Graphic Packaging Holding Co (GPK) 2011 Q1 法說會逐字稿

Good morning. My name is Celeste and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging first-quarter 2011 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 session. (Operator Instructions). I would now like to turn today's call over to Mr. Ankerholz. Please go ahead, sir.

Thank you and good morning and welcome to the Graphic Packaging Holding Company first-quarter 2011 earnings call. Commenting on results this morning are David Scheible, our President and CEO and Dan Blount, our Senior Vice President and Chief Financial Officer.

To help you follow along with today's call, we have provided a slide presentation, which can be accessed by clicking on the Q1 Earnings Webcast link on the Investor Relations section of our website at GraphicPKG.com.

Please note that, in this presentation, when we refer to EBITDA, we are referring to results adjusted to produce comparable financial reporting. The adjustments generally relate to prior-year integration charges. The attachments to the earnings release and the slide presentation appendix, both of which are posted on the previously referred website, provide the calculations of these and other non-GAAP measures.

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 fiber and other raw material prices, consumer demand and pricing trends, capital expenditures, cash pension contributions and pension expense, depreciation and amortization, interest expense, debt and leverage reduction, performance improvements and cost reduction initiatives, including the closure of facilities, 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 substantial amount of debt, inflation of and volatility in raw material and energy costs, cutback in consumer spending that could affect demand for the Company's products, continuing pressure for low-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 Securities and Exchange Commission. David, I will turn it over to you now.

Thanks, Brad. We are pleased with the first-quarter results. Adjusted earnings per share doubled to $0.08 from $0.04 last year and net cash from operations increased by more than $31 million same period 2010. The strong storms throughout the Midwest in February forced the closure of a number of our facilities, as well as our customers, placing pressure on volumes for the quarter. However, volumes began to recover in March and have continued to return to more normalized levels.

The other significant headwind that we faced this quarter was higher input costs, particularly externally purchased board and bag paper. The cost for secondary fiber and petro-based chemicals also increased. Despite all of this, we were able to deliver relatively flat sales and adjusted EBITDA.

Pricing continued to be positive in the quarter and should remain so for the remainder of the year. We continued to take costs out in the quarter, achieving over $20 million of cost take-out and we reinforced our original target of $80 million for the full year.

We are also in the process of implementing a number of additional steps to further combat inflation. As a result, we remain comfortable with our original full-year debt reduction target from operations we laid out on our last earnings call.

During the quarter, we made a few structural changes to the business as well. An important element of ongoing cost reduction is optimizing our converting footprint by closing less profitable plants and consolidating into newer, better capitalized facilities that are located closer to our mills. The best way to offset fuel costs is to simply eliminate the freight entirely.

Earlier this week, we announced the closure of our Cincinnati beverage carton plant. While it is always a difficult decision to close a facility, in this case, it was necessary in order to maintain our competitive position and ensure the long-term strength of our business.

The business in Cincinnati will be transitioned to our converting plants in West Monroe, Louisiana and Perry, Georgia. The transition plan includes an expansion to the Perry site and will capitalize on Perry and West Monroe's close proximity to our Macon, Georgia and West Monroe, Louisiana mills respectively.

We were also pleased to be able to announce the acquisition of Sierra Packaging, a highly respected Northern California producer of folding cartons for beverage carriers and litho-laminated boxes for the consumer packaged goods industry. They are a leading supplier of the fast-growing kraft beer segment and have a strong position in litho-lam lined boxes.

This is a unique opportunity for Graphic Packaging as it provides us with a strategic location to service customers on the West Coast and enhances operating synergies. Strategically, this acquisition does three things. First, it extends our core product offerings and provides new growth opportunities. Second, it improves our core operating platform by better integrating our Santa Clara, California board mill with an additional West Coast converting facility located nearby. And finally, it leverages our integration expertise to drive synergies. The acquisition price was $53.5 million and we anticipate the initial annual synergies to be in the $2 million to $4 million range.

I am pleased also that Allen Ennis, the primary owner of Sierra Pacific, will be joining the Graphic Packaging team. This acquisition is expected to be completed in the second quarter of 2011 and we will provide additional updates at our next earnings call.

Yesterday, we closed the offering of 47 million shares of new common stock and raised roughly $213 million of net proceeds. The offering accomplishes a couple things. One is an acceleration of our debt reduction, a key important part of our focus and improves our capital structure. Second, it will increase liquidity of our stock. Debt reduction remains a key focus and we are now targeting a net leverage ratio of around 3.5 debt to EBITDA by the end of the year.

In addition to paying down debt, we will use a portion of the proceeds to repurchase 6.5 million common shares held by the Grover C. Coors trust and to acquire substantially all of the assets of Sierra Pacific packaging.

Let me talk a little bit more about operating results. Before I do, I would like just to take a minute to address the current situation in Japan. The effects of the earthquake are devastating and our hearts go out to our Japanese friends and colleagues and those who have lost so much. Fortunately, all of our employees are safe and there was no material damage to our facilities or the large majority of our customers' facilities either.

While beer consumption has obviously declined in Japan as a result of the tsunami, there is SKU consolidation among the major breweries around the six-pack wrap size. This is our primary product offering and as a result, at this time, we do not foresee any major disruption to our Japanese business.

Let me profile a few more details on how the first-quarter operating results were generated. Our mills had another strong quarter, performing above our expectations due to improved initiatives in energy and operating efficiencies and reductions in fixed costs. Tons per day production increased nearly 1% and we generated over $7 million in cost savings from our continuous improvement efforts.

Backlogs remain seasonally strong in both our CRB and SUS networks. Going forward, we continue to see significant opportunities to reduce our cost structure in the mills and are focused in three key areas this year -- trimming grade optimization, water and energy conservation, including higher levels of biomass utilization and fiber yield improvement.

Turning to the folding carton business, volumes in our Paperboard Packaging segment decreased 4% in the quarter with the closures from the February storms having a material impact in the middle of the quarter. The February impact was particularly acute in the dry and frozen food items that are key grocery staples, most of which are packaged in the Midwest. Cereal sales were down 1% year-on-year for the quarter. Overall, we were able to offset this volume impact with marketshare gains across the sector, as well as some general improvements in the March trends.

Trends in the beverage end-use markets were a little different this quarter as we saw improved volume in the beer segments while soft drink take-home was softer in the US. We also saw a slight shift from canned packs to bottles in the larger beer brand, as well as continued growth in the kraft segment implying premium sales in beer are recovering. Our European beer business experienced increased sales due primarily to price realization and some underlying volume growth.

Looking at our flexible business, both sales and volume trends improved sequentially from the fourth quarter, but on a year-over-year basis, sales increased around 4% predominately as a result of higher pricing from the recovery of purchased paper inflation in 2010. But volume continued to decline nearly 7% as a result of the continued weakness in the construction and end-use markets.

New product sales were about 12% ahead of first quarter last year, almost $71 million. Our microwave strength and barrier platforms all continued to contribute to our product growth. In microwave, Nestle launched a new line pretzel bread snacks under the Lean Pockets brand, which utilizes our susceptor sleeve. Wal-Mart introduced a new brand of meals using our Smart Pouch steamable bag technology.

In our shrink platform, Unilever launched their Magnum ice cream bar product in a retail-ready Litho-Flute carton that enhances the shelf appeal and provides superior shipping protection. Kellogg commercialized two high caliber strength solutions for their Pop-Tart treats and Rice Krispies cereals in the warehouse clubs and Lance utilized our patented Z-Flute structure for a new sandwich pack in the warehouse clubs as well.

In the rigid barrier platform, we continue to roll out a fourth quarter of our new detergent package with Sun Products for their Surf and Sun brands. We also experienced growth in our flexible barrier package in first quarter with Freshgard and Fresh-Lock technologies in our multiwall bag business. Freshgard barrier paper technology has a dominant share in the retail instant oatmeal category and has expanded to food service with the launch of McDonald's oatmeal breakfast program as well.

Let's talk a little bit about price inflation. Overall, price remained meaningfully positive in the first quarter with a $24 million year-on-year improvement. The majority of the price recovery is a direct result of the look-back nature of our supply agreements and reflect the higher input inflation we experienced in 2010. As a result, we expect prices will continue to increase as we move through 2011.

Commodity input inflation was roughly $30 million for the quarter, but about half of this was due to higher priced externally purchased board and multiwall bag paper. Fortunately, the nature of our customer contracts allow for a quicker recovery of changes in external board prices and we will expect significant recovery yet in 2011 of these inputs.

Other input costs that saw increases on a year-over-year basis in the first quarter included secondary fiber, or OCC, and mill chemicals. As oil hovers around $110 a barrel, we have instituted fuel surcharges to address rising freight costs. Additionally, we are moving more products by rail through our converting network. Dan will discuss the individual components of inflation in more detail during his discussion.

In the first quarter, we announced price increases of $40 per ton for CUK and $40 per ton for CRV effective in April. I want to say that again I think. In the first quarter, we announced an increase of $45 per ton for CUK and $40 per ton for CRV, effective in early April. I also want to remind you that, in 2010, we announced aggregate price increases of $135 per ton in CUK and $165 per ton in CRB. As a result, we should expect to see further benefits from open-market board pricing in the upcoming quarters.

Our bottom line out for 2011 remains unchanged despite a difficult operating environment. Pricing should remain positive through the end of the year and we plan to accelerate our cost-reduction initiatives to fully realize savings in excess of our original target of $80 million. While volumes across the folding sector are not expected to improve significantly, we do expect to offset the early softness of new product launches and marketshare gains and expansion in the Far East. I will now turn the call over to Dan for a more detailed discussion of our financial results. Dan?

Thanks, David and good morning, everyone. David took you through the operational highlights of the quarter. I will focus on financial results. My comments follow the flow of our presentation and we start on page 10.

Overall, the first quarter was in line with our expectations and we remain on track for the full-year performance we guided to on our last call. In particular, we continue to forecast net debt reduction from operating cash flows in the $200 million to $220 million range. Note that this reduction is in addition to the debt reduction that will result from our recent equity offering.

Taking a look at first-quarter highlights, we see operating cash flow improved as we generated $6.1 million in the quarter compared to a use of $25.2 million in the first quarter of last year. Income from operations at $68.6 million is $9 million higher than Q1 last year. Net income for the first quarter improved to $26.7 million from $6.3 million. This represents an improvement of $0.06 per share. And EBITDA for the quarter was $142.7 million versus an adjusted figure of $144.8 million in the prior year.

February weather disruptions that David talked about impacted EBITDA by an estimated $3 million. Adjusting for these disruptions, EBITDA would have come in slightly better than the prior year. I will provide further comments on EBITDA shortly.

The largest year-over-year improvement was in net income, which benefited from continuing reduction in interest expense as we reduced net debt by $224 million over the past year and improved Q1 cash flow generation. Q1 interest expense dropped $5.7 million, or nearly 13%. Income tax expense was reduced by $5.7 million as we utilized the NOL and reduced non-cash charges. And lastly, completion of Altivity integration benefited 2011 results as $8.5 million of Q1 2010 charges did not repeat.

Now let's move to the revenue waterfall on slide 11. We see that net sales at just over $1 billion were down slightly, 0.3% compared to the prior year. As expected, price benefitted the quarter, adding $24 million to the top line. The improvement was principally driven by higher open-market board pricing and contractual inflation recovery on our converted products. As we are over 80% integrated, the bulk of our price improvement comes from inflation recovery mechanisms included in our packaging supply agreements.

Recently, we have received numerous questions on this topic, so I am going to take a moment to describe how the price recovery provisions work. First, let's talk about timing. The inflation recovery provisions are based on lookback calculations that are triggered on either three, six or twelve month intervals. On average, the lookback period is approximately nine months.

So to provide clarity, let's take 2011 for instance. The inflationary change in input costs looking back nine months principally back into 2010 will be used to calculate the price recovery to be recognized in 2011.

The second question is how is the inflation change determined. In the contracts, the inflationary change is calculated either by a producer price type index, actual cost to produce or paperboard price movements.

In summary, we recover our input cost inflation. Yet due to volatility, inflation rates are increasing. There may be a lag before full recovery. But the lag will resolve itself over a nine-month period. As a reminder, input cost in our business is generally defined as fiber, chemicals, energy and third-party purchased paper or paperboard that are used in our manufacturing process.

For the final comment on pricing, let's look at when our contracts reset. We expect pricing to continue to be favorable throughout the remainder of the year with Q2 pricing better than Q1.

Now staying on slide 11, let's turn to volume and mix. We see that we were off $32 million for the quarter. As David described, volumes were materially impacted by the weather disruptions and also by lagging demand in certain folding carton end markets. If we look at industry data from the Paperboard Packaging Council, we saw that overall folding carton volumes were down 3.2% in the quarter. Considering the weather issues, our volume decrease is in line with the industry figures.

Just to conclude this slide, let's talk about sales by segment. Paperboard packaging net sales were down a modest 1.2% as pricing essentially offset adverse weather and lagging demand. In flexible packaging sales, we had an increase of 3.6% as we were able to recover paper and resin cost increases. Volumes continue to lag in the industrial and construction sectors.

Now turning to page 12 in the deck, we see the slight decrease in EBITDA as the result of the following -- $24 million of favorable price, $6 million of unfavorable volume and mix, about $36 million of input cost inflation, $23 million of performance improvement and $7 million of other, which was principally tied to higher long-term stock-based incentives.

I have already briefed you on the drivers of price and volume, so we will turn to input cost inflation. In the quarter, we experienced most of our year-over-year inflation in third-party purchased paperboard and bag paper, secondary fiber, chemicals, inks and freight. David provided details of cost trends on our key commodity inputs. I will concentrate on how to interpret the rather large dollar increase of $36 million that we saw in Q1.

A data point that is helpful in thinking about Q1 inflation is that we benefited from deflation in Q1 2010. And as a result incurred no inflation in that quarter. For the entire year of 2010, we incurred $107 million of inflation. 80% was incurred in the second half of the year.

A substantial portion of what you see in this year's Q1 inflation number is a continuation of the commodity cost levels we experienced during the second half of 2010. Bottom line is that due to aberrations in the prior-year comps, we do not feel that Q1 inflation is a good indicator of year-over-year inflation levels expected to be incurred in the remaining quarters of 2011. As such, if you adjust Q1 inflation of $36 million for last year's deflation swings, the increase is estimated to be in the $25 million range.

Now let's move to performance. Performance is generated based on continuous improvement and other performance initiatives and provided a $23 million benefit in the quarter. This keeps us on target for the $80 million of year-over-year benefit we expect. The largest contributions came from our mills and our paperboard converting operations. The mills produced approximately 4000 more tons in the quarter while the converting operations continued to benefit from consolidation and optimization.

Exchange and other was a negative $7 million impact, the largest driver of which was higher long-term incentive compensation expense based on the increase in our share price during the quarter, which rose 39% to $[5.58]. Movement in our share price up and down will influence this number going forward.

Now let's turn to cash flow, debt and liquidity on page 13. Net provided by operations was $6.1 million compared to a use of $25.2 million in the first quarter of 2010. Due to the seasonality of our business, working capital normally increases in the first quarter and did so again this year. However, net working capital as defined by receivables, plus inventory, less payables actually fell by nearly $15 million as compared to last year. As in the prior years, we continue to actively manage working capital.

Capital expenditures in the quarter were $36.8 million as compared to $18.2 million last year and our full-year capital expenditure target remains unchanged. The Macon biomass and Perry, Georgia converting expansion projects are both tracking well to plan.

Liquidity remains strong with no cash borrowings under our $400 million revolver and $109 million of cash on the balance sheet. The net proceeds of our recent offering will be used to purchase the assets of Sierra Pacific with the remaining approximately $130 million being used to pay down debt.

And now moving to slide 14, I will summarize guidance. As a result of the equity offering, we are improving our guidance on net leverage ratio to the 3.5 times range by year-end. We also have updated several other components of our guidance and I will just quickly run through them.

Capital expenditures will remain in the $170 million to $190 million range. Cash pension contributions will be between $45 million and $70 million, pension expense of around $27 million, depreciation and amortization in the $280 million range, interest expense of $145 million to $155 million and finally, as we have said before, net debt reduction from operations in the $200 million to $200 million (sic-see slide presentation) range. And with that, I will turn the call back over to the operator for questions.

(Operator Instructions). Ghansham Panjabi, Robert W. Baird.

Guys, good morning. Dan, just to clarify on your pricing structure commentary, the nine-month lag is on a rolling basis, correct? So by the end of the third quarter of 2011, you should be cycling through pricing from early '11. Is that the right way to think about it?

That is correct. The one other item that factors with that is in terms of when it rolls. We have a heavy concentration in rolling at the end of the first quarter than we do at the end of the year.

Okay, and the nine-month lag you referred to, how much of the paperboard packaging portfolio does it encompass? Is that 80%, 90%?

What I would say is -- I think what we have said is the nine month is sort of the arbitrage between those that are 12 month and those that are immediate. So I would think across the paperboard space, nine month is on average about what we would see in paperboard across the entire space.

Okay. And then the cost savings from Cincinnati, was that part of the $80 million plus in productivity that you gave us initially for '11 in terms of guidance?

It was.

Okay. And can you just quantify that number just specific to speakers)

We really don't quantify that kind of individual stuff for a whole bunch of legal reasons in the process, but rest assured that the guidance towards the $80 million includes the shutdown of that facility. So what we are saying is you are going to get some benefit in 2011, you are going to get most of the benefit in 2012 because a lot of the benefit in 2011 offsets the costs.

Right. So it wouldn't be -- that is exactly right. When you shut it down, you look at severance and you look at shutdown costs. When you do it in the middle of the year, you tend to get about balanced is where you are.

And just two final questions, if I could. First on D&A, I think initially you said $285 million to $305 million when you gave guidance on your 4Q conference call. Now it looks like $285 million. What is behind the revision towards the lower end?

Well, we just got more specific as we have already had a quarter of activity in the year. We generally start the year out with broader ranges and as we see actual results, we tighten up.

Okay, and just finally on Sierra Pacific, it seems like a very nice fit for you, but it does have a fair amount of -- it sounds like it has a fair amount of exposure towards beer, which has been pretty weak through the course of the recession. How did EBITDA track for this company over the last three years?

We haven't given individual results for that, but let me say -- remember that the only portion of the beer business they are in is the kraft brewery segment, which has been growing about 10% a year over the last three years.

So what I would tell you is their beer business is -- they are in the space of beer that you want to be and in fact, right now, if the recovery continues, you are going to see premium and we have already seen in the large brands premium come back and that is bottles, six pack and bottles and that is exactly what we are seeing in that business.

Got you. That's helpful. Thank you so much.

Phil Gresh, JPMorgan.

Good morning, guys. I just wanted to clarify on the inflation side, you were kind of talking about $25 million ex the deflation for the first quarter. So is it right to think of that $25 million as the right run rate for 2Q and then the comps basically get easier from there in the second half, all else equal at this point?

I am not in a position to predict inflation, but I can tell you that if you do take out the impact of the deflation, we estimate it is in the $25 million range and we have applied a lot of math to get that number. If you look at the comps going forward, like I said, 80% of our inflation in 2010 occurred in the second half of the year. So if you take that $107 million number, you have got 80% in the second half, you can see that 20% of that number occurred in the second quarter. So our comps in terms of inflation will get easier as we move through the year.

I think the other thing, Bill, as Dan said, 50% of that inflation in the first half in input inflation materials was really an externally purchased board, right? So if you sort of think about the price deltas that we dealt with with things like SBS and kraft board, bag paper in the first quarter, SBS was like $170 to $180 a ton delta quarter-on-quarter, but there has not been an SBS price increase announced since then and our projections right now is that there is not likely to be SBS increases based on the market.

And so as you move to the second half of the year, your delta on what we will pay versus what we paid last year drops down significantly. So you start to see a different comp ratio. I think the inflation for us is going to be really two areas. It is how you feel about OCC and how you feel about what oil is going to do, not so much on the freight side of it, but oil-based chemicals. And so whatever projections there are, those two probably drive the inflationary change for us. As you know OCC has been right now actually pretty stable, but our projections for the end of the year is that it will go up, which remains to be seen.

Got it. Okay, very helpful. The second question would just be, in the productivity front, obviously making very good progress there. Can you just give us some thoughts longer term beyond 2011 how you are thinking about it? I mean do you -- I am not trying to pinpoint the $80 million or anything like that, but do you see continued productivity increases 2012, 2013 that we can kind of model in from here or how are you thinking about that?

We have been averaging -- if you forget the synergies that were associated with the Altivity deal and look at those two standalone companies historically on a combined basis, those two companies over a long period of time were averaging somewhere in that $70 million a year of cost takeout on a standalone basis. So we had a ramp-up in the last couple years because clearly we had $150 million of synergies or so on and so forth, whatever the numbers were.

What we expect on a go-forward basis is a more normalized level and we would expect to see around sort of in that $60 million to $80 million cost takeout for the foreseeable future. Now we have also made some pretty significant capital investments. As we mentioned, the biomass project comes up in 2013, so I think your point was what do you think about '12, '13, '14. Well, that biomass project in and of itself is going to have a pretty significant contribution to cost takeout, if you will, energy component cost takeout. So I am pretty comfortable with where we are over that three or four-year timeframe that you asked about.

So should I think of the biomass as incremental to the $60 million to $80 million or is that part of the $60 million to $80 million?

I would think all of our continuous improvement, including those kind of investments, would be part of that $60 million to $80 million worth of takeout. That is where it is going to come. It is going to come from using less energy, less fiber, less water and those are the kinds of investments predominately we are making now.

I announced the shutdown of the Cincinnati facility. I would like to tell you that over the next three years, we won't shut down any additional carton facilities, but as we become more efficient and some carton facilities become less effective or we make small acquisitions that make it necessary, we will certainly continue to optimize our cost base on a go-forward basis.

So if I look at my dashboard going forward and we sort of say what kind of numbers do I think. Sort of that $60 million to $80 million feels like the right sort of cost takeout for Graphic Packaging in the next three years or so annually.

Okay, excellent. Very helpful. Thanks.

George Staphos, Bank of America.

Thanks. Hi, everyone, good morning. I wanted to piggyback on the productivity question maybe one last time. To the extent that you have your laundry list of products that you have been considering, pretty much anything that you would have looked at implementing for this year is baked into the $80 million or so and so the way we should think about it is if there is any upside as the year progresses or downside for that matter, it is really truly predicated on what kind of volume throughput and its effect on productivity would be. Would that be a fair assessment? If not, how would you characterize it?

So what I would say is that we are going to have a number of countermeasure opportunities within our business. What I would do and what I am really edging more than anything else, George, is to say that I don't know what inflation I am going to see. I think this $80 million makes a whole lot of sense. Are there incremental opportunities we are evaluating in the business? Of course there are. Do I believe there is going to be incremental inflation that I don't know about? I would be a fool to suggest otherwise because that has not been the history with what is going on globally.

So what I would say is that I believe the net sort of increase of where we are, that $80 million feels about right. It doesn't mean there won't be different projects in the process between now and the end of the year. It just means that I think when all nets out, that is about where you end up.

Okay. And maybe one last question on the last question, as you are projecting out new productivity projects, what is the leadtime on them, Dave, typically. This year's activity, did it start a year ago in terms of when you decided to go ahead with it? What is the leadtime typically on projects if there is such a thing?

Well, there is. Of course, a lot of it depends. The biomass project is something we announced last year and really doesn't become operational until the first quarter of 2013. The Cincinnati facility is something we have been looking at on a much shorter term basis and with the acquisition of Sierra Pacific that will give us a different footprint and we will be looking at that quickly as well, right? So it really depends upon the size and the scope.

What I would tell you with lean Sigma and policy deployment, what it forces the organization to do is have a long laundry list of projects that make sense. Some of those restrictions and the honest answer with Graphic Packaging is one of our biggest opportunities was to pay down debt because as highly leveraged as we are, we trade off a little bit -- every time I look at a new capital project that takes out cost reduction, I have to hold it up against paying down debt because that really ends up being the most leveraging for Graphic Packaging.

Now if we sort of do what we expect to do in terms of debt reduction, as you go out towards the end of that three-year or what we call LRP, or long-range planning, more of that capital money is probably going to go towards cost reduction in the mills and the converting plants because, at some point in time, paying down additional debt becomes not as leveraging as some of the capital projects that we have just decided not to pursue at this point in time.

So when I look at my base and realize I have got $3.6 billion to $3.7 billion worth of cost in my business, it is not a huge stretch to believe we can take 1.5% to 2% out a year. It is not even world-class. It is just that we have chosen some things that we have put off because honestly for Graphic Packaging, one of the best things we could do over 2008, '09 and '10 was use the cash for a debt reduction and that is what we have been doing. That pendulum will change as we head into '12 and '13. It has to.

Thanks for the thought process on that, Dave. That was very helpful. I guess two end market questions, if you will. One, the CMI numbers for the first quarter were a little bit off. I think they were down 2% or so. You mentioned that beer is doing well. How did you see that evolve within your business, if you can comment at all on that? And on the new product side, how would you evaluate this year's level of new product activity and the types of packages your customers are now looking at relative to say a year or two ago?

So here is -- it's a really good question. What I would say is that when you look at the CMI numbers, you are looking at total consumption. I only care about take-home. So on-premise beer, for example, or even on-premise soft drink that is consumed, while it is -- I am a consumer as well and I can go to a bar too. From a business standpoint, I care mostly about what people are doing at home. That sector of the market did better in the quarter in beer than the on-premise.

How that is going to affect on a go-forward basis I don't know. Traditionally what happens is that if the oil price continues to be $4 gas, people will stay closer to home. That generally, generally benefits our business remains to be seen.

The other question was around --?

New products, current environment say two years ago in terms of what your customers are looking at.

Yes, it's been a lot more in substitution. I think we talked about the fact that, in SUS alone, the last two years, we probably substituted 50,000 to 65,000 tons of board from other substrates in terms of corrugated or other even plastics in some cases for SUS board. So lighter calipers downgrading or downcalibrating, if you will. Our customers are trying to get smaller boxes, smaller grades and replacing alternatives and that has been a much bigger driver of our new product activity than historically has been the case. So (technical difficulty) and more how do we make -- how do we use the solid fiber stuff to take costs out of our supply chain. And with corn, sugar, grains going up, I suspect that trend is not going to change.

Okay, thanks, Dave. I will turn it over. I will be back.

Joe Stivaletti, Goldman Sachs.

Hi, guys. Thank you very much for all the detail, especially on the cost inflation. I just had a couple of little follow-ups on the cost inflation front. So I was just curious if you could tell us of that $35.5 million year-over-year cost inflation what portion of that roughly was the chemicals?

Hold on just a second. I don't know that -- I know I have it if you just give me a second here to figure it out. So chemicals was about, what, $2 million or something like?

Chemicals is about $2 million.

Okay.

The majority of it -- so if you think about it -- let me just -- $30 million was what you would call input inflation. The other $5 million to $6 million was just labor and benefit costs, right, Dan, is sort of the way it works out?

And then freight, freight is about $5 million.

So that is sort of the way it broke out. OCC was $4 million or so, $4 million or $5 million. Most of it was board, $15 million, half of it, over half of it -- I'm sorry -- roughly half of that was just buying multiwall bag paper and SBS and then you have got the chemicals breakdown in the process. So that is why I am saying when you look on a go-forward basis, we are not as exposed as we are to just pure chemicals. We care about it, but it is really OCC we buy or use, what, 200 -- we use 850,000 tons a year roughly or 900,000 tons of OCC. So that is really the more leveraging thing for us, right?

And just to make sure those numbers tie out for you, the chemicals that David cited did not include ink and coatings. So if you put that on top of that, you will get our number pretty close.

Okay. And then just -- I don't know if you have this number handy, but can you talk about a delta on a sequential basis from a cost perspective going from Q4 to Q1?

I don't know that we have broken it out directly. We will have to get back to you on that. I don't know that we have -- Dan is looking.

I am looking at it here and if you look at it, the areas that are affecting us are really the oil-based areas and you are talking about latex, you are talking about resin. You're talking about fuel.

So on a directional basis, the price we paid for external board in the fourth quarter was the same we paid in the fourth -- just about the same we paid in the first quarter, right? So if you did sequentially, that element of inflation would be not very significant quarter-on-quarter if that is helpful. So about half of that input inflation would be sort of moderated based on board pricing.

Right, right. Okay. And then the final question that I had, and still on this topic, was have you talked or have you shared or will you share what you think -- what you are assuming full-year cost inflation will be when you look at all the guidance that you have given for debt reduction and all that for the year? I don't know if you are --.

Yes, but we haven't given that level -- I mean the only guidance we have really (inaudible) is sort of where the cash flow comes from, pension payments, CapEx. We really haven't gotten into it. And look, at the end of the day, no matter what I would say, you know it would be wrong because as I sit here today, I have no idea. I am looking at Goldman's forecast. Over the last two weeks, oil was going to be $200; now it is going to be $110. I have got JPMorgan with a different look at that as well. I mean the reality is that it is very difficult for me to sort of -- and I suspect if I asked on this call, the range on OCC pricing would be interesting, but difficult for us to give you a hard number on, right?

Sure, yes, okay, thanks a lot.

Philip Ng.

Just a quick question. From a demand perspective, it looks like February was obviously weak. It sounds like it normalized in March. Were volumes up year-over-year in March?

Yes.

And how should we be thinking about volumes at least on the paperboard side for the rest of the year, like up low single digits?

You know what? What we are looking at is to assume that volumes are relatively flat for the year. I would love to see some of the trends continue, but if the consumer continues to move discretionary income from whatever they are buying to just putting gas in the tank, what I would say is the historical look on that is that it affects volume on every sort of consumer staple and we would say the same thing.

Okay, that's helpful. And in terms of pricing, it obviously accelerated in Q1 from Q4. How should we be thinking about 3Q and 4Q? I know you mentioned 2Q was going to accelerate.

That's right. We have looked at the timing of when our contracts reset and the guidance we are giving right now is that Q2 will be higher than Q1. The other thing that is going to impact the pricing favorably is that we have announced price increases for board. And when you bake those into the formula, you can very clearly see that Q3 should be a good quarter in terms of pricing as well.

So Q3 should improve sequentially and you guys obviously announced some surcharges as well, right?

That's right.

Okay, all right. Thanks, guys.

(Operator Instructions). [Mark Hoffman], Veracity Capital.

Good morning. Nice quarter considering the weather. I just had a quick question really about the second quarter. What will the charge be for the equity offering and is there a price that you are buying the stock back from the Coors trust?

Well, the first question, in terms of the equity offering that needs to be paid, it was in the [prosub] and it is around $10 million, 4.5%.

So that would be a charge in the quarter?

It goes against equity, so it won't be a charge in the quarter, no. We will have certain other fees, but there won't be the big hit like the $10 million.

Okay.

And then the Coors, we are traded at the same price -- neutral. They were neutral to the deal. (multiple speakers) and they paid their owned fees.

That's good. Okay, thanks for that and good luck in the quarter.

Thank you.

Phil Gresh, JPMorgan.

Yes, I just wanted to ask one more question just kind of around productivity and inflation. When you talked about the inflation side, you obviously didn't mention labor. So is it kind of right to think about labor as somewhat of a negative offset to standard kind of labor inflation year-over-year through that $60 million to $80 million in productivity that you're thinking about? Is that how you look at it?

I think that is exactly what we look at. I think we said in the first quarter labor was around $5 million -- labor and benefits, so all labor and all benefits, those kind of settlements, right around $5 million on the quarter. So you can assume that our inflationary rate on year for labor in benefits is going to be right around that $18 million to $20 million or something like that.

So the way our model usually works is, on a high-level basis, is price resets go to recover inflation from the previous year, productivity needs to cover our cost of labor and benefits and then it exceeds that number so that is how the margins get improved and that is really exactly what we have seen since the acquisition of Altivity. And I think our margins are up 300 to 350 basis points. It is really that model. Inflation recovering -- I'm sorry pricing recovering inflation, productivity outstripping the cost of doing business, margins improving.

Okay, excellent. That's it.

I will now turn the call back over to management for closing remarks.

Well, we thank everybody for listing on the call and we will talk to you at the end of the second quarter.

Ladies and gentlemen, this concludes today's call. You may now disconnect.