Graphic Packaging Holding Company (GPK) Q3 2012 Earnings Report, Transcript and Summary

Good morning. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Brad Ankerholz, Vice President and Treasurer, you may begin your conference.

Thanks, Sarah, and welcome everybody to the Graphic Packaging Holding Company's Third Quarter 2012 Earnings Call. Commenting on our results this morning will 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've provided a slide presentation, which you can access by clicking on the Q3 earnings webcast link on our Investor Relations section of our website, which is graphicpkg.com. I'd 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 Securities and Exchange Commission. David, I'll turn it over to you now.

Thanks, Brad. Good morning, everyone. We're pleased with our strong third quarter results and ability to continue to drive sales, earnings, operating margins and cash flow meaningfully higher during a difficult time for many of our core end-use markets. In the third quarter, net sales increased 3%, adjusted EBITDA margin increased 130 basis points to 15.5%, adjusted EBITDA increased to $171 million, $19 million higher than last year, and cash flow from operations increased $65 million to $146 million Q3. We also dropped below the $2 billion of debt this quarter, representing a significant milestone for Graphic Packaging. New products and market share gains in key end-use sectors drove our sales increase. While productivity enhancement, lower input cost and strong manufacturing performance drove margin improvements. Clearly, the strategic investments we have made in critical areas of our business such as new product development, asset optimization and some bolt-on acquisitions continue to drive positive results. On the new product development side, we're having success by focusing in key strategic areas such as corrugated replacement, expanded microwave cooking technology, secondary packaging for [ph] [Audio Gap] products, away-from-home quick service and a brand new solution for glass bottle packs for the beer market, I'll talk about in a second. We're working on new initiatives in each of these areas and feel good about our new products pipeline. Our solid CUK fiber folding carton that was commercially deployed in the juice pouch sector is clearly a viable substitute to traditional litho-laminated corrugated structures. This new structure runs well on existing packaging machinery and offers significant inbound supply chain benefits compared to corrugated boxes. In the third quarter, we began converting a major food storage bag customer out of their litho-laminated corrugated packaging and into our folding cartons using heavyweight CUK Paperboard. Additionally, we are building on our U.S. success internationally, for example, with the launch of the new products for the dairy market in China replacing corrugated products. In glass bottles, we've developed a new solution for beer multipacks that reduces breakage and noise throughout the distribution and handling process. Our new solution called Tite-Pak offers an alternative to partitions in corrugated boxes for the protection of glass bottles. Tite-Pak launched regionally in the third quarter for YuengLing Brewing and offers great potential due to cost savings and efficiency benefits throughout the customer supply chain. In the away-from-home channel, we recently developed a one-piece clamshell for a major fast food retailer. The clamshell is a completely symmetrical design that incorporates a patented locking feature and can be loaded at the restaurant with either cavity at the bottom. The benefits of the new product include better ease-of-use of manufacturing efficiency and material reduction. Also in the away-from-home, a major coffee chain launched a food product in a new Graphic Packaging Paperboard design. This package was selected because of its ease-of-use in both the staff and customer. And also represents a green alternative to the plastic products available before. Our microwave business continues to experience global growth, largely through new business development. Our ongoing investment in the development of proprietary products and designs continue to find strong consumer acceptance. Sales of our microwave packaging are up 5% year-to-date, as a result of strong new product launch last year. Commercial rollouts have continued this year, including ConAgra's commercialized 50-ounce meals at Wal-Mart, which utilize our proprietary Micro-Rite press tray technology. We expect product development activities in this market to remain strong over the next 15 months, and it will be a major contributor to growth in new business. While new products help drive sales growth, it was continued productivity enhancement and asset utilization that led to higher operating margins in the third quarter. We generated a net $60 million for performance improvements in the quarter, overcoming $7 million in costs related to planned maintenance downtime at our Macon, Georgia and Pine Bluff, Arkansas mills. We have achieved $62 million through the first 9 months of cost savings, putting us on track to achieve between $70 million and $80 million annually. These cost saving initiatives include reduced use of energy, fiber, chemicals, higher output in our Paperboard Mill and optimization of our converting network. Synergies from acquisitions also contributed in the quarter as we completed the closure of our Twinsburg, Ohio plant in our Flexible Packaging division, putting us on plan with our integration of Delta Natural Kraft and Mid-American Packaging business. Further declines in our input -- further, declines in our input cost predominantly from natural gas and secondary fiber contributed to the improvement in margins as well. 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 that we've used to delever the business and strengthen the balance sheet. Our debt fell below $2 billion in the quarter, which is a historic low and our net EBITDA -- our net debt-to-EBITDA ratio fell to roughly 3x. Dan will provide more insight in the cash flow debt liquidity in his section of the call. Let's talk about Paperboard. Our mills had another strong quarter driven by improvement initiatives in energy, operating efficiencies and fixed cost reduction. Despite some extended planned downtime in the quarter, we generated almost 5,200 additional tons of production in the third quarter and utilized this extra production internally in our carton plants. So our mills produced more tons. We converted more tons in our facilities and sold more folding cartons externally. This increased production and utilization rate allowed us to lower our cost per ton and expanded our margins, increased cash generation. The mills continue to benefit from stronger demand for our CUK board, as a result of new customer wins and substitution trends to our solid fiber. The high -- this higher efficiency is allowing us to increase our inventory turns, shorten our cash cycle and improve our return on capital. During the quarter, we completed the planned maintenance outages in Macon, Georgia and Pine Bluff, Arkansas mills. The Macon mill came online a few days earlier than we anticipated as the outage was a little more efficient. As a reminder, we will be taking a longer planned maintenance outage at our West Monroe, Louisiana mill in the fourth quarter. This outage will include a required biannual cold outage to inspect and service the boilers on site. This is fully factored into our expectations. It's something that we have to deal with every other year. Within our biomass boiler investment in Macon, Georgia, we remain on plan to be up and running in the second quarter of 2013. The economic benefit of this project continue to be solid as our new boilers are expected to eliminate our reliance on coal-generated purchased electricity here in Georgia. And we anticipate being a supplier of electricity back to the grid when we come online next year. Looking at folding carton. Our sales increased 4% in this quarter compared to the prior-year period. End market trends across some of our core food categories remain challenging, however. But we were able to offset this with wins in new business in such areas as juice pouch, cartons, pasta, away-from-home and frozen foods. On a year-to-date basis, net new business is performing better than planned and our pipeline of new products remain robust. The cereal and frozen pizza market continues to be sluggish in the third quarter. In the third quarter, ACNielsen estimated that volumes for cereal decreased about 2% and frozen pizza volumes were down about -- about the same. Overall, we saw a better and more normalized trend in our back-to-school business in this quarter which includes food items such as cereal, pasta and pantry foods. I would not say that we have seen industry sales at historical levels, but the trends are certainly better than the same period last year. Industry volumes across the canned beverage market decreased 1.8% on a year-over-year basis, according to Can Manufacturers Institute. Industry softdrink shipment remain weak, but we continue to see a steady recovery in the beer market, led predominantly by craft brewer and bottled beer. Our beverage volumes were down slightly, reflecting the overall market. Premium beer for most brands had a solid quarter, in terms of volume. The craft beer does continue to lead the categories. Our acquisition of Sierra Pacific last year continues to benefit from the strength in craft beer and our new Tite-Pak product that we introduced this quarter is going to benefit from the growth in bottled beer sector. Let's talk about Flexible. We saw really little change in the underlying trends in this market during the quarter. Stagnant demand for construction and industrial related materials continues to negatively impact this business. In addition, a relatively mild storm season has further dampened the roofing shingle wrap market. As I mentioned, the integration of Delta Natural Kraft and Mid-American joint venture is progressing on plan and we completed the Twinsburg, Ohio plant closure ahead of schedule. We continue to target $20-plus million of total synergies from this combination, most of which of course will show up in 2013. Pricing, overall, contributed about $1 million this quarter. The bigger story was inflation. In fact, the lack thereof. Commodity cost input was actually deflating by about $8 million. The lower input costs were driven primarily by decreases in energy and secondary fiber year-on-year. These were partially offset by increases in freight and to a lesser extent wood and chemicals. The increase in freight cost is being driven by government regulatory changes which have reduced the allowable driving hours, as well. Diesel prices continue to be stubbornly high. While crude oil prices are down, and we have seen the benefit from natural gas in the cost of some chemicals and resins, freight prices were $3 million or higher in Q3 in 2011 and we expect this trend to continue somewhat into 2013. In summary, we had a good quarter. We continue to drive growth through focusing our product innovation, asset optimization and debt reduction. We're investing in some of the stronger trends in the food and beverage markets such as litho-lam substitution, pasta, craft beer, food service and microwave while protecting our core segments. We like our positioning, but there are plenty of opportunities to continue to grow the business. Similar to, Sierra Pacific, Delta Natural Kraft and Mid-American Packaging transactions, we will continue to look for strategic bolt-ons to enhance our competitive position globally. I'll now turn the call over to Dan for a more detailed discussion of our financial results. Dan?

Thanks, David, and good morning. David covered the operational highlights of the quarter. I'll focus on the financial results. My comments track our posted presentation. Let's start with financial highlights on Page 9. As a reminder, when I refer to EBITDA and EBITDA margin in my discussion today, I'm referring to results adjusted to produce comparable financial reporting. Let's take a look at third quarter performance. Net sales improved 2.9% or $31 million. EBITDA increased 12.4% to almost $171 million. EBITDA margin increased 130 basis points to 15.5%. Adjusted net income at $42.8 million is $0.02 per share higher than a year ago. And year-to-date operating cash flow at $145.8 million is $64.5 million higher than last year. As David discussed, we posted a very solid quarter. The main drivers of the bottom line improvement are pretty straightforward, as they include revenue growth, strong operating performance and lower interest expense. Higher EBITDA combined with working capital efficiency also generated significantly more cash than a year ago. Moving to the discussion of results. The sales comparison on Slide 10 shows almost 3% growth to over $1.1 billion in third quarter revenues. As you can see, volume gains drove the growth. Overall, volume, net of foreign exchange equated to a roughly $30 million of sales growth. The Paperboard Packaging segment successfully grew their business organically, as David outlined, principally through new products and share gains. As we also saw on the second quarter, the new business delivered a margin of 20%, as we further leveraged our fixed overhead cost. Now in the Flexible Packaging segment, revenues grew nearly $16 million, due to the business combination with Delta Natural Kraft. Right now, the acquired flexible volume is at skinny margins. However, as we have spoken to previously, we expect these sales to improve to a low double-digit margins as we deliver our integration synergies in 2013. These integration initiatives are progressing as expected. Turning to the EBITDA bridge on Slide 11. We see strong EBITDA improvement of $19 million to $171 million. As we look at the chart, what jumps out are 2 things: Commodity deflation and the large benefits from performance gains. Let's talk about these 2 items. First, if you look at the deflationary decline in input cost, the primary driver has been secondary fiber. In this commodity alone, we expect deflation of $25 million to $30 million for 2012. We're glad to have a pullback in commodity inflation this year. But the way our contracts work, some portion of the impact of input cost deflation will be reflected in 2013 pricing. The second driver is performance improvements, where we have achieved $62 million benefit year-to-date and $16 million for the quarter. Looking at the details of the quarterly $16 million improvement, we see cost-reduction delivered $23 million, and this benefit was netted against $7 million of additional mill maintenance that I highlighted was going to be incurred during the second quarter call. Overall, we are pleased with our cost-reduction results and expect to achieve around $80 million for the full year. As a reminder, our fourth quarter will include approximately $8 million of incremental year-over-year mill maintenance expense, as we complete the biannual maintenance outage at our West Monroe mill campus. Now looking at the EBITDA margins. We are pleased with the improvement to 15.5%. In the upper right-hand corner of Page 11, you will see a decline in the flexible segment margin. The margin drop is attributable to the maintenance outage at our newly acquired Pine Bluff mill. If you normalize for the outage, the margin would be comparable to the previous year. And I might mention that we expect margins in Flexible to return to our normal levels starting next quarter. Now turning to Slide 12. Let's look at cash flow, debt and liquidity. Third quarter net cash provided by operations was strong at $146 million. Stronger earnings and a pull forward of various working capital benefits from the fourth quarter into the third quarter helped to drive the solid performance. CapEx increased $10 million to $48 million in the quarter. The increase was the result of timing of expenditures for our Macon biomass boiler project and investments related to the integration of Graphic Flexible Packaging. As David mentioned, the biomass project is on target and we expect the boiler to be up and operational by mid-next year. We expect total CapEx to be around $190 million for 2012. Now looking at debt and interest, we saw a 25% drop or a $9 million reduction in interest expense. This drop was a result of our declining debt balance and a reduction in our effective interest rate. I should also note during the quarter, that pricing on our senior secured term loan and revolver dropped by 25 basis points to LIBOR plus 200. As our leverage ratio dropped below the first step on the facility's pricing grid. Year-to-date, net reduction was $153 million. This figure compares to $80 million of debt -- net debt reduction during the first 3 quarters of 2011. Based on this stronger performance, we are raising our 2012 net debt reduction target to the $240 million range. Our net leverage ratio improved to 3x. This is compared to 3.5x at year-end 2011 and 3.8x a year ago. Liquidity at the end of the quarter was an excess of $685 million. Our target leverage ratio continues to be in the 2.5x to 3x range. And we expect to be within this range by the end of this year. Now let's talk about some guidance. Overall, performance for the third quarter was strong and in line with our expectations for the year. And looking forward, let's turn to Slide 13 and speak to some of our thoughts around fourth quarter. First in the fourth quarter, we expect cost inflation to run at current levels, with secondary fiber and energy positive to 2012 levels. We also expect to see the normal seasonality that occurs in our core food and beverage business, with the fourth quarter somewhat historically weaker around the holiday periods. Volume in Flexible Packaging is more dependent on industrial activities, which also is historically slower in the fourth quarter. Also as mentioned earlier, we will take planned maintenance downtime at our West Monroe mill in the fourth quarter. This biannual maintenance is expected to result in a $13 million charge in the quarter, which is about $8 million higher than we had last year in our results. Overall, as we look at Q4, we expect EBITDA for the quarter to come in around the current consensus analyst estimates. Looking into 2013, we expect contractual price adjustments to reflect some of this year's deflationary commodity environment. We expect very modest commodity inflation in 2013, with major components flat to 2012. Our cost-reduction goal is to, once again, achieve $60 million to $80 million of benefit, and we also expect to roll in the previously announced $20 million of synergies in the Flexible Packaging segment. So EBITDA, again, will grow nicely in the 2013. And now moving to Slide 14. In addition to the comments I had about Q3 -- I mean Q4, I will summarize our guidance for full year 2012. Capital expenditures will be around $190 million. Cash pension contributions will be between $45 million and $60 million. Pension expense of around $40 million, depreciation and amortization in the $260 million to $280 million range, interest expense of $110 million to $120 million, the full year tax rate of 41%, net debt reduction in the $240 million range, and finally, our net leverage ratio should end the year below 3x. And with those comments, I will turn the call back to the operator for questions. Thank you.

[Operator Instructions] Your first question comes from the line of Joe Stivaletti with Goldman Sachs.

You would -- you know now that you've gotten your leverage down significantly, you talked about potential bolt-on acquisitions. And I wondered if you could just talk to us a little bit about what areas in particular would be most interesting for you? And would you be considering anything else in the flexible space or just your core business?

Well, as you all know I have to be somewhat circumspect about any sort of acquisitions. What I will tell you, generally speaking, most of the things -- anything that we're really looking at is in our core business. But that does include Flexible. If you sort of think about it, Joe, with the acquisition of Delta Natural Kraft, we've made that business look a lot more like our other business. So I think there will be some reasonable bolt-ons in that business to make it strategically a better fit, more opportunities for integration. We'll continue to look at that. As I said in the past, our acquisitions in our Paperboard business -- they'll be both domestic and international. And in our focus -- we'd like to have our footprint a little broader in the international business. But it's going to be around our core carton food and beverage markets. I mean, that -- with the sort of uncertainty, and I think it's fair. And moving into 2013, we're just not going to go get too far afield from the things that we know and understand, and can explain in light of the sort of the economic uncertainty that we feel that we're facing in '13.

Okay. I was wondering, Dan, if you could talk at all about -- you gave us guidance on the 2012 cash flow items. So there -- can you share at this point any targets for 2013? And you've talked about 2012, I mean, but 2013 in terms of your -- any thinking on targets for net debt reduction or also maybe CapEx for next year?

Yes, we can give you a few comments on that is, one -- once we hit that range, which we consider to be optimal, that's 2.5x to 3x. We'll use the revolver to efficiently reduce debt with cash. But we will be in a position to be able to ratchet that revolver up or down depending on the acquisition activity and those types of things. We're not looking at that overall net debt reduction outside of that range for the business. The other thing in terms of the range for CapEx, as you know, in 2012, we had additional CapEx related to the biomass boiler. We expect that project to be complete in the middle of 2013. So we're looking at CapEx spending to drop from around that $190 million range to around $175 million for 2013. So there will be a gain there. And that will be positively reflected in cash flow.

Joe, and Dan's right. If you remember that we've talked in the past, maintenance for our business is around $100 million. If you look at the acquisitions, maybe we're up to $105 million or $106 million, because we bought the Paperboard mill with DNK, but it's in that range. So for the $175 million, that gives us some free board for growth investment or strategic investment in that range. So I'm pretty comfortable that $175 million on an actual CapEx is probably a pretty sustainable level for Graphic Packaging at this point in time.

So overall if you look at cash, you have estimates for an improved EBITDA and you have some reduction in CapEx. So we expect cash flow to improve from 2012 levels in 2013.

Your next question comes from the line of Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: On Slides 10 and 11 where you break out the volume mix by sales and EBITDA contribution, can you just parse that out between the legacy businesses and acquired volumes? I'm just trying to get a sense as to how -- a bit where the drop-down margins were for the quarter?

There's a couple of things there. One, if you look -- it's about a $30 million number, right? Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Yes. In net of FX. Correct.

Net of FX. So that's why we're basically looking at it. So if you look at that, half of it is in our Paperboard Packaging and approximately half of it is in Flexible Packaging. Paperboard Packaging really doesn't have any benefits from acquisitions in there. Because on a year-over-year basis, we own the same basic footprints in that business. Flexible Packaging, all of that improvement was related to the acquisition of Delta Natural Kraft and Mid-American Packaging. So if you do that -- and then I also said that the margins were, for Delta Natural Kraft, I mean, they're very skinny at this point. They're low single-digits and that's what's compressing what you see on the other waterfall with EBITDA improvement. So there's mix improvement. There's mix effect in that EBITDA waterfall as well. So if you ferret all those things out, for the new business that David talked about, we're getting about a 20% margin on that new business because we're leveraging our fixed cost base. And the new business for Delta Natural Kraft, I mean, that's compressing what goes on the benefit on the EBITDA waterfall. But we're working on that. We have a plan for it. And in 2013, as we complete our integration activities for that business, you should see that climb dramatically in the low-single double-digit range. So it's going to be a sales figure that actually delivers a measurable benefit to the company in terms of EBITDA margin.

You got to remember also in Flexible, Dan identified, we had that -- we took a downtime in the Pine Bluff mill and that actually shows up in Flexible, not in Paperboard. So it cuts the margins in half. It's a pretty small business. When you take that kind of cold outage downtime in a mill like that, it has pretty significant impact in that quarter on that business. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay, that's very helpful. And then on the planned mill outage, I think last quarter you said $12 million was your estimate for the year-over-year impact for 3Q and $5-somewhat million for the fourth quarter. Was that just a timing issue in terms of why you came in at 7, which I think is what you said?

We have never done an outage at Pine Bluff before. And one of the things is that you're somewhat cautious with your numbers, and the guys that are planning the outage are cautious as well. So now that we've done a lot of learning on how to properly do our maintenance outage on that mill, and you'll see those types of numbers on an annual basis. And we probably even improve on it as we go forward and learn more about how that mill operates.

Yes, I mean, I think you know that, that business had been starved for capital, so we didn't know what we were going to get into when we tore that boiler down, right? And so we said, it could be -- we are pleasantly surprised. Honestly, the boiler was in better shape than we thought. But we gave some upside guidance because until you open it and get into it, you really don't know where you are. So I think it we'll be better on a go-forward basis. The other thing is that Macon came up a little earlier than we thought. I think Dan has said in his comments, we have planned for a downtime in Macon, but we came up a couple of days earlier in Macon, which was good because we made the paper and we sold the paper. So it's kind of why the cash translated into the quarter, because we had a couple of extra tons that we didn't expect, and we ended up selling those tons. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: And just one final clarification on the D&A on your press release on the cash flow side as listed as $202 million and then the reconciliation at $225 million, can you just help us bridge the 2?

Yes. I think you'll find the difference there is pension amortization. So the usual numbers that we highlighted in the comments we had previously is the appropriate way.

Your next question comes from the line of Mark Wilde from Deutsche Bank.

Dave, just to start out, can you give us, just based on what you see right now, a sense for kind of what those price adjusters may mean in '13?

Mark, right now from what we do, I'd say we're probably looking at $25 million-or-so of pricing adjustment from those things blowing through in next year. I mean, that sort of what we expect. So as Dan said, it was great. We love getting it this year. We don't expect a lot of inflation next year. So we'll overcome those with volume, and of course we have the synergies from DNK. We'd like to get back, Mark to a place where really pricing and inflation are kind of balanced, which with the old model. In the last 3 or 4 years, we've been -- inflation has been up and pricing has been down or vice versa. But what you'll see is steady EBITDA growth. You'll see on a normalized basis, EBITDA growth from last year to this year and from this year to next year through that arbitrage of pricing and inflation.

Okay. And then can you give us some sense in the coated board business right now, how important are exports to you?

Well it is a 2 part question. If you're talking just about just pure export board that we sell in the open market in internationally, not very much. We ship and we've said publicly a couple of hundred thousand tons a year to Europe and Asia, Australia, but we use those predominantly in our -- to make folding cartons in those regions. So export is important to me, but it's not the SBS model where CUK is shipped around the world in just to open market applications. It's a pretty small part of the CUK plan.

Okay. All right. So from that, Dave, can we assume that you don't see a big impact to your business from all of this Chinese box board capacity that's out there?

Well, I mean, a lot of it, Mark, as you well know, it really depends on which end-use market ends up. When we don't do a lot of SBS, we don't do a lot of ivory board end-use applications, right? And that board that they're making really isn't very good for beverage application, it's got recycled. So can it have an impact? Sure. But I don't think it's as great on our businesses we -- as we would expect. And in Europe, our business is predominantly beverage, for sure. And in any food business, where there we're a buyer of board, we don't export our CRB. So in sort of a perverse way, any reduction in Europe actually would benefit -- if any, [indiscernible] we would do it, we'd focus on the food. And I think Mark, [indiscernible] said this last week, they really expected most of that stuff to end up in Asia and other places. It really wasn't targeted that much for the United States. So it will be an indirect impact in our business as opposed to direct impact. At least that's what I think.

Yes, okay. Have you seen any sign of kind of Chinese box board kind of coming into the U.S. for that kind of compete with the recycled box board here? I mean, I keep hearing -- I hear -- I just hear about this, and I never know whether it's much of a truly shown up in the market?

Yes. We haven't seen a whole lot of it. You've got to remember that some -- a good part of CRB ends up in direct food contact stuff. And so as you can well imagine, Mark, some of our customers get a little nervous about importing Chinese box board that is direct in contact with pasta or other products. And rightfully so. So we really haven't seen yet. I know it occurs on the coast, for sure. But that's -- I don't get necessarily it. I don't think it starts in the food space, is my point.

Okay. All right. And I'm just curious with the weakening in some currencies like the real and others, are we seeing any more sign of more coated board imports coming into the U.S.?

Well, we haven't seen a lot. And I think that's because, and you know as far better than I do, that the fact that the Brazilian market, which is predominantly, what you're talking about there, is actually growing. And there's been no real new board capacity added significantly in that market. So I think a lot of the coated board stock down there is going to serve the local market. While the real is weaker it's still not -- it's still pretty high, and so we really haven't seen that.

Okay, and just finally, just you've talked about kind of the improvement that you expect to see next year in the Flexible business, specially down the Delta Kraft, can you help just to think about the impact from just the kind of contractual changes and your integration levels in that business?

That's a totally different business. I don't really think we see nearly as much contractual changes in that business. I think the question really becomes there, the synergies become pretty easy to get because it's really internalizing externally purchased board. So those -- that's pretty easy. I think of it really, Mark, is more of a volume question, right? I mean, a lot of it depends upon your view of what the U.S. -- and it's predominantly U.S. market economy is. We're industrial based, long lead concrete, industrial chemicals business, right? And so a lot of it depends on what happens in '13. I think it's more of a volume question, Mark, than it's anything else.

Your next question comes from the line of George Staphos with Bank of America Merrill Lynch.

I guess the first question I had, maybe segueing off of Mark's question, you continued to be optimistic on the synergies with DNK and Mid-America, but are the returns -- given what you've seen in the business in total, from a volume standpoint over the last year, do you think the business will be returning at the same level you'd expect it to, say a year ago when you made that investment in DNK?

Well, first as you well know, our investment in DNK was not very much. So when we essentially just assumed some debt. So we didn't really make a large capital investment. What I would tell you is that, I still think [indiscernible] we just transfer debt. We just picked up transfer debt. So at LIBOR plus 200. So what I would simply say is that we -- for the long term I still like that business because of the integration network. We're still struggling like every other businesses on the industrial side of the equation. We knew where that was going in. I'm sorry, we knew what that market we were selling into going in. I would have preferred it to rebound a little faster. But ultimately, we are sort of where we are. We'll still get the synergies. The business is going to struggle from a volume standpoint, but the margins are going to double. So we're going to get into that double-digit margin square as we head out in 2013. I mean, if we got -- if there's any volume recovery at all, it will happen much quicker. Otherwise, it's just going to be grinding it out at current levels.

All right, I appreciate the affirmation on that, Dave. The second question I had, have you seen any uptick in orders more recently relative to market that perhaps have been, maybe more sluggish over the last 9 to 12 months. We've seen some pickup that we've written about, in terms of point-of-sale data. Obviously, you're gaining market share, so your volumes are outpacing the market. But have you seen any kind of lift into the market, say as we've gotten into the fourth quarter. If you could color on that -- provide color on that.

Yes. What I would say is that we're certainly busy right now and you heard my trends. I said that this back-to-school season was much better than we saw last year, right? So I would tell you right now our converting plants are running and our mills are busy. And I hope that continues. I'm not trying to be evasive, but you and I both know trying to predict around Christmas, New Year's, and Thanksgiving in the fourth quarter is so darn difficult. Because while customers maybe scheduled to run right now through Thanksgiving and they are, it doesn't take but a phone call to say, "Hey, you know what? We're going to go -- we're going to take some downtime around the holiday." And then we lose $8 million to $16 million worth of the volume in 2 days because they move out. Right now I like what the fourth quarter is developing. We're busy and we're running a lot of standard back-to-school, center of the aisle products. And that's why Dan gave guidance through the fourth quarter, it feels like it's going to be in line. It's just the fourth quarter.

Dave, last question and I'll turn it over. If you continue to see growth in CUK through share gains, how much additional capacity, if you will, do you think you have to grow? How much de-bottlenecking can you continue to do? And similarly, I mean, converting it all can have a little bit more, if you will, flex or excess capacity, but how much more could you grow before you have to start considering larger investment in converting equipment?

Well converting equipment, I think, we've got plenty of converting capacity. As you know, we run our converting businesses with about -- in an individual plant. We have less than half of the equipment on 7 days. We have plenty of capacity in converting. And you have to because there are surges we have some surges. In the mill side, we get about 1% a year in creep, just from efficiency operation and you sort of think about that. In the CUK, that's 1.6 million tons or something like that 1.4 million tons. So we pick up enough to run our business pretty effectively. We're -- there's lots of opportunity for us to put with minor investment to put more capacity out there, if we need it. But it makes absolutely no sense to put more capacity in the market that we don't know that we're going to sell. Now that's just -- it's good discipline. So we have plenty of excess capacity in the business, but we're just not going to get ahead of ourselves. In some ways I'd rather be an honest. And I've said this past, I'd rather be a net buyer globally of even CUK. I wouldn't mind buying enough on the outside to be able to balance our network. That part has been part of our core strategy. And there's other people that make it globally, and they'll be glad to sell it to me and I'll be glad to buy it.

Your next question comes from the line of Phil Ng with Jefferies. Philip Ng - Jefferies & Company, Inc., Research Division: From an execution standpoint you guys are doing an incredible job in terms of taking cost out of the system, can you talk about some of the opportunities for 2013?

Well we've got a couple of things going on. We've got some pretty good synergy opportunities in 2013 that will roll through the bottom line. As you -- as I just gave George a little bit of background, we're going to have to make some more tons and more efficiency tons, because our CUK business continues to grow. And that manifest itself in throughput and productivity in the mills. And that's really what part of our plan is, for sure. We've got some growth in China that will manifest itself back to our business that will allow us to optimize sort of what we're doing, because we do some suboptimal in that process. And then we've made a fair amount of capital investments this year in the mills. First of all, we've got the Macon biomass in the second half of the year will contribute. And then the converting plants, we put in some new presses and some new cutters. And the guys that got that money have the expectation from the CEO that they're going to see increased throughput or otherwise, they won't gain more capital. So the project list is out there. We manage each and individual project for all the $60 million to $70 million is tied to an individual project throughout the organization globally. Look, I think if the volume holds up, like we expected to, we'll generate our cost reductions. Philip Ng - Jefferies & Company, Inc., Research Division: Okay, that's helpful. And it sounds like from what you said earlier, demand is firming up a little bit but visibility is still pretty low. Have order patterns just a little bit more choppy?

No. Our order pattern has been good. What you're hearing is just, I don't want to get it or I don't want to over lean my skis. Because the fact of the matter is it's so darn difficult to predict in the fourth quarter because of all the holidays. If you look at -- if you just think what we have to manage through Thanksgiving, Christmas and New Year. In our food business, a day is $8 million in sales. So if it moves a couple of days, you lose $16 million to $20 million in sales. It's kind of hard to predict what's going to be around a number. So I'm just saying, look I like where we are, but customers start to manage inventory at the end of the year, worrying about first quarter, who is going to get elected, who knows. Philip Ng - Jefferies & Company, Inc., Research Division: Okay. And just one final question you guys have done a pretty good job -- a very good job actually picking up some new business on the corrugated conversion side, as well as pasta and frozen, are there any other new markets that you could penetrate that could actually offset some of the market weakness?

Yes. First of all, I don't think we, by any means, exhausted the corrugated conversion. And it's great. I saw those guys are getting their price increase in the marketplace, that's super. Like they say in golf, every shot makes somebody happy. Creates additional opportunity for me, from a conversion standpoint. I like that. The microwave business is really on fire. No pun intended. We're really doing a nice job of growing that business. And we've got some customers that are very committed and dedicated to that. And that feels good. And it's away-from-home I mentioned, are a couple of new items that are in plastic that are going to paper board. So I don't think -- I think, we're sort of a target rich opportunity for new things. Having said that, we're going to have to be disciplined in where we spend our money in the process. So I'm not going to tell you that I see a breakout, and we're going to start growing like Microsoft. I'm just thinking we've got consistent constant growth integrated back to the Paperboard mills, which says, like I said, I think -- my expectation is EBITDA will continue to grow and we'll generate cash. That's our plan. And we seem to be executing towards that, so I'm comfortable going forward.

At this time, there are no further questions. This concludes today's conference call. You may now disconnect. Thank you, sir.