Graphic Packaging Holding Co (GPK) 2008 Q4 法說會逐字稿

Good morning. My name is Ashley and I will be your conference operator today. At this time I would like to welcome everyone to the Graphic Packaging Holding Company's fourth quarter and full year 2008 earnings 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, February 27, 2009.

Thank you. I would now like to introduce Mr. Scott Wenhold, the Company's Vice President and Treasurer. Mr. Wenhold, you may begin your conference.

Thank you, Ashley, and good morning, everyone. Thank you for joining us on Graphic Packaging Holding Company's fourth quarter and full year 2008 earnings call this morning. 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 in this call constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements including but not limited to statements relating to declines in raw material and commodity prices, consumer purchasing trends, statements regarding our performance and our ability to recognize $90 million of annualized synergies by 2010 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 present expectations.

These risks and uncertainties include, but are not limited to, the Company's substantial amount of debt, inflation of and volatility in raw material and energy costs, volatility in the credit and securities markets, cutbacks in consumer spending that could affect demand for the Company's products, continuing pressure for lower-cost products, and the Company's ability to implement its business strategies including productivity initiatives and cost reduction plans.

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 these and other risks is contained in the Company's periodic filings with the SEC. David?

Thank you, Scott. Good morning and thank you for taking the time to be with us today. As we have done in the past, Dan Blount, our Chief Financial Officer, and I will split the duties on this call. Once we have concluded our remarks we will open the call and look forward to answering questions you may have.

What a year 2008 turned out to be. We faced runaway inflation early in the year, a global recession as the year closed, and sandwiched in between was the combination with Altivity. For the last three quarters of 2008 we operated as a combined company and I am pleased to report our integration efforts have exceeded expectations. Our network of manufacturing facilities is increasingly more efficient and we are investing in the right places to create a productive, low-cost manufacturing footprint to maintain our number one market share position. This has translated into solid debt reduction despite the economic headwind.

Last night we reported results for the fourth quarter and full-year 2008. A quick recap shows the fourth-quarter adjusted net loss was $0.11 per share compared to an adjusted net loss in the prior-year quarter of $0.04 a share. On a full-year basis, despite incurring approximately $240 million of cost inflation, pro forma EBITDA of $502 million was relatively flat to 2007 pro forma EBITDA of $510 million.

I am also pleased to say that despite the difficult operating environment we reduced net debt by approximately $119 million since the combination with Altivity last March. We believe our business is headed in the right direction and we are taking the necessary steps to navigate through this unprecedented market and improve our year-on-year results.

Our combination with Altivity increased our position in the food and beverage end-use markets and while no sector of the global economy is unaffected by the current recession, we do see more stable volumes and customer performance as a result of this focus. During 2008 we reduced our cost structure, we enhanced our liquidity position, and we focused on generating cash in a market where cash is clearly becoming king. We know these steps will not only help us continue to manage through the current environment, but we believe they will position us well for the eventual market rebound.

Dan is going to discuss our quarterly and full-year results in more detail, and similar to our past calls we will include comparisons to the 2007 fourth quarter and full-year results restated on a pro forma basis assuming the acquisition of Altivity had occurred on January 1, 2007. This will give you a more apples-to-apples comparison between the periods.

Let's talk a little bit about volume and price. The global economic crisis that initially manifested itself in 2008 has continued to worsen as economic headwinds such as rising unemployment, falling real estate prices, and an increasingly difficult credit environment are driving major shifts in consumer purchasing behavior. Consumers are deferring purchases, not only big-ticket items, but of durable goods as well.

As a result of these external forces we experienced a slight decline in volumes during the fourth quarter as our customers chose to use up existing inventory in an effort to convert working capital to cash as concerns over the broader health of the financial system remaining question. We were conscious of this decline and made the decision early in the quarter to remain focused on inventory control and stay committed to managing production to reflect demand.

As a result, in addition to the permanent shutdown of our #2 paper machine -- SUS machine and the idling of our medium machine for the last two weeks of the year in West Monroe, Louisiana, we also elected to take a total of 43 days of market-related downtime across our recycled board mill system in the fourth quarter. As a result of this aggressive management of working capital including an inventory reduction of over $37 million, we generated $140 million of operating cash flow in the fourth quarter alone.

Despite the uncertain macro environment we believe that we have navigated this market well and will continue to stay ahead of the cost curve remaining focused on driving bottom-line improvement for our shareholders.

For the full year 2008 we were able to make considerable gains in pricing versus 2007 levels. We achieved two solid open-market price increases in both SUS and CRB substrates and we recognized contractual price increases on the carton business. In total, price increased about 2.5% off-setting almost 50% of the cost inflation we experienced in 2008. Throughout 2009 a large number of our carton contracts will reset with new pricing based on the changes in cost and board experienced in 2008 and we will continue to see pricing as an effective tool to counter the negative impact of inflation this year.

Looking forward the challenge will be to maintain general market pricing given the operating environment, but we are committed to balancing our own production to match demand. Based on fourth-quarter trends, for the first time in over a year we can say that we have started to experience a moderation in the cost of some of our key production inputs, particularly secondary fiber and energy.

Inflation continues to moderate but remains above our internal expectation as chemical costs have not yet dropped in line with the petrochemical complex changes seen globally. Inflation will continue to be in our favor in early 2009 as fuel charges are significantly less than a year ago and the secondary fiber market continues to be soft as reflected in the price at OCC. However, we are starting to see some tightness as community stopped collections, particularly on the West Coast, and if this trend continues we would expect OCC prices to increase somewhat later in the year.

Latex and Ti02 used in board coatings are beginning to drop, but we have seen no material change in the cost of caustic soda and expect none until new capacity comes online later this year. Inflation in January was in line with our expectations, but I believe we could see some raw material costs further abate as we further head into quarter two.

Talk about cost of synergies. Turning to cost management, our integration team ended 2008 on a high note as we achieved annualized synergies of over $67 million, well ahead of our pace towards our original target of $90 million. We executed well in our plans for plant closures and integrating tons between the two legacy companies which combined drove a significant portion of this favorable variance. Although we were well ahead of our goal of achieving $90 million by 2010, due to the deteriorating economy we have accelerated many of our original business cases and we are developing additional ones as well.

Recently, we announced the closure of four additional manufacturing facilities. While it is important to note that these closures were part of our original planned integration efforts to optimize the combined company's manufacturing system, in light of the current economic conditions we continue to evaluate all of our manufacturing facilities based on capacity, cost, flexibility, operating efficiency, and proximity to raw materials and customers. We intend to operate the optimal combination of plants that will allow us to continue to compete as a truly low-cost producer of high-quality consumer packaging.

2008 was also a very successful year in ongoing, continuous improvement cost take out as we reduced costs by over $70 million on a pro forma basis. This marks the fifth year in a row we have significantly reduced costs through our continuous improvement processes. Further, based on the expectation that the economic conditions remain challenging for some time, it is going to be important that we be prudent and conservative.

As such, we have announced a salary freeze for all of our executives and non-production salaried employees for 2009 and have reduced our workforce where appropriate. We have also reduced discretionary spending and will not improve pension or health and welfare benefits while the cost to maintain current benefit levels sharply escalates. We are making the necessary adjustments in this environment to ensure that we not only survive this difficult economy but emerge as a much stronger company on the other side.

Let's talk a little bit about the markets. 2008 was characterized by slowing economic growth and increasing inflation for most of the year. According to the US Department of labor CPI data, inflation in the food and home category averaged about 6.4% in 2008 compared with roughly 4.5% in 2007. In contrast to overall inflation that averaged about 3.8% for the year but declined to 1.5% in the fourth quarter, inflation in the food and home category remained at the 6% to 7% level in the fourth quarter as higher input costs worked their way throughout the system.

When we look at packaged goods retail sales data provided by AC Nielsen, it suggests that changing economic conditions are affecting both the type and amount of packaged goods purchased. Aggregate annual unit growth in the major packaging categories did increase by about 1.3% in 2008, but this is far less than the 4% growth seen in 2007. The categories that grew more than average were staples like celery, dry dinner mix, breakfast foods, pizza, snacks, and yogurt.

The data suggests that consumers have adjusted to changing economic circumstances by shifting their purchases to lower-priced food products and buying less non-food items. People are returning to the center of the grocery store where you typically find lower priced and budget-extending items.

The Paperboard Council reported that in 2008 folding card and industry sales declined by about 1.5%. Our sales exceeded these industry averages as sales to food and consumer product markets increased by 2.1%. The markets where we enjoyed good year-on-year growth were cereal, dairy, and frozen pizza. Both branded and private label products grew well in 2008 and we see those trends continuing here early in 2009.

January sales for our food and consumer packaging were solid as demand for staples increased. This trend is in line with consumers managing grocery budgets with less participation in new product offerings and a focus on such items as cereal mixes and dinner kits.

That does not mean that there were not new products during 2008. In fact, during the fourth quarter we continued to develop and commercialize value-added packaging solutions in both consumer and our beverage businesses. We experienced solid new product sales at about $7 million for the quarter that were led by our strength in new age beverage and microwave platforms.

For the full-year Graphic Packaging achieved approximately $60 million in new product sales based on these growth platforms. These new product sales marked a record performance for the Company and were 20% ahead of last year's total.

On the consumer side we saw increased opportunities for graphic packaging innovation. During the quarter we commercialize a new in-store doughnut carton with Wal-Mart using a recycled paperboard and a unique and proprietary polyethylene barrier coating. We were also able to grow our strength platform with two new product launches.

The first one was the Kellogg's Kashi warehouse cereal package for Canada; our first use of lightweight Z-Flute technology. The second launch was Kraft's Triscuit warehouse club package, a shrink solution that also incorporated our film laminated grease masking technology.

Graphic Packaging also had its first major launch of the exciting Snap 2C mobile technology, which connects consumers to the Internet via cell phone and a printed QR code on the package. Finally, working with Kimberly-Clark we executed our annual Kleenex holiday promotion which included a light up tissue carton.

Looking at the beverage market our fourth-quarter sales to North American beverage markets were about 1% lower compared to last year. The slight decrease was attributable to a continued softness with the new soft drinks sector. Domestic beer, however, showed strong sales all year as consumers have trended back to lower price point domestic brands versus imports. 2008 was the reverse of trends of previous years where domestic brewers recaptured share from importers.

Additionally, we saw a global trend in 2008 away from on-premise consumption to take home. Consumers were eating and drinking out less and so package good sales as a percentage of the total increased in '08. We see this trend continuing for the near term as well.

We do continue to see new product growth with our major global customers. In the fourth quarter, Graphic Packaging was able to gain new business with the Miller Coors joint venture in the US as we were awarded the new Litho-Flute 12-pack business for the Blue Moon brand as well as the 18 and 20-pack Litho-Flute business for Coors Light, which included the Super Bowl promotional packs.

Soft drink softness continued in the fourth quarter as really no major retailer did particularly well during the quarter. With the exception of retail promotional pricing on two-liter plastic bottles, advertising activity for cans through the December holiday was largely nonexistent and as you would expect volume suffered. We have seen improving trends in 2009, again, mostly driven by at-home consumption, but we overall expect carbonated soft drink sales to be at best moved sideways in 2009.

Alternative noncarbonated products continue to do very well in 2008. Building on our growth strategies in the fourth quarter we completed our co-pack or incubator strategy with the shipment of our last two energy drink packaging machines to two customers giving us a coast-to-coast presence in the independent bottler system. This move will provide us with the leading market share in the functional drink categories with sales for energy multi-packs expected to grow rapidly in the US market over the next several years.

Let's talk about our multi-wall bag business. This is roughly 10% of our total sales and it was clearly most affected by the economic conditions as this business depends more on construction and general industrial sectors. Fourth-quarter multi-wall bag sales reflected the softness in building materials and chemical sales; both sectors are experiencing unprecedented sales decline.

In light of the deteriorating market conditions, the multi-wall bag group quickly adjusted their manufacturing facilities through targeted downtime and successfully decreased system-wide inventories. Over the last five months of 2008 inventories in this business were reduced by $22 million despite shipments being off by roughly 4%.

With respect to 2009, the general economic consensus is that US construction and industrial sectors will continue to struggle until at least mid-2009. As such management focus will remain on maintaining high levels of synchronization between demand and production levels, overall cost reduction strategies, and very strict management of working capital.

In the mills manufacturing results were down slightly during the quarter compared to the prior year, primarily due to lower fixed cost absorption. The lower absorption was driven by the permanent shutdown of West Monroe #2 paper machine along with the market-related downtime taken on the West Monroe medium machine and across the entire CRB mill system. These negative impacts were partially offset by a reduction in the price of secondary fiber.

Overall softness in the consumer durable goods resulted in significant downtime in the month for key container board producers. Softness in the container board industry has continued into January. Noting the fact I have received the question from investors since then, I would like to state that Graphic Packaging's extremely small presence in the container board industry with less than 100,000 tons sold externally, annually our exposure is extremely limited. On the contrary, over 85% of our total revenues are derived from converted products supplied to the food and beverage end-use market.

Despite recent moderation in the cost of energy, we do not expect this to be a long-term scenario and we continue to look for ways to reduce consumption of volatile high-cost raw materials by keeping our sustainability efforts in the forefront. In the fourth quarter we achieved a major milestone as our Santa Clara recycle board mill completed a heat recovery retrofit project that will save the Company 250,000 MMBtus of natural gas annually.

According to Pacific Gas and Electric, Graphic Packaging's investment in waste heat recovery at the mill has resulted in one of the highest natural gas savings on record. By adding state-of-the-art heat exchange and recovery technology to its co-generation plant the paper mill can now recapture and recycle valuable waste energy from the exhaust gases. As a result duct burner consumption of natural gas has been cut by 50%, eliminating more than 15,700 tons of CO2 emissions annually equivalent to the removing of 2,200 cars per year off the road.

Looking forward, in 2009 we have been paying very close attention to inventories and volume trends. While I believe they will be very difficult to predict for the entire year, we are pleased to see January demand in volumes return to planned expectation levels. I would remind you that generally we do not get too far in front of ourselves in forward projections. And in 2009 that is particularly important.

I like our position in key end markets of food and beverage as I continue to believe they will fare better relative to other sectors, but it really is going to distill down to execution for Graphic. As we developed our policy deployment goals for 2009 across Graphic Packaging they are pretty simple.

Our focus will be on our core businesses and customers. We will recover our contractual pricing. We will accelerate our cost take out and synergy plans. We will build on our new product commercialization successes from 2008, and we will balance production to demand all targeted to deliver better margins increased EBITDA and better cash flow for debt reduction in the year.

With that I will turn it over to Dan Blount who will review the financials.

Thank you, David. Good morning, everyone. As David discussed, we are carefully managing our production capacity to align with demand and are aggressively managing working capital. As a result of this disciplined management, we generated $140 million of operating cash flow in the fourth quarter and have reduced net debt since the combination with Altivity last March by $119 million. Our efforts are and will clearly remain on cash generation.

Along with our disciplined cash management approach, we have and will continue to focus on high returns synergy projects, cost reduction investments, and product innovation efforts. These actions will position the Company for incremental performance improvement, while strengthening cash generation.

Moving to a more detailed review of financial performance. First, we will cover operating results and then turn to cash flow and liquidity. But before getting into the financials, a reminder that in order to provide an apples-to-apples comparison and an effective measure of operating EBITDA performance I will use adjusted pro forma financial results in my discussion.

These pro forma results include the following adjustments. We included Altivity results from January 1, 2007, to the merger date in order to provide a full year of Altivity results for 2007 and 2008. We excluded fourth-quarter 2007 results for the two recycle board mills that were divested last quarter. For 2008 we added back $15.5 million of non-recurring, non-cash charges principally related to the permanent shutdown of our paper machine #2 in West Monroe.

And, finally, also for 2008, we added bag charges associated with the combination with Altivity including severance related to synergy delivery. A reconciliation table detailing the pro forma adjustments is included as an attachment to last night's earnings release. Now to simplify today's discussion, unless I specify otherwise, when I referred to net sales and EBITDA I will be referring to the pro forma adjusted numbers.

Now turning to fourth-quarter results, first we will cover the change in net sales and then bridge EBITDA to the prior year. Fourth-quarter net sales came in at $1.048 billion, which is a modest $16 million or 1.5% lower than the prior year. Included in fourth-quarter net sales is pricing improvement in all business segments. Overall, pricing improved by $28 million or 2.6% in the quarter.

Net sales volumes in the quarter declined 3% or $34 million. Paperboard packaging carton volumes, which are principally for food and beverage applications, held up well and were nearly flat to the prior year. The largest volume decline, approximately $18 million, was in container board open market sales which include liner board and corrugating medium. We also experienced marginally lower demand for our multi-wall bag, specialty packaging, and open-market CRB board sales. Given the economic environment, our volumes really held up well.

Even with the modest decline in fourth-quarter sales, full-year 2008 sales improved by 2.1% to $4.470 billion primarily as a result of price increases and mix improvements.

Now let's discuss EBITDA. During the fourth quarter we stayed committed to cash generation, and as a result took downtime in both our mills system and our converting operation in order to match production with demand. Overall, fourth-quarter EBITDA at $103 million is $17 million lower than the prior year.

Let's look at the four primary reasons for the change in year-over-year performance. The first reason, in the fourth quarter we took market-related downtime on CRB and container board paper machines plus downtime in selected converting plants. The downtime was for two reasons. The first reason is due to demand declines, most notably in container board, multi-wall bag, and CRB open market.

The second reason, and which is really the primary driver of the CRB down time, is to permanently lower on-hand inventory levels. The merger synergy of integrating supply chain operations has enabled us to operate with lower overall inventory on hand. The EBITDA charge resulting from unabsorbed fixed costs is $13 million for the quarter.

The overall fourth-quarter impact is not only fixed cost absorption, however, but it also includes a temporary margin reduction on CRB sales because the inventory we took out of production or took out of on-hand inventory levels was the highest cost inventory. Total impact including absorption and margin is estimated to be in the $15 million to $17 million range. While these decisions lowered EBITDA, they are clearly the right ones as they dramatically improved cash flow and will improve working capital efficiency on a go-forward basis.

Second reason, inputs cost inflation during the quarter was $53 million. The inflation impact is $20 million less than we experienced in the third quarter, but does not yet reflect the current lower cost of key inputs such as secondary fiber, energy, and certain chemicals. As it takes two to three months for our inventory to cycle, the first quarter 2009 is expected to benefit further from key raw material cost declines.

The third reason, cost reduction initiatives which include integration synergies and continuous improvement delivered $34 million of benefit. $17 million of the $34 million is from integration synergies. We continue to be ahead of schedule with our post-merger integration programs and well on our way to achieving $90 million of annual benefit by early 2010.

The fourth and final reason, rounding out the change in fourth-quarter EBITDA improved pricing delivered $28 million of benefit and volume changes net reduced EBITDA by about $10 million.

Now to summarize fourth-quarter performance, we realized price increases of 2.6%, our volumes held up well due to our strong position in food and beverage markets, we reduced operating costs by $34 million, and we effectively managed production capacity to maximize cash generation. For the full-year, despite approximately $240 million of cost inflation and demand weakness in the fourth quarter, we delivered EBITDA of $502 million which is relatively flat to the prior year. Benefits from increased pricing, cost reduction, and synergy delivery were instrumental in offsetting inflation and with our strong presence in stable food and beverage markets our volumes held up well.

Now I will end my discussion with comments about cash flow and liquidity. Let's start with liquidity.

At December 31 we had strong liquidity availability of approximately $391 million, about $81 million more than at the end of the third quarter. We were comfortably in compliance with our debt covenant as we reported a secured debt leverage ratio of 3.6 to 1, which is well within our required 5 times. Additionally, we have no significant debt maturities until August 2011.

In terms of cash flow, for 2008 we measured from the Altivity transaction date forward. Over this timeframe we reduced net debt by approximately $119 million. As you heard previously, in the fourth quarter we aggressively managed production capacity, reduced working capital, and as a result delivered $140 million of operating cash flow. Heading into 2009 our liquidity levels are strong and we are well within compliance with our credit agreement.

In conclusion, given the difficult economic environment Graphic delivered a solid 2008. Looking to 2009 we expect to realize further price increases as contracts containing inflationary price escalation clauses reset and additionally we expect to deliver substantial cost reduction. We are well ahead of pace with realizing our integration targets and now forecast $90 million to be the minimum amount of synergies to be realized from the combination with Altivity.

In 2009 we will continue to manage the business with the same discipline demonstrated in 2008 to maintain strong cash generation. As a result, we expect debt reduction to exceed 2008 levels. Our 2009 debt reduction projection includes pension contributions of $60 million to $70 million, cash interest of $210 million to $220 million, and capital spending of $170 million to $190 million.

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

(Operator Instructions) Jeff Harlib, Barclays Capital.

Hi, good morning. Can you just talk about -- I think on your last call you talked about pricing being -- 2009 pricing being about $50 million to $60 million. Can you just update us first on the pricing pass-throughs?

I think what we said for the year -- our pricing in 2008 was roughly $109 million, $110 million worth of pricing recovery in 2009. The fourth quarter was around $30 million or something roughly in price recovery. And that is all pricing. That includes pass-through on contracts, that includes board pricing in the open market; so the total pricing across the Company. I think that for the year pricing in total was around 2.5% of our total sales, pretty close to that.

Okay. How about for 2009 based on your contract pass-throughs?

Well, in 2009 we expect our contracts that reflect that to be recovered. In fact, in January and February we have already seen some of that. The customer contracts that are written have some escalators based on inflationary costs in 2008 or board price movements, and all of those will be recovered throughout the year.

Okay. Are you willing to roughly quantify it?

I am not going to give forward-look on pricing in 2009. What I would say is that we are comfortable that 2009 pricing will be in line.

Okay. Just on inflation, $240 million of inflation, can you just talk about how you see inflation? I know you have some natural gas hedging. Where does that stand for '09 and how are you currently planning on inflation?

Let me cover the natural gas hedging. Currently, we are about 72% hedged for 2009. If you look at the positions we have taken, that 72% averages about $10.80 in the first quarter and then we are around $9.25 to $9.50 for the remainder of the year.

If you compare that to the 2008, approximately we are about $10 per MMBtu in 2008 on an average for the whole year. What we have done is we have gone ahead and put the foreword curve in for the non-hedged piece. If you take that in, we have a blended price rate for 2009 at about $8.50 per MMBtu. Just another reminder, in terms of our overall energy costs natural gas is about 60% so the other 40% is from other sources including public utilities.

We use about 14 million or so MMBtus a year of natural gas roughly. It's primarily in the mills, as you can well imagine.

Okay. Just lastly on the Altivity synergies, what were the actions that brought you from the $25 million to the $67 million and what are the savings expected from the closing of the four plants?

I won't break out the individual plant closure. What I will tell you is really the acceleration of those was from two things. One it was from the accelerate in bringing the plants forward in the closure and then the other was from the integration of tons between the two organizations were the primary driver in this quarter, right now, for those synergies.

So what we are saying is that if you look at our business, we are at a $67 million rate. I think our synergies in 2008 to the bottom line generated roughly $27 million, so you can see it's an accelerated rate going forward for 2009. And that is why I think Dan and I are both very comfortable that the $90 million level will certainly be met and most likely exceeded.

Thank you.

[Klauss Agnid], D.A. Capital.

Good morning. A couple of questions. One, you mentioned $60 million to $70 million of cash pension contributions for 2009. How much of that runs through your EBITDA number already? In other words, how much is already expensed so what is the extra cash flow deduction we should be thinking about? Or it is none of down in EBITDA?

It's about $13 million to $14 million, larger than the expense, the contribution level.

Okay, 1-3 to 1-4 million?

Yes, $13 million to $14 million delta.

The other question I have is -- and the previous question sort of alluded to that as well -- is we are looking for some color on --. So understand your contracts have these price increases and previously you have mentioned up to 80% of cost inflation is generally with a lag pass-through and at the same time you have benefits from raw materials.

So I guess what we are wondering is if volumes were to say constant and there was no change to that, sort of how much (inaudible) price benefit should accrue to you based on current raw material prices? And then how much pricing benefit the lag hasn't come through yet?

We are not going to honestly provide that much level of detail, because the big assumption there is what if volume stays the same. So we built a hypothetical model there that is probably not one I would want to apply going forward.

What I will tell you is both Dan and I believed on a go-forward basis that in 2009 we do expect our margins to expand. We do expect pricing to be good and we expect at least in the early half of the year for raw material prices to continue to trend down. As you get to the second half of 2009 it's a little bit difficult to think about it.

For example, one of our primary raw materials is OCC and right now OCC pricing is very favorable to 2008 levels. However, what we are also seeing is communities picking up less OCC because the price of OCC, the collection cost is so expensive. What has traditionally happened in that environment is therefore OCC prices start to creep up.

So right now we would say that margins will clearly expand between the delta in pricing and in raw materials. For the entire year, virtually impossible for me to make a legitimate sort of how is that going to work out. And that is, as you said, all tied in assuming volumes maintain in their current trends.

And I don't know that I am comfortable, even in food and beverage, giving forward demand curves on that to suggest that it's going to be -- where it's going to be. I like the early trends, but I don't know what it's going to look like an August.

Got you. And terms of the debt reduction going for 2009, did I hear you correctly that you said it would exceed $119 million that was done in 2008?

Yes, you heard us correct.

That is correct.

Are you giving any guidance on -- you gave us pension, you gave us interest expense, you gave us CapEx. Any guidance on growth in capital relative to last year?

Well, I can tell you for last year when you look at when we initially merged with Altivity our inventory levels were above $600 million. We have entered the year substantially lower than that. We are at below $570 million so there was a substantial reduction in inventory levels. Also, inventory for the end of the year 2008 included much higher inflation which raised our inventory levels, so we saw a substantial reduction.

Included in the $119 million -- and we are not giving specific guidance on working capital at this point -- is working capital reductions.

What we saw is pretty significant cycle improvement. In fact, in our mills our cycle time in our mills improved almost 30% between 2007 and 2008 quarter-on-quarter, fourth quarter. So that is allowing us -- the units are cycling much faster. As Dan says, you have higher costs running through so the dollar looks different but the velocity is much more improved.

So working capital of what 30 -- $35 million or $40 million reduction in 2008. Certainly, we are going to continue to drive ongoing working capital reductions in 2009. We would be very disappointed if we didn't see significant reduction in working capital 2009.

We are going to continue -- again, the underlying assumption there of course is where is the volume. But I will tell you that we will continue to match volume to production. We don't plan market downtime and that is sort of not something we do, but we will continue to match our production output with our demands. We will not build inventory or put cash in inventory if we don't have a legitimate reason to believe we are going to sell those products in a short period of time.

Thank you.

Joseph Stivaletti, Goldman Sachs.

Good morning. Just wanted to clarify a couple of things on the synergy front, is it correct that you have $27 million that you actually reported in 2008 but that you were at a run rate of $67 million by year-end?

That is exactly the right number.

What do you think is reasonable to assume in terms of a reported number for '09 relative to '08 above and beyond that $27 million?

Well, I guess we could do the simple math and suggest that you would expect to see a $40 million sort of number. You are at an annualized rate of $67 million; we ended up with $27 million. So you sort of see the $40 million for sure sort of number, Joe, and I think we are certain comfortable with that. Obviously, we gave you that math.

But I will also suggest that we are looking at accelerating some of the options. One of the things that happens, and you and I have talked about this before, the most difficult thing to sort of forecast when you put integration plans together is how much productivity improvement you get in those plants. As you start to consolidate and you change your run profiles you get improvements. So what that allows us to do is to run less overtime in our facilities, less temporary work, and in a company the size of the Graphic Packaging 14,000 employees that is not an insignificant number.

So what you see is that flowing through the synergy numbers as well. It's tough to predict it because some of it is based on volume and assuming the volume stays at a certain level. But I would tell you that we would certainly expect synergy numbers to be trending towards that kind of number for the year.

Okay, great. I know that it's hard to talk about anything in this environment looking out over a 12-month period, but from a volume perspective is it still reasonable to assume that your volumes for the full year, given your exposure primarily in food and beverage, would hold in at at least '08 levels or up? Because that is very different than so many of our companies in paper and packaging.

Here is how I would answer that question. What I would say is -- and you know, you have followed us in the past -- we tend to approximate GDP. We are sort of a little bit above GDP normally in our business on an annualized basis, right? And so if you look forward you would expect food and beverage typically to be at the underlying GDP rate, if you take out buying of homes and those kinds of things because that is not really part of it.

So if you look at that business we would expect it to be pretty stable. You are also seeing some positive trends where people are eating at home and they are all so eating -- and they are going to the center of the store. Both branded and private label are both doing well as we start the year, so we don't see a huge trend to some product line or some effort where we don't participate.

And so what I would tell you is I would expect, and our early trends are that volume is hanging in there. It's pretty decent volume. But if the economy continues to deteriorate I think it's really difficult for us to figure out what people will do, including packaged goods and packaged food services. When I talk to Kraft and General Mills and Kellogg's they are not sure if they look forward where all of that works out.

So I like where we are starting the year but I am really reticent to give a long-term forecasts. I would certainly rather be making food and beverage cartons than some of the heavy industrial-based products. But I am not going to be tied into telling you what I think volume will do, because I am sure I would be wrong.

That is helpful. Just one final question, in your press release you talked about fourth quarter of '08 being affected by $13 million of costs relating to the shutdown of your #2 paper machine. Is that [severance]? I just was --?

No, that cost is unabsorbed burden. It's a fixed cost base for shutting down #2, #2 machine. That is what it refers to.

Okay, so --

We are not operating the machine. We still have some of the fixed cost we haven't got out.

Right. So is that something that would be out of the system by now or is that going to take you a while to sort of lower your fixed costs, given that --? I was just trying to understand if that is like an ongoing kind of thing.

No, it's not an ongoing type of thing. We are taking actions, we are eliminating the cost, and we are actually boosting production on some of the other machines because we have an ability to do that because we shut down #2. So I think it's an issue that you will not see in 2009 going forward.

Okay, that is helpful. Thanks a lot.

[Gerard Woltchten], U.S. Steel.

Yes, I had a question regarding the ink manufacturing side of things for the corporation such as Riverdale Industries. Do you have plans to close any of those facilities?

We really haven't -- we don't ever really give guidance on what we are looking at across the board. I don't have any sort of real plans right now for sort of additional plant structure changes at this point in time, so I can't help you with that answer. We do make -- I think you are talking about our hand sheet ink facilities, which of course we use to make primarily internally to service our own facilities, and right now we continue to operate those facilities.

Yes, I was concerned because of the high cost of materials such as chemicals in order to make that ink, if that was affecting your business right now.

It's a good question. I mean what we start talking about the fourth quarter of course is that we didn't really see much of the chemical costs come down in the fourth quarter. Those things have tended to lag oil prices, but what we were starting to see in the first quarter, of course, is our chemical prices coming down for most of our products, like latex and our coatings, with the possible exception of caustic soda. It continues to be pretty high. I think there are other market dynamics at work on caustic soda.

But a lot of the input raw materials for those inks, which are for the most part petrochemical based, for the most part, they have -- we have seen them drop. And, of course, we will reflect those as we look into first and second quarter of next year we would expect to see those costs go down.

Another thing, too, I never saw the stock of a corporation so cheap as it is. I think it hit a rock bottom of $0.57. I was concerned, too, if the Company at all is going to have a reverse split or any kind of split in the foreseeable future?

I don't think we are going to talk about the stock prices here. But, no, we have no anticipation of a reverse stock split.

I don't think you guys ever had a stock split as far as that is concerned in history, right, of the Company?

Not that I am aware of.

Well, I hope things can prosper for the Company as far as the shareholders, but like I said I never saw the stock this cheap.

I would tend to agree with you. You and I are aligned on that.

Do you think the stock will go lower here or nobody knows right now as far as the recession and the marketplace for your company?

Of course, I can't provide guidance on stock and I think based on my own portfolio you certainly wouldn't want to be following my advice on the stock market as well. So who knows.

I think what we are going to do, as I said earlier, we are going to operate effectively. We are going to reduce our debt, improve our margins in 2009, and we will let the stock take care of itself. But I appreciate your questions. Thanks a lot, Gerard.

Yes, another thing too, I noticed that there was a report that you are building a new plant in Kalamazoo, Michigan, right?

Well, we are not building a new plant but as we announced in a fourth quarter last year we are making about a $40 million expansion to our existing facility in Kalamazoo, Michigan. That facility is where we make a lot of cereal and dry food products. We are going to add about 160 jobs or so in that area as we expand that facility.

We have already started the work and, yes, that is a very important -- Kalamazoo mill and Kalamazoo carton very important to us and we are excited about that investment. So it's not all about the plant takeout, in some cases it's about investment and doing the right things.

Thanks, Gerard, those are all very good questions. Thanks for calling in. Operator, anybody else?

Sandy Burns, Sterne Agee.

Good morning. In terms of the contract repricing that is occurring, does most of that kick in at the beginning of the year or is it more spread out throughout the year? And just also, given the environment, can you tell us in general how well it has been going overall?

Our contracts do come out all throughout the year. There isn't like a January as a major reset for any individual contract. They roll through whenever those contracts were signed and they are signed throughout the year.

What I will tell you about -- our customers are no different than us. Nobody necessarily wants a price increase, but our customers honor their contracts just like we did when inflation was going through the roof last year. We honored and sold and manufactured at a tough time for Graphic Packaging. So we haven't had to have difficult conversations with our customers. They understand the benefit they have gotten and that is really not a problem for Graphic.

Great. Also, anything you can say right now in terms of what your downtime is looking like in the first quarter on either container board, CRB, SUS and anything else?

Of course, those are three different questions so let's talk about it. In our CRB and SUS that primarily drives food and beverage. And, of course, this is a pretty busy time of the year for us as you can well imagine -- cereal and macaroni and cheese cartons and beverage and beer. So those mills are pretty busy right now.

The container board business we only have a small -- a medium machine down in West Monroe, Louisiana. We make less than 100,000 tons externally and we have taken some downtime in January in that machine just because the market demand is off 17%. It's a pretty small impact overall to the corporation, as you can well imagine. It's a very, very small and old machine, but it makes no -- there is no good reason for us to continue to produce.

Now what we have started to see as we are heading into the end of February and March is that business is beginning to recover as I think most of the container board people will tell you. There is some light at the end of that, but for us clearly, clearly we are the tail wagging that dog. And so our major mills are running. If things change, I will take them down. But we have no current plans to take additional downtime.

Okay, great. Last question, what is the capacity on the #2 machine that is being shut?

I think it was 150,000 tons of SUS roughly.

So certainly one of the smaller machines in the system.

One of the smaller machines in the system. It was what we call the swing machine. We made both liner board and SUS on it, but when it full operating SUS it was somewhere between 150,000 and 175,000. I am hesitating because a lot of it depends upon how much -- what grades, whether you are making heavy caliper, low caliper. It's in that range. It is not a 700,000 ton machine like the other ones in West Monroe.

Right, right. That is exactly what I was looking for. Thanks a lot.

Matthew Armas, Goldman Sachs.

Good morning. Just a couple of quick questions. Can you go and just kind of provide fourth-quarter volume numbers by major segment and that being food, beverage, and industrial?

We do not break that out.

Can you provide some just qualitative then --?

Sure. As I mentioned, food was pretty flat, beverage was down only slightly, beer was up, and soft drink continued to decline a little bit on average. The difference between '07 and '08 in those businesses was negligible from a carton standpoint. The volume drop off in our business was primarily around container board or medium, if you will, and in multi-wall bag; that business was mostly affected by the industrial.

Our international markets were pretty good. They were pretty much online with what they did last year. Open market, what we would call board that was sold to other converters, that was slightly down in the quarter as well because that board is not only used in food and beverage, it's used in a variety of applications and they would have struggled a little bit during the quarter.

So our core businesses were flat to slightly up. The rest of it was more dependent upon other sectors were down.

Great, very helpful. The next question is given that in your distribution of outcomes for the year it sounds like volumes could be good, volumes could be very bad. You are not willing to call the back half. But looking at your covenant step down in the third quarter, would it be prudent to go back to the banks? Have you started discussions with the banks on potentially amending this step down to provide some more flexibility?

No, we have not started any of those discussions. In our forward looks we see no issues with the credit agreement and we really like our credit agreement and the flexibility it gives us to run the business.

If you look at the cushion under at the calculus there is really sort of --

More full turn.

Yes, it's over a full turn, almost a turn and a half. So there is really no forward scenario that would suggest we should be looking at that.

Great, very helpful. The last question is on your natural gas hedging policy can you remind us what the institutionalized policy on a go-forward basis is for forward hedging natural gas? And have you thought about reigning that in a little bit given that it seems to be the second year of three where locked in longer-term higher prices?

First of all, we do some natural gas hedging just because it's sort of part of the covenant process with the banks and our credit group. But we have typically hedged about 70% of the quarter that we are in and the rest of it we go on the open market. I don't suspect that we will do materially different than that.

We aren't hedged significantly into the first quarter of 2010, although we have some small position going into that. So we will continue to sort of follow our overall policy.

The hedge policy for us is really just to sort of make sure that we understand our input costs. We are really not in it for speculation or finding out the low in the market in the process. It helps us to manage our costs and predict on a go-forward basis. And with volumes pretty stable, we use it basically to control cash flow not as an up and down plan.

Great, thank you very much.

[Mark Kaufman], Source Capital.

Thanks, gentlemen. My question was about what your hedging outlook was in 2010, so I guess you have answered that question. Thanks.

[Reisal Elias], [Knight].

Good morning. Just I wanted to see if you could give me an idea of where your volumes stand right now after the shutdown and the integrations and what is your production capacity right now by segment?

We don't provide production capacity by segment. I will tell you that we roughly make about 2.3 million tons a year between our SUS and CRB capacities. That capacity is down only by the 150,000 or so thousand tons that we took in our SUS mill -- or I am sorry, in paper machine #2.

On an annual basis we see maybe a percent of creep or something like that, so our tons don't move materially around that. At this point in time our forward looks are that we will need all of those tons globally. If it becomes different, then we will take the appropriate downtime.

If you look in the 10-K as well, you will see some additional information in regards to production capacities in the mills.

Thank you very much.

[Trey Dougherty], CapitalSource Bank.

Good morning. Just a quick question regarding revolver expectations for 2009. While it was noted that you currently have approximately $160 million invested, do you foresee any additional investment drawdowns or any repayments in the near-term?

We are currently evaluating our lenders and we are looking at when is the appropriate time to really restart our program of borrowing money when we need it and not carrying excess cash on hand. Currently, we are still in the evaluation process and when it's appropriate we will adjust back to our original cash management program.

Okay, thanks.

Amy, can we take one last question and conclude?

Aaron Rickles, Oppenheimer.

Hi, just got in right under the wire. Good morning, guys. I had a question regarding the credit facility EBITDA and the reconciliation of that to your pro forma EBITDA. Really the question is some of the adjustments how do they roll off through 2009? Can you go through that a little bit?

I don't think I would like to go all through that in detail. But what I will tell you is that we have projected out our adjustments and we have modeled our credit agreement EBITDA not only through 2009, but well into 2010. And through that period we see that we have a substantial cushion of between the credit agreement minimum and the expected amount that is calculated based on business performance. So that is what we have done.

But you can't be more specific about how some of those adjustments will --?

Our credit agreement, as you can see by the attachment to the press release, is very complex. There is a lot of moving pieces in that and it's just not something that you can do on a call like this.

Fair enough. Maybe we will follow up afterwards. Your CapEx I was hoping maybe you could go a little bit more in depth, the guidance range is helpful, but is it possible to break that out a little bit more in terms of what you view as maintenance versus sort of reinvestment in the business?

Well, probably my mill guys would come hunting for me, but I would tell you that for Graphic Packaging on a pure maintenance basis we probably run our business on a $110 million to $115 million of CapEx. The rest of it is related to our synergies and our IT integration for this year.

Last year we spent $183 million. We expect, as Dan said, to spend somewhere in the $170 million to $180 million in this year. That is still heavily oriented because we are expanding, as I mentioned earlier to one of the earlier callers. $40 million to our Kalamazoo facility; we have got some IT investment in the process. So CapEx will walk down over time, but on just run a pure run the thing, bare bones sort of thing I am sure we are much closer to $100 million than we are to $180 million, if that is helpful.

No, that is. How are you thinking about 2010 then in terms of walking it down? Do you think that is down quickly or are there still things in the pipeline?

I am trying to get through the first quarter of 2009. So right now -- I don't mean to be flip -- but the reality is looking out to 2010 for CapEx, not sure what volume or needs are going to be from customers is really difficult. Of course, we have a long-term, three-year plan but I wouldn't want to give you insight into that because I really think we have to figure out what '09 is going to be.

I think it will potentially change a lot of different things for companies including Graphic, so I am comfortable with our plans for '09. I like the early trends in the business but I don't really want to try and give guidance for 2010 CapEx.

Totally fair. Thanks. Good luck, guys.

Okay, thanks very much.

Thank you everybody for joining us on our fourth-quarter earnings call.

Thank you.

This concludes today's conference call. You may now disconnect.