Graphic Packaging Holding Co (GPK) 2009 Q1 法說會逐字稿

Good morning. My name is Molly and I will be your conference operator today. At this time I would like to welcome everyone to the Graphic Packaging Holding Company's first quarter 2009 earnings 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, Thursday, May 7, 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, Molly. Good morning, everyone. Welcome to Graphic Packaging Holding Company's first quarter 2009 earnings call. Commenting on results this morning are David Scheible, the Company's President and CEO, and Dan Blount, the Senior Vice President and CFO.

I would like to remind everyone that statements of our expectations on 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 debt reduction, targets, declines in raw material and commodity prices and the expected effect on the Company's results, conditional synergies from the Altivity transaction, consumer purchasing trends, pension contributions, and the performance of our multiwall bag business 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, I turn it over to you.

Thank you, Scott. Good morning, everyone. Thank you for joining us today to discuss our first quarter results.

Arguably, we are operating in one of the more challenging economic environments in history. It seems on a daily basis, there's elevated market volatility in the global economy, entire credit markets. With that as a backdrop, however, I believe we have performed very well, taking the necessary steps to successfully navigate this environment, and position Graphic Packaging for long-term growth.

This morning, I'm going to start by providing you with a brief overview of our quarterly results, including progress on our -- the synergies we realized from the combination with Altivity. I'll conclude with a review of our key businesses and their performance, and then I'll provide some insight into our future direction.

Following my comments, Dan Blount, our CFO, will walk you through our financial results for the quarter in greater detail. Similar to our practice last quarter, we will include comparisons to the 2008 first quarter results, restated on a pro forma basis, assuming the acquisition of Altivity occurred on January 1, 2008, and excluding the results for the two divested mills. This will give you more apples to apples comparison between the periods.

Once we've concluded our remarks, we'll open the call, and look forward to answering any questions you may have.

Last night, we reported results for the first quarter of 2009. A quick recap shows that due to the slowing global economy and continued destocking by our customers, our pro forma sales decreased by about 7% year on year on lower volumes. The majority of this decline was in our multiwall bag and container board businesses, as they were buffeted by the downturns in the construction and general economy.

However, on a more positive sign, sales to our food -- our core food and beverage markets were down roughly 3% in the quarter, where GDP was down 6%, and industry sales were down almost 5% from previous periods.

Trends towards consumer eating and drinking at home continued to help make our core business more recession resistant than the general economy. Following the trends we have seen over the last few quarters, both pricing and total cost reduction, including synergies, were improved, and led to higher margins. Pro forma adjusted EBITDA margin improved over a full point, from 11.6% in the prior year quarter, to 12.7% in the first quarter of 2009, and 2.9 points over fourth quarter of 2008.

Our first quarter adjusted net loss was $0.04 a share, a $0.03 per share improvement over our pro forma adjusted net loss in the prior year quarter of $0.07. Pro forma adjusted EBITDA improved as well, to $130 million during the first quarter of 2009, compared to $127.6 million during the first quarter of 2008.

This was our best quarter, following the transaction with Altivity, and you will recall, it was just over a year ago, in March '08, we combined the operations of Graphic Packaging and Altivity to create one of the world's largest packaging companies. As part of that combination, we set out to achieve at least $90 million in annualized synergies by 2010. Although we will discuss this in greater detail in just a moment, I'm proud to announce that we have already exceeded this goal by achieving annualized synergies of almost $92 million by the end of the first quarter.

We're excited by this accomplishment, and continue to work at unlocking future savings as well.

Another positive during the quarter relates to cash flow. Cash flow from operations improved $77 million, versus the same period last year. Our continuing focus on reduced working capital, particularly inventory management, combined with the margin improvement, were the key drivers.

We've increased our debt reduction targets for 2009 to a range of $170 million to $200 million. We are keenly aware of how critical this metric is in a credit-challenged marketplace. We have several strategies in place to achieve this target, and we believe our business is headed in the right direction. We are taking the necessary steps to navigate through this unprecedented market and improve our year on year result.

Let's talk a little bit about raw materials. Higher input costs continue to negatively impact results, but we are seeing the rate of inflation moderate from prior year quarters. As we experienced about $30 million of inflationary costs in the first quarter, this compares to a 2008 quarterly run rate of almost $60 million.

In particular, we are seeing year-over-year favorability in our secondary fiber, as OCC pricing remains at relatively low historical levels. We're being careful not to count on this benefit going forward, however, as we did see a small uptick in pricing during the first quarter, as international demand for OCC has picked up, particularly in China.

Although incrementally higher than a year ago, the rate of increases have slowed dramatically for chemicals, inks and coatings, freight, and other petro-related inputs, as the barrel of crude oil is roughly half of what it was a year ago today.

Prices were relatively stable during the first quarter -- contributed $24 million, versus the same period in 2008. CUK board remains essentially unchanged from the fourth quarter 2008, while CRB price moved down slightly in the quarter. This reflects the difference in operating rates of these two substrates.

Our current supply contracts typically have time lags, both as costs moved up and down, so as you would expect, prices did move up slightly during this quarter, driven by last year's unprecedented increase in input costs. We do expect downward pressure, and most products will remain in this soft economy.

If you look at our mills, both our CUK and CRB mills had a very solid operating performance in Q1. I'm particularly encouraged by the improvement in our West Monroe facility. We exceeded all key operating equipment effectiveness and total cost metrics versus the same period last year. Fortunately, it was not necessary to take market-related downtime in these grades. But you will recall that we did permanently shut down our #2 paper machine in West Monroe late last year, which allowed us to balance production to demand, particularly for CUKs. However, it was necessary to take 19 days of market-related downtime on our corrugated media machine in West Monroe, and five days on our URB mill in Pekin, Illinois.

The financial impact for the quarter was roughly $3 million in EBITDA. Medium and URB volumes are expected to remain under continued pressure, but we have put initiatives in place to leverage more internal volume in these grades going forward. We would prefer not to have to take market downtime on our machines, but we will continue to match supply to demand to all grades. Building unsold inventory in this economy is a poor cash flow decision.

If I look at our synergies, our ongoing continuous improvement initiatives to integrate and optimize our production facilities ensure that our customers are reliably supported from a solid network of efficient low cost manufacturing facilities, while generating positive EBITDA. We've continued to focus on these goals over the past 12 months, and we are better positioned today to strengthen our earnings performance and continue our debt reduction, even under the current challenging operating environments.

During the first quarter, we implemented a standardized metric and countermeasure system in all seven of our production mills, which is now being used to evaluate, manage, sustain and share improvements across the entire mill system. This continuous improvement tool helped propel mill performance during the first quarter.

Additionally, the Macon, Georgia facility and our Milltown, Ohio mill rolled out Lean Sigma initiative during the first quarter, and we anticipate extending this continuous improvement method to our other mills throughout the rest of 2009. Our focus on these processes to drive down our costs will ensure we maintain our lowest cost producer position in this space.

As I mentioned, the combination of Altivity has resulted in annualized synergies of over $90 million, while our continuous improvement initiatives have generated additional total savings of over $80 million since the combination in March of 2008. During the quarter, synergies contributed $23 million of cost benefit. Looking forward, we expect to continue to realize incremental savings above the $90 million threshold while we're taking out an additional $50 million in costs from our continuous improvement programs in 2009 as well.

As a result of the additional cost savings opportunities resulting from the combination of Altivity and our experience and track record in taking out standalone costs, I believe we are better positioned than our competitors for continued margin improvement.

Some of the actions we took in the first quarter to help us continue to achieve those results include announcing the discontinuation of production at our Tuscaloosa, Alabama folding carton facility by the end of the second quarter of 2009, as well as the permanent shutdown of our folding carton plant in Morris, Illinois and Muncie, Indiana during the third quarter of 2009.

In addition to these facilities, we announced the permanent layoff of approximately 60 employees at our Elk Grove Village, Illinois converting facility, and the expected closure of our multiwall bag facility located in Cantonment, Florida by the end of the third quarter '09 as well. These actions are not a result of slowing economy, but rather, an extension of our synergy integration plans, and are designed to increase our manufacturing efficiencies and streamline operation, helping the Company operate with the lowest cost structure in the industry. This streamlined cost structure and improved manufacturing efficiency will put us in a position to generate higher long-term margins and better cash flow when the market eventually rebounds.

Let's talk about our businesses a little bit, starting with food and consumer. First, in food and consumer sectors during the first quarter, packaging sales to domestic food and consumer products markets were impacted by continued destocking and aggressive cash management in our key customers. Sales continued to show similar trends to Q4, with consumers focusing on value purchases as opposed to premium brands. More specifically, sales to these markets during the quarter were down approximately 3%.

Looking at consumer prices in general, according to US Department of Labor CPI, inflation in the food and home category averaged about 4.9% in the first quarter. This is in stark contrast to overall inflation that averaged a negative 1.7% for the quarter. The A.C. Nielsen retail package sales data reinforces our view that the economic environment has affected both the type and amount of package goods purchased. Aggregate annual unit growth in the major package food categories that we track did increase about 2.2% in 2009, and this is compared to 1.4% growth in the same period for 2008. The categories that did particularly well in the quarter were dry dinner mixes, which increased 7.3%, frozen pizza 3.3%, and refrigerated products at 2.7%.

Although consumers are still buying products, the data suggests they are being more value conscious, and avoiding or delaying purchase of non-discretionary items. Products such as candy, frozen baked goods, showed steep unit decline from a year ago, posting sales losses of 18.7% and 7% respectively. We actively track those trends to ensure we remain nimble and can adjust our manufacturing and sales efforts accordingly.

The data supports our views that consumers are increasingly seeking more basic high value food and packaged good offerings, and our business has realized a benefit in this area as a result, providing us some insulation from the down economy.

Additionally, the sales decline was driven by destocking across the entire supply chain. Not just at our customers and their customers, but in consumer pantries as well. People everywhere are watching cash and adjusting their purchase patterns. They're keeping one frozen pizza versus three, or fewer types of cereal on hand, and they're buying less overall large quantities at a time. Core consumption is not down, but inventory is being adjusted within the entire food supply chain. This inventory purge has slowed from Q1 levels, but I know it's hard for our customers to predict how volume will flow for the entire quarter, for the entire year, and difficult for us as well.

If I look at beverages, the story is very similar. While growth in overall domestic beer market continued to slow, it demonstrated some recession resistance as take home volumes were actually up 0.5% over the same period last year. Imports continued to decline, and were down 2.1%, while domestic premium segment was down almost 1.1%. The domestic sub-premium segment, on the other hand, grew 2.5%. Supporting these trends, the consumer is trading down from glass to can, which is consistent with the move to less premium offerings. In total, net beer sales beat the prior year quarter by more than 6%, driven by improved pricing, mix, and new product launches.

Sales of carbonated soft drinks and premium beverages such as teas continued to be sluggish, largely due to the reduced retail promotional activity, and the negative impact of the economy on premium beverage sales. Offsetting these declines, our co-packer strategy, aimed at increasing multi-packing for energy drinks and non-carbonated beverage continues to outperform our expectation, as this segment of the business outpaced the overall soft drink market.

Within soft drink, first quarter sales increased roughly 3%. During the first quarter, we launched several new brands such as energy drinks for Target stores within our co-packer network, essentially tripling our quarterly sales volume compared to last year. We signed a long-term exclusive agreement with the Minute Maid Company to supply our patented [deep blue] packaging substrate, replacing a corrugated construction, for their juice pouch business. And that will begin scaling up the middle of this year.

Looking at multiwall bag, it's a little different story. This makes up roughly 12% of our sales, and we experienced considerable weakness in our industrial and building products end use markets, as demand in those two areas fell markedly. As a result, tons shipped in the first quarter were down almost 18%. Despite the drop in sales, cash flow year on year was positive, due to quick countermeasures taken in this business, including the combination of improved working capital and inventory management, as well as extended converting downtime. Again, we were balancing demand and supply.

As we look ahead, our plan remains to be focused on minimizing sales shortfalls in this business, optimizing our manufacturing footprint and maximizing our cash flow opportunities through capital spending and working capital reductions. We are encouraged by some of the recent trends in this business we are seeing with our customers who have noted an expectation to see stabilized volumes by early summer. Regardless, we are preparing an operating business in such a way that will allow us to flex costs in response to changing volumes either up or down. We will watch these developments closely, and look to capitalize on market opportunities early in the process.

In summary, by right sizing the cost structure and optimizing this business footprint now, we expect our multiwall bag business to emerge from this lackluster period stronger than before.

Before turning the call over to Dan, I would like to mention that despite a difficult sales environment, we continue to make significant investment in new product development, and have seen positive results during the quarter. In fact, in Q1, new product sales were up 20%, versus Q1 last year. Clearly, in this environment, the windows are narrower for what our customers were willing to do, but they are, in fact, investing in new products if they create the right value proposition.

This quarter, for instance, we continued to drive beer packaging sales through the launch of several new products. At Miller Coors, we introduced the Blue Moon brand six-pack basket carrier, and saw continued expansion of our 18 and 20 pack bottle package in our Litho-Flute high strength package. Significant progress was made during the quarter to integrate all Litho-Flute into Graphic Packaging's paperboard supply stream.

In Europe, new packaging machines were shipped to Heineken, Cott and CCE. Our focus on non-carbonated beverages such as premium juices and teas as well as energy drinks in the United States has continued to deliver new products through our co-packing network. During the first quarter, we gained 4- and 12-pack [fizzy] business, with new titles with Fizz Ed and Apple & Eve, as well as reinforced our leading position in the energy segment with organic [D tea], a new tea business including Red Diamond Tea, which is packaged in our 12-pack with a vertical vendor dispensing feature and high gloss UV on the outer carton gains attention behind refrigerated section doors.

In food and consumer products, we continue to see growth from primary microwave and strength packaging applications. Kraft has launched the latest microwave food concept with its introduction of the flatbread melt. The frozen product is sold under the California Pizza Kitchen and DiGiorno labels. Once again, Graphic Packaging's focused susceptor technology has shown its versatility and resilience with this recent foray into the consumer home pizza market.

In the strength packaging, we experienced significant expansion of our Z-Flute structure at Frito-Lay and Kraft, with multiple items moving in its patented structure. Kellogg's also moved forward and picked Z-Flute for their Kashi cereal carton for a major Canadian launch in the warehouse club market.

I'd also like to highlight our recent win at the 66th annual Paperboard Packaging Council's national packaging competition, where a jury of industry experts selected our Cap-it package as the winner of the inaugural Eco award. Our eco-friendly paperboard multipack was chosen as the paperboard package with the most positive impact on product differentiation merchandising and sustainability. We believe we can reposition paperboard as a competitive alternative to plastics and shrink film, generating a variety of growth opportunities over the long term, for both the industry as well as Graphic Packaging ourselves.

Our Cap-it paperboard multipacks demonstrate that designing for sustainability all along the supply chain can deliver more value, compared to conventional plastic choices.

Let me briefly move forward and remind ourselves, our strategy in this difficult environment is essentially unchanged. Internally, I continue to remind our organization of three key elements of that strategy. First, we will continue to focus on strengthening our core business. We've created a network of low cost mills and converting facilities that is second to none in our space. No one makes folding cartons more cost effectively than Graphic Packaging today. We like to say we will compete where we have a right to win, and in food and beverage packaging, with the acquisition of Altivity, we clearly have developed that position in all these key sectors and channels.

Two. We will grow, even in this environment, through our new product development investments and strong competitive positioning in end-use segments that will outperform the general economy. And three, we will accelerate our financial performance by paying close attention to volume trends, matching production to demand, while keeping cash flow squarely in focus. We look to improve our contractual pricing, implement continuous improvement strategies across all of our manufacturing facilities, and we remain committed to delivering improved EBITDA margins, increasing our EBITDA and better cash flow to drive significant debt reduction during this year.

With that, I'll turn it over to Dan.

Thank you, David. Good morning, everyone. David discussed the economic challenges, and provided a brief overview of our quarterly results. I'm going to walk you through a more detailed review of our first quarter results.

As we move through the numbers, what will become clear is that our volumes held up well, but more importantly, on the strength of the synergies realized from the Altivity transaction, our cost structure improved. We delivered greater EBITDA on lower sales, and we accelerated cash generation.

To simplify today's discussion, unless I specify otherwise, when I refer to net sales and EBITDA, I will be referring to the pro forma adjusted numbers, which provides an apples to apples comparison of operating performance to the prior year. A reconciliation table detailing the pro forma adjustments is included as an attachment to last night's earnings release.

Turning to results, first I'll cover the change in net sales, then bridge EBITDA to the prior year, and end with a review of cash flow.

First quarter net sales, at $1.19 billion, were $77 million, or 7% lower, than the prior year. The change in net sales is broken down as follows.

Pricing improved by $24 million, or 2.2%. We realized pricing as a result of contractual inflationary recovery, and year-over-year increases in open market board pricing.

Volumes. Lower volumes resulted in reduced sales by approximately $92 million. The majority of the decline, almost 60%, was attributable to softer demand in construction, industrial plastics, and corrugated markets. The largest volume declines were in our multiwall bag segment, and in container board open market sales. Sales in our core food and beverage markets held up well, as volumes were off only 3%. As we expected, our concentration in food and beverage demonstrated strong recession resistance.

The remaining sales change results from foreign currency exchange due to strengthening of the dollar.

Now let's discuss EBITDA. Overall, first quarter EBITDA, at $129.9 million, is $27 million higher than last quarter, and $2.3 million higher than Q1 2008. This represents a significant margin increase, as we improved to 12.7% from 9.8% last quarter, and 11.6% in Q1 2008.

Bridging the change in EBITDA from Q1 2008, we see that it was favorably impacted by pricing and cost reduction. Improved pricing resulted in a benefit of $24 million. Cost reduction initiatives, which include integration of synergies and continuous improvements, delivered $37 million of benefit. $23 million of the $37 million is from integration synergies.

As David stated, we are now at a $92 million annual run rate for synergies. Over the remainder of 2009, synergy benefits will principally be driven from well established projects in purchasing, and previously announced plant closures. We consider the execution risk to be low, and have a high level of confidence in the benefit delivery. Looking forward, we have a portfolio of synergy opportunities yet to pursue. As a result, we expect the synergy run rate to grow further in 2009.

Partially offsetting the EBITDA benefits were volume declines, market related downtime, and inflation. Volume declines negatively impacted EBITDA by $16 million. As we stated previously, the volume declines were principally in our multiwall bag and containerboard businesses.

In response to demand declines, we took market-related downtime on our corrugated medium and URB paper machines to control inventory levels. These machines principally sell board in the open market, and their integration into converting is small. Although positive for cash, this action resulted in an EBITDA charge of approximately $3 million.

As a side note, demand for production off our SUS and CRB machines, which are 80% plus integrated into our converting plants, was stable and the machines ran well.

Input cost inflation during the quarter was $31 million. Although we are currently experiencing some deflation with key raw material inputs, our cost of goods sold in the first quarter reflects the higher costs associated with inventory on hand at December 31, 2008. As you have seen from past earnings releases, changes in inflation lagged two to three months before they were reflected in our P&L. Without this lag, input costs would have been lower by approximately $12 million. This benefit of lower cost product in inventory should benefit second quarter financial results.

Now to summarize first quarter performance. Despite an ongoing difficult operating environment, our sales held up well. Our sales to core food and beverage markets were relatively recession resistant. A key achievement in the quarter, however, was the improvement in our cost structure, as synergy efforts and other cost cutting initiatives delivered permanent cost takeout. EBITDA margin improved to 12.7%, and this margin improvement has yet to reflect the full impact of lower input costs.

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

As you saw in yesterday's press release, net cash from operations increased by $77 million versus the prior year. This increase represents a GAAP comparison, which does not adjust to include a full quarter of prior year Altivity results. Taking into account a full quarter of Altivity results, I estimate the cash flow available for debt reduction improved $40 million over the prior year. This cash flow improvement principally results from working capital reductions achieved through supply chain and plant rationalization synergies.

One of the largest improvements is with cycle time in our mills, which on average, improved 30%. With 80% plus vertical integration of mill output into our converting operations, we have further aligned production schedules, and are now able to run our operations with much smaller on-hand board inventories.

The permanent shutdown of our paper machine #2 in 2008 also contributed to the cycle time improvement. Overall, working capital needed to operate the business has been reduced by approximately $50 million since the Altivity transaction.

For full year 2009, we expect debt reduction to be in the $170 million to $200 million range, as we continue to lower working capital levels, carefully manage CapEx, and deliver improved EBITDA margins. In terms of our CapEx, we have reduced our spending projections to the $150 million range. CapEx in 2008 was approximately $200 million. In light of volume changes in the industry, and to a greater extent, increased efficiencies in our plants, we can get the output we need without further capacity investments. In 2009, our CapEx will be focused on maintaining assets, and high return cost reduction projects principally related to synergy initiatives.

Now, with regard to expected cash pension contributions, we maintain our estimate of $65 million for 2009.

Turning to liquidity. On March 31, we had strong liquidity of approximately $343 million. This liquidity level is $61 million better than last year. We remained comfortably in compliance with our debt covenant, as our senior secured leverage ratio of 3.98 to 1 is well within our required five times. Additionally, we had no significant debt maturities until August 2011.

In conclusion, I just want to reiterate David's comments, that we are clearly focused in 2009 on improving cash margins and driving significant debt reduction. We will build on our solid Q1 performance by continuing to drive our cost structure lower, aggressively manage working capital, and strengthening our leadership position in our core businesses.

Now with that, Operator, we'll open the line for the question and answer session.

(Operator instructions) And your first question comes from the line of Joe Stivaletti with Goldman Sachs.

Good morning. Thanks for all the detail. I just wanted to follow up on your -- some of your comments on input costs. I know that was a very big challenge in '08, and I understand the lag and the benefits of these lower costs showing up in EBITDA.

Could you maybe help us a little bit, though, in terms of Q1 to Q2 type of bridge on input costs, or what kind of reduction we might see in input costs running through your income statement from Q1 to Q2?

Yes, Joe -- I don't know that I want to give Q2 forward looks on input. If you look at our business, and you sort of net out what Dan talked about, what was hung up on the balance sheet, and you're talking now just input raw material costs, not labor -- labor production -- labor is, let's say, for us, it's around $5 million a quarter or so, inflation. And so our cash inflation costs went up in the quarter roughly $14 million or so, in quarter on quarter increase.

We still have some hedges, and our primary drivers, Joe, were energy, and we still have some hedges in there. I think the second quarter hedges are going to average -- what, Dan, a little over $9.00, $9.50, $9.25 -- what are our --

No, between $9.00 and $10.00.

Yes. So we'll still have some energy hedges in there. Now that will improve versus Q2 of last year, because, of course, our natural gas costs were higher. OCC will be pretty flat, which is our other big driver. So I think what we would expect, that is, that it be -- the raw material input cost would be relatively flat, quarter on quarter, on the macro. I just don't have enough chemical and ink detail to go through that. That would be net of our synergy plans, okay? So I'm saying, just sort of the base inputs.

Right. But given that you don't have some of the old -- sort of '08 embedded costs in inventory, you should see a benefit from Q1 to Q2.

Right, that's correct. As Dan said, we cycle our inventories. You can look -- roughly 60, every 60 days. So that $12 million that was hung up on the balance sheet, you would expect to cycle through in the second quarter, I think.

Right.

That's right.

So you would expect that to cycle through, so you would have more of a real number, if you will, for the year, sort of thing.

Thanks. Dan, you mentioned one of your components of your debt reduction for the year, your target was working capital reduction. What is the -- what part of that is working capital reduction as far as for the year?

In terms of the $200 million?

Right. I'm just wondering how much working capital reduction -- what is your target for 2009?

Well, this year, I think we said that -- Dan just said we did about $50 million worth of inventory. Most of that working capital was inventory reduction.

Yes, and that was Q1 2008 versus Q1 2009.

Right.

So if you look at it, Joe, and I think you understand that we try to be fairly conservative with our estimates that we put out there in terms of cash. So that $50 million number that we put out there, I think that's a pretty good estimate of what's included in that $200 million number for cash generation.

Okay. And then the last question I had was, I didn't see anything in your release -- unless I missed it, on this big topic of the fuel tax refunds and what not. But I was just wondering where that stands as it relates to Graphic Packaging.

Well --

If any benefits there are included in your $170 million to $200 million of debt reduction.

Well, absolutely. I'll tell you that, there are no estimates whatsoever in our -- in the numbers that Dan and I talked related to the Black Liquor Credit that you're talking about. We have made our -- we certainly would qualify. We burn about, I think, 800,000 gallons of black liquor a day, and we have made our application to the IRS. They've been here, they've been to our plants, and our submission is in process.

But really, until we get that certificate in hand, Joe, it makes no sense to sort of put any numbers or estimates out there, and so none of the numbers that Dan and I talked about in terms of cash flow, or any of the margin improvements, have any -- would that be factored in.

Okay. Is it just that -- is there any particular reason why it's taking a little bit longer with your company to get the certification, and get some of those things firmed up? Or -- I mean, it shouldn't be necessarily due to the sign that there's going to be any kind of reason, that there's a problem qualifying --

No, no. I mean, not at all. I would expect -- we would expect pretty shortly to have news on that issue, or on that process. But now we've given -- we've had no indication whatsoever there's an issue. We clearly qualify. Our Macon, Georgia facility and our West Monroe facility generate black liquor, and we would expect to get those credits. We're aware of them, we've made our applications, we've been doing it for some time, and we would expect -- we have no reason to believe otherwise. We just didn't think it was prudent until we had our -- in hand, to be providing forward looks or estimates to that process. But we fully expect to materially -- we fully expect to obtain those credits.

Okay. Thank you.

Your next question comes from the line of Sandy Burns with Stearne, Agee.

Hi, good morning.

Good morning.

Just big picture. When you look at market dynamics between the three paperboard grades -- SBS, CUK and CRB, kind of -- given where we are in the economy, where are you seeing activity? I mean, there's always a certain amount of customers who can switch between the three grades. Is it getting more competitive than it typically would in this sort of environment, or how would you characterize those dynamics overall?

Well, I would say that we have not seen an increased number of switching activities, right? There's going to be downward pressure in any of these board substrate grades in this kind of an economy, where input costs are going down. But I wouldn't -- I would not -- I have not seen that.

The only conversions we really have seen are the ones I talked about, which is, we've seen sort of -- we've been able to shift paperboard applications to Z-Flute laminated structures out of corrugated, because there is a true value proposition there for how fast they run the customer's plan, and towards the sustainability weight factor. But as far as really switching between grades, we have not seen an inordinate amount of that by any way, shape, or form.

I think the demand difference is really -- SBS, the backlogs are tighter. CUK is also fairly tight, there's just a beverage season, and that's where a lot of that board is used, so you would expect it. And CRB tends to be more buffeted, because there's a fair amount of CRB that is not included in beverage applications and -- you know, toys and games and setup boxes, shoe boxes, all of those kinds of things. They are going to be more buffeted, so you would see a softness.

However, you've also seen a materially greater downtime in the CRB business. Everybody has taken some downtime in the fourth quarter. We expect to take additional downtime whenever it's -- when it's necessary in that grade as well. And I think for the most part, people were managing -- we're managing not to want to build inventory in any of those grades.

Okay, great. That's helpful. And just secondly, in terms of the synergy benefits, you were able to achieve your targets much quicker than you anticipated. And maybe it's hard to quantify, but could you maybe give us some sense on how much more you think you can do going forward? I mean, is it possibly like another $90 million through the next -- through 2010, or is it going to incrementally just be a little bit above where you originally budgeted those savings?

Yes, we haven't really given any -- the reason we don't give future guidance on the synergies, because I think the way we look at this thing, and is it -- you get it in the first 18 months, and then it really becomes part of your continuous improvement operations. At some point, it's no longer a synergy, it's just -- you need to drive it out of the Lean Sigma and Six Sigma.

So we sort of challenged the team to get it done in the first 18 months, because we've done this three times, right? We've doubled the size of the Company. And every time, we sort of found out, what you get is 75% to 80% of it in the first year, and that's exactly what we've seen here. In this case, a little accelerated, but we're getting better at this because of the practice, for sure, and I've got the grey hair to prove it.

The -- what I would tell you is that anything above and beyond, I think will just be the new targets for what we'll see in continuous improvement. I mean, our continuous improvement targets, this year, I think Dan said in the quarter, we were at $14 million or something like that, Dan? So if you annualize that out, that's actually a little bit higher than the guidance we've given you in the past. I would tell you that that's where that will manifest itself. So you will continue to see $50 million to $60 million worth of cost takeout on a go forward basis beyond the synergy stuff.

Okay, and just last question. Pension contribution -- the $65 million, how much of that is already being expensed on the income statement, so it would just an excess cash contribution?

For the year, we're expecting an expense of about $40 million. So it's about $25 million additional on top of expense.

Okay, great. Thank you.

Sure.

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

Hi, good morning.

Good morning, Bruce.

Hey, I'm sorry. I was -- maybe I missed something. But the free cash flow estimate of $170 million, $200 million, that's a clean number -- no Black Liquor, and the working capital component of that -- did you tell us that?

Yes, we said approximately $50 million.

Oh, 5-0?

5-0, yes.

Okay. And the rest, there's nothing else abnormal or unusual in the other $120 million, $150 million?

Well, our operating people would say it's going to be through sweat equity, but no -- it is not going to be anything above. Just running more efficiently in the operation. And you look at the EBITDA margin improvement, that's where some of it's coming from, right? We continue to expect our margins to get better.

Okay. And if you were -- I recognize you haven't accrued for tax credits, as you haven't had mills yet certified. But is there an expectation to use the proceeds if you potentially do receive? And is there any requirements by the banks or otherwise where you have to spend the money?

Well, we have no requirements, but we would be looking to use those funds for debt reduction.

All right. Thanks, guys.

As we would -- as I'll argue, as we would for all free cash flow at this point in time. We're not unaware of the $2.9 billion in debt, so that is going to be our focus for all free cash flow.

Gotcha. Thank you.

(Operator instructions) Your next question comes from the line of Jeff Harlib with Barclays Capital.

Hi, good morning.

Good morning.

Just on pricing, I know you had talked before about offsetting -- I think, 70% of inflation with pricing. Do you see a downward adjustment now with OCC and other input costs coming down, based on some of your quarterly adjustors as you look at the full year?

I don't think you're going to see a lot of adjustments on carton prices this year -- I mean, 2010 is where you'll manifest most of those changes, right? I mean, if you really look at pricing this quarter, we had $24 million worth of pricing and $14 million worth of cash inflation in input costs. So probably in this case, we actually saw pricing improve the margins.

But as you go through the year, I think you'll see additional pressure on pricing, especially in the open market for business. But carton prices remained relatively flat. We don't have that many contracts that actually have quarterly adjustments -- in fact, very few. Most of them are at best six, and many of them are annual.

Okay. Okay. And then on inflation, do you see yourself getting positive year-over-year on inflation over the next few quarters? Or is that --

That's a great question. Our primary drivers are energy, chemicals, and fiber. And so, what we would say is, we're hedged about 72%, so we sort of know what our energy is going to be for the rest of the year, and relative to the year-over-year, it will be positive on a comparative basis, because the energy was pretty extensive for us in the middle of last year.

On a fiber basis, I think it's slightly down year-over-year, but OCC kicked back up. And so, there's a diverging of opinions on when China will start to buy again and that will have some impact.

I think chemical prices are firmly -- are going to be flat to maybe slightly down, simply just because it's the petrochemical complex that drives chemicals, and when I say chemicals, I mean latex coating chemicals, and to some extent, ink.

So what I would say is, I would think there's more downward pressure on input costs, and upward pressure for the remaining part of the year for what we can see right now. But the problem is trying to figure out what you think the economy is going to do in the second half of the year. And I don't know that I'm the right guy to ask for that.

Okay. And just paperboard packaging volumes. I realize you're very high on food and beverage, but they were down 11%. I didn't think corrugated or containerboard was much more than 10%. Are there other applications in there that were way down? I'm just trying to understand --

Yes. So if you sort of think about it, it was actually about half -- about 5% to 6% was just pure downtime. We shut down paper machine #2, if you remember, in West Monroe, and last year, we ran that machine during the first quarter. We took 19 days of downtime on paper machine #1 -- that's our corrugated media machine, and another two days -- I'm sorry, another five days in peak. And so we had about 35,000 to 40,000 tons just that came out -- of just pure machinery we didn't operate last year.

And so, then, that leaves the rest of it, really, for market dislocation. And the majority of that, honestly, was not in the grade that we necessarily make. I think we mentioned last year that we decided to get out of the tobacco market, and despite the fact those were tons, when we talk about sole tons, it isn't just tons that we make. We buy -- on average, Graphic Packaging buys, I don't know, almost 200,000 tons of board on the outside in an annual period. So those external purchases that were primarily SBS for food services and for tobacco were really soft in this quarter. One, we exited tobacco, and the second is that food services -- pretty soft quarter, people eating out don't use it.

So that -- those tons were down, but that's why the EBITDA and the cash flow were not particularly affected significantly, because they were not integrated tons, for the most part. So our integrated tons drop is really pretty consistent with what we saw, that Dan reported in those 3% to 4% sort of numbers.

Okay, that makes sense. And then just lastly, what about the impact on your CUK board shipments, from a shift from bottles to cans? Does that hurt you a little bit, because of some cans not packaged, can you just update us on that?

Well, no, cans are all packaged. I think that the incremental -- and so this is a detail you probably don't even care about, but we do, and that is that bottles use incrementally more, because if you think about a bottle wrap versus a can wrap, you use slightly more board in a bottle wrap. But cans are cans, and when they're packed, they're multi-packed as well.

So the incremental change is not significant to Graphic Packaging, but the guys that run that business, you'd think it's the end of the earth. So yes, what we do -- what you're seeing, although it's increased can volume, so if people are eating at home -- so what's happening is that cans that were sold in a restaurant that is not packed in ours is now coming home to be packaged. So the net change is positive, which is why we saw actually beer up in the quarter.

It's just -- it's a mix change, if you will.

Right. Thank you.

There are no more questions at this time. That concludes the call.

Okay. Thank you, Operator.

Thank you for participating in today's conference call. You may now disconnect.