Graphic Packaging Holding Co
NYSE:GPK
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Graphic Packaging Holding Co
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Thank you for standing by, and welcome to the Graphic Packaging Holding Company Fourth Quarter and Full Year 2020 Earnings Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ms. Melanie Skijus, Vice President of Investor Relations. Thank you. Please go ahead, ma'am.
Good morning, and welcome to Graphic Packaging Holding Company's conference call to discuss our fourth quarter and full year 2020 results. Speaking on the call will be Mike Doss, the company's President and CEO; and Steve Scherger, Executive Vice President and CFO. To help you follow-on with today's call, we will be referencing our fourth quarter earnings presentation which can be accessed through the webcast via self-directed slides and also on the Investors section of our website at wwwgraphicpkg.com. I would like to remind everyone that statements of our expectations, plans, estimates and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties, that could cause actual results to differ 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 are made, and the company undertakes no obligation to update such statements, except as required by law.
Mike, I'll turn it over to you.
Thank you, Melanie. Good morning, and thank you for joining us on the call today. I'm pleased with the results we delivered in 2020, and I'm looking forward to executing on growth opportunities in front of us in 2021 and beyond. We are successfully achieving the milestones established with our Vision 2025 goals. Specifically, we are executing strategic growth initiatives driven by innovation and supported by sustainability. Providing exemplary service to customers, further strengthening our long-term partnerships, allocating capital to growth initiatives and ensuring strategic projects remain on time and on budget while prudently managing the balance sheet; and lastly, investing in and developing our most important asset, our people.
2020 was an unprecedented year for the world and our industry, creating unique challenges that our team had head on. In March, we were designated an essential business and our 19,000 employees solved every challenge our customers placed on us. We delivered exceptional service and quality throughout the year, and we accomplished this while maintaining our focus on long-term goals.
Turning to Slide 3. I'll expand on some of our 2020 highlights. We achieved our EBITDA guidance and exceeded cash flow guidance that we provided before the COVID-19 crisis began. We successfully pivoted the company to growth, increasing net organic sales by 4% which was well ahead of our 100 to 200 basis point target. Operationally, we accelerated strategic business decisions to adapt to the changing environment and invested in tools to keep our employees healthy and safe.
Continued growth in integrated volume, 2 tuck-under acquisitions and our proactive conversion of customers from CUK to SBS folding carton grades resulted in a 2 percentage point increase in our total company integration rate for the year to 70%. This number will continue to grow as integrations progress and supply agreements unwind. The balance sheet was prudently managed as we borrowed effectively where needed, successfully worked inventory out of the business and exceeded guidance for cash flow. As a result, we continued our significant return of capital to stakeholders, with over $900 million distributed in dividends, share repurchases, partnership distributions and redemptions. As Steve will discuss, these actions are accelerating value creation for stakeholders.
We also enhanced disclosure and elevated our communication platform around the company's corporate and social responsibility programs with our comprehensive ESG report, which can be found in the Investor Relations section of our website. You can expect to hear much more about our programs and our progress on our critical environmental, social and governance initiatives in the future. As we turn to 2021, I'm confident in our ability to continue to grow net organic sales, EBITDA and ROIC consistent with the goals established in the Vision 2025.
On Slide 4, let me walk you through our road map to capture continued growth this year while strengthening our leadership position in the industry. We will continue our unwavering focus on winning and growing markets, and I will share with you today some of our latest innovation and new product developments. In addition to the organic sales growth, we expect to capture this year, we will continue to closely match our paperboard supply with demand and manage the commodity input cost environment. During the year, we intend to deliver productivity improvements that will more than offset labor and benefit inflation with annualized net performance improvements resulting from continued execution of strategic projects.
To that end, we are announcing today that our new CRB machine in Kalamazoo, Michigan is expected to begin producing paperboard in Q4 this year ahead of schedule. The acceleration provides increasing confidence we will achieve the first $50 million EBITDA benefit in 2022. Today, we are also providing details on our plans to convert an SBS machine in Texarkana, Texas to a swing machine in an overall capacity neutral investment. This will provide production capacity necessary to meet demand for global CUK beverage packaging solutions while increasing our long-term flexibility across our paperboard substrates. I will cover both of these in greater detail shortly.
Slide 5 is a brief recap of our Q4 performance. Total net sales, including acquisitions, were $1.7 billion. This was an impressive 9% increase over the prior year period. Excluding acquisitions, core food, beverage and consumer sales were roughly $100 million or 9%. Our foodservice business improved sequentially, declining 10% year-over-year in the quarter compared to 14% decline in Q3.
As a result, net organic sales growth for the quarter was 5% over the prior year period. Net performance was $25 million during Q4, benefiting from the completion of several strategic projects and implementation of ongoing productivity initiatives. Proactive decisions made in 2020 to manage inventory levels helped align our supply with demand. This included market downtime on our SBS cup stock line and the substitution of 90,000 tons of CUK to SBS only carton grades to accommodate increased food and beverage demand for CUK. AF&PA industry operating rates in Q4 in SBS and CRB were 96% and 92%, respectively, and our company's CUK operating rate remained above 95%. Industry inventories declined across all 3 substrates and are now below historic averages. Backlogs in all grades remain at 5-plus weeks.
Steve will discuss the financials and capital allocation in greater detail during his remarks, but I would like to quickly highlight stakeholder returns. We continue our return of capital during the quarter with $90 million distributed dividends, partnership distributions and share repurchases. As I mentioned earlier, for the full year, we returned over $900 million to stakeholders. Of that, share repurchases were $316 million, and were executed at an average price per share of $13.48. As stewards of your capital, this reflects our commitment to achieve the best return for investors, allocating capital to our share repurchase program when we feel the GPK share price is below the intrinsic value of the company.
Turning now to Slide 6. New business across 3 growth platforms is increasing, and our innovative offerings continue to support growth opportunities with customers. The addressable market for fiber-based packaging solutions has grown from the initial estimates provided at our Investor Day in September of 2019. With demand for fiber-based packaging solutions expanding across markets, we now believe the total addressable market is closer to $7.5 billion as compared to the initial $5 billion market opportunity we were focused on in 2019.
We have witnessed the rapid adoption of our KeelClip beverage packaging solution an innovative fiber-based packaging that secures cans with a center keel and replaces plastic rings and shrink wrap, while offering merchandising benefits. The package is being rolled out across Europe by major global soft drinks and beer brands.
In addition, the PaperSeal tray innovation of hermetically-sealed tray designs to replace existing plastic and foam tray packaging alternatives continues to penetrate in meat, poultry and other protein markets. We are seeing significant growth and additional market opportunities with each of these unique solutions.
On Slide 7, we provide an example of IntegraFlute, our proven strength packaging solution with the ships in own container or SIOC design. This solution helps reduce overall packaging while providing supply chain efficiencies, including ease of storage. It extends customers' marketing programs with striking branded cartons and benefits the overall consumer experience with efficiency in delivery. The branded carton provides a seamless packaging solution from doorstep to pantry to recycling them. The package arrives, ready-to-use with easy carrying handles and its sturdiness provides a well-kept appearance in the pantry. This trademark solution is currently being tested by customers and is used in a omni-channel distribution environments, including mass retailers and Amazon today. While still early days, customer tests are having extremely favorable results and interest is expanding.
Moving to Slide 8 and 9, and the discussion of strategic initiatives we are undertaking in 2021 and 2022 to position us competitively for growth. CUK remains a growing global paperboard substrate. We are the leading provider of CUK and have been growing production consistently at a 3% CAGR over the last 12 years. We are currently running 90,000 tons of CUK packaging on SBS assets and are purchasing an additional 50,000 tons externally to service our global CUK demand in 2021. In order to optimize our paperboard mill infrastructure, increased strategic optionality, improve margins and capture growth, we're adding a capacity neutral CUK production capability to our network in early 2022.
This will be done with an estimated $100 million investment in our Texarkana, Texas SBS mill over the next 15 months. The investment to an existing SBS machine will convert it to a swing machine capable of producing both CUK and SBS. It is expected to drive $20 million in annual EBITDA growth over the next 3 years, primarily from margin improvements supporting the growing CUK platform.
The swing machine will provide exceptional flexibility to support demand for both SBS and CUK. We are over 95% integrated in our CUK business today when including 1 large converting customer with a long-term contractual agreement. With our current substitution to SBS folding carton grades and the external purchase is necessary to meet near-term CUK demand, we already consumed over half of the machine's future potential CUK production. Importantly, with the strategic investment, we'll be servicing our own internal CUK demand with flexible production capacity.
On Slide 9, we provide an update to our well chronicled CRB platform consolidation investment in Kalamazoo, Michigan. We remain on budget, and I'm pleased to report we are ahead of the original schedule with the start-up timing for the new CRB machine. As a result, we expect to begin producing paperboard in late 2021. This provides greater confidence in our estimates of the first $50 million of EBITDA realized in 2022 and the remaining $50 million in 2023. We have an outstanding team managing this transformational project for the company. The beneficiaries of this project for a wide range may include our employees. We have the opportunity to learn and grow with new automation and world-class paperboard technology. Our customers with a greater quality cycle paperboard and opportunities for new applications and the environment as we reduce greenhouse gases, water usage, purchased energy in the world's lowest cost and most environmentally friendly CRB production platform.
Turning to Slide 10. I will conclude my remarks with thoughts on industry positioning and creating value through leadership with our Vision 2025. We are running a different race. We are focused on innovative, sustainable fiber-based packaging solutions and continue to create and commercialize valuable, safe and circular packaging solutions that help customers achieve their sustainability goals while providing preferred solutions demanded by today's consumer.
We have identified strategic investments that improve our long-term competitive positioning and value proposition to the market. Our focus as a leading integrated provider of all 3 paperboard substrates, CRB, CUK and SBS sets us apart. We focus solely on providing the lowest cost, highest quality fiber-based packaging solutions in the industry. We continue to increase our integration rates over time through downstream strategic acquisitions and organic sales growth. Our dedicated vertically integrated model creates a competitive advantage that provides significant flexibility and results in best-in-class paperboard margins for the company.
We will continue to enhance our differentiated model with targeted and strategic investments. We are hitting the milestones that enable us to achieve our Vision 2025 growth goals as we drive value to the market and for our customers. 2020 was an unprecedented year for all of us, and I'm very proud of what we accomplished. Importantly, we move quickly to ensure employees have the resources necessary to perform their jobs safely. Our teams successfully completed multiple strategic projects, managing a year that also had significant capital investment and growth. We took care of customers and met rapidly changing demand patterns.
In closing, with the promise of the vaccines on the horizon, we look forward to the ongoing recovery in our foodservice business. We also expect continued solid performance in our food and beverage markets as consumers work and do more from home. In addition, the push by consumers for more sustainable packaging solutions is only strengthening. While we are not out of the woods yet as it relates to the impact from COVID-19, it is clear the value we provide the end-use consumer is real. We will build on our sustainable portfolio of packaging solutions and continue to deliver innovation through fiber based packaging. Our teams are motivated and with the perseverance and passion exemplified by our employees in 2020, we are set up for yet another strong year in 2021 and beyond.
Steve, over to you.
Thanks, Mike, and good morning. Turning to Slide 11, focused on full year 2020 results. Net sales increased 6% from the prior year to $6.6 billion driven by 4% net organic sales growth and acquisitions. Adjusted EBITDA improved 4% year-over-year to $1.07 billion. Demand patterns changed overnight near the end of Q1 2020, and we responded rapidly to meet the needs of our customers. We went above and beyond to keep customers in supply, expediting production and delivery as necessary.
In addition, we took market downtime in cup stock and shifted scheduled maintenance to the fourth quarter to match supply with the changing demand environment. Total revenue and EBITDA growth during the year reflected the healthy increase in volumes from conversions to paperboard and greater at home consumption. EBITDA margins were modestly impacted by the actions I just mentioned that were necessary to fulfill fluctuated supply chain requirements and match supply with demand. The timing of synergy achievement related to the 2 acquisitions we completed in 2020 was also a factor. Full year adjusted EPS was $1.12, an impressive 29% increase from 2019. We delivered significant stakeholder value as we acquired $500 million of the international paper partnership interest and continued our share repurchase program.
Turning to Slide 12 and our full year net sales waterfall. Net sales increased $400 million in 2020, driven by $408 million of improved volume mix resulting from a combination of 4% organic sales growth and acquisitions. Our full year EBITDA waterfall can be seen on Slide 14. Adjusted EBITDA increased $40 million to $1.07 billion in 2020. Adjusted EBITDA was positively impacted by $30 million of favorable volume mix, $22 million of commodity input cost deflation and $42 million of positive performance. These benefits were partially offset by $52 million in other inflation, primarily labor and benefits and $1 million of pricing. Foreign exchange impact was essentially flat for the year. As you can see on the waterfall, net performance would have been $57 million for the full year before taking into account our decision to execute SBS cup stock market downtime and moderately higher expenses associated with maintenance downtime as we move the timing of outages to meet increased customer demand. Adjusted EBITDA in Q4 increased $6 million from Q4 2019 to $265 million.
As seen on Slide 15, adjusted EBITDA during the quarter was positively impacted by $9 million of favorable volume mix, $25 million of improved performance and $4 million of favorable foreign exchange. These benefits were partially offset by $11 million of pricing, $8 million of commodity input cost inflation and $13 million of other inflation, primarily labor and benefits.
Turning to cash flow. Our adjusted cash flow was over $300 million in 2020, ahead of the guidance we provided at the beginning of the year. We invested $646 million in capital expenditures including capital for our transformative CRB platform consolidation project. We ended 2020 with over $1.7 billion of global liquidity and $3.5 billion of net debt. Total net debt in Q4 decreased $171 million sequentially due to strong cash flow generation. Our net leverage ratio at the end of 2020 was 3.26x. We expect our year-end 2021 net leverage ratio to be in a range of 3x to 3.5x. Our long-term leverage target of 2.5 to 3x remains unchanged. Last quarter, we mentioned the completion of a $425 million delayed draw term loan with the Farm Credit system intended to refinance our $425 million bond maturing in April 2021. As an update, we funded the Farm Credit loan in mid-January and called the bond at par on January 15.
With this backdrop, let's turn to Slide 16 to discuss 2021 guidance. We expect full year adjusted EBITDA to be in a range of $1.09 to $1.15 billion. A year-over-year increase of 5% at the midpoint. Key drivers of adjusted EBITDA growth this year include positive volume mix productivity gains. We expect $10 million to $40 million in favorable volume mix from 100 to 200 basis points of net organic sales growth.
Net performance improvements are anticipated to be in the range of $70 million to $90 million this year as the large recovery boiler projects completed over the last 3 years will not repeat in 2021. Net performance is expected to more than offset labor, benefit and other inflation, primarily property insurance of $50 million to $60 million. At current rates, foreign exchange is not expected to have a material impact on results.
Finally, we expect price actions will offset commodity input cost inflation for the year. Adjusted cash flow is expected to be in the range of $175 million to $250 million in 2021. The reconciliation from adjusted EBITDA to cash flow includes $690 million to $710 million in capital spending, including the remaining portion of capital deployed in our CRB platform consolidation project, along with the investment we are making in Texarkana. $120 million to $130 million in cash interest, $35 million to $45 million of cash taxes, $10 million to $30 million in working capital and $10 million to $20 million in pension contributions. Importantly, as we look ahead to 2022, we expect to see a significant improvement in cash flow as capital spending returns to more normalized levels, and we earn on these critical projects.
I will end my remarks this morning on Slide 17 with an illustration of the value creation we are providing our stakeholders. We combined our operations with International Paper's Consumer Packaging business in January 2018. This can be seen on the slide. The combination was immediately accretive to stakeholders. And after accounting for the combination, adjusted EBITDA has grown at an attractive 5% compound annual growth rate over the period ending 2020. Over that same period, adjusted EBITDA per ownership unit, which includes both IPs partnership units and GPK shares, has grown at an impressive 15% compound annual growth rate. We look forward to continuing our focus on growth and driving returns to stakeholders.
I'll now turn the call back to the operator for Q&A.
[Operator Instructions]. Your first question comes from the line of Mark Wilde from BMO.
I wanted to talk a little about the pull forward of the CRB machine? And then just kind of a follow-on question around the go-to-market strategy of machines. So can you give us a little color, first of all, on what's allowing you to kind of pull the timing forward?
Yes. Thanks for that, Mark. The bottom line is we just executed well. I mean, as you can appreciate, project that size, we give ourselves some contingency. And even with the backdrop of COVID and some of the issues we had, with the shelter-in-place in April of last year in Michigan, we were able to execute well through the summer. We had good weather. The construction went well, and our team is continuing to make real progress on that. The facilities closed in. Steve and I were there last week. Met with the team looked through kind of where things are at and relative to the timing of commissioning the machine. We feel good that we'll be able to do that in Q4 this year. And I'd have you think about making kind of commercial material probably towards the end of Q4 being on the real and being able to -- we'll sending that downstream to our carton plants late this year.
Okay. And then just as a follow-on, Mike. I mean, this is a much newer and more sophisticated machine than any of its peers in the CRB market in North America. I'm just -- I'm curious about how you're going to position this product within the market and also how you're thinking about sort of the pricing strategy here, as best you can kind of talk about that on a public call. Do you price this against like this other CRB? Or can this really be priced as a kind of a CNK alternative because the multiply board, presumably, it has better wet strength characteristics?
Yes. So it's a 3 ply machine. So we'll start with that. So it is consistent with our K1 machine, and those are the only 2 machines in the U.S. that obviously have that capability to your point. It's going to have the widest caliber range, meaning that we'll be able to specifically go to the low end of the caliber range that others won't be able to and still get our tons per hour up. So relative to pricing, what we really want to do is have that capability and afford our customers, those types of products that allow them to continue to grow their business and see a lift in the marketplace.
So we're excited about that. I mean it really is from a positioning standpoint, to your point, unique and different. We justified it, as you know, on cost, but there's going to be a number of commercial capabilities that are going to allow us to continue to drive our growth and specifically drive our integration rates up on that machine because our goal is to sell finished packages to our customers. So it will be part of our overall portfolio of offerings to our customer set.
But will it -- are you just pitching as a CRB product? Or are you positioning it a little bit differently as potentially kind of a CNK substitute at least in some uses?
There'll be some uses. I mean, as you saw what we did on CUK here in Texarkana. So I mean, we're doing both. And maybe that's a great lead in Mark for me to just comment a little bit on all 3 substrates, just so that it's clear. I appreciate the question. When you look at what we're doing on CRB, we're going to have the lowest cost, highest quality CRB platform in North America by far. And we'll make a little over 1 million tons in terms of how that all kind of comes together. If you look at CUK now, what we're doing there, and you saw the growth that we've been able to generate on our CUK platform at roughly 3% CAGR for the last 12 years. Our global beverage franchise continues to grow so much so we're having to run, as we said, 90,000 tons on SBS right now, we're buying another 50,000 tons.
So we're going to have now 3 mills that are capable of producing our high-quality low-cost CUK or our trademark name SUS. And that inflects about 150,000 of that 300,000 ton machine is already sold. We want to sell that to ourselves. And as we stated in our prepared comments, we've got a 95% integration rate on that machine. And if you just kind of do the math forward over the next few years, over the next 3 to 4 years max, our growth on CUK will actually approach 2 million tons. So that's one of the reasons why we needed to do that.
And then what that leaves on our SBS platform, which right now is about 1.2 million in terms of total tonnage, it's about 900,000 tons. Of that 900,000 tons, roughly $400 million of that is our uncoated cup stock line. That's a highly integrated line, as we've talked about, roughly 85% of our production goes downstream into our cup plants. And then we'll have a coated material, which is about 500,000 tons. And for a business our size, that allows us to utilize that and also service our external customers, which are important. But we've got a clear path to drive our integration rates up towards that 80% range over the next 24 months. And that's -- when you think about how we're repositioning the business, I'd ask you to think about it in that context, it's really part of an overall approach to all 3 substrates for graphic packaging and our end use customers.
Our next question comes from the line of Mark Connelly from Stephens.
Mike, is the cost issue at Texarkana on CUK going to be materially different from your larger mills?
No. And that's Mark why we're actually investing the money we are there because, as you know, you can convert any machine to make just about any product, if it comes down to where you're going to be on the cost curve. And we're the largest producer of CUK and SUS really in the world. As I mentioned on my previous comment, we have 2 mills and 4 paper machines that are already doing it. So we know how to make high quality, low-cost CUK, SUS for us. And that's why we're spending the money there. So it won't have a -- it's going to have a quality profile and a cost profile that's consistent with what we're already doing. And we're really excited about that because it's allowing us to take advantage of a really great fiber basket there around our Texarkana mill, we've got low-cost pulp. And as you know, that's just something that's really important to have in terms of where you're going to be from a cost structure standpoint.
Sure. And just one follow-up question on KeelClip. As we see craft beer proliferating, is KeelClip catching on in the U.S. Every time I go to the supermarket and see the 4 packs of craft beer, it got those heavy plastic carrier things on top that never get recycled. And I look at KeelClip and say, is there a problem getting that product on with smaller brands because really only the bigger craft beer brands at our supermarkets show up in CUK at this point. So I'm just curious how do you see the domestic opportunity and whether there's a volume limitation that will keep some of these smaller craft beers away?
Yes. Thanks for that. So really, if you think about KeelClip, what we targeted initially, Mark, and specifically in Europe, we went after the high-volume type carbonated soft drink and beer with our own integrated machine solution because those bottlers need to be able to run at incredibly high speeds and throughput. And of course, that's where a lot of the volume is. So it makes sense when we would go after that first. We're seeing good traction here in the North American market. We've got a lot of interest from customers. This continues to be more rolled out. I would say our larger craft customers could consider that as an option for them as well as other CUK packages. The smaller craft accounts, those are going to be more -- those are kind of hand setup cartons. They snap those things on those plastic tops you're talking about. That really hasn't been our focus up to this point for the reason I just described, but you'll see it continue to penetrate the North American market here in 2021, KeelClip.
Do you think the North American market for KeelClip is as big as the European market?
Yes. I do. I mean, it's all of that size. I think what's really drove Europe quicker from an adoption standpoint as they were heavily indexed into plastic more so than the U.S., as you know, between shrink wrap film and a lot of their Hi-Cone rings. And so there was more urgency over that, and we actually wanted to go fast there to get the adoption rates in place, as you know, when you install those machines, it makes you pretty sticky. And so now that, that's being proven and proving out well, we've won a number of accolades, as you know, for that particular package. We're seeing more interest here in North America, which is a logical extension of that innovation.
Your next question comes from the line of George Staphos from Bank of America.
Congratulations on the progress in the quarter. I wanted to come back to Texarkana first, if we could, Mike. So could you tell us, are you going to be converting a machine that makes the Bristol at Texarkana currently? And is that machine going to have any practical limitations in being able to swing from bleach to CUK or SUS. Could you, in theory, run the entirety of, like, I think it's the 300,000 tons on SUS. And my last -- the multipart first question. What are your assumptions that you have baked into the $20 million benefit that you had pegged for us?
Yes. So I'll take a couple of those, and then Steve, you can comment with additional color. First off, when we think about that particular machine, it's a 300,000 ton machine. We didn't manufacture any Bristol. So this was all coated SBS. And as I said in my prepared comments, George, we were already using roughly 90,000 tons of that material to service customers and allow us to drive the growth that we drove last year. So what this machine will really be targeted at for us and what I'm really excited about is, it's going to be a single ply machine, and that's going to allow us to really target those lower caliber ranges, which continue to grow, while freeing up some additional capacity in both Macon and West Monroe to really do what they do great, which is those medium and high-caliber ranges.
So it's an integrated approach that gives us a lot of optionality. And relative to the margin profile, what the real driver of that is, we're selling SBS right now to customers at a CUK price because we have to do that to service the business. So as this machine comes online, our cost structure for us in that margin is something that we were able to capture our strategy was grab the growth. I mean -- and you saw we did that this year, 9% between acquisitions and organic growth. And as you know, our DNA is pretty darn good when it comes to driving costs out over time, and that's what this investment is really going to allow us to do and I'm really excited about it.
And, George, it's Steve. Just relative to the financials, as Mike mentioned in the commentary, we'll take a little bit of downtime in Q1 to kind of complete the investment. But in terms of the returns themselves, because roughly half of the volume is already sold, if you will, meaning that we already have the volume, we'll generate roughly half, probably just a tiny bit, a little under half -- roughly half of the economic value pretty quickly because we'll generate margin improvement from existing volume. And then you can think about this asset has really been highly supportive of the growth of CUK. So over the next couple of years, if you're in that kind of traditional 3% type zone, you drive 30, 40 plus 50,000 tons of growth in CUK. This machine will be capable to end up ramping up to being, at some point, fully supportive of CUK, and that would be the long-term goal, as Mike also mentioned earlier. So we'll get a little under half benefits early and then the rest coming over the next couple of years.
That's very helpful, guys. I want to switch gears a little bit. Can you talk a bit about what assumptions you have for inflation currently in your guidance. Obviously, we're not going to hold you to this. You don't have a crystal ball, but what do you have baked in, in terms of inflation, whether it's on recycled fiber, freight and energy? And can you discuss the relative progression net price cost over the quarters and you've given us some directional guidance, if you had any additional color that would be great.
Yes. Thanks, George. I'll kind of back up a little bit to respond to your question and get the details that you're asking for. Overall, the guidance that we're providing in total for EBITDA, at the midpoint is a continuation of our goals of improving EBITDA. At midpoint, it's up 5% a year. And when we step back and look at the year, there's really 3 things that really matter relative to achieving that. And that's successfully earning on our organic growth, that's 100 to 200 basis points, having productivity more than offset labor benefits inflation, which we've got clear line of sight to. And then having our priority in offset commodity input cost inflation over time. And then here, it's a relatively tight band. As you've seen us do, we want any dislocation to be shallow and temporary, and that's really what we've been working hard on for the last couple of years.
In terms of the inflation assumption that's inherent in there, as we talked before, we have about a $2.5 billion commodity input costs stand. And our high level assumption for now is about a 1% to 2% inflation upon that $2.5 billion. And so roughly $25 million to $50 million of inflation is what's inherent in our initial guide, as you were just referencing. We do have some pockets of inflation. Obviously, freight, specifically truck, some resin, some energy, some recent movement in OCC. But when we stand back and look at where we're at, a $25 million to $50 million or 1% to 2% inflation assumption on the $2.5 billion basket feels appropriate to us. Just by way of fact because we've talked about a lot, our entire fiber basket, both hard and softwood and OCC, there's about a $550 million spend.
If we were at pricing where it is today, that actually would be modestly deflationary, even though there's actually been some, obviously, some movement in OCC. Our wood basket is in a very good position on a price basis. And I know you'll recall, OCC ran pretty significantly for about a 4-month period last year, starting in -- primarily in Q2. And the $25 million to $50 million is the inherent assumption there. As such, as you've seen from us, we have a similar assumption around pricing in total.
Pricing is, as you know, more complex than just the market models. We have cost models. We have market models. We have ongoing negotiations that we're always embarked on. We're always working to stop leakage or compress where we can. And when we look through the totality of our pricing initiatives, including pricing that's been recognized as well as pricing that we're executing on currently. And we're assuming some level of success in those endeavors as well, we see a similar $25 million to $50 million range on pricing.
Specifically to your question, we will have some price cost dislocation in the first half of the year. I would expect Q1 of '21 to look a fair amount like Q4, just given that the pricing is coming in. We would then see some improvement in Q2. And then as we articulated in the appendix, a positive price/cost environment in Q3 and Q4. So a lengthy answer, but I know it's important to fill in the blanks. We're certainly encourage you all to come along for the journey of us being a packaging company and us having the ability to offset price commodity input costs over time, keep those compressions short, keep it plus or minus $20 million. That's what we're committed to, but we do want to provide you with some of the facts that you were just asking for.
[Operator Instructions]. Your next question comes from the line of Ghansham Panjabi from Baird.
So Mike, just kind of reconciling all the numbers you laid out by substrate. CUK would be roughly 50% pro forma from a ton standpoint. And CUK is obviously disproportionately beverage. As you sort of raised your organic growth initiatives, is the beverage market where you're seeing the most incremental momentum and foresee that for the next x number of years? And if so, will become an even bigger portion of the end market metrics over time in your opinion?
Yes, so beverage certainly been strong over the last 18 months for sure, and we expect it to be strong again here in 2021. I mean, you can tie that out Ghansham to really all the demand in cans that you're seeing there and every one of those cans for the most part needs a carton. And so we're participating on that side of it, but it's not just limited to beverage. We're also seeing -- I mean that it's a great substrate from a strength and fitness standpoint that really does a nice job on lower caliber profiles for many of our end use customers. And so that's really -- if you go back like we did in 2008, trying to get people comfortable with the fact that this growth is something that has been consistent and a real trend over that 12-year period of time, which gives us the confidence then to make that kind of capital allocation into Texarkana.
I think to your point and where Mike was also discussing earlier is we do see growth in our targeted substrates like SBS on cup with ongoing conversions from foam and plastic into our solutions. Obviously, there's a return to some of the norms post pandemic. But those conversions are still real strong. And as we articulated as well, strength packaging solutions tend to be a great combination of both CUK and even CRB. So it's -- CUK will play a significant role, as Mike said, and then the other substrates, too, are very supportive.
Okay. That's helpful. And then, Steve, I think I heard you mention 100 to 200 basis points of organic growth for 2021. How does that split between, call it, CPG end market as you've been kind of characterizing in your last few earnings calls versus food service? What would you have embedded for 2021? And how do you -- how should we sort of sequence those two end markets as the year unfolds?
Yes. I'll jump in and Mike can add some addition. I think the way we're thinking about it is really our growth platform. So the 3 growth platforms, plastic substitution. The things we've talked about here around strength packaging, around microwave and cooking solutions. They can drive the net 100 to 200 basis points of growth, and we have line of sight to multiple installations and innovation and new business development projects that are really that result in the outcome. We do expect to see some reversion, if you will, from food and beverage coming down from some of the growth rates, food service moving up. But the net of those, as we've discussed before, we don't expect to be net material on a volume basis. Really, it's $100 million to $200 million is driven by the new product development and innovation initiatives.
I think the only other thing I'd add Steve to that is we saw a sequential improvement in foodservice on Q4, which was an important start on inflection, and we'd expect that to continue in 2021. We're not anticipating that we're back to that being a growth platform on a net basis in 2021, but we would expect it to be in 2022. So kind of the portfolio, as we've talked about is very balanced around beverage, food, consumer products and food service. And so we think that gives us a lot of optionality as the consumer comes back, and we learn new habits. I mean it's kind of an unviable trend that there's going to be more work done at home. Well, that's going to have different implications for our food and beverage business long term. It will also add some implications for foodservice. And we think the investments we're making on the substrates Ghansham are really supportive of those kind of structural trends that we're seeing.
Our next question comes from the line of Anthony Pettinari from Citi.
On the operating performance target of $70 million to $90 million, you don't have the boiler projects this year. I'm just wondering if there are any particular projects that you'd highlight as driving a large portion of those operating performance improvements? And then just longer term, I mean, you're transitioning from a company that was really seeing flattish growth to sustain positive growth. How does that kind of change volume profile, change how you think about the potential for operating performance improvements in the future, if it does?
Yes. So in regards to productivity, I'll point to a couple of things. First, our investment in Monroe, Louisiana, our beverage investment in Monroe, Louisiana and Sneek, Netherlands are one is fully ramped and operating on a year-over-year basis. So there'll be positive generation productivity there. And the other is in the early ramp up stages and so -- and that'd be Sneek. We're starting to see some benefits from that. And the mill side of things, in addition to the $20 million of nonrepeating recovery boiler work that you mentioned. Recall that we put a curtain coater on our number 7 paper machine in West Monroe, and that's kind of about a $20 million annualized benefit. And that happened in the August time frame. So we'll get a 3 quarters of a year benefit from that. So a lot of the investments we've made are there, and that's what's really giving us confidence to be at the upper end of that range that we outlined for you.
And in terms of the overall inflection towards growth, I appreciate that question, Anthony. It is -- last year was an exceptional year for us. I mean we had organic growth of 4%. And as we said, look, some of this is going to be a little bit lumpy. Obviously, COVID had some impact on net positives and negatives as we've been outlining this morning. But look, our confidence in our ability to drive that 100 to 200 basis points as part of our Vision 2025 goals that we put out there is high. And that's why we're pointing to that as kind of the target, realizing, of course, that there will be some puts and takes along that journey here relative to how all these consumer trends play out. But what is also true and what we really believe, and I think it's evidenced by the fact that these paperboard markets continue to grow, is that the end-user consumer values fiber-based packaging and sustainability is real as part of their decision-making process around the demands and the products they want to support. And we're positioning our business to be able to really capture a disproportionate amount of that increasing pie as it plays out over the next couple of years.
Okay. That's very helpful. And then just a quick follow-up on the price to commodity cost outlook that you gave. I'm sorry if I missed this, but there are price hikes that have been announced for CUK, CRB, SBS, some of which have been recognized by Pulp and Paper Week, some of which have not, but maybe will be recognized this month. Does the outlook that you gave on price costs, is it just assuming hikes that have been recognized by Pulp and Paper Week? Or are you on the SBS hike? Or are you assuming some of that goes through? Or is there any kind of finer point you can put on that?
Yes, Anthony, as I mentioned just a moment ago, we're assuming some execution, some positive execution from the SBS and the second CRB price increase in that range. And so obviously, it's a range, but we're executing on them, and we expect to have some success there. So if you kind of work through that midpoint of that range, of $37.5 million, that does have some execution, successful execution of things that are in motion as well as other pricing initiatives that we're taking on. One example of that for example is on a go-forward basis, as we're working through contracts with customers, what new initiatives we're bringing forward is that for freight, freight from us to our customers. We'll have 4 openers a year rather than two, for example, so that we're able to capture inflation or deflation on freight faster. So it's those kind of initiatives, along with all of our other activities, that resulted in the guide, the $25 million to $50 million that we've talked about for both price and commodity input cost inflation.
Our next question comes from the line of Kyle White from Deutsche Bank.
I wanted to address the sustainable packaging that you talked about in the total addressable market. I think you said it increased to $7.5 billion. I think before it was around $5 billion. Just kind of curious what drove this increase? Is the plastic substitution opportunity being greater than initially expected? Or is strength packaging a bigger opportunity? Any color you could give there?
Yes. Thanks for the question, Kyle. I mean it's really a combination of all 3 of those things and a little bit more experience and work that we've been able to do in those verticals as we look at the wide range of products that we can actually provide to customers. And I'll give you one specific example that's really helped to expand it. Our work that we're doing with PaperSeal. And I talked about that in my prepared comments for proteins, in particular, we're seeing a lot of traction on that on a global basis. And that's much bigger than we initially thought, and it's one that we'll continue to work towards. Same thing I'd say around pressed trays and bowls. I mean that progress continues to accelerate as we see more and more demand from customers along those lines. So it's really a combination of really looking at those addressable markets with a finer point and doing a little more work around how deep they are and broad they are kind of customer-by-customer basis.
Got it. And my next question, I just wanted to focus in on leverage. This year above 3x, which is above the long-term target you have. Obviously, you have the IP partnership sales that are like upcoming here this year. You also bought a decent amount of your own shares this year. I'm just curious, how do we think about this leverage. Again, when your guidance to being above your long-term target once again for this coming year. How do we think about that in terms of your repurchases that we should expect for the coming year as well?
Yes, Kyle, it's Steve. We really like the flexibility that we have here in 2021, as we mentioned, 3.5x. We have complete flexibility on how best to handle ongoing international paper partnership redemptions, assuming that those occur. So we have flexibility to do so either like we have done with cash or debt or in other forms. And so we really like that flexibility. We have it. It all fits inside of the 3 to 3.5x. And so we've really been borrowing obviously very effectively within that. If you forward beyond it, we are committed to the 2.5 to 3x.
And if you look out to 2022, just by way of example, and you look at where we're guiding this year and you assume the good return on the investments that we're making in round figures in 2022, here at an EBITDA that's in the $1.2 billion range and $400 million of cash capital and another couple of hundred million dollars in interest and taxes and pension, you've got a $600 million cash engine that we can deploy. And obviously, we can put it to work in multiple strategic ways, but that alone, if it were applied to debt is 0.5 turn, roughly. So our confidence in our ability to get back into the 2.5 to 3x range is high. And it gives us flexibility, obviously, to invest further in the business if we choose to.
Our next question comes from the line of Adam Josephson from KeyBanc.
Steve, just a couple of follow-ups. Following up on Kyle's question about leverage. Can you be a little more specific in terms of what you're planning to buy from -- assuming IP puts more of its stake to you this year, call it, $500 million worth. Are you expecting that? And are you expecting to pay with cash or debt or with stock as part of that 3.0 to 3.5x year end target?
Yes. Adam, obviously, we don't know what action IP will take. So we won't hypothesize on that other than the actions that they have taken previously. We won't comment on how we'll do it because really, that's a decision that we'll make when that decision is made based upon other strategic options that are available. You know the math. If we were to -- the 3 to 3.5x at the midpoint of our guidance on the low end of 3 would have one assumption and 3.5 would be another, and it's really that simple. And so we're going to make those decisions as they come. We'll make them when we hear. And then we'll obviously articulate that path forward, but I wouldn't want to presuppose either. We make those decisions once we engage with IP on their strategic intent.
Sure. I appreciate that. And one more, Steve, on the cost inflation. Can you just be a little more specific in terms of the buckets composing that $25 million to $50 million, so you break out in your presentation, obviously, wood, fiber, recycled fiber, nat gas, caustic, et cetera, et cetera. Freight is one that you don't break out, but that's obviously a big component, nonetheless. Can you just talk about what exactly you're expecting from those various buckets? Are you assuming deflation in wood, fiber, for example, is part of that $25 million to $50 million?
Yes. We really take a more holistic view than that. I mean, we have a $2.5 billion spend. We see inflation happening in certain categories, they're well chronicled. We do expect truck inflation. It's 10% of that is in the areas of truck. Could that inflate 5% to 8%, clearly based upon what we're seeing relative to the market. That being said, spot rates are down. As I mentioned earlier, wood costs are currently down. We don't assume those necessarily will stay down, but currently, today, they are. Obviously, we know and it's well chronicled, where there are some pockets of inflation in resin and chemicals. So we really look at it as a true basket of costs. We think the 1% to 2% range is appropriate knowing where we're experiencing inflation currently as well as where we have pockets of modest deflation obviously, OCC moved up more recently. That certainly could move up further, and that's within the guide that we're providing. So I think we're really trying to not move away from this specific $5, $10 type move, but the basket of commodity input costs at 1% to 2%, we believe, is a very prudent and practical assumption here in February based upon all that we know and all that we're negotiating with our suppliers.
Your next question comes from the line of Arun Viswanathan from RBC Capital Markets.
Congratulations on the progress in '20. I guess I just wanted to ask first on the long-term growth rate. You discussed a little bit larger addressable market for some of these sustainable products now at $7.5 billion for the conversion. What do you think that -- what would you estimate that adds to your organic growth profile? Is that maybe 50 basis points? And does that also imply that maybe over the next couple of years, you could see that accelerate above the 1% to 2% range that you're considering right now?
Yes. Thanks, Arun. Look, I think what it really does, it gives us a lot of confidence in the 100 to 200 basis points that we're talking about right now. And of course, last year, as I mentioned earlier, a great year at 4%. And there was some dislocations that helped us obviously drive that. And so as we kind of look forward here, we've got a steady backlog of -- in growing backlog, quite frankly, projects that are in each one of those 3 growth platforms that we've outlined for you here. So I think, look, we want to get into 2021, see how things are doing. So how the economy opens up in a post vaccine world and probably by midyear, we'll be in a position where we can talk a little bit more clearly around kind of how that all plays out. But for now, just the walkaway should be, we've got confidence in the 100 to 200 basis points of a challenging comp in 2020 to be fair. So that's a pretty solid outcome for Graphic.
Okay. And then also just a quick question on the cadence of your price cost outlook. It sounds like you expect that to switch positive in the back half of '21. Could you just walk us through some of the assumptions there? Is that dependent on getting further price in CRB and SBS? Or is it more a result of inflationary pressures subsiding?
Yes. Arun, I think we've touched on that previously. We are assuming some successful execution on the SBS and CRB. That would be at the midpoint of the guide there that we're providing. We've obviously been successful in CUK and CRB already, and that's assumed in there as well. And so it's -- as we've talked earlier that, that's when the pivot will occur with more positive net pricing as we lap beyond the reductions that occurred early in '20.
And then just lastly, on Capex, it looks like you're calling for a $300 million reduction in '22. Are there any other projects like Texarkana or anything that you envision coming up? Or are you pretty confident in that reduction of CapEx and a subsequent increase in free cash flow?
Yes. Thanks for that. Look, I think as we said, our target as part of Vision 2025 is around 5% of sales, and will approach $7 billion in sales here this year with guide that we gave you. So that's kind of a 350-ish number. We had a little carryover for Texarkana and CRB in Kalamazoo that we've got in that 400 number for next year. But we like our profile and the investments we've made. We think we've outlined them really well, and that's a good guide for what we know to be true at this time.
Your next question comes from the line of Mark Weintraub from Seaport Global.
A question on IntegraFlute. Does that give the capability potentially for it to be a box that gets delivered straight to the consumer through the e-commerce channel?
Yes. Thanks, Mark. It does. And that's one of the reasons why we want to profile it. We've got a number of customers in certain verticals, not all, that are interested in that as well. And one of the tailwinds we're seeing around paperboard there just the printing capabilities and the ability to merchandise the material. Of course, it's got a tertiary packaging reduction implication for it. At the same time, where that -- corrugated boxes have gone up in price. So we've got a number of customers that are pretty interested in taking a look at that for us. To be fair, it's -- we're not trying to point to say that's going to be a massive source of growth, but it's another base that adds to our totals here relative to the other platforms that we've got, we're pretty excited about that.
And so would it be effectively replacing the corrugated box and giving marketing capability? Or are there situations where you already have a package that is in...
So why don't I speak to that particular product? I mean, that particular product is in multiwall flexible bag. And so in a corrugated case, and now it's going to be in a carton with an aligner that we put inside the package. So there is a source of production there. And those are the types of things that we're looking at that -- where we can play a role where we've got kind of unique value proposition for the end-use customer and consumer.
And then in the past, you've given us -- you bracketed, for instance, KeelClip, what you thought that could potentially engender in volume growth. And any early estimates on IntegraFlute and products like this?
Yes, as I said, that's one that's going to be a smaller component of our 100 to 200 basis points, but every basis helps. And we continue to find more opportunities to find those abilities to drive that organic growth, and that's what really gives us the confidence in that 100 to 200 basis points mark.
I know we're going to call it here in a moment. Our apologies for not being able to get to everybody today. We had a lot to cover, but we'll make sure we have appropriate follow-ups.
Okay. Thank you for joining us on our call today. Momentum is strong in our business, and we are well positioned for another growth here in 2021. We look forward to updating you next quarter with our progress on our Vision 2025 goals. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.