Greif Inc (GEF) 2003 Q4 法說會逐字稿

Welcome to the Greif fourth quarter 2003 results conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Friday, December 12, 2003. I would now like to turn the conference over to Miss Jo Ellen Price (ph). Please go ahead ma'am.

Good morning and thank you for participating in our fourth quarter 2003 conference call. Our speakers today are Chairman and Chief Executive Officer Mike Gasser, who will discuss the company's performance improvement process, positive benefits from the September 30, 2003 CorrChoice transaction, and current market conditions for the Company's businesses; following Mike's remarks, Don Huml, Chief Financial Officer, will review the Company's results for the fourth quarter of 2003, highlight key elements of the next phase of the performance improvement process, and provide the Company's outlook for fiscal 2004. There will be a question and answer session following their remarks.

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.

I'm pleased to introduce Mike Gasser for his remarks.

Thank you and welcome to today's quarterly conference call. Our results for the fourth quarter of 2003 included topline growth, sequential improvements in gross profit, and further reductions in SG&A expenses. We remain focused on improvement in process as we continue to build our capabilities to achieve sustainable advantages in our business.

We began the year with a 3-pronged process -- an extensive review of our corporate structure, an in-depth analysis of our businesses, and development of specific financial metrics to measure our performance. This review was driven by our aspirations to become a top performing company. These efforts form the basis for the performance improvement plan which we began to implement in the second quarter of 2003. The most significant invisible results of this initiative have been the achievement of a streamlined corporate center, increased focus and accountability in our business, and 18.3 percent reduction in the Company's SG&A expenses, excluding CorrChoice, compared to fiscal 2002.

First phase of the performance improvement process primarily addressed SG&A optimization and involved all areas of the Company. We targeted $50 million of permanent cost reduction, and increased that amount during the fourth quarter based on additional opportunities. This resulted from aggressive implementation of our plan and a broader scope of savings than originally anticipated. These cost savings initiatives are expected to exceed $60 million annually, (indiscernible) similar to the amount of restructuring charges in fiscal 2003. Approximately 30 million of the savings were realized in fiscal 2003, which was double our initial estimate for that period, with 30 million in additional savings expected this year. Greif has become a leaner, more market focused, performance driven company as a result of this process.

Recently, we began to implement the second phase of our performance improvement process, which emphasizes commercial and operational excellence. These initiatives are focused on organic growth as well as enhancing the Company's key competencies in fiscal 2004 and beyond. This will be accomplished through optimization of our operations and value propositions. Don will address this next phase of our performance improvement process in his remarks. Consistent with the goals of the performance improvement process, we remain committed to unlocking value within Greif and dramatically improving returns at each of our businesses.

On September 30, 2003, we announced that CorrChoice, a joint venture engaged in the corrugated sheet feeder business, had redeemed all outstanding shares of its minority shareholders for approximately $115 million. This was substantially fund funded by CorrChoice cash and cash equivalents of approximately 110 million. This transaction was immediately accretive to our financial results of fiscal 2003 and is expected to provide a substantial earnings contribution in fiscal 2004. CorrChoice net sales are included in our financial results for the fourth quarter in fiscal 2003. We cannot consolidate CorrChoice results prior to this transaction because we lack effective control.

The benefits of this transaction also extend to our operations, which includes substantial opportunities to achieve improved efficiencies in our paper, packaging and services business. We will maximize production at our paper mills and corrugated operations, which is highly critical in this highly competitive industry. The Company is now a fully integrated buyer -- a producer of containerboard, and in fact, a meaningful net buyer of paper.

In terms of our business outlook, there are initial signs of improvement in our markets; however, we remain cautious pending further evidence of increased activity levels. A sluggish industrial economy impacted our business throughout fiscal 2003, especially in North America. This was most apparent in paper packaging services, where linerboard and (indiscernible) prices at the end of fiscal 2003 were approximately $40 per ton below the prior year level. In industrial packaging and services, we expect weak market conditions and generally higher costs for cold rolled steel and polyethylene -- 2 key raw materials. Last week, President Bush removed tariffs on steel imports that were implemented in March of 2002. These tariffs resulted in significant price increases during the second half of fiscal 2002 in North America and led to higher prices in world markets during fiscal 2003. We anticipate that steel prices will remain relatively stable in fiscal 2004, principally influenced by supply and demand.

There has been recent speculation in the paper industry that market conditions are finally stabilizing. This is attributable to the signs of increased demand, coupled with reduced production capacity as a result of industry discipline. We're confident that we are on the right course and that positive benefits from our performance improvement process, combined with an ongoing commitment to unlock value within the Company, will enable us to achieve our corporate and financial goals. Now Don will discuss details of the financial results, the next phase of the improvement performance process, and the Company's guidance for fiscal 2004.

Thank you Mike. The fourth quarter of 2003 results were in line with expectations on a same structure basis. This was due to a solid performance in industrial packaging and services, sequential improvement in paper packaging and services, and timber, which was as planned. Two key factors contributed to the fourth quarter of 2003 results and will also provide substantial benefits in future periods.

First, as Mike mentioned, CorrChoice became 100 percent owned by Greif in the fourth quarter of 2003. CorrChoice was included in the consolidated results for the entire year, with a minority interest deduction through September 30, 2003. Their results were previously accounted for under the equity method. Second, permanent cost savings from the performance improvement process will exceed the original $50 million target by $10 million on a run rate basis, with a corresponding increase in onetime costs. We originally expected to realize $15 million in cost savings in fiscal 2003 and we delivered double that amount. We are very encouraged by the meaningful impact of our performance improvement process thus far, and anticipate realization of substantial cost savings in fiscal 2004.

Now turning to the Company's fourth quarter of 2003 results, net income before restructuring charges, debt extinguishment charge, and timberland gains, was $22 million versus 16 million a year ago. On a per-share basis, net income was 79 cents compared to 57 cents for a Class A share and $1.19 versus 87 cents per Class B share for the fourth quarter of 2003 and 2002, respectively. Net sales increased 18 percent to 514 million for the fourth quarter of 2003, including 53 million from CorrChoice, compared to 436 million a year ago. Foreign currency translation represented another 24 million of the increase in net sales. On a constant currency same structure basis, net sales were 1 percent above the fourth quarter of 2002.

The gross profit margin was 19.2 percent of net sales for the fourth quarter of 2003 compared to 22 percent for the same period last year. The principle factors included generally higher raw material costs in industrial packaging and services, lower pricing levels and fixed cost absorption in paper packaging and services, and lower planned timber sales. SG&A expenses declined to 55 million, or 10.7 percent of net sales for the fourth quarter of 2003, compared to 63 million, or 14.5 percent a year ago. Positive contributions from the SG&A optimization initiative, and to a lesser extent, the elimination of goodwill amortization expense, were the key factors compared to the fourth quarter of 2002. SG&A expenses have declined as a percent of net sales each quarter since we initiated the performance improvement process.

Operating profit before restructuring charges and timberland gains increased to $43 million for the fourth quarter of 2003, compared with 33 million for the same period last year, including a $7 million increase due to the consolidation of CorrChoice. The industrial packaging and services segment achieved solid results across its portfolio. Excluding the impact of foreign currency translation, net sales were 1 percent higher than the fourth quarter of 2002. Performance improvement process was the principle factor contributing to the improved results. However, those benefits were partially offset by higher raw material costs and value-added erosion. Operating profit before restructuring charges increased 57 percent compared to the fourth quarter of fiscal 2002.

Paper packaging and services results benefited from the CorrChoice transaction. Net sales increased to $139 million for the fourth quarter of 2003, which included 53 million from CorrChoice, compared to 84 million for the same period last year. Operating profit before restructuring charges improved to 13 million for the fourth quarter of 2003, due to the inclusion of CorrChoice. Sequential improvement in operating profit from the third quarter of 2003 was driven primarily by increased containerboard volumes and favorable manufacturing efficiencies which more than offset price erosion. For timber, the fourth quarter of 2003 operating profit, before restructuring charges and timberland gains, was $6 million, which was 2 million below the prior year but in line with planned levels.

Net debt outstanding declined to 612 million, or 49.6 percent of total capitalization, at October 31, 2003, from 628 million, or 51.4 percent of total capitalization on the same date last year. Capital expenditures excluding timberland purchases for fiscal 2003 were $61 million compared to 46 million for the fiscal year -- for the prior fiscal year. The fiscal 2003 projects included new manufacturing plants in key growth markets such as China and Russia, as well as a number of other projects to enhance our manufacturing capabilities. Fiscal 2003 capital expenditures were $22 million below depreciation expense. The Company anticipates that capital expenditures will be approximately 75 to 80 million for fiscal 2004, which would be approximately 20 to 25 million below anticipated depreciation expense for the year.

As we stated last quarter, a detailed diagnostic review was conducted to identify additional opportunities beyond SG&A optimization. The opportunities identified include improving labor productivity, material yields, and improving other manufacturing efficiencies, coupled with further network consolidation. The related onetime costs will be approximately $50 million, which will be incurred in fiscal 2004. This is expected to result in the elimination of an estimated additional 700 physicians and the closing of several facilities. This final phase of the restructuring is expected to deliver additional annualized benefits of approximately $50 million, with about $15 million of those savings to be realized in fiscal 2004. The Company is also launching a strategic sourcing initiative to more effectively leverage its global spend and lay the foundation for building a world-class sourcing and supply chain capability.

Regarding our outlook for fiscal 2004. Earnings per share, before restructuring charges and timberland gains, are expected to increase due to additional savings realized from the Company's performance improvement process, 100 percent ownership of CorrChoice in fiscal 2004, and incremental increases in operating performance. As a result, the Company's guidance for fiscal 2004, before restructuring charges and timberland gains, is $2.35 to $2.40 per Class A share.

During fiscal 2004, we shall remain intensely focused on the basics of execution and functional excellence, with the aim of dramatically improving performance levels and returns and unlocking value. The accomplishments of fiscal 2003 -- most notably the successful execution of the SG&A optimization program, the design and implementation of a robust performance improvement process, and the integration of CorrChoice -- position the Company to deliver on its aspirations of becoming a top performing industrial company.

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

(OPERATOR INSTRUCTIONS). Brandon Holt (ph).

A couple of quick questions. The first one -- in the containerboard business, you guys -- this quarter closed at the end of October. What are you seeing in November, and I guess thus far in December, as far as the volumes?

We are encouraged the last part of this year (indiscernible) starting really in the first of October and going through even today, the volumes have held up reasonably well. Obviously this is a seasonal time, but the season is a little bit later this year. It started a little bit later but it's going a little bit later, so sitting here right now we've been very happy with the volumes that have happened. Obviously the next couple of weeks are going to be difficult because of the holiday season.

But thus far though, the back half of this year they're a little better than they had been sort of on a run rate basis?

Yes, they have.

Outside the containerboard business in the industrial business, what about volumes on that front? I guess kind of everyone is thinking of the global rebound in '04, but I'm just wondering if you guys have seen it, felt it, if your orders are picking up? What are you seeing?

It is consistent with the season we are in right now. We do have a little seasonality, especially in December is slow on that end of the business. October and November were good. All over, really. Europe -- Germany has been leading the way for Western Europe. And the United States has been pretty consistent. So we haven't seen a big rebound there but it hasn't decreased at all either. So it's been pretty consistent what we thought it (inaudible).

How would you gauge -- I don't know if you can read (indiscernible) the body language of your customers, as far as what they're thinking for '04?

There's more optimism today than there has been in the last four years. Let's hope that this is optimism that is justified, but there truly is more optimism in both our customers in the paper business, the container business, and also our customers in the industrial packaging business. So there is more optimism today. That is pretty evident. I think people feel good, they think things are growing going right. But they're also cautious just to make sure that it continues. But there is much more optimism.

I guess I have some questions for Don. Some follow-ups here. Your expectation for depreciation and amortization in fiscal year 2004 -- can you give me a range on that?

Yes. That would be about 102 million, and that would include a full year of CorrChoice, which would add about $12 million.

The cash cost for restructuring in the fourth quarter as well is what you are expecting for next year?

For the fourth quarter it was 80 percent of the total charge, and quite frankly, the 2004 -- we're going to need to do a bit more analysis. I would anticipate that it's going to be in the 75 percent range, however.

And that has kind of been where it is running, right? 75 to 80 or so?

75 to 80.

I guess you guys sort of found some more things that you were able to realize this year on the cost saving front, and going into 2004, obviously, you've got another big program. After that is done, are you feeling like at that point you going to be pretty well aligned with where you want to be?

This is Mike again. We are comfortable after that point from a restructuring standpoint with where we're going to be at. We have really developed a philosophy that this is going to be a continuous improvement process. Through '04 (indiscernible) been through all of the facilities. We'll have been through the sales marketing program. We'll have been through the issues on strategic sourcing. We'll go back and continue to modify that, but that will be part of ongoing operations at that point in time. So what we're really looking is the big hit initially, and we won't be through that in '04.

I guess back to Don. Don, what was the balance on the AR securitization? Was it 85 million?

That's correct.

So I guess the revolver was about 7?

Yes.

Lastly, your expectation in '04 for timber sales?

Those we expect to be down further, and so they would be down about $10 million from what we had experienced in 2003.

So roughly 18, $19 million?

That's correct.

Walter Liptak, McDonald Investments.

The first question is on the EPS guidance for next year, the 235 to 240. Could you provide some color and maybe talk about some of the other assumptions that go into that -- revenue, foreign currency, you know, maybe pricing?

Yes. In fact, let me try to bridge 2003 to 2004. We have a few moving parts and some offsetting items, but we have just reported EPS before restructuring and other items of $1.53. And so to bridge to that 2.35 to 2.40, the first item would really be the SG&A optimization contribution. And we talked about realizing $60 million on a run rate basis. When we deduct what we actually realized of that in 2003, that would be the incremental 30 million, or 70 cents per share. We then talked about the next phase, which would involve the adoption of the lean manufacturing practices, rationalization of facilities, with the capture of about 15 million of the $50 million opportunity in 2004. On a per-share basis that would be 35 cents. Now, that is offset by containerboard price declines, because we are entering 2004 at pricing levels substantially below those that prevailed during the year of 2003. So that differential in price is going to offset the 35 cent contribution from the next phase of the performance improvement process. We will then get the accretion from CorrChoice -- basically the full year benefit as opposed to the one month contribution for 2003. That will represent accretion of about 17 cents per share, and then we would have really synergies from CorrChoice that would be sufficient to offset the reduced timber harvest that we talked about a moment ago. And so that would basically bridge you to the guidance we're providing for 2004.

Great. So in terms of volume improvement, at this point, what do you think your leverage is for every incremental dollar of sales? Because it doesn't sound like you're expecting much in terms of volumes.

Where it is easiest to really deal with our price sensitivity is really within containerboard, and that is where it is just really a critical variable. But a $10 change in price, based on our production capacity of over 600,000 tons, would be $6 million. For example, to give you an idea of the price erosion that has occurred within that market, the prices prevailing today based on the indexes are really $40 below the prevailing rate one year ago. We do expect to see some improvement; fundamentals seem to be a bit more favorable. We are encouraged by some of the initial signs, so there could be some reversal of that pricing erosion during 2004. And there is some improvement that is factored into our guidance for 2004.

Great. I guess another question -- the phase 2, the timing of the $50 million charge, will we see that in the next quarter or is it spread across the year?

It's going to be spread across the year.

And then the 15 million of savings, I assume that comes mostly from the people cost (indiscernible) or the terminations. But the remaining 35 million -- how long of a time period are we looking at to achieve that cost reduction?

We would really expect the remainder to be substantially captured in 2005. We look at these as basically one year payoffs (inaudible).

Then the sourcing initiative, it sounds like you are kind of at the early stages of it. Can you quantify at all what kind of reductions you can get, and then kind of the timeframe?

We are in the early stages. As we had mentioned on our last conference call, we have been fortunate to have recruited a top person to head up this initiative. So we will be going through a period of three months of really detailed diagnostic of our spend. We would certainly feel that the opportunity would be in the 5 percent of our global spend, which would basically indicate a $50 million opportunity. But we are basically going to wait until we have completed the analysis to try to confirm the ability to capture that opportunity and then provide some guidance on the timing of its realization.

That 5 percent is really based upon -- historically, when other companies go through a process like this they get in the range of three to five percent. And so as Don said, we just need to verify that number. That would give you -- not saying we can get that, but that would give you an order of magnitude of what other companies have got when they're going through something like that.

Great. Just a couple of miscellaneous questions. In the industrial packaging business, the operating profit declined sequentially. I assume that's because of absorption issues and this seasonal factor you alluded to?

That, and the -- exactly what are you referring to?

Maybe I could talk to you off-line. I thought the operating profit in industrial was 6.6 percent down sequentially from the third quarter?

We would be happy to take that off-line. There is a slight reduction but that really is due to seasonal factors. There's a seasonality factor -- a slight seasonality factor, and it's a difficult comparison because quite honestly, last year (indiscernible) Europe had a very strong third quarter 2002 -- this year had a very strong third quarter in 2002 because they have a food business, and that dropped off. But it is more of a little slight seasonality, but nothing major.

Exactly. So sequentially, we're down just a bit. But on a year-over-year basis, up significantly.

And then the last question is in the paper and packaging segment. I wonder if you could tell us what the operating profit would have been without CorrChoice in it?

It would have been -- well, for the fourth quarter it would have been $6 million. And that really illustrates, if you look at the third quarter for the paper and packaging segment, without excluding CorrChoice, we were basically at a breakeven. So it does illustrate the improvement that has occurred, which is being driven primarily by higher volumes within our containerboard activities. And volumes are up about 21,000 tons.

Christopher Chun, Deutsche Bank.

I am participating on behalf of Dave Martin in his absence today. Can you guys talk about what the EPS contribution from CorrChoice -- I mean it's full consolidation this quarter was?

Yes. If you -- basically, if you look at the contribution of that one month where we captured 100 percent as opposed to 63 percent of the earnings of CorrChoice, that would translate into about 4 cents per share.

I was a little bit confused why it was so much from one month, given that you guys are talking about 17 cents for all of '04, right?

That's a very good point, because the 4 cents is not a number that should be annualized. They did happen to -- CorrChoice did happen to have a very strong finish to the year, and I am sure that is similar to what you were hearing from others, where there was a nice uptick in activity levels within the converting activities. And that drove the results of CorrChoice, so they had a very solid, very solid performance, and that 4 cents definitely should not be extrapolated to the full year.

Christopher, to give you an example, October historically is a strong month (indiscernible) it was a really good month this year. And it had more days to it, 23 operating days this year, which is one more than last year. So that helped. And compared to November, which is 18. So you couple that with the number of (inaudible).

That's great. Can you guys talk a little bit more about your cost savings expectations in '04? You guys mentioned an additional $30 million from your performance improvement plan, and another 15 million from your new cost-cutting program. Do you guys have those expectations broken down by quarter at all for next year?

We are really not providing guidance by quarter, and there is still some further work to be done in the calendarization of those items.

Just a couple of more miscellaneous questions. Do you guys have CapEx guidance for '04?

Yes. 75 to $80 million. And the reason that it is up is really due to CorrChoice, primarily. They would tend to be spending in the 15 to $20 million range.

That's historical CapEx at CorrChoices. So for right now we have had that number in there.

Okay, thanks. Did you guys take any downtime in your containerboard operations?

No, not during the fourth quarter.

With what we have right now, as we said in our announcements earlier, we are a fully integrated producer now and would be a net buyer. So we would anticipate to run those mills full throughout 2004.

Okay, great. Finally, can you guys give us little more color on what your steel costs were in the fourth quarter compared to what you guys have been seeing historically? And also, what your expectations are going forward?

Basically, the steel costs -- and we're really not able to disclose specific amounts, the purchase price per ton. But on a year-over-year basis, steel was up about 14 percent for 2003 compared to 2002. There has been some stabilization, even some declines. But we really are anticipating that if anything, there might be a slight upward bias.

And that's really driven by a couple of things, Christopher. One is that that's what the so-called experts in the industry are saying right now, that steel will trend gradually upward. Even in light of, as we said earlier, of President Bush electing to eliminate the tariffs in U.S. But it is a world market today, and costs are up. Energy costs are up. As you know, that affects steel production, and iron ore is going up, so that is affecting steel production. And quite frankly, as I said earlier, it's a supply and demand. China is becoming a huge buyer of steel, and so that is driving the demand standpoint. We are anticipating that if they do anything they will trend upward.

You guys mentioned that you're expecting timber sales in '04 to be down about $10 million from '03. I was wondering if you can give us some more color on why that is and what we should expect in terms of timber sales, even beyond '04.

That's really a management decision. I think we have said in previous calls that this is the business, that we think we would like to have a sustainable 30 million in timber sales over a long time frame. As you recall in '01 -- 2001, 2002 we actually cut more than that. We actually got as high as 45, close to 50 million. And this is just the process of rebalancing that. We believe it is the right opportunity because we really want to have a sustainable yield. So it's really more of a management decision than anything else, to cut back on those timber sales. We could adjust it if needed, but right now our plan is to drop it down so we can balance it, so we get to a sustainable $30 million cutting sometime in the not so distant future.

Ross Haberman, Haberman Funds.

Could you talk about the synergies at CorrChoice? You touched upon it a little bit when you were discussing, I guess, the operating income of the paper think. I think you said without CorrChoice for the quarter it would've been about 6 million. What would have been that number? Would it have been about 22 million for the year?

In terms --

Ex CorrChoice or without it?

Let's make sure we got the question right, Ross.

What would be the operating income of the paper business for the year without CorrChoice? And then, could you put the synergies which you would expect with that for next year?

In terms of the operating profit impact, CorrChoice contributed -- and since we consolidated for the full year -- $21 million in operating profit. And there was 7 million in the fourth quarter.

So if my math is right, without CorrChoice you would have earned about $8 million for the year in the paper business versus 20 million last year?

That's correct.

Apples to apples?

That's correct. You're exactly right. And it's for the reasons that we discussed (multiple speakers) the pricing level being down. That's the key factor.

Okay. And again, the synergies from CorrChoice, I think you said it was going to be roughly 10 million. Is that to the operating line?

I don't recall that we (multiple speakers). But yes -- in that, that was actually implicit in the guidance, and that is really the absorption affect. As Mike had mentioned earlier, we will now, as a fully integrated producer of containerboard, be operating the mills at capacity. And that benefit equates to the $10 million. And as I mentioned in the bridge, that is really offsetting the shortfall in the timber harvest.

Also, there will be some moneys which build into that because there will be some plant consolidations as we look at this business. And we have already started this process of moving some corrugated business to more efficient corrugators. This is the real advantage it gives us; it's really a hub and spoke concept that allows us to run to the maximum capacity both the mill one, which is pretty evident, but also as you go downstream, also the corrugators. And to run those as efficiently and effectively as possible. So we will be looking at, and already have started, closing down some inefficient corrugators and putting that volume in more efficient corrugators, which brings some synergies. Then, implicit in it also is that there is some purchasing opportunities when we look at what they buy on (indiscernible) items versus what we buy on (inaudible) items.

That's 10 million at the operating income line of the paper business, correct? An incremental 10 million at the operating line? It sounds like with some of these other aspects about it, it might (inaudible) be more than that. Am I misconstruing what you are telling me or being too optimistic about what you are telling me?

I think there could be some upside there, Ross. We have given you what we feel very comfortable to give you right now, and I think you could come up with a scenario that could make it a little bit more optimistic than that. But we want to give you what we feel very comfortable that we can deliver on right now, and that is the number we're looking at right now.

Just going back, you threw out the notion that you did not expect much price increases on the steel side. Again, I'm not a steel expert, but it seems like from what I've been reading recently that you could expect some steep increases over the next three to six to nine months.

Hopefully we didn't have a communication (indiscernible). I think what we were saying is that we anticipate steel to trend upwards. That's what I thought we answered; is that what we answered (inaudible)? So maybe --

What kind of increases are you sort of building into your expectations for next year, percentage dollar increases, if I may ask?

Yes. We do get into a little bit of sort of our proprietary strategies for dealing with those. We feel reasonably safe in saying that although there will be an upward bias, we feel we are reasonably well positioned.

No, I just asked because again, all of the literature which I've been reading in studies seems to indicate it's going to be a fairly dramatic price increase, at least over the next couple of quarters. And again, I'm not a steel maven, but I hope you are right and the soothsayers are wrong.

We are definitely anticipating an upward bias and we have positioned ourselves accordingly.

Okay. Just one final question. On the timber sales for next year, you expect that you would be down about 10 million on the revenue line. Is that because of volume, prices, both? What are you seeing there?

Primarily volume. We're going to cut less, Ross. We have made a decision that we're going to intentionally cut less. We see prices to be fairly stable to what they ended up this year as.

You were doing a little bit of development with that excess land. Where does that initiative stand?

That's an ongoing operation. Really we weren't actually developing, we were selling land that is more valuable than growing timber on. And that is an ongoing process. As you know, we disclose that (indiscernible) amount separately, because that's really more of on an opportunistic basis. So that is always out there, is that if we have land that is more valuable than growing timber, we will look at selling that land to recognize that value.

Should we expect any of that for next year, and if so, will it all be used to pay down debt?

We don't in our plan go ahead and budget for that because it is opportunistic. What we have done with those proceeds, to be very honest with you, we have used that money to reinvest in more timberland to grow trees, because we are allowed under tax for exchange to defer the tax on that. So it's a very tax efficient way. In the past, as we sold those lands we have reinvested those proceeds into more timberlands to grow trees on. We have not -- we have used it for that purpose historically.

One final thought. My perennial question -- are you moving closer to combining the A&D shares, and are we any closer today than we were three or six or nine months ago?

You are consistent anyways, Ross. As we have always answered in the past, it's something that we have looked at. I couldn't give you (indiscernible) an indication that's any closer. It's a process and it's been something that the Company has had since 1926, so it's been around. There is no movement in the foreseeable three to six months.

Walter Liptak, McDonald Investments.

Mike, when you were going through your comments you mentioned that in phase 2 you're working on more of an operational change. And you mentioned that you're going to be focusing on key competencies. And I wondered if you could provide a little bit more color on what the lean discipline requires, and if that means that there could be any businesses that are divested?

That's a very good question. We really are focused on building capabilities, and the real 2 major phases -- well, let me back up. There's 4 aspects to this process -- we have what we call operational excellence, we have commercial excellence, world-class supply chain and fact based general management. Because we really need to be sure that we're building good -- developing good general managers. But the two really to focus on right now is operational excellence and commercial excellence. From the operational standpoint, it's really the lean manufacturing techniques. We're really embracing lean manufacturing, looking at it from a 5 S standpoint from a (indiscernible) housekeeping standpoint. Going through the process of training our managers under lean principles, we have found some fairly dramatic opportunities in the plants that we have started. We have gone through four plants up to this point, and we will start rolling it out at a much faster rate come January. That's the reason we have the second phase of this. But we have been able to, quite frankly, reduce the manpower in these plants and actually end up producing more drums. So it is a fairly dramatic process. And this has been quite staggering to us. We've been producing drums since 1920 or since 1877, and really fiber and steel drums since the '50s. So I've been very happy with the way our people have embraced this philosophy, but it is an education and it is a mindset. And it's looking at things totally different. It's a total commitment to have a war on waste, and whether it would be a waste of too many raw materials at one spot, too many products being produced when they weren't needed, people standing around not working, and scrap; so it's a total war on waste (inaudible) from that standpoint. From the commercial excellence standpoint, it's really a discipline and a training technique to really segment the markets that we're operating in -- to understand where our customers need value; where they're bringing value to their customers; what kind of profits they are making; what kind of value we are bringing to our customers; what kind of cost it takes us to bring that value; and then having those conversations with the customers to ensure that we get paid for that value, and/or eliminate the value that we're bringing if they're not going to be paid for it; and also look at from a segmentation standpoint if there are other customers out there in those businesses, are we selling them? And if not, why not? So the 2 need to go hand-in-hand. The operation and the commercial truly need to go hand-in-hand. We will become the lowest cost producer in this business and we will be able to get the -- understand our customers and what value they bring. So we're very excited about this process. It's a real education for all of our individuals; they've embraced it. Obviously, there's a lot of work that we have done and a lot more to do, but it's a real transformation for Greif as we go forward into the future. And that allows us to be pretty confident that we're going to reach our aspiration goals in the not so distant future.

(OPERATOR INSTRUCTIONS). Justin Orlando (ph), (indiscernible) Management.

I wondered if quickly you could talk to me about the segments and revenue growth and margins for the two segments?

For '04 (indiscernible) you talking about Justin?

Yes sir.

I think what we said in our comments, we are anticipating the market conditions. When we did our budget, we anticipated the market conditions to be fairly similar to '03. This -- obviously, if the trend of the last 30 days continues, there could be some upside potential in this. But we have anticipated that the trend line would continue. Now you need to add in light, of course, that we have taken significant costs out. So we are factoring that in. But we have, for our budget and for the guidance we have given you, said that the market conditions (indiscernible) slight uptick, but fairly consistent with where we are at. I think that would be the most general for both businesses. Now in the paper business, obviously, there's the add-on because of the fundamental -- that business -- that business has changed for us because of CorrChoice. So we have that add-on to the process. Did you want to add anything, Don?

No, I think (inaudible)--

That gives it the best generalization, I think.

Maybe you could help me a little bit. Now that we're in paper and packaging with CorrChoice involved, what do you think is a good peak to trough kind of number for paper packaging now that it has got the new CorrChoice business in it, in terms of EBITDA or EBIT?

That -- what we could say is that the amplitude of the swing should be reduced. Earnings variability should be reduced, since as a fully integrated producer, we have now eliminated one of the key variables that contributes to the cyclicality of the business. So we are going to have to get some additional experience to more precisely determine what that swing might be. But clearly, we have reduced our cyclical exposure as a result of that transaction. And as we continue the rationalization and optimization of our converting network, we will be able to reduce fixed costs, and that should improve our performance during the trough period even further.

Just to add a little color to what Don was saying, the swing in the cyclicality -- as you know, in the containerboard, or in any paper business in the mill driven business, there's really 3 main variables -- it's the volume that you produce, it's the price that you sell it for, and it's the cost of the material that you use to put into it. As we have said a couple of times during this call, we are fully integrated now, and actually net buyers (indiscernible). So as Don was saying, the volume component of that from a mill standpoint goes away. So we would have a difficult time to try to give you ranges of amplitude, because that really would depend on what paper prices are going to do. And that would just be subject to anyone's view at this point.

I guess I am kind of thinking of it on a historical basis is really my question, rather than have you go forward and think about pricing going forward.

One thing that might be helpful is really considering the performance of CorrChoice. This was a very difficult year, 2003. And we mentioned that their operating profit was $21 million, fairly consistent with last year. And producing, basically, an operating profit margin in the 10 percent range. So it is really a company that has performed exceptionally well during all phases of the economic cycle.

Ross Haberman, Haberman Fund.

Just a clarification. On the 50 million cost expense for '04, I think you said you're going to save -- we're going to see savings of 15 million, I guess, associated with that?

Realized during 2004, but capturing on a run rate basis 50 million.

So we will see that run rate, you're saying, by the third or fourth quarter of '04?

Right, by the end of the year.

Essentially, will that be the end, or at least for the time being, the end of your onetime expense hits for a while?

That is -- yes. And as Mike had mentioned, right now we're sort of going through the step function change. And beyond 2004 it will be a continuous improvement. And basically the cost associated with continuous improvement will go through operations and not to restructuring.

Some of that cost save, is that going to come -- I think you had thrown out a goal a quarter or two ago of dropping the SG&A, I want to say to 10 percent?

That's exactly right.

If my recollection is right.

That's very good. Good memory.

So that 50 million is going to hit the SG&A? So you're saying we're going to -- will we hit that 10 percent by the third or fourth quarter of '04?

Actually, what we're basically doing is we're moving from SG&A more to cost of sales. The SG&A, we had set that target, if you correctly recalled, at 10 percent for realization in 2006. We did mention on our last conference call that we were going to achieve that targeted level earlier. And we are now ending 2003, basically, for the quarter, the SG&A to sales was 10.7 percent. So you can see that we are almost at that run rate as we close 2003. And so we would expect clearly by the end of 2004 to be at that run rate, and we will be striving to achieve it for the year. But what we are talking about in the $50 million to be incurred in 2004 is really it has more of an operational focus as opposed to SG&A.

Zeke Duwan (ph), Citigroup.

Just a quick question on working capital. It was up a little bit in the fourth quarter. I wanted to get a sense as to what you guys are thinking next year?

Yes, it was up. Currency is a significant factor. When we actually look at it on a days basis and as a percentage of revenues, it is down. So we have actually made some progress; not as much as we would have liked in improving working capital efficiency, but we are targeting much more significant improvement during 2004. And we have targeted $50 million as the goal for reduced working capital for the year. We are quite confident in our ability to deliver that.

As far as a targeted debt level for the end of next year? Do you have a sense of that now?

Yes. As we mentioned, we ended this year at a net debt to capital ratio of 49.6 percent. We do anticipate strong cash flow during 2003 or 2004. We would expect the ability to reduce debt in the range of $75 million for 2004.

Ms. Price, there are no further questions at this time. Please continue.

Thank you again for joining us today. As a reminder, this call will be available for replay from noon Eastern time today through 6 PM on Monday, December 15, by telephone. For domestic callers, the number is 800-218-0204. For international callers, the number is 303-205-0033. Please use the reservation code 561 600. This call will also be available on our website at www.Greif.com, in approximately 1 hour. Thank you again for your participation in this conference call this morning.

Ladies and gentlemen, once again, this concludes today's Greif first quarter 2003 results conference call. We thank you for participating. You may now disconnect.