Apr 25, 2013
Executives
Bradford G. Ankerholz - Vice President and Treasurer David W.
Scheible - Chief Executive Officer, President and Director Daniel J. Blount - Chief Financial Officer and Senior Vice President
Analysts
Matthew R. Wooten - Robert W.
Baird & Co. Incorporated, Research Division Philip Ng - Jefferies & Company, Inc., Research Division Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division Anthony Pettinari - Citigroup Inc, Research Division Joseph Stivaletti - Goldman Sachs Group Inc., Research Division
Operator
Good morning. My name is David, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Graphic Packaging First Quarter 2013 Earnings Call. [Operator Instructions] Thank you.
I will now turn the call over to Brad Ankerholz, Treasurer and Vice President. Mr.
Ankerholz, you may begin your conference.
Bradford G. Ankerholz
Thank you, David, and welcome, everybody, to the Graphic Packaging Holding Company's First Quarter 2013 Earnings Call. Commenting on our result this morning are David Scheible, the company's President and CEO; and Dan Blount, our Senior Vice President and Chief Financial Officer.
To help you along with today's call, we have provided a slide presentation, which can be accessed by clicking on the Q1 Earnings webcast link on the Investor Relations section of our website, which is located at graphicpkg.com. I would like to remind everyone that statements of our expectations in this call constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Such statements including, but not limited to, statements relating to the effect of our recent acquisitions and costs and synergies related thereto, completion of the Macon biomass boiler project and the related tax benefit, raw material inflation costs, consumer demand and pricing trends, capital expenditures, cash pension contributions and pension expense, depreciation and amortization, interest expense, income tax rates, debt and leverage reduction, annual cash flow, performance improvements, particularly at our Pine Bluff mill in New Philadelphia multi-wall bag facility and cost reduction initiatives are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. These risks include, but are not limited to, the company's substantial amount of debt, volatility in raw material and energy costs, cutbacks in consumer spending that reduce demand for the company's products, continuing pressure for lower cost products and the company's ability to implement its 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 of which they are made and the company undertakes no obligation to update such statements. Additionally, information regarding these and other risks is contained in the company's periodic filings with the Securities and Exchange Commission.
David, I'll turn it over to you now.
David W. Scheible
Thanks, Brad. Good morning, everyone.
Our first quarter results were in line with our expectations and we're pleased with our ability to continue to grow the business in a challenging environment. Unseasonably cold weather undoubtedly curtailed demand in some of our core end markets like beverage, but we believe, really, the more important factors were high unemployment rate, increased taxes and fuel prices that weighed on discretionary consumer spending, having a much broader impact in Q1.
Despite these conditions in the first quarter, we grew our volume, sales and margins. Volumes in our core paperboard segment grew 7%, total sales increased 3% and adjusted EBITDA margin increased 60 basis points to 14.7%.
The increase in our folding carton volume outpaced the industry, further evidenced that we are winning new business and taking market share through our strategic focus on developing new products, optimizing our asset base and pursuing bolt-on acquisitions. Sales of newly commercialized products were robust in the first quarter and continue to drive our growth.
Corrugated replacement, strength packaging, microwave cook technology, quick serve dining solutions and our proprietary beer bottle cartons, called Tite-Pak, remained our primary focus this quarter. We continue to work on new initiatives in each of these areas and I feel good about our new product pipeline at this point.
A good example of this growth occurred in the first quarter as we began providing an innovative packaging sleeve for McDonald's new Premium McWrap. The premium McWrap is the newest item in McDonald's line of premium entrées.
Our pillow-pack style folding carton fits snugly around the product and features a convenient perforated pull tab that allows customers to remove the top half of the sleeve and easily eat the wrap right out of the sleeve. The new packaging was featured in the release of the McWrap and it's currently highlighted on a national television campaign.
Our packaging is a combination of form, function, style and it's a great example of how we are helping our customers differentiate their products through innovative new packaging ideas. New products certainly help drive growth, but honestly, it was our performance improvement that drove margin expansion.
We generated $23 million of performance improvements in the first quarter and continued to make strategic investments in the business to support our long-term growth objectives. The business of -- the building the biomass boiler in our Macon facility is almost complete and on schedule to begin operating late in this quarter.
This is an $85 million project and we expect to receive a tax incentive rebate following the project's completion. The boiler will make the mill self-sufficient from electrical power and steam generation standpoint, thereby reducing our energy costs and improving our profitability.
The integration of our recently acquired Contego Packaging and A&R beverage packaging businesses in Europe is progressing according to plan and we are aggressively working on new business opportunities from the expanded operations. We've already made progress in synergies for purchasing and supply chain optimization.
During 2013, we will make decisions in how we maximize our European footprint to improve our long-term strategic position and to reduce our costs. The environment in Europe is challenging.
I think even more so than North America for revenue, but we are confident in our ability to generate a significant ROI through our focus on execution and the integration of the business. The combination of Contego Packaging and A&R beverage packaging business with Graphic's legacy operations creates one of Europe's largest folding carton packaging business.
And it gives us critical mass to improve profitably and expand our global footprint. Look, I'm really pleased with our progress thus far.
The integration of our Flexible business with the Kraft paper and Multi-Wall business of Delta Natural Kraft and Mid-America Packaging is also progressing. But while we had a solid execution quarter on paperboard, we experienced some operational issues at our Kraft paper mill in Pine Bluff, Arkansas, and our New Philadelphia, Ohio multi-wall bag facility during this quarter.
We recently installed new equipment and systems aimed at improving fiber yields and throughput at the mill, but we have been slow to achieve the production yields we had hoped. The Pine Bluff production issues forced us to forgo open market sales, as well as buy more expensive Kraft paper externally for our own converting network.
The new management team at Pine Bluff is working through these issues and we are seeing improvement already and we expect to be in normal production rates over the next few months, but it was a negative impact this quarter. We also have had a great deal of focus at our new Philadelphia multi-wall bag converting plant and that also expect performance to improve in the second quarter there.
The synergies from the transfer of the business from the Twinsburg, Ohio plant have been slower than expected. The combined impact in the quarter between the mills and the converting businesses was approximately $8 million.
And while we have seen significant progress in March and April, we have a lot of work to do in both facilities. We're tracking to our synergy goals of $20 million for the year as a result, predominantly, of integrating the mill's Kraft paper into our own operations.
But the production issues left revenues and margin well short of our expectations, which will temper results during the first half of this year. We can generate double-digit operating margins in this business, but I acknowledge there is a lot of work to be done yet.
Turning to paperboard. Our mills had another strong production quarter driven by improvement initiatives in energy, operating efficiencies and lower fixed costs.
We took no unplanned downtime and had a 3% increase in tons per day, yielding 14,000 more tons this year than a year ago. Even with a higher production levels, strong demand for CRB and SUS outstripped our internal supply and we purchased board on the outside during the quarter.
In summary, we produced more tons, serviced our increased demand and appropriately managed inventory levels across the sector. Let's talk a little bit about folding carton.
Volume in our global folding carton business increased 8% of the first quarter driven by our European acquisitions and the legacy folding carton operations. The first quarter, ACNielsen data through March 16 indicated that volumes in 2 of our key categories of cereal and frozen pizza decreased 1.4% and increased 1.8%, respectively.
We're encouraged by the increase in frozen pizza volumes, actually it's been a while. You'll remember in the fourth quarter, we actually saw a decrease in that space of about 0.7%.
Facial tissue also rebounded in the quarter with volume increasing 2% after a 4.5% decrease in the fourth quarter. Dry foods were also up in the quarter, increasing about 0.5% across the industry.
Weather, high fuel prices and higher payroll taxes negatively impacted the Away From Home category overall and we saw some volume decline in this sector year-on-year. Looking at beverage.
Industry volume trends across the can market in the United States and Canada decreased about 3.3% on a year-over-year basis. This is according to Can Manufacturers Institute.
Industry soft drink shipments decreased 3.8% and beer shipments decreased about 2.5% for the quarter. Graphic Packaging's beer trends have, however, been solid with particular strength in our craft and imported beer business.
Big beer brands for the major breweries may have been handicapped by unseasonably cold water compared to last year and it gets hard to really estimate. The soft drink market continues to experience issues that are negatively impacting overall demand as well.
However, we had some benefit as the take-home channel outperformed the on-premise channel in the quarter. Talking about flexible packaging from an external standpoint, trends in that business remained weak in the first quarter.
As I mentioned earlier, we had operational issues, which also negatively impacted the business. Flexible packaging decreased sales by nearly $20 million or 11% in the quarter.
The decrease was primarily the result of continued weakness in the key end-use markets, including construction and agriculture. While the planned shift from internal -- external sales to internal consumption of Pine Bluff paper accounted for around $5 million of the decline.
The aforementioned production issues and lower pricing accounted for the remainder of decline. We had no paper, so we didn't sell it.
As I mentioned, we are confident the production issues are being addressed and this business should achieve its production yields and targets for later this year. Let's talk about pricing and commodity costs overall.
Overall, pricing declined about $5 million in the first quarter. This is in line with our expectations.
As we discussed on our fourth quarter call, we expect pricing decline approximately $30 million this year as a result of the pricing reset mechanisms built into our current contracts. Remember, these mechanisms are look back over a 6 to 9-month period and they adjust pricing up or down based on changes in commodity costs.
Last year, commodity prices declined in the middle of the year and our contracts are in the process of being reset at those low prices. Total input costs were essentially flat on a year-on-year basis in the first quarter.
Recycled fiber was down $13 a ton from last year, but it was up $15 a ton sequentially in Q1. And we expect it to trend up further throughout the remainder of 2013.
Natural gas costs were flat year-on-year this quarter, but we expect both secondary fiber and natural gas-based energy to be the primary drivers of input inflation the rest of 2013. Freight and wood costs were moderately higher than 2012.
Wood was really driven by wet weather conditions in the southeast. It increases the difficulty of getting into the forest and it pushed up wood prices slightly, but this will normalize as we move through the rest of the year.
Oil prices have moderated somewhat in Q2, but higher diesel prices in Q1 increased our overall freight cost. Right now, I think it's pretty hard to predict the impact on fuel, TiO2 and chemicals with any high that -- with really a high level of variability in overall global demand, but it would appear, for the back half of 2013, increases in these inputs will be relatively modest for Graphic Packaging.
Relative to pricing, we have some catch up to do in terms of inflation recovery from late 2012 and Q1 of this year. So it is not a surprise, we have begun to recognize increases in paperboard prices.
We recently reported a $20 a ton increase per CUK and $25 a ton increase per CRB in April. This comes on a yield of a $20 per ton CUK price increase announcement in March.
This should benefit our sales on board in the open market in 2013 and to begin to benefit contract pricing later this year and into next year, setting a positive backdrop for pricing as we head into 2014. Before I go into the 2013 outlook, I'll just like to fill you in on a secondary market transaction that was executed in March.
Most of you know that 4 of our largest shareholders sold an aggregate of 32 million shares during the quarter. This transaction reduced their combined holdings from 53% to 44% of total shares.
These same shareholders also completed a secondary offering last December. The offer increased the public float and the liquidity of our stock.
Since the March offering, the average daily trading volume in our stock has been nearly 2.7 million shares. This compares to approximately 1.2 million shares the month before the offering and only 865,000 shares prior to the December 2012 offering.
So we believe these secondary market transitions have proved beneficial to all shareholders. Looking forward, in conclusion, we had a solid first quarter.
We grow volume increases with new customer wins and acquired business. We expanded operating margins with performance improvements and we continue to invest our future growth and we manage our assets to adapt our business around our customers' changing needs.
I sure would like to see a pickup in end-market demand and I did not expect to be bouncing along the bottom this far into this economic recovery, but we know we can grow sales and earnings by helping our customers differentiate their products, lower their distribution costs and improve their sustainability metrics. Our overall performance were solid, but we have some operational issues in our flexible business, which we are addressing vigorously.
Finally, on the capital structure side of the business, I think it's important to reiterate our commitment to further debt reduction from operating cash flows. And our expectation is to be at the top end of our 2.5x to 3x net leverage ratio at year end.
I'll now turn it over to Dan and he can give you more detailed discussions of the financial results.
Daniel J. Blount
Thanks, David, and good morning, everyone. David covered the operational highlights, I'll focus on financial results.
My comments track our posted presentation. Let's start with Q1 highlights on Page 12.
Overall, Q1 financial results show continued improvement with both operational performance and our capital structure. As you can see, all of our key financial metrics improved in the quarter.
Our top line grew over 3%. Adjusted EBITDA was up almost 8% on the strength of 14.7% EBITDA margins.
And finally, mainly driven by productivity improvements, adjusted earnings per share grew $0.04 to $0.10 for the quarter. As is our practice, we adjusted EBITDA and net income for a specific nonrecurring acquisition, post- acquisition integration and capital structure expenses.
For 2013, we expect adjustments to result from integrating our 2 European acquisitions and refinancing high-cost debt. As a reminder, the investments in Europe are expected to achieve nearly $20 million of synergy benefits and the refinancing will generate approximately $20 million of interest expense savings.
For Q1, the add backs are small, $1.4 million for EBITDA and less than $1 million for net income. Turning to Slide 13.
We see that Q1 revenues grew by more than $33 million to $1.1 billion. The increase was driven by $42 million of higher volume, primarily related to the recent European acquisitions and organic volume growth in Paperboard Packaging, partially offset by weaker flexible packaging sales.
As David already covered the volume improvement, I'll concentrate my comments on price. During our last call, we stated that we expected price headwinds of around $35 million in 2013.
This is resulting from the pass-through of 2012 input inflation. As you will recall, the reset mechanisms in our contracts provide for pricing adjustments.
Up or down, based on input cost movements and changes in board price with an average lag of approximately 9 months. Recently, we revised our estimate of the price reset closer to $30 million.
The change reflects paperboard price increases that have already been recognized this quarter. Looking at the timing of the contractual price resets, we saw a $5 million reduction in Q1.
We expect the remaining price resets of $25 million, which depend really on mix and volume, will occur over the next 2 quarters with the bulk hitting the second quarter. By Q4, we expect to have cycled through the reductions and price should turn slightly positive as we realize the paperboard price increases.
Looking to 2014, we expect contractual price resets to return to a more normal behavior as we will realize price increases to recover 2013 commodity inflation. Now turning to Slide 14.
We see a Q1 EBITDA increase of approximately $12 million to $162 million. The big driver behind the earnings improvement, strong performance of $23 million, price, volume mix and inflation had relatively modest impact.
As David discussed, our mills performed particularly well during the quarter, producing over 3% more tons per day than last year. David also mentioned that our performance numbers would have been better if it had not been for our production problems in our Flexible Packaging segment.
Now let me tell you what this means as we think about performance improvement for the next quarter and the total for the year. First, the production issues in Flexible Packaging are disappointing, but we do know the root causes and corrective actions are being implemented.
Second, even with the challenges in Flexible, performance in Q1 was solid as we overachieved in other businesses, especially our mills, and hit our cost-reduction targets. In fact, based on year-to-date performance, we expect to achieve annual productivity benefits at the high end of the $90 million to $120 million range we cited last call.
Now looking at timing, we expect second quarter performance improvement to be in line with Q1. For Q3 and Q4, we expect performance benefits to grow as we reduce the production issues in Flexible and the benefits of the biomass boiler begin to be realized.
The boiler is expected to come online within the next 60 days. As for input costs, our financial results show virtually no inflation impact this quarter.
Inflationary increases we saw for energy and wood were offset by continued favorable -- favorability in secondary fiber as David outlined. Right now, due to volatility, it is difficult to predict commodity input cost behavior, but given recent increases in key energy and fiber inputs, we expect relatively moderate commodity inflation for the remainder of 2013.
Heading into Q2, recycled fiber is up $15 per ton, sequentially, and we consume around 250,000 tons a quarter. Natural gas is up $2 per MMBtu over the price we paid in Q2 last year and we use around 3 million MMBtus per quarter.
In addition, we are seeing modest increases in transportation, wood and chemicals. And also as a side note, I do want to mention that our natural gas usage will decline later this year as the Macon biomass boiler becomes operational.
Now to summarize, for 2013, we expect the EBITDA to improve on the strength of operating performance, mixed improvements and volume growth. The operating improvements will more than offset the contractual price resets resulting from 2012 deflation.
In terms of quarterly EBITDA results, we expect Q2 EBITDA to be in line with the prior year, as the majority of the price resets hit that quarter. Q3 and Q4 EBITDA are expected to outpace the prior year.
Now turning to Slide 15, let's look at cash flow, debt and liquidity. As is the case every year, the seasonality of our business causes a use of cash during the first quarter.
As expected, net debt increased by $52 million in the quarter. Now looking at the $24 million increase over last year, a lot was timing related, with the key drivers being the timing and amount of incentive compensation, working capital, plus we accelerated pension payments.
For the full year, we continue to expect net debt reduction of $250 million and to end the year with our leverage ratio dropping into the top end of our 2.5x to 3x target range. Our leverage is currently at 3.5x and we have ample liquidity of $600 million.
Turning back to the full year net debt reduction, the $250 million, a reminder that this year's cash flow will include 3 non-repeating items: First, we will invest $40 million to integrate Europe and drive $20 million of post-acquisition synergies. Second, we'll early call and refinance our high cost 9.5% bond which will result in a cash use of $28 million.
And as a special cash inflow, we expect to receive a cash tax rebate of more than $20 million after the startup of the Macon biomass boiler. Now considering these nonrecurring items, our 2013 normalized cash flow would be in the $300 million range.
To improve our debt profile, earlier this month, we made the opportunistic move to issue $420 million of 4 3/4% 8-year notes. The proceeds will be used to redeem our 9.5% notes on June 15, when they are first callable.
The attractive debt markets prompted us to act before the call date. We minimized the double interest penalty by temporarily using the new bond proceeds to reduce the balance of our revolving credit line.
Overall, we are pleased with the execution as the new notes, in addition to lowering cost, provide us with a flexible covenant package, including a sizable, restricted payment and dividend basket. In addition, we will save $20 million in annual interest and reduce our average cost of debt to less than 3.5%.
Now before moving to guidance, I do want to make a note that we will incur a charge in the second quarter of approximately $20 million related to the call premium and write off of debt issue costs related to the old bonds. And now let's move to Slide 16 and I'll refresh some of our guidance for 2013.
Capital expenditures are expected to be in the $215 million to $235 million range. The higher level of spending is driven by the completion of the biomass boiler and the integration investments related to European acquisitions.
Cash pension contributions are projected to be between $40 million and $70 million, pension expense of around $40 million, of which $38 million is pension amortization. Depreciation and intangible amortization in the $270 million to $290 million range; interest expense of $105 million to $115 million; we'll achieve our net debt reduction of $250 million and reach the top end of our leverage target range and, as I mentioned during the last call, the bulk of this debt reduction will occur in the second half of the year as the bond refinancing costs and the final Macon biomass spend will occur in the second quarter.
And with those comments, I will turn the call back to the operator for questions and answers.
Operator
[Operator Instructions] Your first question comes from the line of Ghansham Panjabi with RWB.
Matthew R. Wooten - Robert W. Baird & Co. Incorporated, Research Division
It's actually Matt Wooten sitting in for Ghansham today. I was hoping that you guys could provide some additional detail on Contego and A&R in terms of the EBITDA contribution in the quarter.
And I know it's still early, but do you guys already ahead of schedule on the $20 million synergy target?
David W. Scheible
Most of those synergy targets, as you know, were really going to be in 2014. So all we've really done so far is start some of the purchasing work and some of the headcount adjustments.
So I'd say we're slightly ahead. But again, I think the contribution for the year, we said, was only going to be $3 million or $4 million worth of synergies this year and we'll certainly do that, but that's about all we expect out of that at this point in time.
And we never break out those individual operating units or operating businesses once we acquire them. So I'll give you color on integration synergies and what we're doing, but we're not going to break out those as separate businesses, because we don't run them that way.
Matthew R. Wooten - Robert W. Baird & Co. Incorporated, Research Division
Okay. And considering that your European operations are exposed to the beverage end markets, can you provide some color as to the customer demand trends in the quarter for the past quarter and then your customer mix in the region, any impact there?
David W. Scheible
Well, I mean certainly the A&R business was predominantly a beverage business, the Contego, of course, had really a no beverage business and our historical legacy business was all beverage. In that particular case, we're exposed to what we saw in Europe.
Now most of our business with Heineken, for example, which is a large account, is really export business. Most of that business is business they do there that ends back up in the United States.
And if you saw those results, you know that Heineken struggle materially in Europe, I think it was down 7% or 8%, but their export business in the United States was actually okay. And that's the same thing we saw.
Craft beer and import business was okay. So our European business, while it's reflected that way, is actually in some ways, certainly the business we acquired, more impacted by export to the United States and Latin America, if you will, of the Heineken brand.
So it wasn't terrible. As I said in my results or in my comments, I mean, Europe is continuing to be -- it's a revenue difficult program.
They have a lot of countries with austerity programs over there. So overall, our volumes have held up okay in Europe.
But we didn't expect a big tailwind in Europe. We sort knew that we are running into a burning building when we did it, but we bought great assets at really good prices.
So ultimately, EBITDA will be driven more by integration synergies than they will any real recovery in volume, at least in 2013. I'm hoping that turns around in '14, but pretty difficult to predict that.
Operator
Your next question comes from the line of Philip Ng with Jefferies.
Philip Ng - Jefferies & Company, Inc., Research Division
The $90 million to $120 million productivity target, does that account for the drag that you're seeing in the first half? I'm sorry if I missed it.
Daniel J. Blount
Yes, it does. We're actually overachieving in the Paperboard Packaging segment.
So it does account for that. What it doesn't account for is some of the sales mix misses that we had in the Flexible business.
Philip Ng - Jefferies & Company, Inc., Research Division
Okay. And can you give me a little more color on the drag on 2Q, I mean you provided color for Q1, just wanted to get more color on Q2.
Daniel J. Blount
Well in Q2, like I said, predominantly the bulk of the price reductions that we're going to have there that are driven by deflation are going to hit in the second quarter.
David W. Scheible
Because they time out. If you think where deflation was last year, in the second quarter.
So you're -- 1 year later, it's pretty easy to sort of figure out where those things impact. So Q2 is a bigger quarter for that.
Seasonally though, we have bigger volume -- first quarter is always tough, because there's not a lot of really good underlying strength. Beverage is not that strong.
Food is not as strong. But as you move into the second and third quarter, you see different volumes.
That is a seasonally better market for us, right. And we're busy right now, so we feel good about that.
And that sort -- so we expect the productivity increases to offset the price gets back and then the price get backs, as Dan said, they go way as you get to fourth quarter because you have the reverse. If you remember towards the fourth quarter, you start to see inflationary impacts and so you see the reverse of that process.
So as you head into '14, you got the board price increases that have announced and recognized and then, of course, you've got the resulting reset bring you the contracts that are on based on costs starting to move up as you head into '14 as well.
Daniel J. Blount
So Phil, what I would recommend is, we consider the second quarter as more of a transition quarter for us. I mean, we're going to cycle through a lot of the price reductions.
There's going to be some inflation improvement at that point and we're going to continue to have productivity in the business. But based on those 2 negative factors, it's a transition quarter for us and then we look at Q3 and Q4, then we cycle through that pricing in particular, and the business starts to improve.
So we're looking at it as more of a flat quarter.
David W. Scheible
It's also hard, as Dan said, in this calls to sort of give a read on the inflation inputs as well, right. I mean, we saw not much in the first quarter.
We still -- I think we told, externally, we expect to see $50 million or so worth of inflation for the year, but it's all going to be -- we expect it to be second half, that depends upon what happens to OCC and natural gas. And I think, right now, trying to figure out what all that's going to do is a little difficult.
Philip Ng - Jefferies & Company, Inc., Research Division
Got you. And then you talked about how you're busy right now.
But how much of that is seasonal. Just want to get the sense have things picked up from demand perspective after a soft Q1 and I know Q1 had some 2 lost shipping days and just bad weather across the board.
David W. Scheible
That shipping day thing always feels like sort of a illegitimate excuse. I mean, we can run overtime and ship that stuff, if we really have the demand, so we didn't really factor that into our process.
I will tell you that the demand drivers are for Graphic have always been and we've talked about this before is, sort of the unemployment rate and consumer discretionary spending. And I can't say that the dynamics have materially changed.
I mean, those tax increases are real. Fuel prices have mitigated a little bit, but I noticed, today, in Georgia, fuel prices are up another $0.07 or $0.08 per gallon or gas is.
And so I think our consumers are being clearly impacted by that. Having said that, underlying some of these trends are good.
I mean, pizza has been good, cereal is not really -- is not bad right now, craft beer and some big beer is better. So it's really the end-use market by end-use market.
So what I would tell you is most of the volume improvement will be new product stuff. It will be the seasonality in the business, but I can't really sit here and say that I've seen any dynamics that would suggest the individual consumer feels better in Q2 than they felt in Q1.
Operator
Your next question comes from the line of Alex Ovshey with Goldman Sachs.
Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division
Some of the commentary in the new product development front is pretty exciting to hear. And I was wondering if you can help us frame the revenue size of the new product portfolio.
What kind of incremental margins do you have there and how you see that revenue pie growing over time?
David W. Scheible
Well, you and I both know, I'm not going to give by customer or by product margin stuff or otherwise we wouldn't have any. What I would tell you is that if you look at the industry -- if you look at the industry backdrop for folding cartons and food, you saw overall industry decline.
And yet with the graphic packaging, you did not. So if you sort of think about that 1% drop down and the difference between us, a lot of that's from new products.
So we're probably getting in our paperboard business about a 1% improvement on the new product activity. That's sort of what we've talked about in the past and that's really what we're seeing right now.
And that's the flow-through of the stuff that we've done in the past like Capri Sun or like the McWraps I talked about or the Panera transitions from plastic to paper and you put all that together, we get about 1% from the new product activity.
Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division
On the flexible side would be the production issues you're now experiencing, do you still think you can grow earnings and EBITDA in that segment in '13 or is that now going to be delayed until next year?
David W. Scheible
No. We are definitely going to improve our earnings in that business in 2013.
There's nobody within Graphic Packaging who is more disappointed than me with our execution in that space. We have a lot of plans or a lot of process.
For the most part, we do a really good job executing, but sometimes we don't. And in this case, we did not.
There's really no other way to say it. Our New Philadelphia converting plant did not do well and we exacerbated it by not running well in our paperboard mill.
We're making some changes in that mill to improve the fiber mix. It has a rich mix of fiber.
We used too much fiber to make the paper, certainly, versus the industry. And so we made some changes and, unfortunately, as we made those changes, we really -- we made it worse before making it better.
So we're going to continue to work that problem but I would guarantee you that margins will, in fact, improve as we go through 2013. But we have some work to do.
Fortunately, Alex, it's not across a whole bunch of sites, a whole -- it's a very concentrated issue and as I said in my remarks, we are working it vigorously, and I do think there's anybody in that business within Graphic Packaging that doesn't understand that they're lying 3.
Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division
Got it, David. I mean, thinking about the order of magnitude and the improvement would it likely be somewhat below the synergy target of $20 million, because you get that $20 million benefit and then some offset from the production issues or...
David W. Scheible
You got to remember, part of the synergy number is impacted by our ability not being able to make paper, right. So some impact, I mean, I haven't defined the entire -- I'm looking at an overall saying we need to -- the overall performance should improve.
But if we don't make paper, then we don't necessarily get the synergy impact and that's really what you saw. That's why I said, I think, it's about $8 million impact, right.
Probably about half of that was just pure operational issues and the other half of it was really sort of, we didn't get the paper and we didn't get the sales, we didn't get the coverage. So it's sort of mixed in there.
So we're going to see the improvement in the -- the synergies are there. We just need to be able to run the mill effectively.
And look, we're only talking about running the mill at historical levels, we're not even talking about materially improving the overall output. We're trying to get back to more historical levels using less fiber and energy in the overall process, which is -- this is not rocket science.
We just didn't do a good job.
Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division
Okay, I understood. And then a question for you on OCC and if you have any insight on the Green Sense initiative in China and whether that's resulting in more tonnage staying here in the U.S.
and not moving into the export markets?
David W. Scheible
Well, I mean, boy, I have no idea. I mean, I've read the same comments as you do.
There's a lot -- we don't really collect OCC and send it over to China, so I think there's probably better people to ask about that. What I would tell you is we've seen moderation on in the price of OCC even in April.
And I would tell you in April were really haven't seen increase in price of OCC. But that's about all the visibility we have.
Trying to define what's going to happen in the fourth quarter here on OCC, we're expecting it to move up and, as what Dan said, we expect natural gas and OCC to move up. That's all based on what we think the economy will do on a global basis and that's why it's a little bit hard to define what's going to happen.
Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division
And just my last question and, hopefully, an easier one, just on the CapEx front. I believe in '13 it will be meaningfully higher than '12.
Can you just talk to us if you have a sense for how to think about CapEx in '14?
Daniel J. Blount
Yes. I think what you're going to see, Alex, the items that are increasing is the investment in Europe and finishing up the biomass boiler.
I mean both of those, the investment in Europe should be completed in 2013. And I don't think there's much flow over into '14 based on what I see.
So we're thinking to go back to more of a normalized level of CapEx and that's going to be in the $180 million to $190 million range for 2014. That's where we think we're going to be.
Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division
So is the entire $40 million investment in Europe, is that on the CapEx line?
Daniel J. Blount
No, it is not. It's about half.
Half CapEx and half expense. We'll break out -- as I said, we'll breakout the expense for you because it's nonrecurring.
Operator
Your next question comes from the line of Anthony Pettinari with Citigroup.
Anthony Pettinari - Citigroup Inc, Research Division
You referenced the folding carton volumes up 8% in the quarter with acquisitions driving most of that. And apologies if you said this before, but, organically, what would've that volume growth have been?
And then with the new product pipeline and some customer wins, when you look at the full year, is there kind of an estimate you could give us in terms of what kind of year-over-year volume growth is realistic or achievable?
Daniel J. Blount
Well, that's a long question, right? What I would say is that organic folding carton volumes for Graphic in the quarter were about, in the United States, were flat.
So new -- I think the market was down 1% or 2%. We were about flat, new products made up a good portion of that and then we had some better mix performance overall.
The reason it's really hard to estimate is because the biggest drag on folding carton volumes in the quarter were in the beverage business, right. And so it's a little hard to figure out how much of that was truly weather and how much that will really change.
I mean if you look at our customers and their forwards, they believe that there will be an improvement, certainly in organic -- certainly beer and they don't expect neither -- I'm sure, neither Coke nor Pepsi expect soft drink to be down 4% or 5% as it was in the first quarter. So I mean, I think, we'll see a more normalized level back at that.
Our projections, I think, we said for the year is that we kind of felt the market will be flat overall and that's organically, and I didn't see any reason to suggest otherwise at this point in time. I'd love to see a little bit better recovery, but I think we're going to need to get more people back to work, I think, to see a structural change, if you will, in organic demand.
Anthony Pettinari - Citigroup Inc, Research Division
Okay and then from your comments earlier, maybe you get 1 point on top of that with new products and customer wins, is that fair?
David W. Scheible
That's kind of the way that, that thing works.
Anthony Pettinari - Citigroup Inc, Research Division
Okay, that's helpful. And then maybe switching gears to flexible packaging.
You referenced some of the issues at Pine Bluff and you called out an $8 million impact on the quarter. Assuming that there's still work going on in April and that work is successful, do you have kind of estimate in terms of what that impact would be in the second quarter versus running very smoothly?
David W. Scheible
We have not -- I have done not done that math specifically. What I think Dan talked about overall is that we should be at the upper end of our performance targets and that includes all in, including whatever recovery we have in the flexible business for the year.
And that's probably the best way to look at it, that I think we'll continue to outperform in paperboard. We're going to struggle a little bit in the quarter.
It's not as if it's going to turn itself around in 30 days. So we'll have some second quarter impact.
But I don't think it makes sense to sort of try and model that individual thing because it's just not -- it's not going to be that significant.
Operator
Your next question comes from the line of Joe Stivaletti with Goldman Sachs.
Joseph Stivaletti - Goldman Sachs Group Inc., Research Division
A few things. One was, could you maybe update us on your sales in Japan and sort of how that -- what the outlook there is?
David W. Scheible
Well, as you know, Dan mentioned in his script that for first time we thought we saw a negative FX impact and that was predominantly in Asia. I think that Dan said like $4 million of FX in the quarter, something like that.
Daniel J. Blount
That was the impact in the quarter, right.
David W. Scheible
And that's mostly the yen. So we have, certainly, on the top line, had that impact.
That doesn't really necessarily affect the EBITDA significantly, but the top line. Overall, our Japan business is pretty consistent.
I will tell you, we saw -- certainly, saw a slowdown in our China business. Now, China is hard for me to say -- it's hard for me to talk about, because we think a lot of other people in this space.
They have huge exposures to China. Ours is pretty small.
But even saying that, we certainly saw a slowdown in machinery placements. We saw a slowdown in customer demand for cartons.
It's clear that some of our Chinese customers are beginning to recalibrate for what is -- what appears to be, at least in the segments that we're in, a little bit lower demand profile than they expected. A couple of the dairies are delaying their expansions or pushing them out, if you will.
So we did see some of that in China. But Japan was not materially impacted.
Joseph Stivaletti - Goldman Sachs Group Inc., Research Division
Okay. You also -- you mentioned the possibility for future acquisitions.
I wondered if you could just update us there in terms of what your main priorities would be when you think about acquisitions and if you think that anything's imminent.
David W. Scheible
Well, as you know I couldn't -- even if we had something imminent, I couldn't talk about it. What I would tell you is our focus and direction, strategically, is to expand -- is to continue to make legitimate carton acquisitions for the most part and with some geographical bend.
We're pretty well covered in North America. There are a couple of places where we might make a move in North America, in U.S., but we feel -- but we feel pretty good about our converting network here.
Certainty, we talk and, recently, we made the acquisition, because our converting network in Europe really wasn't that good. And there are other parts in Latin America that we're in or participate, but we don't have a robust converting system.
So over time, that would be our expectation to do as well. But again, I want to be clear, these are relatively small bolt-on acquisitions.
Strategically, they make sense, they allow us to absorb the excess creep capacity we get in our paperboard mill. But they are -- they're in this $80 million to $100 million sort of range in the process.
Dan will look at maybe because he wants to make sure we sort of keep in that debt-to-EBITDA ratio and continue to pay down our debt. So it's going to be around those kinds of strategic alternative.
And I never really know when a carton business is going to come up. They tend to be pretty small.
A lot of them are privately owned. It's not as well known.
When it's going -- when it does, we will be active.
Joseph Stivaletti - Goldman Sachs Group Inc., Research Division
Okay. And then the last question I had was, just to get your perspective.
When you talk about, in your release, about flexible packaging and you talked about continued weakness in areas, some of the demand drivers. You talked about continued weakness in areas like construction and -- I guess, I was wondering if you could put that in perspective, because obviously from a bigger picture perspective, we're seeing quite a recovery in housing and whatnot and I wondered if you could just talk about, is it just the nature of your particular product mix in the construction space or...
David W. Scheible
Well, as you know, a lot of improvement in construction right now is not in single home, it's a multi-dwelling and we're making with multi-wall bags that end up in concrete and they tend to be smaller job-related stuff, not the big booms that come in and dump millions of tons of concrete. So that particular part of the sector is still pretty soft.
And it's improving. But if you listen to Home Depot and Lowe's reports as I do, they'll say that part -- that sector is still has a ways to go to get to where they like to see it.
So I think maybe that's a long answer and, say, it's -- a lot of it had to do with mix but it's not a rising-tide-lifting-all-boats sort of plan.
Operator
Your next question comes from the line of George Staphos with Bank of America.
David W. Scheible
George, are you sharing your line with [indiscernible]? I assume the lines are working operator, right.
Operator
Yes, the lines are working. It looks like Mr.
Staphos took his question back. There are no further questions at this time.
Do you have any...
David W. Scheible
We thank you for your participation. We'll talk to you in a quarter.
Operator
This concludes today's conference call. You may now disconnect.