Greif Inc (GEF) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Greif third quarter 2007 results conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded Thursday, August 30, 2007. I would now like to turn the call over to Deb Strohmaier, Vice President Communications. Please go ahead, Ms. Strohmaier.

Good morning everyone. As a reminder you may follow this presentation on the Web at Greif.com in the Investor Center under Conference Calls. If you don't already have the earnings release, it is also available on our website. We are on slide 2.

The information provided during this morning's call contains forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are on slide 2 of this presentation, in the Company's 2006 Form 10-K and in other Company SEC filings, as well as Company earnings news releases.

As noted on slide 3, this presentation uses certain non-GAAP financial measures, including those that exclude special items such as restructuring charges and Timberland gains. Management believes the non-GAAP measures provide a better indication of operational performance and a more stable platform on which to compare the historical performance of the Company than the most nearly equivalent GAAP data.

All non-GAAP data in the presentation are indicated by footnotes. A table showing the reconciliations between GAAP and non-GAAP measures are available at the end of this presentation and in Greif's third quarter earnings release. I will now turn the call over to Chairman, CEO and President, Mike Gasser.

Good morning everybody. We appreciate your participation in our conference call today. If you are following our presentation on the Web, please go to slide 4. We're pleased with our results for the third quarter. Our strong topline increase benefited from organic growth, especially in the emerging markets, and acquisitions during the past year. We had solid performance across our business portfolio and delivered another exceptional quarter from Industrial Packaging & Services, especially in Europe.

Ongoing application of the Greif Business System continues to provide benefits to our existing and newly acquired operations. And we are aggressively executing our growth strategy of consolidation, expansion in emerging markets, and limited exploration of adjacencies.

The discipline of the Greif Business System is clearly benefiting our operational and commercial excellence initiatives, as well as our sourcing and integration activities around the world. Continuing to refine our tools and their use is becoming even more widespread, resulting in continuing improvement in our businesses.

Clearly we have global sourcing traction as we take advantage of low-cost countries sourcing and demand dynamics around the world. We have benchmarked our indirect spend and are implementing demand management and strategic sourcing of this spend. And we are in the initial stages of implementing our transportation management system, which together will bring further efficiencies and cost management to our operations globally.

Now to slide 5. In addition to the day-to-day management driven by the Greif Business System we had a busy quarter in two emerging markets. In June we opened our new steel drum plan in Huizhou, China. Our major customer there -- our major customers there were very pleased with the new site. We are already the largest steel drum producer in China with a marketshare in the mid single digits. And we also produce closures and intermediate steel drums in the country. We will soon expand to produce fiber and plastic drums.

Our new IBC manufacturing facility in Kazan, Russia officially opened in July. At 3,500 square meters, the facility will eventually produce large steel drums and plastic canisters as well. We again heard positive responses from our customers who attended the opening there.

Also this quarter we bought out of the remaining partners in our Russian joint venture, solidifying our position in the country's steel drum market. We now operate four plants in China and eight in Russia, compared to the six total in those two countries in 2004.

After the quarter ended, the Competition Commission in the United Kingdom issued its final report that cleared the acquisition of Blagden steel drum manufacturing plant in that country, and opened the way for us to integrate the operations there. Outside the UK our integration of Blagden continues to progress with excellent results.

Now please go to slide 6. As you can see, we continue on track for achievement of our 2009 performance targets. With solid, fundamentals in place, we exited the quarter with positive momentum.

Executive Vice President and Chief Financial Officer, Don Huml, will now provide you with an update on our financial results.

Good morning everyone. Please go to slide 7. Net sales increased 27% to $874 million this quarter over the third quarter last year. Excluding the impact of the Delta and Blagden acquisitions, organic growth was 11%, or 7% on a constant currency basis. The $184 million increase is primarily due to higher volume driven sales for industrial packaging.

Gross profit increased 19% to $162 million compared to the same period last year. The higher gross profit dollars resulted from positive contributions from solid organic growth and acquisitions, coupled with the Greif Business System. The gross profit margin decline to 18.6% of net sales from 19.8% in the third quarter of 2006, is primarily due to our portfolio mix, which includes Delta's business model of lower value-added, lower SG&A and higher asset intensity. In addition, there were fluctuations in raw material costs, including higher OCC.

SG&A expenses were $77 million or 8.8% of net sales compared to $70 million or 10.2% in the third quarter of last year. The dollar increase is primarily due to the Blagden and Delta acquisitions, partially offset by tight cost controls and the impact of acquisition integration activities.

Operating profit before special items was $87 million, an increase of $11 million over the same period last year, primarily due to higher operating profit for industrial packaging. The increase is notable in light of the fact that during the third quarter last year we recorded $9 million in gains on disposal of certain assets which were not repeated this year.

On slide 8 we highlight the positive trend in operating profit in year-over-year third quarters. From the base of 2002, before beginning our transformation initiatives, our operating profit has trended up significantly. This can be directly attributed to our discipline and focus in implementing the Greif Business System in our legacy and our acquired operations. On this chart you will also see that our key performance metrics are trending well.

Slide 9 shows the results for industrial packaging. Net sales were up 35% to $695 million over the third quarter last year, an increase of 14%, excluding the impact of the Blagden and Delta acquisitions, and including 5% from currency translation. This increase was primarily attributable to the recent acquisitions and organic growth, which included higher sales volumes across all regions, with particular strength in Europe and emerging markets.

Gross profit margin for industrial packaging was 18.7% versus 20.5% in the same quarter last year. This decline was primarily due to portfolio mix and fluctuations in raw materials, partially offset by positive contributions from the continued execution of the Greif Business System.

Operating profit before special items rose to $67 million from $57 million in the same quarter last year, primarily due to improvement in net sales and execution of the Greif Business System. As previously noted, this increase is above the operating profit recorded last year that included $9 million in gains on disposal of certain assets, which were not repeated this year.

Now on slide 10. Net sales in our Paper and Packaging segment were $176 million compared to $172 million in the third quarter of last year. The gross profit margin remained the same at about 17.2% compared to the third quarter of 2006. Higher average OCC costs were offset by higher volumes and contributions from execution of the Greif Business System.

Operating profit before special items was $16 million for both periods. On a sequential quarter basis this segment was up $6 million, generally due to the mill shutdown last quarter.

On slide 11. Timber segment net sales were $4 million, consistent with plan, compared to $3 million in the third quarter last year. Operating profit before special items was $3 million compared to $2 million in the same quarter last year.

Now to slide 12. Capital expenditures are expected to be approximately $110 million for the full year, which remains in line with our estimated annual depreciation expense. On a side note, we are pleased to note that on a sequential quarter basis we reduced total debt by $75 million.

We are encouraged by our third quarter and year-to-date results. Our improved results are attributable to solid operating performance, orderly integration of recent acquisitions, and realization of further benefits from the Greif Business System. To reiterate Mike's comments, we experienced positive business momentum as we exited the quarter, which included a recently announced containerboard price increase that is expected to be fully implemented in the first quarter of fiscal 2008.

We are affirming our fiscal 2007 annual earnings guidance, excluding special items, of $3.05 to $3.10 per share for the Class A common stock. This increase is approximately 28 to 31% above our record earnings last year.

That concludes my formal remarks. And you should now go to slide 13. Mike and I will be pleased to answer your questions.

(OPERATOR INSTRUCTIONS). Christopher Chun, Deutsche Bank.

I though your 3Q was another very solid quarter, but I was a little surprised to see that you didn't raise your full year guidance, because in light of the first three quarters if we just back into what you're telling us 4Q is going to be like, you are really not baking in any sequential improvement between 3Q and 4Q. And in prior years 4Q has been seasonally your strongest quarter. I was just wondering what was going on there, whether there is any change in seasonality, or whether you are seeing anything in the business that causes you concern?

No, I would say that consistent with past practice, we would like to under commit and over deliver. I would say there is perhaps a bit of caution. We do have some positive momentum as we enter the fourth quarter without a doubt. There are also some risks. OCC remains a bit volatile. We have been pleased that to date through the actions of our paper and packaging team we have been able to mitigate the impact, but it is reason for caution.

I will say that we were very pleased with containerboard increase. That is expected to provide relief, but most of that impact is really going to be in fiscal 2008. So we would in knowledge that the guidance has more upsides potential than downside risk.

This is Mike. I would just add one thing. The seasonality issue is a good point you brought up. But we have found over the last couple of years that the third and fourth quarters are getting closer together. Europe is generally stronger in the third quarter and North America is generally stronger in the fourth quarter. So we do anticipate to have a very strong fourth quarter, and it is starting off that way from a seasonal basis. But I would agree we probably do have some potential for some upside. But less let's wait 90 days and see where that turns out at this point.

Fair enough. Then turning to your long-term guidance on slide 6, it seems like you are again reiterating your '09 targets, if I'm interpreting that correctly. And I'm wondering if your level of confidence in achieving those '09 targets has changed any over the last few months, and how you feel about the risks that might be inherent in actually achieving them?

I would say that we remain confident, particularly given the tractions of the Greif Business System. As you know, our legacy activities are in the continuous improvement phase. But we are really in the early stages of adopting the business system within paper and packaging, and also within our recently acquired facilities. So we are very comfortable that between the commercial and operational excellence and sourcing initiatives within the Greif Business System that we will be able to deliver the $100 million in impact required to close the gap between our runrate and the 2009 targets.

And the total management team is rallied around these goals and is committed to delivering those. So we have a lot to do between now and then, but our confidence level has not waned at all on this.

Chris Manuel, KeyBanc Capital Markets.

Congratulations on another very, very solid quarter operationally. I wanted to circle in a little bit -- Mike, if you could give us a little more color on the volume side. It sounds like volumes were high single digit, low double-digit. Can you give us a little color there with what happened?

We had a very good quarter from a volume standpoint. And again thank you for those comments. I guess a combination of events. We have got to go back to the Greif Business System is a big start of that. Part of the Greif Business System it is in commercial excellence, which allows our salespeople to really go out and articulate the value that we bring. That is continuing to bring traction throughout the world. And as we continue to refine that and add new tools, we are seeing more and more benefits from that.

From a volume standpoint it was generally good across all substrates and all regions. I will give you a little bit of color. North American steel was up mid to low single digits. Fiber was flat to slightly minus. I wouldn't be over concerned about that because that could have some seasonality from last year because of the food business that we have in the fiber drum. Plastic, low single digits. Europe was a very high single to low double-digits, and it was great growth opportunities there. And Europe, as I mentioned in our prepared remarks, is doing very well right now. So we're very pleased with Ivan Signorelli and his team as they continue to execute there.

Plastic was low single digits. And then the emerging markets was extremely high, but that is a really tough comparison because we're just -- the base that we're starting from is quite low, so from a numeric standpoint it is quite high. We are starting to grow there. As I mentioned, we are opening up some new plants. We're gaining some new market entries because of our presence there. We are pleased with the volume. We were pleased with traction we're getting. We are pleased with our diverse portfolio of products and geographic region. And so I think things are progressing, and we hope that they will continue to go forward in the future.

If I can follow up with that. With volumes, as you mentioned being the different numbers, those were clearly better than what underlying market or GDP type conditions in each of those respective regions or areas were, and with Greif Business System helping that, as you mentioned. Is that something that you think -- well, let me come at it this way, was there potentially any pull ahead this quarter from what may transpire in the fourth quarter, or do you believe that going forward you can consistently continue to deliver at least market or better than market sort of growth rates?

I'm not in position to predict what we can do in the future. I am optimistic that we can continue to execute the Greif Business System, which our plan, as you know because you study us very well, is to have a 5% organic growth rate, which is above market trend. That is our plan, and to date we have been able to go forward.

To answer your first part of the question, to my knowledge there was no real significant pull forward from the fourth quarter to the third quarter. I am not aware of anything of any significant there, so I don't think there was anything in those numbers. I think you should attribute it to better market penetration, the geographic presence that we have. And the value that through the competencies that the Greif Business System bring is allowing us to do that. We're going to continue to work very hard to try to continue to go forward the same way.

If I could switch gears for a second, with Delta, how are things coming there? At various times you guys have talked about that is a leverageable platform both domestically and internationally. Can you give us some extra color on how that is coming along and when we may anticipate some expansion there?

We had the Board -- we had a Board meeting Monday and Tuesday this week. We had it in Houston, so Tuesday afternoon we took the whole Board to one of the Delta facilities. The Board walked away extremely impressed with what they had seen down there. So it is going well right now. We have a great management team in place there with Diana Lister leading the way down there. And we are very pleased and cautiously optimistic of what the future will bring.

We're having many, many conversations with companies regarding taking over or providing them filling and blending services. These are different stages in the process. The timeline to complete that is a little bit longer than selling drums, so it takes a little bit longer because it is a commitment on both parties that has much longer term consequences.

We're very optimistic today. I am more optimistic today than I was 30 days ago -- or 90 days ago, excuse me, that what we bought is replicable. I would anticipate that we will see some expansion in the future. I would be remiss if I tried to guess when that would be because the time cycle of that is a little bit longer. But I am seeing increased activities. I am seeing increased levels of interest by our customers, so it is replicable and I would anticipate in the future we will go there.

So probably not something the next two, three, four months but potentially within the next 12, is that fair?

I would think in the next year. I would be disappointed if we didn't have anything in the next year. Let me put it that way. Whether the next two, three, four months, I mean, I could get off this call and someone could call and tell me someone is committed to go. So I would not want to predict there, but I would be disappointed if we didn't have something in the next year.

That's fair. I have a few more questions, but I will jump back in the queue. Thank you.

(OPERATOR INSTRUCTIONS). Walt Liptak, Barrington Research.

My first question is just a clarification. I think I know the answer but I want to make sure. The guidance $3.05 to $3.10 you're using the $0.90, excluding the $6 million restructuring charge, right?

That's correct.

Could you just refresh my memory, what was the $6 million charge related to, what part of the business and what is the payback expectation?

In terms of the restructuring?

Yes.

That is going to be split between basically our paper and packaging business, some Greif Business System related initiatives that will have a very attractive payback in the 1 to 2 year period. And then the other significant component would relate to acquisition integration. Those costs related to really severances and some other activities that will also produce attractive paybacks and allow us to capture the synergies of the Delta and Blagden acquisitions. That basically would be the component that didn't qualify for purchase accounting treatment.

Got it. Mike, in your commentary you mentioned transportation and management system. Is this a new initiative? And if so, what is the cost savings opportunity from that?

That is an initiative that we started about 90 days ago. And it is really a software based system that allows us to manage our inbound and outbound freight, we are in the initial steps of looking at. Freight is a huge component to us, as you would imagine. And we are looking at a fairly quick payback on this process. I think we will hold off giving some estimates right now until we have an opportunity to really test it in a couple of locations. But it is something that we believe is going to bring some good value to our Company from a cost savings standpoint.

Then I just would like to ask a follow-up question on the $100 million of cost reduction that you've got to go through to hit those 2009 targets. Can you comment at all about how you think -- I know you said that things are tracking well, but how smoothly do you think the cost savings comes through, because it is quite a bit of a ramp at this point to get that over two years? Is it more back end loaded towards 2009, or as we go into 2008 are there initiatives that were started this year, like in sourcing, that you're going to start to see a payback from?

It is going to be, as we have mentioned from the outset, a bit back end loaded. We are undertaking some new initiatives within sourcing that we expect to contribute significantly. Mike had referred to the indirect spend where we did really a detailed benchmarking of all of our spend. We have initially focused on direct materials, but now with the indirect, we have really put in place they plan to attack those. And a lot of that is really going to be late in 2008 and 2009 where we will contribute most of it.

Also, the continued implementation of the Greif Business System within paper and packaging, we're very excited about the initial results, and very optimistic that that they will contribute significantly to the savings. And then also, the combination of capturing the synergies of the acquisition and the benefit of GBS that is going to be very positive.

If I could characterize that, it sounds like PPS, the Paper and Packaging segment. we might see some benefit in '08, as well as with the acquisitions. And then more of the sourcing in '09.

I think that is a fair characterization.

All right. Thanks guys. Great quarter.

Chris Manuel.

If I could circle in a little bit on uses of cash from as we go forward. Early in your remarks, Mike, you mentioned that you were looking for better consolidation and continued expansion in emerging markets, adjacencies, things of that nature. Could you help us prioritize through what your uses of cash are from where you sit today? Is it looking for acquisitions? Is it continuing to raise dividends? Is it buying back shares? Your debt levels looked pretty reasonable. Can you help us prioritize there?

Let me try to help there a little bit. We believe we are in the phase, what we call the earn and grow phase, and so we believe that we are in a growth opportunity here. Our mantra that we use now is GBS plus growth equals real value. And so I think with that we are looking at continuing to grow the Company.

We're going to do that in a couple of ways. Continue to look at consolidating opportunities when they arise. And we are constantly looking at it. Even in the time when we're not doing acquisitions, people were constantly talking to us. We know probably most of the players in the business that we operate. So we will look at continuing the consolidating opportunities. We will look at continuing to grow in those markets where our presence isn't as great, either through new facilities and/or product expansion. And I mentioned we're looking at bringing fiber drums into China. We will be looking at adding other products in other regions where we don't have that. So we believe that our footprint will allow us to do certain things today that most companies can't because we do have this great footprint.

That would be the first priority is from a growth standpoint. The second and third priority would be to continue to bring value by either paying down debt and/or giving money back to the shareholders, either through dividends -- and we have done a good job with dividend increases over the last couple of years. We have a good dividend rate today. And buying back shares. We bought back about $10 million of Greif shares this year so far to date. I think about $5 million in the quarter. We will continue to look at opportunistic ways to do it there. But that would be the priorities that we would look at.

And then along the acquisition side, from where you sit today you have talked about that you have had a number of opportunities, or looked at a lot of stuff over the past few years, would you view the market as beginning to shift more favorably in your direction with -- it has become a lot more difficult for financial sponsors to continue to buy. Do you think that that is playing to your benefit here? Have you started to see potentially multiples come back to a little more palatable level, or can you give us some more color there?

We hope so. We have not elected to participate when multiples got beyond a certain level that we believe could bring long-term value to our Company. I have said on many calls that we are going to be very disciplined. And I believe that we have stuck by that. That the companies we have bought we bought, which we believe are fair prices, but also fair from our shareholders' standpoint to bring long-term values.

I think it is a little early yet in the game to see if they have come back. All indications are through the credit crunch that we are experiencing right now that the multiples have retracted. I think deals are going to have to be completed to really prove that, but we would anticipate that they would. And we would believe then that would be better for us to be able to buy things which we believe we could bring value with.

Let me switch gears, and I want to ask a couple of questions about your timber portfolio. Exactly a year ago you broke out that -- gave us some more color into your timber portfolio. And I believe that you guys had indicated that there is a sizable chunk, it memory serves, about 60,000 some acres or so. I believe that was -- you had classified it as either higher better use or special-purpose, things of that nature. And I believe you had also indicated that that would be something you would look to, work on at a time next 24 months. Being we're about halfway through that next 24 months, could you give us an update as to your current thinking with respect to some of the higher, better use or special-purpose timber and monetization of that, etc.?

The plan that we had outlined, the first step was identifying those special use properties, principally higher and better use ones. We were very pleased that approximately 20% of the portfolio fell under that category. And we are continuing to opportunistically monetize those properties. I think you're going to see a continuing contribution from that really over the next five to seven year period.

And the other thing that really is positive is that these classifications change over time. As Mike says many times, the populations continue to catch up with some of our, even what are presently core timber holdings. That is a process that continues to evolve, but there are a lot of opportunities, and there will be an ongoing contribution from those special use properties.

Scott Blumenthal, Emerald Advisors.

Most of my questions have been answered. I'm just going to fill in a couple of the blanks here. Mike, you mentioned in your remarks the containerboard price increases that you expect to be fully implemented. Could you give us an idea as to the magnitude of the increases? And if you have had any push back, and if you expect them to go through easily, or do you think that might be a little bit of a struggle?

It is a $40 a ton increase announced for September 1. So Friday will be the first day. And as with any increase, there is a tiering in effect. As Don said, we really are right now looking at a minimal impact in our fourth quarter, because our fourth quarter ends in October. But really get it fully implemented in time for the 2008 year.

The increase is always dependent upon getting box prices up. And right now box prices have been announced to go up. And if they do go up then that increase will stick. We are optimistic that it will come in place. We are out, we're up, and we will go forward. I think 90 days from now we will be able to give you a pretty good read of where we stand on that. But we believe that it is time for an increase. We believe the market needs that increase. We believe that it is the right appropriate amount to go up.

I know that you have been feeling a little bit of pressure in the OCC market over the past couple of quarters. How do you gauge the timing to go out to the market? We're looking at certainly in the last four to six weeks, at least in the United States, a little bit of an indication of maybe things are softening. How do you go out there and time these things, especially with economic conditions, at least domestically, looking the way that they are they might be a bit softer?

First of all, you probably never can time it right. So we start with that premise. You look at, especially in the paper industry when it is seasonally strong, and we're entering the seasonally strong period of time right now, so the demand should be the strongest in the September/October/November timeframe. So the increase is a perfect time from that standpoint because of timing.

OCC, as you stated, it is a product that has some volatility from a cost standpoint. Energy is a real cost that is out there. We as a Company have close to $100 million of energy cost spread throughout our whole envelope, so energy is a real cost that we look at. But you really have to look at demand, supply. September this quarter is generally the right time to go up in a price increase for paper.

Can you give us any indication as to whether you are seeing some relief from steel?

Steel is basically flat for us right now. Down a little bit in some of the emerging markets. Trading down a little bit trade, but generally flat in the mature markets. Would you see that differently, Don?

No, that is true. That is actually a difference between this time last year when steel costs were rising. But they have come down recently, but as Mike stated, are stable and expected to continue to be for the next three to four months.

Yes, we just look out through our fiscal year is what we would really comment on at this point in time.

You did mention a couple of new plants in China and Russia. Can you give us an indication of how full you have those booked at this point, and how things are looking there?

China is running very strong right now. We have good volume in our plants as we ramp those up. And as you would anticipate, there is a training mechanism to train people the right way. We focus very, very keenly on safety. Safety is something that is a high priority of our Company. And all new plants go through a big safety review to make sure they work safely. China is busy.

Russia is busy. It is a new product, so that will be a ramp up stage. The IBC that we're manufacturing in Kazan is a new product so that market has to get used to that. And as that -- as time goes on we will add other products to that manufacturing base, and that will happen during the 2008 fiscal year.

I guess my last question is, I know that you haven't -- you and Ron haven't gotten through this transportation system very much yet. But is this -- will this be at some point -- you're inbound freight is somebody else's outbound and vice versa. Do you see this as being a potential revenue opportunity at some point?

I don't think we have taken to that level yet, but we should look at it. I think it opens up a lot of opportunities for us, because what it really does it gives us transparency. And that is the key. Once we have the transparency then we can start dealing with the facts and dealing with how we deal with those costs. And that is what this system will give us. We will see where that takes us right now.

But we have some very good people. Ron Brown's group is working on it. Doug Lingrel is actually heading that up. He is doing a nice job at getting it to where it is at today. We will hope that we get some good execution in '08 and bring some significant -- meaningful cost reduction to us.

Well, we believe you will. And congratulations in the quarter.

At this time there are no further questions in queue. I would like to call back over to management for their concluding remarks.

Thank you again for joining us this morning. As a reminder, this call will be available for replay from 1 PM Eastern time today to midnight on Wednesday, September 5. The playback telephone numbers are 800-405-2236 for domestic callers, and plus 1-303-590-3000 for international callers. The pass code is 11095510 pound. This call will be posted on the Company's website in approximately one hour. Thank you for your time this morning.

Ladies and gentlemen, this does conclude the Greif third quarter 2007 results conference call. You may now disconnect. And we thank you for using AT&T Teleconferencing.