Greif Inc (GEF) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Grief third quarter 2004 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 on Thursday, September 2, 2004. I would now like to turn the conference over to Miss Deb Strohmaier, Director of Communications. Please go ahead, Ma'am.

Thank you. Good morning and welcome to Greif's third quarter conference. Slides are included as part of today's conference call. They are available on our web site www.greif.com in the Investor Center.

We are currently on Slide 1.

Our speakers this morning are Mike Gasser, Chairman and Chief Executive Officer who will discuss the Company's transformation aspirations and Don Huml, Chief Financial Officer, who will discuss Greif's to financial results for the third quarter and management's guidance for fiscal 2004.

Following their remarks, there will be an opportunity to ask questions.

At this time I'll read the Company's Safe Harbor statement which appears on slide 2. This presentation contains certain forward-looking information within the meaning of the Private Securities Litigation Reform Act 1995. The words may, will, intend, continue, believe, expect, anticipate, estimate, target and similar expressions among others identify forward-looking statements. All forward-looking statements are based on information currently available to management. Although the Company believes that the expectations reflected in these forward-looking statements have a reasonable basis the Company can give no assurance that these expectations will prove to be correct. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. The risks and uncertainties related to forward-looking statements are discussed in the Company's annual report on Form 10-K for the fiscal year ended October 31st, 2003. The Company assumes no obligation to update any forward-looking statements.

In addition as noted on slide 3, some of the comments during this conference call include certain GAAP and non GAAP financial measures. Non GAAP measures which are reconciled to the GAAP amounts in the appendix of the slide presentation or before restructuring charges in timberland gains which are hereinafter referred to as special items.

Now I will turn the call over to Mike Gasser for his remarks.

Thank you, Deb. Good morning to each of you participating in this conference call.

Eighteen months ago we announced the most comprehensive transformation program in Greif's 127-year history. Every area within our Company has been affected by these initiatives.

Today we are a better Company and becoming stronger and leaner in all our operations. The positive achievements are shown on slide 4. We are making solid progress and are on track to achieve our aggressive goals.

The first phase of our transformation focused on SG&A optimization. The second phase of our transformation program is focused on excellence in our operations, commercial activities, management of resources, and development of our people. We are seeing efficiency gains at plants that have implemented lean manufacturing. Also we have augmented our commercial and strategic sourcing activities and are seeing some initial benefits there.

At the end of the third quarter of 2004 cumulative savings from the transformation is $67 million. Most of this is attributed to SG&A optimization, initial phase of our transformation.

As you can see on slide 5 we are well underway in our transformation progress in many regions throughout the world. Thus far, much time and effort has been expended on operational and commercial excellence and IPS North America and IP&S Europe. Different packagings of services began their transformation earlier this year which will continue through the middle of fiscal 2005. More recently, we initiated the transformation of IP&S IP&S Asia Pacific and IP&S Latin America and Africa which will begin at the outset of 2005 calendar year.

In resource excellence, sourcing and working capital activities are being implemented throughout the world. Unlocking value throughout the Company is integral to our strategy. The primary catalyst for this achievement will be growth productivity and our people.

Slide 6 summarizes our aspirations. On the left you will see the qualitative results. We aspire to be the premier value-added packaging provider with a strong performance ethic. Operational and commercial excellence initiatives, along with continued focus on our supply chain and fact-based general management are critical to Greif's long-term success. They are also becoming embedded in our culture.

On the right side are the quantitative measures we intend to achieve before the end of fiscal 2006. By accomplishing these strategic objectives we will realize significant financial benefits. We have made solid progress toward our goals for operating profit margin, SG&A to net sales, return on net assets and operating working capital to net sales.

In fact, we are currently ahead of our schedule. Later Don will review our progress through the third quarter of 2004.

Going to slide 7, we are on track to achieve the fiscal 2004 savings. Commercial excellence activities are contributing through right pricing and value-added initiatives, (indiscernible) to existing customer needs and finding new customers. In fiscal year 2005, we expect to capture 35 million from operational excellence activities and we remain committed to realizing meaningful benefits from global sourcing initiatives next year.

As we enter the final quarter of fiscal 2004, we are encouraged by the accomplishments thus far on our transformation process and recognize the need to do more to achieve our aspirations. Plans continue to be implemented to realize these goals. These initiatives -- combined with gradually improving industry fundamentals -- increase our confidence that we will be successful.

And now Don will review our third quarter financial results in guidance for fiscal 2004.

Thank you, Mike. As shown on slide 8, net sales rose 18 percent to 585 million compared to 497 million for the same period last year. Net sales increased approximately 14 percent, excluding the impact of foreign currency translation. Higher selling prices and volumes in industrial package and services and higher volumes in paper packaging and services contributed to this increase. Operating profit before special items increased 22 percent to 43 million on a year-over-year basis.

Net income before special items was 23 million for the third quarter versus 13 million in the same period last year. Net income this quarter reflects 100 percent ownership of CorrChoice whereas the third quarter of 2003 there was a $900,000 deduction of CorrChoice's net income, related to its minority shareholders.

Earnings per Class A shares before special items increased to 80 cents from 47 cents a year ago, while earnings per diluted Class B shares before special items rose to $1.22 for the third quarter compared to 70 cents for the same quarter last year.

Slide 9 shows gross profit was nearly $100 million compared to $89 million a year ago. The margin decreased by 80 basis points compared to the same period last year. This comparison was impacted by higher raw material costs particularly in steel and OCC, lower planned timber sales and higher energy costs.

Improved efficiencies in labor and manufacturing costs partially offset these factors. Gross profit margin increased 60 basis points, sequentially, reflecting the gradual improvement in market conditions and better operating efficiencies.

On slide 10, we see a continuing decline in our SG&A expense ratio. The increase in SG&A expenses in dollars was attributable primarily to higher employee benefit costs and the impact of foreign currency. These factors were partially offset by additional savings realized from our transformation initiatives.

We continue to be on track to reach our fiscal 2006 target of 10 percent on a run rate basis by the end of this fiscal year -- a year ahead of initial estimates.

As you can see on slide 11, our industrial packaging and services business continues to perform well. IPS had a solid quarter with a strong contribution coming from outside of North America as a result of good execution and currency benefits. On a constant currency basis, net sales increased 13 percent to 436 million for the third quarter compared to the same period last year.

Before special items, operating profits for the segment rose to 34 million for the third quarter compared to 27 million in the comparable prior year period. Operating profit benefited from labor and other manufacturing efficiencies. However, higher raw material costs continue to constrain further improvement.

SG&A expenses for this segment remained well-behaved -- remained well-behaved during the third quarter.

Turning to slide 12, net sales for paper packaging and services rose to 144 million compared to 120 million for the same quarter last year due to improved volumes. We successfully completed the first containerboard price increase which covers higher raw material and energy costs and a second containerboard increase was implemented beginning in July. We expect to fully realize the benefits of this second increase prior to the end of our fiscal year. This will help restore containerboard prices to a more reasonable level and increase margins.

Overall, containerboard demand is excellent with our mills operating at their practical capacity. Industrywide, July box shipments were up compared to the same period in the previous year and box inventories remained tight at their lowest levels in ten years.

Given this, we expect price increases downstream to be more rapidly realized as the containerboard price increases are passed through to customers.

Before special items, operating profit was nearly $6 million compared to 2.4 million in the second quarter of 2004. And almost $4 million for the same quarter last year. Improved sales volume were partially offset by a decline in gross profit margin due to higher raw material costs particularly OCC and energy costs in our containerboard operations.

Slide 13 reflects our third quarter performance in the timber business over the past three years. Timber sales are consistent with planned levels during each of the quarters shown on the slide and operating profit is driven by sales levels. We continue to manage our timber portfolio for the long term and monetize these assets as appropriate.

Slide 14 shows further progress reducing our ratio of total debt to total capital. This slide highlights our capital structure for the third quarter and at year-end fiscal 2003. Total debt at July 31st, 2004 was 617 million or 50.8 percent of total capital, representing a 280 basis point decline since year end of 2003. Sequentially long-term debt declined at 27 million as a result of improving cash flows.

On Slide 15, we have updated our rolling 12 month performance for key financial metrics including operating profits margins, RONA (ph), SG&A to net sales and working capital to net sales.

As Mike mentioned earlier, we continue to make progress toward achieving all of our goals targeted for 2006. Operating profit margin before special items is improving on an annual basis. Currently at 6.7 percent we remained on track to realize our goal of 10 percent by fiscal 2006.

The 11.5 percent return on net assets for the twelve months ended July 31st, 2004 which approximately equals our calculated pretax cost of capital keeps us on track to achieve up a RONA exceeding our cost of capital this year and the 20 percent target in 2006. We continue to make significant progress regarding SG&A to net sales. For the twelve months ended July 31st, we were at 10.4 percent a March decrease from the 15.4 percent in 2002 and ahead of schedule to meet our 10 percent target.

We are also making progress toward our goal of 12 percent operating working capital to sales. For the most recent 12 month period we were at 14.5 percent compared to 16 percent to years ago.

As you will note on slide 16 we have updated our guidance for the year. We anticipate achieving $2.40 to $2.45 per Class A share, an increase of 5 cents over prior guidance. Although we are experiencing higher costs and getting mixed signals from the economy, we continue to realize significant benefits from the transformation process.

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

(OPERATOR INSTRUCTIONS) Walt Liptak (ph) with KeyBank McDonald.

My first question is about the demand trends especially in North America. North America was up 15 percent and I wonder if you could talk a little bit about what you saw during the quarter? I guess, on a monthly basis, if you saw demand picking up during the quarter or slowing down?

Walt, this is Mike. We had a good quarter as you mentioned in demand in North America -- actually all over the world -- and it was a fairly even quarter. We do have some cyclicality, seasonal cyclicality, so that has a little bit of effect but right now volumes have been good. They have been good for the last 60 days or so and we are actually encouraged by what we see at this point.

Okay. I guess and what I'm trying to get at is I'm curious about the guidance that you gave for the fourth quarter. You know, you had a strong third quarter but you didn't take up the fourth quarter number. Basically you increased the full year by the amounts of the third quarter increase. I wonder why? And you talked about mixed signals. I wondered why you were so conservative about -- on the fourth quarter number?

Walt, this is Don Huml. The fourth quarter is a -- it's projected to be a strong quarter and we feel good about the positive momentum as we enter our fourth fiscal quarter. I would say that there is upside potential but we remain a bit cautious. OCC is rather volatile and there is always the possibility of a spike. We are pleased that, at the present time, OCC actually is trending down. But, again, that could reverse.

We also have a rather volatile situation in steel and I think we have done a reasonably good job of coping with those challenges, but they remain.

And, Walt, our cautiousness really is not so much on the buying, but it is really on the cost side of it and as Don said, there potentially could be some upside but we thought it was prudent for us to be cautious as we go forward into the next quarter.

Okay and, Don, what do you expect the tax rate will look like for the fourth quarter?

It should be in the 28.5 to 29 percent range and we feel that that is really a sustainable range and when I say sustainable, looking out over the next 12 to 18 months.

Okay. Great. And then just in your presentation, you talked about operational excellence next year adding -- or reducing cost by 35 million. But then you also mentioned global sourcing. I wondered if there is -- if global sourcing is included in that 35 million? Or if there is some number that global sourcing could improve your cost structure by?

That is not included in the operational excellence number. And we do anticipate a benefit. We have stated previously that we would expect global sourcing to realize savings in the $10-$15 million range. Given the volatility of the raw materials that we are sourcing -- namely steel, resins, and paper -- we are a bit cautious in really assuming that that is going to directly impact the P&L. There may be some offsets.

So at the present time I think in bridging to 2005, the operational excellence, we have a high degree of confidence in our ability to realize those savings. And the sourcing initiative provides protection against downside risks and, hopefully, some upside potential.

Okay. Well, congratulations on unlocking the values through that operational excellence program. Thank you.

Christopher Chun with Deutsche Bank.

Congratulations on the quarter. First of all, I just wanted to start off with sort of a comment. And I apologize in advance if I am alone on this but I actually locked onto your web site and I was not able to find your presentation. I am on the Investor Center so maybe it's just me and it's somewhere else.

We appreciate you mentioning that, Chris, and we will definitely look into that. Sorry about that, Chris.

Anyway...

Anyway there are people scurrying around here trying to find that, Chris.

Okay I'm not very familiar with the web site so I don't know if it is just me or what. Anyway. Can you talk a little bit about your CapEx plans for this year, next year and maybe what the long-term rate would be?

Yes, we did revise the guidance on CapEx. We reduced it to 65 million or less. And that would be about $35 million below our depreciation provisions. I would say that in the future, we are going to see that rise a little bit and, perhaps, getting more toward -- more towards the midpoint of that differential that exists presently.

And, Chris, one of the reasons why we revised it downwards a little bit this year is that we have had a very strong focus on instituting our operational excellence program. And part of the initiative was to make our operations better without spending capital. And we worked really hard over the last 18 months to do that. So we have actually downward revised the amount of capital we're spending.

As we go through that process we will gladly loosen up the capital and go forward; but we really put a serious focus on unlocking value without spending capital to do that.

Can you guys talk a little bit about some bigger strategic issues such as whether you are happy with your current business mix or whether you might be considering any divestitures or acquisitions or anything like that?

Yes, Chris, we constantly are evaluating all of our book, all the products that we have in the businesses that we have to see how we can grow them or what is the best way to bring value to our shareholders. Recently, we actually sold an IBC plant a couple of months ago down in Georgia because we thought that that would be the best for our Company. So we are constantly looking at that and it's not something that we talk ugly about how we are doing but it is something we're constantly are looking at -- what is the best thing to bring value to our shareholders. So it is something we're looking at.

Okay, great, and finally just on the box business side. Can you talk a little bit about how the first box hike did and how things are progressing on the second one?

Yes, the first box increase which was in the nine percent range and announced on April 1st. There has been about a 50 percent realization of that increase. The second increase was announced on August 1st and that was also in the 9 percent range and so far we have been pleasantly surprised that increase is being implemented more rapidly and we would expect a fuller realization.

Bill Weiss with High Rock Capital.

Good morning. Really impressed to see the margin improvement that you are showing in the face of the rapidly rising raw materials environment. I think you are setting yourself apart from your peers on both sides of the business. And I think it speaks volumes on the power of your operational excellence program. Just a comment there.

I guess I'm a little bit curious. Your stock has done well recently but I think is arguably still considerably undervalued if you look at the earnings power more than twice what you laid out for this year's guidance if you are successful in reaching your 10 percent operating margin goal, not to mention the 320,000 acres of timberland you have got. And I'm wondering if you've given any thought to why that might be? Why as you approach $1 billion in market cap here you still only have two guys who on a sales side who publish estimates and a limited following. And I'm wondering as you've given so much thought to streamlining the operational structure of the business and highlighting the value, if you might also give some thought to streamlining your capital structure and is collapsing the dual share structure ever part of the plan? Because I think that might provide some additional interest in the stock and potential additional liquidity?

First of all thank you for the initial comment about our margin and performance. We've worked really hard to attempt to mitigate some quite escalating costs, raw material and energy costs, and are pleased with the results we have. We tend to agree with you that the values of the Company is greater than it currently is being shown. We do have complexity and we admit to that. And that probably does lead to some of the complexity both in business and being the only public and professional packaging company it is very hard for people to have comparables in that arena. And we have the paper business and timber business. And we have complexity because of our capital structure's complexity and we are well aware of those complexities. It is a structure, Bill, we have had since really the Company went public in the early '20s. It's a structure that has been well for us over the years but it is something we are constantly looking at. So it would be premature for me to answer the question whether we would ever would or would not do that -- collapse the structure -- but it is something that we are constantly looking at. What we have to do to bring value and there's differences of opinion on what that means but I can assure you that this is a conversation that we have a lot of times.

Great. Glad to hear it. That's it for me. Thanks.

(OPERATOR INSTRUCTIONS)

Ross Haberman with Haberman Funds.

Nice quarter. I got on a little late and I just wanted to get a clarification. The 10 percent which I know, historically, you have been throwing out as your goal for the operating margin. Would you care to share a breakdown of that between, say, the paper and the industrial side if one is ultimately going to be higher than the other? Or what's sort of your thoughts on each of those divisions in regard to the operating margin?

The targets for the results on a consolidated basis and as far as the segments, the key metric there is the return on net assets of those businesses have different levels of capital intensity. And so, we will within the paper and packaging segments tend to see over a representative cycle a bit higher operating profit margin but a lower asset velocity in the industrial packaging. That is a much more challenging task. It is one that, quite frankly, we feel they're capable of achieving. But it is going to be more difficult. There is an awful lot of opportunity for further improving the net asset turnover within industrial packaging. So they could actually earn our targeted return on net asset and be a little bit below that 10 percent operating profit margin.

Okay and just one further item. You make mention I guess you are going to have some further restructuring costs in the fourth quarter. What is that going for and will we see further restructuring cost in calendar '05? (MULTIPLE SPEAKERS) Sorry?

The primary restructuring costs will be related to severance. There are some other exit-related costs but it's primarily going to be severance. For example, during the third quarter, we eliminated 281 positions and we expect that there will be additional position eliminations during the fourth quarter. On a full year basis, we are expecting to eliminate 700 positions. So that is going to be really one of the primary drivers of those restructuring cost.

And did you throw out -- again, I got on late -- historically I think you throughout 2 I think it was 210 to 220 in cash flow for the year. Did you adjust those numbers at all?

We had previously talked about free cash flow exceeding $100 million. We generated about $25 million in free cash flow for the third quarter and that represents, really, also our year to date free cash flow. And we still confidently expect to generate the in excess of $100 million in free cash flow for the full year. So you can see that we are anticipating a very strong generation of cash flow during the fourth quarter.

Okay. Thank you.

Jeremy Bloomer with Airlie (ph).

I was wondering if you could comment on the potential for buying trucking acquisitions in your industrial products or packaging product segment of the business?

That is something that we are constantly looking at. There potentially could be some tuck in acquisitions. We have a good presence in the industrial packaging arena but there are pockets around the world that, truly, we could enhance that position. For the last 18 months, we have really focused on getting our own house in order before we stepped out. And we are well on the way of doing that.

That does not mean that we haven't been looking at opportunity but nothing, really, has come up yet to date to allow us to do that. We will continue to look. We are confident and comfortable that we are well on the way of implementing the operational excellence phase of our business which will earn us the right, we believe, to continue to grow. And part of it will be through acquisitions.

So it's something we are looking at. There will be some opportunities, we think, in the future. Probably there is nothing in the magnitude that we did in '01 of a Van Leer size. But there will be some tuck ins and we will continue to look at those.

(OPERATOR INSTRUCTIONS)

At this time, we have no further questions. Please continue with any further remarks that you would like to make.

Thank you again for joining us on today's quarterly conference call. As a reminder this call will be available for replay from noon Eastern time today through noon on Tuesday September 7th. For domestic callers, the number is 800-405-2236. For international callers, the number is 303-590-3000. Please use the reservation code 11006910 pound.

You can also hear a replay and see the slides at the Investor Center on our website at www.greif.com. This call will be posted in approximately one hour. We appreciate your participation.

Ladies and gentlemen, this concludes the Greif Incorporated third quarter 2004 results conference.

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