Graphic Packaging Holding Management Discusses Q2 2012 Results - Earnings Call Transcript

Graphic Packaging Holding (GPK)

Q2 2012 Earnings Call

July 26, 2012 10:00 am ET

Executives

Kevin Crum

David W. Scheible - Chief Executive Officer, President and Director

Daniel J. Blount - Chief Financial Officer and Senior Vice President

Analysts

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Philip Ng - Jefferies & Company, Inc., Research Division

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Matthew R. Wooten - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Welcome to the Graphic Packaging Holding Company Second Quarter Earnings Call. I would like to now introduce the conference, Assistant Treasurer, Kevin Crum. Mr. Crum, go ahead.

Kevin Crum

Good morning, everyone. Welcome to Graphic Packaging Holding Company's second quarter 2012 earnings call. Commenting on results this morning are David Scheible, the company's President and CEO; and Dan Blount, 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 Q2 earnings webcast link on the Investor Relations section of our website at www.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 the effect of business combinations, completion of the Macon biomass boiler project, raw material inflation costs, consumer demand and pricing trends, capital expenditures, cash pension contributions and pension expense, depreciation and amortization, interest expense, income tax rates, debt and leverage reductions, performance improvements and cost reduction initiatives, 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 include, but are not limited to, the company's substantial amount of debt, volatility in raw material and energy costs, cutbacks in consumer spending that reduce 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 turn it over to you.

David W. Scheible

Thanks, Kevin. Good morning, everyone. We're very pleased with our second quarter results and the strong benefits of our strategic initiatives are generating across the business. While demand in some of our key end-use markets was down in the quarter and the overall operating environment remains sluggish, we successfully drove increased volumes, better margins and cash flow through a combination of new business wins, productivity enhancements, better asset optimization, acquisition synergies and of course, lower cost debt. We continue to successfully invest in new innovative packaging that helps our customers differentiate their products, lower their distribution costs and improve the sustainability metrics throughout the supply chain. Our solid CUK fiber carton, that was recently implemented in the juice pouch sector, continues to gain momentum and is clearly a viable substitute to traditional litho-lam structures. We're excited about additional customer wins this quarter in this space and a long-term potential of substrate substitution for our solid CUK fiber carton.

The convenience of our microwave packaging continues to experience strong consumer acceptance in new business sectors, leading to new sales and margin contributions. We have also capitalized on some of the sector trends across the food and beverage industry by making strategic acquisitions and investments in growing markets such as craft beer, pasta and away-from-home markets such as fastfood. In total, new business activity generated nearly $40 million of revenue in the second quarter versus the same period last year. Productivity enhancement and asset optimization are driving improved margins, even in a less-than-robust demand environment. We generated $29 million of performance improvements in the second quarter. Cost saving initiatives to reduce the use of energy, fiber and wood, and chemicals, as well as plant consolidations are reducing our total operating costs. Key investments, including the expansion of our Perry, Georgia plant and the closing of 3 older converting facilities within the last year, contributed to an EBITDA margin increase of almost 200 basis points to 15.9% this quarter. Both pricing and input inflation were relatively moderate and balanced in the quarter, which means that our margin expansion was predominantly driven by performance improvements and return on capital investments made over the past few years.

The integration of Delta Natural Kraft and Mid-American Paper (sic) [Mid-America Packaging] is progressing nicely. You will note, we had roughly $5 million of integration costs in this quarter. The Sierra Pacific acquisition has exceeded our synergy expectations. More importantly, Sierra Pacific has increased our exposure to the craft beer market. Craft beer continues to be one of the fastest-growing areas in the entire beverage market, and this is a space where we had very little exposure just a few years ago.

Debt reduction continues to be a critical value driver for Graphic Packaging. And our focus on winning new business, improving operating efficiencies and optimizing our capital structure over the past few years has allowed us to generate higher levels of cash flow used to delever the business and strengthen the balance sheet. As of June 30, our net debt was approximately $2 billion and our net leverage ratio is down to 3.27x. We generated $110 million of net cash from operating activities in the second quarter and reduced our net interest expense by $9 million, or 25% from the same period last year. Debt reduction remains a key priority and we are well on track to hit our net leverage ratio target of 2.5x to 3x.

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