Greif Inc (GEF) 2009 Q1 法說會逐字稿

Good morning. My name is [Artavia] and I will be your conference operator today. At this time, I would like to welcome everyone to the Greif first-quarter 2009 conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Ms. Strohmaier, you may begin your conference.

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 Web site. 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 2008 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 the first-quarter 2009 earnings release.

I will now turn the call over to Chairman and CEO, Mike Gasser.

Thank you, Deb. Good morning, everyone. Thank you for joining our conference call today. If you are following this presentation on the Web, we are now on Slide 4.

I will be blunt. This quarter was as challenging as we expected it to be. Seasonal factors that historically reduced demand for drums compounded the impact of the length in global downturn throughout the manufacturing sector. We answered the challenges with accelerated yet disciplined execution of comprehensive Greif business system initiatives.

Further, our management team remains focused on sizing the activities of the organization to the demands of the market. The outstanding character of our entire team is evident as we all work to maintain our footing on this difficult terrain.

Now to Slide 5. As I said last quarter, we expect the global economic slowdown to continue through 2009. That is not stopping us, however, from making progress on our strategy.

In the past few weeks, we have closed on two small, tuck-in acquisitions, one in our industrial packaging business in the southwestern United States and one in our load securement business in packaging accessories. These acquisitions are immediately accretive and although together they represent less than 2% of sales, these are the type of acquisitions that create value long-term.

A week ago, we announced the closing of our new senior secured credit facilities, which were oversubscribed. With enhanced financial flexibility and access to capital, we are well-positioned to address the challenges in the global economy. With increasing opportunities available to us and the ability to selectively pursue the right ones, we will emerge from this recession a stronger company.

If you will go to Slide 6 please, we are balancing our strong defense with an agile offense through this economic period. The Greif business system is the catalyst that enables strong relative performance and creates value as we work through this cyclical trough.

Our solid management team is proving to be up to the challenges thrown at us, and our balance sheet remains strong. Our activities to date, some of which I've mentioned, attest to our determination to re-earn the premium valuation we were achieving before the economic crisis.

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

Thank you, Mike. Good morning, everyone. Please go to Slide 7.

The unprecedented global economic crisis impacted our performance year-over-year and sequentially. The comprehensive actions we've previously announced to mitigate these developments are being aggressively limited and are gaining traction. Consequently, our financial results for the first quarter are consistent with guidance for the full year. Net sales decreased 21% to $666 million, or 15% on a constant currency basis, with a 20% decrease in sales volumes and a 5% increase in average selling prices.

During this period, we adjusted our cost structure to lower activity levels across all product lines and regions. Operating profit before special items was $46 million for the first quarter compared to $105 million last year, or $75 million excluding a one-time gain of $30 million from the divestiture of business units.

Paper Packaging's operating profit improvement compared to the first quarter of 2008 was more than offset by lower results for industrial packaging. We expect operating profit to improve as savings from recently implemented initiatives are realized during the remainder of 2009.

Net income before special items was $22 million in the first quarter compared to $69 million last year, which included the one-time after-tax gain of $21 million for divestiture of business units.

Slide 8 shows Industrial Packaging net sales decreased 21%, or 13% excluding the impact of foreign currency translation, to $530 million, notwithstanding generally higher selling prices compared to the same period last year.

Operating profit before special items decreased to $22 million from $78 million last year, primarily due to the $30 million nonrecurring divesture of business units in 2008, coupled with lower net sales and a $5 million lower cost or market inventory adjustment. The segment is limiting the accelerated Greif business system initiatives and contingency actions to mitigate the impact of lower activity levels.

Now, on Slide 9, Paper Packaging net sales were $130 million in the first quarter, compared to $169 million last year. Operating profit before special items increased to $21 million in the first quarter from $20 million in the first quarter of 2008. The increase was primarily due to higher containerboard selling prices implemented in the fourth quarter of 2008, lower raw material costs, especially old corrugated containers, which more than offset lower sales volumes. This segment, too, is implementing incremental and accelerated GBS initiatives and contingency actions to mitigate the lower activity levels.

On Slide 10, operating profit before special items for the Timber segment decreased to $3 million in the first quarter from $6 million last year due to lower special-use property sales, consistent with plan.

On Slide 11 you see our full-year 2009 goals. Given the sudden and dramatic changes in the global economy, our current focus is to outperform our peers and to adjust our cost structure consistent with expected activity levels. This requires us to be lean, agile, and entrepreneurial throughout the enterprise. Our objective is to fully implement the accelerated GBS initiatives and contingency plan and deliver the expected operating-profit impact of at least $100 million.

During the first quarter, we eliminated 1,375 positions and closed 10 facilities. The full impact from these actions will be realized during the remainder of 2009.

As Mike noted, we were pleased to have successfully completed the syndication of $700 million in credit facilities, including a $500 million revolver and a $200 million term loan. These facilities were priced attractively, relative to recent comparable transactions, and represent a $250 million increase in credit availability with an option for an additional $200 million. Our strong balance sheet and increased financial flexibility position us well to execute our disciplined growth strategy.

Now, turning to Slide 12, capital expenditures were $27 million for the quarter, which includes carryover projects initiated in 2008. For the full year 2009, we anticipate capital expenditures of $85 million, excluding timberland purchases. This amount is below expected annual depreciation expense for 2009.

The global economic crisis presents unprecedented challenges and opportunities. Actions we have taken during the past several months provide evidence of our commitment to respond quickly and decisively to them.

The accelerated GBS initiatives and contingency actions are on track to deliver at least the expected operating profit impact. As a result, we reaffirm our earnings guidance, before special items, of $3.25 to $3.75 per Class A share for 2009.

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

Operator, we are ready to take questions right now.

(Operator Instructions). Ryan McLean.

Good morning. I was wondering if -- you know, we are all familiar with how pricing was affected on the way up for commodities over the last year and even before that. But now that they are on their way down, I was wondering if you could talk about maybe the pricing dynamics within each segment, about how it's affecting you, the drop in commodity prices.

Yes, Ryan, prices -- the commodity prices obviously are dropping quite rapidly and have dropped quite rapidly. Steel, for example, has dropped over $500 a ton in a relatively short period of time.

The same dynamics that were in play when prices were going up are really in play when they go down. By that, I mean we do have a certain amount of customers who are on contracts with ability to adjust prices up or down either on a 90 or 120-day cycle. So those dynamics -- that natural hedge that we had built-in and we talked some about so much in the past still is in play as prices go down.

The unusual thing that's happened right now is the unprecedented drop in demand, in volume. So, we have more higher-priced inventory that we were not able to sell to our customers because the demand dropped faster than anyone could anticipate. We are working our way through that. We did announce a $5 million lower cost-to-market charge in Asia, so we are working our way through that. But the dynamics are still the same, and it applies to all products the same way.

Okay. Within the non-Industrial Packaging, the other side, in Paper Packaging, with the OCC costs coming down and the pricing initiative last summer, I was wondering if that still may have ratcheted not quite down with OCC costs if you are gaining additional margin from pricing that was previously in there.

Yes, Ryan, that's a very good point. I mean I think we were very pleased with the results of the Paper segment this quarter. You could see, with even lower volume, lower sales volume, profitability was equal to and slightly above last year. You would have to attribute a big part of that to lower input costs. OCC has dropped quite significantly. It has stayed down. Our anticipation is that it will continue to remain low, so that has been a positive for us as we look at that segment. That's a very good point.

Okay, thank you. Within the Industrial Packaging segment, as it relates to the two-thirds of your business that's chemicals, paints and coatings, those end-markets that you sell into, I'm wondering if you are still experiencing the sharp declines sequentially, or if there is any sort of sense of stabilization occurring -- what you are seeing out there, basically.

Yes, you know the volumes are obviously the big unknown what now. It appears, Ryan, that it is bottoming; indications are that demand has bottomed.

We do have limited visibility. We are getting some positive data points, and these are our only data points, so they are not a trend yet, but we have some positive data points coming this week from China as far as demand pickup there. We have positive demand points from the Southwestern United States. We have some positive demand points from Latin America. Again, these are data points and not a trend yet, but there are some positive data points out there today.

Okay. Looking forward, I imagine that a lot of your competitors are under stress. I'm wondering where you would emphasize making acquisitions in terms of substrates or geographies. I mean, you announced the two tuck-ins, but I was wondering if you could give us a little bit more color there as to what it is that you're looking at and where (multiple speakers)?

Well, one of the things that we have, I think over the last five to six years, proven that we are pretty good at and that is consolidation. So if we find opportunities in our main product lines to either have a geographic consolidation or a product enhancement, we would definitely look at those.

You know, no one likes going through times like we are going through right now, but we do believe that that there are opportunities out there, and they are great opportunities for us right now. The longer this lasts, the more opportunities there will be for us. So we are going to be opportunistic and use this opportunity to grow our company to the best we can.

Okay. Finally, for the credit facility, first off, congratulations on getting that done. But I was wondering. LIBOR really can't go much lower than that, so have you given any thought into fixing it now for the next few years, fixing your rate?

We look at that all of the time. What we typically have is between 50% to 75% of our variable cost debt swaps to fixed. We normally basically remain neutral with respect to interest rate trends, but hedging in that range is something that we consistently do.

Okay, thank you very much.

Christopher Chun.

Good morning, guys. Just following up on the volume question, I was wondering if you could give us a little more color on what the year-over-year volume comps were like in 1Q in both the industrial and the paper businesses, and what you are expecting for the rest of the year.

Yes, we will give you a geographic comparison, Chris. I think that will probably answer your question.

The paper business was down 10% to 15%. I'm going to give you a range for all of these. IPS-North America was down 15% to 20%; Latin America, about the same, 15% to 20%. Europe was down 25% to 30%. Asia, including China, was down 35% to 40%. So total for the Company, we were down 15% to 20%.

As I said a few seconds ago, it appears this is bottoming out. We had guided in the 15% to 20% range is where we thought it would be for the year, cautiously optimistic that volumes will start to improve. We are seeing a few data points that the trend is improving, but again these are only data points right now.

Right. Have your expectations of what volumes will look like the full year changed any since your last call?

Well, the volumes were a little bit lower than we thought they would be during the last call, so we accelerated some of our GBS initiatives. You know, our profitability is in line with where we thought it would be and in line with our guidance, as Don said.

You know, we don't have any more visibility than most people do. We are comfortable. We have a plan in place though, Chris, that if volumes don't get to the level we thought they were, then we will have other contingency plans to be able to factuate. If volumes do improve to [where] we are, then we should have some significant upside because our cost structure has changed here.

Then speaking of your initiatives, you are still targeting $100 million of benefits in '09. Can you talk about how you are expecting those benefits to flow through on a quarterly basis?

Yes. Christopher, they would be a little bit back-end loaded, but the one thing we are very pleased with is that, for the Greif business system acceleration, we calculated an impact of approximately $15 million for the quarter. So, we are basically on a run rate to exceed the $15 million target that we had set. We would expect really to be delivering impact consistent with that for the remainder of the year.

What's going to be a little bit more back-end loaded will be the contingency actions that are being taken by our strategic business units. We are very, very pleased with the progress that's being made. Those benefits are really going to start flowing through the P&L in the second quarter with an even stronger impact in the back half of the year.

Okay. Did you say that there was a $15 million benefit just in 1Q?

That's correct.

So in actuality, you are already on a $60 million annualized run rate?

That's correct.

Okay. I guess I am trying to square that with your statements that the benefits are going to be somewhat back-end loaded.

For the contingency plans. You'll recall that we basically targeted $100 million. We have two buckets, accelerated GBS initiatives and the contingency plans, that were primarily driven by portfolio optimization. Those will be a bit more back-end loaded, the latter.

Okay. So if that's the case, can you give us some indication of to what extent 2010 might see greater benefit than 2009 if 2009 is not going to see the full benefit or the full year's benefit of those initiatives?

Well, clearly, there will be a significant benefit in 2010. I think one way of illustrating the point, in terms of our lower cost structure and improved earnings power as a result of that -- if you look at the volume declines year-over-year from the first quarter of 2008 to 2009 and you look at the actions that have been taken to mitigate those and to reduce costs, I mean we basically -- if we have the same activity levels as 2008 -- would have improved operating profit -- we would basically double our operating profit, an improvement of 30% year-over-year. So that, we think, powerfully illustrates the impact of adjusting our cost structure and a lot of that has been in our fixed costs.

When you look at our total operating costs, basically our cost of sales and operating expenses, they are down 20%, in line with the lower volume. That is even before some of the impact of initiatives that were taken during the quarter.

So the team has done, I think, a remarkable job of flexing costs based on lower activity levels. We are really going to be improving our results once volumes are restored because, again, our fixed costs have been reduced, and so we think that's going to be very positive for 2010.

Okay. Thanks for all of that color, Don.

My final question has to do with containerboard prices. I was just wondering what you guys are seeing in the market right now and what you are expecting over the next few months.

Yes, we are seeing containerboard prices have dropped a little bit, as you know, and has been published in the market. We are seeing volumes about the same level. We are anticipating volumes will be at the same level as we do right now, and hopefully that prices will stay at this level and not deteriorate any further. So we think there is a balancing effect going on right now and hopefully that will continue for the next three to six months anyways.

Right, but are you assuming any further price declines in your guidance?

We are not assuming any further price declines at this point.

Okay. Thanks for your help.

Chris Manuel.

Good morning, gentlemen. Congratulations on a very, very strong operating performance in such a challenging environment.

If you could help a little bit with -- you talked about some of the volume trajectory as you saw it by region. I guess what I'm scratching my head over is, when we extrapolate out what your operating performance was by looking at the Industrial Packaging North America, Europe, and then in Asia/Latin America, etc., you were able to, by our calculation, over triple the operating profit in North America, on what was a 15% to 20% decline in volume. I mean, it's amazing. So help us understand. What were the swing factors for such a large change?

Yes, we probably would have to go offline to work on those numbers. Tripling might be a little high, but there definitely was a big improvement in North America, period-over-period.

Chris, the difference really between what happened in North America and what happened in the rest of the world is our ability in North America to immediately flux costs versus making the same decisions on the rest of the world, but having a delay in getting that impact.

With the work councils and other regulatory environments outside of the United States, while we have fluxed them and we've made the same decisions, the impact is later in coming. So in North America, we can get that immediately, so that's one positive. Both with Dave Fischer's leadership and Mike Patton and [Yvonne Signarelli's] implementation, we have looked at best practices and implemented the same procedures.

The second point I would tell you that makes the difference between North America and the rest of the world is the diversity we have here in products. We've always talked about diversity as being one of our strengths, but we have many more products that we manufacture here, so our ability to spread those product costs over lower overhead is more impactful here in the United States. So as Don said, we have closed some facilities, have been able to get that impact, and that has an immediate impact.

You know, in this time, we do believe there is some optimism. When volumes do come back, we are going to have some significant upside potential. So this excites us as we go forward.

No, Chris, I would just like to add briefly because really everything that Mike has mentioned, in terms of the reduced costs, productivity improvement, and those were really the key drivers. In the interest of full disclosure, also North America is primarily on LIFO and the rest of the world is on FIFO. So they do get a little bit of a benefit because they are flowing through their cost of sales, the more recent, lower cost as opposed to the challenges that are faced in the rest of the world. So that would represent perhaps a quarter of that favorable delta.

Okay, so a quarter, that helps. I will circle back with you off-line to go through some more detail on that, but that's one bucket that helps. But it's still a big, big, big swing.

When you referenced, in your bank lines, the piece there that you are excited about having them put back into place, I realize it's such a challenging environment to get them in. You referred to I believe continuing to execute on your growth strategy. While we are seeing such retrenchment in volumes, help us understand what you're talking about when you're talking about growth strategy, what you're seeing on your specific product areas, specific geographies, or what is it that you are referring to there?

You know, the growth strategy, we spelled that out I think a couple of quarters ago. Our strategic plan and our growth strategy really very simplistically is to continue looking at making tuck-in acquisitions in the Industrial Packaging business. We have not disclosed publicly what geography that we're looking at but there are geographic areas that we believe we could make some tuck-in acquisitions today. We also look at some product enhancement in the Industrial Packaging business. So that's part of our growth strategy.

We believe there's some add-in acquisitions that could come into our paper business that would further enhance the integration level that we have that is so strong in that business. With the values that are out there right now, we continue to look at some limited adjacencies that would broaden our portfolio. So when we talk about continuing our growth strategy, it would be the strategy that we spelled out previously.

Okay. So I guess (inaudible) really interested in you've answered it for me -- is it's not just limited to the IPS component. It is in both IPS and PPS.

Yes, sir, that's right.

Okay. Let's see here. The last question that I had was a couple of clarification points. If I remember right, when you had given us your earnings guidance before, $3.25 to $3.75, I was thinking you had referenced global volume numbers down 10% to 15%. I thought I heard earlier, when you referred to that as potentially now global volumes for full-year down 15% to 20% -- did I hear something incorrectly, or what's embedded into there today?

No, I would view -- you recall correctly. We were basing it on 10% to 15%, as Mike had mentioned. The first quarter was a little bit softer than we had anticipated, which triggered additional contingency actions. So our results are in line but volumes are down a bit, and so we would say that, conservatively, if these trends continue for the remainder of the year, we need to step up the cost reduction and productivity improvement initiatives to offset. Just as we did in the first quarter, we think that would be possible in the second quarter. But we do think that there is a little bit of upside potential if indeed we see improvement in the back half of the year.

Okay, so help me clarify that a bit. So your guidance doesn't embed necessarily 10% to 15% down for volumes. It may be something a bit worse than that, but you've implemented additional -- hence the $100 million-plus of savings you referenced -- to still get to that range. Is that --?

That is correct.

That is correct.

Okay, that's helpful. Thank you, gentlemen.

Bob Franklin.

Is your revolver drawn at all right now, did you say?

Yes. The revolver, as of the end of the quarter -- because the new refinancing was a subsequent event -- there were borrowings of $338 million, so there was availability of a little over $100 million, plus cash items.

Okay, but I guess what you're saying is that the balance sheet that you report doesn't reflect the new facility.

That is correct.

Okay. In that case, it's sort of irrelevant. Well, as of today then, is the $200 million outstanding then as of today -- the term loan?

Yes it is, yes.

Okay.

The transaction closed and funded on Thursday of last week.

Yes, I should have realized that. Can you tell us anything about the covenants on it?

The covenants are consistent with the previous credit agreement. We did do an 8-K filing, so you can go into the detail. There are some subtle shifts, but not materially different.

Okay, thank you.

(Operator Instructions). Michael [Blassey].

Good morning, guys. Thanks for taking my questions. Could you just give me a little bit more color on the inventory balance. With the decline in sales, I think I would have expected it to be a little lower than Q1 '08. Do you have anything you can tell me there?

Yes. Now, that is a good question. The lower-than-expected volumes did present a bit of a challenge, and so our inventory days, which last year were 34, increased to 47 days. So, we would expect, really within the next two months, to be back to more normal levels.

Okay. I notice there was some lower cost-to-market adjustments in Asia. Just based on what you said about North America, I wondered if there was the potential for some of that there as well.

There were no lower cost or market issues anywhere else in the world.

Okay. Just a final question -- I was looking for the operating cash flow number, if you had that.

That will be included with the 10-Q.

Chris Manuel.

Just a follow-up or two here, if I could? A couple of questions on -- you had indicated there would be some tuck-in transactions, or you did some tuck-in transactions in February. You gave us a little information on it. I kind of missed part of it. Could you repeat to me or repeat to us what you had -- what you bought there potentially, you know, what the revenue might look like from that, that kind of stuff? A little more color on it would be helpful.

We haven't really disclosed anything, but what we said in our prepared remarks, Chris, is that the combined revenue between the two businesses was there was a drum business in the Southwestern United States and a load-procurement business in the Southeast. That combined revenue was less than 2% of our consolidated sales, so we combined them both together. They are truly tuck-in acquisitions.

Just to give you an idea, you know, the values or the multiples are significantly lower today than what they were six months, nine months ago. So we believe these to be good transactions, even in these times. Being a tuck-in, we are very confident we can generate great value from both of those.

That makes sense. When we think about the -- something else I'm curious about that gets tough to disseminate from volume levels is the blending and filling business. When you think about it, have you seen similar type of levels for throughput, whether it's gallons filled or blended, or however you look at metrics there, to what you are seeing from drum volumes? Has that been a little better, a little worse? I guess a sense of how defensive that business is in relation to just outright --

Yes, it's very similar to the drum business, Chris, right now. You know, I forgot to mention there's a few data points that that business may be having some -- a little bit of upturn right now, so there is optimism.

We've done a good job over the last year of really revamping that organization, so we've taken a lot of costs out of the business. Even with the volumes being reduced like they are in the drum business, the profitability of that business is better today than it has been.

Okay, that's helpful. As you look forward at opportunities there, you know, with overall industrial production down so much, it makes a lot more sense, I would think, for companies to want to continue to outsource that type of business, particularly to someone like yourselves that can combine it with other folks' operations for efficiency purposes and such. Does that make sense, both here in North America and globally as well, or are you seeing incremental opportunities for that type of line of work?

Yes, we are having much more serious conversations. I think you are very astute in the analysis that you did.

But yes, in a downturn like this, people -- it makes sense to outsource it because they don't run their facilities full.

If you want to come and sell that, help sell this for us, Chris we can do that, because you said that very well.

You know, Wall Street is a tough place these days. Who knows?

The last question I had for you was just a small one. In the Paper side of the business, can you tell us what your mill utilization rates were in the quarter, or where they are today as well?

Yes, and there was a bit of a slow back, notwithstanding our full integration, so we did operate at a little bit over 85% of capacity.

In 1Q. Are you still kind of running at that level today?

Yes.

Okay, that's very good. Thank you much, gentlemen. Good luck in the quarter.

At this time, we have no questions in queue. I will now turn the call over to Deb Strohmaier.

Thank you. 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, March 3. The playback telephone numbers are 800-642-1687 for domestic callers and 706-645-9291 for international callers. The conference ID is #85890635. The digital replay of the conference call will also be available in approximately one hour on the Company's Web site, www.Greif.com.

We appreciate your joining us this morning.

This concludes today's conference call. You may now disconnect.