Greif Inc (GEF) 2002 Q2 法說會逐字稿

Welcome to the Greif Bros. Corporation, second quarter 2002 results conference call. During the presentation all participants will be in the listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, please press the 1 followed the 4 on your telephone. As a reminder, this conference is being recorded, Thursday, June 6, 2002. I would now like to turn the conference over to Krista Hines, Director of Communications. Please go ahead, Ma'm.

Good morning and welcome to Greif's second quarter 2002 conference call. Today we have two speakers, Chaiman and CEO, Mike Gasser, who will review business activities and our new Chief Financial Officer, Don Huml, who will discuss the financial results for the quarter which ended April 30th. There will be a question and answer session at the end of the presentation. Before we begin, I'd like to read the customary Safe Harbor language. Some of the comments on this call may contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, project and similar expressions among others identify forward-looking statements. Forward-looking statements speak only as of the day the statement was made. Such forward-looking statements are subject to certain risk and uncertainties and could cause the Company's actual results to differ materially from those projected. Now, I would like to turn the call over to Mike Gasser.

Thank you, Krista and welcome to all of you.

I am very pleased to introduce Don to you. In past calls, you have asked about the CFO search and you've been patient with the process. As I mention then, our search would be thorough and deliberate. This approach has paid off. We found a true professional that brings to Greif a strong portfolio of financial leadership, integrity, stewardship, teamwork and worldwide industrial experience. I am very excited that Don is part of our management team. Don joins us from Snap One Incorporated. A global manufacturing and marketing leader in the industrial tool business where he was Chief Financial Officer and Senior Vice President of Finance. Since starting on April 29th, we have kept Don very busy learning the Company and our business relationships, but I know that he is anxious to meet with the investment community and provide you with a better understanding of Greif. You can look forward to increased emphasis on investor contact and communication. Before Don talks about the second quarter earnings, I would like to highlight the results from our recent annual strategy meeting.

With the leaders of our three business segments and the company support functions in attendance, we confirmed our gross strategy for each line of business. We are optimistic about the opportunities to expand our industrial packaging products to achieve a greater market share with current customers and to expand the range of product offerings in the world regions we serve. We particularly see growth opportunities in developing regions such as Russia and China. And in plastic drums and intermediate bulk containers in major world regions. In our corrugated packaging business we are focused on increasing marked share in our U.S. regions, specifically targeting products used to protect in-transit materials and our multiple bag business. In the timber business, we project ongoing timber sales similar to recent years, and through the sale property for development purposes and income from property leases plan to keep increasing our pine timber holdings. This will be accomplished through transactions that qualify under IRS Section 1031 which involve like kind exchanges whenever possible. We will continue to explore the most efficient ways to serve our customers. Which includes uses of business partnerships and acquisitions in addition to current company resources. Greif's strengths remain our broad offering of products and services, our extensive packaging expertise and our regional and worldwide network of operations, sales and partnerships in support of the customer. To leverage these strengths in our product line strategies, we are committed to insuring that our business processes, information systems and management personnel are in the place for the future.

We are currently undergoing a thorough review of certain financial processing systems, human resources services and purchasing and logistic practices to improve their effectiveness, mainly through the use much information technology. We are also strengthening our succession planning program by expanding the programs scope in intensity of training and mentoring.

As we position the Company for the future, it is essential that we have strong leadership throughout the world and capable management teams in all functional areas. I whole heartedly support our initiatives to develop and retain the best talent in the business.

Now, I would like Don to discuss our financial results for the second quarter of fiscal 2002.

Thank you, Mike. I am pleased to be here this morning.

First, let me share with you my personal enthusiasm as the newest member of the management team. I was attracted to Greif for several reasons. These include a successful 125 year history of growing businesses, its ability to achieve profitability, even in difficult market conditions, it's attractive and undervalued asset base and Greif's strong culture and performance ethic. Each of the businesses has favorable long-term growth prospects. Most importantly, Greif has highly talented people who are motivated to achieve the Company's goals.

I, now, want to review the second quarter 2002 results. Although I did not assume my duties with Greif until the final two days of the quarter, I have the following initial observations. First, fundamentals are improving throughout the Company. Following a period of soft market conditions for our packaging businesses, positive changes are evidenced due to the gradual up-turn of the North American economy, the favorable economies in Europe and other regions and internal cost reduction efforts. Second, measurable benefits from the successful integration of Van Leer Industrial during the past - past year continue to be achieved. They are complimenting actions to reduce day-to-day operating costs. As a result, Greif is better positioned to participate in the improving economy in the United States, Europe and other regions of the world. Third, these positive developments also point towards further improvement during the second half of fiscal 2002, which was an important factor in the company's initial guidance for this fiscal year. With those observations in mind, let's look at the results compared to last year. Net sales increased 11.3 percent to $396.9 million for the second quarter 2002 from $356.6 million a year ago. Increased sales in the industrial shipping containers and timber business segments contributed positively to the second quarter results. However, these increases were partially offset by lower net sales in the container board and corrugated product segment. In addition foreign exchange rates negatively affected the quarter's net sales by approximately 3% as compared to the same period in 2001. On a comparable structure basis, net sales for the Company were off approximately 8% for the second quarter 2002 as compared with the same period in 2001. Sequentially, however, second quarter net sales were up 9% from the first quarter 2002 which indicates positive momentum as we enter the second half of our fiscal year.

In Industrial Shipping Containers, the principal factor in the increase from $258.8 million in the second quarter 2001 to $306.6 million this quarter was the full quarter contribution from the Van Leer acquisition as compared to two months last year. Timber sales were $10.9 million for the second quarter 2002, which was slightly higher than a year ago. Lower market prices for liner board and medium was the principal reason for the $7.6 million decline in the container board and corrugated products net sales which were $79.4 million for the second quarter compared to $87 million for the same period last year. The lower container board prices and volumes were partially offset by unit volume increases at certain corrugated converting plants and improved margins. Published average containerboard selling prices for medium and liner declined approximately $45 and $40 per ton respectively during the past 12 months. Excluding gains on timberland sales for both periods, EBITDA was $42.1 million for the second quarter 2002 compared to $40.9 million before the $11.5 million restructuring charge for the second quarter 2001. Reported EBITDA was $47.3 million for the second quarter compared with $76.1 million before the $11.5 million restructuring charge for the same period last year. Net income was $6.9 million for the second quarter 2002 compared with $23 million last year. I would like to point out two major changes in business conditions that occurred during the second quarter. First, market conditions gradually improved for the Company's industrial shipping container's market compared with last quarter. In North America we are seeing a pick-up in demand, particularly from our largest industrial segments, chemical and petroleum. We experienced favorable demand in our European business during the second quarter. In addition we are currently beginning to see improvement for the Company's containerboard and corrugated products business. Second we announced price increases for steel drums in the second quarter 2002 and more recently for plastic and fiber drums. The price increases in steel drums and fiber drums were in response to higher steel prices due to a tariff imposed by the United States on imported steel announced in March. Cold rolled steel prices were at a 20-year low in the United States prior to the tariff announcements. The impact has affected drum prices in most world regions. During the second quarter 2002 resin also rose from earlier prices this year. We expect the product price increases to offset the rising cost of raw materials having a beneficial impact on the Company's second half results. Prices may increase further, later this year if raw material costs continue to rise. In the containerboard market, price increases of approximately $30 per ton for liner and $40 per ton for medium will go into effect in the month of July. This suggests that market conditions are improving following nearly two years of soft demand and declining prices.

There are two other second quarter 2002 financial highlights. Net debt was $613.8 million on April 30th, 2002 down $101.6 million from the same date last year. There was a $46.2 million decline in net debt during the second quarter 2002. This is the fourth consecutive quarter that debt outstanding has been markedly reduced since the acquisition. Net debt to total capitalization was 49% at April 30th, 2002 compared with 52% last quarter.

Capital expenditures were $22.9 million for the first half of 2002 compared with $15.7 million for the same period a year ago. As previously reported, the Company anticipates capital expenditures for fiscal 2002 will be approximately $60 million or $36 million below anticipated annual depreciation, depletion and amortization for the year. This year's capital budget principally includes projects to maintain productive capacity and carry-over projects from last year.

In summary, we are encouraged by recent developments in our markets. We are actively monitoring business conditions and seeking to enhance margins and improve asset utilization in returns. Our balance sheet continues to be strengthened through improved cash flow and further debt reduction. Market conditions in the company's businesses improved at the end of the second quarter 2002. We are seeing a modest economic recovery in North America. Increases in key raw material costs have been met with prompt announcements of higher prices for the affected products. Industrial shipping container volumes are expected to continue to increase during the second half of fiscal 2002. However, the rate of growth could be affected by further increases in raw material costs. Recently announced liner and medium price increases in the containerboard industry suggest more favorable market conditions later this year. The previously disclosed outlook for fiscal 2002, which anticipated improved second half performance remains intact. Therefore, the Company maintains its $225 million EBITDA guidance for fiscal 2002. Mike and I now would be happy to take your questions. Operator?

Thank you. Ladies and gentlemen, if you wish to register a question, you will need to press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your polling request, you may do so by pressing the one followed by the three. If you are on a speaker phone, please pick up your hand set before entering your request. One moment, please, for the first question.

As a reminder, to register for a question, please press the one followed by the four at this time. Once again, to ask a question, press the one followed by the four. One moment, please. Mark Heilweil with Spectrum Advisory, please go ahead.

I prefer Heilwile as a pronunciation. I just called because I didn't want you to think that that fine presentation was being ignored, and say hello and congratulate you on this debt reduction. It's looking sharp. I really don't have any questions that you didn't cover in your talk. Keep up the good work, guys.

Thanks, Mark. Thank you very much.

Yeah, thank you.

We appreciate you calling in and hope to see you soon. Thank you. Bye-bye.

We do have another question from Philip Cast with Traron. Please go ahead.

I'm sorry if I missed this during the call. Talking about net debt I was wondering if you could give us what the cash component is at the ends of the quarter and what, you know, debt outstanding was.

Um -- yes. The cash component was $51 million, and that was a bit above our normal transactional balances by about $20 million, and that really is a function of about $5 million in restricted cash which will be reinvested under the Section 1031 transactions and then there was about $15 million that was in transit. But, in terms of the -- in terms of the gross debt outstanding, that was $665 million.

Okay. This $15 million in transit, is that like working capital?

Yes. $15 million in transit, that was really just in the process of being concentrated from Europe.

Okay.

Yeah. It was in transit.

Okay. And what did you see in working capital during the quarter?

There was actually a significant reduction in working capital, and if you look at one of the focuses here is really an operating working capital which would be receivables plus inventory and less trade payables, the more management controllable components of working capital. And they were at the end of the second quarter $252 million. And that compared with the beginning of the year, the fiscal year of $299 million. And really contributions from all components with receivables and inventories down since the beginning of the year, and payables up.

Okay. All right. Great. Keep up the good work.

Thank you.

Once again, ladies and gentlemen if you'd like to ask a question press the one followed by the four at this time. Mark Heilweil with Spectrum Advisory please go ahead with your follow-up.

Yeah. I just wanted to see whether any thought or discussion had taken place in the board room about eliminating the two class stock and whether you view that as something that we might see happen in the next two years?

Hi, Mark. The board is alleges looking at the capital structure to determine, you know, the pros and cons of evaluating the capital structure. I hate to put time elements on decisions. I think the best I can say is it that it's something that is routinely talked about, and, you know, we'll -- will continue to be talked about as we go forward. But to put a time element on when a decision would be made is somewhat difficult and problematic.

Of course.

But I can just say that is something that does come up on a very routine and periodic basis.

Thank you.

You're welcome.

Our next question comes from Peter Rushmeyer with Lehman Brothers. Please go ahead.

Thanks and good morning. I had a question, I guess, in the containerboard mill system. I was curious if you could elaborate on how much waste paper you buy for your system and what you are seeing with those trends and whether you are hedging any of your exposure there?

Um -- we are, as you would imagine, Peter, seeing increasing costs in waste paper. OCC, specifically in the last 60 days cost trends have started to rise quite rapidly. We do have part of the system that we do have -- that we have hedged, we have hedged for the last five or six years with the minimum and maximum price. So there is a hedge element to the whole thing. But prices of OCC have started to rise in the last 60 days. That, you know, is part of the reason, I think, that paper prices are going up in July of $30 in liner and $40 in medium. So that system has started to go up. As far as how much we buy, I don't have that number right on top. Do you have that, Don? We can get back to -- with you on that. I'll tell you it's in the 200,000 ton range a year.

Okay.

Plus or minus 10 percent of that, probably.

Any rough quantification of how much OCC went up for you in fiscal 2002 and what you might expect in the next quarter?

It -- through the April time frame it really had not gone up very much at all. Starting in May, it had started to rise. Do you have the numbers there? Yeah, it was fairly flat through April. It has gone up in May and June, and we are looking in the -- as of this date to $20 to $30 range. Where it will go at the end of the year, Peter, you know, we speculate, but, you know, it really will probably depend a lot on how the economy continues to go forward and how mills continue to operate and what the supply/demand is. But it has gone up in the last 45 to 60 days.

Ok. Alright. Good. Another question if I could. I was curious on the timberland business, I'm not as familiar with how you run that business, and just curious if you could elaborate on kinda how you - your philosophy of managing that business and elaborate a little bit more on what you are seeing, you know, in the market place in terms of demand for fiber logs whether it's salt logs, pulp wood, et cetera.

We. Peter. We have really focused the last couple of years to make that asset a productive business for us. We have approximately 275 thousand acres of timberland in the southeast United States and another 40 thousand plus acres in Canada. But to focus principally on the United States at this point in time, we manage that business as an on-going timber management business. By that I mean, we're actively out cutting timber, to - then sell the stumpage. We have seen the demand for our product remain strong. The prices has remained stable, um throughout the year. So we have not seen a huge fluctuation in price. Part of it is, the location of our properties. We are located in a very good place where there's a lot of mills that are hungry for the pulp. We also have trees that are of a size and statue that we can sell for poles and salt timber, so that has maintained the price structure. and we anticipate, at least our estimations this business will continue to remain strong. This business is easier to model, so we have done modeling, and we believe that with the inventory that we have and you can assume some kind of price factor, that the sales that we have been able to achieve over the last couple of years are ann -- we can anticipate to get those over the foreseeable future.

Okay. All right, great. Thanks very much.

Our next question comes from Lisa York with Met Life. Please go ahead.

Hi, two quick questions. In terms of the EBITDA figure for the year, has the company disclosed or broken out what portions of that would be coming from the gains on timberland sales?

Lisa, we -- the only thlg we have said at the beginning of the year, we would not leave a large transaction like we did last year.

Right. Okay.

Last year -- we have not broken it out any further than that. If you remember last year we had about $70 million and we said we would not - In that $225 there would not be a large transaction like that.

Okay. Fine. And, I guess my other question is, you mentioned that Europe in the quarter had reasonably favorable demand. I just wondered if you could comment. Is that trend continuing? Or what are you seeing over there?

We are seeing, and I'll start and if Don has something to jump in. We're seeing that the demand for Europe has continued to be strong. It was strong in May. All indications are for our next quarter which would be May, June, July that it will continue to be good for us in Europe. It actually has been a very good market, and I'm talking Europe in general now. There are spots that obviously are better than others, but Europe in general has been a good market for us. We anticipate and our people on the ground anticipate that for the foreseeable future that would continue. Do you want to add anything, Don?

No. I think that would cover it.

Okay. Thanks.

Once again, if you would like to ask a question, please press the one followed by the four at this time. Keith Hanson with Ohio State Teachers, please go ahead.

Yes. You had commented that in North America chemical and petroleum were picking up and Europe was pretty robust. Are there any areas that -- of end market demand that are still on the soft side?

Well, I think when we say are picking up, it's still not where we want it to be. So I -- we -- let's take that all with a grain of salt.

Sure.

It is picking up.

Understood.

Chemical is a big part of our business. We are just going into an important season which will be the latter part of our year which would be the food products part of our business. The jury is still out on that, and what that will be. And we -- our visibility of where that will be is somewhat limited at this time. So we are looking at where that will end up being this year. And so, you know, we are cautiously going forward with that statement. I hope I didn't make you believe that it's robust in Europe. Europe is good.

Okay.

And that is more of a general. So I think we are looking to see what will happen in the food business. Chemical can still continue to improve. It's better than what it was. There have been many articles, I'm sure you've read in chemical week that it's been a 20 year low and that the first quarter was a low and chemical businesses are starting to improve, so we're coming from a fairly low base here on the chemical.

Okay. Thank you.

Kevin Stew, please go ahead.

Kevin Stuby ,Forbes, one of your bankers.

A quick question on, if you could please explain the rather substantial increase in both absolute and relative terms in SG&A expenses over the last quarter and the last six months versus last year?

Um -- yes. Those SG&A trends reflect a couple of different factors. I would say that the key one are some costs related to the Van Leer acquisition integration.

Right.

And that would include professional fees and training. We had a very significant trade Conference where, you know, we really wanted to make sure that we had an appropriate presence. So those sorts of costs on a year-to-date basis would be in the $11 million range. We have not -- we have chosen not to pro forma those. Those are included in our normal operating costs. We also have not pro formaed the transition costs related to restructuring initiatives announced in conjunction with the acquisition and those totalled approximately $3.6 million during the first six months. So if you adjust for those, you see a trend that is fairly comparable to the SG&A as a percentage of sales that we were running last year, which has not really our objective. We are looking to improve that ratio. One of the things that did make it a little bit more difficult was really just the unfavorable operating leverage. We are operating at a lower level of activity, and we have had some pricing pressure which, fortunately, we are seeing some improvements. But those factors have really contributed to the trends that you are observing.

Okay.

Thank you.

Once again, ladies and gentlemen if you would like to ask a question, please press the one followed by the four at this time. I am showing no further questions at this time. Please continue with your presentation or any closing remarks.

Thank you for joining us today. As a remainder, this call will be available for replay from noon eastern daylight time today through noon on Saturday, June 8th for domestic callers the number is 800-633 --8284. For International callers the number is 858-812-6440. Please use this reservation code 20654031. You can also go to our website at www.greif.com. Thank you again for your participation.

Ladies and gentlemen that does conclude the Conference call for today. You may all disconnect and thank you for your participation.