David Scheible - Chairman, President and Chief Executive Officer Mike Doss - Chief Operating Officer Dan Blount - Senior Vice President and Chief Financial Officer.

Mehul Dalia - Robert W. Baird & Co Philip Ng - Jefferies Anthony Pettinari - Citi Mark Wilde - Bank of Montreal George Staphos - Bank of America Alex Ovshey - Goldman Sachs.

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Graphic Packaging Third Quarter 2014 Earnings Conference Call. (Operator Instructions) Vice President and Treasurer, Brad Ankerholz, you may begin your conference..

Thanks, Steve, and welcome, everybody, to Graphic Packaging Holding Company's third quarter 2014 earnings call. Commenting on results this morning are David Scheible, the company's Chairman, President and CEO; Mike Doss, our Chief Operating Officer; and Dan Blount, our Senior Vice President and CFO.

Also joining us today is Steve Scherger, our new Senior Vice President of Finance.

To help people along with today's call, we've provided a slide presentation, which can be accessed by clicking on the Webcasts and Presentations link on the Investors 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 future-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..

Good morning, everyone. We had a solid third quarter. I'm pleased with our results. Third quarter adjusted EBITDA increased 9% to $191 million and our adjusted EBITDA margin increased over 300 basis points to a record 18.2%.

During last quarter's earnings call, I said we expected the third quarter EBITDA to look a lot like second quarter, and it's exactly what happened.

Demand across some of our core used markets remains challenging, no question about that, but we are executing our global strategy, we're maintaining the bottomline and tracking to a full year EBITDA and cash flow targets. We reduced net debt in the quarter by $140 million and dropped our leverage ratio below 3.0.

We think this is a testament to the unique model we built, which combines low-cost paper mill assets with highly efficient converting facilities and industry-leading design development.

We spent years honing our strategy in improving our execution and we're beginning to see the results consistently of those efforts as a pure play vertically-integrated paperboard packaging company. Our recent divestitures and acquisitions make it somewhat difficult to understand the underlying fundaments and business trends.

For example, sales declined 9.7% in the quarter, and that's what you'll see in the financial table on the back of the press release. However, adjusting for the recently divested businesses, our ongoing paperboard packaging sales actually increased 4.9% principally related to the acquisitions in Europe.

Volumes across the paperboard business were down slightly, about 0.5%, in the quarter and the decline was predominantly attributable to continued weakness in the domestic cereal and dry food markets.

Consumers continue to closely manage their discretionary spending, while we're beginning to see some major food companies responding with increased promotional and advertising activities to drive volume. Lower grain prices versus last year is allowing these companies to improve their margins, while working on volumes through promotional activity.

Historically, this strategy has resonated with the end consumer and has improved sales, time will tell. Our performance across our core addressable markets is solid.

We're gaining global market share and end market demand for our major product categories such as carbonated soft drink, beer, frozen pizza and cereal remained a mixed bag in the third quarter. Some of our end use markets were very good. Some went sideways and some weakened.

Understanding the underlying drivers of each of our core market segments requires a drill-down of these trends at the sub-sector level. In doing this, you'll see that we are pretty well positioned. Carbonated soft drinks is a great example. Volume across the total CSD market continued to be down, and this market is reported to be in a secular decline.

However when digging down a bit, you'll see there is a real difference in the in-market performance of cans versus plastic bottles or multi-pack versus single-serve, take home versus on-premise and national brands versus private label. ACNielsen data indicated that overall soft drink market declined 2.5% in the quarter when compared to last year.

Our sweet spot however is cans, multi-packs, take home and predominantly for national brands. They are outperforming their counterparts and some by a pretty wide margin. The overwhelming majority of our CSD business is multi-pack cans, specifically (inaudible) 12 packs sold to the big national brands due to grocery and mass market channels.

That's where the volume is being driven the CSD end market today, and that's where we play. Our Perry, Georgia converting facility is running a significant amount of 12-can multi-packs, which minimizes downtime and maximizes productivity since there are minimal changeovers to the machines.

This is a highly efficient process that allows the big national brands to drive volumes to price without impacting margin. Despite the marketplace challenges, we're encouraged about our CSD business as the overall declines in the market are not having an impact on our business. The end market trends in beer are even more complicated.

Craft beer is still the fastest growing segment of the market. It's off a relatively small base, and we're now seeing a movement in the craft segment towards cans. Our craft beer business is smaller than our big beer business, of course, but it's growing at a much faster double-digit rate.

Additionally, our customers in both craft and big beer are utilizing our new tight pack for glass. So new product efforts are paying off in all of the beer sectors for Graphic. We've doubled the number of machine placements in the craft segment year-to-date and expect to add a similar number of machines in 2015 as well.

We're also now supplying nine of the top 10 craft brewers in the United States, as reported by IRI, total US food channel. Looking at our key big beer customers, we have seen relatively stable demand over the last few quarters. Our recent acquisitions in Europe have improved our position in beer packaging in those markets as well.

And we continue to see positive trends in the European beer packaging demand. These macro trends towards premunization are beginning to take hold in the emerging markets as well where we are selling an increasing number of packaging machines as we shift from plastic to paper in those markets.

Overall, the global beer market is doing very well and we are doing so as well. Consumer packaging is our largest market. And within this sector, our large businesses are frozen pizza, cereal, dry foods and other frozen foods.

The frozen pizza market has been volatile over the past year and influenced by the pricing trends from the big home delivery chains. Frozen pizza however was much better in the third quarter. After a real challenging second quarter, the decline in the third quarter was about 1% according to ACNielsen.

Total dry foods were down about 1.3%, as reported by ACNielsen, while cereals showed the biggest decline across these sectors and was down about 3.3% in volume for the quarter. Mike will talk about it next, but our promise in this space is really driven more by new product and new channel sales where we have some real positives.

Pricing across the business was up about $19 million in the third quarter and that equates to roughly $55 million in paperboard for the nine-month period as we've recovered prior period's input inflation cost. We told you that pricing will peak in the second quarter and would begin to fall off some in the fourth quarter.

We're tracking in line with this plan and do not expect to see much year-over-year pricing benefit in Q4. Input cost inflation was roughly $16 million in the quarter and was driven by increased cost for wood, external board and to a modest extent energy.

Looking forward, we like the way we've positioned the business and the directional trends heading into 2015. We'll share more details on our fourth quarter call relative to 2015.

As most of you know, the fourth quarter is typically a seasonably slower period of us because of the shift in discretionary spending around the holidays, but there are levers to pull and the productivity gains in the mills are more than offsetting weakness in some of the core end use markets.

There's always work to be done around optimizing our supply chain and there's still some opportunity to further right-size our resources and asset base. We recently closed the facility in Canada and adjusted our overhead structure within Graphic needed to support our streamlined business.

Dan will discuss the cost and the benefits of these activities in his comments. One final note, I'd like to express my heartfelt congratulations to Dan Blount on his planned retirement, well earned. Dan and I have worked together for the past 11 years and he's been a trusted confidante and a critical member of the leadership team.

I know I speak for everyone here at Graphic and many of you on this call in wishing him all the best in his retirement. As far as our transition plans, Steve Scherger was named Senior Vice President, Finance, effective October 1st and will be appointed Chief Financial Officer as we start 2015.

Steve was previously Senior Vice President in Consumer Packaging Division and has over 20 years of global packaging experience when he was the General Manager, Finance and Strategy. His deep experience along with his financial and operating background uniquely positions him as the ideal CFO successor for Graphic going forward.

We look forward to introducing Steve to the investor community over the next few months. I'm now going to turn the call over to Mike Doss, our Chief Operating Officer, who will talk to you more about how we're executing our global strategy and driving the business forward.

Mike?.

Thank you, David, and good morning, everyone. Graphic Packaging is committed to be a leader in the global paperboard packaging business in the food and beverage sectors. We spent the last six years both building and optimizing our core business around this focus. We've divested non-core assets and businesses to free up capital.

We invested heavily in our core business and substantially reduced debt levels. We've streamlined and significantly increased our productivity in our low-cost mills. We've optimized our network of global converting facilities around both our mills and marquee customers.

We've implemented LEAN and Six Sigma resources to shorten our supply chain and improve efficiencies across the organization. In short, we've built a very unique business model that vertically integrates low-cost mills with a network of highly efficient converting facilities.

The net result from all of this work is a pure play global paperboard packaging company with a clear top and bottomline growth strategy. As we've discussed previously, we have an incremental 150,000 to 200,000 tons of low-cost unutilized pulp capacity in our mills that provides us with tremendous operating leverage as we grow.

With the amount of build, we are focused on driving our converting volumes and leveraging the additional pulping capacity. We do this in a number of way, through new product development, channel expansion, product substitution, geographic expansion and acquisitions.

Over the past few years, we've significantly expanded our penetration into faster growing segments of the markets, focused our new product development on supply chain sustainability and broad-based consumer trends and made three major strategic acquisitions in Europe to further expand our geographic presence in the food and beverage markets.

Our European integration is progressing to plan and is already beginning to pay dividends, as we were awarded our first major SUS, conversion contract with a big UK food group. It's in the frozen pizza category and is expected to generate close to 800,000 tons of incremental SUS demand.

As you know, just about everything we do in the US, frozen pizza market utilizes our SUS. We use low caliper board that offers superior characteristics in the areas of strength, printability and freeze/thaw. We believe it's a far better alternative to existing recycle substrates in these tremendous conversion opportunities across Europe.

The operating side of our business had a terrific quarter and we like our forward trends. Our mill division set daily and monthly production records at both Macon and West Monroe this quarter. Tons per day increased by more than 4%, and our yield improved by almost 100 basis points to over 90% in the quarter.

Although SUS production was down in the first quarter due to weather, total production was strong in both the second and third quarters. Q3 alone increased by nearly 25,000 tons over last year. We've done our normal plan downtime at our Macon mill for annual maintenance and the mill came back up flawlessly.

In addition to productivity improvements, we saw the reduction in energy cost from our biomass boiler in Macon as the capital we've reinvested back in our mills over the past few years has really begun to pay off.

In total, we recognized $22 million of performance-based improvements in the quarter with a majority coming from mills in our European synergies.

We continue to emphasis on procurement, energy, operating efficiencies and fixed cost were the primary drivers of our performance improvement gains and we are tracking to full year adjusted target of $60 million in net performance benefits. Graphic's new product development strategy remains consistent in both the US and Europe.

Our focus is on innovative packaging solutions that offer convenient solutions for on-the-go consumers, better shelf impact for product recognition and improved sustainability for our product partners.

We launched several new products in the third quarter, but two big call-outs are, first, a major commercial launch of our proprietary Tite-Pak product with Miller Coors and second several big club store roll-outs with Kellogg's Special K Rice Krispies Treats and Kashi brands.

Both of these conversion wins from corrugate to solid fiber demonstrate our ability to expand our business through new volume growth in solid fiber. The business is well positioned in both the US and Europe, but we operate in a very challenging environment. As a result, we're always evaluating our infrastructure and looking to optimize our asset base.

And we'll be making some adjustments over the next few quarters around that footprint. In closing, I too would like to add my congratulations to Dan Blount on his planned retirement and thank him for the leadership over the past 16 years. With that, I'm going to turn it over to Dan who'll take you through our financials in greater detail..

first, added another year to the facility maturity out to October 2019; second, reduced the pricing grid by 25 basis points, lowering our current LIBOR spread to 1.5%, saved us more than $3 million in cash interest per year; third, upgraded the term loan and revolver debt mix, increased the revolver to $1.25 billion, decreased the term loan to $1 billion.

I'm pleased with the revolver upgrade. Now that we have met our debt targets, it provides us with a much better tool to manage cash. Additionally, the larger revolver will provide a stronger liquidity profile going forward.

In terms of the transaction cost, the payback is less than a year as we continue to take advantage of opportunities to improve our capital structure. The other debt structure opportunity we have is to refinance our 7 7/8 % bonds. Many of you know that they became callable earlier this month.

We fully expect to take advantage of this refinancing opportunity in the near term and would expect to be able to further reduce annual interest expense by $6 million to $8 million. Now before turning to guidance, I want to circle back and comment about taxes. Our effective tax rate in Q3 was approximately 43% versus our guidance of 38% to 40%.

Now before talking about the effective tax rate, I do want to remind you that while we record tax expense to the P&L, we do not pay US federal income taxes as we take advantage of our NOL assets. At the end of Q3, our NOL balance stood at $811 million. And for full year 2014, we expect cash taxes to total less than $15 million.

Now turning back to the effective tax rate, the 43% rate experienced in the quarter was primarily driven by the geographic mix of earnings, specifically lower earnings in our lowest tax rate international jurisdictions. We do not expect this higher rate to continue. Q4 should return to the 40% range.

And for the full year 2014, we expect the tax rate to be in the 40% to 41% range. And if you look forward to 2015, our projected tax rate remains at approximately 36% to 38% based on projected international earnings growth as we realize the benefits of the integration and our newly acquired European businesses.

I will however reiterate that we will not be meaningful taxpayer next year as the bulk of the tax expense will simply reduce the NOL tax asset. Now turning to last slide, you see our outlook for 2014.

Given that we only have a quarter left in the year, we have tightened up on our ranges, particularly with CapEx, interest, and we also adjusted the tax rate outlook. If you have any questions about guidance, we'll address those during Q&A. And then as a final note, I would like to thank David and Mike for their comments about my retirement.

From my perspective, however, it has really truly been an honor and I consider myself very fortunate to have served on this management team led by David Scheible. David is a highly motivating leader and the business value created over my nearly 17 years really far exceed than the expectation I may have had.

While my time at Graphic is coming to an end, I will continue to be an investor. With David's continuing leadership and a management team that includes really deeply experienced talents such as Mike Doss and Steve Scherger, I'm going to enjoy watching the business continue to move forward.

And with those final comments, thanks to everyone, and I will now turn the call back to the operator for Q&A..

(Operator Instructions) Our first question comes from the line of Ghansham Panjabi with Robert W. Baird & Co..

It's actually Mehul Dalia sitting in for Ghansham.

Can you give us some more color on the inter-quarter trajectory for (inaudible) during 3Q? Was there any major deletions month-to-month? I'm wondering if there's any volatility month-to-month?.

It was a pretty consistent quarter. I think when we talked on our last earnings call, we were mid-way through the quarter, and I gave the indication we thought it'd be quarter a lot like second quarter from a volume and earnings standpoint. And that's kind of what we saw.

We did see of course the traditional pick-up in back-to-school and some beverage pick up, because the Labor Day holidays are in there. But it was pretty consistent.

The Multi-wall Bag business, you remember, had a lot of construction elements relative to those products, and that added some volatility historically to us that really just didn't show up in this quarter. And that's sort of our expectations going forward as well. Fourth quarter should be pretty consistent.

The trends that we're seeing in beer, soft drink are pretty consistent from what we've seen in the third quarter. There's some evidence that promotional activity is helping in dry foods and cereals and so on and so forth. But I think the volume trends are pretty prescriptive for what we've seen in 2014 year-to-date..

Given that you're now within your target net debt to leverage ratio, how do you think capital allocation evolves over the next year? Just wondering of the timing of a move toward dividends or buybacks?.

I think we've consistently said that that's something we're clearly going to deal with in early part of 2015. And I have no reason to believe that that timing has changed. I'm pretty confident in our cash flows. We had a good quarter in the third. I expect to have a good quarter as well in the fourth on cash flow.

And that would put us in a great place in the first part of 2015 to talk about more externally-focused cash flow return. Our priority is still going to be investment back in the mills, because there's great returns in those projects. We're still looking at acquisitions, bolt-on.

That'll be a priority, because they strategically add to the business long term. And then third on that will be the ability to return some cash to shareholders. Dan mentioned on his discussion that until we refinance the revolver, our baskets in past were limited.

The restructuring that he just did and completed gives us a lot more flexibility to do some things with return to shareholders that previously until we got this finalized here in the third quarter was not possible for us. So we're in a good shape from a business standpoint.

And I think we've got the capital structure flexibility worked out from a timing standpoint as well. So we're focused on that in 2015..

Can you give us an update on integration efforts related to the European acquisitions, assuming it's on track, synergies and everything else?.

We're right on track with the guidance we provided with the Benson integration. We'll deliver the $15 million to $17 million for Contego and A&R here in '14. And then in '15, we'll deliver the $6 million to $8 million that we outlined in our previous guidance..

We are starting to see some sales advantages in that as well. There's some transitions that occurred. He mentioned some SUS in the pizza and some other applications there. So we're getting some traction with our SUS board, which was, as you remember, strategically important part of the European business. You'll see it in the P&L.

It takes a little bit more working capital, because shipping to Perry is a lot shorter than shipping to Liverpool. But at the end of the day, nonetheless, the return on the additional board sales are certainly worth our working capital investment. And that's what you're going to see on a go-forward basis..

Our next question comes from the line of Philip Ng with Jefferies..

On the last call, I think you guys mentioned you expected inflation to moderate a bit. We've seen OCC prices and energy pull back a bit. So I'm surprised to see inflation take up sequentially. Can you give us some color? And if I'm remember, on the last call, you guys guided toward $30 million to $40 million inflation number.

Is that just input cost inflation and how much do we tack on for labor?.

Our input inflation this quarter was a little less than $16 million, which I think was pretty consistent than what we saw before. I will tell you our primary driver this quarter on inflation was actually external board sales. We buy SBS and some COB outside and there were some pricing there that's lapping the quarter. Energy costs were pretty moderate.

They were less than $3 million. Our second biggest was wood. Woods costs were up about $2.4 million. So if you look on a forward basis, I think we expect our input inflation going forward to be around $30 million, $35 million. And that's probably a good conservative estimate. I don't see a lot of drivers in OCC.

Wood prices are clearly moderated quarter-on-quarter. I don't think you'll see much in the fourth quarter all relative to wood increase. And Dan has hedged out a good part of our energy for next year right around $4 per MMbtu, which will be year-on-year flat on energy costs, I think, for the most part.

So I think a $30 million increase in '15 looks about right. Labor and benefits, we've always said, is generally around $30 million to $35 million. We had a spike up in this quarter. It had to do with some timing on medical costs year-on-year. But as you go forward, we won't see that kind of increase next year on a sequential or on an annual basis.

And I think there were some other things in there like we've been encouraging more participating in the 401(k) and we had sort of a spike up in the quarter for increased employee participation in the 401(k). So I would tell you if you look forward, if you look at total inflation going forward, we're probably in that $60 million to $65 million.

Performance next year, $60 million to $70 million plus whatever the integration activity in Europe and pricing will be a lot more moderate, but it'll be $10 million to $15 million or something like that on a carryover basis.

I mean we've been averaging, guys, around 5% EBITDA year-on-year growth is kind of what we've shown historically, and it's kind of where we're at. From what we know right now, that's kind of where we look..

Phil, I know it's a trend to try to predict every type of inflation category and all the pricing categories and build it into your models. You're going to have to have an IQ of about 200 to be able to do that accurately.

But in any event, I think if you pay attention to how we're improving the margins in the business, we're managing inflation, we're managing pricing, we're managing the improvements in the cost reduction. You'll see that we've taken the right actions given all those inputs going forward.

And additionally just to add on to David's comments, in terms of natural gas, we see an opportunity to lock in natural gas at what we consider to be a very, very favorable price. And not only have we gone into 2015, we've gone into 2016.

So you're looking at, taking natural gas inflation really off the table for close to two years as we implement this strategy. I think we're on top of our game here. If you look at margin increase and the way we're managing the business, I just wanted to add those comments on to David's..

I think the key question is really sort of what does the volume do and some of the markets did very well. Some of them not so well, but some of the acquisition growth, which has been a part of our plan on a go-forward basis, will continue to add to the topline. We have a lot of fixed cost to blow through.

It's why the margins were up 300 points, because there's fixed cost blowing through increased volume through the integrated acquisitions. And that's sort of the story. We sort of told you guys what we thought the quarter was going to look like. We bought $190 million in much like the second quarter.

And that's kind of where it was and the breakdowns are pretty much what we said it would be. Inflation was moderate. Pricing was good. Performance was excellent and margins were up 300 basis points. We're overall pretty pleased with that performance..

Can you give us an early look on how you think about free cash flow for 2015, weight at least some of the moving pieces? Just want to get a little color on how you think about CapEx next year as well..

I think it's a little early to do that. We're still in our planning cycle. I can give you some overall comments and my expectations here. I expect cash flows in terms of the percentage of EBITDA that you're going to deliver us cash flows to be consistent with what we've done in 2014.

And to David's point, we're going to look at capital allocation very closely. We've got cash and investing back into the business, pursuing really smart acquisitions and then giving back to shareholders is a priority. So we've always been very transparent with how we're running the business and how we're allocating cash.

And I expect that to continue in 2015..

I think one of the things Dan and I talked about with you all before too was we have cash to invest back in the mills, things we've not really had money to do in previous years. And we're going to invest back in the mills to address the same issues you talked about, which was inflation.

So we're going to look at way to take energy, fiber, digesting capacity, those kinds of things reduced, because mainly due to those input inflations. The stuff that ends up in the mills and cost reductions, those we keep in our profit. And that's what we're going to continue to invest in. I don't think our CapEx is going to spike up.

We've talked, what $200 million to 220 million sort of a range. And everything we need to do in the next couple of years to be able to make investments to be able to better the business. On an ongoing basis or long-term basis, we should be able to run this business at about $200 million worth of CapEx and do absolutely everything we need to do.

And that's consistent with our guidance in the past..

Why don't you give some color on how trends are shaking out in Europe, certainly certain concerns on the macro front? I appreciate that you guys are getting some market share. And then in North America, you sound a bit more upbeat. But one of your largest Euro customer did announce a plant closure.

Just want to get a sense if that will have any impact going forward on your business..

I don't know that I would use the word upbeat relative to US demand. What I said is we've got programs to help fill in where our customers are struggling. What I would say is that it's really by sector. Actually for us, beer and soft drinks still are pretty good business for us. Tissue business, pretty good business.

Some of those dry foods segments really good. Cereal is still struggling. Obviously we know that they shut down the facility. But on the other hand, if you go into the stores right now, you're going to see those same customers promoting cereal and they're doing bogo, buy one get one free type things.

So you're seeing those kinds of activities, which are traditionally driving volumes, as I said in my comments. Let's see how that works out. Right now, those trends look okay. But I don't believe anybody is suggesting US economy is particularly hitting on all cylinders.

Mike will talk more about Europe, but overall, yeah, Europe is struggling overall, but we're in a pretty small slice of the European market. We're doing food and beverage and those trends are not necessarily materially different than what we're seeing in United States. If anything, the beverage market is stronger in Europe and here..

That's right, David. I mean our overall beverage volumes year-over-year in Europe were actually up. Our consumer products both in the UK and Continental Europe has held up pretty well. And we've had a couple of wins as we outlined here. So we like the momentum as we head into 2015 in that business..

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

You talked about mill system with 150,000 to 200,000 tons of spare pulp.

And I was just wondering if you could remind us when you would expect that to get utilized? Maybe by the end of 2015, how many tons would you expect to have utilized in your system?.

I think what we've said is that if you look at our comments that we expected over the next three years to be able to build out those tons and use them. I didn't give guidance.

But what I will tell you is certainly with the growth in Europe in some of the transitions, for example, Mike mentioned on the call that Miller Coors is transitioning to a Tite-Pak. They're transitioning from a corrugated structure to Tite-Pak.

We're going to have to figure out 15,000 tons, 16,000 tons of incremental business, because that's the transition. And so over the next three years, we'll build out those tons. And it will be a pretty consistent increase right now in our planning each of those years. But it will take that long. First of all, we will not build those tons ahead of sales.

And then there is some lead time in building the tons as well, simply because we'll want to do all that during maintenance downtimes. We can't really take our mills offline to be able to do larger construction projects because we need the paper. So we'll do it consistently over a two to three-year period to generate those tons as demand increases.

So right now, if you look at SUS year-on-year, 40,000 tons of SUS demand year-on-year. And so I sort of like those trends on a go-forward basis..

And for instance, the pizza contract, have you already shipped tons for that already or is that Q4 or next year?.

Yeah, we're completely qualified and that product is commercial in the marketplace..

Maybe just a follow-up on big beer. You described trends as stable. You've produced carriers for, I guess, bottles as well as cans.

And I wondering if you're seeing a meaningful shift between those two containers and from your perspective, from a volume and margin perspective, is there a big difference between the two, or are you seeing any kind of substitution out of bottles into cans?.

We're not a primary packaging supplier. We're secondary. So the whole issue of cans and bottles to some extent we're agnostic to that transition. What we're a lot more interested in, Anthony, is the transition from plastic to paper, and that is what we're seeing in Europe and in markets like Brazil.

We're also seeing more baskets sold to craft beer even in beer. In Germany, for example, we just placed a couple of machines making baskets, and that's a new paperboard application.

Certainly we've talked about it before and others have as well that in areas like China and in Brazil, we're seeing a move towards premunization, which is really a transition from plastic to paper.

And that is more exciting to us, because that's net new tons whether we make our machines really or don't really know whether we're making a can pack or a bottle pack. We've seen some improvement in the craft beer business or transitions from bottles to cans, but that's all new growth, because they're not substituting.

They're still making their bottle. They're also making cans, which allow them to expand their business. Obviously some of that comes at the share of big beer, but ultimately as long as our share in both of those sectors is good, then we're sort of gaining as they gain. And so we feel good about that..

Maybe just one follow-up to Phil's question on early view on 2015. I guess you got $22 million in operational improvements in the quarter without flexibles, as you've been planning for '15.

Do you have any initial view on what the performance improvement could be?.

I think we said that we expect to do that $60 million to $70 million plus something from Europe stuff. So that's pretty much the same. If you look at where our mills are, if you look at the productivity, I don't see a jump-up, but I also don't see a drop. I have said before it's shifting a little bit.

More of it's coming from the mills, because those are bigger projects. And now that we have, as you all continually point out to me, additional free cash flow, we're putting some of that back into the paperboard mills, because we have the money to do so and the returns on those projects are great.

A number of projects are mills, they're one to two-year return projects and they're big projects. And the Macon biomass, we haven't talked about, but that turned out to be just a really, really good project in the process. And we have those kinds of things in the mills. So I'm comfortable on a go-forward, we've got good productivity improvements.

Again, more capital-driven and predominantly in the mills, but we're not changing our guidance on CapEx materially to do it. I think it's just a shift in our focus and direction..

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

I wanted to just turn back to capital allocation.

Just first of all, kind of thoughts on sort of dividend versus buyback activity, Dave?.

Well, of course, that's a Board of Directors discussion, as you well know. And I don't know right now whether I have an opinion on one or the other. We are one of the few companies in this space that of course does not have a dividend.

I'm not sure as to meaningful driver of share value, but it might attract different level of investors or at least open us up to a newer group of investors. We just got back from Europe. Dan and I and Mike did a road show over there, because there's lot of European interest, and a number of those investors sort of have checked the box.

So we'll assess that. Clearly in the space, buying back shares has been more leveraging for shareholders than dividends. And we see the same map, Mark. So we're going to have to assess that.

I think it just depends upon whether or not there's the dividend expectation for different group of investors, but I think we would lend or lean more towards shareholder return in terms of buyback, because it just seems to be more leveraging, Mark..

I also wanted to talk a little bit about acquisitions. I wondered if you could talk about converting assets versus maybe picking up mill assets. And on the converting side, I wondered if you could talk specifically about Mexico. I mean we've seen a couple of deals in the last couple of months where brewers have sold other packaging assets.

And I know that some of those brewers actually have paperboard packaging assets..

Yeah, that's still a priority for us. I will tell you we've done well in Europe. I mentioned on one of the other calls. I mean our focus right now for acquisitions is probably of Europe at least for a good part of 2015, because my team over there has got a plenty to grace. First of all, they're integrating the acquisitions.

Second of all, they're doing good on the sales side of the equation, but that takes some time as new product transitions. They've got some work to do and we just don't want to overload them.

As you have pointed out to me on a number of times, the list of people that have done well by converting assets in Europe is very small, and we don't want to join that list.

I think what we want to make sure that we do is that we've done a good job with our acquisitions in Europe and so we're very much focused on it, which means our acquisition focus will be in North America.

So Canada, the United States, Mexico is sort of the areas we're looking at predominantly on the converting side with the same philosophy of pulling board through those converting assets. Mexico is something we're interested in. I told you before we're a long way down the path in Mexico. But we sort of lost that acquisition at the last.

We couldn't confirm that the numbers were the actual numbers. And so we sort of walked away, but we expect to find something in Mexico to build on our base. We'd like to be a much higher percentage of that market. And we'll look to find the right assets.

But you know this that buying in Mexico, you need to be patient and you need to make sure that what you're getting is what you're buying and it takes a little while to do so. But we're not walking away from investment in Mexico..

With the dollar rallying, Dave, have you seen any impact from that on either sort of export volumes around the world or any impact on export pricing to this point?.

We don't export a lot of board other than to ourselves, and I think that's where that manifests itself. So we haven't really seen it. We also haven't seen a lot more imported board. I mean that's always a possibility, but since we're in the carton business, you still got to quality, got to get the customers to get okay with it.

These are the same issues that make it sticky for us to transition business, makes it difficult for anybody else as well. So we haven't really seen an impact. Paperboard for folding cartons is really not sort of a scale-up, scale-down. Customers really don't like changing their printed paper stock that touches their products on a regular basis.

So you have to begin it, but on the long haul, it's kind of tough to arbitrage a paperboard transition based on currency, because you and I both know it's great that the currency is strong right now, but we're putting money like there's no tomorrow.

So long term, you got to wonder about whether the strengthened dollar is something you can count on over a three or four-year period of time. And our customers are really not that interested in the short-term gain on a currency evaluation if that board might not be there..

We've had a wet autumn down at some parts of the Southeast. And I wondered if that was having any impact on kind of wood cost, particularly around Macon.

And then I wondered also with this highway bill, any change in cash pension contribution next year?.

We've seen no material impact in our wood basket in Macon or West Monroe..

We're well aware of the highway bill and the possibility that your minimum contribution level could be lower. Currently our strategy is to continue to fund our pension at our current funding rate. It's like $40 million to $60 million per year. And that's what our expectation is for 2014 and we expect to continue to do that in 2015.

Clearly, our target at this point is to have our plan fully funded by somewhere in 2017 and we're well on track to do that..

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

Of all the innovations that you're bringing to the market right now, David, what are you most uplifted about, what do you think has the best ability to drive traffic to the center of the store? You said that the investments in the mills will be done around normal maintenance downtime.

But should we be planning for more maintenance downtime in the next couple of years as we model out? And then thirdly, what are your thoughts on MLPs and their sutaibility for Graphic Packaging?.

New product side of the equation, a couple of things I would tell you, a level what's going on in Microwave, that's clearly center of the store stuff, and we're definitely winning in that space. Our teams there are doing a really good job. Mike talked about the corrugated or the strength transition.

The stuff that we're doing in the last four to five years or last three years or so, things like Capri Sun and Tite-Pak transition, these are all building long-term markets for our SUS. And I like those a lot. The other thing I like right now in Europe is that we've never had a platform over there to sell our SUS board.

And so in pizza, even somewhat in cereal, in cakes and crackers, over there we've had an opportunity to do stuff that we're just getting started in, we've already got a number of great wins in Europe, because we've got a really strong manufacturing platform over there. So those substitutions all make great sense to me.

Extra downtime in the mills, no, we're not going to see extended outings in our mills from a maintenance standpoint unless it would be something unplanned in the process, because the problem with that is that we need the tons.

So it's not just the cost of taking the mill down, but it's the fact that we run in pretty tight in extended downtime, means we don't make the paper. And that's not good if you're actually selling folding cartons. So I would not expect it.

What we will do is we will probably realign some of the activities that we do at that point in time, but that's going to be pretty transparent to the external community. That's really more of a nit and nat for our mill guys.

And if Alan Nichols was on the call instead of working in Macon and West Monroe today, he would tell you that all stuff was well within our bandwidth. And then the third thing was, what, MLPs. I have been pretty outspoken about the fact that Graphics is not a leader in the MLP stuff.

It's really difficult when you're as integrated as we are to manage the process with MLPs and split our virgin and restock. But because we don't really look at the business that well that way. I mean if there's any juice in that, it's probably the bigger guys, larger cap guys that have got more flexibility than we do and manage it.

So we're not actively evaluating MLP structures for Graphic Packaging..

In terms of incremental acquisition benefit, I realize you have synergies from Benson, but can you remind us what would be the amount of EBITDA that you'll bring into next year that you didn't incur this year, because you've made the acquisitions forward through the year?.

$10 million to $12 million..

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

Do you know where working capital will come in this year, what are you targeting for maybe?.

The key on this is where we're going to end up cash-wise. And we're going to manage working capital to such an extent that we're going to deliver the $350 million in cash flow. I think what you're going to see is that our ratios are going to be pretty much consistent with what we adjusted for seasonality, for where we are in the third quarter.

But remember, you need to adjust it for seasonality. Generally, our inventories are going to grow as we head out into 2015, because we're planning for really the beverage volume that's going to come later in the year.

So if you're planning for it, you're going to see inventories grow, you're going to see accounts receivable shrink, because business volume is going down. And you're going to see us achieve the $350 million in cash flow from operations as we manage both of those..

Dan is right. We have to build board inventory in the fourth quarter to be able to meet the demand in beverage ramp-up in the first quarter as well as the increase in Europe. So we will need to build it or otherwise we would not have sufficient board stocks as we got into the first quarter to do with that seasonality.

So you see that every year and we would be expect to be building board inventory. I mean I'm talking 10,000 tons to 15,000 tons or something like that and we make 2.3 million tons.

So I mean it's not repressive, but it needs to be done to manage the business or otherwise you get into a herky-jerky first quarter where you're up and down, up and down, trying to meet customer demand. And we did that a couple of years and it was not particularly fulfilling..

David, you talked about the new terms of the debt, giving you a lot more flexibility around what you can do with the big cash flow profile.

Are there any restrictions that you have in place right now or are you going to essentially do whatever you want with the cash flow in the business now?.

The senior secured facility we just put in place, which is the bulk of our debt profile, find that once you dip below 3 times leverage, you pretty much have all the flexibility you need to do whatever you want in terms of capital investment, acquisitions or giving back value to shareholders as well..

We're going to close it off. It's after our appointed hour and I'm sure there's other analysts callers you want to get to. So we're going to let you go and then we'll talk to you all in February..

This concludes today's conference call. You may now disconnect..