Graphic Packaging Holding Co (GPK) 2006 Q3 法說會逐字稿

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Corporation Third Quarter Earnings Release Conference Call.

[OPERATOR INSTRUCTIONS]

As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, November 2nd, 2006. Thank you. I would now like to introduce Mr. Scott Wenhold, the Company's Vice President and Treasurer. Sir, you may begin your conference.

Thank you, Dennis, and good morning, everyone. Thank you for joining Graphic Packaging Corporation's third quarter earnings call. With me 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.

Before we get started, I would like to remind everyone that statements of the Company's expectations, including but not limited to the effect of certain contractual changes, expected cost savings, projected volume increases, expense estimates, capital expenditures and pension funding costs 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, Steve, I'll turn this morning's proceedings back over to you.

Good morning, everyone. Last night the company announced third quarter 2006 earnings reporting a net loss of $4 million or $0.02 a share. This compares to the third quarter of 2005 net income of $0.6 million or $0.00 per share. Excluding the approximate $4 million impairment charge for our Brazilian operations, third quarter earnings per share was essentially flat to the prior year.

In a moment, our CFO Dan Blount will walk you through the specific items that bridge current period financial results to the prior period. But to summarize the quarter, price increases for cartons and roll stock, continued progress with cost reduction initiatives and strong manufacturing performance more than offset cost inflation in the quarter. These gains, however, were tampered by unfavorable product mix in the non-cash Brazilian impairment.

Our strategy to pass along higher inflation to our customers is now gaining traction. Increased pricing for cartons, open market roll stock and containerboard contributed approximately $11 million in bottom line favorability when comparing to the prior year. In addition to contractual price increases related to inflation pass-throughs, pricing increased for open market roll stock and containerboard. Specifically, effective with shipments as of October 1st, the Company announced a $40 per ton price increase on all of our coated unbleached craft grades. This follows the $40 per ton increase that was announced last Spring.

Also during the quarter, the Company announced a $30 per ton increase in our coated recycled board calipers greater than 16 point and $40 on 16 point and lower. Increased containerboard pricing also helped us in the quarter as our medium sold for approximately $90 per ton more than the prior year quarter and linerboard average pricing was approximately $70 higher than last year's third quarter.

Also helping to offset inflation in the quarter was another successful quarter of cost reduction. Altogether, cost savings stemming from our continuous improvement programs and manufacturing initiatives totaled approximately $12 million in the third quarter. This brings year-to-date savings to approximately $39 million, on pace to duplicate last year's savings of $50 million.

Also on a positive note I am extremely pleased with the manufacturing performance this quarter, particularly at our US mills. As I pointed out in prior calls, our management team has been focused on upgrading our West Monroe, Louisiana mill's preventive maintenance program. This initiative is aimed at improving the overall reliability of the coated paper machines, and as a result production continued to improve during the quarter. As part of this program, the high pressure boiler at the mill was upgraded in August to allow for the optimization of bark usage and to generate more steam at a lower cost.

Similar to the Macon, Georgia mill, West Monroe has now successfully converted to pine production, creating ongoing savings from fiber optimization. In addition to the improvements at West Monroe, our Kalamazoo, Michigan coated recycled board mill reported record productivity rates during the quarter, resulting in favorable fixed cost absorption versus the same period last year.

Moving to sales, total coated board sales tons declined slightly from the prior year quarter. The primary driver of this was continued softness in US beverage demand. Specifically beverage carton shipped to North American markets declined approximately 2% from the prior year quarter.

Industry data also indicates that after a couple of strong quarters, total US beverage can shipments declined by 1% compared to the prior year quarter. The quarterly decrease in all US can shipments was driven by an approximate 2.3% drop in non-alcoholic can shipments. US beer can shipments, off a much smaller base than other non-alcoholic cans, were up approximately 1.5% versus prior year quarter but remain below historical averages.

On the food and consumer products side of the business, carton sales to North American markets were up slightly from the prior year quarter as volumes with our top five customers remain strong. Beverage companies and food and consumer products companies continue to innovate to grow their sales. And during the quarter Graphic launched new packages and placed several package machine orders in support of our customers.

First, Graphic worked closely with Bush Beans to develop a new pantry pack structure. Bush chose Graphic as both its packaging machinery supplier and carton vendor on the project to launch an eight-pack structure replacing shrink film . The machine startup was extremely smooth and beat the estimated timeline for entering full production.

Graphic's Z-flute structure continued its growth by gaining two new customers in the quarter. First, King and Prince Seafood adopted Z-flute for its warehouse club frozen fish packaging. The application represents the first one of our patented Z-flute substrate in the frozen food section. And second, GPI added Frito-Lay as a new customer for this packaging innovation with their 100 calorie warehouse pack.

Also in the quarter, our global beverage business placed three significant new packaging machines that are now resulting in new carton volume. First, Graphic placed a new packaging machine at Heineken, Spain and will be the 100% supplier to this operation in 2007. GPI also placed a new Quickflex line with SABMiller in the Czech Republic. And finally Brooklyn Beverage chose Graphic's Fridge Vendor packing style for their private label customer base. This application represents the first use of Fridge Vendor in the private label carbonated soft drink customer world.

To recap, cost inflation continues to negatively impact results in the quarter. However, our cost reduction initiatives, higher pricing and improved manufacturing performance significantly outpaced cost inflation during the quarter. Finally, to conclude my remarks, as was made public several months ago, I will be stepping down as the Company's President and Chief Executive Officer to assume the role of Vice Chairman effective January 1st. Therefore, this will be my final earnings call as David Scheible, our current COO, will take over as President and CEO on that date.

David and I have worked closely since the two legacy companies merged in August of 2003, and I can tell you that he is a strong executive and a highly respected leader. And although David is taking over as the Company builds momentum driven by the recent abatement in the price of crude oil and natural gas, I can assure you that we are also making good progress in getting customers to understand that its time for prices to move upwards.

We will also remain committed to our long-term strategies of taking cost out of the system by utilizing our continuous improvement and reliability center maintenance programs, and growing the top line through product innovation efforts. And, as I continue to have a significant financial interest in the Company's future, I'm able to leave my current responsibilities with confidence knowing that David and the management team will continue to lead Graphic Packaging in a promising and successful future.

And with that, I'll turn it over to Dan Blount, one last time, for a review of the financials.

Thanks, Steve. Good morning, everyone. As you just heard, for the third quarter, we reported a net loss of $4 million or $0.02 per share as compared to third quarter 2005 net income of $600,000. In our review of operating results, I'll start with revenues, then I will address income from operations. Third quarter net sales were 617.7 million, up 2% as compared to net sales of 605.4 million in the third quarter of 2005. In our paperboard packaging segment, net sales at 591.6 million were 5.7 million higher than the prior year quarter. Increased pricing drove approximately $7 million of sales improvement.

Overall volumes declined slightly, primarily as a result of weaker demand in North American beer markets and lower open market sales in Asia. North American beverage carton sales declined approximately 2%. North American consumer products and Europe experienced sales increases. In total, international sales increased approximately 8% and represents approximately 18% of paperboard packaging segment sales.

In the containerboard segment, net sales of 26.1 million were 6.6 million higher than the third quarter of 2005. Increased pricing was the primary driver of the improvement. Income from operations for the 2006 third quarter was $44 million, which is consistent with the 2005 third quarter income from operations of 44.1 million. Third quarter 2006 included a $3.9 million impairment charge in cost of sales related to our Brazilian operations.

EBITDA adjusted to exclude the impairment charge for 2006 third quarter was 95.7 million or 15.5% of sales. This compares to EBITDA of 92.7 million or 15.3% of sales in 2005. During the quarter, our cost reduction initiatives including continuous improvement programs and manufacturing strategies delivered approximately 12 million of benefit. We also realized price increases of approximately 11 million and improved manufacturing performance of approximately 7 million.

Inflation negatively impacted earnings by approximately 20 million in the quarter. Inflation was principally driven by energy, mainly natural gas, transportation and labor and benefits. Accounting for the remaining EBITDA change is an approximate $4 million impact from lower volumes and unfavorable product mix.

Turning to the remainder of the income statement, depreciation and amortization expense in the quarter was lower than the prior year quarter by $800,000. We expect full year 2006 depreciation and amortization to be in the range of a 195 million to 205 million. Selling, general and administrative expenses were reduced by $0.5 million versus the prior year quarter. Net of inflation and incentive compensation increases, the main driver of the decrease is the reduction in workforce that occurred in late 2005.

Other income expense, net was $700,000 favorable to the prior year quarter. The reduction included favorable foreign exchange settlements. We hedge currency exchange exposure of inter-company board sales to Europe and Japan. Year-to-date, other income is favorable by approximately $12 million due to favorable foreign exchange settlements and lower asset writedowns.

Net interest expense was 4.1 million higher than the third quarter of 2005 due to higher interest rates. Three month LIBOR increased by approximately 200 basis points to 5.5% from the prior year quarter. For the year, we expect total net interest expense to be in the range of 165 million to 175 million, including an approximate 9 million of non-cash interest expense associated with amortization of debt issuance cost.

Turning to cash flow, net cash provided by operating activities during the third quarter was 38.9 million compared to 42.4 million in the third quarter of 2005. Cash payments during the quarter included an approximate 23 million pension contribution, which compares to an approximate $15 million payment last year. For the full year, we expect contributions between 25 million and 30 million to the pension plans. We contributed 17.7 million in 2005.

Changes in operating assets and liabilities improved by approximately 11 million from the prior year period, a result of improved working capital levels. Capital expenditures were 13.9 million in the quarter, and we expect full year 2006 CapEx to be in the neighborhood of 60 to $70 million.

Liquidity remains strong. As of the end of third quarter we had 4.9 million in cash and equivalents, and 308.1 million available under our US revolving credit facility. Our total revolver commitment is for 325 million. As of September 30th, we had 5 million of cash borrowings and 11.9 million in outstanding letters of credit.

And finally, during the third quarter, total debt decreased by 20.8 million as compared to a 19 million reduction during the third quarter 2005. Total debt of 1.977 billion was 62.9 million lower than the third quarter 2005. For the full year 2006, we expect debt reduction to be in the range of 55 to $60 million.

And with that operator, we will open the line for the question-and-answer session.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of line of Joe Stivaletti with Goldman Sachs.

Hey, good morning. I was just wondering when we look at the third quarter EBITDA, obviously you talked about it with that 3.9 million added back, it is up a bit year-over-year. But it's up pretty dramatically versus the first half of the year. And we saw that pattern last year, and then we a saw noticeable falloff in the fourth quarter.

I was hoping maybe you could give us a guidance here, should we expect that same seasonal pattern or just some of this progress in the third quarter represented more of a return to some of the historical margins?

Hi Joe, this Dan Blount. We expect fourth quarter EBITDA to be up over the prior year, but it will -- due to the cyclicality of our business, be down versus the third quarter.

Okay. Can you sort of talk about some of the major sort of things that are driving that on a year-over-year basis? I mean is it more just exactly the same as we -- obviously we saw 3.2% pickup in EBITDA in the third quarter year-over-year.

Is it that kind of magnitude? I am just trying to get a little bit of hands on whether we should be expecting a bit more of a recovery on a year-over-year basis, given kind of how good this third quarter came in on an absolute basis?

I think you're going to see the same type of dynamics we saw on the third quarter in terms of pricing continuing to help us. We're continuing to manage cost downward, and our manufacturing performance continues to improve. So you are going to see those same types of dynamics in the fourth quarter.

The one major difference of course in the fourth is that, we do have our cold outage in West Monroe, Louisiana. So we take that down time during the fourth quarter. And so that's one of the reasons you saw some impacts quarter-to-quarter, and that of course will be consistent.

Last year, we did not have a full outage in West Monroe, so I think you'll see improved performance, despite the fact this year will have a full outage and last year we did not. So Dan is right, better pricing, maintaining cost, overall, the same sort of trend.

Hey Joe, its Steve. I think as we have tried to play out for you previously, there is some lag effect in recovery of pricing under the existing contracts. So there is a spring that has been winding that will start to uncoil in terms of recapture of the last implementation of recoveries.

As we said in the call, we are feeling that we are making real headway and gaining traction across the customer base, helping them come to terms with the fact that pricing needs to go up. And though it's somewhat episodic in terms of -- everybody wants to know when every contract expires, and we can't get to that level of detail. But we feel really good that the traction is moving in the right direction.

And I think, the wildcard of energy input costs are favorable at the moment on a comparative basis. And, at least looking at the key layers, it's going to continue and maybe even become a little more favorable and that should help us. So --

Right. Okay. Well, that brings me to sort of my next question, which was just in terms of helping us do some forecasting with gas, on the last call you said you are 80% hedged for the rest of '06 and 30% hedge for '07. Could you sort of update us there and give us some feel for whether you are sort of hedged -- where your hedges are relative to sort of stock price, so that we are not incorrectly forecasting energy price swings?

Yes, the main change since last call is we have increased our hedge position in the first quarter to 80%. And that would be at an average for gas used in the first quarter of about $8.09. That's the major change since last call.

From third to fourth quarter, given that you had done a lot of those hedges I believe quite a while ago, related to the fourth quarter of '06, should we assume that you are really not going to see an environment to now benefit from the fact that gas prices have declined?

That's correct.

Okay.

And just to continue that, Joe, you will see that product will be held in inventory. So there will be a period time in the first couple of months of 2007 where that higher cost inventory will roll through the P&L. So you will see that lag come through. So you are looking at -- the last month of the first quarter and in particular, the second quarter where we are going to get benefits from lower cost for energy rolling to the P&L.

Right. And so where does that put you in terms of your total percentage of your '07 needs that are hedged? I assume it goes up from that 30%?

Right, it's -- like I said, it's 80% in the first quarter. It's 30% for the remainder of the year. So I think our average is out somewhere around 40%, somewhere in that neighborhood.

Okay.

As we discussed last time, Joe, we think the risk premium built into the market is too great at the moment. So, as that changes then we will consider increasing our hedged position. But right, now it looks like an awfully big price to pay.

Right, right. Okay. And the last question I had was on how do you -- how are you situated in terms of your bank covenants looking into the first half of '07.

Yes. All that's is detailed in the Q. But what you will see is that we are in compliance with all of our bank covenants, and our leverage ratio is about 6.05 and the covenant is at 6.75. So there is plenty of cushion there.

Great. Thanks.

Okay.

Your next question comes from the line of Jeff Harlib with Lehman Brothers.

Hi. Good morning.

Hey, Jeff.

Good morning.

I don't know if you commented on credit agreement in the press release. Can you just talk about where you were with credit agreement EBITDA in the quarter and in LTM?

Yes, I can. Just in terms of credit agreement EBITDA, we have made a decision that due to the variability of that metric that we are going to cover it in the Q where we can better explain the components of credit agreement EBITDA. But in terms of where we stand, the leverage ratio was, as I said before, at 6.05 and the interest coverage ratio is at 1.8. So we are well within the levels that we need to be compliant.

Okay. Do you have the credit agreement EBITDA number for the quarter? I realize that is helped by pension but usually there is some other add-back.

Right it's about 326 million.

LCM. Okay.

Yes, the last 12 months. And it is actually been helped by the pension expense versus the pension contributions.

Right. Okay. And, can you just talk a little bit about demand? What are backlogs that you're seeing from your beverage and consumer customers heading into yearend?

The backlog for the open market is still pretty strong. And I think four to five weeks is about right on our board machines. Consumer products business has been pretty consistent. There are large customers in that space: General Mills, Quaker etc.. They have all had pretty solid years.

And our focus has paid off on those. Beverage demand has been a little variable. Steve mentioned that second quarter was great, third quarter was slow, and the fourth quarter is not traditionally the strongest quarter certainly for peers and that seems to be reflected in those volumes as well.

But it's pretty consistent with what we have seen historically. Imports are continuing to have a impact on domestic beer and we certainly feel that in our business and we will continue to during the fourth quarter as well.

Okay. Good. And Steve you talked about being satisfied with price increases, can you just address a little bit the beverage contracts, the '07, '08 maturing beverage contract, how far along you are on those and is that meeting your expectations?

Well, no, I will talk about it all briefly. I think the characterization we used in the script was, we're making good traction. And I think we've done a particularly good job of explaining and showing facts and data to customers to help them reach the same conclusion that we have that prices have to go up.

And the old line, many a slip tween the cup and the lips, so I don't want to be getting out in front of myself. But I would say that my general reaction or my general outlook is that we are right where we ought to be. We could be slightly ahead of schedule, but I am very pleased with the progress we're making.

Right. And you commented in the past about potential asset sales of non-core businesses. Any update on the status on that?

No progress of note. We have kind of what I would call formalized the process by bringing in some investment banking resources. And I think that should add a lot more traction to the process.

Okay. And last question, 2007 CapEx. Obviously '06 was a lower year than you had in '05. I mean if -- the number or maybe just talk a little bit about some of the things you'll need to spend on in '07, whether its capacity or equipment upgrades etcetera.

Well, I think that we are in a mode where there might be some replacement spending but we're not adding any new capacity. And we have allocated funds to continue our reliability centered maintenance efforts at the mill. We have talked about the continued strong growth in Z-flute and that will require some very modest investments to create a little bit more line capacity in that area.

But I think that the operating profile that we have been in the last several quarters will be sustainable through '07.

Okay. Good. All right. Thanks very much. And Steve good luck to you on...

Well, thank you.

On your tenure.

Thanks.

Your next question comes from the line of Christopher Miller with JP Morgan.

Good Morning.

Good morning.

Good Morning.

Two follow-up a little bit on the cost savings, obviously, you are tracking well towards your goal for the year. Can you give us a little bit more granularity in terms of how that's really been achieved, what you saw in this quarter? And then the expectation as you look to'07, you look to track on another, kind of, 50 million cost savings at this point?

Well, that would be yes and yes. We have tried to, to characterize but we have really kind of, two principal drivers of cost reduction; one is continuous improvement, which is utilizing a very comprehensive set of tools including Six Sigma and reliability center and maintenance.

And that focuses on a better use our operating assets, less down time, a higher speeds, more yield, less scrap and in our current operations we talk about lowering the cost of variation which is basically less scrap, getting up and running better, faster. And with all of those, we continue to have very strong improvements and see continued opportunity for the future.

Another area is where we apply some capital to drive manufacturing efficiency. And we've had several capital additions as previously noted, over the last couple of years. And those are starting to make very strong contributions. So you see some quarter-over-quarter improvement from continued opportunities.

We've been, I think, very unrelenting in our drive to reduce fixed overhead in the company where we have closed less competitive, higher cost, generally smaller facilities and bulked up in areas where we have better scale, better access to our customers from a ship to and better access to our mills and we see some continued opportunity in `07 for more of that. So it's really kind of a lengthy way of saying that it's more of the same, same kinds of activities and similar kinds of expectations as we look to '07, as we've had the last several years.

Okay. And then, you talk a little bit, and I think it was in reference to the beverage carton shipments that there was a bit of a mix issue. I think you are talking a little bit about the alcoholic beverages, then is this a mix strictly from your end, there was a mix in terms of what you are selling into your customers? Just trying to get a little bit better understanding there?

Partially mixing metaphors, US beverage carton shipments were down, it was particularly noted in the non-alcoholic can sector as we said before, cans tend to be more paper board in sense of a class of PET. We also are selling more product on a relative basis outside of the beverage channel, which gives us some mix issues in terms of both margin but also working capital.

And that's just kind of -- the vagaries of the multiple end-markets and channels and geographic areas that we do business with.

Okay.

That's the mix component.

Okay. That's very helpful. Thank you, very much.

Okay.

Your next question comes from the line of Bill Hoffman with UBS.

Hi. Good morning.

Hi, Bill.

Steve, I wondered if you could just talk a little bit about, it's just a follow on what you were just talking about the beverage/food consumer mix. I mean it seems like you guys have been working awfully hard to shift out of the beverage side, obviously because of what's happening in those end-markets.

But, as a whole if you take a step back and look at the company, we are really not getting any traction here. You know, where most of the increase in the EBITDA and recovery in EBITDA is coming from your cost programs and starting to try to push price at the end-market. And I just wonder if -- as you push, you try to push prices whether that makes it more difficult for you to actually gain traction into these other food consumer markets, and why we seem to be kind of stuck here from a volume standpoint?

Well, let's take a few pieces. We are trying to bring a close to the launch cycle where customer prices declined sequentially.

Okay.

And we have discussed that revenue has then taken a hit about 1% on average, with price give backs to the customers over the last several years. I mean you've got that bringing your top line down year-over-year and I think those days are behind us. We have talked a lot about focusing our energy around innovation and we are generating something in the range of $50 million of revenue each year of products that didn't exist the prior year.

And while we don't give a lot detail, we have acknowledged that the margin structure on those new sales is significantly higher. One, they really are innovative, they are not as heavily competed and they are protected by a lot of intellectual property. And, we haven't got any acquisitions to drive revenues. So in our case it's been a lot of mix. We've been driving down the amount of container board that we sell by plan, I mean that's a long recurring theme in this company.

So I guess if the question is, would we expect to have higher top line growth in the future. I think we've said repeatedly that -- when we think if we could get to GDP that would be pretty good. Given now, the one thing that will change that is, as we get more price -- positive pricing rather than negative pricing the revenue line as well as the bottom line are going to move up pretty strongly.

You know, I guess that I think I wanted to get to is more of as you shift this mix while you are trying to increase prices, doesn't that cause difficulty in executing the volumes of?

I don't think so. I think that the relative competitiveness of our company to the market really hasn't changed, okay. I think we are just part of a broader base of suppliers not just in paperboard but across all commodities that have determination to recover more of inflation through pricing. If you look at the consumer products business, the quarter-over-quarter results -- year-over-year results is up about almost 2% and about 1.5% of that is volume and 0.5% is price.

So what I would say is that we've been successful in continuing to push price in that sector as well as volume. Now, we have and I think we have mentioned before that we have exited some portions of that business, almost $60 million or so of business sectors that just didn't make a lot of sense for us to begin.

And so we've taken sort of revenue hits on that line but it's because we focused more on end use customers that we like relative to frozen or dry foods, and microwaveable products.So I wouldn't say that we believe that there is not a legitimate underlying growth strategy in consumer products nor do I believe pushing price in that sector will retard any growth prospects for us.

A more direct answer is Bill we are not losing market share in any of these spaces. I think our prevailing view of beverage is that our customers have over the last five or six years, have decreased volumes in the core product lines that are highly penetrated by paperboard packaging, which would be carbonated soft drinks and beer.

To lose some market shares to other competing trends whether it be water or juices or imported beer and sport drinks. And we have worked hard and I think pretty effectively to get paperboard packaging introduced in all of those other commodities, all those other drinks. But it's also a very small base.

So when you have, non alcoholic lets just say carbonated soft drinks: The demand goes down 2% and it's 70% paperboard for take home and the growth is in water, which is less than 5% paperboard penetrated has a negative mix effect. And I am not sure from where I sit, that I see the engine at the customer level rebuilding that core carbonated soft drink and beer volumes yet.

So we've been - and we're still a very significant leading market share player in all those. We pride ourselves as being the innovator in that space. But what we talk about involvesthings like Microwave, Z-flute -- more or less non-beverage. So that's where we are spending our time and money where we think there is the opportunity to grow and where the returns are much more attractive for every dollar in the sales, much more attractive.

That's terrific, guys. Thanks for the help.

Okay. Sure.

Thanks. Thanks, Steve.

Okay. Thank you.

All right.

Your next question comes from the line of Bruce Klein with Credit Suisse.

Hi. Good morning.

Yes. Good morning.

I was wondering, with what Steve said the use of beverage was the -- you had beer can shipments, was that up. I think you said earlier wasn't 100%?

Yes. Can shipments were obviously up a little bit in the quarter, but overall can was down because of non-alcoholic, primarily carbonated soft drink, which is a much larger base in can shipments. And Beer is more glass intensive.

You may remember that soft drink guys ran a big promotions during the second quarter. And so you saw a little bit of pull back as consumers sort of rush through the inventory that they built with the heavy and highly promoted can shipments during that quarter in soft drink.

And Steve, I am just wondering, I know your comments on contracts are confidential. I can appreciate that, I am wondering, if you would share with us whether you're just sort of confident with some of the conversations you are having, is that something you would share with us?

Well, not as granularly as you might like, but we wouldn't have optimism and describe traction unless we were confident that these discussions will actually result in favorable restructuring and renegotiation of these agreements. You know it's a little bit awkward, but I think in deference to our customers.

I just think that, they get it, we have done a very good job of meeting with the senior people of all of our customers and laying out the facts and the case and the data. And that isn't to say they like it, and that isn't to say that they are enthusiastic about it, but they got it. So, its just going through the kind of the final negotiation of when and how and you know all of the related terms, but there is no question in my mind that there is a resetting of the economics in the business, no questions.

That's helpful. Thanks. And then on all of the 18 and 24 pack corrugate, some conversions to SUS is that, gaining more or less traction, any update there?

Well, it's an area of that it's really -- we're waiting for our customers to make a firm declaration. Our general sense of that is that they're going to make the conversion. It might be slightly later than what we have previously been told to expect. But I think you will see a significant conversion start of early next year.

I think what we would say about that is , this quarter, we spent time with our -- with number of our customers by getting products in the marketplace, getting consumer feedback, getting through our customer operations and what we would say is everyone of the feedbacks we got on that front is been positive.

The products performed well with our customers -- our plan is to perform well in the marketplace. It has some significant advantages for our customers so what I would say is that important elements are lined that you should expect this to become a package of growth in the future. Trying to handicap when exactly that conversion will take place-- we are just not that good at this point in time.

And then the gas story I guess is going to help probably quite a bit, assuming we stick in these ranges I assume for '07 given where you are hedged.

That's correct.

And then...

It's about $10 million favorable for the first quarter.

Yes.

And of course that was the noticeable level for last year...

First part of '07 the benefit you are saying year-over-year?

Yes, it's year-over-year first quarter.

Right, I got you.

Okay.

And then obviously the working capital should come down for 4Q if you are going to meet your debt target? Is that fair?

Yes. The cash flow should go up.

Right. Cash flow will increase but in terms of working capital and Steve already made this comment because some of the shift in terms of the mix of customers.

Yes.

Our account receivable is going to rise slightly so we expect working capital to remain pretty much flat to where it is at the end of third quarter.

Okay. I guess that's a good thing and it will come from other sources. Okay I appreciate thanks guys.

Okay. Thank you.

Good luck to you, Steve.

Okay. Thanks.

Your next question comes from line of [Peter Corey] with Durham Asset Management.

Sorry. My question was just was answered. Thanks

All right. Thank you.

Your next question comes from line of Jeff Bencik with Jefferies and Company.

Hi. Thank you. Could you tell me what the -- if there were any FX impacts in terms of revenue in the quarter?

The exchange in the quarter I talk about -- I'm talking about the EBITDA line, because there it is just a slight impact.

Okay. And then the revenue line, that will be roughly the same?

$2 million.

Okay. Steve just in terms of the way you are talking today on the call versus what you were talking last quarter on the call, in terms of the contrast you seem significantly more positive on what you can get out of it, previously you said that you would not be able to at least fully offset or maybe not even recapture any of the past -- raw material inflation. Is that changed now, and am I reading that correctly that you're going to at least get some of that back now?

I would say there is some possibility of some margin recapture. I think that, the kind of body language that I would want you to have is that, we have another quarter of experience under our belt of meeting with and talking to various senior people and all of our major customers.

Making the case to why prices need to go up and as I said, I think our customers get it, they don't like it, they are not happy about it, but they understand and I think that, that is you really can't expect to get closure until the customer buys into the promise.

And I think a lot of progress was made in the last quarter. So, I think that is deserving of a more optimistic outlook, whether as you try to pencil in numbers or drop in numbers for '07 we are not prepared to give guidance.But I think from what I have seen over the last quarter its deserving a slightly more positive and upbeat stance.

Okay. And then in terms of your debt reduction, I think previously you were talking about 65 million for '06. And today you're talking about 55 to 60. Can you just talk about that, what is accounting for that change?

Well I think that Dan drove everyone's attention that working capital would be slightly higher because of our channel mix and we are thankful for the revenue, but just going to have a little bit more money tied up to support that revenue.

That's correct. If you go back to the comments in regards to a slightly lower sales in North American beverage. Those turn very quickly in terms of those receivables. So, consumer packaging turns slightly slower and then international turn is even slower than that and that's where our growth has been.

Okay. And in terms of the 60 million in businesses that you have sort of lost this year, is that going to be similar next year, or does that sort of flat line which would allow you're doing 50 million in new business each year to sort of accelerate your growth.

I think we have exited those segments that, that where we concluded that either the business is just not attractive or we don't have the right competitive platform and I think we are pretty well done with that. And so I think you could expect that the whatever pricing is achieved plus the new products would be accretive to revenue growth.

Okay. And if you can just talk about the juices and PET business, I know you mentioned it is less than 5% penetrated, but I guess you started to go into that business a year or so ago, what is the growth rate and is that ramping as you expect and when does it really become meaningful?

Well the answer is, it is a very small base, generally speaking the growth rates are pretty strong, but it's going to be a long time to take a small base and turn it into a bigger base. And that's why I was trying to be very careful to say that even a modest drop in cans where paperboard is so highly penetrated , just cannot be overcome and won't be overcome for the foreseeable future in these other drink segments. It's the right thing for us to work on and we are -- we've got a great product solution both from machinery and packaging but it's just -- it's a up hill climb.

And Steve can you -- since I wasn't around, what's happening can you refresh my memory, in terms of how long it took for -- sort of to get to decent level of penetration in cans with folding carton and --

Years.

And the heck of it is, I wasn't in the business then, I was out of diapers, I am happy to add. But, back in the 70s and early 80s the people who were in the business at that time that -- taught me a lot about this business acknowledge that at the time so called experts thought that paperboard had no future, because it tends to be a higher cost packaging solution.

And notwithstanding that it really became the norm for take-home. So, we've talked in the past, and I don't really want to try to tell the customers how to run their business, but I think that paperboard seems to be associated with brand building. It has its own distribution advantages in terms of selling and getting through the wholesale distribution system.

So when a category goes from high growth ,and it's more hotly competed that's when we generally see the opportunity for paperboard to increase. So I think that, for the foreseeable future, we are handicapped by -- our customers seem to be willing to let their volume drop in beer and carbonated soft drink take home and paperboard sectors, can make it up in pricing and other product categories that are less paperboard intensive. And, will that last forever, I don't know, and that's what we've been observing the last four or five years.

Okay.

And then finally, what is your total annual natural gas purchases in volume?

8.5 million MMBTU.

Okay.

All right?

All right, thank you very much.

Thanks. Operator, I think we're at the point in the call --

I have one more comment.

Go ahead.

Yes. I just wanted to, there have been various questions in regards to credit agreement EBITDA and I just wanted to point out to everybody that the calculation of credit agreement EBITDA can be found on the company's website, and that's at www.graphicpkg.com. So if you want to get the calculation before the Q comes out, its there.

All right. I think, Operator we are about to the point where we could entertain one more call.

Yes, sir. The final question will come from the line of Durham Asset Management.

Hi, thanks.

Hi.

Made it just in under the gun.

Very good.

Couple of quick follow-ups. Just to get my ducks in a row. North American food carton sales, you mention were up slightly, is it?

That's correct.

Could you quantify, did you place a number on that or are you just giving kind of general commentary there?

No, I think -- well I don't think we give you an exact number.

No, I think it's about -- I think it's about 1.7% -- you give me a second I'll look it up. I think it's 1.7% in the consumer products area.

Okay.

All right.

And then beverages, North American beverage is down 2%, is that right -- sales?

Yes, yes, it's correct. It's about right.

And did you mention what the international beverage sales were -- change there?

We mentioned that the international sales were up 8%.

All right. Okay. Any reason why you don't disclose that in the press releases any more?

In terms of what item?

Well, all three, I mean, historically if look back when you talked about sales in general you would, kind of, highlight those figures specifically and I don't -- haven't seen that in the last couple of quarters. I just wonder, if that was a conscious change or --?

Our decision process was to report segments sales in compliance with GAAP, and that's what we are disclosing in our press release. And in the Q when we go through those numbers we have a lot more detail, we are able explain it better in terms of the components of those segments and what has changed.

Okay.

So, it should be in the Q and I don't think I saw it there either, well maybe I missed it.

There is more information in the Q about the components of change in those segments.

Okay.

.

That's all I have. Thanks.

All right. So, thank you. Thank you, operator.

Thank you very much everyone for joining in for this morning's Graphic Packaging Corporation Third Quarter earning release conference call. You may now disconnect.