Graphic Packaging Holding Co (GPK) 2012 Q4 法說會逐字稿

Ladies and gentlemen. Good morning.

My name is Kimberly and I will be your conference operator today. I would like to welcome everyone to the Graphic Packaging fourth quarter and full year 2012 earnings conference call. (Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to turn the call over to Mr. Brad Ankerholz, Vice President and Treasurer of Graphic Packaging.

Welcome to all to the graphic Packaging Holding Company fourth quarter and full-year 2012 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 Chief Financial Officer.

To help you follow along with today's call, we have provided a slide presentation which you can access by clicking on the Q4 Earnings webcast link on the Investor Relations section of our website, which you can find at www.graphicpkg.com.

I would like to remind everyone that statements of our expectations in this call constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements, including but not limited to statements relating to the revenue, cost and synergy effects of acquisitions, cost production and tax benefits expected on the completion of the Macon Biomass Boiler Project, raw material inflation, consumer demand and pricing trends, capital expenditures, cash pension contributions and pension expense, depreciation and amortization, interest expense and refinancing costs, debt and leverage reduction, performance and EBITDA improvements, and cost reduction initiatives are all 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 and 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 day of 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 fourth quarter results as adjusted earnings per share improved to $0.08 cents from $0.02 cents in the prior year quarter. We were able to drive sales and increase our fourth quarter EBITDA margins to 14.3% in what was a sluggish quarter for some of our key end markets.

Like other consumer driven sectors, we have seen some volatility in the business in the past few months. Industry volumes in our core markets were solid in October and November and the demand slowed in mid-to-late December. Clearly, we experienced some level of customer inventory management as this trend has now reversed itself and demand has been stronger in the early part of this quarter.

Despite the market noise, we managed the business tightly in the fourth quarter. We improved margins and drove cash flow. New product launches, customer wins, productivity enhancements, acquisition synergies, asset optimization, and a lower cost of capital remain the driving forces behind our improved results.

For the full year 2012, total volumes increased 3.9% and sales increased 3.1% to $4.3billion. Higher operating margins combined with significantly lower interest expense, helping increase cash flow by $81 million to $469 million for 2012.

Fourth quarter, we generated net performance improvements of roughly $6 million despite incurring $5 million in increased costs for the West Monroe bi-annual cold outage. In total, we delivered nearly $67 million in performance improvements for the year. The strong performance helped drive a full-year 2012 EBITDA margin of 14.9%, up significantly from 14.1% for the full-year 2011.

Additionally, we made some strategic investments in the business last year to drive long-term sales and grow earnings. This includes $203 million of capital projects focused on improving our asset utilization and lowering our overall cost structure going forward. The largest of these three projects included the expansion of our Perry, Georgia and West Monroe carton facilities and the building of a biomass boiler in the Macon, Georgia mill.

The Perry and West Monroe carton expansions were completed in 2012, and allowed us to better optimize our converting footprint by consolidating production into these two highly efficient plants. The building of our biomass boiler in Macon, Georgia is progressing well, and we still expect that it will come online late in second quarter.

This is an $80 to $85 million project of which we expect to receive a tax incentive rebate of approximately 30% for the total cost upon project completion. The boiler will make the mill self-sufficient from electrical power and steam generation standpoint thereby reducing energy costs and improving profitability of that facility.

Another area of significant investment 2012 was the integration of our flexible packaging business with the Kraft Paper and Multi-Wall Bag business of Delta Natural Kraft and Mid-America Packaging.

The combination created North America's only vertically integrated Multi-Wall Bag business and allows for significant synergies and profit potential going forward. In fact, we expect to receive full synergy targets in 2013 in the range of $20 million to $25 million. More recently, announced two acquisitions in Europe to build critical mass and improve profitability in this strategically important region.

The acquisition of Contego Packaging and A&R's beverage packaging business creates one of Europe's largest folding carton packaging businesses and significantly expands Graphic's position in the global marketplace. Similar to our operating model in the US, this provides us with an opportunity to further integrate our board business and expands our share of the global SUS market. It also expands our relationship with key global accounts such as Kellogg's, Nestle, General Mills, Heineken, SABMiller, AB In-Bev, and it provides us access to other new accounts in Europe.

Our estimate of annualized synergies is between $16 million and $18 million, and we expect to achieve them over the next 24 months. These are the second and third acquisitions we have made in the last two years of the core food and beverage business. Certainly, we know how to operate in this space, and believe we can generate significant improvement in ROI through a focus on execution and integration of these acquisitions.

In both cases, we were able to acquire just the core food and beverage packaging business from Contego and A&R respectively. These acquisitions provide cost synergies, but they also come with some very good intellectual property that will not only be used in Europe, but we believe we can translate back to the US and allow the two regions to leverage ideas.

Contego, as a microwave business, fits perfectly with our existing microwave platform. And the A&R beverage business is focused primarily on the bottled beer market. This is a market that has grown and one that we know very well.

Another core area of significant improvement in 2012 (inaudible). We remain focused on developing new and unique packaging that helps our customers differentiate their products. We lower their distribution costs and we improve their sustainability metrics throughout and across the entire supply chain.

Our product development teams are focused on four main strategic areas. First, core data replacement like our success in commercializing Capri Sun. Second, proprietary glass beer bottle packs called [TIGHT PACK]. Three, away from home, quick-serve dining solutions. And four, microwave cooking technology. We are working on new product issues in each of these areas and feel very good about our new product pipeline going forward.

Our solid CUK fiber folding carton is clearly a viable substitute for traditional Litholand corrugated structures. This new product runs well on existing packaging machinery and offers significant inbound supply-chain benefits compared to corrugate. In addition to Capri Sun, this past year we converted the Church and Dwight's 20-pound kitty litter box from corrugated into to our heavy-caliper CUK carton, along with another major US consumer product company's club store sandwich bags.

In total, corrugate replacement growth added $84 million sales in 2012. We continue to actively work on targeting the frozen food accounts for continued growth in 2013.

In glass bottles, we have developed a new proprietary solution for beer multi-packs that reduces package breakage -- reduces glass breakage and noise throughout the distribution handling process. Our new solution called TIGHT PACK offers an alternative to internal partitions in corrugated boxes for the protection of the glass bottles. This innovation reduces glass breakage in the breweries and the distributors. We had our first major commercial sales in Q4, and have significant interest from several additional brewers going forward.

The away-from-home market continues to grow. It was up 14% year-on-year in 2012. We had considerable success offering our customers enhanced dining solutions, lead by solid fiber replacement for resin-based packaging.

In 2012, Graphic Packaging was selected successfully to convert a Panera foods plastic clamshell to solid fiber. This is annual revenues of greater than $10 million. GPI has targeted projects in the pipeline for 2013, leveraging its existing technology capabilities to further grow in this core segment.

Our microwave business continues to experience global growth as well, largely through new business development. Our ongoing investment in the development of proprietary products and designs continue to find strong consumer acceptance based on increased convenience coupled with an enhanced cooking experience.

This is a very fast-growing market for us, as year-over sales increased 8%, lead by new applications proprietary microwave even-heat technology. We will, in fact, be investing $7 million in new capacity for microwave in 2013.

Strengthening our balance sheet and improving our capital structure continue to be top priorities, and we made significant progress throughout the year on both. In December, we completed a secondary public offering that sold 21 million shares of common stock held by four of our largest shareholders. Concurrent with the offering, the company also repurchased almost 50 million shares of common stock from selling shareholders for $300 million. The offering, in simultaneous repurchase of shares, increased the public float and liquidity of the stock while lowering the number of outstanding shares by almost 12%.

Early in 2012, we also entered into a $2 billion amended and restated senior secured credit facility. We used the new facility, plus cash on hand, to repay approximately $1.7 billion of the institutional term loans that were due in May of 2014.

The new credit facility provided us with attractively priced financing, and gives us the flexibility necessary to meet our operating and strategic goals. For instance, this flexibility allowed us to expand by $300 million to fund the repurchase of shares I just referenced.

Let's talk a little more about the business. Looking closer at the fourth quarter, our mills delivered a solid quarter due to improved initiatives in energy conservation through efficiency and lower total fixed costs.

We took our bi-annual cold outage at our West Monroe, Louisiana mill in the fourth quarter. Dan will speak more to it in his section, but the additional downtime related to the planned outage negatively impacted EBITDA by probably $5 million in the quarter.

After adjusting for the impact of the cold outage, our mills generated 11 thousand more tons than fourth quarter of last year. This equated to approximately a 2% increase in tons per day. Backlogs for our key CUK and CRB substrates also remain strong as approximately four plus weeks.

I would like to point out our mill did not take unplanned downtime during the entire year of 2012 and our board inventories are below 2011 year-end levels on a larger revenue base, despite the fact that in-market demand was less than robust in many of our end use segments. We believe this is a true testament to our growth strategy and our efforts to optimize our Board integration.

Looking at folding cartons, volume in our global folding carton business remained relatively flat in the fourth quarter despite overall weakness in the market conditions. Significant volume increases from new business gains offsets softness in some of our legacy core markets.

In the fourth quarter, AC Nielsen estimated our key categories of cereal and frozen pizza volumes were relatively flat, down around 0.5% and 0.7%, respectively.

Despite a hard-hitting cold and flu season, facial tissue volume was weak in the fourth quarter for us and decreased about 4.5% according to AC Nielsen.

Energy volumes across the canned beverage market increased 1.4% on a year-over-year basis in the fourth quarter, according to the Can Manufacturers Institute. Industry soft drink shipments increased about 0.1%, and beer shipments increased about 4% for the quarter. Reflective of these trends, we continue to see solid volume in the beer, which strengthens our craft and imported business and a softer soft drink business.

Looking at flexible, trends in our flexible packaging business remain sluggish, though we did see some modest improvement in the fourth quarter. Flexible packaging sales increased 13.6% in the fourth quarter due predominantly to the acquisition of Delta Natural Kraft and Mid-America Packaging Business in December of 2011. As discussed earlier, the new joint venture formed between our Legacy Flexible Packaging Business and the two new companies should enhance both growth and profit profile of this business as we head into 2013.

We did see a slight pickup in our multi-wall bag business the fourth quarter as the construction market has begun to improve modestly. However, our specialty plastic business, which includes Shingle Wrap, remains somewhat lackluster due to continued weakness in retail and industrial markets for film-based products.

Looking at pricing and commodities, for the first time in 2012, pricing declined in the quarter, predominantly as a result of the past declines, and commodity costs starting to flow through our contracts and some board price movements. Commodity costs in the fourth quarter remained relatively in line with recent trends as lower costs for secondary fiber continued to provide a tail-wind benefiting the fourth quarter by about $11 million.

Not all of our commodity imports were down, however. Wood costs were up roughly $5 million and freight costs were up $3 million year-on-year, due primarily to government regulatory changes for driver mandates. So unfortunately, we expect this trend to continue into 2013.

In summary, we had a solid quarter and a very good year. We continue to drive growth through focusing our product innovation, asset optimization, and selected bolt-on acquisitions. We are investing in some of our stronger trends in the food and beverage market, such as Litholand's substitution, pasta, craft beer, food service and microwave while protecting core businesses.

We like our positioning. There are plenty of opportunities to grow in our customer base and lower our cost structure and improve our operating efficiency.

I am now going to turn the call over to Dan for a more detailed discussion of the financial results.

Thanks, David. Good morning, everyone. David covered the operational highlights. I will focus on the financial results. My comments track our posted presentation, so let's start with Q4 and full-year financial highlights on page 10.

Overall, both Q4 and full-year financial results were strong. Our strategic actions improved both operational performance and the company's capital structure. As you can see on the slide, all key metrics improved in the quarter and for the full year 2012. The work we completed on both fronts in 2012 has positioned us for a solid start in 2013.

Specifically taking a look at fourth quarter, adjusted EBITDA was up 2.5% to over $150 million on the strength of 14.3% EBITDA margins. Adjusted net income increased from $7 million in Q4 of 2011 to $33.2 million. Q4 adjusted earnings per share grew from $0.02 to $0.08. On a full-year basis, EBITDA was up 9.5% to over $647 million. EBITDA margin expanded to 14.9%. Adjusted earnings per share grew from $0.26 to $0.37.

We adjusted EBITDA and net income for specific non-recurring items. Acquisitions, post-acquisition integration and capital structure expenses.

During the quarter, we incurred $16 million of nonrecurring charges related to the two European acquisitions share buyback and the completion of the DNK integration. As all these activities are complete, there will be no further charges for these items in 2013.

Turning to slide 11, we see that Q4 revenues were essentially flat to the prior year as increased volume was partially offset by lower pricing. The price give backs totaling $8.8 million were largely from contractual resets driven by deflation in secondary fiber and resin.

As you will recall, the reset mechanisms in our contracts provide for pricing adjustments up or down, based on input cost movements and changes in board price. As explained before, the average lag between input cost change and price reset is approximately nine months.

With respect to full year, revenues grew a solid 3.1% to $4.3 billion. It is important to note that during 2012, along with acquisitions and new product launches, we successfully completed the negotiations of an abnormally high number of contracts. As a result, we locked in integrated board volume.

All of these actions will lead to a more profitable business mix. As a side note, the right business mix is a large value driver for us. It leads to less waste and higher operating rates.

For example, during these negotiations we received better grades and better [trims], which will lead to further optimization through converting and, more importantly, into the mill system, all driving margin expansion.

In 2013, we expect contractual price reductions related to deflation and other resets in the $35 million range. Overall EBITDA on a year-over-year basis will increase from improved mix, further board integration in the mills, higher operating rates and expected price increases in paper and paper board. These will more than offset the price reductions.

Turning to slide 12, we see a Q4 EBITDA increase of nearly $4 million to $150 million. The improvement was driven by our paperboard packaging segment

as this margin grew to 17.3% from 16.7% in 2011. For the full-year 2012, the EBITDA margin in this core segment improved a hundred basis points to 18.3%.

David and I have already covered inflation and price; therefore I will concentrate on performance improvement.

In Q4 we realized $6 million of benefits from improved productivity. The benefit in this category is net of the $5 million in costs incurred from the bi-annual cold outage at our West Monroe mill. We continue to execute at a high level with our productivity and cost-cutting initiatives and for the full-year 2012 delivered net benefits totaling $67 million.

Looking forward to 2013, given the expanded level of investment we made in 2012, we expect to accelerate performance, specifically because of the success of the investments made to integrate the flexible packaging acquisition and the early completion of the Macon biomass boiler, we expect productivity benefits in 2013 to climb into the $90 to $120 million range.

Key initiatives include the following items. One, $70 to $90 million for continuous improvement and productivity initiatives. Two, $20 million synergy benefits resulting from a 2011 acquisition of DNK. And three, $7 million cost-benefit in the Macon mill resulting from the mid-year startup of the biomass boiler.

So in summary, on an overall basis, we expect 2013 EBITDA results to improve on the strength of operating performance, mixed improvements and continued success with new product introductions.

Before I move into cash flow, a follow-up comment about the two European acquisitions. In 2013, we expect these acquisitions to add $325 million of sales and approximately $20 million of EBITDA. We will work on integrating these businesses in 2013, and in 2014 we expect synergy benefits in the $16 million to $18 million range.

Now let's turn to slide 13 and look at cash flow debt and liquidity. Cash flow for 2012 was strong, as net cash provided by operations improved $81 million over the prior year to $469 million. Cash flow available for debt reduction grew to $264 million from $220 million last year. Reduced interest costs and improved operating performance drove the cash flow improvement.

CapEx increased $43 million to $203 million. The increased capital investment focused on high-return projects like the Macon biomass boiler and the integration of DNK. As we highlighted, both of these investments are expected to drive improvement in 2013 results. Overall, our capital investments continue to target projects with less than three-year paybacks.

For 2013, we expect cash flow available for debt reduction to be in the $250 million range. Included in this number are; one, approximately $40 million of expense and capital investment to deliver the Europe synergies. Two, $30 million to refinance our 9.5% 2017 bonds that are callable in June. And, finally as an inflow, receipt of a $23 million tax grant for the start-up of the biomass boiler.

On a normalized cash flow -- our normalized cash flow, without the above strategic investments, would be in the $300 million range.

Turning to debt, we started Q4 with net leverage right at three times, which is at the top end of our target range. We executed three shareholder accretive actions during Q4 as we raised $300 million of additional term debt to fund a repurchase of over 12% of our outstanding shares and invested over $150 million in the two European acquisitions.

These actions resulted in a year-end net leverage ratio of 3.5 times, almost exactly the same level we began the year with. We continue to target the two-and-a-half to three times leverage ratio range, but will, as we have communicated before, venture outside this range to fund accretive acquisitions and other high-return investments.

However, with that said, for 2013, our focus is clearly, I repeat clearly, on applying cash flow to debt reduction and reducing leverage back within our target range. We have already talked about the European acquisitions, but let me expand on the equity market transaction we undertook in Q4.

First, the company completed a secondary share offering on behalf of our four largest shareholders. In total, 21.3 million shares were sold, thereby improving market load by more than 15%. Concurrently, the company repurchased and retired 49.2 million shares from these same shareholders.

The combination of these actions, in addition to 12% EPS accretive, increased average trading volume by over 40% to over 1.2 million shares per day and reduced major share shareholder ownership from 65% to 53%.

Now sticking with the capital market topics, I note that our 9.5% notes become callable this June. Recent bond market activity has been very attractive to issuers, and we are evaluating our options as they relate to refinancing these high-coupon bonds. Based on current market yields, we expect the refinancing of these bonds will reduce cash interest costs by up to $20 million per year.

And now let's summarize our guidance. We will move to slide 14. This guidance is for 2013.

Capital expenditures are expected to be in the $215 to $235 million dollar range. This higher level of spending is driven by the early completion of the biomass boiler and the integration costs related to the European acquisitions.

Cash pension contributions are projected to be between $40 million and $70 million. Pension expense of around $40 million.

Depreciation and amortization in the $270 million to $290 million range.

Interest expense of $110 million to $120 million, and we expect to achieve net debt reduction of $250 million while funding increased CapEx spending and paying bond refinancing costs of around $30 million.

Our net leverage ratio should end the year around three times.

And finally a couple notes about the timing of the net debt reduction in 2013. The seasonality of our business normally results in an increase in net debt in the first quarter as we build working capital levels.

However, given the timing of European integration in 2013, we are going to get an early start on this, and the cost to refinance the 2017 bonds, we expect net debt reduction in the first half of 2013 to be moderately behind last year's. As a result, the bulk of the full-year 2013 net debt reduction will occur in the second half of the year.

With that I will turn the call back over to the operator for questions.

(Operator Instructions). Your first question comes from the line of the Gansham Panjabi with Robert W. Baird.

Hey guys, good morning.

Good morning.

Obviously, busy last quarter.

Yes, it seems like we were doing something every day of the quarter.

You know, just on productivity, I think, if I remember correctly, your previous range was $60 million to $80 million on an annual basis. 2013 is tracking well above that. Should we view that as a revising upward up the longer-term targets or is that specific to 2013?

You know, it really has -- that performance target that we gave you included the $60 million to $70 million we normally do in CI and it added all the synergy instead of trying to break all of that out. What I would say is it is an increase simply because we have integration synergies in 2013 that we didn't necessarily have in 2012.

And then, Dan, just a clean-up question on 4Q. The $12.5 million in charges for business combinations that you referred to, is that purely in flexible or was there any spill over into paper board and corporate?

Okay, the non-recurring charges, I think, totaled $16 million. They are a combination of things. They are the final steps in preparing for delivering synergies in 2013.

It is in flexibles. And so, if you look at the flexible operating income number in particular, it has the impact of about $12 million in that category that you referenced.

The rest of the stuff is for all of the special activity we took in terms of the share buy-back and the secondary offering in particular. And there are some costs in there for the two acquisitions. That's why the number is fairly large.

Got it. And David one last question, in terms of the fourth quarter intra-quarter trend. Any big deviation there? A lot of your peers were talking about aggressive end-market de-stocking.

Did you see something comparable to that, and then if you can give us an early read on January that would be helpful. Thanks so much.

As I said in my prepared comments, October and November were pretty good up until the 15th of December. But then from the 15th of December, we saw some pretty significant change in order patterns, particularly on the food-side of the equation and in beverage, but less so. So yes, we saw a marked drop-off at the end of the year.

I think what I would tell you is it is hard to read. I would tell you it looked like inventory restocking. Because certainly, in January, early trends are good, our backlogs are solid in both the folding carton -- both for beverage and in food, but also a pull for board.

We're busy. Our backlogs are four to five weeks in board mills as well, so it felt like a de-stocking.

I have almost given up forecasting what is going on on a forward basis. What I would tell is you we feel good about where we started the year, but we've got 11 months.

Makes sense, thanks so much.

Your next question comes from the line of Alex Ovshey with Goldman Sachs.

Thanks, good morning.

Good morning, Alex.

In the flexible segment in 2013, do you think you can improve for profitability above and beyond the $20 to $25 million synergy number that you are expecting?

I would like to say yes. The fact of the matter is a lot of it will depend upon how much recovery we see in those core industrial markets. If the construction markets does improve, because a lot of that business is tied into things like chemicals that go into construction. It is cement that goes into construction in that multi-wall bag sector then I think yes. Otherwise, the trends in that business have been pretty flat.

And so right now if you look at our forwards, we are projecting the improvement we predominantly relate to the integration synergies. We would like to see some tail wind in there, but January was better, but not like -- not a barn-burner of recovery in that space.

That's helpful, Dave. And then on pricing, was your comment you expect to give back $35 million of pricing for the full year 2013?

That's correct. It will flow through the year, but it is mostly related to deflationary stuff we saw last year. There were some contract resets.

For sure there is some resin pricing in there as well because it moves around. But yes, it is about $35 million of pricing flowing through in 2013.

Of course, as you remember, as I have said with the nine month look-backs that reverses itself in 2014. So we sort of have a continuum because we had pretty significant changes in input.

Input inflation this year, if I am looking forward it is probably going to be somewhere around $25 million, $30 million or something like that maybe depending upon what happens to OCC.

Just a follow-up on that. I believe there is a price increase on CUK in the market place.

Yes.

If that is successful would there be potential upside to the pricing number that you have out there that maybe instead of dropping $35 million it doesn't drop by that amount, a price increase should be successful or is that included in your outlook?

I didn't really change a lot. Quite frankly with the current price increasing, it takes quite a few months for that to flow through. The impact in 2013 wouldn't be material, right. If you look at the same six-month, nine-month delay, the first quarter increase doesn't have a material impact on our business in 2013. It will in 2014, but not necessarily in 2013.

Our open market business will see that. But we only do a couple hundred thousand tons a year in the open market in the United States.

Got it.

Don't forget there is also price increase out there on kraft paper. And that will have some positive impact as well. That market is tight as well in the process.

What I would tell you is pricing trend will start to turn because people will, as we start to see inflation in wood and OCC, you are going to start to see prices from us at least to increase to try and overcome those as we look to the second half of the year and towards 2014.

And then just one last question, is the way you pass through your changes in those C-costs, is that any different than the way other input costs are passed through to your customer base?

The input costs all really basically flow through the same. It is a sort-of a look-back plan. You look at what costs for wood, and chemicals, and energy, and so forth and then you figure out what the average increase is and then when the contract anniversary hits, you start a new pricing scenario; up or down depending on that flow.

We use OCC as a proxy for that discussion because it tends to be the most volatile of the process, but that doesn't mean we don't get recovery from chemicals and other things as well. It's just that that's the bigger by far and away the most important in a single input cost.

Thanks, Dave.

I will -- just one final comment. When we talk about that, in fairness we do not get or blow through labor increase. So, if you think about benefits in labor $30 million a year those we get, we improve those profitability through the improvement in our plan. We do not pass through our labor and benefit costs.

Your next question comes from the line of Phil Gresh with JPMorgan.

Good morning.

Good morning, Phil.

Just one wanted to follow-up on some of the commentary around the benefits you are expecting from the mix shift in the new product introductions. Is there any way to calibrate perhaps, relative to some of these offsets, how much those would impact it to the positive?

Yes, I think, Phil, you saw when we went over the productivity improvements. We increased the range from -- the normal range from $60 million to $80 million from $90 million to $120 million. It is included in that number, particularly when you look at the first -- the number one item I talked about is our normal ongoing CI work and productivity work. I cited $70 million to $90 million. So, it is included in that number. You can infer that the increase over our historical average will give you what the increase is for that year.

So that includes mix and new product introductions?

Right, for the most part it does. To the extent that we know but yes, that's right. I mean, we expect -- sort of think through the puts and the takes. If you think about it,

we would expect EBITDA to grow $35 million to $45 million next year. Something like that -- in that range by the end of the year. Something like that.

Got it. That's very helpful. Follow-up question here, you talked about the $84 million in corrugated replacement that you saw this year. And just wondering, how you are thinking about how that progresses in 2013, especially with TIGHT PACK you just introduced, which seems like another opportunity there.

Is that something that you think can accelerate as we head into 2013? Or is that more of the same?

It sends to be chunky. We will not see something to the extent of Capri Sun every year, that we saw last year, which was a big movement. We will continue to see the corrugate replacement or the other substrate replacement every year.

The trend is good. It becomes chunky for things like that. You'll see in addition to a $10 million or $15 million change in the process -- sorry, change in the substitution, but that is the kind of the range of the product mix that we work on.

TIGHT PACK is a great opportunity, because clearly there is corrugated replacement there. It allows our customers to save bottle breakage in the process and so we are real happy with that.

But you know, it takes awhile. We will run some trials. We will modify some machines. Customers will do the distribution trials. It takes awhile to scale up. It won't take nearly as long as Capri Sun did which was almost seven years, I guess. But nonetheless, I like the forward trends in those kinds of substitutions.

Got it. And is there anywhere you are seeing the reverse? You feel like CUK might be losing share anywhere? How are you thinking about that?

We haven't really seen CUK losing share. We have a constant battle with plastics from one side to the other. I don't think it's substrate specific relative to CUK or CRB or SBS. It is really more paperboard, plastic back and forth. Something less or more convenient. That kind of give and take that goes on throughout the business. I haven't really seen a -- like I said, we grew our CUK tons. We sold more tons. Our backlogs are strong. I haven't -- I don't really -- I haven't seen anything that would suggest that we are losing ground on CUK.

Got it. Well the last question for Dan. Normalized cash flow of $300 million, is that something you would expect to see in 2014?

Currently based on the fact that there is no pending acquisitions and those types of things we're trying to integrate, and our capital structure will be in good shape. We probably won't have to refinance another bond at that level. I would expect that that would be a good number to build on for 2014.

So that $40 million in that additional spend this year, I believe, that you said was for the integrations, etc. Is that in CapEx or is some of that operating?

Some of that will be in expense as well. My current -- if I were to estimate that the expense would be $10 million of the $40 million.

And what we'll do when we report the numbers, we will break that out, and there will be certain costs involved in the refinancing of the bond as well, and we will break that out as well, so you will be able to see more of an operating EBITDA number.

And I guess I would offer this too is that in 2013, we are going to be very focused on generating cash to pay back debt that we borrowed to do the share repurchase in these acquisitions.

From time to time we may spend some EBITDA to get better cash flow quicker. Because really for us, the best thing for our shareholders and our -- is to generate the cash to pay down the debt that we borrowed. And so we'll see that.

That's why I hedge on some of the EBITDA stuff because in the past that's what we've done. And I want to make sure that we -- I want to make sure we pay back what we borrowed. We want to get back into that range because we want the flexibility to be able to strategically invest in the business, and I'm not really comfortable making huge investments when we are at three and a half times.

That makes sense. Congratulations on a great year in 2012. Good luck.

Now we get to do it again, right?

Keep it up.

Your next question comes from the line of George Staphos with B of A Merrill Lynch.

Thanks, hi everyone, good morning again. Congratulations on the year from us. I guess had a couple of questions on the incremental volume and the sort of abnormally large number of contract renewals that you had going into this year.

I'm assuming that the benefit of mix of volume et cetera is embedded in that $90 million to $120 million that you provided. Is that correct, Dave?

That's correct. We get a breath here in 2013. We really just don't have any major contract renewals that are facing us in 2013.

2012 was incredible. But we did factor that kind of pricing changes to change to mix optimized. So Dan sort of rolled that into that performance improvement, continuous improvement (inaudible).

The other thing you have got to remember is that -- what I will tell you is that all of the continuous improvement stuff is really based on volumes running through the mills and running through the carton. So both pricing and performance is tied to volume. To the extent that volume is greater or less than those numbers sort of move around based on that. And we are giving you the best estimate we can based on what our customers are telling their volume. But in fairness, our customers have been no better at forecasting volume than we have been in the last couple years.

Join the back of the line on that.

In terms of the next series of contracts, were you able to stagger things such that you don't have a very heavy year, whenever that might be down the road, and so you have staged it so you have more of a smooth annual progression in terms of renewals? Or is there another year, say three years, five years from now, that we to be cognizant in terms of your heavier than normal renewal period?

Well, some of those contracts are three and some are five, so it will stagger out but I think for the most part, if you think about it, you and I worrying about contract renegotiations three to five years from now probably is not the number one thing we should think about or worry about in the business climate. I would be much more concerned about government regulations in China and other global than my contracts three to five years out.

I am happy to get them done. Certainly we gave price to be able to do it, but our core to be able to make sure that we could optimize back to the mills. That's where our cash EBITDA comes from.

All in all, I am pleased with where we ended up. In three to five years from those things, we will have plenty of time and runway to deal with those.

That's the time frame we are talking about. And it's not two years from now from what you are saying.

No, these are all -- we didn't renew any contracts in a two-year period of time because we can't make the investments. We can't really optimize the business in a two-year period that's why they have to be three to five year contracts.

Fair enough, fair enough. Next question I had in terms of Contego and A&R, you gave the incremental revenue and EBITDA. We appreciate that. It is more or less in line with where we were thinking.

What is the net incremental tonnage that we will be seeing in terms of your overall figures? I realize that ultimately we should focus on revenue and square meters per say and not tonnage. But, as I recall, there is some opportunity for you to forward integrate from existing tonnage that you have into these acquisitions. What do you think the net incremental might be in terms of tonnage?

So if I think about it, those two businesses combined are probably, as we say in the space, cutting up 180,000 tons of board. And all of that is not stuff that we make. We actually in fairness, we do make most all of those, but it is unlikely that we are going to be shipping CRB across the space. So, we'll be a buyer for the most part of CRB.

It doesn't mean some of that business over time --- 50,000 tons is SUS around the space. And so over time we will optimize that SUS back into our business. Or as our U.S. business grows, we will export less to Europe and buy our tons in Europe as opposed to buying them here.

There are also CRB applications over there that quite frankly, we think would be better served using virgin board, and we will look to do that as well. That's not a number one priority for us. It is getting the manufacturing footprint in some of the initial direct replacement for board done. But over time, that's where some of those productivity and profitability improvements will come in those businesses.

But, as Dan says, we are going to spend a fair amount of dollars this year getting the process right, getting the plants right, getting the footprint in a place we can optimize it. It makes no sense to be optimizing all that while you are moving a whole bunch of stuff around.

We have done it that way before. It doesn't really work. What we learned from the Altivity acquisition is; get it done, get the plans right first and then aggressively do the board and optimization second. I think that's the model we are going to use for Europe, albeit on a smaller scale.

Okay, two last ones and I will turn it over. Realizing it is kind of difficult to talk about this on a public forum, is there anything you could add in terms of what is unique about the microwaveable technology? I think you said you got it from Contego?

And then just in general it has been a trend and a question we have all asked at times. Are you seeing, over the last few quarters, are you seeing any effect at all from the incremental paperboard capacity that's coming on in Asia relative to your overall business? Thanks guys and good luck in the quarter.

So the access we got in Contego was the fact that they are selling microwave products in Europe, but they are not necessarily using our technology, so we have the opportunity to sort of upgrade the technology in transition. We are pretty excited about that.

Relative to China board, I know that question keeps coming up, and we haven't directly seen anything in either Europe or the United States here yet impacting that business. I think a lot of that SBS that you're seeing, or SBS-type products are not necessarily going to be food contact or direct food substrate SBS, which is really all we buy.

As you can well imagine, there are a lot of reasons why that inner recycled sheet that they are using is not great for food. You can also understand why a lot of our customers aren't all that excited about buying SBS from China for a whole variety of reasons. So, we haven't yet seen it.

Our core business -- that's probably a better question for John, Luke and Jim Rubright because those guys are more directly in that business than we are.

Appreciate the thoughts.

Your next question comes from the line of Philip Ng with Jeffries.

Good morning. Dan, thanks for the color on normalized free cash flow for 2013. When we look out at 2014, what is a more normalized CapEx? I know you are spending quite a bit to get those synergies.

A normalized CapEx, we're talking about the addition of Europe, larger business. We are thinking $180 million to $185 million range would be a normalized level for CapEx. Some years we will be lower, some years we will be higher, but that's a good average.

I agree.

Okay, and then from a working cap standpoint, you have a bigger business in Europe. I would imagine you are shipping some board produced in the US to Europe. Does that impact your working cap at all?

It will initially. As I said earlier, one of the strategic opportunities we have is as we grow the United States business is to not ship as much board over there and buy the board over there, which helps the working capital.

In the short-term we will probably expand our board sales and we will see some incremental working capital. The terms are going to be longer in Europe because that is the nature of the business over there. Into Dan's cash flow -- it is not as if we missed that. Into our cash flow projections included the expansion in working capital to run a European and bigger global business, right?

Okay, that's helpful. And then from a demand perspective, the overall market is tough to predict, but you do have some new products coming online. Do you still expect to outpace the market in 2013 from a growth standpoint?

The question is what the heck is the market? What I would tell you is we did not build a lot of volume growth into our business in 2013. You could just follow the bouncing ball through my comments and recognize that most of the volume is really what we've acquired.

And we have -- I think soft drinks are going to again decline. I think beer will continue to grow. We have certainly seen those trends.

The food business feels better, but not robust. The wild card, for me, is trying to figure out what flexible is going to do in 2013.

When I put all the puts and takes, when I put our plan together - I've talked to our board - I am seeing pretty flat growth. I would love it to be different. 1% in the market for Graphic Packaging is hugely leveraging but I am not doubling down on that. I think what we will do is we will run our business to improve our cash flow in EBITDA based on sort of what we have in front of us. That's really the way we are planning for 2013.

Okay. On flexible packaging, if I look at the run rate the last two quarters, it has been in a $5 million type loss run rate. I know there were some one offs in Q4. Going forward is it a good way to think about that business using that run rate plus the synergies for 2013?

I think that's fair.

Yes.

Because when we look at it, and as we look at it internally and we add back some of the nonrecurring items, we do see EBITDA improvement in 2012 over 2011. Once we get the noise out of the system and we start getting the $20 million of synergies, I think you will like the result a lot better.

And one last question for Dan, your tax rate bounces quite a bit. How should we be thinking about it in 2013, and then the cash tax rate as well? I know you still have a good amount of NOL's, but you have a bigger business in Europe now. How should we be thinking about tax on the P&L and the cash tax for the cash flow statement?

For 2013, you think about expense of 39% to 40%, I think is a good estimate for that.

Okay.

Going forward, after we do the work in Europe, we will be able to use that to lower our effective tax rate. And we will see what that is as we move into 2014.

In terms of cash taxes, we are looking at somewhere around $10 million to $15 million in terms of cash taxes for 2013.

Okay, thanks, guys.

Your final question comes from the line of Joe Stivaletti of Goldman Sachs.

Good morning, just a couple little things. You talked about refinancing your bond issue. I was just wondering what your current thinking is on your mix of bonds versus bank loans and what you would expect to use to take out that bond issue when it is callable?

Our expectation is based on the rates for an eight or ten-year bond, we would issue another set of bonds to take out the 2017's. Our expectation is that in addition to a lower rate, we would get a better [cut] package as well when we do that, which is attractive to us and will be important to shareholders. That's our expectation there.

In terms of the overall mix, we are going to be in pretty good shape for several years after we refinance this bond. So it depends on -- we are happy about our mix today based on the cost of debt and the flexibility we have with the new arrangements we put in place.

As the future unveils itself we will look at whether there is a better mix or not. But today we are pretty happy with the cost of our debt and the opportunity we have to refinance this bond.

And I think, Joe, that's the other side of the equation of why we were so focused on getting the cash flow down -- or the debt down. We want to use the cash flow to do that and maybe work on our credit ratings so that as the interest markets change over time and ultimately -- it seems unlikely with all of the money that the Fed has printed at some point in time that these trends don't change. And we want to make sure that we are in a place where, if that's the case, we don't have significant increase in interest costs.

So, we are trying to get ourselves in a place where we are making strategic investments but keeping a pretty good eye on the balance sheet to keep the mix where we need it to be. Because right now our bank debt is pretty darn cheap, but it won't always be.

Right. Okay, great. And the other question was just, I know you talked about potential future acquisitions and there is nothing immediate or, you know, you are very focused on keeping your leverage down and whatnot.

But I just wondered as you think about potential future acquisitions, whether they be this year or next year, whenever, what types of -- what is at the high end of the priority list in terms of the types of things, the types of areas where you would like to expand?

Well, you know, the model that has worked for us has continued be is to make the investments and the acquisitions in the converting business, and then blow that forward lean back through the paperboard mills. And that's -- we are going to continue to do that.

So regionally - look, I have said before, I would like us to be bigger in Latin America than we currently are, and if there are good assets available down there then we are going to buy them. Europe, I think we can do more in Western Europe, but I believe Eastern Europe is a good place for us as well.

I like our plan in China, which not really to buy a whole bunch of converting assets over there. I like the converting network. It is an incredibly low-cost converting network over there. It is just as easy to design the products and pull the board through than it is to sort of build on the ground converting in China. I don't know that a big acquisition in Asia Pacific makes a whole lot of sense.

And I have said this before in the public forum, we don't really -- the only substrate we really don't make that we convert a lot is SBS.

So as companies reassess their strategic goals and strategic assets, you never know when somebody might want to spit out an SBS mill, and we are certainly interested in those kinds of things. But that is sort of where the list -- where our list -- how our list forms.

Great. Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for question and answers. I will now turn the call back over to our speakers for any closing comments.

Thanks everybody for joining the call. We will talk to you next quarter.

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