Graphic Packaging Holding Co (GPK) 2003 Q3 法說會逐字稿

Welcome to the Graphic Packaging Corporation third quarter earnings report. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question, please press the one followed by the four on your telephone.

As a reminder this conference is being recorded Thursday, November 13th, 2003.

I would now like to turn the conference over to Bruce Curt (ph). Please go ahead, sir.

Thank you. Welcome to the Graphic Packaging Corporation conference call to review our earnings report for the third quarter of 2003. Steve Humphrey, Chief Executive Officer will discuss the important factors in this period, John Baldwin, Chief Financial Officer will review the financial reports of the period. David Scheible, Senior Vice President, Chief Operating Officer is also on this call. Following our comments they will be pleased to answer your questions.

Our 10-Q record for the third quarter will provide you with information incremental to that contained in our earnings report. Importantly this document provides pro forma results for the third quarter and for the nine months through September 30th. I would go on.

Credit agreement EBITDA refers to EBITDAs defined in the company's credit agreement and is a financial matter that is used therein for purposes of determining compliance with specified financial ratios. It is calculated on a pro forma basis for the merger and in accordance with the credit agreement. Credit agreement EBITDA is not a defined term under GAAP and should not be considered as an alternative to income from operations or net income as a measure of operating results or cash flows or cash flows as a measure of liquidity.

Borrowings under the credit agreement are the key source of the company's liquidity. Statements made in the course of this conference call that are not historical financial results are forward-looking statements as defined in section 21E of the securities act of 1934.

Our actual results could differ materially from those projected in these forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are contained in our report filed or furnished to the Securities and Exchange Commission including our registration on form S 4 related to the merger.

Annual report, report on form 10-K A for the year end December 31, 2002 and quarterly reports on form 10-Q for the quarters ended March 31 and June 30th, 2003.

We are not obligated to publicly update or revise these forward-looking statements to reflect future events or developments except as required by law.

Let me introduce Steve Humphrey.

Good morning. I'm really pleased to resume our quarterly conference calls with investors following our brief hiatus during the period preceding our merger.

This last quarter was active almost to excess but the merger of Riverwood Holding Inc. and Graphic Packaging International Corporation was consummated on August the 8th.

This (inaudible) and lower cost debt financing was put in place. We previously noted that our present annual interest expense is $30 million below that of the combined predecessor companies.

Our previously announced management team drawing from both predecessor companies has come together quickly and very effectively. The senior management team has been strengthened by the addition of John Baldwin as our new CFO and Steve Hellrung, as our new General Counsel.

Integration of our predecessor companies and the achievement of our forecast synergies is advancing under the attention of Dan Blount, formerly Riverwood's CFO.

We achieved a little over a million dollars of forecasted synergies in the third quarter and we're on track to achieve the $52 million of synergies by the third year after closing that we have previously discussed and disclosed.

Approximately 40 percent of this total is expected in the first calendar year post closing. We filled out our board of directors with the election of Robert Tieken, Executive Vice President, CFO of the Goodyear Tire and Rubber Company.

The general business climate during this quarter was challenging for some of the markets we serve. On balance overall international markets were positive while certain domestic markets were a little soft.

Paper board packaging. This business segment for Graphic Packaging Corporation are our new business segment definitions, are paper board packaging that combines Riverwood's coated segment with the former Graphic Packaging's business and contained board in another segment.

Total paper board packaging segment sales were $459 million, were increased by a hundred and fifty four and a half million as compared to the second quarter and this increase was primarily due to the addition of Graphic Packaging's business.

Foreign currency exchange rates positively impacted sales by $7.7 million. Higher volumes in international beverage markets also contributed to our increase. And these increases were somewhat offset by lower volumes in pricing in North America markets as a result of increased market competitiveness.

International paper board sales, including those from our (inaudible) operations were up 9 percent for increases international beverage up 8.8 percent and international consumer products up 14.3 percent and (inaudible) up 5.5 percent.

North American soft drink. Sales fell 13.1 percent as a result of a 9 percent unit volume decline and 4.4 percent due to lower price realization. The volume decline during the period reflects the non-renewal of the supply contract with Coca Cola Enterprises which we have previously discussed and quantified as well as a somewhat soft market.

Some of the largest soft drink companies already reported volume for their North American business during the third quarter and a few examples of comments include Coca-Cola Bottling Company noted a 3.8 percent decline in bottle/can volume. Pepsi America cited a 3.7 percent decline in US volume. However, Pepsico said soft drink in total volume increased 2 percent.

While there are product mix differences for these companies, these comments indicate some recent softness in market conditions. There has been continued growth in the non-carbonated drink volume such as bottled water and juices but these are not as often common packed in carrier board or multiple packs as carbonated soft drinks.

We have developed a successful carrier for the well known water bottle brand Dasani and are currently seeking to advance paperboard packaging for other non carbonated drink products.

In beer, shipments to the North American beer market were off 2.2 percent, and average price realizations decline by 0.5 percent which taken together caused a 2.7 percent decline in sales.

North American consumer and folding cartons. In spite of lower paper board shipment volume to North American consumer product markets, sales were up slightly due to improved average pricing which was up 2.9 percent.

Our earnings report for this quarter is noted the $155.8 million sales contribution due to the inclusion of Graphic Packaging international sales for 53 days. This sales contribution is net of inter company sales which is paper board that Riverwood's Mills had previously sold and shipped to Graphic Packaging locations.

Graphic sales contribution, net of inter-company sales to the company's total pro forma sales of $585.4 million was up 3 percent over the same quarter in 2002. This increase is relative positive contribution that Graphic made for the period in spite of a fairly sluggish business level from customers.

The sluggish environment was evident in some dry food, serial and convenience food products. New frozen food accounts increased serial promotional activity and new product launches including microwave lasagne in Europe all added to sales.

Frozen pizza a sales were small early in the quarter but picked up throughout the quarter and remained strong as we head into the fourth quarter. And a multi year supply agreement has been successfully renegotiated with one of our most important customers.

Container board sales and others. Container board sales fell by $2.5 million to $19.1 million. Liner board medium and bag paper prices were all below those recorded in the same quarter of 2002.

Packaging machinery placements declined 35 percent for the first 9 months of 2003 as compared to the same 9 months in '02, due to the timing of shipments.

For the year, machine replacements are expected to be comparable with 2002. In fact, we have the biggest machinery backlog since I have been with the company. So that bodes well for fourth quarter '03 and into '04.

We also note that our three primary paper mill boards in the US ran well during this most recent quarter.

We have summarized our business strategy before but let me go through highlights quickly. Our goal is to deliver superior financial results and apply cash flow for debt reduction and the initiatives and strategies accomplish this include the following. Strengthen our number one position in paperboard packaging, serving beverage and consumer goods companies.

Leverage our global footprint to grow sales, optimize production and reduce cost.

Maintain low cost converting operations and a low cost mill systems.

Continue to improve efficiency through integration of operations.

Exceed industry growth through innovative products and value applications.

And lastly enhance penetration of crossover selling opportunities as a result of existing strong customer relationships.

With that I'd like to introduce John Baldwin, our new CFO and he will go through the financial report.

Thank you, Steve. I have just a few brief comments to make on the financials that you probably saw included with the third quarter earnings release. They are certainly complicated by the purchase accounting treatment of the merger between Graphic Packaging International Corporation and Riverwood Holding Inc., that occurred on August 8.

We intend to, along with our 10-Q, which should be filed by tomorrow, include pro forma statements for the 3 month and 9 month periods ending September 30th, 2003, as well as the comparative periods for 2002 and that should hopefully give you some additional color on the operations.

But let me just take you through the results. The results as I said included our most recent quarter included only 53 days of Graphic Packaging international, the 53 days from the August 8th effective date of the merger.

Obviously the reports for 2002 included only Riverwood Holdings Inc., so the changes or comparison between the reported periods are influenced by the purchase accounting treatment of the merger.

Our reported sales increase was $152 million, which mainly reflects, as I believe Steve said, the contribution from Graphic Packaging International Corporation's which was $155.8 million of that increase.

The gross margin for the 2003 period was $81.4 million or 17 percent, which compares to $72.3 million or 22.2 percent of the previous year.

The lower percentage gross margins for the recent quarter reflects the combination of Riverwood Holdings, Inc., where full year 2002 gross margin was 21 percent and Graphic Packaging International Corporation or year 2002 was 12 percent.

Gross margin for the 2003 period excluding the $7.1 million purchase accounting adjustment for acquired inventories in the merger was $88.5 million dollars or 18.5 percent.

Operating income for the 2003 quarter, therefore, was $33.1 million or 6.9 percent of sales as compared to $31.1 million dollars or 12.6 percent of sales in the prior year.

Excluding that $7 million inventory adjustment as well as the $6.7 million of merger related expenses that are included in selling general and administrative expense for our quarter, the operating income would be $46.9 million or 9.8 percent of sales.

As also cited in the earnings release interest expense was slightly higher by $4.6 million the quarter, due primarily to the higher indebtedness taken on in connection with the merger.

Income tax expense of $1.4 million in the quarter mainly reflect that on our foreign income as we had the losses in the period for the US and we will obviously continue to benefit from the $1.2 billion NOL that Riverwood has going forward as we turned that income into taxable income.

Finally, I would note our share account is hire in the quarter as a result of first of all the split and secondly the sheers issued to the former Graphic shareholders in the merger.

Depreciation and amortization for the 9 months to September 2003 was $104.9 million, and capital expenditures for the 9 month period were $75.9 million. This includes $3.8 million of Graphics's capital expenditures from the date of the merger and also Riverwood's previously announced capital expenditures initiative to spend $75 million over the three years to 2005 is under way. Expenditures on this initiative were $17 million through the third quarter of this year.

Purchase accounting roll end up impacting our total depreciation amortization expense going forward as Graphic's assets have been stated on our balance sheet at their fair market value.

Pro forma statements of operations for 3 and 9 month period for 2003 and 2002 will be contained in our form 10-Q. These statements will hopefully provide with you some additional information on the operations for those periods.

I would just point out as you read the pro forma statements, please note that 2002 will reflect a (inaudible) Graphic Packaging's Kalamazoo mill, (inaudible) cost of about $4.5 millio in the 2002 third quarter and the 9 month pro forma statement for 2003 will include a $1.9 million charge taken in the first quarter for Riverwood that wrote off costs related to the intended IPO.

As Steve said, we are certainly focusing on using our free cash flow for debt reduction so let me conclude with a few remarks on our debt. Our debt was almost entirely replaced as a result of the refinancing transactions in connection with the merger of Graphic and Riverwood.

We ended the quarter with $2.182 billion of total debt comprised of $850 million of notes with an average interest rate of 9 percent and $1.275 million of bank term loans, $990 million of which have been swaped all in rates of approximately 5.5 percent.

The remainder of our debt represents debts under revolving, the largest of which is the knew 325 credit facility which along with the bank term loans constitutes the credit agreement you will here us refer to from time to time.

Also refinancing also provided us with sufficient liquidity. At quarter end in addition to the $15 million of cash on hand we had $288 million of availability under our credit lines to support our working capital needs going forward as well as the integration activities we're involved with.

Let me turn it back to Steve Humphrey at this point.

Before we get to the Q and A, I'd like to comment on the merger.

We are running ahead of an already ambitious timetable to get the new organization structured, staffed and fully mobilized. Work to implement actions which drive previously disclosed synergies is proceeding very nicely.

Additionally we are putting definition and scope to further synergy opportunities associated with facility rationalization and cross-selling. We should be reporting to you on those categories over the next several quarterly earnings calls.

I believe it becomes clearer to each of us every day of the compelling leverage of putting these two companies together. There's a tremendous energy and enthusiasm which is eagerly observable inside our organization.

Our full attention is focused on capturing these opportunities and transforming them into future results.

With that I'd like to open it up for Q&A.

And I remind you that David Scheible is also on the line.

Thank you. Ladies and gentlemen, if you would like to register a question press the 1 followed by the 4 or your telephone. You will hear a three tone prompt to and your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by 3. If you are using a speaker phone, please lift your hand set before the question.

One moment please for the first question.

Our first question comes from the line of Joe Stivaletti with Goldman Sachs. Please proceed with your question.

Hi. Good morning. I was just wondering on the pricing side, you talk about I know, one of the areas obviously that's been a concern is North American Beverage where you talk about two to three percent year-over-year lower realizations.

I'm just wondering what we should be expecting as we get into the fourth quarter. I know some of your contracts were, you know, reworked as we got into a year or so ago, so I was wondering are (inaudible) in the beverage markets in terms of pricing?

Exactly. There's no more shoes to drop. This is the flow through of the negotiations that were subsequent to the CCE situation last year. So that, just rolling through each of the quarters it doesn't have any further degradation beyond the end of the year.

So in the fourth quarter year-over-year, though, should we then be expecting prices to be about flat for the North American

It takes, most of those contracts were implemented very late in the fourth quarter last year. There will be some further price deterioration year-over-year yet in the fourth quarter.

OK. But so in the first quarter of next year, all other things being equal --

It's clear.

So it should be about level year-over-year then -

That's correct.

OK. The other question I was wondering if you could sort of comment on for those of us who sort of followed both companies independently over the years, how demand was going more in the -- for the old, you know, comeing from the old Graphic Packaging customer base, how have demands looked in the third quarter for that group of customers.

David, why don't you take that one.

Sure. If you look across-the-board as Steve made the comment, we saw a softer demand in dry food or cereal elements but we saw some pickup in frozen food. I think previous those, (inaudible) where we picked up a number of frozen food accounts last year and we saw that annualized basis.

So sales were year on year were up in our business in what was a pretty tough overall market. You probably read Kraft and General Mills and Kelloggs releases, and overall for the most part their business remained a little tepid during the third quarter.

OK, thanks a lot.

Our next company comes if the line of Sandy Burns with Deutsche Bank. Please proceed with your question.

Good morning. Maybe a follow-up in terms of what was happening in the old Graphic Packaging business. How successful were those operations in terms of raising prices to the folding carton customers to offset the increase in board prices that they, that the operations experienced in the first half of the year?

Well, you can see that in the numbers that Steve reported actually our pricing improved during the quarter and that's because we were able to pass through board increases.

As you know, all major board types, SDS, NCRB had prices in the third quarter as our contract did allow. We did roll those price increases to customers. But that is not to imply as Steve said, it is still a tough pricing market for our business but relative to those board increases or board costs we were able to recover those during the quarter.

Great. I was also wondering on the CSD side where you mentioned volumes were down 9 percent. Would you happen to know what the number is if exclude the CCE loss?

It would be up slightly.

It would be up slight. OK.

It's a combination or a result of we have been able to pick up new business this year so there is a back fill and in certain cases customer volumes were a little stronger in certain cases customer volumes were a little weaker. But the CCE volume more than explains the drop.

OK. That's helpful. And last question is you mentioned the strong orders on the packaging machinery side.

Yes.

I'm just curious, is a lot of that really new business, new applications or is that just replacing old machinery that you have out there and you're cannibalizing some of the old machinery that you have out there?

It is both but more the former than the latter.

For the business that is replacing old machinery, I hope if you can comment on the margins on the new machinery will be greater or similar or less than what you are currently experiencing on the machinery?

We have never really talked about margins on packaging machinery because they are put out on multi-year leases that are in conjunction with multi-year current supply agreements.

So we tend to look at it on a total basis, machine and curtain. But generally the reason for the pace of machinery replacements is that there's an increasing migration towards the 2-by-6 curtain profile, and there's also much higher productivity, more through put per hour on the newer machines, so customers that are either converting to the new pack style are ready to increase their through put are both candidates for machine replacements.

In the new type of cartons on the new machinery generally have higher margins than the old ones?

One of those, yes and no. At the moment as we're in the middle of implementing this major re-capitalization of our beverage assets the margins are actually down somewhat. But once the investments are done and we are running the wire format higher steam presses and dye cutters, the margins will actually go up somewhat on a historical basis.

OK. Great. Thank you.

OK

Our next question comes if the line of Chad Brown with Levin. Please proceed with your question.

Yes, good morning. I missed the first part of the call I'm afraid and I did hear some numbers that were not in the press release, like the 585 of pro forma sales and it sounded like you were referring to a number of segment data.

Could you just give us the numbers that were included in your remarks that are not in the press release which presumably we'll get in the 10-Q tomorrow?

Hang on a second. You got a $585 million in sales, right? Yes.

Could you perhaps follow up (inaudible) Thursday in the call?

That would be terrific. And then did you give a number for the EBITDA credit agreement number for the quarter? You gave it for the trailing12 months but I didn't know if you gave it for the quarter.

No, we did not.

Can you give that number now or not?

Not just at this time. It's still working.

OK. Was there any sort of accounting rule, you know, obscurest reason that you didn't put an earns per share number into the press release. If I just divide the $6.3 million by your shares outstanding, 4 cents, is that --

We had a 32 cent loss per share in the third quarter.

I understand. And I know there's a lot of rules on GAAP and non GAAP, but the sort of operating earnings number?

Oh, you mean a number after all of that

Yes, kind of an operating number that was before the purchase accounting adjustments

You refer to the nature of the problem. The FCC rules don't want you -- or doesn't allow you to put a per share number after all those adjustments.

So we get to do that division all by ourselves then?

Sorry. Yes.

OK. Thank you.

Ladies and gentlemen, as a reminder, to register for a question press the one, four. Our next question comes from the line of Christopher Miller with J.P. Morgan. Please proceed with your question.

Good morning, guys. A couple quick questions. I wanted to follow up in the previous quarters we talked a little bit about the microwave business and some of the new inline quoting processes, you would had. The indication had been previously you would have quite a hiccups getting getting that process started.

I just want to get an update on how that was progressing.

I'll take that one, Steve. There are two separate questions, let me take the second one first which was the inline processing and that had to do with the frozen food business.

It was not microwave but it was inline and we did struggle no question the first couple of quarters but I will tell you the third quarter it was a very good quarter for that business and every month right now scrap and productivity is improving in that application with a very specific piece of business, it's called Eat Out Of The Box, it's a package that people take home and eat direct food out of it, and it's running much better in our facility.

Microwave had a good quarter. We had a couple of small product launches and a new product launch in Europe. Microwave continues to be a pretty positive contributor from a sales margin standpoint, more and more convenience items and a fair amount of development work with customers on new microwave introductions.

Can you give any sense of the sort of growth that you saw in the quarter there?

Microwave growth in the quarter was up -- it's about what we have been experiencing so it was about 8 to 9 percent for microwave only.

OK. Great. And then maybe more of an accounting issue and I'm sorry if I missed this. On the NOL, as you look going forward with section 382, my understanding is then that that NOL will basically be limited to about 40, $45 million per year going forward. Is that how this is playing out as you see it at this point in

It won't be limited until or unless there is a change in control, with the legacy (inaudible) with shareholders would own less than 50.1 percent of the company.

OK.

Prior to that or up to that moment it's -- there's no limitation.

There's no limitation as of now.

It will depend on the share price at the time there is a change of control if any, and I think the number you're referring to assumes a particular share price of about $5 but it could be different depending on if there ever is a change of control or what the share price may be at the time.

OK. Thank you very much.

You're next question comes from the line of Bruce Kline with Credit Suisse First Boston. Please proceed with your question.

Good morning.

Good morning.

I was wondering just on a contract side what a lot of the beer businesses is that multiyear, I believe, is a lot of that set earlier in the year, is there anything major coming up on that side in the next few months or 6 months or so

Not before '05.

OK.

At the earliest.

OK. And on the CCE, I know they reopened and there was -- you guys talked about what I think was a $20 million plus or minus common impact, the bulk of that -- was there anything else like that that's come up with them or any other bottlers or?

No, as I have tried to describe previously, all of the gyrations that were kind of the after consequence of that were already done, they are already fully priced and reflected in the numbers.

OK. And then the open market, the CUK, just the spot market what are you seeing out there in terms of price, and I think it (inaudible) is it flat or what's the direction there in the last couple months?

Well, it's like watching a weather van in a wind storm and it depends upon whom you listen to, but for what I would call the trade volume pricing has been pretty stable, and then there have been some reports on some fairly large end user bids of some special dealing. But I'm not ready to conclude that that is a generalizable norm for overall pricing. But there's a lot of noise out in the market at the moment.

And that's true. But this has been no real official movement on the prices, so no risky reporting that suggests prices in the board market aren't at least stable on an overall basis.

And the North American beverage, did I read your release right, it sound like sequentially it's been flat for the last couple quarters in '03, did I read that correctly?

Yes, that's pretty close. We have been able to overcome market and customer specific softness with some new business year-over-year. So when you net it, it's pretty flat.

And then in the third quarter we ran negative to last year. But it's not -- it's as I said more than a hundred percent of the variance in the third quarter was attributable to CCE volume.

And lastly, just on the CAPEX there was some converting projects I think at the old river wood site. I'm wondering if those are still happening?

Absolutely on schedule and we should have all $75 million dollars expended by no later than the third quarter of last year, perhaps a little sooner than that.

I think I had 115 of total combined CAPEX for '03. Is that still a good number?

I think we're saying about 120 to $130 million.

I think that was the guidance we had given, 120 to 130.

OK. And then '04, does it drop back down? I don't remember the number

We're still working on that. As I mentioned in my closing remarks, if you go back to our S 4 when we disclosed synergies for the merger, we identified 4 categories, which was basically end sourcing that we call volume, purchasing, corporate overhead and divisional synergies and we said there were a couple of categories we really couldn't get to prior to signing the merger agreement and those were cross selling opportunities and then some manufacturing rationalization.

And we're working very, very intently on both of those. The manufacturing rationalization I think will probably require some CAPEX, so we're going to work to see what that will do to the run rates, but real be able to give that guidance in our next call.

OK. Thanks, guys.

OK. Thank you.

You're next question comes from the line of Viva Jeffrey (ph) with Fankatee (ph). Please proceed with your question.

I just have a couple housekeeping questions. Can you disclose what the availability on the revolver was at the end of the company and if there are any larger (inaudible) that impact that?

There was availability under all of our revolving credit lines of $288 million at the end of the third quarter and there were approximately $24 million of letters of credit this impacted that number.

Great. Thanks.

Ladies and gentlemen, as a reminder, if you have a question press the one, four.

Our next question comes from the line of Chad Brown with Levin. Please proceed with your follow-up question.

Yes, my follow-up question was should we assume that none of the $52 million synergy was included in the September 30th quarter?

I think I mentioned that there was slightly more than a million dollars of contribution.

OK.

OK.

Thank you.

Ladies and gentlemen, as a reminder, if you have a question press the one, four.

I'm showing no further questions at this time. Please proceed with your presentation or closing remarks.

I want to thank everybody for joining and as I said in the opening remarks and kind of resuming our quarterly communication with investors and we look forward to talking to you again. Thanks, bye.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for participating and ask that you please disconnect your line.