Greif Inc (GEF.B) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Greif Inc. 2004 conference call. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded today, Tuesday, March 2nd of 2004. I would now like to turn the conference over to Ms. Sherry Maxwell. Please go ahead.

Good morning and welcome to today's conference call. Our speakers this morning our Mike Gasser, Chairman and Chief Executive Officer, who will discuss the status of Greif's performance improvement plan and the Company's priorities for fiscal 2004; and Don Huml, Chief Financial Officer, who will discuss Greif's financial results for the first quarter and management's guidance for fiscal 2004. Following their remarks there will be an opportunity to ask questions.

We are including slides as part of today's conference call. They are available through our website, www.greif.com, in the investors center under the heading "Conference Calls". At this time I will read the Company's Safe Harbor statements which appears on slide one.

Some of the comments on this call may contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "estimate", "target", and similar expressions, among others, identify forward-looking statements. All forward-looking statements are based on information presently available to management. Such forward-looking statements are subject to certain risks and uncertainties that could cause events and the Company's actual results to differ materially from those express or implied.

In addition, as noted on slide two, some of the comments during today's conference call include GAAP and non-GAAP financial measures. The non-GAAP measures, which are reconciled to the GAAP amounts in the appendix to this slide presentation, are before restructuring charges, timberland gains and cumulative effect of change in accounting principles here and after referred to as "special items" as appropriate.

At this time, I would like to introduce Mike Gasser for his remarks.

I also want to welcome you to today's quarterly conference call.

Greif's first quarter of 2004 results were substantially influenced by the implementation of our comprehensive performance improvement plan. (indiscernible) benefits from Phase I were evident by a 280 basis point reduction in selling, general and administrative expenses as a percentage of net sales compared to the prior year, while $15.3 million of restructuring charges were recorded in conjunction with Phase II of our plan.

I want to begin my remarks this morning by briefly recapping key accomplishments for the first phase of the performance improvement plan. Let's just focus on SG&A optimization.

These initiatives, as shown on slide three, include streamlining our corporate center and empowering each of our businesses to substantially determine the level of service and support they require from the corporate center. First phase also includes identification of ways to achieve increased focus and flexibility in our business.

The most visible results of SG&A optimization has been the double-digit reduction digit reduction in SG&A expenses. Thus far we have eliminated approximately 600 positions and closed 12 plants and other facilities. This resulted in restructuring charges of approximately $60 million during fiscal 2003, and is expected to generate annual cost savings of $60 million this fiscal year. One-half of these savings were already realized in fiscal 2003.

We began to implement Phase II of the performance improvement plan at the beginning of fiscal 2004. This phase, as shown on slide four, specifically addresses capability building. The two principal areas of focus are commercial excellence and operational excellence. Each of them requires a specific commitment to discipline and training. Commercial excellence involves getting everyone in the Company to better understand our markets, to better understand our customers, to better understand the value we deliver, and most importantly how to compete based on value rather than price. This will be achieved through a strong focus on market segments in each of our businesses and requires us to carefully assess each customers' need in order to determine Greif's value proposition for each of them. Operational excellence will involve implementing lean manufacturing, increasing management training and declaring war on all forms of waste.

As part these efforts we will continue to rationalize our network of facilities around the world. We're developing new Greif systems based on a business model for production, marketing, working capital and supply chain management. The management accountability process has also been introduced that recognizes and rewards positive employee performance.

Recently we establish the Greif Center of Excellence. Employees will be participating in a combination of class-based training and field work. Each of them will conduct follow-up calls with instructors to reinforce what they have learned. The first twelve week session of the Center of Excellence is underway in North America. It is focused on specific concepts of operational excellence. This will be followed by commercial excellence, then focusing on supply chain management and fact-based general management. The Center of Excellence will then be implemented over time throughout Greif's global operations. It reflects our fundamental belief in adopting a long-term approach to learning, and we're convinced that this is the best way to foster continuous improvement and positive change in our Company.

Additional objectives of Phase II are shown on slide five. In order to achieve our goal of becoming a leaner, more market-focused and performance-driven company we need to make further changes. We anticipate there will be approximately 40 to $50 million of restructuring charges this year or an additional 30 to $35 million in the final nine months of fiscal 2004. This will involve eliminating approximate 500 full-time positions and closing 7 more facilities during the remainder of fiscal 2004. As a result, we anticipate additional savings from the second and final phase for our performance improvement plan will be approximately $50 million, with 15 million being realized in fiscal 2004 and the remaining 35 million in fiscal 2005.

As shown on the next slide, permanent cost savings from both phases of the performance improvement plan are expected to be approximately $110 million per year. There were 30 million of savings realized in fiscal 2003 from Phase I; a total of 45 million savings are anticipated in fiscal 2004; the remaining 35 million in savings from Phase II are expected to be realized during fiscal 2005.

We have comprehensive plans to shape our priorities for fiscal 2004, which are shown on slide seven. They're specifically focused on successful implementation of the performance improvement plan. In addition to delivering the full-year savings from Phase I, we're aggressively implementing the second and final phase of the performance improvement plan this year. The operational excellence component will be rolled out during the remainder of fiscal 2004. A new Greif system is being implemented to promote organic growth in our businesses through the commercial excellence initiative. We will also be seeking to move closer to achievement of our working capital targets and real-life savings from strategic sourcing opportunities this year. We plan to maximize the benefits of our 100 percent ownership of CorrChoice with both operational and administrative synergies to be realized this year. We anticipate measurable benefits from our fully integrated position of paper, packaging and services in fiscal 2004.

The last, but certainly not the lowest priority for fiscal 2004 is further debt reduction. We've made solid progress in the past three years, but want to continue reducing our debt outstanding. This will increase financial flexibility and further strengthen our balance sheet.

At this time, Don Huml will review our first quarter of 2004 results and discuss management's guidance for this year.

Thank you Mike.

The fundamentals of our businesses are improving -- demand is on an upward trajectory and inventories are low; selling prices are increasing and in response to these market conditions and also due to higher costs for steel, paper and recycled fiber. Internally we continue to realize benefits from our transformation process and anticipate further gains throughout this year.

As presented on slide eight, our results for the first fiscal quarter of 2004 particularly benefited from top-line growth and lower SG&A expenses compared to the same period last year. Operating profit before special items rose 15 percent to 18.6 million, while net income before special items was 4.5 million for the first quarter of 2004 versus 900,000 a year ago. Earnings per fully diluted Class A shares before special items increased to 16 cents from 4 cents a year ago, while earnings per fully diluted Class B share rose to 23 cents for the first quarter of 2004 compared to 5 cents last year.

While we're beginning to experience improved activity levels, cost pressures are creating some near-term challenges. Slide nine identifies three factors that contributed to erosion in the gross profit margin for the first quarter of fiscal 2004 compared to last year.

First, following the extended period of price declines it appears we are at a cyclical trough for paper prices. Increases of approximately $50 per ton are currently being implemented and there is some discussion of an additional increase later in the year. During the first quarter of 2004 we experienced higher prices for OCC, which is a key input for our mills. Positive contributions from higher containerboard prices could be compromised if the recent rise in the OCC prices continues.

The second factor -- higher raw material prices, especially for steel and lower absorption of fixed costs -- is impacting our industrial packaging and services business. Price increases occurred during the quarter and adequate supply and availability of steel is becoming an issue in some regions. We're actively addressing this situation and are developing appropriate contingency plans to mitigate the risk.

Finally, timber sales, which have a high gross profit margin, are lower and in line with planned levels.

We are aggressively implementing the second phase of our performance improvement plan, as shown on slide ten. Targeted savings from the first phase continue to be achieved, and we're on schedule to realize the full amount by the end of fiscal 2004. The $8.5 million reduction in first quarter SG&A expenses compared to last year was influenced by a $2 million negative impact from foreign currency translation.

Our strategic objective of a 10 percent SG&A expense to net sales ratio is achievable on a run rate basis this fiscal year. For the first quarter of 2004 this ratio was 10.9 percent versus 13.7 percent a year ago.

Turning to the next slide, industrial packaging and services achieved a modest increase in net sales of one percent on a constant currency basis for the first quarter of 2004 compared to the prior year. The quarterly results for industrial packaging and services benefited from a reduction in the segment's SG&A expenses due to the performance improvement plan which more than offset the gross profit margin erosion.

The first quarter comparison shown on slide 12 reflects the weak market conditions that have prevailed in our paper, packaging and services business during the past few years. It highlights the impact of the prolonged decline in containerboard prices, combined with increased pressures more recently from higher costs, especially for OCC and energy in the containerboard operation. The results of paper, packaging and services benefit from the full ownership of CorrChoice which occurred in the fourth quarter of fiscal 2003. These benefits include no ceeding (ph) of earnings to our minority shareholder, operational synergies, and increased consumption of containerboard which resulted in improved utilization of our mills.

Net sales for our timber business fluctuate from time to time. The next slide reflects our performance in this business over the past three years. We're actively managing our timber portfolio in the United States for the long-term, and monetize these assets as appropriate. The amount of annual stumperd (ph) sales are influenced by local and regional market conditions and balanced against opportunities for maximizing long-term return. Timber sales have been consistent with planned levels during each of the years shown on this slide. The operating profit for this business is directly related to changes in sales volume.

We're committed to consistently strengthening our balance sheet and increasing financial flexibility. Slide 14 profiles our capital structure for the first quarter of 2004 and at year-end fiscal 2003. Total debt at January 31, 2004 was 661 million or 53.8 percent of total capital, which is comparable to the year-end fiscal 2003. During the past three years we have reduced our total debt to total capital ratio. As Mike stated in his remarks, we're committed to reducing debt and anticipate further progress this year as a result of strong free cash flow.

Slide 15 presents 4 of our financial performance goals. We regularly monitor our progress against key financial metrics including the 4 that are displayed on this slide. We're making solid progress toward achieving our objectives for each of them within the desired time frame. The most recent annual measures represent the twelve-month period ended January 31, 2004.

Operating profit margins are consistently improving and we are on track to realize our goal of 10 percent by fiscal 2006. Return on net assets is also improving as we continue to permanently reduce costs and optimize the balance sheet. The 11.5 percent return on net assets for the twelve months ended January 31, 2004 is encouraging, and puts us on track to achieve our goal of at least earning our pre-tax cost of capital of 12 percent this year and a return on net assets of 20 percent within the next two fiscal years. Selling, general and administrative expenses to net sales has shown the most significant progress to date as a result of the performance improvement plan. For the twelve months ended January 31, 2004 we were at 11.3 percent, and as I mentioned earlier we were at 10.9 percent for the first quarter of 2004. Progress has been made during the last two years toward achieving a 12 percent operating working capital to net sales ratio. For the most recent 12 months we were at 14.9 percent.

The Company's guidance for fiscal 2004 is presented on slide 16. The operating environment for fiscal 2004 is expected to be modestly improved compared to fiscal 2003. Benefits from this gradual improvement in activity level may be influenced by higher raw material costs, especially for steel and OCC.

We anticipate that capital expenditures will be approximately 75 to 80 million for fiscal 2004. This would be approximately 20 to 25 million below expected depreciation expense for the year. Savings from the performance improvement plan and positive contributions from the Company's full ownership of CorrChoice are expected to be realized as planned. Both of these factors are anticipated to represent a substantial portion of the improved fiscal 2004 results. Consequently, management's guidance for fiscal 2004 before special items remains $2.35 to $2.40 cents per Class A share.

That concludes my remarks. Mike and I will now be pleased answer your questions.

(OPERATOR INSTRUCTIONS) Sandy Burns (ph), Deutsche Bank.

In the industrial packaging business you mentioned that results were negatively impacted by low fixed-cost absorption. I was wondering if you could elaborate on that. Were just volumes a little below your expectations or down year-over-year? Or was there some specific down-time that you felt you needed to take and that was the cause of the issue there?

Yes, and it was primarily within the substrate of fiber drums. The volume levels were down on in the low single digit range, and that is the principal factor.

I don't recall if you mentioned this overall -- could you give a sense of how much the volumes were up in the industrial packaging business over last year?

They were, within the steel and plastic substrates, up in the low single digit range.

And then in terms of the issue with steel rising as you mentioned, I know most of your contracts have the steel pass throughs. Have customers been pretty accepting of the steel increases you're looking to pass through? Has there been much push-back? And then also related to that, I know some companies who use steel have talked about seeing steel surcharges. I'm curious if you're seeing that, and if so if you feel you have the ability to pass those through to your customers.

Yes, we are seeing receptivity to the steel pass through in the contracts. People today are realizing that steel is actually quite tight right now, and so they're thrilled to be able -- their biggest concern right now is to be able to get drums and so at our size we're able to get steel, and so we do see some receptivity to the steel pass through.

We are experiencing surcharges, like everyone else is. And we are passing those through because that is additional costs to us. And so we are passing that through as we would any other increase.

Last question, again on the cost side on the corrugated box business. I am wondering if you can give a little more color on what you're seeing in the OCC market. I guess recent trade journals have said the increases have slowed down a little bit. I was wondering if you would agree with that. Also, if you could maybe just remind everyone how much OCC approximately you use a year.

To the first question, we are seeing a stabilization in that market. The export demand appears to be down. And we would say that the price is stabilizing at a relatively high level, the index is on a delivered basis really in the 90 to $95 range. But we are encouraged by the recent stabilization of that market. And we do have a little bit of flexibility in terms of furnished, but we would typically be in the 75 to 80 percent range for OCC as an input.

I'll also add one other point to Don's comments. The export market, we've seen that slow up a little bit. We have also seen collections increase. As you recall, we had a fairly cold severe winter in the Northeast, and as we get closer to spring we would anticipate collections would increase. So that could be a positive factor as we go forward.

That's a good point. Great. Thank you very much.

Walt Liptak, McDonald Investments.

Congratulations, Mike and Don, on the reductions to overhead; it's good timing on it.

My question is regarding volumes. I wonder if you could tell us what the volumes were by geographic region.

If we look at North America, I mentioned by substrate we're basically seeing low single digit increases in the steel and plastic; a little bit stronger in plastic than in steel; fiber down a bit. We are still seeing some substitution that is contributing to that.

Outside of North America there has been relative strength, and that is continuing. So we have seen slightly stronger volume increases across really all substrates, with the exception of fiber in Europe and the rest of the world.

I will just add one more point to Don's comments. If you look in our press release, we talk about operating profit by geographic region -- we show North America, Europe and other. And other really primarily is China. As we mentioned last year, we did open up another plant in China at the end of last year, and so we've done fairly well in China and increased that quite a bit with that second plant. That's the biggest increase there.

You mentioned in the press release -- you were talking a little bit about procurement savings and I wonder can you give us a hard number, quantify a little bit about the savings that you might get over the next year or two?

We're in the diagnostic phase of the strategic sourcing initiative. We will complete that within the next few weeks. And everything that we have seen up to this point reaffirms the target that we had mentioned during our previous conference call, and that is a five percent targeted savings based on our global spend of about $1 billion. That is where we would expect to be on a run rate basis in 2006. And to try to give a rough calendarization between now and then, we would anticipate savings of about $5 million this year -- not additive -- basically would provide a cushion for contingencies. For 2005 about 15 million realization and 30 million realization in 2006, exiting the year at the run rate of 50 million.

Okay, good. Thanks very much.

David Martin, Deutsche Bank.

I just wanted to come back briefly to this conversation about the geographic distribution of sales and operating profit. I was caught by surprise a bit in the release by the size of the operating profit in this other category which you are suggesting is China largely. I just want to understand a bit more what China means to you currently and then based on your current capital investment plans where you can take this over the next year or so.

As I mentioned, in the other category the principal reason for the increase is China. There was a little bit additional because of Latin America, but principally it was China. China today is less than 10 percent of sales for the business -- for industrial packaging.

We do have opportunities there because, as you know if you have read many newspapers, there's a lot of chemical companies moving to China opening operations there. We have relationships with all those companies someplace around the world. We are invited in when they go there to look at being able to provide drums to them. We have two facilities today in China and are looking at a third facility, and then we will see where it goes from there.

We're going into this very cautiously. I think there's great opportunities, but you've got to be very cautious. So we go in very cautiously into China, but right now it has been a good opportunity -- it has been a good couple of years for us in China.

So my interpretation is from your comments the numbers -- margins in China are significantly higher than the other geographic regions, potentially in the double-digit range?

Yes, I would say that that is a reasonable expectation for the future. We're not necessarily there at the present time.

The one thing that I would add -- Mike mentioned that also in the other category would be Latin America and South Africa, as well as the Asia-Pacific region. And South America has been very strong. Venezuela has recovered. That was a real problem last year. So that, coupled with some currency benefits -- because really when you look at everything from the Australian dollar to the Brazilian real to the South African rand, they're all in the 20 to 30 percent range. So not only did we have some solid fundamentals, but we also did get a boost from currency.

That's helpful. Then coming back to the volume growth in economic activity, could you also mention what your volume comparisons were versus last year in the paper packaging business?

Yes. The one benefit that we realized was as a result of our full integration and really becoming a net buyer of paper. Our mill volumes were up about 19 percent, a little over 23,000 tons. So we clearly have that anticipated benefit from the full utilization of our mills. When we look at our converting network really on a same structure basis because we have gone through a rationalization process, we have really seen low single digit growth in volume.

Coming back to the price increases that have been talked about earlier largely in the industrial business, how much exactly has taken place in the marketplace today on percentage terms and what is in the works in the next quarter or so?

Are you talking about steel or are you talking about in the paper business?

In the steel, plastics, fiber.

Steel has gone up quite significantly, as you can imagine. It has gone up in the range of --

Twenty-six percent.

I was thinking 25, 26 percent range. Really just in the last couple of weeks it has gone up. And we're out with price increases comensatory (ph) to that at that time. So it is anticipated that steel is going to continue to be high for the foreseeable future, and a lot of it is attributable to the Chinese in the market buying a lot of the coke and iron ore and using steel in building their infrastructure. So steel is up quite a bit.

Paper will go as the paper market has. And as you know, most paper companies have announced a $50 a ton increase, which we have announced, which we have put in March 1st. So that will have an effect on the fiber drum supply.

And resin is up -- do you know what the numbers for resin is up, Don?

About eight percent.

Eight percent in resin.

Lastly, just quickly, I think you also took some restructuring charges in your timber business. What changes are you making there?

The key change there is we basically have insourced the sale of cutting rights where previously we had outsourced that, and that's resulting in a fairly significant savings; that, coupled with a lower corporate allocation as we've reduced our corporate center costs.

Part of that gets allocated to the business, so that's part of that.

Thank you.

(OPERATOR INSTRUCTIONS) Ross Haberman (ph), Haberman Funds.

I just want to get a clarification. You had that chart showing the cost savings and how much is going to be realized I believe in '04 and '05. How much of the '04 and '05 numbers are coming from CorrChoice specifically?

Really they're not included in those. These are basically savings that are directly attributable to the performance improvement plan, and although there would be some benefit as a result of converting activities that we have closed down, and some of that activity has been transferred. But that would be a relatively small component of those savings, really something in the 2 to $3 million range.

And have you put a number -- you were talking I believe on the last call about some revenue enhancements with the CorrChoice. Have you put any numbers or ranges to that?

No, we really have not. We have talked about an organic growth target, and clearly the commercial excellence initiative is focused on that, as Mike had mentioned during his remarks. But that really is where we are allocating our time and resources.

Thank you.

There are no further questions at this time. Ms. Maxwell, please continue with any closing statements.

Thank you again for joining us on today's quarterly conference call. As a reminder, this call will be available for replay from Noon Eastern time today through 6 PM on Thursday, March 4th. For domestic callers the number is 800-405-2236; for international callers the number is 303-590-3000. Please use the reservation code 571320#. You can also go to our website at www.greif.com. This will be posted in approximately one hour. We appreciate your participation.

Thank you. Ladies and gentlemen, this concludes the Greif Inc. first quarter 2004 conference call. You may now disconnect and thank you for using AT&T Teleconferencing.