Greif Inc (GEF.B) 2006 Q1 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Greif, Inc. first quarter 2006 results conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, March 2nd, 2006. I would now like to turn the conference over to Deb Strohmaier. Please go ahead.

Thank you and good morning. As a reminder, you may follow this presentation on our website at Greif.com in the investor center under conference calls. If you don't already have our earnings release, it is also available on our website.

The information provided during this morning's call provides contains forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are on slide 2 of this presentation, in the Company's 2005 Form 10-K and in other Company SEC filings as well as Company earnings news releases.

In addition, as noted on slide 3, this presentation uses certain non-GAAP financial measures including those that exclude restructuring and other unusual charges and gains such as timberland gains that fluctuate from period to period. Management believes the non-GAAP measures provide a better indication of operational performance and a more stable platform on which to compare the historical performance of the Company than the most nearly equivalent GAAP data.

All non-GAAP data in the presentation are indicated by footnotes. Tables showing a reconciliation between GAAP and non-GAAP measures are available at the end of this presentation and in the first quarter earnings release which is on the Greif website. I will now turn the call over to Mike Gasser.

Thank you, and good morning everybody. Thank you for joining us on our first quarter 2006 conference call. For those of you following our presentation on the Web, please go to slide 4. As Don Huml said during the fourth quarter conference call, we entered fiscal 2006 with a solid balance sheet and a disciplined system. I am happy to report that this continues to be the case.

We are pleased with our first quarter performance, especially given the challenging market conditions. Benefits from the Greif Business System mitigated the adverse impact of higher energy and transportation costs during the quarter. We believe fundamentals in our markets are improving. If you go to slide 5, you will see examples of some areas in which our ongoing focus on the Greif Business System is having an impact.

Through operational excellence, we are rationalizing our footprint in the United Kingdom where we are in the process or closing two plants and consolidating production into the three remaining facilities. We're getting rid of waste, maximizing our product lines, and creating efficiencies that are putting our UK business back on track.

Paper, Packaging & Services is also rationalizing its corrugated operations. The Reno, Pennsylvania facility was closed. Its operations were consolidated into our Washington, Pennsylvania plant. In addition, corrugators in [Zanesville] and Toledo have been taken out of production to leverage our highly efficient CorrChoice sheet feeder network, improve focus, and reduce working capital.

We're also capitalizing on emerging markets. In the first quarter, we opened a new steel drum and water bottle plant Russia. We anticipate opening two new plants in Russia in the next 18 months and two new plants in China before the end of the year. Our global sourcing of supply chain continues to find savings and contain costs. They have plans in place and are on track to realize incremental benefits of 25 million from strategic sourcing this fiscal year.

Plus we continue to concentrate on embedding key commercial capabilities in the organization, emphasizing discipline and managed products mix, pricing and total account management. If you now go to slide 6, we carry positive momentum into the second quarter and we remain optimistic about our results for the remainder of the year. Volumes for fibre and plastic drums at our Paper & Packaging business have been trending up, and we managed implement price increases to medicate mitigate higher input costs.

Improving market fundamentals in Paper, Packaging & Services provided minimal impact in the first quarter. However, we're optimistic there will be a greater return for increased containerboard prices which will be realized over the full year. As these positive developments are fully realized, we believe our Company will be positioned for a successful 2006 fiscal year.

That concludes my comments on our business. Don will provide you with an update on our financial results.

Thank you, Mike and good morning everyone. If you will click to slide 7, reported net sales for this quarter were basically flat compared to the first quarter of last year. Positive comparisons in Industrial Packaging were offset by a decline in the Paper & Packaging business. On a constant currency basis, net sales increased 5% over the same quarter last year. This increase is evenly split between overall improvement in selling prices and volume levels.

Gross profit margin was 15.4% versus 15.2% in the last quarters of 2006 and 2005 respectively -- excuse me, the first quarters. Raw material costs were generally lower for steel, containerboard, and old corrugated containers and higher for resin. Overall benefits in the gross profit margin related to raw material costs in the Greif Business System were significantly offset by higher energy and transportation costs.

SG&A expenses were $60 million or 10.2% of net sales in the first quarter compared to the same amount or 10.3% of net sales in the first quarter of 2005. We continue to focus on cost control.

Operating profit before special items was 32 million in the first quarter compared with 31 million in the first quarter of 2005. Positive comparisons for Industrial Packaging were partially offset by a decline in Paper & Packaging due primarily to lower containerboard pricing compared to the same period last year.

Net income before special items was $17 million in the first quarter compared to 15 million in the first quarter of 2005. Diluted earnings per share before special items were $0.60 versus $0.50 per class A share and $0.90 versus $0.76 per class B share in the first quarter of 2006 and 2005 respectively.

Now, on slide 8, in the Industrial Packaging segment, net sales rose 6% on a constant currency basis in the first quarter. This improvement was primarily due to plastic and fibre drum sales which benefited from recent tuck-in acquisitions and organic growth in plastic drums. In addition, plastic drum selling prices increased in response to higher resin costs. The improvement in sales resulting from plastic and fibre drum volumes and pricing was partially offset by lower steel drum pricing and volumes.

Operating profit before special items rose to 24 million in the first quarter from 18 million in the first quarter of 2005. Industrial Packaging's gross profit margin improved to 100 basis points to 16.7% in the first quarter from the same quarter of last year. This improvement was due to lower raw material costs, especially steel, and the Greif Business System.

Slide 9 shows the results for the Paper & Packaging segment. Net sales were slightly below the first quarter of 2005 due to lower selling prices of containerboard, substantially offset by improved sales bottoms of containerboard and corrugated sheets. Operating profit before special items was 4 million in the quarter compared to 10 million a year ago. The decrease in operating profit was primarily due to lower containerboard prices and significantly higher energy and transportation costs, partially offset by improved overall sales volume and operating efficiencies as compared to the first quarter of 2005.

To slide 10, net sales were 6 million in the first quarter compared to 5 million in the first quarter last year. Operating profit before special items was 3 million including 700,000 resulting from the sale of development property in Canada compared to 4 million in the first quarter of 2005.

We completed the second phase of our previously reported $90 million sale of [timberland, timber, and associated assets] in the first quarter of 2006. In this phase, we sold 15,300 acres of timberland holdings in Florida for $29 million resulting in a gain of 27 million. The final phase of this transaction, approximately $10 million, is expected to occur later in fiscal 2006.

We are now on slide 11. Net debt outstanding was 370 million at the end of the quarter compared to 325 million at October 31st and 430 million at January 31st, 2005. Net debt is long-term debt plus short-term borrowings, less cash and cash equivalents. Net debt is higher than at fiscal year-end primarily due to the seasonality of our business, coupled with changes in working capital and the net impact of property, plant, and equipment transactions.

Our key financial performance goals are shown on slide 12. On a full year basis, operating profit margin and SG&A to net sales both remain stable compared to the 12 months ended October 31st. Operating and working capital to net sales with a ratio of 9.6% remains well below our 2006 target. And our RONA target remains achievable for fiscal 2006 on a run rate basis.

If you will now click to slide 13, as Mike noted, we enter the second quarter with positive momentum across our product portfolio and regions. Industrial Packaging activities outside of North America have been performing well and are expected to continue to do so. In addition, North America with a typically slow November and disappointing December had a strong January, which continued in February. Finally, the fundamentals for our Paper & Packaging business are improving, which we believe makes the recently announced $50 per ton containerboard price increase credible.

We anticipate that improving industry fundamentals, coupled with additional savings achieved from the Greif Business System, will more than offset the pressures related to higher energy and transportation costs which have recently moderated. Therefore, we are increasing our earnings guidance before special items to $3.55 to $3.65 per class A share for fiscal 2006.

That concludes my formal remarks, and you should now click to slide 14. Mike and I will be pleased to answer your questions.

(OPERATOR INSTRUCTIONS). Chris Manuel, KeyBanc Capital Markets.

Congratulations on a good quarter. Couple questions for you. First of all, could we drill down a little more into the granularity of how volumes were by your -- in your drum segments, specifically steel plastic fibre in the quarter? (multiple speakers) And Don, the other piece of that is I know you did a few small acquisitions in there, so really what I'm trying to get at is how much of up/down was due to stuff you added in and what is the core piece?

Chris, as you know, during the middle of last fiscal year, our volumes were down about 5% across the portfolio. In the third quarter, we saw the situation stabilize. As you know, we have been really focusing on improving the customer profitability. And we did place some business at risk, but we have -- we saw in the fourth quarter an improving trend which continued in the first quarter. And perhaps most noteworthy is that we finished the first quarter on a strong note.

In terms of the substrates, we have seen in fibre drums, which is really where most of the impact was from the tuck-in acquisitions, that on a same structure basis fibre drums was flat; which as you know, that's a very mature product line and has been declining. And so we were actually quite pleased that on organic basis it was flat, since that does represent an improvement.

Plastic drums have been growing in the low double-digit -- at the low double-digit rates. So we're very pleased with the plastic drums, and those were not significantly impacted by the tuck-in transactions. And then finally, steel as you know, that has been modestly negative on a year-over-year basis. But the trends are improving, particularly during the end of the first quarter and continuing into February.

And Chris, let me add just a little bit of color. I think Don did a really nice job of explaining that. And I do want to reiterate one comment that we're very happy with the fibre drums to be flat on an organic same-store basis, if you want to use a retail terminology. That really has been a three year reversal. We're three years -- for three straight years we've been having a decline in fibre drums, and so that's a huge improvement for us. And for steel and plastic to end the way they are is very good and we're very excited about that.

December was a really disastrous month. It was a residual of the hurricanes, especially in North America. We had -- a couple of our big customers were down and it seemed like people to holidays a lot longer. So basically December turned into about a 15-day month. But January came back very strong and February is continuing net trend, so we are cautiously optimistic on the volume front right now.

Good. That sounds very, very encouraging. The last question along -- with this topic is that do you think that with the improvement you started to see in steel that those numbers could in fact begin to turn positive as the year progresses? And does this all fit with -- I think last quarter -- or you have given us in the past that incorporated into what you're guidance number were volumes as a whole up about 3%. I just wondered if that is still a good number and then if you thought steel would in fact start to become positive. Thank you.

We would definitely be more comfortable with the first statement that the guidance for 2006 was for volumes to be up about 3% on a year-over-year basis. It's a little bit more difficult to predict by substrate. There is some substitution among substrates, so it's really going to be driven by our customer preferences.

And also, Chris, it's the price of the commodity of the raw material. And original estimate was that steel, especially in the U.S., would probably trend down at the first -- the middle part of this year. And that was going to be a result of worldwide prices, which were lower than U.S. prices, were going to draw the U.S. prices down. That no longer is the case. Worldwide prices are rising, and the looks like it's going to support the U.S. pricing.

So depending where that price goes will dictate a little bit of substitution this year. So -- but that price is in flux. And especially the Asian market is very strong right now in steel; Japan, Germany are showing very strong consumption of steel right now.

Very good. I have a couple other questions, but I will jump back in the queue. Thank you.

Eric Autio, SunTrust Robinson Humphrey.

Good morning. Nice quarter. I was hoping you could give us a little bit more detail on what you're seeing on the containerboard price increases. I assume January is sticking fairly well, but on the $50 increase we're hearing about for March and April, is that built into your guidance at all?

No, Eric, that is not built into the guidance. And to comment on where we are with the containerboard increases, the October 1st $30 increase -- not surprisingly, that has been fully realized. We are particularly pleased that that has also been fully realized down stream, and so that we feel is very positive. We did anticipate that during our last conference call, so that doesn't really change the expectations for results.

The January 1st increase of $40 per share has been implemented. Had very limited impact on our fiscal first quarter results. We have announced the box increases that are consistent with the increase in containerboard and really has been virtually no pushback on that, so we do confidently expect that is going to be realized. And that has been factored -- fully factored into our guidance.

The $50, as we mentioned in our prepared remarks, is credible based on the strong fundamentals and -- including the tight inventory levels. And so we do think that that represents upside potential to the guidance.

We have announced that increase, Eric, but we have not -- it will have no effect -- it will have very limited effect in the second quarter -- our fiscal second quarter. Mostly it will be a third and fourth quarter effect.

Could you talk a little bit about how we're seeing some declines in natural gas pricing? I think last quarter you had mentioned expecting about a $20 million year-over-year increase from 2005 due to energy and transportation. Is that still the number you're thinking about now or is that devolved as the quarter progress?

I would say that it could be a little bit less, and we will participate in the declining prices, but on a lagged basis because we do hedge about -- and on a forward looking basis, we have hedged about 50% of our requirements. And if you take what we have hedged and the current pricing for a natural gas, we're in the 8.5 to $9 dollar per decathterm.

And just a quick housekeeping question, I will jump back in. Tax rate, can give us your outlook on that for the year? Has that changed at all?

I think you could really look to the tax rate, the effective tax rate on a GAAP basis -- a consolidated basis, which is about 31%, and hold that fairly constant for the remainder of the year.

Okay, great. Thanks so much.

Ross Levin, Arbiter Partners.

When you guys are looking at stock buybacks under the authorized repurchase program, by what criteria do you determine which share class to repurchase?

Ross, we look at this on a basis of availability of stock. As you know, the B is -- has limited liquidity, and so we are conscious of that. But we do buy B back periodically, and so it is not -- we don't go into the market saying we're going to buy so many A and so many B. We look at it from an availability standpoint primarily.

(OPERATOR INSTRUCTIONS). Chris Manuel.

Two follow up questions. The first is on your savings that you anticipate coming through the year. 25 million from, I believe, that is your procurement piece, and then there was -- is there another five that's also a [tale] from the previous Greif Business System stuff as well? Is that correct?

That is correct, and that is primarily related to operational excellence.

Okay. And I guess I'm just -- can you help us with a little bit of the timing as this rolls through the year? Is it more back end loaded? Was there any in the quarter, number one? And the number two, you had announced some additional restructuring activities in the quarter. And I'm wondering if -- what is going to be cash cost of that? What sort of savings are you anticipating and some timing of when we could achieve those?

In terms of realization of the Greif Business System savings, and as you mentioned, 25 million of that 30 is driven by strategic sourcing. That is going to be a bit back end loaded. We did see some benefits in the first quarter, but we also had the negative impact of energy and transportation costs as an offsetting item.

We did have about $5.5 million of restructuring in the first quarter. That related to a rationalization of our United Kingdom footprint. And then we also, within our Paper & Packaging business, had the closure of the plant that Mike mentioned in his remarks as well as a rationalization of our corrugators. We're basically leveraging CorrChoice to a greater extent. But there were basically three plants closed, and 127 positions eliminated. Of that 5.5 million, about 90% of that was cash, and we would estimate that the payback on that investment would be in the two-year range.

Okay. Very good. And then the last question I wanted to ask for you, Mike, was acquisition outlook. Is there anything -- how have the markets been looking to you? Has it -- over the past couple of years financial sponsors have sort of bid prices up, and do you think things are coming back? Is there any thing out there that looks attractive to you? Your debt to cap as we look at it is, from a financial position, you're within a comfort zone of where you want it to be. So maybe if we looked at this question from the perspective of uses of free cash and how acquisitions may or may not play into that.

Yes, that's very good question, Chris. We do look at our use of cash to make sure we are properly utilized, and we have really three uses of cash that we are constantly looking at. And they are not in priority order, but let me just go over those. One is continue to give back to our shareholders, and we have gone for 70 consecutive years of paying dividends, so that's very positive. Seven out of the last ten years, we have increased dividends to our shareholders. So we take that responsibility very seriously.

The second one is we're constantly looking at our debt load to make sure that it's a manageable level. So we are constantly looking at do we have the right amount of debt on our books. And the third use of the cash is to grow the business. And the two ways we look at growing the business is, one is organic growth. And I mentioned in my prepared remarks we have two plants in Russia we're looking at opening up this year, two plants in China. I think I mentioned in the fourth quarter we'll be looking at the Middle East. So we're going to be looking at organic growth.

And then also, doing acquisitions. One of the things that we have been very good about and we are going to continue to be very good about is being a very disciplined buyer. As opportunities come to us, and opportunities come to us all the time in our market position. We are -- we do get looks at different things, but we want to be disciplined. And you're right, over the last year or two the values have been quite high; too high for us to really jump into.

I can't really comment on when those values are coming down or if they are coming down. But if we do acquisitions, I can assure you that we will be disciplined. It will be strategic. It will fit our core business, and we do have aspirations to grow. So we will look at this on a very disciplined basis.

Thank you very much gentlemen.

Eric Autio.

I just wanted to get a little bit deeper into the operational improvements in Paper & Packaging. You mentioned some closures there. Can you talk about what you're looking at as far as perhaps further consolidations or other initiatives under way?

I will start off Eric. First of all, we're very thrilled with the management of the Paper & Packaging segment right now. As you know, Mike Patton moved in there about a year ago, and has really put a discipline into that business and put a discipline of implementing the Greif Business System.

So we have renewed energy and renewed enthusiasm in that business, and through Mike's leadership, we have done this footprint consolidation. We are looking at our facilities, Eric, to determine where we can be the most efficient. As Don mentioned in the remarks, we did have a consolidation of two corrugators to put them into our very efficient and highly automated CorrChoice facility, and that makes sense.

So we're looking at other ones, and without trying to jump ahead of any announcements, I can to say we are constantly looking at those facilities to determine where it [is] best to consolidate, and also to maintain the business. We're not trying to shrink this market at all. We are trying to just become much more efficient in what we play in.

With what you announced so far, can you give us a feel for what the cost savings are on that?

I would really just repeat, Eric, that two-year payback. These are very, very attractive initiatives that are being undertaken, so the payback is rapid.

(OPERATOR INSTRUCTIONS). [Bob Franklin], Prudential.

One operational problem -- I think you tried to explain before, but it didn't get through to me. Why would steel drums be down in a generally strong economy while plastic drums are up?

Yes, I think you're seeing some substitution. I think that would be the primary reason for that.

Substitution, I believe, is the best answer. And also the -- if I go back to December, there were some large customers who had plants [that] were off-line because of some mechanical problems and used primarily steel drums. So the economy could be up, but in that one substrate there was a blip, and that did have a fairly big impact -- it had a huge impact in December and had an impact to the quarter. So I would not discount that at all.

Okay, you referred your debt level as something you look at. Are you comfortable with them now? I think if your bonds aren't callable now, they maybe soon. What are your thoughts about that?

We said early on back in '01 when we made the last large acquisition of [Van Lear] that we wanted to get our debt load in that 30 to 40% range. And we're there now at the lower end of that, so I would -- we haven't changed our mind as for as a comfort level with that. As far as the bonds being callable, I think that is '07. We have looked at those, Bob, and I think we would -- we'll react accordingly when that time comes.

Okay, thank you.

There no further questions in the queue this time. Please continue with any closing remarks you may have.

Thank you again for joining us this morning. As a reminder, this call will be available for replay from noon Eastern Time today through noon on Tuesday, March 7. The playback telephone numbers are 800-405-2236 for domestic callers and plus 1-303-590-3000 for international callers. The pass code is 110-54861 pound. This call will be posted on the Company's website in approximately one hour. We appreciate your participation and good day.

Ladies and gentlemen, that does conclude the Greif first quarter 2006 results conference call. You may now disconnect and thank you for using AT&T's teleconferencing.