Graphic Packaging Holding Co (GPK) 2005 Q4 法說會逐字稿

Good morning. My name is Kimberly and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Fourth Quarter and Fiscal Year End Earnings Conference Call. (Operator Instructions.) As a reminder, ladies and gentlemen, this conference is being recorded today, February 2, 2006. Thank you.

I would now like to introduce Scott Wenhold. Mr. Wenhold, you may begin your conference.

Thank you, Kimberly, and good morning everyone and thank you for joining us this morning on Graphic Packaging Corporation’s Fourth Quarter Earnings Call. Commenting on results this morning are Steve Humphrey, the Company’s President and CEO, and Dan Blount, our Senior Vice President and CFO. David Scheible, our COO, is also available to answer questions at the end of the presentations.

I would like to remind everyone that statements of this--of the Company’s expectations, including, but not limited to, the effect of inflation, the Company’s ability to implement price increases, and cost savings are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. 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 historical experience and its present expectations. Undue reliance should not be placed on such 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.

Additional information regarding risks facing the Company is contained in the Company’s periodic filings with the SEC. With that out of the way, I will turn this morning’s proceedings over to Steve Humphrey.

Good morning, everyone. Yesterday, the Company announced fourth quarter earnings for 2005, reporting a net loss of 42.5 million, or negative $0.21 per share. This was essentially flat to the fourth quarter of 2004, despite being impacted by approximately $22 million of cost inflation during the quarter.

For the full 2005 year, the Company reported a net loss of 91.1 million, or a negative $0.46 per share. This is approximately 30 million, or $0.15 per share lower than the 2004 full year, despite being impacted by approximately $96 million of higher year-over-year input costs. Higher input costs also impacted debt reduction as we achieved roughly half of our $100 million goal.

In a moment, our CFO, Dan Blount, will walk you through the specific items that bridge current period financial results to the prior period. Let me say, however, that I am pleased with the job that the Company did to counter the negative impacts of inflation. First, as I promised at the beginning of 2005, the Company was successful in obtaining all price increases to which we were contractually entitled.

And second, we were successful in taking costs out of the system. In the fourth quarter alone, the Company reduced operating costs by approximately $19 million. This brings the full year 2005 operating cost reductions to approximately $50 million. The Company was able to achieve the majority of these cost reductions through, one, the execution and continued support for our continuous improvement principles, as well as improved performance in our manufacturing assets, or what we refer internally to as Operating Equipment Effectiveness, or OEE.

This improved manufacturing performance was the result of better utilization of existing assets and investment in new assets. More specifically, I am referring to both the beverage manufacturing rationalization that occurred primarily in 2004, and the food and consumer products sheet-fed strategy that is just coming to a conclusion. I am happy to say that both of these projects were successful, and that we are looking forward to realizing the ongoing cost savings associated with these improved manufacturing efficiencies.

Looking to volumes, the quarter was again marked by a familiar trend. Beverage carton sales were down versus the prior period, while sales to the food and consumer products markets were again strong. On the beverage side, total carton sales within North America were down approximately 6% in the fourth quarter of ’05, compared to the prior year quarter. For the full year, sales in this market were down approximately 3% from 2004.

A decline in beer carton shipments to the Company’s top three customers was the primary driver of this overall decline. As I’ve commented in the past, the domestic beer brewers continue to be negatively impacted by an overall weakness in demand, particularly for can take home volumes.

The story is very different on the soft drink side, however, as fourth quarter sales within North America increased slightly over the prior year quarter, but were up a solid 7% when comparing full year ’05 to full year 2004. This despite a year of overall decline in total soft drink can shipments within the U.S. The strong performance in our soft drink business was primarily driven by share gains with the Company’s top two customers in this market, along with increased volumes in the fast growing non-carbonated sector.

As I mentioned earlier, sales to our food and consumer products markets within North America were again strong with fourth quarter increases of 4.7% versus the prior year quarter. For full year 2005, sales were up 5.9% over 2004. The solid growth in this market is due to both increased pricing and significant volume gains with just about every one of our major customers.

We also continued to set the stage for future revenue growth in the quarter, with numerous new product rollouts. Dr. Pepper 7–Up launched six different brands in the first six-pack 12-ounce can format of Graphic Packaging’s Fridge Vendor package. This new package configuration was introduced to encourage the purchase and refrigeration of multiple brands for households who prefer a variety of beverage flavors.

Graphic Packaging developed a 12-pack 16-ounce PET package for SABMiller, representing the first time that beer has been available in the U.S. in a 12-pack PET multi-pack format. The package is targeted at increasing Miller’s sales to consumers who prefer the PET bottle for its re-sealability and for safety consumption at outdoor events.

In the rapidly growing energy drink segment, BevSpec chose Graphic Packaging’s Fridge Vendor design to drive the growth of its 8.3-ounce canned energy drink in a 12-pack format. This launch is representative of the overall trend in the adoption of the Fridge Vendor in the non-carbonated drink sector.

Graphic Packaging’s Z-flute continues to grow in the market place as well, as Kraft Foods commercialized a 34-count cookie and cracker variety pack item during the fourth quarter. Graphic’s sales of this innovative high strength package have doubled in the last 12 months.

A package for Conagra’s new microwave seven-ounce Pot Pie product line. The package incorporates Graphic Packaging’s microwave susceptor technology, which reduces the cook time of the product from 30 minutes in a conventional oven to five minutes when it’s microwaved.

Looking ahead, we are extremely excited about the potential of the products currently in our innovation pipeline, and we look forward to a number of significant new launches throughout 2006.

On the production side, our U.S. mills ran at less than full capacity during the quarter, primarily due to market-related downtime and several unplanned events that adversely affected paper machine availability at our West Monroe, Louisiana mill. Overall, when looking at the full year, however, we are pleased as production volumes and performance exceeded the prior year, particularly at our Kalamazoo and Macon, Georgia mills. The year-over-year improvements were a result of diligent efforts aimed at implementing continuous improvement initiatives and further reducing cost.

On the beverage converting side, the Clinton, Mississippi plant shutdown and business transfer has been completely absorbed by the West Monroe and Fort Smith, Arkansas manufacturing facilities. In addition, performance at the West Monroe carton plant continued to improve during the fourth quarter, with output and efficiency of our new 67-inch Gravure press now at expected levels.

Our food and consumer products facilities are also performing well during the quarter, as our sheet-fed manufacturing strategy nears completion. Both the Lumberton, North Carolina and Fort Smith, Arkansas facilities have met or exceeded every commitment made in the original rationalization timeline. In addition, our Bow, New Hampshire plant is now completely shut down.

Now, looking into 2006. First off, Dan Blount will provide some specific guidance for 2006 in regards to certain line items in the financial statements. But, more generally speaking though, we mentioned in our earnings release last night that earlier in the year, we engaged Bain Consulting to assist Management in undertaking a comprehensive review of Graphic Packaging’s current strategies and business model. We felt that a rigorous re-look was mandated, given the changes in our financial trends. This work was reviewed regularly over the five-month span of the engagement with our Board of Directors. After much consideration and discussion about strategic options and alternatives, the team concluded that our current business strategy was appropriate and that our margins were favorable to most of our competitors.

The review did, however, result in Management taking several actions during the quarter. First, a reduction in force reflected by a $5 million charge in the fourth quarter. Although a difficult decision, the rationalization will save the company $7 million annually and ensure that we have the right people in place to successfully execute the Company’s strategies, and the realignment of our European operations in order to re-focus more on the beverage market.

In addition to these actions, we will be sharpening our focus in several key areas as we move into 2006. First, we will continue to work with customers to establish a more equitable sharing of inflationary risks as contracts are re-negotiated. To date, good progress has been made in this area. Also, we will narrow the focus of our innovation efforts to concentrate on fewer, shorter cycle opportunities with a particular emphasis on microwave packaging. Further, we will look closely at selling non-strategic assets in order to accelerate debt reduction.

Next, we will better align our production capacity to market demand. Although they don’t, at the moment, consume as much paperboard packaging as carbonated soft drinks and beer, non-traditional beverage segments like bottled water, fruit juices, and sports energy drinks are expanding at a rapid pace. At the same time, demand continues to fall off for carbonated drinks and beer. As a result of this market trend, we will continue to adjust our operating profile to effectively run customer demand on fewer, more cost effective manufacturing assets.

And finally, we will accelerate cost reduction initiatives. While Management has a good track record for reducing costs through continuous improvement and capital additions, opportunities still exist to take more costs out at a faster rate. In order to do so, we will exit segments with poor long-term potential, consolidate functions and manufacturing capacity, and streamline operating procedures.

While our strategic review confirmed that Graphic Packaging is well positioned in attractive market segments and possesses the assets necessary to support our goals and strategies, we have much headwind to overcome in 2006 as we keep a close eye on the price of crude oil and natural gas, as they have the potential to continue to negatively impact future results. In an effort to reduce some of the volatility in this area, we do enter 2006 having hedged a significant portion of our natural gas requirements, albeit at a significantly higher price than 2005 levels. And Dan will provide more detail around those hedged prices in a moment.

Now in closing, I want to be clear. While inflationary effects have been both sudden and dramatic, we cannot use this as an excuse for lack of improvement in our financial results. In 2005, we were successful in offsetting the majority of cost inflation by way of some price increases, improved manufacturing performance and by taking costs out of the entire system. In 2006, execution will be our governing watch word as we go far beyond these strategies in an effort to successfully achieve one of our key financial strategies of debt reduction.

And with that, I’ll turn it over to Dan Blount for a review of the financials.

Thanks Steve. Good morning, everyone. As you’ve just heard from Steve, for the fourth quarter we reported a net loss of 42.5 million, or $0.21 per share, as compared to a fourth quarter 2004 net loss of 39.8 million, or $0.20 per share. For the full year, we reported a net loss of 91.1 million, or $0.46 per share, versus a 2004 net loss of 60.9 million, or $0.31 per share.

As we review operating results, I’ll start with net sales and then move to earnings. Fourth quarter 2005 net sales were 572.6 million, down 2.5% as compared to net sales of 587.1 million in the fourth quarter of 2004. On a full year basis, the Company reported net sales of 2.384 billion, slightly less than 2004 net sales of 2.387 billion.

When comparing to the prior year quarter, the fourth quarter 2005 decline in net sales was principally driven by three factors. One, a 6% decline in beverage carton sales within North America. As Steve mentioned, the reduction was primarily driven by weaker demand and unfavorable mix for beer cartons. Two, lower domestic open market coated board sales and containerboard sales. A large portion of these reductions is due to producing less containerboard and more coated board. We utilized more coated board in the production of food and consumer product cartons. And three, a stronger dollar than a year ago negatively impacted net sales by 6.9 million. As a result, total international sales were 7.5% lower than fourth quarter 2004.

Now, partially offsetting the declines was a 4.7% increase in food and consumer product carton sales in North America. The increase was a result of both higher volumes and increased pricing versus the prior year quarter.

In summary, for the quarter, sales in our paperboard segment were flat to last year, as consumer product gains offset beverage declines. Containerboard sales were down 28%.

For the year 2005, total sales were relatively flat with 2004, as price reductions and volume declines in both North American beer and Europe were offset by price increases and volume gains in North American food and consumer products. Overall, the average sales price per ton increased 1% as we continued to replace open market sales with converted carton sales.

Income from operations for the 2005 fourth quarter were 6.9 million, up from the 2004 fourth quarter income from operations of 5.2 million. Looking at the full year, 2005 income from operations was 86.9 million versus the 115.6 million in 2004.

EBITDA for the 2005 fourth quarter was 57 million, or 10% of sales, as compared to EBITDA of 61.1 million, or 10.4% of sales, in the fourth quarter of 2004. For the full year 2005, EBITDA was 292.2 million, compared to 344.5 million in 2004.

Now in the quarter, EBITDA declined by $4 million. Cost inflation had a substantial negative impact of 22 million, yet our continued success with continuous improvement programs and other cost reduction initiatives delivered a strong $19 million benefit to offset inflation. For the full year, inflation negatively impacted results by a shocking 96 million. Cost reduction benefits were a solid 50 million.

Inflation included dramatic increases in costs for freight, chemicals, coatings, resins, fiber, and energy. The full impact of energy inflation was mitigated by our natural gas hedging program. However, not all natural gas needs are hedged, and we had substantial price increases in other energy sources as well.

In addition to inflation and cost reduction, fourth quarter EBITDA was affected by two other factors. One, the $5.0 million charge related to the work force reduction. As Steve stated, the benefit of this action will be an approximate $7 million cost reduction in 2006 and thereafter. And then, two, a legal settlement that produced a $4.5 million benefit

I’ll end the review of the income statement with a couple comments about changes in other categories. Other income expense is 7.3 million, favorable to the prior year, as a result of the $4.5 million lawsuit and lower asset write-downs, particularly at our U.S. mills. Depreciation and amortization expense in the quarter is lower than the prior year quarter by 5.8 million. The decrease is primarily a result of the accelerated write-off of assets recorded in the prior year fourth quarter related to the Clinton, Mississippi plant closure.

Full year 2005 depreciation and amortization was 205 million--that’s 205.3 million, compared to 228.9 million in 2004. In addition to the plant closures, the full year-over-year decline was primarily due to lower amortization of intangibles related to the August 2003 merger. Selling, general, and administrative expenses were down slightly in the fourth quarter of 2005 versus the prior year quarter. The full year increase was primarily attributable to costs for outside consulting services.

Turning to the balance sheet and cash flow, our liquidity remained strong and the balance sheet strengthened during the quarter. At the end of the year, we had 12.7 million in cash and equivalents, and approximately 307 million availability under our revolving credit facility. Our total revolver commitment is for 325 million. As of December 31, we had 6 million of cash borrowings and 12.4 million in outstanding Letters of Credit.

When comparing to the end of 2004, total working capital levels slightly improved as inventory levels were down slightly from a year ago, receivables were slightly up, and total payables increased approximately $10 million. The units in the inventory declined, but dollar value stayed relatively consistent with the prior year due to higher costs per unit driven by inflation.

Year-end total debt was 1.978 billion, representing a decrease of 46.9 million during the year. When the year-over-year increase of cash and equivalents is taken into account, total net debt decreased by 52.3 million.

Approximately 66 million of the total annual net debt reduction of 52.3 million occurred in the fourth quarter. This large fourth quarter debt reduction is a result of the seasonality of our beverage business and the timing of our public debt interest payments. Interest of 38 million is paid in the first and third quarters.

Capital expenditures for the 2005 fourth quarter were 23.7 million. Capital expenditures for the full year were 95.6 million, compared to 2004 expenditures of 137.8 million. The decline was primarily the result of 2004 spending related to the Company’s beverage manufacturing strategy. For 2006, we expect capital expenditures to be in the neighborhood of 80 to 90 million.

Also impacting 2005 cash flow was 17.4 million of cash contributions made to fund the Company’s U.S. pension plans. Keeping with our funding policy, we expect to contribute in the neighborhood of 25 to 30 million of cash to these plans in 2006.

Continuing to look forward into 2006, we expect the price of natural gas to adversely impact results. In late 2004, the Company hedged the majority of its 2005 needs at approximately $7 per MMBTU. When we first began looking at hedging 2006 requirements last fall, the forward markets were severely impacted by Hurricanes Katrina and Rita, pushing prices well above the $14 level. In response, the Company only layered in a hedge for a portion of its first quarter 2006 requirements. Later in the fall and early winter, as prices came down closer to the $10 level, we layered in a series of hedges to guarantee price for the majority of our natural gas requirements for the remainder of 2006.

In summary, higher costs for natural gas will negatively affect us in 2006. In particular, we expect first quarter 2006 results to be adversely impacted by higher costs for natural gas.

In addition to CapEx and pension contributions, other items we normally give specific guidance on include interest expense and depreciation. In 2006, we expect net interest expense to be between 160 and 170 million, as 2006 forward interest rates are higher than actual rates experienced in 2005. And for 2006, our expectation is for depreciation and amortization to be between $190 and $200 million.

Finally, our net--our debt reduction target for 2006 is $65 million. Due to the seasonality of the business and the timing of our semi-annual fixed note interest payments, you should expect the majority of this debt reduction to occur in the fourth quarter. This debt reduction, however, does not include any proceeds from the potential sale of non-core assets.

With that, that concludes my remarks. And I’ll ask the Operator to open up the line for a question-and-answer session. Thank you.

(Operator Instructions.) Your first question comes from Joe Stivaletti of Goldman Sachs.

Yes. Hi. I was just wondering on the asset sale comment if you could give us any kind of a feel for what you’re talking about, what types of assets, and also, if you had any rough ballpark of potential proceeds there?

Joe, it’s Steve Humphrey. I think in the nine years that I’ve been doing these calls, I have consistently identified our mill in Sweden, Fiskeby, is a non-strategic asset. And we’ve gone through the efforts a couple of times to see if there is a fair monetization of that asset. And life to date, we haven’t been successful. But, that’s one that we continue to look at.

I think anything else would be--I alluded to in my comments that in conjunction with the strategic review that we did, we sharpened our focus on underperforming assets. We commented last year that when the Company merged, we looked at all of our product lines and we found in the ice-cream packaging segment low returns and poor opportunity, and we exited that segment. Now, we were able to backfill the plant that was the principal producer with other volumes, so we didn’t wind up selling off anything. But, I think that’s denotive.

So, I really don’t want to get down into any more detail. But, we do have some elements inside the business that we would consider as non-core. And I think it’s a little premature to offer guidance on what the proceeds may be and the timing. But, I think that this is a clear indication that we continue to be diligent in not hanging on to assets or business pieces that just don’t have the potential to measure up.

Okay, that’s helpful.

Okay.

I was just also wondering, you guys have clearly explained that you don’t have some cost pass-throughs in some of your contracts and that those contracts will be up for renewal in ’07 and ’08. I wondered if you might be able to talk just a little more specifically about when in ’07 we might start to see some relief. And also, if you have any sort of--I mean, way of guessing or an educated guess as to how optimistic are you that you’ll be able to get some relief there, or do you think there is going to be an unrealistically harsh competitive environment at that time?

Well, I--in the--in last quarter’s call, I declined an invitation to provide any guidance relative to calendarization. But, I did make very specifically included in the remarks this time that good progress is being made working with customers, and that we remain confident and committed that as these contracts run through their current cycle, at the end of the day we will have equitable inflation risk sharing in all of our agreements. And that is well within the context of the current competitive market dynamics. So--.

Okay. And just one last thing on a numbers question. You talked about 25 to 30 million that you’re going to put--contribute to your pension plans in cash this year. Dan, is--how does that compare to what you would expect to be your expense?

That’s predominantly about equal to expense.

Oh, okay. All right. That’s helpful. Thanks.

But, you’ll go--what you’ll find is that the difference between straight EBITDA and credit agreement EBITDA will narrow substantially.

Okay. Yes, that’s helpful. Thanks.

Okay. Thanks, Joe.

Your next question comes from Brandon Hole of Deutsche Bank.

Good morning, guys.

Yes, good morning.

I think last quarter--and you’ve done it a couple of times for us, you’ve just run through the quarter-over-quarter inflationary cost changes for fiber board, chemical coatings, things like that. Could you do that for us?

We included most of that information in the K we are going to release. But, I do have--I can give you some of the larger ones--.

--Okay--.

--Here. Energy was about $5 million. Chemicals was about $7 million. Freight was about $5 million. And then, fiber was about $3 million. And then, the remainder would be labor and benefits.

Okay, great. And, I guess, just back of the envelope with your $65 million target for debt reduction, is there any working capital component involved in that?

There’s a piece of working capital in there as well.

Okay. Do you want to illuminate that or--?

I don’t think I want to detail out, but we’re pretty confident in the $65 million at this point, based on our planning.

Okay. You know what? I’ll get back in the queue. Thanks.

Okay. Thank you.

Your next question is from Bill Hoffman of UBS.

Hey. Good morning.

Yes, good morning.

Steve, I just wondered, when we were down in January, you talked about a lot of new products and you sort of expanded on a few more today in the food consumer, etc. And, obviously, it’s a smaller segment. But, I just wonder if you could help us quantify that--what kind of size of top line growth do you think you could achieve out of new product developments that you’ve got going in ’06. You’ve also done a few press releases about things recently. So, just to--we’re just trying to get a quantification of your targets.

Bill, I think that I have spoken previously--I know I have, that it would be a goal that we would have to try and get revenue from innovation roughly equal to GDP.

And do you think you’ll be able to achieve that this year?

I think we are getting ever closer to it. And as I’ve been very careful to say, and I know Dave Scheible has echoed these comments, there is kind of an acceleration curve you have to go up as you seed new ideas into the market and kind of wait for them, not only to be successful with a launch customer, but then, get on the radar screen of other competitors in that same space. And if you think back to Fridge Vendor, when it was launched it went to one national customer. And then, within the next two years, all the soft drink companies were using it.

And I--we’re seeing some traction in things like Z-flute and the beer business that I think are pretty encouraging. A harder one to handicap is in the non-beverage, because there you’re not replacing another substrate. You’re introducing multiple packaging or new multiples into the marketplace. So, I’m not trying to be evasive. I’m just saying it’s a little problematic.

But, our new--our revenues from new product introductions have grown each year-over-year for the last three years. And we would expect that to continue.

Great, that’s helpful. Second question is as you look forward and you’ve been successful at reducing debt here. I’m just looking to see if there’s been any discussion from your owners about making more strategic moves with the Company. And I know that’s kind of a hard thing to talk about, but--.

It’s not only hard, it’s impossible. I think the way I would ask you to think about it is I think the capital structure we have presently is workable, and that I think we have demonstrated over a long period over time both legacy companies that were not at all reticent to look for opportunities to improve the capital structure. And sometimes that’s in conjunction with an event and sometimes it’s not.

Okay.

We have no aversion to taking those steps whatsoever.

Thank you.

Okay.

Your next comes from Bruce Klein of Credit Suisse.

Hi.

Yes, good morning.

I was just wondering on the contract business, is it--or have you guys approached those contract customers earlier than maybe when some of that stuff comes up. And any success on trying to share some costs before the expiration?

The only time we get to talk to them earlier is when it’s at their invitation.

Right.

And I think that--I’d just stand on our comments that very good progress is being made, and that I think that it’s really unrealistic to presume that customers are going to agree to let’s just call it revenue or inflation sharing sooner than they have to. On the other hand, we’ve made very good progress. So--.

I think that’s exactly right. I mean, we would not be saying that we didn’t believe we had a legitimate opportunity of changing the way the contracts are written if we hadn’t already engaged many of those customers. We talked to customers earlier as we prepare for their contracts to expire, and so, we have a very good indication of those--of what’s going to happen to new contracts going forward.

And Steve is absolutely right. I believe there’s a really very, very high confidence with it. As the contracts expire, we will have escalators that will allow us to at least share some of the inflationary impacts as we go forward in the process in the accounts that today don’t have that opportunity.

And it’s--and the other thing I’ll tell you is not just Graphic. It’s--the competitors are doing similar things. So, it’s not such an issue of well the competitive structure will not allow that to occur. That’s not been our experience as we’ve initiated these discussions.

Okay, thanks. Thanks Dave. And on the volume, I know it was probably like a--it’s mostly beer business. Do you think your customers maybe are losing share or do you think another beer business has been down in the U.S.? I’m just wondering is there anything else going on there in terms of how you’re positioned.

Well, the beer--I mean, it’s true that certainly our beer customers are losing share to hard alcohol. I think the most recent numbers I show--I saw were something like a 2.5 to 3% drop in the market for beer. And that’s primarily in replacement of our alcohol, and we pay for that because that’s the take home portion of the business that gets impacted the greatest, and that’s impacting it. Now, having said that, I’ll also say that you’ve seen the greatest level of activity from the beer guys trying to change some of those trends, and packaging is part of it.

And I know you probably saw that Miller has introduced or is announcing the introduction of a bottle fridge pack. And Steve mentioned about how the markets will change. And so, here they start this quarter introducing the Fridge Vendor concept, but using a 12-pack bottle. Well, that will help spurn some interest in that business as well and a better mix for Graphic Packaging as well. So, those are the kinds of incremental things that are occurring at least in the beer sector.

And lastly, is there any change in the sort of trends? I know they’re going to spend a lot of money and I think they’ll probably eventually help the problem. But, is there anything yet from the last few months? Or not yet?

Yeah, I can’t tell you that I’ve seen any firm trends underlined. It’s a my gosh, they’ve turned the thing around. I will tell you the level of activity on promotion and new package styles is greater than we have ever seen, but it’s too early. And January, of course, this time of year is really not the best year--the best time to get a feel for what’s going to happen. It’s really, obviously, a spring and summer sort of phenomena, which is the majority of the beer sales.

So, we’re hopeful. We’re certainly putting a lot of new products in place with them and being in a position to launch them. But, I think time will have to tell.

Okay. Thanks a lot guys. I’ll pass it back.

Okay, thanks.

(Operator Instructions.) Your next question comes from Christopher Miller of JP Morgan.

Thank you. Just generally follow up on that entire question, trying to dig down a little bit deeper on the volume decline, particularly in North America. Was it more of a--it seemed to accelerate sequentially. Was that purely a seasonal type issue or are the trends--do they look like they’re moving a little bit more negative on you?

Steve, you want me to take this one?

Yes, go ahead.

Okay. Well, there were a couple of things going on. I will not tell you that quarter-on-quarter that we saw material acceleration in the decline in the beer segment, per se. But, there were also some changes in our business as well. I think we mentioned earlier that Coors Brewing Company has moved from an old composipac laminated structure to an SUS, in case sort of structure. And that has some impact on year-on-year pricing--or not pricing, necessarily, but dollar revenue.

And so, that was an impact in the marketplace as well. We also exited some non-core stuff. Steve mentioned the ice-cream business. We used to make labels, some small label businesses, for Coors that we no longer really had the right assets or the right process. And so, that had an impact quarter-on-quarter because this was the first quarter we finally sort of exited that sector. And I think that’s what show--that’s what’s showing in many ways the acceleration.

I will tell you the decline in beer has been pretty consistent year-on-year in that sort of 3% sort of range from a marketplace standpoint.

Okay. And then, maybe just a couple of quick housekeeping issues. The mill that you mentioned over in Europe that is a potential sale candidate, just refresh us on the size of that.

It’s about 160,000 ton white line chip, basically a coated recycled mill.

Okay, great. And I think that will do it for me. All right. Thank you so much. I appreciate it.

Our next comes from David Frey of Stanfield Capital.

Hey, guys.

Yes, good morning.

Thanks for taking my call. I just wanted to explore a little bit on the cost savings your got, $19 million in the fourth quarter, which is pretty impressive. Can you just give a little bit more color on the types of things you were able to do there?

Well, as I alluded to in my remarks, one, we’re getting now the full run rate benefit of some capital additions that we’ve made in both our beverage business and in the sheet-fed portion of our food and consumer packaging. So, we would expect to see that sustain at an annualized rate. We’ve talked previously about our continuing focus on improving manufacturing effectiveness, and we use a metric called OEE. And that improved across the company, particularly in our converting operations in two of our three mills.

And there’s tremendous cost and efficiency leverage as OEE goes up, not only because you get more throughput, but it allows you to run more on your lowest cost assets. So, you get both a mix improvement as well as a run rate. And we continue to look and find ways to take cost out of every nook and cranny of the business. And it’s embraced by, it’s all accommodated under this very broad umbrella that we’ve been talking about for almost nine years called continuous improvement.

We’ve got a lot of resources in the Company, Black belts, Yellow belts, a good cadre at each of our sites’ leadership structure. And all of our major cost reductions are well chronicled and tracked and managed very tightly. And it’s a discipline that is now pretty robust in the Company. And the good news is it’s continuing to accelerate.

Yes. I guess that was my next question. You talked about--in the press release, about accelerating--.

--Right--.

--Cost reduction in ’06. So, you think you can get more than the 50 you got in ’05 in ’06?

That’s correct. Absolutely.

I have to answer that question yes, right? I mean, the reality is that we do. I’ll tell you, we use a lot of metrics. One of the metrics that’s interesting to look at for us internally is how much material do we actually scrap. And our scrap rate this year was the lowest in the history of the two companies combined. So you see that--and that trend is continuing. So, you’ll see that kind of cost takeout. I do believe, also, that what Steve has sort of pushed on on all these processes is that there is money between the cracks. And for us, that--those are things like freight and moving products around internally.

We’ve upgraded the integration level of our business, which means we sell a lot more parenthetically to ourselves. That give us the opportunity to sort of optimize freight internally, looking at intermodal versus truck line--versus truck that we have to ship to customers. And so, if you look at the opportunity out there as we’re sitting in ’06, there is tremendous potential as we’ve made those investments in the manufacturing that then optimize back through the system. So, we’re by no means out of cost options. In fact, he’s right. It will accelerate.

We’re still executing to the original integration plan. One of the last pieces, if you go back and read our S-4 and you look at how we calendarized the savings, we said in the third year we’d get some additional savings as we consolidated the two IT systems, Graphic was on, JD Edwards, and Riverwood on SAP. That project is now complete and we’re in the stages of decommissioning the data center out in Golden. We also, while we are providing further guidance on integration synergies, we said there were a lot of things in the pipeline that are largely manufacturing, rationalization, and optimization related that we would continue to work on. And that is the case.

So, in our view, there’s every expectation and good reason to justify our projection that we’ll do better in ’06 than we have in any other of the previous years.

And just one other comment there. In the previous years, our primary focus has been on our manufacturing facilities and we’ve increased our focus on SG&A in 2006 as well. And the computer system and having a single ERP system helps greatly, plus we rationalized our work force going forward.

And then, just lastly, I want to make sure I understood your comments on the natural gas hedges correctly. When you indicated that when the price got to $10 you hedged most of your needs for the remainder of ’06, is that the average price that you hedged at?

It will vary by month, but that is predominantly average after you get past the first quarter of 2006. It could be slightly less in some quarters and about right on $10 for other quarters.

OK. Great, thank you.

All right. Thank you.

Your next question comes from Matthew Kence of Liberty Mutual.

Yes. My understanding is that you have contractually on some of your beverage contracts --I think it’s--is it annual price-downs or efficiency sharing?

We have across most of our contracts annual price-downs.

Does that phase in in the calendar year or kind of step down, or is that sort of as the year goes on?

Well, we’ve tried to speak to this previously. It’s very difficult to generalize because each one of these agreements is unique. But, it would generally phase in across the calendar.

Okay. So, there shouldn’t be any dramatic impact in the first quarter, then, that we would notice?

That’s correct.

Okay, thank you.

At this time, there are no further questions.

Well, if there are no further questions, I’d like to thank everybody for joining in. And we’ll look forward to talking to you on the next call. Thanks so much.