George Staphos: All right. Thanks, Mike. I don’t want to turn this into kind of an algebra class, but when I do some rough math on East Angus, Middletown and Tama and look at the slide deck and also make a conversion for metric to short ton. It seems like Waco adds about 550,000 short tons, if I did the math right. Would you agree with that? And if so, it seems like the profit per ton is a bit more $20, $30 versus K2. Could you talk to that? And if it is higher, why would that be the case?
Stephen Scherger: Yes, George, it’s Steve. I’ll start, and Mike can add on as well. But you got it correct. The Waco investment 550,000 short tons addition the assumption as you see in the slide, the cumulative capacity of the other three facilities that are the higher cost facilities are 350,000 tons across Middletown, East Angus and Tama. And so that’s the net incremental 200. Obviously, that can move over the years, dependent upon the growth profile, the supply-demand environment from what they’re doing, but that’s the math that you’re seeing there. And yes, we’re seeing a slightly higher net improvement because of the singularity of this investment if you will, in terms of its ability to kind of stand on its own. And with some of the incremental investments that Mike was talking about on recovery and energy production and the like, I said again.
Michael Doss: No, that’s right.
Stephen Scherger: So again, fiber costs will be a little lower in the aggregate here because of the capabilities we have George, in internalizing some of that material. We’re just not getting much money for right now in the export markets. So like I said, that’s a pickup for us there. From cost standpoint also from a sustainability standpoint, which we’re quite excited about. And the other part of that is making our own electricity with our own steam, and that’s going to lower the overall cost. So you’re thinking about it the right.
George Staphos: Okay guys, I will turn it over. Thanks very much.
Michael Doss: Thanks, George.
Operator: I’ll turn to Kyle White from Deutsche Bank. Your line is open.
Kyle White: Hey, good morning. Thanks for taking the question. A lot of investors are concerned that pricing for your paperboard grades will begin to roll over as this happened in other markets. Looks like backlogs came down just a touch, but remain pretty healthy. I guess, what do you say when asked about this standpoint and environment, do you see any increased competition in any of your markets with any kind of discounting taking place?
Michael Doss: So Kyle, as you know overall capacity based on what’s been publicly announced is going to be relatively flat over the next couple of years for sure. And then there’s some ads that happen into 2025, 2026. But if you just take a step back and look at what we are talking about at Graphic Packaging, which is what I’ll talk about, speak to, we expect our volumes to grow in 2023, meaning we’re going to need more paperboard. And so we expect those markets to remain . Our backlogs are solid as we reported here, and that’s our expectation going forward.
Kyle White: And then on the cost, you increased the range by quite a bit on the commodity cost bucket relative to the preliminary outlook last quarter. What was kind of the reasoning behind this? You talked about a little bit, but what was, where do you see the most uncertainty and costs that could see the most inflation throughout the year that caused you to increase this range?
Stephen Scherger: Yes, Kyle. It’s Steve. I mean, I think we’re just being prudent to, if you look back over the last two years, we’ve seen hundreds of millions of dollars of inflation come at the business in short order at times. And you’ve seen very high volatility in cost categories like nat gas, like recycled fiber. And so we’re just looking at this saying, listen, we don’t know where it will land. We think the 100 to 400 is a good assumption. I just provided the mark-to-market a little bit earlier, which is on the lower end. But could you see some reinflation in the back half of the year? Is that plausible? And certainly we don’t have a point of view on it, but we’re recognizing that it is in fact plausible. And if it occurs, then we’ll take appropriate price action to recover. But we’re just trying to be mindful of the fact that we’ve been for now over two years, operating in a pretty volatile commodity input cost environment.
Michael Doss: I mean, if you think about it, Kyle, just to build on that, I mean, if someone would’ve told us in August we’d have $2.50 mmbtu nat gas, I don’t know if you would’ve believed it either. So I mean, things can move around in a hurry, based on geopolitical things and other events. And a couple of the analysts on the call have actually wrote about reinflation in the second half of this year. So I think it’s prudent to be a bit conservative here in terms of how we’re looking at it because as Steve said, we just don’t know for sure.
Stephen Scherger: And Kyle to that, just to round that out.
Kyle White: Yes. Sounds good. I’ll turn it over.
Stephen Scherger: Yes. Thanks, Kyle.
Michael Doss: Thank you.
Operator: We now turn to Adam Samuelson from Goldman Sachs. Your line is open.
Adam Samuelson: Yes. Thank you. Good morning, everyone.
Michael Doss: Hi, Adam.
Adam Samuelson: So I guess, hi. So I wanted to come back to the Waco investment and just, I mean, talk about a 12% kind of return on cash return and 11% ROIC. And I’m just trying to get a sense of how you’ve risk adjusted that versus your cost of capital for the size of the project and alternative uses of capital in terms of buying whether it’s buying stock or M&A which obviously delivers earnings on a much shorter order, just would seem like the spread versus the cost of capital for sizeable project doesn’t have a big project risk premium in there. I just want to make sure how you are viewing that?
Michael Doss: Yes. Thanks for the question, Adam. So first off, you know, part of how we derisk the project is the experience and the knowledge we have coming out of K2. So I’ll start with that. I mean, as I mentioned in my prepared remarks, this is an identical machine, the one we just got done building. So all the engineering is done. If you think about the operating system on this machine, it’ll be all debugged by the time we lift and shift it down to Waco, so all those things really give us confidence in our ability to have a vertical ramp. And I think you’d actually have to agree our ramp in Kalamazoo and then 11 month fashion getting up to full run rate. I’ve exceeded most people’s expectations, including mine, which were high.
And so I think if you think about it in those terms, that’s that gives us confidence in the project. Having said that, I think the other thing you’ve got to factor into an investment like a mill like this is, a three decade plus, a type investment. And one other benefit about CRB versus some of the virgin stuff is the ongoing capital requirements to run a CRB mill are much lower than that of a virgin mill because you don’t have all the pulping and backend things that you got to deal with. So the drop through on that 160 once, we’re at full run rate is pretty large. And, our stakeholders and investors will be the beneficiaries of that kind of cash dropping through each and every year, just like they were, if you recall when we talked about, when we did K2, what we saw in K1, it had been running for three decades thrown off a $100 million of cash for $120 million investment.
So that’s how we think about it in a high level capital allocation. You’re right, there’s things like, acquisitions that you could do that could have a little bit more immediate, but they come with risk too, as we know in a situation in the macro like we’re dealing with right now. But we’ve done all of those. I mean, if you think about the AR deal we did, it was winner for us. Synergies are on track. We’re growing our topline there. We have done buybacks in the past, if you go back to 2015 almost a $1 billion of buybacks that we’ve done over that period of time. So we look at it as truly a balance capital allocation process. And we think this one is a real winner for our shareholders.
