Graphic Packaging Holding Company Q1 2008 Earnings Call Transcript

| About: Graphic Packaging (GPK)

Graphic Packaging Holding Company (NYSE:GPK)

Q1 2008 Earnings Call

May 9, 2008 10:00 am ET


Scott Wenhold – Vice President, Treasurer

David Scheible – President, Chief Executive Officer

Daniel Blount – Senior Vice President, Chief Financial Officer


Joe Stivaletti - Goldman Sachs

Bruce Klein - Credit Suisse

Derrick Winger - Jefferies & Co.

Willis Taylor - Gagnon Securities

David Marcus - Boone Capital

Jeff Harlib - Lehman Brothers

Vic Kumar - South Coast Partners

Frank Duplak – Prudential

Matthew Armas - Goldman Sachs


Welcome everyone to the Graphic Packaging Holding’s first quarter 2008 conference call. (Operator Instructions) I would now like to introduce Scott Wenhold, Vice President and Treasurer.

Scott Wenhold

Welcome to Graphic Packaging Holding Company’s first quarter earnings call. Commenting on the results this morning are the David Scheible, the Company’s President and CEO and Dan Blount, Senior Vice President and CFO.

Before we get started I would like to remind everyone that statements of our expectations including but not limited to the achievement of synergies and debt reduction, pension contributions, capital spending, interest expense and integration expenses constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's historical experience and its present expectations.

These risks and uncertainties include, but are not limited to, inflation of and volatility in raw material and energy costs, the company’s substantial amount of debt, continuing pressure for lower cost products, the company’s ability to implement its strategies including productivity initiatives and cost reduction plans, currency translation movements and other risks of conducting business internationally, the impact of regulatory and litigation matters including those that impact the company’s ability to protect and use its intellectual property and company’s ability to fully integrate Altivity Packaging, and fully recognizing the anticipated benefits of combining the operations of Graphic Packaging Corporation and Altivity Packaging.

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.

With that out of the way I’ll turn it over to David.

David Scheible

Yesterday the company announced solid first quarter 2008 results excluding charges related to the combination with Altivity Packaging. Adjusted net loss was approximately breakeven compared to an adjusted net loss of $0.19 per share in the prior year period. The strong performance came despite closing a complicated transaction during the quarter and operating in extremely difficult inflationary environment.

As I mentioned in last night’s earnings release despite the many hours necessary to complete the combination with Altivity, I’m proud that our teams never lost focus on the day-to-day operations. I am equally pleased with what I observed as the same focus and dedication in the Altivity organization as they continued to perform similarly to Packaging.

I want to thank George Bayly and Don Sturdivant and their entire team for continuing to drive the results during this period of time. We are glad finally to be working as a single team. The logic of the combination with Altivity is powerful. We created a diversified packaging company with global reach, a shared history of innovative products and a manufacturing footprint to address customer needs in both the national account and regional packaging arenas.

The timing of this combination is also important. Graphic Packaging is now the largest folding carton manufacturer in the world and we believe this increased size and scale will be crucial to successfully operate in the face of rapidly rising inflationary pressures and economic uncertainty.

Graphic Packaging now approximately $4.4 billion in expected sales has the necessary scale to compete effectively in the global arena. Our manufacturing system is second to none in this space. We will include four CRB mills and two SUS mills combined producing over 2.4 million tons of paper. We will have 46 folding carton operations, the

largest multi-wall bag network in the United States, three manufacturing facilities making flexible packaging, three label facilities, and three packaging machinery production facilities as well.

The combination has diversified our product line and provided new opportunities for top-line growth. We remained the largest manufacturer of beverage cartons in the world and now we are the largest manufacturer of cartons for the food and use sectors as well serving both national accounts and regional players. We have expanded our focus in paperboard food and beverage sectors, which we believe will outperform the general market in a tough economy.

But our mix now also includes a solid position in the multi-wall bag sector, a flexible packaging business, and a fast growing label business. The combination provides us an opportunity to better balance our mix and grades and now help us deliver complete solutions to the customer.

We’re very excited about the opportunity to create a much larger solution set for our customers than either company could offer alone. John Best, who heads our new product development group and Tony Hancock have combined to create a formidable team focused on creating valuable, value, added new products. Both companies have a rich tradition of creating innovative packaging that makes our lives as consumers easier. This tradition is illustrated by Graphic Packaging’s Microwave Technology that was developed to enter the chilled food market for daily products and it’s patented

dispensing technology to prove customer convenience in a take home beverage space.

Altivity’s new Shape FX multi-layer paperboard and film lamination is the first packaging concept to unite shrink film with folding cartons and specialized dye cuts. This creates a uniquely shaped package design with show stopping market impact. Our customers are increasingly spending more dollars towards on-the-shelf differentiation.

The new Company’s strength and innovation will allow us to capture a large share of

those expenditures. Finally, cost reduction through the use of continuous improvement principals is embedded in both company’s cultures and on a combined basis with a experienced management team will lead to significant synergy savings over the next several years.

Since 2003, Graphic Packaging has reduced operating costs by approximately $170 million through its dedicated continuous improvement methods such as six sigma, process management and reliably centered maintenance. Don Sturdivant and his team are well down the path improving cost position through a dedicated lean manufacturing principal and legacy Altivity facilities.

We have seen results that show they are achieving the cost takeout since the Smurfit and Field merger in 2006. Synergies are going to be critical in this rising inflationary market. We said before the merger we expect that to combine the companies will lead to an incremental synergy opportunity of $90 million by 2012 and that 2/3 of this will be achieved by 2010.

Now that we have come together and been able to review our plans we can confirm that the cost takeout will be achievable and clearly our internal expectations are significantly higher. We are working to accelerate those efforts as we face increasing inflationary pressure in our markets. The critical components of this plan include operating expense reduction, supply chain procurement improvement, mill optimization and manufacturing process rationalization and improvement. The integration teams are already in place and working. We have begun the process of synergy realization.

I previously announced our senior teams that include members of both legacy organizations. We now have established all operational teams, our corporate staff. We’ve combined our sales and new product development organizations. We’ve created one logistics and continuous improvement organization, and we are on the way to merging all key HR processes as well.

Dan and his team have a solid plan to create the financial accuracy and compliance we are known for and we have initiated transition to SAP across the entire organization.

Our plant rationalization plans are already underway. We previously announced the closure of two converting facilities earlier this quarter.

In a moment our CFO, Dan Blount, will walk you through the specific items with current period financial results for the prior period. But let me summarize.

Net sales increased approximately 24% year-over-year and that include a roughly

$113 million of Altivity sales for the 21 days in March. First quarter adjusted sales were approximately 5% over the previous year period.

Our first quarter gross margins improved to 12% from roughly 9.6% in the previous year quarter. Stand-alone gross margins were about 14.1% despite the fact we experienced approximately $27 million worth of input inflation in the quarter.

The improvement was the result of improved manufacturing performance particularly at our West Monroe mill and higher pricing added roughly a $11 million in the quarter.

First quarter adjusted EBITDA excluding charges related to the combination was over $98 million representing approximately a 52% increase over the prior year period.

Altivity inclusion in the results positively contributed $7 million to the total adjusted EBITDA as well. As I mentioned, healthy top line growth contributed significantly to our overall improved financial results. Stand-alone Graphic carton sales to North American markets were up approximately 6% over the prior-year quarter.

In addition to higher contractual pricing the quarterly sales improvement was driven by

volume increases in beverage and favorable mix in food and consumer product packaging. We observed a very similar trend in the Altivity mix as well with food and beverage sectors driving year-on-year increases of the same magnitude.

Although beer take [inaudible] volumes in the United States remained flat to slightly negative we continue to see favorable prior period comparisons for our beer carton volumes. Our first quarter beer volume was up about 3% higher than the previous quarter.

Particularly we are now converting the 18 and 20 bottle packs for one major customer having moved them away from our corrugated package into our 100% solid paperboard package.

Import beer growth has slowed or stopped for the first time in a couple of years as consumers become more price conscious in this market. We have seen a similar trend towards less on-premise consumption versus take home. $4 gas tends to keep people at home.

Even though total U.S. soft drink shipments remain depressed several factors drove an approximate 6% increase in our home domestic shipments. First we experienced some share gain with the major U.S. supplier and second we are now reaping the benefits of our product innovation efforts particularly in the energy drink markets.

As I mentioned in last quarter’s call in order to offset the declining carbonated soft drinks the major bottlers are broadening their offering in Sport and Energy drinks, Isotonics and high-end teas. Industry data indicates that energy drinks for example grew by over 24% in 2007.

Although this is off a smaller base than carbonated soft drinks we are gaining traction in converting these fast growing segments to paperboard packaging. For example, PepsiCo’s Mountain Dew AMP which was launched modified Graphic Packaging [inaudible] in 2007 is now starting to take off in the marketplace.

In summary, the investments we made early on to development innovative packaging and build specialized machinery for this new consumer trend is paying off in sales and

profits. In addition to strong beverage volumes a positive mix, particularly for food and consumer product cartons, helped drive the top line increase in this quarter. The fact that our economy is struggling right now is certainly not a good thing but as the consumer is pinched by prices at the pump and higher cost for other necessities there is a benefit to our business. More people begin to eat at home as opposed to going out in to restaurants.

We can see this in products like ready-to-eat cereal which was up 15% over the first quarter of 2007. Frozen pizza sales increased almost 10% as well. Due primarily to increased sales of microwave packaging, frozen food carton sales were up almost 6% higher than the previous year quarter.

Fortunately, we are now positioned to be able to meet this current demand for higher products as we freed up converting assets in the second half of 2007 by actively exiting lower margin, slower growth businesses.

We have observed the exact the same trends Altivity’s end-use sectors as well. Both dry and frozen food is up while products focused in the home building or durables have seen slower growth. Additionally, we have been able to renew critical customer contracts in this space so we are comfortable about forward trends in this business.

We remain more committed than ever to pushing the top line by introducing new innovative packaging solutions to our customers. You may remember that in 2007 we saw $49 million of growth in new products. In the first quarter we saw an additional $22

million of new product sales. Our Food and Consumer products business had an extremely strong quarter for new product sales. As more people returned to the center of the store our customers used our products to capture share of the consumer food dollar.

For example, Hormel launched their Simply Tang product line in GPIs [inaudible] flute carton designed for retail shelf display. This carton is design to provide both shipping and retail display capabilities. ConAgra launched their new Orville Redenbacher Gourmet Varieties Popcorn warehouse pack in a [inaudible] construction as well.

ConAgra saw terrific value in the shelf appeal of its high strength carton within a warehouse club environment. In active microwave packaging, GPI had three launches with Kraft. Kraft launched a new line in extension to their Oscar Mayer’s Fast Franks product line with sausage and bun product. Kraft also launched a New Deli Creations Flat Bread product line. Finally their South Beach Living brand launched a new microwaveable sandwich product.

All of these launches used Graphic Packaging’s patented microwave structure design for use with refrigerated products. Our active microwave business also saw major Nestle products’ launch with a new hot microwavable sandwich on the Stouffer’s brand.

Finally, Kellogg’s launched a multi-pack of single served cereal pouches in a Graphic Packaging designed dispensing carton for a variety of new brands. This product allows the consumer to have their cereal on the go many times during the day and is expected to lead to a multi-million dollars expansion sale.

In addition to top line growth both the use of lean manufacturing along with other proven methods including six segment and process management we recognized almost $13 million of lower operating costs in the first quarter. This is an area where Altivity also excelled as their cost take out plans are well organized at the plant level and results are positive.

We are building on this momentum. Additionally, improved manufacturing contributed approximately $22 million to the bottom line first quarter. The majority of this improvement occurred at our mills as the three legacy Graphic mills produced

46,000 tons more in first quarter of 2000 [sic] than we did in 2007 and the average cost to produce a ton of board at these mills decreased by approximately $28.00 a ton despite a $27 million increase input inflation in the quarter.

I can also tell you that Don and his team had a great operating quarter in the CRB mills and Altivity as well. Higher throughput and lower cash costs in those mills. Our primary folding carton business is geographically located in the Midwest and post sale of the Philadelphia and Wabash mills our core CRB system in this critical geography will be over 700,000 tons including mills in Kalamazoo and Battlecreek, Michigan and Milltown, Ohio. We will, by our estimates, be the lowest cost per ton system in the industry.

Turning to our SUS mills efforts to upgrade the West Monroe, Louisiana mill infrastructure in 2007 are providing to be a success. We produced approximately 20,000 more tons of board at West Monroe than the first quarter of last year. In addition to improved operating equipment effectiveness, our measure of manufacturing performance, the mills are using less higher priced raw materials like fiber and energy.

Given the dramatic increase in more traditional energy sources, we are focused on alternative energy options like forwarding more of our bio mass byproduct as a substitute for natural gas. Our investments in 2006 and 2007 to upgrade our digesters, for instance, reduces the need to purchase energy in both Macon and in West Monroe.

This will be a critical focus through the remainder of 2008 as we work on ways to not only reduce natural gas usage but also to lower the amount of chemicals, fiber and water we need to make board from our mills. We have hired outside industry experts to assist our local West Monroe teams specifically focused at this objective.

We believe that benchmarking and learning’s will be translatable across the entire mill system. Although we are constantly looking for ways to lower costs, unfortunately inflation will continue to negatively impact us across the entire enterprise. Input costs were up roughly $39 per ton for 2007 across the combined mill system, about equal in CRB and in SUS. This quarter the inflationary impact was driven mostly by the higher cost of fiber both in our virgin and recycle mills.

We believe fiber costs will mitigate some going forward but the cost of energy and oil derived products will continue to impact us in 2008. As I said in the past, many of our raw materials are positively correlated with the price of oil which seems to be reaching new highs everyday.

Graphic Package on a combined basis will buy roughly $63 million a quarter of energy related inputs so movement in natural gas or electricity certainly has an impact on the bottom line.

Fortunately, the nature of our business has changed dramatically from the last time we were hit by rapid inflation. At that time we were locked in to many contracts where we were actually giving back price to the consumer. Our contract renegotiations over the last year and half have changed that. We now have seen 12 consecutive quarters of increased pricing over the prior period.

Building on full year the 2007 price increases of almost $43 million, higher pricing positively impacted results by another $11 million in the first quarter of 2008. In addition, many of the contract price escalator triggers are lagged so you will continue to see improved pricing through 2008 and well into 2009 which will help mitigate some of the impact of the higher price inputs.

Altivity contracts also mirrored this effect and we expect pricing recovery going forward there as well. The recent combination with Altivity will also help us weather the storm better than last time as size and scale should provide us an asset towards managing costs in this inflationary impact.

Given the business environment it’s even more crucial to achieve the pre-merger identified synergies and roll out our cost cutting programs across the entire organization. As a result we will be expediting certain planned integration expenditures that were originally scheduled for 2009 and 2010. This will help combat the negative impacts inflation earlier, thus positively impacting 2009 and 2010 results.

To summarize, it was an excellent operating quarter for Graphic Packaging and Altivity contribution was positive. The merger with Altivity is in full swing and the business is performing as expected. The new teams are in place and synergy activities are underway and we are look to accelerate these efforts in light of the top operating environment.

Inflation, particularly in fossil fuel based products will be an issue for us the remainder of the year and we will continue to concentrate our efforts on usage reduction across our enterprise.

Finally, our bottom line focus is on getting cash out of this business to reduce our overall debt.

With that I will turn the call over to Dan Blount for a detailed review of the financials.

Daniel Blount

As you saw on yesterday’s earnings release, first quarter financial performance shows strong improvement over the first quarter of 2007. Taking a look at some key metrics we see, as David mentioned, gross margins improved a full 2.4 percentage points to 12% from 9.6%.

The EBITDA margin improved to 13.6% from 11.1%. To better compare performance to the prior year we adjusted 2008 EBITDA to exclude charges associated with the combination with Altivity. Finally, adjusted net loss improved by approximately $38 million to a loss of $1 million. Adjusted net loss excludes business combination charges.

As David highlighted, operational management’s strong execution of our business strategy continues to drive financial improvement. In our financial results these improvements are reflected in continued success with our cost reduction programs, as well as price and volume increases. Inflation is partially offsetting the positive gains.

Altivity results only had a minor impact on operating metrics as the transaction did not close until March 10. Please note that a reconciliation of non-GAAP terms as well as additional information for legacy Altivity can be found on our website at It’s under the Investor Relations section.

Before I provide further analysis of Q1 performance I’ll spend a moment on reporting segments.

As a result of the combination with Altivity we positively diversified our company. Thus, we revised financial reporting segments. The Containerboard segment was combined into the Paperboard Packaging segment plus two new segments were created. Going forward, we will report in three business segments; Paperboard Packaging, Multi-wall bag, and Specialty Packaging.

The Paperboard Packaging segment includes our highly integrated mill and plant system that produces board and converts it into folding cartons. This segment will also include the design, manufacture and installation of packaging machinery and the open market sale of folding carton grade board and certain containerboard substrates.

The multi-wall bag business segment includes the production and sale of multi-wall bags, consumer bags and specialty retail bags. The bags serve a wide range of industrial and consumer product applications including fertilizer, chemicals, concrete, pet and food products.

The third and smallest segment is specialty packaging. It includes flexible packaging, label solutions, laminations and ink codings. All of these products are used in a wide range of consumer applications. Ink sales are principally internal.

In future conference calls we will provide analysis of combined company performance by segment that will include historical Altivity pro forma information. For this quarter since only 21 days of legacy Altivity financial results are included my comments will focus on separate Altivity and Graphic results.

For the stub period included in Q1 results Altivity performed in line with our expectations and contributed $113 million to net sales and $7 million to adjusted EBITDA. To provide guidance on Altivity’s annual revenue and EBITDA performance we reference Altivity’s unaudited 2007 financial results which are posted on our website.

For 2007 Altivity sales were approximately $2 billion. The Altivity management team delivered strong cost improvement of $50 million and adjusted EBITDA was $206 million.

Now the 2007 adjusted EBITDA includes $30 million of non-recurring cost add backs principally related to the merger with Field Container and post merger integration initiatives.

Based on Altivity’s performance through Q1 and projected performance for the remainder of the year we expect Altivity annualized financial results that will contribute to combined company performance to exceed 2007 levels. Now turning to the legacy Graphic.

Graphic delivered strong Q1 sales and EBITDA improvement. Sales at $611 million improved by $27 million or 4.7% due to improved pricing, improved product volume and mix and foreign exchange rates. Now the detail.

The price improvement reflects negotiated and contractual inflationary cost pass throughs as well as price increases in open market paperboard sales. For the quarter price improvement totaled $11 million. Improved product mix was primarily in the cereal and frozen food product lines. Improved volume primarily resulted from beverage carton volume increases resulting from the introduction of 18 and 20 beer multi-packs.

For the quarter net sales improvement from volume and mix totaled $8 million. The remainder of the sales improvement is from foreign currency exchange. Now EBITDA.

Graphic contributed additional EBITDA of approximately $91 million. This excludes

charges of approximately $10 million related to the combination with Altivity. The strong

improvement over the prior year period was due to increased sales and strong cost reduction partially offset by inflation. Here is the details.

Increased pricing, strong volumes, and better sales mix drove $14 million of EBITDA improvement. Cost reduction delivered $35 million of EBITDA improvement. Approximately $22 million of this cost reduction was at our West Monroe mill where our initiatives to improve operational efficiencies is delivering results. The remaining cost reduction is primarily from continued success with our continuous improvement initiatives.

Inflation in the quarter totaled $27 million. I’ll provide more comments about inflation later.

In summary, looking at Q1 we see strong financial performance improvement by both companies that substantially exceeded inflation. The rate of inflation, however, is currently about double the rate that we experienced in 2007. We believe that inflationary pressure will continue to negatively impact results for the remainder of 2008 at the same rate that we just experienced in the first quarter.

Inflation indexed escalators and sales contracts will partially offset inflationary increases but there is a lag before the price recovery. We expect the market to react to cost increases and raise open market board prices but that will depend on demand/supply economics plus there will also be a lag.

We have initiated several new projects to reduce energy usage, decrease raw material waste and substitute high cost inputs. While these initiatives are expected to generate significant savings most of the savings will be realized in 2009. Overall, to summarize this we feel that expected price increases and cost reduction initiatives will more than offset the rate of inflation being experienced and we will continue for the remainder of

2008 to deliver improved performance over the prior year.

Incremental to this financial improvement will be synergies realized from our integration activities.

Now before turning to cash flow, just a few comments about our integration process and expected synergy delivery. We assembled an experienced full time team to drive integration projects. To date, all major integration projects are in full scale execution.

We believe the initially defined synergy benefit of $90 million is the low end of the benefit range and we will be able to accelerate synergy delivery. We are starting to see synergy benefits in our performance. Starting with next quarter’s earnings release we will begin reporting benefits realized and associated one-time costs incurred to deliver the synergies.

I will end my discussion with a couple of comments about cash flow. For the first quarter net cash used in operating activities was approximately $41 million greater than the first quarter of 2007. Approximately $10 million of this use was related to expenses associated

with the closing the Altivity transaction and the remaining approximately $29 was related to the timing of pension contributions.

The Q1 pension contribution is one-half of our expected 2008 total estimated contribution of approximately $60 million. Now looking forward we expect cash flow available for debt reduction to be $120 million to $150 million over the next three quarters for the combined company.

This projection includes capital spending of $140 million to $160 million, cash interest payments of $160 to $170 million and nonrecurring charges for integration initiatives. And finally, in regards to the credit agreement, at the end of the quarter we were comfortably within compliance with the senior secured debt covenant.

We’ll open the line for the question-and-answer session.

Question-And-Answer Session


(Operator Instructions) Your first question comes from Joe Stivaletti - Goldman Sachs.

Joe Stivaletti - Goldman Sachs

Dan, the pension contribution you are expecting for the full year of $60 million, is that your expense or your cash contribution?

Daniel Blount

That is our cash contribution.

Joe Stivaletti - Goldman Sachs

How do you think that will compare to the expense?

Daniel Blount

That is going to be greater than expense. Somewhere in the range of $25 million.

Joe Stivaletti - Goldman Sachs

So the expense will be $25 million lower than that roughly?

Daniel Blount

That is correct.

Joe Stivaletti - Goldman Sachs

Those other numbers you just gave us, those are for the 9 months, the final three quarters for the year, the CapEx and the cash flow?

Daniel Blount

That is correct. The numbers we reported in the first quarter would be added into those to give you the annual numbers. I gave you the Q2 through Q4, which would be the combined company numbers going forward.

Joe Stivaletti - Goldman Sachs

You said $160 to $170 for cash interest?

Daniel Blount


Joe Stivaletti - Goldman Sachs

What were the non-recurring integration charges?

Daniel Blount

We didn’t give an amount for integration charges but our estimates are included in the overall cash number which we gave you guidance on. That would be in the $120 to $150 million range.

Joe Stivaletti - Goldman Sachs

Are you able to break this NG down any more in terms of trying to give us a feel of what you may be able to show in your 2008 numbers, that $90 million?

Daniel Blount

What we’re going to do going forward starting with next quarter is we are going to give very precise information on the synergies and are rolling to the financials as well as the non-recurring costs that were incurred. I think at that time we will be able to provide more guidance on synergy activities including updates on the amount of synergies we expect overall. So the second quarter is going to have a lot of rich synergy information.

Joe Stivaletti - Goldman Sachs

When you talk about the contract with the escalators and what not, can you quantify the percentage of your overall business that you now have where escalators apply?

David Scheible

It is across the entire business both for Graphic and Altivity. It is going to be a very, very high percentage of our business in at least the carton side of the business. When you look at paperboard, paperboard tends to be more of an open market as the price moves up the board price moves up.

But in almost all the folding carton business it is probably on a combined basis at least 90% of our business will be in some a contract that will have some escalation process whether it is board or more recently in some of the larger national accounts they want more visibility with cost escalators, but regardless you’ll continue to see pricing move up in 2008 and in 2009 as we roll through the subsequent quarters.

Joe Stivaletti - Goldman Sachs

What is the normal lag in those contracts? Is it a 30-day or 90-day cash due?

David Scheible

That has pretty much been our tradition. In most of those contracts we are trued up on a year’s basis. You look at the previous year’s inflation and then you capture it in the next year is the way it goes. There are some with a shorter duration. There really aren’t any beyond a year but for the most part I think the way we look at it is it tends to be a year lag for the carton side of the equation. Board pricing as the board price is announced and recognized it tends to move up pretty quickly for open market board.


The next question comes from Bruce Klein - Credit Suisse.

Bruce Klein - Credit Suisse

Will you touch a little more on volumes? You mentioned I think your beer shipments were up 3% and your soft drinks were up 6%. That was right? That was the first quarter over the prior year first quarter?

Daniel Blount

That’s right.

Bruce Klein - Credit Suisse

Food and consumer, was that up? I think your revenue was up but I didn’t know the breakdown.

Daniel Blount

In the food sectors of those businesses they were up. We exited in capacity preparation some areas that were not really food related for us so the net is just a slight up. If you look at what we would consider our core sectors, dry food, frozen food, almost all food, on average we were up 6% in those spaces and some of them were much higher. Like I said cereal was up like 15% year-on-year across space which obviously in that is pretty incredible in a space that is typically GDP level.

Bruce Klein - Credit Suisse

Those volume trends are continuing? That is bucking the trend a little bit with the general economy which you articulated some reasons why. Have you seen that?

Daniel Blount

What I would say is that our plants that are focused on those sectors of the market are pretty busy right now for sure. Those trends that we are seeing in the economy of people cooking at home, staying at home, less eating out clearly are supporting both the food side but also the beverage side.

I made the comment that you are seeing on premise consumption drop and that hasn’t occurred for awhile so you are seeing more take home, more cans and bottle packs purchased in the grocery store and consumed at home. That is driving some of the trend. Certainly in beer and in the core food businesses. Center aisle of the store is where the growth right now is occurring both in the grocery channel but also in the club warehouse channel as well.

Bruce Klein - Credit Suisse

And the free cash flow application? What is the intended target for that?

Daniel Blount

All our free cash flow goes for debt reduction. Is that the question?

David Scheible

Bruce that would include the proceeds from the sale of the two mills.

Bruce Klein - Credit Suisse

The $22 million in charges, Dan where are they on the income statement? Is that varied? Did I miss that on the income statement?

Daniel Blount

In cost of sales would be $12.5 million and SG&A would be $9.8 million.

Bruce Klein - Credit Suisse

The CRB market, how would you characterize that in terms of the operating rates and demand and product pricing to offset OCC?

David Scheible

Product pricing of course there have been announcements out there in product pricing. We are seeing some of that materialize. Our operating rates are pretty solid, I think primarily driven because of the sectors we are in. Industry rates are certainly lower and backlogs are down year-over-year for sure in the space. I don’t have any indication that it will pick up much going forward other than of course the strength in the food space.


The next question comes from Derrick Winger - Jefferies & Co.

Derrick Winger - Jefferies & Co.

Could you break out long term debt in terms of the line items and the balances and also in that could you give us the credit facility size, the amount you are on and any letters of credit against it? Secondly, any tax guidance in terms of absolute or a rate?

Daniel Blount

You wait until we file the Q and then you would have all that long term debt versus short term debt, letters of credit. You’ll have all that in the Q we’ll file later today.

Derrick Winger - Jefferies & Co.

And the tax guidance?

Daniel Blount

We don’t pay cash taxes I think is the simple answer.

Derrick Winger - Jefferies & Co.

On a GAAP basis are we going to see the same kinds of things we saw in the first quarter here?

Daniel Blount

With regard to taxes?

Derrick Winger - Jefferies & Co.


Daniel Blount

That is basically what you are seeing on the tax line is a non-cash number is the amortization of the tax good will and that will continue.

David Scheible

Any cash taxes paid is minor and it comes from international locations.

Derrick Winger - Jefferies & Co.

When do you presume you might become a tax payer?

David Scheible

It is going to be a while based on our existing NOL. We’re looking to take benefit of that $1 billion plus NOL over the next several years. So we’re looking pretty far out in the future before we expect to pay taxes.


The next question comes from Willis Taylor - Gagnon Securities.

Willis Taylor - Gagnon Securities

Given that you consolidated 21 days of Altivity results can you discuss why depreciation and amortization and interest expense were both down versus last year?

David Scheible

I can. It is a couple of things. Depreciation and amortization was down because we took accelerated depreciation on certain assets we were taking out of service. In terms of interest expense that’s primarily the difference in the rate. The rate of interest was favorable over 2007.

Daniel Blount

We refinanced in May as well.

David Scheible

Refinancing in May our spread was two points. That was significantly better than what we had before. Plus the overall rate was lower.

Willis Taylor - Gagnon Securities

What is on hedge? What is the position?

Daniel Blount

On hedge we are approximately at 35% floating.

Willis Taylor - Gagnon Securities

For the last several years the CapEx spent has been considerably less than depreciation and amortization. Could you help us think about how that is going to trend in the future?

David Scheible

I think you are going to see approximately the same trend in the future. We’ve had a combination with Graphic Packaging where we wrote off the assets and now we are having a combination with Altivity where we wrote off the assets as well. So you’re going to see that same type of trend in terms of CapEx being lower than depreciation.


The next question comes from David Marcus - Boone Capital.

David Marcus - Boone Capital

I was curious in terms of your timing and plans for investor relations. Now that you’ve got the merger done and you’ve posted good numbers for the quarter. I’m curious when you’ll be out speaking at conferences and meeting with investors?

David Scheible

We’ve done certainly we have already done some debt [rad] conferences and talked about

that for sure. Scott and I had a conversation this morning before this call and we are in the process of working with some folks to create a road show here before the end of the second quarter, at least to talk about where we are.

So that’s what our target is right now. I think important for us is to explain our story but also we want to have a quarter or so behind us to be able to show what the synergies are doing and being able to talk with some amount of clarity around what the future earnings and cash flow look like in this business. So we’re trying to get that done and then go and talk to the Street about the future prospects, so, certainly during 2008.


The next question comes from Jeff Harlib - Lehman Brothers.

Jeff Harlib - Lehman Brothers

Just the $120 to $150 million cash flow number you used does that include any asset sales or any unusual cash flows, in flows or out flows beside pension and some other things you mentioned?

Daniel Blount

No, that’s just operating cash for debt repayment. The mill sale would be incremental to that.

Jeff Harlib - Lehman Brothers

On the cost savings the $90 million, I know you aren’t going in to too much detail yet but are what are some of the things that you are working on more in the near term and what are some of the actions that are pushed out in to 2009, 2010? If you could give a cost savings of synergy target for 2008 run rate that would be helpful.

David Scheible

First of all we really haven’t done mush pushing out. We have in fact accelerated. I already announced the fact we’ve closed two manufacturing facilities or announced the closure of two manufacturing facilities, so we’re well on the process of the plant rationalization work.

I think the one we’re focusing the most on right now is really in the procurement area. That’s an area where it gives us both earnings and cash and by virtue of our leverage with Altivity now that we have been able to see combined purchases we think there’s upside opportunity in purchasing. So in these synergy activities the things that generally come first are the overhead reductions, which we’ve talked about announced, the combinations of the staff, the combination of the business units and so we’ve seen some of that starting to flow through.

Next will be the purchasing synergies because as we get to look through those numbers we are able to translate some of it very quickly. Those areas where we are purchased at the different price for the same unit, for example, and then we’re

starting some bidding activity for our larger purchase to goods and we’re in the process of being able to do things like transportation, things like chemicals, corrugated, those types of things.

The things that tend to trail are the plant closure activities. The impact on those is less because as you can well imagine the shut down in severance cost in the year tend to absorb a lot of the savings so what we do in 2008 probably won’t manifest itself until 2009.

Dan talked about in the second quarter we are starting to see some synergies that we will detail out what those look like and what categories they’ll be in the second quarter and I think that will give you a better feel. But right now as we just merged 20 days ago synergies are mostly effort that we’re working on results to come.

Jeff Harlib - Lehman Brothers

How does overall capacity utilization look for the combined companies? Both mills and folding carton plants?

David Scheible

That is two separate questions. Of course we already announced the fact we will be rationalizing some of our folding carton capacity. It’s not so much that we’re taking a lot of capacity out but we are certainly upgrading the capacity that we are utilizing. We have got some parts of our organization which have some slower, older, really assets that are not contributing above cost of capital. Those assets will come out of our system.

From a mill standpoint we continue to say that we will operate all of the mills that are in our business, post of course the divestiture of Philadelphia and Wabash as part of the consent decree. Capacity utilization in our SUS mills has been very tight. The industry is tight on SUS capacity for sure. Our CRB mills ran well and capacity was good in the first quarter.

I think the industry is a little softer. We may not have felt as much of it because our mix is focused more on food and that tended to be up, but certainly we’ll balance our capacity for board with our demand in folding carton as we have traditionally done.

Jeff Harlib - Lehman Brothers

Lastly, you mentioned the folding carton contracts are typical annual contracts. Are they weighted to any particular quarters which can benefit certain quarters versus other quarters?

David Scheible

No. First of all the contracts are generally not annual. So I didn’t mean to imply that. They are generally three plus year contracts. They have annual escalators for input

cost changes primarily. But our business has some seasonality if you’d like. Beverage is certainly busier this time of year and up to the summer and falls off in the fall.

In the fall traditionally is when we see our food business pick up because back to school drives a lot more cereal and pizza. Now we’ve seen some counter trends here in the first quarter, of course, but I think that has more underlying economic issues than actually a change. But the contracts themselves really do not have any quarterly or any seasonality basis for pricing or supply.


The next question comes from Vic Kumar - South Coast Partners.

Vic Kumar - South Coast Partners

The $22 million in improved manufacturing costs that you had primarily on the West Monroe mill. I just wanted to get a better sense of how that was achieved and is that something that you expect to see continuing in future quarters or is was last year’s quarter a weak time for the West Monroe mill?

David Scheible

Well, actually a little bit of both. Last year’s quarter you may remember we had a very difficult operating quarter in West Monroe. But we have also invested in West Monroe to change the amount of wood and energy that we used in that system so you got a little bit of both.

I made a comment in my script that said we invested in the digesters in that system and we have. That allow us to burn more bark as opposed to natural gas. Right now our bio mass utilization is a blessing. Buying natural gas as we go forward is going to be more and more expensive. I think in the first quarter we were hedged at about $8 but as you go forward, certainly natural gas is going to go up and so we have consciously made an effort to use more bio mass derived fuel and we saw that in West Monroe. So we will continue to see improvement in West Monroe. I think our total business use suggested for the first quarter was up from a performance standpoint around $37 million. Dan?

Daniel Blount

$35 million on the quarter.

David Scheible

$35 million on the quarter so we are raising our original targets. We talked generally about $50 million or so improved stand alone improvement but I think those numbers are clearly going up. Altivity’s quarter I will say for unaudited numbers what I’ll tell you is their performance in cost take out was excellent. So what I would say going forward is the overall cost take out will at least be at this level, potentially accelerate in some areas of the business. Dan’s comments are accurate that if you combine the cost take out with the pricing in the combined businesses despite the fact we expect to see inflation at roughly the same rate we do expect performance to improve by virtue of those combinations. A lot of it will come from the mills.

Vic Kumar - South Coast Partners

As part of the merger, you have to divest a couple of mills. How does that affect the run rate EBITDA for Altivity from 2007?

David Scheible

It’s really inconsequential.

Vic Kumar - South Coast Partners

You mentioned in the overall CRB market that food is obviously doing very well. What are the segments that are struggling?

David Scheible

I don’t have quite as much visibility over those areas because we don’t participate, and

quite frankly if you look at Altivity’s mix it is very much focused like ours. It is in food and beverage as well. But I’m pretty sure areas that are struggling are going to be anything supporting durable goods, areas, the toys, games, media, and those kinds of things. Those are all real difficult economic places right now. We have also seen some of the restaurant supported products; they are struggling a little bit as well. People just aren’t eating out as much. So the products associated with carrying products to those

establishments are certainly struggling in the space.

I think it’s a different economy right now and I like our position in food and beverage, but by no means are we insulated from an economic slowdown in the United States.


The next question comes from Frank Duplak - Prudential.

Frank Duplak - Prudential

Back in the middle of March you put up a chart on your website that talked about projected capital spending and it looks like today’s guidance the full year 2008 number will be below that level you indicated there. Just curious any thoughts yet about

2009? I thought you had 2008 and 2009 in the $237 million area flat year-over-year. Any ideas about 2009 CapEx at this point?

Daniel Blount

I think that 2009 CapEx is probably a reasonable number at this point. In terms of 2008

what’s happened since the combination of the two companies we were able to look at what they planned to spend on capital and what we planned to spend on capital, and we were able to rationalize quite a few projects because they overlapped. Or our business strategy had changed.

So that’s where the savings have come from. So I think in 2009 we haven’t gotten that far that we’ve really looked at what was the details in their plan versus ours. So I think that original guidance that we provided is where we’re standing right now.

David Scheible

You have got to remember that as Dan and I talked about before we really had a chance to look at the two businesses we had a rough idea of where we were going to spend money, but really not appropriate for us to look at level of detail. But now that the team and Don Sturdivant and his team working with Mike Doss and once they have gotten together and looked at they realized there were some things that could be done differently or better than we had originally planned and with an eye towards preserving cash for debt reduction we’ve made those decisions.

But I will tell you, I want to make sure that we are not slowing down synergy acceleration, nor are we changing our equipment improvement upgrades or the plant investments we’re making are the same that we were making before. Timing may be a little bit different but that’s it.

Frank Duplak - Prudential

Can you talk about the mill sell process at all? Are you willing to talk about how things are going? Any update there?

David Scheible

We’re on time with our expectations on it. We hired an outside investment banker to help us. We have gone through the initial processes. Plant tours have occurred. We have a number of buyers who are interested as you can well imagine. We expect to be finalizing that and closing that before the end of the year.


Your final question is from Matthew Armas - Goldman Sachs.

Matthew Armas - Goldman Sachs

Can you say if you had any mark to mark hedge gains in the quarter in natural gas? As well as what your hedge position in natural gas is for the rest of the year?

Daniel Blount

I think in the first quarter I don’t believe that there are any significant mark to market

gains on the nat gas hedges. We were hedged at around $8. I think we probably actually bought slightly north of that but I don’t believe it was a material number.

David Scheible

Looking at the remainder of the year we are 60% of our expected usage hedged in the second quarter and then we dropped down for the remainder of the year to about the 25%

level. And that’s for the combined entity of Altivity and Graphic.

The average rate in terms of those hedges that we’ve got in place is slightly below $8.


There are no further questions at this time.

David Scheible

We thank everybody and we’ll talk again next quarter.

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