Greif Inc (GEF.B) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Greif, Inc. second-quarter 2007 results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Thursday, June 7, 2007. I would now like to turn the conference over to Deb Strohmaier, Vice President of Communications. Please go ahead.

Thanks, Heidi. Good morning. As a reminder, you may follow this presentation on the Web at Greif.com in the Investor Center under conference calls. If you don't already have the earnings release, it is also available on our Web site. We are on slide 2.

The information provided during this morning's call contains forward-looking statements. Actual results or outcomes may differ materially from those that maybe 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 2006 Form 10-K and in other Company SEC filings as well as Company earnings news releases.

As noted on slide 3, this presentation uses certain non-GAAP financial measures, including those that exclude special items such as restructuring charges, a debt extinguishment charge 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. all non-GAAP data in the presentation are indicated by footnotes. Tables showing the reconciliation between GAAP and non-GAAP measures are available at the end of this presentation and in Greif's second quarter earnings release.

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

Thank you, Deb. Good morning, everybody. We appreciate your participation in our conference call today. If you are following our presentation on the Web, please go to slide 4.

We are pleased with our results for the second quarter, which included strong sales growth resulting from higher volume in Industrial Packaging attributable to solid organic growth and recent acquisitions, coupled with improved pricing across our business portfolio. Our business fundamentals are solid, and we expect strong performance during the second half of 2007. We are on track to achieve our annual objectives as well as the previously disclosed financial goals for 2009, which we discuss on a quarterly basis. Management's confidence is reflected in the Company's annual earnings guidance, which Don will discuss during his remarks.

Our Industrial Packaging segment reported solid results for the second quarter of 2007, especially in the Americas, Europe, and emerging markets. Once again demonstrating the advantages of our diverse business portfolio and geography. Blagden continues to contribute positively to sales volumes and integration of the business is progressing nicely. Also, the management team at Delta Petroleum continues to make improvements in that business.

Our strong performance in Industrial Packaging was partially offset by the high cost of OCC compared to a year ago and acceleration into the second quarter of major annual maintenance at one of our containerboard mills. This maintenance was previously scheduled for the third quarter. If you will please go to slide 5.

The two-for-one stock split approved at our annual meeting occurred as planned in the second quarter. As you can see throughout our earnings release and this presentation, all amounts have been updated to reflect this split. Also during the second quarter, I had the pleasure of attending the opening of our new steel drum plant near Shanghai, China and the groundbreaking of Phase 2 next door, which will manufacture plastic and fibre drums and water bottles for this thriving market.

After meeting with our extensive A-list of customers and government officials in the area, I am truly impressed and supremely confident in our Asian operations now headquartered in Shanghai. Later this month, we will be opening a new plant in the Hong Kong area, which underscores our confidence in and commitment to that market.

Our sixth largest steel drum plant in Russia also opened recently. Located 6000 kilometers east of Moscow [in Anguish] in eastern Siberia, the new plant was built according to the Greif Business Systems and lean manufacturing principles.

Finally of note for the second-quarter activities, I attended formal reviews for the progress we're making implementing the Greif Business System in Europe and Latin American. We hold these reviews periodically at various locations around the world and I'm always impressed by the dedication and passion exhibited by our people. We remain dedicated to the Greif Business System. The benefit it brings to our Company are clearly evident in our financial performance indicators, which are summarized on slide 6.

As you can see on slide 6, we are tracking positively towards our 2009 performance targets. In all, we are pleased with our results for the second quarter. We ended the third quarter with positive momentum and anticipate strong performance for the second half of this year. Executive Vice President and Chief Financial Officer, Don Huml, will now provide you with an update of our financial results.

Thank you, Mike. Good morning, everyone. Please go to slide over 7.

Net sales increased 31% to $815 million compared to the second quarter of 2006. Excluding the impact of the Blagden and Delta acquisitions, net sales increased 14%, including 4% for foreign currency. The constant currency increase of 10% is evenly split between volume and price improvements.

Gross profit for the quarter increased to $143 million, which is up 30% compared to the same quarter last year. The gross profit margin remained stable at 17.5%. Positive contributions from solid organic growth and acquisitions, coupled with the Greif Business System, offset higher costs for old corrugated containers which were at their highest level in more than a decade.

SG&A expenses were $78 million or 9.5% of net sales this quarter compared to $62 million or 10.1% of net sales for the same period last year. The dollar increase is primarily due to our Blagden and Delta acquisitions and currency exchange. Operating profit before special items was $68 million compared to $53 million in the second quarter of 2006 due to positive contributions from our strong organic growth, the recent acquisitions and the Greif Business System.

Slide 8 shows the results for Industrial Packaging. Net sales were $647 million, which was 41% higher than the second quarter last year, 18% higher excluding Blagden and Delta and 13% higher on a constant currency basis. This improvement was primarily due to the recent acquisitions and organic growth, which included higher sales volumes across all regions with particular strength in the Americas, Europe, and emerging markets.

In terms of our acquisitions, I would like to point out how pleased we are with the orderly integration of Blagden. We have closed a factory in the Netherlands and transitioned the sales to our existing locations. We have been able to retain virtually all of Blagden's customers and we are [cantering] synergies that exceeded our initial expectations. For Delta, we are continuing to make improvements and identify additional opportunities in our blending and filling operations.

Industrial Packaging's gross profit margin was 18.2% versus 17.6% in the same quarter last year, primarily due to the positive contributions from the Greif Business System. As a result of the strong top-line growth for this segment and the improvement in gross profit margin, operating profit before special items increased by 60% to $54 million in the second quarter from $34 million for the same period last year.

Now on slide 9, our Paper & Packaging segment had net sales of $164 million compared to $157 million in the second quarter last year. This was principally due to higher containerboard and corrugated sheet selling prices, partially offset by lower sales volumes, principally resulting from the acceleration of major mill maintenance that Mike mentioned earlier.

The gross profit margin decreased to 14.1% from 16.9% in the same period last year. Higher average OCC costs of approximately $7 million and the impact of the mill maintenance of $3 million were substantially offset by positive contributions from the Greif Business System, including pricing initiatives. I do want to note that quarter-end OCC costs were below the spike recorded earlier in the second quarter, but remained higher than the first quarter of 2007 levels. Operating profit before special items was $11 million compared to $14 million in the second quarter last year, primarily due to the reduction in gross profit margin.

On slide 10, Timber segment net sales were on plan and operating profit before special items was $3 million for the second quarter of this year compared to $4 million in the same quarter last year. Operating profit in both years included approximately $2 million of gains on the sale of special use property.

On slide 11, capital expenditures are expected to be approximately $110 million for fiscal 2007, which is in line with our estimated annual depreciation. Included in our capital spending are amounts supporting our growth in emerging markets. We are encouraged by our solid operating performance, quarterly integration of acquisitions, realized benefits from the Greif Business System, and positive momentum as we exited the second quarter. Consequently, we're raising our annual earnings guidance, excluding special items, to $3.05 to $3.10 per share, adjusted for the two-for-one stock split for the Class A common stock for fiscal 2007. This is approximately 28% to 31% over our fiscal 2006 record earnings.

That concludes my formal remarks and you should now go to slide 12. Mike and I will be pleased to answer your questions.

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

I have got a few questions for you. First of all, very good performance in the Industrial Packaging segment. It looked -- the volumes were up sharply, Mike. Can give us a little bit of a sense what appears to be sort of mid single digit growth? Can you kind of help us by substrate or confirm that for us?

Chris, yes. We're very pleased with the Industrial Packaging business. As you can tell when you looked at the operating profit, it's up over 58% from this year versus last year, and we were extremely pleased with that and we have a nice position in that business. The volumes were up mid single digits across generally steel and plastic were the principal ones in both Europe and the United States. Asia was strong also. Fiber was fairly flat from a volume standpoint, but we're very pleased with the volumes that we had in the quarter and the continuation into the third quarter as well.

So you feel like that is a sustainable rate?

What we see right now, we're very pleased with what we have seen to date, yes.

Okay. And then my second question is for you, Don. In the income statement, there was a -- about a $4.3 million other item. That's a line item that's usually only plus or minus $0.5 million a year and that's a pretty big swing. Can you give us a little color what's going on there?

Yes. As we have discussed previously, that is really sort of a sundry item that is primarily driven by foreign exchange. And in this case, one of the reasons for the more significant delta is really the hyper-inflationary accounting, particularly for Zimbabwe. And as you know, we go through a translation of our net assets into our functional currency, the U.S. dollar, and those adjustments normally would go to a separate component of equity, the cumulative translation adjustments. In the hyper-inflationary economies, those flow through the P&L.

We had last year, Turkey as a designated highly inflationary and so we had a gain, and then we had really a corresponding loss primarily for Zimbabwe. This year, the expectations would be that going forward, these amounts will be less, given the fact that we have now made really a fairly significant adjustment based on the valuation of the Zimbabwe dollar. So the remaining exposure has been diminished.

And Chris, Turkey no longer is in the hyper-inflationary accounting, so the big credit we had last year we don't have this year.

Okay, so for the -- if you can help me maybe drill in this just a little further, it's a onetime item and can you maybe give us an approximate amount that it hurt you this quarter?

That would be about half of that delta. And the remaining items would primarily be foreign exchange effects as a result of intercompany items that are normally hedged. But as you know, when we have intercompany transactions, sometimes they are in countries where it is not practical to hedge them. Typically, those are offsetting items. This quarter, they didn't offset to the same extent that they normally do.

Overall, I'm really very pleased with our risk management practices and the natural hedges that we put in place. But given the fact that we have nearly 50% of our sales in currencies other than our functional currency, you are going to have a little bit of noise.

The good news is that for next quarter, we have easy prior-year comparisons because the other expense was about comparable to this quarter. So we should, again, have favorable comparisons for the third quarter.

Okay. I have a few other questions -- let me just ask one and I will jump back in the queue. Mike, can you give us any sort of an early read with respect to, you know, now that Mauser has changed hands and I believe it's in a Dubai private equity shop's hands, can you give us an early read as to how you feel there may be any changes either positively or negatively in the competitive landscape?

Good question, Chris. Yes, it has been announced that Mauser is being bought by Dubai Holding. We were well aware of that transaction and that should not be a surprise to anyone because Mauser has been actively for sale for over a year. We know the people very well. We have a very disciplined financial portfolio from a buying standpoint, and so I think Dubai was able to buy that at the price they did.

We know a little bit about Dubai. We're learning more about them every day. I think we're going to have a wait-and-see attitude of what happened. It -- they have some financial strength, which is good and if they want to continue to consolidate the industry, we think further consolidation is always good for the industry because there is still fragmentation out there. But we have a wait-and-see attitude because they really have not closed yet, Chris. It will be in a couple of weeks it will close and then we'll see what happens with them.

Okay. Thank you very much. I'll jump back in the queue.

(OPERATOR INSTRUCTIONS). Walt Liptak, Barrington Research.

Thanks. Good morning. Nice quarter. My first question is in the PPS segment, you mentioned $7 million of incremental OCC costs in the quarter. I wonder where are you with cost recovery and what's the outlook for price increase in the second half?

Yes, for OCC, as I mentioned in my prepared remarks, we have come off of the recent peak levels and the prices spiked to in the 170 range. And based on the board market report, they would be in the $100 range today. We always have to add freight, which is a fairly significant component of our all-in costs. But what we are looking at is relative stability. One thing that we have seen is improved availability of wastepaper. So that is positive. That has resulted in that tick down in pricing. I would say that it's difficult to project, but we would say near-term, likely to be stable. Basically our guidance, as we had stated last quarter, we expected about a $50 million -- excuse me, a $50 per ton increase. And on average, that's pretty consistent with what has been realized, so we also anticipated that that would continue for the full year, our fiscal year. And I would say that that is probably a reasonable assumption and hopefully has some upside potential.

And Walt, if I can interject here also, the other thing that affected PPS this quarter in addition to the OCC was the unplanned shutdown of the mill, which we really were scheduled to do in May. It was a center press roll failed and our people took advantage of the fact that we were going to have to shut the mill down. And I give them a lot of credit because they were able to pull forward a whole week's of activity almost 40 days earlier than planned, and successfully pull it off. And that was probably about a $3 million effect to the quarter. So if you look at the paper business, while it is down quarter over quarter, if you look at the spike in the OCC and the shutdown, you get close to $10 million and they were down a little over three. So the paper people did a great job, and attribute part of that to the Greif Business System, which we said the last quarter we're just starting to implement there. That had some big impacts, so while on the surface it looked down, and if you peel it back, they actually did a very good job this quarter.

Okay. Thanks for that color. And so next quarter, we would see that $3 million from the unplanned shutdown reversed.

That's correct.

But then we would still have some headwind, as Don was talking about, from the higher OCC costs.

Right. And pricing right now is -- from a paper standpoint, is stable. A fall increase may not be out of the question. And I think as it stabilizes I think that that's probably what people would be looking at.

Okay. I wonder if you could talk a little bit about the seasonal demand trends. Have you seen volume -- first of all, during the quarter, how much were volumes down in PPS?

They were down in the converting side about 2%. If you look at the Fiber Box Association's statistics for the regions that we had served, they were down about 2.6%. The mills were also down about 2%, but that was impacted by the shutdown that Mike had mentioned. If you excluded that impact, they would have been up by that amount. So the trends really across the portfolio are quite good. We are seeing signs of an improved economic environment and that is definitely being reflected in our order intake level. So we feel quite good about the fundamentals.

And the Board just this week was at -- we were visiting, as part of the Board meeting, visiting one of our mills at one of the core choice plants, converting plants, and they're running very strong right now, very busy. And so that (technical difficulty) indication of what's happening.

Okay, so both -- with the seasonal pickup, both converting and mill volumes had picked up into the positive range?

Compared to -- July is a slow month. You get into the slow month from the mill standpoint and that starts to pick up in late August, September, in the fall of the year. So you are comparing it to a seasonally slow period of time anyway.

Okay, thanks very much.

Mark Wilde, Deutsche Bank.

Hey, Don. This is Matt Butler. I work with Mark and Chris here at Deutsche Bank. Good morning to you. It looks pretty good. I was wondering if you could walk us through, again, your SG&A reduction target and how you plan to get there and just give us a sense of your confidence in getting to that 7.5% target. And maybe just in light of what you would call low-hanging fruit in the sense that is it going to get tougher or is this a challenge for you? Or is it something that you think you can do pretty easily? Thanks.

Yes, that is a good question. I would say that we're going to really be getting there through the leveraging of our SG&A and the real focus right now is harmonizing our ERP systems, standardizing our business processes and practices, and really increasing the scalability of our infrastructure. And I think we are making really very good progress. What we -- if you model out our results for the 2009 period, we definitely need to supplement our organic growth to get to the 7.5% target. And we would expect to do that, now that we have entered the earn and grow phase of our transformation process, we will be making acquisitions from time to time. And that is really the way we're going to realize that target, to make sure that as we increase in size that we realize the scale advantages based on our systems and standard practices.

And Matt, we will get there by '09 and that's our goal and we definitely will do that. It's going to take some work. It's not a laydown because we don't really set out targets that are just easy. We set out targets that stretch us a little bit so we will get there.

I would just add one other color to this. We really haven't got the benefit of the Blagden, Delta SG&A benefits yet because of the carryover of some costs that initially apply. And I would think over the next six to nine months you would see some of that cost go away, and so we will start seeing some of the benefit, which ties into what Don was saying that supplement the organic growth will help us get there.

If you could just speak generally about valuations and potential acquisition targets, is it a sense that the smaller targets are a much lower premium businesses? I know a lot of the packaging companies that we cover and some of the transactions we've seen done in private equity buyers, the valuations have been quite high. So is that something that you have to be careful about? And does it sort of limit the size of businesses that you are acquiring?

You are right. I think there has been an uptick in valuation over the last period, short period of time last year, as far as acquisition. We are cognizant of that. We are in a good position, Matt, because of our relative position in Industrial Packaging. We know about everyone who's in that business and if they are for sale, they normally talk to us at some point in time.

We are very disciplined on what we do. I don't think it limits us. I think it just -- I think our discipline helps us to make sure that when we do something, we ensure that we're going to bring value to our shareholders long term by doing that. The same thing would hold true in the paper business.

So we have not really seen a correlation between size making a difference in multiple. I think it's really where you are at geographically, what kind of profits you have, what kind of equipment you have, what your future is like, really has more of a bearing of multiples versus size at this point in time.

Okay. Thank you very much.

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

Good morning again, gentlemen. Can you comment a little more on the Greif Business System? I think your targets were originally 30 million for the year and you bump those up a bit to exceed $30 million a year. Can you kind of give us a range of what you think a new number might be and how does that play into the related guidance or I guess kind of help us with the what is an improved guidance in spite of some onetime items?

Yes, and it really is due to our expectation that the Greif Business System impact will exceed the $30 million. And basically, when you look at the guidance revision from last quarter, it basically implies that we're going to get at least an additional $5 million in impact from GBS. And that is going to be split two-thirds sourcing and one-third operational excellence. With sourcing also the cooperating with our commercial team to make sure that the opportunities that they create are translated into impact on the bottom line.

Chris, I just want to make one comment. I think -- I applaud you for recognizing the increased guidance in light of the onetime items; you are absolutely right because you have to really factor all of that in, so I -- very astute on your part.

Thank you, Mike. Next question I had was about -- if you look at your CapEx -- well before I get to that, the tax rate, a housekeeping item -- the tax rate still 25%, 26% for the full year?

Yes, we are currently estimating 26.2%. That is, as you know, down from last year, but up a bit from the previous guidance. Last quarter, we were at 25.2. As you know, there is some variability in tax rate based on earnings mixed shifts. We have a very significant differential between our U.S. statutory rates and the composite rate outside the U.S. So there is going to be a little bit of movement, but it will be within a fairly narrow band.

Okay. And the last question I had was your CapEx numbers. You have taken those up a little bit. I'm assuming that may be because you were -- you talked about adding a few new plants or were those already in the mix? Or can you give us maybe a little more color there and when we would expect contribution from that?

Yes, it really, there has been a bit of an acceleration of our organic growth strategy, and so you are seeing some evidence of that combined with some currency effects.

Okay. Thank you very much, gentlemen.

[Amy Levine], [Shankline] Capital.

Can you just comment, you have accumulated quite a bit of cash on your balance sheet and what you plan to do that?

Yes, the cash accumulation was a bit more than we would have expected, but part of that is really due to the -- kind of the early stage of the acquisition integration process. And we will see a repatriation of funds in subsequent quarters and then we would expect to use that cash for general corporate purposes, including debt paydown.

Thank you.

[Charles Robby], [Xialen].

Good morning, guys. Quick question for you on the Industrial Packaging segment. Can you help me understand the seasonal pattern generally speaking to that business? It looks like the summer months I believe are generally stronger. Is that correct?

Charles, it really varies by geographic region. Summer months are generally stronger in Europe and the fall -- our fourth quarter -- and I'm going to tell by quarter here. So our May, June, July is generally stronger in Europe and August, September, October is generally stronger in the United States. Cumulative, you add those two together, those two balance out relatively the same. You might get a little bit of fluctuation. But those two quarters historically are stronger than the first two quarters.

Okay, great. Thanks a lot. That's all I had.

Walt Liptak, Barrington Research.

Thanks. Just as a follow-up on Chris's question, on the guidance, the 305 to 310, the base you're using, Don, is the $0.66. Is that right? For the second quarter?

That's right. That's right.

Okay. And the charge that Mike talked about, is the maintenance shutdown, the $3 million in PPS, because you pulled the charge out, right -- the restructuring charge of $0.05?

The maintenance charge was not restructuring, Walt, if that is what you're asking.

Right. So the headwinds that you were able to raise guidance with -- even with the headwind of the maintenance shutdown, but you've got the restructuring charge in the second quarter already adjusted to get to the $0.66. Is that correct?

The restructuring charge is not related to the mill annual maintenance. That is flowing through the pro forma results. So that is -- if it had not been for the mill shutdown and that $3 million impact, our EPS would have been $0.03 higher for the quarter, the second quarter.

Right. Okay, thanks very much.

(OPERATOR INSTRUCTIONS). We have no questions at this time. Do you have any closing remarks?

Yes, I do. Thank you, Heidi. I'm going to thank you for joining us this morning. As a reminder, this call will be available for replay from 1 PM Eastern time today through noon on Tuesday, June 12. The playback telephone numbers are 800-405-2236 for domestic callers and 1-303-590-3000 for international callers. The pass code is 11090670#. This call will be posted on the Company's Web site in approximately one hour and thank you for your time this morning. Good bye.

Thank you. Ladies and gentlemen, this concludes the Greif, Inc. second-quarter 2007 results conference. Thank you for your participation. You may now disconnect.