Greif Inc (GEF) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Greif Inc. third-quarter 2008 results conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded today, August 28, 2008. I would now like to turn the conference over to our host, Ms. Debra Strohmaier, VP, Corporate Communications.

Hello. 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 2007 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 disposal. 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. Tables showing the reconciliation between GAAP and non-GAAP measures are available at the end of this presentation and in Greif's third-quarter 2008 earnings release. I will now turn the call over to Chairman and CEO Mike Gasser.

Good morning, everyone. I appreciate you joining our conference call today. If you're following this presentation on the Web, we're on slide 4.

In our third quarter, we experienced strong sales and earnings growth. In addition to strong sales growth, our results also benefited from execution of our geographic diversity and our business system, which mitigated the impact of sharp increases in raw materials and other input costs.

Slide 5 summarizes some of our achievements in the quarter. We continue to actively manage our portfolio. The most recent example of this is our acquisition of a steel drum manufacturer in Vietnam, which took us into a new geographic market. You may recall that, in the first quarter of 2008, we recorded a substantial net gain relating to the divestiture of a business unit in Australia. That transaction was prompted by our customers moving their operations to Southeast Asia from Australia. The integration in Vietnam has gone extremely well and we are pleased to have our new associates on board. It strengthens our footprint in Southeast Asia, and also reflects ongoing portfolio management activities.

We also are aggressively expanding our activities in the green arena, actively engaging in environmental initiatives that make sense for our business and our shareholders, as well as the planet. We're making a strong commitment to sustainability, and will identify specific initiatives following the completion of data-gathering activities that are underway across our entire portfolio. Also, we joined the World Business Council on Sustainable Development to participate in serious discussions with the CEOs of other multinational organizations and will contribute our expertise and resources where appropriate.

Our Russian operations celebrated their 15th anniversary this quarter and once again achieved stellar results. Their drive and the superior position they have built in the market served them well as they set their marks even higher and subsequently reached their goals.

As noted in our last quarter's call, we recently completed our strategic plan that takes us to 2012. Building on our 2007-2009 plan, we will continue to strengthen our core businesses, emphasize environmental stewardship, and carefully consider adjacencies to add to our portfolio. In this vein, we are pleased to announce this morning that Delta, the blending and filling operation we acquired, has contracted with Cognis for dedicated packaging services at their plant in Cincinnati. This is Delta's first expansion outside their own facilities.

Of course, the Greif Business System will remain the catalyst for our success. Key elements of this plan will be discussed in a subsequent call and the contents of our 2012 financial goals.

Turning to slide 6, we remain on track to achieve our key 2009 financial performance targets. We are pleased with the progress thus far and are confident that we will reach those goals. Executive Vice President and Chief Financial Officer Don Huml will now provide you with an update on our financial results.

Thank you, Mike. Good morning, everyone. Please go to slide 7. Net sales increased to a record $1.034 billion, representing an 18% increase over the third quarter of last year. Excluding the impact of foreign currency translation, this was a 12% delta. This constant currency increase was about equally split between volume and price.

Organic volume growth for the third quarter was above our goal of 5%. Operating profit before special items increased 25% year-over-year to $108 million. This increase was led by the strong performance of Industrial Packaging. Net income before special items increased 31% to $70 million for the quarter, benefiting from the strong operating performance and the lower effective tax rate.

Now on slide 8. This slide once again documents the consistency and positive upward trajectory of our results. Slide 9 summarizes Industrial Packaging's results. Net sales were up 21% to $852 million, an increase of 14%, excluding the impact of foreign currency translation. Higher sales volumes across all regions with particular strength in emerging markets continued to drive the segment's organic growth.

Operating profit before special items increased by 37% to $93 million, primarily due to improvement in sales volumes and contributions from the Greif Business System. These achievements were partially offset by higher costs for steel, energy, transportation, and other input. The results also demonstrate our ability to protect gross profit dollars during a period of rapidly rising raw material costs.

On slide 10, you'll note that Paper Packaging's net sales were $178 million compared to $165 million last year. This was principally due to higher selling prices, including a containerboard increase implemented in the fourth quarter of 2007. We expect to realize a $3 million to $6 million pretax benefit during the fourth quarter of 2008 from the recent $55 per ton containerboard increase, with the remainder being realized in the first quarter of fiscal 2009.

Operating profit before special items decreased by $2 million to $13 million this quarter, primarily because of higher input costs including raw materials, energy, and transportation. We anticipate that operating profit for Paper Packaging will improve as the previously mentioned containerboard increase is fully implemented, and further savings are realized to the Greif Business System.

On slide 11, Timber net sales were $4 million and the results are in line with expectations.

Now to slide 12. Capital expenditures for the quarter were $38 million. We now expect our fiscal 2008 CapEx to be approximately $135 million, which includes increased capital to support our growth strategy in the emerging markets. This amount is approximately $15 million above anticipated depreciation and amortization expense for fiscal 2008.

We are raising our 2008 guidance for the second consecutive quarter to $4.45 to $4.55 per Class A share. The annual guidance includes $0.35 for Class A share impact, for the first quarter net gain related to divestiture of businesses. This increase is primarily driven by improved profitability for Industrial Packaging and partial realization of a $55 per ton containerboard price increase in the fourth quarter of this year.

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

(Operator Instructions). Jim Lucas, Janney Montgomery Scott.

Good morning. First question, you're probably anticipating this one, Mike. I bet it would come up at some point on the call. From a geographic standpoint, can you talk about, just trend-wise, what you're seeing out there, both by geographies and markets, and in particular, the wonderful headlines that seem to keep coming out every day about Western Europe, what you're seeing there as well.

We sort of thought that that question would probably come up because our volumes were good this quarter. One of the things that continues to be very positive for Greif is our diversity. Diversity of customers, geographic diversity -- as you mentioned, we're in 48 countries today. And we're very well positioned in those areas of the world that are actually doing quite well, maybe even booming, which would be Southeast Asia, China specifically, Russia, Middle East, South America are all doing quite well.

We do -- we are pleased that North America volumes did increase a little bit during this quarter, partly could be to do with the weak dollar, because it probably is within more export. And in Europe specifically, Western Europe, it did well. Volumes were good, not great but good. Eastern Europe, the volumes were great. And so, it is a tale of two cities when you look at Europe. It really depends on what area you're at.

Part of the process we go through, Jim, each quarter and part of the Greif Business System is a really detailed review of the performance of all businesses. We call it our quarterly business review, QBRs, and Dave Fischer, Don Huml, and I spent Thursday and Friday, all day Thursday and Friday last week, going over that. And we really pressed Ivan Signorelli, who runs Europe, pretty hard on volumes and customers. And his comments to us really were that they've talked to a great number of customers, no customers are really talking about slowing down at this point in time. The only slowdown Europe will have in his range will be a seasonal slowdown, because Conoco business historically doesn't -- is stronger in the third quarter than the fourth quarter.

Now in all fairness, that transparency is 30 days to 45 days. So we get into about mid-October, is where we can see. But right now, things still look pretty strong from where we're at.

And from a endmarket perspective, any commentary there? And then, the final question is just on the commodity, the input-cost side of what you're seeing there, where you are in terms of your price closing the gap.

We'll start with the first question, the endmarket. We have said in the past, about two-thirds of our business is in chemicals, generally, and about one-third in food. And that's a good estimate to look at.

In that chemical business, there is a portion that goes into lubricants. As we went into this a little bit more in-depth from the last call, the lubricant business is pretty stable. Plants are running, they need lubricants. If plants shut down or slow down, they tend to do more maintenance, which tends to use more lubricants. And the diversity of products that we package in the chemical business really insulates us from any one sector or group of sectors being down. So drums had historically been fairly stable.

And then the third part of the business, the food business, really is a growing business, and the only stipulation on the number of drums really used in the food business is the weather, whether it rains a lot or not. So that's the only really factor that affects there.

As far as raw materials, we've been in quite a period here in the last year with steel going up as rapidly as it has. Resin has attempted to follow suit. Our sourcing people would tend to think that steel will peak at the end of, in the fourth quarter this year, fourth calendar quarter of this year. And moderate after that. But that is their opinion at this point. That's what we tend to see right now, that it is peaking, and could be moderating towards the end of the fourth quarter, beginning of the first quarter next year.

And where you stand on the pricing side right now, in terms of the gap of price versus commodities?

Yes, at the end of the third quarter, we were a little bit behind in steel, and with the subsequent increase in August, we're fairly current in the steel, so we've really caught up with the increase in steel prices. Resin, we're a little bit behind there, but we'll be catching up there.

Christopher Chun, Deutsche Bank.

First of all, just following up on that last question regarding raw materials. Can you remind us, just in general, how it works in terms of what the relationship is between price and cost, what kind of pass-through provisions you have, whether there are delays in covering higher costs, and typically how long those delays are?

Generally, about 50% of our business is contract. And contract business all has a raw material price provision in there for pass-through. Contracts will vary on what kind of delay is payable, from 30 days to 90 days, so that will vary by contract by region. So anywhere between 30 days and 90 days delay on about 50% of the business which is contract, and they all have raw material price pass-through provisions. And other 50% would be spot. And so that would be an automatic one. Prices go up, we would automatically change those prices.

In terms of the spot business, are there conditions under which you would be at risk of not being able to raise prices, despite rising input costs?

The only time -- of course, and that would be if there's competitive situations. In today's world, the input costs have been fairly draconian, so that has not allowed really even competitors to sit back and not raise prices. They've gone up so dramatically that that has forced everyone really to raise prices just to cover those higher costs.

Very good. And then, I wanted to talk a little bit about the US dollar. It seems like after a long period of weakening, recently it's turned around, and started strengthening. At least against the euro and some other currencies. I'm wondering how big of a headwind you see this as, and then just in terms of your '09 targets, I'm encouraged that you're still confident about them. But how much strengthening in the US dollar would there have to be to put those targets at risk?

As far as the headwind for the US dollar, as I said in our prepared remarks, I do believe that the US economy, manufacturing economy, has benefited from the weak dollar. Having said that, it's not a major impact to us. The dollar definitely has strengthened a little bit, but not significantly when you look at it in historical terms. So it still is weak in historical terms, the dollar. So it's still a place where exports still can originate from, so we don't see that as an issue sitting here today.

We are still confident in the '09 goals. Our diversity, we believe, will allow us to reach those goals as we go forward. As -- if the dollar would strengthen considerably against the euro, we would anticipate that the European economy would then become more of an export economy, which they have been struggling to do a little bit, which would allow that economy to even strengthen a little bit more. So our diversity tends to allow one economy to play off the other to reach the goals that we've set.

In terms of our sensitivity to changes in the value of the euro, as you know, our European team has been delivering exceptional results, so clearly there would be an impact. Just for sensitivity purposes, a $0.10 change in the value of the euro would translate to about a $7 million to $8 million pretax impact. So there is a translation exposure, but it's one that we would consider very manageable.

That's very helpful. And then, looking beyond '09, you talked a little bit about your goals for 2012. I'm wondering if you care at this time to talk any more about what those goals might be from a financial perspective. And then, when we should expect to hear more about that.

I think it's premature, Christopher, to talk about that. We are spending a lot of time internally going over goals that we want to set. I can lead you with this. They are going to continue to be aggressive as we have set the last -- in '03 and '06. We will continue to be aggressive, continue to challenge us, but we also hope to continue to deliver on those. As far as the timing on when we're going to share those, it will be within the next year, but we really haven't decided when would be the appropriate time yet to share those with everyone.

Chris Manuel, KeyBanc Capital Markets.

A couple questions for you. First, as we look at -- you had a subsequent announcement out this morning about a new business -- there's some new business you picked up, I think down the Cincinnati area, and it would be your first expansion of the Delta petroleum acquisition you had done since you completed it. Can you give us a little more color potentially on -- we did a little work here, looked up some information on Cognis. It looks like they're quite a large organization, a global organization. Is this sort of a test -- I don't say test run, but could this open the door to some other opportunity with this same company globally, and yet further expansion of this platform? How do you think about the Delta platform that you acquired over the next couple years and the opportunity?

We continue to be excited about the platform. I've said repeatedly that this is a longer sales cycle in Delta. But once we get a sale, then there is longer commitment, it's more difficult to move the business. And this is a good example of what we're talking about.

And you're very current. Yes, we did talk about the Delta signing the contract with Cognis today. It's for the one plant in Cincinnati, that's a filling operation, it's a great opportunity for us to prove our ability to Cognis. We're pretty confident that we're going to be able to do that. We are hopeful that this will lead to other opportunities with them, or other companies like them. And so this is -- even though it is relatively small in relation to Greif, the size operation of the one Cincinnati plant, we do believe it does open the gates for other opportunities.

And we're continuing to have conversations with other companies outside the US on potential filling, blending type operations. So this is ongoing. And we still remain excited about Delta and what it can do from a growth standpoint for Greif.

I don't know how you measure it, but when you think about -- I don't know if it's gallons that you blend or if it's -- somehow you think of throughput in the business, can you give us a sense of what that has been like, from the time you acquired it to present? How has that grown? What's it been like over the last quarter or so?

I don't have those numbers off the top of my head. But I can give you a generic feel. The filling business has gone exceedingly well for us. And we have done very, very well in that business. The blending business has been a little bit more challenging for us, but we've worked through those challenges. So I would tell you that we've exceeded expectations on the filling, which is something that we believe we can replicate, which is what Cognis' opportunity is. The blending, with the run-up in raw materials, has been a little bit more challenging, but something we have worked our way through and pretty comfortable with now. (multiple speakers)

As you know, our focus initially has been on embedding the Greif Business System. So, there has not been as much focus until very recently on growth. But they're really getting to the point now where they've re-earned the right to grow, or earned the right to grow, and this is really the first evidence of that.

That's actually a great lead into the next question I had. And that is the capital spending. You've bumped the number up a little bit. Is it more indicative of currency moving up, therefore some of the -- in other words, is it more that you're doing new projects or more that currency has made current projects more expensive?

I would say it really indicates the opportunities that we have, particularly in emerging markets. So that, unlike a few years ago, there is an expansion capital component, and that's really what is driving it a bit higher. We would expect that there's going to be a normalization, so on a going-forward basis, we think that depreciation is a good proxy for capital spending. But right now, we do have a bit of an uptick, primarily to support our emerging markets growth strategy.

A couple other questions that I had were -- as we think about some of the different regions, and I know you've given us some data geographically, and if we strip out the paper piece and we strip out the timber piece from North America and we get to sort of IPS North America and we look at IPS North America versus IPS Europe, and IPS other regions, that the margins in North America tend to lag a little bit. Particularly European. And I'm just -- for instance, is there anything structurally different in North America, or as you look at Greif Business System as a way to harvest more savings and become, continue to become more efficient, a second way to look at it is where do you see the most opportunity going forward?

I really think you're seeing business mix effect. As you know, the Paper Packaging team has had significant headwinds with higher wastepaper costs, energy, and transportation. And so there has been some margin erosion. And so I really -- that is what is impacting North America.

Also, during the quarter, we had a relatively small contribution from Timber. They are on track on a full-year basis, but activity was light during Q2. And as you know, that's a very high -- those are very high-margin transactions. When you take away the business mix effect, you really see a fairly comparable margin across all of the regions, which you would expect, given that the Greif Business System is really syndicated across the enterprise.

I think this is a good opportunity for me just to say one thing about the Greif Business System, too, since you mentioned it. It continues to be part of our strategy as we go forward. We continue to be more and more excited about the opportunities that present itself. As we look at best-in-class capabilities around the world, we're seeing analytically some real opportunities to continue to take additional costs out, which hopefully we can put together plans to tactically implement. So that continues to excite us for the next three to four years.

(Operator Instructions). Scott Blumenthal, Emerald Advisers.

Good morning, gentlemen. Congratulations on a great quarter. Mike or Don, is Cognis currently a customer?

Yes, they're a global customer with us. We provide them packaging around the world.

And can you give us an idea of how much investment is going to be needed to get this operation kind of off the ground?

We don't give that out, but it's minimal. It's not significant.

And I guess, keeping on the growth capital track that Chris was on, could we safely assume that -- or make an assumption that some of this increase in growth capital is needed for your new Vietnamese acquisition?

No, that -- not a significant item. I would say that one other significant factor would be some spending related to the integration of Blagden in Europe. So once again, it's tied to the three-pronged growth strategy, but in addition to the emerging markets, greenfield activities, there are some investments that are being made related to the Blagden integration.

How long do you think that that's going to continue, Don? We've had Blagden for a while now.

The one thing that we stated at the outset was that that was going to be more of a three-year period for capturing the synergies related to Blagden. And that -- we're really right on track.

With Gustavo en route through the Gulf of Mexico, can you give us an idea of how, if at all, Katrina affected Greif a couple of years ago, when she came through, and if there was any significant impact on your operations?

Our operations obviously had to shut down during the height of that storm, that tragic storm. We had no significant damage to our facility. The only residual effect we had was getting the employees back in a timely manner, because obviously they dispersed at the same time.

I think there is a conference call about -- at 10 o'clock this morning, the same time this call started -- with Mike Patton, who runs the business with the people down, making contingency plans on what will happen. We've already made contingency plans for the [oraphile] to move outside the area if it hits, contingent plans to move equipment and people. So we have not historically, knock on wood, had damages to our facility. We've been able, with our, a number of the locations, been able to manage the business, and we, like everyone, hope that there's not a loss of life or loss of damage because of the storm.

Could you also, Mike, then talk about -- I know that you specifically mentioned your 15 years of operations in Russia. And if you have any concern about your Russian businesses due to the current state of affairs between the United States and Russia?

Being in 48 countries, there tends to be flareups every once in a while of differences of opinion on how things should operate. We obviously, we don't get in the midst of all that. The Russian business is run very well, and the people there who run it are very competent. Drums is not a real big issue to the Russian government. This is not a big part of what they do. And so, we're able to stay under the radar screen, and we don't (multiple speakers)

What goes into them might be.

It's mostly, it's similar to what goes into them in the rest of the parts of the world. And so, we don't see it being something that we're overly concerned about. We manage investment in companies on a risk profile. And so, as we put investments in company, we have a risk index that -- the riskier the company, whether it's a political risk, or it's an economic risk, a currency risk, we risk adjust those. And so, for us to make an investment, they need to hit those hurdles and to date, Russia investments have hit those hurdles that we've set up.

That's really helpful. Could you also maybe comment on what we've been led to believe is kind of an Olympics-induced slowdown? Have you noticed anything at all in your Chinese operations?

Not really. August, there was rumors that it would be slower. Our business was okay in August. We don't -- we have not seen nor have we heard that there's any real issues in there yet.

I guess my last one is with regard to the paperboard business. There's obviously pricing power, which is a result of the supply-demand balance. Can you give us, Mike or Don, what might be your best estimate as the current supply-demand balance in paperboard? I know that I talked with Don a couple weeks ago, and he mentioned that you were running pretty much flat-out in the paperboard business. But is there enough supply in paperboard in North America right now? Containerboard, I'm sorry?

Definitely the supply has been somewhat constrained, and that has provided a nice backdrop for the price increase initiative. We have -- our mills have really been operating exceptionally well. We, in July, had record productivity at our Riverville mill for example, and so we're -- we're very pleased not only with the supply-demand balance, but the performance of our both of our mills, and the backlogs are very healthy. We think we're well-positioned.

One of the other points that I might make it is that wastepaper, or old corrugated container, has been very stable to trending downward. And we've also seen, up until the recent uptick, that natural gas is down from the elevated levels in the third quarter. So a lot of factors moving in a positive direction.

Backlogs better this year than you saw this time last year?

They are a little bit stronger because some capacity has been taken off-line.

(Operator Instructions). Bob Franklin, Prudential Financial.

I want to make sure I heard something right. Did you say your organic volume growth was greater than 5%, or was it greater than 4%?

Greater than 5%.

Do you have a way of breaking that out by region?

We have talked about it, you know, very generally, about the strength within the emerging markets, and the fact that we're strong double digits in those regions and in the mid-single digits in Europe, and the low single digits in North America. We really have not gotten more granular, more granular than that.

Have you broken out revenues by region, or percentage of revenues, or by continent, at least?

We do have a breakout by geographic region in our press release.

I apologize. I'll take a look at it there.

The one thing that you will note is the strength in other sales, up year-over-year about 36%. And that basically is our emerging -- the emerging markets. Asia-Pacific region, Latin America, and so --

That's right, I'm looking at it, and that's what struck me. And you don't break out Western versus Eastern Europe?

No.

So, on the questions that came up about currency, I was under the impression you didn't export much because you end up exporting a bunch of air with your products. Am I looking at that right?

No, you're looking at -- . We don't ship empty drums, but our customers export. So we sell drums and then they export their products. So it's our drums being --

Got it. So it's a secondary effect. And one last thing. If I -- just refresh my memory, do you get most of your cash flow in the fiscal fourth quarter?

That's correct. There is a bit of seasonality, and as we increase the food and agriculture activities, that will be increased. But just based on harvesting time and the collection of the related receivables, you do see very strong cash flows in the fourth quarter.

I show no further questions in the queue at this time. I would now like to turn the call back over to management.

Thank you, David, and thank you all again for joining us this morning. As a reminder, this call will be available for replay from noon today and ending at 11.59 PM Eastern time on Tuesday, September 2. The playback telephone numbers are 800-405-2236 for domestic callers, and +1-303-590-3000 for international callers. The passcode is 11118278#. That's 11118278#. A digital replay of the conference call will also be available in approximately one hour on the Company's website, www.Greif.com. We appreciate your joining us this morning.

Ladies and gentlemen, this concludes the Greif Inc. third-quarter 2008 results conference call. You may now disconnect.