Greif's Earnings Miss Ests, Trims View - Analyst Blog

Greif, Inc. GEF reported second-quarter fiscal 2014 (ended Apr 30, 2014) results with adjusted earnings of 57 cents per share, down 17.4% from 69 cents per share in the year-ago quarter, due to disrupted production in its flexible products manufacturing facility in Turkey. Results also fell short of the Zacks Consensus Estimate of 68 cents per share.

Drop in earnings is in line with Greif's previous announcement that second-quarter earnings would be adversely affected by production disorder caused by protestors occupying the facility in Hadimkoy, Turkey for 60 days. The company also revealed that inclement weather will likely weigh on the Paper Packaging and Rigid Industrial Packaging segments. Due to these reasons quarterly earnings negatively impacted by approximately $20 million.

Including special items, earnings per share in the quarter were 61 cents compared with 69 cents in the year-ago quarter.

Operational Updates

Revenues improved 1.1% year over year to $1,100.7 million from $1,088.9 million. The top line missed the Zacks Consensus Estimate of $1,131 million. The year-over-year growth in net sales was primarily attributable to increase in selling prices, partially offset by negative impact from foreign currency translation.

Cost of sales increased 1.2% year over year to $204 million. Gross profit inched up 0.8% year over year to $204 million compared with the year-ago quarter.

Selling, general and administrative expenses (SG&A) increased 11% year over year to $135.4 million. Adjusted operating profit decreased 15.9% year over year to $70.6 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) declined 8% to $100.9 million from $112 million in the year-ago quarter.

Segmental Performance

Rigid Industrial Packaging & Services: This segment reported sales of $784.3 million, up 1.4% from $773.4 million in the year-ago quarter. The growth was driven by 3% increase in selling prices primarily as a result of pass-through of higher resin costs, changes in product mix and volume improvement in Europe. These were adversely affected by unfavorable foreign currency translations. Adjusted operating income went down to $47.2 million from $53.2 million in the year-ago quarter.

Flexible Products & Services: Sales from this segment went down 6.3% year over year to $105.3 million. The decrease in net sales was attributed to decrease in selling price of 5.6% and in volume of 1.7% due to the disturbance at the manufacturing facility in Turkey and product mix, partly offset by the positive impact of 1% foreign currency translation. The segment reported an operating loss of $10.3 million, compared with the prior year profit of $0.8 million.

Paper Packaging: Sales increased 5.4% year over year to $205 million, aided by higher selling prices as a result of the pass-through of containerboard price increase and increasing sales of specialty products, partially offset by the impact of adverse weather conditions. The segment reported a record adjusted operating profit of $26.5 million, up 3.1% from $25.7 million in the year-ago period. The increase was driven by higher selling prices partially offset by higher energy and input and logistic costs.

Land Management: This segment's sales decreased 29.1% year over year to $6.1 million driven by lower sales of timber. Operating income improved nearly three fold to $11.2 million due to gain on the disposal of timberland.

Financial Position

Greif ended the quarter with cash and cash equivalents of $87.4 million of Apr 30, 2014, as against $78 million as of Oct 31, 2013. Cash from operations during the quarter was $102.7 million versus $107.8 million in the prior-year quarter.

Long-term debt was $1.3 billion as of Apr 30, 2014, up from $1.2 billion as of Oct 31, 2013. The debt-to-capitalization ratio expanded 320 bps to 47.9% as of Jan 31, 2014, from 46.3% as of Oct 31, 2013. Capital expenditures were $27.5 million in the reported quarter versus $27 million the prior-year comparable period.

Guidance

For fiscal 2014, Greif trimmed Earnings before interest, taxes, depreciation and amortization (EBITDA) guidance in the range of $475 million to $505 million from the previous band of $490 million to $540 million. Excluding timberland gains of around $20 million or 20 cents per share, earnings per share was also lowered to the new band of $2.48 to $2.80 from $2.60 to $3.15.

Greif anticipates a gradual global economic recovery during fiscal 2014, which should result in moderate sales and volume improvement, along with slightly higher raw material costs. The company expects that the Rigid Industrial Packaging segment will benefit from moderate volume growth, especially in Europe.

In addition Flexible Products segment is repositioned for sustainable growth and profitability during the second half of 2014 depending on the implementation of specific actions regarding the disrupted production in the manufacturing facility in Turkey.

The company is expected to benefit from the sale of select non-core assets. Greif's plans to accelerate restructuring actions will also drive growth. However, foreign exchange volatility as well as social and political unrest remains headwinds.

Delaware, OH-based Greif manufactures and sells industrial packaging products, bulk containers, and containerboard and corrugated products worldwide. The company provides services such as blending, filling, packaging and recycling of industrial containers for a wide range of industries. Greif also manages timber properties in North America and offers land management consulting services.

Greif currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the same sector include Crown Holdings Inc. CCK, Graphic Packaging Holding Co. GPK and AO Smith Corp. AOS. While Crown Holdings has a Zacks Rank #1 (Strong Buy), Graphic Packaging and AO Smith carry a Zacks Rank #2 (Buy).