Graphic Packaging Holding Co (GPK) 2010 Q2 法說會逐字稿

Good morning. My name is Camelia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Holding Company's Second-Quarter 2010 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) Thank you.

I would now like to turn the conference over to Mr. Brad Ankerholz, Vice President and Treasurer. Please go ahead, sir.

Thank you, Camelia. Welcome to the Graphic Packaging Holding Company's second-quarter 2010 earnings call. Commenting on results this morning are David Scheible, the Company's President and CEO and Dan Blount, our Senior Vice President and Chief Financial Officer.

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 debt reduction, input cost, changes in pricing, working capital levels, plant closures, cash generation from real estates, capital expenditures, cash pension contributions and pension expense, depreciation and amortization, interest expense, net debt reduction, and consumer purchasing trends 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.

And David, I'll now turn it over to you.

Thanks, Brad. We're pleased with our second-quarter results, as we delivered another strong operating performance in what continues to be a difficult operating environment. Volumes across all of our businesses were up and we offset nearly $35 million of price and inflationary pressures with improved operating efficiencies. As a result, our adjusted EBITDA remained relatively flat on both the sequential and year-over-year basis, and we grew our adjusted earnings per share to $0.04 from $0.01 a year ago.

We also generated over $125 million of cash in the quarter and reduced our net leverage ratio by more than a full turn to 4.6 times from 5.7 times a year ago. We put some of this cash to use by repurchasing $35 million of subordinated notes in the quarter and have called an additional $67 million of those notes for settlement on August 16.

Looking out over the remainder of the year, we believe we're in excellent position to achieve our net debt reduction target of $200 million. While fiber costs have moderated off of their peak, we expect to face rising inflationary costs across some of our input categories. However, demand is relatively stable, paperboard prices are rising and contract pricing should turn positive in the second half of this year.

Our mills ran full for the quarter with no market-related downtime, and our operating rates remain in the mid to upper 90% range. We continue to see a slow, but steady rise in overall paperboard demand, and backlogs for both our CUK and CRB products are around four weeks, up a full week over last year same period.

The strong mill performance is being driven by our continuous improvement initiatives, which have increased grade-to-grade cycle times by more than a day and trim utilization by a full percentage point. The end result was the record production levels at both our virgin and recycled board mills, and tons per day increased nearly 3% over last year.

At the same time, we're also seeing a slow, but steady strengthening in the overall demand for both CUK and CRB. In the second quarter, total paperboard volumes sold increased 4.4% sequentially to over 655,000 tons. The gradually improving global economy, paperboard substitution trends, and the tight industry supply levels are keeping demand healthy. In addition, our level of paperboard integration is steadily rising and now stands at around 80%. By converting more of our internally produced board and substituting outside purchases like SBS with internally produced CUK, we're able to achieve better margins and lower inventory levels across the supply chain.

The end of the second quarter marks the completion of our integration efforts in captured savings from our 2008 acquisition of Altivity. One important aspect has been the permanent reduction in inventory required to operate our business. Over the past year, we've improved working capital by over $50 million and we do not see this reversing. The majority of this improvement is coming from inventory reduction. This has allowed us to consolidate our warehouse footprint by over 30% and reduce the number of warehousing facilities by more than 45%.

Finally, the quality of the inventory today is much higher than the past. We have better trim utilizations decreasing in number of odd lots and specialized sized paper rolls produced. In addition to warehousing, we continue to optimize our global footprint and recently, we announced the planned closing of our Golden, Colorado facility. The closing of this facility was a difficult decision, but a necessary move to ensure we are continuously meeting our customers' changing needs by optimizing operating efficiencies across the supply chain and investing to modernize our system.

So from where we stand today, we're producing more paperboard, converting more of our own paperboard in our own converting facilities, selling more paperboard across the total market, and carrying a lower level of high-quality inventory across the system. The end results are higher operating efficiencies and a much shorter cash cycle.

Let's talk about folding carton end market trends. Trends across our folding carton end markets remained relatively consistent in the second quarter. But unlike any recession this country has seen previously, food and beverage sales are down with the average unemployment length reaching a record 24.5 months and the average workweek for the majority of the workforce down to a record low of 33 hours, consumers are buying food and beverage products differently.

They are trading down, making more on their own and going without products they were previously considered staples. As a result, consumer goods manufacturers have altered their mix of products and the way they think about new product introductions and trade promotions. New products must be more of a specialty item to get customers to try it and promotions must be more point-of-sale oriented. So while the number of new product introductions has declined significantly over the past year, manufacturers are increasingly turning to packaging to help differentiate new products and promote existing products.

During quarter two, PepsiCo Quaker launched two new creative structural designs. The first was one for their Life cereal bars, which included a Curve score to highlight the nutritional information. The second one was for their new Gatorade package, which required a shaped package design. We also produced the spring promotional cartons for Unilever's Axe brand, which required a unique carton construction and UV coatings to capture consumer choice at retail.

We have seen in our business center-of-the-aisle take-home products continue to outperform away-from-home products. In general, cereal, dry foods, and lower-priced frozen foods remained resilient in sustainable categories. By comparison, our most challenging markets, for example, have been the quick-service restaurant channel and facial tissue.

Early in the recession, we experienced a move towards private-label products. But in 2010, we are clearly seeing a shift back to branded products in key segments. Consumers are very sensitive to prices and discounting and we saw some acceleration in carbonated soft drinks in the second quarter, driven by aggressive price promotions by a large mass merchant.

Beer volumes across the industry were down 3% in the second quarter. This trend is not surprising, it's due to the hardest hit demographics in terms of unemployment or the manufacturing group in the 21 to 34 age category. Both are important consumers to the beer category. Beer sales at retail have improved somewhat over the last four-week period, but it's way too early to determine whether this is a forward trend.

Food and beverage inventories in the channel remain very lean and the entire industry has learned to operate with much less inventory. As a result, the velocity in which companies are turning their inventories much higher in the entire supply chain has shortened. For Graphic Packaging, the implementation of our SAP system and better integration of our mills and converting facilities have helped drive our improved inventory velocity.

If I turn to Multi-wall Bag for a second, our Multi-wall Bag and Specialty Packaging sector is much more exposed to general manufacturing and housing conditions than our food and beverage sectors. And there has been some positive trends off of the 2008 lows. We are starting to see a sustained recovery in this business. The divestitures of the two businesses and price reductions from lower raw material cost in 2009 have negatively impacted sales, but volumes are clearly on the rise. In addition, we should begin to see recovery in prices over the next year, as price resets from changes in raw materials begin to flow through. Increasing volumes, higher prices and better efficiencies from operating improvements should all bode well for this business going forward.

On the new products side, we continue to see a pickup in the pipeline of new products across all of our businesses. In the second quarter, new product sales increased 12% sequentially and 35% year-over-year to almost $70 million. Companies are increasingly using packaging to help differentiate products, lower distribution cost and improve sustainability. As a result, our large customers look to us for creative solutions.

New products typically carry higher margin rates for us and therefore help lift our overall profitability. In addition, many of them have become substantial, commercial business over the years. So this remains a very important strategic area for Graphic Packaging. Convenience, sustainability and brand building remain key customer trends in today's marketplace and areas of focus for our new product development activities.

Our innovative microwave susceptor provides browning and crisping straight out of the microwave and Graphic Packaging dominates this growing segment. In the second quarter, ConAgra launched a range of Marie Callender baked meals in Micro-Rite trays supplied by Graphic Packaging. These products use the Micro-Rite technology to provide consumers with more evenly heated meals with less moisture loss.

Nestle commercialized a press susceptor dish for their new Lean Cuisine breakfast panini. We are also now providing susceptor sleeve for Stouffer's soup and sandwich hot pocket panini. Kellogg's launched Eggo real fruit pizzas with fruit and granola toppings utilizing our susceptor technology to cook effectively in the microwave.

Our patented Z-Flute Strength products offer better value to customers by improving shipping and display efficiencies to manufacturers and better sustainability overall. As a result, we continue to substitute solid fiber cartons for corrugated and believe this is a long-term positive trend for Graphic Packaging. In the quarter, General Mills chose our Z-Flute technology for their large warehouse club cereal product line. This decision is the first use of GPI Z-Flute technology within the cereal packaging.

Nabisco picked Z-Flute for their Double Stuff Oreo product line to create powerful retail-ready package. [Esselte] also chose Z-Flute for the retail distribution of their [pentex] folder line. Ralcorp selected GPI's Litho-Flute for their wholesale -- for their warehouse club package as well.

We are finding more customers willing to try new packaging structures if they are truly unique. PepsiCo has chosen to expand the use of our IntegraPak carton with Cracker Jack into Canada. IntegraPak is a Graphic Packaging-patented carton process that combines the barrier film into the carton, which allows for a unitized packaging solution.

During the second quarter of 2010, we experienced major growth in the energy drink segment with the launch of Red Bull 4-packs in US and Mexico, as well as a 10-pack Fridge Vendor for Hansen's Monster brand. Test market activity continued for the new [carpet] structure. We supplied carpet packaging for test markets at Polar Beverage and Coca-Cola.

In support of Coors cold-activated cans and bottles, we started providing a package with windows placed to highlight the can or bottle. Additionally, we provided the Miller Lite brand with an open-corner package for their new pint aluminum bottle. The open corners allow consumers to see the unique primary can package, as well as reduce cost through the use of less paperboard. I'm encouraged by the increasing activities on these new products in this environment.

Let's talk about inflation and pricing. Overall input costs in the quarter were up about $23 million over the prior-year period. As expected, lower energy costs were more than offset by higher costs for secondary fiber, wood, resins, and inks and coatings. We consume about a million tons of secondary fiber annually, of which about a third of that is OCC. On a P&L basis, our secondary fiber costs averaged about $137 per ton in the second quarter, up roughly $36 per ton sequentially and $76 per ton on a year-over-year basis.

Looking today at OCC prices, they peaked at about $174 per ton in March and have since retreated to the mid-120s range in the spot market. We expect market prices for both OCC and pine cost to continue around current levels, perhaps moderating later in the year as the economy improves.

In addition to the significant inflationary headwinds in the quarter, we experienced $12 million of lower pricing on our converted products as a result of deflationary environment we experienced in 2009. As many of you know, the majority of our business is contractual and the contracts include some form of backward looking price adjustment mechanism for change in raw material cost. As a result, our pricing typically lags any changes in raw material cost.

In the second quarter, the price of our CRB increased over $50 a ton, while the price of CUK remained relatively flat on a year-over-year basis. However, given the strong paperboard demand for both grades and rising input cost, we continue to raise board prices by implementing a $40 -- $45 per ton increase in April and announced another $40 per ton increase to take effect in early August on our CRB products. On CUK, we implemented a $40 per ton price increase in late May and we announced another $50 per ton increase to take effect late in August. In Europe, we instituted similar increases across our space.

Our outlook for 2010 really remains unchanged and we are on track to achieve our net debt reduction target of $200 million. We should start to see higher pricing in the second half of the year, as our contracts adjusted for last year's inflation and board prices roll through.

Fiber costs are coming down, but are still higher year-over-year and we are also facing higher cost in other input categories. Net-net, higher inflation costs are expected to outweigh higher contract pricing. However, we expect performance improvements to offset any net changes between pricing and input cost.

Our current view is the demand should remain relatively stable in our core Paperboard Packaging segment and continue to improve in our more cyclical Multi-wall Bag and Specialty businesses. Tight inventories across both the sectors should keep supply and demand in balance, and gradual improvements in the economy will eventually lead to gradual improvements in volume. However, given the continued high unemployment rates and structural changes in the industry, we think this could be a slow and extended process.

Now, I'll turn it over to Dan for his review of the financials.

Thanks, David, and good morning everyone. As you saw, second quarter was solid, with improved operating performance, offsetting the spike in fiber costs and the impact of lower pricing. These results are in line with our expectations and put us clearly on track to achieve the full-year targets we shared on the last call.

What is also important about the quarter is that we completed our integration activities and recorded our final non-recurring charges related to the combination with Altivity. In total, the integration of Altivity was a huge success, as we realized over a 250 basis-point improvement in EBITDA margin resulting from the delivery of over $150 million of ongoing annual benefit. Also, free cash flow generated from the combined business doubled.

In total, the final integration charges were a rather large $47 million, but what is really important about the charges is that they are either non-cash or payable over an extended 20-year time period. Approximately $22 million of the charge is related to multi-employer pension plan withdrawal liabilities for closed production facilities. These pension liabilities are expected to be paid out at a nominal amount of about $1 million per year over a 20-year period. The remaining charges are principally related to plant rationalization and adjusting real estate assets held for sales to fair market value. In total, we expect to generate about $30 million of cash from real estate that is being actively marketed at this time.

To provide a more detailed review of second-quarter results, we will discuss revenue and EBITDA performance and then move to cash flow, leverage and liquidity. As a reminder, when I refer to EBITDA and EBITDA margins, I am referring to both current year and prior-year EBITDA results that are adjusted to produce comparable financial reporting. These adjustments are detailed in the earnings release and principally relate to the non-recurring charges incurred in the integration of Altivity, as well as the refundable alternative fuel tax credit that expired in 2009.

Turning to sales, we saw volume increases over the prior year of just over 1%. The volume increase was good news, but clearly consumer buying trends are different in this recession and affecting our business. We remain optimistic about the future, but with caution. Overall, revenue was essentially flat to the prior year, as price adjustments driven by last year's input cost deflation offset our volume gains.

Looking at the breakdown of the modest $7 million decline in sales, we saw first a $6 million increase from stronger volumes in all three reporting segments. Paperboard Packaging grew just over 1%, while the combination of Multi-wall Bag and Specialty Packaging showed a stronger recovery growing at just over a 3% pace. These volume increases were partially offset by roughly $3 million of reduced sales related to the 2009 divestiture of the Handschy inks business.

Next, we saw a $12 million reduction in price resulting from contractual price adjustments, driven by lower raw material costs in 2009. The good news is that we have cycled through most all of our price adjustments related to 2009, and expect to see favorable pricing comparisons over the remainder of 2010 and into 2011. And finally, the remaining change in sales resulted from foreign currency exchange.

EBITDA; as we stated previously, we are pleased with our EBITDA performance. EBITDA margins of 14% were achieved even as we absorbed the combination of the Q1 spike in fiber costs and lower pricing. Overall, EBITDA of $145.1 million was lowered by a modest $2.6 million compared to the prior-year quarter.

Looking briefly at the drivers of the change in EBITDA in more detail. First, we experienced a $23 million impact from inflation, $18 million of this amount due to higher fiber costs. I have more comments on input cost shortly. Secondly, we saw a $12 million impact from lower pricing, net of our volume gains. Integration synergies and continuous improvement initiatives continued to deliver impressive results, as our performance gains netted to a $35 million benefit this quarter. And finally, the remaining change is primarily due to foreign currency impact.

Returning to input cost inflation, we experienced year-over-year inflationary increases in both wood and secondary fiber. The spike we saw in secondary fiber in Q1 rolled through the P&L in the second quarter, and total secondary fiber cost was up close to $15 million. As David stated, secondary fiber costs have recently retreated, so we should see a sequential reduction in the third quarter. Wood cost also spiked, as it averaged $3 per ton more than the prior year, for a total second-quarter impact of $3 million. Currently, wood cost has eased back to prior-year levels and we expect minimal wood inflation over the remainder of the year.

Inflation related to other inputs such as external board, inks, coatings and resins was more modest then fiber and was partially mitigated by lower natural gas costs. Natural gas averaged $1.65 per MMBtu less than the prior year and we use about 3 million MMBtus per quarter. For the remainder of the year, we have hedged about 75% of our natural gas needs at a blended rate of $1.74 per MMBtu favorable to the prior year. In summary, we expect to continue to feel inflationary pressure for the remainder of the year, with fiber inputs continuing at current spot levels rather than the high levels seen earlier in the year.

Now, let's turn to cash flow, debt and liquidity. Starting with CapEx, expenditures were $22 million in the quarter. With year-to-date capital spending of $40 million, our pace of spending is behind last year when we had heavier spending to complete the integration plans. We do, however, expect to catch up with last year's level, as we complete several projects in our mills during the regularly scheduled maintenance outage later this fall. Our full-year estimate for CapEx remains in the $130 million range.

With regard to debt levels, we continued to make steady progress. As David described, we had strong cash generation in the quarter and focused a portion of our debt prepayments on the higher-cost subordinated notes. As a result of ongoing debt reduction, interest expense was lower by $7.5 million in the quarter and $14.7 million year-to-date as compared to 2009. With the recent bond call, we have essentially used our currently available basket for bond repurchases. Through operating cash flows and the prepayment of senior secured debt, we expect to rebuild this basket back up to around $70 million by year-end so we can continue to reduce higher-cost debt.

Liquidity at the end of the second quarter remained strong at about $546 million. We had no borrowings under our $400 million revolver and $172 million of cash. We are well within compliance of our senior secured leverage ratio covenants at 2.89 times versus the maximum allowable ratio of 4.75 times.

Now, before concluding with guidance, a couple of comments regarding recent news releases and analyst reports. First, the credit rating agencies have acknowledged our improving operating and financial profile, as S&P increased each of our ratings by one notch, while maintaining our outlook at positive. S&P now has our general corporate rating at BB-. Additionally, Moody's upgraded our outlook from negative to stable. We are pleased with the rating agencies' recognition of our financial progress and look forward to earning further upgrades, as we continue to improve operating results and reduce debt.

The second topic relates to the June 2010 IRS Chief Counsel memorandum on the topic of black liquor tax credits. The memo essentially outlines that black liquor can be used either as an alternative fuel credit or a cellulosic biofuel credit, but not both. In 2009, we chose the alternative fuel credit rout and booked a net benefit of approximately $138 million. It appears that some in the industry are considering the cellulosic biofuel credit path. We have evaluated this approach and given our large NOL position and the fact that the cellulosic biofuel credit can only be used to offset federal income taxes payable, we will not be pursuing this option.

And now finally turning to guidance. In the third quarter, we expect to begin realizing price improvements from announced increases and contractual inflationary recovery. As such, we are reiterating the financial targets we laid out during our last conference call. These include capital expenditures in the $130 million range; cash pension contributions of $45 million to $70 million, of which $19 million has been contributed through June; pension expense of approximately $32 million; depreciation and amortization in the $310 million range; interest expense of $175 million to $180 million; and net debt reduction in the $200 million range.

And now, I will turn the call back over to the operator for questions.

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

Good morning. Just a couple quick things. One was, did I get the numbers right when you said you'd repurchased $35 million of the 2013 bonds in the quarter and that you called another $67 million, is that what you mentioned?

That's correct, Joe.

Okay. So you can't do anything for a while, but then you're going to expect to rebuild the basket so you would still be expecting to use free cash flow, I mean, to attack that particular tranche, that's still your priority, I assume?

That's priority. I mean, I think as you probably remember, our basket can be rebuilt as we pay down the bank debt. We can rebuild the basket that allows us to repurchase some of the 2013 bonds. And as I said, we expect to have about a $70 million basket available by year-end.

Okay.

And we may utilize some of that basket as we build it during the second half of the year as well.

Right. Right. The other thing was on the selling price, the contractual selling price shifts, is it -- as that starts to become more favorable in the third quarter, is it reasonable to look at that as sort of a neutral on a year-over-year basis in terms of the impact of selling price changes or would it actually be more likely to be turning positive year-over-year? I know it's been negative for the first six months.

I think, Joe, I looked at that math recently and what I would say is it'll be sort of at best neutral to slightly negative for 2010 and then in 2011, it turns the other way because it just takes the time. We also mentioned that we had the board price increases outright and most of that impact is going to be in the second half of the year. But as you annualize those for all of 2011 is where you start to see more pricing contribution.

Okay. Thank you.

Your next question comes from Ian Zaffino with Oppenheimer.

Great. Thank you. Couple questions. The first one would be on the resets, when do you start getting the benefit of contract repricing off of March OCCIs? And I have some follow-ups. Thanks.

I mean, Ian, the resets will depend upon the individual contracts. Some of them will start in the subsequent quarter. And for board pricing, it starts pretty quickly because it rolls through in the open market. For contract pricing in cartons, it can be up to a year for some of the resets.

So it will be -- it will be an ongoing calendar flow and that's why I said that -- or for the year we'll be about neutral to slightly negative and then in 2011 you start to see a higher level of contribution because you get -- your base of pricing going up and raw materials staying flat.

And these are contractual resets or are they negotiations?

They're contractual resets. All -- the high, high majority of our business, 90% plus is under contract and those contracts have terms and conditions, and one of the primary terms and conditions is how the pricing moves in its -- those resets, up or down, are determined by industry price movements that can be tracked by our customers.

Okay.

Or costs that are tracked.

Okay. And then as far as your guidance, can you just give us some sensitivity what would need to happen for you to -- to beat the guidance, what would have happened for you to fall short of the guidance?

Well, I mean, Ian, I don't really -- as you know, on these calls I don't really get into sort of the hypothetical and in this environment that doesn't make a whole lot of sense. What I would tell you is that we're comfortable with the numbers that we've given. I'd love to see volume come back differently, but our projection, as Dan said, for volume is -- demand is pretty tepid. We haven't seen a real bounce-back in the sort of core sectors and therefore we're staying pretty conservative in our forward looks.

Okay.

So I think for the most part, it's how you feel about the economic recovery and demand more than any other real surprise in the input raw materials or some other exogenous sort of event.

Okay. And then last question would be, I know you've talked about maybe de-levering or accelerating your de-levering beyond what you could generate free cash flow. Where are you in that process or where are your thoughts on that right now?

I guess the -- I mean, right now our only -- I'm not fully sure I understand the question, but what I would tell you is that our only de-levering plan right now is using free cash flow to reduce roughly $200 million of our debt. And as Dan said, our target will be to get the high-cost debt out first, our 2013 bonds. And then to the extent that we need to continue to reduce bank debt to create a different basket or an additional basket, we'll do that. But that's our primary focus for debt reduction right now.

Yes, the only thing that would be on top of that, the $200 million that we've laid out there as a target doesn't include any sales of the real estate. And as you can see that we have some real estate that's held for sale, we're actively marketing it. But since we're not sure of the timing, we didn't include it in the target as a potential upside, but that was only around $30 million.

Yes, if we sold all of it.

Right.

Okay, great. Thank you very much.

Your next question comes from Mark Kaufman with Rafferty Capital Markets.

Good morning, gentlemen. How are you?

Good, sir. Yourself?

Good, thanks. Good. I had a question about the new products, I mean typically you see in the third quarter, not typically -- maybe not the last two years being typical. But prior to that, you would see a pickup in new product introductions on the part of your customers, you were remarking about you seeing new product sales up. And how does that work in conjunction with each other? And what are your outlook for the third quarter on new product offerings? Are you seeing that pick up from the final market like you had in the -- typically a few years ago?

It's interesting because as you know for our business, the third quarter tends to follow back-to-school trends. And traditionally or typically, customers do start back-to-school promotions. They'll change a cereal box or they'll do a promotional lunchables or those kinds or macaroni and cheese stuff.

What I would tell you is that I think the activity in that level has been muted relative to historical levels and we've seen it increase over where we were in 2009 because 2009 Q3 we really saw nothing. So we clearly have seen year-on-year improvement, but if you're thinking about sort of historical levels, which was the base of your question, I'd say it's still pretty muted.

Our customers are -- they're playing pretty close to [their vest] as well. They're maintaining their cash, almost all the advertising and promotion we're seeing is on the box, which is typically not particularly expensive for them, but it's also pretty leveraging for the consumer and so we're seeing that. But what we're not really seeing is a lot of promotional boxes or a lot more new designs or things like that that traditionally we have seen at least not to historical levels. And I don't expect that to change until consumer spending trends start to adjust.

Okay. These new products that you have been introducing, is it basically replacing existing products? And if so, do you feel you have opportunity for better margins on these products or are they product line extensions?

It's a little bit of everything. And microwave product, for example, is generally something that was not microwaved before, that was done traditionally in the oven and our customer wanted to provide a more convenient or quick cook. So those are almost all new, it's rare that those things are substituting, I can't even think of example one.

Our Z-Flute packages are often substitutions, not necessarily for folding cartons, but for corrugated. So what we're working in there is we're replacing corrugated packaging with the folding carton or laminated structures. So for us it's net new, for the industry it's really a switch of substitution of one kind of fiber for another and that's mostly cost and sustainability sort of process.

There's always a level of substitution at some level when a customer decides they're going to change a package for the club store, it very well may be that there was a different kind of package doing a similar product, but they've changed it to get a different price point or a different promotional point and that ends up being really more cannibalization of some sector of the market.

We have all of them, the predominance of it though is really more new things to the overall mix. And for us, those new products tend to carry much higher margin, so they help maintain -- in a tough operating environment, they help us maintain our EBITDA margins. So I'm always happy when that occurs initially because it does help in a tough operating environment to have new product stuff.

If I may just a couple more quick questions. What's your internal usage [rate] now in the boxboard plants and the -- my other question is, is there any natural gas hedged for 2011 yet?

Well, let me talk about -- we would call them -- we're not going to call them boxboard plants necessarily.

Sorry.

We'll go with converting facilities since we're not [selling corrugated]. But what I would say is that utilization rate in our folding carton plants is not materially changed, it's probably 75% or something like that is the capacity. For the most part though in our business, Mark, we tend to look at the capacity utilization of the mill that trends to drive more of the economics in our business. And as I said earlier, those utilization rates are well into the mid and upper 90s with backlogs moving out.

Maybe I didn't phrase it properly. How much of the mills are you using internally in your packaging plants?

About 80 -- north of 80% of the board that we manufacture we use internally, which is really about our optimal balance. Now, we are a net buyer of board and I mean by that, we convert more board than we manufacture across our entire space. So by doing that, it sort of allows me to manage my mix and optimize my trims across the base.

So, on a net integration basis, we're a net buyer. I don't see our integration directly getting much higher than 80% to 85%. That just becomes inefficient in the operating system because we don't make every grade or every caliper or every split that's necessary [in our own] board mills.

And your other question regards to natural gas hedging, we've only placed the small amount of hedges in 2011. We've concentrated on the higher risk quarter, which is the first quarter. We have 25% of our expected need hedged in that quarter at a rate of about $5.30. And the $5.30 is favorable to our actual amount in 2010.

Thanks very much.

There are no further questions at this time. Do have any closing remarks?

No, we just like to thank everybody for their interest in Graphic Packaging.

Thank you.

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