Graphic Packaging Holding Company (GPK) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Ginger, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Brad Ankerholz, you may begin your conference.

[indiscernible] and good morning, everybody. And welcome to the Graphic Packaging Holding Company's Third Quarter 2013 Earnings Call. Commenting on results this morning are David Scheible, the company's Chairman, President, and CEO; and Dan Blount, our Senior Vice President and CFO. To help you follow along with today's call, we have provided a slide presentation, which can be accessed by clicking on the Q3 earnings webcast link on the Investor Relations section of our website 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 that 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 on which they are 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. Third quarter earnings and cash flow were in line with our expectations, and we're pleased to have delivered improved results despite -- continues to be a challenging operating environment. There is no question, we expected a stronger recovery at this point, but that's not the backdrop for our business. Despite those issues, volume in our core Paperboard Packaging segment increased 6.4%, and adjusted EBITDA increased to over $175 million. New products, acquisitions and customer wins overcame soft demand in some key end-use market areas that drove the increase in volume. Our continuous improvement initiatives, integration activities and strong operating performance kept our margins solid. Sales of new products launched in the quarter were good. Revenues from last year's European acquisitions added over $70 million in the quarter. Consumer trends continued to fuel our approach to innovation, which includes creative engagements with customers resulting in market-driven packaging solutions. Consumer needs for convenience continues to be a strategic focus for many of our new products. Replacing corrugated packaging, microwave cooking technology, quick-service dining room solutions and our Tite-Pak beer bottle cartons remain key areas of growth. In fact, during the quarter, we launched several new products, delivering more than $18 million in new product sales. We recently launched products leveraging our proprietary Litho-Flute and Z-Flute designs for cookies, cereal and popcorn in the club store channel. Additionally new strength items were launched in the cereal category with General Mills and carry [ph] ingredients under the Kirkland brand for Costco. We recently worked with Kellogg's to provide new packaging for a Special K snack bar for the on-the-go consumer. We also launched several new microwave cooking solutions in the third quarter with ConAgra Foods and T.G.I. Friday's. In the quick-serve food category, we leveraged our success with McWrap packaging and created packaging for McDonald's Mighty Wings products. Volume in our global folding carton business increased roughly 3.5% in the third quarter and was driven primarily by our recent European acquisitions. This was partially offset by softness in our legacy beverage and consumer products folding carton markets. Our trends on the beverage side were clearly mixed. Carbonated soft drink demand remained weak throughout the quarter, and we did not see the traditional pickup from the start of the back-to-school season. Beer demand, however, did improve as the quarter progressed, with volumes in big beer category up on a year-on-year basis. Craft beer and specialty drinks continued to be a bright spot for both the industry and Graphic Packaging. We saw over $3 million of new business in this sector during the quarter. This is a continuing trend for us as we build on the Sierra Pacific acquisition. Over the near term, we would expect the beer market, globally, to continue to improve, while we see really no catalyst for the soft drink side of the business materially improving. The bigger surprise in the quarter was actually weakness in some of our core food markets, such as dry foods, cereal and frozen food, which all reported down for the quarter by the Nielsen market data. Cereal volume was up 6% sequentially but was down 3.3% from the same period last year. Our customers tell us the primary drivers continue to be slow employment recovery particularly blue-collar jobs. Clearly the uncertainty about employment and direction is negatively impacting consumer confidence. Our data also shows consumers continued to tightly manage spending as the prices for key staples, like food and fuel, remain higher than most expected. Talk about Flexible. External sales and volumes in our Flexible Packaging segment were relatively flat during the quarter. The Pine Bluff mill had a solid operating quarter, and we made the necessary upgrades and installed new equipment during the outage to increase our fiber yields and decrease basis weights in the mill, which will improve profitability beyond this quarter. The majority of the kraft paper that used to be sold on the open market from the Pine Bluff mill is now being used internally to produce our own multi-wall bag products. This has resulted in lower sales, of course, but it enhances our EBITDA and overall margins. We also began to see a modest pickup in the demand for concrete bags and construction-related materials early in the year. And for the most part, this trend has continued. We remain cautiously optimistic about demand trends overall in the multi-wall bag business. Keeping with our long-term strategic plans, we completed the sale of our flexible retail plastics business to Berry Plastics late in the third quarter. The sale included facilities located in Des Moines, Iowa; Milwaukee, Wisconsin; and Schaumburg, Illinois. They produce various plastic products for the consumer in industrial markets. In addition, we wound down the operations in our Brampton, Ontario Canadian plastics plant in the third quarter, and we closed it in early October. Dan will discuss the financial implications of these actions. It's somewhat complicated, but plastics was clearly not a key business for us, and the exit from this business will allow us to focus more on our core vertically integrated businesses. We're making progress operating the multi-wall business and addressing costly legacy issues. As a result, margins are moving towards 10% as we head into 2014. We have strong operating performance across our mills and converted plants during the quarter. We generated $23 million of performance improvements across this business, which brings our total for 2013 to nearly $75 million. We're looking to achieve roughly $100 million of performance benefits for the full year. The bio-mass boiler in Macon, Georgia, was operational throughout the quarter, and this was the first quarter we began generating our own energy in the facility. We estimate the savings in energy to be about $20 million per year on a go-forward basis. The integration of Contego Packaging and A&R beverage packaging business in Europe is progressing on plan. We remain very comfortable with the $16 million to $18 million synergy target for 2013 [ph]. New converting presses have been installed, and we are making the capital investments necessary to optimize our European footprint. We consolidated the Gillingham, England, converting plant business to other lower-cost facilities and closed that plant. Macro conditions across Europe remained challenging, but we've seen a nice rebound in the sectors we serve, and our business continues to outperform the overall industry. Our strategy in Europe is the same as the U.S. We will work to drive higher volumes and profit through a disciplined focus on new product introductions and supply chain optimization. I'm extremely happy with the progress we're making in Europe. Paperboard production in our mills was again strong in the third quarter. Both total production and tons per day increased year-to-date, and demand for our CRB and SUS board remains solid. The increase in production was driven by our continuous improvement efforts to reduce energy and improve operating efficiencies, reducing the fixed-cost complement. We took no unplanned downtime in the quarter, and our planned annual maintenance outage at Macon mill was consistent with last year third quarter. West Monroe completed its annual outage in October with no issues. Both virgin mills operating well. We sold our Pekin, Illinois, URB mill during the quarter. URB was a non-core substrate for Graphic, and the sale of this mill frees up capital and allows us to focus more on core businesses. Let's talk about pricing and commodities. Company-wide pricing declined by around $5 million in the third quarter, and so that makes about $26 million for the first 9 months of the year. The quarterly decline was in line with our expectations and represent a sequential improvement from price decrease of $16 million we reported in the second quarter. Our carton contracts contain mechanisms that allow prices to move up or down with changes in certain inflation items, forward movement and the like. No 2 carton contracts are the same, but contractual pricing generally adjusts over about a 9-month period. We expected pricing reductions to total about $30 million in 2013. So we also expect pricing to be neutral to slightly negative in Q4 and then begin increasing throughout 2014. This is further bolstered by the fact we successfully increased the price for both SUS and CRB, by roughly $40 a ton during the quarter. That reflects a strong demand for both substrates, and we have extended lead times with them as well. In total, through the first 9 months of 2013, we've seen SUS rise roughly $85 a ton; and CRB, $75 a ton. These increases should benefit our open market sales in the fourth quarter and begin to benefit carton contract pricing next year for those carton contracts with board price escalators. We expect pricing to remain positive throughout 2014 at the tune of $30 million to $40-plus million on a full year basis. Commodity input pricing was relatively stable on a sequential basis from Q2 to Q3. However comparing to last year, we experienced commodity input inflation of around $8 million in the third quarter. We spent about $5.4 million more on natural gas than we did the same period 2012. Freight costs. Some regional wood costs were the other drivers of input inflation. OCC was slightly up during the quarter, but most of these had pretty minimal impact. We now expect total input inflation to be roughly $50 million for the full year. We delivered another solid quarter in a challenging environment. We drove volume increases with new customer wins and acquired businesses. We maintained high operating margins with performance improvements. We also continued to invest in future growth and optimize our assets and footprint around customer needs. We do expect some end-use markets to be more challenged than others, but we are continually finding ways to gain market share and expand our addressable market. We sure have work to do in our Flexible business to realize stronger margins, but we are clearly moving in the right direction, and I'm confident in our ability to deliver our synergy and operating targets for next year. Looking ahead, we expect pricing to begin to turn positive toward the end of the quarter and remain positive throughout 2014 and beyond. Dan will provide more details on our full year 2013 guidance and some additional guidance around 2014. We remain committed to generating cash and reducing our debt levels and expect to be near the top end of our 2.5x to 3x net leverage target by the end of 2013. I'll now turn the call over to Dan for a more detailed discussion of our financial results.

Thanks, David, and good morning, everyone. To aid in our discussion this morning, I will follow our posted presentation. Let's begin on Slide 11, where you see that we reported adjusted third quarter EBITDA of $175 million. Adjusted earnings per share was $0.12, up $0.01 over last year. These results are in line with our previously provided guidance. During the quarter, we continued to improve financial results, as operating performance improvements, coupled with volume gains from our European acquisitions, more than offset modest price declines and inflation. As David described, the third quarter was busy, as we sold our flexible retail plastics business, and in a related activity, shut down our flexible plastics operation in Canada. Additionally we sold our URB mill. We amended our $2.4 billion senior secured facility to reduce interest expense and extend duration. And finally, we continued making progress with the integration of our European acquisitions. The combination of all these activities created numerous nonrecurring benefits and charges that rolled through the financial statements. As a result, we adjusted EBITDA and net income for the nonrecurring transactions. A reconciliation of the adjustments is included in today's earnings release and is also summarized on this slide. As you can see, reported Q3 EBITDA is almost $189 million, and adjusted EBITDA is $175 million. The main adjustments include, one, a $20 million gain from the sale of our retail plastics and URB businesses, net of the closer costs from the Canadian operation. We sold the businesses for $76 million, received $65 million in cash and took back a note for the balance. Two, a $5 million charge for European integration activity. We continue to expect European synergy benefits of $16 million to $18 million per year, starting in 2014. And finally, three, a $1.2 million charge related to the enhancement of our senior secured facility -- credit facility. I will speak more about the benefits of this upgrade later. Now turning to Slide 12, you find the sales bridge where you see a 5% or $58 million increase over the prior year. David described that the increase principally results from the European acquisitions, offset by weakness in beverage and certain consumer products categories, along with a modest pricing -- along with modest pricing resets. On the pricing topic, we experienced a $5 million reduction in Q3. In Q4, we expect price to be neutral to slightly negative. So for the full year, we will end up with approximately $30 million of downward price resets. Please, recall the inflation reset mechanisms in our carton contracts provide for pricing adjustments, up or down. The average lag is approximately 9 months. The downward price resets we are experiencing in 2013 results from commodity deflation during the back half of 2012. And as David mentioned, we expect favorable price next year. Turning to our Q3 EBITDA bridge on Slide 13. You see the gains from operating performance and European volume more than offset the price inflation and currency headwinds, allowing EBITDA to grow by $4.4 million year-over-year. Taking a closer look at the categories, increased volume added $5.5 million. The incremental margin percentage on this increase is lower than our average rate because the majority of the volume growth comes from Europe, where we have significant integration efforts in process. As Europe optimizes its manufacturing, we expect the margin on this business to rise well above our average converting margin. In terms of commodity inflation, we experienced an $8 million increase. As David pointed out, rising natural gas pricing was the key driver. We have had 75% of our Q4 exposure at $3.95 per MMBtu, and nearly 60% of Q1 2014 at around $4. These actions will reduce the potential exposure to natural gas price hikes. Now looking at commodity inflation, our view is that input prices will remain consistent with the levels we saw in Q3 for the remainder of 2013. However due to commodity deflation in the back end of last year, we do face a more difficult year-over-year inflation comparison in Q4, driven predominantly by secondary fiber, energy and external paper. As a result, we expect the year-over-year comparison headwind in Q4 to be $15 million to $20 million. With regards to performance improvements, David detailed the drivers of our results. Year-to-date, we have delivered $75 million of productivity improvements. A review of the status of our cost reduction initiatives show that they are progressing well, and we expect annual performance improvement to be comfortably around $100 million. Now to summarize, through 9 months, EBITDA grew $15 million as we cycle through downward price resets of $26 million related to 2013 deflation and offset $31 million of inflation by delivering $75 million of performance improvement and growing volumes through the European acquisitions. Now to turn to Q4 guidance. 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 remaining downward price resets. This view has not changed. However given the Q3 business divestitures, we are raising our 2013 debt reduction guidance from $250 million to $300 million, and correspondingly, lowering our Q4 EBITDA guidance by $4 million to reflect the impact of the exited businesses plus some costs associated with these transactions. On an annual basis, the net EBITDA impact of these exits is expected to be around $12 million. Now in summary, given the changes, we expect Q4 EBITDA to be about $10 million higher than Q4 2012, and full year EBITDA to be in the range of $25 million greater than last year. On an earnings per share basis, we expect Q4 to be in the $0.10 to $0.11 range. Now looking forward to 2014, our view is becoming more optimistic. We have cycled through the downward price resets. Price will turn positive as contracts resets will reflect CRB, CUK and other commodity increases. With a more manageable price cost spread, a greater portion of our improvement initiatives will flow to the bottom line. Our backlog of performance improvement initiatives is strong and should produce $80 million to $100 million of benefits, including strong contributions from our 2013 investments in our mills and Europe. Now turning to Slide 14. You'll find our cash flow, debt and liquidity summary. As we commented earlier, we are raising our net debt reduction targets to $300 million. Operating cash flow was strong in the quarter at $160 million. Due to our refinancing activities earlier this year, interest expense in the quarter was down 10% versus last year. Now as I referenced earlier, we executed and amend and extend on our bank loan facility, reducing rates by 25 basis points. We also added 18 months to the maturity and are providing ample liquidity to our European and Japanese businesses through these facilities. In summary, we invested $3 million for the amendments but expect to save $4 million in annual interest expense due to the lower pricing. Overall if you look at our entire debt portfolio, we have an average effective borrowing rate of 3.5%. With the greater upward pressure on interest rates, we are well positioned, as we have hedged LIBOR at -- into 2016 at 75 basis points. And as we execute our near-term debt reduction goals, what this means is that our interest rate exposure will approach 70% fixed. Now turning to the last slide, you will see our refreshed guidance for 2013. Please note that we added a new line item for tax rate. We expect 2013 full year effective tax rate to be about 41% to 42%. Remember we continued to not pay U.S. cash income tax as we consume the NOL. Our NOL balance currently stands at $766 million. The other point I'd like to make on this page is that we expect to end 2013 with our net leverage ratio right at 3x. Now the remainder of our guidance is listed on the slide. And if you have any questions about them, we will address them during the Q&A period. And with those comments, I will turn the call back over to the operator. Thank you.

[Operator Instructions] Your first question is from Ghansham Panjabi. Mehul M. Dalia - Robert W. Baird & Co. Incorporated, Research Division: It's actually Mehul Dalia sitting in for Ghansham. Seems like there are a lot of moving parts in the Flexible business during this quarter. Can you detail some of the moving parts in that business, given the profitability weakness that was reported when stripping out that gain on the sale?

Well the primary moving parts in Flexible were the sale of the retail plastics business. The rest of the business, the overall sales on the external thing were pretty flat. The mill, as you know, had a -- we announced that this was the quarter for the downtime for our Pine Bluff, Arkansas, mill. So of course, in that period of time, we lose some tons and some EBITDA. But we -- the changes we made there are going to significantly improve the yield and throughput for that facility. So as we came out of the quarter, we started to see significant improvement in the Pine Bluff mill. And as we head into the fourth quarter, we expect the same. If you remember last quarter, I mentioned that one of our converting facilities in Philadelphia struggled in the third -- in the second quarter. By the time the end of the quarter -- the third quarter, we were breakeven to slightly positive in that facility. So we saw positive movement in Flexible as we moved through the quarter, which is why, as I said in my comments, as I move into 2014, we clearly expect that business to be double-digit EBITDA margins. Mehul M. Dalia - Robert W. Baird & Co. Incorporated, Research Division: All right, great. And more long term, I guess, ideally, how big do you think that the Flexible, the business needs to be in terms of scale?

Well, our Flex -- well, and I hate calling it Flexible because Flexible sort of things like plastics. So if you would think about it in terms of sort of -- for us, it's really now at this point, a multi-wall bag business for the most part. It is a business that we're going to make bags and make our own paper. As I said, we, for the most part, have integrated a lot of the tons in the Pine Bluff mill. So our business -- we still like the multi-wall bag business. It's still a good cash flow business. We think the EBITDA margins will get better. A lot of the substitution we've seen in plastics has really sort of hit a plateau. So there's some positive rebound back in that business, and it's a pure integrated business. So even though it's not like Paperboard, we run it very much like Paperboard now, because we've sort of gotten rid of all the ancillary things. We're already, from a critical mass standpoint, we're already big enough. That doesn't mean that we wouldn't add to the multi-wall bag portfolio if it made sense for us to do so. Mehul M. Dalia - Robert W. Baird & Co. Incorporated, Research Division: Great. And last question. Given your upsized productivity target to $100 million for this year, is there any pull-forward from next year? Or are you still expecting productivity in the same range as you had previously guided to?

I think if you listened to the scripts of what we've told you for 2014, we expect the range to be $80 million to $100 million. And if you remember, we've made a lot of investment in Europe, and we've made investments in our bio-mass boiler, and a lot -- and those types of investments are going to start paying dividends in terms of productivity in 2014. So we're pretty confident that that's going to be a range that we can attain -- achieve.

Daniel, [indiscernible] but by this time of the year, guys, we've already started to lay in '14 stuff, right, and what we're going to do. So we have a pretty good visibility over what our productivity stuff will be. The only caveat I will say to any of that is, and the one that everybody recognized, I said it before, is that all of that assumes a certain underlying demand. So we're not expecting a material change in demand in the business. We're assuming we're going to have save money on sort of the kind of trends that we've seen, but that's the caveat. Because a lot of our cost savings comes from throughput, better yields and so on and so forth, which assumes that you sell and run through your converting and mill assets.

The next question is from George Staphos from Bank of America.

It's actually Alex Wang sitting in for George. First question, what is the year-over-year change in adjusted EBITDA in Paperboard? And was the performance as expected, or was there any deceleration in the period?

First off, we really don't -- you mean the segments, right? We really don't detail that out. We detail out in the press release operating income, right? So in terms of looking at it overall, if you want a general comment about it, all the improvements that we had generated in the growing of the $4.4 million is coming from Paperboard.

And we realized, Alex, it's sort of a confusing quarter to look through with all the changes. But a lot of the flexible improvement was really sort of from the sale and from accounting stuff. If you look at true improvement, so EBITDA improvement year-on-year, it came from Paperboard. We sold more tons. Our acquisitions were positive and contributed. And despite the fact there were some volume issues -- some demand issues in subsegments of Paperboard, overall, overall Paperboard sales were up. And that translated to increased EBITDA.

And second question, was there any impact on reported operating comparisons from the mill divestitures in the quarter?

That was really a small divestiture. And so it's not -- it's so insignificant that it's not even worth even thinking about at this point. I mean, that was a small URB mill, and it sold for a relatively small amount of money as well.

I mean, just on a perspective basis, Alex, we make, say, roughly 2.5 million tons. That mill made 50,000. So you won't -- we won't even -- we will really totally -- you wouldn't expect a significant impact on our business. And by the way, it's also the lower end of the profitability tons because it's uncoated recycled paper. So if you look in our -- from SUS, and kraft and the CRB, this was the lower end of the profit pool for us.

Got it. And then just lastly, maybe, if you can talk about overall, what kind of volume rates are you seeing in early 4Q?

Well I don't usually give a lot of those day-to-day guidance. It's not because I'm trying not to, it's just that for a business this size, giving day-to-day trends doesn't help much. But what I would tell you is beer has continued to be strong. Cereal has continued to struggle, I think, relative to what we saw in the third quarter. It feels about the same. So I would say, our planning or our focus on demand trends at this point in time is saying, we would not expect to see a significantly different trend than we saw in the quarter, in the third quarter. Europe is still doing well. The multi-wall bag business has got some improvement in its trends. But I think for the most part, consumer is still pretty challenged, guys. I mean, unemployment rates are not great. Fuel costs are still up, relatively speaking. The consumer's challenged, and it's certainly impacting demand.

Next question is from Alex Ovshey from Goldman Sachs.

It's actually Usha Guntupalli sitting in for Alex. First question. So for the $30 million to $40 million pricing benefit outlook for 2014, could you help us understand how you're thinking about it? Because looking at the price increases announced so far, seems like a low number.

Yes. I think as we've talked about before, our contracts that use board price increases, they're delayed. So some of these -- the increases we got in Paperboard in the third quarter, we won't even start to see some of those roll through until fourth quarter of next year, right, in many of those things. So it's just a roll through. If you look at the overall, we would say that overall pricing impact to the enterprise over a 2-year period of time is going to be well over $100 million. Well over. You shoot all in 40, you're all -- I'm sorry, next year, what you're actually going to see is probably around that $40 million range that will impact the business. Our run rate as we exit '14 will be materially higher, and that's based on our current estimate on the process.

That's helpful. And what are you hearing from your customers on forward demand outlook for fourth quarter in '14? Do you get a sense that there's increased focus on promotions for boosting volumes?

I get a sense that they believe that volumes are going to get better. I do not get a sense that they know why. So what I would say is that there's a lot more promotional activity going on. Our customers are optimistic about their demand and the recovery in the process. I'm going to be a little more cautious in -- you're going to have to actually show me before I'm buying into it. And I think that's about all we can say at this point in time. The data is just not -- is not very precise. I do know this: I certainly know that beer is better. I know that -- we cannot see a specific catalyst in soft drink. There's clearly more promotional activity. We're going to head into the Super Bowl period of time. We're going to head into the holidays. And that, traditionally, has been an uptick in those businesses, so you would expect to see more promotions and more volume. Having said that, back-to-school is generally a period of time where we see some pretty impressive volume changes. And cereal was up sequentially 6% from Q2 to Q3. That's pretty anemic relative to the kind of increases we historically see. We would expect cereal demand, quarter-on-quarter, be up 10% to 15% historically. Didn't happen. So some of these demand trends are different. They're changing. This is a very, very strange economy, as you well know. I don't think all the stuff with all the uncertainty that Washington's injecting into the market is helping us. Too many variables to get a legitimately strong predictor of what volume and demand is going to be.

That's very helpful. And one last question. So on the flexible business, your target for margins is around the 10% heading into '14. What's the upside in the medium term to that number?

Well, we haven't -- we wouldn't really give a lot of guidance in the quarter. But I would tell you that our expectations is that we should be seeing margins as we exit this year, certainly, 8.5% and above. And I think -- and I know, I don't think, I know, the team that's running that business has those expectations as well. And so if you look at the investment we made in the Pine Bluff mill in the first quarter, we'll get a full impact of all that. If you look at the improvement that were in our operational converting facilities, and you think about the businesses that we kind of sold off of that process, getting to 10% is a reasonable expectation for us in Q1 of '14.

Your next question is from Philip Ng from Jefferies.

The $3 million of net debt reduction that you're guiding for '13, is that just all operations? Or is some of that a function of -- from the proceeds from the asset sales as well?

It also has proceeds from the asset sales, as well as those charges we incurred for the shutdown of Brampton in that as well, as well as some of the fees we paid to execute those transactions. So if you look for operations, it's -- we're more in the $250 million range, like we guided to before. And then on top of that, we added $50 million worth in net number for the other stuff that we executed in the third quarter.

Okay, that's helpful. And then from a leverage target standpoint, I mean, you guys are going to hit that 3x leverage target you've been pushing for. So with all that free cash flow you're generating, how should we be thinking about cash flow deployment going into '14? Is there an opportunity before you start returning more cash back to shareholders?

Well we're certainly going to look to return value to shareholders. So, 2 things: A part of that is, yes, we'll certainly look at what we're doing relative to our free cash flow and how we might more effectively use it. We are, however, continuing to do some of these little bolt-on acquisitions. They've been good for us. You can see the results have been buoyed by those things, and so we're going to continue to do those. We have ideas. We have concepts. We have some things that we will work on. And so we'll -- Dan and I will balance the difference between how acquisitions work and returning cash to shareholders. But if we continue to hit our $300 million worth of free cash flow that Dan sort of talks about in 2014, clearly, we're going to have to consider options on how we return cash to shareholders.

Got you. And then -- sorry. I'm still surprised, with -- can you give us a little color on the corporate expense for next year? I know pension expenses are going to meet a little tailwind next year. Should that come down?

Right. I mean, Phil, as you know, a lot of the calculations for pensions result at year end. I mean, if you would think it would come down because the discount rate has shown improvement. But we got another quarter to go, and then we run these calculations, and then we run the expense. But through the third quarter, it's definitely trending that way.

Your next question is from Ketan Mamtora from Deutsche Bank.

You mentioned in your presentation that European acquisitions added about $17 million to sales in Q3. Can you give us some color on either what the EBITDA contribution was or maybe from a margin standpoint?

We do not break out the margins or pieces of our Paperboard Packaging segment. But we can tell you that those margins, after we integrate and we head into 2014, our contribution from Europe is going to be somewhere in that $20 million range or better than 2013. So you're going to see the contribution in terms of value growing to shareholders from that transaction.

Got you. And then just one follow-up question. As you look at some of these offshore markets, maybe Europe and also Mexico, how would you think about investment in those markets? Do you see attractive opportunities out there?

Well that's a really good question. And the answer is it really depends by market. So what we used to do in Europe, as you know, is we needed to establish a base that was big enough for us to do additional acquisitions to build around. And that's really what we established with A&R and Contego. So would I expand and make more acquisitions in Western Europe? If you look at the results we generate from this one, you have to say yes. Because if we can find similar sort of bolt-on acquisition to generate this kind of return and these kind of margins, we're going to do that. Yes, I'd like to be bigger in Mexico for sure. Mexico is a much more complicated question. You're peso denominated. There's a lot of currency risk in that process. And to be perfectly honest, what we really struggle on in Mexico is being able to determine if, in fact, the EBITDA reported is actually the EBITDA that's actually generated. So we're a lot more cautious in Mexico, because sometimes I don't know what I'm buying. And so each region of the world, we have an interest in acquiring. But we are not going to be planting flags serendipitously just because we feel like we need to be in a region. We need to keep the same discipline and acquisition as we've had in the United States and in Europe. So if I find something good that I can confirm and believe, I'll do. If I'm not sure, I'm not going to waste shareholders' money.

Okay, that's helpful. And just 2 quick follow-up questions. On the productivity target for 2014, and correct me if I'm wrong here, I was thinking that you had earlier pointed to $60 million to $80 million for 2014, and today, you talked about $80 million to -- did I get my previous numbers wrong?

It was probably the European -- because I don't know how far back it goes, but those numbers now include the European synergy acquisition, so they came up a little bit -- I think it's basically the delta is just how far back you went now calculating and adding the European synergies of $16 million to $18 million, which, I think, Dan and I both believe, at this point in time, are doable for sure.

That's right.

Right. So $80 million to $100 million includes the $16 million to $18 million of European synergies?

Yes, sir. It does. It just makes it easier than breaking all that out. It's just pure performance. It's pure cost improvement, and it makes it easier for you guys to model, and it makes it easier for us to take the phone calls around it.

That makes sense. And then just one last one. In terms of CapEx for 2014, do you still think it will be in the $185 million, $200 million range?

Yes. Yes, we do.

[Operator Instructions] You do have a follow-up question from George Staphos.

It's George. Sorry I jumped on late. Dueling conference calls. The first question I had, do you see a need at any stage, perhaps, to reposition your assets that are aligned more towards the CSD business if that, at all, would be possible? Given the volume trends that, as you say on the slide deck, you, thus far, don't see a positive catalyst coming on. Then I had a follow-on.

Okay. Well the fact of the matter is that the CSD business is there. It's still pretty good for Fridge Vendor. And I think you're talking about the investments we made at parity. So we're not really struggling to fill the parity volume up, which is the -- which is Fridge Vendor. It's some of the other different SKUs that cause bigger problems. None of those assets are -- none of those assets in the converting site are such that they cannot be repurposed if it makes sense to do so. We can use those -- those are 10-color flexo presses, so we can use those to do a lot of other things, if it makes sense to do so. Right now, they're well -- they're busy making carbonated soft drink. But if a point in time comes that Pepsi and Coca-Cola cannot sell soft drink, then we'll reposition them to something else. There's still going to be incredibly low-cost assets because they're sitting there right next to Macon paperboard mill. And when you -- I think you toured our facilities. You know that there are not many converting assets in the world that stack up to Graphic Packaging's.

Certainly, not next to Perry. It's a great operation. Anyway I just wanted to ask the question. I appreciate the response there, Dave. And I thank you if this question was asked before, but apologies if it already has. Did you see any deceleration in the quarter relative to what your expectation have been going into the quarter? And it sounds like business has picked up somewhat in the fourth quarter, but is it at the level you would have anticipated again, say, a couple, 3 months ago?

Well, I think it's -- a couple, 3 months ago, I don't -- I would say that we were as you -- as I told you, I thought we were pretty cautious about the quarter. What I would tell you is I'm kind of disappointed this far after the 2009 meltdown that we haven't seen a stronger rebound. But one of the reasons we became very aggressive in good bolt-on acquisitions and hyped up the new product activity is because we sort of felt like some of these core markets would struggle. So I don't -- we're -- they are what they are. I love our position in beer right now. Big beer, craft beer, we're -- that's a good business for us, guys. It really is. And so if I look at one thing that's structured, you talked about, the one that struggles the most, I think, is carbonated soft drink. But I think the other businesses, like dry food and cereal, quite frankly, they should be fine long term. I mean, it's not a situation where you would expect them to see or to be in a structural decline. Those are good products. They're good-for-you products. The demographics -- long-term demographics fit those products, so I think we feel pretty good about that. For us, however, it's expanding that addressable pie. If I can do more with my solid fiber replacing other packaging, whether it's flexible or corrugated, so that increases the overall pie for Paperboard space, and that's really what we're trying to do. And then we'll layer on some acquisitions that allow us to use the extra board that we make during the year, and that kind of worked -- I mean, in fairness, guys, that's kind of what drives the EBITDA and cash flow. It's not a complicated model.

Maybe on that point, and to the extent that you can comment, and maybe you can't really talk to 2014 yet, but if we hold pricing and inflation constant, considering the productivity you expect to gain, including European synergies and the pricing benefits you should have built in given the lag, should we not see greater EBITDA growth in '14 than what you're seeing in '13?

So now you sound like one of my board members. And what I'll simply tell you is, at this point in time, we're not providing EBITDA guidance for 2014. I think, as Dan said in his comments, we are optimistic about 2014. I like the profile -- pricing profile better. I still expect to get $50 million -- $40 million to $50 million worth of inflation next year in the input costs. And I like some of the positioning from a market standpoint on both new products and geographics. So overall, as I sit here right now, I feel better about 2014. But translate that down to EBITDA at this point in time, we haven't really even finalized our 2014 numbers and plans. It feels like I -- that's leaning too far in for us at this point.

The next question is from Joshua Zaret from Longbow Research.

Here's a simple question. In Flexible Packaging, you reported EBIT of $8.8 million. What would that number be if you strip out the nonrecurring?

We're doing math.

And also, if you do that with the Paperboard Packaging as well.

Yes, that's going to be a loss of somewhere around $10 million. Yes, which is comparable to last year at this point.

A loss of $10 million for Flexible Packaging, okay. And what would it be for Paperboard?

Add $5 million to the Paperboard.

Excuse, can you say that again, please?

Add $5 million to Paperboard.

I have no further questions at this time. Mr. Ankerholz, do you have any closing remarks?

Well, we'll go back to operating the business and talk to you in the first quarter.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.