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
David W. ScheibleThanks, 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. Read the rest of this transcript for free on seekingalpha.com