Greif Inc (GEF) 2003 Q2 法說會逐字稿

Good morning and thank you for joining Greif's Second Quarter of 2003 Conference Call. Our speakers today are Chairman and CEO, Mike Gasser who will give an update on the Company's performance improvement; Chief Financial Officer, Don Huml who will discuss the financial results for the second quarter which ended April 30th. There will 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 "believe," "expect," "anticipate," "project," "estimate," "target," 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 events and the Company's actual results to differ materially from those expressed or implied. Mike Gasser will now discuss the performance improvement plan activities for the second quarter.

Thank you Christa (ph) and I would like to welcome you to today's call. As we announced last quarter, the company has embarked on a comprehensive review of its businesses, its operations, organizational structure, and its practices in order to permanently reduce debt, continue debt reduction, and strengthen performance and growth of our business. In this performance improvement plan, we outlined four deliverables, a complete and through transformation of the Industrial Packaging and Services business; an extensive examination of our Paper, Packaging and Services Group to increase productivity and profitability; a redesign of our corporate functions, focusing on those activities essential to protecting the corporate assets; and implementation of key business processes and systems that are more efficient, effective and disciplined.

Through these initiatives, we will achieve best in class financial performance and establish a more secure footing in our various markets and economies to facilitate organic growth. We have broad-based involvement in implementing the performance improvement plan. As soon as the plan was announced, we went right to work. The timetable for recommendations and results range from a few months to a few years but we expect to conclude the [foremost] structure of this plan in fiscal 2004.

During the second quarter our focus was on reducing SG&A cost at the corporate levels and in each business. Controlling our SG&A cost is a necessary starting point in our plan because it establishes the foundation for other improvement activities. It is also a key financial metric for the company. As we have stated last quarter, our target is an SG&A to net sales ratio of less then 10%. A year ago this ratio was almost was 17%, this quarter it is down to 13.2%. We are definitely moving in the right direction and I believe we will achieve our goal well in advance of schedule.

Well, the first place to achieve SG&A savings was in the redesign of the corporate functions, and I am pleased to report that this task is almost completed. We have eliminated certain activities and reduced spending levels for other. We have realigned some functions within the business groups, and we are establishing a shared service structure. Coinciding with these actions was a reduction in the corporate staff.

In addition to the corporate focus, the business groups adjusted their organizational structure and activity levels and made significant reductions in their administrative staffs during the second quarter. As part of the SG&A reviews during the first two quarters approximately 350 employees have been laid off.

Through our efforts this quarter and our plan for the rest of the fiscal year, we are well on track to realizing our stated goal of $50m in annual pre-tax cost savings by the end of fiscal 2004.

Simultaneous to the SG&A focus, teams are working on other components of the plan, which includes, growing market share, improving the way we take our products to market, increasing manufacturing effectiveness, achieving procurement and transportation effectiveness and optimizing working capital. The company is energized by potential of these improvements in creating more value to shareholders, customers, and employees.

Overall, I am pleased to see that our employee teams are powered and committed to making difficult decisions. They are being thorough in evaluating how we can work more productively and cost effectively. And I am reassured by your updates to me that they are dedicated to protecting Greif's core capabilities and offerings, our supply advantages, and the company values during this process. Throughout the next several quarters, Don and I will report on the progress of the performance improvement plan. As we demonstrate management's commitment to permanently reduce spending, to continue to reduce debt, and to increase organic growth. I would like to turn the presentation over to Don, who will give you the Company's second quarter results.

Thank you Mike. We are encouraged by the progress towards achieving the financial targets and the aspiration-driven goals of the Company's performance improvement plan. We are particularly pleased with the 21% increase in operating profit before restructuring charges for the quarter. This increase was due to a strong performance by industrial packaging and services and a substantial reduction in SG&A expenses compared to last year. For the second quarter, we reported earnings before restructuring charges and timberland gains of 20 cents per class A share versus 13 cents last year and 30 cents per class B share versus 19 cents a year ago.

There were $17.4m of pretax restructuring charges during the second quarter related to the implementation of our performance improvement plan. The reported net loss was 18 cents per class A share for the second quarter versus net income of 24 cents last year, and a net loss of 27 cents per class B share in the second quarter compared with net income of 37 cents for the same period last year.

The results of the second quarter were achieved in a difficult operating environment, especially in North America. We benefited from geographic diversification with strong results outside North America. Net sales rose 7% to $424m for the second quarter from $397m last year, principally due to a 29% increase in Europe. Net sales increased 3% excluding the impact of foreign currency translation. Industrial packaging and services' 12% second quarter sales increase was partially offset by the soft market conditions in paper packaging and services, especially in the converting operations. Sales for this segment declined 7% primarily due to lower selling prices for [line-up] board and medium. Timber sales were $4m below the prior year, consistent with planned levels.

Gross profit margins decline 300 basis points to 17.5% for the second quarter, which is a bit higher on a sequential basis, but below the 20.5% reported a year ago. The quarterly results for industrial packaging were impacted by higher steel and [resin] costs, while the paper and packaging business incurred higher cost for energy as well as recycled fiber, the latter of which was approximately 30% above the second quarter of 2002.

This year's second quarter gross profit margin was also adversely affected by lowered timber sales. Selling, general and administrative expenses for the second quarter were approximately $56m, which are 16% below last year. As a percentage of net sales, SG&A expenses declined to 350 basis points to 13.2% for the second quarter. This was primarily due to our company-wide focus and permanently reducing costs through SG&A optimization. In the interest of full disclosure, the adoption of FAS 142 earlier this year reduced amortization expense approximately $2m for the second quarter compared to last year.

As previously announced, we expect $45-50m of pretax restructuring charges in 2003. Of the $17.4m in the second quarter, 50% was related to SG&A optimization in North America for industrial packaging and services, and additional one-third was for the corporate re-design and [right] sizing, and the remainder was for productivity improvement initiatives in Paper Packaging and Services. Approximately $14m of the second quarter restructuring charge was related to the severance of 350 employees.

Operating profit before restructuring charges rose to $18m for the second quarter from $15m a year ago; including restructuring charges operating profit was approximately $700,000 for the second quarter. Interest expense rose to $14m for the second quarter from $13m for the same period last year. Borrowing cost increased approximately 50 basis points due to the replacement of the senior subordinated notes during the second quarter of fiscal 2002. This increase was partially offset by the lower average debt outstanding for the second quarter compared to a year ago. Other income was $2m for the second quarter versus approximately $700,000 last year, primarily, due to foreign exchange gains. The company's effective tax rate is expected to decline from 36% to 32% for fiscal 2003. This lower effective tax rate is due to tax planning initiatives and a shift in earnings mix favoring non-U.S. activities.

Total debt outstanding was $657m at April 30, 2003 compared with $666m on the same date last year. Total debt to capitalization was 53.9% at April 30, 2003, versus 52.9% the prior year. Capital expenditures, excluding Timberland purchases, were approximately $11m for the second quarter compared with $13m a year ago. The company anticipates that capital expenditures will be about $65m for fiscal 2003, which is well below depreciation expense. Our capital expenditures are focused on productivity improvement.

For the remainder of fiscal 2003, the company expects continued strength in Industrial Packaging and Services combined with a further decline in SG&A expenses due to the performance improvement plan. Market conditions for Paper Packaging and Services are expected to stabilize with modest improvement anticipated during the second half of the year. The company's guidance was previously based on EBITDA. In the second quarter of 2003, we adopted an operating profit format. Our fiscal 2003 guidance is operating profit before restructuring charges of $110-115m which is consistent with prior guidance.

Just three months ago, we announced a comprehensive performance improvement plan to transform the company and enable it to earn its cost of capital during the trough of the business cycle and achieve superior returns during a complete cycle. As Mike noted, one of our key enablers to delivering superior returns is reducing SG&A expenses to below 10% of net sales. Based on initiatives identified today, we expect to be at this level for fiscal 2004. We had initially planned to reach this level by fiscal 2006. We are very encouraged by our progress thus far.

That concludes my remarks. Mike and I will now be pleased to take your questions.

Thank you. Ladies and gentlemen, if you would like to register for a question, please press the "1" followed by the "4" 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 registration, please press the "1" followed by the "3". If you are using a speakerphone please lift up your handset before entering your request. One moment please for the first question; our first question comes from the line of David Martin with Deutsche Bank Securities. Please go ahead.

Good morning and thanks. In Industrial Packaging, you commented on the impact of foreign currency translation had on your revenues, can you detail what impact that was on EBITDA on that particular segment?

And then secondly, excluding the foreign exchange impact revenues grew at 7%, can you comment on the drivers for this growth? Was it further implementation of cost driven price increases or something a bit broader?

Yeah, in terms of the foreign exchange affect on operating profit that would be much less impactful than it was on sales. Because one of the things I didn't mention when we look at our SG&A expenses they actually increased $3m as a result of currency effects and that really offset a lot of the benefit on the top line so it was basically a modest improvement of about $1m in operating profits that would have been the effect of the currency.

And Dave, the effect on revenue growing 7%, the primary driver that was outside the United States, Europe was very strong for us; during the quarter over 6-months, primarily Western Europe and the manufacturing sector that we participated in was very strong. So that was the primary driver for the sales increase for that period.

So this would be a combination of volume growth as well as sales price growth?

In Western Europe, that is correct.

Okay. And then next regarding your customers in that business that you referred to as your strategic customers can you just generally comment on recent trends that you possibly recognized and what those folks would potentially be telling you about their businesses going forward?

Well we had meetings with quite a few in the last two weeks, I think that the way to properly categorize their opinion right now Dave is that they are cautiously optimistic. I don't think anyone has enough clarity to say with any degree of certainty that things are going to get better, but they are cautiously optimistic of what -- in the foreseeable future -- I am looking -- we are looking 6 and 9 months out. So it is probably more cautious optimism right now.

Okay and then next in your paper packaging business I believe you commented that your paper prices were down 3% on a year-over-year basis while if you look at trade papers I believe they suggest prices would have been up. Can you comment on the pricing declines and update us on your integration levels including your affiliate relationships and then lastly you mentioned weakness in some of your converting businesses, was that seasonal or something a bit more?

Paper prices we found, we are a small player in the paper industry Dave, as you know we have about 2% of the market share which we have said publicly many times; so our paper prices follow the industry trend and it is stable now. We were giving you a comparison period-to-period so I would think that our paper prices pretty much follow the trend -- it is based on the list prices that are published.

As far as the weakness in the converting end of the business, we have strategically aligned our converting business to be those businesses that are more value-added and those businesses are not the stable commodities like beer, food products which are fairly consistent in different economic times.

So our business has a little bit more affect of the general economy because it would be disposable products, or products that people would buy more value added. So our business probably at the converting end is off a little bit more, if you were just in the brown box business, but that is the strategic decision we had made a while back because there is greater value for us in that business. So from the volume standpoint it would be off a little bit more.

Okay. Thank you.

Once again, ladies and gentlemen, to register for a question please press the "1" "4". If you are using a speaker phone please pickup your handset before entering a request. Once again to register for a question please press the "1" "4". Our next question comes from the line of Josh Lipson (ph) with Prudential. Please go ahead.

Hi, just wanted to explore Europe a little bit more. Which industries in particular in Western Europe were strong for you and it was part of the gain, or part of the sales increase or due to market share gain?

Western Europe it would be primarily the chemical industry in Western Europe. There would be a slight market share gain Josh in Western Europe nothing of tremendous significance, but you know, we have been aggressive in that market, I think, our reputation and quality of products is paying dividend. Lot of it is the relationships we have with customers around the world and so, you know, as you know because we have said this for over two years now, being a global company, we want to capitalize on that strength, and I think, you have seeing the slight impact of that right now also.

And then with respect to, you know, you highlighted a lot of areas where you are going to be focusing little bit. One of them was improving working cap and have you stated or have you identified what kind of potential cash you could get out of working cap?

Yes Josh we have identified an opportunity of a $125m reduction in working capital through improved working capital efficiency and that would be over the period ending fiscal year 2006.

The objective for this year is basically to reduce our working capital by $50m. So that by the end of the year we would be in a position to fund the restructuring charges related to the performance improvement plan.

Right. Thank you very much.

At that time I am sure, there are no further questions. Please proceed.

Thank you again for joining us today. And as to remind you, this call will be available for replay from noon Eastern Time today to noon on Saturday June 7th. For domestic callers, the number is 800-633-8284, for international callers, the number is 402-977-9140. Please use the reservation code, 211-46008. 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.