Graphic Packaging Holding Company Q1 2010 Earnings Call Transcript

Graphic Packaging Holding Company Q1 2010 Earnings Call Transcript
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Graphic Packaging Holding Company (GPK)

Q1 2010 Earnings Call

May 6, 2010 8:30 am ET

Executives

Brad Ankerholz – Investor Relations

David W. Scheible – President, Chief Executive Officer & Director

Daniel J. Blount – Chief Financial Officer & Senior Vice President

Analysts

Ian Zaffino – Oppenheimer & Co.

Mark Kaufman – Rafferty Capital Markets

Presentation

Operator

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At this time I would like to welcome everyone to the Graphic Packaging first quarter 2010 earnings conference call. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) Now, I would like to turn today’s call over to Mr. Brad Ankerholz.

Brad Ankerholz

Welcome to the Graphic Packaging Holding Company’s first quarter 2010 earnings call. Commenting on results this morning are David Scheible, the company’s President and CEO and Dan Blount, Senior Vice President and CFO. 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 related to product price reductions, movement in raw material and commodity prices and the expected effect on the company’s results, cost reduction benefit, capital expenditures, cash pension and contribution and pension expense, appreciation and amortization, interest expense and net debt reduction 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.

This 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, cut backs 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 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 turn it over to you now.

David W. Scheible

We are pleased with our first quarter results. Our margins continued to improve and it was very encouraging to see some demand improvement across our business as tons sold increased both sequentially and versus the prior year period in all three of our segments. Execution on our cost reduction plans and improving operating efficiencies in both the mills and converting plants contributed significantly to continued earnings growth.

When comparing to last year’s first quarter adjusted net earnings per share improved to $0.04 a share from a loss of $0.04 a share in 2009. Adjusted EBITDA increased more than 11% to $145 million and our adjusted EBTIDA margin increased roughly 170 basis points to 14.4%. We also ended the quarter with a net leverage ratio under 5.6 and believe we are in excellent position to continue reducing our debt levels this year.

Although volumes increased, sales in our core paperboard packaging segment declined a modest .7% versus the prior year quarter. The decrease in net sales was primarily driven by lower pricing from contractual pass throughs related to raw material deflation that we experienced in 2009. Paperboard packaging demand for both CUK and CRB strengthened during the quarter. In total, volumes in this segment increased 1.7% over the prior year quarter.

We produce approximately 2.3 million tons of paperboard every year and our mills ran full in the first quarter with operating rates in the mid to upper 90s. We saw order activity in the quarter as both CUK and CRB backlogs are currently a full week longer than a year ago. Performance at the mills was excellent in the quarter through a series of ongoing improvement initiatives we continue to reduce [rate] to grade cycle times and increase trim roll utilization at our mills. The result was record levels of paperboard production in both grades.

At the same time we maintained tight control of our inventory levels and sold this higher production on the open market or used it internally in our carton plants. While external paperboard market demand remains strong, our level of paperboard integration is at an all time high. We’re using more and more of our own board as we have significantly reduced the amount of SBS and CRB tons we are purchasing from external suppliers. Since the combination with Altivity, we have successfully integrated over 75,000 tons of externally purchase board in to our mill system and our paperboard integration levels now stand roughly at 82%. This increase integration helps improve our mix and resulting margins.

Despite a lagging economy, folding carton demand continued to be solid with first quarter volumes up on a sequential basis and down in the low single digits from the prior year quarter. Looking at first quarter AC Nielsen data for the broader market categories, dry food units increased roughly 2%, frozen food units increased just under 1% and refrigerated foods increased 3.6%. On the non-food side, packaged detergents were up almost 8% and facial tissue was down roughly 6%.

More specifically, for graphic packaging food and consumer product packaging demand continues to be steady. When adjusting for low margin business that we consciously exited as part of the Altivity merger in the second half of 2009, volumes were flat to up both on a sequential basis and over last year’s first quarter. Center of the aisle take home products continue to outperform away from home products. Cereal continues to be our most resilient and sustainable category followed by dry and frozen foods like pizza. Our most challenging markets are refrigerated and dairy, quick service restaurants and cosmetic and toiletries. These are largely discretionary products and they reflect budget conscious consumer’s buying behavior most directly.

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