Graphic Packaging Holding Co (GPK) 2012 Q3 法說會逐字稿

Good morning. My name is Sara and I will be your conference operator today. At this time I would like to welcome everyone to the Graphic Packaging third-quarter 2012 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)

Mr. Brad Ankerholz, Vice President and Treasurer, you may begin your conference.

Thanks, Sara, and welcome, everybody, to the Graphic Packaging Holding Company's third-quarter 2012 earnings call. Commenting on our 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 you can access by clicking on the Q3 earnings webcast link on our Investor Relations section of our website, which is graphicpkg.com.

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 the effect of business combinations, completion of the Macon biomass boiler project, raw material inflation costs, consumer demand and pricing trends, capital expenditures, cash pension contributions and pension expense, depreciation and amortization, interest expense, income tax rates, debt and leverage reduction, performance improvements, and cost reduction initiatives 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 include, but are not limited to, the Company's substantial amount of debt, volatility in raw material and energy costs, cutbacks in consumer spending that reduce 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 in 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. Good morning, everyone. We are pleased with our strong third-quarter results and ability to continue to drive sales, earnings, operating margins, and cash flow meaningfully higher during a difficult time for many of our core end-use markets.

In the third quarter net sales increased 3%, adjusted EBITDA margin increased 130 basis points to 15.5%, adjusted EBITDA increased to $171 million, $19 million higher than last year, and cash flow from operations increased to $65 million to $146 million in Q3. We also dropped below the $2 billion of debt this quarter, representing a significant milestone for Graphic Packaging.

New products and market share gains in key end use sectors drove our sales increase while productivity enhancements, lower input costs, and strong manufacturing performance drove margin improvements. Clearly, the strategic investments we have made in critical areas of our business, such as new product development, asset optimization, and some bolt-on acquisitions, continued to drive positive results.

On the new product development side, we are having success by focusing in key strategic areas such as corrugated replacement, expanded microwave cooking technology, secondary packaging for (technical difficulty) products, away-from-home quick service, and a brand-new solution for glass bottle packs for the beer market I will talk about in a second. We are working on new initiatives in each of these areas and feel good about our new product pipeline.

Our solid CUK fiber folding carton that was commercially deployed in the juice pouch sector is clearly a viable substitute to traditional litho-laminated corrugated structures. This new structure runs well on existing packaging machinery and offers significant inbound supply chain benefits compared to corrugated boxes.

In the third quarter we began converting a major food storage bag customer out of their litho-laminated corrugated packaging and into our folding cartons using heavyweight CUK paperboard. Additionally, we are building on our US success internationally, for example, with the launch of new products for the dairy market in China replacing corrugated products.

In glass bottles we have developed a new solution for beer multi-packs that reduces breakage and noise throughout the distribution handling process. Our new solution called Tite-Pak offers an alternative to partition and corrugated boxes for the protection of glass bottles. Tite-Pak launched regionally in the third quarter for Yuengling Brewing and offers great potential due to cost savings and efficiency benefits throughout the customer supply chain.

In the away-from-home channel we recently developed a one-piece clamshell for a major fast food retailer. The clamshell is a completely symmetrical design that incorporates a patented locking feature and can be loaded at the restaurant with either cavity at the bottom. The benefits of the new product include better ease of use of manufacturing efficiency and material reduction.

Also, in the away-from-home a major coffee chain launched a food product in a new Graphic Packaging paperboard design. This package was selected because of its ease of use in both the staff and customer and also represents a green alternative to the plastic product available before.

Our microwave business continues to experience global growth, largely through new business development. Our ongoing investment in the development of proprietary products and designs continue to find strong consumer acceptance.

Sales of our microwave packaging are up 5% year-to-date as a result of strong new product launched last year. Commercial rollouts have continued this year including ConAgra's commercialized 50 ounce meals at Walmart, which utilize our proprietary MicroRite press tray technology. We expect product development activity in this market to remain strong over the next 15 months and it will be a major contributor to growth in new business.

While new products help drive sales growth, it was continued productivity enhancement and asset utilization that lead to higher operating margins in the third quarter. We generated a net $16 million of performance improvements in the quarter, overcoming $7 million in costs related to planned maintenance downtime in our Macon, Georgia, and Pine Bluff, Arkansas, mills.

We have achieved $62 million through the first nine months of cost savings, putting us on track to achieve between $70 million and $80 million annually. These cost saving initiatives included reduced use of energy, fiber, chemicals, higher output in our paperboard mill, and optimization of our converting network. Synergies from acquisitions also contributed in the quarter as we completed the closure of our Twinsburg, Ohio, plant and our Flexible Packaging division, putting us on plan with our integration of Delta Natural Kraft and Mid-America packaging business.

Further, declines in our input costs, predominately from natural gas and secondary fiber, contributed to the improvement in margins as well.

Debt reduction continues to be a critical value driver for Graphic Packaging and our focus on winning new business, improving operating efficiencies, and optimizing our capital structure over the past few years has allowed us to generate higher levels of cash flow that we have used to delever the business and strengthen the balance sheet. Our debt fell below $2 billion in the quarter, which is a historic low, and our net debt to EBITDA ratio fell to roughly three times.

Dan will provide more insight into cash flow debt liquidity in his section of the call.

Let's talk about paperboard. Our mills had another strong quarter driven by improvement initiatives in energy, operating efficiencies, and fixed cost reduction. Despite some extended planned downtime in the quarter, we generated almost 5,200 additional tons of production in the third quarter and utilized this extra production internally in our carton plants. So our mills produced more tons, we converted more tons in our facilities, and sold more folding cartons externally.

This increased production and utilization rate allowed us to lower our cost per ton and expanded our margins and increased cash generation. The mills continue to benefit from stronger demand for our CUK board as a result of new customer wins and substitution trends to our solid fiber. This higher efficiency is allowing us to increase our inventory turns, shorten our cash cycle, and improve our return on capital.

During the quarter we completed the planned maintenance outages in Macon, Georgia, and Pine Bluff, Arkansas, mills. The Macon mill came online a few days earlier than we anticipated as the outage was a little more efficient.

As a reminder, we will be taking a longer planned maintenance outage at our West Monroe, Louisiana, mill in the fourth quarter. This outage will include a required biannual cold outage to inspect and service the boilers on site. This is fully factored into our expectations, something that we have to deal with every other year.

Regarding our biomass boiler investment in Macon, Georgia, we remain on plan to be up and running in the second quarter of 2013. The economic benefit of this project continues to be solid as our new boiler is expected to eliminate our reliance on coal-generated purchased electricity here in Georgia, and we anticipate being a supplier of electricity back to the grid when we come online next year.

Looking at Folding Carton, our sales increased 4% in this quarter compared to the prior-year period and market trends across some of our core food categories remain challenging however. But we were able to offset this with wins in new business in such areas as juice pouch, cartons, pasta, away from home, and frozen foods. On a year-to-date basis net new business is performing better than planned and our pipeline of new products remain robust.

The cereal and frozen pizza market continues to be sluggish. In the third quarter AC Nielsen estimated that volumes for cereal decreased about 2% and frozen pizza volumes were down about the same. Overall, we saw a better and more normalized trend in our back to school business this quarter, which includes food items such as cereal, pasta, and pantry foods.

I would not say that we have seen industry sales at historical levels, but the trends are certainly better than the same period last year. Industry volumes across the canned beverage market decreased 1.8% on a year-over-year basis according to the Can Manufacturers Institute. Industry soft drink shipments remained weak, but we continue to see a steady recovery in the beer market led predominately by craft brew and bottled beer.

Our beverage volumes were down slightly reflecting the overall market. Premium beer for most brands had a solid quarter in terms of volume, but craft does continue to lead the categories. Our acquisition of Sierra Pacific last year continues to benefit from the strength in craft beer and our new Tite-Pak product that we introduced this quarter is going to benefit from the growth in bottled beer sector.

Let's talk about flexible. We saw really little change in the underlying trends in this market during the quarter. Stagnant demand for construction and industrial [aided] materials continues to negatively impact this business.

In addition, a relatively mild storm season has further dampened the roofing shingle wrap market. As I mentioned, the integration of Delta Natural Kraft and Mid-America joint venture is progressing on plan and we completed the Twinsburg, Ohio, plant closure ahead of schedule. We continue to target $20 million-plus of total synergies from this combination, most of which, of course, will show up in 2013.

Pricing overall contributed about $1 million this quarter. The bigger story was inflation; in fact, the lack thereof.

Commodity cost input was actually deflating by about $8 billion. The lower input costs were driven primarily by decreases in energy and secondary fiber year on year. These were partially offset by increases in freight and, to a lesser extent, wood and chemicals.

The increase in freight costs is being driven by government regulatory changes which have reduced allowable driving hours as well. Diesel prices continue to be stubbornly high. While crude oil prices are down and we have seen the benefit from natural gas in the cost of some chemicals and resins, freight prices were $3 million higher in Q3 than 2011 and we expect this trend to continue somewhat into 2013.

In summary, we had a good quarter. We continue to drive growth through focusing on product innovation, asset optimization, and debt reduction. We are investing in some of the stronger trends in the food and beverage market, such as litho-lam substitution, pasta, craft beer, food service, and microwave while protecting our core segments.

We like our positioning, but there are plenty of opportunities to continue to grow the business. Similar to Sierra Pacific, Delta Natural Kraft, and Mid-America Packaging transactions we will continue to look for strategic bolt-ons that enhance our competitive position globally.

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

Thanks, David, and good morning. David covered operational highlights of the quarter. I will focus on financial results. My comments track our posted presentation. Let's start with financial highlights on page nine.

As a reminder, when I refer to EBITDA and EBITDA margin in my discussion today I am referring to results adjusted to produce comparable financial reporting. Let's take a look at third-quarter performance.

Net sales improved 2.9%, or $31 million. EBITDA increased 12.4% to almost $171 million. EBITDA margin increased 130 basis points to 15.5%. Adjusted net income at $42.8 million is $0.02 per share higher than a year ago. And year-to-date operating cash flow at $145.8 million is $64.5 million higher than last year.

As David discussed, we posted a very solid quarter. The main drivers of the bottom-line improvement are pretty straightforward as they include revenue growth, strong operating performance, and lower interest expense. Higher EBITDA combined with working capital efficiency also generated significantly more cash than a year ago.

Moving to the discussion of results, the sales comparison in slide 10 shows almost 3% growth to over $1.1 billion in third-quarter revenues. As you can see, volume gains drove the growth. Overall volume, net of foreign exchange, equated to roughly $30 million of sales growth.

The Paperboard Packaging segment successfully grew their business organically, as David outlined, principally through new products and share gains. As we also saw in the second quarter, the new business delivered a margin of 20% as we further leveraged our fixed overhead cost.

Now in the Flexible Packaging segment revenues grew nearly $16 million due to the business combination with Delta Natural Kraft. Right now the acquired flexible volume is at skinny margins; however, as we have spoken to previously, we expect these sales to improve to low double-digit margins as we deliver our integration synergies in 2013. These integration initiatives are progressing as expected.

Turning to the EBITDA bridge on slide 11, we see strong EBITDA improvement of $19 million to $171 million. As we look at the chart what jumps out are two things -- commodity deflation and the large benefits from performance gains. Let's talk about these two items.

First, if you look at the deflationary decline in input costs, the primary driver has been secondary fiber. In this commodity alone we expect deflation of $25 million to $30 million for 2012. We are glad to have the pullback in commodity inflation this year, but the way our contracts work some portion of the impact of input cost deflation will be reflected in 2013 pricing.

A second driver is performance improvements where we have achieved $62 million benefit year-to-date and $16 million for the quarter. Looking at the details of the quarterly $16 million improvement, we see cost reduction delivered $23 million and this benefit was netted against $7 million of additional mill maintenance that I highlighted was going to be incurred during the second-quarter call.

Overall, we are pleased with our cost reduction results and expect to achieve around $80 million for the full year. As a reminder, our fourth quarter will include approximately $8 million of incremental year-over-year mill maintenance expense as we complete the biannual maintenance outage at our West Monroe mill campus.

Now looking at EBITDA margins, we are pleased with the improvement to 15.5%. In the upper right-hand corner of page 11 you will see a decline in the Flexible Segment margin. The margin drop is attributable to the maintenance outage at our newly acquired Pine Bluff mill.

If you normalize for the outage, the margin would be comparable to the previous year. And I might mention that we expect margins in Flexible to return to our normal levels next quarter.

Now turning to slide 12, let's look at cash flow, debt, and liquidity. Third-quarter net cash provided by operations was strong at $146 million. Stronger earnings and a pull-forward of various working capital benefits from the fourth quarter into the third quarter helped to drive this solid performance.

CapEx increased $10 million to $48 million in the quarter. The increase was a result of timing of expenditures for our Macon biomass boiler project and investments related to the integration of graphic flexible packaging. As David mentioned, the biomass project is on target and we expect the boiler to be up and operational by mid next year.

We expect total CapEx to be around $190 million for 2012.

Now looking at debt and interest, we saw a 25% drop or a $9 million reduction in interest expense. This drop was the result of our declining debt balance and a reduction in our effective interest rate. I should also note during the quarter that pricing on our senior secured term loan and revolver dropped by 25 basis points to LIBOR plus 200 as our leverage ratio dropped below the first step on the facility's pricing grid.

Year-to-date net reduction was $153 million. This figure compares to $80 million of net debt reduction during the first three quarters of 2011. Based on this stronger performance, we are raising our 2012 net debt reduction target to the $240 million range.

Our net leverage ratio improved to 3 times. This is compared to 3.5 times at year-end 2011 and 3.8 times a year ago. Liquidity at the end of the quarter was in excess of $685 million. Our target leverage ratio continues to be in the 2.5 to 3 times range, and we expect to be within this range by the end of this year.

Now let's talk about some guidance. Overall performance for the third quarter was strong and in line with our expectations for the year. Looking forward, let's turn to slide 13 and speak to some of our thoughts around fourth quarter.

First in the fourth quarter we expect cost inflation to run at current levels with secondary fiber and energy positive to 2012 levels. We also expect to see the normal seasonality that occurs in our core food and beverage business with the fourth quarter somewhat historically weaker around the holiday periods. Volume in Flexible Packaging is more dependent on industrial activities, which also is historically slower in the fourth quarter.

Also, as mentioned earlier, we will take planned maintenance downtime at our West Monroe mill in the fourth quarter. This biannual maintenance is expected to result in a $13 million charge in the quarter, which is about $8 million higher than we had last year in our results. Overall, as we look at Q4 we expect EBITDA for the quarter to come in around the current consensus analyst estimates.

Looking into 2013 we expect contractual price adjustments to reflect some of this year's deflationary commodity environment. We expect very modest commodity inflation in 2013 with major components flat to 2012. Our cost reduction goal is to once again achieve $60 million to $80 million of benefit, and we also expect to roll in the previously announced $20 million of synergies in the Flexible Packaging segment. So EBITDA again will grow nicely in the 2013.

Now moving to slide 14. In addition to the comments I had about Q3 -- I mean Q4, I will summarize our guidance for full year 2012.

Capital expenditures will be around $190 million. Cash pension contributions will be between $45 million and $60 million. Pension expense of around $40 million. Depreciation and amortization in the $260 million to $280 million range.

Interest expense of $110 million to $120 million. The full-year tax rate of 41%. Net debt reduction in the $240 million range and finally our net leverage ratio should end the year below 3 times.

With those comments, I will turn the call back to the operator for questions. Thank you.

(Operator Instructions) Joe Stivaletti, Goldman Sachs.

Now that you have gotten your leverage down significantly you talked about potential bolt-on acquisitions. I wondered if you could just talk to us a little bit about what areas in particular would be most interesting for you. And would you be considering anything else in the Flexible space or just your core business?

As you well know, I have to be somewhat circumspect about any sort of acquisitions. What I will tell you generally speaking, anything that we are really looking at is in our core business but that does include Flexible.

If you sort of think about it, Joe, with the acquisition of Delta Natural Kraft we have made that business look a lot more like our other business, so I think there will be some reasonable bolt-ons in that business to make it strategically a better fit, more opportunities for integration. And we will continue to look at that.

As I said in the past, our acquisitions in our Paperboard business they will be both domestic and international in our focus. We would like to have our footprint a little broader in the international business, but it is going to be around our core carton food and beverage markets. With the sort of uncertainty, and I think it is fair moving in 2013, we are just not going to get too far afield from the things that we know and understand and can explain in light of the economic uncertainty that we feel like we are facing in 2013.

Okay, thank you. I was wondering, Dan, if you could talk at all about -- you gave us guidance on the 2012 cash flow items. Can you share at this point any targets for 2013? You talked about 2012, I mean, but 2013 in terms of your -- any thinking on targets for net debt reduction or also maybe CapEx for next year?

We can give you a few comments on that. One, once we hit that range which we consider to be optimal, the 2.5 to 3 times, we will use the revolver to efficiently reduce debt with cash. But we will be in a position to be able to ratchet that revolver up or down depending on the acquisition activity and those types of things. We are not looking at overall net debt reduction outside of that range for the business.

The other thing in terms of the range for CapEx, as you know in 2012 we had additional CapEx related to the biomass boiler. We expect that project to be complete in the middle of 2013, so we are looking at CapEx spending to drop from around that $190 million range to around $175 million for 2013. So there will be a gain there and that will be positively reflected in cash flow.

Joe, Dan is right. You remember that we have talked in the past maintenance for our business is around $100 million. If you look at the acquisitions maybe we are up to $105 million or $106 million because we bought the paperboard mill DNK, but it's in that range.

So if we are at $175 million that gives us some free board for growth investment or strategic investment in that range. So I am pretty comfortable that $175 million on an actual CapEx is probably a pretty sustainable level for Graphic Packaging at this point in time.

Overall, if you look at cash you have estimates for improved EBITDA and you have some reduction in CapEx, so we expect cash flow to improve from 2012 levels in 2013.

Great, thank you very much.

Ghansham Panjabi, Robert W. Baird.

On slides 10 and 11 where you break out the volume mix by sales and EBITDA contribution, can you just parse that out between the legacy businesses and acquired volumes? I am just trying to get a sense as to how Paperboard drop down margins were for the quarter.

There is a couple of things there. One, if you look -- it is about a $30 million number, right?

Yes. Net of FX, correct.

Net of FX. And that is where we are basically looking at it. So if you look at that half of it is in our Paperboard Packaging and approximately half of it is in Flexible Packaging.

Paperboard Packaging really doesn't have any benefits from acquisitions in there because on a year-over-year basis we own the same basic footprint in that business. Flexible Packaging, all of that improvement was related to the acquisition of Delta Natural Kraft and Mid-America Packaging, so if you do that.

Then I also said that the margins for Delta Natural Kraft, I mean they are very skinny at this point. They are low single digits and that is what is compressing what you see on the other waterfall with EBITDA improvement. So there is mix improvement, there is mix effect in that EBITDA waterfall as well.

So if you ferret all those things out, for the new business that David talked about we are getting about a 20% margin on that new business because we are leveraging our fixed cost base. In terms of the new business for Delta Natural Kraft that is compressing what goes on -- the benefit on the EBITDA waterfall. But we are working on that.

We have a plan for it and in 2013, as we complete our integration activities for that business, you should see that climb dramatically into the low single, double digit range. So it is going to be a sales figure that actually delivers a measurable benefit to the Company in terms of EBITDA margin.

You got to remember also in Flexible, as Dan identified, we took the downtime in the Pine Bluff mill and that actually shows up in Flexible, not in Paperboard. So it cut the margins in half. It is a pretty small business and when you take that kind of cold outage downtime in a mill like that it has a pretty significant impact in that quarter on that business.

Okay, that is very helpful. Thank you.

Then on the planned mill outage. I think last quarter you said $12 million was your estimate for the year-over-year impact with 3Q and $5-some-odd-million for the fourth quarter. Was that just a timing issue in terms of why you came in at $7 million, which I think is what you said?

We had never done an outage at Pine Bluff before. One of the things is you are somewhat cautious with your numbers and the guys that are planning the outage are cautious as well. So now we have done a lot of learning on how to properly do a maintenance outage in that mill and you will see those types of numbers on an annual basis. We probably even improve on it as we go forward and learn and more about how that mill operates.

I think you know that that business had been starved for capital, so we didn't know what we were going to get into when we tore that boiler down. And so we said it could be -- we were pleasantly surprised. Honestly, the boiler was in better shape than we thought, but we gave some upside guidance because until you open it and get into it you really don't know where you are. So I think we will be better on a go-forward basis.

The other thing is that Macon came up a little earlier than we thought. I think Dan in his comments we had planned for a downtime in Macon, but we came up a couple of days early in Macon, which was good because we made the paper and we sold the paper. So it is kind of why the cash translated into the quarter, because we had a couple extra tons that we didn't expect and we ended up selling those tons.

And just one final clarification. On the D&A on your press release, on the cash flow side it is listed at $202 million and then the reconciliation is at $225 million. Can you just help us bridge the two?

I think you will find the difference there is pension amortization. So to use a number that we highlighted in the comments we had previously is the appropriate way.

Got you. Thanks then, so much.

Mark Wilde, Deutsche Bank.

Dave, just to start out can you give us, just based on what you see right now, a sense for kind of what those price adjusters may mean in 2013?

Right now from what we do I would say we are probably looking at $25 million or so of pricing adjustment from those things blowing through in next year. I mean that is sort of what we expect.

So as Dan said, it was great; we love getting it this year. We don't expect a lot of inflation next year, so we will overcome those with volume and, of course, we have the synergies from DNK. We would like to get back, Mark, to a place where really pricing and inflation are kind of balanced, which was the old model.

The last three or four years we have been -- inflation has been up and pricing has been down or vice versa. But what you will see is steady EBITDA growth. You will see on a normalized basis EBITDA growth from last year to this year and from this year to next year through that arbitrage of pricing and inflation.

Okay. Then can you give us some sense in the coated board business right now, how important are exports to you?

Well, it is a two-part question. If you are talking about just pure export board that we sell in the open market internationally, not very much. We ship, and we have said publicly, a couple hundred thousand tons a year to Europe and Asia, Australia, but we use those predominately to make folding cartons in those regions.

So export is important to me, but it is not the SBS model where CUK is shipped around the world in just open market applications. It's a pretty small part of the CUK plan.

Okay. All right, so from that, Dave, can we assume that you don't see a big impact to your business from all of this Chinese boxboard capacity that is out there?

Well, a lot of it -- Mark, as you well know, it really depends on which end-use market it ends up. We don't do a lot of SBS. We don't do a lot of ivory board end-use applications, and that board that they are making really isn't very good for beverage applications because it has got recycled.

So can it have an impact? Sure, but I don't think it is as great on our business as we would expect. In Europe, our business is predominately beverage for sure and any food business we have -- we are a buyer of board; we don't export our CRB. So in sort of a perverse way any reduction in Europe actually would benefit our -- any (inaudible) we would do would focus on the food.

I think, Mark, didn't I read also -- RISI said this last week that they really expected most of that stuff to end up in Asia and other places. It really wasn't targeted that much for the United States, so it will be an indirect impact on our business as opposed to a direct impact. At least that is what I think.

Okay. Have you seen any sign of kind of Chinese boxboard kind of coming into the US to kind of compete with the recycled boxboard here? I always hear about this and I never know whether much of it has really shown up in the market.

We haven't seen a whole lot of it. You got to remember that a good part of CRV ends up in direct food contact stuff. And so as you can well imagine, Mark, some of our customers get a little nervous about importing Chinese boxboard that is direct in contact with pasta or other products. And rightfully so.

So we really haven't seen it. I know it occurs on the coast for sure, but I don't think it is necessarily -- I don't think it starts in the food space is my point.

Okay, all right. Then I am just curious with the weakening in some currencies like the real and others, are we seeing any more sign of more coated board imports coming into the US?

Well, we haven't seen a whole lot and I think that is because -- and you know this probably better than I do -- the fact that the Brazilian market, which is predominately what you're talking about there, is actually growing and there has been no real new board capacity added significantly in that market. So I think a lot of the coated board stock down there is going to serve the local market. And while the real is weaker it is still not great.

It's still not two. Yes, [not great].

Still pretty high and so we really haven't seen that.

Okay. Then just finally, just you have talked around kind of the improvement that you expect to see next year in the flexible business, especially around Delta Kraft. Can you help us just think about the impact from just the kind of contractual changes and your integration levels in that business?

That is a totally different business. I don't really think we see nearly as much contractual changes in that business. I think the question really becomes there, the synergies become pretty easy to get because it is really internalizing externally purchased board, so that is pretty easy.

I think really market is more of a volume question. A lot of it depends upon your view of what the US, and it is predominately a US market, economy is. We are industrial-based, long lead, concrete, industrial chemicals business and so a lot of it depends upon what happens in 2013. I think it is more of a volume question, Mark, than it is anything else.

Okay. All right, sounds good. Listen, good luck in the fourth quarter, good luck next year.

George Staphos, Bank of America Merrill Lynch.

Sorry, a little late; four calls going on at once. I guess the first question I had, maybe segueing off of Mark's question, you continue to be optimistic on the synergies with DNK and Mid-America. But are the returns, given what you have seen in the business in total from a volume standpoint over the last year, do you think the business will be returning at the same level you had expected, say, a year ago when you made that investment in DNK?

Of course, as you well know, our investment in DNK was not very much so we essentially just assumed some debt. So we didn't really make a large capital investment.

What I would tell you is that I still think (multiple speakers) just transferred debt. We just picked up transferred debt at LIBOR plus 200. So what I would simply say is that we -- long term I still like that business because of the integration network.

We are still struggling like every other business is on the industrial side of the equation. We knew where that was going in. I am sorry, we knew what that market we were selling into going in. I would have preferred it to rebound a little faster, but ultimately we are sort of where we are.

We will still get the synergies. The business is going to struggle from a volume standpoint, but the margins are going to double. So we are going to get into that -- we are going to get into that double-digit margins square as we head out into 2013. I mean if there is any volume recovery at all it will happen much quicker, otherwise it is just going to be grinding it out at current levels.

All right. I appreciate the affirmation on that, Dave.

The second question I had; have you seen any uptick in orders more recently relative to markets that perhaps have been maybe more sluggish over the last nine to 12 months? We have seen some pickup that we have written about in terms of point of sale data.

Obviously you're gaining market share so your volumes are outpacing the market, but have you seen any kind of lift into the market as we have gotten into the fourth quarter? If you could provide color on that. Thanks.

What I would say is that we are certainly busy right now and you heard my trends. I said that this back-to-school season was much better than what we saw last year, so I would tell you right now our converting plants are running and our mills are busy. And I hope that continues.

I'm not trying to be evasive, but you and I both know trying to predict around Christmas, New Year's, and Thanksgiving in the fourth quarter is so darn difficult. Because while customers may be scheduled to run right now through Thanksgiving, and they are, it doesn't take but a phone call to say, you know what, we are going to take some down time around the holiday. Then we lose $8 million to $16 million worth of volume in two days because they move out.

Right now I like what the fourth quarter is developing. We are busy and we are running a lot of standard back-to-school, center of the aisle products and that is why Dan gave guidance to the fourth quarter that feels like it is going to be in line. It is just the fourth quarter.

Dave, last question and I will turn it over. If you continue to see growth in CUK through share gains, how much additional capacity, if you will, do you think you have to grow? How much debottlenecking can you continue to do?

And, similarly, I mean converting you are always going to have a little bit more, if you will, flex or excess capacity. But how much more could you grow before you have to start considering larger investments in converting equipment? Thanks.

Well, converting equipment, I think we have got plenty of converting capacity. As you know, we run our converting businesses with about -- in an individual plant we have less than half the equipment on seven days. We have plenty of capacity in converting, and you have to because there are surges. We have some surges.

In the mill side we get about 1% a year in creep just from efficiency operation and you sort of think about that. In the CUK that is 1.6 million tons or something like 1.4 million tons, so we pick up enough to run our business pretty effectively.

There is lots of opportunities for us to put -- with minor investment to put more capacity out there if we need it. But it makes absolutely no sense to put more capacity in the market that we don't know we are going to sell. It's just good discipline. So we have plenty of excess capacity in the business, but we are just not going to get ahead of ourselves.

Okay, fair enough.

In some ways I would rather be, honest -- and I have said this in the past, I would rather be a net buyer globally of even CUK. I wouldn't mind buying enough on the outside to be able to balance our network; that part has been part of our core strategy.

There is other people that make it globally. They will be glad to sell it to me and I will be glad to buy it.

We like your approach, Dave. Thanks.

Phil Ng, Jefferies.

Sorry, I hopped on the call a little late so if you guys have already touched on this I apologize. From an execution standpoint, you guys are doing an incredible job in terms of taking costs out of the system. Can you talk about some of the opportunities for 2013?

I mean we have got a couple of things going on. We have got some pretty good synergy opportunities in 2013 that we will roll through the bottom line. As I just gave George a little bit of background, we are going to have to make some more tons and more efficient tons because our CUK business continues to grow. That will manifest itself in throughput and productivity in the mills and that is really what part of our plan is for sure.

We have got some growth in China that will manifest itself back through our business that will allow us to optimize what we are doing we do some sub optimal work in that process. Then we have made a fair amount of capital investments this year in the mills. First of all, we have got the Macon biomass that in the second half of the year we will contribute.

Then in the converting plants we have put in some new presses and some new cutters. The guys that got that money have the expectation from the CEO that they are going to see increased throughput or otherwise they don't get any more capital.

So the project list is out there. We manage each individual project for all of the $60 million to $70 million is tied to an individual project throughout the organization globally. So, look, I think if the volume holds up like we expect it to do we will generate our cost reductions.

Okay, that is helpful. And it sounds like from what you said earlier demand is firming up a little bit, but visibility is still pretty low. Have order patterns just been a little more choppy?

No, order patterns have been good. What you are hearing is just I don't want to over lean my skis, because the fact of the matter is it's so darn difficult to predict in the fourth quarter because of all the holidays.

If you just think what we have to manage through, Thanksgiving, Christmas, and New Year's, in our food business a day is $8 million in sales. So if it moves a couple days you lose $16 million to $20 million in sales. It is kind of hard to predict what that is going to be around a number.

So I am saying, look, I like where we are but customers start to manage inventory at the end of the year, worrying about first quarter, who is going to get elected. Who knows?

Okay. Just one last final question. You guys have done a very good job actually picking up some new business on the corrugated conversion side, as well as pasta and frozen. Are there any other new markets that you could penetrate that could actually offset some of the market weakness?

Yes, first of all, I don't think we are, by any means, exhausted the corrugated conversion. It is great; I saw those guys are getting their price increase in the marketplace. That is super. Like they say in golf, every shot makes somebody happy; creates additional opportunity for me from a conversion standpoint. I like that.

The microwave business is really on fire, no pun intended. We are really doing a nice job of growing that business. We have got some customers that are very committed and dedicated to that, and that feels good. Then this away from home I mentioned a couple of new items that are in plastic that are going to paperboard.

So I think our -- we are sort of a target-rich opportunity for new things. Having said that we are going to have to be disciplined in where we spend our money in the process. So I'm not going to tell you that I see a breakout, we are going to start growing like Microsoft.

I am just thinking we have consistent constant growth integrated back through the paperboard mills, which says -- like I said, my expectation is EBITDA will continue to grow and will generate cash. That is our plan and we seem to be executing towards that so I am comfortable going forward.

All right, thanks a lot. Thanks for your color.

At this time there are no further questions. This concludes today's conference call. You may now disconnect.

Thank you very much.

See you all next quarter.