Graphic Packaging Holding Company CEO Discusses Q3 2010 Results – Earnings Call Transcript
Graphic Packaging Holding Company (
)
Q3 2010 Earnings Call
November 4, 2010; 08:30 am ET
Executives
David Scheible - President & Chief Executive Officer
Dan Blount - Senior Vice President & Chief Financial Officer
Brad Ankerholz - Vice President & Treasurer
Analysts
Brian Bittner - Oppenheimer
Philip Payne - Jefferies
Mark Kauffman - Rafferty Capital Markets
Presentation
Operator
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Graphic Packaging Holding Company Q3 2009 Earnings Call Transcript
Good morning. My name is April [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Holding Company’s third quarter 2010 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period. (Operator Instructions) Thank you.
I would now like to turn the call over to Mr. Brad Ankerholz, Vice President and Treasurer. Please go ahead, Sir.
Brad Ankerholz
Thank you, April and thanks to everyone on the line for joining our call this morning. Commenting on results this morning, are David Scheible, the company’s President and CEO; and Dan Blount, our Senior Vice President and Chief Financial Officer.
I would like to remind everyone that statements of our expectations in this call constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements including, but not limited to statements relating to fiber and other raw material prices, consumer demand and pricing trends capital expenditures, cash pension contributions and pension expense depreciation and amortization, interest expense, debt reduction, cost reduction initiatives and achievement of previously announced operating and financial targets are base on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company’s present expectations.
These risks and uncertainties include, but are not limited to the company’s substantial amount of debt, inflation of and volatility in raw materials and energy costs, volatility in the credit and securities markets, cutbacks in consumer spending that could affect demand for the company’s products, continuing pressure for lower cost products, and the company’s ability to implement its business strategies, including productivity initiatives and cost reduction plans.
Undue reliance should not be placed on such forward-looking statements as such statements speak only as of the date on which they are made and the company undertakes no obligation to update such statements. Additional information regarding these and other risks is contained in the company’s periodic filings with the SEC.
David, I’ll now turn it back over to you now.
David Scheible
Thanks, Brad. We’re pleased with our third quarter results as we deliver another solid quarter of operating margins and cash generation. Our strategy to focus on our core business, growing through innovation and building the right execution culture continue to serve us well in a difficult economic environment. Volume got off to a sluggish start in July, but we saw a healthy bounce back in August and September in a number of very positive leading indicators that suggest volume trends should continue to improve.
Throughout the entire quarter we optimized production and managed our cost structure effectively, generating over $36 million in continuous improvement savings. This resulted in the strong EBIT, adjusted EBITDA margin of 14.5% and over $73 million of operating cash flows.
We also strengthened our capital structure and lowered our cost of capital by refinancing a significant portion of our 9.5% 2013 subordinated notes through the issuance of new 7.875 senior notes due 2018. As we expected prices were positive in the quarter and we cycled through almost year-over-year comparisons on input cost. We should continue to benefit from higher prices and our input cost comparison should ease over the next several quarters.
We are therefore comfortable with our progress towards our 2010 operating financial goals in our reiterating our net debt reduction target of $200 million by year-end. Our mills had another very strong quarter with operating rates in the mid to upper 90% range and no market related downtime. We produced 33,000 more tons of board in Q3 2010 than last year after adjusting for the timing of scheduled maintenance related downtime. In our tons per day, production increased nearly 7% over last year. We produced and sold more of our higher margin CUK subsidiary [ph] than last year, which had a positive impact on our mix. We are seeing strong demand in CUK as a result of substitution trends from SPS and strength in the frozen food segment and the Asia Pacific Beverage market as well.
We continue to see relatively stable trends in overall paperboard packaging demand backlog in both CUK and CRB is up from last year at around four to five weeks each. The strong mill performance is being driven by our continuous improvement initiatives. We've increased grade-to-grade cycle plans by almost three days and term utilization by more than a four-percentage point. Aggressive management inventories and successful subsidiary conversion enabled us to sell the additional production, keeping inventories at low levels and generating more cash.
In addition, our level of paperboard integration is steadily rising and the same is around 80%. By converting more of our internally produced board and substituting outside purchase boards were internally produced CUK and CRB, we were able to achieve better margins and lower inventory levels across the entire fledging. Earlier this year, we completed our activity integration effort to make significant investments in our converting plans as part of that work.
We are now focused on ongoing operating and process improvement across the entire enterprise, but particularly in our mills. Better operating systems in the mills have lead to improved visibility over input flows and operating costs. Higher term utilization continues to reduce the number of odd lots and special size paper rolls we produce, thereby leading to a permanent reduction of inventory and working capital levels.
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