Graphic Packaging Holding Co (GPK) 2003 Q4 法說會逐字稿

Welcome to the Graphic Packaging Corporation fourth quarter and year end results 2003 conference call. (OPERATOR INSTRUCTIONS) As reminder, this conference is being recorded, Thursday, February 5, 2004. I would now like to turn the conference over to Mr. Bruce Curt of Graphic Packaging Corporation. Please go ahead, sir.

Welcome to the Graphic Packaging Corporation conference call to review our earnings report for the fourth quarter and year 2003. Steve Humphrey, Chief Executive Officer, will discuss our strategies and achievements during the period. John Baldwin, Chief Financial Officer, will review the financial report for the period. Following their commentaries, Steve and John will be pleased to answer your questions. Dave Scheible, Executive Vice President of Commercial Operations is with us and will participate in the question-and-answer session.

Our Form 10-K report for the 2003 year will provide you with additional incremental information to that that is contained in our earnings report. We anticipate filing on Form 10-K in March 2004.

Credit agreement EBITDA reversed to EBITDA as defined in the Company's credit agreement, and is a financial measure that is used therein for purposes in determining compliance with specific financial ratios. It is calculated on a pro forma basis for the merger in accordance with the credit agreement. Credit agreement EBITDA is not a defined term under GAAP. It should not be considered as an alternative to income from operations or net income as a measure of operating results, 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 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 reports filed with, or furnished to, the Securities and Exchange Commission, including our registration on Form S4 related to the merger, and Form 10-KA for the year ended December 31, '02, and quarterly reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2003. We're 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 would like to begin my comments today where I left off on our last conference call. We would like to focus on recent progress on our key business strategies and the major issues that impacted our fourth quarter and year-over-year changes.

Debt reduction in the recent quarter was 27 million, which was similar to the debt reduction in the third quarter. Further debt reduction during 2004 is anticipated and is expected at an annual rate that will compare to the reduction achieved in this past quarter. That reduction is one of our key priorities.

Beverage markets in the U.S. were soft during the past quarter. Our U.S. beverage volume for the year and the fourth quarter reflected the nonrenewal, or loss, of a contract with Coca-Cola Enterprises that we have previously quantified. Repricing in this market took place at the beginning of 2003. Beverage pricing was down 3.2 million in the fourth quarter and down 15 million for the year. These year-to-year penalties took place in '03 and in the fourth quarter. Beverage pricing is now stable, and has been relatively stable during year. The year-to-year effects of the contract loss and repricing are fully behind us.

Yesterday the Company issued a press release announcing the dismissal of a lawsuit that we have filed last June alleging infringement of our Fridge Vendor patent. We're pleased that this matter has been resolved. And we stated, we look forward to a long-term business relationship with Coca-Cola Enterprises.

We have disclosed in our SEC filings the sales and tons that had been lost during 2003 and expected in 2004. We cited that the loss represented approximately 5 percent of legacy Riverwood's 2002 sales, and approximately 40,000 tons of products. As we announced, the Company is resuming supply of Fridge Vendor cartons to Coca-Cola Enterprises in various locations, and should have a positive impact on our volumes going forward.

The terms agreed to in this matter limit the extent of our comments to what has been stated in the press release. And of course, you may access the historic information from our SEC filings. Taken as a whole, there should be a positive impact on our volumes going forward. On the basis of our business today we ought to recover well over 50 percent of the volume that was lost previously. And this should start in April and May of 2004.

Mill exposure to energy and fiber cost is ongoing. Fiber cost at our U.S. mills rose $2 million in the fourth quarter, and $7 million for the entire year of 2003. Energy costs rose 5 million in the fourth quarter and $11 million for the year. Our overall mill cost, including chemicals, increased $20 million for the year 2003.

Our approximate recycled fiber use is between 600 and 625,000 tons. But this is reduced by as much as 33 percent by the clippings and trim generated at our own carton plants that we repulp. We consume about 10 billion BTUs of gas at our mills. These numbers will provide you with the framework for your own estimates of cost impact depending on your own estimates of forward price changes.

The effective beverage pricing, which was approximately $15 million negative, and mill cost increases, which was another $20 million negative totals approximately $35 million. The negative effect of these two factors alone compared to our EBITDA earnings decline of $28 million year-over-year.

Containerboard business loss for 2003 increased by $5 million, as compared to 2002, and $2 million in the fourth quarter alone. Price deterioration throughout the year, and our decision to produce more linerboard in the fourth quarter to avoid the even higher costs of mill down time, contributed negatively to our results when comparing 2003 over the prior year. Happily, linerboard prices are heading up.

Our linerboard exposure will be reduced as we in source more coated board, and replace purchases that had come from other suppliers. Coated board shipments to the legacy Graphic carton system were up. In fact they were up more than 20 percent during 2003, and we expect further increases during 2004. New business and new products that utilize our own coated board will also reduce our linerboard exposure.

Synergies are well ahead of our earlier disclosures as to both amount and timing. We had announced our expectation to achieve $18 million of synergies in the first full year following the merger, and 52 million over three years. Synergies are already in an annualized rate of more than $24 million based on our announced third and fourth quarter achievements. The announced Garden Grove plant closure added $4 million to our previously announced $52 million synergy total. Further facility rationalization will be forthcoming, and it will add to our synergy expectations. These initiatives are important to our strategy to maintain, if not improve, our low-cost converting operations in mills system.

Cost reduction initiatives represent part of our intended capital expenditures for the year. Our beverage manufacturing rationalization expenditures last year were approximately 27 million of the total $75 million associated with this program. The Fort Atkinson Wisconsin plant that was closed in November in conjunction with this strategy.

Two new wide format flexo (ph) presses have been delivered to our Perry plant and are being installed as we report. This beverage plant expenditure program is expected to yield roughly $39 million of annualized cost savings by the end of 2005.

And during the past quarter, our Z-Flute operation advanced from the pilot stage to the production stage. A small pilot plant in the Atlanta area was closed, and the operations were moved to our large facility in Lawrenceburg, Tennessee.

As we indicated in our press release, capital expenditures this year are up from earlier indications due to further manufacturing rationalization initiatives that are being undertaken. In order to provide some benchmarks for our expected yields from these initiatives, and from our continuous improvement program, I would point you to the history of the legacy companies.

Riverwood reduced its cost by $228 million over the period 1996 to 2002. Graphic reduced its cost by 78 million over the 1999 through 2002 period. The Company has recently achieved $31 million in annual cost savings. Our record and our recent achievement point towards our expectations for the future.

Innovation builds our relationship with customers and expands our market potential. The award from Coca-Cola North America as their packaging integration supplier of the year is an important recognition of our capabilities. We were also recently the supplier of the year from Nestle, Chef America for our microwave subcepter sleeve (ph) that they used in their Hot Pockets product.

To summarize, we reduced our indebtedness in the past quarter and anticipate more for the year. We have quantified the cost of energy and fiber, as well as our containerboard business. We're running ahead both in timing and amounts in previously announced synergies. Capital expenditures for the year are expected to further reduce costs. Our innovations are adding to top line and our growth potential. And with that I will turn it over to John Baldwin, who will review the financials.

Good morning to everybody on the call. As I think most of you know, our quarter ending December 31, was the first complete quarter which reflects the merger of Graphic and Riverwood last August. This merger was accounted for as a purchase, so our comparative numbers last year, 2002, reflect only Riverwood's results, while the financial statements from August 8th of 2003 reflects the results of the combined companies.

To hopefully provide some clarity for you, we have included in the attachments to the press release the operating results for the combined companies on a pro forma basis for each of the last eight quarters. These statements assume that the merger occurred at the beginning of each period. And most of my comments today reflect a comparison of the actual fourth quarter 2003 to those of last year's fourth quarter, as if the companies were combined.

For the fourth quarter, the Company reported a loss of 7 cents per share compared to pro forma earnings for the 2002 fourth quarter of 4 cents per share. Fourth quarter 2003 sales were 569 million, up 24.6 million, or 4.3 percent, as compared to pro forma net sales of 544 million in the 2002 fourth quarter. Favorable foreign currency exchange rates made a $17 million positive contribution to those sales for our most recent quarter.

Our total international sales reached $102 million, which is 18 percent of the Company's total sales in the 2003 fourth quarter, as compared to $81 million a year ago, which was 15 percent of the pro forma sales in the 2002 fourth quarter. In addition to favorable foreign currency exchange rates, unit volume was up 6 percent across the total of our international beverage consumer products and mill product sales.

We noted in our earnings release today that Australia's International Coated Board in Fiskeby, our mill located in Sweden, experienced strong sales in the quarter. Sales were down approximately 2 percent in North American beverage markets, as Steve mentioned, due to lower pricing and product mix. Again, Steve has already commented relative to recent conditions in the North American beverage market and their impacts on our Company.

Our gross margin for the 2003 fourth quarter was $83 million, or 14.6 percent of sales, compared to a gross margin on a pro forma basis for 2002 of 90 million, or 16.5 percent of sales.

Turning to income. Income from operations for the 2003 fourth quarter was $19 million, or 3.3 percent of sales. For the 2002 quarter, pro forma income from operations was $35 million, or 6.4 percent of sales. We incurred a $5 million charge to reflect the retirement of certain mill equipment. Excluding this charge, income from operations in the 2003 fourth quarter would have been $24 million, or 4.2 percent of our sales.

Steve has already noted most of the items contributing to the results from operations, but let me recap. Lower pricing in North American beverage markets accounted for 3.2 million lower earnings in the fourth quarter of '03 versus that of '02. The Company's pro forma containerboard earnings were down about $5 million for the 2003 year, and about 45 percent of this decline was in the fourth quarter.

In the fourth quarter volume was up 11 percent, but prices were off 11 percent as compared to the 2002 period. Energy costs at our mills were up approximately $5 million as compared to the pro forma 2002 fourth quarter. And as Steve noted, again on a pro forma basis they were up about $11 million for the year. A portion of our natural gas requirements are hedged by contracts that extend out through 2004.

Fiber costs at our U.S. mills were up $2 million in the quarter as compared to 2002 fourth quarter, and were up $7 million for the year on a pro forma basis. Our legal expenses were up nearly $2 million in the fourth quarter.

Depreciation and amortization expense was $56 million in the 2003 fourth quarter, as compared to a pro forma $58 million in the comparable period in 2002. Credit agreement EBITDA was $91 million for the fourth quarter of 2003. Non-cash adjustments for pension and OPID expenses, costs incurred as far as the merger, and charges related to the retirement of the mill assets we mentioned, are excluded from the definition of EBITDA. Again, our credit agreement.

Net interest expense was $36 million for the fourth quarter 2003. And at year end total debt was 2.155 million, a decrease of 27 million from the end of the third quarter 2003. In spite of somewhat higher capital expenditures, this year we anticipate further debt reductions as we previously indicated. At the end of the year we had $18 million of cash, and 291 million available under our bank credit facility.

Finally, as we commented in our press release, capital expenditures for 2003 were $136 million, and were approximately $61 million in the 2003 fourth quarter. Expenditures for the year were higher than our previous indications due partly to accelerated expenditures on our beverage carton manufacturing initiative. Those expenditures on that $75 million initiative now total to $27 million. Capital expenditures for the current year are estimated at approximately $150 million, and include normal maintenance and placement requirements, further beverage manufacturing initiative spending, and additional manufacturing rationalization expenditures.

To conclude, I would like to repeat the strategies that continue to drive the Company. We're focused on cash flow generation and significant deleveraging opportunities to increase equity value. We strive to improve our leadership position in paperboard packaging, serving both beverage and consumer good companies. Our strong customer base drives stable revenues with significant growth in cross selling opportunities.

The Company has sizable merger synergies and ongoing cost reductions that will add to our cash flows. And we sense real opportunities to leverage legacy Company products and technologies. For instance, we integrated Z-Flute in our Lawrenceburg, Tennessee plant. We have engaged the sales group from the old Graphic organization. And we now have a credible way to get this technology in front of the major prospective customers. And we are already seeing a very rapid acceleration of sales with more to follow. And that is very characteristic of the kinds of cross selling opportunities that we saw in putting these two companies together.

And with that, operator, we're ready to open the line up for questions.

(OPERATOR INSTRUCTIONS) Cynthia Kasner (ph) Credit Suisse First Boston.

Actually it this Kevin Cohen (ph) from CSFB. If you could comment on your outlook for North American beverage and beer markets in 2004 in terms of pricing volume trends, that would be great.

I will put it in two contexts. One is just the normal existing business flow. And as we have said several times, the beer business is basically a steady volume business. But we continue to see growth opportunities by converting out of other packaging substrates such as corrugated into fiber. So we're optimistic that there is some growth opportunity in beer, even though that the market sales will be relatively stable.

Soft drink, I think there is some reason for optimism that volumes will pick up. We're starting to see more of the bottlers start to offer bottled water with paperboard packaging. And that is a net growth opportunity, because currently bottled water for take home is almost exclusively in high coner (ph) and our corrugated trays with a shrink film overwrap. So we're pretty positive about that.

Pricing is done. Almost all of our beverage business is conducted under multiyear agreements, so there is very stable pricing. And as we released last night, the cessation of the lawsuit against Mead and resumption of shipment to Coca-Cola Enterprises locations that will start in April and May, will be a net positive to Graphic Packaging beverage volume for the year.

A couple of other quick questions. The '04 synergy target?

Well I think what we would refer back is to what we have previously disclosed in the S4, that we would achieve about 40 percent of our 52 million in the first full year of the merger which began on August 8th. And then we would get that up to about 75 percent by the end of the second year. And then by the end of the third year, we would be at the full maturity. And then we also indicated that the Garden Grove announcement will produce another $4 million of improvement. And that is accretive to the 52 million. And I think that is where we would like to leave it for now. We are running ahead on both rate and timing. It is something that has a very substantial amount of focus and energy within the management organization.

In terms of debt reduction, one last question. I guess, you guys had noted that the reduction would be sort of similar to the 4Q run rate. So should we infer about 108 million or so?

I think that is a real good extrapolation for '04.

And lastly, any cash pension contributions expected in '04?

None.

Joe Stivaletti with Goldman Sachs.

Just following up there on the -- can you just expand a little bit on the heels of this agreement with Mead and Coke, how much volume you're going to be getting back? And just fill us in a little bit on that?

I really can't be much more expensive than the comment that was in the call where I said that when fully implemented and we begin shipping to all of the locations, we will have recovered well more than half of the volume that was lost.

And I realize that is not as precise a guidance as you would like, but we're bound by confidentiality commitments to keep it at a fairly oblique level.

Just in terms of the -- back on the synergy issue. I know one of the things that you made reference to was selling more CUK board into the old Graphic converting facilities. How has that transfer gone? And similarly, have some of the converting jobs that Riverwood was farming out to other companies have you -- I am just curious how quickly you have been able to deal with the two companies -- have the two companies dealing with each other as opposed to outsiders?

We're running ahead on the timetable that we had established to resource to Riverwood SUS board to replace outside purchases from the old Graphic for their converting plant. So I am very much satisfied there is a lot of focus, a lot of cooperation with customers. And we're running way ahead.

As far as the in sourcing of beverage carton converting that we have traditionally outsourced some of the shorter runs, that won't really start until probably '05. As we have we have acknowledged, when we put the synergy table together and disclosed it in the S4, we were very specific to note that manufacturing rationalization cost and savings were not included in our projections. And we have been working on a very comprehensive review of all of our converting assets from both the legacy Riverwood and legacy Graphic. And the Garden Grove decision is the first output of that analysis looking at how much converting capacity, where it is going to be located, what the mix between web and sheet fed offset gravere (ph) and flexo. And we have already alluded that there's more to come.

And we're going to let that rebalancing and rationalization pretty well run its course before we try to in source the converting. But it is coming in on. And converters that have it know that it is coming in. But we think that it is a better decision to let the smoke clear from our internal restructuring first.

The last question. I just wondered if you could update us. You talked about the international sales. I know that Riverwood on a stand-alone basis you talk about how they have been so successful, or you have been very successful, in Japan and talked about trying to replicate that in some other foreign countries. I wondered if you could update us a little bit on that and where you see that going?

Yes. Our international beverage was actually up year-over-year, total tons. So I think that is the first positive indicator. In Japan the business was pretty sluggish, as beer sales in the local market suffered, but there was no loss of share. We continue to expand the placement of packaging machines and the deployment of our innovative packaging designs in support of continuing to grow our beverage business.

We have chronicled many times the changes that were negative in Brazil that were conjunctive with the merger of Kaiser (ph) -- not Kaiser -- but the creation of AmBev and their going from paperboard to shrink film. But otherwise our beverage business continues to perk right along. So I feel pretty good about that.

Sandy Burns with Deutsche Bank.

On the last call you had mentioned that your machinery backlog was at extremely high levels. I wonder if you can give us an update if that trend has continued or slowed down a little bit?

It continues. It continues. We've got a really robust order book. We've done everything that we can think of to increase our production rates -- run them seven days, adding extra outsourcing. We have a very, very robust order book on machines.

Is it fair to say most of that gets placed in '04, and you start to see the volume lift from that this year as well?

There could be some improvement this year, but I think the general chronicle of the beverage business is, if you to get the machine in before March, they don't make a lot of installations during the peak of the beverage season. So they tend to bring them up after the crest. But it will have some -- we're expecting beverage volumes to be up year-over-year. And I think the question is, does this bode well for '05 and beyond, the answer is yes.

And then also on the cost side of the business, you gave some color on energy. I am just wondering if you could classify all what you expect your virgin fiber cost to look like year-over-year in '04, as well as general pressure on benefits as well?

I think In Time (ph), which is our larger source of virgin fiber, I expect prices to be relatively stable. There is more than adequate supply in the baskets that we draw from. Hardwood, I think we all know is a depleting fiber source, and is very much affected by weather patterns, and whether you can go in and into the stumps and cut and haul.

We have put in place expanded wet storage for hardwood, principally in our West Monroe facility. So we feel like we're in pretty good shape to avoid major -- as we did last year. We have some shock on hardwood pricing, but not nearly the magnitude of many other of our virgin fiber users.

Benefits will be up. I think we're looking at medical increase, something in order of double-digit. And I really see no abatement.

Also, in that vein, in terms of pension, you mentioned earlier that there's no cash contribution. Is there any big change just based on the accruals you need to do, based on the volatility in the market for the last few years?

Not yet.

(OPERATOR INSTRUCTIONS) Nathaniel Lapp (ph) with J.P. Morgan.

I just had a quick question regarding your other expense line in the quarter of 14.5 million. I understand roughly 5 of that was related to the mill and plant closure. What was the rest of that related to?

There were also some costs related to pensions. Pension expense in the quarter was about $8 million, 7 or $8 million. And also we had some other asset write-offs related to the beverage strategy that impacts that number as well.

Going forward in '04, what do you expect for the pension expense?

The pension expense for last year on a combined basis was nearly $30 million. Arguably that should start to go down as the assets in the pension plan get better. But we don't have any guidance as to what that might go down to.

Mr. Curt, there are no further questions at this time. I will now turn call back to you. Please continue with your presentation or closing remarks.

Well, if there are no more questions, I would like to thank everybody for joining in. And we will look forward to our next update. Thank you.

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