Graphic Packaging Holding Co (GPK) 2014 Q4 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference operator today. At this time I would like to welcome everyone to the Graphic Packaging fourth quarter and full year 2014 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you. Brad Ankerholz, Treasurer, you may begin your conference.

Thank you Stephanie, and welcome everybody to the Graphic Packaging Holding Company's fourth quarter and full year 2014 Earnings call. Commenting on results this morning will be David Scheible, the Company's Chairman, President, and CEO, Mike Doss, the Chief Operating Officer, and Steve Scherger, the Senior Vice President and CFO. To help you follow along with today's call, we have provided a slide presentation, which you can access by clicking on the Webcast and Presentations link on the Investor section of our website, which is 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, and 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.

Thanks Brad. Good morning, everyone. We had the best fourth quarter in the Company's history. Sales in our ongoing core business increased roughly 5.5%, driven by acquisitions and modest share gains in our markets around the world. Adjusted EBITDA and margin were record fourth quarter numbers for Graphic Packaging. Adjusted EBITDA year-over-year increased 8.5% to $172 million, and adjusted EBITDA margins increased 250 basis points to 17.2%. Adjusted earnings-per-share increased 24% to $0.21 versus the prior-year quarter. Our full-year-results were also solid as we improved all of our key operating metrics. Despite the severe weather that disrupted operations in the first quarter of last year, sales in our ongoing business increased by almost 4%. Adjusted EBITDA increased 6%, and margins increased 180 basis points to 16.8% in 2014. Full year adjusted EBITDA margins were also full-year records for Graphic Packaging.

We generated over $350 million of free cash flow in 2014, which allowed us to execute our growth strategy by making strategic investments within the business, and acquisitions to drive sales and earnings, as well as continue to reduce our debt. We ended the year at a net debt leverage ratio of just about 2.66 times, achieving our targeted range. The balance sheet and financial flexibility has never been stronger, so we had the wherewithal to invest in the business long-term, and to return money to shareholders. It is this financial strength and confidence in growth and cash generation of the business that led our Board of Directors to initiate a capital allocation plan, which includes both a $0.05 per share quarterly dividend, and a $250 million share repurchase program. Steve will go into more detail about this capital allocation plan, but we are very pleased to have announced this in conjunction with our strong quarterly and full-year results this morning. We're committed to maximizing shareholder value through a balanced approach that combines profitable growth, and returning capital to shareholders, and the capital allocation plan is further evidence of that commitment.

We spent several years transforming this business into a pure-play global paperboard packaging company, with both a clear top and bottom-line growth strategy. We have divested non-core assets in businesses to free up capital to be reinvested heavily in our core business, particularly our mills, and strengthen our balance sheet. We have optimized our network of global converting facilities to better support our mills and customers. We have implemented Lean and Six Sigma projects to shorten our supply chain and improve efficiencies across the organization. We have built a business model that vertically integrates our low cost mills with a network of highly efficient converting facilities. Many important components of this transformation were achieved in 2014, it was a very busy year. Following the divestiture late in 2013 of our flexible business, we sold our label businesses in February, and our Multi-Wall Bag business to Mondi in June.

In May we acquired the Benson Group, which is a leading folding carton producer in the UK, and announced the acquisition of the folding carton paperboard mill assets of Cascades' Norampac Division in December. Earlier this week we completed the purchase of these Canadian assets. In January, we also acquired Rose City Printing & Packaging, a two-plant folding carton operation in the Pacific Northwest. The divestitures effectively allowed us to focus all of our resources in paperboard packaging to serve our food, beverage and consumer products to customers globally. The re-focused footprint also has allowed us to right-size our domestic support and overhead structure in Q4 of last year. This will deliver margin-enhancing benefits as we head into 2015. During 2014, the proceeds from the sale of our non-core units were utilized to further strengthen our global folding carton footprint. The acquisition of the Benson Group greatly expanded our folding carton business in Europe by broadening our customer base, and our product deck options, while also providing access to the important store brand market.

The Benson integration is progressing on plan, and we remain comfortable with the target performance improvements $6 million to $8 million for this year. Cascade's box acquisition provides a vertically-integrated platform of both mills and folding carton converting in Canada. This is a little more complex acquisition than something like Benson, so it will take some time to optimize and build the business in Canada, but the acquisition puts the initial assets in place to capitalize on a geographic region where our participation today is low.

Rose City Printing & Packaging is a strategic bolt-on converting acquisition that will enhance our footprint on the West Coast, and allows for further integration of our SUS and CRB production out of our Santa Clara, California mill. The acquisition includes two state-of-the-art folding carton converting facilities located just outside of Portland, Oregon, and a management team with a great reputation that has consistently delivered results. Mike will provide further color around these acquisitions in a moment, but we are excited about the opportunity of integration in 2015.

During the fourth quarter, we successfully accessed the debt markets to improve liquidity, reduced our interest costs, and extended our maturities. Steve will cover the new bond issue and the amend and extend transition shortly. Finally, in the first half of the year we completed the last two of eight secondary stock offerings, which allowed our long time private holders to sell their remaining stock, and this increased our public float by nearly 100% of the outstanding shares. This has dramatically improved the liquidity, and broadened the ownership base of our stock. Looking forward, I think we have done a good job positioning Graphic Packaging by investing for future growth and optimizing our assets around customer needs. We are particularly excited about the Canadian Rose City acquisitions, which will further strengthen our North American presence.

We continue to be pleased with the European expanded footprint, and see further opportunities for growth there. End market demand across some of our core markets will remain challenging, there's no question. But it's our job to manage through this, and grow the business in any environment. We think we have created a good model, a unique strategy to do exactly that. Both pricing and inflation should moderate in 2015, and we see plenty of opportunities to reinvest in this business to drive share gains and margin improvement. We estimate currency headwinds could be close to $20 million or so in 2015, in light of our larger international footprint, but lower oil prices, natural gas costs, acquisition synergies, and performance improvements should again drive improved year-on-year results on EBITDA. Later, Steve will give you detailed 2015 guidance, but I will jump ahead and tell you on the important free cash flow metric, we expect to generate between $350 million to $375 million of free cash flow.

I'm now going to turn the call over to Mike Doss, our Chief Operating Officer to discuss the operating results in greater detail.

Thanks David. Volumes in our global paperboard packaging business were up slightly in the fourth quarter. The increase was driven by our European expansion, which is partially offset by modest declines in our US business. As David indicated, the integration of Europe is progressing well, and we have had a number of key wins in this market. Last quarter, we told you about the first major SUS conversion contract with a big UK based food group in the frozen pizza category. We also told you there were tremendous conversion opportunities across Europe, particularly in SUS, which offers superior characteristics in the areas of strength, printability, and freeze/thaw compared to competing substrates available in Europe.

In the fourth quarter we finalized the supply agreements to provide SUS packaging to a UK based breakfast cereal manufacturer in the quantity north of 10,000 tonnes annually. It is clear that our European strategy is gaining traction, and these wins further support the internalization of our paperboard mill tons. We have also seen positive trends in the beer business in Europe and emerging markets, where the movement towards premiumization is leading to strong demand for our packaging machines and cartons.

Demand across our US consumer products and beverage folding carton market remain mixed in the fourth quarter, but consistent with trends throughout the year. AC Nielsen reported low to mid-single digit declines in the US cereal, dry foods, and frozen pizza categories in the fourth quarter. Frozen pizza continues to be the most volatile of all three declining over 5% in the fourth quarter, after being down just 1% in the third quarter. Our volumes across the food and consumer products markets only declined modestly. We outperformed in both frozen pizza and dry food markets, while our share remained flat in cereal. New product and channel sales are supporting this business, and we are encouraged with the trends in new product development.

Looking at our US beverage markets end market demand trends were mixed, but consistent with expectations. AC Nielsen reported a 2.1% decline in US soft drink market in the quarter, a slight improvement from the third quarter. As we discussed in our last earnings call, much of the decline is coming from on-premise and single-serve plastic bottles, and the majority of our volume is multi-pack take home cans. It's our fridge vendor 12-packs of the national brands that drive take home volume in the CSB category, and we are very well-positioned in that segment of the business.

End market trends in the US beer market improved and turned positive in the fourth quarter, up 2.2% according to AC Nielsen. Craft beer continues to be the fastest growing submarket, but it is still relatively small compared to the big beer market. Our new Tite-Pak solution for glass bottle packaging continues to make in-roads in both the craft and big beer markets, and new products in innovation are driving our overall US beer business. The operating side of our business had another very strong quarter. Our mills ran very well across the system, and we set daily production records at the Kalamazoo, Macon, and Battle Creek mills in the quarter. We took our planned biennial cold outage at our West Monroe mill in the quarter, and this naturally impacted our production on a year-over-year basis. Despite this fact, our overall production level was up in the fourth quarter, and our yield improved 1% year-over-year.

Pricing across the business was up $16 million in the fourth quarter, and over $78 million for the full year. Input cost inflation was less than $1 million in the fourth quarter, increases in external board principally SBS and energy were largely offset by decreases in the secondary fiber and chemicals. In addition to the productivity improvement, we saw a reduction in energy costs fro the biomass boiler in Macon, and the capital we reinvested back into the mills over the past few years continues to generate a nice return. We generated $12 million of performance based improvements in the quarter, and nearly $58 million for the full year. We're proud of this overall performance, given the weather related issues we experienced in Q1. The majority of this came from the mills and European synergies, with the primary drivers being procurement, energy, operating efficiencies, and fixed costs.

As David said, we have positioned ourselves well for future growth, but let me give you a I few more details with respect to 2015. Heading into the year our mill backlogs are modestly better than last year, and we expect both commodity inflation and pricing to moderate significantly from the increases we saw in 2014. Continued synergies in Europe, performance gains from our continuous improvement and strategic purchasing initiatives, and SG&A reduction should drive EBITDA and margin growth. We're really excited about our two recent acquisitions, Rose City Packaging, the West Coast based converting business in Cascades' Norampac paperboard assets, a Canadian based mill and converting business which on a combined basis has net sales of approximately $225 million, and LTM EBITDA of $15 million. Over the next 24 months we expect to integrate approximately 20,000 to 25,000 tonnes of Graphic paperboard, and generate $10 million to $15 million in synergies from the two acquisitions.

However, to achieve the synergy goal we will take actions predominantly in Canada in 2015, that will likely result in the initial reduction of approximately $3 million to $5 million in EBITDA versus the LTM results. So working off of 2014 numbers, the net incremental EBITDA looks to be approximately $10 million in 2015, another $15 million in 2016, and another $5 million in 2017, for a total run-rate of approximately $30 million by 2017. As we have told you previously, we can operate this business on roughly $200 million of capital spending, with about $100 million to $110 million for ongoing maintenance. That's about what we spent in 2014. In 2015 we expect CapEx to be higher due to another exciting energy project with terrific projected returns. This is roughly a $30 million co-gen energy project for our West Monroe, Louisiana mill, which will be constructed in 2015, and is expected to come online in early 2016. We estimate the annual savings upon project completion to be over $10 million per year, and expect it will take the mill almost entirely off the electrical grid. We think this is a very worthy project. Much like some of our other larger capital projects in the past, we will keep you informed on the expected size, payback, and timing of this project.

So with that I will turn it over to Steve Scherger, our Chief Financial Officer, who will take you through our and outlook for 2015 in greater detail. Steve,

Thanks Mike, and good morning. It is a pleasure to be speaking with you this morning, and I look forward to building relationships with the investment community. Let me begin by thanking Dan Blount for his many years of leadership as our CFO, and for his personal guidance and counsel over the past four months, focused on ensuring a smooth transition.

As Mike and David have shared, both Q4 and full year results show strong improvement versus prior year. 2014 results established new records for the business along several key metrics, and we're well-positioned to improve performance again in 2015. Consistent with past practices, when I refer to EBITDA, net income and EPS today, I will be referring to adjusted numbers. Results have been adjusted for non-recurring items, including divestitures, post-acquisition integration activities, and capital structure expenses. During the fourth quarter we incurred $26.3 million of non-recurring charges impacting EBITDA,. $14.4 million of which relates to costs associated with the refinancing or retirement of our 2018 bonds, and the amend and extend of our bank agreement. $11.9 million relates to the sale our Labels and Flexible Packaging businesses, the acquisition of Cascades and Rose City, along with our Europe integration activities.

Focusing on Q4 results our reported net sales were down $74 million compared to Q4 2013. Excluding net sales from divested assets, net sales from our ongoing business were up 5.6%. EBITDA increased 8.5% to $171.8 million, as margin improved to 17.2% from 14.7% a year-ago. Excluding earnings from divested assets, EBITDA from our ongoing business was up 13%. The increase was driven by higher pricing and performance gains, which was partially offset by moderate labor inflation and FX headwinds. Net income increased $11.5 million to over $70 million. EPS for the quarter was $0.21, up $0.04 from a year-ago. Focusing briefly on the Q4 sales bridge versus prior year, price contributed $16.4 million in the quarter. The price benefit is lower than the prior three quarters, as price began overlapping with increases from Q4 of 2013. Mike mentioned the volume improvement in the ongoing business, which was driven by our growth in Europe.

Before turning to the overall full years results, let me take a moment to discuss Q4 and full year tax rates. The effective rate of 26% in Q4, and 34% for the full year, was driven by the recognition of a multi-year look back of federal and state R&D tax credits, along with favorable R&D tax legislation that was extended in Q4. Since some of the tax benefits were multi-year in nature, we expect our 2015 tax rate to be in the 36% to 38% range, based on known tax legislation, and our projected international earnings growth. At the end of 2014 the NOL balance stood at $712 million. We do not expect once again to be a meaningful cash taxpayer in 2015.

Commenting on the full year results, reported net sales were down $238 million excluding divestitures sales from our ongoing business increased 3.7%. EBITDA increased $41 million, or 6% to $710.8 million. Excluding divestitures EBITDA of the ongoing business grew $59 million or 9%. Earnings per share were up $0.20 to $0.72 for the year. The key drivers for the year were price and performance. Price was $78 million. We recovered prior year input cost inflation and market paperboard prices flowed through carton pricing, performance was $58 million, and was very solid given the poor weather issues in Q1. Commodity inflation of $40 million was driven primarily by higher energy costs and external board purchases. Other inflation primarily labor and benefits was $35 million, in line with expectations.

Cash flow for 2014 was strong and net cash from operations totalled a record $527 million, or 15% more than 2013. Excluding M&A and capital market activities, we generated over $350 million of free cash flow for the year. Please note that this amount included a one-time $27 million federal grant for the Macon biomass boiler project that was competed in 2013. We ended the year with $1.9 billion of net debt leaving our net leverage ratio at 2.66 times at the bottom end of our targeted 2.5 to 3 times range. During Q4 we improved our debt profile through an amend and extend of our bank facility, and refinancing of our 7.875% 2018 bonds, with new 4.875% bonds maturing in 2022. Benefits of these transaction actions include a $10 million reduction in annual interest expense, extended maturities of one year for the bank agreement, and four years on the bonds, enhanced covenants, and enhanced liquidity through an upsized revolver to $1.25 billion.

At year-end our average cost of debt was 3.1%, and our domestic liquidity was over $1 billion. Given the Company's strong financial performance and outlook, the Board of Directors has approved the initiation of a $0.05 per share quarterly dividend, along with a $250 million share repurchase program. The first quarterly dividend will be paid on April 5th, 2015 to holders of record as of March 15th, 2015. The dividend will be approximately $16 million per quarter based on current shares outstanding. Regarding the share repurchase program, management supported by outside experts, will take an opportunistic and very disciplined approach to determine the timing and quantity of repurchases. We look forward to sharing the results of the repurchase program with you on a quarterly basis.

Turning to 2015 guidance, we expect continued improvement in overall financial performance. As of now we expect both pricing and commodity input inflation to be modest, in the zero to $10 million range. We expect labor and benefits inflation to be in the $30 million to $35 million range, and performance improvements to be in the $70 million to $80 million range. Capital spending is expected to be between $220 million and $230 million, as we pursue the Energy co-gen product in Louisiana that Mike mentioned. We will continue to fund our pension plans in the $40 million to $60 million range, and we inspect interest expense to be in the $70 million to $80 million range. As such, we expect our free cash flow to be between $350 million and $375 million for the year.

Considering that the 2014 cash flow figure included $27 million from the biomass tax grant, we expect to generate 5% to 10% increase in cash flow year-over-year. This level of cash generation, along with our ample liquidity and leverage, allow us to continue to invest in the business, pursue acquisitions, and execute a disciplined capital allocation plan. The remainder of our guidance is contained in the presentation on our website. If you have any questions, we will be glad to address them during Q&A. Thank you for your time this morning. I will now turn the call back to the operator.

Thank you. (Operator Instructions). Our first question comes from the line of George Staphos from Bank of America Merrill Lynch. Your line is now open.

Hi everyone. Good morning thanks for the details and taking my question. I guess my first question for Steve or Mike or Dave, could you go through your synergy targets and earnings targets again for Cascades and Rose City, and I am looking specifically at Slide eight, where you say net incremental EBITDA to Graphic Packaging will be $10 million in 2015, $20 million to $25 million in 2016, and $25 million to $30 million in 2017. By 2017 is that $25 million to $30 million the accumulation of incremental benefits, or each of these is incremental, so I'm tacking on $25 million on top of $20 million on top of $10 million?

Yes. Good morning, George. It's Mike. I wanted to just clarify that. Your read is correct. It's $10 million in 2015, $25 million run-rate in 2016, and $30 million run-rate in 2017. So you don't add them all on top of one another. We're trying to just show you that it takes approximately 24 months for us to get the full run rate of the synergies for those two acquisitions.

Fair enough. And then recognizing that you're not in Canada, and you maybe don't want to talk too much about this in a broad forum, what are some of the complications I think is how you framed it, in terms of the integration of Cascades within Graphic Packaging that we should be aware of, and any key operational mile markers that we should be aware of, that would dictate whether you are going to be successful or not with your synergy and earnings goal there?

Yes. I think the way to think about that, George, is there's paperboard mills involved and when we're driving synergy through paperboard mills as we saw when we did the Altivity transaction, it just takes us longer to get those synergies to the bottom-line, and we like the converting assets we just purchased, and we think there is some opportunity to scale and drive efficiency through those, but there will be a little dislocation for the first 12 month as we look to optimize the mills into our system, and really, really figure things out. You have to remember we just closed on that transaction yesterday, so there's been a limit to how much true diligence and planning we can do with the other side, just given the fact that we just closed.

George, wherever we do an acquisition that includes a mill you can well imagine, we have a lot more outside scrutiny by government agencies, and therefore, there's only so much you can do in a bolt-on with the converting businesses we can get pretty deep pretty quickly. Mills not so much. So we have a very good understanding of what we're getting up there, but in some ways we are going to need to do some work. Additionally, a lot of it is some of it is board integration, we're going to have to build, we will have some capacity build-out in some of our CRB mills to help integrate some of those activities even in Rose City, there are some outside tonnes being purchased that we will integrate into our mill. Those just take a little bit longer. So if you think about the difference between sort of what we did in Europe which we're all converting versus when we did the Altivity thing, it took a little longer, but the rate of synergy is pretty good. You took $30 million of EBITDA for a total purchase of $110 million, that's a real decent return for Graphic Packaging.

No. That makes perfect sense David again on the mill side. I get what you're saying. Last one and I will turn it over. Two of your peers obviously recently announced plans to merge, and one of the things that they have talked about and certainly we've discussed in our own research, is that will now allow them to offer the full suite of box board grades, so the folding carton market. Is that important, do you feel like you need to fill on SBS or SUS side, or does net Cascades actually give you sufficient amount, where you don't see that as a strategic issue to contend with? Thanks, guys. I will turn it over.

So I am assuming you're talking about the Rock Vaco?

Rock Vaco.

Yes. What I have always said about offering all three grades, is that we thought it was predominantly a cost option for us because we could optimize back through the board mills if you had all three grades, right? Never really said it was a customer deficiency. Those customers, those end use markets are pretty well defined, and of course we have got great supply partners with our current SBS guys, and I would think they would have an incentive also not to want to lose share to a new competitor. So I'm unconcerned about that part of the equation. I like our current position. CUK is a great grade, and I know they believe that as well, which is I'm sure what drove a good part of that acquisition, but I think when you have strong competitors overall, you end up in a good market position, and so we kind of looked at that as a net positive for Graphic as we go down the road. We know both of those guys are great competitors, they're well-run companies, putting them together will take some complication, they will get that done, but that makes us stronger as well. So we did not see that as a negative for Graphic.

Okay. Thank you, Dave. I will turn it over.

Your next question comes from the line of Ghansham Panjabi with Robert W. Baird. Your line is open.

Hey, guys. Good morning and Steve welcome to the call.

Thank you.

Hey. First off on the dividend, based on current stock price it's a little over 1 point percent yield. Maybe can you outline the thought process behind how you got to that dividend payout, and also your philosophy on the dividend in terms of perhaps growing it over time?

Yes. I mean I will take part of it and let Steve do part of it. We did a fair amount of analysis. We used outside advisors in the process, and then fortunately we have a fair amount of analysts like yourself that call us, that were not short of opinions and insight into what would be appropriate, and we certainly put that into the cauldron as well. We wanted to make sure that the amount was enough to be meaningful. It seemed not reasonable to just do a nominal without it being significant, and if you look at where the industry is, and when people initiate we're certainly on the upper end of that percentage. It gives us some opportunity over time to expand our dividend, but it also gives us enough dry powder to be able to have cash flow for share buyback in the appropriate times, in dips or to make sure that we can, that our management incentive plans are not dilutive to shareholders. We want to be able to have that kind of flexibility. And then as Mike said, we've got some good capital projects and ongoing acquisitions, so it's a balance of the cash flow that we're going to have to invest back in the business and return to shareholders. So we debate it in great detail with our Board. Which is a very, very informed and experienced Board, and we came out which number that made sense for us at least at initiation stage.

Okay. And then just as it relates to the weather disruption for the first quarter of 2014, is there any reason that you would not be able to capture what you lost from weather during the first quarter in particular, and can you kind of remind us as to what that number was on EBITDA? And also, Steve, if you can just given the Company's growth in Europe if you have a sensitivity in terms of foreign exchange Euro versus dollar, and the impact on EBITDA, that would be helpful, also? Thanks.

Sure. I would be glad to and thank you. Relative to the FX, as David mentioned, there will be some headwinds, and it will be a function of translation and transaction based, and of course we don't predict exchange rates, but at current rates it's a $15 million to $20 million headwind. We will manage through, and as David said, we have got some deflation activities and other things that we certainly will apply against that, as we continue to improve the earnings year-over-year. I think as you look back on last year barring any additional weather activities that was a $15 million type impact in the quarter, and it should be something that would be a net positive for the coming quarter, assuming nothing occurs of substance here over the remainder of the quarter.

I think if you remember I think we have said that we expect performance, this year's performance improves about $60 million. That included the $15 million of first quarter numbers, first quarter headwinds that we had. So our target for this year is reasonably in that $75 million range, that includes the integration activities and costs that we're going to get out of Benson, it includes the add-back of the $15 million I announced in the fourth quarter that we had taken an SG&A reduction in corporate level across because of the smaller footprint, and that was probably $10 million, so if you look at it, I think the $75 million in performance sort of target it makes perfectly good sense, and some of that is going to be eaten up in this $20 million worth of FX, but having said that, guys, we have always said that we sort of are high level we grow the business 2% to 3% on the top line, 5% to 6% on bottom line. We're not walking off of any of those kind of numbers. We will find a way to improve and grow the business, such that we can generate those kinds of financial improvements, and that's kind of what we're expecting to do and you saw that in our cash flow guidance.

Okay. Thank you so much.

Okay.

Your next question comes from the line of Debbie Jones with Deutsche Bank. Your line is now open.

Hi. Good morning.

Good morning, Debbie.

I was wondering could you talk a bit about exposure to Mexico? Mexico is obviously growing pretty fast, imports or exports into the US they're expected to continue it grow. Do you think that there is an opportunity for you guys to capitalize on that going forward?And how much is that a priority for you?

Yes, Debbie, It's Mike. I would characterize it as we have talked in the past, that is a priority for us, and we continue to look for ways to do that both organically and inorganically. As we mentioned on a prior call, we actually were in the final stages of a potential acquisition, and the multiples just got too rich, and we walked away from that deal, but that remains a key priority for us, and we're looking at a number of different options, and we certainly would like to increase our position in Mexico. We have one plant there now. Our customers are moving there, they're building out factories, and we think it's a good place for us to be.

We had a real good year in Mexico overall, our sales were good there, we made good money there. Mike is right. It is difficult in Mexico to make sure you know what you're buying, so there's a little bit of a pig and poke mentality. Graphic is big enough to be able to make that acquisition, and know that there's going some mistakes along that line, but we're not stupid enough to give away shareholder value. So we're going to continue to look hard in Mexico, but you have to lean over your skis to be able to buy down there, it is just really difficult to figure out exactly what you're buying from an EBITDA standpoint. So I think we'll get something done in Mexico for sure in the next 18 months, because it just makes sense for us, but we're going to be smart about that.

Okay. Thank you. That's helpful. Just on the new product side of the equation, you addressed this on the last call, wondering if you could talk about what you are most excited about this year, what you think will for have the biggest impact for GPK?

We have a couple of things that we're pretty excited about. Of course we profiled at length our Tite-Pak innovation for beverage contains, which is really getting some positive traction, both with the craft brewers as well as the big beer customers. We also have some pressed tray options that are using our SUS paperboard, that can replace CPET trays, we're working on some of those things in applications, and seeing some success. And then I would also say that our microwave business continues to perform well.

Thanks. That's helpful.

Your next question comes from the next question comes from the line of Mark Wilde, BMO Capital Markets, your line is open.

Good morning, Dave, Mike, Steve.

Good morning.

Good morning, Mark.

First question I had just a little bit of a follow-up on FX. Is there another kind of layer of potential FX issues just as we think about say European carton board suppliers, particularly the Scandinavians maybe having a little more of a currency advantage now?

Well, I mean certainly they will have the ability to sell here with the tailwind of currency, but and I both know you plan a business around hedging and currency, that's a short-term plan, right? Because ultimately just like it's going a one way it's going to go the other. Your projection and mine relative to oil and the impact to that with foreign exchange, says it's really difficult to build a long-term supply chain.

On top of which you're not really selling board. None of our customers actually buy board. When the stuff shows up it needs to be printed, cut, glued, and ready to be installed. So at the end of the day unless you are buying board that goes through a large converting operation like Graphic, or Rock Vaco, then you're selling through a whole bunch of small independent guys. Not that you can't do it, but these are not sheets of 8.5 by 11 things,-- each one you look at, if you look at the number of, the complexity that goes into rolls that we sell in our own operations, let alone outside, it's a really difficult process to do, Mark, and then you still got US logistics. You can get it to the coast, but check out the East Coast. There's no folding carton business there, so you got to get it from one place to the other. So yes, it's certainly an impact, a transitory impact potentially, but as far as being in the folding carton business and planning for, or being concerned about a big onslaught of board from Europe showing up in the United States, that is not what keeps me up at night.

Yes okay and Dave just kind of follow-on that I was just kind of curious as to whether you are seeing any more Scandinavian pressure over in the UK market, the Euro has declined a lot against the British pound?

Yes we are a net buyer over there, so that's not a negative for us, right, Mark?

Okay. Second question. Can you give us some sense of where you're picking up volume domestically, which markets?

Yes. We don't talk a lot about those kind of things, just because it's really not in our best interest. What I would say is we had a great quarter and year in frozen pizza and dry foods. The beer craft was good for us as well. So I kind of leave it at that.

Okay. And, Dave, the corrugated box volumes have picked up pretty nicely the last four or five months, over half of what goes into boxes are beer and food, which you provide the packaging for. So what do you think is going on here? We got a pickup in corrugated, but we don't really seem to have much pickup in the stuff that would go into corrugated yet?

I think Mark, you know that as well as I do, that the predominant part of the US economy has picked up has been more the industrial side of the equation. Those corrugated boxes that are moving products to and from a Ford plant, or Amazon online shopping, and so on and so forth, and there's not a lot of food. There's not a lot of food being delivered by drones, so at the end of the day, we're not seeing that kind of pickup on an aligned basis with corrugated.

Having said that, as Mike said, our backlogs are good in our core business ,so it's incrementally stronger than we saw first quarter of last year, so we're seeing some improvement on that, but corrugated tends to be the tip of the spear. They're going to see, when the general economy construction, manufacturing, when it goes up they're going to see a much bigger improvement than the food and beverage part of the equation, and of course when the economy struggles, we don't see the level of decline that occurs in that business as well. So to some extent it's really different macro trends in those businesses.

Okay. And then the last question I have, Dave, is just on accretion, once you integrate more tonnage in the mills, from slide eight, it looks like you assume something in the $500 to $600 a ton range for the accretion from each incremental ton that you can move forward through a carton plan. Is that a good number?

Mark, this is Steve. We tend to think of that more in the $300 range, and then there are other synergies that we drive through the system, and so what you're seeing there is kind a cumulative impact that we would secure over the next several years, but we tend to, the $500 you referenced, we would use a number closer to $300 on a board only basis, and then we would pursue, of course other synergies, SG&A, other supply chain activities, optimization of assets in terms of where we runs things, and the like.

Freight will be a bigger part of the Canadian thing because as you well know, a number of our plants are actually as close to the market as the CRB mill that we're purchasing, so we will optimize around those mills. that mill network, and we will pick up some freight. And which freight of course is traditionally being mostly we keep it. Some of it is of course customer freight that the customers will have an advantage on, and sourcing as well with two additional paperboard mills.

Okay. I actually had one other question. You mentioned Tite-Pak. I think when we were down there in December you mentioned that you were into one of the Yuengling breweries, but not the other. Have you picked up any kind of incremental wins since then?

Well, Mark, we don't talk about specific customers, but I would say is the traction we spoke with you about when you visited continues to be very positive. Yes.

Okay. Good luck in the quarter.

Thank you.

Next question comes from the line of Alex Ovshey with Goldman Sachs. Your line is open.

Thank you. Good morning guys.

Morning, Alex.

On the raw material side 2015, what you going to be paying more for in terms of the inputs that are actually going on for you? Can you talk about those.

Well, for one outside purchased board, paper because there were some price increases throughout 2014, so we will see some incremental on that. And then probably the biggest impact will be wood. Wood continues to see some inflation that's really agnostic to what the macro is doing, and anyway there is some outside pressure in the United States, because Europe subsidizes the burning of our wood to meet their ridiculous sustainability goals in Europe, and therefore, that puts some pressure on the wood baskets that incrementally drive wood prices up in the Southeast. So as long as Europe has plenty of cash to support those subsidies, I would inspect that to continue. Beyond that, it's going to be pretty flat, and I think I said in our notes, we expect actual input inflation on the year to be kind of modest. Yes. Maybe $5 million or something like that, on a net-on-net basis.

Okay.

Go ahead. The only thing I might add to that is to David's point is freight from, excluding the fuel surcharge component, supply/demand from a freight perspective we have seen increases there. We would expect to see it relative to rules of the road, supply/demand there, so line hold rates themselves actually have inflation, obviously some of that is offset by fuel surcharges, but for example fuel surcharges are 20% of the overall cost of freight. So it's just, that's another area underneath a number where we would see an increase for example.

I will tell you too, Alex and we don't want to get too far for you, but Mike is on a terror here to look at our entire warehouse and freight distribution system. Graphic still spends way too much money on storing and moving things around, and warehousing, so over the next couple of years we will be spending some insignificant funds, but to fake out a fair amount of costs that are resident in our business by virtue of our warehouse footprint. So that freight and those kind of things in order to our benefit, we will have to spend some money to do it, but there's lots of cost opportunities in this business, and he and his team specifically supply chain, have got some significant programs to take those kind of costs out of our business, but until we do that we're going to see incremental increases in just moving our stuff around.

Got it, appreciate the color. And just one for me. On the buyback of $250 million I know it's opportunistic, but is the goal to get it done in 2015?

No. I guess I think that $250 million is going to be over a period of time. First of all, I mean I want to keep some dry powder available to do these bolt-on acquisitions, and on our business, so I wouldn't do it, it will take a couple of years. I will say we will certainly have a floor, for sure we're going to go and buy back the shares that would be dilutive from management comp, and so that our shareholders aren't losing ground on that. So for sure, that's probably $30 million to $35 million, or something like that we expect. Beyond that, we will just watch the dips, and we've got and outside advisor that's going to help us on the process, and try to be smart about what we do from a buyback standpoint.

Great. Thank you.

Sure.

Your next question comes from the line of Anthony Pettinari with Citi. Your line is now open.

Good morning.

Anthony.

I just had a follow-up on George's question. the large competitors of yours that are merging, or have announced their intention to merge, they have touted the benefits not only of being in the three box board grades, but also being integrated in the container board, and maybe having an integrated containerboard box board offering, might allow them to gain share with CPG customers, and I'm wondering if you think that that's something that you, is that something that you see in the marketplace, is that something that you would consider is having a containerboard offering something that you think would give you an advantage in the marketplace?

Yes. So what that looks like is you have a bigger basket to lower your price on, I guess. I mean the guy that buys paperboard and buys containerboard is two completely different parts of the organization, so a bigger basket allows you, I guess to reduce the price in one sector to sell something else, and if that math works, I guess then that's what you would do. Hard-pressed for me to see how price reductions in that really work, but that's really the advantage. Otherwise, no customer really comes to you any more and says we want one-stop-shopping. I mean that is just yesterday. Yestertech stuff. That's not the way things are doing, you will see the focus seems to work. So I think the bigger opportunity there as I said is the opportunity across multiple grades, to optimize back your paperboard mills, and there is great synergy in that process, and I would expect them, and in fact, I think they announced that they were going to do that, but I don't think the customer offering a broader basket of customers is really a big competitive advantage in the process. If you want to cut the price, just cut the price. So I mean you don't really need more tools to do that with.

Okay. Okay. That's very helpful. And then regarding North American volumes, I'm just wondering how they trended in the three months of the quarter, and then into January and February? I mean from your comments it seems like there's been a bit of an acceleration, but you have easier comps in terms of weather last year. I wonder if you could just give any more color around kind of the volume recovery, if any that you're seeing in North America?

Q4 and Q4 was relatively flat. We were up able little bit because of our acquisitions as we kind of outlined on the waterfalls. As we headed into January here, our backlogs as we said were modestly stronger. I wouldn't characterize them as being any more strengthening than that. I mean they were steady. But I wouldn't say that they're up materially from what we saw last year.

Okay.

Net of the weather.

Net of the weather.

Net of the weather. Okay. Okay. That's helpful. I will turn it over.

Next question comes from the line of [Saleb Ing] with Jefferies. Your line is open.

Good morning. The Cascades business was previously operated with somewhat depressed margins. How much of that is tied to the cost structure, or lack of pull through on the demand front?

Both.

Okay. Would you be able to parse it out?

Well I am not going to parse, I don't think that it makes a lot of sense to parse it out, because at the end of the day we have got to solve both of those problems, right? The advantage of the integration activity is that we will improve the mix, it will improve the flow of board through that entire business. And that will manifest itself in better margins, some of it will be yield, some of it will be efficiency, and some of it will be in the carton plants as well. So what I would simply say is as we look at that integration synergy, we absolutely believe that in that business there is no reason we can't be at the same kind of margins that we are in our CRB business. Nothing we have seen would suggest that we can't do that, but it will be a combination of improving the kinds of things that we do every single day.

That is why it takes a little longer to do it, that is why we are projecting over a 24 month period of time.

Got you, very helpful. And does your synergy target account for any ability to untap some of that low cost call it capacity you guys highlighted at your Analyst Day? And will this acquisition limit your open market purchases on the SBS front, I know it is not quite SBS, but it is S-like?

Yes, it won't really change our SBS, we will do some optimizations out of that mill, we will have a chance to really look at [Jean Kier], look we know Jean Kier is not a top quartile mill, we are not idiots, so we know that it is an expensive mill to operate, and we will optimize that mix and look at our grades, but we are still going to be a big purchaser of SBS on the outside. Relative to SUS, there are integration opportunities within the Cascades, but also within Rose City, they bought a fair amount of tons out there, and I don't know why, but not from Graphic Packaging. So we will change that approach for sure, so yes, we will take some of the pulp, excess pulp capacity out of West Monroe, and use it. Additionally that Santa Clara board mill makes a grade out there on the West Coast, that we use for a lot of our craft beer, it is a hybrid between CRB and SUS, and that will allow us to build up that board mill out there, and that is a real positive for Graphic, it is a nice ecosystem on the West Coast, if you sort of think about the converting network between Oroville which we purchased about three or four years ago now, in this one, we have got a pretty good ecosystem around the Santa Clara board mill, out there on the West Coast, which is incredibly important, because as Mark Wilde said earlier, you want to protect yourself from a carton standpoint from imported, some might take a scud on imported board from whatever, wherever based on currency flux. And this allows us to do that.

Got you. And then how are you guys thinking about M&A at least for this year? Are you hands full at this point and it is going to be more of a 2016 event, or are you going to be opportunistic this year?

Every time I say that we aren't going to do something, we announce another deal. Right, isn't that kind of the way we have been. So Graphic Packaging, we are a serial buyer and seller, and we just have to sort of get over that. And the fact of the matter is that if there is something out there that looks like it is going to be accretive, certainly as accretive as these two acquisitions are going to be, then we will do it again.

Okay. And just one last one from me, the inflation number Steve, you highlighted the zero to $10 million number, is that just input cost inflation, I know on the last call you guys kind of flushed out input cost inflation as well as labor and wages and other inflations, can you help me parse that out for 2015?

Yes, I would be glad to, yes, that is just input commodity cost inflation, and that equates to the $40 million that we saw this year for those items, that is the zero to $10 million, and then the other inflation which is primarily labor and benefits, where we saw roughly $35 million, we would see $30 million to $35 million again there. So you have got two separate inflation numbers that accumulate into the total for us.

Okay. Very helpful. Thanks guys.

You bet.

Your last question comes from the line of George Staphos with Bank of America Merrill Lynch, your line is open.

Hi guys. One one-off question, to some degree it was something that Mark was asking on. When we look at SUS as it is produced here in the States, what are its relative merits versus something like a fresh fiberboard over in Europe, and why do you think that it will continue to gain share versus that other grade? Thanks.

George, it really has to do with the strength characteristics, strength and tear characteristics of the SUS paperboard relative to anything else that is really available on the market. It holds up really well in wet environments, it also holds up very well in frozen environments. And the basis weights of that paperboard when compared to other competitive offerings, they are very, very solid, meaning that you can use a lighter weight caliber to get the same effect. So that is really what makes it cost competitive on a global basis.

I know that you don't want to get too technical in the process, but you have got to remember that the fiberlink is totally different on pine than on recycled, or on bleached, so the tear characteristics are materially different, and so are the ability to hold heavier product, if you took a CRB and you wrapped it around a 24-pack of beer, you wouldn't get it from the store to your car, so the fact of the matter is that there are end use applications that work great for that, and that is what we tend to, we don't use CUK in areas where it makes sense to run CRB. But CUK has a very broad range of applications that it competes great across the two other substrates.

Yes, I will take it offline, but I thought that the fiberboard would be more analogous to SUS in terms of being virgin based and the like, and having therefore the fiber like--?

Do you mean folding box board? That has got a big recycled.

No, I mean the Scandinavians make this fresh fiberboard which I thought was more virgin based, I didn't think that it was recycled grade?

It is, it is George, but you have got hardwood and softwood fibers there, and so you are back into this whole strength and tear question.

Understood. Thanks for the primer there, and good luck in the quarter guys, thanks for all of the details.

Take care George. Okay. They are telling me that we are done. So we are going to get back to work, and we will talk to you again at the end of next quarter. Thanks for helping.

This concludes today's conference call, you may now disconnect.