Feb 23, 2012
Executives
Brad Ankerholz - David W. Scheible - Chief Executive Officer, President and Director Daniel J.
Blount - Chief Financial Officer and Senior Vice President
Analysts
Philip Ng - Jefferies & Company, Inc., Research Division Matthew R. Wooten - Robert W.
Baird & Co. Incorporated, Research Division Phil M.
Gresh - JP Morgan Chase & Co, Research Division Benjamin Wong Mark Wilde - Deutsche Bank AG, Research Division Alex Ovshey - Goldman Sachs Group Inc., Research Division
Operator
Good morning, and welcome to the Graphic Packaging Fourth Quarter and Full Year 2011 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded.
I would now like to introduce Brad Ankerholz, Vice President and Treasurer. Please begin.
Brad Ankerholz
Thank you, Rachel, and welcome to everybody on the phone to the Graphic Packaging Holding Companies fourth quarter and full year 2011 earnings call. Commenting on results this morning will be David Scheible, the company’s President and CEO; and Dan Blount, our Senior Vice President and CFO.
To help you follow along with today's call, we have provided a slide presentation, which can be accessed by clicking on the Q4 earnings webcast link on the Investor Relations section of our website which is graphicpkg.com. I would like to remind everyone this morning that statements of our expectations in this call constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Such statements, including but not limited to, statements relating to the effect of the combination with Delta Natural Kraft and Mid-America Packaging, recovery of raw material inflation costs, consumer demand and pricing trends, capital expenditures, cash pension contributions and pension expense, depreciation and amortization, interest expense, debt and leverage reduction, performance improvements, and cost reduction initiatives, including the closure of facilities, are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. These risks and uncertainties include, but are not limited to, the company's substantial amount of debt, inflation of and volatility in raw material and energy costs, cutbacks in consumer spending that could affect demand of the company's products, continuing pressure for lower cost products and the company's ability to implement its business strategies, including productivity initiatives and cost reduction plans.
Undue reliance should not be placed on such forward-looking statements, as such statements speak only as of the date on which they are made, and the company undertakes no obligation to update such statements. Additional information regarding these and other risks is contained in the company's periodic filings with the Securities and Exchange Commission.
And with that, I'll turn it over to David.
David W. Scheible
Great. Thanks, Brad.
Good morning, everyone. We are pleased with our fourth quarter results as we delivered higher sales and expanded margins.
Volumes across the industry remains somewhat constrained in the quarter. The Graphic Packaging's fourth quarter volume and mix trends were positive as a result of overseas growth, new customer wins, new product launches and substrate substitution.
The quarter, compared to 2010 fourth quarter, net sales increased roughly 4% to a little over $1 billion and adjusted EBITDA increased 10% to $147 million. Higher pricing, stronger operating performance and cost reduction initiatives more than offset higher input costs.
Fourth quarter pricing increased by $27 million. We generated a $20 million net benefit from our ongoing cost reduction and supply chain optimization efforts.
For the full year, pricing increased $116 million and we achieved our goal of over $70 million in cost reductions. Performance improvements are a critical part of our overall strategy, and they are not solely a result of cutting cost or driving lean manufacturing principles.
We continue to put money back into our business, making strategic investments to streamline the business, reduce our long-term cost structure and add top line growth. In 2011, we invested $160 million on CapEx projects to efficiently maintain our assets and drive sales, operating margins and cash flow.
One of our largest capital projects was the expansion of our Perry, Georgia and West Monroe, Louisiana carton facilities. And the reallocation of volume from other higher-cost plants that were closed during the year.
Through our ongoing efforts to streamline our assets, we have been able to shrink our overall converting footprint without diminishing our total carton production capacity. A critical element of our asset optimization strategy is strategic acquisitions and partnerships.
Our acquisition of Sierra Pacific last April, provided a strategic location in northern California to service our West Coast customers and allow us to leverage our Santa Clara, California recycle board mill. This acquisition has helped reduce our cycle times, it has lowered our transportation cost and is better aligned volumes with geographies.
More importantly, it's increased our exposure to the fast-growing craft beer and wine box markets and broaden our customer base. I could not be happier with how this acquisition has turned out and been integrated.
In December, we announced a joint venture between Delta Natural Kraft, Mid-America Packaging and our Flexible Packaging division. Neither party received cash consideration, but Graphic Packaging did repay approximately $26 million of debt as part of the transaction.
The combination creates North America's only vertically integrated multi-wall bag business and allows for significant synergies of potential profit improvement. It also introduces us to new customers and growth opportunities, as Mid-America's business was slightly different.
Incremental sales of the new business are expected to be around $125 million and we estimate operating synergies to be between $20 million and $25 million. This should lead to double-digit margins in this business by 2013.
These types of small tuck-under acquisitions or combinations are an important part of our growth and optimization strategy going forward, and we will continue to look for similar opportunities. Other core areas of significant capital investment in 2011 were product innovation and energy conservation.
On the product innovation side, we remained very focused on developing new and unique packaging that helps our customers differentiate their products. It lowers their distribution cost and improve their sustainability metrics throughout the entire supply chain.
Last quarter, I mentioned to you about a newly-developed solid CUK fiber carton that was chosen to replace the traditional corrugated litho-lam structure by a major customer in the fast-growing juice pouch sector. The product is Kraft Food Capri Sun juice pouches.
And I'm happy to report that we begin supplying this new package in November. Volumes will continue to transition over the next few quarters, and we expect the full run rate volume to exceed 75,000 tons of CUK per year.
We've made a significant investment in our West Monroe carton plant to support this conversion, and we have also supplied the packaging machines to Kraft as part of the transition. We believe the superior performance characteristics of our solid fiber carton and the enhanced environmental aspects make for an attractive substitute to traditional corrugated materials, and we're excited about its potential from other customer wins in similar areas this year.
On the energy conservation side, the building of our bio-mass boiler in our Macon, Georgia mill remains on schedule. Permits are in place, construction is ongoing, and in total, this is expected to be about an $80 million project that will run through the middle of 2013.
The boiler will make the mill self-sufficient from an electrical power and steam generation standpoint, thereby reducing energy costs and improving profitability. We should have excess renewable energy to sell back to the grid in 2013 and beyond.
Debt reduction and strengthening our capital structure remains a top priority -- remained a top priority in 2011, and for that matter, well for 2012. Net reduction from operations was $218 million for the year, which was at the high-end of our targeted $200 million to $220 million range.
We also used a portion of the proceeds from the April stock offering to pay down debt. In total, we reduced net debt by $346 million in 2011 and ended the year with a net leverage ratio of 3.5x.
The April stock offering not only accelerated our debt reduction efforts, but it also improved the liquidity of our stock and supported the acquisition of Sierra Pacific. Let's talk a little bit about Paperboard.
Fourth quarter performance on our mills was strong. Improvements in energy and operating efficiencies in fixed costs translate to the bottom line.
Our integrated efforts to consolidate purchases continued to yield significant cost reduction coatings, process chemicals and wood. Tons produced per day increased nearly 2% over last year's fourth quarter, while backlogs for our key CUK and CRB substrates remained strong at about 3 to 4 weeks.
Volume in folding carton business decreased about 1.6% in the fourth quarter. This modest decline was consistent with the third quarter, as we were able to offset continued softness in end market demand to growth in Asia Pacific region, new customer wins, new product launches and substrate substitution.
ACNielsen estimated that our key categories of cereal and frozen pizza volumes were down roughly 4% and 6%, respectively, in the quarter. The at-home frozen pizza category continues to be challenged by competitive delivery prices.
Facial tissue however had a strong quarter, and we were significantly outperformed the industry. Graphic packaging facial tissue sales increases 16% versus decline of 6% for the industry as measured by ACNielsen.
Industry volume trend across the canned beverage market decreased on a year-over-year basis in the fourth quarter. According to the Can Manufacturers Institute, total beverage cans decrease around 5% in the fourth quarter was soft, declining about 5.7%; and beer, around 3.7%.
In total, Graphic Packaging beverage business outperformed the industry, with soft drink sales increasing about 3% and beer sales declining roughly 4.5% in the quarter. Turning to our Flexible Packaging business.
We really see very little change in this segment, as the construction and industrial manufacturing sectors remained stagnant in Q4. Flexible Packaging sales increased 4% in the quarter due to increased pricing and the additional of the joint venture of course in December.
As discussed earlier, this new joint venture with Delta Natural Kraft and Mid-America Packaging should enhance both the growth and profit profile of this business. Turning to pricing inflation for the quarter, we saw significant benefit from higher pricing, while cost inflation remained in line with expectations.
Pricing increased $27 million in the quarter and $116 million for the full year. The increases continue to be driven by the pricing reset mechanisms in our contracts that adjust pricing up or down based on changes in inflationary cost on an approximate 9-month lag.
We expect pricing to remain positive for the full year of 2012. Total cost inflation was $33 million in the quarter, and about $151 million for the year.
Primary drivers in the quarter were externally purchased board, predominantly SBS and paper, inks, encodings and chemicals. We've also seen an uptick in freight cost with the rise in diesel fuel surcharges.
After peaking in Q3, OCC pricing moderated in the quarter to an average price per Graphic Packaging of roughly $137 per ton. We will begin to capture the benefits of these lower OCC prices as newer inventory gets converted into finished cartons in first quarter of 2012.
I do expect secondary fiber to trend upward as we move through 2012. Looking forward, we finished 2011 strong and we are very well-positioned heading into 2012.
We have a strong pipeline of new business ramping up early in 2012 that should help offset any general ongoing weakness in the macro folding carton markets. The new business is the combination of new innovative products such as our new Capri Sun launch, share gains in frozen drive foods, pasta and food service, spread between price and cost reduction and inflation should be positive in 2012, and we expect to see continued expansion in our margins.
Combined inflation is always a wildcard, but the trends thus far seem to be favorable and we are optimistic that 2012 could see less inflationary pressure than 2011. Reducing debt, strengthening the capital structure remain key initiatives in 2012, and we will continue running our business to drive cash flows and improve our credit profile.
I'll now turn it over to Dan for more detailed discussion of our financial results. Dan?
Daniel J. Blount
Thanks, David, and good morning, everyone. David covered the operational highlights of the quarter.
I'll focus on the financial results. My comments track our posted presentation.
Let's start with Q4 and full year financial highlights on Page 9. Adjusted Q4 results show strong operating improvement over the prior year.
EBITDA up 10.4%, net income more than doubled to $0.06 per share. Main drivers of the improvement include revenue growth, improved operating margins and lower interest expense.
In order to provide comparable financial reporting and a better baseline for gauging future performance, we adjusted results to remove nonrecurring transactions. Let's talk about the 3 principal Q4 adjustments.
First, we recorded a value for $1.2 billion NOL tax shield on the balance sheet. Based on our 3-year track record of profitability and positive view of future earnings, a determination was made that it was more likely than not that we would fully monetize the NOL.
We recognize the value of the NOL by recording a $265 million adjustment to set up a net tax asset. The adjustment includes $460 million for the value of the federal NOL using a 35% tax rate.
This amount was netted against future tax liabilities, primarily related to depreciation and amortization timing differences. The change has no impact on our cash income tax obligation, as we continue to pay -- to not pay U.S.
income taxes until the NOL is fully consumed. Currently, we project that we will not pay federal income taxes for 4 to 6 years.
Going forward, we will record income tax expense and offset the expense against the tax asset. For those of you updating models, we expect an effective tax rate of approximately 38%.
The second adjustment relates to the workforce reduction that we announced in October. The reduction will produce an ongoing annual benefit of $20 million to $25 million.
In Q4, we recorded the charge of $5.2 million principally for severance related to this cost reduction. And finally, the remainder of the adjustments principally relate to the nonrecurring charges incurred during the business combination with Delta Natural Kraft.
As David commented, this transaction is expected to be highly accretive, projected to generate $20 million of annual benefit, beginning in 2013. Now moving to Page 10.
We see a 4% or $40 million growth in Q4 revenues. For the year, revenues grew 2.7%.
Increased pricing benefited the quarter by $27 million. This improvement is principally driven by exercising inflation recovery provisions included in our packaging supply agreements.
Year-to-date, we recognized about $116 million of higher pricing, which recouped the vast majority of the commodity inflation we incurred in 2010. As we have stated previously, our contractional inflation recovery is based on look back calculations that lag inflation by about 9 months.
Given the lag, price should be favorable over the next couple of quarters as we continue to recover commodity inflation. Turning to volume mix, we see a $12 million increase for the quarter.
Our Paperboard Packaging segment, as a whole, increased 4% as we grew packaging sales in our Asia-Pacific markets and grew open market sales of paperboard. Additionally, our domestic sales mix improved, partially due to the initiation of Capri Sun shipments.
The Flexible Packaging segment finished essentially flat for the quarter, as the partial month addition of Delta Natural Kraft offset a modest volume decline in our historical business. Moving to Page 11, we see a Q4 year-over-year EBITDA increase of $14 million.
The improvement was driven by our Paperboard Packaging segment, as its full year 2011 margin improved to 16.9% from 16.2% in 2010. In addition to strong price recovery, fourth quarter realized $20 million of benefit from improved operating productivity.
We performed well in the execution of our cost-cutting initiatives and for the year, we hit the high-end of our guidance range by delivering benefits totaling $76 million. In addition to CI, major 2011 cost reduction activities included converting plant consolidations like the closure of our higher-cost Cincinnati facility, and corresponding realignment of business volume to the newly expanded Perry, Georgia plant as well as our West Monroe plant.
Also as David mentioned, our acquisition of Sierra Pacific increased the integration of our Santa Clara mill, and allowed us to further streamline our supply chain and reduce freight and board costs. Now moving to look ahead to 2012, we have initiated our major cost reduction projects and expect to deliver another $60 million to $80 million of benefit.
The key value drivers include capturing the full year benefit of the 2011 plant consolidations, realizing the workforce reductions and executing defined projects focused on productivity improvements and waste reduction in both our mills and converting plants. We have also gotten a jumpstart on 2013 cost reduction.
As we expect the Macon biomass boiler to begin operation in mid-2013, and also expect to realize $20 million of annualized synergies from the Delta Natural Kraft combination. To conclude the year-over-year EBITDA comparison, I'll comment about inflation.
As we have experienced throughout the year, during the quarter, we continued to see inflation increase at the rate of around 4%. The main drivers being increased prices for externally purchased board and paper, secondary fiber, selected chemicals and freight.
During the quarter, we did experience the much-publicized decline in pricing for secondary fiber and natural gas. As a reminder, we used about 12 million MMBtus of natural gas annually and consumed about 900,000 tons of secondary fiber.
Any pullback in the rate of commodity inflation should have a positive impact on our results. But remember, that due to our inventory cycle time, it takes about 2 to 3 months for our input cost change the flow through operating results.
Now turning to Page 12, let's look at cash flow, debt and liquidity. 2011 net cash provided by operations improved $50 million over the prior year to $388 million.
Cash flow from reduced interest costs and improved operating performance drove the improvement. CapEx increased $37 million to $160 million.
The increased investment focused on high-return projects like the Perry expansion, the Macon boiler and expanding volume opportunities by placing new packaging machinery at customer locations in Europe and China. Overall, our CapEx investments are targeted at projects with less than 3-year paybacks.
We ended the year hitting our deleveraging guidance, as our net leverage ratio improved to 3.5x. M&A activity was managed to be leveraged accretive or neutral.
Overall, year-to-date net debt was reduced by $346 million, $218 million coming from operations and around $150 million from the secondary offering. Liquidity remains strong at over $600 million.
We continue to target a leverage ratio and the 2.5 to 3x range and expect to be near the top-end of this range by the end of 2012. During 2013, we expect to be operating well within the range.
With our revolving credit facility maturing in May 2013, and the term loans a year later, we began the refinancing process. Graphic Packaging's improved credit statistics and upgraded credit ratings provide us much broader access to credit markets.
At present, we are actively pursuing a $2 billion senior secured commitment based on today's attractive market pricing. The new facility will have ample operating flexibility and will include substantial baskets to allow us to initiate dividends and/or stock buybacks amongst other improvements.
Given that we are fast approaching our target leverage, this new facility will provide the appropriate debt structure for us to operate under for several years. The specifics of the facility are still under review, but we expect to have the refinancing complete by the end of next month.
Now for our guidance, let's move to Page 13, and we'll have a summary. First, capital expenditures will be in the $190 million to $210 million range.
This higher level of spending is driven by completing the bulk of the biomass boiler spend and completing most of the investment needed to drive the Delta Natural Kraft integration. Cash pension contributions will be between $40 million and $70 million, pension expense of around $40 million.
Depreciation and amortization in the $250 million to $280 million range; interest expense of $130 million to $145 million. Also, we expect to achieve net debt reduction of $200 million while funding increased CapEx spending and paying refinancing costs of around $25 million.
And finally, our net leverage ratio should end the year around 3x. And with those comments, I would turn the call back to the operator for the question-and-answer session.
Thank you.
Operator
[Operator Instructions] Your first question comes from Philip Ng with Jefferies.
Philip Ng - Jefferies & Company, Inc., Research Division
Based on your comments about refi and what not, and leverage comfort zone, I guess, you guys could be in position to start returning cash as soon as sometime in 2013? Is that your assumption?
Daniel J. Blount
Well, as we said, we're entering our target range at the end of 2012, so that's going to open up a lot of opportunities for us in terms of what to do with the cash.
Philip Ng - Jefferies & Company, Inc., Research Division
Okay. And then when I look at your price cost, Brad, it's obviously narrowing quite a bit and it's tracking more favorably and it sounds like the impact of OCC coming in should kick in a little more fully in Q1 and a recent pull back in that -- so should we see a neutral or even perhaps a positive price cost spread in Q1?
Brad Ankerholz
I have -- it will depend upon what our mix on OCC-based products are. What I would tell you is yes I mean, I think if you record the quarter, probably we'll see an additional improvement in the quarter.
But I don't -- and talk about this before [indiscernible] -- I don't really think the long-term driver of improved margins is really around this, around a pure question of inflation and pricing because ultimately, it becomes a transitory process. It goes up, we get it back; it runs through the deal.
What you are going to see the margin expansion, I think, is going to be growth, and then through the capitalization of some of these projects that we talked about like the risk -- and the shutdown of high-cost manufacturing facilities, the integration of Delta Natural Kraft and Sierra Pacific. So I think that's where the margin really comes from.
Not this inflation price arbitrage because I think it's from a quarter-to-quarter standpoint, it's kind of arbitrary.
Philip Ng - Jefferies & Company, Inc., Research Division
Okay. That's helpful.
And just lastly, I mean David, I think you called it out last quarter, if I remember correctly, that bonds are actually starting to stabilize a bit here in [indiscernible] so what you are hearing from your customers? And it sounds like some for your beverage customers are at least stepping up promotional spending, so I just want to get sense on it.
And unemployment is a little bit better on the margin, so...
David W. Scheible
Yes, I mean what I would tell you is that I like the momentum going into -- I like the momentum going into the first quarter based on what we've seen already. I will remind you Philip that I had the same sort of feeling going into the first quarter of 2011, and there was good momentum and then the year just sort of kind of petered out.
But right now, we're busy, backlogs are good and our customers are definitely promoting. We've got a lot of new product wins that are starting the year as opposed to back-end of the year loaded.
So I'm feeling okay about volumes going into 2012.
Operator
Your next question comes from Ghansham Panjabi with Robert W. Baird.
Matthew R. Wooten - Robert W. Baird & Co. Incorporated, Research Division
It's Matt Wooten sitting in for Ghansham today. A few questions, if I may.
Those your expectation of reaching the price cost parity, and assuming that that's not going to be the primary driver, but does that assume the successful implementation of the February CUK price increase?
David W. Scheible
Yes. I don't think we've had a lot -- I don't think we've ever really projected much price increase in board for our 2012 look forward.
We are seeing some lift in CUK. I mean CUK pricing year-on-year was up something like $80 a ton, or something like that, 10%.
And some of that came in the second half of the year, so we'll get more of the run rate of that as we go into 2012. But at this point in time, we don't have a lot factored in for pricing improvement necessarily coming from board movement in the first half of the year.
Matthew R. Wooten - Robert W. Baird & Co. Incorporated, Research Division
Okay. And then of the $200 million or so in CapEx, how much of that would you consider maintenance CapEx?
David W. Scheible
We can run this -- let's see I've got to add the Delta Natural Kraft. But I would think we can run this business on $105 million to $106 million a year in CapEx, if we really, really had to.
Matthew R. Wooten - Robert W. Baird & Co. Incorporated, Research Division
Okay. And then lastly, the trajectory of the DNK synergies.
Is that something we should see start accruing in the second half of 2012? Or is that something that's not going to happen until 2013?
David W. Scheible
It's really more into 2013. We've begun the announcement on some things we're doing in plant consolidation, so on and so forth, but some those synergies are really around how we integrate some of that board and get out some old bad contracts and so and so forth that will take some time for those to run their course.
But those synergies, I mean, if we didn't believe those $20 million of synergies were there, I wouldn't be telling you they were.
Operator
Your next question comes from the Phil Gresh with JPMorgan.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
So just on the end market, some of your food customers have been talking pretty cautiously on the volume side. What do you see on that front?
David W. Scheible
It really -- it's really by -- it's very sectorial. So cereal is actually doing pretty good.
Pizza is still sort of difficult, but some of the snacks and things are good. Beverage, as somebody mentioned, Coca-Cola and Pepsi are doing pretty well from a volume standpoint.
So it really depends on the core end-use market. I think the bigger impact on that is going to be what do we really think the impact of oil prices are going to be vis-à-vis natural gas, right?
I mean -- I'm sorry, vis-à-vis the consumer's pocketbook, right? And predicting that will be interesting.
I think the President's down in Florida talking about energy today probably anxiously waiting for that outcome. But right now, what you're seeing for us in the real short-term is energy prices translating into fuel surcharges and that while it doesn't necessarily affect our P&L directly, it affects my end-use consumer.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
Okay, so you're not really seeing anything that for example, General Mills I believe is talking about weaknesses as quarter progress. And I think some of these customers even said January was kind of weak.
So you're not really seeing that at this stage?
David W. Scheible
No, not across the entire spectrum.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
Okay. And then the driver of outperformance on the tissue side, what would you attribute that to?
David W. Scheible
Some of it's share, some of it's just sort of mix.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
Okay. And then the question on CapEx, $105 million is what you could run at.
But what's kind of a realistic run rate kind of ex the bio-mass project moving forward? How much was -- is bio-mass this year?
David W. Scheible
I think Dan has always said that our target in CapEx is somewhere between $160 million and $175 million a year, because we have enough good cost reduction and growth projects that we would fund during that period of time. So we're not going to run the company on $105 million.
The question was what could you? And I'm saying we could.
But the reality is that if I'm modeling in and I model forward with my board, I'm thinking between $160 million and $175 million is a really good CapEx project. The $85 million -- $80 million boiler project hits a lot of it in -- most of that comes through in 2012.
I think there's some catch-up in 2013, some carryover in the first quarter. But predominantly, it's 2012.
Because the heavy constructions going on now, all the boiler is being built, it will be installed at the end of this year that type of thing.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
Okay. And then just on the synergies that you talked about -- you're talking about kind of a head start on 2013 in saves.
So should we interpret that to mean the synergies will be part of the standard $60 million to $80 million? Or is that incremental to the standard performance opportunities?
David W. Scheible
Well, I have no -- I think it really has virtually no impact in 2012, right?
Phil M. Gresh - JP Morgan Chase & Co, Research Division
I'm sorry, I meant 2013.
David W. Scheible
So in 2013, those synergies should be separate from our cost reduction plans.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
Okay, okay. I just wanted to be clear on that.
David W. Scheible
I don't mean to caution, but I have a hard time forecasting out the quarters, and now we're talking about cost reductions in 2013, and what I would say is, right now, we are plans would be to have it be incremental, and that assumes that the economy looks something reasonable. But good lord knows.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
Understood. Understood.
Thank you and last question is on the acquisition front. Are you thinking you would be looking at more bolt-on opportunities this year?
Or are you really just kind of targeting that debt paydown at this stage?
David W. Scheible
Well, I think what we would say is we ought to be able to do both. I mean, last year, we did 2 nice little bolt-ons and still paid down $200 million of debt from plus from operations.
So the focus is to get the debt down to our ratios. Now when we make the acquisitions, we pick up some EBITDA.
So what I'm trying to do is get the ratio into that -- between 2.5 and 3, right? So the little bolt-on acquisitions don't take us off of that path.
Operator
Your next question comes from George Staphos from Bank of America.
Benjamin Wong
It's Benjamin Wong sitting in for George, George is traveling. Just 2 questions.
On new products, you had the nice win recently with the CUK carton and Kraft. Can you comment about how you feel about new products in 2012?
Are there any other possible launches this year?
David W. Scheible
Yes, there are. What I would simply say is that the whole concept of using solid fiber to replace some of these litho-lam carton is a good play for us.
It's not only a good play for us, it's a good play for other people in the space. I just hope we get our unfair share of that pie.
But I like the trends, I like what -- how CUK performs from a property standpoint versus other substrates, makes me feel very positive heading into 2012. There are lots of things we're working on, a number of things we've already done.
Much smaller in scope, but nonetheless, we probably added another 9,000 to 10,000 tons of new products in that space as we've started this year. So Kraft was great.
We love the Capri Sun. We've had an incredible partner with those guys on that, but that's not the only thing we're working on in those kind of new product opportunities.
Benjamin Wong
Okay, we'll keep a look out for them. And then just based on your comments, it seems you would be in a position to return value to shareholders pretty soon.
Can you talk about your preference towards either dividends or buybacks or both?
David W. Scheible
Well, what I would say is we've been returning shareholder value at this point of time since the stock has responded, and so you're talking about specifically the potential of using cash as a direct dividend payment back to shareholders. And what I would tell you is that's not a 2012 thing for us.
I mean, we took a $200 million worth of debt reduction we've got to get done, to get down to the right credit ratio for us that's certainly one of a number of things we'll have to think through as we get into 2013, but right now, I'm sort of focused on the things that are right in front of us, simply because it really is in this economy, all about execution.
Operator
Your next question comes from Mark Wilde with Deutsche bank.
Mark Wilde - Deutsche Bank AG, Research Division
I wondered if you can give us just a little more color on sort of the dynamics of acquiring and integrating Delta into your business? And sort of where those synergies will come from in just broad terms?
David W. Scheible
Sure, I'd be glad to. So if you think about our Flexible business before, Mark, it was a complete converting business, right?
And those margins were trending at 7% to 8% or something like that. What Delta Natural Kraft allows us to do is to take the Pine Bluff, Arkansas mill and balance production between that mill and our West Monroe facility because you may -- I think you are aware that we have a bag machine in West Monroe.
We don't talk about it much, but paper machine #5 is the bag line there. But it’s sort of the sub-optimized mix because this is the only thing we can do.
We have the opportunity not to -- mix manage and make and sell internally a higher value product than we are currently making out of West Monroe and stop purchasing it on the outside of that expensive paper. That cash and that EBITDA all towards directly to Graphic Packaging.
So in much like we did with Altivity acquisition, so think about the same thing we did in integrating those cartons and those tons into our business had a huge impact on EBITDA and cash flow. Then the second thing is Mid-America Packaging had 3 converting facilities, and we had a number of more as you well know.
We don't need all those, so we're integrating those and moving -- relocating that business to lower-cost facilities, much like we did with Altivity. So if you put all that together, along with the purchase, you can imagine Graphic Packaging had more purchasing power than Delta Natural Kraft did.
We were a stronger company, we bought more, financially more stable. So the purchasing savings sort of a newer soon as those contract expires.
So if you sort of think of the split, maybe 25% is plant, smaller portion is purchasing, and then a big part of it is paper integration, just like Altivity. And that's sort of where the $20 million comes from.
So really more of a time question than -- I think we're going to get it. Yes, we're going to get it.
It's just we've got to be -- we've got to get it when the contracts allow us to do so.
Mark Wilde - Deutsche Bank AG, Research Division
And just in general terms, Dave kind of what's the timing on those contract roll-offs?
David W. Scheible
Most of them come off by the fourth quarter of '12.
Mark Wilde - Deutsche Bank AG, Research Division
Okay. And then just in terms of D&A in the new Flexible segment.
Can you give us that number?
David W. Scheible
We are looking at each other right now, so I guess the answer is -- we're not sure, we'll have to get back to you. I don't have it the fingertip depreciation, amortization of the new thing.
We'll let you know, Mark.
Mark Wilde - Deutsche Bank AG, Research Division
That's fine. I just wanted a question about that business.
Pine Bluff is a fairly old mill, and I'm just curious what type of capital needs you may have identified at Pine Bluff over the next say 3 to 5 years?
Daniel J. Blount
What we've identified is going into this year, we've already put in -- we're going to spend about $20 million, okay, to get to capture those synergies. And included in that $20 million is enough money to bring up those that mill up to Graphic Packaging standards.
And currently, we have our mill people looking at that mill and they're identifying areas of improvement where we can get productivity improvement beyond what we have built into the $20 million run rate for synergies.
Mark Wilde - Deutsche Bank AG, Research Division
Do you have -- Dan, do you have just a kind of general sense of what type of stuff that's --
Daniel J. Blount
It's $6 million.
David W. Scheible
It's about $6 million is what we'll have to --
Daniel J. Blount
-- to $20 million.
David W. Scheible
Incremental. And if you -- more and get more money for it, using our hurdle rates, we'll end up doing it.
Mark Wilde - Deutsche Bank AG, Research Division
Okay. And then another question.
I wonder if you can talk little just a bit about what you see going on in the bleach board market. There have been some reports said that market is a little bit soft right now.
I think the backlogs have come down.
David W. Scheible
Well, only thing I know about bleach is that we buy it. And so, what I would tell you is that our bleach board business has been okay.
Now when I say that, Mark, you know that we do a fair amount of substitution from our bleached board business into CNK. So I say that the applications that we're selling into are still there and they seem strong, but we don't necessarily use -- we don't necessarily use as much bleach as we used to into those end-use applications.
Mark Wilde - Deutsche Bank AG, Research Division
Okay. And then just one last question, this Sierra Pacific business that you bought.
Did they do any of that sort of bag and box business out there?
David W. Scheible
No. Graphic actually does some.
We do bag -- you're talking wine, right?
Mark Wilde - Deutsche Bank AG, Research Division
Yes, exactly. Because I cover the Smarvard-Kappa guys, and they love that business.
They've been talking about how that's kind of growing worldwide. They don't have any presence here.
So I was just curious what you were seeing.
David W. Scheible
Yes, we are in that -- now I'm surprised that you are a bag and box wine drinker, but the reality is that we are in that business on the West Coast with the legacy graphic facilities, and Sierra Pacific was out there. We have a lesser -- they have specific assets left to hammer out there in our facility that we purchased in Sierra Pacific in Norville.
So we're in that space.
Daniel J. Blount
Okay, remember we're all value guys, Dave.
Operator
[Operator Instructions] Your next question comes from Alex Ovshey with Goldman Sachs.
Alex Ovshey - Goldman Sachs Group Inc., Research Division
A couple of questions. Can we just talk about how to think about the EBITDA bridge for '12?
If we assume that price cost is even and you normally get $60 million of productivity plus you have the benefit of the Sierra Pacific acquisition for the entire year, plus incremental CUK volume, are we thinking the EBITDA is at $50 million in 2012 versus '11?
David W. Scheible
We sort of as you well know do not give guidance on EBITDA for the quarter -- I'm sorry, for the year. What I would say is that and it's obvious, as cryptic as I can, what I would say is I like our trends year-on-year in EBITDA.
I don't know what the inflation price curve will actually be. You guys are saying at all -- I don't really know.
It's pretty early in the year to figure out what that's going to look like because who knows what OCC inflation is going to be in the second half of the year. I hope that's a flat -- I'm guessing it's probably more like what we saw this year, which is we were still a little bit negative in 2011.
I would think it would be a little bit as well. I think we'll get a little bit of bump from the new product activity in the overall process and performance will be in that $60 million, $70 million.
So I think it moves directionally good, but whether it's $40 million or $50 million, I'm not going to -- but I will tell you is that we feel pretty comfortable with our projections on cash flow, the $200 million, despite the refinancing costs of about $25 million, and the increased boiler investment in Georgia, we still think $200 million of debt reduction is doable.
Alex Ovshey - Goldman Sachs Group Inc., Research Division
That's helpful, David. If you think about the M&A pipelines for the business, are you seeing more opportunities on the converting paperboard side?
On the flexible side? And do you have a number that you want to spend on bolt-on acquisitions in 2012?
David W. Scheible
We don't really target a number. What I would tell you is that I like the things we did with Sierra Pacific.
Those are $50 million to $60 million companies in the geographically or end-use sector. That's what we're going to be focusing on.
So if there's some integration there, or they're regionally advantageous for us, and I think those guys are out there, right? Sierra Pacific has really been a very good acquisition.
We brought a good asset, we brought a great team, who -- and they all stayed. Allen Ennis and his team, they stayed and they've grown that business.
So those kinds of things are what we're looking for. It takes a while, though.
Allen and I started talking about that a long time ago. So it's kind of hard to project year-on-year, but we do think there are opportunities out there, and we will be smart about it.
It needs to be accretive for Graphic Packaging, but that's our goal.
Alex Ovshey - Goldman Sachs Group Inc., Research Division
Understood. Thanks and last question for Dan, what is the other cash items that we should be thinking about?
Do you have a number for cash taxes, working capital and any incremental cash costs that you expect to incur in order to realize the synergies for DNK?
David W. Scheible
Yes, we expect cash taxes to be about $10 million. Working capital, we're looking for improvement there but if I was a betting man -- may I say based on the growth of our business, I think we're main pretty much neutral where we are today with the working capital and did you have one other item?
Alex Ovshey - Goldman Sachs Group Inc., Research Division
Yes. Incremental cash costs in order to realize synergies from DNK?
Daniel J. Blount
Well, we've included that in our projection to come up with the $200 million. I mean there's about $20 million in total that we're going to spend either through some type of severance payments or in terms of our CapEx.
Operator
And at this time, there are no additional questions. So then including -- concluding remarks.
David W. Scheible
So we thank everybody for listening in and we'll talk to next quarter.
Operator
Thank you, ladies and gentlemen, for participating in today's conference call. You may now disconnect.