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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

Graphic Packaging Holding (GPK) Q2 2012 Earnings Call July 26, 2012 10:00 AM ET

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 fast food. 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.

Talking about Paperboard, our mills had another very strong quarter, driven by improvement initiatives, predominantly in energy, throughput efficiencies and fixed cost reduction. We generated almost 7,000 additional tons of production in the second quarter and consumed this extra production in our carton plant. The increased production also allowed us to better leverage our fixed costs and expand our margins. The mills are benefiting from stronger demand for our CUK fiber board as a result of the new customer wins and substitution trends to this product. The new volume allows us to better trim our machines, increasing our output and yield, which translates to lower per ton cost of production. Just a note, we remain on schedule with our biomass boiler investment in Macon, Georgia. The economic benefit of this project continues to be quite compelling as coal, which is the primary source of purchase electricity in Georgia, has continued to increase in cost. The biomass boiler is expected to eliminate our reliance on purchased electricity. In fact, we anticipate being a supplier of electricity back to the grid when we come online in second quarter of 2013.

If I look at folding carton, this business was relatively flat in the second quarter. End market trends across some of our core food markets remain somewhat sluggish but we were able to offset most of this with new business in such areas as juice pouch cartons, pasta and food service. The cereal and frozen pizza markets, which are 2 important markets to us, remained challenged in the second quarter. ACNielsen estimated that volumes for cereal decreased roughly 2%, while frozen pizza decreased 3% in the quarter. These trends are weak, especially in historical terms, but they were an improvement from the 3% and 11% decline for cereal and frozen pizza demand, respectively, we saw in the first quarter. New sales from pasta packaging were very strong in the second quarter, as a result of recent investments we made to reconfigure our carton plant in the Midwest. While pasta has not been a large category for us in the past, it remains one of the best-performing segments in the food industry, and we invested resources to growing our end-use markets and are being successful doing so.

Industry volume trends across the can beverage market decreased on a year-over-year basis in the second quarter. Weakness in soft drink more than offset the strength in the beer sector. According to Can Manufacturers Institute, total beverage can shipments decreased roughly 1.7% in the second quarter, with soft drinks decreasing 3.8% and beer increasing 2.1%. Graphic Packaging's beverage business performed well in the second quarter, with sales increasing 3%, driven primarily by beer. Craft beer volume was once again very strong in the quarter, and our Sierra Pacific acquisition continues to benefit from this trend. ACNielsen also reports that sales of noncarbonated and energy drinks continue to be strong, up 16.5% through the first half of this year. We are well-positioned as a leading supplier of multi-packs to these markets and our specialty beverage sales were up 35% year-to-date.

Turning to our Flexible Packaging business. We saw a slight pickup in shingle wrap demand resulting from the severe storms that ran through the Midwest and Eastern regions in the spring. The multi-wall bag business however, remains challenging. Given the continued sluggish state of construction and industrial manufacturing segments, this is likely to continue. As I have mentioned, the integration of Delta Natural Kraft and Mid-America Packaging is progressing on plan and we continue to target $20-plus million of synergies, along with double-digit EBITDA margins in 2013 for this combined flexible business.

Now looking at pricing and inflation, both were relatively moderate in the quarter. Pricing was up $12 million and commodity input inflation was up roughly $6 million. Higher pricing was driven by the reset mechanisms in our contracts that adjust pricing up or down based on changes in input raw material costs. The increase in input costs resulted from higher priced chemicals, ink, coatings, wood and freight. In fact, freight was the highest single increase, and that freight cost is being driven predominantly by government regulatory changes, which have reduced the allowable driving hours.

Looking ahead, we expect pricing and input inflation to remain moderate and in balance for the remainder of the year, with energy and fiber cost flat to 2011 and chemical prices edging up slightly. Looking forward, we had a good second quarter, particularly given the operating backdrop driven by execution in new product commercialization and operating excellence. I think we'd all like to see a pickup in the broader economy and end-market demand but with unemployment levels remaining elevated, we're not expecting any tailwinds in our near-term outlook. Demand in the food and beverage market remains very sector-driven, with pockets of strength and weakness across different end-use categories. We will continue to adapt and grow our business accordingly. We're investing more resources in the sectors which remain healthy and make sense for us to be larger players, such as pasta, food service and craft beer, and of course, litho-lam substitution. And we'll protect our core markets at the same time.

We had a very solid quarter running the business but there were a number of areas where we can improve our execution and we will build opportunities in the second half of the year to benefit our operating metrics. As a reminder, in the second half, we will have roughly 20 days of planned maintenance downtime in our 2 virgin board mills. The Macon outage will occur in Q3 and West Monroe will be taken down in Q4. The West Monroe outage will also include the required biannual code outage to inspect and service the boilers. Dan will discuss the financial implications on the back half of the year in just these few minutes.

We also continue to optimize our asset base around our customers' needs and offer new unique packaging solutions to our customers to differentiate their products, lower their cost and improve their sustainability. We will accomplish these goals, both through direct investment and potentially through smaller, strategic acquisitions that will enhance our position globally. I'll now turn the call over to Dan for a more detailed discussion of the financial result.

Daniel J. Blount

Thanks, David, and good morning, everyone. David covered operational highlights of the quarter. I'll focus on financial results. My comments follow our posted presentation. Let's start with financial highlights on Page 8.

Taking a look at second quarter operating performance, we see net sales improve nearly 3%, or $31 million. EBITDA increased 17.5% to $176 million. EBITDA margin increased by almost 200 basis points to 15.9%. And after normalizing the income tax rate, adjusted net income increased $19.5 million to $0.11 per share, $0.05 per share better than the prior year. The quarter itself, as you can see, is pretty straightforward, but understanding how our tax rates have changed is a little more confusing. So I want to spend some time upfront on that explanation. You'll remember, in the fourth quarter of 2011, we have recorded the value of our NOL tax shield on the balance sheet. In conjunction, beginning in 2012, we started recording normal income tax expense. To provide comparative financials, we adjusted quarterly results to compensate for the tax treatment change. While the P&L reflects tax expense on a cash basis, we will continue to benefit from our $1.1 billion NOL and not pay U.S. income taxes until the NOL is consumed. I hope that overview has been helpful.

Let's turn to the core financials. Overall, you will see during the review of sales and earnings, the main drivers of the bottom line improvement include revenue growth, improved operating performance and lower interest expense. Please note, as has been our practice, we adjusted results for certain nonrecurring charges. The adjustment in this quarter was the add back of $5.2 million of expense, primarily related to the integration of the Flexible Packaging acquisition.

Moving to sales comparison on Slide 9. We see 3% growth to over $1.1 billion in second quarter revenues. Volume growth of $25 million was the largest driver of the top line increase. As David mentioned, end-market trends across core markets remained sluggish, but we were able to more than offset with new business principally from our continued success in corrugated replacement, pasta and food service. Additionally, revenues in our Flexible Packaging segment increased 19% due to the business combination with Delta Natural Kraft and Mid-America Packaging. The $12 million increase in pricing is a result of realizing inflation recovery, as provided in our sales contracts. As a reminder, we recover inflation on an approximate 9-month lag.

Turning to the EBITDA bridge on Slide 10. We see strong EBITDA of $176 million, a $26 million improvement. As David covered in detail, the majority of the earnings -- quarterly earnings improvement resulted from both our success in securing new business in these challenging markets and continuing to drive cost reduction through plant rationalization, converting asset upgrades and mill productivity investments. Performance improvements totaled $29 million, which brings the year-to-date total to a strong $46 million. Year-to-date, we have been able to accelerate the pace of cost reduction by completing the plant closings we began last year. For the remainder of 2012, we expect to deliver an additional $25 million to $30 million of cost reduction, which will bring the annual total into the $70 million to $80 million range. The volume growth, largely driven by new business, achieved an average EBITDA margin of 20%. This margin level is the result of our operating leverage as we utilized existing overhead and further optimized and integrated our paperboard production.

Lastly, a comment about the relationship of pricing and inflation. As David pointed out, our contracts are designed to recover commodity inflation based on look-back calculations, average 9-month look-back. Over the longer term, 2 to 3 years, this methodology historically has shown that the amount of inflation and price recovery are comparable. The favorable price cost spread in Q2 results from the decline in the inflation rate, driven principally by lower costs for secondary fiber and energy. Looking forward, we expect as contracts adjust, that pricing will be modified to reflect current commodity inflation levels. Our view is that price and input cost inflation should be mostly in balance. Salary and benefit inflation was a little over $8 million in the quarter. Year-to-date, we have incurred $17 million and expect to be around $35 million for the entire year. Overall performance for the second quarter was strong and in line with our expectations for the year.

And looking forward to the remainder of 2012, see Slide 11, we want to provide additional guidance on the expected behavior of income tax expense and mill maintenance downtime. Both of these expense categories are going to trend differently than they did in the prior year. First, income tax expense. For 2012, we initially gave guidance that income tax expense would have an effective rate of around 39%. Year-to-date, income tax expense is running around 42% and we expect our rate will average 41% for the full year of 2012. The reason for the change is that while our earnings have dramatically improved, the improvement is principally driven by earnings growth in the United States. A few international locations in Europe and other geographies are operating in a very weak economy and as a result, are generating net losses. In these locations, there is no tax benefit available to partially offset the losses and reduce tax expense. As the economies in these international locations improve, we expect the effect of tax rate to normalize. And as a reminder, on a cash basis, we utilize the NOL and pay no U.S. income taxes. Now I just mentioned Europe, I'd like to provide a side comment. Our exposure in Europe is minimal, less than 5% of total company sales. Our European management team has done a good job of reducing costs. In the quarter, European operational performance improved and exceeded our expectations. Additionally, while we have net losses in a couple of European locations, Q2 cash flow generation was healthy as it significantly exceeded the prior year. The biggest delta from first half to second half for us is going to center around the planned maintenance downtime in Q3 and Q4. Our virgin mills maintenance cycle requires that on an every other year basis, we perform more extensive maintenance on our recovery boilers, the largest activity in 2012 being the cold outage in the West Monroe mill. This means, as we normally do, that we will incur planned mill downtime in the second half of the year. We schedule these outages to coincide with historical volume patterns, particularly beverage season. So very little mill maintenance downtime was taken in the first half of 2012. To provide clarity, here are the expected financial comparisons with 2011 and the first half of 2012. Total expense from mill maintenance downtime in the second half of 2012 is expected to be approximately $25 million greater than the amount incurred in the first half of 2012. On a year-over-year basis, mill maintenance expense will be about $15 million greater in the second half of 2012 than the same period in 2011. The $15 million represents approximately $10 million of normal, every other year maintenance and $5 million of special mill equipment upgrades. The expense includes cost of maintenance and unabsorbed overhead resulting from reduced production. If you break it down by quarter, we expect mill outage and other expenses to be approximately $12 million higher in Q3 over the prior year, and Q4 expense is expected to be approximately $5 million greater.

Now turning to Slide 12, let's look at cash flow, debt and liquidity. Second quarter net cash provided by operations was a -- was solid at $110 million. CapEx increased $5 million to $39 million in the quarter. For the year, we expect CapEx to be around $200 million, or $30 million more than the prior year, as investments continue to be focused on the Macon boiler and mill productivity improvements. And as David mentioned, we saw a 25% drop, or a $9 million reduction in interest expense. This drop was the result of declining debt balance and a reduction in our effective interest rate. Year-to-date, net debt reduction was $51 million and our net leverage ratio reduced to approximately 3.3x. The debt reduction is net of the $22 million we spent to refinance the senior secured credit facility earlier this year. In comparison, net debt reduction during the first half of 2011 totaled $40 million. We are on track to deliver $200 million to $220 million of net debt reduction this year. Our target leverage ratio continues to be in the 2.5x to 3x range and we expect to be near the top end of that range by the end of this year. Liquidity at the end of the quarter, was an excess of $588 million.

And now to conclude, let me just summarize the guidance. In addition to the comments I had about the tax rate and the mill outages, we see that capital expenditures will be in the $190 million to $210 million range, with most of the expending, as we said, on the biomass boiler, and completing the investment needed to drive these synergies based on the Delta Natural Kraft acquisition. Pension expense contributions will be between $40 million and $60 million, pension expense of around $40 million, depreciation and amortization in the $260 million to $280 million range, interest expense of $115 million to $125 million, net debt reduction of $200 million to $220 million and finally, our net leverage ratio should end the year around 3x. And with that, I'd like to turn the call back over to the operator for the question-and-answer period.

Question-and-Answer Session

Operator

[Operator Instructions] And at this time, you do have a question from the line of Alex Ovshey.

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

Just a question for you around the SBS pricing. It seems like that market is teetering on the edge of potentially maybe going out of bounds in the near term. Do you have an outlook for SBS pricing for the back half of the year? And I know there's a lot of capacity in Asia that's coming online that could potentially be a competitive product to SBS. Do you see any potential in the future to source some of your SBS needs out of Asia?

David W. Scheible

Well, I think, our -- we're a net buyer of SBS, as you well know. So I mean our forecast for the second half of the year is that most board prices will be pretty flat. So we really don't expect SBS pricing to be escalating. I'm not particularly worried about the China stuff coming on board. We do source some already but it's not really projected to be a huge impact here in the United States. I've seen all the Rissy [ph] reports and so on and so forth. We have a little bit different view. Most of our stuff is food and beverage applications. Most of our customers are not at all that excited about sourcing board from China in the food and beverage applications to the United States. So while that may affect other things, it doesn't really affect our business very much.

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

That's helpful, Dave. And then just on the productivity, clearly coming in out of expectations for '12. Is there any initial read that you have on what productivity will look like for you in '13 relative to what you're seeing currently in '12?

David W. Scheible

Well, I mean, I think we've been pretty consistently in that $70 million to $80 million range. You're going to have to think about the Delta Natural Kraft synergies, which will come in. And we've said those will be about $20 million. Won't start really until January but they should come on pretty quickly in January, not really much of a ramp up for them. So I would say, based on the investments that we're making, that feels good. I think Dan made some comments about the second half of the year. We're doing some downtime in the mill. We're taking a little bit of extra time to put some additional things in our mills to be able to continue drive productivity. That's why there's a little extended downtime, and that will all manifest itself in 2013. So I feel good about $70 million to $80 million worth of cost takeout in '13.

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

Good to hear, Dave. And then last question for me, as you approach the high end of your leverage range, how do you see your capital allocation priorities changing next year?

David W. Scheible

Well, we're certainly talking about that internally. I think Graphic, as you well know, is pretty conservative about that approach. My comment to Dan is, "Well, let's get there." There's a lot of uncertainty in the forward markets. I love our cash flow right now, but we're going to sort of address that when we get closer to it. I made in my comments, we will continue to look to be acquisitive, at least on the bolt-on side. So we hope to be able to spend some of that cash like we have in the last year or 2 on smaller bolt-ons that work. The remaining part of that cash flow for -- after debt reduction, we'll have to talk about.

Operator

And at this time, we do have a question from the line of Philip Ng.

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

The downtime you guys are taking in the back half, any of that economic-related?

David W. Scheible

No. It's all around the planned maintenance. I think you've been covering paper for long enough to know when you take a mill the size of Macon and West Monroe, we've got to take the recovery boilers off-line cold and do the inspection every other year. And that is extended downtime, as you can well imagine, going from it and coming back up. So it will all around that.

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

Okay, that's helpful. And then, in terms of the initiatives as a whole, I mean they've done a pretty good job matching supply with demand for CRB, but prices are down. So I just want to get a sense, are you concerned there is little more downside risk going forward? And just help me understand what the P&L impact is this year? I mean given the lag, is it more of a 2013-ish impact with the recent drop in CRB prices?

David W. Scheible

Well, I mean, CRB pricing is down $30, $40 a ton, I suppose. And we will see -- we all some of that in our open market already. In our current -- the carton pricing will probably not reflect any of that until the late fourth quarter, or 2013 at best. I mean we're still a net buyer of CRB so we haven't really had -- we have taken some downtime in our paperboard mills but it's really been around maintenance and that type of thing. We really haven't had any extended downtime for market-related CRB or -- and certainly not for

SUS.

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

Okay. But I mean, overall, I guess your comments earlier, you feel pretty good that prices are stable and the market's still fairly balanced I think you said there [ph]?

David W. Scheible

Yes. I think it's pretty disciplined. It's pretty balanced at this point in time. And look, I mean if it gets out of balance, then I think we'll do the same thing. I'm not going to build -- let me put it this way, I am not going to put the inventory on the balance sheet that I don't have any reasonable expectation to sell in that quarter. So we'll monitor that very, very closely. Right now, I like the forward looks. We're busy. But it's a difficult economy to read right now. I think you would have to agree.

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

Okay. And just one last question. Beer demands have been quite strong but CSD continues to be weak. There is some hope that a big CSD guy was stepping up promotions this year, it doesn't seem to have much of a lift yet. And I think based on some of the recent comments, they're looking to do like everyday lower prices rather than discounting in the big holidays. Do you think that's having any impact on volumes currently?

David W. Scheible

Well, we care a lot about take-home, not so much what goes on the C-stores. So actually take-home buying has not been that bad. People are buying. So we care about that and that's been okay. I listened to the same PepsiCo call yesterday and look, they're doing -- I mean, the CEO is right. They're continuing to promote. They're continuing to put power behind their brands, and I feel good about where CSD is heading. Beer has been strong. It's been hot. And again, take-home is important to us and take-home beer has been good. Craft has been good. As I mentioned in our call, we were up a couple of percentage points just on core big beer, big beer brands. And that's good for our business, and I don't really see any major slowdown right now.

Operator

And your next question comes from the line of Phil Gresh.

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

One question on the maintenance numbers, just so I'm clear. 2013 versus 2012, how much is in this every-other-year bucket that -- do we get added back? Is it the $15 million?

David W. Scheible

About $10 million, or something like that. If you go back and look at our 2010 -- if you look at sort of '09, '10, '11, '12, you see the every other year, it's probably in that $10 million range. It also may depend upon -- if there is something -- when we do a cold outage like that from that from some time, we will do some extra work. Because when it's down, we want to take the extra day or so to be able to do something in the mill that we just cannot do when it's running, and we may add a day of downtime, or something like that, but it's really around increasing forward productivity. This year, it's a bigger outage because we've been building up some time to do some things, particularly in our West Monroe mills. So we're going to -- it's going to be a little longer. But generally speaking, year-on-year, in a year when we have cold outage versus not, it's in that $10 million to $12 million range is what is sort of normalized.

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

Got it, okay. And then, because you had such a big outage -- or you had such a big outage planned in the second half, is it reasonable to think that you did build a little bit of inventory ahead of that because of the outage and that might have helped your productivity in the quarter? Or what was the real driver of such a strong productivity number?

David W. Scheible

Inventory was down, as you know, year-on-year, so we didn't actually really build inventory. We will -- our inventory will drop, there is no question about it. In the third quarter when we take that downtime, we'll lose some production, and our inventory will drop even further. I don't know that we're actually going to get a head to sort of put it on the balance sheet. We'll run and we generally don't. We may run a little higher and maybe, I figure, 10,000 tons or something like that but nothing that's measurable. You got to remember, we're a net buyer of board, right? So the fact of the matter is we produced more board. Even though our tons were slightly down, and I mean, a couple of thousand tons, we just -- we produced more, which meant we bought less externally. So when you look at Graphic's numbers, you got to remember that not every ton is the same ton. So for us, we had better productivity because we made more tons and we sold those tons and bought less external tons. That's one of the reasons why. And we talked in the past about operating leverage, I think you all have asked me to explain, how do you really see operating leverage in the business? Well, look at the second quarter. You saw a better throughput, more throughput through our existing asset base and therefore, the operating leverage and the margins increased. Because we really don't get anything on pricing. I mean the fact of the matter is our customers do not allow us to improve our margins on pricing. We hope to break even on pricing and what we really see as an improvement is when we are more productive in our facilities and operating less facilities. That's what drives our margins. But certainly, not through pricing.

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

Yes, now that certainly was impressive this quarter. The highway bill, is there any impact in how you're thinking about pension contributions for next year?

Daniel J. Blount

We're taking a close look at the highway bill. But in terms of our practice, we're focused in on really continuing to contribute at the rates we have published before. I mean we're talking, I think it's $60 million, $80 million this year, and we're still planning to do that. In 2013, we'll take a closer look at the highway bill and what we want to contribute. But we're focused in on funding our pension obligations.

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

Okay. And then just my last question, following up on the capital deployment being at 3x by the end of the year. And kind of addressing it then, is it fair to say the high end of the range is a place for you would think -- where you're willing to discuss potential plans? Or is it more kind of the midpoint or low end? I'm just trying to calibrate, is this 6 months away or 12 months away?

David W. Scheible

Now you sound like our Board. listen, what I would say is that I'm more comfortable getting that 2.5x. The fact of the matter is we're getting there pretty rapidly, as you guys saw, we made a pretty big dent in the ratio this year already. So I think Dan's right. We'll be right around that 3x, but we won't be very far after that to 2.5x. You're probably talking in the shorter range as opposed to 12 to 18 months. That's probably not -- we'll have to be dealing with that issue certainly by this time next year.

Operator

[Operator Instructions] And we do have a follow-up question from the line of Alex Ovshey.

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

A couple of quick follow-ons. I'm sure you're aware that there's a containerboard price increase out there, and in '12, you did take some share from corrugated with the CUK substrate. I mean, are you seeing any customers coming to you and potentially doing more conversions out of corrugated into CUK?

David W. Scheible

Well, we had a number of other wins this quarter. I didn't detail them all out for the brevity. But we're not really -- but regardless of pricing in the containerboard, there's a lot of other advantages. The sustainability metrics are particularly different. With freight costs going up, that's as big a driver as anything else. The thing on containerboard pricing is, it will have to translate to carton pricing or box pricing for it to make a difference to me, right? Because my customers don't really buy board. They buy boxes. So I don't expect a material impact on those economics this year.

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

Okay. And then in the Flexible business, is there much exposure to the residential U.S. housing market?

David W. Scheible

Yes, I mean, there is. I mean, don't forget that the good part of our multi-wall bag ends up in concrete bags. And -- so that's smaller projects, do-it-at-home, those kinds of things. Any pickup there would be welcomed. We don't -- we really have no forward outlook -- none of our forwards as we gave you guidance, has any market improvement in any of our sectors, because I'm growing weary of trying to forecast what the U.S. economy is going to do and certainly, on individual sectors. It would be great if it happened but we're not expecting it. Look the improvement in Flexible for us is going to be the integration of the Delta Natural Kraft synergies as we go into 2013. If market comes back, that will be a bonus but not expected.

Operator

Your next question comes from the line of Ghansham Panjabi.

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

It's actually Matt Wooten sitting in for Ghansham. So your volume is clearly outperformed the industry and competitors. And obviously, forecasting is very difficult, but can you at least comment on the trajectory throughout this past quarter month-to-month?

David W. Scheible

You mean for the 14 days to -- or 26 days of July? What...

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

No, I was talking about 2Q.

David W. Scheible

Oh, Q2. Yes, I mean look, food and beverage was good. What can I tell you? I think the volume was where we expected it to be. And I told you at the end of the first quarter, I thought the second quarter trends would be pretty good on food and beverage and the change in -- the focus on pouch carton and pasta and food service has served us well and our volume is good. It's good but it's not great compared to where you would think we would be historically from a recovery of the kind of recession that we saw. So I'm happy versus where we are, but disappointed in sort of what we would expect on a historical basis. I would expect volume to be much stronger than it has been. But we're busy. We're making -- we're okay.

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

Understood. And then, you've just talked about bolt-on acquisitions. Can you talk about how robust that pipeline is right now for these opportunities?

David W. Scheible

I would tell you, we have -- we are actively involved or actively engaged in a number of bolt-on sort of looks. Small acquisitions are almost as difficult to get done as big ones. Integration is of course less complex, but we look at a lot. And we'll get some things done if they make sense for us.

Operator

And there are no further questions at this time.

David W. Scheible

All right, operator. Thank you. We'll talk to you all next quarter.

Operator

This does conclude today's conference call. You may now disconnect at this time.

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