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Graphic Packaging Holding (GPK)

Q4 2010 Earnings Call

February 24, 2011 8:30 am ET

Executives

Brad Ankerholz - Investor Relations

Daniel Blount - Chief Financial Officer and Senior Vice President

David Scheible - Chief Executive Officer, President and Director

Analysts

Joseph Stivaletti Jr.

Philip Ng - Jefferies & Company, Inc.

Brian Bittner - Oppenheimer & Company

Matthew R. Wooten

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Richard Close - Jefferies & Company, Inc.

Presentation

Operator

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Good morning. My name is Anita, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Holding Company Fourth Quarter and Full Year 2010 Earnings Conference Call. [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, Anita, and welcome, everybody, to the Graphic Packaging Holding Company's Fourth Quarter and Full Year 2010 Earnings Call. Commenting on the results this morning are going to be David Scheible, the company’s President and CEO; and Dan Blount, our Senior Vice President and CFO. To help you follow along with today's call, we have provided a slide presentation, which can be accessed by clicking on the Q4 earnings webcast link on our Investor Relations section of our website at graphicpkg.com. 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 and leverage reduction, performance improvements and cost reduction initiatives, including the closure of facilities, 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 material and energy costs, 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 now David, I'll turn it over to you.

David Scheible

Thanks, Brad. We're very pleased with our fourth quarter performance and full year results. For the quarter, adjusted earnings per share were $0.06 compared to $0.03 in the prior year period, while full year 2010 adjusted earnings per share were $0.22 versus $0.03 for the full year 2009. Volume was positive in both the fourth quarter and for the full year. We've seen a steady increase in some of our key leading indicators over the last two quarters and as a result, sales in the fourth quarter increased a healthy 3.4%. The primary drivers were higher volumes and pricing. While the overall operating environment remained challenging throughout 2010, we improved our operating margin and exceeded our EBITDA and cash flow targets by optimizing our converting in-mill assets and increasing productivity throughout the supply chain. In the fourth quarter, we generated over $169 million in operating cash flow, and our adjusted EBITDA margin increased 50 basis points to over 13%. For full year 2010, operating cash flow exceeded $338 million and our adjusted EBITDA margin improved over 40 basis points to 14%. Our full year net debt reduction result was $210 million, ahead of our original target range of $180 million to $200 million. With the economy slowly improving, volumes beginning to pick up, pricing moving higher, we believe there is momentum heading into 2011. Our mills had another very strong quarter. We produced more prime tons of paperboard, and we sold those additional tons generating higher profitability and lower year-end inventories. Board production per day was up nearly 2% on a year-over-year basis in the fourth quarter. We took five days of scheduled cold outage downtime in our West Monroe facility and almost four days of scheduled maintenance at our Macon facility. So comparing the fourth quarter on a year-over-year basis, we incurred nearly five additional days of scheduled downtime across all of our mills. In spite this, we still produced and sold more tons of paperboard in this year's fourth quarter than last year. We annually produced roughly 2.5 million tons of paperboard, and we see additional opportunities to improve efficiencies and reduce costs in our seven paperboard mills. We have focused our capital investments to do exactly that. I'm really excited about our recent announcements of plans to build a new $80 million biomass boiler at our Macon, Georgia, facility. The majority of the fuel source for the new system will be parts of the pine trees that cannot be used in the pulping process. Principally, these are tree tops and branches that are generally left behind in the forest as part of the logging process. This abundant source will now be collected and delivered to the mill where it will be consumed to produce energy. The objectives of the biomass project are to further the company's sustainability strategy, reduce our energy costs and improve the profitability of the Macon mill in advance of expected increase in electricity costs going forward. The new biomass system is expected to make the mill self-sufficient from electrical power and steam generation standpoint, thereby reducing energy costs and dependency on fossil fuel alternatives. In 2013, we expect the mill to become a net producer of electricity with the ability to sell power back to the grid. Within our Folding Carton business, we continued to see some incremental positive trends there as well. Volumes in our Paperboard Packaging segment increased a little over 1% in the fourth quarter, and we have seen a slow but steady increase in new machine orders, sample requests and other trial work, which typically our business bodes well for future new product introductions and demand. Unemployment in the United States remains very high, so the overall economic environment remains challenging for our business but we are cautiously optimistic that volume trends are slowly moving in the right direction. The trends in the fourth quarter mimic what we have experienced all year. We continued to see a shift away from premium products and strengthened the everyday staples and value-driven merchandise. In this environment as you would expect, the more discretionary refrigerated items struggled as commodity prices inflated and consumers traded down to more value items. Dry and frozen foods do much better in this environment, and our sales reflected these macro trends. We also saw significant strength in our Facial Tissue segment in the fourth quarter as consumers built inventories for the cold and flu season. Beer consumption across the industry also remained relatively unchanged, with volumes down slightly in the fourth quarter and down low- to mid-single digits for the full year. The one bright stack here remain is the Crash segment, which continues to grow at a double-digit rate. Similarly, soft drink volumes across the industry were down about 1% in the fourth quarter and 4% for the full year. Conversely, our international beverage business, particularly in Europe, saw a nice pick up in the fourth quarter. This business is benefiting from a recovery in both the pricing and volume side and appears to be building momentum heading into 2011. This momentum is partially attributable to a substitution trend from plastics to paperboard. In the quarter, a major international soft drink company purchased new machines to make the change to paperboard from plastic, and we see others following this trend. So while international markets are relatively small part of our business today, it's significant growth opportunity and area where we also see some positive leading indicators.

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