Greif Inc (GEF.B) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you very much for standing by. Welcome to the Greif Inc. first-quarter 2007 results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, March 1, 2007.

I would now like to turn the call over to Deb Strohmaier, Director of Communications. Please go ahead.

Thank you. Good morning. As a reminder, you may follow this presentation on the Web at Greif.com in the Investor Center under Conference Call. If you don't already have the earnings release, it is also available on our website. We're on slide two.

The information provided during this morning's call 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 two of this presentation in the Company's 2006 Form 10-K and in other Company SEC filings, as well as Company earnings news releases.

As noted on slide three, this presentation uses certain non-GAAP financial measures, including those that exclude special items such as restructuring charges and timberland gains. 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. Online GAAP data in the presentation are indicated by a footnote. It will show in the reconciliation between GAAP and non-GAAP measures are available at the end of this presentation and in Greif's first-quarter earnings release.

I will now turn the call over to Chairman, CEO and President, Mike Gasser.

Thank you. Good morning, everyone. We appreciate your participation in our conference call today. If you are following our presentation on the Web, please go to slide four.

We're very pleased with our exceptionally strong results this quarter with a 29% increase in net sales, a rise of 90% in operating profit and a two-fold increase in net income before special items over the same period last year. We remain focused on our strategy, continue the disciplined implementation of the Greif businesses and are redoubling our efforts in developing talent and instilling passion in our leaders throughout the world.

Our operations and commercial teams deserve full credit for the terrific quarter they delivered. The power of the Greif Business System, combined with our ability to increase topline results, gives us a positive momentum in the marketplace.

Turning to slide five, early in the quarter we completed the acquisition of Blagden steel drum manufacturer and closure businesses, which expanded our footprint in Europe and Asia. We continue to make excellent progress in consolidating and integrating operations and retaining customers, as well as highly talented and enthusiastic employees. We could not be happier with the progress to date.

We remain on track with the integration of Delta. We have a strong management team in place that is focused on embedding the Greif Business System into the business and expanding globally. Also, we recently retired our outstanding high interest rate notes and issued new notes at a lower interest rate, which will save us about $6 million in interest expense annually. We will provide more details of this shortly.

As shown on slide six, progress continues to be achieved regarding our 2009 performance goals we announced last year. Each of our businesses began 2007 on a positive note, and we are all positioned to continue our move forward. We remain excited about our future.

Executive Vice President and Chief Financial Officer Don Huml will now provide you with an update on our financial results.

Thank you, Mike, and good morning, everyone. If you will please go to slide seven. I share Mike's enthusiasm for our first-quarter results. Our net sales were $751 million, up 29% compared to the first quarter of 2006. On a same structure basis, net sales increased 10%, including 3% for foreign currency translation. The increase is attributable to positive contributions from our paper and packaging and industrial packaging segments, plus the acquisitions of Blagden and Delta. Gross profit for the quarter increased 45% to $130 million. Gross profit margin rose 1.9 percentage points to 17.3%, benefiting from the improvement in net sales, particularly the price-driven increases in paper and packaging and positive contributions from the Greif Business System. SG&A expenses were $75 million or 9.9% of net sales this quarter compared to $60 million or 10.2% of net sales for the same period last year. The dollar increase is due to our Blagden and Delta acquisitions and accruals related to our performance-based incentive plan. Operating profit before special items was $61 million compared to $31 million in the first quarter of 2006 due to the balanced contributions from each of our business segments and the geographic regions. Slide eight shows the results for industrial packaging. Net sales rose 35% to $582 million in the first quarter over the same quarter last year or 10% on a same structure basis, including 3% for currency translation. This improvement was primarily due to recent acquisitions and strong organic growth, which included higher sales volumes in emerging markets. The gross profit margin was 16.5 versus 16.7% in the same quarter last year due to our recent acquisitions which are progressing as planned. Operating profit before special items rose to $36 million in the first quarter from $24 million in the same period last year, primarily due to the improvement in net sales and the contribution of the Greif Business System.

Now on slide nine, our paper and packaging segment turned in another exceptional quarter with net sales of $165 million, up 12% compared to the first quarter of 2006. This was primarily due to higher containerboard and corrugated sheets selling prices and also improved volume levels. The gross profit margin improved to 19.6% from 11.7% in the same period last year. Higher containerboard pricing and improved efficiencies partially offset by higher OCC and transportation costs contributed to these results. Operating profit before special items was $18 million compared to $4 million in the first quarter of last year, primarily due to the improvement in net sales, gross profit margin and tight control of SG&A. The operating profit margin of 10.9% for the quarter compares very favorably to paper and packaging's peer group.

On slide 10 timber segment net sales were on plan and operating profit before special items was $7 million, including $5 million of profits on the sales of special use properties compared to $3 million in the same quarter last year.

If you would go to slide 11, net debt outstanding was $694 million at quarter-end compared to $324 million at October 31, 2006, primarily due to the cash purchase of Blagden. While our net debt to net capital ratio of 44.5% was above our targeted range of 30 to 40%, we expect to be comfortably within that range by fiscal year-end. Net interest expense was $12 million and $9 million in the first quarter of 2007 and 2006 respectively. The increase was due to the financing of the Delta and Blagden acquisitions.

As Mike noted, on February 9 we closed on $300 million of 6 3/4% senior notes due 2017. At the same time we completed a tender for our 8 7/8% senior subordinated notes in the amount of $246 million, which represented 99% of the outstanding bonds. The notes were issued on more favorable terms and conditions, including investment-grade covenants due to our stronger credit profile. These actions, excluding the impact of a second-quarter 2007 debt extinguishment charge, will be immediately accretive to earnings.

On slide 12 we are encouraged by our strong first-quarter 2007 results and positive momentum. In addition to our approved operating performance, we anticipate a lower annual effective income tax rate and reduced interest expense due to the bond refinancing. As a result, we are increasing our annual earnings guidance which excludes special items to a range of $6 to $6.10 per share for the Company's Class A common stock on a presplit basis. This range is approximately 26 to 28% above the Company's fiscal 2006 record earnings.

That concludes my formal remarks, and you should now go to slide 13. Mike and I will be pleased to answer your questions.

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

Congratulations on another terrific quarter. A couple of questions for you. First of all, in your press release towards the bottom of page one, you talked about additional savings in core businesses and other sorts of synergies and such. I wanted to touch on both of those. First, are you sort of intimating to us that there could be some more restructuring reactions to come, number one, and then number two, can you give us an update on what you're anticipating in terms of synergies with the two acquisitions?

Yes, Chris, as far as the benefits that we are receiving from our core operations, I think the best way to address that would really be by bridging you from Q1 '06 to Q1 '07. And when you look at the approximately $31 million operating profit improvement, that by causal factor would be about one-third related to volume improvement, one-third improved price realization primarily the higher containerboard pricing and one-third from the Greif Business System, about two-thirds sourcing and one-third operational excellence. So that is basically how it would break out. Based on our full-year guidance for the Greif Business System impact, our run-rate is a bit above the guidance, but it is really too early to revise our full-year expectations at this point. But clearly we have gotten very good traction from the Greif Business System.

The other thing that we're very pleased with, although we are only two months into the acquisition of Blagden, and the key focus has been on customer retention and network optimization. We have captured some early synergies through the closure of a Netherlands plant, and we have eliminated approximately 150 positions. But I would say again, as Mike had mentioned, we are very pleased with the progress of the integration. We were definitely on track, but again it would be too early to upwardly revise our expectations for the accretive benefits of those acquisitions.

If you could share with us what are your expectations for accretiveness from those acquisitions?

Well, basically when we constructed our guidance, our previous guidance bridge, we anticipated approximately $0.30 in EPS contribution.

Okay. The next question I wanted to ask you concerned the paper segment. And again, that was -- two consecutive quarters of double-digit margins is very, very impressive. Is this indicative of what you consider to be a new run-rate for the business that you think -- I know you talked about some of your Greif Business System savings being centered as you roll that through PPS. But is margins or our margins in the double-digit range now more realistic?

Yes, we are very, very pleased with the paper results this quarter and actually the last six to nine months. We have a new management team in there, which we expressed to you I think six months ago. They are doing a fabulous job. They are very driven to deliver superior returns. That is indicative of the results that you are looking at. We are just putting in the Greif Business System, so we would believe that there's some upside to this as we continue to embed the Greif Business System into the operations. As you know, this business has some cyclicality. There is announced price increase out now, which we believe will be realized sometime during this year. So we believe that there is very big positive momentum for this business today.

Christopher Chun, Deutsche Bank.

Good morning and congratulations again on another great quarter. Just following up on the paper business briefly, in terms of your new guidance that you announced, can you talk about the containerboard prices and the OCC prices that you're assuming for the rest of the year in arriving at that guidance?

Yes, if I could, I would like to step back and just provide the updated guidance bridge. If we go from the previous guidance of $5.45 to $5.55, the increase of $0.55 would be comprised of -- the strong operating performance for Q1 would represent $0.30 improvement. The bond refinancing would be about $0.10 in accretion. The lower effective tax rate, which is driven by an earnings mix shift that is being projected for the full year, that is about $0.45. And then we have been offsetting risk for old corrugated containers, OCC, where we are basically building in a contingency that, quite frankly, is likely to be realized based on the official board market statistics released last night. But we are providing a contingency of a $50 increase, and so we are showing a stepdown of $0.30 in order to get to the new guidance.

We are also not assuming an increase in the selling price that we have announced to the $40 increase. We fully support it, and as Mike mentioned earlier, there is an expectation of realizing a portion of that. But that really represents upside potential to the guidance.

chris, in the past, well, Don, is absolutely correct. We have announced and we believe it will be in. We just don't put that into our guidance until it actually realizes. So we are conservative in nature from that regard, so that could be an upside when that happens.

Okay. That is extremely helpful. Can you remind us again what your exposure to OCC is in terms of the number of tons per quarter or per year that you consume?

Yes, so we consume about 475,000 tons per year.

And then do you also consume other types of wastepaper that might be closely related to OCC?

Principally OCC. There is some mix change that we can put through our system, but I would think your best bet is just to focus on the OCC number, and that probably gives you the best answer you are going to come up with.

Okay, very good. And then moving on to the tax rate, should we assume around 25% for the rest of the year?

Yes. The tax rate of 25.2%, that is a projection for the full year. And I'm sure your follow-up is, is that rate sustainable indefinitely? I would like to say that it is, but I would really provide a range of from 25 to 30% with an expectation that we would be in the middle of that range.

And that would be for 2008 and beyond. For 2007 it would be the 25 is what we are predicting.

Sure. How about in terms of interest expense, what should we expect going forward?

Well, we will be paying down debt as I mentioned in the prepared remarks, that we expect our net debt to net capital to be comfortably within the targeted range near the midpoint of that 30 to 40%. So there will be a debt reduction. So we will see a lowering of interest expense as the year progresses.

And, as you know, our second half is very strong in terms of cash flow generation. So I guess in terms of providing guidance on where the interest expense would be, it is going to be a up a bit from 2006, but again it will be declining as we move through the year.

And the reason obviously that it is up a little bit is the two acquisitions we made at the end of 2006.

Sure. That makes sense. Can you talk a little bit about the $4.7 million in special use property sales in your timber segment?

That basically is ongoing. We have talked about in the past that we do have properties that do have a higher and better use, and as opportunities come to monetize those, we look at those and capitalize on those if it makes sense. We don't really budget for those because it again is an opportunistic nature. So we will have those periodically as these transactions come before us.

Okay. I will go ahead and turn it over. Thanks for your help.

Walt Liptak, Barrington.

Good morning and congratulations. My first question is on the price increase and the realization. I just want to make sure I understand the timing of it. OCC costs have come up pretty dramatically recently. The price increases you have put in place, does that cover the rise in OCC costs, or is there another price increase that --?

The one we announced will cover the increase. As we said earlier, we have not factored that into our guidance because while it has been announced, it has not been implemented yet. The OCC is real today, but when we get that increase, that $40 per ton increase, it will cover the OCC increase that we have.

Okay. Is the realization a second-quarter or a third-quarter expectation?

It is probably going to be in second quarter. You know, we are on a fiscal year basis, so it's not calendar quarter. But again, it's the market dynamics at play, and you know this very well. You know, as the market, we will see how the market unfolds as we go forward on this. But our realization is that it could be at the end of the second quarter that it will come in.

Okay. And then I would like to ask about the European friends. What does pricing look like in Europe for IPS and the volume trends too?

Well, we are very pleased. If you look at our 10-Q, the European results did very well. We were very pleased with the progress that Ivan Signorelli is running. Europe is doing a great job there. Our Blagden acquisition will help us as we go forward, and as Don said, we expect that to be accretive this year. We had a good start to that transaction. Pricing is good in Europe today, and so we are very positive sitting here today for the European results.

Okay. And just a quantitative thing. Don, I wonder if we can get the actual revenue numbers for Blagden and Delta during the quarter?

Yes. I guess what we have provided is an indication of what the annual sales of Blagden have been, and I would really refer you to that, the $265 million in annual sales prior to the date of acquisition, and that would be -- I mean if you were to calendarize that, it would give you a pretty good idea of the Blagden. And then we have also indicated that the Delta was $185 million.

The problem with trying to break it out anymore is we have done a pretty good job already with Blagden of moving business and consolidating. So we are losing that identity fairly quickly as we go through this process.

Okay. Fair enough and then one more if I may. In the press release, you talked about in the paper segment, volumes in corrugated gated products were kind of an offset to the positive trend in that there was, if you could talk a little bit about the multiwall bag volumes being down and just provide some color.

Yes, that is more of a seasonal thing. We hope it's a seasonal thing. You know that business does have some seasonality, and sometimes the feed seed business is stronger in our first quarter, and sometimes it is stronger a little bit later in the year. So we are hopeful that that is a seasonal thing, but you know it's a little bit too early to tell that right now. But that is basically what that represents.

(OPERATOR INSTRUCTIONS). Tim Burns, Cranial Capital.

A couple of things. In terms of IPS and Blagden in particular, now you have got your arms around it, are you finding any kind of interesting technology that might help your business globally that you did not have? I mean not that you guys were not the world leader, but sometimes you get lucky.

We have not found technology per se. We have found that some of those plants are run very, very well. So, as we continue to evolve the Greif businesses and we're trying to take those attributes which we think are really good and incorporate it into the Greif Business System, but there was not a silver bullet type event. But they have some plants that are run very well that we will take some of their techniques and put it in some of our plants also.

Got you. And the synergy and procurement numbers that you budgeted have not been blown up since the ownership?

No, you know we were anticipating Blagden when we had give you the guidance the last quarter at the end of the year, and we have done very well with the synergies and the sourcing right now. It's just a little bit too early to tell whether some of that was pushed forward or whether we are actually going to have an upside. But right now it is just too early to tell that, and we will continue to update you on future calls if it appears that we will get some more positive from it.

Okay. And on the PPS, I mean it is having quite a nice run here, management change, etc. Are there any mix changes around your total comprehensive systems approach that are helping that, or is that still in progress?

Not really any mix changes. I think it is a focus on what drives profit, what drives volume and I think that is really more blocking and tackling today. And I think, as I said earlier, we get the Greif Business System in which we are just starting. We're very excited to see what that will generate also. But more blocking and tackling without any fundamental mix change.

Okay. And if the OSU Buckeyes win the NCAA men's basketball tournament, will you increase your guidance for the remainder of the year?

That is probably the best question we have had. Let me get back with you on that.

Michael Peasley, Priority Capital.

Just to get back to the tax issue real quickly, would you give a little more color on what the change in mix is that's driving the tax rate? I was not clear on that.

Yes, there is a very significant differential between our US tax rate and the non US tax rate, and that is actually growing because of tax reduction initiatives outside of the United States. And so on previous calls we have talked about a differential between 35% and 22%. It is now 35% and 20%. So that coupled with our expectation that there will be very strong earnings contributions from outside the United States is really significantly contributing to that. And one of the reasons that we wanted to signal what would be likely sustainable is so that you would be able to model those future periods. And so the 25% is good based on our projections for 2007, and then we would go to the midpoint of that range that we provided for the out years.

Bob Franklin, Prudential Financial.

Have you or would you give a pro forma operating income number at this point?

The pro forma with and without the acquisitions?

Well, with the acquisitions I want to know what you're running at at this point for a full year. I am not asking for synergies. I just want to know, if you just sort of added things together, what would you be up to in operating income?

Well, we really provide the guidance based on the EPS, and in terms of the contribution of the acquisitions, we have indicated what we expect the accretion to be. We're clearly on track to deliver that. But, at this point, there is more of a contribution to sales and operating profit than there is to EPS. For the first quarter, that would have basically been -- the transactions would have basically been EPS neutral, which at this stage of the integration we're quite pleased with.

Okay. Going back to the discussion on the taxes, if I understand it right, there is a greater increase in earnings overseas at this point than in the past? Is that right?

That is projected. As you know, the effective tax rate is computed based on your full-year projection.

Right. What I'm driving at here is, you used to have a lot of cash built up overseas which you did not repatriate and you made acquisitions overseas. If you're talking about debt repayment, are you going to have a lot of cash trapped overseas, and how do I think about that?

Well, that is a very good question. Fortunately we will not have cash locked up in Europe. We have been able to refresh a structure that allows us to tax efficiently and repatriate funds. And so, as of the beginning of this fiscal year, we will be able to return funds with very little in the way of friction losses due to taxes.

Okay. And just the naivete on my part, I was under the impression that taxes were greater overseas than in the US. I'm wrong there?

Based on the way our assets are deployed and also some of the changes that are occurring outside of the United States, we really find it much more tax-friendly outside as opposed to in the US.

Chris Manuel, KeyBanc Capital Markets.

Two quick follow-ups. One is, do you have -- I think you approximated for us the revenue from the acquisitions when you dissect the press release. You have done a good job there. Can you help us with potentially what the operating income -- (multiple speakers)

(technical difficulty)--

We have Chris on the line.

(multiple speakers). Can you help us approximate what the operating income contribution from the acquisitions was in the quarter?

Yes, we would prefer at this point to really focus on the top and bottom lines. I am afraid that if we started getting too granular, it is not necessarily that the results for the first quarter are not necessarily indicative since it is so early in the integration process. We have one business where we are embedding the Greif Business System where the focus is clearly on improving the profitability. But --

Well, let's come at it a different way. You indicated I think in those slides in your prepared remarks in the press release that the acquisitions may have been a bit of a drag on the margin side, right? Can you help us understand maybe it was at a 50 basis point -- the differential so that as you get that business, let's call it up to speed using the tools that you have discussed, what we can anticipate?

Well, what I could do is say that the impact on gross market margin was 1.3 points. So that gives you a -- and again, that is at the gross profit margin level.

Okay. That is helpful. And then another question for you, and that is there has been -- we have seen some filings of concerning Blagden with potential antitrust type actions in Europe. Can you elaborate a little more to us on if you anticipate any problems, if you may have to sell a few plants in a few countries, or can you elaborate a little bit for us there?

Yes, there has been some filings. It is all in the UK. Let me start there. It is no other place but the UK, and that is progressing. There is a review which is pretty normal in this situation where the UK would review a transaction like this. But we are confident that at the end of the day the conclusion -- the final outcome will be positive. So it is not something that should be concerning at this point in time. Principally it is all the UK, and it is pretty normal for an event like this.

Okay. And then actually one last question for Don. In your $6.00, $6.10 guidance, are you including the -- I think there was some -- you alluded to a $4.7 million of timber sales, and I think there was 5.2 altogether when you looked to the income statement. Are you including that extra income in the guidance as part of what gets you to the $6 to $6.10, or is that excluded?

No, that is included.

At this time there are no further questions. I would like to turn the call over to Deb Strohmaier. Please go ahead.

Thank you, Mike, and thank you all for joining us this morning. As a reminder, this call will be available for replay from 1:00 PM Eastern time today through noon on Tuesday, March 6. The playback telephone numbers are 800-405-2236 for domestic callers and +1-303-590-3000 for international callers. The passcode is 11084426#. This call will be posted on the Company's website in approximately one hour.

Thank you for your time this morning.

Thank you. Ladies and gentlemen, this does conclude the Greif Inc. first-quarter 2007 results conference call. You may now disconnect. Thank you for using AT&T Teleconferencing.