Greif Inc (GEF.B) 2010 Q4 法說會逐字稿

Greetings and welcome to the Greif Incorporated 2010 fourth-quarter and fiscal 2010 results conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Deb Strohmaier. You may now begin.

Good morning everyone. 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 website. 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 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 2009 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, debt extinction charges, timberland disposals, and acquisition related costs. 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 a footnote. Tables showing the reconciliation between GAAP and non-GAAP measures are available at the end of this presentation and in the fourth-quarter and fiscal 2010 earnings release.

Giving prepared remarks today are Chairman and CEO Mike Gasser and Executive Vice President and CFO Don Huml. President and COO David Fischer is also available for the question-and-answer session. I will now turn the call over to Mr. Gasser.

Thank you Deb. Good morning everyone. Thank you for joining our conference call today.

For those of you following this presentation on the Web, we are on Slide 4. We are pleased with our strong fourth-quarter and full-year results, which were primarily driven by improved sales volume, the Greif Business System, and permanent cost savings due to the actions we began last year.

As you may recall, we had specific goals going into 2010, and we achieved them. Our 2010 operating profit exceeded the record was set in 2008 before asset disposition gains. We realized permanent contingency savings above our $120 million target. We leveraged the Greif Business System to achieve an economic impact over our targeted levels and to integrate our acquisitions.

We completed 12 acquisitions, adding two growth platforms to our core business, Flexible Products & Services and reconditioning services for steel and plastic industrial containers. We improved our financial flexibility by successfully syndicating a $1 billion credit facility which Don will discuss later.

During fiscal 2011, our efforts will be primarily focused on integration activities. As we enter the year with strong fundamentals, we look forward to future progress and improved financial performance in fiscal 2011.

On Slide 5. During the quarter we completed seven acquisitions, including Unsa and Sunjut, and continue to establish the Greif Business System in our facilities. From my visits to the flexible IBC plants and conversations with our managers there, I expect the GBS to return significant savings operationally, administratively, and commercially.

During my recent travels in Asia, I toured the plant in SCIP that will be occupied by Delta. We're 95% complete with construction anticipates that nonhazardous package will start in late January.

Also while in Asia, I toured a small demonstration drum plant located at a customer site in Japan. This plant is based on our knockdown drum model receiving its components from China.

In Chile, I had the opportunity to tour a [south pack] Conoco drum plan which we acquired this year. The line complements our knockdown drum technology, allowing us to serve the extensive agriculture industry customers in Latin America. With full application of the Greif Business System at this site, we will reduce operational costs and expect to double volume in the next few years.

Looking ahead and planning for future growth, we will be establishing a new strategy team in mid-2011 to investigate and quantify opportunities. We do this every three years with proven success. It was our strategy team in 2008 that laid the groundwork for our new flexible IBC business.

Now to Slide 6. Regarding sustainability, Greif is a goal oriented company. A major goal of ours is to make a positive difference in accordance with the objectives of the World Business council for Sustainable Development.

On the matter of safety, I am pleased to report that with 20 million work hours recorded in 2010, we improved our key safety metrics by 13% over fiscal 2009.

For the environment, we have now reduced our carbon emissions 13% over our baseline period of 2008, making this the third consecutive year for such reductions. We're also making strong progress in reducing our energy usage. Our paper packages core choice business and Rigid Industrial Packaging businesses in Latin American and EMEA have logged double-digit reductions from our base in 2008. However, because of the tremendous energy needs of our mills, we stand at an overall 2% reduction on a per-unit basis.

Everyone, including our mills, are working to increase energy efficiency. We have recently added the task of reducing the waste we generate in the ultimate goal of producing zero waste going to landfills.

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

Thank you Mike. We are pleased with our strong operating results driven by solid topline growth across all operating segments and regions. We continue to see benefits of the Greif Business System and permanent cost savings. To date, our integration and synergy capture are on track. Finally, our financial flexibility has been improved by entering into a $1 billion credit facility.

Slide 7 shows our consolidated fiscal year results. As you can see, net sales were $3.5 billion for the year, compared with $2.8 billion last year. The 24% increase is primarily due to strong sales volume evenly split between organic growth and acquisition. By segments, the increases are attributable to Rigid Industrial Packaging & Services of $321 million, Flexible Products & Services of $189 million, and Paper Packaging of $163 million, partially offset by Land Management's decrease of $4 million.

SG&A expenses increased to $363 million from $268 million last year. This increase was primarily due to the inclusion of $38 million of SG&A expenses from acquired companies and $27 million of acquisition related costs. In addition, there was a $5 million unfavorable impact from foreign currency translation. As anticipated, we had higher employment-related costs this year compared to last, when normal salary increases and certain benefits were curtailed.

Operating profit before special items increased to $379 million for the year from $277 million last year. The $102 million increase was due to Rigid Industrial Packaging & Services with $80 million, Paper Packaging with $25 million, and Flexible Products & Services with $10 million, partially offset by Land Management with a $13 million decrease.

Net income before special items increased to $255 million for the year from $175 million, a 46% increase. Diluted earnings per share before special items were $4.35, compared to $3 last year.

On Slide 8, for the year, Rigid Industrial Packaging & Services net sales increased 14% to $2.6 billion from $2.3 billion last year. The improvement in operating profit before special items is driven by higher sales volume, including a 10% same-structure improvement, the Greif Business System, and further benefits from permanent cost savings achieved during fiscal 2009, partially offset by lower net gains on asset disposals. Operating profits for all geographic regions within this segment improved over last year's operating results with particular strength in the EMEA region, driven by sales volume improvements and margin expansion.

Please go to Slide 9. Flexible Products & Services net sales and operating profit before special items increased primarily due to the acquisitions of Storsack, Sunjut, Unsa and Ligtermoet during 2010.

Now on Slide 10. Paper Packaging net sales were $624 million compared to $461 million last year due to higher sales volumes, 32% or 20% on a same-structure basis, and higher container board selling prices. For the year, we benefited from the full realization of a $50 per ton container board price increase initiated in January and the full realization of an additional $60 per ton price increase initiated in April. The significant increase in operating profit before special items due to the higher sales volume, improved selling prices and execution of the Greif Business System, are partially offset by higher OCC costs at the paper mill.

As shown on Slide 11, Land Management results were consistent with planned levels. Operating profit before special items decreased from fiscal 2009 due to lower gains on the sale of specialty use properties.

Please go to Slide 12. At the end of fiscal 2010, we further strengthened our financial flexibility by successfully closing on a $1 billion senior secured credit facility that replaced our existing $700 million one. The syndication was well-received and the facilities were more than two times oversubscribed. The new five-year credit agreement provides us a $750 million revolving credit facility and a $250 million term loan. These new facilities improve flexibility, lower borrowing costs, and support our ability to execute our growth strategy.

Now on slide 13. We have four overarching goals for fiscal 2011 -- deliver record sales and earnings and top-quartile returns; optimize, expand and leverage the Greif Business System to intensify our customer cost and cash focus; and integrate to our acquisitions, capture anticipated synergies, and reduce our debt levels.

Please turn to Slide 14. For fiscal 2011, we anticipate improvement in sales volumes, contributions from acquisitions, and further productivity improvements from the Greif Business System. These positive factors are expected to be partially offset by lower gains on asset sales, elevated debt levels due to previous acquisitions, and a higher effective tax rate.

We believe that global economic uncertainties and currency fluctuations will continue to be challenges. Based on the foregoing factors, we expect that Class A earnings per share before special items will be in the range of $4.75 to $5 for fiscal 2011.

That concludes my remarks. You should now go to Slide 15. Mike, David and I will be pleased to answer your questions.

(Operator Instructions). Ghansham Panjabi, Robert W. Baird & Co.

Good morning. As it relates to the Paper Packaging business, OCC prices have moved up quite a bit during October. Given your use of FIFO and I assume carrying some inventory, is it fair to say that the full cost increase will not be felt until the first quarter? Also, are there any price increases and Paper Packaging outstanding [at current] and if you can also update on OCC trends that would be helpful. Thank you.

You are correct. OCC, our costs have risen quite dramatically. They are currently at about $180 per ton all-in. That would compare to the end of the fiscal-year level of $150, and so that $30 delta, if you extended that on a full-year basis, would be an unfavorable impact of about $15 million. So when we get to the earnings guidance bridge, that will basically be one of the steps, one of the steps down.

As far as price increases, There's no price increases currently on the horizon. You know there was one (technical difficulty) tried in August that did not go through.

Just switching to the Rigid business, it sounds like steel prices will be up quite a bit in '11, in addition to plastic prices certainly sequentially. I assume that margins in both 1Q and perhaps 2Q could feel some pressure in Rigid until the escalators kick in? Is that the right way to think about it?

The one thing that has been challenging is the volatility. We're very fortunate to have contractual pass-throughs, so we do have a natural hedge, but there are some leads and lags. We actually have seen increases, more recently some softening. Now the expectation is that during the first quarter might actually be higher pricing. Many of the steel producers are sort of managing the supply to demand, and so, again, we do anticipate an upward bias. Near-term, that actually could be a positive. As you mentioned, we are on FIFO, and so we do get a benefit of a lacking average cost and the benefit of the price resets, so there is typically a bit of margin expansion in that environment.

Just going back to historical trends, has there ever been sort of a prebuy as steel prices have gapped higher?

Not really. The inventory levels that we can maintain really doesn't allow us. We may get a day or two, but nothing of any significance.

Okay, and just one final if I could? The tax rate, Don, for 2011?

I'd really put that conservatively in the 20% range.

Thanks so much.

Chris Manuel, KeyBanc Capital Markets.

Good morning gentlemen. A couple of questions -- actually I got stuff for each one of you, so let's start -- I'll start with you Don. Could you give us kind of a walk-through or bridge both to 2011 as you laid out your guidance, what some of your key assumptions are behind those, and then as well if you want to address what the cash flow might look like in 2011, and kind of --? I guess there wasn't a cash flow statement released. If you could give us a view stats to help us understand where you finished the year?

Okay. In terms of the guidance for 2011, why don't we bridged that based on operating profit and the EPS, and beginning above the line, looking at 5% organic growth, so that contribution would be in the $50 million to $55 million range. Chris, what we are considering there is basically a contribution margin ranging from 30% to 32%; the Greif Business System in the $30 million to $35 million range; acquisitions, $15 million to $25 million. SG&A will be about $15 million higher based on basically merit increases that benefit costs, including pensions.

Currency, we're assuming the euro, which is a good proxy for our basket of currencies, would be at 1.30, and that would represent a step down or a negative of $5 million. Then we had discussed earlier OCC being a negative of $15 million, basically assuming that the current costs continue for the full year and that there is no, as Mike mentioned, no container board price increase. Again, hopefully that's a conservative assumption.

I would say below the line, I would, on a pretax basis, assume a reduction of $25 million. The key components, you could almost say they are about equal, in equal parts of minority interest deduction, interest expense, and the tax rate. So that basically would bridge you to that $4.75 to $5 range.

If I just add it up, you're op income numbers, that takes me -- I think the range is $4.25 to $4.35. Does that sound right?

A little bit low, but yes. I would say it has (multiple speakers)

I'll go back and take a look at it.

Yes, in that range of the $4.50 would be a good one.

The last component on the cash flow?

Yes. On the cash flow for 2010, the first -- basically the gross cash flow, if you look at net income on a GAAP basis up over $100 million or 90%, depreciation higher -- so you've got to basically a gross cash flow of about $330-plus million.

The one thing that we did have is an unusually high requirement for working capital. That was a use of funds of about $150 million. That $150 million was about two-thirds or about $100 million is related to the acquisitions, many of which, basically seven of them, occurred in the fourth quarter. So we basically assumed the working capital, but we really didn't have the associated revenues, so it really looks like our working capital intensity increased.

We also have not had the opportunity to embed GBS best practices, and so we will definitely be unlocking that cash during 2011. That will be the focus.

The other one-third of that $150 million use of funds would be the combination in equal parts of commodity inflation, and we talked about OCC and steel, and then currency. So that is really why you're going to see a surprisingly low free cash flow, atypically low for 2010, because we did have CapEx of -- and basically before getting to that, so the operating cash flow, about $180 million, CapEx of $144 million. So, we're looking at a free cash flow in that $40 million range.

Then given the discussion that you gave us with your other bridge, you just have a -- even if you just want to start it off with cash flow, I recognize a lot of moving parts as to what 2011 might look like.

Well, we basically will have the expected earnings improvement and the higher depreciation levels. So when you consider that, the fact that now really working capital for 2011 will be a source of funds as we reduce working capital intensity within the acquired companies, for example Storsack, their operating working capital to sales is in the 18% to 20% range. They do have an extended supply chain, but based on our experience, we are going to be able to get them much closer to the 10% of Greif. Plus, we have aspirations to reduce that to 9% for 2011, to 7.5% of sales by 2015. So that's going to unlock about $120 million. Then (technical difficulty) offset some of the requirements based on higher sales levels and assume capital spending comparable to this year, you would get basically a free cash flow in the $275 million to $300 million range.

Okay, that's perfect. Then two other questions I had for Mike, can you give us some -- poor Mr. Huml had intended to retire at the end of the fiscal year but I see you guys are still beating him up. Could you give us an update on how the CFO search is going?

Yes, I would like to. We're in the final stages of discussion with an individual, and I would anticipate, within the next two to three weeks, that we would make an announcement. Thank you for asking that question, because I would like to right now publicly thank Don for all that he has done. He is been a great partner to me, a great, demanding partner to our company. For everyone who sat through these calls knows that he is very transparent, he is very honest, and we obviously -- the new person has big shoes to fill. But we've enjoyed the experience with Don for the last eight years. So we're there. This probably will be Don's last call. We'll ask him to come back, but I'm not sure he will. (multiple speakers)

Thank you Mr. Huml. We appreciate your help over the years.

Thank you, Chris, very much.

I don't want to leave you out, David, so I have a question for you too. You've laid out what you anticipate out of the FIBC leg of -- new leg of the stool that you've build on over the last -- in June of this year. Your new market that you are addressing now is the refurbishment of drum market. Could you maybe give us a sense of -- layout what that market looks like, how big you think it is, what you think your opportunity there is?

It's a complex question you ask. I would say, globally, that market mirrors the new steel drum market and the new plastic drum market less, a little less, but let's just stick on steel for a moment. It's about the same size on a global basis. However, we're going to elect to participate only in the mature markets where regulations pose a competitive demand on other competitors that we can line ourselves up with and compete on a very ethical basis and treat our customers and the environment as it should be.

So, I would say our outlook is to create a business that reflects our current footprint in new steel in the global -- sorry, in the mature markets that we compete. I think with the sustainability push for our customers and what they are doing in their own operation, we are very favorably positioned to meet their needs and expand in a very healthy business on a fairly low capital investment basis, given our existing new steel drum footprint.

Thank you much. I've got some more questions but I'll jump back in the queue.

(Operator Instructions). Michael [Whirley], Janney Montgomery Scott.

Good morning guys. Just following up on the FIBC, when you guys laid out the plans for that market, you were assuming that you would get to a 30% market share by 2015. I realize that you're not going to be doing quite as much rolling up, but how much do you think of the gap between where you are now and the 30% will come from acquisitions versus organic?

This is David. We are currently in the throes of the -- consolidating the top three production players globally. I would anticipate that to get, let's say, to a steady, stable footprint over the coming six months or the coming next two quarters. Once we do that, you will see likely around the world smaller bolt-on acquisitions. But the majority of that growth is going to come organically as we leverage two key points.

One is our existing participation in our rigid packaging around the world. We have a very favorable position to expand those sales in the white spaces, that those three competitors that we put together don't currently participate in, in a large way. Number two, as we build the Saudi hub and really leverage our cost advantage of that Saudi operation, you're going to see us further expand via organic sales.

I would just add one thing. Right now we are about 18% to 19% product share around the world, so we're well on the way. Our goal was to get to $1 billion in sales with the [15]% operating margin, as you know.

From a sales standpoint, on a run rate basis at the end of the year -- and this is a run rate basis -- we are between $400 million and $500 million, so we have a good start to that. We have a lot of work to do on the operating profit margin, but we shared that upfront, that that would be really from the GBS and from what Dave said when we get the hub built in Saudi. We are tracking where we thought we would be, and we are pleased with the progress we're making in this business.

Then just following up on the margin side of that, how much of that margin bridge do you think you can achieve in 2011 or by the end of 2012?

The starting point, as you know, was mid single digits. We have seen a couple of points of improvement so far, which we have been really quite pleased with. So I would say that we would clearly expect to see another point of improvement for 2011. Then we are going to be getting the fabric hub in place the following year, and that's going to be a very significant source of lift, of margin lift.

A good example of that is in the fourth quarter of this year you see that the margins of that business actually went down compared to the third quarter. That's really attributable to price cost increases in raw material in the FIBC business. Without having the Greif Business System in there, we had a long lag of passing through those costs, which caused margin compression. This is something we really can fix. We can do this. The Greif Business System takes care of that. So the decrease in the fourth quarter is not something that concerned us. It's something we understand. To Don's point, that will allow us, by putting the Greif Business System, to get that margin lift as we go forward.

Okay. Did you break ground yet on that hub?

We haven't officially turned over a shovel of dirt yet, but it's in the coming weeks that we do that. Most of the engineering work is complete.

We are looking at 18 months?

Roughly.

And then just briefly going back to the reconditioning, you kind of sized the market for us. But what -- aside from the steel, your plans to go after the mature market in steel, what are your plans for the plastic drum side of things in the reconditioning?

It's similar to steel. Our current acquisitions in North America that we've already executed involve reconditioning of plastic drum. We have the same interest level as we do in steel. The market is just not going to be as big as it is in steel.

Tim Burns, Cranial Capital.

Mike, this knockdown drum, is it novel? Is it a displacement tool? Is it a growth tool? How would you describe it?

Yes, it's a technology we've had for a while, and it's a great technology if you have to ship drums a long ways because you can actually nest them in a container where they press down, we put them in a container and then actually expand them at the customer's location. So they work if you ship long distances. It's a technology we have. Some location it really works well at. The one we were at in Japan recently, it's on the customer's [premise system]. So this could work out very well. We will bring the parts in from China, be able to make the drums, and really be able to compete in that market in a very big way. So, we're very excited about that. But it has unique applications, so it won't work everywhere but it will work certain places.

That's exactly what I was looking for. So it's more than a logistics play. There are markets -- end markets where this can really add benefit?

Yes, that's true.

Are you going to list those markets?

Not currently today. I think (multiple speakers) (technical difficulty)

the last question I had was is it true that there's going to be a massive disco party send off for Don at the Shoe sometime after the first?

I think [Gordon's] already planning that. [Gordon Greif] is already that, for a disco party for Don. That's right.

Thanks for planting the seed.

Best of luck to you, Don.

Thank you so much.

Chris Manuel, KeyBanc Capital Markets.

Good morning again. Just a couple follow-up questions -- when -- just a little more understanding around what happened here in 4Q. As you guys think of normal volume targets or objectives, it is in the kind of range that you laid out for us, 5%-ish but yet the quarter was a bit light. I think it was 2% in your industrial sides, or in the drums piece. Could you give us maybe a little color as to what drove some of the shortfall? Is that something that what you're seeing maybe in the near-term trajectory early this year as November/December kind of looking at you today? Some little extra color there might be helpful.

Let me start and then Dave and Don can jump in to add some more color.

The drum -- the volume for the fourth quarter was really driven by the reduction in the ag business compared to previous years. As you recall and we said previously, that business is a seasonal business. That doesn't mean in months but it means in years. In the last two years, we had record crops, which means we had record drum usage in those two businesses -- in that business. This year, we had a good crop and a good usage but not a record usage. So when we look at the volume, in North America for the quarter the volumes were flat. Now, if you look at the components, steel and plastics were up almost mid-single digits, but the fiber was down significantly. That's a result of the ag business. If I look through the rest of the world with Latin America up a strong double-digit 20% range, EMEA up a mid single, Asia basically flat, we're getting close to that 5% range without the ag, but the ag business would have been [back worth] that. So it's really attributable to the ag business this year.

Okay. So the rest of the business, as far as running in aggregate, if I understand you right, that's at mid single digit level. The offset from the fiber piece that was primarily related to ag was your detriment this particular quarter. Is that --?

That's basically it.

That's helpful. Let's see. The other question I had was you went through some sustainability oriented stuff in your slideshow, Mike. As you look at what it takes to -- for lack of a better term -- green the Company up, is this something that -- is there a way to do this and make money in the process, or do you look at this as something that it's just the right thing to do and maybe it costs us a little bit of money. How do you think about that?

I believe that true sustainability, and I'm talking about true sustainability, has both an equal amount of being cost effective, bringing value to the shareholders, and being good for the environment. If it's just one or the other, then you don't have true sustainability, because it will go away one way or the other. So we look at it as a true sustainability play.

So as we try to, as you say, "green the Company", obviously any energy carbon reduction work we do brings value to us (multiple speakers). When we look at zero landfill waste, that brings value to us, but it takes cost out of the business. We look at new product innovation; that helps bring value. We also look at it on the eye of the future. What's the demographics of the world going to be ten years from now? What's water usage going to be? So, we have programs underway, but the way we look at it is you have to have equal parts of both. If it doesn't, then it doesn't fit our criteria of true sustainability.

That's helpful. The last question I had was twofold. One, if you give us a sense of as a company where you are running today, if 2008 was -- if we were at -- from last peak-in volumes, are we running at let's call it 80%, 85%, 90%? Where are we at in relation to last peak on volume level, number one?

Then two, a question for Don regarding CapEx. Obviously, your CapEx is elevated a bit here. I'm assuming you've got some other growth oriented projects. Does it go back to below D&A levels as you get out 2012 and beyond?

Yes, the volume -- the volume is -- 95% to 98% of the 2008 levels today. So we are tracking along that line as far as CapEx.

As far as the CapEx, it will remain elevated for a couple of years, primarily because of the fabric hub. Then beyond that, I would really expect to see us at or just below the depreciation provision, which really for next year would be about $135 million. So -- and we really see about two-thirds of that as sort of the maintenance of productive capacity with the remainder being really discretionary.

That's helpful. Good luck guys.

(Operator Instructions). There are no further questions at this time. I would like to turn the conference call back over to Ms. Strohmaier for any closing comments you may have.

Thanks Chris. Thank you all again for joining us this morning. A digital replay of the conference call will be available in approximately one hour on the Company's website at www.greif.com in the Investor section. We appreciate you joining us this morning.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. We thank you all for your participation. Good day.