Graphic Packaging Holding Company (GPK)

Q2 2010 Earnings Call

August 5, 2010 8:30 AM ET

Executives

Brad Ankerholz – Investor Relations

David Scheible – President and CEO

Dan Blount – Senior Vice President and CFO

Analysts

Joe Stivaletti – Goldman Sachs

Ian Zaffino – Oppenheimer

Mark Kaufman – Rafferty Capital Markets

Presentation

Operator

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Previous Statements by GPK
» Graphic Packaging Holding Company Q1 2010 Earnings Call Transcript
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Good morning. My name is [Camilia] and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Holding Company second 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 conference over to Mr. Brad Ankerholz. Please go ahead sir.

Brad Ankerholz

Thank you, Camilia. Welcome to the Graphic Packaging Holding Company's second 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 debt reduction, input cost, changes in pricing, working capital levels, fine closures, cash generation from the real estate, capital expenditures, cash pension contributions and pension expense, depreciation and amortization, interest expense, net debt reduction, and consumer purchasing trends 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.

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 effect 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.

And David, I'll now turn it over to you.

David Scheible

Thanks, Brad. We are pleased with our second quarter results as we deliver another strong operating performance and what continues to be a difficult operating environment. Volumes across all of our businesses were up and we offset nearly 35 million of price in inflationary treasures with improved operating efficiencies.

As a result, our adjusted EBITDA remained relatively flat on both the sequential and year-over-year basis and we grew our adjusted earnings per share to $0.04 from a penny a year ago. We also generated over $125 million of cash in the quarter and reduced our net leverage ratio by more than a full turn to 4.6 times from 5.7 times a year ago.

We put some of these cash to use their repurchasing $35 million of subordinated notes in the quarter and they called in additional 67 million of those notes for settlement on August 16. Looking out over the remainder of the year, we believe we have excellent position to achieve our net debt reduction target of $200 million.

While fiber cost had moderated off of their peak. We expect to face rising inflationary costs across some of our input categories. However, demand is relatively stable, paperboard prices are rising and contract pricing should turn positive in the second half of this year.

Our mills ran full for the quarter with no market related downtime and our operating rates remain in the mid of 90% range. We continue to see a slow but steady price in overall paperboard demand and backlogs to both our CUK and CRB products around four weeks, up four week over last year same period.

Strong mill performances is being driven by our continuous improvement initiatives which have increased great degree cycle times by more than a day and term utilization by four percentage point. The end-result was a record production levels at both our virgin and recycled board mills and tons per day increased nearly 3% over the last year.

At the same time, we’re also seeing a slow but steady strength in the overall demand for both CUK and CRB. In the second quarter, total paperboard volumes sold increased 4.4% sequentially to over 655,000 tons. The gradually improving global economy paperboard substitution trends in the type industry supply levels are keeping demand healthy.

In addition, our level of paperboard integration is steadily rising and now stands at around 80%. By converting more of our internally produced board and substituting outside purchases like SPS with internally produced CUK, we were able to achieve better margins and lower inventory levels across the supply chain.

At the end of the second quarter, it marks the completion of our integration efforts in captured savings from 2008 acquisitions of activity.

One important aspect has been the permit reduction inventory required to operate our business. Over the past year, we’ve improved working capital by over $50 million and we do not see this reversing.

The majority of this improvement is coming from inventory reduction. This has allowed us to consolidate our warehouse footprint by over 30% and reduced the number of warehousing facilities by more than 45%.

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