started moving business, cartons to and from those facilities. Because two separate companies were sub-optimized in the Canadian market. So it would be virtually impossible for us to trace back through making the carton now in Canada, we are making in United States and figuring out which was related to acquisition versus which was related to on board. So we try to give you a high level, say look we expect to do $60 million - $80 million worth improvements. We added the synergies in that mix, so you have a pretty good guidance on that but breaking them down further seems to me a little low value.

Okay, that make sense. And then you mentioned that 2Q volumes were slightly positive so what are your expectations for organic volume growth moving forward in 2015 and can you just put that up by European volume, and then North American volumes?

No, we will not. I don't breakout European and US volumes. We haven't done that. We’re not going to start breaking out Europe at this point. What I will tell you is that it's completely dependent upon the new sectors. What we are seeing is, as Michael said, beer is then positive on our global basis, soft drink is a challenged market, take-home is a little bit better than on-premise but then the last that it has been a more challenging segment. Frozen pizza was doing well and some of the dry fruits stuff is starting to improve a little bit. But when I talk about improvement, I’m talking about of a pretty anemic base. So what I would say is we don't see any macro trends that are materially positive or negative in our space, so we would expect our volumes to trend slightly up because that's what we are seeing, but not materially different than what we’ve experienced in the first half of this year. And European volumes are, our European business is doing well, we’ve gain some share over there, some of the acquisitions have bought us new product opportunities that we did not have before. And that's actually growing specifically in the case Benson. It's been a great acquisition from new product stuff and growth in Europe. And as Mike said that's the best thing, the best way to think about Europe is the fact that three years ago we were selling 95,000 tons a day, we’re over a 150, we’re heading towards 200. So like you see some sort of feel for the kind of growth trajectory that we are seeing in Europe in terms of EBITDA.

The next question comes from the line of Mark Wilde, BMO. Your line is open.

I have got a few questions, first just on capital allocation, I mean your leverage is down at 2.7 times, your stock was below $14 for a much of June and you only bought back $4 million where stack, can you talk about that?

Well, of course high side being 20-20, if we might have, we could have bought some more back and we’ve talk a little bit about that, I will tell you that Mark Wilde, we are really-really good at running operations and making acquisitions. We’re new to the whole deal of buying back stock so as David talked about it, probably just a little bit of a window in the second quarter. However if my stock have been trading a 12.50 today, you have may asking the question differently for sure. But I will tell you is that I’m going to continue to stay focused on the three things in this priority. Order one, investing back in the business; two is acquisitions and three is dividends and share buyback. And that will be worth our priority in the quarter. Having said that, if I was grading my performance I would say that we might have missed a little bit of window, we did buyback our shares to maintain, to keep the delusion down, which we promised to do, but we might have missed the little bit upside. We’ll certainly continue to evaluate our process there. We work closely with our board, we have a process and with investment banks that we look at and we’ll continue to upgrade that as we go forward.

Well, I just say David editorially it looks to lot of us on the outside that '14, you look pretty attractively valued versus other packagers so, can you move into your second issue there, which is -- can you just update us on the M&A environment and maybe give us some sense of where you are focused from an M&A perspective sort of domestic versus offshore, converting versus mills?

That's fair, well, right now we have certainly been focused on converting and geographic. Earlier in the call I think it was George, might have been Phillip mentioned the Mexico, Mark we believe that is a hole in our portfolio. We’re trying to -- because you see growth down there, and you see some of our customers building facilities down there. Right now we are attacking that market -- shipping from United States or using local converting partners, so we just don't have enough capacity in Mexico to do what we want to do. So we know we need to work on that. There are a lot of great load of converting businesses right now Mark, there are available. They are probably interesting to graphic packaging because we might have an older facility somewhere that will give us an opportunity to upgrade through the acquisition or maybe a regional business a little bit like this year specific acquisition for craft beer that's kind of what we’re looking at and we’re seeing a lot of it. And the pipeline is really good and good businesses. And the other thing I will say while I’m on this is that well I hope we could do is more the things like we did with the Benson and with Rose City. We’ve got great management team. We’ve learned a lot from the Benson guy and we’ve learned some things from Rose City guys as well. So that's the other part of these acquisitions that I like. And we’ll work for that. What you know that we do really good job making CRB, and SUS and we buy a lot of SBS, I mean we buy a lot of SBS, but I cannot buy something that is not for sale. But if and when yes, as it b ecome available certainly graphic packaging will try to prove itself in the mix because I think there are some things we can do to improve that side of the business. If you look at the SBS business overall in the US, there is -- I think run differently that side of the paperboard market could be improved from margin standpoint at least that's our humble opinion in graphic.

Okay. And Dave just to come back on Mexico for one minute, would there be any advantage in having any mill capacity in Mexico or would you really rather just focus on doing, converting in Mexico and just to shipping board of whatever type into the market?

It's a great question, I think we would leave with converting as we always have, I would never say never to additional acquisitions, for mill a capacity. But I don't think Mexico would be the first place I would look right now Mark. Let us built out our converting network for and then take a different look but for us it would be a stair step sort of approach, right.

Yes, okay that's fine. Turning to this export of more at the SUS board Dave, you have talked about I think having something in the order of a 150,000 tons of extra popping capacity in the system and I’m just curious, as you are able to forward integrate more that is there a point here whether it's a significant capital bomb to allow you to convert that pulp in the board?

Hey Mark, its Mike. I think the way we would think about that as we’ve talked about that we can run the business with around $200 million of CapEx and where we do incremental high value projects we’ll give you transparency into those and example of that was the co-gen that we’re doing in West Monroe, here right now that would online in Q1 of next year, we’ve got some projects that are in that kind of range from an expenditure standpoint that can help us drive some additional tons and convert that pulp that we’ve talked about into additional paperboard and the projects that are in that 10 to $20 million range. So its not some big capital infusion that we have to make and we are ready to make those as soon as we’re confident that those tons are there, we like to trends we see in Europe, we’ve got pretty good line of site to 200,000 tons we talk about over the next few years. And so as we kind of head into ‘16, we will continue to give you some views into what we’re seen and what that means from a capital standpoint but it will be inline what the type of CapEx that we’re spending right now.

And we’re just not going to get out there making tons that we don't know were sold they are just no good, I think good comes of that, so at the end of the day when we sold those tons then we’ll make those tons and that's kind of been I know it's a conservative approach but that's kind of been what’s work for us when you running, when you need reserve cash, you just have to be smart over the way you spend it.

Dave if you look at the problems have been caused when people get more capacity than there is a market for I think that's a good strategy, last question I had a just impact from the rising dollar in terms of competition, I mean you’ve got another coded craft board producer down in Brazil their currency is a lot weaker now, you have got a lot of recycle board capacity over in China, can you just talk about sort of how, what currency is doing right now in terms of competition and boxboard markets?

Mark, this is Steve. I think if you look at currency over the last year the movement has occurred and been in place for a while now and we have not seen any material impact relative to imported board as you know the travel costs, the move of actual hitting the board from A to B is not a simple solution. We also have to have a place for it to go and so generally speaking with the long term relationships though we have with our customers we haven't seen that as material impact on our business certainly on the CRB side where there's very limited and as Mike said the sub characteristics of the board being very positive we haven't really seen anything there as well. So obviously there's the current scene in question. We haven't seen that materially impact our business. Mike, anything you add to that.

No, I think you said it well.

And number two, Mark we said earlier, not all board is the same board. What's been made in Europe is a lot different from what's being made over here, it's a great board very light calibre, and you know in the United States, that is being predominantly little lamb top sheet and so on to the light -- or maybe some food service business, we're not heavily exposed to. The China board, Mark, I cannot tell how many times we've talked about how scary it's going to be -- you know the capacity comes on in China and in the next quarter, everybody's saying it just hasn't shown up yet. And I kind of tell you that's kind of another quarter of more capacity coming online but just doesn’t show up in the United States.

Our next question comes from the line of Chip Dillon of Vertical Research Partners. Your line is open.

First question is on Jonquiere, the machine that was shut down. I think you said about a 105,000 tonnes, competes basically in the CRB market. Could you talk a little bit about where the other tonnes went, was it SBS high applications but maybe at the low end like cup and plate.

Yes, so chip this is Mike Doss. I wouldn't characterize 105,000 tonnes to be primarily on the CRB side. As Dave, I think he stated a little bit will come into CRB, a little bit will come into SUS, but the lion's share it was in SPS substitution product for food service and the like.

Cog sheet.

A little bit of cog sheet too, yes.

And, as you think about maybe one day getting an opportunity to get into SBS, is there any aversion to get into more into food service applications like cups, is that part of the attraction for you or would you want to avoid that and stay mainly folding cartons.

No, I mean we are, you know, we talked a lot about folding cartons because it's easy to understand, you know, but we make a lot of these other things, right. We make trays, we make plates, we do a lot of food service stuff, right. The little trays, the little boards and we do a lot of those things. So any portion along that is part of our business. But the issue is that it got it’s own non-integrated business. So we can improve it in the converting side of the equation. We can't do much on the board side, which is why I said earlier, chip, to be perfectly honest and optimized mix across that as I think an opportunity for margin expansion across the vertical. But, you know, we don't own it. So, we wouldn't have any aversion to any portion of end use sectors. We like them. They're growing, there are people, they are consumer based. They meet some millennial trends. You can see kids are being, folks on the go, all those are great trends that we capture in our core business. It's just that we don't happen to own enough SPS board mills so I don't care as much about it today.

And in terms of food service, Chip, just to build on David's comment, we already have a $250 million plus business where we're in those markets. So, we know those accounts.

That's very helpful. And last quick question. I would imagine with all the moving parts you're probably up around a 180,000 tonnes or so of SPS purchases. Could you just remind us of all the M&A activity, where you stand in terms of your gross outside purchases of CRB and then you sell some of what you make, I guess it's still around 15% and you might verify that. Is that something you could share with us?

So, our SPS external purchases are in excess of $200 a tons a year and you're in the neighborhood on our CRB open market sales around, you know, maybe 15% of the production.

Are you buying any CRB on the open market even though you sell some?

Yes, we do buy a little bit and we tend to buy the grades in calipers as you can imagine that either don't trim us off or we don't want to make. And In Europe, we buy all our PD board and a little bit in Mexico as well.

If you look globally, if you answer the question globally we are net buyers of every grade

Your next question comes from line of Alex Ovshey of Goldman Sachs. Your line is open.

You guys see much of the substitution in the U.S.?

Well, you mean for like between the grades Alex?

Well from other substrates, plastics corrugated into box board?

We’ve certainly grown our pie. I mean you know as well as by on this call that we got Mike went through a number of examples quickly, but there is a whole bunch of substitution there that was from corrugated and a couple of them from plastics. But we win -- I would say net-on-net we are gaining, expanding pie in this space, but it’s not, look it’s about a 1% change year-on-year and that’s based across that’s kind of our target, right new product stuffs about 1%, acquisitions about 1% and moves back in board but that’s kind of how we get our 2% annual growth and then 5% EBITDA. So we have good quarter in that space for sure.

And then you guys giving up on the idea of lower gas prices actually help in consumption for some of your end markets. You think you see any of that benefit at some point here over the couple of quarters?

I don’t know that I can correlate the gas prices. What I can correlate to you more is the jobs and you saw the jobs report today. It's okay, but still kind of anemic if you think about where we were prior 2009 and where we are today. And I know let’s talk about a little bit of job growth and things are down, but it’s been a pretty anemic recovery and more than anything Alex that’s what we have to watch is oppose to whether the individual consumers have more money to pay, we just need more people working and that’s kind of I think in the bigger impact on the business more than the benefit of lower gas.

Just a question on some of the cash item. So for pension contributions and CapEx maybe looking into ’16. Is there an opportunity to maybe see those lines item comes down in ’16 versus ’15?

This is Steve, I mean we’ll start to give a sense for ’16 a little bit later this year. I mean you know the impact of interest rate bump up a bit though, have some impact on pension calculations. And we’ll play that out for you and as Mike mentioned we’ll be pretty clear on our CapEx expectations going forward above that core baseline.

And just last one on cap allocation. If both on opportunity either transformative opportunity don’t really come up over the next couple of quarters. Would you let your leverage fall below 2.5 or with the plug there be buyback?

As you know, I mean we getting down towards to is just by no means is optimal capital plan for us. And you know that and even that math we can do here. So we’ll have to address it when you get there.

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

I have two quick questions. First on free cash flow, you didn’t make any changes to that target, each of your CapEx 10 million. So I’m just wondering what needs to happen to get to the high-end of that range if you hold currency constant?

Yes Debbie, its Steve. We lowered our interest expense expectations a bit to as well, so the two basically kind of get each other out. No changes of course in capital side.

So again have you kind of look at the high-end of your range that just is that working cap at the high-end or is it operational improvements. What you need kind of achieve that?

This probably working capital.

Yes, there is a little bit in working capital. But for the most part if you think about the guidance, you got a little bit of CapEx up in a little bit of interest cost down and everything else for the most part is pretty steady in terms of the EBITDA expectations in the 5.6% range, 5% to 6% range that we’ve been sharing, driving, the majority of that cash flow, so no real material change.

My last question is as we can last quarter you gave a currency headwind for the year, are you able to do that again?

Yes, it is 25 million to 30 million is what the current expectation at today’s rate. So that your 100 euro, 155 pound and 125 yen, it’s in that $25 million to $30 million range

Your next question comes from the line of George Staphos of Bank of America Merrill Lynch. Your line is open.

Hi guys. One last one, I guess bigger picture of some degree, we’ve seen evidence that the standup pouch market is growing a bit more quickly than it has in the past, certainly having a little more impact in the market than 10 or 20 years ago, when it first started coming out. Do you see that as a net positive, or net negative? Now intuitively say okay it's a competing substrate versus holding cartons but I could imagine that a lot of secondary packages that are used for pouches would be more likely comment on like CUK versus cans and competing products to pouches would tend to be more secondarily packaged in cargo. So how would you have us frame that if its frame able at all? Thanks guys and good luck on the quarter.

Yes, I think you did a pretty good job of answering your own question. I think you are absolutely right. If you think about something like a pre-son, any time those pouches are for beverage applications which is the predominant, and for usually is the package that's just surrounding it. We put some functionality in opening feature, we protect the product, we make it easier for the consumer to store it, so look out we’re not into anit-pouches. We want them to grow.

So in total you see stand up as actually a net positive for this UK market overall?

Yes, because some of that is actually getting if you think about it, we don't get to this, some of them is actually giving at the little juice, a little one of plastic juice bottles which are not necessarily a package in paperboard, but when you get to a plastic pouches almost always in paperboard, so arbitrage is not bad for us right, and you are not going to put beer in a plastic pouch. So --

Not yet I guess.

Yes exactly, so is that kind of nicely the thing is really more that juice sort of market and some of that is transferring from PE bottles into pouches and then paperboard becomes the right way to protect that product, so yes that's not a bad trend for us.

Your next question comes from the line of Mark Wilde of BMO. Your line is open.

Just a follow-up, I wanted to ask about that $2.3 million price decline sort of net of commodity deflation that you had identified?

Yes, this is Steve. Just to put a little bit of color behind that as you know in some cases particularly in Europe for example we’re net buyer of board and as we’ve seen in earlier commentary around currency we’ve seen some declines for example in the craft of that board that really a direct pass to our customers, we counted ourselves as price, but its offset by the deflation that we experienced in that particular instance, Europe ended up being a largest percentage to this quarter of that total then as some of those things started to roll through. Our expectations have not altered at all relative to price offsetting commodity inflation, first quarter we were up a couple of millions, second quarter down. Those things tend to net themselves out and we don't see that changing. But it was a little bit of a European phenomenon for us in Q2.

But not, but Mark make sure, it did not EBITDA impact, your board, it shows up as a price reduction, because the board blows through but then you are paying less for the board. So EBITDA impacting Europe was negligible its just the way that just the way we account for.

Thanks that's help, Steve just kind of since you’ve mentioned the European business, can you just give us some sense of where you are at in terms of the improvement in operating margins that you’ve had out there for the European converting business?

Yes, Mark we are not giving actual margins. This is what I would tell you is that, that business operated solidly, we integrated more tons into business and grew that business if you think about the primary drivers of how margins get better graphic a little bit of topline growth higher load integration and good operating results you can assume that margins in Europe are directionally correct for us for sure.

Is there much, just from Dave, separate from the board integration but just in terms of converting businesses themselves over there, is there much of an incremental opportunity to just improve margins in those businesses?

They have been, absolutely have been, they are really executing well over there, we are really good team, and they are flat running those plans some of our most, I mean its embarrassing, but some of our most efficient ship that plans right now or not in this continent.

And Mark, its Mike if you think about it, we’ve shutdown one facility, down-sized another and optimized the loss cost assets we have there so, our overall operational efficiency in Europe is a very good story.

We are trying to translate some of that back here. Mike has got his teams working to be able to understand to do what we're doing in Europe in some case is, expanding that back into our sheet bed facilities in the United States.

There are no further questions in the queue. It's time I turn the call back over to David Scheible for closing remarks.

All right, my closing remarks are, to see you next quarter. Thanks to Sherin.

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