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Graphic Packaging Holding Company (NYSE:GPK)
Q3 2021 Earnings Call
Oct 26, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to the Graphic Packaging Third Quarter 2021 Earnings Call. My name is Harry, and I'll be your operator today. [Operator Instructions]

I'll now hand the call over to your host, Vice President of Investor Relations, Melanie Skijus. Melanie, please go ahead.

Melanie Skijus -- Vice President, Investor Relations

Good morning, and welcome to Graphic Packaging Holding Company's third quarter 2021 earnings call. Joining us on our call today are 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 will be referencing our third quarter earnings presentation, which can be accessed through the webcast via self-directed slides and also on the Investors' section of our website at www.graphicpkg.com. Before I turn the call over to Mike, let me remind you that today's press release and a presentation made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks, and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties and include, but are not limited to, the factors identified in the beliefs and in our filings with the Securities and Exchange Commission.

Now, let me turn the call over to Mike.

Michael P. Doss -- President and Chief Executive Officer

Thank you, Melanie. Good morning to everyone joining us on the call and webcast this morning. Our performance in the quarter was strong. We successfully navigated a complex supply chain and labor environment, we raised prices where necessary to offset accelerated commodity input cost inflation, we received the required regulatory approvals for our AR Packaging acquisition and made significant strides toward completion of our transformational CRB platform optimization process. All of these accomplishments are aligned with the goals we established with Vision 2025, and have us on track to meet or exceed our long-term aspirations for the business.

Demand for more sustainable and circular packaging options continues to accelerate globally. The ongoing evolution to practice and promote more environmentally responsible behaviors is evidenced by the increasing number of new pledges made by global corporations to eliminate waste and increase the focus on recyclability, all supportive of commitments to lowering carbon footprints. Examples include proactive announcements by retailers around the world moving to minimize the impact that packaging has on our planet. Consumers are making their preferences known and companies that are serving them are responding.

The fiber-based packaging solutions we are developing and the role we play in providing consumers with packaging choices to promote a more sustainable and circular economy provide our employees with an immense sense of pride. This shows through our continued innovation and new product development initiatives along with service levels we provide our customers in today's very challenging supply and labor environment. We established Vision 2025 in September of 2019 and have demonstrated a very real pivot to organic growth since that time. While Q3 organic sales declined slightly, we still expect to deliver organic sales growth in 2021 at the high end of our 100 to 200 basis points annual target on top of the 4% organic growth we generated in 2020.

On Slide 3, let me cover additional highlights from the third quarter. We have been successful in positioning the company to capture growth opportunities in this very strong demand environment. We are growing with existing customers while ramping up with new ones in new markets. Momentum for fiber-based consumer packaging solutions is materializing at a time when we are experiencing unprecedented inflation, supply chain bottlenecks, and labor market challenges. We estimate that the constraints in supply and labor markets resulted in approximately $25 million in delayed sales in the third quarter.

We delivered strong adjusted EBITDA growth of $284 million, up 14% year-over-year. EBITDA growth was driven by positive price realization of $53 million and favorable net performance of $79 million, which offset unprecedented commodity input cost inflation of $88 million experienced in the quarter. The current environment with all its twist and turns is not deterring us from the focus on meeting or exceeding our Vision 2025 goals, and capturing global demand for sustainable packaging solutions. Our dedicated teams are working tirelessly to keep customers in supply while backlogs remain elevated across all our paperboard substrates.

As a result of the continued inflation in commodity input costs, we have taken swift pricing actions to recover the price cost dislocation we are experiencing this year. We committed the unit price would offset commodity input costs over time and that any dislocation would be short-lived, we are delivering on that promise. As we have discussed with you over the past several quarters, we have implemented a number of initiatives to reduce pricing and recovery lags with customers and have been negotiating positive modifications of other business terms. While the inflation we are experiencing this year is one for the history books, we are doing what we said we would do. Approximately $650 million in pricing initiatives have been implemented and will be recognized over the 2021 and 2022 time horizon.

We recently published our latest comprehensive ESG report. In it, we outlined the many initiatives underway to further drive sustainability across operations and innovation and product development with the end customer in mind. We intend to continue to invest in innovation and promote progress and sustainability to support the migration to a more circular economy. 10 months earlier we have been pursuing the required regulatory approvals for the AR Packaging acquisition we announced in May of this year. I'm pleased to report that we have received the final necessarily regulatory approvals this month and we are working toward a November 1st close. In addition, our CRB platform optimization project remains on track for a start-up of coated recycled paperboard production on our K2 machine in the fourth quarter.

Turning now to Slide 4, you will see the innovation powerhouse that the combination of AR Packaging will create where the large distributed footprint of AR Packaging, it's 25 converting facilities across Eastern and Western Europe add significant scale and cost-efficiency benefits. The completion of this transformational acquisition extends our global reach, expands our service offerings, and advances our commitment to sustainable packaging solutions for customers around the world. We intend to share our growth plans and milestones for the integration of AR Packaging along with an update on Vision 2025 when we report our fourth quarter and full year 2021 results. We will do this at an Investor Meeting on February 17th in New York City where we look forward to hosting many of you in person, while also providing a webcast for those of you who will need to attend remotely.

Turning to Slide 5. In a second extremely impactful and well-time strategic initiative, you can see the picture of our new state-of-the-art K2 CRB machine. Our team is executing a significant investment in our paperboard capabilities. The build-out and start-up of the K2 machine in Kalamazoo, Michigan is the largest component of our CRB platform optimization project, and we are on track for paperboard production to begin in the fourth quarter. We are well into the operational readiness space, we have our teams in place, and we are completing the most extensive training effort in our company's history. We look forward to bringing this world-class, lower-cost, higher-quality CRB platform investment to light over the coming quarters, working with our customers to grow their commitment to the recycled fiber-based solutions while generating the returns we are committed to achieving.

Turning to Slide 6, I will provide a few additional remarks on the current environment for pricing and the positive momentum we have to offset historically high commodity input cost inflation. We have executed $63 million, a positive price that is flowing through the business over the first nine months of 2021, and we expect to realize approximately $77 million of positive pricing during the fourth quarter. We're currently targeting $510 million of pricing in 2022 based on implemented and recognized pricing initiatives. The price actions are intended to fully offset the inflation we are experiencing across a wide array of commodity input costs. In total, at this point, we expect to execute approximately $650 million in price actions over the 2021 and 2022 time horizon.

As I have shared today, global demand for fiber-based packaging solutions continues to grow. On Slide 7, let me touch on the steady and consistent nature of the value paperboard substrates have earned over time. Over the 15-year period captured here, you can see the steady but increasing pricing for our paperboard substrates. This can be interpreted to a healthy underlying demand for paperboard solutions, supply levels required to meet customer demand, and the introduction of new packaging solutions driving growth in existing and new addressable markets.

Before I turn the call over to Steve for a more in-depth discussion of our financials and guidance, I'd like to take a minute on Slide 8 to reflect on the organic growth we've generated since 2019. We surpassed our net organic sales growth goal in 2020 delivering 4% growth, and we expect to deliver at the high end of our targeted 100 to 200 basis points goal this year. Notably, this year's expected net organic growth of approximately 200 basis points reflects growth on top of the very strong growth we drove in 2020. The year-to-date picture on the slide tells the same story. Net organic sales have experienced growth of 2% compared to the same period in 2020, and the two-year compounded annual growth rate for organic sales since 2019 is 3%. This trajectory is consistent with our organic growth expectations for the business as we continue to see conversions to fiber-based packaging solutions.

We have positioned the company to capture growth opportunities in the years ahead, and we've accomplished a great deal so far this year. We look forward to closing the acquisition of AR Packaging in the next week, and we look forward to closing the acquisition of AR Packaging in the last week, and the start-up of our K2 machine in the fourth quarter. Simply put, we're running a different race. The strategic priorities we are focused on and executing are redefining our leadership in the industry.

With that, I will now turn the call over to Steve.

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Thanks, Mike, and good morning. Moving to Slide 9, focused on key financial highlights. Net sales increased 5% or $84 million from the prior year period to $1.8 billion. The year-over-year increase in sales was driven by higher pricing flowing through the business and acquisitions. Adjusted EBITDA increased 14% to $284 million resulting in an improved adjusted EBITDA margin of 15.9%. Adjusted earnings per share grew 31% to $0.34 a share. Finally, our integration rate increased to 73% as we continue to internalize all paperboard into our converting operations.

On Slide 10 and 11, you'll see our revenue and EBITDA waterfalls. The drivers of the 5% year-over-year increase in sales were $53 million in pricing, $20 million of higher volume mix and $11 million of favorable foreign exchange. Adjusted EBITDA increased $34 million or 14% year-over-year to $284 million in the third quarter versus the prior year period. The increase is low given accelerated commodity input cost inflation that materialized in the quarter. Adjusted EBITDA growth was driven by $53 million in price, $3 million in volume mix, and $79 million in improved net productivity. Adjusted EBITDA was unfavorably impacted by $88 million of commodity input cost inflation, and $13 million of labor, benefits, and other inflation.

On Slide 12, you will find additional financial and market detail. Our foodservice business continue to recover from last year, growing 11% year-over-year. Our food, beverage, and consumer sales improved 3% including acquisitions. 9 point to $25 million in delayed sales resulting from supply chain and labor market constraints during the quarter. All the supply chain bottlenecks impacted all areas of our business. Labor availability challenges are more specific to our foodservice business as we continue to ramp up production from the declines experienced in 2020. Without these delayed sales, net organic sales growth would have been flat for the quarter, in line with our expectations.

AF&PA industry operating rates were strong again in the third quarter. CRB was 95% while SBS improved sequentially and was 96% at the end of the quarter. Our CUK operating rate continue to be well about 95%. These operating rates reflect the strong demand environment for paperboard. AF&PA third quarter data also showed continued declines in industry inventory levels with balances at multi-year levels. Backlogs were elevated at eight-plus weeks across CUK and CRB and on the six-plus weeks in SBS.

We ended the quarter with net leverage of 3.97 times. I will discuss our cash generation expectations with you shortly. We have clear line of sight to bring leverage down to 3.5 times or lower at the end of 2022, after leverage peaks in the fourth quarter due to the financing for AR Packaging acquisition. Global liquidity was $1.8 billion at the end of the third quarter. Importantly, after we found and complete the AR Packaging acquisition, our global liquidity will remain substantial with approximately $1 billion available.

Turning now to full year 2021 guidance on Slide 13. We've updated guidance to reflect additional price actions, higher commodity input cost inflation, higher net performance, and the assumption AR Packaging as part of our business effective November 1. 2021 adjusted EBITDA is projected to be in a range of $1.04 billion $1.06 billion. The largest important of the EBITDA guidance change is the accelerated commodity input cost inflation occurring in the second half 2021. As Mike mentioned, we are actively taking the price actions necessary to offset this increased level of inflation.

We anticipate cash flow will be in the range of $100 million to $150 million for the year. Capital spending has increased modestly driven by inflation across raw materials and the labor required to complete critical strategic projects on time.

On Slide 15, I will wrap-up my prepared remarks and look into 2022. We continue to be very confident. In the guard rails we provided last quarter for adjusted EBITDA in the $1.4 billion-plus range. Importantly, on this slide, you can see the components and the walk through the substantial estimated EBITDA growth we will be driving next year. AR Packaging and Americraft are expected to contribute $160 million and $30 million before synergies respectively. For the base business, it is reasonable to assume at least $20 million from our traditional EBITDA drivers of volume mix and net performance, more than offsetting labor, benefits, other inflation, and FX. The first $50 million of incremental EBITDA from our Kalamazoo project and a minimum recovery of $170 million of 2021 price cost dislocation provided a clear step-change higher to adjusted EBITDA of $1.4 billion-plus in 2022.

The significant expected growth in EBITDA coupled with our commitment to meaningfully lower capital expenditure next year following the large capital project to Kalamazoo, result in significant cash flow generation. The material EBITDA growth and cash flow generation projections give us line of sight to year-end 2022 leverage at 3.5 times or lower. We look forward to providing you with more detailed 2022 guidance when we meet with you in February.

Thank you for your time this morning. I would now turn the call back to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Mark Wilde of the Bank of Montreal. Mark, your line is open now if you'd like to proceed with your question. I'm afraid we're basically having some connection issues with Mark Wilde there. I'll move on to our next question who is -- which is from Mark Weintraub from Seaport Research Partners. Mark, your line is now open if you'd like to proceed with your question.

Mark Weintraub -- Seaport Research Partners -- Analyst

Thank you. Last quarter, I believe you had indicated that the rollover impact from inflation at that point in time to '22, you would have gauged at roughly $50 million to 75 million, if I remember correctly. If you were to update that number today, where would it stand?

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Hey, Mark, it's Steve. Good morning. Yeah. So we've updated obviously for this year the inflation now at midpoint of $310 million and the rollover effect is in the $100 million to $125 million range, assuming everything stays as is. And so the cumulative two-year inflation right now is in the $400 million to $425 million range. Obviously, we shared with you today that our cumulative price activity over that same period of time is the $650 million that we shared with you today.

Mark Weintraub -- Seaport Research Partners -- Analyst

Okay. Great. And so, just to make sure I fully understand that. So I think you had -- just trying to get, here we go. So you talked about $510 million on the pricing side for 2022 recognizing that there certainly can be a lot more inflation or not from where we are today. If we think about the price cost, if things were to be fixed today, can we take the $510 million and subtract the $100 million to $125 million and that would be a starting number for 2022, again recognizing that we can get more inflation from here. Is that fair or am I missing something?

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Well, I think the way you want to make sure you think about it, Mark, is we have very clear line $510 million of pricing next year, based upon known and recognized activity. That's roughly $250 a ton across the three primary substrates along with our cost models. And so, then if you compare that of course to the flow-through on inflation, you've got $310 million this year, another $100 million to $125 million next year leading into the low-fours. So we need to and what we committed to on the slide with the -- to the $1.4 billion-plus is that we'll first recover the $170 million of dislocation this year, and then whatever inflation comes next year obviously, we have plans in place to recover that as well. The $100 million to $125 million is what would be known carry over today. Does that give it to you specifically?

Mark Weintraub -- Seaport Research Partners -- Analyst

That does. Thank you. Thank you very much.

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

You bet.

Mark Weintraub -- Seaport Research Partners -- Analyst

Okay, great. And just lastly if I could, level of confidence in getting that $510 million on pricing, is that pretty contractually established? How much work is needed to achieve bringing those numbers to the bottom line? What level of confidence should investors have about that at this point?

Michael P. Doss -- President and Chief Executive Officer

Yeah. Good morning, Mark. It's Mike. We usually have a high level of confidence in this. This is contractually driven, these are multi-year contracts, so it's flowing through in execution of the contractual terms of those agreements.

Mark Weintraub -- Seaport Research Partners -- Analyst

Super. Appreciate it.

Michael P. Doss -- President and Chief Executive Officer

Thank you, Mark.

Operator

Thank you, Mark, and our next question will be coming from Ghansham Panjabi. Ghansham, your line is open now if you'd like to proceed with your question.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Yeah. Thank you. Good morning, everybody. Just as a follow-up to Mark's question, can you comment on the velocity of inflation that you're seeing at current versus as you kind of get granular with the various constituents, I know there's a lot going on with OCC, freight, labor, and random shocks like the China curtailments that are impacting other industries. But at this point, are you starting to see a plateauing sequentially?

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Yeah. Good morning, Ghansham. I'll start. This is Steve and Mike can add on. I think, certainly what we saw throughout the quarter was an acceleration of inflation. And as we talked during the quarter on the occasions where we had the opportunity to do so, when we saw more inflation, we took more pricing action. And it kind of flowed through in the incremental $100 million of inflation from the last time that we spoke, and it was pretty widespread. I mean that $100 million, half of it is well chronicled relative to chemicals, energy, resin all moving up. We also saw OCC move up. That was another significant part of the $100 million and then, of course, the ongoing challenges on the logistics front just in terms of rates for truck, rail as well as oceans.

So we kind of move through $120 million that we're guiding to for Q4 is representative of what we're seeing today. And obviously, we don't try to hypothesize whether they'll move up or down from here. Mike, anything you want to add to that?

Michael P. Doss -- President and Chief Executive Officer

No, I think the -- what you've seen Ghansham is that like on OCC it's kind of volume it went up 11 months in a row and in the last couple of months it's kind of peak. And so we watch those kind of things but as Steve said, it's pretty difficult to try to forecast out what inflation is going to do. As you know, it seems like every month there is a new commodity that somehow gets challenged. And so we're dealing with those things. And I think the point that investors should look at here, as Steve has outlined, is with pricing actions we've taken, we're at a really good spot relative to how inflation develops as we go into next year, both in terms of the carryover and additional inflation that we could incur. And as we've demonstrated here, since our second quarter call, when we see more inflation we will take more pricing actions to offset them.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Okay, that's very helpful. Thank you for that. And then for my second question, every inflation cycle customers start to mitigate price increases to consumers by reducing packaging size and also decontenting material to some extent. How do you see that dynamic playing out in the current inflation cycle which is much more severe in the magnitude, and do you see the lightweighting in the packaging side shift as a volume risk for you in 2022? Thanks so much.

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Yeah, thanks for that question. I appreciate it. I think if you look at packaging in general across a wide swath of different packaging mediums, they're all inflating at relatively similar rates. And so the substitution piece of that is going to be pretty minimal based on how we see it. iIn terms of lightweighting and your packaging optimization, those are things that we deal with, with our customers all the time and will actually create some opportunities for us, particularly on the fiber-based side. So we would actually see that probably as more of an opportunity than a threat going forward.

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

Okay, great. Thanks so much.

Michael P. Doss -- President and Chief Executive Officer

Yeah. Thanks, Ghansham.

Operator

Thank you, Ghansham. Our next question comes from George Staphos from Bank of America. George, your line will be open now if you would like to proceed with your question.

George Staphos -- Bank of America -- Anlayst

Thanks very much. Hi, guys. Good morning. Thanks for all the details. I wanted to hit some -- two questions. Generally one on volume and then the other on Kalamazoo. So in terms of volume, you documented pretty well in terms of what was affecting you in the third quarter of the lost revenue, a lot of that effect hitting you in foodservice. What comfort do you have that the supply chain issues and labor issues that were affecting you will moderate here such that volume should be as expected in the fourth quarter? And aside from foodservice can you talk a bit about where you're seeing particular strength for your products especially the new products, Mike? And I ask that partly with some content recently that I've seen where one of the major QSR changes is moving from a poly coated paper cup back to plastic, so where do you stand with your defense of that with a PLA-coated cup?

Michael P. Doss -- President and Chief Executive Officer

Yeah. So, thanks for that, George. I think if you kind of take a step back and we've kind of outlined this a little bit in our prepared comments, but it's good to spend a little bit of time on it too. Year-to-date through the second quarter, we saw our volumes up 3% across the board. And as you recall, we reiterated at that point in time that we'd be at the high end of our 100 to 200 basis points. So, as Steve mentioned in his comments, we actually saw a little bit of this coming in Q3 and anticipated it relative to the guide that we gave on the second quarter.

There are really four things that hit us in the quarter relative to organic volumes being down 1%. First, and you've seen this from a number of our customers that have already released, our customers were having some challenges with their supply chains and obviously they don't make a package. We don't sell a box. And so there was some of that going on. So labor ability -- availability on the foodservice side of our end-use markets as well has been pretty well chronicled.

And in our case, to ramp foodservice is just a -- we had to add over 200 people back. And if you think about when the pandemic hit, we actually had to rightsize that business real quick and we did, but as volumes are coming -- comes back in a strong way like we saw them happen here in the second and third quarter, adding that many people in a rapid-fire fashion just isn't easy in this environment. So our labor issues are fairly discrete in our foodservice business. Yes, we see it going across our platform. But in terms of the impact on volumes, it would have been in the foodservice business. So we have the demand, the issue is getting the people there so we can actually execute, and we've made some progress in our third quarter as we go into the fourth quarter, so that's part of the comfort that you hear from me.

We also launched the facility for about two months in the Northeast. As a part of Hurricane Ida, it's just got flooded out. And so we had to move all that volume around and that costs a little bit of sales in the quarter. And then lastly, some of the open market paperboard that we buy in Europe just became difficult to get in some cases. And so that's why it is down a little bit in the European platform. Again, we have plenty of demand, the issue is getting the materials that we need in order to process them and actually get them out the door. So when you put that all together, we see some of those things abating as I mentioned as we're in the fourth quarter here, and we expect to return more toward that higher part of that 100 to 200 basis points to finish the year strong.

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

And George just to add to Mike's point around the momentum on the innovation front, I mean overall our momentum for fiber-based conversions whether it's foam cups continuing to convert over to fiber-based solutions, or KeelClip solutions in Europe expanding globally, or PaperSeal solution gaining significant traction around meats and cheese is another perimeter of the store activities, those items as we've talked quite a bit give us confidence that the 100 to 200 basis points of organic growth that we've experienced over the last few years will continue as we move into 2022.

George Staphos -- Bank of America -- Anlayst

Okay. I guess, the -- I was hoping maybe if you had a quick update on PLA coated cups. If you have, well maybe you'll save it for the analyst presentation in February. And then my second question just quickly. With Kalamazoo coming up quickly, congratulations on that being on track and earlier frankly than your initial budgeting in guidance. There has been some reports about the reaction in the community to the growth of the Kalamazoo project.

Can you comment how you're being received in the community? There's also been some discussion about your tax benefits that you're getting in the facility. Anything that we should be aware of in terms of how that project will drive return in growth for Graphic going forward? Thank you, guys.

Michael P. Doss -- President and Chief Executive Officer

Yeah. So thanks for the question. I'll deal with the mentioned Kalamazoo here in terms of our project. Yeah, we're on -- we're actually on our original schedule. We expect to make paperboard here in the Q4 toward the end of the quarter. And it's important that we do, because we absolutely need that paperboard to operate our business. We've got a lot of demand, customers that we actually need that tonnage coming online.

Relative to some of the reports that's come out around some of the order complaints that I was referencing. I'd characterize those as kind of normal course. We're dealing with those through normal channels. And there is really from a return standpoint on the project we're investing well over $600 million. As you know, it's a state-of-the-art facility and it will have the capability to be a great citizen in that community and ultimately drive the jobs and additional production that we committed to when we started.

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

And George very briefly, out of the cycle, we like the customer trialing that's going on. We've got good momentum that we'll share more with you as we kind of embark around into 2022. I'm sure we'll talk about that specifically when we describe our overall innovation efforts when we'll together February 17th.

George Staphos -- Bank of America -- Anlayst

Sounds good. Thanks guys. Good luck in the quarter.

Michael P. Doss -- President and Chief Executive Officer

Thank you, George.

Operator

Thank you, George. Our next question is from Mark Wilde from Bank of Montreal. Mark, your line is now open. Please proceed with your question.

Mark Wilde -- BMO Capital Markets -- Analyst

Yeah. Good morning, Mike. Good morning, Steve.

Michael P. Doss -- President and Chief Executive Officer

Hey, Mark.

Mark Wilde -- BMO Capital Markets -- Analyst

Mike, I just wanted to start, if you could help us just unpack what's going on here in the current quarter market over the last three to six months, because it's really been a very sharp turn in the market. Just trying to get some sense of how you understand it, that pickup in domestic demand, that perhaps set against maybe some difficulties bringing imported bleach powder imported kind of CRB into the market?

Michael P. Doss -- President and Chief Executive Officer

Yeah, thanks for that, Mark. I think you've answered part of it. I would also add, as you know in 2019 and early 2020, there was some capacity taken out of the market. One of our competitors shut-in their mill down. The other one shut a paper machine down. We obviously shut down a small recycled paperboard mill in conjunction with our project in Kalamazoo.

And at the same time, you've got strong demand. I mean, take a look at our demand. We're up compounded 3% on volumes and over that two-year period of time. We've got a high market share as you know, approaching 40%. And so, when you look at some of the dislocations and shipping challenges that some of the importers who we'd to deal with, that has created a real desire for domestic production and the operating rates being above 95%, in some cases 97%, backlogs at multi-year highs.

And industry inventories, as Steve mentioned in his prepared comments really now across all three grades. And so, that's really the dynamic that is going on and again why our start-up of our mill in Kalamazoo is so strategic. The timing of it just couldn't be better relative to the demand we see out there, because we'll have tons that we'll be able to help our customers to meet their objectives. And this would be some of the highest quality, lowest cost CRB tons in the world.

So we like that project better today than we did when we announced it. We like them when we announced it. So I think that gives you a little color on what we see here.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. And then just a couple of questions around Europe. Last year you had some delayed machine placements. I'm curious about how you sit on that? And then the impact of these European energy price spikes either on your existing business as well as on the AR business?

Michael P. Doss -- President and Chief Executive Officer

Yeah, thanks for that Mark. In terms of our machine placements, they are going along well. We're able to get our technicians in now I think on KeelClip side, we're up to almost 60 machines that we've placed and are installed and operational and that's on top of other machines that do wraps and baskets. It's just general movement there on the beverage side out of plastics and into Paperboard.

So that's been a real source of growth for us this year. In regards to energy rates in Europe, as you know, we're converting only over there even with AR Packaging that converting only. So the actual impact from nat gas on our direct operations is relatively small. Obviously, we buy the Paperboard and you've seen kind of rapid-fire launch of increases in surcharges that have gone up by European producers on that material.

And the way our contracts where you, those will be pass along that we take on to the increases there as we talked about when we announced the deal with AR. Those tenders tend to be a shorter duration and have more frequent openers because the vast majority of people who may folding cartons in Europe are not integrated.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay, that's helpful. I'll turn it over. Thanks, Mike.

Michael P. Doss -- President and Chief Executive Officer

Thanks, Mark.

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Thanks, Mark.

Operator

Thank you very much, Mark. And our next question comes from Gabe Hajde from Wells Fargo. Gabe, your line will be open now if you'd like to proceed with your question.

Gabe Hajde -- Wells Fargo Securities -- Analyst

All right. Good morning, Mike, Steve. Thank you. I think to harp on the the inflation point here. But and to be clear, I guess, you're an industry efforts to maintain or even enhance margins, our price increases is pretty encouraging.

But if I want to sort of stress test the assumption that you gave us kind of for the fourth quarter in terms of inflation and then heading into 2022, and even just in the fourth quarter, in the second half, I want to say it's going to be around $120 million for the fourth quarter, $210 million for the second half, but you're telling us a $100 million to $125 million for next year.

So I'm curious if that's, if there is timing and something related to the cadence of that, that says, OK, maybe things taper off in the back half of 2022. And then, on the labor and benefit bucket that is kind of consistently in $50 million range, could this maybe run a little bit harder next year and I appreciate the magnitude, it's not nearly as big as in as an input cost, but maybe $60 million just given where labor and benefit markets are today?

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Yeah Gabe, it's Steve. To answer the second question, almost as you did, I think we'll likely see our labor and benefits inflation be at the higher end of our range next year and that's kind of in the guard rails that we provided to just given some of the realities that we've been talking about relative to labor availability in some wage inflation. But to your commodity input cost inflation question, as we've talked, we're not forecasting for 2022 inflation at this point.

But what we are hearing is that if everything commentate as is and a lot of this acceleration here occurred in the second half. So you're right, you've got $200 plus million in the second half of the year if things stay where they are and you compare that then to the prior year, the rollover of that $100 million to $125 million range, mostly because most of the acceleration, through acceleration has occurred in the second half of the year.

And so, most of the inflation on the carryover would be occurring in the first half of next year. And again that's not a forecast, that's important, but it is the carryover in terms of that as a pressure testing it.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Okay. And then I guess, again sticking with inflation and I apologize. To the extent that, I mean, I'm sharing food and beverage brand owners talk about potentially 20%-25% inflation as they roll this inflation through the grocery channel etc. And how consumers might respond when they're spending their dollars on that, what is your experience when we've seen this kind of inflation in terms of I guess demand elasticity for the products that you serve?

Do you see any kind of potential that consumer trade down, and is that a net positive for your -- or potential risk as we head into 2022?

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Yeah. Gabe, thanks for the question. I think, it's a great question. I think, look, I can't tell you that we've seen this exact experience relative to the amount of inflation that's flowing through, at least not recently. Here is a couple of decades since we've seen this kind of input cost inflation shocks. I mean, I think the thing that I point to for Graphic and what positions us uniquely in the marketplace is 95% of everything we do is food and beverage base. So you're right, there may be some trade-downs, maybe instead of buying branded, I go to store brand. But it's a physiological human need that I have to eat and drink. And we make those kind of packages that go into those kind of products. And we've got a diversified portfolio as you well know relative to food service and the add home consumption.

So relative to our revenue makeup, it's a nice balance and really gives us the ability to benefit regardless of how that develops in the environment there. But it's definitely going to be inflationary going forward, there is no doubt about it. Yeah, Gabe, just add on to that if the occasions where for whatever reason the economy comes to slower position either due to inflation or other activities, our business has been very defensive in the past as Mike mentioned. And so, yes, there may be, there could be some headwinds. But overall, the trading down actually can be sometimes net favorable and even if there is largest dislocation on true consumption patterns, they tend to be quite modest on a percentage basis.

Michael P. Doss -- President and Chief Executive Officer

Yeah. That's right. Bottom line is that just to give you summarize that our confidence level in our Vision 2025 goal of growing a 100 to 200 basis points between now and 2025 is high, based on the projects we see even what our customers are telling us.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Thank you, guys. We're just trying to can remain vigilant over here.

Michael P. Doss -- President and Chief Executive Officer

Yeah, absolutely.

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Thanks, Gabe.

Operator

Thank you, Gabe. Our next question comes from Adam Samuelson from Goldman Sachs. Adam, your line will be open now if you'd like to proceed with your question.

Adam Samuelson -- Goldman Sachs -- Analyst

Yes, thank you. Good morning, everyone.

Michael P. Doss -- President and Chief Executive Officer

Good morning, Adam.

Adam Samuelson -- Goldman Sachs -- Analyst

So I guess, first, I was hoping to get a little bit more color on the performance in the quarter, the net performance line, which was a positive $79 million contribution in the third quarter that as far as back as I can see one of the bigger quarterly results that you guys have posted.

Maybe if you could dissect that a little bit, because I think through some of the prepared remarks that you've made earlier, it's talking more about headwinds and challenges around labor, around the mill in the Northeast rather than productivity benefits. And so, I'm just hoping to get a little bit more color on kind of how you've been able to mitigate some of these cost headwinds operationally?

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Yeah, Adam, it's Steve, we'll be glad too. Most of the headwinds that we've talked about kind have rolled through in terms of the waterfall, the impacted volume mix because of the volume not necessarily being there. So that's where those headwinds showed up. We were very pleased with our overall productivity in the quarter and you're right. It was a pretty substantial number. Two primary drivers there, one, just very good core productivity in $30 million-$40 million range, that's kind of our expectations.

And then, on a year-over-year basis, we had significantly less maintenance downtime. Year-over-year, we had quite a bit last year, much less this year and our teams executed against that exceptionally well. So that positive for us in the quarter. So those are the two big primary drivers of positive there. You'll see that returned back to more normalized in Q4 and as we look out over time, our $50 million to $70 million of core productivity is the right kind of range for the business.

But now, it was a very strong performance relative to overall productivity in the quarter.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay. That's really helpful. And there's been a lot of discussion on the price cost dynamic on the call. But maybe just list here today and we're evaluating kind of the future progression of some of these commodity markets. I mean, you see anything start to come down, particularly some -- on the chemical side, or are you seeing anything more plus how versus where the specific pockets that are -- have been much more challenging through the second half of the year?

Michael P. Doss -- President and Chief Executive Officer

Adam, it's Mike. So, with the comment, as I mentioned earlier, we've seen at least in the last couple of months, that we review that secondary fiber has ticked a bit. We're not calling that it won't go up again. But, you asked questions. So that's couple of months in a row after seeing that March higher for 11 months straight. And some of the poly ethylene like low density poly ethylene, we've seen them moved down slightly, not materially or still elevated quite high on a year-over-year basis, almost 100% on some of the grades we buy.

But they have gone down, they ticked down just slightly. So, we're watching those things. On the other side of things, we've seen some wood inflation, that is growing particularly on hardwood and some of the baskets we're in. But that's all in the guide that Steve gave you and it's all consistent with the inflationary expectations we outlined for both Q4 and the carryover into 2022.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay. That color is actually helpful. I'll pass it on. Thanks.

Michael P. Doss -- President and Chief Executive Officer

Thanks, Adam.

Operator

Thank you, Adam. Our next question is coming from Michael Roxland from Truist Bank. Michael, your line will be open now if you'd like to proceed with your question.

Michael Roxland -- Truist -- Analyst

Thanks very much. Good morning, Mike, Steve, Melanie and I appreciate you taking my question.

Michael P. Doss -- President and Chief Executive Officer

Good morning, Michael.

Michael Roxland -- Truist -- Analyst

Just quickly on -- of those actually will link the cost inflation, I want to just quickly on labor, and Mike you mentioned particularly bigger headwind in food service. But I think as you had some layoffs and you shown up. But now there's been recovery, you're trying to build that back-up.

Can you just talk a little more about what the company specifically is doing to attract the labor? And have you looked roll-out of vaccine mandate, has that impacted the labor supply?

I just wanted to try to get a sense of what the company specifically doing and whether the vaccine mandate have actually impacted your attraction of labor as well?

Michael P. Doss -- President and Chief Executive Officer

Yeah. I appreciate the question, Michael. So we're doing a number of things to attract talents that we need to operate those facilities that I mentioned. And we're doing it differently than we've done in the past. We've got some pretty big sign-on bonuses that we put in place for people. You employ a referral type bonuses that we're offering folks because they know different people in the community and suggest to them, it is a pleasure to take a hard look at given us track record. And those things are actually making a difference.

And in some cases, we've had to look at wage rates, particularly for some of our entry level positions. And we're doing those types of things to continue to take a look at how we are the employer of choice in the communities where we operate. So it will be a combination of all of those things. We're staying very close to it. And I'm confident that over the next quarter or two, we'll be able to get our staffing back to the levels we need it to be. But as airlines, the food service is really the most profound for us just given the magnitude of the enough amount of people that we had to hire back after the layoffs that into following the pandemic.

Michael Roxland -- Truist -- Analyst

Got it. It's helpful. And then, just quickly on sustaining the packaging solutions, off the cycle Paper saw, I mean, I know you had in the product. I wondered if you could just talk about commercialization, where those products stand from a commercialization beverage point as there's maybe incremental revenue, EBITDA.

I think that the market share with respect to your focus is to be in the packaging solutions. Can you help us and help investors give your appreciation of how you guys growing the business. So just any insights on those sustainable packaging that would be helpful.

Michael P. Doss -- President and Chief Executive Officer

Again, I appreciate that question, Michael. I think it all comes back to our three big growth platforms that we've talked about. So it's around plastic replacement opportunities, enhance packaging solutions to strength packaging. We've got a big addressable market as we showed you when we were together, kind of pre-AR Packaging that $7.5 billion and we'll update that for you when we'll together in February in New York City, kind of giving you an outline on what that looks like, it's going to grow.

We've seen more opportunities to actually go faster and that give Steve and I a lot of confidence in our 100 to 200 basis points of true organic growth. And to your point, we'll be able to show additional examples and products that we've got there, when we'll together kind of giving you an update on our enhanced Vision 2025 goals.

Michael Roxland -- Truist -- Analyst

Nice, good luck in the quarter.

Michael P. Doss -- President and Chief Executive Officer

You bet, Mike. Thank you.

Operator

Thank you, Michael. Our next question comes from Kyle White from Deutsche Bank. Kyle, your line will be open now if you'd like to proceed.

Kyle White -- Deutsche Bank -- Analyst

Hey, good morning. Thanks for taking my questions. I just wanted to go back to the 2022 bridge. And ask is it possible to break out what you expect from your core productivity in a $20 million grouping that you have.

I know you had some weather events this year that you should lap. And then, also, how do you outages next year compared to this year?

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Yeah. Kyle, it's Steve. Obviously, in February, we'll provide you with the details. I think what's there as we've talked about in the prepared remarks, we've got a long history of our productivity and the organic sales growth that we were just talking about. Those items were more than offset labor and benefits inflation that we're experiencing obviously any FX headwinds.

And also, there will be synergy capture, that will be in there. So current line of sight to $20 million plus feels clear to us. Obviously, we'll provide more details on that in February. I think the intent here is good long history of synergy capture, overall performance, organic sales growth more than offsetting those other items and our confidence as we head into 2022 that that will occur is high.

Kyle White -- Deutsche Bank -- Analyst

Got it. And then, on the Kalamazoo project, are there any start-up cost associated with bringing that up? And should we expect a $15 million benefit to begin rolling through in 1Q on kind of a flat line basis or it really take some time to kind of ramp up?

Michael P. Doss -- President and Chief Executive Officer

There will be a little bit of ramming Kyle. I think modest benefits in Q1 and then we would expect to see more as we kind of roll in the one-time costs or redundancy costs are relatively modest and we'll call those out if there are any of signs. But we're looking forward to starting up here in Q4 and be making product in Q1.

But I think the benefits themselves will be a little more weighted Q2 and beyond as production and high quality production ramps up.

Kyle White -- Deutsche Bank -- Analyst

Appreciate it. I'll turn it over.

Michael P. Doss -- President and Chief Executive Officer

Thanks, Kyle.

Operator

Thank you, Kyle. Our next question is from Anthony Pettinari from Citi. Anthony your line will be open if you'd like to proceed.

Anthony Pettinari -- Citi -- Analyst

Good morning.

Michael P. Doss -- President and Chief Executive Officer

Good morning.

Anthony Pettinari -- Citi -- Analyst

On capital allocation, you're closing AR soon and you have a capex cycle that rolls off next year. I'm just wondering if you could talk about either the appetite or the ability to pursue additional acquisitions as you integrate AR or is now sort of time for kind of a natural pause?

And then, just kind of remind us where you'd like to be from a leverage perspective, maybe the next year?

Michael P. Doss -- President and Chief Executive Officer

Yeah. So I'll take a shot and then Steve will add a little color too. Anthony, thanks for the question. From our standpoint, we love the setup we've got going into 2022, but for the catalyst we've got in front of us between AR packaging, the timing there looks excellent with the growth of consumer fiber-based packaging, which our Kalamazoo starting up.

We've got to deliver on the $100 million of EBITDA growth there. $50 million over the next couple of years. So when you look at all that, our leverage is going to be elevated here at year end, because we will take that on for the AR Packaging. So, I think what you should think about us in 2022, is a heads down year for us, focused on kind of taking advantage of the investments we've made and delivering on those.

We've got clear line of sight in terms of what needs to happen. As Steve mentioned in his prepared comments, we feel confident we'll be at 3.5 times level at year-end on 2022 or lower. And when we did AR, we told you that by 2023, we want it to be at 3 times.

So that's kind of where we're focused on. It's not to say that we want to look at something if it came up. But we -- our capex is going to go back to a more normalized rate. But we've got -- the projects that I've outlined in front of you that give us good synergy things to work on and value creation for shareholders and we want to stay focused on that stuff at least into 2022.

Anthony Pettinari -- Citi -- Analyst

Okay, OK that's helpful. And then, just following up on Mark Wilde's question on the global box board market. Assuming freight rates or ocean freight rates kind of improve or normalize at some point next year, do you think it's the case that significant import pressure could come back in SBS and maybe CRB or do you think it's more the case that some of this capacity is either no longer running or maybe not in the cost position to impact the U.S. market?

And I guess I'm thinking about the Chinese shutting down some capacity and the Europeans dealing with some of these cost issues. So just kind of curious what your take is?

Michael P. Doss -- President and Chief Executive Officer

Well, I guess, as I said here today, first off, I don't see omission rates coming down materially. So maybe some of the congestion will clean up. But we expect freight as we've told you for several quarters now to be structural in nature, both in terms of their ship rail and truck and that really nerves to our benefit. They're given the wide platform that we operate, how we've built the company. So that I'll start with that point.

And then in terms of what's happening in Europe, as I mentioned with what we're seeing on the beverage side, there's even more growth of consumer fiber-based packaging in Europe replacing single used plastics in that market. So those producers over there particularly with higher freight and dislocation on shipping costs, they're going to want to service that market first.

And as you answered part of that question, if you think of what was happening with GD board in that market compared to their reversion of recycle versus some of the version grades, you've got natural gas prices approaching $30 in mmBTU. So there's going to be a lot of demand for fiber and that market in as those producers can move it into that market. I'm sure they want to, just like we would want to do that here domestically.

So we're in that market now in a material way. As I mentioned to you, whether AR Packaging will be the largest purchaser of paperboard, so we've got good knowledge of what's going on and that's going to help us drive our agenda going forward here.

And we like the positioning that we have established for the company on a combined basis.

Anthony Pettinari -- Citi -- Analyst

Okay, that's very helpful. I'll turn it over.

Operator

Thank you very much, gentlemen. Thank you, Anthony. And that concludes today's Q&A session. I'll hand back to Mike Doss for any closing remarks.

Michael P. Doss -- President and Chief Executive Officer

Thank you for everyone for joining us today. We look forward to seeing many of you on February 17th in New York City, where we will outline our fourth quarter results and full-year results, provide a detailed outlook for 2022 and update you on AR Packaging integration and growth opportunities.

Finally, we want to be able to spend some time talking about our updated Vision 2025 milestone incorporating the catalysts that we discussed today. With that, hope you have a great day. And we look forward to talking to you again soon.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Melanie Skijus -- Vice President, Investor Relations

Michael P. Doss -- President and Chief Executive Officer

Stephen R. Scherger -- Executive Vice President and Chief Financial Officer

Mark Weintraub -- Seaport Research Partners -- Analyst

Ghansham Panjabi -- Robert W. Baird & Co. -- Analyst

George Staphos -- Bank of America -- Anlayst

Mark Wilde -- BMO Capital Markets -- Analyst

Gabe Hajde -- Wells Fargo Securities -- Analyst

Adam Samuelson -- Goldman Sachs -- Analyst

Michael Roxland -- Truist -- Analyst

Kyle White -- Deutsche Bank -- Analyst

Anthony Pettinari -- Citi -- Analyst

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