Graphic Packaging Holding Co (GPK) 2008 Q1 法說會逐字稿

Good morning, my name is Thia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Holding Company first quarter 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, May 9th. Thank you. I would now like to introduce, Scott Wenhold, Vice President and Treasurer. Sir, you may begin your conference.

Thank you, operator. Good morning, everyone. Welcome to Graphic Packaging Holding Company's first quarter earnings' call. Commenting on results this morning are David Scheible, the company's President and CEO; and Dan Blount, Senior Vice President and CFO. Before we get started, I would like to remind everyone that statements of our expectations including but not limited to the achievement of synergies and debt reduction, pension contributions, capital spending, interest expense, and integration expenses constitute "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial, and competitive 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.

These risks and uncertainties include, but are not limited to inflation of, and volatility in, raw material and energy costs, the company's substantial amount of debt, continuing pressure for lower-cost products, the company's ability to implement its business strategies, including productivity initiatives and cost reduction plans, currency translation movements and other risks of conducting business internationally, the impact of regulatory and litigation matters, including those that impacts the company's ability to protect and use its intellectual property, and fully recognizing the anticipated benefits of combining the operations of Graphic Packaging and Altivity Packaging. Undo reliance should not be placed on such forward-looking statements. 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 these and other risks is contained in the company's periodic filings with the SEC. And with that out of the way I'll turn it over to David.

Thank you, Scott. Good morning everybody. Yesterday the company announced solid first quarter 2008 results, excluding charges related to the combination with Altivity Packaging. Adjusted net loss was approximately break even compared to an adjusted net loss of $0.19 per share in the prior-year period. The strong performance came despite closing a complicated transaction during the quarter and operating in an extremely difficult inflationary environment. As I mentioned in last night's earnings release, despite the many hours necessary to complete the combination with Altivity, I'm proud that our teams never lost focus on the day-to-day operations. I'm equally pleased with what I observed as the same focus and dedication in the Altivity organization as they continued to perform similarly to Graphic Packaging. I want to thank George [Bayly], and Don Sturdivant and their entire team for continuing to drive the results during this period of time. We are glad finally to be working as a single team. The logic of the combination with Altivity is powerful. We created a diversified packaging company with global reach, a shared history of innovative products and a manufacturing footprint to address customer needs in both the national account and regional packaging arenas.

The timing of this combination is also important. Graphic Packaging is now the largest folding carton manufacturer in the world, and we believe this increased size and scale will be crucial to successfully operate in the face of rapidly rising inflationary pressures and economic uncertainty. Graphic Packaging, now approximately $4.4 billion in expected sales, has the necessary scale to compete effectively in the global arena.

Our manufacturing system is second to none in this space, and will include 4 CRB mills and two SUS mills, combined producing over 2.4 million tons of paper. We'll have 46 folding carton operations, the largest multi-wall bag network in the United States, three manufacturing facilities making flexible packaging, three label facilities, and three packaging machinery production facilities as well.

The combination has diversified our product line and provided new opportunities for top-line growth. We remain the largest manufacturer of beverage cartons in the world, and now we are the largest manufacturer of cartons for the consumer food and use sectors as well. Serving both national accounts and regional players,we have expanded our focus in paperboard food and beverage sectors, which we believe will outperform the general market in a tough economy. But our mix now also includes a solid position in the multi-wall bag sector, a flexible packaging business, and a fast-growing label business. The combination provides us an opportunity to better balance our mix and grades and now help us deliver complete solutions to the customer. We're very excited about the opportunity to create a much larger solution set for our customers than either company can offer alone. John Best who heads our new product development group and Tony Hancock have combined to create a formidable team focused on creating valuable, value-added new products. Both companies have a rich tradition of creating innovative packaging that makes our lives as consumers easier. This tradition is illustrated by Graphic Packaging's microwave technology that was developed to enter the chilled food market for deli products, and its patented dispensing technology to provide customer convenience in the take-home beverage phase. Altivity's new shape FX multilayer paperboard and film lamination is the first packaging concept to unite shrink film with folding cartons and specialized diecuts. This creates a uniquely shaped package design with show-stopping market impact. Our customers are increasingly spending more dollars towards on the shelf differentiation. The new company's strength and innovation will allow us to capture a large share of those expenditures.

And finally, cost reduction through the use of continuous improvement principals is embedded in both company's cultures and on a combined basis with an experienced management team, will lead to significant synergy savings over the next several years. Since 2003, Graphic Packaging has reduced operating costs by approximately $170 million through its dedicated continuous improvement methods such as Six Sigma, process management, and a reliably centered maintenance. Don Sturdivant and his team are well down the path to improving our cost position through dedicated lean manufacturing principals and legacy Altivity facilities.

We have seen results that show they are achieving the cost takeout since the [Smurfit] and Field merger in 2006. Synergies are going to be critical to in this rising inflationary market. We said before the merger, we expected to combine the company would lead to an incremental synergy opportunity of $90 million by 2012 and that two-thirds of this will be achieved by 2010. Now that we have come together and been able to review our plan, we can confirm that the cost takeout will be achievable and clearly, our internal expectations are significantly higher. We are working to accelerate those efforts as we face increasing inflationary pressure in our markets. The critical components of this plan include operating expense production, supply chain procurement improvement, mill optimization and manufacturing process rationalization and improvement. The integration teams are already in place and working. We have begun the process of synergy realization. I previously announced our senior team that includes members of both legacy organizations. We now have established all operational teams, our corporate staff. We've combined our sales and new product development organizations, we've created one logistics and continuous improvement organization, and we are on the way to merging all key HR processes as well. Dan and his team have a solid plan to create the financial accuracy and compliance we are known for and we have initiated transition to SAP across the entire organization. Our plant rationalization plans are already underway. As you know, we previously announced the closure of two converting facilities earlier this quarter.

In a moment our CFO, Dan Blount, will walk you through the specific items of current financial results for the prior period, but let me summarize. Net sales increased approximately 24% year-over-year, and that included a roughly $113 million of Altivity sales for the 21 days in March. First quarter adjusted sales were approximately 5% over the previous year period. Our first quarter gross margins improved to 12% from roughly 9.6% in the previous year quarter. Stand alone gross margins were about 14.1%, despite the fact we experienced approximately $27 million worth of input inflation in the quarter.

The improvement was the result of improved manufacturing performance, particularly at our West Monroe mill and higher pricing added roughly $11 million in the quarter. First quarter adjusted EBITDA, excluding charges related to the combination, was over $98 million, representing approximately a 52% increase over the prior-year period. Altivity's inclusion in the results positively contributed $7 million to the total adjusted EBITDA as well. As I mentioned, healthy top line growth contributed significantly to our overall improved financial results. Stand alone Graphic carton sales to North America markets were up approximately 6% over the prior-year quarter. In addition to higher contractual pricing, the quarterly sales improvement was driven by volume increases in beverage and favorable mix in food and consumer product packaging. We observed a very similar trend in the Altivity mix as well with food and beverage sectors driving year on year increases of the same magnitude.

Although beer take-home volumes in the United States remained flat to slightly negative, we continue to see favorable prior-period comparisons for our beer carton volumes. Our first quarter beer volume was up about 3% higher than previous quarter. Particularly we are now converting the 18 and 20-bottle packs for one major customer, having moved them away from a corrugated package into our 100% solid paperboard package.

Import beer growth has slowed or stopped for a couple of years as consumers become more price conscious in this market. We have seen a similar trend towards less on premise consumption versus takehome; $4 gas tends to keep us at home.

Even though total U.S. soft drink shipments remain depressed, several factors drove an approximate 6% increase in domestic shipments. First, we experienced some share gain with the major U.S. supplier, and second, we are now reaping the benefits of our product innovation efforts, particularly in the energy drink markets. As I mentioned in last quarter's call, in order to offset the declining carbonated soft drinks, the major bottlers are broadening their offering in sport and energy drinks, isotonics, and high end teas. Industry data indicates that energy drinks, for example, grew by over 24% in 2007. Although this is off a smaller base than carbonated soft drinks, we are gaining traction in converting these fast-growing segments to paperboard packaging. For example, Pepsico's Mountain Dew AMP, which was launched in modified Graphic Packaging [Fridge-Vendor] packaging in 2007 is now starting to take off in the marketplace.

In summary, the investments we made early on to develop innovative packaging and build specialized machinery for this new consumer trend is paying off in sales and profits. In addition to strong beverage volumes, positive mix, particularly for food and consumer product cartons helped drive the topline increase in this quarter. The fact that our economy is struggling right now is certainly not a good thing, but as the consumer is pinched by prices at the pump and higher cost per other necessities, there is a benefit to our business, more people begin to eat at home as opposed to going out to restaurants.

We can see this in products like ready to eat cereal which was up 15% over the first quarter of 2007. Frozen pizza sales increased almost 10% as well. Due primarily to increased sales of microwave packaging, frozen food carton sales were up almost 6% higher than the previous year quarter. Fortunately, we are now positioned to be able to meet this demand for higher products as we freed up converting assets in the second half of 2007 by actively exiting lower-margin, slower-growth businesses. We have observed the exact same trends in Altivity's end use sectors as well. Both dry and frozen food is up, while products focused in the home building or durables have seen slower growth. Additionally, we have been able to renew critical customer contracts in this space, so we are comfortable about forward trends in this business.

We remain more committed than ever to pushing the top line by introducing new innovative packaging solutions to our customers. You may remember that in 2007, we saw $49 million of growth in new products. In the first quarter, we saw an additional $22 million of new product sales, our food and consumer products business had an extremely strong quarter for new product sales. As more people returned to the center of the store, our customers use our products to capture share of the consumer food dollar. For example, Hormel launched their simply Tsang product line -in a GPI Z-Flute carton designed for retail shelf-display. This carton design provides both shipping and retail display capabilities. ConAgra launched their new Orville Redenbacher's gourmet varieties popcorn warehouse pack in a Z-Flute construction as well. ConAgra saw terrific value in the shelf appeal of this high strength carton within a warehouse club environment. In active microwave packaging, GPI had three launches with Kraft. Kraft launched a new line extension to their Oscar Mayer's fast franks product line with a sausage and bun product. Kraft also launched a new Deli creations flat bread product line. Finally, their South Beach Living brand launched a new microwavable sandwich product. All of these launchings use Graphic Packaging's patented microwavable structure design for use with refrigerated products.

Our active microwave business also saw major Nestle products launch with the new hot microwavable sandwich on the Stouffer's brand. Finally, Kellogg's launched a multipack of single serve cereal pouches in a Graphic Package design dispensing carton for a variety of new brands. This product allows the consumer to have their cereal on the go many times during the day, and is expected to lead to a multi-million dollars expansion in sales.

In addition to topline growth, both the use of lean manufacturing along with other proven methods, including Six Sigma process management, we recognized almost $13 million of lower operating costs in the first quarter. This is an area where Altivity also excelled as their cost takeout plans are well-organized at the plant level and results are positive. We are building on this momentum. Additionally, improved manufacturing contributed approximately $22 million to the bottom line in the first quarter. The majority of this improvement occurred at our mills as the three Legacy Graphic mills produced 46,000 tons more in first quarter of 2008 than we did in 2007, and the average cost to produce a ton of board at these mills decreased by approximately $28 a ton, despite $27 million increase input inflation in the quarter.

I can also tell you that Don and his team had a great operating quarter in the CRB mills and Altivity as well. Higher throughput, lower cash costs in those mills. Our primary folding carton business is geographically located in the midwest. And post sale of the Philadelphia and Wabash mills, our core CRB system in this critical geography will be over 700,000 tons, including mills in Kalamazoo and Battle Creek, Michigan and Milltown, Ohio. And will by our estimates, be the lowest cost per ton system in the industry.

Turning to our SUS mills, efforts to upgrade the West Monroe, Louisiana mill infrastructure in 2007 are proving to be a success. We produced approximately 20,000 more tons of board at West Monroe than in the first quarter of last year. In addition to improved operating equipment effectiveness, our measure of manufacturing performance, the mills are using less higher priced raw materials like fiber and energy. Given the dramatic increase in more traditional energy sources, we are focused on alternative energy options by forming more of our biomass byproducts as a substitute for natural gas. Our investments in 2006 and 2007 to upgrade our digesters, for instance, reduces the need to purchase energy in both [Macon and West Monroe]. This will be a critical focus through the remainder of 2008 as we work on ways to not only reduce natural gas usage, but also lower the amount of chemicals, fiber and water we need to make board from our mills. We have hired outside industry experts to assist our local West Monroe team specifically focused at this objective. We believe the benchmarking and learnings will be translatable across the entire mill system. Although we are constantly looking for ways to lower cost, unfortunately inflation will continue to negatively impact us across the entire enterprise. Infra costs were up roughly $39 a ton for 2007 across the combined mill system, about equal in CRB and in SUS. This quarter the inflationary impact was driven mostly by higher cost of fiber both in our virgin and recycled mills. We believe fiber cost will mitigate some going forward, but the cost of energy and oil-derived products will continue to impact us in 2008. As I've said in the past, many of our raw materials are positively correlated with the price of oil which seems to be reaching new highs every day. Graphic Packaging, on a combined basis, will buy roughly $63 million a quarter of energy-related input. So movement in natural gas or electricity certainly has an impact on the bottom line.

Fortunately, the nature of our business has changed dramatically from the last time we were hit by rapid inflation. At that time, we were locked in to many contracts where we were actually giving back price to the consumer. Our contract renegotiations over the last year and a half have changed that. We now have seen 12 consecutive quarters of increased pricing over the prior period. Building on full year 2007 price increases of almost $43 million, higher pricing positively impacted results by another $11 million in the first quarter of 2008. In addition, many of the contract price escalator triggers are lagged, so you will continue to see improved pricing through 2008 and well in to 2009, which will help mitigate some of the impacts of our higher priced inputs. Altivity contracts also mirror this effect, and we expect pricing recovery going forward there as well.

The recent combination with Altivity will also help us weather the storm better than last time as size and scale should provide us an asset towards managing costs in this inflationary environment. Given the business environment, it's even more crucial to achieve the premerger identified synergies and roll out our cost-cutting programs across the entire organization. As a result, we will be expediting certain planned integration expenditures that were originally scheduled for 2009 and 2010. This will help combat the negative impacts of inflation earlier thus positively impacting 2009 and 2010 results.

To summarize, it was an excellent operating quarter for Graphic Packaging and Altivity contribution was positive. The merger with Altivity is in full swing, and the business is performing as expected. The new teams are in place, and synergy activities are underway, and we are looking to accelerate these efforts in light of a tough operating environment. Inflation, particularly in fossil fuel-based products will be an issue for us the remainder of the year, and we will continue to concentrate our efforts on usage production across our enterprise price. Finally, our bottom line focus is on getting cash out of this business to reduce our overall debt. With that, I will turn the call over to Dan Blount for a detailed review of the financials.

Thanks, David. Good morning, everyone. As you saw on yesterday's earnings' release, first quarter financial performance shows strong improvement over the first quarter of 2007. Taking a look at some key metrics, we see as David mentioned, gross margins improved a full 2.4 percentage points to 12% from 9.6%. Adjusted EBITDA margin, improved to 13.6% from 11.1%. To better compare performance to the prior year, we adjusted 2008 EBITDA to exclude charges associated with the combination with Altivity. And finally, adjusted net loss improved by approximately $38 million to a loss of $1 million. Adjusted net loss excludes business combination charges.

As David highlighted, operational management's strong execution of our business strategy continues to drive financial improvement. In our financial results, these improvements are reflected in continued success with our cost-reduction programs, as well as price and volume increases. Inflation is partially offsetting the positive gains. Altivity results only had a minor impact on operating metrics, as the transaction did not close until March 10th.

Now please note that a reconciliation of non-GAAP terms as well as additional information for legacy Altivity can be found on our website at www.graphicpkg.com. It's under the investor relations section. Before I provide further analysis of Q1 performance, I'll spend a moment on reporting segments. As a result of the combination with Altivity, we positively diversified our company. Thus, we revised financial reporting segments. The containerboard segment was combined into the paperboard packaging segment; plus two new segments were created. Going forward, we will report in three business segments. Paperboard packaging, multi-wall bag, and specialty packaging.

The paperboard packaging segment includes our highly integrated mill and plant system that produces board and converts it in to folding cartons. This segment will also include the design, manufacture, and installation of packaging machinery, and the open-market sale of folding carton grade board and certain containerboard substrates. The multi-wall bag business segment includes the production and sale of multi-wall bags, consumer bags and specialty retail bags. The bag serves a wide range of industrial and consumer product applications, including fertilizer, chemicals, concrete, pet, and food products. The third and smallest segment is specialty packaging. It includes flexible packaging, label solutions, laminations, and ink coatings. All of these products are used in a wide range of consumer applications. Ink sales are principally internal.

In future conference calls, we will provide analysis of combined company performance by segment that will include historical Altivity pro forma information. For this quarter, since only 21 days of legacy Altivity financial results are included, my comments will focus on separate Altivity and Graphic results.

For the stub period, included in Q1 results, Altivity performed in line with our expectations and contributed $113 million to net sales, and $7 million to adjusted EBITDA. To provide guidance on Altivity's annual revenue and EBITDA performance, we reference Altivity's unaudited 2007 financial results, which are posted on our website. For 2007, Altivity sales were approximately $2 billion. The Altivity management team delivered strong cost improvement of $50 million, and adjusted EBITDA was $206 million. Now these 2007 adjusted EBITDA includes $30 million of nonrecurring cost add-backs, principally related to the merger with Field Container, and post-merger integration initiatives. Based on Altivity's performance through Q1 and projected performance for the remainder of the year, we expect Altivity annualized financial results that will contribute to combined company performance to exceed 2007 levels.

Now turning to Legacy Graphic delivered strong Q1 sales, and EBITDA improvement. Sales at $611 million improved by $27 million or 4.7% due to improved pricing, improved product volume and mix, and foreign exchange rates. Now the detail. The price improvement reflects negotiated and contractual inflationary cost pass throughs as well as price increases in open-market paperboard sales. For the quarter, price improvement totaled $11 million. Improved product mix was primarily in the cereal and frozen food product lines. Improved volume primarily resulted from beverage carton volume increases, resulting from the introduction of 18 and 20-beer multi-packs. For the quarter, net sales improvement from volume and mix totaled $8 million. The remainder of the sales improvement is from foreign currency exchange.

Now EBITDA. Graphic contributed additional EBITDA of approximately $91 million. This excludes charges of approximately $10 million related to the combination with Altivity. The strong improvement over the prior-year period was due to increased sales and strong cost reductions partially offset by inflation. And here's the details. Increased pricing, strong volumes, and better sales mix drove $14 million of EBITDA improvement. Cost reduction delivered $35 million of EBITDA improvement, approximately $22 million of this cost reduction was at our West Monroe mill, where our initiatives to improve operational efficiencies is delivering results. The remaining cost reduction is primarily from continued success with our continuous improvement initiatives.

Inflation in the quarter totaled $27 million. I'll provide more comments about inflation later. In summary, looking at Q1, we see strong financial performance improvement by both companies that substantially exceeded inflation. The rate of inflation, however, is currently about double the rate that we experienced in 2007. We believe that inflationary pressure will continue to negatively impact results for the remainder of 2008. At the same rate that we just experienced in the first quarter. Inflation indexed escalators and sales contracts will partially offset inflationary increases, but there is a lag before the price recovery. We expect the market to react to cost increases and raise open-market board prices, but that will depend on demand/supply economics, plus there will also be a lag.

We have initiated several new projects to reduce energy usage, decrease raw material waste, and substitute high-cost inputs, while these initiatives are expected to generate significant savings, most of the savings will be realized in 2009. Overall, to summarize this, we feel that expected price increases and cost-reduction initiatives will more than offset the rate of inflation being experienced, and we will continue for the remainder of 2008 to deliver improved performance over the prior year. Incremental to this financial improvement will be synergies realized from our integration activities.

Now before turning to cash flow, just a few comments about our integration process and expected synergy delivery. As you know, we assembled an experienced full-time team to drive integration projects. To date, all major integration projects are in full-scale execution. We believe the initially defined synergy benefit of $90 million is the low end of the benefit range, and we will be able to accelerate synergy delivery. We are starting to see synergy benefits in our performance, starting with next quarter's earnings release, we will begin reporting benefits realized and associated one-time costs incurred to deliver the synergies.

I will end my discussion with a couple of comments about cash flow. For the first quarter, net cash used in operating activities, was approximately $41 million greater than the first quarter of 2007. Approximately $10 million of this use was related to expenses associated with the close -- with closing the Altivity transaction. And the remaining, approximately $29 million, was related to the timing of pension contributions. The Q1 pension contribution is one-half of our expected 2008 total estimated contribution of approximately $60 million. Now looking forward, we expect cash flow available for debt reduction to be $120 million to $150 million over the next three quarters for the combined company. This projection includes capital spending of $140 million to $160 million, cash interest payments of $160 to $170 million and nonrecurring charges for integration initiatives. And finally, in regards to the credit agreement at the end of the quarter, we were comfortably within compliance with the senior secured debt covenant. And with that, operator, we'll open the line for the question and answer session.

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A roster. The first question is from Joe Stivaletti with Goldman Sachs.

Yes. Good morning. I just wanted to clarify a few of those last numbers that you just mentioned, Dan.

Hey, Joe, could you speak up a little bit, we're really having a difficult time hearing you.

Sure.

Thank you.

The contribution -- just to clarify a few of those numbers. The pension contribution you're expecting for the full year of $60 million.

Yes.

Is that your expense or your cash contribution?

That's our cash contribution.

Okay. And how do you think that will compare to the expense?

That's going to be greater than expense. Somewhere in the range of $25 million.

So the -- the -- the expense will be 25 lower than that, roughly?

That's correct.

Okay. And then on the -- those other numbers you just gave us, those are for the nine months -- the final three quarters of the year, that CapEx and the interest budget and the free cash flow?

That's right. The numbers we reported in the first quarter would be additive to those to get the annual numbers. So I gave you the Q2 through Q4, which would be the combined company numbers going forward.

You said 160 to 170 for cash interest.

Right.

And then what were the nonrecurring integration charges? I didn't catch that number.

We didn't give an amount for integration charges, but our estimates are included in the overall cash number, which we gave you guidance on, that would be in the $120 to $150 million range.

Okay. That's fine. And -- what are you -- are you able to break the synergies down any more in terms of trying to give us a feel for what you might actively be able to show in your '08 numbers, that $90 million?

Well, what we're going to do going forward is -- you know, starting with next quarter, we're going to give very precise information of the synergies that are rolling through the financials as well as the nonrecurring costs that were incurred. I think at that time we'll be able to provide more guidance on our synergy activities, and including updates on amounts of synergies we expect overall. So the second quarter is going to have a lot of rich synergy information.

Okay. Yes, that's very helpful. And I guess just a final question, when you talk about these contracts with the escalators and what not, I mean, can you put -- can you sort of quantify the -- the percentage of your overall business that you now have where -- where escalators apply?

It's -- across the entire business, both Graphic and Altivity, Joe, it's a going to be a very, very high percentage of our business in -- at least in the carton side of the business. When you look at paperboard, paperboard tends to be more of an open market as the price moves up, board price moves up, but in all of the fold -- in most all of the folding carton businesses, it is probably -- I would say in a combined basis, at least 90% of our business will be in some sort of a contract that will have some escalation process whether it's board or more recently in some of the larger national accounts, you're finding more-- they want more visibility over the cost escalators, but regardless, you'll continue to see pricing move up in '08 and in '09 as we roll through the subsequent quarters.

So what is -- what's the normal lag in those contracts? I mean, state 30-day or a 90-day pass through or --

Yes, it's -- pretty much by our traditional, which has been in most of though contracts are sort of trued up on a year's basis. Right? You look at the previous year's inflation, and you capture it in the next year is sort of the way it goes. There are some with shorter duration. There really aren't any beyond a year, but for the most part, I think the way we look at it is that it tends to be a year lag for the carton side of the equation. Board pricing, as the board prices announce and recognize, it tends to move up pretty quickly for open-market board.

Okay. Great. Thank you.

The next question is from Bruce Klein with Credit Suisse.

Hi, good morning.

Good morning.

You touched a little bit more on volumes, you mentioned think your beer shipments were up 3%, and your soft drinks were up 6. That was right? That was the first quarter over the prior-year first quarter?

Yep. That's right. Bruce.

And food and consumer, was that up? I know you said, I think your revenue was up, but I didn't know the breakdown.

In the food sectors of those businesses they were up. We got, we exited sort of in capacity preparation, some areas that were not really food-related for us, so the net is just the slide up. But if you look at what we would consider our core sectors, dry food, frozen food, almost all food, on average, we were up 6% in those spaces, and some of them are much higher. Like I said, cereal was up, I think 15% or something year-on-year across the space, which obviously is , and that is pretty incredible in a space that is typically GDP sort of

And sort of volume trends continuing? I guess that's sort of bucking the trend a little bit and general economy --

Yes, what I would say is that -- that our plants that are focused on those sectors of the market are pretty busy right now for sure. The I -- those trends that we're seeing in the economy of people cooking at home, staying at home, less, less eating out, clearly are supporting both the food side, but also the beverage side. I made the comment that you're seeing on-premise consumption drop, and that hasn't occurred for a while. So you are seeing more take home, more cans and bottle packs purchased in the grocery store and consumed at home. So that's driving some of the trend, certainly in beer, and in the core food businesses. Center aisle of the store is where the growth right now is occurring. Both in the grocery channel but also in the club warehouse channel as well.

And the free cash flow application, what is the intended target for that?

All of our free cash flow goes to debt reduction? Is that the question?

Yes, that's what I'm wondering.

Bruce, hi. That would include the proceeds from the sale of the two mills.

Right. Okay. And then the 22 million of charges, where -- Dan, where on the income statement is that buried?

The 22 million?

Yes, did I miss that. Yes, where on the income statement.

In cost of sales. It is 9.5, and -- no cost of sales would be 12.5, and SG&A would be 9.8.

Okay. And then lastly, just the CRB market, what -- how would you characterize that in terms of the operating rates and demand and product pricing to offset OCC?

The product pricing of course the announcement out there in product pricing we're seeing some of that materialize. Our operating rates are pretty solid. I think primarily driven because of the sectors that we're in. Industry operating rates are certainly lower and backlogs are down over -- year-over-year for -- for sure. In the space. And I don't have any indication that it will pick up much going forward, other than, of course the strength in the food space.

Thanks a lot, guys.

The next question is from [Derrick Winger] with Jefferies & Company.

Yes, two questions. Could you break out long-term debt in terms of the line items in the balances, and also in that, could you give us the credit facility, the size, and the amount drawn and any letters of credit against it? And then secondly any tax guidance in terms of absolute or a rate?

Do you want to deal with debt?

Yes, I mean, we could, or you could wait until we file the Q. You'll have all of that long-term debt versus short-term debt, letters of credit; you'll have all that in the Q, Derrick. Later today we'll file the Q.

Okay. And the tax guidance?

Well, we don't pay cash taxes I think is the simple answer.

Okay, but on the GAAP basis are we going to see the same kind of thing that we saw in the first quarter here?

With regard to taxes?

Yes.

Yes, that's basically what you are seeing on the tax line is a non-cash number, it's the amortization of the tax goodwill, and that will continue.

Any cash taxes paid is minor, and it comes from international locations.

Gotcha. When do you presume you might become a taxpayer?

Well, it's going to be a while based on the -- our existing NOL. It -- I mean we're looking to take benefit of that -- billion-plus NOL over the next several years. So we're looking pretty far out in the future before we expect to pay taxes.

Great. Thank you.

The next question is from [Willis Taylor] with [Cagnon] Securities.

Hi, given that you consolidated 21 days of Altivity results, could you discuss why depreciation, amortization and interest expense were both down versus last year?

Yes, I can. Depreciation and amortization was down because we took accelerated depreciation on certain assets we were taking out of service. And in terms of interest expense, that's -- that's primarily the difference in the rate. The rate of interest was favorable over 2007.

We refinanced in May of last year.

Right. Refinancing in May. Our spread was 2 points, and that was significantly better than what we had before.

Okay.

Plus overall rates were lower.

On the unhedged portion of debt.

Right.

What is unhedged? What is the percentage?

Unhedged? We're approximately 35% floating.

Okay. And then for the last several years, the CapEx spent has been considerably less than depreciation and amortization. Could you help us think about how that's going to trend in the future?

I think -- approximately the same trend in the future. I mean, we've had, we had the combination with Graphic Packaging where we wrote up the assets, and now we're having a combination with Altivity where we wrote up the assets as well. So you're going to see that same type of trend in terms of CapEx being lower than depreciation.

Okay. Thank you.

The next question is from David Marcus with Boone Capital.

Hi. I was curious in terms of your all's timing and plans for investor relations, sort of. You've got the merger done. You posted good numbers for the quarter. I was curious when you will be out speaking at conferences, meeting with investors.

We have done -- certainly we have already done some debt conferences and talked about that for sure. Scott and I had conversation this morning before this call, and we are in the process of working with some -- some folks to create a road show here before the end of the second quarter, at least to talk about where we are. So that's what our target is--target is right now. We -- I think important for us is to try and -- is to explain our story, but also we want to have a quarter or so behind us to be able to show what the synergies are doing and being able to talk with some amount of clarity around what the future earnings and cash flow look like in this business, so we're -- we're trying to get that done and then go and talk to the Street about the future prospects. So certainly during 2008.

Very good. Thanks.

The next question is from Jeff [Harlib] with Lehman Brothers.

Hi, just the $120 to $150 million cash flow number you used, does that include any asset sales or any unusual cash flows, inflows or outflows beside other things you mentioned?

No, that's just operating cash for debt repayment. The mill sales would be incremental to that.

Okay. And on the cost savings, the $90 million, can you just -- I know you aren't going in to too much detail yet, but are what are some of the things that you are working on more in the near term, and what are some of the actions that are kind of pushed out in to 2009, 2010, and if you could, give a cost savings of synergy target for '08 run rate that would be helpful.

Let me -- first of all we really haven't done mush pushing out. We have in fact accelerated. I think you-- I already announced the fact we've closed two manufacturing facilities. We're now at the closure of two manufacturing facilities, so we're well on the process of the plant rationalization work. And I think the one we're focusing the most on right now is really in the procurement area. That's an area where it's -- gives us both earnings and cash, and by virtue of our leverage with Altivity, now that we've been able to see combined purchases, we think there's upside opportunity in purchasing. So in these synergy activities, the thing that generally come first are the overhead reductions, which we've talked about announced the combination of the staff and the combination of the business units, so we have seen some of that starting to flow through. Next will be the purchasing synergies cause as we get to look through those numbers, we are able to sort of translate it some of it very quickly, those areas where we're purchased at the different price for the same unit, for example, and then we're starting some bidding activity for our larger purchase to goods, and we're in the process of being able to do things like transportation, things like chemicals, corrugated, those types of things. The things that trend to trail are the plant closure activities. The impact on those is less as you can well imagine a shut down in severance cost in the year tend to absorb a lot of the savings, so what we do in 2008 probably won't manifest itself until 2009. Dan talked about in the second quarter, we will -- we're starting to see some synergies that we will detail out what those look like and what categories they'll be in in second quarter, and I think that will give you a better feel, but right now as we just merged 20 days ago, synergies are mostly effort that we're working on results to come.

Okay. Fine. And how does overall capacity utilization look for the combined companies, both mills and folding carton plants?

Well, I mean it's two separate questions. Of course we already announced the fact we will be rationalizing some of our folding carton capacity. It's not so much that we're taking a lot of capacity out, but we're certainly upgrading the capacity that we are utilizing. We have got some parts of our organization which has some slower, older, really non- -- assets that are not contributing above cost of capital. And those assets will come out of our system. From a mill standpoint, we continue to say that we will operate all of the mills that are in our -- in our business, post, of course, the divestiture of Philadelphia and Wabash as part of the consent decree. Capacity utilization as I meant in our SUS mills has been very tight. The industry is tight on SUS capacity for sure. Our CRB mills ran well, and capacity was good in the first quarter. I think the industry is a little softer. We may not have felt as much of it because our mix is focused more on food and that tended to be up, but certainly we'll balance our capacity for board with our demand in folding carton as we have traditionally done.

Okay. Good. And lastly, just -- you mentioned the folding carton contract are typical annual contracts, are they weighted to any particular quarters which can benefit certain quarters versus other quarters?

No, first of all the contracts are generally not annual, so I didn't mean to imply -- they are generally three-plus years sort of contracts. They have annual escalators for, for input cost changes primarily. But our business has some seasonality if you would like. I mean beverage is certainly busier this time of year and up to the summer. It falls off in the fall. In the fall, traditionally is when we see our food business pick up because back to school drives a lot more cereal and pizza Now we've seen some countertrends here in the first quarter, of course, but I think that has more economic underlying issues than actually change. Now we have seen some counter trends here in the first quarter, of course, but I think that has more economic underlying issues than actually change. But the contracts themselves do not really have any sort of quarterly, or any sort of seasonality basis for pricing or supply.

Great. Thank you.

The next question is from Vic Kumar with South Coast Partners.

Hi, guys, I had a question about the $22 million in improved manufacturing costs that you guys had primarily on the West Monroe mill. Just wanted to get a better sense of how that was achieved and is that something that you expect to see continuing in future quarters or is this, or was last year's quarter a weak time for the West Monroe mill?

Well actually a little bit of both. Last year's quarter, you may remember we had a very difficult operating quarter in West Monroe. But we have also invested in West Monroe to sort of change the amount of wood and energy that we use in that system, so you got a little bit of both. I made a comment in my script that said we invested in the digesters in that system, and we have. And that allows us to burn more bark as opposed to natural gas. Right now our biomass utilization is a blessing. Buying natural gas as we go forward is going to be more and more expensive. I think in the first quarter we were hedged at about $8, but as you go forward, certainly natural gas is going to go up, so we have consciously made an effort to use more biomass-derived fuel, and we saw that in West Monroe. We will continue to see improvement in West Monroe. I think our total business we suggested for the first quarter was up from a performance standpoint around $37 million, Dan --

$35 million.

$35 million quarter on quarter. So we're razing -- I think our original targets we talked generally about $50 million or so of stand-alone improvement, but I think those numbers are clearly going up. Altivity's quarter, I'll just I will say for unaudited numbers, what I will tell you is their performance in cost takeout was excellent, and -- and so what I would say going forward is that the overall cost takeout is -- will at least be at this level, potentially accelerated in some areas of the business. Dan's comments are accurate, that if you combine the cost takeout with the pricing in the combined businesses despite the fact we expect to see inflation at roughly the same sort of rate, we do expect performance to improve by virtue of those combinations.

Got it.

A lot of it comes from the mills.

Right. One question I had as part of the merger, I guess you guys have to divest a couple of mills, how does that effect the run rate EBITDA for Altivity from 2007?

It's really inconsequential.

Okay. And then one final question, you mentioned in the overall CRB market that food is obviously doing very well, what are your -- what are the segments that are struggling?

Well, I don't have quite as much visibility over -- over those areas because we don't participate, and quite frankly if you look at Altivity's mix it is very much focused like ours, it's in food and beverage as well. But I'm pretty sure areas that are struggling are going to be anything sort of supporting durable goods, areas -- the toys, games, media, those kinds of things, those are all real difficult economic places right now. Anything -- we've also seen sort of some of the restaurant-supported products. They are struggling a little bit as well. I mean people just -- they just aren't eating out as much. So the products that are associated with carrying products to those establishments are certainly struggling in the space. So it's very, very -- it's a a different economy right now, and I like our -- I like our position in food and beverage, but by no means, are we insulated from an economic slowdown in the United States.

Great. Those are my questions. Thank you.

The next question from Frank [Duplaque] with Prudential.

Good morning, guys.

Good morning.

I just had a question. Back in the middle of March, you guys put up a chart on your website that talked about projected capital spending, and it looks like today's guidance the full year '08 number will be kind of below that level you indicated there. Just curious any thoughts yet about kind of '09? I thought you guys had kind of '08, '09 in the 237 million area? Flat year-over-year. Any ideas about 2009 CapEx at this point?

I think that '09 CapEx is probably a reasonable number at this point. In terms of 2008, what's happened since the combination of the two companies, we were able to look at what they planned to spend on capital, and what we planned to spend on capital, and we were able to rationalize quite a few projects because they overlapped. Or our business strategy had changed. So that's where the savings have come from. I think in '09, we haven't gotten that far that we've really looked at what was the details in their plan versus ours, so I think that original guidance that we provided is where we're standing right now.

You've got to remember that as Dan as I talked about before, we really had a chance to look at the two businesses, we had a rough idea of where we were going to spend money, but really not appropriate for us to look at level of details. Now that the team -- Don Sturdivant and his team working with Mike [Doss] and once they have gotten together and sort of looked at they realized there were things that could be done differently or better than we had originally planned and with an eye towards preserving cash for debt reduction we've made those decisions.

But I will tell you, I want to make sure that we are not slowing down synergy acceleration, nor are we changing our equipment improvement, upgrades or the plant investments we're making are the same that we were making before. Timing may be a little bit different but that's it.

Just one more. You may have talked about this. Can you talk about the mill-sell process at all? Are you willing to talk about how things are going? Any update there?

It's -- we're on time with our expectations on it, we have-- we hired an outside investment banker to help us. We've gone through the initial processes, plant tours have occurred. We have a number of buyers who are interested as you can well imagine, and we expect to be finalizing that and closing that before the new year.

Thank you very much. That's it.

The final question is from Matthew Armas with Goldman Sachs.

Good morning, just a quick question. Can you say if you had any mark-to-mark hedge gains in the quarter for nat gas, as well as what your hedge position in nat gas is for the rest of the year?

(Indiscernible) yeah. I think in the first quarter I don't believe that there were any -- any significant mark-to-market gains on the nat gas hedges. We were hedged at around $8. I think we probably actually bought slightly North of that, but I don't believe it was a material number.

And looking at the remainder of the year, we are -- 60% of our expected usage hedged in the second quarter and then we -- we dropped down for the remainder of the year to about the 25% level. And that's for the combined entity of Altivity and Graphic.

Thank you very much.

The average rate in terms of those hedges that we have got in place, is -- it's slightly -- slightly below $8.

Great. Thank you very much.

There are no further questions at this time.

Okay. Well then, operator -- thank everybody and we'll talk to you again next quarter.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.