Graphic Packaging Holding Co (GPK) 2011 Q4 法說會逐字稿

Good morning and welcome to the Graphic Packaging fourth-quarter and full year 2011 earnings call. All lines have been placed on mute to prevent any background noise. (Operator Instructions).

As a reminder, today's call is being recorded. I would now like to introduce Brad Ankerholz, Vice President and Treasurer. Please begin.

Thank you, Rachel, and welcome everybody on the phone to the Graphic Packaging Holding Company's fourth-quarter and full year 2011 earnings call.

Commenting on results this morning will be David Scheible, the Company's President and CEO and Dan Blount, our Senior Vice President and CFO.

To help you follow along with today's call, we have provided a slide presentation which can be accessed by clicking on the Q4 earnings webcast link on the Investor Relations section of our website which is graphicpkg.com.

I would like to remind everyone this morning 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 the effect of the combination with Delta Natural Kraft and Mid-America Packaging, recovery of raw material inflation costs, 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's substantial amount of debt, inflation of and volatility in raw material and energy costs, 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 Securities and Exchange Commission.

And with that, I'll turn it over to David.

Great. Thanks, Brad. Good morning everyone.

We are pleased with our fourth-quarter results as we delivered higher sales and expanded margins. Volumes across the industry remain somewhat constrained in the quarter, but Graphic Packaging's fourth-quarter volume and mix trends were positive as a result of overseas growth, new customer wins, new product launches, and substrate substitution.

In the quarter, compared to 2010 fourth-quarter, net sales increased roughly 4% to a little over $1 billion and adjusted EBITDA increased 10% to $147 million. Higher pricing, stronger operating performance, and cost reduction initiatives more than offset higher input costs.

Fourth-quarter pricing increased by $27 million. We generated a $20 million net benefit from our ongoing cost reduction and supply chain optimization efforts. For the full year, pricing increased $116 million and we achieved our goal of over $70 million in cost reductions.

Performance improvements are a critical part of our overall strategy and they are not solely a result of cutting costs or driving lean manufacturing principles. We continue to put money back into our business, making strategic investments to streamline the business, reduce our long-term cost structure and add top line growth.

In 2011, we invested $160 million on CapEx projects to efficiently maintain our assets and drive sales, operating margins and cash flow. One of our largest capital projects was the expansion of our Perry, Georgia and West Monroe, Louisiana carton facilities, and the reallocation of volume from other higher cost plants that were closed during the year.

Through ongoing efforts to streamline our assets, we've been able to shrink our overall converting footprint without diminishing our total carton production capacity.

A critical element of our asset optimization strategy is strategic acquisitions and partnerships. Our acquisition of Sierra Pacific last April provided a strategic location in Northern California to service our West Coast customers, and allow us to leverage our Santa Clara, California recycled board mill. This acquisition has helped reduce our cycle times. It has lowered our transportation costs and it has better aligned volumes with geographies.

More importantly, it's increased our exposure to the fast-growing Kraft beer and wine box markets and broadened our customer base. I could not be happier with how this acquisition has turned out and been integrated.

In December, we announced a joint venture between Delta Natural Kraft, Mid-America Packaging and our flexible packaging division. Neither party received cash consideration, but Graphic Packaging did repay approximately $26 million of debt as part of the transaction. The combination creates North America's only vertically integrated multi-wall bag business and allows for significant synergies and potential profit improvement.

It also introduces us to new customers and growth opportunities, as Mid-America's business was slightly different. Incremental sales of the new business are expected to be around $125 million and we estimate operating synergies to be between $20 million and $25 million. This should lead to double digit margins in this business by 2013.

These types of small tuck-under acquisitions or combinations are an important part of our growth and optimization strategy going forward and we will continue to look for similar opportunities.

Other core areas of significant capital investment in 2011 were product innovation and energy conservation.

On the product innovation side, we remained very focused on developing new and unique packaging that helps our customers differentiate their products. It lowers their distribution costs and improved their sustainability metrics throughout the entire supply chain.

Last quarter, I mentioned to you about a newly developed solid CUK fiber carton that was chosen to replace a traditional corrugated litho-lam structure by a major customer in the fast growing juice pouch sector. The product is Kraft Food Capri Sun juice pouches. And I'm happy to report that we began supplying this new package in November.

Volumes will continue to transition over the next few quarters and we expect the full run rate volume to exceed 75,000 tons of CUK per year.

We've made a significant investment in our West Monroe carton plant to support this conversion. And we've also supplied the packaging machines to Kraft as part of the transition. We believe the superior performance characteristics of our solid fiber carton and the enhanced environmental aspects make for an attractive substitute to traditional corrugated materials. And we are excited about its potential for other customer wins in similar areas this year.

On the energy conservation side, the building of our biomass boiler in our Macon, Georgia mill remains on schedule. Permits are in place. Construction is ongoing. And in total, this is expected to be about an $80 million project that will run through the middle of 2013.

The boiler will make the mill self-sufficient from an electrical power and steam generation standpoint, thereby reducing energy costs and improving profitability. We should have excess renewable energy to sell back to the grid in 2013 and beyond.

Debt reduction and strengthening our capital structure remains a top priority -- remained a top priority in 2011. And for that matter, will for 2012.

Net reduction from operations was $218 million for the year, which was at the high end of our targeted $200 million to $220 million range. We also used a portion of the proceeds from the April stock offering to pay down debt. In total, we reduced net debt by $346 million in 2011 and ended the year with a net leverage ratio of 3.5 times.

The April stock offering not only accelerated our debt reduction efforts, but it also improved the liquidity of our stock and supported the acquisition of Sierra Pacific.

Let's talk a little bit about paperboard. Fourth-quarter performance at our mills was strong. Improvements in energy and operating efficiencies and fixed costs translated to the bottom line. Our integrated efforts to consolidate purchases continued to yield significant cost reduction in coatings, process chemicals, and wood.

Tons produced per day increased nearly 2% over last year's fourth-quarter, while backlogs for our key CUK and CRB substrates remain strong at about 3 to 4 weeks.

Volume in folding carton business decreased about 1.6% in the fourth quarter. This modest decline was consistent with the third quarter as we were able to offset continued softness in end-market demand through growth in Asia-Pacific region, new customer wins, new product launches, and substrate substitution.

AC Nielsen estimated that our key categories of cereal and frozen pizza volumes were down roughly 4% and 6% respectively in the quarter. The at-home frozen pizza category continues to be challenged by competitive delivery prices.

Facial tissue, however, had a strong quarter and we significantly outperformed the industry. Graphic Packaging's facial tissue sales increased 16%, versus a decline of 6% for the industry as measured by AC Nielsen.

Industry volume trends across the canned beverage market decreased on a year-over-year basis in the fourth quarter. According to the Can Manufacturers Institute, total beverage cans decreased around 5% in the fourth quarter with soft drink declining about 5.7% and beer around 3.7%. In total, Graphic Packaging's beverage business outperformed the industry with soft drink sales increasing about 3% and beer sales declining roughly 4.5% in the quarter.

Turning to our flexible packaging business, we really see very little change in this segment as the construction and industrial manufacturing sectors remained stagnant in Q4. Flexible packaging sales increased 4% in the quarter due to increased pricing and the addition of the joint venture, of course, in December.

As discussed earlier, this new joint venture with Delta Natural Kraft and Mid-America Packaging should enhance both the growth and profit profile of this business.

Turning to pricing inflation for the quarter, we saw significant benefit from higher pricing while cost inflation remained in line with expectations. Pricing increased $27 million in the quarter and $116 million for the full year. The increases continue to be driven by the pricing reset mechanisms in our contracts that adjust pricing up or down based on changes in inflationary costs on an approximate 9 month lag. We expect pricing to remain positive for the full-year of 2012.

Total cost inflation was $33 million in the quarter and about $151 million for the year. Primary drivers in the quarter were externally purchased board, predominantly SBS and paper, inks and coatings and chemicals. We have also seen an uptick in freight costs with the rise in diesel fuel surcharges.

After peaking in Q3, OCC pricing moderated in the quarter to an average price for Graphic Packaging of roughly $137.00 per ton. We will begin to capture the benefits of these lower OCC prices as newer inventory gets converted into finished cartons in first-quarter of 2012.

I do expect secondary fiber to trend upward as we move through 2012.

Looking forward, we finished 2011 strong and we are very well positioned heading into 2012. We have a strong pipeline of new business ramping up early in 2012 that should help offset any general ongoing weakness in the macro-folding carton markets.

The new business is a combination of new innovative products such as our new Capri Sun launch, share gains in frozen and dry foods, pasta and food service. The spread between price and cost reduction and inflation should be positive in 2012 and we expect to see continued expansion in our margins.

Commodity inflation is always a wild card, but the trends thus far seem to be favorable and we are optimistic that 2012 could see less inflationary pressure than 2011.

Reducing debt, strengthening the capital structure remain key initiatives in 2012 and we will continue running our business to drive cash flows and improve our credit profile.

I'll now turn it over to Dan for a more detailed discussion of our financial results. Dan?

Thanks, David, and good morning everyone.

David covered the operational highlights of the quarter. I'll focus on the financial results. My comments track our posted presentation. Let's start with Q4 and full-year financial highlights on Page 9.

Adjusted Q4 results show strong operating improvement over the prior year. EBITDA up 10.4%. Net income more than doubled to $0.06 per share.

The main drivers of the improvement include revenue growth, improved operating margins, and lower interest expense.

In order to provide comparable financial reporting and a better baseline for gauging future performance, we adjusted results to remove non-recurring transactions. Let's talk about the three principal Q4 adjustments.

First, we recorded a value for our $1.2 billion NOL tax shield on the balance sheet. Based on our three year track record of profitability and positive view of future earnings, a determination was made that it was more likely than not that we would fully monetize the NOL.

We recognized the value of the NOL by recording a $265 million adjustment to set up a net tax asset. The adjustment includes $460 million for the value of the Federal NOL using a 35% tax rate. This amount was netted against future tax liabilities primarily related to depreciation and amortization timing differences.

The change has no impact on our cash income tax obligation as we continue to not pay US income taxes until the NOL is fully consumed. Currently, we project that we will not pay Federal income taxes for 4 to 6 years. Going forward, we will record income tax expense and offset the expense against the tax asset. For those of you updating models, we expect an effective tax rate of approximately 38%.

The second adjustment relates to the workforce reduction that we announced in October. The reduction will produce an ongoing annual benefit of $20 million to $25 million. In Q4, we recorded a charge of $5.2 million, principally for severance related to this cost reduction.

And finally, the remainder of the adjustments principally relate to the non-recurring charges incurred during the business combination with Delta Natural Kraft. As David commented, this transaction is expected to be highly accretive, projected to generate $20 million of annual benefit beginning in 2013.

Now moving to Page 10, we see a 4% or $40 million growth in Q4 revenues. For the year, revenues grew 2.7%. Increased pricing benefited the quarter by $27 million. This improvement is principally driven by exercising inflation recovery provisions included in our packaging supply agreements. Year-to-date, we recognized about $116 million of higher pricing which recouped the vast majority of the commodity inflation we incurred in 2010.

As we have stated previously, our contractual inflation recovery is based on look-back calculations that lag inflation by about 9 months. Given the lag, price should be favorable over the next couple quarters as we continue to recover commodity inflation.

Turning to volume mix, we see a $12 million increase for the quarter. Our paperboard packaging segment, as a whole, increased 4% as we grew packaging sales in our Asia-Pacific markets and grew open market sales of paperboard.

Additionally, our domestic sales mix improved, partially due to the initiation of Capri Sun shipments. The flexible packaging segment finished essentially flat for the quarter, as the partial month addition of Delta Natural Kraft offset a modest volume decline in our historical business.

Moving to Page 11, we see a Q4 year-over-year EBITDA increase of $14 million. The improvement was driven by our paperboard packaging segment as its full-year 2011 margin improved to 16.9% from 16.2% in 2010.

In addition to strong price recovery, fourth-quarter realized $20 million of benefit from improved operating productivity. We performed well in the execution of our cost-cutting initiatives and for the year we hit the high end of our guidance range by delivering benefits totaling $76 million.

In addition to CI, major 2011 cost reduction activities included converting plant consolidations, like the closure of our higher cost Cincinnati facility, and corresponding realignment of business volume to the newly expanded Perry, Georgia plant as well as our West Monroe plant.

Also, as David mentioned, our acquisition of Sierra Pacific increased the integration of our Santa Clara mill and allowed us to further streamline our supply chain and reduce freight and board costs.

Now, moving to look ahead to 2012, we have initiated our major cost reduction projects and expect to deliver another $60 million to $80 million of benefit. The key value drivers include capturing the full-year benefit of the 2011 plant consolidations, realizing the workforce reductions, and executing defined projects focused on productivity improvements and waste reduction in both our mills and converting plants.

We have also gotten a jumpstart on 2013 cost reduction as we expect the Macon biomass boiler to begin operation in mid-2013, and also expect to realize $20 million of annualized synergies from the Delta Natural Kraft combination.

To conclude the year-over-year EBITDA comparison, I'll comment about inflation. As we have experienced throughout the year, during the quarter, we continued to see inflation increase at a rate of around 4%, the main drivers being increased prices for externally purchased board and paper, secondary fiber, selected chemicals and freight.

During the quarter, we did experience the much publicized decline in pricing for secondary fiber and natural gas. As a reminder, we use about 12 million MMBtus of natural gas annually and consume about 900,000 tons of secondary fiber.

Any pullback in the rate of commodity inflation should have a positive impact on our results. But remember, that due to our inventory cycle time, it takes about 2 to 3 months for an input cost change to flow through operating results.

Now turning to Page 12, let's look at cash flow, debt, and liquidity. 2011 net cash provided by operation improved $50 million over the prior year to $388 million. Cash flow from reduced interest costs and improved operating performance drove the improvement.

CapEx increased $37 million to $160 million. The increased investment focus on high-return projects like the Perry expansion, the Macon boiler, and expanding volume opportunities by placing new packaging machinery at customer locations in Europe and China. Overall, our CapEx investments are targeted at projects with less than 3 year paybacks.

We ended the year hitting our de-leveraging guidance as our net leverage ratio improved to 3.5 times. M&A activity was managed to be leveraged accretive or neutral. Overall, year-to-date net debt was reduced by $346 million, $218 million coming from operations and around $150 million from the secondary offering.

Liquidity remained strong at over $600 million. We continue to target a leverage ratio in the 2.5 to 3 times range and expect to be near the top end of this range by the end of 2012. During 2013, we expect to be operating well within the range.

With our revolving credit facility maturing in May 2013, and the term loans a year later, we began the refinancing process. Graphic Packaging's improved credit statistics and upgraded credit ratings provide us much broader access to credit markets.

At present, we are actively pursuing a $2 billion senior secured commitment based on today's attractive market pricing. The new facility will have ample operating flexibility and will include substantial baskets to allow us to initiate dividends and/or stock buybacks amongst other improvements.

Given that we are fast approaching our target leverage, this new facility will provide the appropriate debt structure for us to operate under for several years. The specifics of the facility are still under review, but we expect to have the refinancing complete by the end of next month.

Now for our guidance, let's move to Page 13. And we'll have a summary.

First, capital expenditures will be in the $190 million to $210 million range. This higher level of spending is driven by completing the bulk of the biomass boiler spend and completing most of the investment needed to drive the Delta Natural Kraft integration.

Cash pension contributions will be between $40 million and $70 million, pension expense of around $40 million.

Depreciation and amortization in the $250 million to $280 million range, interest expense of $130 million to $145 million. Also, we expect to achieve net debt reduction of $200 million while funding increased CapEx spending and paying refinancing costs of around $25 million.

And finally, our net leverage ratio should end the year around 3 times.

And with those comments, I will turn the call back to the Operator for the question and answer session. Thank you.

(Operator Instructions).

Philip Ng, Jefferies & Company.

Based on your comments about re-fi and whatnot and leverage comfort zone I guess, you guys could be in a position to start returning cash as soon as some time in 2013, is that a fair assumption?

Well, like we said, we're entering our target range at the end of 2012, so that's going to open up a lot of opportunities for us in terms of what to do with the cash.

And then when I look at your price cost spread, it's obviously narrowing quite a bit and it's tracking more favorably. And it sounds like the impact of OCC coming in should kick in a little more fully in Q1 and recent pullback in nat gas. So should we see a neutral or even perhaps a positive price cost spread in Q1?

It'll depend upon what our mix on OCC-based products are. What I would tell you is yeah, I think if you look quarter to quarter, probably we'll see an additional improvement in the quarter.

Philip, you and I have talked about this before, I don't really think the long term driver of improved margins is really around a pure question of inflation and pricing because ultimately it becomes a transitory process. It goes up, we get it back. It runs through the deal.

Where you're going to see the margin expansion, I think, is going to be growth. And then through the capitalization of some of these projects that we talked about like the RIF and the shut-down of high cost manufacturing facilities and the integration of Delta Natural Kraft and Sierra Pacific.

So, I think that's where the margin expansion really comes from. Not this inflation price arbitrage because I think it's from a quarter to quarter standpoint, it's kind of arbitrary.

Okay, that's helpful. And just lastly, David I think you called it out last quarter if I remember correctly, that volumes are just actually starting to stabilize a bit here and troughing. So, what are you hearing from your customers and it sounds like some of your beverage customers are at least stepping up promotional spending. So, I just want to get a sense, and unemployment is a little bit better on the margins.

What I would tell you is that I like the momentum going into the first quarter based on what we've seen already. I will remind you all, Philip, that I had this same sort of feeling going into the first quarter of 2011 and there was good momentum and then the year just sort of kind of petered out.

But right now, we're busy. The backlogs are good. And our customers are definitely promoting. We've got a lot of new product wins that are starting the year as opposed to backend of the year loaded. So, I'm feeling okay about volumes going into 2012.

Okay, thanks, guys.

Ghansham Panjabi, Robert W. Baird & Co.

It's Matt Wooten sitting in for Ghansham today.

A few questions if I may. Does your expectation of reaching the price cost parity, assuming that that's not going to be the primary driver, but does that assume the successful implementation of the February CUK price increase?

Yeah. I don't think we've ever really projected much price increase in board for our 2012 look forward. We are seeing some lift in CUK. CUK pricing year-on-year was up something like $80.00 a ton or something like that, 10%. And some of that came in the second half of the year, so we'll get more of the run rate of that as we go into 2012.

But at this point in time, we don't have a lot factored in for pricing improvement necessarily coming from board movement in the first half of the year.

Okay. And then of the $200 million or so in CapEx, how much of that would you consider maintenance CapEx?

I've got to add really quickly the Delta Natural Kraft, but I would think we could run this business on $105 million to $106 million a year in CapEx, if we really, really had to.

Okay. And then lastly, the trajectory of the DNK synergies, is that something we should see start accruing in the second half of 2012? Or is that something that's not going to happen until 2013?

It's really more 2013. We've begun the announcement on some things we're doing in plant consolidation, so on and so forth, but some of those synergies are really around how we integrate some of that board and get out of some old bad contracts and so on and so forth. And that'll take some time for those to run their course.

But those synergies, if we didn't believe those $20 million of synergies were there, I wouldn't be telling you they were.

Okay, thank you. And good luck on the year.

Phil Gresh, JPMorgan.

Just on the end markets, some of your food customers have been talking, pretty cautiously, on the volume side. What do you see on that front?

It's really by, it's very sectoral. Cereal is actually doing pretty good. Pizza is still sort of difficult, but some of the snacks and things are good. Beverage, as somebody mentioned, Coca-Cola and Pepsi are doing pretty well from a volume standpoint. So, it really depends on the core end-use market.

I think the bigger impact on that is going to be what do we really think the impact of oil prices are going to be vis a vis natural gas, right? Or, I'm sorry, vis a vis the consumer's pocketbook, right? And predicting that will be interesting.

I think the President is down in Florida talking about his energy plan today. I'll be anxiously awaiting that outcome, but right now, what you're seeing for us, in the real short term, is energy prices translating into fuel surcharges, and while it doesn't necessarily affect our P&L directly, it affects my end-use consumer.

Okay. So you aren't really see anything, for example General Mills I believe is talking about weakness as the quarter progressed. And I think some of these customers even said January was kind of weak. So, you're not really seeing that at this stage?

No, not across the entire spectrum.

Okay. And then the driver of outperformance on the tissue side, what would you attribute that to?

Some of it's share, some of it's just sort of mix.

Okay. And then the question around CapEx, $105 million is what you could run at, but what's kind of a realistic run rate, kind of ex the biomass project moving forward? How much is biomass this year?

I think Dan always said our target in CapEx is somewhere between $160 million and $175 million a year, because we have enough good cost reduction and growth projects that we would fund during that period of time. So, we're not going to run the company on $105 million. The question was what could you and I'm saying we could.

But the reality is that if I'm modeling in and I model forward with my board, I'm thinking between $160 million and $175 million of really good CapEx projects. The $80 million boiler project hits a lot of it, most of it comes through in 2012. I think, Dan, there's some catch up in 2013, some carry over into the first quarter, but predominantly it's 2012, because the heavy construction is going on now, all the boiler is being built. It'll be installed at the end of this year. That type of thing.

And then just on the synergies that you talked about, you were talking about kind of a head start on 2013 saves. So, should we interpret that to mean those synergies will be part of the standard 60 to 80, or is that incremental to the standard performance opportunities?

I think it really has virtually no impact in 2012.

Right, I meant 2013.

So, in 2013, those synergies should be separate from our cost reduction plans.

Okay, just wanted to be clear on that.

I don't mean to caution you, hell, I have a hard time forecasting out the quarter, so now we're talking about cost reductions in 2013. What I would say is right now our plans would be to have it be incremental and that assumes that the economy looks something reasonable. But, good Lord knows.

Understood. Thank you. Last question, on the acquisition front, are you thinking you would be looking at more bolt-on opportunities this year? Or are you really just kind of targeting the debt pay down at this stage?

I think what we would say is we ought to be able to do both. Last year we did two nice little bolt-ons and still paid down $200 million of debt plus from operations. So, the focus is to get the debt down to our ratios.

Now when we make the acquisitions we pick up some EBITDA. So, what I'm trying to do is get the ratio into that, between 2.5 and 3. So, the little bolt-on acquisitions don't take us off of that path.

Got it. Nice quarter. Thanks.

George Staphos, Bank of America Merrill Lynch.

Hi, good morning. It's Benjamin Wong sitting in for George. George is traveling.

Just two questions, on new products you had the nice win recently with the CUK carton and Kraft. Can you comment about how you feel about new products in 2012? Are there any other possible launches this year?

Yes, there are. What I would simply say is that the whole concept of using solid fiber to replace some of these litho-lam corrugated, is a good play for us. Not only a good play for us, it's a good play for other people in the space. I just hope we get our unfair share of that pie.

But I like the trends. I like what, how CUK performs from a property standpoint versus other substrates makes me feel very positive heading into 2012. There are lots of things we're working on. A number of things we've already done, much smaller in scope, but nonetheless, we've probably added another 9,000 to 10,000 tons of new products in that space as we've started this year.

So, Kraft was great. We love the Capri Sun. We've had an incredible partner with those guys on that, but that's not the only thing we're working on in those kinds of new product opportunities.

Okay. We'll keep a look out for them. And then, just based on your comments, it seems you'd be in a position to return value to shareholders pretty soon. Can you talk about your preference towards either dividends or buybacks or both?

What I would say is we've been returning shareholder value at this point in time since the stock has responded. So, you're talking about specifically the potential of using cash as a direct dividend payment back to shareholders.

And what I would tell you is that's not a 2012 thing for us. We've still got $200 million worth of debt reduction we've got to get done to get down to the right credit ratio for us. That's certainly one of a number of things we'll have to think through as we get into 2013. But right now, I'm sort of focused on the things that are right in front of us simply because it really is, in this economy, all about execution.

Understood. Thanks.

Mark Wilde, Deutsche Bank.

I wondered if you can give us just a little more color on sort of the dynamics of acquiring and integrating Delta into your business and sort of where those synergies will come from in just broad terms.

Sure. I'd be glad to. If you think about our flexible business before, Mark, it was a complete, a converting business. And those margins were trending at 7% to 8% or something like that.

What Delta Natural Kraft allows us to do is take the Pine Bluff, Arkansas mill and balance production between that mill and our West Monroe facility, because I think you are aware that we have a bag machine in West Monroe. We don't talk about it much, but paper machine number 5 is the bag line in there.

But it's sort of a sub-optimized mix because this is the only thing we could do, we have the opportunity now to sort of mix manage and make and sell internally a higher value product than we're currently making out of West Monroe and stop purchasing on the outside that expensive paper. That cash and that EBITDA all inures directly to Graphic Packaging.

So, much like we did with the Altivity acquisition. So, think about the same thing we did in integrating those cartons and those tons into our business. It had a huge impact on EBITDA and cash flow.

And the second thing is Mid-America Packaging had 3 converting facilities and we had a number more, as you well know. We don't need all those. So, we're integrating those and relocating that business to lower cost facilities, much like we did with Altivity.

So, if you put all that together along with the purchase, you can imagine Graphic Packaging had more purchasing power than Delta Natural Kraft did. We were a stronger company. We bought more, financially more stable.

So, the purchasing savings sort of inure as soon as those contracts expire. So, if you sort of think of the split, maybe 25% of it's plant, a smaller portion is purchasing and then a big part of it is paper integration, just like Altivity. And that's sort of where the $20 million comes from.

So, it's really more of a time question than it is do I think we're going to get it. Yeah, we're going to get it. It's just we've got to be, we've got to get it when the contracts allow us to do so.

And just in general terms, Dave, what's the timing on those contract roll offs?

Most of them come off by the fourth quarter of '12.

Okay. And just in terms of D&A in the new flexible segment, can you give us that number?

We're looking at each other right now, so I guess the answer is we're not sure. We'll have to get back to you. I don't have it at my fingertips what the depreciation and amortization is of the new thing. We'll let you know, Mark.

That's fine. Just one other question about that business. Pine Bluff is a fairly old mill. And I'm just curious what type of capital needs you may have identified at Pine Bluff over the next let's say 3 to 5 years?

What we've identified, going into this year, we've already put in, we're going to spend about $20 million to capture those synergies. And included in that $20 million is enough money to bring that mill up to Graphic Packaging standards.

Currently we have our mill people looking at that mill. And they're identifying areas of improvement where we can get productivity improvements beyond what we had built into the $20 million run rate for synergies.

Dan, do you have just kind of a general sense of what type of stuff that --

It's about $6 million.

It's about $6 million is what we'll have to do.

That's in the $20 million.

Okay.

(Multiple speakers)

But if we can find more and get more money for it, hitting our hurdle rates, we'll end up doing it.

Okay, and then another question, I wondered if you can talk just a little bit about what you see going on in the bleach board market. There have been some reports that that market is a little bit soft right now. I think the backlogs have come down.

The only thing I know about bleach is that we buy it.

Right, I understand.

And so what I would tell you is that our bleach board business has been okay. Now, when I say that, Mark, you know that we do a fair amount of substitution from our bleach board business into [C&K]. So, what I would say is that the applications that we're selling into are still there and they seem strong. But we don't necessarily use as much bleach as we used to into those end-use applications.

Okay. And then, just one last question, this Sierra Pacific business that you bought, do they do any of that sort of bag and box business out there?

No, Graphic actually does some. You're talking wine now, right?

Yeah, exactly. Because I cover the Smurfit Kappa guys and they love that business. They've been talking about how that's kind of growing worldwide. They don't have any presence here, so I was just curious what you were seeing.

Yeah, we are in that, now I'm surprised you're a bag and box wine drinker. But the reality is that we are in that business on the West Coast with the legacy Graphic facilities and Sierra Pacific was out there. They have specific assets, litho-lamer, out there in our facility that we purchased in Sierra Pacific in Oroville. So, we're in that space.

Okay, remember, we're all value guys, Dave.

I know you are.

Alright, thanks.

(Operator Instructions).

Alex Ovshey, Goldman Sachs.

Congrats on a great free cash flow year. A couple of questions, can we just talk about how to think about the EBITDA bridge for '12, if we assume that price cost is even and you normally get $60 million of productivity, plus you have the benefit of the Sierra Pacific acquisition for the entire year plus incremental CUK volume.

Are we thinking that EBITDA is up at least $50 million in 2012 versus '11?

We sort of, as you well know, do not give guidance on EBITDA for the year. What I would say is that, and Alex I'll be as cryptic as I can, what I would say is that I like our trends year-on-year in EBITDA. I don't know what the inflation price curve will actually be. I don't really know. It's pretty early in the year to figure out what that's going to look like because who knows what OCC inflation is going to be in the second half of the year.

I hope that's flat, I'm guessing it's probably more like what we saw this year which was it was still a little bit negative in 2011. I would think it would be a little bit as well. I think we'll get a little bit of bump from the new product activity in the overall process and performance will be in that $60 million, $70 million.

So, I think it moves directionally good. But whether it's $40 million or $50 million, I'm not going -- what I will tell you is that we feel pretty comfortable with our projections on cash flow of $200 million, despite the refinancing costs are about $25 million and the increased boiler investment in Georgia, we still think $200 million worth of debt reduction is doable.

That's helpful, David. As you think about the M&A pipeline for the business, are you seeing more opportunities on the converting paperboard side? Or on the flexible side? And do you have a number that you want to spend on both on acquisitions in 2012?

We don't really target a number. What I would tell you is that I like the things we did with Sierra Pacific. Those are $50 million to $60 million companies that if they fit geographically or in an end-use sector, that's what we're going to be focusing on.

So, if there's some integration there or they're regionally advantageous for us, and I think those guys are out there. Sierra Pacific has really been a very good acquisition. We bought a good asset, we bought a great team, and they all stayed. Allen Ennis and his team, they stayed and they've grown that business.

So, those kinds of things are what we're looking for. It takes a while though. Allen and I started talking about that a long time ago. So, it's kind of hard to project year-on-year, but we do think there are opportunities out there and we'll be smart about it. It needs to be accretive for Graphic Packaging, but that's our goal.

Understood, Dave. And last question for Dan, what are the other cash items that we should be thinking about? Do you have a number for cash taxes, working capital, and any incremental cash costs that you expect to incur in order to realize the synergies for DNK?

Yeah, we expect cash taxes to be about $10 million. Working capital, we're looking for improvement there. But, if I was a betting man, I'd say based on the growth of our business, I think we'll remain pretty much neutral where we are today with working capital.

And did you have one other item?

Yeah, incremental cash costs in order to realize synergies from DNK.

Well, we've included that in our projections to come up with the $200 million. There's about $20 million in total that we're going to spend either through some type of severance payments or in terms of CapEx.

Understood. Thanks, Dan.

At this time there are no additional questions. So, are there any concluding remarks?

We thank everybody for listening in and we'll talk to you next quarter.

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