Graphic Packaging Holding Co (GPK) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Graphic Packaging Corporation conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded, Thursday, May 6th, 2004. I would now like to turn the conference over to Bruce Kirk, Graphic Packaging Corporation. Please go ahead, sir.

Thank you. Welcome to the Graphic Packaging Corporation conference call to review our earnings report for the first quarter of 2004. Steve Humphrey, Chief Executive Officer, will discuss our strategies and achievements for the period. John Baldwin, Chief Financial Officer, will review the financial report for the period. Following their comments, Stephen and John will be pleased to answer your questions. David Scheible, Executive Vice President of Commercial Operations, is with us and will participate in the question-and-answer session.

I would remind you that statements made in the course of this conference call that are not historic financial results are forward-looking statements as defined in Sec 21-E 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 or furnished to the Securities and Exchange Commission, including our Form 10-K report. 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'd like to begin my comments today by focusing first on the major factors that impacted our first-quarter results, followed by a summary of recent progress on our key business strategies.

Our reported 6 percent total sales advance for the quarter was led by our domestic food and consumer product carton business, or our non- beverage general-purpose folding carton segments, where we posted a 9 percent sales gain for the quarter.

We gained new business with Band-Aids during the fourth quarter of 2003, and also during the recent quarter. Operating results for these segments advance more than 30 percent due to impressive cost reduction, improved productivity, reduced waste, and overhead reductions.

Our food and consumer carton business has benefited from certain customer promotional activity, including that by Kraft and General Mills. In addition, Kellogg has launched its Pop Tarts product in a Z-Flute carton. A Quaker Oats product is in the market in a Z-Flute carton. Sare Lee has introduced a new carton for the Atkins Diet promotion. And our new barrier-coated packaging products have been introduced by Celestial Tea and for single-serve packets for Quaker oatmeal. And new microwave offerings of Hot Pockets are also in the market. A relatively small, but nice, milestone in the quarter was our first microwave product, Micro Right (ph), product shipments to Asia.

A number of our innovative cartons received awards at the recent annual National Paperboard Packaging Competition. Awards in the beverage carrier category included three for our innovative, patented Fridge Vendor® carton for Pepsi, Dr Pepper, 7 Up, and Ocean Spray cartons. The Company has also received awards for cartons supplied to Kellogg, Procter & Gamble, General Mills, Schwann's, and Scott's Miracle Grow.

Beverage carton sales in the North American segment were down 1 percent. This decline was offset by higher sales in Australia, Central and South America areas. We have noted that in recent reports issued by some industry analysts, and some of the larger bottles indicate that North American beer industry unit volumes were up about 1 percent for the quarter, and carbonated soft drink volumes were up approximately 2 percent. These reports suggest a more positive overall beverage market as compared to what was reported throughout last year.

Our unit volumes for the recent quarter were approximately in line with the indicated industry trends. The combination of lower price realization and mix changes reduced earnings for this business segment. We noted in our press release that the two new Flexo Presses (ph) being installed at our expanded Perry, Georgia carton plant moved into startup during March and April. The press de-gluer (ph) systems are operating well on both of these units. The gluer depalletizing systems are in the process of being optimized. Overall, the capital program in these installations are on track.

As we commented in our last conference call, recovery of a portion of the carton volume that was lost in 2003, due to the nonrenewal of a contract, was expected to start in April of 2004 in the current month. We are now seeing the start of this recovery.

Earnings in our other businesses taken together were relatively unchanged in the 2004 first quarter as compared to that of a year ago. Relatively small earnings gains for Europe and other commercial operations were offset by small declines in open market board and containerboard areas.

Our earnings release identified two larger specific factors in other expense that impacted our results for the quarter. We also noted the accelerated depreciation accrual on equipment at plants that will be closed. The total of these items is approximately equal to the loss per share that was reported during the quarter.

Our key financial strategy is to reduce our debt. Our outstanding debt moved up in the past quarter due to the timing of interest payments which took a place in February, and our fixed rate notes on our relatively-high capital expenditures. Following the February interest payment, our debt level moved down in March. More than half of our $45 million capital expenditures during the past quarter were expenditures in our beverage manufacturing initiative. The 26 million spent on this initiative during the quarter brings the total up to 53 million, or more than two-thirds of the intended $75 million of capital associated with this program. In spite of the debt increase for the first quarter, we have not changed our expectation to reduce our debt by $100 million during 2004.

In the first quarter, we achieved more than $10 million of synergies arising out of the merger. This is equivalent of approximately a $40 million annual run rate. As previously disclosed, we had expected that the synergy achievement for the first year following the merger would be 17.6 million, and the second full year would reach 41. We are currently at an achievement rate that approximate our second-year goal.

We have added $19 million to our synergy expectations. The previously-announced closing of the Garden Growth plant is expected to add $4 million, and the two plants to be closed that were announced this morning will add another 15 million. These additional synergies, improved cost structures and increase productivity, are expected to evolve over the 2004 through 2006 period.

During the quarter we generated approximately $6 million in Six Sigma and other continuous improvement projects. Last year, we achieved about $31 million of cost reductions, and we are on track to achieve savings this year approximately of the same magnitude.

Integration of coated board volume that was previously purchased from a competitor, more than 50,000 tons annually, is advancing. During the recent quarter, we have reduced these purchases to an approximately 20,000-ton annual run rate. The Company's coated board volume has also moved up by more than 10,000 tons as a result of converting cartons that used to be on SBS or coated recycle, to those using our CUK coated paperboard.

Additionally, coated board volume has benefited from our cross-selling of Z-Flute products, cross-selling in international markets, and increased contractional coated board sales. Taken together, higher coated board volumes enable our mills to operate more effectively and reduces our liner board production.

And now, John Baldwin will review our financial performance for the quarter.

Thanks, Steve, good morning. As many of you already know, Riverwood Holding and Graphic Packaging International merged in August of last year. And the merger was accounted for as a purchase, so our comparative income accounts for the first quarter, as reported, reflect only Riverwood's results for the 2003 quarter, while the financial statements for the recent quarter are those for the combined company.

In order to provide you, hopefully, some clarity, we have included both in our fourth-quarter press release three months ago as well as in this quarter's earnings report, the operating results for the combined companies is on a pro forma basis for the individual quarters of 2003. These statements assume the merger occurred at the beginning of each period reported, and they are also available on our website and in our SEC 8-K filing for the 2003 fourth quarter.

Accordingly, most of my comments today are going to reflect comparisons of the actual first quarter 2004 to those for the 2003 quarter on a pro forma basis, because we think that is somewhat more meaningful. The Company, therefore, reported a loss of $12.4 million or $0.06 per share for the 2003 first quarter, as compared to a loss of $0.04 per share on a pro forma basis for the 2003 quarter.

First quarter 2004 sales were 576 million, up $33 million or 6 percent, as Steve said, as compared to pro forma net sales of $543 million in the 2003 first quarter.

Favorable foreign currency exchange rates made a positive contribution of $15.3 million to our sales versus that of last year for the most recent quarter. And our total international sales now are at a $98 million rate for the quarter, which is 17 percent of the Company's total sales.

Sales to the North American beverage markets were down 1 percent as compared to the 2003 quarter due to changes in pricing and mix. And carton sales to food and consumer product customers in North America were up 9 percent as a result of volume gains. Gross margin for the 2004 first quarter was $89 million, or 15.5 percent of sales, as compared to a gross margin on a pro forma basis for 2003 of 85.4 million, or 15.7 percent of sales.

SG&A expense was $50.6 million in the quarter, 8.8 percent of sales, as compared to 49.2 or 9 percent of sales in the 2003 first quarter on a pro forma basis. Income from operations for the 2004 first quarter was 27 million, or 4.6 percent of sales, as compared to the 2003 first quarter on a pro forma income from operations, which was $28 million or 5.2 percent of sales.

Other expense amounted to 11.7 million for the 2004 first quarter, and includes a charge of approximately $3 million related to asset retirements and disposals, about half of which was related to the closing of our Kennesaw, Georgia plant. Other expense also includes amortization of intangibles, including non-compete agreements, customer relationships and patents, which amounted to $7.4 million and results from the purchase accounting adjustments we made in connection with the merger. Much of the amortization is for short lived intangibles, so we will see the $7.5 million decline to roughly $2.5 million by this year's fourth quarter.

Pricing in North American beverage markets was down, and in food and consumer product cartons markets was relatively unchanged. Containerboard earnings were off $2 million due to continued low pricing. Energy costs at our mills were up approximately $3 million as compared to the 2003 first quarter on a pro forma basis. The $3 million energy cost increase in the first quarter is slightly less than the $5 million increase that we experienced in the 2003 final quarter, however. We continue to hedge a portion of our natural gas requirements by contracts that extend out through much of the remainder of 2004.

Fiber costs at our U.S. mills were up approximately $2 million in the 2004 first quarter as compared to the 2003 first quarter on a pro forma basis. The increase in the recent quarter was approximately equal to that which we reported for the 2003 fourth quarter.

Depreciation and amortization expense was 57.5 million for the first quarter as compared to 52.9 million on a pro forma basis for the 2003 quarter. As we noted in our press release, our depreciation and amortization expense for this year is now estimated at between 220 and $230 million as compared to the earlier estimate that we had provided you of 210 to 220 million. The increase is the result of shortened useful lives for equipment at the plants that we announced yesterday that would be closed.

Capital expenditures for the 2004 first quarter were $45 million. Approximately 25 million of that amount was spent on our beverage carton manufacturing initiative, bringing the total on this initiative to approximately 53 million, about two-thirds of the expected 75 million that we were planning on spending on the beverage manufacturing strategy. We still expect total capital expenditures for this year to be approximately $150 million, as we previously disclosed.

EBITDA for the 2004 first quarter was $84 million, or 14.6 percent of sales, as compared to $81 million or 14.9 percent of sales in the first 2003 quarter. Credit agreement EBITDA was $96 million as compared to $88 million in the 2003 quarter. Non-cash adjustments that reconcile the difference between the EBITDA and credit agreement EBITDA are primarily pension and OPEB expenses, which were nearly 7 million in the quarter, as well as the charges which we mentioned already related to that retirement of mill assets at the $3 million level.

Finally, just to reintegrate a point that Steve made, at the end of the first quarter, our total debt was 2.219 billion, which was an increase of $64 million from the 2003 year-end debt level, which had been 2.155 billion. The debt increase results from timing factors specifically related to the higher working capital associated with our increased sales, interest payments on our fixed-rate debt, which are made semi-annually rather than quarterly, as well as the high level of capital expenditures during the first quarter.

Total cash expense on interest in the first quarter was $57 million, and that, coupled with the capital expenditures of $45 million, drove the increase in debt. In spite of the increase, we do expect to see debt reduction during this year of approximately the $100 million that Steve had mentioned and that we had previously indicated.

Just to wrap up, at the end of the first quarter, we had $10.5 million of cash, and also $231 million available under our bank credit facility. Steve?

I would like to summarize a few important points. Synergies arising from the merger are ahead of earlier-announced expectations. Continued strong execution on continuous improvement and other cost reduction activities are expected to generate savings comparable to what was achieved last year.

Coated paperboard volume is benefiting from our conversion of volume previously purchased of competitors and conversion of cartons from other grades. Our business with Coca-Cola Enterprises is now starting to ramp up. And strong growth in the microwave and ready-to-eat categories continues. And with that, operator, we will open the line for the Q&A session.

(OPERATOR INSTRUCTIONS). Joe Stivaletti of Goldman Sachs.

Hi, good morning. I just wanted to -- on the synergy front, you are saying here in your 10-Q, that by the end of the first quarter, you were at a run rate of about 43 million, which is obviously a huge amount of progress toward 52 million. I wondered, away from the plant closures and that additional 19 million, is that 52 million number something that you are going to be looking to revise upward as you've gotten in and gotten to work with these assets and look at things more closely?

Well, the answer is yes, but there's a "but." If you'll recall in the S4, when we disclosed the 51.6, we said there would be additional contributions for things cross-selling and manufacturing rationalization, which would take some time to materialize. And now, with the two additional plant closures that were announced yesterday, we've added $19 million to the total, just from manufacturing rationalization. We have yet to provide any guidance on the cross-selling, because that is still a work-in-process. When you get back to the core 51.6, our first focus is to get it sooner, and we are well ahead on that. A lot of the purchasing synergies are coming in sooner than what we had originally expected. The conversion from previously-purchased board to internally manufactured board is running ahead of schedule. So that is good news.

We are not ready yet to provide renewed guidance on total synergies. But I would reiterate what we have said since day one, this is a really high priority, and I'm very, very pleased with the progress that we're making, both integrating the two organizations, but also in generating the synergies that we had identified.

Okay. Great. And the other thing I was wondering about, one of the presentations you made a few months back, you talked about some initial work in providing multiple packs for beverages in the bottled water area as a new area that you were very optimistic about. I wondered if you had any update on how that is going?

Yes. It is going very well. I can't give you specific information, because that's customer proprietary, but I think it is well-chronicled in the beverage world that the two major national brands -- Coke with Dasani, and Pepsi with Aquafina -- are beginning to show combinations, multi-packs in the market that are paperboard. And there's a number of machines that are on order and shipments have already begun.

Time will tell. You know, initially you get the lift as they fill the supply chain, but the sales take-away data seems to be very good that a category that has already enjoyed strong growth is seeing incremental growth when paperboard is introduced to the local markets. I am very, very hopeful and optimistic that this will be the source of meaningful new paperboard demand through time.

Was that material to your volume in the first quarter, or not yet?

No. Remember, it's starting from zero, so going to take a while.

Right. Right. Okay.

Bill Hoffmann of UBS.

Good morning. Steve, I wondered if you could talk a little bit about international markets in a little more detail? Just try to give us a sense on what kind of volume growth opportunities you are seeing at this point? And then the second part was, you also mentioned some of these cross-selling opportunities. I just wonder if you could give us a little more detail on what kinds of opportunities you are seeing? And also if you are missing opportunities by not having a broader product offering?

Okay. I'm going to turn it over to David Siebel, because he's back from trips to Europe and Japan. So it's all fresh with him.

Well, the Asian market, I would say overall, actually has been a pretty stable market for us over time, and our expectations for this year are pretty consistent. Europe is a market that is in change, much like ours here. There is change by country. The German deposit legislation has changed a little bit the multi-pack, because of the way that you now have to reclaim for your recycled goods in Germany. But overall, our European volume has increased, both in terms of units and as well as our open board sales. Because, you know, in Europe, we sell to other folks that make beverage cartons as well.

I think the positive we're seeing in Europe is some of the upside potential for some of the cross-selling opportunities Steve mentioned, some new product launches. He mentioned a microwave product launch in Asia, but also two new products for lasagna and pizza were launched in Europe this year. We have some customers in this country who are expanding their product offerings into Europe, specifically in handhelds and pizzas. And our Micro Right, or microwave technology, is the technology specified. So we expect to see some growth in that sector as well.

Bill, I wanted to get a little bit more clarification, if you would, on the question about breadth of product line. Is there something specifically that you note that is missing?

No, I just really am curious -- as you look at your business model right now and the growth opportunities -- clearly, you have a lot of penetration opportunities, but I'm just wondering if you guys are thinking that, as you go forward, you would like to have other capabilities to offer to customers?

I guess the answer to that is certainly yes, through time. Both the Legacy Graphic and Riverwood were carton and substrate innovators. We would like to believe that when you put the two product offerings together, we've got the broadest and deepest set of capabilities, from extrusions to laminations -- you name it, we've got it.

Right.

And the answer is, we see lots of opportunities to cross-sell. And one of my favorite examples is Z-Flute. There was a nifty idea that we created at Riverwood to give us a way to go after and compete for applications that are principally litho-lam. But we just didn't have the standing with the target customers. And now that we've got the companies merged, and we've got a sales organization and reputation with the non-beverage consumer companies that are the target market, our sales are up smartly. And we'll continue to accelerate.

Yes, it looks like it is clear that that's working.

It is working. It was a great idea, it's just Riverwood did not have the means to execute on its own.

Right. Great. Thanks.

Christopher Miller of J.P. Morgan.

Good morning. Just wanted to follow up on a couple of things. First, in the containerboard market, kind of what you are seeing right now, and what you see going out over the next quarter in terms of pricing in containerboard?

Okay. Pricing moved down in the first quarter, and now the increases are starting to take hold. And we expect our prices to move up throughout the remainder of the year. We have been working to change our mix. As we have said ever since day one at Riverwood, the sooner we stop making and selling brown linerboard, the happier I'd be. And we will largely accomplish that this year.

We did introduce a couple of more value-added containerboard grades, both post-print and pre-print products. Pre-print, really for Litho-lam and post-print for the vegetable markets. And the growth in that product line has been very strong. And it provides pretty good realizations for us. So, container is an area that, as we have said all long, we are basically going to mix our way down in that business. We will continue to have a Bagcraft (ph) machine, and that's all it will ever be, of some 40,000 tons of capacity. And we've got a corrugated-media machine that is about 150,000 tons of capacity. And those are kind of embedded in our West Monroe complex, and as long as they make a positive contribution, we will keep running them.

There are some possibilities to use product from each of those machines internally, in non-containerboard applications. And as you would expect, that is a fairly high priority for us. We are working through some engineering and technical qualifications, but that would be a nice win resulting from the merger as well.

Okay. And then on the closing of the two facilities being consolidated -- is there any cash charge associated with those closings? And if so, when would we expect that would show up?

I will let John Baldwin comment.

No, we will obviously receive some proceeds when we sell the building and land associated with those closures. But that's going to be largely offset, and hopefully the timing will work out as well, with severance payments made to employees. So I would assume no ups or downs in cash related to those.

What -- just a sense of magnitude of what you expect to realize from the sale of the land and buildings?

No, because, I mean, the markets are all different, so I'd rather not go there.

Okay. And then just a technical issue on the increased D&A that you are moving up associated with that. Would we expect to return, kind of, an '05 -- call it a more normalized level of D&A at that point?

Yes, mostly the increased D&A is running about $1 million a month for shortening up the lives. So when we get into early '05, that will fall away as well.

Okay. Great. Thanks so much. Appreciate it.

Tim Burns (ph), Cranial (ph) Capital.

Steve, I had a question that maybe Dave Scheible could chip in too. The systems group of the old Riverwood, which was renowned for the application use of paperboard and kind of high-speed, demanding, close comfort environments in the beverage world. Can it be utilized with some of the traditional folding carton customers --

Absolutely.

Any progress there?

Yes. Yes, there has been some progress, Tim. Again, as Steve said, we're not going to talk about individual customers activities, but I will tell you that we are, in fact, building machines for different applications other then beverage multi-pack, trading on Legacy Graphic relations, and as you aptly put, Legacy Riverwood expertise in machinery.

You can go through club stores and supermarkets as we speak, and find non-beverage applications that are country cousins of Legacy Riverwood beverage cartons. And in those cases, those cartons are being filled on Graphic Packaging machines.

Got you. So when I find one, I can call you and ask you if that's it?

You got it.

There could be 48 items in my grocery cart, so be careful.

Well, you're going to make some chain very happy.

The other question I had was, it sounds like there has been a spurt of new products or conversion of products that were trying to come your way with the Kellogg’s, Quaker Oats, Celestial Tea. The single-serving I'd didn't quite get. What was that particular product?

That is the oatmeal pouches, the instant oatmeal pouches.

Got you. Is there anything we can do to the traditional folding carton or coated paper wrap to make them even more friendly and convenient? I'll tell you what I'm thinking, the other day I bought a pack of wipes -- not that I need wipes, but I bought them anyhow, these wet wipes, you now. It came in like a flexible box, but it had he rigid opening, which replaced kind of like that tape re-seal type thing. I thought it was an interesting application of a convenience feature that somebody, obviously, has been dying for. I'm just wondering if there are carton sales being lost where incremental features could be added to convert?

Sure. Our energy is largely around function, so we've got a lot of things that are opening-feature, that I would call consumer-centric. And you will see permutations of our Fridge Vendor® 2X6, our patented design manifest itself in a host of club store vending type applications. Very shortly, you'll see twin stack, our 12 over 12 beverage carton in non-beverage applications with a unique dispensing feature that will make it a retail point-of-sale display. We've already done that in the U.K. It was wildly successful. And we've taken a good idea and introduced it here to the North American consumer goods companies.

Great.

And then functionality, things like barrier protection, the Miracle Grow example.

And microwave, some of the things we are working on now, Tim, is -- right now, as a consumer, you have to make a determination when you buy a product, are you going to make it ovenable or microwavable, because the packages are different. But, Graphic Packaging has got some new technology we are introducing to the marketplace that will allow you to have the package -- the product be microwaved or ovened in the same package, which creates some different convenience items in it, and it allows some foods that typically have not been microwaved, or in microwave cartons, in that design.

So, Steve alluded to some of the cross-selling activities. We have a monthly new product development team meeting that is global, that we dial into all these individual consumer options and manage it right through a development process. So I think we're pretty optimistic about improving the functionality and convenience of products in paperboard.

Interesting. Last question, Steve, the hot thing in beverage cans these days are these smaller-than-normal cans, 8-ounce, 10-ounce, whatever. It this good or bad? From my standpoint, it's good because I've got three young boys with a lot of testosterone, and 12 ounces of Coke is too much, you know? And then there's a lot of cleanup after. Eight ounces, I can get by with. And I saw yesterday that Molsen's is coming out with a new product in kind of a 10-ounce shooter. Are these good for your mix? And is it good for business?

Well, it is kind of a yes and no. They don't consume as many square inches of board per-unit. So, it may be on that side, it's a little bit of a downer. On the other hand, if it energizes the total sales of the category, of carbonated soft drinks, that is a good thing.

Got you. Well, thanks a lot, and good luck the rest of the year.

(OPERATOR INSTRUCTIONS) Mr. Kirk, there are no further questions at this time. I'll turn the call back to you. Please continue with your presentation or closing remarks.

We would like to thank everybody for joining in on the call, and we'll look forward to next quarter. Thank you. That's it.

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