Graphic Packaging Holding Co (GPK) 2014 Q3 法說會逐字稿

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Third Quarter 2014 Earnings Conference Call.

(Operator Instructions)

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

Thanks Steve, and welcome everybody to Graphic Packaging Holding Company's Third Quarter 2014 Earnings Call. Commenting on results this morning are David Scheible, the Company's Chairman, President, and CEO; Mike Doss, our Chief Operating Officer; and Dan Blount, our Senior Vice President and CFO. Also joining us today is Steve Scherger, our new Senior Vice President of Finance. To help you follow along with today's call we've provided a slide presentation which can be accessed by clicking on the Webcast and Presentations link on the Investor section of our website at GraphicPKG.com.

I would like to remind everyone the 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'll turn it to you.

Good morning, everyone. We had a solid third quarter, and pleased with our results. Third-quarter adjusted EBITDA increased 9% to $191 million, and our adjusted EBITDA margin increased over 300 basis points to a record 18.2%.

During last quarter's earnings call, I said we expected the third-quarter EBITDA to look a lot like second quarter, and that's exactly what happened. Demand across some of our core end-use markets remains challenging, no question about that.

But we are executing our global strategy. We're maintaining the bottom line, and tracking to our full-year EBITDA and cash-flow targets. We reduced net debt in the quarter by $140 million, and dropped our leverage ratio below 3.

We think this is a testament to the unique model we've built, which combines low-cost paper mill assets with highly efficient converting facilities, and industry-leading product design development. We spent years honing our strategy and improving our execution, and we're beginning to see the results consistently of those efforts as a pure-play, vertically integrated, paperboard packaging Company.

Our recent divestitures and acquisitions make it somewhat difficult to understand the underlying fundamentals and business trends. For example, sales declined 9.7% in the quarter, and that's what you'll see in the financial table on the back of the press release. However, adjusting for the recently divested businesses, our ongoing paperboard packaging sales actually increased 4.9%, principally related to the acquisitions in Europe.

Volumes across the paperboard business were down slightly, about 0.5% in the quarter. The decline was predominantly attributable to continued weakness in the domestic cereal and dry food markets. Consumers continue to closely manage their discretionary spending.

While we're beginning to see some major food companies responding was increased promotional and advertising activities to drive volume, lower grain prices versus last year is allowing these companies to improve their margins while working on volumes through promotional activity. Historically, this strategy has resonated with the end consumer, and has proved sales. Time will tell.

Our performance across our core addressable markets is solid. We are gaining global market share, and end market demand for our major product categories such as carbonated soft drink, beer, frozen pizza, and cereal remain a mixed bag in the third quarter. Some of our end-use markets were very good. Some went sideways, and some weakened.

Understand, the underlying drivers of each of our core market segments requires a drill-down of these trends at the sub-sector level. When doing this, you will see that we are pretty well-positioned.

Carbonated soft drinks is a great example. Volume across the total CSD market continued to be down, and this market is reported to be in a secular decline. However, when digging down a bit, you will see there is a real difference in the end-market performance of cans versus plastic bottles, or multi-pack versus single-serve, take-home versus on-premise, and national brands versus private label.

AC Nielson data indicated that overall soft drink market declined 2.5% in the quarter when compared to last year. Our sweet spot, however, is cans, multi-packs, take-home, and predominantly for national brands. They are all out-performing their counterparts, and some by a pretty wide margin.

The overwhelming majority of our CSD business is multi-pack cans -- specifically Fridemender12-packs sold to the big national brands through the grocery and mass-market channels. That's where the volume is being driven in the CSD end market today, and that's where we play.

Our Perry, Georgia, converting facility is running a significant amount of 12-can multi-packs, which minimizes downtime and maximizes productivity, since there are minimal change-overs to the machines. This is a highly efficient process that allows the big national brands to drive volumes through price without impacting margin. Despite the market place challenges, we are encouraged about our CSD business, as the overall declines in the market are not having an impact on our business.

The end market trends in beer are even more complicated. Craft beer is still the fastest-growing segment in market, but that's off a relatively small base.

We are now seeing a movement in the craft segment towards cans. Our craft beer businesses is smaller than our big beer business, of course, but it's growing at a much faster, double-digit rate.

Additionally, our customers in both craft and big beer are utilizing our new type pack for glass, so new product efforts are paying off in all of the beer sectors for graphic. We've doubled the number of machine placement in the craft segment year to date, and expect to add a similar number of machines in 2015, as well. We are also now supplying 9 of the top 10 craft brewers in the United States, as reported by IRI total US food channel.

Looking at our key big beer customers, we have seen relatively stable demand over the last few quarters. Our recent acquisitions in Europe have improved our position in beer packaging in those markets, as well.

We continue to see positive trends in the European beer packaging demand. These macro trends towards premiumization are beginning to take hold in the emerging markets, as well, where we are selling an increasing number of packaging machines, as we shift from plastic to paper in those markets. Overall, the global beer market is doing very well, and we are doing so, as well.

Consumer packaging is our largest market, and within this sector our large businesses are frozen pizza, cereal, dry foods, and other frozen foods. The frozen pizza market has been volatile over the past year, and influenced by the pricing trends from the big home delivery chains.

Frozen pizza, however, was much better in the third quarter. After a real challenging second quarter, the decline in the third quarter was about 1%, according to AC Nielson.

Total dry foods were down about 1.3% as reported by AC Nielson, while cereal showed the biggest decline across these sectors, and was down about 3.3% in volume for the quarter. Mike will talk about it next, but our promise in this space is really driven more by new product and new channel sales, where we have some real positives.

Pricing across the business was up about $19 million in the third quarter, and that equates to roughly $55 million in paperboard for the nine-month period, as we've recovered prior-periods' input inflation cost. We told you the pricing would peak in the second quarter and would begin to follow some in the fourth quarter. We are tracking in line with this plan, and do not expect to see much year-over-year pricing benefit in Q4. Input cost inflation was roughly $16 million in the quarter, and was driven by increased cost for wood, external board, and to a modest extent, energy.

Looking forward, we like the way we've positioned the business and the directional trends heading into 2015. We'll share more details on our fourth-quarter call relative to 2015.

As most of you know, the fourth quarter's typically a seasonably slower period for us because of the shift in discretionary spending around the holidays. But there are levers to pull, and the productivity gains in the mills are more than offsetting weakness in some of the core end-use markets.

There's always work to be done around optimizing our supply chain, and there's still some opportunity to further right-size our resources and asset base. We recently closed a facility in Canada, and adjusted our overhead structure within graphic needed to support our streamlined business. Dan will discuss the cost of the benefits of these activities in his comments.

One final note. I would like to express my heartfelt congratulations to Dan Blount on his planned retirement -- well-earned. Dan and I have worked together for the past 11 years, and he has been a trusted confidant and a critical member of the leadership team. I know I speak for everyone here at graphic and many of you on this call in wishing him all the best in his retirement.

As part of that transition plan, Steve Scherger was named Senior Vice President Finance effective October 1, and will be appointed Chief Financial Officer as we start 2015. Steve was previously Senior Vice President in Consumer Packaging division, and has over 20 years of global packaging experience in the areas of general manager, finance, and strategy. His deep experience, along with his financial and operating background, uniquely positions him as the ideal CFO successor for Graphic going forward.

We look for to introducing Steve to the investor community over the next few months. I'm not going to turn the call over to Mike Doss, our Chief Operating Officer, who will talk to you more about how we are executing our global strategy and driving the business forward. Mike?

Thank you, David. Good morning, everyone. Graphic Packaging is committed to being the leader in the global paperboard packaging business in the food and beverage sectors. We've spent the last six years both building and optimizing our core business around this focus. We have divested non-core assets and businesses to free up capital, reinvested heavily in our core business, and substantially reduced debt levels. We've streamlined and significantly increased our productivity in our low-cost mills.

We've optimized our network of global converting facilities around both our mills and marquee customers. We've implemented lean and Six Sigma resources to shorten our supply chain and improve efficiencies across the organization.

In short, we've built a very unique business model that vertically integrates low-cost mills with a network of highly efficient converting facilities. The net result from all of this work is a pure-play, global paperboard packaging Company with a clear top- and bottom-line growth strategy.

As we've discussed previously, we have an incremental 150,000 to 200,000 tons of low-cost, unutilized pulp capacity in our mills that provides us with tremendous operating leverage as we grow. With the model built, we are focused on driving our converting volumes and leveraging the additional pulping capacity.

We do this in a number of ways -- through new product involvement, channel expansion, product substitution, geographic expansion, and acquisitions. Over the past few years we've significantly expanded our penetration into faster-growing segments into the market, focused our new product development on supply chain sustainability and broad-based consumer trends, and made three major strategic acquisitions in Europe to further expand our geographic presence in the food and beverage markets.

Our European integration is progressing to plan, and is already beginning to pay dividends, as we were award our first major SUS conversion contract with a big UK food group. It's in the frozen pizza category, and is expected to generate close to 8,000 tons of incremental SUS demand. As you know, just about everything we do in the US frozen pizza market utilizes our SUS.

We use low-caliper board that offers superior characteristics in the areas of strength, printability and freeze-thaw. We believe it's a far better alternative to existing recycle substrates, and there's tremendous conversion opportunities across Europe.

The operating side of our business had a terrific quarter, and would like our forward trends. Our mill division set daily and monthly production records at both Macon and West Monroe this quarter. Tons per day increased by more than 4%, and our yield improved by almost 100 basis points to over 90% in the quarter.

Although SUS production was down in first quarter due to weather, total production was strong in both the second and third quarters. Q3 alone increased by nearly 25,000 tons over last year. We took our normal planned down time at our Macon mill for annual maintenance, and the mill came back up flawlessly.

In addition to productivity improvements, we saw the reduction in energy cost from our biomass boiler in Macon, as the capital we've invested back in our mills over the past few years has really begun to pay off. In total, we recognized $22 million of performance-based improvements in the quarter, with the majority coming from the mills in our European synergies. Continued emphasis on procurement, energy, operating efficiencies, and fixed cost were the primary drivers of our performance-improvement gains, and we are tracking to our full-year adjusted target of $60 million in net performance benefits.

Graphic's new product development strategy remains consistent in both the US and Europe. Our focus is on innovative packaging solutions that offer convenient solutions for on-the-go consumers, better shelf impact for product recognition, and improved sustainability for our product partners. We launched several new products in the third quarter, but the two big call-outs are: first, a major commercial launch of our proprietary Tite-Pak product with Miller-Coors; and second, several big club store rollouts with Kellogg's Special K, Rice Krispy Treats, and Kashi brands.

Both of these substrate conversion wins from corrugate -- are from corrugate to solid fiber, and demonstrate our ability to expand our business through new volume growth in solid fiber. The business is well positioned in both US and Europe, but we operate in a very challenging environment.

As a result, we're always evaluating our infrastructure and looking to optimize our asset base. We'll be making some adjustments over the next few quarters around that footprint.

In closing, I too would like to add my congratulations to Dan Blount on his planned retirement, and thank him for the leadership over the past 16 years. With that, I'm going to turn it over to Dan, who will take you through our financials in greater detail.

Thanks Mike, and good morning, everyone. As in the past, I will use our posted presentation to aid in our discussion.

Let's start on Slide 13. As you see, we reported adjusted third-quarter EBITDA of nearly $191 million. This result is in line with the guidance we provided during last quarter's earnings call.

Q3 adjusted net income rose to $57.5 million, from $42.9 million, a 34% increase. Adjusted EPS at $0.17, up $0.05 over last year. Improved operating results, coupled with lower interest expense, drove the earnings increase. In the quarter, EBITDA margins climbed above 18%, and interest expense, driven primarily by lower debt levels, declined by $3 million.

In looking at net income, income tax expense stands out as needing special mention. At 43%, our effective tax rate was 3 percentage points over our normal rate. It cost us about $0.01 per share. I will go into further details around taxes shortly, but it is important to note that the spike we saw in tax expense is a Q3 event, and should not continue into the fourth quarter.

Primarily due to our previously announced administrative cost-reduction initiative, and to a lesser extent expenses related to European integration, we incurred $8.3 million, $4.5 million after-tax, of non-recurring charges this quarter. As a reminder, last quarter we announced that we were going to create more value out of the multi-wall bag divestiture by right-sizing our support and overhead structure.

During Q3 we executed the actions needed to deliver the cost reduction. Starting in 2015, annual savings from these efforts are expected to yield at the higher end of our $10 million to $15 million targeted range. As previously communicated, these reductions will be in addition to our normal $60 million to $70 million annual cost-reduction target.

Now for the remainder of my time today, I will build on David and Mike's comments, and quickly take you through the year-over-year change in sales and EBITDA. I will wrap up my commentary on cash flow, debt, tax, and an update on guidance.

Please turn to slide 14 for the sales bridge, where you see the categories driving the change in sales. Excluding these divestitures, the ongoing business grew nearly 5% compared to last year.

As David commented, price at $19 million was a significant contributor to revenue improvement, albeit at a lower rate than experienced last quarter. Overall volume finished better, as the acquisition of Benson offset the modest declines David described. Looking forward to further price improvement, please recall that price began increasing in fourth quarter 2013; therefore we expect next quarter's pricing to be only modestly better than the prior year.

Moving to our Q3 EBITDA bridge on Slide 15, again excluding divestitures, adjusted EBITDA improved $17.6 million, or 10%, with $41 million of price and performance more than offsetting inflation. Looking forward to Q4, we expect adjusted EBITDA to be around $170 million, which is $10 million to $12 million better than Q4 last year.

Continued operating-result improvement, driven by mill productivity and acquisition integration, is expected to drive earnings growth. We expect Q4 demand, adjusted for our normal business seasonality, to be consistent with the flat-to-slightly-down markets we have experienced throughout this year.

In summary, looking at Q3 results, we continue to be pleased with our operating performance, price capture, margin expansion through cost reduction, and manageable inflation. We are able to drive earnings improvement in an environment where demand in our core markets is flat to slightly lower.

Now moving to Slide 16, you'll find our cash flow, debt, tax, and liquidity summary. You will note that year-to-date cash flow from operations has generated $202 million of debt reduction. As most of you know, we generate the majority of our cash flow in the second half of the year.

In Q3, we delivered nearly $140 million of debt reduction. We clearly remain on track to achieve the $350 million of net debt reduction from operating cash flows in 2014.

A highlight for the quarter is that our debt leverage dipped into the high end of our 2.5 to 3 times target range. Net debt leverage currently stands at 2.9 times.

Given our full-year cash flow outlook, we expect to be in the bottom half of our target leverage range as we leave 2014. Overall, looking at our debt portfolio, we have an average effective borrowing rate of 3.4%, and strong liquidity of over $850 million.

This interest rate and liquidity position should improve going forward, as on October 2 we completed a transaction to amend and extend our senior secured credit facility. The highlights of this transaction include: first, added another year to the facility maturity, out to October 2019; second, reduce the pricing grid by 25 basis points, lowering our current LIBOR spread to 1.5% -- saved us more than $3 million in cash interest per year; third, upgraded the term loan and revolver debt mix -- increased the revolver to $1.25 billion, decreased the term loan to $1 billion.

I'm pleased with the revolver upgrades. Now that we have met our debt targets, it provides us with a much better tool to manage cash. Additionally, the larger revolver will provide a stronger liquidity profile going forward.

In terms of the transaction costs, the pay-back is less than a year, as we continue to take advantage of opportunities to improve our capital structure. The other debt structure opportunity we have is to refinance our 7-7/8% bonds. Many of you know that they became callable earlier this month. We fully expect to take advantage of this refinancing opportunity in the near term, and would expect to be able to further reduce annual interest expense by $6 million to $8 million.

Before turning to guidance, I want to circle back and comment about taxes. Our effective tax rate in Q3 was approximately 43%, versus our guidance of 38% to 40%.

Before talking about the effective tax rate, I do want to remind you that while we record tax expense through the P&L, we do not pay US federal income taxes, as we take advantage of our NOL asset. At the end of Q3, our NOL balance stood at $811 million, and for full-year 2014, we expect cash taxes to total less than $15 million.

Turning back to the effective tax rate, the 43% rate experienced in the quarter was primarily driven by the geographic mix of earnings -- specifically, lower earnings in our lowest tax rate international jurisdictions. We do not expect this higher rate to continue. Q4 should return to the 40% range, and for the full year 2014, we expect the tax rate to be in the 40% to 41% range.

If you look forward to 2015, our projected tax rate remains at approximately 36% to 38%, based on projected international earnings growth, as we realize the benefits of integration in our newly acquired European businesses. I will however reiterate that we will not be a meaningful taxpayer next year, as the bulk of the tax expense will simply reduce the NOL tax asset.

Now, turning to the last slide, you see our outlook for 2014. Given that we only have a quarter left in the year, we have tightened up on our ranges, particularly with CapEx, interest, and we also adjusted the tax rate outlook. If you have any questions about guidance we will address those during Q&A.

As a final note, I would like to think David and Mike for their comments about my retirement. From my perspective, however, it has really truly been an honor, and I consider myself very fortunate to have served on this Management team, led by David Scheible. David is a highly motivating leader, and the business value created over my nearly 17 years really far exceeds any expectation I may have had.

While my time at Graphic is coming to an and, I will continue to be an investor. With David's continuing leadership and a Management team that includes really deeply experienced talent such as Mike Doss and Steve Scherger, I'm going to enjoy watching the business continue to move forward. With those final comments, thanks to everyone, and I will now turn the call back to the operator for Q&A.

(Operator Instructions)

Ghansham Panjabi, Robert W Baird and Company.

It's actually Mehul Dalia sitting in for Ghansham.

Dan, just wanted to say congrats and good luck in the future.

Thank you.

Can you give us some more color on the inter-quarter trajectory for volumes during 3Q? Were there any major deviations month to month?

During Q3, month to month?

Yes, wondering if there's any volatility month to month.

It was a pretty consistent quarter. I think when we talked on our last earnings call, we were midway through the quarter. And I sort of gave the indication we thought it would be a quarter that looked a lot like second quarter from a volume and earnings standpoint. That's kind of what we saw. We did see of course the traditional pick-up in back-to-school, and some beverage pick-up because of Labor Day holidays are in there; but it was pretty consistent.

The multi-wall bag business, you'll remember had a lot of construction elements relative to those products. That added some volatility historically to ours that really just didn't show up in this quarter. That is sort of our expectations going forward, as well.

Fourth quarter should be pretty consistent. The trends that we're seeing in beer/soft drink are pretty consistent from what we've seen in the third quarter. There's some evidence that promotional activity is helping in dry foods and cereal and so on, so forth. But I think the volume trends are pretty prescriptive for what we've seen in 2014 year to date.

Great. Given that you're now within your target net-debt-to-leverage ratio, how do you think capital allocation evolves over the next year? Just wondering the timing of a move towards dividends or buy-backs.

I think we've consistently said that's something we're clearly going to deal with in the early part of 2015, and I have no reason to believe that timing has changed. I'm pretty confident in our cash flows. We had a good quarter in the third. I'd expect to have a good quarter as well in the fourth on cash flow, and that will put us in a great place in the first part of 2015 to talk about a more externally focused cash flow return.

I will tell you, though, that our priority is still going to be investment back in the mills because there are great returns in those projects. We're still looking at acquisitions, bolt-on. They will be a priority because they strategically add to the business long term. And then third on that will be the ability to return some cash to shareholders.

The other thing that Dan mentioned -- I think he mentioned on his discussion -- is that until we refinance the revolver, our baskets in the past were limited. The restructuring that he just did and completed gives us a lot more flexibility to do some things with return to shareholders that previously, until we got this finalized here in the third order, was not possible for us.

We are in a good shape from a business standpoint. And I think we've got the capital structure flexibility worked out from a timing standpoint, as well. We're focused on that in 2015.

Great. One last one. Can you give us an update on integration efforts related to the European acquisitions? I'm assuming it's on track with synergies and everything else.

Yes, this is Mike Doss.

We're right on track with the guidance we provided with the Benson integration. We'll deliver the $15 million to $17 million for Contego and A&R here in 2014. Then in 2015, we'll deliver the $6 million to $8 million that we outlined in our previous guidance.

Mike mentioned in this call, we are starting to see some sales advantages in that, as well. There are some transitions that occurred. He mentioned some SUS into pizza and some other applications there. So we're getting some traction with our SUS board, which was, as you remember, a strategically important part of the European business.

You will see it in the P&L. It takes a little bit more working capital, because shipping to Perry is a lot shorter than shipping to Liverpool. But at the end of the day, nonetheless, the return on the additional board sales are certainly worth the working capital investment. That's what we're going to see on a go-forward basis.

Philip Ng, Jefferies.

Dan, sorry to see you go but congrats on the retirement.

Thanks, Phil. I appreciate that.

On the last call, I think you mentioned you expected inflation to moderate a bit. We've seen OCC prices and energy pull back a bit. I'm surprised to see inflation tick up sequentially. Can you give us some color?

If I remember, on the last call you guys guided toward the $30 million to $40 million inflation number. Is that just input cost inflation? How much do we tack on for labor?

I would think, sequentially -- I'll have to look back -- but our input inflation this quarter was a little less than $16 million, which I think was pretty consistent with what we saw before. I will tell you our primary driver this quarter on inflation was actually external board sales. We buy SBS and some CRB outside, and there was some pricing there that's lapping the quarter.

Energy costs were pretty moderate. They were less than $3 million. Our second biggest was wood. Wood costs were -- let's see, what were wood costs? They were about $2.4 million.

If you look on a forward basis, I think we expect our input inflation going forward to be around $30 million, $35 million. That's probably a good, conservative estimate. I don't see a lot of drivers in OCC.

Wood prices have clearly moderated quarter on quarter. I don't think you'll see much in the fourth quarter at all relative to wood increase. And Dan has hedged out a good part of our energy for next year, right around $4 for MMBTU, which will be year on year flat on energy costs, I think, for the most part. So I think a $30-million-a-year increase in 2015 looks about right.

Labor and benefits we've always said is generally around $30 million to $35 million. We had a spike up in this quarter. It had to do with some timing on medical costs year on year. But as you go forward, we won't see that kind of increase next year on a sequential or on an annual basis. I think there were some other things in there, like we have been encouraging more participation in the 401(k). We had a spike-up in the quarter for increased employee participation in the 401(k).

I would tell you if you look at total inflation going forward, we're probably in that $60 million to $65 million range. Performance next year -- $60 million to $70 million, plus whatever the integration activity in Europe. Pricing will be a lot more moderate, but it will be $10 million to $15 million, or something like that, on a carryover basis. We have been averaging around 5% EBITDA year-on-year growth, is what we've shown historically. From what we know right now, that's where we look.

Phil, I know it's a trend to try to predict every type of inflation category and all the pricing categories and built it into your models.

Sure.

You're going to have to have an IQ of about 200 to be able to do that accurately. But in any event, I think if you pay attention to how we're improving the margins in this business -- we're managing inflation, we're managing pricing, we're managing the improvements in the cost reduction. You will see that we've taken the right actions given all of those inputs going forward.

Additionally, just to add on to David's comments, in terms of natural gas, we see an opportunity to lock in natural gas at what we consider to be a very favorable price. Not only have we gone in through 2015, we've gone into 2016. You are looking at taking natural gas inflation really off the table for close to two years as we implement this strategy.

I think we're on top of our game here, if you look at margin increase and the way we're managing the business. I just wanted to add those comments on to David's.

I think the question is really what does the volume do. Some of the markets did very well, some of them not so well. But some of the acquisition growth, which has been a part of our plan on a go-forward basis, will continue to add to the top line. We have a lot of fixed costs to blow through. It's why the margins were up 300 points; because there is fixed cost blowing through increased volume through the integrated acquisitions, and that is sort of the story.

I was a little surprised -- Ghansham was not on the call --but we sort of told you what we thought the third quarter was going look like. It would be about $190 million, much like the second quarter. That's kind of where it was in the breakdown, so pretty much what we said it would be. Inflation was moderate, pricing was good, performance was excellent, and margins went up 300 basis points.

Got you.

We're overall pretty pleased with that performance.

Got you. Okay, that's very helpful.

Since I have you on the call, Dan, can you give us an early look on how you're thinking about free cash flow for 2015 or at the very least, some of the moving pieces? I know you have announced a West Monroe investment. I just wanted to get a little color on how you are thinking about CapEx next year as well.

I think it's a little early to do that. We're still in our planning cycle. I can give you some overall comments on my expectations here, though.

Sure. That would be great.

I expect our cash flows, in terms of the percentage of EBITDA that you are going to deliver as cash flows, to be consistent with what we have done in 2014. To David's point, we are going to look at capital allocation very closely.

We've got cash and investing it back into the business; pursuing really smart acquisitions; and then looking at shareholder give-backs is a priority. We've always been very transparent with how we're running the business and how we're allocating cash, and I expect that to continue in 2015.

I think one of the things Dan and I talked about with you all before, too, was we have cash to invest back into mills -- things we've not really had money to do in previous years. We're going to invest back in the mills to address the same issues you talked about, which was inflation. We're going to look at ways to take energy, fiber, digesting capacity -- those kinds of things -- reduced because managing those input inflations -- that's all stuff we keep. The stuff that ends up in the mills in cost reductions, those we keep in our profit. That's what we're going to continue to invest in.

I don't think our CapEx is going to spike up. I think we've talked, what, $200 million to $220 million sort of a range. We should be able to do everything we need to do in the next year or two, next couple of years, to be able to make investments in CoGens and otherwise to be able to better the business. On an ongoing basis or long-term basis, we should be up to run this business at about $200 million worth of CapEx and do absolutely everything we need to do. And that is consistent with our guidance in the past.

Okay. One last final question. I wanted to get some color on how trends are shaking out in Europe. Certainly, some concerns on the macro front. I do appreciate that you are getting some market share.

Then in North America, you sound a bit more upbeat. But one of your larger cereal customers did announce a plant closure. I just want to get a sense if that will have any impact going forward in your business.

Yes, I don't know that I would use the word upbeat relative to US demand. What I said is that we've got programs to help fill in where our customers are struggling. What I would say is it's really by sector.

Actually for us, beer and soft drinks, still a pretty good business for us. Tissue business, pretty good business. Pasta, some of those dry food segments really good. Cereal is still a struggle.

Yes, obviously, we know they shut down the facility. But on the other hand, if you go into the stores right now, you are going to see those same customers promoting cereal. They're doing the bogos -- buy one, get one free type things. You're seeing those kinds of activities, which have traditionally driven volumes.

As I said in my comments, let's see how that works out. Right now, those trends look okay. But I don't believe anybody is suggesting the US economy is particularly hitting on all cylinders.

Europe -- Mike will talk more about it. But overall, yes, Europe is struggling overall. But we are in a pretty small slice of the European market, right? We are doing food and beverage, and those trends are not necessarily materially different than what we're seeing in the United States. If anything, the beverage market is stronger in Europe than here.

That's right, David. Our overall beverage volumes year over year in Europe were actually up. In our consumer products business, both in the UK and Continental Europe, has held up pretty well. We've had a couple of wins, as we outlined here. We like the momentum as we head into 2015 in that business.

Okay. Thanks, good luck in the quarter.

Anthony Pettinari, Citi.

Good morning, and congratulations to Dan and Steve on the transitions.

You talked about the mill system with 150,000 to 200,000 tons of spare pulp. I was wondering if you could remind us when you would expect that to get utilized? Maybe by the end of 2015, how many tons would you expect to have utilized in your system?

I think what we have said is, if you look at our comments, that we expected over the next three years to be able to build out those tons and use them. I didn't give guidance for any individual one. But what I will tell you is certainly with the growth in Europe and some of the transitions -- for example, Mike mentioned on the call that MillerCoors is transitioning to a Tite-Pak.

They're transitioning from a corrugated structure to Tite-Paks. We're going to have to figure out 15,000-16,000 tons of incremental business because that's the transition. Over the next three years, we will build out those tons. And it will be a pretty consistent increase right now in our planning each of those years. But it will take that long.

First of all, we will not build those tons ahead of sales. Then there is some lead time in building the tons as well, simply because we will want to do all of that during maintenance downtimes. We can't really take our mills off line to be able to do large construction projects because we need the paper. So we will do it consistently over a two- to three-year period to generate those tons as demand increases. Right now, if you look at SUS year on year -- what are we Mike? 30,000 tons or 40,000 tons, something like that?

Year over year, 40,000 tons.

40,000 tons of SUS demand year on year. I like those trends on a go-forward basis.

Okay, that's helpful. For instance, the pizza contract. Have you already shipped tons for that already, or is that Q4 or next year?

Yes, we're completely qualified; and that product is commercial in the market place.

Okay. Maybe a follow-up on big beer. You described trends as stable. You produce carriers for, I guess, bottles as well as cans. I'm wondering if you're seeing a meaningful shift between those two containers. From your perspective, from a volume and margin perspective, is there a big difference between the two? Are you seeing any kind of substitution out of bottles into cans?

Well, we're not a primary packaging supplier; we're secondary. So the whole issue of cans and bottles, to some extent we're agnostic to that transition. What we're a lot more interested in, Anthony, is the transition from plastic to paper. That is what we are seeing in Europe and in markets like Brazil.

We are also seeing more baskets sold to craft beer, even in Europe. In Germany, for example, we just placed a couple of machines making baskets, which was before -- that's a new paperboard application.

Certainly we've talked about it before and others have as well, that in areas like China and in Brazil, you are seeing a move towards premiumisation, which is really a transition from plastic to paper. That is more exciting to us because that is net new tons. Our machines really don't really know whether we're making a can pack or a bottle pack.

We've seen some improvement in the craft beer business of transitions from bottles to cans. But that's all new growth because they're not substituting. They're still making their bottle; they're also making cans, which allows them to expand their business. Obviously, some of that comes at the share of big beer. But ultimately, as long as our share in both of those sectors is good, then we're gaining as they gain. We feel good about that.

Okay. Maybe just one follow-up to Phil's question on early view on 2015. I guess you got $22 million in operational improvements in the quarter without flexibles. As you've been planning for 2015, do you have any initial view on what the performance improvement opportunity could be?

I think we've said that we expect to do that $60 million to $70 million, plus something from Europe's stuff; so it's pretty much the same. If you look at where our mills are, if you look at the productivity, I don't see a jump up; and I also don't see a drop. That is kind of what we have for the next -- I've said before, it's shifting a little bit. More of it is coming from the mills because those are bigger projects.

Now that we have -- as you all continually point out to me -- additional free cash flow, we're putting some of that back into the paperboard mills because we have the money to do so. And the returns on those projects are great. Dan went through a number of these projects in the mills. They're one- to two-year return projects, and they're big projects.

The Macon biomass we haven't talked about in a while. But that turned out to be just a really, really good project in the process. We have those kinds of things in the mills. I'm comfortable on a go-forward basis we've got good productivity improvements. Again, more capital driven, and predominantly in the mills, but we're not changing our guidance on CapEx materially to do it. I think it's just a shift in our focus and direction.

Okay, that's helpful. I'll turn it over.

Mark Wilde, Bank of Montreal.

Mark Wilde, as I live and breath. How are you?

I'm excellent. It's good to see you doing well. You've made so much progress over the last five or six years.

I wanted to just turn back to capital allocation. First of all, thoughts on dividend versus buyback activity, Dave?

Of course that's a Board of Directors' discussion, as you well know.

Right.

I don't know right now whether I have an opinion on one or the other. We are one of the few companies in this space that of course does not have a dividend. I'm not sure it's a meaningful driver of share value, but it might attract different level investors or at least open us up to a newer group of investors.

We just got back from Europe. Dan and I and Mike did a Road Show over there because there's a lot of European interest. And a number of those investors sort of checked the box on that process; so we'll assess that.

Clearly, in the space, buying back shares has been more leveraging for shareholders than dividends. We see the same math, Mark. So we're going to have to assess that. I think it just depends upon whether or not there's the expectation for a different group of investors. But I think we would lend or lean more towards shareholder return in terms of buyback because it just seems to be more leveraging, Mark.

I also wanted to talk a little bit about acquisitions. I wondered if you could talk about converting assets versus maybe picking up mill assets. And on the converting side, I wondered if you could talk specifically about Mexico.

We've seen a couple of deals in the last couple of months where brewers have sold other packaging assets. I know that some of those brewers actually have paperboard packaging assets, and you've mentioned Mexico in the past.

That is still a priority for us. I will tell you, we have done well in Europe. I mentioned on one of the other calls, however -- our focus right now for acquisitions is probably off Europe at least for a good part of 2015 because my team over there has got plenty to say grace over.

First of all, they're integrating the acquisition. Second of all, they're doing good on the sales side of the equation; but that take some time. It's new product; it's transitions. They've got some work to do, and we just don't want to overload them.

As you have pointed out to me a number of times, the list of people that have done well buying converting assets in Europe is very small. We don't want to join that list. I think what we want to make sure that we do is that we have done a good job with our acquisitions in Europe. So we're very much focused on it, which means our acquisition focus will be in North America.

Canada, the United States, Mexico are the areas we're looking at, predominantly on the converting side, with the same philosophy of pulling board through those converting assets. Mexico is something we're interested in. I told you before we were a long way down a path in Mexico, but we lost that acquisition at the last. We couldn't confirm that the numbers were the actual numbers, so we walked away.

But we expect to find something in Mexico to build on our base. We're already -- what, Mike -- 20% of the market down there? Is that right? We're that big?

Mid-teens.

So we'd like to be a much higher percentage of that market, and we'll look to find the right assets. You know this -- that buying in Mexico, you need to be patient. And you need to make sure that what you're getting is what you're buying, and it takes a little while to do so. But we're not walking away from investment in Mexico.

Okay. I'm curious. With the dollar rallying, Dave, have you seen any impact from that on either export volumes around the world or any impact on export pricing to this point?

We don't export a lot of board, other than to ourselves. I think that's where that manifests itself. So we haven't really seen it. We also haven't seen a lot more imported board. It's always a possibility; but since we're in the carton business, you've got to qualify; you've got to get the customers to get okay with it; yada, yada, yada. The same issues that make it sticky for us to transition business make it difficult for anybody else as well. So we haven't really seen an impact.

Paperboard for folding cartons is really not a scale up/scale down. Customers really don't like changing their printed paper stock that touches their products on a regular basis. So you have to be in it for the long haul. It's kind of tough to arbitrage a paperboard transition based on currency because you and I both know. It's great that the currency is strong right now, but we're printing money like there's no tomorrow.

Long term, you've got to wonder about whether the strength of the dollar, is something you can count on over a three- or four-year period of time. And our customers are really not that interested in a short-term gain on a currency evaluation if that board might not be there.

Okay, and two other real quick lines.

One, we've had a wet autumn down in some parts of the Southeast. I wondered if that was happening any impact on wood costs, particularly around Macon. I wondered also, with this Highway Bill, any change in cash pension contribution next year?

Mark, this is Mike Doss. I'll take the question about the wood basket.

We've seen no material impact in our wood basket in Macon or West Monroe. I will defer to Dan to comment on the Highway Bill.

We're well aware of the Highway Bill and the possibility that your minimum contribution level could be lower. Currently, our strategy is to continue to fund our pension at our current funding rates. It's like $40 million to $60 million per year. That's what our expectation is for 2014. We expect to continue to do that in 2015.

Clearly, our target at this point is to have our plan fully funded by somewhere in 2017; and we're well on track to do that.

Okay, good luck. Enjoy retirement, Dan. You have done a great job over the last several years.

Thank you.

George Staphos, Bank of America.

Everyone, congratulations on the new endeavors.

Dan, we'll miss working with you.

Late in the call, not a lot to talk about other than the World Series here. But I guess the first question I had of all the innovations that you're bringing to market right now, David, what are you most uplifted about? What do you think has the best ability to drive traffic to the center of the store?

Second question. You said that the investments in the mills will be done around normal maintenance downtime. But should we be planning for more maintenance downtime in the next couple of years as we model out?

Thirdly, I'm sure the question has come up in the past. What are your thoughts, since there has been a fair amount of discussion around MLPs and their suitability for graphic packaging?

Thanks and good luck in the quarter.

Now that's a laundry list.

Well, I waited until the end here, so I had to get it all out there.

In the World Series, you're batting cleanup, is what you're telling me.

New product side of the equation, a couple things I would tell you. I love what's going on in microwave. That's clearly center-of-the-store stuff, and we're definitely winning in that space. Our teams there are doing a really good job.

Mike talked about the corrugated or the strength transition. The stuff that we're doing in the last three years or so -- things like CapriSun and Tite-Pak transition -- these are all building long-term markets for our SUS. And I like those a lot.

The other thing that I like right now, that is newest for us, is Europe. We have never had a platform over there to sell our SUS board. In pizza, even somewhat in cereal, in cakes and crackers over there, we've had an opportunity to do SUS; and we're just getting started. We've already got a number of great wins in Europe because we've got a really strong manufacturing platform over there. So those substitutions all make great sense to me.

Extra downtime in the mills, no. We are not going to see extended outings in our mills from a maintenance standpoint, unless it will be something unplanned in the process. Because the problem with that is that we need the tons. It's not just the cost of taking the mill down, but it's the fact that we run them pretty tightly; and extended downtime means we don't make the paper. That's not good if you're actually selling folding cartons. So I would not expect it.

What we will do is we will probably realign some of the activities that we do at that point in time, but that's going to be pretty transparent to the external community. That's really more of a nit and nat for our mill guys. If Al Nichols was on the call instead of working in Macon and West Monroe today, he would tell you that's all stuff well within our bandwidth.

The third thing was what -- MLPs? I have been pretty outspoken about the fact. Graphics is not a leader in the MLP stuff -- doesn't really fit our model. It's really difficult when you're as far integrated as we are to manage the process with MLPs and split our virgin and recycle because we don't really look at the business that way.

If there's any juice in that, it's probably the bigger guys, larger-cap guys, that have got more flexibility than we do and manage it. We are not actively evaluating MLP structures for graphic packaging.

David, we thank you.

One last quick one. In terms of incremental acquisition benefit, I realize you have synergies from Benson. But can you remind us what would be the amount of EBITDA that you will bring into next year that you didn't incur this year because you made the acquisitions part way through the year?

Yes, $10 million to $12 million.

Alex Ovshey, Goldman Sachs.

Good morning. Good quarter.

A couple of quick ones for you. One, do know where working capital will come in this year? What are you targeting for maybe?

Yes, hold on a second. Apparently, we're doing ciphering here.

I think the key on this is where we're going to end up cash wise. We're going to manage working capital to such an extent that we are going to deliver the $350 million in cash flow. I think what you're going to see is that our ratios are going to be pretty much consistent with what we adjusted for seasonality, but where we are in the third quarter. But remember, you need to adjust it for seasonality.

Generally, our inventories are going to grow as we head out into 2015 because we're planning for really the beverage volume that's going to come later in the year. If you're planning for it, you can see inventories grow. You can see accounts receivable strength because business volume is going down. You're going to see us achieve the $350 million in cash flow from operations as we manage both of those.

You've got to remember -- Dan's right. We have to build board inventory in the fourth quarter to be able to meet the demand in beverage ramp-up in the first quarter, as well as the increase in Europe. We will need to build it, or otherwise we would not have sufficient board stocks as we got into the first quarter to deal with that seasonality.

You see that every year, and we would expect to be building board inventory. I'm talking 10,000 to 15,000 tons or something like that, and we make $2.3 million tons. So it's not repressive, but it needs to be done to manage the business. Otherwise you get into a herky-jerky first quarter where you're up and down, up and down, trying to meet customer demand. We did that a couple years ago, and it was not particularly fulfilling.

Got you. Thanks for all that color. One more from me.

David, you talked about the new terms of the debt giving you a lot more flexibility around what you can do with the big cash flow profile of the Company assured. Are there any restrictions that you have in place right now, or you can essentially do whatever you want with the cash flow and the business now?

With the senior secured facility we just put in place, which is the bulk of our debt profile, you're going to find that once you dip below three times leverage, you pretty much have all the flexibility you need to do whatever you want in terms of capital investment, acquisitions, or giving back value to shareholders as well.

Good to here. Thanks very much.

Dan, good luck with your retirement. Enjoyed working with you.

Thanks, everybody.

We're going to close off. It's after our appointed hour, and I'm sure there are other analyst calls you want to get to. We're going to let you go, and we'll talk to you all in February.

Thank you.

This concludes today's conference call. You may now disconnect.