Greif Inc (GEF) 2002 Q3 法說會逐字稿

Good morning, and welcome to Greif's fourth quarter 2002 conference call.

Our speaker's today are Chairman and CEO, Mike Gasser, who will review the achievements of this past fiscal year; and Chief Financial Officer Don Huml who will discuss the financial results for the fourth quarter and year, which ended October 31st.

There will be a question-and-answer session at the end of the presentation.

Before we begin, I would 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 belief, expect, anticipate, project and similar expressions among others identify forward-looking statements.

Forward-looking statements speak only as of the date the statement was made. Such forward-looking statements are subject to certain risks and uncertainties that 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 and welcome to all of you.

Here in 2002 we concentrated on positioning Greif for future growth and improved shareholder value, and for the most part, I am pleased with the results.

Integration of Van Leer, a business equal to our size at the time of the acquisition was successfully completed during the first quarter, a year following closing. As part of the integration, we also exceeded our targeted cost synergies of $27.5 million. The benefits of our business rationalization and improved operating efficiencies positively contributed to our results this year, which has also lead to a company-wide mindset to further improve asset utilization and reduce costs in all that we do.

Our integration success is extremely important, because our expansion into the international marketplace is part of our strategic positioning, well for more value-added packaging solutions to our customers where they do business around the world.

Here in 2002, we continue to build constructive working relationships with our multi-national customers and supported our global locations in their efforts to serve regional customers, to leverage our global leadership position. And to eliminate any possible customer confusion, we are not using the Greif brand name around the world, another indication that we operate as one company.

As I've mentioned in prior conference calls, the Van Leer acquisition is a growth story. And this venture has given us greater visibility into the market opportunities for investor packaging, products and services. As a result, we will open a new facility in Russia and also in China in fiscal 2003, to primarily serve the growing chemical business in these countries.

As we assimilate the Van Leer following several acquisitions over the years, it was time to thoroughly assess our organization and reorganize critical corporate and business functions. Our objective was to insure that we were doing the right activities in the right places, staffed at the right levels, and at the right costs.

Our organization have proven initiative resulted in the realignment of certain activities, moving them from our corporate function to groups, and establishing shared services that had synergies across the company. In addition we were developing common procedures, systems and policies to improve efficiencies and reduce costs.

We began implementing these changes at the end of the fiscal year and look forward to more tangible benefits in fiscal 2003 and beyond.

Clearly our focused here in 2002 was on better financial management. And I'm very pleased that Don Huml, who's been with the company for only a few months, has taken such a leadership position within the company and in the financial community.

Our management team is set on a course to perform above the average of pure companies in return of net assets, net asset turnover, operating working capital and a lower ratio of SG&A expense to net sales.

As part of improving our financial position, we successfully completed a major restructuring of our capital during July and August. This included the $250 million senior subordinate note offering, and refinancing of the company's credit facility to improve financial flexibility and achieve a better duration matching of assets and liabilities.

As I've stated to you, shareholders and employees, I am committed to paying down debt, and we have demonstrated the continuous progress. Since the Van Leer acquisition in 2001, we have reduced debt by $156 million.

Here in 2002, the company continues to build relationships with the investment community, and within our industries to increase our visibility and promote our investment story. In the fourth quarter, a significant event occurred when the company's stock moved to the New York Stock Exchange, trading under the ticker GEF and GEFP. We believe the New York Stock Exchange is a better fit for our company.

Additionally during the year, the leaders of our three business groups and company's support functions confirmed our five-year growth 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.

In our paper, packaging and service business, we are focusing on increasing share in the value-added niche market in our U.S. regions. In the timber business, we continue to focus on regeneration and additional timber holdings to insure a sustainable yield over the long-term.

Well I believe, we have made significant accomplishments in strengthening the company during fiscal 2002. We recognize that we must be better prepared to meet ongoing economic challenges and the changing needs of our customers. We must improve our asset utilization, reduce SG&A expense, continue to make progress in reducing debt and be an organization that is flexible and receptive to change.

Greif's competitive advantages remain our strong market positions, 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.

As we head into 2003, we will build upon the groundwork laid this year in the areas of organizational improvement, financial management, and strategic planning to increase our profitability, and be in a better position to capture additional growth opportunities.

Now Don will review our financial results and discuss the outlook for the next year.

Thank you Mike. Overall, we are pleased with our fourth quarter performance, especially considering the challenging operating environment.

During fiscal year 2002, EBITDA improved each quarter, and we reported 61.8 million for the fourth quarter. This enabled us to achieve results in line with expectation for the year. Our fourth quarter 2002 included a solid performance by industrial packaging and services and strong sequential improvement by paper packaging and services.

Gross profit margin expanded primarily due to pricing actions to recover cost increases, and realization of acquisition-related synergies, and finally strong free cash flow resulted in further debt reduction.

Net sales were 435.5 million for the fourth quarter 2002, two percent below the same period last year on a reported basis, but up two percent on a constant currency basis. Industrial packaging and services benefited from higher prices, and nearly matched net sales for the fourth quarter 2001 on a reported basis, but was up four percent on a constant currency basis.

Paper, Packaging and Services net sales were 10 percent below the prior year. The $25-per-ton increase for liner and medium that was implemented during the quarter was less than the company anticipated. However, it partially offset price erosion earlier in the year. Average paper prices remained below the prior year at the end of the quarter.

Timber sales were $10.7 million for the quarter compared to 9.2 million last year.

Gross profit margin for the fourth quarter increased 70 basis points to 22 percent of net sales versus 21.3 percent for the same period a year ago. On a sequential basis, gross profit margin improved 220 basis points. Favorable contributions were realized from higher selling prices and improved operating efficiencies.

Raw material costs were generally higher in the fourth quarter compared to the third quarter 2002. They were especially volatile earlier in the year for industrial packaging products. However, Paper, Packaging and Services results benefited from a $10-per-ton decline in OCC compared with the average price in the third quarter 2002. Despite this recent reduction, OCC costs remained substantially above the fourth quarter 2001 levels.

SG&A expenses were $63 million for the fourth quarter of 2002 and 2001. On a sequential basis, SG&A expenses declined $1.6 million. SG&A expenses were fourteen-and-a-half percent of net sales for the fourth quarter compared with 14.2 percent for the same period last year and 14.8 percent in the third quarter of 2002.

We are actively reviewing opportunities to simplify, delayer, and streamline business processes and push activities closer to the customer for improved accountability and responsiveness. Our four-year objective is to reduce SG&A expenses to 10 percent of net sales through a combination of increased sales and cost-reduction activities.

Reported EBITDA improved to $61.8 million for the fourth quarter compared to 59.7 million for the same period last year. On a sequential basis, reported EBITDA increased 7.7 million. The fourth quarter 2002 results included a $2.8 million restructuring charge for severance and costs related to facilities being held for sale included - including anticipated losses upon disposal. In addition, there were $4.4 million of special charges that primarily represented integration-related costs and a legal settlement involving an operation the company has exited. Therefore, our fourth quarter 2002 EBITDA, excluding timberland gains and special charges, was 63.7 million.

Reported EBITDA was 204 million for fiscal year 2002 versus 266.4 million for the prior year, which included timberland gains of 12.1 million and 79.7 million respectively. There were 14.4 million of restructuring and special charges for fiscal 2002. These items consist of the restructuring reserve and special charges incurred during the fourth quarter and earlier transition costs related to the acquisition integration, including the organizational improvement initiative. Excluding timberland gains and special charges, EBITDA was 203.5 million for fiscal year 2002, which is in line with the company's guidance, and $10.9 million above the prior year.

Total debt was 653 million at October 31, 2002 compared with 714 million on the same date last year. Total debt to total capitalization was 53 percent at year-end 2002 versus 55 percent a year ago. Capital expenditures excluding timberland transactions were $45.7 million for the fiscal year 2002, which is slightly above the 43 million for the prior year. These expenditures remained well below the company's annual depreciation expense, which was 78.5 million for fiscal year 2002.

In summary, we are encouraged by improvement in the performance of our group despite weak market conditions. Furthermore, the balance sheet strengthened, based on strong cash flows and deleveraging. Operating cash flow for fiscal year 2002 was 133.3 million resulting in free cash flow of 87.6 million.

We entered fiscal 2003 on a solid foundation and a focus on cash flow, profitability, and shareholder value. The economic outlook for fiscal 2003 remains uncertain and the recovery tentative. We anticipate a sluggish start followed by improvement later in the year. Efforts will continue to be directed toward cost reductions and productivity improvements. Expectations for the first quarter, which is historically a slower period due to fewer shopping days, extended downtime and the seasonal downturn in retail markets, are anticipated to be comparable with first quarter of fiscal 2002.

For fiscal 2003, the company's non-timber businesses are expected to improve EBITDA by approximately $20 to $25 million above fiscal 2002. Timber EBITDA is anticipated to be approximately $15 million below fiscal 2002 results. Management's guidance for fiscal 2003 EBITDA is $210 to $215 million before timberland gains.

Mike and I will now be pleased to respond to your questions.

Thank you.

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One moment, please, for the first question.

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Our first question comes from the line of David Martin of Deutsche Bank. Please go ahead.

Good morning.

Morning, Dave.

I have a couple - ...

Good morning.

... a couple questions for you. First of all regarding improved profit margins and cost reductions, I believe you mentioned in your release improved purchasing leverage and other supply chain efficiencies. I was wondering if you could provide a little color on what you've been able to achieve, and if possible quantify some of those results.

Yes, we have been focusing on improving supply chain efficiencies and we have reduced logistics costs by over $4 million as a result of those initiatives. One of the other areas that we've benefited from - as you know, there's been a ratcheting up of steel prices. We are a significant of cold-rolled steel, and the purchasing team has realized savings as a result of sourcing strategies that are really a bit proprietary, but we have - we have realized savings as a result of those. So, those would be illustrative of some of the things we're doing to improve the supply chain and purchasing leverage.

And can you - can you add a little color on what you're doing within the logistics to achieve the $4 million?

David, yes, this is Mike Gasser.

The logistics - we really are better utilizing our fleet. We've undertaken an exhaustive study in North America primarily right now to look at the fleet that we have. We've actually looked at to outsource some of the activity and really just better utilize the fleet that we have with some outsourcing capabilities.

This is going to be ongoing project. We annualized about $4 million savings, as Don mentioned, in fiscal 2002 and we would anticipate that we would continue to look at ways to further reduce those costs.

OK. Secondly, regarding your capital budget for '03, if you could provide us some details regarding what that is and any details regarding within what segments those dollars are going to be spent and any particular growth projects. I believe you mentioned two new facilities in Russia and China.

yes, Dave, I'll comment on the Russia and China projects, and then Don could give you a flavor on the - on the total investment and generally the areas.

What we've - we have done - we've decided to do on - and those emerging markets with Russia and China is that we primarily use equipment that we've had - used equipment. So our actual capital invested in those facilities is not overly significant. You know, we felt that that's the best way for us to go into those markets to get our presence and they don't need the newest technology today. Actually in China, we will be using equipment made in China this time.

So there'll be some Chinese equipment that will be used, so our capital in those were really not overly significant. We leased buildings. In China, we're actually building a building in Shang Hai, which is - has a huge port - a chemical port, and we will - we will be right on that property. But it overly significant, so it's not something that is of - is of great magnitude.

Do you want to give them a flavor of total, Don?

Yes, the capital spending - we are anticipating that it will be above 2002 levels, and we're targeting a $60 to $65 million allocation. It will be distributed on a basis fairly consistent with the sales distribution, so about three-quarters will be allocated to industrial packaging and those would be primarily for productivity improvement. Mike has really addressed, you know, one of the key growth initiatives, but the primary focus will be cost reduction.

OK. And then, lastly, if you could comment on your current timberland holdings in any portfolio shaping you plan to do in '03, and as well, the long-term kind of strategic importance of the timberlands to the company?

The timberlands -- as you know, we the project about three and a half years ago to make that asset productive, and worked very hard to, you know, manage that as a timber asset -- you know, growing timber and cutting timber. And, you know, we still believe that it's still strategic to our company from a -- it generates a very good cash flow, as you can tell from the results. Our holdings are still in that 300,000 acre range, when you look at the 20-some thousand acres we have in Canada.

Strategically, to shape that portfolio in the future -- it's consistent with what we've said in previous calls. You know, we're gonna be looking, and are looking at taking lands that are more valuable to timber. We will look at selling those lands and then taking those proceeds on a tax-free basis to reinvest in more timberland. So, we have groups of people out who are constantly looking at that -- to look at lands that could be utilized with greater value and see if we can make a market in those. So, that will be the portfolio shaping that we'll continue to do in 2003.

Can you give us any idea of -- within your portfolio -- what percentage of the acreage you would characterize as higher, better-value use?

We did an analysis a couple of years ago, David, and we haven't updated that over the last year, but at that time it was in the seven, eight percent range on a percentage basis.

OK. Thank you.

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Our next question comes from the line of with Deutsche Asset Management. Please proceed with your question.

Good morning.

Could you talk a little bit more specifically about your working capital initiatives, and, you know, what you might be able to achieve this coming year?

Yes. We have seen improvement in that area, and I would say that it's been primarily based on increased focus. And when we look at our working capital intensity at the end of fiscal year 2002, compared to the prior year, we have seen an improvement from a little over 19 percent to about 17 percent, which implies that as a result of improved working capital utilization, we have been able to reduce our working investment by about $41 million.

When we model out what is the potential, we've basically established a target of our operating working capital -- namely receivables plus inventory, less payables -- as a percentage of sales representing 12 percent. And that would imply that there is a -- excuse me -- a $100 million opportunity for working capital improvement, and there will continue to be a focus on this area, and a very close monitoring and assignment of responsibility for accomplishing that reduction over a three-year period.

One of the great advantages -- and I mentioned this in the opening remarks -- is having Don on board. He has really brought a discipline to our company. He is intimately involved with all the businesses. The business leaders have embraced that we have set out in our monitoring. So, we are very excited and pleased with what Don has done, and are very excited about the future of taking these costs out.

Thank you. And with respect to, you know, the 100 million, you know, will that come in, you know, pretty much even over the three years? Or, could you maybe try to talk about that?

I think it would be reasonable to expect it to be fairly evenly distributed.

OK. And my next question -- could you talk a little bit about the pricing in the various, you know, product lines that you have; you know, what the current environment looks like, and, you know, what you think you might be able to achieve going into next year?

As you recall if you listened to previous conference calls, 2002 has been a year where there has been tremendous escalation in our costs, and most of the raw materials; steel and resin, primarily. And we have counteracted that with price increases to offset those cost increases.

As we sit here today, looking into 2003, you know, we see a modest change in steel prices today. Depending on the world situation, resin will fluctuate based upon the world events, which will happen. But, you know, assuming that there is no major world events that would disrupt the flow, resin -- we see resin will go up slightly. In our modeling we have anticipated modest price increases for our products, primarily to, you know, offset the cost increases that we would anticipate would come about.

But, we do not anticipate today, sitting here, anywhere near the volatility in raw material and/or prices that we experienced in 2002.

Do you have the ability in your customer contracts to, you know, just pass through raw material price increases?

Most orders are on a -- most sales are on an order basis. We do have some contracts, which we have mentioned in previous calls. Almost all contracts have a raw material re-opener clause. Some have various degrees of timing; it might be 30 days up to 90 days. But, yes, in almost all cases there is an ability to adjust the price for raw material changes.

Thank you very much.

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Our next question comes from the line of with Bear Stearns Asset Management. Please proceed with your question.

Hi. Thank you.

Most of my questions have been answered, but I just wanted to get at a housekeeping item. What was the DD&A for the full year, if you haven't said that already?

97.5 million.

OK. Thank you.

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There are no further questions at this time. Please continue with your presentation, or any closing remarks.

Thank you again for joining us today.

As a reminder, this call will be available for replay from noon eastern time today through noon on Saturday, December 14. For domestic callers, the number is 800-633-8284. For international callers, the number is 402-977-9140. Please use the reservation code, 21077764. You can also go to our website at www.greif.com. This call will be posted in approximately one hour.

Thank you again for your participation.