Bradford G. Ankerholz - Vice President and Treasurer David W.

Scheible - Chairman, Chief Executive Officer and President Daniel J. Blount - Chief Financial Officer and Senior Vice President

Philip Ng - Jefferies LLC, Research Division Alex Ovshey - Goldman Sachs Group Inc., Research Division Mehul M. Dalia - Robert W.

Baird & Co. Incorporated, Research Division Ketan Mamtora - Deutsche Bank AG, Research Division George L.

Staphos - BofA Merrill Lynch, Research Division Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

Thank you, Regina, and welcome, everybody, to the Graphic Packaging Holding Company's fourth quarter and full-year 2013 earnings call. Commenting on the results this morning are David Scheible, the company's Chairman, President, and CEO; and Dan Blount, our Senior Vice President and Chief Financial Officer.

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 our Investor Relations section of our website, which is graphicpkg.com. I would like to remind everyone that statements of our expectations, plans, estimates and beliefs regarding future performance and events constitute forward-looking statements.

Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the company's periodic filings with the Securities and Exchange Commission.

Undue reliance should not be placed on forward-looking statements, as such statements speak only as of the date on which they are made, and the company undertakes no obligation to update such statements. David, I'll turn it over to you now.

Thanks, Brad. Good morning, everyone.

We had a busy quarter including integration activities, business divestitures, stock repurchases and fighting some difficult consumer trends. So overall, I'm very pleased that our fourth quarter earnings and cash flow were in line with our expectations.

Both volume and sales in our core Paperboard Packaging segment increased in the quarter, with volumes up 2.3% and sales up 7.2%. Adjusted EBITDA increased 5.4% to over $158 million.

And margins at 14.7% were up 0.4 points from the same period last year. We did not see a significant change to the terms in our core end markets in the quarter.

And we continue to drive volumes and margins higher through a strategy focused on new products, acquisitions and productivity initiatives. We've been very strategic in the way we are building this business.

Graphic Packaging is designed to deliver long-term sustainable growth in both good and bad operating environments. Volume trends in many of our core markets have remained challenging for several years now, and there's no way to predict when or if those markets may improve.

We are certainly not unique in struggling to anticipate new consumer trends in this environment, but we cannot wait around for a pickup in demand. Rather, it's our job to find a way to continue to grow this business and gain market share even in a flat to down volume backdrop.

And that's exactly what we have done through a balanced strategic approach by investing in our core food and beverage business, developing new innovative products and making tuck-under acquisitions. And of course, Graphic Packaging always is working to improve the productivity across the operation.

We're committed to investing in our core food and beverage business globally. One way to do this is by developing new and innovative solutions to help our customers differentiate their products and lower their supply chain costs.

This year, new products for sales were up almost $100 million. Supporting this growth during Q4, we launched a new strength-package container for mandarin oranges and other fresh fruit.

The new package provides a secure way to transport fruit from the grocer to the retailer and provides a superior branding opportunity versus traditional mesh produce bags. We also commercialized 2 brand-new Z-Flute cartons and a large Litho-Flute box that were specifically designed to withstand the unique palletizing and display demands of the warehouse club channel.

Tite-Pak, which is our new proprietary beer bottle carton, continues to gain traction in the market. We launched new Tite-Pak cartons for MillerCoors and ABI in the fourth quarter.

Tite-Pak solidifies our existing share in the solid fiber category and delivers a competitive advantage over other fiber alternatives. We are excited by the long-term potential of Tite-Pak globally and continue to see ongoing interest everywhere.

Frozen pizza, cereal, dry food, beer, carbonated soft drinks, you all know these are all big markets and they're important and new segments for us. The trends in many of these markets have been flat to down for a couple of years now.

So in addition to launching new products, we're driving healthy results by optimizing our asset structure. We're driving down our costs and we're improving our productivity.

A good example of this in 2013 was the investment we made in our Kalamazoo recycle board mill. Specifically, we invested $40 million to upgrade the Kalamazoo paper machine #1 coating application to a state-of-the-art system.

This upgrade will replace the traditional air-knife coater with a new curtain coater, allowing the new mill to reduce the waste, it will use a lot less TiO2 and it will improve the throughput. We had extensive R&D work that was completed in the mill process and exhaustive printing and press trials have been successfully run throughout our conversion network in preparation for this conversion.

The mill will transition to this coating technology in Q1 2014. We're committed to core food and beverage markets and our focus on investing more resources in subsectors of the markets that we're growing volumes.

These areas include things like microwave, craft beer, dry foods and pasta, and, from a channel perspective, the warehouse club stores. We invested in each of these areas in 2013 and saw significant growth in those categories.

For example, on our Wausau converting plant, we invested almost $10 million in a new production line to boost the capacity and improve productivity for our proprietary microwave products. We've seen significant growth in the microwave business, and we continue to be an industry leader in this category.

Most of the new capacity in our Wausau facility is focused on frozen foods, particularly on the lower-calorie offerings. We're also focused on making strategic tuck-in acquisitions.

We successfully integrated the Contego Packaging and A&R beverage packing businesses that we purchased last year and created a platform for continued growth and market share gains in Europe. Europe's become a very meaningful part of our business, and we like the underlying fundamentals of that market.

These are very large and mature end markets that are supported by strong consumer demographics. But the carton industry is very fragmented, which provides an opportunity for us to differentiate ourselves.

Look, we know how to drive volumes and productivity rates in mature markets and believe that there's a meaningful opportunity in Europe to do just that over time. Finally, we are focused on divesting our non-core businesses and freeing up capital to reinvest in our core businesses or, of course, to pay down debt.

Earlier this week, we closed on the sale of our Labels business to Multi-Color Corporation, which included 2 plants located in Greensboro, North Carolina and Norwood, Ohio. During the third quarter of 2013, we sold our Pekin, Illinois URB mill and completed the sale of our flexible retail plastics business to Berry Plastics.

The sale of our plastics business included 3 different facilities, and we also closed our Brampton, Ontario, Canada facility in early October. Labels, URB, plastics were not key businesses for us, and the exit from these businesses frees up capital, management time and allows us to better focus on the core vertically integrated business that is key to us.

Let's talk a little bit about the folding carton business. Our global folding carton business increased 2.7% in the fourth quarter and was driven predominantly by our recent European acquisitions.

This was partially offset by continued softness in our legacy U.S. beverage and consumer products folding carton markets.

Turns on the beverage side were mixed in the quarter. Carbonated soft drink demand remained weak.

And while we have seen some improvement trends in 2014, we are not going to suggest this market is ready to improve materially. The Can Manufacturing Institute (sic) [Can Manufacturers Institute] estimated that industry volumes across the canned beverage markets decreased 3.9% in the fourth quarter, with nonalcoholic beverages down 5.7% and alcoholic beverages down only about 0.4%.

We've had a number of new-product commercializations that have helped our overall volumes in CSD, but the underlying trends remain relatively unchanged in that sector. Beer, of course, different story.

We began to see beer trends improve late in third quarter, and that trend generally held through the fourth quarter. The Kraft beer sector, which is one of our strategic areas where we continue to invest and develop, remained strong in the fourth quarter.

We also saw modest improvements in the take-home side of the beer business as the quarter progressed. Beer packaging in Europe grew in Q4 for Graphic Packaging as well.

These are all positive trends for our beer business on a global basis. Trends in some of our core food end markets such as cereal, frozen food and dry foods remained relatively weak in the fourth quarter.

A.C. Nielsen reported that cereal was down about 3%, prepared frozen food is down about 2% and overall dry foods' down about 1%, maybe a little less.

A slow employment recovery, the recent curtailment of the SNAP food stamp program and some de-stocking by major retailers all continued to weigh on the food markets in the fourth quarter. Many of you know the government cut back its SNAP food stamp program on November 1 of last year.

The cuts amounted to a roughly 5.5% to 6% reduction in monthly benefits to an individual family under the program. While it's still really early, we know this had a negative impact on the low income and consumer in the fourth quarter.

And this is just one more factor pressuring the sector -- this sector of the food market. Our Flexible Packaging business remains a work in progress.

I really thought we would have made more progress in this business by now, but it remains a challenge. A lot of it has been market-related, particularly in multi-wall bag.

But some of our issues are of our own making, and we need to address both elements in 2014. The sale of our plastics business and Label business, of course, reduced the overall significance to Graphic Packaging of this business, and allows us to focus resources on a smaller footprint to improve the results.

Fortunately, we don't really need to make big capital and investments to grow or improve these operations. While margins remain modestly likely more in the high single-digit to low double, the business will generate positive cash flow and a reasonable return on capital.

In the latter half of 2013, we did implement several cost structure projects, and we have just now started to see some benefits. New equipment and other changes to the Pine Bluff mill have begun to improve profitability.

We are also starting to gain some traction with initiatives in our converting facility in New Philadelphia, Ohio. However, the underlying volume trends in this business remain challenging.

And as a result, our turnaround progress has been somewhat slower than we would have expected. Additionally, while we have seen pricing improvement across all other paper grades during 2013, we did not miss business despite higher fiber energy and chemical costs.

Accordingly, we announced yesterday a $50-a-ton price increase on kraft paper grades effective in March. Like I said, we're a work in progress, but I'm optimistic we will improve markedly in 2014.

Overall in performance, we had another strong quarter, and we generated about $25 million of performance improvements across the business in the quarter, which brought our total in 2013 to roughly $100 million. Biomass boiler in Macon, Georgia mill was operational throughout the quarter, and this was the second quarter we generated our own energy in the facility.

And we continue to estimate the savings in energy to be around $20 million per year. In relation to this project, we had expected to receive an approximate $25 million government grant before the year end, but we're still waiting on this.

Various factors beyond our control have delayed the grant. And we now expect to receive this during the first half of 2014.

Looking at our European business. In September, we completed the consolidation of the Gillingham, U.K.

converting plant into our other lower-cost facilities. The integration of Contego Packaging and A&R beverage packaging business in Europe continues to drive cost savings.

And we remain very comfortable with the $16 million to $18 million synergy target we provided you that we will realize in 2014. Look, we're very pleased with the performance of our European business overall.

We're ahead of our own expectations in building our platform in the region. Europe has become a meaningful strategic business for us, and we believe there are significant opportunities to continue to build and grow this business long term.

Now look at our paperboard mills, we had a good quarter, just like all 2013. Both total production and tons per day increased, demand for our CRB and SUS remains strong, backlogs are in that 3- to 4-week for both grades.

The increase in production was driven by our continuous improvement efforts in energy, operating efficiencies and fixed costs. We look for -- we took no down -- unplanned downtime in the quarter, and we came out of our planned annual outages better than the previous year.

Pricing turned positive in the fourth quarter, as we generated $4.3 million of positive pricing benefits. This reverses a trend through the first 3 quarters of 2013, where pricing climbed by nearly $26 million.

The increase in the fourth quarter was slightly ahead of our projections, and I think it positions us well moving into 2014. You'll remember that prices for both SUS and CRB have increased significantly over the past year, reflecting strong demand and healthy lead times for both substrates.

Since the beginning of 2013, SUS pricing has increased by approximately $85 a ton and CRB roughly $75 a ton. These increases should benefit our open market board sales and carton contracts containing board escalators in 2014.

The majority of our carton contracts have mechanisms that allow prices to move up or down with changes in certain inflationary items. No 2 carton contracts are the same, but contract pricing generally adjusts on a 9-month basis.

So we expect pricing to remain positive throughout 2014. If I look at commodity input pricing, it was relatively stable on a sequential basis compared to last quarter.

Looking at the fourth quarter this year versus the quarter last year, commodity input inflation increased by approximately $16 million. Energy, no surprise, led by natural gas, was once again the biggest commodity inflation item, increasing $7 million in the quarter.

Secondary fiber were up modestly in the quarter by roughly $3 million. Nothing else was material in and of itself.

Increases in the cost of external board, corrugated boxes, freight and resins were the other drivers, but none of them, as I said, were significant. Looking forward, we delivered another solid quarter in what remains to be a challenging operating environment.

We drove volume increases to maintain high operating margins through strong operational performance. We also continue to invest in the future, optimize our assets around our customer needs.

We do not expect some end markets will be more -- we do expect some end markets will be more challenged than others, but we are continuously finding ways to gain share and expand our addressable market. Looking ahead, we expect pricing to remain positive in 2014.

We expect to continue to find high-quality acquisitions globally, and believe we are well positioned to gain share and grow our top line, EBITDA and cash flow. And with that, I'll turn it over to Dan for a more detailed discussion of our financial results and initial outlook for 2014.

Dan?

Yes. Thanks, David, and good morning, everyone.

To assist with our review, I will refer to our posted presentation. Let's begin on Slide 11 with the financial highlights.

Overall, both Q4 and full-year results show solid gains. In our discussion this morning, we will cover the reasons for our improvement.

But as I reflect on 2013, I think our work in 3 areas stands out. This work clearly benefited us this year, but also positions us well heading into 2014.

One, we wrung another $100 million of cost out of the business through productivity improvements. Our cost structure is in good shape.

And in 2014, we should build upon this work to improve margins further. Two, through acquisitions built a large-scale, well-capitalized European business that drove revenue growth.

Going forward, Europe provides a strong platform for further growth and margin improvement. And then three, upgraded our capital structure, lower-cost debt and ample liquidity, more than adequate resources to fund capital and expansion needs going forward.

It was a good, solid year of accomplishment. Now let's get into more detail by focusing on the Q4 numbers on Slide 11.

Adjusted EBITDA, up 5.4% to $158 million, as the margin improved to 14.7%. Adjusted net income increased $25 million to over $58 million.

Adjusted earnings per share for the quarter at $0.17, and double the $0.08 we reported last year. Before turning to the full-year numbers, there are 2 tax items to discuss.

First, we had an income tax benefit of $3.5 million for the quarter. This benefit principally relates to recent guidance from the IRS relating to the taxability of the black liquor tax credit.

When we recorded the credit back in 2009, it was net of income tax. Updated guidance released in October now concludes that the credit is not subject to federal income tax.

Recording this reversal is the principal reason our full year 2013 income tax rate dropped to 32%. With our growth in international markets, we expect our effective tax rate to be in the 38% range for 2014.

The second point on taxes, as David mentioned, is that due to government delays, we have not yet received the tax grants related to the Macon biomass boiler. We have noted that other companies applying for similar renewable energy grants have also experienced delays.

We are tracking the status of the government review process and do not anticipate any issues with our tax grant application. We expect the full $25 million refund within the next 3 to 5 months.

As a reminder, the tax grant will not be recorded through the P&L as an offset to income tax expense, rather as a balance sheet adjustment to reduce the investment in the biomass boiler. Now let's focus on the full-year numbers, we're still on Slide 11.

EBITDA was up 3.5% to over $670 million, as the margin improved to 15% for the year. Adjusted earnings per share grew from $0.37 to $0.52.

Now, as is our normal practice, we adjusted EBITDA and net income for specific nonrecurring items, divestitures, post-acquisition integration, capital structure expenses. During the quarter, we incurred $18 million of nonrecurring charges.

$2 million relates to costs associated with recent business divestitures and the secondary offering. The bulk of it, $16 million, relates to the final, and I do repeat, final charges related to our European integration activities.

In 2014, we expect European results to improve by $16 million to $18 million as a result of acquisition integration investments. Now let's move to Slide 12, the Q4 sales bridge.

You see a 2%, or $22 million, increase over the prior year. David described that the increase principally results from the European acquisitions offset by weakness in beverage and certain consumer products categories, as well as the reduction of revenues related to the divestitures of the retail plastics business and the URB mill.

Price did turn positive in the quarter, and we expect price to remain positive in 2014 as we recover 2013 inflation. In terms of the business divestitures, the quarter-over-quarter sales reduction resulted from these exited businesses was approximately $33 million.

On Slide 13, the Q4 EBITDA bridge, you see that gains from price, operating performance and European volume growth more than offset inflation and currency headwinds. EBITDA grew by $8.1 million year-over-year.

EBITDA margin for the quarter, up 40 basis points to what we -- like we said, 14.7%. Taking a closer look at commodity inflation, we experienced a $16 million increase.

As David pointed out, energy, driven by rising natural gas pricing, accounted for nearly half of the increase. Due to unusually cold weather, natural gas prices have continued to rise.

For those of you familiar with our risk mitigation practices, you know that we run an active natural gas hedging program to reduce exposure to price volatility. For the first half of 2014, we locked in 60% of our expected need at approximately $4 per MMBtu.

We also have nearly 50% coverage on the remainder of the year at just over $4 per MMBtu. With the -- now moving to performance improvements.

David detailed the drivers of our $100 million of productivity improvement. We continue to have a strong pipeline of continuous improvement projects.

And when combined with synergies from our European integration and benefits from our new Macon biomass boiler, we expect to see 2014 net performance benefits in the range of $70 million to $90 million. And then lastly, in terms of divestitures, the quarter-over-quarter EBITDA reduction resulting from business exits approximated $3 million.

Now summarizing the year. EBITDA grew $23 million as we cycled through downward price resets of $22 million related to 2012 deflation, and offset $52 million of inflation by delivering $100 million of performance improvement and by growing volumes through the European acquisitions.

Now let's turn to Slide 14. You'll find our cash flow, debt and liquidity summary.

Cash flow for 2013 was strong, as net cash from operations totaled $458 million. Including divestiture proceeds and net of CapEx, we generated $280 million of free cash flow.

We used $200 million of cash resources to return value to shareholders with a share repurchase. This repurchase action at a price of $8.38 per share is 7% EPS accretive.

Including the $300 million repurchase in December 2012 at $6.10 per share, over the last 13 months, we have repurchased $500 million in shares, that on a combined basis, is 18% EPS accretive. For the year, our leverage ratio improved to 3.3x and we have ample liquidity of over $680 million.

We continue to target the 2.5x to 3x leverage ratio range, but we'll, as communicated before, venture outside this range to fund accretive acquisitions or other high-return investments. Our current expectation for 2014 is to reduce leverage back within our target range.

Now turning to the last slide, you see our guidance for 2014. Let me start with a couple of comments about our success with divesting non-core businesses and freeing up capital to invest in higher-margin core businesses or pay down debt.

In 2013, you saw, as we've commented, that we sold our URB mill and our flexible retail plastics. Plus, earlier this week, our Labels business was sold.

We have no further plans for divestitures as our remaining business portfolio consists of core, vertically integrated packaging businesses. The combined proceeds from the business sales totaled approximately $150 million.

The last 12-month LTM revenue and EBITDA from the divestitures totaled approximately $200 million and $21 million, respectively. Now looking forward into 2014, as we focus on our core vertically integrated businesses, we expect continued improvement in financial performance.

We have cycled through the downward price resets. Price will continue to be positive as contracts resets to reflect CRB, CUK and other commodity increases.

With a more manageable price-cost spread, a greater portion of our improvement initiatives will flow to the bottom line. Our backlog of performance improvements is strong and should produce $70 million to $90 million of benefit, including strong contributions from our 2013 investments in our mills in Europe.

Additionally, we expect free cash flow to grow beyond EBITDA improvement into the $350 million range as CapEx requirements will be reduced due to the completion of major projects in 2013, receipt of the biomass tax grant and drop in interest expense as we benefit from recent refinancings. Please note that this cash target represents cash generated from operations.

The proceeds from the recent sale of the Labels business is accretive. Now the remainder of our guidance is listed on this slide.

If you have any questions, we can address them during the question-and-answer session. And with those comments, I will turn the call back to the operator.

Thank you.

Just a quick question. I noticed the productivity savings looks a little light relative to what you guys were talking about last quarter.

Are you guys stripping out some synergy numbers or this a function of Flexible not performing as well as you had expected?

I think, Phil, I think you'll find that those productivity numbers, the $100 million, was pretty much right on what we said in terms of the range we gave you.

They're not so much 2013, I'm talking more on 2014.

Oh, 2014? Oh, just a sharpening our pencil as we go through our planning exercise.

I think you have to remember, we've always told you that when we give you the guidance, it's backed up by individual projects. So as we get through the end of the year and we sit down with each one of the operating businesses, then we hone in on those individual targets.

So we'll give you a broader range, but you shouldn't have more confidence around the numbers we're providing now because they're tied to individual projects in the forwards. The other thing that happens, too, is you have to remember that a lot of our productivity improvement includes -- it has an overall assumption of what we think volume is going to do on individual segments.

So as some of the volume on a go-forward basis gets -- is less certain, then we dial back a little bit, because we need the throughput to be able to get it. So what I would tell you is that it's an ongoing balancing act, but I feel pretty good about the targets that we provided right now.

Got you. And in terms of your Paperboard segment, I mean, performance has been quite strong in light of a challenging demand backdrop and a negative price-cost spread in 2013.

So when you think about 2014, with price, some of the cost take-out initiatives you have in place and with synergies kicking in, should we expect margins to step up a bit here in this business? I know nat gas prices have ticked up a bit, but you guys do seem to be nicely hedged here.

Yes, I mean, I think for the math to work, the margins really have to improve. And that's certainly our expectations as well.

I mean, I'm not going to give margins guidance, but if you're asking me are they going to go up, yes, they will. You accurately pointed out, we're still going to get volume and price contribution here and in Europe.

The programs like I talked about in Kalamazoo are there to support the things that we did last year. In Macon, we spent $200 million in CapEx last year and half of that, at least half of that was on pure cost-reduction activity.

So yes, I feel pretty good about the cost-reduction activities, the volume if it holds. We would expect margin expansion.

And you and I have talked about this before. It's a big fixed cost business.

So a little bit of volume improvement drops directly to the bottom line. Right now, we're being conservative about our looks in volume and price, but I would expect margins to move up.

Got you. And I guess just on that last piece, on the volume front, I know demand has been a little choppy.

You seem to be a little more upbeat on share gains and beer, but food and CSDs are still a little weak. What's your outlook for volumes for 2014?

I've almost got to get out of the business of predicting it because I don't think I've been very good at it. What I will tell you is that our volume right now is pretty good.

Our backlogs are strong. Now these storms in the Midwest sort of don't affect our volumes, but they'd affect our ability to run our plants.

I can't get trucks in and out of my facilities. So right now, I'm much more concerned about getting this stuff delivered than I am having orders to make.

But overall, I would tell you I don't expect carbonated soft drink trends to get materially better. I think beer is continuing to improve and that's exactly what we're seeing.

And I think the others will sort of be flat versus what we saw in 2013. At least that's our current projections.

Europe is a good market for us right now. Backlog sales in Europe look pretty good.

So overall, I am optimistic in at least the way we built our model and expectations around the volume we put in.

Is weather going to be a big headwind for you in Q1? I know a few of the companies down in the Southeast have flagged that.

Is it just more of a one-off? Is it pretty manageable or is it going to be a big hit in Q1?

It's always -- weather, you can't use weather as an excuse. What I would tell you is we'll drive some -- we'll have some incremental costs in trying to get our stuff moved around.

We'll have -- freight costs will be a little different because we're trying to meet customer needs. And we can't -- look, right now, if you're trying to get a big truck in and out of our Illinois or Wisconsin facilities, you've got, as you would like to call, a headwind, and they're 50 miles an hour in your face.

So the fact of the matter is they will have some costs, but it's not going to have a material effect on Q1, certainly not on 2014.

Dave and Dan, a couple of questions. I think on the last quarter's conference call presentation, you talked about a pricing number for 2014.

I think it was in the $30 million to $35 million range. Correct me if that's not exactly right.

And I think you talked about the fourth quarter being a little bit better for you in 2013. Do you have an updated pricing number to share with us for 2014?

Yes, I think what I said was I thought we'd be in the $30 million to $40 million range for 2014. Certainly, we're going to be more on the upper end of that range as you look at it right now.

But a lot of the folks in the space do a linear math, and they'll say, "Well, you're just selling so many thousand tons. You multiply it times your price increase.

You're going to get $70 million worth of pricing and lock it in." But the fact of the matter is that's not really the way that business works.

The reason it doesn't work that way is 2. One is that makes sort of assumption on volume in those end-use sectors.

And as you can see, the volume is softer. I'm not going to get a lot of pricing.

Even though I have price increase contracts in CSD this year, I'm not going to get all of that pricing on a per ton basis because they're not going to take the tons necessarily relative to year-on-year. So I lose a little price on that side.

The second side of that deal is that when we have these contract resets, and this is important to us, is that this year, we'll have $700 million worth of contract resets. We do a couple of things.

One, of course, we take our pricing in that contract. But the second thing we do is we look at the individual parts of that contract, and there are pieces of that business that we like and there are pieces of that business that we don't.

And we will trade off with customers those pieces that don't make sense for us. Maybe we'll trade off an SBS application for an SUS application.

You won't see that in price, but where you will see that is in productivity because that will allow us to have better throughput in our mills. So when we think about how we actually manifest that stuff into our portfolio on a long-term basis, it's taking those contracts when they reset and get the business that makes it stickier, that really we're the people that those customers should be doing that business with so we don't get into all this bid-ask stuff every time a contractor -- and so we'll spend a little bit of pricing money to do that because I pick it up on the productivity side of the equation getting it.

And that's why you don't do a linear thing. We're building the model for a long term, not for individual quarter cyclicality.

So when I tell you it's $30 million to $40 million, is that going to be in the upper side? Yes.

Could it be a little higher? Sure.

But is it a linear process of you make this many tons times this? No, that's not the way Graphic Packaging is built and never has been.

Appreciate that color, Dave. And just thinking about the input cost just for the raw materials side, taking into account where gas price is, whatever your base case for OCC and other important input costs, how do you see your raw material inflation for 2014?

Obviously realizing that there's investment -- that much visibility into that question, but how do you guys see it as we stand today?

I think we saw in '13, Dan, around $40 million roughly, mas o menos. $40 million of inflation.

I think that's probably a pretty good number for 2014. And you know what, you're absolutely right.

It's going to be driven right now in our models predominantly by energy. You all know -- you track this as close as I do, but secondary fiber forecast for the first quarter are kind of flat.

So we're not going to see a tremendous amount of movement on OCC during that period of time. We have seen some paperboard increases out there.

I think the SBS guys are -- have announced a $50 a ton, and we buy a fair amount of SBS. So we'll have to see that flowing through the P&L as well.

That comes in inflation, but then, of course, we raise the price on the backside. So I'm thinking, Dan, $35 million to $40 million is about -- is a good number.

And, Alex, just to remind you, that that's our input cost inflation. And in addition, we have employment inflation as well.

And that will be somewhere in that $25 million to $30 million range incrementals on top of that number.

Got it, okay, I appreciate that. And just one last one from me.

On the Flexible segment or maybe that segment will be renamed here, Dan, you gave a sort of the pro forma numbers of revenues and EBITDA of what was divested. Maybe the other way to ask the question is can you just sort of tell us pro forma what's left for that segment, sales and EBITDA, and what the plan is to try to improve that number for '14 is?

Yes, I think you're going to see a revenue number somewhere in that $400 million to $450 million range in that business currently as it's structured. And part of what we do in that business, we sell to ourselves.

So if you look at, versus the prior year, some of that is going to be due to selling the output out of the mill into those bag converting plants.

I talked to you about the productivity improvements. We have a couple of things.

One, I think the issues that we had in the paperboard mill in 2013 are behind us. We made some investments in that to improve.

We had, I told you earlier last year, we had a fiber yield problem in that mill, which required us to change -- do some work on the head box, which we have -- we completed in September -- August, September. So we're starting to see every month good productivity and improvement out of the mill, so the focus really ends up being in the converting side of that business.

We're certainly seeing progress in the cost per bag. I think the hard thing figuring out in that business, though, is what the volume trends are doing because for us to get the productivity, we need to see a throughput on bags.

And, quite frankly, that market has really struggled relative to volume and really inconsistent, wide variability. And it is a much -- it is incredible.

That business is much more impacted by weather because if you think about it, it's feed and seed, it's salt, it's chemicals, it's construction, cement and the weather has not really been favorable over a long period of time for that business. So in some ways, it has been, using a very tired vernacular, like trying to catch a dropping knife.

So we're going to make a huge progress in 2014. But I told you in my script, I was expecting us to be further along in improving this business than we are right now.

It's actually Mehul Dalia sitting in for Ghansham. How should we think about the progression of price costs on a quarterly basis in 2014 based on what you know now?

Well, I haven't done quarterly. We haven't done quarterly.

We'll see a lot of it start in the first quarter because the contracts reset. The fact of the matter is, we won't -- in many of these contracts, we see the pricing in the contracts go up when it gets to its annual date.

And so some of those contracts started in the fourth quarter, which is why we got $4.3 million above that. And then some of them will start throughout the -- will go throughout the year.

I can't give you individual quarterly because I just don't have it at my fingertips. Like I said, the run rate in the fourth quarter will certainly be above $40 million, there's no question about that, because what I'm giving you on $30 million to $40 million is what we will get in 2014.

So the run rate will definitely be higher by the end of the year.

Yes, one thing you want to think about is there's some cyclicality to our business. So when you're applying the assumption for price increase, you should consider that for -- on a quarterly-by-quarterly basis.

There'll be more price flowing in, in the months where we have higher sales volumes. And I think that's a good technique to use.

Yes, I mean, you guys have not had this conversation before. I really don't kind of really worry about the individual quarterly detail that you guys are worried about on when pricing hits.

What I'm trying to run the company for is a long term. Anybody who's buying or selling on the quarterly ups-and-downs should buy somebody else's stock.

So what I would tell you is that overall, we're going to increase the improvement of this business by the things running through quarterly changes in pricing or not. We don't track it that closely here.

We certainly don't -- we don't provide that information.

Can you provide us an update on your M&A pipeline? Is acquisitions a priority for Graphic in 2014?

It will continue to be a priority for Graphic beyond 2014. As we said in the call, we really have a couple of -- we have some segments in the business that struggle from a volume standpoint.

And so for us to continue to grow the business, we're going to do 2 things, one is new innovative products and the second is acquisitions. And we're going to continue to globally look for opportunities to Graphic Packaging.

And yes, 2014 is like every other year. We expect to be able to make strategic acquisitions this year.

It just sounds to me that you seem quite optimistic about the European business. Can you just talk about the kind of opportunities you are seeing there and as you go along if this provides more bolt-on opportunities there?

Sure. I mean, if you think a little bit about our European business, even the beverage business, for example, the beverage business in Europe is almost exclusively beer-based.

There's really not much paperboard that goes in soft drink. So whatever secular decline that is occurring in soft drink here in the United States is -- we don't see in Europe.

And so as I said, beer was solid in this country. Beer is growing in Europe as well.

And so with the acquisition of A&R, that made us a big player. It gave us a solid position in Heineken.

We already had a big position in AB. We've got opportunity at Beck's across the board.

So there's some great opportunities with Graphic Packaging in the beer side. On the food side, we were literally not -- we're not in the food business materially.

We just did not have the right assets. And part of it was physical assets, but we didn't have the right management team for that either.

So what we've really acquired in Europe is both the physical assets, the customer share and the right management team for it. So we have seen great success.

Guys like General Mills and Kellogg's and Kraft, those are global customers. And we're doing business now on both of those continents.

And some of that innovation activity is translated. So as I look across Europe in a very fractionated folding carton market, there's great opportunities for us to add really high-quality assets, both physical as well as people.

And that's what we're doing. So I'm optimistic about Europe because I think the kind of things that we've done here, we can successfully do in Europe.

And we've got years and years of runway there because of the fractionated basis -- the fractionated structure of that market versus the United States, which, as you know, has become a pretty consolidated space in the paperboard side.

Right. And then just switching gears to Flexible.

I mean, obviously, you mentioned that margin has not improved as you would've liked. But can you just talk about which end markets are you seeing the most weakness in, I mean outside of the weather issues that you had?

Well, I think the most variable has actually been the feed and seed side of the equation. That's been a pretty consistent growth market historically.

But I will tell you that if you're talking to farmers, ranchers, they'll just tell you it's been very, very difficult 18 months to figure out what's going on and that has definitely affected that business. A good part of our business, probably 20% of our portfolio, is in cement bags.

And it seems like the construction market is just a stop and start. It's housing starts look like we're moving, and all of a sudden they stop again.

And so it's been sort of a very inconsistent demand. That has also contributed to our performance issues because our product line mix in that business shifts around materially more than it has in our folding carton business.

So it's a little difficult on the converting side to get a consistent, improved performance because your viability around your mix changes materially versus a plant running cereal or pizza or consumer products' side. And that has been a little bit frustrating.

Traditionally, there's been variability. But really, in the last 18 months, we've seen a significant increase in the variability of the demand for those end use sectors.

Okay, that's very helpful. And then just one last one.

I noticed that your NOLs actually went up $126 million from Q3 to Q4. Can you just talk a little bit about what happened there?

Yes, I can do that. When we made the adjustment for black liquor, the result of that was to increase the NOL, because we had used the NOL back in 2009 when we recorded net of tax.

Jumped on the call late here given dueling calls, so I apologize if you already answered this question. On Flexible, Dan and Dave, are you still ultimately targeting the segment to get to a double-digit EBITDA margin?

And could you put some, if that's still the case, some parameters on when you expect to ultimately get there and what still the biggest challenges are to get to that goal, if it's still viable?

Well, yes, it is viable and it is going to be a low double-digit margin business for us for sure, but it is not going to happen in second quarter of 2014. We're going to make significant progress this year because we're going to get a lot more contribution from the mill performance than we got last year.

The converting fix is an ongoing battle for sure, but we are making progress. We made progress in the fourth quarter and we're making progress in the first quarter.

But to get to that number, it's going to be an end of the year sort of run rate to get to that kind of thing. Now it is -- will generate positive cash flow and positive ROIC, so it's a contributor, but we still have work to do in that space.

All right, I appreciate the color on that, Dave. Secondly, with Macon increasingly coming on, could you remind us what it ultimately did for your energy consumption, your reduction of nat gas and other purchase fuels?

I know -- I remember what the savings benefit is, but if you could quantify it in MMBtu? And then kind of the related question, given the recent spike in energy, I don't know if you commented on this earlier, but if you held all of your input costs constant as of today's pricing, what kind of commodity inflation would you expect in 2014?

So now we're going to do have to do calculus? Let me say this, Macon doesn't use a tremendous amount of natural gas.

You know we -- it was a purchased energy mill, but that energy was driven in many ways by coal, which has switched over to natural gas. So that $20 million arbitrage is really against the increased pricing and costs that we were seeing blowing through from Georgia Power for purchased energy.

And that -- so that's how you think about it. In terms of actual MMBtu purchase, most all of our MMBtus is purchased in West Monroe, Louisiana.

And we're still purchasing the predominant amount of that. What are we purchasing, 4...?

10 million to 12 million MMBtu across the country a year.

So as Dan said on the call, we've hedged roughly, on average, about 50% to 55% of our natural gas usage in 2014 at about $4, guys? At about $4.

The rest of it, of course, will float at increased energy costs. So our primary inflationary driver next year will be energy.

I think this year, it was as well. Energy was -- of our $40 million of inflation this year, $24 million of it or so was energy.

So that gives you some sort of feel for -- we are more heavily hedged this year at a lower price relative to last year. But I think we averaged, and I wrote this number down somewhere, but we averaged in natural gas last year a light $4, about $4 or something like that.

Didn't we, Debbie? I'm just -- and so we're going to be -- we averaged about $4 for the year, did we not, roughly?

About $4.09 or something for the year in natural gas. So clearly, we're going to average a little higher than that.

But 50% of it is hedged at that rate. So I would think energy is going to be another $20 million or something to us this year, maybe not quite that high, but somewhere in that range.

Yes, I think we took a lot of the risks off the table with our hedging program. We thought the rates were attractive around the $4 range.

And we did that. So if you look at -- there was a huge increase in that, in natural gas between 2012 and 2013.

And it was unusually low in 2012. I think you remember that, George.

And even at $4, what we paid in '13 historically, that's a real good rate for natural gas.

I'm probably high on that. It's probably closer to maybe 12 to 15 incremental is about right if I do that math.

Just, like I said, we had to do calculus in my head, but it's going to be somewhere around that.

No, that's very helpful. I appreciate it and all the figures around it.

I guess the last question that I had for you, is there a way to, perhaps not quantify, but qualitatively discuss the whatever increase in interest you're seeing in CUK these days versus last year from markets that were previously not your core beverage packaging markets as a way -- you see where I'm going with it. Obviously, your view is it's growing in interest as a substrate in the packaging market.

There's a way to quantify for us or qualitatively give us discussion in terms of how much more broader appeal you're getting now on that business versus, say, a year or 2 ago?

I think it's easier to think about it in large sectors like this, which is as opposed to individual applications. Yes, of course, we're seeing it in individual applications.

I love what Tite-Pak does for that business. And the warehouse clubs is a great win.

But actually, you should think more about what we're doing in Europe. If you think about the acquisitions in Europe, guys, that gives us an opportunity to integrate substrate that we were -- they were buying in Europe that were not buying from us or they were not SUS, but SUS -- all those characteristics and qualities that SUS has that makes it work in the United States makes its work in Europe.

It's just the board was not available, and neither was the converting business focused on that board because nobody like Graphic owned those businesses. So as I look forward in Europe, I will tell you over a long period of time, we have a plan to double our SUS sales in Europe.

And I don't see any reason in the world why we can do that. We're building -- the assets that we bought, and I know you can't get over there to see these assets, but I will tell you that the assets we bought in Europe are world class.

They are as good as any converting plant that we have in the United States and far better than the ones that we were running at legacy Graphic, make no mistake about it. So we've got a good base to be able to build and take advantage of where SUS naturally competes with other substrates.

And that's why I feel optimistic about SUS long term.

I just had just one thing. On the acquisition front, I was wondering if you could talk a little bit about the priorities, as you're thinking about possible acquisitions, what areas?

And also in light of your 2.5 to 3x leverage target, I mean, would you -- for the right acquisition, would you consider -- how high would you consider taking leverage temporarily to complete an acquisition?

Well, the first question first, and what is our focus. We're still -- look, we still like the converting business.

I get that it's a difficult business. It can be a messy business from time to time, but it allows us to control our own destiny long term by being closer to the customer and driving back that flywheel of cash back through our paperboard mill.

That's our model and that's what we're going to do. Geographically, right now, guys, I feel much better about investing in the developed countries, United States and Western Europe, than I do in the emerging businesses.

We've looked at those things. We've done our work.

We've had -- we've put millions of dollars with Bain to help us understand what we should be doing in China and India. And the fact of the matter is, what we're doing there is very little.

And that's just about the right context right now. Long term, we'll look at the emerging markets, but there doesn't -- we can't see a way to make much cash and EBITDA in those spaces, so we're going to -- we're not going to focus on those in the short term.

Relative to getting to our targets, I mean, Dan and I expected to continue to deleverage at a pretty rapid pace. We expect to get to our 2.5x targets clearly by the end of this year.

How far up would we go? I think we said in the past, I don't want to sort of box ourselves in.

What I will tell you we're not going to do is we're not going to get back up in that 5x leverage stuff. That's just -- that's rarefied air.

We're not comfortable operating in that. There's no reason that we have to operate in that.

Our stock is also our currency. So if we want to do something that makes sense, we have cash and stock to be able to do the right acquisition.

I'm just not getting back into that rarefied air.

We're going to get back to work and run the quarter. Thanks very much.

Talk to you next time.