Greif Inc (GEF) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Greif Inc. third-quarter conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded Thursday, September 11, 2003.

I would now like to turn the conference over to Miss Krista Heins, Communications Director. Please go ahead, ma'am.

Good morning and thank you for joining Greif's third-quarter 2003 conference call. Our speakers today are Chairman and CEO Mike Gasser, who will talk about the company's performance improvement strategy and Chief Financial Officer Don Huml, who will discuss recent performance improvements achievement and the financial results for the third-quarter which ended July 31st. 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, estimate, target, and similar expressions among others identify forward-looking statements. Forward-looking statements speak only as to 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. Now I will turn the presentation over to Mike.

I would like to welcome you to today's quarterly review. Since March, we have developed and begun to implement a multifaceted campaign to be the industry's performance leader in the markets and regions we serve. First stage of this performance improvement plan was to change our organizational structure and mindset to be more efficient, nimble and disciplined. Through this effort, we reprioritized our activities and, as a result, we will exceed our stated goal of $50 million in annual savings.

Don will give you more information about activities that contribute to this positive result.

While cost reduction was critical in establishing our new foundation, the Company's performance improvement strategy is much more. It is aimed at increasing organic growth and sustaining it at a level above GDP. To do this, we're using a total business system approach, reshaping and leveraging such key components as marketing and sales, production, supply chain, working capital, and management talent.

We are driving this transformation strategy from every function and through many teams and individuals. As the head of our North American industrial packaging business recently told his plant managers, the performance improvement plan is no longer a project or initiative. This is how we will lead and manage today in going forward. I totally agree.

We have gone beyond viewing this as a separate activity and we are well on our way to integrating this new business model into all that we do.

This month, we began deployment of the new Greif business model. We are starting in the U.S. where we are the industrial packing leader. Because of the significant potential to improve our asset utilization, standardize our different systems from our acquisitions and present customers with an undeniable value proposition that fits their needs. Our teams are also staffed with international employees so that we can continue this implementation to other world regions.

The roll out is on a region by region basis, enabling us to learn and transfer this knowledge as we move forward. Our change efforts will be thorough and decisive. We will capitalize on regional customer opportunities, as well as on key global counts in order to own a solid profitable market portfolio with growth potential. We will redesign our production systems to make high-quality products, using standardized processes with fewer inputs and at a much lower cost.

We will also streamline the supply chain through better planning and scheduling with suppliers. Simultaneously we will implement better processes for managing inventory, accounts payable and accounts receivable. And cutting across all efforts, we will enhance employee skills, develop performance-driven management talent and create a stronger productivity culture.

Don and I participate in every performance improvement kickoff status and decision meeting. And I'm constantly impressed by the determination of our employee teams to make Greif a better company. We're truly energized to create more value to stockholders, customers, and employees.

This has been a very focused six months for the Company and we expect design level and intensity for the next year until our new way of operating becomes fully implemented. As we progress, we are mindful of the need to continue to be responsive to customers, protect our market position, take actions as necessary to overcome challenging economic and industry conditions.

We remain confident that our new course is the most beneficial for the Company's long-term future. Now Don will discuss details of the performance [indiscernible] plan and our third-quarter results.

Thank you, Mike. Our performance improvement plan is indeed firmly in place. It replaces old structures, practices, and behaviors and we're institutionalizing these changes as Greif's business model going forward.

As a result of the comprehensive approach we're using, we have identified improvement opportunities beyond our initial expectations and are beginning to generate operational and financial benefits earlier and deeper than projected. Major accomplishments primarily achieved in the second and third quarters include the following.

We realigned the organization resulting in fewer management layers, a smaller corporate staff focused on essential activities and business groups that are better organized and equipped to achieve their performance improvement plans. Through our portfolio optimization efforts, we closed seven operations and consolidated sales, technical, and regional administrative offices. The targeted year end workforce reduction of six percent was almost reached in the third quarter and we expect the fiscal year total to be closer to 7 percent or approximately 675 employees.

As a result of these actions, we have steadily reduced SG&A expenses.

In the third quarter, SG&A costs were 11.2 percent of net sales, down from 13.2 percent last quarter and 14.8 percent in the third quarter of last year. We are on track to achieve our goal of an SG&A to net sales ratio of 10 percent during 2004, well in advance of the fiscal 2006 timeline.

Our streamlined organization is uncovering even more cost-saving opportunities to be realized next year. We expect to complete our diagnostic review shortly and be able to discuss the scope of these opportunities during the fourth-quarter conference call.

For the third quarter, restructuring charges were 16.6 million. Of this amount the cash component was approximately 75 percent. To date, the Company has recognized 35.6 million in restructuring charges and we expect to incur approximately 50 (ph) million in charges for the year. As Mike pointed out, cost reduction was just a first step in operational and process improvement, leading to long-term sustainable growth. Our new business model is above all focused on strengthening our leadership position and industrial packaging, a position gained through strategic acquisitions which have provided increased geographic and customer diversity, a broader product portfolio and a solid global platform.

What we have accomplished and will achieve through the performance improvement plan bolsters this position and enables the Company to provide customers with a much more attractive value proposition. Now let us turn to the third-quarter results.

We encountered another challenging economic period during the third quarter, which included continued sluggishness in North American industrial markets and a relatively flat demand in Europe. The latter was impacted by the euro being approximately 15 percent stronger than the U.S. dollar compared with the third quarter of 2002.

In this environment, however, the Industrial Packaging and Services business delivered solid results. Before restructuring charges, this segment's operating profit increased 59 percent from the third quarter of 2002, primarily due to the performance improvement plan. Excluding the effects of foreign currency translations, net sales for Industrial Packaging and Services were up 1 percent over last year's quarter.

The positive results of the Industrial Packaging and Services business were offset by the lower volume and Paper, Packaging and Services which resulted in a net sales decline of 11 percent for this segment. Timber, generally, was not affected by weakness in the U.S. economy and delivered according to plan.

On a consolidated basis, net income before restructuring charges, debt extinguishment charge and Timberland gains for the third quarter was 45 cents per Class A share versus 35 cents last year. And 67 cents per Class B share versus 53 cents a year ago. The Company's net sales rose 4 percent to 452 (ph) million for the third-quarter from 435 million last year. Excluding the impact of foreign currency translation, net sales were 2 percent lower, primarily due to reduced volumes in the Paper Packaging and Services business.

Gross profit margin was 18.1 percent of net sales for the third quarter compared with 20.8 percent a year ago. This quarter's results were impacted by higher costs for raw materials in Industrial Packaging and Services. Lower absorption of fixed costs and Paper, Packaging and Services and lower planned timber sales.

Operating profits before restructuring charges rose 19 percent to 31 million for the third quarter from 26 million a year ago. As I previously noted, SG&A reductions have had a favorable impact on operating profits. Total debt outstanding was 652 million at July 31st, 2003, compared with 673 million on the same date last year. Total debt to total capitalization was 54 percent at the end of the third-quarter and also in the prior year period. For the nine months ended July 31st, 2003, capitals expenditures were 36 million compared with 30 million for the same period in 2002, both excluding Timberland purchases.

The Company anticipates the capital expenditures will be about 55 to 60 million for fiscal 2003, which is 20 to 25 million below depreciation expense.

For the fourth quarter the Company projects further progress and a solid performance in Industrial Packaging and Services, and achievement of timber results as planned. The Company is cautious about the improvement potential in Paper Packaging and Services due to the continued weakness in this segment. Realized savings from the performance improvement plan are expected to offset a substantial portion of a possible shortfall here.

As we look forward, taking into consideration the ongoing benefits from the performance improvement plan, we are confident that the Company is on the right course to earn its cost of capital during a weak economic environment and to produce a positive spread and superior returns when the economy is strong.

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

[Operator Instructions]. Mark Wilby (ph) of Deutsche Bank.

Good morning and it's good to see so much improvement on the performance improvement plan. I wondered if you could give us a little bit of additional color on activity during the quarter in both the businesses. I guess in industrial packaging, I was kind of surprised that that business over in Europe was as good as it was, given some of the economic numbers we've seen out of Europe. And then in the paper business, I was curious about that 11 percent decline. And I wondered what that translated to in terms of actual volume and versus how much was priced?

Good morning, Mark, it's Mike Gasser. I will start the first question with the industrial packaging and we were pleased with the results of the industrial packaging business during the third quarter, we've been pleased with the results of the business for the whole year. We're quite excited that we -- the acquisitions that we've made are starting to bear fruit and the performance improvement plan will do nothing but to enhance that. The European operations were very strong during the third quarter and a little bit countercyclical, counter to what we've heard in the newspapers but our business has been fairly strong there.

It's starting to stabilize now so we anticipate the fourth quarter will be much more stable without the growth that we experienced in the first 3 quarters, but our business has been very strong and I think it's really -- relates to the strong market position that we have, the focus that we've given to our employees to go out and be very aggressive in the market and to get our fair share so we have been very pleased with those results. The paper? You want to talk about the paper, Don?

Yes and good morning, Mark. The volumes at the mill were down about 14 percent. That was substantially due to some down time -- approximately 23 days. That represented a substantial portion of that 21,000 ton shortfall. The down time did allow us to rebuild our recovery boiler at our Riverville mill and also upgrade our paper line at Mansell and the -- in terms of our converting activities, those volumes in the region that we have served, the industry was down about six percent. Our volumes were down a bit more than that given our overweighting and really the industrial sector.

We have chosen not to participate to any meaningful extent within the consumer nondurable sector.

Could you give us a sense of what price bid for you on both kind of mill volume and box prices?

The box prices have remained stable and really during the third-quarter the liner and medium consistent with the pulp and paper statistics have really been quite stable.

Okay. Any sign in that business, Don, of any pickup -- you know these purchasing manager numbers last week would suggest that maybe there's a little bit of life afoot in the manufacturing sector. Can you see that?

I would say that at this point we don't, we don't see a lot of evidence of it, other than, really, just a few more positive comments. But really very little evidence, one week we will seek good order intake levels and the next week will be disappointing. So still a bit choppy.

And, Mark, we are seeing our customers are more positive. We just don't see it in the order flow yet so conversationally I think that there's a little bit more optimism but we have not see it in the order flow yet.

can you update us on industrial packaging on the raw material situation right now?

Yes. For industrial packaging, as you know, steel and resin are the -- really the key raw materials. Steel has been -- has been relatively well behaved on a sequential basis. Actually down a bit. That is expected to reverse itself a bit, but it is down sequentially. On a year-over-year basis, still higher by about 6 percent. In terms of resin, that is fairly stable, also. A slight upward bias, but it has been stable and has been stable sequentially on a year-over-year basis. That is up about 18 percent however.

Okay -- any significant differences Europe versus North America?

No, it's relatively the same. I think -- we're -- looking at a chart here in front of me, Mark. And it's the same trends are playing out in Europe as we are in North America.

Okay and then, finally, I just wondered if you could put a little more meat on things in terms of in these 2 businesses, what the biggest performance improvement levers have been to this point?

To this point through the end of July, the biggest performance improvement lever has been in the SG&A initiative and you can see our SG&A costs have dramatically decreased and we expect that to continue as we go forward. We are instituting -- the process is much more than just taking SG&A costs (indiscernible) because we are really looking at our whole go to market strategy and our whole business process. And we anticipate that that will reap us some very good benefits and really when we get to the fourth-quarter conference call, we think we will be in a position to really go into that into a lot more detail than we are sitting here today.

Okay, do you feel like just in terms of facility rationalization -- are we through that process now or might we see some more moves over the next three to six month?

We anticipate from what we know right, what we see right now Mark, that we will see some more next year. Especially if this business process, as we see it today, does materialize it will make our operations much more efficient, much more productive, which will allow us to continue to rationalize some facilities.

Okay and I know you guys want to talk to employees about this first but in terms of general areas where we might see that?

It really will be in all the manufacturing sectors so it won't -- it is not limited to one product. Or one business. We're really looking at this on a holistic approach and it is not just in the United States. It will be around the world, but the initial activity appears to us that we can rationalize some more because of the productivity gain, but we need to really prove that out before we go forward. And that's what we're going to be doing the next couple of months.

Okay and last question from my side, I am just kind of curious on that statement for the start of your comments about getting yourselves to actually grow above GDP and actually what I think about some of these industrial packaging businesses it seems like they grow a little bit slower than GDP -- I just wondered if you wanted to talk at all about what you're thinking up there? What the elements of strategy are?

The elements of strategy and we're developing as we go, because that is part of we have two real programs under way right now Mark -- one is called the market back and the other is operations forward, and the market back is really the growth of the Company. We believe that we are -- the business is due -- you are absolutely right, some of the business we operate do grow less than GDP. We do believe that with the position that we have, the value proposition that we believe we will bring to our customers will be compelling enough that we should be able to grow at a rate faster than the product will grow up to an (indiscernible) GDP growth. We're not planning on getting into other businesses at this time but we do believe that there's enough growth potential in the existing businesses to allow us to have that goal and reach that goal as we go forward.

Okay. Very good.

Nye (ph) Rosenzweig (ph) with Bear Stearns.

I was wondering if you could just tell us where you stand on the bank revolver and also I notice it is not broken out on the press release but in the Qs, you have a line item for short-term debt -- I was wondering if you could just refresh my memory and describe the nature of that facility? Thanks.

Yes. We have a bank credit agreement where there is approximately $380 million outstanding under that. That includes a credit facility, a revolving credit facility, of 250 million and there the utilization is 82 million of that $250 million facility.

Yes -- thank you -- I was wondering if you could describe, I guess in your Qs you break it out. There's another or is that part of the revolver? That's a short-term borrowing line in the liabilities? I think on April it was about 24 million outstanding.

Yes, that would tend to be borrowings, local borrowings of our foreign affiliates that would not be under the credit agreement. Because the other borrowings would be -- since the term of the credit agreement is beyond one year, that would be classified -- the revolving credit would be classified as long-term.

Okay, so that -- the local borrowings, is that unchanged from April?

Yes.

Thank you.

Walt Lippkis (ph) from McDonald Investments.

Thank you. Good morning. I guess a follow-up question on the paper and packaging side of the business. What's the magnitude of the revenue that you're looking for for the fourth quarter, given the cautious outlook? Are you looking for, say, a sequentially flat quarter?

There is normally a seasonal uptick and we would anticipate some sequentially improvement but it is not going to be necessarily as robust as we had previously thought. But it -- there will be sequential improvement. The other point that I would make is that our volumes at the mills and volume as you know is really a key driver of profitability, given the capital intensity of a mill. The volume was down because of the major maintenance that was done during the third quarter and so that capacity is available in the fourth quarter and we would expect it to be substantially utilized. So there will be that benefit. Unfortunately, offsetting that, we did see in August, pulp and paper -- the pulp and paper containerboard index drop $10. So there is still -- there is still some pricing risk and OCC is always volatile.

And then, I guess along those lines, specifically, where do you see the cost savings or -- to offset the shortfall in that segment?

The cost savings would really be within the performance improvement process overall. And, clearly, our Paper, Packaging and Services segment is participating in those. As you know, we announced the closing of the Centralia plant. That represents a little over 10 percent of the capacity. There will be the ability to basically improve the utilization of our remaining converting activities. So that will benefit, but it will be a continuation of really the SG&A optimization of savings across the enterprise and then, the continued improvement of manufacturing efficiencies.

Okay, let me ask you about that, then. Sounds like the performance improvements clearly become kind of a Greif business systems and I wondered is there a consultant or consulting firm that you're using and or like a manufacturing process like (indiscernible) or Six Sigma?

Yes the one point that Mike Gasser makes repeatedly is that this is really [indiscernible] Greif's transformation process but we are getting support from McKinsey and they are assisting, really, in the market back and operations forward and included within operations forward are lean manufacturing principles.

Okay and then -- thank you. And then the supply chain improvement that you mentioned. Do you have an estimate of what kind of procurement savings you can get going forward?

We have really just recently hired an exceptionally talented supply chain person by the name of Jonathan Hanson, who spent most of his career at GE and is just bringing a fresh perspective to Greif's supply chain. And we're really in the process right now of bracketing the opportunity within that area. So we will be in a position during our fourth quarter conference call to provide more detail.

Okay. And the -- with the performance improvement product you may have mentioned this and I might have missed it but initially you said 50 million in savings. Is that correct? What are you looking for now?

We really wanted to complete the diagnostic and really provide that update during the fourth quarter, but it will clearly be in excess of $50 million and we would expect the realization during 2003 to be about half of that. We had previously stated our expectations at about 15 million.

Okay, year-to-date. How much would you say you've gotten?

It is going to be in the -- in the $10 to $15 million range.

Okay, so maybe another 10 million in the fourth.

Uh-huh.

Okay, then, with regard to -- just a miscellaneous questions in regard to volumes in Europe, I'm not sure if you mentioned what the volumes were coming out of Europe?

Basically the volumes within industrial packaging were up modestly.

Okay. And then just as a final question, given the moving parts in your business, last quarter you talked about earnings guidance of operating profits of under 110 to 115 million. Is that still management's guidance?

We are very feeling very good about industrial packaging and expect another solid performance during the fourth quarter. We are going to continue to realize the performance improvement savings. Timber is going to be as planned. As we mentioned, we are cautious about the near-term outlook for Paper and Packaging. The -- the -- as mentioned our previous guidance was 110 to 115. The analyst estimates are about $5 to $10 million below the low-end of that range. And I think that would bracket the risks associated with Paper and Packaging. And, once again, we're working diligently to offset those risks through additional contributions from the performance improvement initiatives.

Okay. Okay. Thank you.

Ross Haberman from Haberman Brothers.

Good morning, gentlemen, how are you?

Good, Ross, how are you?

Could you share a little bit of light on timber prices and, too, could you shed some light on I guess your -- just forgot the name of that joint venture of yours [indiscernible]. Yes, I guess -- looking at the income statement I guess the income and that was down somewhat too. How closely is that tied to, I guess, the profitability of your overall Paper and Packaging segments and just, finally, how much cash is that -- that joint venture today?

I will start with your second question, Ross, as Don looks up the timber prices. We will find that information, we have it someplace. Cort Choice is in the corrugated business. They buy paper from mills and convert that paper into sheets and then sell those sheets to box companies to make boxes. So it is subject to the whims and flows of that segment of business. You know, we have said many times, we think it's an extremely proficient, extremely well run operation, but it is within the same whims and realms of that business. So as that whole business goes up-and-down it does have an effect on the Cort Choice operations. So the results for the quarter were down a little bit but they were in line with what we thought they would be and they've done a nice job running that business.

What's your expectation -- if I may interrupt you -- for the cash flow for the year for that business? Or operating income from that business? Whichever is easier?

If you use EBITDA as a proxy then it would be in the $32 million range.

Versus about 40 if my recollection is right, last year?

Yes, I think you're rounding up. But that's very close. The other part of your question regarding the cash position at Cort Choice -- it is about under $100 million.

And my last recollection was right? You had no debt at [indiscernible]?

That is correct -- never had it.

Okay. Have you gone anywhere in terms of possibly dividending a portion of that up or out?

There is a formula, we have historically paid dividends from at operation but it is -- there is a formula that was developed when the arrangement was put together about four years ago and we have all of that formula. So that would be on an ongoing basis.

Okay. And just the timber prices you were going to get [indiscernible] if they are readily available?

Basis on those prices they have been stable. We look at our results, we have sold cutting rights to about 3500 acres and that's down about 1100 from last year. So that really explains the change year-over-year and that was based on the planned harvesting board 2003.

And just one final question. Most of the SG&A savings I think you said you had 15 million to date you expect possibly another 10 million in the fourth quarter. Could you give us a sense of how much of that relates to the packaging side and how much relates to the paper side?

We sequenced the initiative in such a way that really corporate led and so that's where we're capturing a disproportionate share of the savings at the present time. So that -- that is a significant part of the savings, followed by industrial packaging. And then, really, the Paper and Packaging business, although they've had meaningful contribution, that started later in the year. So as a result, really, about a third of the savings is going to be -- going to be part of the corporate and then in fact -- excuse me, it would be the complement of that. About two-thirds will be corporate and about one-third industrial packaging. Paper and Packaging will start to see some of the benefits there in the subsequent quarter.

And Ross really I really thought for that this program to have credibility we really needed to lead it off for corporate to start there so we really focused the first couple of months on focusing on that arena and that has been a good decision because it has given this whole program a lot more credibility out in the field as you can imagine and so that's where we focused initially.

Will you be at -- you weren't quite at the 10 percent run rate this quarter will you be at that goal by the end of the fourth quarter? [indiscernible] 10 percent [indiscernible]

We will be making more progress.

What we said we will be adding during 2004 -- we are comfortable with that. Our initial plan as you know was to be there by 2006.

Okay. Okay, best of luck. Let's hope we see some pricing improvement on the Paper side.

We would agree with that also.

Sooner than later. Thank you.

Brent Reilly (ph) with Rutabaga Capital.

Hi I had a couple of follow-ups if I could. I was wondering on the Paper side if you guys have seen any capacity leaving the market and into various geographies and I guess secondly, just a numbers question. Of the $50 million restructuring charges you guys are going to take this year, could you give me a ballpark? I can go back and get the last three quarters, but how much total will be cash?

Good morning. The capacity issue -- the industry has taken a lot of capacity off the market during the year. Recently, we have not seen any new capacity being taken off recently. But there's a lot of speculation in the industry that some more will be taken off in the near-term future. We hear.

Forgive me, is that actually capacity going away for good or are they temporarily [indiscernible] want to make sure I am clear on that.

I hear the same things you hear, that it will be gone for good, but there has been nothing that has been factually stated, but there's been nothing that has been factually stated. These are just rumors that are out in the market and that -- I hear the same thing you did. So we hear that. We have not seen anything. Actually, that has been gone off but there's -- there's that possibility that might happen as we go forward.

Okay and has that -- have you been hearing things mostly in the domestic market?

Mostly in the domestic market, yes, Brent.

And on the restructuring charges, how much ballpark is [indiscernible] ?

75 percent.

75 percent that was in the quarter, that is good for the year as well.

Exactly.

Okay, that's [indiscernible]. (indiscernible) some of the earlier questioners -- you mentioned, you guys -- it sounded like you've been gaining some market share in Europe industrial packaging side and you mentioned that started stabilizing somewhat is that a fair assumption I guess I interpreted it as you were gaining some market share. Is that a fair statement?

I think there's been a little bit of market share gain. I think there are customers' business that has been strong so it's been a combination of both.

Okay and then you mentioned imagine also [indiscernible] questioner I talked about mentioned raw material prices and in the press release you guys talked about that being a little more dramatic overseas. You did comment on steel and resin being -- kind of having same patterns both here and overseas, I guess I just wanted to understand that statement in the press release a little better. Is the costs -- are the cost pressures lighter overseas than they are in the U.S. or did I misunderstand?

Well, we were talking I think and the answer to the question was trend. And how prices [indiscernible] -- The prices are greater overseas on an absolute dollar basis but I think that we were [indiscernible] question whether trend was doing trend [indiscernible] prices are greater there.

Okay, so the prices are higher there but you guys -- the trends are the same and they've been -- and they're up and basically stable at this point?

Correct.

I appreciate it. Thank you.

[Operator Instructions]. Gentlemen, I am showing 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, September 13th. For domestic callers the number is 800 633-8284. For international callers, the number is 402 977-9140. Please use the reservation codes 211 59 641.