Graphic Packaging Holding Co (GPK) 2015 Q4 法說會逐字稿

Good morning. My name is Keith 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 2015 earnings conference call. Please note, this is a 60 minute call.

(Operator Instructions)

I would now like to turn the call over to Brad Ankerholz, Vice President and Treasurer. Please go ahead, Sir.

Thanks, Keith, and welcome, everybody, to the Graphic Packaging Holding Company's fourth-quarter and full-year 2015 earnings conference call. Commenting on results this morning are Mike Doss, the Company's President and CEO, and Steve Scherger, our Senior Vice President and Chief Financial Officer. To help you follow along with today's call we have provided a slide presentation, which you can access by clicking on the webcast and presentation link on the investor section of our website which is graphicpkg.com.

I would like to remind everyone that statements of our expectations, plans, estimates and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the Company's present expectations.

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

Thank you, Brad. I am pleased to be speaking to you today as President and CEO of Graphic Packaging and I would like to personally thank the Board of Directors for their confidence in me. I would also like to recognize David Scheible for his 17 years of leadership with Graphic Packaging. David and I have worked together over the past several years to transform Graphic Packaging into a pure play global paperboard packaging company with a clear profitable growth strategy. I am proud of the work we've done and even more excited about the Company's future.

We delivered a very strong quarter in the face of difficult end markets and currency headwinds. Sales increased 2.4%, adjusted EBITDA increased 5.2% and adjusted EBITDA margin increased 40 basis points to 17.6%. Macro trends in the fourth quarter were similar to what we've seen all year long with selective US end markets remaining challenged and overall European markets showing stability.

Despite sluggish US markets and currency headwinds, we are executing against our three strategic priorities to drive growth and increase shareholder value. These three priorities are: first, invest in our core business to drive organic growth and lower cost; second, make strategic acquisitions to enhance growth and expand channels; and third, return capital to shareholders to drive long-term shareholder value.

On the first priority of investing in our core business, we invested $244 million in capital projects and delivered $74 million of performance improvements in 2015. We are benefiting from the investments we have made in our mill system and ongoing upgrades to our converting network. Our second priority of making strategic acquisitions, we made three acquisitions in 2015 and closed a fourth the first week of January. So far this year, we have announced two additional acquisitions. All six of these transactions expand or deepen our geographic product and customer base in our core food and beverage markets.

And the third priority of returning capital to shareholders, we declared over $65 million in dividends and purchased $63 million of our stock in 2015. This includes $40 million of share repurchases in the fourth quarter. In 2016, we've already purchased an additional $20 million of stock. In total, since this time last year, we have returned nearly $150 million to shareholders between dividends and share repurchases. These strategic priorities served us well in 2015 and we see plenty of opportunities to continue to deploying our capital to drive future profitable growth.

Looking at some trends in the quarter, volumes in our global paperboard packaging business increased 4.6% in the fourth quarter. The increase was primarily driven by growth in Europe and the Rose City Packaging and Cascades' Norampac paperboard acquisitions.

If you recall, we told you last quarter we would be building SUS roll stock inventory in the fourth quarter in order to efficiently service our folding carton customers during the second quarter of 2016, of a new press section and head box on one of our paper machines in our West Monroe facility. This paperboard would have normally been sold in the open market during the fourth quarter.

Adjusting for these tons, our core organic volumes were essentially flat in the quarter and for the full year. By comparison, the AF&PA reported that 2015 US industry production of our two primary grades was also essentially flat in 2015, with CUK up about 1%, offset by a slight decline in CRB production, reflective of the fusion mill shut down in late 2014.

As far as our end markets are concerned, the overall trends we saw in the fourth quarter are very similar to what we've seen all year long. The global beverage markets continues to steadily grow, led by specialty drinks and craft beer, and our volume was solid in the quarter. As you know, we have increased our exposure to both the specialty and craft beer markets through targeted acquisitions and investments over the past several years, driving net volume growth globally. After several years of consistent declines, carbonated soft drink sales were down only 0.2% in the fourth quarter, a modest slowdown in the volume decline trend. Food and consumer markets were mixed in the quarter. As reported by AC Nielsen, industry volumes for frozen pizza products were up low single digits, while markets for dry cereal, frozen foods and facial tissues were all down low- to mid-single digits in the fourth quarter.

On the acquisition front, we continue to make solid progress. As you know, we have been integrating our three European acquisitions and optimizing our platform for the past two years. These integrations are substantially complete and we are well positioned to continue growing in the region. In 2015, we met our goal of shipping nearly 150,000 tons of SUS paperboard to Europe, and we are tracking to our longer-term goal of 200,000 tons over the next couple of years. As we have discussed, the internalization of our US produced SUS paperboard remains central to our strategy in Europe, and growth in this region provides additional leverage to our vertically integrated model.

Due to the end marketplace remains highly fragmented, and now we have a low cost, scalable platform to build upon. With European integration nearly complete, we will look for additional opportunities to invest in the region, further leveraging our vertically integrated model. In North America, the integrations of Rose City Packaging and Cascades' Norampac paperboard business are nearly complete.

We continue to target 20,000 to 25,000 tons of SUS integration in these businesses within two years of the acquisitions and are tracking towards this goal. Both Rose City and Cascades were important tuck-under acquisitions for Graphic Packaging. Rose City broadened our regional exposure to the craft beer market, allowed us to optimize our west coast manufacturing footprint by consolidating volumes from three facilities into two and added a talented new leadership team to our organization. The Cascades acquisition extended our relationship with many of our large US food and beverage customers in Canada, allowed us to optimize our CRB paperboard network and provided us access to a market where we did not previously have converting assets.

The integration of G-Box in Mexico and Carded Graphics in Virginia, two acquisitions that we completed over the last four months, is well underway and progressing in line with expectations. Both of these are strategic tuck-under acquisitions that supplement growth and improve our positioning by expanding our geographic footprint, manufacturing capabilities, customer base and range of products. G-Box gives us a stronger platform in Mexico from which to build upon, while Carded Graphics allows us to better serve new and existing customers, particularly the fast-growing craft beer market.

We continue to expect the acquisitions to generate approximately $15 million in EBITDA in 2016, with combined EBITDA increasing to $20 million to $25 million in 2017 as we integrate paperboard and grow in markets like craft beer and geographically in Mexico. In January, we announced our intentions to acquire Colorpak and Walter G. Anderson. Colorpak operates three folding carton facilities that convert paperboard for food, beverage and consumer product markets.

The three converting facilities are located in Melbourne, in Sydney, Australia and Auckland, New Zealand. Similar to our strategy in the US and Europe, we are committed to growing our business in developed food and beverage markets and optimizing our global supply chain. Graphic Packaging has been operating in Australia for over two decades, serving primarily beverage customers using third-party converting partners.

Colorpak has been our largest converting partner and its three folding carton manufacturing facilities allow us to expand our proven integrated supply chain in the Australia and New Zealand food, beverage and consumer product markets. This acquisition will broaden our customer base and offer our current customers a wider range of products. Colorpak is expected to contribute $4 million to $6 million of EBITDA in 2016, and $11 million to $13 million annually within 12 to 24 months.

W.G. Anderson is the premier folding carton manufacturer with a focus on store branded food and consumer product markets. The company operates two world-class folding carton converting facilities in Hamel, Minnesota and Newton, Iowa. These facilities are strategically located in the Upper Midwest, where many of our largest CPG customers are concentrated. The acquisition is a continuation of our strategy to grow in attractive geographies and end markets.

The addition of these two state of the art converting facilities enhances our leadership position in the key North American food and consumer product markets. We're also pleased to add a very talented leadership team, including Mark Anderson, along with his highly experienced workforce to the Graphic Packaging Team. The acquisition is expected to generate $14 million of EBITDA in 2016 and $20 million to $25 million annually within 12 to 24 months. Having received regulatory approval for the Walter G. Anderson acquisition, we expect to close the transaction this month and expect to close on Colorpak in the second quarter.

New product development remains an essential component of our organic growth strategy. In the craft beer market, we launched a new litho-lam 12 pack carton for glass bottles with a major craft brewing customer. In the food market, we worked with a major frozen pizza customer to launch a new line of frozen pizza at Walmart called Sasquatch Pizza. This is an extra large pizza that utilizes our heavy caliber SUS and heavy a UV window. On the strength packaging side, we used heavy caliber SUS to produce a two-pack carton for Kellogg's Special K Fruit and Yogurt Cereal and a Nutri-Grain variety pack. In microwave cooking solutions, we launched a new pizza carton that features our proprietary MicroFlex Q susceptor for even heating of the Gino's East of Chicago line of deep dish frozen pizzas.

Shifting gears, let me make a few comments on pricing. As you know, we manufacturer two primary grades of paperboard, SUS and CRB. We convert over 80% of this coated paperboard into folding carton packaging for our CPG customers through our network of converting facilities. We also make folding cartons for customers from paperboard purchased from other manufacturers. This non-Graphic Packaging paperboard includes SBS in the US and bleached, recycled, and SUS alternatives outside of North America.

As we have stated in the past and has been our experience, pricing and commodity inflation/deflation should offset over time. Our carton contracts are generally contain one of two price resetting mechanisms. One is typically based on a basket of commodity inputs while the other is typically based on open market price of paperboard. When we look at the RISI published pricing for our coated paperboard grades for 2015, they published $15 per ton decrease in SUS in February and a $50 per ton increase in CRB in August. As a reminder, these price adjustments generally flow through our carton contracts on an average of nine months.

Turning briefly to container board, RISI published reduction in the container board pricing on January 24. We have a single machine in our West Monroe complex that made 120,000 tons of medium in 2015, nearly half of which was used internally. Our exposure to the container board market is less than 2% of total Graphic Packaging sales. We are an integrated folding carton company selling end products directly to food, beverage and consumer CPGs, primarily on the coated paperboard that we manufacture. We are a net buyer of container board as our folding cartons often ship in corrugated boxes.

Turning to manufacturing operations, we had another strong quarter and full year. Our US mills ran well and produced nearly 18,000 more tons of coated paperboard over the fourth quarter of last year. The improvements in mill efficiency in the fourth quarter and the full year have been a result of our continued commitment to both Lean and Six Sigma principles, along with targeted, high-return capital investments.

As we have discussed before, the leverage of our vertically integrated model comes from our ability to produce more paperboard on our existing mills and to integrate this paperboard into folding cartons for our CPG customers. In 2015, we produced and sold over 60,000 more tons of coated paperboard from our US mills. This increase does not include the tonnage we added via the Canadian mill acquisitions. In the fourth quarter and throughout the year, our mills ran full and our backlogs remained strong and consistent at around 4 to 5 weeks for both CRB and SUS.

We've talked in the past about the excess pulp capacity in our system and our focus on growing our converting volumes to tap into this additional capacity to drive the operating leverage in our model. The four announced acquisitions in 2015, the two new acquisitions announced in January and our growing platform in Europe, provide us with the incremental demand to continue ramping up our paperboard production to capitalize on the operating leverage in the model.

As we discussed on our last earnings call, we will do this by adding a new press section and head box to one of our SUS paperboard machines in West Monroe during the second quarter of this year. The new press section will offer a range of benefits, including increased throughput, better quality, and higher yields, resulting in approximately 30,000 tons of annual incremental SUS capacity. This is expected to provide added operating leverage as we move into the latter part of 2016 and beyond. We are very excited about the project and believe it is right in line with our strategic priority of investing back into the business to support continued long-term growth.

As we shared in October, we're planning to take approximately 25 days of downtime in the second quarter to complete the normal maintenance work and install the new press section and head box. That's about 15 extra days compared to what we would normally taken for an annual maintenance outage. As we mentioned earlier, in the fourth quarter, we built approximately 20,000 tons of additional SUS stock inventory in order to keep the business running smoothly during this downtime.

An additional significant project that we are planning to undertake in the second half of 2016 is the installation of a new curtain coater and other improvements on one of our Macon SUS paperboard machines. We installed a similar asset at our Kalamazoo CRB mill in 2014 and have been very pleased with the quality and cost-reduction benefits of the project. The investment at the Macon mill will be approximately $30 million and will drive approximately $10 million of EBITDA upon completion.

Finally, I am pleased to announce that our West Monroe cogen investment came online in January. As you know, this was a capital allocation project that we have been working on for over a year. In total, we spent $30 million and expect to save about $10 million annually on energy costs. We think this was an excellent use of capital and another example of how we invest back in the business to drive long-term profitability. And with that, I will turn it over to Steve Scherger, our Chief Financial Officer to take you through the quarterly financial results in more detail.

Thanks, Mike, and good morning. As Mike shared, we delivered another strong quarter. Fourth-quarter EPS, EBITDA and EBITDA margins were excellent, allowing us to close out 2015 with positive momentum.

A few full year highlights. Adjusted EBITDA increased $40 million to $751 million. Adjusted EBITDA margin increased 130 basis points from 16.8% to 18.1%. Adjusted EPS increased $0.03 to $0.75 and cash flow available for debt reduction, M&A and return to shareholders was $345 million. Also, since the announcement of our capital allocation plan 12 months ago, we have returned nearly $150 million to shareholders, with $112 million returned in 2015 and the balance thus far this year. References today to EBITDA, net income and EPS will be to adjusted numbers.

Pretax adjustments related to M&A, integration costs and special charges were $8 million for the quarter and $23 million for the full year. Focusing on full-year net sales, revenue from our ongoing business increased 3.5%, driven by improved volume mix, primarily from our acquisitions. Price was lower by $5 million in the quarter and $15 million for the year. The strong US dollar translated to lower sales of $21 million in the quarter and $109 million for the year.

Turning to EBITDA, we posted a strong fourth-quarter increase of 5.8%, or $9 million, driven by operating performance and favorable commodity costs net of price, which more than offset foreign exchange headwinds and labor and benefits inflation. Looking at the full year, EBITDA grew 5.7% to over $751 million. Key drivers of the increase included $74 million of performance, $29 million of volume mix, and $4 million of favorable commodity costs net of price.

Labor and benefits inflation and foreign exchange each had a $28 million negative impact for the full year. Cash flow for 2015 was strong, as net cash from operations totaled $589 million, or 12% more than 2014. Excluding M&A, dividends and share repurchases, we generated $345 million of free cash flow for the year. We contributed $53 million to our pension plans and working capital grew by $20 million. We continue to manage working capital aggressively and have maintained our key metrics in a relatively tight range.

Over the past few years we have, when competitively required, entered into extended terms with selective investment-grade CPG customers, when low cost supply chain financing or accounts receivable sale programs were available. The cost of these programs is in our EBITDA, and the programs have been fully disclosed in our reported financials. When we have utilized these programs to be competitive, they have not resulted in a change in our accounts receivable metrics, and as such, has not resulted in an acceleration of cash collections when compared to prior periods.

We ended the year with $1.83 billion of net debt, leaving our net leverage ratio at 2.44 times. Adjusting for the G-Box acquisition, which closed on January 5, our net leverage ratio was at the low end of our 2.5 to 3 times range. Our liquidity profile remained strong. At year-end, our average cost of debt was 3.2% and our global liquidity exceeded $1.1 billion.

Before turning to 2016 guidance, I would like to briefly discuss taxes. Our effective tax rate for the quarter was 33.1%, resulting in a full-year effective tax rate of 36.3%. This lower Q4 rate resulted primarily from the permanent extension of the US research tax credit that was enacted as part of year-end tax legislation. Our NOLs ended the year at $470 million. The year-end tax legislation also extended bonus depreciation through 2019, which provides meaningful cash flow benefits to Graphic Packaging. Based on our analysis, we now expect our federal NOLs to extend through [most] of 2018. Said another way, we do not expect to be a meaningful US federal cash taxpayer until 2019.

Now turning to 2016 guidance. We are committed to once again improving our year-over-year financial performance. We expect 2016 EBITDA to grow in the 4% to 7% range, driven by net performance improvements of $60 million to $80 million and net volume mix improvements primarily from acquisitions of $30 million to $35 million. These improvements will be partially offset by labor and benefits inflation of $25 million to $30 million and foreign exchange headwinds of $15 million to $25 million at current rates.

Many of you have asked for a rule of thumb around foreign exchange and its impact on our EBITDA. At a very high level, a 5% strengthening or weakening of the US dollar across all of the currencies in which we operate, would result in a $10 million annual impact on EBITDA.

Moving on to cash flow. We expect to generate $360 million to $380 million before M&A, debt reduction, and returning value to shareholders. Bridging from EBITDA, key drivers will be capital expenditures of $270 million to $280 million. The West Monroe capacity expansion and the Macon curtain coater projects will drive capital spending above the $200 million base level we have discussed in the past. Both projects have outstanding return profiles.

Pension contributions will again be in the $40 million to $60 million range and we'll focus on funding and immunizing these plans over the coming years. Cash interest will be higher by $10 million to $15 million, assuming modest interest rate increases and slightly higher debt levels. Cash taxes will again be modest at $20 million to $25 million due to international and US state taxes. The $360 million to $380 million of cash flow will fund our M&A, pay dividends, and repurchase shares, all consistent with our capital allocation strategy.

The G-Box, Colorpak and Walter G. Anderson acquisitions will cost approximately $320 million in 2016. Dividends at the current rate will consume approximately $65 million annually. At current stock valuation levels, we will continue to be active in the market repurchasing shares.

And finally, we expect to exit 2016 with a net leverage ratio in our target range of 2.5 to 3 times. The remainder of our guidance is contained in the presentation on our website. Thank you for your time this morning and I will turn the call back to Mike for some closing remarks.

Thank you, Steve. In closing, let me reiterate how focused we are at executing around our three strategic priorities. The softness in many of our end markets and fluctuating currencies or headwinds that we have been dealing with now for several years. We are not looking for these conditions to change, nor is our growth dependent upon it. We are committed to driving profitable growth by making smart investments in the business, executing strategic acquisitions, and returning capital to our shareholders.

I would like to thank everyone for their continued interest and support of Graphic Packaging. We look forward to speaking to you again in April to review our first-quarter results. I will turn it back now to the operator for questions.

(Operator Instructions)

Ghansham Panjabi.

Hello. Good morning.

Morning.

First off, on the $60 million to $80 million in productivity for 2016, the question is how much of the investments you are pursuing at current on a legacy Graphic Packaging basis impacting that range? West Monroe and Macon.

Hey, Ghansham, it's Steve. In terms of the investments we will make this year, actually some of those investments will have a bit of a headwind. As Mike said, we will have about $15 million of downtime in Q2 associated with the investment to increase our SUS capacity.

That will be inside of that $60 million to $80 million of productivity, so we will incur some costs this year, but we will benefit from prior-year capital investments, as well as our ongoing lean six sigma and synergy capture that will have us in the $60 million to $80 million range. But inside of that will be some of the costs that we will incur associated with the incremental downtime in Q2.

Okay great. That's what I was getting at. And then on Colorpak, can you just give us some more strategic insight into what you found attractive with this asset versus other opportunities either in Europe or Mexico that you have been investing in?

Yes, Ghansham, it's Mike.

We have been in Australia since 1990 in a meaningful way. Last year, we actually converted over 20,000 tons of SUS paperboard through third-party converters in that market, so Colorpak was the largest of four converters that we used in Australia.

And we view that as an opportunity to get closer to our customers. Our customers like that when we control the manufacturing more directly and we were able to integrate those tons into our acquisition. So it made sense for us to pursue that. We have known Alex Cummings and his team for a long time. We are excited to have them joining our Business.

Okay, I will turn it over. Thanks so much.

Thank you.

Anthony Pettinari, Citi.

Phillip Ng, Jefferies.

Good morning

The incremental 30,000 tons of CK capacity you're adding this year, how much of that is going to be consumed right off the bat? Because certainly you have announced a few more tuck-in acquisitions of late.

I think the way that we would think about that for 2016, Phil, is because of the downtime we will be taking in Q2, we would expect our production to be largely flat in 2016. So really the incremental piece of that will be absorbed as we head into 2017 and the acquisitions we did, both the ones we've done in the past, as well as the ones that we've recently announced, will really drive that demand.

Okay. But would you assume most of that going into 2017 essentially consumed right off the bat?

Yes. We are confident we've got those tons sold. As we talked about in the past, that's the only reason we would make investments to make additional board is when we were confident that we had the tons sold.

Yes, so we will have the run rate as we exit out of the year so that you will see the advantages of it primarily in 2017.

Got you. Okay. That's helpful.

The reason why I ask is there's a fair amount of concerns out there, and I think it's overblown, on some of the SUV capacity coming on in Europe. And from a supply/demand dynamics, CK CRB seems pretty tight, but can you talk about what kind of impact it could have on your business? Could it put a lid on pricing down the road?

Yes. If I took a step back and thought about the overall North American market for a minute. If you think about the SPS being around 5.3 million tons. I am working off AF and PA numbers. CUK last year being round 2.5 million tons, CRB being around 2.2 million tons. You add it all together, you are roughly 10 million tons. Strip out some of the top sheet and food service liquid packaging type grades on the SPS side, it's a 6 million ton market.

Mezza, which is who I think you're referring to, has publicly stated they are going to target 200,000 tons for -- I think last week I saw the Americas, so that's a lot of geography. And if you put 200,000 tons on top of 10 million, you're roughly 2%. If you put 200,000 tons on 6 million, you're a little over 3%. So if you think about that in terms of the overall capacity expansion and certainly not insignificant. But it also is not a something that's a tidal wave either, as we would think about it.

Having said that, do we expect in the short- to medium-term there to be some headwinds, particularly around SBS, as the new producer tries to buy into a market where they are non-integrated? We could see that. And as we think about that for CRB and SUS, we think about that probably having an impact more in terms of an overall ceiling on pricing, as opposed to an expectation that we are going to see broad-based implications in a downward fashion.

Got you. That was very helpful, Mike. And then just one last one for me.

I might have missed it on the call, but you talked about this incremental Macon investment that's going to kick in to the back half. Should we expect any savings this year and is there any drag from a P&L standpoint this year? Thanks.

No. Yes, thanks. Good question there.

The way I would characterize that is, that will be a second-half project for us. We're still trying to fine tune exactly when we're going to do it, whether it's Q3 or Q4. We will give you some insight into that on our next earnings call. But the way that would work, is it really cuts down on the amount of coating that we actually utilize on the sheet and specifically the amount of Ti02 we have to put in.

So it's a pretty mechanical savings that's generated once we get the curtain coater up and running. Again, we've installed one of those already in Kalamazoo with outstanding results so we're pretty excited about the project and the incremental improvement on that will really be 2017-driven.

Danny Moran, Macquarie Research.

Good morning. Congratulations on the quarter.

Thanks, Danny.

Backlog appear pretty healthy in your Business. Can you give your view on current CRB and SUS fundamentals? Are we now past the seasonally soft period? And then how have demand trends been thus far in the year?

You know, Danny, I think the way I would answer that question is if you look year-on-year, both those grades are pretty flat in 2015. And as we started the year here, a month and a half into Q1, that's the trend we've continued to see.

Okay, great. And then, given your different price resetting mechanisms relative to other paper companies, and you being a net buyer of SBS, would it be possible to give us the sensitivity to price changes in CRB and SUS grades and maybe even SBS on earnings?

Well, SBS is pretty straightforward because, as we've talked about within 60 to 90 days, it goes up or down by whatever the movement was. That's the way we structured those agreements because we don't manufacture that grade.

CRB and SUS, it's much more difficult because there's a bunch of different resetting mechanisms, but I think if you look at 2015, and we've got some waterfalls in there that really show what pricing did and what commodity input cost did, and that overtime those two offset each other, that's really our expectation and it's really been our experience over the last probably 3 to 4 years.

Yes, just adding to that Danny, our expectation going forward is that our pricing would continue to offset inflation or deflation. And this year, we saw some net deflation, kind of things that passed through one of the pricing models that we deploy, and this year it was a small win for us, about $3 million to $4 million. And our expectation going forward over time is that would remain neutral.

Okay. Very helpful. And then I know you've been active on the M&A front, but how is the pipeline looking here, and would you be interested in getting more exposure to a grade that might be more at risk of price declines?

Just as a clarity question, are you asking specifically about SBS?

Yes.

Okay, got it.

In terms of the pipeline, we've kind of had a little bit of a serial acquirer. So if you are looking to run a processor or sell your business, we are probably on your list. And we'd characterize our backlog as being healthy in that regard for converting assets. In regard to SBS, we've talked publicly in the past about an interest level there that we would have. Now having said that, we are in those markets.

We understand those markets pretty well. We're buying almost 200,000 tons of SBS here in North America. We buy 100,000 tons roughly of FPB board in Europe. So we know those markets, we know the producers, we are in them every single day. If something presented itself, in terms of an opportunity, we would take a hard look at it, but again, we know the dynamics and we would not pursue a bad deal.

Okay. Thanks, Mike. Good luck in the year.

Thanks, Danny.

Chip Dillon, Vertical Research.

Yes, and good morning, gentlemen.

Morning, Chip.

First question is on the, if you could remind us where you stand on the SUS integration net of the moving parts for the acquisitions and how much of the board is now open market, and how much of the SUS is now integrated to your own conversion?

I think in our 10-K that we are filing, we are over 80% integrated right now, Chip.

Got you. Okay. And I think you mentioned, not to get nit picky, but you mentioned in SBS, you mentioned the Mezza capacity coming on. Is there a possibility that the cross currents of that capacity trying to hit our markets, though coupled with an even bigger impact from a shut down that's supposed to take place quite soon in the Riegelwood mill that maybe that could actually create a disruption on the other side? In other words, might there be some tightness caused by that, at least temporarily?

The way I would respond to that, Chip, is we also shut down a mill, as you know, in Jonquiere, Canada last year that made over a little over 100,000 tons, and probably two-thirds of that volume wound up in the SPS space combined with the major product that you talked about that's in the process of taking one of their mills down. So there are some tons coming down. At the same time, these FPV board tons are coming online. I think 2016 is going to be a real harbinger for how that all plays out.

There's a lot of moving parts and pieces right now, but the biggest one that would really drive all that is what's the end-use markets look like? What's overall demand look like in the food and beverage space? So far as I've indicated, we're seeing trends that are consistent with what we saw in 2015. If they end up being stronger, perhaps there's little bit more to your point upside pressure. If they are a little weaker, then obviously that would factor into that, as well.

Okay. And then the last one, I think you might have told us before. But the West Monroe project which adds the 30,000 tons, any few of, or just a reminder of what that EBITDA ultimate impact of that will be and how much capital is involved?

Yes. The total project is in the neighborhood of $35 million to $40 million. So if you think about that project along with the curtain coater, that's how you get to the $270 million to $280 million that Steve talked about in his range for this year. And the EBITDA return on that project is somewhere between $10 million and $12 million of EBITDA.

A portion of what we are doing there is maintenance. We are really at the end of our useful life of our pressing section on that particular aspect, so we are able to do a couple of things there, get some earnings gross and EBITDA growth and also improve our quality at the same time. So we're pretty excited about that project.

So said differently, both the curtain coater and that project are -- you're looking at about a three-year payback.

Yes.

Yes, that's right. If you look at them cumulatively, that would be right and most of the positive impact will be in 2017.

Okay. Thank you very much.

Mark Wilby, BMO Capital Markets.

Good morning, Mike. Good morning, Steve.

Hey, Mark.

Just curious, when we think about use of cash, has the drop in the share price made repurchase more interesting for you versus M&A?

I don't think it's more verse, but I think what you saw us doing, Mark, is as we've been very active in the market over the last three months, repurchasing the shares that we outlined for you, roughly the $60 million. And at current valuations, we would expect to continue to do that. What it doesn't mean, though, is that we have to take our foot off of the opportunities that are in the pipeline relative to the tuck-under acquisitions that we have continued to pursue.

So there is a both there that is available to us given the strength of the balance sheet and as Mike rightly said, our balance capital allocation strategy is very important to us and those three priorities are what guide us. But you did see us more active in the marketplace, we believe appropriately so from the last couple months of the year and into this year.

Okay.

And just puts and takes from the strong dollar, in terms of doing offshore M&A. On the one hand, it makes offshore acquisitions less expensive. But at the same time, it would seem like it makes it a little bit harder to move quite as much SUS to some of those offshore converters at healthy US dollar prices.

Yes I think that's a fair comment.

But it's still very profitable for us to do it even in Australia, Mark. And so we're pretty excited about continuing to look at those kinds of opportunities. Europe, as you know, has been an area that we have specifically targeted, and we have grown our SUS integration levels there from when we started a little over 90,000 tons to last year over 150,000 tons.

Steve outlined some of the translation and transaction FX impacts of that, and it's certainly something we think about and we talk about and we make sure we are making the right moves. But on the other side of things, we like the European market. We think it's very stable for the type of products that we make and manufacture. It's a large market that's still heavily fragmented and one that we think over time, provides opportunities for our Company.

Okay. And Mike, is it possible to just get some thoughts on what you are seeing in box board markets globally? There's been some discussion in some of the trade press about Chinese box board, and then I always keep my eye on Klabin down in Brazil with the weakness in the Brazilian economy and the real weakness in their currency.

Yes. We've certainly, for a number of years, seen a little bit of Latin American board in this market, but it's been pretty small and I wouldn't characterize it as increasing in order of magnitude, at least not that we have seen. The FPB board coming on in Europe has really been the stuff that has been chronicled pretty well. I went through some of the math a little earlier on that.

Take a step back and talk about, you mentioned Chinese ivory board in particular. It's a big market. There's 11 million tons of ivory board if you add up all the capacity based on the information that we have and it's been that way for a long time. And we have seen modest amounts on the west coast with some non-integrated converters that have wound up there. But we haven't seen that penetrate our core markets in a meaningful fashion.

Okay, all right. And last question for you. Just benefit in 2016 from the coated recycled hike.

Yes, Mark, we will see that flow through our financials. As we said, we executed on that $50 per ton increase soon after it was announced. And it will flow through our economics on that nine-month leg as expected and as we talked, some customers experience that. Others don't if they're on a different model. And it really just is consistent with our overall messaging of price offsetting commodity inflation, deflation, but we have executed on that $50.

All right. And fair to stay, Steve, that some of these changes in the PPW index, that's not a real issue for you. Or any thoughts on that?

You are referring to the series B adjustments they made, Mark?

Yes. Exactly, Mike.

No, we are really set on delta change. They just reset the overall number, so that is not having an impact on our business.

All right, very good. I will turn it over.

Thanks, Mark.

George Staphos, Bank of America Merrill Lynch.

Hi, everyone. Good morning. Thanks for all the details and congratulations on the year.

First question I had, you have West Monroe adding 30,000 tons. Is it possible to talk about what might be on their drawing board in terms of the potential to further grow your internal tonnage, obviously with the goal of further forward integrating over the next three years?

Yes. If we take a step back, George, and I mentioned it in my prepared comments, we made and manufactured almost 60,000 additional tons in 2015. We are going to add another 30,000 tons now. So we are starting to get up towards 100,000 tons. We'd told you there was in the neighborhood of 152,000 to 175,000 tons at full capacity there.

So as we think about dry powder, which is I think where you're going with that, it was probably somewhere in the some neighborhood of 65,000 tons to 75,000 tons after we are done with the West Monroe project that we are going to do this year. But again, we will not look to execute those projects, or add those tons to our base until we are confident that we have got them sold through our forward integration of our folding carton sales to end-use customers. That is our model.

No, understood.

But it sounds like you have plenty of opportunity to do that based on the converting pipeline that you at least directionally talked to, either in Asia PAC or in Europe. Would it be fair that you'd say that the pipeline is as good as what you've seen in the last few years, or really with Benson and Contigo and the like, the larger candidates, the better candidates have already been folded into TPK?

No, I would say that it's still pretty solid. Europe is in a very fragmented market. I will remind you that the largest producer over there is still in the high teens in terms of market share.

Okay, fair enough. Appreciate that, Mike. Next question I had just on the EBITDA guidance, we triangulated to what you guided to from a percentage standpoint from the metrics that you have I think on the last slide of your deck. What you think the swing factors are in terms of the 4% to 7% growth? Is it purely volume or there are other things that we should at least know is informing your guidance range of the 4% to 7% growth for EBITDA in 2016?

Yes, George. It's Steve. Even at 4% to 7%, it's relatively tight range of $20 million plus or minus on 2016 EBITDA. But there's a couple things in there. One is, we are taking a significant amount of downtime in Q2. It's 25 days down. It's a very significant and important capital project. We've got line of sight to it, phenomenal people leading it. But it's a significant investment for us and we've got to go down, invest and come back up.

So we are managing some potential variability there that would have a net impact on full-year productivity. And as you know, there's some swings that just are natural there relative to FX and the like and you can see those playing through the modeling that you are referencing. As Mike mentioned earlier, our core market assumptions will be similar to 2015, pretty flattish, but that is one that we keep a watchful eye on that could have some variability, down or up, dependent upon consumer buying habits.

Are you seeing any change in your customer's expectations for the next 12 months, either in terms of new product introductions or type of cartons they are introducing? Or for that matter, any changes in the caliber of the sheet that they are using either up or down and what the implications would be for you in your business model?

In terms of spec changes, I would characterize those as being kind of what we historically see. They are nothing really new there. What I am encouraged about, and we are cheering for them along these lines, is a number of our customers are making some pretty sizable investments back in their R&D and product development groups.

Hiring folks that do food technology work and the like, and really trying to figure out new products that are relevant to the types of things that consumers want to buy. Now we haven't built any of that into our 2016 forwards, so anything we'd get there would be upside. But I tell you what, these are pretty well capitalized, large CPG firms and they are focused on doing the right things for their business and we see those types of investments as positive.

Mike, last one for me and I will turn it over.

On the same vein of questioning, and you may have talked about this in past quarters, so to the extent that the consumer seems to be moving their purchase from center store to perimeter, and moving from processed to fresh and all the stuff that we have read about in the press, how do you think that affects your business?

And can you move pretty seamlessly with that or to the extent that one of your larger CPG companies may be, and the premise of the question may be wrong, but let's say the CPG customer that you've traditionally dealt with is losing market share to the local producer, does that hurt you at all?

Thanks, and I will turn it over.

Thanks, George.

What we really try to do with some of these acquisitions, like Carded Graphics and Rose City Packaging, have been to go after people that were servicing that regional food customer that you were describing. We see those growth rates as going higher. They are winning disproportionately right now in the marketplace and we want to make sure we are able to capture those kind of gains.

So part of what the way we do that, George, is we have an active acquisition strategy that goes and finds the best in those spaces and we seek to acquire where it makes sense. In terms of ongoing shifts, in terms of center store versus perimeter of the store, that's really where our R&D and new product development is focused. We got products that are targeting those types of applications and really spending a lot of time with our microwave and strength packaging solutions that really appeal to those kind of products.

Thank you, Mike.

(Operator Instructions)

Debbie Jones, Deutsche Bank.

Hi, good morning.

Hey, Debbie.

If I could go back to that serial acquirer comment. If you were to look going forward at your strategy, would you say that Europe is still the strategic priority in terms of acquisitions and the rest of the world is a little bit more opportunistic in nature? Or would you say that Mexico and the opportunities in Australia and New Zealand also seem just as viable for you?

Yes. Thank, Debbie.

I think Australia was opportunistic for us and we took the opportunity to be opportunistic there, which is great in that regard. In terms of Mexico, that being a focus area for a long time as you know, and we are very pleased that we were able to execute on the G-Box acquisition, knowing out of three facilities in the Mexican market, an excellent management team led by Marcelo Belden, who came with the G-Box acquisition.

So we like where we are at in Mexico. We have high expectations for how we'll perform there. So I think you characterized it pretty well that our focus in 2016 now, having integrated three big acquisitions that we have done in Europe, we'll probably shift back more towards Europe.

Okay. Then can you just one housekeeping. In the free cash flow guidance, what is your working cap assumptions?

There will be a little bit of pickup probably, Debbie, just because of the build that we did this year. But pretty modest in terms of flat to small pickup.

Great, thanks, I will turn it over.

Anthony Pettinari, Citi.

Good morning. On M&A and integration, in the slides, you indicated Rose City and Norampac will integrate 20,000 to 25,000 tons, and maybe you can get another 50,000 into Europe. Can you quantify the additional tons you might be integrating from G-Box, Carded, Colorpak and Walter Anderson as a group?

And then just a follow-up question, given the large number of bolt-ons you've done, and you've got big capital projects going on, are you at all constrained in terms of management bandwidth? And would you maybe take a pause while you integrate Colorpak and Walter Addison, or is that not really a hitting issue in terms of further acquisitions?

Yes, Anthony. It's Steve.

And I will hit the board piece of it, paperboard piece, and then Mike can add on to the leadership and bandwidth component. In looking at them piece by piece, with Colorpak, as Mike said, we've got a good, strong portfolio of business there today that's been more beverage-oriented. We can see some additional paperboard opportunities that we haven't yet quantified. We don't own the business yet.

We are working through the regulatory and approval processes and targeting April, but we will come back, I think, at a later time, and share what we think those opportunities could be. But we do believe that there are some. And we've been able to land paperboard in Australia very cost effectively for years, and we would expect to see some integrated value from that.

With Walter G, Anderson, there's some. They're an excellent buyer of paperboard today, not much with us, but they have got a good strong network of paperboard providers that service them today. We see that as really two world class facilities that offer up some other opportunities as well around capital avoidance and the like. So we haven't put a large number around the paperboard piece there, mostly because of other opportunities with an outstanding couple of folding carton facilities and a strong leadership team.

And then G-Box, we expect to see growth. That's a growing market and a growing business, and so on both of our substrates as well as the acquiring that they do locally, as we've said, we can see growth in that 5% to 10% range of that core business, our Mexico business, over the next several years. So we would get paperboard growth from G-Box as well.

And just to build on Steve's comments, Anthony, once we are through the gates around the strategic fit and financial fit around any acquisition, we take a step back and really look at our resources, and make sure that we can operate a business that we are going to acquire effectively, how best to do it. We have gotten a fair amount of experience doing that over the last really 3 to 5 years, things we have done well, and some things that we could do better.

And each time we do that, we hone our process a little bit more. I will tell you we've got a small dedicated team that really runs those integrations for us, coordinates the major activities in buckets to make sure that we hold ourselves accountable to the types of returns that we outlined for you when we go through those on a call like this. So something that's on our mind and will continue to be on our mind, but we like our ability to execute the ones that we've announced so far this year and feel that we will be able to deliver on the types of the results that we've outlined for you.

Okay, that's helpful.

And then just a follow-up on capital allocation and the dividend, you obviously have low leverage, strong free cash flow and you've talked about the share repurchase activity. I was just wondering if you could remind us how you're thinking about the dividend in terms of target payout, desirability of future dividend growth, maybe dividend versus share repurchases. Just general thoughts on the future of the dividend.

Yes, on the dividend, we put it in a year ago. We have been pleased with it as one of the tools for returning value to shareholders and you obviously will continue with that dividend. We don't have plans, necessarily, immediately on an increase. As we have talked, we will assess that as we go forward.

I think what you have seen us do is utilize the other tool around share repurchases to enhance the volume that we are doing there with being active in the market here more recently. And I think you would expect to see us continue with that, as opposed to addressing a change in the inherent value of the dividends in the short term.

At current pricing levels.

At current levels.

Okay. That's helpful. I will turn it over.

Mark Wilby, BMO Capital Markets.

Just a single follow-on, I promise. Steve, can you give us any sense of the benefit you might have had from the fourth quarter from the inventory build on the board side?

Well, what we actually in terms of, we did build roughly the 20,000 tons that we shared with you, and actually, that's board, Mark, that we would have traditionally sold in the marketplace. So we actually had a little bit of headwind on that, in terms of not taking that paperboard and selling it into the open market. So is a bit of a use of cash, somewhat modest there, but it did have, it actually created some EBITDA headwind for us, because we did not take that paperboard sale into the open market.

All right, super. That's helpful. Good luck in the coming year.

Thank you, Mark.

Thanks, Mark, and thank you for joining the Graphic Packaging call and we look forward to talking to you in April after our Q1 results. Thank you.

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