Jun 03, 2005. /Lesprom Network/. Greif, Inc. (NYSE:GEF)(NYSE:GEF.B), a global leader in industrial packaging with niche businesses in paper, corrugated packaging and timber, today announced results for its second quarter ended April 30, 2005. Net income before restructuring charges, debt extinguishment charge and timberland gains (special items) was $23.9 million for the second quarter of 2005 compared with $16.0 million for the second quarter of last year. Diluted earnings per share before special items were $0.81 versus $0.56 per Class A share and $1.25 versus $0.85 per Class B share for the second quarter of 2005 and 2004, respectively. The Company reported GAAP net income of $16.8 million, or $0.57 per diluted Class A share and $0.88 per diluted Class B share, for the second quarter of 2005 versus $8.4 million, or $0.30 per diluted Class A share and $0.45 per diluted Class B share, for the same quarter last year. The Company's second quarter 2005 results were positively impacted by a higher gross profit ($8.7 million increase), a lower level of restructuring charges ($1.7 million decrease) and higher timberland gains ($2.0 million increase) compared to the second quarter of 2004. These positive impacts were partially offset by a debt extinguishment charge ($2.8 million) in the second quarter of 2005. Michael J. Gasser, chairman and chief executive officer, said, "Operating results for the second quarter of 2005 are in line with our expectations, despite continued competitive pressures and higher input costs. During fiscal 2005, the Greif Business System, which is the way we do business, will continue to benefit our operations as we strive to sustain the positive results already achieved and look for new opportunities to further enhance shareholder value." A reconciliation of the differences between all non-GAAP financial measures disclosed in this release with the most directly comparable GAAP financial measures is included in the financial schedules that are a part of this release. Consolidated Results Net sales rose 13% (10% excluding the impact of foreign currency translation) to $613.0 million for the second quarter of 2005 from $542.2 million for the same quarter of 2004. The net sales improvement was attributable to the Industrial Packaging & Services segment ($58.7 million increase) and the Paper, Packaging & Services segment ($12.0 million increase). Higher selling prices, primarily in response to increased costs of steel and resin, drove this improvement. Gross profit was $97.9 million, or 16.0% of net sales, for the second quarter of 2005 versus $89.3 million, or 16.5% of net sales, for the second quarter of 2004. The deterioration in gross profit margin compared to a year ago was principally due to generally lower sales volumes and higher raw material costs, partially offset by improved selling prices and labor and other manufacturing efficiencies related to the ongoing transformation initiatives. See "Transformation to the Greif Business System" below. Selling, general and administrative (SG&A) expenses were $56.1 million, or 9.1% of net sales, for the second quarter of 2005 compared to $55.7 million, or 10.3% of net sales, for the same period a year ago. While certain SG&A expenses, such as employee benefits and professional fees, primarily related to compliance matters regarding Section 404 of the Sarbanes- Oxley Act of 2002, were higher on a quarter-over-quarter comparison, certain other SG&A expenses were reduced compared to the second quarter of 2004. Operating profit before restructuring charges and timberland gains increased 28% to $42.7 million for the second quarter of 2005 compared with $33.3 million for the second quarter of 2004. This increase was primarily attributable to the Paper, Packaging & Services segment ($7.9 million increase) and the Industrial Packaging & Services segment ($1.7 million increase), partially offset by the Timber segment ($0.2 million decrease). There were $10.6 million and $12.3 million of restructuring charges and $3.4 million and $1.4 million of timberland gains during the second quarter of 2005 and 2004, respectively. GAAP operating profit was $35.4 million for the second quarter of 2005 compared with $22.4 million for the same period last year. Business Group Results Industrial Packaging & Services In the Industrial Packaging & Services segment, the Company offers a comprehensive line of industrial packaging products, such as steel, fibre and plastic drums, intermediate bulk containers, closure systems for industrial packaging products and polycarbonate water bottles throughout the world. The key factors influencing profitability in the second quarter of 2005 compared to the second quarter of 2004 in the Industrial Packaging & Services segment were: - Higher selling prices; - Generally lower sales volumes for steel and fibre drums; - Benefits from transformation initiatives; - Higher raw material costs, especially steel and resin; - Lower restructuring charges; and - Impact of foreign currency translation. In this segment, net sales rose 15% (11% excluding the impact of foreign currency translation) to $458.4 million for the second quarter of 2005 from $399.7 million for the same period last year. Selling prices rose primarily in response to higher raw material costs, especially steel and resin, compared to the same quarter last year. However, sales volumes were generally lower for steel and fibre drums. Operating profit before restructuring charges rose to $29.4 million for the second quarter of 2005 from $27.8 million for the same period a year ago. Restructuring charges were $8.8 million for the second quarter of 2005 compared with $9.5 million a year ago. The Industrial Packaging & Services segment's gross profit margin declined to 15.6% in the second quarter of 2005 versus 17.8% in the second quarter of 2004 due to generally lower sales volumes and higher raw material costs, partially offset by improved selling prices and labor and other manufacturing efficiencies related to the transformation initiatives. GAAP operating profit was $20.6 million for the second quarter of 2005 compared with $18.2 million for the second quarter of 2004. Paper, Packaging & Services In the Paper, Packaging & Services segment, the Company sells containerboard, corrugated sheets and other corrugated products and multiwall bags in North America. The key factors influencing profitability in the second quarter of 2005 compared to the second quarter of 2004 in the Paper, Packaging & Services segment were: - Higher selling prices; - Generally lower sales volumes for containerboard, corrugated sheets and corrugated containers; and - Lower restructuring charges. In this segment, net sales rose 9% to $150.0 million for the second quarter of 2005 from $138.0 million for the same period last year due to improved selling prices for this segment's products. Sales volumes for containerboard, corrugated sheets and corrugated containers were down on a quarter-over-quarter comparison. Operating profit before restructuring charges was $10.4 million for the second quarter of 2005 compared with $2.4 million the prior year. Restructuring charges were $1.8 million for the second quarter of 2005 versus $2.7 million a year ago. The increase in operating profit before restructuring charges was primarily due to improved selling prices, partially offset by generally lower sales volumes and higher transportation and energy costs in the containerboard operations. GAAP operating profit was $8.6 million for the second quarter of 2005 compared with a loss of $0.2 million for the second quarter of 2004. Timber As of April 30, 2005, the Company owned approximately 281,000 acres of timber properties in southeastern United States, which were actively harvested and regenerated, and approximately 35,000 acres in Canada. The key factors influencing profitability in the second quarter of 2005 compared to the second quarter of 2004 in the Timber segment were: - Consistent level of timber sales; and - Higher gain on sale of timberland. Timber net sales were $4.5 million for the second quarter of 2005 and 2004. Operating profit before restructuring charges and timberland gains was $2.9 million for the second quarter of 2005 compared to $3.1 million a year ago. Restructuring charges were insignificant for the second quarter in both years. Timberland gains were $3.4 million for the second quarter of 2005 and $1.4 million for the same quarter last year. GAAP operating profit was $6.2 million for the second quarter of 2005 compared with $4.4 million for the second quarter of 2004. As previously reported, in May 2005, the Company completed the first phase of the sale of 56,000 acres of timberland, timber and associated assets for $90 million. In this first phase, 35,000 acres of the Company's timberland holdings in Florida, Georgia and Alabama were sold for approximately $51 million in the third quarter of 2005. The second phase of this transaction is expected to occur in several installments during the Company's 2006 fiscal year. The Company will recognize significant timberland gains in its consolidated statements of income in the periods that these transactions occur. Transformation to the Greif Business System The Company's transformation to the Greif Business System continues to enhance long-term organic sales growth, generate productivity improvements and achieve permanent cost reductions. The transformation, which began in fiscal 2003, delivered annualized benefits of approximately $80 million through the end of fiscal 2004. Additional annualized benefits of approximately $35 million are expected during fiscal 2005. The opportunities continue to include, but are not limited to, improved labor productivity, material yield and other manufacturing efficiencies, coupled with further footprint consolidation. In addition, the Company has launched a strategic sourcing initiative to more effectively leverage its global spend and lay the foundation for a world-class sourcing and supply chain capability. In the second quarter of 2005, the Company recorded restructuring charges of $6.8 million related to transformation activities begun prior to October 31, 2004. These restructuring charges totaled $14.0 million for the first half of 2005. Management is pleased with the progress of the transformation initiatives to-date and is continuing to evaluate future rationalization options based on that progress. In the second quarter of 2005, the Company also recorded $3.8 million of restructuring charges related to the impairment of two facilities, currently held for sale, that were closed during previous restructuring programs. Financing Arrangements Total debt outstanding was $490 million at April 30, 2005 compared to $469 million at October 31, 2004 and $644 million at April 30, 2004. Total debt to total capitalization was 42.1% at April 30, 2005 compared to 42.7% at October 31, 2004 and 52.5% at April 30, 2004. Interest expense was $10.7 million for the second quarter of 2005 and 2004. Lower average debt outstanding was offset by higher interest rates during the second quarter of 2005 compared to the second quarter of 2004. During the second quarter of 2005, the Company entered into a new revolving credit facility to improve pricing and financial flexibility. As a result, the Company recorded a $2.8 million debt extinguishment charge. Capital Expenditures Capital expenditures were $16.2 million, excluding timberland purchases of $1.3 million, for the second quarter of 2005 compared with capital expenditures of $16.3 million, excluding timberland purchases of $1.9 million, during the same period last year. For fiscal 2005, capital expenditures are expected to be approximately $75 million, excluding timberland purchases, which would be approximately $25 million below the Company's anticipated depreciation expense of approximately $100 million. Company Outlook Ongoing benefits from the transformation initiatives, which include incremental savings of $35 million to be realized in fiscal 2005, favorable comparisons for the Paper, Packaging & Services segment and generally better results in the international operations of the Industrial Packaging & Services segment are expected to drive earnings improvement. These positive factors will be partially offset by lower planned timber sales coupled with downward pricing pressure and lower than planned sales volumes during the second half of fiscal 2005. The second quarter results were in line with expectations and management reaffirms previous earnings guidance, before special items, in the range of $3.50 to $3.60 per Class A share for fiscal 2005.