Graphic Packaging Holding Company (GPK) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Montserrat, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to pass this call over to your host, Mr. Brad Ankerholz. Sir, you may begin your conference.

Thank you, Montserrat, and welcome to Graphic Packaging Holding Company's Second Quarter 2013 Earnings Call. Commenting on results this morning are David Scheible, the company's President and CEO; and Dan Blount, Senior Vice President and Chief Financial Officer. To help you along with today's call, we have provided a slide presentation, which can be accessed by clicking on the Q2 earnings webcast link on the Investor Relations section of our website, which is at graphicpkg.com. I would like to remind everyone that statements of our expectations, plans, estimates and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties and could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the company's periodic filings with the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements as such statements speak only as of the date in which they're made, and the company undertakes no obligation to update such statements. David, I'll turn it over to you now.

Thanks, Brad. Good morning, everyone. Second quarter results were in line with our expectations despite what turned out to be a challenging global demand environment. Volumes in our core paperboard segment increased 5%, and our adjusted EBITDA of $175 million and EBITDA margin of 15.4% were also strong and benefited from our strong operating performance and continuous improvement initiatives. Our earnings per share for the quarter was $0.13 a share compared to $0.11 a share a year ago. New products, acquisitions and customer wins, particularly in the consumer packaging sector, offset weather-related weakness in the beverage segments during the quarter. Sales of new products launched in the quarter were solid, and revenues from the fourth quarter 2012 European acquisitions added almost $80 million sales in the quarter. Corrugated replacements, strength packaging, microwave cooking technology, some quick-serve dining room solutions and our proprietary beer bottle cartons called Tite-Pak remain key areas of growth during the quarter. We're partnering with our customers to develop solutions to differentiate products, shorten their supply chain and lower their distribution cost. Our recently opened innovation lab in our Atlanta corporate center has served as an important new resource for our product development efforts, and we're utilizing that capability globally. We talked about the launch of our newly developed receptor sleeve for McDonald's Premium McWrap on our last earnings call. I'm happy to report that the Premium McWrap continues to do very well with consumers, and our packaging is helping distinguish this new item in the marketplace. We also launched 2 new important products of Kraft in the second quarter. Both these products were developed to make it easier for consumers to quickly prepare a quality meal. The new designs are developed by Velveeta Cheesy Skillet Singles and Kraft Recipe Makers. Let's talk about volume. In our global folding carton business, it increased about 3.6% in the second quarter and was driven predominantly by our European acquisitions. Our legacy folding carton volume was down about 3% on a year-over-year basis, and it was the tale of 2 stories in the quarter. Consumer product sales were flat in the quarter, with strength in pizza, dry food and new products offsetting weakness in the cereal and away-from-home markets. The real weakness in the quarter came in the beverage market. Cold and wet weather conditions in both the U.S. and Europe negatively impacted sales of both soft drink and beer packaging. This is especially true in the U.S. for the important Memorial Day and Fourth of July holiday periods. The Can Manufacturing Institute estimated that industry volumes across the canned beverage markets decreased roughly 4.7% in the second quarter, with nonalcoholic beverage down almost 6% and alcoholic beverages down about 2.5%. So both the on-premise and take-home markets have been relatively weak in this quarter, but it was the take-home market that has been more sensitive to weather fluctuations, particularly around the key holidays. Less picnics means less beer and less soft drink consumed. On a positive note, the craft beer sector continues to outperform big beer and was a positive again for us in this quarter. Both the soft drink and big beer markets picked up early here in the third quarter, and we are cautiously optimistic based on these improving demand trend, but I think time will tell it needs to stay high. Both sales and profit trends in our flexible business improved in the second quarter. Demand for the concrete bag and construction side of the business improved, which helped Flexible Packaging backlogs more than double during the quarter. New management, along with some recently installed equipment and systems upgrades, have improved fiber yields in throughput at the Pine Bluff, Arkansas mill. Tons per day increased 9% sequentially in the quarter, and we believe we will reach optimal levels as further paper machine improvements are made during our planned maintenance outage here in August. There's also ongoing work being done on the converting side, and we expect to make significant progress on this end over the next 2 quarters. We are confident that production issues are being addressed, and this business should achieve its production yield targets later this year. We should also see better pricing trends in both our multi-wall bag and specialty retail plastics business in the second half of the year as prices begin to reflect higher kraft paper and resin costs being passed through to consumers or customers. We've made the decision after the quarter to close our Brampton, Ontario flexible film facility, and we will rationalize this volume into other lower-cost facilities by the end of September. This will result in roughly $4 million to $5 million in lower annual operating cost once the transitions are completed. All these changes drove a sequential improvement in our Flexible Packaging EBITDA margin in the second quarter as it grew from 1.8% in Q1 to 3.2% this quarter. As we finish the work at the mill and the converting side, we expect our flex margins to reach high single digits by the end of the year and low-double-digit range early next year. Let's talk a little bit about additional performance improvements. The integration of the Contego Packaging and A&R beverage packaging business in Europe is progressing on plan, and we remain comfortable with the $16 million to $18 million synergy targets that Dan and I talked about for next year. We're installing new presses and making the capital investments necessary to optimize our European asset base. This quarter, we announced the closure of our converting plant in Gillingham, England and are consolidating the plant volumes into other lower-cost facilities throughout Europe, thereby improving our European manufacturing cost position. Macro conditions across Europe remain challenging, but they are improving for our sectors. We are confident in our ability to drive higher volumes and profit margins through a disciplined approach on new product introductions and by optimizing our supply chain. We had another very solid quarter in operating performance across our mills and our converting plants. This quarter, we generated about $29 million of performance improvements across the business year-on-year, which brings our total for 2013 to over $50 million. We remain on track to achieve our goal of $100 million to $120 million of total performance benefits for the full year. A significant portion of this in the second half will be our energy consumption side, with the biomass boiler in Macon now online. The biomass boiler is expected to generate annual savings of nearly $20 million starting in the third quarter. We had a strong production quarter in our mills. The improvement initiatives in reducing the amount of energy and better throughput and reduction in fixed cost. We took no unplanned downtime, and we produced 11,500 more tons and utilized more tons than last year quarter. And we continue to have very strong demand for both our 2 core grades, SUS and CRB. The integration efforts to consolidate our mill purchases continue to yield significant cost reductions in coating, process chemicals and wood and provides additional tons for us to sell. Company-wide pricing declined by $16 million in the second quarter and $21 million through the first half of the year. This was in line with our expectations, and it's the clear result of contractual prices resetting based on input cost inflation we experienced in 2012. Second quarter represents a low mark for pricing, and we expect price givebacks to moderate significantly in the second half of the year. As I mentioned last quarter, we expect pricing to decline by approximately $30 million for the full year and turn positive starting in late Q4 and then improve further as we head into 2014. On the cost side, we experienced commodity input inflation of roughly $10 million versus 2012 quarter. Increases in energy, chemicals and wood drove the commodity inflation. Higher energy costs were the result of rising natural gas prices, while higher wood prices result predominantly from wet weather, raising transportation costs both in Georgia as well as in Louisiana. Oil prices moderated somewhat in Q2, but higher diesel prices also increased our freight cost. It's hard to predict the impact of fuel, TiO2 and chemicals with the high level of variability in global demand, but looking forward, we have no reason to believe input costs will rise on a sequential basis in the back half of the year, but we do face difficult year-over-year comparisons in the third and fourth quarters as we experienced deflation during that same time period last year predominantly based on recycled fiber inputs and lower natural gas cost. We've begun to recognize increases in paperboard prices due to continued strong demand for SUS and CRB. During the quarter, our pricing on CUK or SUS rose $45 a ton, and CRB increased $35 a ton. We recently announced additional increases on both grades effective during Q3. These increases should benefit our open market sales in 2013 and begin to benefit carton contract prices later this year and into next year. We're setting up a very positive backdrop for pricing as we head into 2014. Talk about the capital structure. Commenting a moment for equity ownership, we completed another secondary offering in June. Four of our largest shareholders sold an aggregate of 15 million shares. This is on top of the 32 million shares sold in March of this year and another almost 19 million shares sold in December of last year by the same 4 shareholders. Combined with the company's share repurchase last December, these transactions have reduced the combined holdings of these shareholders from 65% to 39% of our total shares. This has significantly increased the public float and liquidity of our stock. And since the June 2013 offering, the trading volume in our stock has been close to 2 million shares per day, which is more than double the volume before these transactions. We believe the secondary market transactions have proven beneficial to all shareholders. If I look forward a little bit, we had a solid second quarter. We drove volume increases with new customer wins and acquired businesses. We maintained higher operating margins with performance improvements. We continue investing in future growth and optimize our assets around customers' changing needs. We certainly don't control the weather, but we are continually finding ways to win new business and expand our addressable market. We have work to do in our flexible business. We certainly realize that double-digit markets -- double-digit margins are our target, and we're moving in the right direction. And I'm extremely confident in our ability to be able to deliver those synergies and operating targets there next year. Looking at the back half of 2013, we expect pricing to become less of a drag but to face greater year-over-year headwinds from inflation. Dan's going to provide more detailed guidance on 2013. We remain committed to generating cash and reducing our debt levels this year near the top end of our 2.5x to 3x net leverage ratio by year end. I'm going to turn the call over to Dan for a more detailed discussion of financial results and then move to Q&A.

Okay. Thanks, David, and good morning, everyone. Let's begin on Slide 12, where you see that we reported adjusted second quarter EBITDA of $175 million and adjusted net income of $44 million. These results are in line with our previously provided guidance as during the quarter, we cycled through the majority of the downward price resets expected for 2013. Overall, given the softness in beverage volumes that David discussed, we are pleased with our results as we were able to offset the beverage sales impact and price resets with improved operating performance. Before reviewing sales, I will mention that a reconciliation of GAAP to adjusted results is included in today's earnings release and summarized on this slide. We adjusted EBITDA and net income for specific nonrecurring post-acquisition integration and debt refinancing expenses. Let's briefly look at the adjustments. First, we called our 9 1/2% senior notes and replaced them with 4 3/4% senior notes. We incurred a $26 million charge for the early redemption premium and unamortized debt issue cost. But we'll save $20 million per year in cash interest. We continue to make progress with Europe post-acquisition integration and incurred charges totaling $9.5 million. The Gillingham, U.K. closure that David discussed is part of this charge. In total, for the year, we expect to incur charges totaling $20 million for our Europe integration. Beginning in 2014, the Europe synergy benefit, as stated earlier, is expected to be in the $16 million to $18 million per year range. And finally, as a planning note, the Brampton, Ontario plant shutdown that we announced in July will be included as a nonrecurring charge in Q3. This shutdown is part of the integration of Flexible Packaging and will result in improved Flexible margins. The third quarter charge is expected to be in the range of $7 million to $10 million. Now turning to Slide 13, you will find the sales bridge, where you see a 2.5 -- or $28 million increase over the prior year. David already described that the increase principally resulted from the European acquisitions offset by weather-related weakness in beverage and pricing resets. To follow on David's discussion, I do want to comment on the internalization of our kraft paper production, which impacted year-over-year sales. Also, I will provide a couple of additional comments on pricing. As discussed in prior quarters, vertical integration of our kraft paper mill in Pine Bluff, Arkansas with our multi-wall bag converting operations is a key initiative to reduce cost in our Flexible segment. Redirecting paper to internal consumption enhances margins but results in the reduction of P&L sales as internal sales are eliminated. For the quarter, the kraft paper shift to internal use resulted in a sales impact of $9 million. For the year, the impact is expected to total $22 million. Now going back to pricing, David discussed that we expect to cycle through $30 million of downward price resets in 2013 due to prior year input cost deflation. As you will recall, the reset mechanisms in our contracts provide for pricing adjustments, up or down, based on input cost movements and changes in board price. The average lag is approximately 9 months. Now looking at timing, we saw about $21 million of lower pricing flow through the first half of the year. For the remainder of the year, we expect to see a further $9 million price decline, with the bulk hitting in the third quarter. By the end of the year, we expect to have cycled through the reductions and price to turn positive moving into 2014 as contracts reset to recover 2013 commodity inflation and we realize implemented paperboard price increases. Now turning to the EBITDA bridge on the next page. The overall volume increase added $2.2 million. The incremental margin percentage on this increase is lower than our average because the majority of the volume growth comes from Europe, where we have significant integration activities in process. As Europe optimizes its manufacturing through such activities as the Gillingham plant closure and upgrading production equipment, we expect the margin on this business to rise well above our average converting margin. In terms of commodity inflation, we experienced a $10 million increase. As David pointed out, rising natural gas pricing was a key contributor. Recently, we saw a pullback in natural gas pricing and hedged 75% of our remaining 2013 exposure. This action will greatly reduce the potential impact of natural gas price volatility. Looking at overall commodity inflation, our view is that input prices will remain consistent with the levels we saw in Q2 for the remainder of 2013. However, due to commodity deflation in the back end of last year, we do face a difficult year-over-year inflation comparison in Q3 and Q4, driven predominantly by secondary fiber costs. Given current commodity pricing, we expect the year-over-year comparison headwind over the next 2 quarters to be $20 million to $25 million. With regard to performance improvements, David detailed the drivers of our strong results. Year-to-date, we have delivered $52 million of productivity improvement. A review of the status of our cost reduction initiatives shows that they are progressing well, and as a result, we expect total performance improvement for 2013 to be in the $100 million to $120 million range. To summarize, through 6 months, EBITDA grew $10 million as we cycled through the $21 million of price resets and continued to improve productivity. Now looking forward, earlier this year, we told you that we expected EBITDA for 2013 to improve by roughly $30 million over last year. This guidance reflected our view of no noticeable change in economic activity, modest inflation and cycling through the downward price reset. Given Q2 performance, we are leaving this guidance of roughly $30 million year-over-year improvement unchanged. The weather-related reduction in beverage volume, we will make up with increased performance improvement. Looking forward to 2014, our view is becoming more optimistic. Contractual price resets that will include the recent increases in CRB and CUK pricing should result in margin expansion as we expect inflation to be modest. Additionally, 2013 investments in our mills and Europe should make strong contributions. Turning to the next slide, you'll find our cash flow, debt and liquidity summary. I will not spend much time discussing as we continue to track to our 2013 debt reduction target of $250 million. Plus, Q2 cash flow was strong, and we lowered our effective interest rate by replacing the 9 1/2% notes with 4 3/4% notes. Overall, looking at our entire debt portfolio, we have an average effective borrowing rate of 3.6%, and this rate includes hedging the exposure on a substantial portion of our variable rate debt. As we enter an environment where interest rates have risen and have greater upward pressure, we are well positioned as we have hedged LIBOR over the term of our bank agreement at 75 basis points. We expect, after near-term planned debt reduction, to operate with 70% of our interest rate exposure fix. Now turning back to the $250 million debt reduction target, just a reminder that this year's cash flow will include 3 special items. And the first one is the $27 million we spent to refinance the 9 1/2% notes, which allowed us to achieve an annual interest rate savings of $20 million. Second, in total, we are investing $40 million to integrate Europe, and this will allow us to drive $16 million to $18 million of post-acquisition synergies. And third, and this is a cash inflow, we expect to receive a cash tax rebate of more than $20 million in Q4 related to the Macon biomass boiler. Adjusting for these items, our 2013 normalized cash flow would be in the $300 million range. Now turning to the last Slide, you will see our refreshed guidance for 2013. If you have any questions about them, we'll be glad to address them during the Q&A. 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 Philip Ng with Jefferies.

Can you talk a little bit about inter-quarter trends in your beverage business and into Q3? Have you seen things pick up a little bit with the weather warming up a bit?

Well, we have, both in the United States and Europe. So we have seen a pickup, and so I'm optimistic that we'll see better comparisons. But we're not ever going to get the volume back for Memorial Day or Fourth of July. Those picnics or outings did not occur, and those beer sales are never going to happen. So second quarter is an important quarter for the beverage business, and it's disappointing that we just didn't see the volume. Third quarter is usually pretty strong for us as back-to-school combines with NFL and football, at least in our part of the country, SEC Football, and that tends to be a good volume as well, and that's kind of what we're seeing right now. We're just going to wait and see, but it's hot down here now.

Got you. Can you -- where are your backlogs stacking up for CUK right now? And can you give us a little perspective how that stacks up to the industry on a relative basis?

I can't talk about the industry, but if you want to order CUK or SUS from us right now, you aren't going to get anything until end of August or maybe early September, depending upon how important a customer you are.

Okay. So it sounds like it's pretty elevated at this point, right?

Well, CUK -- and actually, the backlogs that are longer are CRB. We're having a great year producing CRB, and we can't build a ton of inventory. And as you know, we're a net buyer, and we're buying probably, yes, 60,000 tons of CRB on the outside this year.

Got you. And then you guys are obviously generating a lot of cash flow, and you should hit that upper end of your leverage target by year end. So how should we be thinking about cash flow deployment as we go into 2014, potentially dividend, more tuck-in acquisitions? Can you give a little color on that front?

Well, as you know, I can't talk too much forward. What I would simply say is that we like the idea of some tuck-in acquisitions. We're always looking at stuff as well. Clearly, the capital structure discussion is one that we're going to -- we're going to continue to have in the second half of this year. I think what I would tell you, Dan and I, is let's just see how the year progresses. I think our $250 million cash flow target is one we're definitely going to hit, but I'm going to kind of wait until we get that cash before I go spending it.

Your next question comes from the line of Anthony Pettinari with Citigroup.

You've kept your CapEx guidance at $215 million, $235 million, and I'm wondering the remaining -- I guess you've spent $85 million in the first half. The remaining portion, should we expect that kind of evenly distributed between 3Q and 4Q? And then looking to 2014, is there any kind of initial view on maybe CapEx coming down a bit to a more normalized level?

I'll let Dan do -- I know that third quarter's going to be a little higher because we'll pay for the remaining part of the biomass boiler now that it's coming online, right?

That's correct. I think if you divide it up, a 60-40 split is reasonable in terms of CapEx, looking at it for the quarters.

And in 2014, we sort of said back down to maybe...

Right. I think what we were looking at in particular, that we will not repeat the higher-level investments in Europe that we've commented on. And we've added back because it's not a normalized level of CapEx. So I think if you back out a substantial portion of that, you'll come to a level that would be more normal for our Graphic Packaging.

Would that be $190 million, something in that ballpark?

$185 million to $190 million or something like that is probably about where we normally run.

You can inch up to $200 million and that type of thing, but it's all about the same number.

Okay. And then just switching gears to Flexible Packaging, you said that you expect high-single-digit margins by the end of the year. And I'm just wondering, do you mean by that that you would get those margins in 4Q or maybe exiting the year? Or what kind of -- how should we think about maybe the margin level for the fourth quarter?

Well, part of the margin is going to come from an upgrade in our paperboard mill in August. That's late August downtime, so that portion of it, we should get most of in the fourth quarter. What I would say on the converting side of the equation is we'll need most of the year to sort out the issues that are there. So what I would tell you is for us, we would see monthly improvement in those margins. So we're certainly going to exit the year heading towards -- moving into the first quarter of 2014 in that low double digit. So if by the end of the -- by December, for example, we should be high single digit exiting -- going towards double-digit for 2014 first quarter.

Your next question comes from the line of Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: David, is it time to get a weatherman on the payroll?

Well, I'll tell you. I really hate to talk about weather stuff. And I think Dan was trying to talk about it. I think for us, it was more of a missed opportunity than it was a real detriment to the business. I think we could have had a really strong quarter. But it probably cost us -- Dan and I were trying to do the estimate. Probably 10,000 tons of business or something like that, maybe $20 million of revenue between United States and Europe that was directly -- that we can directly attribute to weather. And if you sort of multiply that times our margins in our paperboard space, it's a lost opportunity. I'm not going to get it back. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Yes, yes. Anyway, on the acquisitions, I think you said $80 million of sales roughly for the quarter. Can you just give us sort of an EBIT contribution as it relates to the paperboard business? And also, how did the volumes for those 2 acquisitions perform on a year-over-year basis? Because obviously, weather was quite unfavorable in Europe also.

Yes, there's no question that the -- and it's interesting because there were a couple things that happened in the quarter in Europe. You remember, the weather was not good on the beverage side. But you remember early in the quarter, the food side, you got all those meat scares over there, and it really did affect the food volume early in the quarter. Some of that has come back, but consumers, especially in the U.K., were very concerned about all the meat issues that occurred. So we had downward pressure on volume in both of those. We have seen an improvement right now. Europe's hot, and so it -- we started right now in July. I kind of like our volumes across our business, but it's a marathon, not a sprint. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Yes, makes sense. And then in terms of 2014, you guys have been pretty consistent with productivity, and obviously, this year is very, very strong. Pricing impacted '13. How should we think about -- I know it's early, but how should we think about pricing for 2014 based on what you've seen realized across the market for CUK and CRB at this point?

Well, divining forward, what I would say is that if you sort of look at our pricing scenario, Dan and I were just talking about this, in 2012, our pricing year-on-year was up about $17 million. This year, it's down around $30 million. I think next year, it's reasonable. Our expectations is that pricing will be up somewhere between $30 million and $40 million at this point in time. And if I believe anything, it's probably going to move to the higher ranges as all these increases blow through. But I'll tell you we are flat serious about all of our price increases. And we're busy, and our board knows we're busy. I feel good about the pricing parameters going forward, so I think $30 million to $40 million of year-on-year improvement in pricing is doable for Graphic next year.

I just wanted to add one thing. For modeling purposes, if you look at Graphic with the 9-month lag, I think if you look not at the annual period but the 18-month period, you'll see that the cost/price spread in terms of inflation and price basically offset each other in terms of commodity inflation. And we have seen that historically, and that type of model in books.

Your next question comes from the line of Alex Ovshey with Goldman Sachs.

I wanted to ask you a couple of questions on productivity for next year. You mentioned a couple of positive factors, synergies in Europe, the full year impact of the biomass boiler, higher margins in Flexible. So as you think about the productivity number in 2014, how do you think it stacks up relative to the normal $60 million to $80 million that you typically have been able to take out of the cost structure annually?

Alex, that's a good -- I don't know that we've actually sat down and done the math for 2014 right now, so we'll have to get back to you on that. Certainly, we're going to get our $60 million to $80 million. We've got some adds, and now we've done the Brampton thing, which will add some. We probably really need to redo that math for 2014. But certainly, I think if you're modeling in $60 million to $80 million, we ought to be able to do the high end of that without any difficulty. I just haven't done all the gives and takes on the other stuff that we've announced recently.

Generally, in the third quarter call, we'll start to provide more guidance on '14. But I think if you take what we said today, there's upside on that $60 million to $80 million. We would consider that Europe should be incremental to that number because that's an integration activity. So I think there's going to be good news on productivity for 2014.

Yes, the one thing we tried to remind everybody, and I know we forget, but part of our productivity growth does require us to actually make products. So the fact of the matter is that the volume impacts in the second quarter are not just around lost sales, but the fact we couldn't run our plants as efficiently, so some of our productivity metrics aren't as good because they're around throughput, they're around scrap, they're around labor reduction, which we can't get if we don't run. So part of our hedging is just what do we think the operating environment's going to be in 2014. I believe the U.S. is improving. I know Europe is improving for 2014, so you got to believe that's going to be helpful. But man, trying to divine right now what U.S. and European economies are going to do on the blue collar side is a little difficult for us. And that's really the part of the economy that we care about. Unemployment needs to get better, for sure, and the consumers -- we definitely saw this quarter the impact -- I don't care what anybody says. We saw the impact of the payroll tax. There's absolutely no question that our consumers certainly made buying decisions differently because of the impact of payroll taxes and higher gasoline in the quarter. There's no question about that. So the question is how long does it take to readjust, how long does it take them to sort of recalibrate and get back to buying on a normal pattern. Third quarter looks like it -- you see some of that adjustment, but it's difficult for Dan and I to sort of divine what that looks like.

That's good color, Dave. And one more question from me on the packaged food side. As you talk to your customers in that vertical, are they saying anything around promotional activity in the back half of '13 that may be beneficial to volumes in the back half of the year?

I'm sorry, you're going to have to repeat because we did not hear -- we only heard every other word. Could you start that one again?

Yes, sure. So I said on the packaged food side, as you talk to your customers about the second half outlook, are they saying anything about promotional activity that may suggest that we may see some sort of volume pickup in the important packaged food verticals that you're exposed to?

Here's what I would say. They would tell us that they're more optimistic about their business in the second half than the first half. What I would tell you is they always are. So what I will say is what I -- at this point, I'm just going to say what I know, which is we're starting the quarter off good. But in fairness, I think our customers are having the same problem divining what is going on with the consumer as we are. There's not great data or read-throughs out there. And so I'm -- there's certainly more promotional activity that we see. But whether that drives demand at the consumer level, I mean, I don't know. I really don't.

[Operator Instructions] Your next question comes from the line of George Staphos with Bank of America.

I guess my first question is around Europe, and it was a question, I think, Ghansham had asked. To the extent that you can share what kind of margin benefit you've gotten thus far from Contego and A&R either in percentage or dollar terms, that'd be helpful. If you can't disclose that, just in general, what have been your observation thus far about the European market? Any surprises? Obviously had the weather-related issues and the meat scares, but what have you found thus far?

George, what we found -- when we bought Contego and A&R, we bought a business that had about $20 million worth of EBITDA. That's the number we expect to deliver in 2013. We're maintaining that $20 million in a tough environment, and that's on top of the margin that we got in the Graphic business. So we're looking at 2014 when we start to get the $16 million to $18 million, and hopefully, we'll get productivity beyond that point, but we're counting on that $16 million to $18 million, you'll see a margin that substantially improved. But for this year, we're adding in what we bought with how we performed before, and that's the margin structure we're expecting in Europe.

Well, I'll just tell you that one of the surprises -- not surprises, but one of the benefits is that we have much better management team in Europe than we had before. And what we're really starting to see over there is sort of at a very basic level or a granular level, we're picking up $0.5 million and $0.75 million opportunities over there on a go-forward basis. I couldn't be happier with the acquisition itself. Europe is a tough operating environment from a volume standpoint, but we knew that going in. So it's maybe more depressing than we expected but not something we cannot overcome through operating our business better. And that's really what we're seeing. But it's early, but I like very much what we're seeing in Europe.

With challenges, obviously, you get opportunities, and so do you see additional opportunity, perhaps, to build on your existing business in Europe because others might also be facing the same challenges but not have your resource or wherewithal?

There's no question. As you look at our LRP -- I'm sorry, as you look at our long-range plan that we put together for a 3-year look forward, there's no question as we move towards the end of '14 and '15, there are growth opportunities in Europe for us that we're already beginning to prepare for and put into our business. There's an opportunity for us. There is no Graphic Packaging in Europe -- or there wasn't, and we believe that we'll do the same thing we've done in the United States. And solid execution at the customer level is translated to more cash and appreciation in our equity, and we see no reason why Europe won't be a positive contributor to that trend.

How many tons are you shipping from the States over to Europe right now, if much at all? And where would you see that on, I don't know, a 2014 basis? Would there be much in the way for integration gains?

Well, the more -- so it's a really good question. Our old tons were 75,000 to 80,000 tons. That's what we shipped before. And that's about the rate we're doing right now. And the reason is because we really don't have a lot of extra tons to ship to Europe at this point in time. So right now, what I would tell you is that our integration activities over there really aren't including board integration. It's just solid execution at the plant level and getting rid of high-cost facilities. So longer term, we may ship more board over to Europe. But right now, that's really not a good arbitrage for us because it's a bad use of cash if our paperboard mills are full here, so we're continuing to buy the tons that we need to run Europe in Europe. And for '13, it looks unlikely that will change.

David, I was in the market domain into my notes, but what did you say you're in the market with in terms of CUK and CRB pricing?

I'm sorry, repeat again? What do I think about what?

What are you in the market with in terms of announced price increases in CUK and CRB? I missed it as you're going through in your discussion.

Yes, so we announced a $50 a ton price increase for both SUS and for CRB in the third quarter, and we have achieved already in the second quarter $45 a ton on SUS and $35 a ton on CRB in the quarter.

My last question, and I'll turn it over. Dan, you mentioned that you hedged out your natural gas. How far out did you hedge? Is it just for this year? Is it 12 months? And actually, one related question. You mentioned a $20 million to $25 million year-on-year increase in input cost. Is that for the year? Is that just the back half of the year, what's left to go?

Yes, so let me address your second question first. The $20 million to $25 million was for the last 6 months of the year, so that's for Q3 and Q4. And just to bridge on that, most of that, as David had pointed out, is in fiber cost, secondary fiber and wood and some comes in the spread on natural gas. In terms of our hedging activity, I told you we had 75% for the back half of the year. We also took some hedges in the first quarter, in particular. We like to hedge the high-risk quarters, and that's what we've done.

If you remember last year, OCC got down to $87-something a ton, and we're not going to see that. We don't expect to see that in the third quarter, so a lot of the arbitrage is on that, which is why we saw the price increases on CRB. I mean, OCC is up, and so we're reflecting that in the CRB prices.

There are no further questions at this time.

All right. Thanks, everybody. We'll talk to you next quarter.