Greif Executive Insights: Rigid and Flexible Volume Trajectory, Low Volume

On Thursday, Greif, Inc. Class A (NYSE:GEF) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Rigid and Flexible Volume Trajectory:

Matt Woolley – Robert W. Baird: It’s Matt Woolley sitting in for Ghansham. I was hoping you could walk us through the volume trajectory for both Rigid and Flexible throughout the quarter, and in particular, is the volume weakness in Europe broad-based or is it specific to certain product lines?

David B. Fischer – President and CEO: We anticipated volumes would be a key portion of this conversation, so I’ll try to walk you through what I consider a very wide mixed bag of volume indicators around the world in an orderly fashion. So, Rob covered some of the numbers in aggregated form and I’ll try to offer some color commentary. On a macro basis, only our Paper business in Asia-Pacific are up sequentially quarter-over-quarter for this year and for 2012 year-to-date versus 2011. The rest of the businesses remain below levels seen both quarterly, sequentially year-to-date from 2011. However, we’ve experienced some slightly stronger volumes in comparison of Q1 versus Q2 both in North America and Europe excluding our Flexible business which has remained relatively flat and I’ll come back to the numbers in just a second. Latin America is probably the one area that’s declined sequentially quarter-over-quarter in 2012 reflecting tougher economic conditions within the region as well as and entering of the low season within the region. Sequentially, if you look at our business from Q2 versus Q1 this year, North America Rigid has increased a bit more than we expected. It varies region by region across the country more than what we had anticipated, but they generally fall in the 10% to 15% range for Q2 versus Q1 which again was a bit more than we had expected. For Europe, it’s almost similar story to North America with the quarter, or the second quarter over Q1 increased in the low double digits to high single digits range, stay in the 8 to 12 range. Again, wide variation depending on the region of the continent and I’ll mention Russia as a particular interesting market these days which has shown quite a bit of strength within the region, especially relative to Western Europe. In Latin America, the volumes quarter-over-quarter have declined in the low single digit range. As I mentioned earlier, we’re still down, the high single digits versus 2011 year-to-date so no sign of firming or recovering in Latin America just yet. In Asia, we’re up high single digits to low double digits; Q2 over Q1 for 2012 and again it’s our only area of the Rigid business, which is up both sequentially for quarter-over-quarter this year as well as up 2012 year-to-date over 2011. If you take a look around the world and try to get a handle on what’s happening in the recent days or even recent weeks, I would tell you that the watchword out of Europe or the watchwords coming out of Europe are restructuring and caution. oftenly mentioned and we hear those from a wide base of our European customers especially in the chemical industry. We’ve also noticed a slowdown in customer shipments from China into Western Europe, probably a reflection of the concern of the macroeconomic conditions in Western Europe. In North America and in Europe, probably the most interesting of the main markets that get the most press in recent weeks and days, we continue to see firming in North America in both in Paper business and in our Rigid Industrial Packaging business in recent days and weeks. To our bit of a surprise better-than-expected pickup in our own Western Europe businesses in recent days to weeks excluding again our Flexible business which has remained relatively flat.

Matt Woolley – Robert W. Baird: For a follow-up, after another quarter of solid free cash flow generation, could you just remind us of your priorities for free cash flow allocation after obviously the dividend pay?

Robert M. McNutt – SVP and CFO: This is Rob. In terms of free cash flow allocation we’ve got a long history of the dividend and clearly that’s the important component of it. Capital spending to maintain facilities under our current structure we believe is in the $85 million to $90 million range and that’s certainly a priority. We’ve said that we’ll spend $130 million this year on CapEx we’re looking at some projects towards the latter part of the year potentially that are quick payback, high return whether we do them late this year or early next year may move that number around a little bit. Then debt pay down obviously is key component as you see reflected in what we’ve done with cash thus far.

Low Volumes:

Phil Gresh – JPMorgan Chase and Company: Just wanted to follow-up on the volume trends and as you look at your revised guidance, what are you assuming for volumes in the Rigid business in the back half and is it basically in sync with the run rate that you’re seeing exiting the second quarter and entering into the third quarter?

Robert M. McNutt – SVP and CFO: As we look forward, the market conditions that David described in terms of continuing to firm although at a slower rate probably than we anticipated earlier in the year in Europe and continued solid performance in North America as we mentioned. As David mentioned, Asia-Pacific has been a bright spot for us in volumes and we continue to see – expect for the balance of the year that we’ll continue to see year-over-year improvement there and Latin America continuing to be somewhat soft, but not materially different from what we’ve been seeing here in recent months.

Phil Gresh – JPMorgan Chase and Company: I mean at what point if you just kind of run rate the progress that you have been making here, what point do you turn positive on volumes in Rigid?

Robert M. McNutt – SVP and CFO: We have to gain back globally about another 5% if you are talking about a year-over-year type number to go positive year-over-year on a same structure basis.

Phil Gresh – JPMorgan Chase and Company: I guess let me just ask my question in a different way, because it seems like – I’m not sure about this, so it seems like the volumes might still be down a little bit as we progress through the back half and currency is a negative. So, if I look at the second half earnings from last year and the first half of this year, and (adjust) all those up, that’s something in kind of the mid to high $400 million range on EBITDA and it seems like volumes might be down and currency is a headwind. So, I guess I’m wondering what the offsetting positives are that would get it to the $500 million to $525 million or just correct me if I’m missing something in the volumes there.

Robert M. McNutt – SVP and CFO: Sure. I think as you may recall from David’s comments that last year we started to see weakening in Europe in the third quarter in terms of volumes and we talked about that on our third quarter call and our fourth quarter call, and so expect that as we’ve seen some improvement in volumes here in the recent months and sequentially quarter-over-quarter, we certainly got a year-over-year easier comp in the back half of the year than we did in the first half of the year, and so that one component of it. The other pieces that fall into line there and you’re exactly right on currency and I am sure you’ve got a better forecast on currencies than we do, during the month of May, we saw a significant deterioration in the euro, and just to put that into perspective, it’s about $1.2 million of operating profit for every $0.01 decline in the euro for us. So, if you run that math and depending on what’s your forecast on the euro is you come to that conclusion. The other pieces that you’ve got to continue to look at is you look at the cost structure and the work that David pointed out that our team in Europe has done to substantially improve the cost structure year-over-year. Those guys who have taken a lot of cost out of the structure and so I think that operating performance, we’ll continue to see better operating performance relatively in terms of the income and cash flow performance versus the volume performance continuing to be a little softer. So, I think it put all those together and that’s where we are comfortable at this point with the $500 million to $525 million. Now again, if the euro continues to stay in this $1.24 range, that adjusts accordingly.

Phil Gresh – JPMorgan Chase and Company: Just a follow-up question is with your Flexible business, obviously the margins got a little bit worse there quarter-over-quarter, even I mean actually in the special items. So how are you thinking about that margin target that you have out there for 2015 at this stage? I mean, does the volume challenges makes you rethink that at all?

Robert M. McNutt – SVP and CFO: It makes us look at it all the time. I don’t know about rethinking or move off of it just yet. We remain committed to the 15% margin. We need to pick up sales and volumes over the next couple of years to the tune of around $200 million, $250 million over I guess the 36 month period to get to that type of level. Also recognize that, during this time period, when we are having startup costs for new capacities coming on, both Saudi hub getting ready to fire up over the coming months as well as our shipping sack business. They’ve also put a drag on margins particularly when we are also at the same time consolidating the heritage network and still integrating four companies into one in Western Europe.