Graphic Packaging Holding Co (GPK) 2013 Q4 法說會逐字稿

Good morning my name is Regina and I will be our conference operator today. At this time I would like to welcome everyone to the Graphic Packaging fourth quarter and full-year 2013 earnings conference call.

(Operator Instructions)

Thank you, I would now like to turn the conference over to Mr. Brad Ankerholz, Vice President and Treasurer of Graphic Packaging. Sir you may begin.

Thank you Regina, and welcome to the Graphic Packaging Holding Company fourth quarter and full-year 2013 earnings call. Commenting on results this morning are David Scheible, the Company's Chairman, President, and CEO; and Dan Blount, our Senior Vice President and Chief Financial Officer.

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

I would like to remind everyone that statements of our expectations, plans, estimates and beliefs regarding future performance and events constitute forward-looking statements. Such statements 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.

Information regarding these risks and uncertainties is contained in the Company's periodic filings with the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements, as such statements speak only as of the date on which they are made, and the Company undertakes no obligation to update such statements. David, I will turn it over to you now.

Good morning, everyone. We had a busy quarter, including integration activities, business divestitures, stock repurchases, and fighting some difficult consumer trends, so overall, I am very pleased that our fourth quarter earnings and cash flow were in line with our expectations. Both volume and sales in our core Paperboard Packaging segment increased in the quarter, with volumes up 2.3% and sales up 7.2%. Adjusted EBITDA increased 5.4% to over $158 million, and margins at 14.7% were up 0.4 points from the same period last year.

We do not see a significant change to the terms in our core end markets in the quarter, and we continue to drive volumes and margins higher through a strategy focused on new product, acquisitions, and productivity initiatives. We have been very strategic in the way we are building this business. Graphic Packaging is designed to deliver long-term sustainable growth in both good and bad operating environments. Volume trends in many of our core markets have remained challenging for several years now, and there is no way to predict when or if those markets may improve.

We are certainly not unique in struggling to anticipate new consumer trends in this environment. But we cannot wait around for a pickup in demand; rather, it is our job to find a way to continue to grow this business and gain market share even in a flat, to down, volume backdrop. And that is exactly what we have done through a balanced strategic approach, to investing in our core food and beverage business, developing new innovative products, and making tuck under acquisitions. Of course, Graphic Packaging always is working to improve the productivity across the operation.

We are committed to investing in our core food and beverage business globally. One way to do this, is by developing new and innovative solutions to help our customers differentiate their products, and lower their supply chain cost. This year, new products for sales were up almost $100 million. Supporting this growth during Q4, we launched a new strength package container for mandarin oranges and other fresh fruit. The new package provides a secure way to transport fruit from the grocer to the retailer, and provides a superior branding opportunity versus traditional mesh produce bags.

We also commercialized two brand new Z-Flute cartons and a large Litho-Flute box, that were specifically designed to withstand unique palletizing and display demands of the warehouse club channel. Tite-Pak, which is our new proprietary beer bottle carton, continues to gain traction in the market. We launched new Tite-Pak cartons for MillerCoors and ABI in the fourth quarter. Tite-Pak solidifies our existing share in the solid fiber category, and delivers a competitive advantage over other fiber alternatives. We are excited by the long-term potential of Tite-Pak globally, and continue to see ongoing interest everywhere.

Frozen pizza, cereal, dry food, beer, carbonated soft drinks, you all know these are all big markets and they are important new segments for us. The trends in many of these markets have been flat to down for a couple of years now, so in addition to launching new products, we are driving healthy results by optimizing our asset structure. We are driving down our cost and we are improving our productivity.

A good example of this, in 2013 was the investment we made in our Kalamazoo recycled board mills. Specifically, we invested $14 million to upgrade the Kalamazoo paper machine number one coating application to a state-of-the-art system. This upgrade will replace the traditional air-knife coater with the new curtain coater, allowing the mill to reduce the waste, it will use a lot less TiO2, and it will improve the throughput. We had extensive R&D work that was completed in the mill process, and exhaustive printing press trials have been successfully run throughout our converting network in preparation for this conversion. The mill will transition to this coating technology in Q1 2014.

We are committed to core food and beverage markets and are focused on investing more resources and subsectors of the markets that are growing volumes. These areas include things like microwave, craft beer, dry foods and pasta, and from a channel perspective, the warehouse club stores. We invested in each of these areas in 2013 and saw significant growth in those categories.

For example, in our Wausau converting plant, we invested almost $10 million in a new production line to boost the capacity and improve productivity for proprietary microwave products. We have seen significant growth in the microwave business, and we continue to be an industry leader in this category. Most of the new capacity in our Wausau facility is focused on frozen foods, particularly, on the lower calorie offering.

We are also focused on making strategic tuck-in acquisitions. We successfully integrated our Contego packaging and A&R beverage packaging business that we purchased last year, and created a platform for continued growth and market share gains in Europe. Europe has become a meaningful part of our business, and we like the underlying fundamentals of that market. These are very large and mature end markets that are supported by strong consumer demographics.

But the carton industry is very fragmented, which provides an opportunity for us to differentiate ourselves. We know how to drive volumes and productivity rates in mature markets, and believe there is a meaningful opportunity in Europe to do just that over time.

Finally, we are focused on divesting our non-core businesses and freeing up capital to reinvest in our core businesses or, of course, to pay down debt. Earlier this week, we closed on the sale of our labels business to Multi-Color Corporation, which included two plants located in Greensboro, North Carolina and Norwood, Ohio.

During the third quarter of 2013, we sold our Pekin, Illinois URB mill, and completed the sale of our flexible retail plastics business to Berry Plastics. The sale of our plastics business included three different facilities, and we also closed our Brampton, Ontario, Canada facility in early October. Labels, URB, plastics, were not key businesses for us; and the exit from these businesses reset capital, management time, and allows us to better focus on the core vertically-integrated business that is key to us.

Let us talk a little bit about the folding carton business. Our global folding carton business increased 2.7% in the fourth quarter and was driven predominantly by our recent European acquisitions. This was partially offset by continued softness in our legacy US beverage and consumer products folding carton market.

Terms on the beverage side were mixed in the quarter. Targeted soft drink demand remained weak, and while we have seen some improvement trends in 2014, we are not going to suggest this market is ready to improve materially. The Can Manufacturing Institute estimated that industry volumes across the canned beverage markets decreased 3.9% in the fourth quarter, with nonalcoholic beverages down 5.7%, and alcohol averages down only about 0.4%. We have had a number of new product commercializations that have helped our overall volumes in CSD, but the underlying trends remain relatively unchanged in that sector.

Beer, of course, different story. We began to see beer trends improve late in the third order, and that trend generally held through the fourth quarter. The craft beer sector, which is one of our strategic areas where we continue to invest and develop, remains strong in the fourth quarter. We also saw modest improvements in the take-home side of the beer business as the quarter progressed. Beer packaging in Europe grew in Q4 for Graphic Packaging as well. These are all positive trends for our beer business on a global business.

Trends in some of our core food end markets such as cereal, frozen food, and dry foods, remained relatively weak in the fourth quarter. ACNielsen reported that cereal is down about 3%, prepared frozen foods down about 2%, and overall dry foods down about 1%, maybe a little less. A slow employment recovery, the recent curtailment of the SNAP food stamp program, and some destocking by major retailers, all continue to weigh on the food markets in the fourth quarter.

Many of you know, the government cut back its SNAP food program on November 1 of last year. The cuts amounted to roughly 5.5% to 6% reduction of monthly benefits to an individual family under the program. While it is still really early, we know this had a negative impact on the low income end consumer in the fourth quarter, and this is just one more factor pressuring this sector of the food market.

Our flexible packaging business remains a work in progress. I really thought we would have made more progress in this business by now, but it remains a challenge. A lot of it has been market related, particularly in multiwall bag, back but some of our issues are of our own making, and we need to address both elements in 2014.

The sale of our plastics business and label business, of course, reduces the overall significance to Graphic Packaging of this business, and allows us to focus resources on the smaller footprint to improve the results. Fortunately, we don't really need to make big capital investments to grow or improve these operations. While margins remain modestly -- likely more in the high single-digit to low double, the business will generate positive cash flow and a reasonable return on capital.

In the latter half of 2013, we did implement several cost structure projects, and we have just now started to see some benefits. New equipment and other changes to the Pine Bluff Mill have begun to improve profitability. We are also starting to gain some traction within issues in our converting facility in New Philadelphia, Ohio. However, the underlying volume trends in this business remain challenging. As a result, our turnaround progress has been somewhat slower than we would have expected.

Additionally, while we have seen pricing improvement across all other paper grades during 2013, we did not miss business despite higher fiber, energy, and chemical cost. Accordingly, we announced yesterday a $50 per ton price increase on kraft paper grade, effective in March. Like I said, a work in progress, but I am optimistic we will improve markedly in 2014.

Overall, in performance, we had another strong quarter. We generated about $25 million of performance improvements across the Business in the quarter, which brought our total, in 2013, to roughly $100 million. Biomass boiler in Macon, Georgia mill was operational throughout the quarter; and this was the second quarter we generated our own energy in the facility, and we continue to estimate the savings in energy to be around $20 million per year. In relation to this project, we had expected to receive an approximate $25 million government grant before the year-end, but we are still waiting on this. Various factors beyond our control have delayed the grant, and we now expect to receive this during the first half of 2014.

Looking at our European business in September, we completed the consolidation of the Gillingham, UK converting plant into another lower-cost facility. The integration of Contego packaging and A&R beverage packaging business in Europe, continues to drive cost savings; and we remain very comfortable with the $16 million to $18 million synergy target we provided you that we will realize in 2014.

We are very pleased with the performance of our European business overall. We are ahead of our own expectations, and building our platform in the region. Europe has become a meaningful strategic business for us, and we believe there are significant opportunities to continue to build and grow this business long-term.

A look at our paperboard mills, we had a good quarter. Just like all 2013, both total production and tons per day increased, demand for our CRB and SUS remain strong, backlogs are in that three to four weeks for both grades. The increase in production was driven by our continuous improvement efforts in energy, operating efficiencies, and fixed costs. We took no unplanned downtime in the quarter, and we came out of our planned annual outages better than the previous year.

Pricing turned positive in the fourth quarter as we generated $4.3 million of positive pricing benefits. This reverses a trend in the first three quarters of 2013, where pricing climbed by nearly $26 million. The increase in the fourth quarter was slightly ahead of our projections, and I think it positions us well moving into 2014. You remember that prices for both SUS and CRB have increased significantly over the past year, reflecting strong demand and healthy lead times for both substrates.

Since the beginning of 2013, SUS pricing has increased by approximately $85 a ton, and CRB roughly $75 a ton. These increases should benefit our open market board sales, and carton contracts containing board escalators in 2014. The majority of our carton contracts have mechanisms to allow prices to move up or down with changes in certain inflationary items. No two carton contracts are the same, but contract pricing generally adjusts on a nine-month basis, so we expect pricing to remain positive throughout 2014.

If I look at commodity input pricing, it was relatively stable on a sequential basis for the quarter. Looking at the fourth quarter this year versus the quarter last year, commodity input inflation increased by approximately $16 million. Energy, no surprise, led by natural gas, was once again the biggest commodity inflation item, increasing $7 million in the quarter. Secondary fiber were up modestly in the quarter, by roughly $3 million; nothing else was material in and of itself. Increases in the cost of external board, corrugated boxes, freight and resins, were the other drivers; but none of them, as I said, were significant.

Looking forward, we delivered another solid quarter in what remains to be a challenging operating environment. We drove volume increases, maintained high operating margins through strong operational performance, we also continue to invest in the future, optimize our assets around our customer needs. We do not expect some end markets will be -- we do expect some end markets will be more challenging than others, but we are continuously finding ways to gain share and expand our addressable market.

Looking ahead, we expect pricing to remain positive in 2014, we expect to continue to find high-quality acquisitions globally, and believe we are well-positioned to gain share and grow our top line, EBITDA, and cash flow. And with that, I will turn it over to Dan for more detailed discussion of our financial results and initial outlook for 2014. Dan?

Thanks David and good morning everyone. To assist with our review I will refer to our posted presentation.

Let us begin on slide 11, with the financial highlights. Overall, both Q4 and full-year results show solid gains. In our discussion this morning we will cover the reasons for our improvement, but as I reflect on 2013, I think our work in three areas stands out. This work clearly benefited us this year, but also positions us well heading into 2014.

One, we've run another $100 million of cost out of the business through productivity improvements. Our cost structure is in good shape, and in 2014, we should build upon this work to improve margins further. Two, through acquisitions, built a large-scale, well-capitalized European business that drove revenue growth. Going forward, Europe provides a strong platform for further growth and margin improvement. And then three, upgraded our capital structure, lower cost debt and ample liquidity, more-than-adequate resources to fund capital and expansion needs going forward. A good solid year of accomplishment.

Now let us get into more detail by focusing on the Q4 numbers on slide 11. Adjusted EBITDA up 5.4% to $158 million, as the margin improved to 14.7%. Adjusted net income increased $25 million to over $58 million. Adjusted earnings per share for the quarter, at $0.17, double the $0.08 we reported last year.

Before turning to the full-year numbers, there are two tax items to discuss. First, we had an income tax benefit of $3.5 million for the quarter. This benefit, principally relates to recent guidance from the IRS relating to the tax ability of the black liquor tax credit. When we recorded the credit, back into 2009, it was net of income tax. Updated guidance, released in October, now concludes the credit is not subject to federal income tax. Recording this reversal is the principal reason our full-year 2013 income tax rate dropped to 32%. With our growth in international markets, we expect our effective tax rate to be in the 38% range for 2014.

The second point on taxes, as David mentioned, is that due to government delays, we have not yet received the tax grants related to the Macon biomass boiler. We have noted that other companies applying for similar renewable energy grants have also experienced delays. We are tracking the status of the government review process, and do not anticipate any issues with our tax grant application. We expect the full $25 million refund within the next three to five months. As a reminder, the tax grant will not be recorded through the P&L as an offset to income tax expense; rather, as a balance sheet adjustment to reduce the investment in the biomass boiler.

Now let us focus on the full-year numbers, we are still on slide 11. EBITDA was up 3.5% to over $670 million as the margin improved to 15% for the year. Adjusted earnings per share grew from $0.37 to $0.52.

As is our normal practice, we adjusted EBITDA and net income for specific nonrecurring items: divestitures, post acquisition integration, capital structure expenses. During the quarter, we incurred $18 million of nonrecurring charges. $2 million relates to costs associated with recent business divestitures and the secondary offering. The bulk of it, $16 million, relates to the final, I do repeat, final charges related to European integration activities. In 2014, we expect European results to improve by $16 million to $18 million as a result of acquisition integration investments.

Now let us move to slide 12, the Q4 sales bridge. You see a 2%, or $22 million, increase over the prior year. David described that the increase principally results from the European acquisitions, offset by weakness in beverage and certain consumer products categories, as well as the reduction of revenues related to the divestitures of the Retail Plastics business and the URB Mill. Price did turn positive in the quarter, and we expect price to remain positive in 2014, as we recover 2013 inflation. In terms of the business divestitures, the quarter-over-quarter sales reduction resulted from these exited businesses, and was approximately $33 million.

On slide 13, Q4 EBITDA bridge, you see the gains from price, operating performance, and European volume growth, more than offset inflation and currency headwinds. EBITDA grew by $8.1 million year-over-year. EBITDA margin for the quarter, up 40 basis points to, like we said, 14.7%.

Taking a closer look at commodity inflation, we experienced a $16 million increase. As David pointed out, energy, driven by rising natural gas pricing, accounted for nearly half of the increase. Due to unusually cold weather, natural gas prices have continued to rise.

For those of you familiar with our risk mitigation practices, you know that we run an active natural gas hedging program to reduce exposure to price volatility. For the first half of 2014, we locked in 60% of our expected need at approximately $4 per MMBTU. We also have nearly 50% coverage on the remainder of the year at just over $4 per MMBTU.

Moving to performance improvements; David detailed the drivers of our $100 million a productivity improvement. We continue to have a strong pipeline of continuous improvement projects. And when combined with synergies from our European integration, and benefits from our new Macon biomass boiler, we expect to see 2014 net performance benefits in the range of $70 million to $90 million. And then lastly, in terms of the divestitures, the quarter-over-quarter EBITDA reduction resulting from business exits, approximated $3 million.

Summarizing the year, EBITDA grew $23 million as we cycled through downward price resets of $22 million related to 2012 deflation, and offset $52 million of inflation by delivering $100 million of performance improvement and by growing volumes through the European acquisitions.

Let us turn to slide 14, you will find our cash flow, debt, and liquidity summary. Cash flow for 2013 was strong, as net cash from operations totaled $458 million. Including divestiture proceeds and net of CapEx, we generated $280 million of free cash flow.

We used $200 million of cash resources to return value to shareholders with a share repurchase. This repurchase action, at a price of $8.38 per share, is 7% EPS accretive. Including the $300 million we purchased in December of 2012 at $6.10 per share, over the last 13 months we have repurchased $500 million in shares that, on a combined basis, is 18% EPS accretive.

For the year, leverage ratio improved to 3.3 times, and we have ample liquidity of over $680 million. We continue to target the 2.5 to 3 times the leverage ratio range, but will, as communicated before, venture outside this range to fund accretive acquisitions or other high-return investments. Our current expectations for 2014 is to reduce leverage back within our target range.

Turning to the last slide, you see our guidance for 2014. Let me start with a couple comments about our success with divesting non-core businesses, and freeing up capital to invest in higher-margin core businesses, or pay down debt.

In 2013, you saw as we have commented, we sold our URB Mill and flexible retail plastics, plus, earlier this week, our labels business was sold. We have no further plans for divestitures as our remaining business portfolio consists of core vertically-integrated packaging businesses. The combined proceeds from the business sales totaled approximately $150 million. The last 12 months' LTM revenue and EBITDA, from the divestitures, totaled approximately $200 million, and $21 million, respectively.

Looking forward into 2014, as we focus on our core vertically-integrated businesses, we expect continued improvement in financial performance. We have cycled through the downward price resets, prices will continue to be positive as contracts reset to reflect CRB, CUK and other commodity increases. With a more manageable price cost spread, a greater portion of our improvement initiatives will flow to the bottom line. Our backlog of performance improvements is strong, and should produce $70 million to $90 million of benefit, including strong contributions from our 2013 investments in our mills in Europe.

Additionally, we expect free cash flow to grow beyond EBITDA improvement into the $350 million range, as CapEx requirements will be reduced to due to the completion of major projects in 2013: receipt of the biomass tax grant, and drop in interest expense as we benefit from recent refinancings. Please note that this cash target represents cash generated from operations. The proceeds from the recent sale of the labels business is accretive.

The remainder of our guidance is listed on the slide. If you have any questions, we can address them during the question-and-answer session.

And with those comments, I will turn the call back to the operator. Thank you.

(Operator Instructions)

Philip Ng with Jefferies.

Good morning guys. Just a quick question.

I noticed the productivity savings looks a little light relative to what you guys were talking about last quarter. Are you guys stripping out some synergy numbers, or is this a function of flexible not performing as well as you had expected?

I think, Phil, you will find that those productivity numbers, the $100 million, was pretty much right on what we said, in terms of the range we gave you--

Not so much 2013, I am talking more on 2014.

2014? I guess we are sharpening our pencil as we go through our planning exercise.

I think you have got to remember, we have always told you that we give you the guidance backed up by individual projects. So as we get through the end of the year, and we sit down with each one of the operating businesses, and we hone in on those individual targets.

We will give you a broader range, but you should have more confidence around the numbers we are providing now because they are tied to individual projects in the forwards. The other thing that happens too is you have got to remember that a lot of our productivity improvement includes -- has an overall assumption of what we think volume is going to do on individual segments.

So when some of the volume on a go-forward basis is less certain, then we dial back a little bit because we need the throughput to be able to get it. What I would tell you is that it is an ongoing balancing act, and I feel pretty good about the targets that we're providing right now.

Got you. In terms of your paperboard segment, performance has been quite strong in light of a challenging demand backdrop and negative price cost spread in 2013.

When we think about 2014, both price and the cost takeout initiatives you have in place and the synergies kicking in, should we expect margins to step up a bit here in this business? Gas prices have ticked up a bit, but you do seem to be nicely hedged there.

Yes, I think for the math to work, the margins really have to improve; and that is certainly our expectation as well. I am not going to give margin guidance, but if you are asking -- Are they going to go up? Yes, they will. You accurately pointed out, we are still get volume and price contributions here and in Europe.

The programs like I talked about in Kalamazoo are there to support the things that we did last year in Macon. We spent $2 million in CapEx last year; and half of that, at least half of that, was on pure cost-reduction activities.

So, yes, I feel pretty good about the cost-reduction activities. The volume, if it holds, we would expect margin expansion.

And you and I have talked about this before. It is a big fixed-cost business, so a little bit of volume improvement drops directly to the bottom line. Right now, we are being conservative about our looks in volume and price; but I would expect margins to move up.

Got you. On that last piece, on the volume front, I know demand has been a little choppy. You see more upbeat on share gains and beer, but food and naud still seems a little weak. What is your outlook for volumes for 2014?

I have almost got to get out of the business of predicting it because I don't think I have been very good at it. What I will tell you is that our volume right now is pretty good. Our backlogs are strong.

Now, these storms in the Midwest don't affect our volumes; but they affect our ability to run our plants. I can't get trucks in and out of my facilities. So right now, I am much more concerned about getting the stuff delivered than I am having orders to make.

But overall, I would tell you I don't expect the carbonated soft drink trends to get materially better. I think beer is continuing to improve, and that is exactly what we are seeing. I think the others will be flat versus what we saw in 2013; at least that is our current projections.

Europe is a good market for us right now. Backlog sales in Europe look pretty good. So, overall, I am optimistic, at least the way we have built our model, in expectations around the volume we have put in.

Is weather going to be a big headwind for you in Q1? I know a few of the companies down in the Southeast have flagged that. Is it pretty manageable, or is it going to be a big hit in Q1

You can't use whether as an excuse. What I would tell you is we will have some incremental costs in trying to get our stuff moved around. Freight costs will be a little different because we are trying to meet customer needs and we can't.

Look, right now, if you are trying to get a big truck in out of our Illinois or Wisconsin facilities, you have got, as you would like to call, headwinds; and they're 50-miles-an-hour in your face.

So the fact of the matter is, it will have some costs. But it's not going to have material effect on Q1. Certainly not on 2014.

Okay, good luck on the quarter guys.

Alex Ovshey with Goldman Sachs.

Morning. A couple of questions.

I think on the last quarter's conference call or presentation, you talked about a pricing number for 2014. I think it was in the $30 million to $35 million range; correct me if that is not exactly right.

And I think you talked about the fourth quarter being a little bit better for you in 2013. Do you have an updated pricing number to share with us for 2014?

I think what I said was, I thought we would be in the $30 million to $40 million for 2014. Certainly, we are going to be more on the upper end of that range as you look at it right now.

But a lot of the folks in the space do linear math. And they will say --Well, you're just selling so many thousand tons. You multiply it times your price increase, you are going to get $70 million worth of pricing and lock it in. But the fact of the matter is, that is not really the way that business works.

The reason it does not work that way is, two. One is, that make some sort of assumption on volume in those MU sectors; and as you can see, the volume is softer.

I am not get a lot of pricing; even though I have price increase contracts in the CSC this year, I am not get all that pricing on a pure ton basis because they are not going to take the tons necessarily, relative to year on year. So I lose a little pricing on that side.

The second side of that deal is that when we have these contract resets, and this is important to us, is that this year we will have $700 million worth of contract resets.

We do a couple things. One, of course we take our pricing in that contract. But the second thing we do is we look at the individual parts of that contract; and there are pieces of business that we like, and there are pieces of that business we don't.

And we will trade off with customers those pieces that don't make sense for us. Maybe we will trade off an SBS application for an SUS application.

You will not see that in price, but where you will see that is in productivity because that will allow us to have better throughput in our mills.

So when we think about how we actually manifest that stuff into our portfolio on a long-term basis, it is taking those contracts when they reset and get the business that makes it stickier.

Really, we are the people that those customers should be doing that business with. So we don't get into all this bid/ask stuff every time a contractor -- we will spend a little bit of pricing money to do that because I would pick it up on the productivity side of the equation -- getting it. And that is why you don't to a linear thing.

We are building the model for a long term, not for individual quarter cyclicality. So when I tell you it is $30 million to $40 million, is that going to be in the upper side? Yes.

Could be a little higher? Sure.

But, is it a linear process of, you make this many tons times this? No, that is not the way Graphic Packaging is built and never has been.

Appreciate that color, Dave.

Thinking about the import cost just for the raw materials side, taking into account where gas prices is, whatever your base case for OCC and other import costs are. How do you see you raw material inflation for 2014, honestly, realizing that there is not that much visibility into that question. But how to guys see it as we stand today?

I think we saw in 2013, Dan, about $40 million, roughly, (spoken in Spanish) $40 million of inflation. I think that is probably a pretty good number for 2014.

And you know what, you are absolutely right; it is going to be driven right now in our models predominately by energy.

You all know OCC, and you track this as close as I do, that secondary fiber forecasts for the first quarter are kind of flat. We are not going to see a tremendous amount of movement on OCC during that period of time.

We have seen some paperboard increases out there. I think the SBS guys have announced $50 a ton, and we buy a fair amount of SBS. so we will have to see that flowing through the P&L as well.

That comes in inflation, but then of course we raise the price on that on the backside. I am thinking, Dan, $35 million to $40 million is a good number.

Alex, just to remind you, that is our input cost inflation. In addition, we have employment inflation as well; and that will be somewhere in that $25 million to $30 million range. Incremental is on top of that number.

Got it. Okay. I appreciate that, and just one last one from me.

On the Flexibles segment -- maybe that segment will be renamed here -- Dan, you give us the pro forma numbers of revenues and EBITDA that were divested. Maybe the other way to ask the question is -- Can you tell us, pro forma, what is left for that segment? Sales and EBITDA and what the plan is to try to improve that number for 2014 is?

I think you are going to see a revenue number somewhere in that $400 million to $450 million range in that business, currently as it is structured.

Part of what we do in that business, we sell to ourselves. If you look at versus the prior year, some of that is going to be due to selling the output out of the mill into those bag converting plants.

Okay.

I talked to you about the productivity improvements. We have a couple things.

One, I think, the issues that we had in the paperboard mill in 2013 are behind us. We made some investments in that to improve.

I told you earlier last year, we had a fiber yield problem in that mill, which required us to change and do some work on the headbox, which we completed in August, September. We are starting to see every month good productivity and improvement out of the mill. So the focus really ends up being in the converting side of that business.

We are certainly seeing progress in the cost per bag. I think the hard thing figuring out in that business though is what the volume trends are doing. For us to get the productivity we need to see throughput on bags, and, quite frankly that market has really struggled relative to buying, and really inconsistent, wide variability.

And it is incredible. That business is much more impacted by weather because if you think about it, it is feed and seed; it is salt; it is chemicals; it is construction, cement; and the weather has not really been favorable over a long period of time for that business. In some ways it has been, using a very tired vernacular, like trying to catch a dropping knife.

So we are going to make a huge progress in 2014. But I told you in my script, I was expecting us to be further along in improving this is the than we are right now.

Appreciate that detail. Thank you.

Ghansham Panjabi with Robert W. Baird.

Good morning. It is actually Mehul Dalia sitting in for Ghansham. How are you doing?

How should we think about the progression of price cost on a quarterly basis in 2014 based on what you know now?

We haven't done quarterly. We will see a lot of it start in the first quarter because the contracts reset. The fact of the matter is, in many of these contracts, we see the pricing in the contracts go up when it gets to its annual date. And so, some of those contracts start in the fourth quarter, which is why we got $4.3 million above that; and some of them will go throughout the year.

I can't give you individual quarterly because I don't have it at my fingertips. Like I said, the run rate in the fourth quarter will certainly be above $40 million. There is no question about that.

What I am giving you, $30 million to $40 million is what we will get in 2014. So the run rate will definitely be higher by the end of the year.

One thing you want to think about is there some cyclicality to our business. So when you are applying the assumption for price increase, you should consider that on a quarter-by-quarter basis.

There will be more price flowing in, in the months where we have higher sales volumes. And I think that is a good technique to use.

You guys have not had this conversation before. I don't really worry about the individual quarterly detail that you guys are worried about and where the pricing hits.

What I am trying to run the Company for is the long term. Anybody that's buying or selling on the quarterly up and downs, you should buy somebody else's stocks.

What I would tell you, is that overall, we are going to increase the improvement in business by the things running through, quarterly changes in pricing or not. We don't track it that closely here. We certainly don't provide that information.

Great, thanks for the detail; and can you provide us an update on your M&A pipeline? Is acquisition a priority for Graphic in 2014?

It will continue to be a priority for Graphic beyond 2014. As we said in the call, we have some segments of the business that struggle from a volume standpoint. So for us to continue to grow the business, we are going to do two things.

One is new innovative products, and the second is the acquisitions. We are going to continue globally to look for opportunities at Graphic Packaging.

And, yes, 2014 is like every other year; we expect to be able to make strategic acquisitions this year.

Great, thank you.

[Keegan Manthrow] with Deutsche Bank.

Good morning.

Mark is on another call, huh?

It sounds to me that you seem quite optimistic about the European business. Can you talk about the kind of opportunities you are seeing there, and as you go along, if this provides more bolt on opportunities there?

Sure. If you think a little bit about our European business, even the beverage business for example, the beverage business in Europe is almost exclusively beer-based. There is really not much paperboard that goes in soft drinks.

So, whatever secular decline that is occurring in soft drinks here in the United States, we don't see in Europe. As I said, beer was solid in this country; beer is growing in Europe as well.

With the acquisition of A&R, that made us a big player. It gave us a solid position at Heineken. We already had a big position at AB. We have got opportunity at (inaudible) across the board. So there are some great opportunities with Graphic Packaging on the beer side.

On the food side, we were not in the food business, materially. We just did not have the right assets; and part of it is physical assets, but we did not have the right management team for that either.

What we really acquired in Europe is both the physical assets, the customer share, and the right management team for it. So, we have seen great success.

Guys like John Mills and Kellogg's and Kraft -- those are global customers. And we are doing business now on both of those continents; and some of that innovation activity is translated.

As I look across Europe, in a very fractionated folding carton market, there are great opportunities for us to add really high-quality assets, both physical as well as people; and that is what we are doing.

I am optimistic about Europe because, I think, the kind of things that we have done, here we can successfully do in Europe. We have got years and years of runway there because of the fractionated structure of that market, versus United States, which, as you know, has become a pretty consolidated space in the paperboard side.

Thanks for the color there. Switching gears to Flexibles, obviously, you mentioned that margin has not improved as you would have liked. But can you talk about which end markets are you seeing the most weakness in -- I mean, outside of the weather issues that we have had?

I think the most variable has actually been the feed and seed side of the equation. It has been a pretty consistent growth market, historically. But I will tell you that if you're talking to farmers and ranchers, they will tell you it has been a very difficult 18 months to figure out what is going on; and that has definitely affected that business.

A good part of our business, probably 20% of our portfolio, is in cement bags; and it seems like the construction market is just a stop and start. Housing starts -- it looks like we are moving, and then all of a sudden we stop again. It has been a very inconsistent demand.

That has also contributed to our performance issues because our product line mix in that business shifts around materially more than it has in our folding carton business. It is a little difficult on the converting side to get a consistent, improved performance.

Your variability around your mix changes materially, versus a plant running cereal or pizza or consumer products. And that has been a little bit frustrating.

Traditionally, there has been variability, but really, in the last 18 months, we have seen a significant increase in the variability of the demand of those end-use sectors.

Just one last one. I noticed that your annuals actually went up $126 million from Q3 to Q4. Can you talk a little bit about what happened there?

I can do that. When we made the adjustment for black liquor, the result of that was to increase the NOL because we had used the NOL back in 2009 when we recorded net of tax.

Got you. Those are all my questions. Good luck on the next quarter.

Thank you.

George Staphos with Bank of America Merrill Lynch.

Hi, everyone, good morning. Jumped on the call late here, given dueling calls, so I apologize if you already answered this question.

On Flexible, Dan and Dave, are you still ultimately targeting the segment to get to a double-digit EBITDA margin? And could you put some -- if that is still the case -- some parameters on when you expect to ultimately get there; and still -- the biggest challenges are to get to that goal, if it is still viable?

It is viable, and it is going to be a low-double-digit margin business for us for sure. It is not going to happen in the second quarter of 2014.

We are going to make significant progress this year because we are going to get a lot more contribution from the mill performance than we got last year.

The converting fix is an ongoing battle for sure, but we are making progress. We made progress in the fourth quarter, and we are making progress in the first quarter.

But to get to that number, it is going to be an end-of-the-year sort of run rate to get to that kind of thing. Now, we will generate positive cash flow and positive ROIC. So it is a contributor, but we still have work to do in that space.

I appreciate the color on that, Dave.

Secondly, with and Macon increasingly coming on, could you remind us what it ultimately did for your energy consumption, your reduction of net gas and other purchased fuels?

I remember what the savings benefit is, but if you could quantify it in MMBTU. And then, kind of a related question, given the recent spike in energy -- I don't know if you commented on this earlier -- but if you held all of your input cost constant as of today's pricing, what kind of commodity inflation would you expect in 2014?

Let me say this. Macon doesn't use a tremendous amount of natural gas.

You know, it was a purchased energy mill. But that energy was driven in many ways by coal which has switched over to natural gas.

So that $20 million arbitrage is really against the increased pricing in costs that we were seeing blowing through from Georgia Power for purchased energy. So that is how you think about it.

In terms of actual MMBTU purchase, most all of our MMBTU is purchased in Westborough, Louisiana. And we are still purchasing the predominant amount of that.

10 million to 12 million MMBTU across the country, a year.

As Dan said on the call, we have hedged, roughly on average, about 50% to 55% of our natural gas usage in 2014 at about -- $4, guys? At about $4.

The rest of it, of course, will float at increased energy cost. Our primary inflationary driver next year will be energy. I think this year it was as well.

Of our $40 million of inflation this year, $24 million of it or so was energy. So that gives you some sort of feel. We are more heavily hedged this year at a lower price relative to last year.

Nonetheless, I think we averaged -- and I wrote this number down somewhere -- but we averaged in natural gas last year about $4 or something like that. Didn't we, Debbie? And so we are going to be -- we averaged about $4 for the year, did we not, roughly? About $4.09 or something, for the year, in natural gas.

So clearly, we are going to average little higher than that; but 50% of it is hedged at that rate. I would think energy is going to be another $20 million or so this year, maybe not quite that high, but something in that range.

Yes, I think we took a lot of risks off the table with our hedging program. We thought the rates were attractive around the $4 range when we did that.

There is a huge increase in natural gas between 2012 and 2013. It was unusually low in 2012. I think you remember that, George. And even at $4 -- what we paid in 2013 -- historically, that is a real good rate for natural gas.

I am probably high on that. It is probably closer to maybe $12 million to $15 million incremental is about right. If I do the math, like I said, we have to do calculus in my head. But it is going to be somewhere around there.

That is very helpful. I appreciate it -- and all the figures around that.

The last question I had for you, is there a way to, perhaps not quantify, but qualitatively discuss whatever increase in interest you are seeing in a CUK these days, versus last year, from markets that were previously not your core beverage packaging market?

You see where I'm going with it. Obviously, your view -- is it going in interest as a substrate in the packaging market?

Is there a way to quantify for us, or qualitatively give us discussion in terms of how much broader appeal you are getting now on the business versus a year or two ago? Thank you guys. Good luck in the quarter.

I think it is easier to think about in large sectors like this, which is opposed to individual applications. Yes, of course, we are seeing individual applications. I love what Tite-Pak does for that business, and the (inaudible) is a great one.

But, actually, I think you should think more about what we are doing in Europe. If you think about the acquisitions in Europe, guys, that gives us an opportunity to integrate substrates that they were buying in Europe, they were not buying from us, or they were SUS.

But all those characteristics and qualities that SUS has that makes it work in the United States makes it work in Europe. It is just the board was not available and neither was the converting business focused on that board because nobody like Graphic owned those businesses.

So, as I look forward in Europe, I will tell you over a long period of time, we have a plan to double our SUS sales in Europe; and I don't see any reason the world why we can't do that.

We are building -- the assets we bought, I know you can't get over there to see these assets. But I will tell you, the assets we bought in Europe are world-class.

They are as good as any converting plant that we have in the United States and far better from the ones that we were running as Legacy Graphics. Make no mistake about it.

So we've got a good base to be able to build and take advantage of where SUS naturally competes with other substrates. That is why I feel optimistic about SUS long term.

Thank you very much guys.

(Operator Instructions)

Joe Stivaletti with Goldman Sachs.

I had just one thing.

On the acquisition front, I was wondering if you could talk a little bit about the priorities as you are thinking about possible acquisitions - what areas.

And also, in light of your 2.5 to 3 times leverage target, for the right acquisition, would you consider -- how high would you consider taking leverage temporarily to complete an acquisition?

The first question first: What is our focus? Look, we still like the converting business. I get that it's a difficult business.

It can be a messy business from time to time, but it allows us to control our own destiny long term by being closer to the customer and driving back that flywheel of cash back through our (inaudible). That is our model, and that is what we are going to do.

Geographically, right now, guys, I feel much better about investing in the developed countries -- United States and Western Europe -- than I do in the emerging businesses.

We have looked at those things. We have done our work. We have put millions of dollars to Spain to help us understand what we should be doing in China and India. The fact of the matter is, what we are doing here is very little; and that is just about the right context right now.

Long term, we will look at the emerging markets. But we can't see a way to make much cash and EBITDA in those spaces, so we are not going to focus on those in the short term.

Relative to getting to our targets, Dan and I expect to continue to deleverage at a pretty rapid pace. We expect to get to our 2.5 targets clearly by the end of this year.

How far up would we go? I think we have said in the past -- I don't want to box ourselves in. What I will tell you we are not going to do is we are not going to get back up in that five times leverage stuff.

That is rarefied air. We are not comfortable operating in that. There is no reason that we have to operate in that.

Our stock is also a currency. So if we want to do something that makes sense, we have cash and stock to be able to do the right acquisition. I am just not getting back into that rarefied air.

Thanks.

Thank you.

At this time there are no further questions. I will turn the conference back over to Management for any concluding remarks.

We are going to get back to work, run the quarter. Thanks very much. Talk to you next time.

Ladies and gentlemen, this does conclude today's conference. Thank you all for joining, and you may now disconnect.