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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

Richard Close - Jefferies & Company, Inc.

Graphic Packaging Holding (GPK) Q4 2010 Earnings Call February 24, 2011 8:30 AM ET

Operator

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 the 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. Despite this, we still produced and sold more tons of paperboard in this year's fourth quarter than last year. We annually produce 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. Looking at 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 in 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 valued 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 spot here remains 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 a relatively small part of our business today, it's significant growth opportunity and area where we also see some positive leading indicators.

Let's talk about our Flexible business. This is really more closely tied to the general manufacturing and housing sectors. The partial recovery trend in volume that we saw in the first half of the year just did not continue into the second half. Similar to the third quarter, unit volume declined 5% on a year-over-year basis in the fourth quarter. The decline was driven primarily by weaknesses in the industrial and construction sectors of the business. Partially offsetting this volume decline was an increase in pricing in the fourth quarter through the successful recovery of higher paper and resin costs. As we did in 2010, we will continue to aggressively manage this business by consolidating volumes into our most productive facilities, reducing the overall cost structure and managing capital expenditures. New product introductions and innovation was a positive in the quarter. This is a key strategic growth area for Graphic Packaging, and our customers depend on us to provide differentiated packaging to support their marketplace growth and cost reduction goals. New product sales increased 20% in the fourth quarter over $70 million. For the full year, new product sales increased to about $250 million, which exceeded our internal targets. Our microwave products continue to provide superior performance and convenience to our customers and varying consumers. We had several new product launches in the fourth quarter including a LEAN CUISINE spring rolls from Nestlé, a panini sandwich from Wal-Mart, a quiche with Santa Teresa in Spain and a take-home dumpling product from Tokyo in Japan. In addition, we are working aggressively on expanding our micro-right [ph] trade offerings with ConAgra's popular Marie Callender line of microwavable meals after a very successful initial launch in mid-2010. Our shrink packaging platform remains focused on helping customers lower their supply chain costs through better distribution efficiencies. In the fourth quarter, our patented Z-Flute packs were utilized in an oatmeal product by PepsiCo Quaker. The strength of the Z-Flute structure allows pallets to be double-stacked and makes for a four-sided shoppable pallet display resulting in significantly lower transportation and handling costs in the store. Our Z-Flute technology was also used by Langer's Juice and PouchSmart in expanding their business into additional West Coast markets. And finally, our new eight-sided heavyweight SUS Folding Carton was adopted by Faribault Foods for all of their private-label pouched beverage business. Our barrier platform continues to grow with the customers' adoption of new and patented structures. In the rigid barrier market, we commercialized a new detergent package in the fourth quarter with Sun Products for their Surf and Sun brand. The next-generation detergent package allows us to reduce materials by 15% to 20%, thus reducing packaging costs and improving the packaging's environmental profile. We are encouraged by strong customer interest in this product as a result of the cost reduction, environmental improvement and enhanced consumer functionality. Our Beverage business saw a consistent level of activity for new products in both the United States and Japan. We see an increasing interest in our Cap-it, our patented paperboard replacement for plastic secondary packaging. Gatorade is currently testing the new six-pack solution in specialty stores across the U.S. Reviewing pricing and inflation impacts on the quarter, as we expected, the differential between these two moderated in the fourth quarter. Pricing continues to move higher as a result of both contractual, inflationary pass-throughs and open market price increases on board. At the same time, inflationary trends have eased off of their peak level in middle of 2010. Price turned meaningfully positive in the fourth quarter at $23 million, offsetting the majority of the commodity inflation, which ran at roughly $32 million in the quarter. Higher-priced externally purchased board was the single biggest component of overall inflation in the quarter. However, the nature of our customer contracts allows for a quicker recovery of changes in external board prices. Our other input costs saw increases on a year-over-year basis in the fourth quarter, included OCC and resin. Dan will discuss the individual components of inflation in more detail during his talk.

In the fourth quarter, we implemented another $40 a ton price increase in both CRB and CUK. This was the fourth increase in CRB and the third increase in CUK in 2010. For the full year, we announced pricing increases of $165 per ton in CRB and $135 per ton in CUK. As a result, we should see a benefit from open-market board pricing heading into 2011. In summary, we are cautiously optimistic about our prospects in 2011. We believe higher pricing in the first half in a relatively stable to improving demand picture should provide a favorable backdrop. While we cannot predict the level of raw material inflation, the differential between pricing and input cost should narrow in 2011 versus 2010. At the same time, we will continue to push our continuous improvement projects that should deliver additional benefit to our bottom line. Finally, we remain committed to our key financial strategy of deleveraging our balance sheet and expect to achieve financial progress towards this goal in 2011. With that, I'll turn it over to Dan for a more detailed discussion of our financial results and guidance for 2011. Dan?

Daniel Blount

Thank you, David. Good morning, everyone. Fourth quarter financial performance reflects the continuing trend of improved margins and strong cash generation. In addition, this quarter we saw a healthy increase in the top line driven by both volume and pricing. These fourth quarter trends provide us with positive momentum for 2011.

Let's take a look at a few 2010 highlights. The best way to measure bottom line improvement is to strip out the one-time integration charges. Doing this, we see adjusted net income improved to $74.2 million or $0.22 per share from $10.4 million or $0.03 per share in 2009. 2010 adjusted EBITDA at $574 million represents a $18 million increase and a 40 basis point improvement in margins over 2009. Net leverage ratio improved to 4.3x from 4.8x as we reduced net debt by $210 million. With those highlights in mind, I'll provide some more specifics on our operational and segment performance for both fourth quarter and full year. As a reminder, when I refer to EBITDA and EBITDA margin in my discussion, I'm referring to results adjusted to produce comparable financial reporting. The adjustments primarily relate to prior year nonrecurring integration charges. The attachments to the earnings release and the slide presentation appendix provide the calculations of the non-GAAP measures. Both of these sources are posted on the company's website.

Now for those of you following along on the slides, I am now on Page 10. Starting with revenue, fourth quarter net sales were just over $1 billion, which is 3.4% better than the prior year. Volume gains accounted for 1% of the overall sales improvement. Looking at volume by segment, Paperboard Packaging experienced a pickup in demand that produced a 1.6% sales increase. Flexible Packaging continued to experience demand challenges for multi-wall bags in the construction end markets. And as a result, volumes were down modestly.

Now turning to price. We saw increased pricing drove a 2.3% improvement in fourth quarter sales. The increase resulted from the continuing capture of contractual price increases related to inflation recovery and also previously announced open-market price increases. Just to remind you, the majority of our business is under contract and our contracts include inflation recovery provisions. As we look into 2011, we expect meaningful price improvement to continue. Since the bulk of the 2010 inflation occurred in the second half of the year, we expect the contractual increases to ramp up in late Q1 and produce a more pronounced benefit in the second and third quarters.

To wrap up the review of fourth quarter sales, the $33 million increase breaks down as follows: $23 million attributable to price, $8 million from volume and $2 million of positive foreign exchange.

Now as shown by the EBITDA waterfall on Slide 11, we continue to improve margins as price and performance exceeded inflation. Q4 EBITDA margin improved a full 50 basis points to 13.1%. For the full year, EBITDA margin was right at 14%, representing a 40 basis point improvement over 2009. By segment, we see that all margin improvement occurred in Paperboard Packaging where 2010 margins grew to 16.2% from 15.8% a year ago. In dollar terms, we generated $132.7 million of fourth quarter EBITDA, which was $9 million better than the prior year as we saw a price improvement of $23 million, $19 million of improved performance and incurred $32 million of inflation. The input cost inflation was primarily driven by recycled fiber, purchased board, resin and freight. Of this list of inputs, recycled fiber and freight have continued to increase into the first quarter. Secondary fiber was about $44 per ton higher in the fourth quarter 2010 as compared to the prior year. And so far, it's up about another $10 in the first quarter of 2011. Freight costs also continue to increase with the price of oil. Now in terms of other key inputs, most notably wood, which is our largest input cost, and energy, which is our third largest input cost, we see relative cost stability. Wood costs have changed little over the past two years due to an abundant supply provided by the wood baskets surrounding both our Georgia and Louisiana mills. With energy, we have hedged over 50% of our 2011 exposure at below $5 per MMBtu, and we expect to increase our hedge positions as opportunities present themselves.

With regard to performance improvements, we delivered another strong quarter of net cost reduction, bringing the full year of 2010 total to over $128 million. A substantial amount of the benefits resulted from the consolidations of converting facilities in 2009 along with the strong mill performance that David referenced.

Our commitment to continuous improvement has been a key driver of margin expansion, and we continue to have a healthy list of cost reduction projects that will deliver benefits well into the future. As such, we expect to realize performance improvements in excess of $80 million in 2011. As announced earlier this week, we are closing our Jacksonville, Arkansas, multi-wall bag facility to further optimize manufacturing.

Now let's turn to cash flow, debt and liquidity. We exceeded our full year cash guidance through improved operating performance, reducing working capital and carefully managing CapEx. In total, we reduced net debt by $210 million for the year. The working capital reduction came from a $20 million improvement in inventory. Now this is on top of the $70 million of improvement we delivered in 2009. Progress with shortening cycle times in 2010 allowed us to run the business with about 25,000 fewer tons of paperboard in inventory. Inventory turns are now above 8x. Capital expenditures in 2010 were $123 million, slightly lower than 2009. For 2011, we expect capital expenditures in the range of $170 million to $190 million.

We are investing more projects related to new product launches, cost reduction efforts and the biomass boiler in Macon. David stated the biomass investment is an estimated $80 million and that will be spent over a three-year period. Upon completion, we expect to recoup about a third of this investment by qualifying for a federal tax grant. When the biomass boiler comes online in 2013, we would expect the Macon mill will be 100% energy self-sufficient and the return on investment will be substantial.

Fourth quarter of 2010 interest expense was reduced by an adjusted $11.7 million as a result of both lower debt levels and lower interest rates. The trend in lower interest should continue into 2011. In 2010, we retired $352 million of the original $425 million of subordinated bonds due in 2013. We plan to use cash from operations to fully retire the remaining $73 million. Our net leverage ratio should be in the range of 3.7x by the end of 2011. The debt reduction, along with our expected improvement in our credit ratings, will put us in a strong position to address our senior secured bank debt, which matures in 2013 and 2014.

As you can see on Page 12 of the slide deck, we have substantial liquidity of $502 million at the end of the year, and we were also well within compliance of our senior secured leverage ratio covenant.

And now I'll conclude by summarizing our guidance for 2011. We expect, through improved pricing and continued cost reduction, that 2011 results will exceed our 2010 performance. Continued inflation with secondary fiber and transportation is a concern, but inflation risks with other key inputs such as wood and energy appears to be modest. Based on the timing of contractual adjustments, pricing is expected to be positive in Q1 but will be more pronounced beginning in Q2.

Now the specific guidance outlined on Page 13 of the slides includes capital expenditures in the $170 million to $190 million range, cash pension contributions between $45 million and $70 million, pension expense around $27 million, depreciation and amortization in the $285 million to $305 million range, interest expense of $145 million to $160 million and net debt reduction in the $200 million to $220 million range, with a resulting net leverage ratio of about 3.7x. And with that, I will turn the call back to the operator for the question-and-answer period.

Question-and-Answer Session

Operator

[Operator Instructions] And you do have a question from the line of Ghansham Panjabi with Robert W. Baird.

Matthew R. Wooten

It's actually Matt Wooten sitting in for Ghansham today. Is it fair to assume that price cost spread will remain negative through the first half of 2011 but then turn positive in the second half given the time lag of price increases?

David Scheible

I think that that's probably a reasonable assumption, but I don't think you're going to find that the spread is all that great, and I think what you'll find in the first quarter, is there's probably going to be a negative spread but in the second quarter we'll start bridging that.

Matthew R. Wooten

And then secondly, it appears as if some of your competitors are expanding to other products, container board I guess for one, corrugated for another. Have you guys been able to increase market share as a result?

David Scheible

Well, I don't want to comment on what competitors are doing with their core strategies. What I would say is that we've been able to successfully compete in this business regardless of what our competitors have focused on. And you saw our growth was up, the industry was down a little bit. I'd say it's a combination of customer growth and some share around the fringes.

Matthew R. Wooten

And then finally, the resegmenting of the Flexible Packaging segment, can we take that to indicate that there are furthering restructuring opportunities there, perhaps in SG&A?

David Scheible

I think that you can take that as a -- we put it under common management because there's a lot of similarities in those two businesses, and we've determined that it's more appropriate for it to be managed by one executive.

Daniel Blount

And in fact, some of those businesses make -- the film actually ends up in the multi-wall sector. So in many ways, they sort of sell internally to each other. So it just makes a whole lot more sense to do, make sure the integration and synergy opportunities or cost reduction opportunities I guess is a better phrase, are optimal, and that's why we've done it.

David Scheible

Just to be clear, you can see from our announcement we are reducing costs in that segment, and we think that putting it under common management will facilitate that further.

Matthew R. Wooten

And then I guess one last question, and it's of a regulatory nature. Does Graphic see any impact from the new rule from the EPA that sets the standards for hazardous air pollutants for the boilers?

David Scheible

You're talking about the EPA macro that came out last night?

Matthew R. Wooten

That's right.

David Scheible

Look, it just came out last night, so we've just started to assess the new rule. What I would tell you is that what we saw in there was certainly more favorable than the initial EPA ruling. A number of changes that were made there will certainly benefit our smaller boilers in our recycled board. As you know, we're placing our entire boiler system in Macon by 2013. So obviously that boiler system will be regulated under any new standards. So I would guess right now where I sit, the impact will be relatively minor to Graphic Packaging, but we'll do that assessment boiler by boiler, stack by stack over the next six months.

Operator

Your next question will come from the line of Philip Ng with Jefferies & Company.

Philip Ng - Jefferies & Company, Inc.

Just a quick question on the inflation front. I mean, obviously from a comparison basis, 2010 was pretty challenging because '09 was deflationary. So how should we be thinking about 2011?

David Scheible

Well, I think, for us, you got to break it down the input, as Dan tried to say, the input that seems to have the most volatility clearly would be secondary fiber. It continues to creep up and it's a global commodity for sure. I would have said 72 hours ago that I felt the oil pricing driving diesel was pretty easy to predict, but the Middle East, as it's unfolded over there, you see oil yesterday was what, about $100 a barrel or something like that, that will clearly blow back through the freight side of the equation. Our wood costs and our natural gas costs, which are our two largest drivers, I mean, they look pretty unaffected by sort of the global economy. It's very reasonable. So from that perspective, I feel good. We'll have to push pricing in the CRB side to recover secondary fiber, and we won't be alone in that by any way, shape or form. 65% of what we do is virgin in our mills. So there's a lot of folks with exposure to recycle that are going to be concerned about that as well.

Philip Ng - Jefferies & Company, Inc.

But I mean just from a magnitude perspective, [indiscernible] your base in 2011 is probably going to be a little more modest than 2010 right?

David Scheible

Well, it depends. I mean yes, I would have said so. I just do not know how to handicap some of the global things that are going on in the oil markets, right? And oil has a spider effect. It affects resin and diesel and surcharges. So I would have said yes. Let's see how it settles down in the Middle East.

Philip Ng - Jefferies & Company, Inc.

On the pricing front, I mean you guys have done a phenomenal job passing pricing through at the paperboard level, industry's obviously very tight right now. Was 2010 more a anomaly? Or should we expect that type of momentum going to 2011?

David Scheible

In terms of the impacts or sort of pricing moves?

Philip Ng - Jefferies & Company, Inc.

Pricing moves. This past year, you guys pushed through a lot of price increases on CUK and CRB. So how should I be thinking about 2011 just because the market is still very tight right now?

David Scheible

I mean, what I would say is that, as Dan suggested, our contracts are delayed, so you're going to see a lot more movement in the second half because we saw a second half movement in those primary input costs that drive pricing. A lot of the paperboard pricing increases in SUS and CRB were in the second half of the year. So once again they reset, right? So you're going to see pricing movement in 2011 that might not be materially different than 2010, but still a recovery of the inflationary.

What I do not know is how much more you will see if you end up with oil and OCC running away. You will see, I'm guessing, from Graphic Packaging a need to recover those costs, which you'll see board price movements to do so, if this thing doesn't moderate. And it's really difficult to predict, but that would be my guess. Because historically, that's what's happened.

Philip Ng - Jefferies & Company, Inc.

I mean, that's what I was trying to dig in, not the recovery, just additional increases on the board side so. I mean, outside...

David Scheible

The board side recovery is almost always driven by input costs if you look traditionally. And so if your view on input costs that drive those are probably your view on what board pricing will do; that would be my best guidance on that.

Philip Ng - Jefferies & Company, Inc.

If inflation is relatively stable...

David Scheible

Prices in board generally stay pretty stable.

Philip Ng - Jefferies & Company, Inc.

Just because market conditions are still, I mean, exceptionally tight right now so I thought just from a demand side perspective, you guys might be able to get more pricing through.

Operator

Your next question will come from the line of Ian Zaffino with Oppenheimer & Co.

Brian Bittner - Oppenheimer & Company

It's Brian in for Ian. You guys have traditionally been able to effectively take out costs year after year after year. Just seeing kind of what your outlook on the cost run is over the next couple of years and your ability to just continue to take the same magnitude of cost out of the business, and just walk us through what you're thinking around that is.

David Scheible

Well, I mean, certainly, we've been pretty consistent in our continuous improvement objectives. They spike up when we do a merger because there's a bunch of synergy targets, and most of those are pulling through. But if you look at -- we've completed, but if you look at just the core operating cost, Graphic Packaging still has, what, $2.6 billion worth of cost. We have $400-some-odd million worth of inventory. We have seven paperboard mills. So for me to say that cost reduction is done at Graphic would be a terrible distortion of the facts. And in fact, our forward-looks on continuous improvement look exactly like they have in the last couple of years. And as I look in the first quarter, as I look at what we're doing, we are not having a problem taking costs out of this business. As efficient as we are, there's still a lot of opportunity. Some of it isn't coming from new capital investments. The Macon biomass is a perfect example. But I mean in some of our mills like West Monroe, we were looking at that the other day and if you look at the art of the possible, West Monroe uses almost twice as much water as Macon on a per ton basis. It's not the water that's expensive, it's that we have to heat that water. So there's a lot more energy. So we can improve our digesters, we can improve our efficiency in our West Monroe mill, and energy is our second largest cost. So as we look over the next two to three years, we have lots of cost opportunity take-outs in those large paperboard mills to drive continuous improvement.

Operator

Your next question will come from the line of Joe Stivaletti with Goldman Sachs.

Joseph Stivaletti Jr.

I just was wondering on the Flexible Packaging side, is that a business that you have any, from a strategic standpoint, would you be looking to possibly grow that business or shrink that business? Divest it? I just wondered on the heels of separating it out, if there was anything, any changes that we should expect?

David Scheible

Well, what I would expect is that we operate that business more effectively going forward. I mean, it is a lower margin business than our core paperboard business. The announcement at the Jacksonville facility suggests that there's cost take-out opportunity to improve the overall margin in that business. So I think if you look at all of our businesses, Joe, it is the one that's most likely to recover volume as the economy improves. It's driven by construction. It's driven by manufacturing. So as we make more cards and we build more houses, we'll see an inherent improvement, and it has some leverage. If the volume improves, the margins will improve in that business, and that's the primary expectation.

It still does good on cash. It's a good cash business for us. And again, even though we've reduced debt, we still have $2.4 billion or so of debt. So as long as we're generating cash to pay down debt, that makes it strategically important to me.

Joseph Stivaletti Jr.

Is it an area that you would consider growing?

David Scheible

Well, you mean organically?

Joseph Stivaletti Jr.

Through acquisition.

David Scheible

Through acquisition. That's a totally different question, and I don't know that I can answer that one.

Operator

Your next question will come from the line of Richard Close with Jefferies.

Richard Close - Jefferies & Company, Inc.

I was looking for a little bit more color on the boiler project in Macon. Could you guys talk a little bit about, not type of cost savings, but rather maybe quantify a little bit the type of cost savings that you're going to get there from reducing your energy purchases?

David Scheible

We haven't really published what that's going to do. What I would tell you is the project is around an $80 million project. 30% of the costs are going to be paid under the recovery act by the federal government biomass investment. It's a three-year project, so we won't really start to see savings on that until the end of 2013. If the project is a very lucrative project, and so we are very comfortable with the returns in that project, but the reality is that they won't start accruing for the most part until 2014. So I'm trying to stay focused on the ones that are right here. For the corporation, it's a great strategic investment. I love getting off the grid long term, but short term, it doesn't have a lot of impact.

Operator

And there are no further questions at this time. I would now turn the call back over to our host today.

David Scheible

Well, thank you, all, for listening, and we'll talk to you at the end of next quarter.

Operator

Thank you for your participation. This does conclude today's conference call. You may now disconnect.

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