Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Quarterly Earnings Call. [Operator Instructions]I would now like to turn the call over to Mr. Alex Ovshey, Vice President of Investor Relations. Please go ahead.

Thanks, Michelle. Good morning and welcome to Graphic Packaging Holding Company’s Conference Call to discuss our Second Quarter 2019 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 by clicking on the Webcasts and Presentations link on the Investors section of our website at www.graphicpkg.com.I would like to remind everyone that statements of our expectations, plans, estimates and beliefs regarding [Technical Difficulty]

Excuse me our conference will resume shortly.

undertakes no obligation to update such statements, except as required by law. Mike, I’ll turn it over to you.

Thank you, Alex. Good morning and thank you for joining us to discuss our second quarter 2019 results. We reported strong results in the quarter as our adjusted EBITDA margin increased 160 basis points year-over-year to 17.2%. Adjusted EBITDA of $267 million was ahead of our expectations driven by strong execution on pricing, performance, growth initiatives, and synergies.We reported $31 million of year-over-year improvement in adjusted EBITDA. Pricing improved by $40 million during the quarter reflecting the benefits of pricing initiatives. Importantly, our pricing to commodity input cost relationship was a positive $26 million in the quarter and $41 million year-to-date. Overall, we operated well in the quarter generating $22 million in performance improvements.These benefits were partially offset by commodity input cost inflation, specifically increased wood, as well as labor and benefit inflation and unfavorable foreign exchange. The elevated wood cost continued to be driven by wet weather in the U.S., Southeast, and Gulf State regions. As I mentioned, we generated $40 million of positive pricing during the quarter. We continue to expect 2019 pricing of approximately $110 million.We are pleased to report that our commercial teams have been successful in customer negotiations to reduce our pricing lags to six months compared to eight months previously. This reduction is an important milestone as it provides the opportunity to adjust pricing two times per year on average to better reflect market conditions.In Q2, we repurchased $18 million of shares at values we estimate to be below the intrinsic value of graphic packaging. Over the last three quarters, we have repurchased $198 million of shares successfully reducing our share count by a meaningful 5%. Since inception of our share repurchase program in February of 2015, we have successfully reduced our share count by 10%.Let me briefly discuss our current 2019 financial guidance…

Thanks, Mike, and good morning. We reported second quarter earnings of $0.22 per diluted share up compared to $0.16 in the second quarter of 2018. Second quarter 2019 net income was impacted by $5.8 million of special charges that are detailed in the reconciliation of non-GAAP financial measures table attached to the earnings release.When adjusting for these charges, adjusted net income for the second quarter was $69.6 million or $0.24 per diluted share. This compares to second quarter 2018 adjusted net income of $54.5 million or $0.18 per diluted share.Focusing on second quarter net sales, revenue increased 3% driven primarily by $40 million of higher pricing and $16 million of volume related acquisitions. These benefits were partially offset by $14 million one favorable foreign exchange.Turning to second quarter adjusted EBITDA. The $31 million increase to $267 million was driven by $14 million of positive pricing and $22 million to performance. These benefits were partially offset by $40 million of commodity input cost inflation primarily wood. $12 million of other inflation primarily labor and benefits, $3 million of unfavorable foreign exchange, and $1 million of unfavorable volume mix.We ended the second quarter with over $1.4 billion of global liquidity and $3 billion of net debt. Total net debt decreased $121 million during the quarter. In the second quarter, we invested $78 million in capital, repurchase $18 million of shares, paid $22 million in dividends, and made a $6 million distribution to our GPIP partner.Second quarter pro forma net leverage ratio was 2.91 times adjusted EBITDA compared to 3.13 times at the end of Q1. We remain committed to our long-term net leverage target of 2.5 times to 3 times and expect to be well into this range at year-end reflecting our strong cash flow generation.Turning to full year 2019 guidance, as…

We are encouraged by our strong results in the first half of the year. We are executing on our strategy of building a highly integrated packaging company that is delivering profitable growth across all three paperboard substrates.We are well-positioned to drive benefits through our growth, productivity and synergy initiatives that we anticipate will be in excess of our labor and benefit cost inflation. We expect to generate robust cash flow in 2019 and we will continue to focus on creating shareholder value to effective capital allocation. We believe these actions will create value for all our stakeholders in 2019 and beyond.And I will now turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from George Staphos from Bank of America. Your line is open.

It’s actually [John Babcock] on the line for George. I just want to start out - you talked a bit about this earlier but could you elaborate on the new customer wins and how to shift from plastics to paperboard solutions is impacting your volumes and then also let me just add - just also what gives you confidence in your volume outlook for the second half?

So in terms of our new customer wins, as we talked about earlier this year, we're really seeing that kind of translate into wins on the food service part of the business, specifically transitions out of polystyrene into paper cups, trays, clamshells. Those types of products as well as continued acceleration on what I would characterize as our beverage business. We talked about KeelClip in here and move away from shrink wrap film in Europe and other areas.So we’ve got a high degree of confidence in our 100 bps that we outline on the second half of the year. And our business being 95% food and beverage tends to hold up pretty stable during really any type of economy and we see that here in the second half of this year, so that's all contained in our guide.

And then also looks like backlogs are still quite strong in CUK and CRB but pullback a little bit in SBS. Could you talk about the current market dynamics in this grade?

Sure, happy to do that. So as you know operating rates are solid in both CUK and CRB. On the SBS side they are down a little bit in the 92% range. That's really driven by the fact there's a new entrant that's come into the market and that's now fully contained in the actual numbers that the AF&PA is posting. And as we saw in the quarter, one of our competitors announced that they were actually going to take capacity out.So if you look at kind of the net, net of both of those things as it kind of plays out here into Q4 and into 2020. We'd expect operating rates to be moving up a little bit on a net-net basis with the results of those two moves.

And then last question before I turn it over. Just with regards to the acquisition of Artistic Carton. Could you talk about or just kind of benefits you see from this transaction and how the CRB mill and fits into their existing plant network? And then also looks like this mill is at the upper end of the cost curve in CRB. So what opportunities are there to drive efficiencies out of this facility?

So you got a number of questions there. I'm going to answer them here in order. In terms of what we're excited about in terms of the Artistic acquisition, we really see good customer diversification on the converting side of the business. They’re in a number of segments that we’re not in, and we’ve talked in past about the need and our goal to continue to diversify our product portfolio and mix. They're doing things on the retail side of the business.They're also in certain industrial markets that we find interesting. So we think that's going to be a big opportunity for us. And in regards to synergies on the CRB side, we've got a reasonably - a sizable CRB business, and we really see supply chain efficiencies being the biggest opportunity there where we can leverage some of the things we do and drive some synergies.

Your next question comes from Mark Wilde from BMO Capital Markets. Your line is open.

I wondered just going back to John's questions around Artistic we could add another one on there. And just talk a little bit about the timing on the synergies but also the use of capital for this acquisition versus say growing the food service business or growing the European carton business which - both of which I would have guessed would be a little higher priorities?

Yes so, I think Mark, the way we look at it is - expectations around multiples are still pretty high in the space. And as we've talked about, we have to look at that and look through those to make sure that we find opportunities that create value over the long term for our shareholders. And this is a good example of one that is unique and we think the valuation is good for us, and it moves us into some verticals that we're not in. You are right that from a priority standpoint, anything that we can do to drive our SBS integration up is going to be prioritized for those reasons.But we have to make sure that we get the valuations right on those kind of deals as well. Europe, we're still interested in driving towards that $1 billion platform on a converting side that we've discussed with you in the past.But that market well our business is holding up pretty well because we're so indexed to both convenience and the beverage business. We’re going to be a little bit more cautious there as we look at that and probably prioritize North America and specifically anything that you can drive are our integration levels up on the SBS side ahead of that.

Mark, it’s Steve. I think one of the things to its relatively modest overall allocation of capital and it’s one that we can see very clear line of sight to the kind of pre and post multiples that we aspire to when we take on a decision to apply capital to an acquisition.

Okay. And then just synergies and the timing of synergies?

On this one as we mentioned as we look out to 2020 we would expect the majority of that $10 million of EBITDA which is a post synergy number would be available to us for the majority of 2020. So that's a fair number as we look out. Obviously, we'll get some very modest improvement this year dependent upon the close think of that as maybe a quarter.Typically, we spend those early months making sure that we understand the business well and then work hard to operate and drive those efficiencies. In this case, we would expect through 2020 as the primary line of sight to that $10 million.

And then just if I may follow-on. I just was struck when I looked at the slide deck. You're still buying 100 million pounds of polyethylene. And I'm just curious about where you're at in terms of coming up with alternative coatings for the paper cup and the foodservice products to really make them kind of more easily recyclable rather than having that polyethylene coating which complicates the issue?

It does and thanks for that question. It is a strategic focus for us relative to our new product innovation side. And as I’ve commented on in the past, it is the top priority for our food service business. We've got numerous different trial materials that we're working with customers that are bio-based that would reduce that footprint. The thing about our low density polyethylene, as you know Mark, is its pretty cost effective and the variable properties are high. And so, we're up against a pretty optimized specification.But to your point, it's one of those things from a sustainability standpoint that we believe consumers ultimately will hold that through the marketplace as we come up with these new options and innovations and over the next 12 months to 24 months. We expect to make progress on that 100 million pounds. The other thing that I mentioned to you that we're working on is we're working with our customers around the collection of those materials.And the ability to, get them back to our mills and others to be able to use because the fiber is really good there and we're probably a little behind in the U.S. We are certainly Europe and parts of Asia are in that regard and that's an opportunity for us as well.

The next question comes from Mark Connelly, Stephens Inc. Your line is open.

This is actually [John Rider] on for Mark. So our first question is, so should we assume that the reduction in the price pass-through from eight to six months represents the majority of your response to addressing the price cost gap or are there other significant actions that you're taking to address in the future?

So John yes, that was a significant undertaking for us in multiyear over the last couple of years. So, we believe that six months is where we're going to wind up on that

And so just as a follow-up to that, so are there other ways that you can mitigate the risk of comp inflation?

Yes John, it's Steve. As we've talked before, I think in addition to compressing the time horizon, which has been a critical initiative for the last couple of years for us we've also taken several other actions around pricing. So looking at ways to make sure that we're addressing any areas of potential leakage, for example, like freight cost, pass throughs and the like. So, it's really been a multi-dimensional approach which has allowed us to commit to the kind of pricing improvement year-over-year.Last year’s $80 million, this year’s $110 million it's a combination of those negotiations and the compression of time lags as well as other initiatives to lock down areas where you might have price leakage either during negotiations or in the normal course of the business.

And now second question is, so if you guys could just talk a bit about mill productivity, we saw some good improvement here in the last quarter, and we know you've had unusually high wood cost but also low OCC. If you could just help us put your overall productivity efforts into perspective.

Sure happy to do that, John. So really, what you're seeing is a lot of benefit from the investments that we made in 2016 and 2017, specifically into our CUK mills making in West Monroe with the curtain coaters and the pressing section that we put into West Monroe, that's all coming kind of through in terms of productivity right now on a year-over-year basis. We do see productivity levels up pretty substantially there.In regards to your question as it relates to OCC and wood cost, we expect wood cost to remain elevated here in 2019. Well, the weather is a little better in the Southeast and the Gulf States. We're behind in terms of actual - building our stockpiles for wood that we need going into the rainy season.So, you'll see a lot of effort by ourselves and I would assume others to build those piles back here while we can because once we get into Q4 of course we do expect more normalization of wet weather patterns which is the historic patterns in those regions. So, in regards to OCC, you see what we see in terms of what that looks like. They are down. It is a commodity. We'd expected it to move up and down as respect to supply and demand.And right now demand is down a little bit on a global basis. I think I saw the most recent AF&PA data and exports were down 3.5% in June as an example. So, that’s kind of how we're thinking about it.But net net, our fiber costs are up year-on-year and it's driven primarily by wood offset by secondary fiber to a degree.

And the combination of those things, John are in the revised $70 million guide and some natural benefits from recycled fiber, chemicals, spray, partially offset by the continuation of inflation on wood as Mike mentioned.

Your next question comes from Chip Dillon from Vertical Research. Your line is open.

Yes. Well, thanks for the details. First question is just looking at just one last one on sort of pricing. I know you I believe still have some pricing tied to costs. And we've seen not only OCC come down but more recently some of the white stuff, the pulp substitute grades come down as well pretty sharply. And is that going to create any kind of price get back in some of your contracts or in a material amount that we'll see or notice in early 2020 let's say or at any point in the future.

Yes, Chip, it’s Steve. Those costs would be taken into consideration in our cost models. But those would also be offset by other inflationary dynamics. So if you think about overall, we still experience inflation net in the business in total, and so our cost models where they apply would still have some modest inflation in them.Yes, if you are just purely on the CRB side as a customer you may get some benefit. They'll be offset elsewhere or cost models that might apply for example on the on the virgin side at CUK and SBS.Overall, as we look out into 2020, we'll talk about it later. And in the future where we have line of sight now into the kind of pricing that we would expect in 2020 that will be something we'll talk about later. Currently it's a net positive, but that will be something we'll talk about in Q3 Q4.

And I guess I have just kind of a follow up would be a broad one. Looking at the water market, one of the can companies has talk about the fact that there's more plastic water bottles single serve than there are - there's the use of beverage cans in total for everything else. And I do notice, not very often, on an aluminum can with water, distilled water in it, but I probably notice as much if not more, and as sort of an SPS type package with water in it. And I didn't know if you think this is something that's more kind of a niche situation or because the cost differential is so great. You might also want to talk about whether, where an SPS water package compares to an aluminum can versus the PET or the plastic.

Yes. I mean, and SBS package is going to be high - substantially higher than the aluminum can in terms of total cost. We're not seeing a large amount of growth in that particular vertical as it relates to water and SBS. We've read the same types of announcements that you're referring to around water being in aluminum cans.And I think that's probably the more likely area that we could get some pickup in that because if they ended up putting it in a paperboard package as an example, that would be something that we currently do for those end-use customers and probably the more likely area we participate in that kind of a trend.

You mean the beverage carrier?

Yes. That's two boxes.

Compared to individual cans? Got you.

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

Just following up on the closing of the lags from eight months to six months, is that on all your boxboard grades or just the legacy CRB and CUK businesses? And then, you had a goal to shrink those lags for a number of years now. It seems like you made really significant progress this quarter. Is there something about the market environment or a large contract renewal or is there any kind of color you can give us on what allowed you to move those lags so meaningfully this past quarter after years of trying to do it?

So, Anthony, it's an average of all our paperboard grades and all our packaging contracts, if you will, to six months that aggregates out to that movement. It has been a strategic focus for us for the last couple of years, and I'll tell you that the inflation that we experienced in 2017 and 2018 was a big part of that impetus as we went into renewals with customers that we had to shorten those lags. And so, it was a strategic focus of those negotiations, and we ended up where we did. We made progress on it.

And then on sustainability, are you seeing the pace of sustainability driven substitution into paperboard? Is that moving faster in Europe than it is in the U.S. or as maybe some of the low-hanging fruit maybe around polystyrene already been picked. I’m just wondering if you could compare the pace of substitution and the market opportunity in sustainability in Europe. And then if - what learnings there are for the U.S. market.

Yes. Thanks for that question. We've got a pretty good sized business in Europe as you know. And one of the things we really like about operating in Europe is the packaging trends tend to be 12 to 18 months ahead of what we see here in North America. And I would tell you that the activity there around the elimination of single use plastic is - it continues to be very, very high.And so we would see and expect that those trends would continue to translate here and things that we'll see in North America that we're already seeing and things that we do expect to see. With our global customers many of them operate in Europe. And so they operate in the U.S. as well.And as you've seen Anthony they're putting out targets for sustainability goals that they've enacted into multiyear goals. That translates into the reduction and usage of certain materials over specific periods of time. So, I expect that activity to remain quite high.

And, Anthony to Mike's point, in Europe we're seeing probably a little more assertive shift for secondary packaging like in beverages in the paperboard because of a long history of those packages being in other substrates film base substrates.Whereas as Michael's also mentioned in the U.S. and North America there's an awful long runway for conversion of primary packages for cups like we were talking and trays that have more proximity to the end product. Those moving are probably commensurate with what we're seeing in Europe.

The next question comes from Ghansham Panjabi from Baird. Your line is open.

This is actually Matt Krieger sitting in for Ghansham. Just wanted to ask, so how do you intend to manage the execution risk associated with the more active than average maintenance schedule during the third quarter of 2019? And are there any unique actions that you're taking from an inventory management or operational perspective that we should know about?

The answer is we have built inventories on both our CUK and SBS. You can see that on a year-over-year basis. Those are up 5% to 6% in terms of those grades. So, we got the material we need to take care of customers. We plan for these things in many quarters in advance to make sure we've got the board manufactured and prepositioned so that we can serve these customers.In terms of the downtime that we're actually taking, this is a - what I'll call the usual or the normal annual outage in Macon. So, we do this each and every year. This one actually is slightly less complicated because we're not installing a curtain coater like we've done in the last couple of outages that we've done in Macon.And then in Texarkana, we're actually doing the lower tube work that we talked about which is in line with what we did with our Augusta outage in Q4 of last year but significantly less extensive. So, we've got the same vendor that's doing that work for us that did an excellent job in Q4 of last year and we expect to be able to manage that outage accordingly.So, we've got the inventory. We know where it is. And it's positioned in the right spots. And we've got good project management skills to take care of both of those outages. And I think the other thing I'd add on that since you asked that question is that is why sometimes you see a little bit of dislocation in terms of what we actually produce on an individual month day basis versus how it plays through, because we actually happen with two SBS mills, we have to build that inventory in order to run our business and take care of customers.

That makes a lot of sense, and that's helpful, thank you. And then as you negotiated contracts to reduce the pricing lags during the quarter and prior to that, what did you have to give up if anything the customers on the flip side to kind of shrink that pricing gap? Particularly given that your customers generally have kind of a one year pricing model with their own retail customer base?

So, I'm not going to get into the individual pricing components because there, it’s a wide range in variable depending on the actual contract. But I would just say it's a part of the normal negotiation we have with them. They have things that they want. We have things that we need. And that's where we wound up.

Your next question comes from Brian Maguire from Goldman Sachs. Your line is open.

Just a question, multipart question on volumes, as it’s probably going to be hard to answer directly, but hoping we could get some color on how much of the 100 basis points is organic volume acceleration you're expecting in 2Q. How much of that you think is directly tied to the sustainability trend or the shift out to plastics versus just normal end market growth or market share gains? And any reasons to think that that ends at the end of this year and doesn't continue into until at least the first half or next year as you annualize those contracts. You know I guess what I'm getting at is there any kind of like large infill of volume upfront on some of thosecontracts or should we think about it just kind of taking a year to annualize. And I guess the last one is tied to volume is have you've seen any customer destocking or activity along those lines either like late in 2Q or so far in 3Q. Thanks.

Sure. Let me take a cut at that. So, in terms of our visibility out, I don't want to go out further than a year because it's just very difficult for us to have visibility beyond that. But in terms of if you think about what we see relative to that 100 basis points of growth, I'd say there's a high correlation to the sustainability aspect of that. And really if you look back Brian over the last few years, we haven't seen a lot of real organic growth as you know.And so I believe it's got a high correlation to that and the types of products that we're selling are tend to be the ones that I've talked about, the conversions into paper cups that trade the clamshells, the beverage packages out of shrink film and high going rings and that kind of stuff. So, highly correlated in that regard. And can you repeat the second part of your question, please.

Yes. I was just asking I guess interested in that volume growth in the second half. I know in the coffee space you've got a new customer in particular. I just wanted to get through some inventory build happening there, some infill that would make the 1% less of the - a more normalized number for that business on a run rate basis. And then have you seen any destocking separately in late into 2Q or so far in 3Q.

I can't speak to any major destocking that we experienced in Q2 or Q3. To this point our volume as we've entered into Q3 is consistent with what we saw in Q2 with the acceleration of some of the organic growth that we talked about already. So, I don't see a lot of that, Brian.

I think it's a nice point. We haven't seen, Brian, a shift in kind of the underlying pull from our customers if you think about it as core volume, which has kind of been that flattish that we've seen for several years offset by our new product development activities. To Mike's point, this is mostly driven by actual decisions to convert from other substrates into paperboard-based solutions.

And just to shift gears to the Artistic Carton acquisition, any way to give a rough cut of the purchase price for those assets? And there's obviously some consolidation already in CRB. Any expected DOJ issues particularly related to the mill? And then, just other thoughts within CRB, I know there's a - one of the three other remaining players in that market kind of exploring some strategic options with their assets. Any interest or do you think it would even be possible to get something done along those lines?

Brian, just with regards to the valuation, we haven't disclosed the purchase price, but you can just expect that if it fits the categories that we've done before in terms of pre-acquisition multiple and post, this will be a five, six times transaction on a post. I think that can give you a sense for where we are transacting relative to the multiple. Very, very consistent with where we have acquired businesses in the past.

And then just to build on the second part of your question around some of the assets that may be for sale in the marketplace, I think the way I would answer that is, look, we routinely look at a wide range of capital allocation decisions, investing in our business, making tuck-under acquisitions, returning cash to shareholders. And we've done all three of those things year-to-date year here in 2019.So, we'll continue to look at things that makes sense for us and evaluate opportunities. What we won't do though is speculate on what we would or won’t do in the marketplace before we did it.

Your next question comes from Adam Josephson from KeyBanc. Your line is open.

Just a two-part one, Steve. Just on your - forgive me if I missed this. On the commodity cost basket, I know you went into the year saying you thought there’d be about $85 million of inflation. What your assumptions now along those lines just considering what happened in the first two quarters? So, what is the $85 million come down by relative to the $15 million guidance increase?

Yes. It is that Adam. When we look at the change, the $85 million we've moved to $70 million. As we mentioned before at Q1, we had line of sight to about $60 million to $65 million of known inflation. That's still generally the case. We've seen some puts and takes. So, we've seen a little lower inflation across recycled fiber, chemicals as we’ve mentioned and freight but it's been more than offset in terms of just those cores by the continuation of wood.So, think of the $15 million reduction is primarily the net impact of freight chemicals recycled fiber, $85 million go on to $70 million. And that is the, in essence, the $15 million increase in our EBITDA guidance.

And just on a related matter, so last year, obviously, you and other producers experienced significant cost inflation which you responded to by raising prices. Now your costs or for everyone, costs are falling. Do you have reason to think that prices would follow suit just as they went up after costs rose, because obviously there's a clear relationship over time between prices and costs.

Like there's actually a clearer relationship around operating rates. You know Adam if you take a look at that on a historical basis, and the operating rates as I mentioned on two or three grades are 95% plus. And on the third one it's down a little bit, but there are some changes that are going to happen in terms of mill structure and you’re both, some capacity is going to go away, and some capacity comes in.So, I think overall, we see a pretty balanced operating environment for the three paperboard grades.

And just Steve, one last one on cash taxes if you don’t mind. Is your expectation still that come 2021 your cash taxes will approximate or closely approximate your book taxes or could it be longer than that until that happens?

I think it will be, it will start to come in under our current structure in 2021. So there will be some modest uptick in 2021 and more full in 2022. It probably wouldn’t mirror all the way up to our 25% cash tax rate and probably be a couple of hundred basis points below that if you’re doing long range modeling.

Your next question will come from Steve Chercover from D.A. Davidson. Your line is open.

So, I guess that somehow factors into the guidance, I noticed that the Texarkana I guess it’s going to take four days longer than you anticipated in Q1. But your total loss production actually declines by 15 days to 134. So I would have thought that would be more of a benefit to you guys, and I'm just wondering how if there's anything that might be associated with the maintenance has impacted your full year EBITDA guide.

No. I wouldn't really say that. I think what happens here, Steve, as you know as we go into the year with a set of plans that we work as it gets closer to the outage to continue to fine-tune and of course we're always trying to find ways to use less down time to accomplish what we need to in any particular outage.And so, a couple of them we're able to do faster, and Texarkana, where we actually got a few days to your point that we've actually added on. But net-net, we're down from where we thought we were going to be, and that's kind of the normal process that we use for planning.

Sure. And are there any start-up expenses associated with the new product launches that should drive your second half volume growth up by 1%?

Yes. Nothing that isn't in the guide.

Okay. And last, real easy one, I suspect, but I mean, clearly, would despite better weather in the Southeast is going to be an ongoing headwind, does it make you reconsider your procurement going forward perhaps carrying higher inventories?

Yes. We've been spending some time talking about that. I think there are some strategies there that we'll look to investigate in terms of having a little bit more inventory particularly as we go into the wetter weather season.The first thing we've got to be able to do is build it back, and that's what we're going to do here in Q3, and that's why we expect Q3 to be elevated as well because we have to pull from a wider basin and in some cases shift further to get into our mills to build those reserves back so that we can operate efficiently and effectively during the wet season.

Your next question comes from Arun Viswanathan from RBC Capital Markets. Your line is open.

So, I just wanted to understand about going back to the commodity cost and pricing situation. You did give up a little bit of a price situation in the SBS. You were able to offset that with CUK. The commodity costs are now a little bit lower and the Q2 performance was quite strong. So, I guess, just to confirm, is there an element of conservatism I guess in the commodity cost outlook? And if so, is that because of the wood side and the recycled paper side or is it chemicals and energy or anything? Any detail you can provide on that? Thanks.

Yes, now, Arun. It’s Steve. Overall, we believe that the $70 million guide is the appropriate one. We've seen a little over $30 million year-to-date. And a lot of it is, as we've talked quite a bit here, around wood. We haven't seen wood step back yet.As Mike said, we have to rebuild inventory that may keep some pressure up much longer than we would have anticipated earlier. So, I would just characterize it as we have a basket of cost, as you know, a couple billion dollars’ worth of buy. And then net of, as we look through all of that is the $70 million. Woods playing a real role there.

And then on the volume side, congratulations on getting the wins. I think that's encouraging. And I'm just - I just wanted to get your thoughts on just overall end markets. The beverage markets are relatively robust at least on the can side. It looks like there is some growth in foodservice. So, just curious to get your thoughts and if at some point if you start to think that there could be maybe one or two points of structured organic growth that you should see going forward or is this still kind of a flat expectation as the most reasonable base case. Thanks.

I think the base case remains. We expect flat volumes relative to what we already have, where we're going to be able to break out a little bit. As you know, we've always done around that 100 bps of new product development work.And that went in many cases over the last few years to buttress up some secular flow decline in certain categories like carbonated soft drinks or cereal. So, what we're really saying is we're inflecting a little bit here and being able to bring that new product development back to 100 bps of organic growth. And so that's change.

Your next question comes from Mark Weintraub from Seaport Global. Your line is open.

On the pricing lag, congrats, getting it down to six from eight months. I'm curious as a consequence of those successful negotiations was there any change in the makeup of cost push versus ties to pricing indexes.

Not meaningful.

Okay. And so is it fair to say that CRB is still more cost push driven and SBS is still primarily price index. And I guess Steve - and the coated that would put more in the middle.

That’d be a fair statement.

Okay. Super. And then also I recognize it’s just optics but congrats on getting that positive cash from operations first time in lots of quarters. I assume that’s a consequence of the way you’ve rewritten contracts on factoring. Is that correct and is there more change to come in that regard? Are we now done with that?

Yes, Mark. Thanks for raising that. We appreciate it. Yes, those were changes in the contractual language associated with our accounts receivable program. If we had moved, it was down in the investing line and we've been able to address that effectively in Q2. And so, on a go-forward basis, you'll see that be more representative of the cash flows of the business from an operating perspective.For the remainder of this year, Q1, we had not completed the majority of the work that we have now completed. So, there will be a little bit of a hangover in Q1. As you roll into next year, it will be all-in relative to that.We continue to provide you with the reconciliation as well on where we are in free cash flow which is $66 million year-to-date, $33 million last year. So, we're seeing net on adjusted basis up $33 million but thank you for that note in terms of how that's now being accounted for. It is change that resulted in the accounting change.

And one last real quick one, I apologize if it's just my not having understood it properly but that $6 million or $5.8 million non-recurring, I saw some kind of vague-ish language about what it was. Can you provide a little bit more in way of specifics or I may have just missed it I apologize.

No, it’s just in the normal course of business-related activities. A couple of them, SG&A related. A couple of them associated with our recent acquisitions in terms of synergy capture and those are the primary -- there was really nothing unusual in that figure for the quarter.

Your next question comes from Daniel Rizzo from Jefferies. Your line is open.

Just one quick question. You mentioned that one of the reasons for doing the acquisition was because of some interesting industrial end market. I was wondering exactly what they were, like what you’re looking at that seems to be good and if there is more room for additional acquisitions within that market?

Yes, thank you, Dan. I mean there are some things that we're doing relative to filtration both air and automotive categories that we're not in, and retail to include things like retail boxes that we're not largely in right now, so we find that to be interesting.And as I've talked about in the past, we've got good market shares in some of the traditional folding carton categories and finding different options for us or different verticals that we can grow into is something that we're pretty excited about. And so we're really glad to have this acquisition, and existing customer relationships that now we can build upon.

And then, and just one other. So, in the past with the price hikes you enacted, the goal was to recover the higher cost that occur likely between 2015 and 2017 or thereabouts. With everything that's occurred and with -- where wood is and what other costs of doing with your price like you've already announced, will you have achieved that goal by the end of this year?

Dan, it’s Steve. No as we've talked, what we're really working to overcome that occurred in 2017 and 2018 is about $125 million worth of price cost dislocation and we're making significant progress on that this year. And as we look out over a two to three year time horizon, we would expect full recovery. So our intent of recovering it holistically remains, it'll be a two to three year return to provide to cover all $125 million.

And finally that would suggest that the additional price hikes might be necessary?

Yes, so we're not going to talk about forward pricing actions other than to just say that our intent is to continue to recover that inflation.

Your next question will come from Edlain Rodriguez from UBS. Your line is open.

Just one quick one on the price lag reduction, again, very positive if you believe that the boxboard market is well-positioned for higher prices going forward, because otherwise, you would have to give out some prices. So, as of now, do we think that the market is tight enough to be constructive on prices?

So, just a clarification, Edlain, I understand what you're saying around that the timing if there was a reduction, I guess, it would flow through. But I think the more relevant fact and one of the things that we've really talked to our investors around is that we want to make sure that we're dealing with inflation in the year that it occurs.And now, we have, on average, two openers that allow us to be able to do that as opposed to dragging some of that into the next year. Up or down, it's a more relevant picture for how the business is performing, and it's tighter. So, we view that as quite positive in that regard.And in regard to the operating rate, as I've mentioned, it will go off the AF&PA data. We've got a couple of those operating rates that are north of 95% and one that's a little below that and with some actions that are going to happen later on this year that in our opinion will drive that one up as we head into 2020. And that's our view.

That makes sense. And one quick one on volume. Can you remind us again at what was the organic volume growth this quarter?

Edlain, it was flat. So organic was flat. The modest growth was acquisition based, as we expected.

Mark Wilde, your line is open.

Yes. Steve, I just wanted to chase down that organic growth a little bit further. So, for the first half, how much organic growth did you have?

First half, overall, is basically flat as well. We were down very, very slightly in Q1 organically, flat years. So, it's literally at zero to minus a 0.5 point if you kind of look at it organically and that's the pivot that we're expecting, Mark, in the second half towards organic growth of about 100 basis points. So, that’s kind of first half to second half.

So, just -you've talked I think pretty widely about one big comp conversion that's going on. That sounds to me like that's a pretty big chunk of the overall organic growth in the second half. Would that be fair?

It's certainly a component of it, Mark. And as you know, there are always things that are up and things that are down. But the net-net positive of it gives us a lot of confidence to be able to make the guide be 100 bps of growth of organic growth.

And if I could Mike, I think most of where you're picking up like food service or leasing comps is in hot cups, coffee cups. Is there anything to suggest that maybe you could do the same thing in cold cups or in other niches?

We're certainly working on that. You are correct. The majority of our gains, to this point, have been on the hot cup side of the business. But cold cup is still prevalent to it. Polystyrene is a big option and these tend to be larger cups as well. And so, we're working with several of our customers on options that would provide them innovative solutions to be able to use paper and paper board as an option to polystyrene foam.

And then, just finally, and I know we want to be careful about this on a public conference call, but the trade paper over the last several weeks has been pointing to a little bit of pricing weakness both in SBS and in CRB. I wonder if we could just get your perspective on that.

I can only work off the numbers in what we're seeing, Mark. The numbers, as you see, are very solid in a couple of the grades and then a little lower than that on SBS. And again, I can't really comment on what the trade -- that particular trade paper does in terms of their process and who they talk to, but if you look at some of the things that they reported on, I mean, we were down they said 30 days in Kalamazoo, and that just wasn't the case, as an example.And so, when you kind of look at what they say and how that kind of comes through, they talked to certain people, and that's when it gets reported. But when we look through and really look at the actual results and the numbers that come out to the AF&PA and others, I think it tells a pretty balanced and -- story.

Yes. And, Mark, to that point, and that's one of the things we conveyed to you here today, was that was our CUK operating rate which was 25% plus. So, to reiterate that, because there's some commingled information in there, we'll provide it to you in terms of our operating rates, the CUK 95% plus, CRB 97%. And obviously, we're working through, as Mike said a couple of times, this little bit of volume in, volume out that's taking place on SBS which will play itself out here in this Q3, Q4.

Okay. All right. Sounds good. Good luck in the second half of the year, guys.

Yes. Thanks a lot, Mark.

We have now reached the end of our Q&A session. I will turn the call back over to Mike.

Thank you for joining us on our second quarter call. We look forward to talking to you again in October. Have a great day.

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