Greif Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 8, 2023

There are 7 speakers on the call.

Operator

Good morning, everyone.

Speaker 1

Good morning and thank you for standing by. Welcome to the Greif Inc. 2nd Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Speaker 1

I would now like to hand the conference over to your speaker today, Matt Leahy, Vice President of Corporate Development and Investor Relations. Please go ahead.

Operator

Thanks, and good morning, everyone. Welcome to Greif's 2nd quarter fiscal 2023 earnings conference call. This is Matt Leahy, Greif's Vice President of Corporate Development and Investor Relations, and I'm joined by Oli Rosgaard, Greif's President and Chief Executive Officer and Larry Hillshire, Greif's Chief Financial Officer. We will take questions at the end of today's call. In accordance with Regulation Fair Disclosure, Please ask questions regarding the issues you consider important because we are prohibited from discussing material non public information with you on an individual basis.

Operator

Please turn to Slide 2. As a reminder, during today's call, we will make forward looking statements involving plans, expectations and beliefs related to future events. Actual results could differ materially from those discussed. Additionally, we will be referencing certain non GAAP financial measures to the most directly comparable GAAP metrics

Speaker 2

can be found in the appendix of today's presentation.

Speaker 3

And now, I'll turn the presentation over to Ole on Slide 3. Thanks, Matt, and good morning, everyone. Greif posted an exceptional second quarter in the face of historic volume headwinds, the likes of which we have not seen since the great recession. Our teams are executing extremely well this year, Taking swift action to lower our cost base across our manufacturing network, maintaining discipline on pricing under our value over volume philosophy and extracting cash from our businesses by driving down working capital. I could not be proud of our team and the work we are doing to advance our build to land strategy.

Speaker 3

Our performance in the first half of twenty twenty three and specifically our ability to execute well on the challenging market conditions has been a process years in the making. As we shared with you at our Investor Day last June, The growing benefits of our continued evolution as a company are becoming more visible now and the hard work Our teams have put in over the past several years are bearing fruit today. Before discussing our financial results, I would like to highlight Several achievements made during our Q2 and specifically recognized the contributions of 3 of our outstanding teams. On our mission to become legendary in customer service, we have long used the customer satisfaction index or CSI as we call it as a metric to reflect overall customer satisfaction with Greif in terms of product quality, customer service and our ability to deliver value. We set an aspirational target of 95 out of 100 As our benchmark of success, and I'm proud to recognize our GIP team, who for the 2nd consecutive quarter produced The CSI score above 95.

Speaker 3

Our PPS colleagues were not far behind with a score of 93. To continue to provide this level of service in a period of challenging market conditions is a testament To the global Greif team working every day towards our vision to be the best performing customer service company in the world. Thank you to each of our almost 13,000 colleagues for your unwavering support and dedication to our customers. Our ability to drive legendary customer service It's directly related to the engagements and well-being of our colleagues. Our colleagues come first and why our mission our first mission in Build for Last is creating thriving communities.

Speaker 3

During the Q2, we completed our 6th annual Gallup engagement survey with over 90% of our global colleagues And I'm proud to share that we continue to improve engagement at Greif and remain in the top quartile of all manufacturing companies around the world surveyed by Gallup with a 5% jump in engagement percentile compared to last year. In addition, in the past months, it was announced that we ranked amongst or among the top 100 Global most loved workplaces in a survey done by Newsweek. While we are placed as a top 100 company in Newsweek's U. S.-based survey for years, we are elated to be counted now as a top global company in the very first year this new survey was conducted. It's our firm belief that the financial results, which we are about to share with you, are the direct result Our third mission is about protecting our future with a focus on sustainability, lowering our carbon footprint and driving solutions to support the circular economy.

Speaker 3

At Greif, Sustainability has always been a cornerstone of our business model and remains critical to our ability to serve customers with excellence and promote a profitable and ethically sound organization for the long term. This quarter, we published our 14th annual sustainability report, which includes our recently announced 2,030 sustainability targets and share a comprehensive overview of our sustainability strategy. I highly encourage our investors to review this report And share your thoughts with us on our sustainability strategy. Finally, A moment of recognition for 3 of our extraordinary teams at Greif, who are helping us become a stronger, leaner and more scalable and modernized organization advancing our final mission of ensuring financial strength. We are a global organization with operations in over 35 countries, and our performance Would simply not be possible without the coordination and support of our global operations group, our digital and information technology team and our global supply chain organization.

Speaker 3

Our Global Operations Group or GOG, as we call it, led by Kim Kellerman, was formed in February 2022 with a purpose of improving operations through a globally consistent approach to tools, processes and behaviors. Our One Grife approach to safety, Driving a zero harm culture with significantly improved safety measures has lowered safety incidents across our manufacturing network by 25% and is improving production level colleagues' well-being, retention and productivity. Our GOG teams are also champions of continuous improvements, driving our DRIVE business system or GBS 2.0 to accelerate plant modernization and automation as well as our GEMBA value creation and 6 Sigma Green Belt Certification programs, all designed to elevate standards of daily performance and execution across the enterprise. These collective efforts yield real cost savings as the GOG team continues to drive structural cost out And productivity gains that not only help optimize our current business, but also provides the foundation to accelerate integration and synergy capture as we grow through acquisitions. We are already starting to see the impact of those savings our financials, and this quarter is a prime example of the success of these initiatives.

Speaker 3

Our digital and information technology team is led by Vivian Buetz, who joined Griess in December of 2022 and is launching a comprehensive modernization effort of our technology ecosystem with a digital first approach. This transformative strategy aims to capitalize on market opportunities and deliver frictionless order management and delivery experiences to our customers at speed and scale. Under Divya's leadership, we are exploring systems To further accelerate our production automation, leveraging AI for efficiency gains and real time market intelligence and building technology infrastructure to drive legendary customer service. This multiyear digital modernization strategy will enable Greif to better leverage our scale, accelerate our margin expansion and improve our global operations and service. Finally, our global supply chain led by Gina Schonner is also undergoing a transformation To invest in advanced sourcing and supply chain management capabilities, taking a one drive approach to supply chain, The team is focused on leveraging our global logistics network across GIP and PPS to improve asset utilization and scale benefits.

Speaker 3

They are advancing supply chain automation and digitization, Revamping our sourcing function to drive better raw material purchasing and terms. They are helping us optimize working capital advanced supply chain sustainability and our circularity model. We expect that this multiyear journey will continue to provide tangible savings as well as improve our purchasing agility to flex quicker with changing demand cycles. We believe this One Greif approach is a key element of our success, enabling better decision making, cooperative teamwork, Group identity and the ability to serve our customers with excellence. The 3 teams' profiles exemplify our commitments to being a global best in class partner for our customers across the world.

Speaker 3

I'm proud of the work of our TOG, IT and Global Supply Chain teams under Kim's, Vivian's and Tina's leadership. My sincere thanks to you all. Now I'll shift over to financial results on Slide 4. Greif posted a strong result in our 2nd quarter with $228,600,000 of EBITDA and $185,500,000 of free cash flow. Our EBITDA was the 2nd highest Q2 in company history, Exceeded only by last year and our cash conversion ratio was over 80%, well above the long term target upgraded than 50% outlined at our 2022 Investor Day.

Speaker 3

These results are exceptional considering historic volume headwinds and are testaments to the resiliency of our business model. We remain focused on controlling what we can control and delivering results regardless of market conditions. This quarter, we also advanced our inorganic growth strategy with the majority acquisition of Centurion Containers, a business we have watched rapidly grow as a minority partner for the past 3 years. The Centurion business is an excellent fit as it enhances Greif's resin based offering and IBC business in North America, supports our circular economy goals and offers a margin accretive organic growth story to the GIP portfolio. We could not be more delighted to take this next step in growing the Centurion partnership.

Speaker 3

Between Le Container At Centurion, we have spent nearly $500,000,000 on acquisitions in the past 6 months and yet We still closed this quarter at the midpoint of our target leverage ratio range. Our M and A pipeline remains robust, And we intend to continue to deploy capital towards value accretive targets in the coming quarters. Now I'd like to take a deeper dive into the results of each of our primary segments. Please turn to Slide 5. Our GIP business posted solid results in the quarter despite persistent demand pressures in all substrates and regions.

Speaker 3

Quick and decisive cost actions by our teams as well as strict adherence to our value over volume philosophy Produced yet another strong quarter for margins despite lower sales. This is to drive business systems in action. On the volume side, all GIP products and geographies showed softness compared to the prior year With global steel and resin based products both down low double digits on a per day basis. The North American markets remain our weakest, largely due to lower demand within the chemical and coating end markets. LatAm, which had fared better from a volume perspective in the past few quarters, has now started to feel the same macroeconomic effects as other regions and was down low double digits.

Speaker 3

EMEA and APAC volumes were comparatively stronger, though still down year over year with some support from automotive and agricultural end markets. However, We did not see a material volume inflection exiting the quarter and into May and are not anticipating 1 to occur In the back half of twenty twenty three, we will continue to focus on our value levers regardless of the demand environment. And I commend the Global GIP team for their excellent work in the Q2. Please turn to Slide 6. Paper Packaging 2nd quarter sales declined $135,000,000 year over year, primarily due to a soft demand environment.

Speaker 3

We took approximately 97,000 tons of total downtime across our mill system in the 2nd quarter as we faced Total digit per day volume declines in both primary converting operations. Despite this substantial volume headwind, Our margin performance was exemplary, with EBITDA only down by $13,000,000 year over year, owing to our PPS team's swift and effective cost management actions, which added to the ongoing benefits from lower raw material costs. Demand remains soft in most paper converting end markets throughout the Q2 and into May. We remain conservative in our outlook for PPS volumes in the second half, but expect that Our year over year declines will ease as prior year comps become easier. Our PPS team remains laser focused on cost rationalization, winning profitable new business and delivering value to our customers during this challenging time.

Speaker 3

And I'm proud of the work our colleagues put forth in the quarter. I'll now turn it over to Larry on Slide 7 to discuss our Q2 financial review as well as revised 2023 guidance.

Speaker 4

Thank you, Ole, and good morning, everyone. First, I want to take a moment to echo Ole's opening comments regarding the contribution of our teams across Greif and our commitment to serving our customers with excellence. The results in the Q2 are truly exceptional considering the macro environment and is a result of the collective efforts of all Greif colleagues. I will repeat a statement I made at Investor Day. I am more excited about the growth and future of this company than ever before, and that conviction only grows with each quarter.

Speaker 4

Thank you to all of our teams. As Ole mentioned, lower volumes across both businesses compared to the historic Q2 2022 period resulted in a year over year sales decrease of approximately $360,000,000 Despite this, actions by our global teams drove EBITDA margin Expansion of over 2 40 basis points and EBITDA dollars were down only about $22,000,000 compared to Q2 2022. In tougher demand environments, it takes commitment and perseverance to adhere to our operating philosophies and to deliver legendary customer service. Our teams did both in the quarter. Our customers remain committed to Greif because they know that our quality and service are unfaltering in every environment.

Speaker 4

We are reliable and deliver customer value every day. At the same time, our teams know how to manage their business as well and have worked to right size our cost structure in the face of extended slower demand, while remaining agile enough to quickly respond to changing customer needs. This is not an easy task and I want to extend my heartfelt appreciation to each of our colleagues for their resilience and dedication to executing well. On CapEx and capital allocation, we continue to pursue value accretive opportunities to grow the business regardless of short term economic cycles. To that end, we are encouraged that our teams are executing well on our organic CapEx spend, launching several larger projects which will ramp up in the second On the M and A front, I am pleased to report that both the recently acquired Lee Container and Centurion Container Businesses are performing in line with expectations and post close integration is going well with a line of sight to meet or beat our initial synergy Lastly, I'd like to focus on free cash flow.

Speaker 4

The source of $185,500,000 in the second quarter is an extraordinary result. Clearly, we do not expect 80 plus percent free cash flow conversion every quarter, but I am encouraged by our team's ability to act and drive Cash out of the business during a lower volume period. As we have mentioned several times in the past, Greif is a cash flow machine and our transformation efforts over the past 7 years are yielding great value to our shareholders. Our results speak for themselves We are running a dramatically different business than when Oli and I joined Greif in 2015 2014, respectively. I believe our cash flow performance in 2023 is evidence of a stronger, leaner and less economically sensitive model that has earned fresh consideration Let's now turn to Slide 8 to discuss our revised 2023 guidance.

Speaker 4

In light of the strong second quarter performance and improved visibility for the full year, we are raising our fiscal 2023 guidance. We are moving away from our Q1 low end guidance and introducing a new range of $780,000,000 to $830,000,000 of adjusted EBITDA for fiscal 2023, an increase of $65,000,000 at the midpoint over the prior low end guidance, reflective of our team's ability We are also raising our adjusted free cash flow guidance for fiscal 2023 with a new range of $390,000,000 to $440,000,000 an increase of $45,000,000 This reflects our higher expectations on adjusted EBITDA, partially offset by higher cash taxes and higher CapEx as we expect to pull forward high priority organic growth projects given our strong cash generation. Slide 7 further outlines key modeling assumptions embedded in our guidance ranges. I'd like to close on Slide 9 by providing an update on our recent capital allocation. As mentioned in Ole's opening remarks, as we closed the quarter at the midpoint of our target leverage ratio range at 2.25 times, A reminder that this ratio includes the nearly $500,000,000 of acquisitions completed in the past 6 months.

Speaker 4

In that context, you can see how our cash machine is capable of funding organic CapEx as well as sustaining an extended cycle of M and A. Our acquisition pipeline is robust, full of actionable, margin accretive targets that fit our strategy, and we expect to continue deploying capital in this capacity in the near term. In May, following Q2, we also completed our $150,000,000 share repurchase program. We continue to believe that our own stock offers one of the most attractive capital deployment opportunities available given the significant valuation gap. Due to the highly attractive and actionable nature of some of our M and A opportunities, we do not plan to implement another repurchase plan in the near term, But the case for further buybacks is very much still on the table.

Speaker 4

Lastly, as we've discussed before, But it bears a reminder, our dividend yield remains compelling, and we intend to continue expanding our dividend to further return cash directly back to our shareholders. In closing, I've never been more excited for the opportunities in front of us than I am today. Our teams are operating on all cylinders, driving a resilient, dependable, cash generating business that will fund our value accretive growth in many exciting ways. I look forward to the future and the potential for this business in the months and years ahead. With that, I'll turn things back to Ole on Slide 10.

Speaker 3

I think Larry sums things up nicely. We are extremely proud of our performance this quarter, although we are not surprised Because we see day in and day out the commitment of our teams and the transformative changes underway, Our build to last strategy will continue to fuel Greif's journey and evolution to a higher growth and margin business By taking care of our people and serving our customers with excellence, we are excited for the road ahead and we'll work to continue to produce results worthy of your investments in our company. We thank you for your interest in Greif. Operator, please open the line to questions.

Speaker 1

Please standby while we compile the Q and A roster. The first question comes from Michael Hoffman with Stifel. Your line is now open.

Speaker 5

Good morning and thanks for taking the questions. Given the revised guidance, Can you give us a little bit of proportioning across the two segments? How you want to think about where we're adding and subtracting relative to the two segments And the guidance revision?

Speaker 4

Certainly, Michael. Thanks for the question. I'll sort of do a walk. We had low end guidance at $740,000,000 and again that was low end. We never said that was like midpoint or anything else.

Speaker 4

I'll walk you through the various elements and talk about each business. So between lower transportation cost and manufacturing cost, As a result of the actions by our leaders, the ones that Oli mentioned as well as our business units, GIP will drive $37,000,000 lift from that, and PPS $33,000,000 for a total of 70,000,000 From a price cost mix standpoint, the lift is about $51,000,000 in GIP And about $5,000,000 in PPS. Centurion adds about $12,000,000 over the remainder of the year. There's some FX drag of about $7,000,000 relative to where we were. SG and A is A drag of about $14,000,000 mostly related to better incentives and that kind of thing.

Speaker 4

Volume is a big drag. You've got about $48,000,000 between the businesses predominantly in GIP, being worse than what we had Given in the Q1 guidance, it's $51,000,000 of that with PPS actually slightly better at $3,000,000 than where we were before, dollars 3 or $4,000,000 And then just hotspots of other items, about $4,000,000 of just odds and ends on various items that are below the line kind of thing. So Hopefully, that helps walk you from the $740,000,000 to the $805,000,000 midpoint.

Speaker 5

Okay. That's terrific. Thank you. So I'm not a paper and packaging analyst per se. I cover a lot of things.

Speaker 5

And my coverage And the industrial world is saying that there is still low level growth in the industrial economy. And yet your volume outlook in GIP in particular Would suggest that's not the case. So is this how do you think about what's happening under the Structural demand versus there's excess product in the channel that needs to clear, But there is in fact actually a stable growth story behind it or do you not see that? I'm curious your view.

Speaker 4

So just one clarifying thing, Michael. When we went to the $740,000,000 last quarter, that was in the face of Significant declines in unit sales. And now we're taking volumes even further down in GIP. So The end markets are significantly impacted relative to prior year and even our original guidance Beginning of the year, but I'll let Ole comment more specifically on some of the end market impacts.

Speaker 3

Yes. So Michael, if you The 3 biggest end markets we have where we see declines is in chemicals and bulk chemicals particular All chemicals are chemicals like TDI and MDI. They're used to produce the insulation in your fridge, The 4 wheel seats and that sort of thing, dashboards and cars. So with the fact that people move less around the world, they buy less houses and so That means they're buying less fridges and that sort of thing. The other one is paint and coatings and the reasons there are the same.

Speaker 3

And then the last one is the loop business. So those 3 are those are the 3 biggest segments and they're down. We don't see any more destocking per se, but the order pattern has changed from a lot of our customers. They are now taking their safety stocks down to a significant lower level than we've seen in the past. And what that means to us is that we see a lot of smaller but more frequent ordering.

Speaker 3

We see sort of urgent orders, Panic orders and that sort of thing. And then our customers are paying us to respond to that accordingly, which is what we're doing.

Speaker 5

Okay. And then on the PPS business, we're seeing and again in another part of our coverage a beginning a Very gradual beginning recovery in recycled fiber. And how have you reflected that in this revised guidance?

Speaker 4

Yes. You are aware, Michael, that RISI increased OCC Pricing in a week ago or early this week. We believe it will trend up Slightly more throughout the rest of the year, maybe another $10 or so. We that is primarily generation Related, there's just with all of the economic downtime being taken across the industry, it's just less paper being produced. And so the supply side of that is down, although we also imagine that some of the trash haulers and stuff made Dominantly, I would say more of the one off kind of things in various communities.

Speaker 4

The pricing is still not a level that allows profitability. Our belief is some still getting landfilled instead of sold.

Speaker 5

Okay. Thank you very much.

Speaker 1

Please standby for the next question. The next question comes from George Staphos with Bank of America.

Speaker 2

Thanks so much. Hi, everyone. Good morning. Thanks for the details and congratulations on a really good quarter Relative certainly to our forecast. Hey, Larry, one thing I wanted to come back to relative to your answer to Michael's question.

Speaker 2

On price cost mix, you said it was $51,000,000 benefit in the bridge, but I did not catch the breakdown between GIP And PPS, if you can go back to that. And also in terms of just clarification, during the discussion, Oli, you were talking about your end market. You said North America was weak, but some other markets had also weak. And I just wanted to make sure I had that for posterity in terms of What had weakened and I had a couple of other follow ons?

Speaker 4

Yes. So George, the breakdown on that 56,000,000 It was 51 GIP and 5 PPS. And I'll reiterate, this is the walk from the guidance numbers we gave at Q1 to the revised guidance. So different from obviously year over year Q2 to Q2, which I can address separately if you like, but I'll turn it back to Ole.

Speaker 3

Hi, George. So you mentioned North America. So if we look at the North American market, it was clearly the weakest in our portfolio. And aside from non residential construction, all our other markets were sequentially worse than in Q1. For LATAM, LATAM has been fairly stable, but volumes came under real pressure in Q2, a strong Q1.

Speaker 4

And the weakness is that coming

Speaker 3

primarily from the air chem and the lube markets. And then in EMEA and APAC, volumes were still down year over year, but those markets are actually showing greater resiliency than other regions. And that's primarily coming from ag again and then the auto end markets.

Speaker 2

That's very helpful. Thanks for that. I want to come back to the specific actions that you talked through in terms of cost reductions. And I think you said lower transportation manufacturing costs were, I think, a combined 70, if I wrote it down right, GIP 37, PPS33. And that's obviously from the low end of your guidance to where we are right now.

Speaker 2

What's the lead time On taking those sorts of actions, it's not as if you snap a finger and it all comes into play. Said differently, when did you start working on this relative to it ultimately materializing in 2Q? And then Is there a way that you can provide some clarity to us, some quantification in terms of what the steel Price cost negative was from 1Q and how it might have flipped into 2Q or do it on a year on year basis? What was the benefit 2Q versus 2Q? Thank you, and I'll turn it over.

Speaker 4

So let me address the transportation manufacturing costs first. Our GIP business really jumped on this aggressively as we started to see volumes decline From like beginning of July last summer and really executed with excellence on Yes, shift management, eliminating shifts, really being hawks on overtime and also looking at Improving maintenance costs and then leveraging I mean the reason Ole spent the time he did in his opening comments Our Greif business system, our GOG group and the supply chain is those teams are delivering great value to us, Playing in the spot markets on the supply chain, working with vendors on negotiating better rebates and those kind of things And also managing overtime specifically well and driving costs out of our maintenance program. So They really did well. On transportation, a lot of it, that cost change is also volume related. But also we're starting to see improvements in some pricing on that as Diesel and fuel costs are migrating a little better.

Speaker 4

PPS, you might remember, George, Our customer base was telling us they expected volume to pick up in January. So even though we were seeing weakness in the fall, The teams were hesitant to pull back dramatically when they were hearing information from our customers that everybody expected things to pull up. When that didn't materialize, they actioned very rapidly and really attacked structural overtime. In the paper industry, overtime is sort of it's Structurally built in, and they've worked very diligently to make sure that they take Restructured shift lines and those kind of things and took out the cost. So, those were the key elements.

Speaker 4

That's about the timing. And so a lot of that really came to play in the Q2 when you combine all that across both of them. In terms of your question on price cost mix on the GSE side in steel, what we saw if I go quarter over quarter, year over year, Price in the in our steel business is about down about $63,000,000 Year over year in our steel business and cost there was an $88,000,000 Tailwind, year over year flowing through, that business.

Speaker 2

Thank you, Larry. Thank you, all. I'll turn it over.

Speaker 1

Please standby for the next question. The next Question comes from Gabe Hajde with Wells Fargo. Your line is open.

Speaker 6

Holly, Larry, good morning and Nice work on the quarter and what you guys are doing thus far.

Speaker 5

Thanks, Dave.

Speaker 6

I wanted to ask And I appreciate that we're not doing an updated Investor Day here. But the $650,000,000 of sort of Worst case scenario, EBITDA that I think you guys have laid out, part of the world is or at least North America is actually on fire right now. So Pretty bad situations and we're talking about mornings being down mid to high teens, which I think would fit the characterization of Pretty nasty backdrop. If we add in maybe the $50,000,000 from Lee container as well as The 22 or so from Centurion and think about it structurally, okay, the baseline now or the worst case scenario is $700,000,000 of EBITDA for Greif. How much of the $70,000,000 that you're kind of talking about Would you view as being permanent in the business and maybe how much of it is in response to what you're seeing in the economic backdrop?

Speaker 6

And then anything else that you would have us think about, to understand sort of the again, in a recessed scenario, what the worst case It might look like for free EBITDA or is $780,000,000 now the new base in that backdrop?

Speaker 4

Yes. Yes, fair question, Gabe. I mean, obviously, we laid that out in Investor Day and we're at that point, Maybe not as optimistic as how our teams would do on every element of the strategy and they've been doing a great job. But yes, I think you walked through, you add the elements that you mentioned on Lee and also Centurion. You then we came out with low end guidance last quarter at $7.40 That included Lee for the rest of the year, did not include Centurion.

Speaker 4

I don't see any scenario where we end up in the future below $7.40 plus a full Impactively plus Centurion, and we have more acquisitions in front of us. So I think those old baselines are Gone. So yes, I think the ballpark you're playing and we haven't really walked through to say what's our new Yes. Baseline, we'll come back to that, but I don't think what you just walked through could be far off at all. And Gabe, then also, I mean,

Speaker 3

we mentioned some of all the operational improvements we made. And what we haven't mentioned is the rooftop consolidations that we made as well. We've done 6. They are most of them are in progress. Whilst the benefits of them don't come immediately, A lot of them are coming trickling through towards the year, and you will see the full brunt of those exiting the year as well.

Speaker 4

Yes. And those are primarily in our IPG business in the URB

Speaker 6

side. Okay. And then maybe thinking about, I guess the outlook for this year, maybe going to the midpoint, I guess, because that's the easiest. But, it sounds like you're embedding Again, just maybe consistent level of underlying demand relative to what we're seeing, but on a year over year basis That improves just because of easier comps. And if that is in fact the case, if there is some sort of Restock event or I guess the economy kind of reaccelerates maybe in October or something like that, which I know is only 1 month for you guys, but would that be kind of upside or how are you thinking about maybe the midpoint and what would get you to Low and high end?

Speaker 4

Yes. I think you said it correctly, Gabe. When we went to low end guidance in the Q1, we talked about the reason being just Total uncertainty where we're at. We're not as uncertain now by any stretch and that's why we came back to a range. We have confidence Where we're at, some really high confidence actually.

Speaker 4

And we did build into that up If something does come in the second half, you get a little tick up, then that drives you up on the upside element of ours. But we are not forecasting any kind of improvement in demand over the second half other than some minor seasonality on Mag stuff. So, if hey, look, if things turn around and pick up, great, all the better for us. But we're just not building that in except for a slight amount on the upside for events like you mentioned.

Speaker 6

Okay. And then I hate to hone in on this, but the $25,000,000 that you kind of called out between Price and cost on the steel side in GIP, I know I appreciate that that was mostly timing related. Does that unwind over the remainder of the year? Is there more to come in fiscal Q3? And then sort of as we're looking out next year, all else equal, should we assume that GIP earns $25,000,000 less Next year, because of this timing difference, if that makes sense.

Speaker 4

It better not. Yes, no. Gabe, actually, we're predicting relatively flat on steel cost price over the remainder of this year. But a lot of this is timing. We've talked about it incessantly that normally Over a year or so, cost trends on steel even out Through that cycle because of the pass through mechanism.

Speaker 4

We had a very odd, very rapid increase that Benefited us highly in 2021. It really bid us in the Q1 of this year as that turned around. We had some of that in the very beginning of the 2nd quarter, but then it mitigated nicely. And steel costs, if they start to trend up again, if demand picks up, It continues to pick up in the auto industry, if it continues to pick up in construction and we see steel costs going up actually a benefit for us. So, yes, we unless we had some rapid decrease in steel cost Toward the end of the quarter where we got stuck with some high cost inventory, we shouldn't have anything that will be turning around on us.

Speaker 6

Okay. I'll turn it over. Thank you.

Speaker 4

One caveat on that. This is an environment where Lots of customers are going out to bid pricing and stuff like that. So you have to play through the competitive environment, see how that is, but We're confident in the service and value we deliver that our customers see that value, but that could have some marginal impact.

Speaker 1

Please standby for our next question. The next Question comes from George Staphos with Bank of America Securities. Your line is open.

Speaker 2

Hey, thank you very much. Hey, guys. Just one sort of knit type question, not a big deal and recognizing they're not directly comparable. If I look at your revised guidance, Q1 low to the midpoint now from 2Q, EBITDA goes up $65,000,000 The cash tax expense goes up $26,000,000 And again, I wouldn't be applying a tax rate necessarily to EBITDA, but just The tax would go up a little bit more than I would expect given that EBITDA if I was just applying 25%. So Anything else going on in terms of the cash tax outlook for this year?

Speaker 2

And more importantly, anything that we would take away for the future? And then is there anything else that you would call out on the working capital significant improvement that We need to remember either for comparative reasons, the rest of this year or as we get into 2024? Thank you.

Speaker 4

So on the cash taxes, it's really just the mix of income where it is. Some of it's in slightly higher tax jurisdictions than where it had previously been predicted, but and that's all it is. It's just tax rate on income generated over the remainder of the year. And it is Phil, we didn't change the rate range of our tax rate. It remains at 23% to 27%.

Speaker 4

So it's still right in that range. Relative to working capital, we built into our bridge is obviously continued improvement On a year over year basis on working capital and a source, but only a slight improvement over What we had guided to before, because we were doing well, but nothing there to And sir, as we actually think that we continue to have opportunity to drive improvement in working capital, the teams are doing Hey, great job, but sort of nothing to call out to say, yes, this will reverse. The only thing is if we have a rapid And increasing the economy and you have growing sales again, you obviously build working capital, which should then That would be offset by growing profitability.

Speaker 2

No, that's fine, Larry. But there isn't a watch out, hey, listen, next year, whatever the environment, there is something that we need to Either build headwind in 4 or further tailwind in 4 from what I'm hearing from you? No. One last one while I have you guys and I'll turn it over. So Oli, Larry, if you reflect on the IBC business, do you have The platform you think you need right now, both there and also in reconditioning to grow with your customers and basically Be the Greif you want to be from a total product suite or should we expect That's an area where you still look to grow inorganically, both in terms of again IBC and also reconditioning.

Speaker 2

Thank you and good luck in the quarter.

Speaker 3

Yes. Without getting into what we have in our pipeline, George, yes is the answer. We are looking at some adjacencies, but they're very, very close to what we're doing. So primarily everything within resin based Containers, reconditioning, life cycle services that supports our strategy. That's what we're looking at.

Speaker 3

And we're not going to go outside of call business of that.

Speaker 2

Okay. I appreciate the comments here. I'll turn it over. Thank you, guys.

Speaker 1

Please standby for the next question. The next question comes from Gabe Hajde with Wells Fargo. Your line is open.

Speaker 6

Thank you, guys. Larry, I wanted to dig in. I actually had it on my list and you brought it up in terms of the Competitive backdrop. So intuitively for me, I would have expected sort of a rising interest rate environment, Maybe tighter credit to translate into a more disciplined operating environment. And I'm not asking you to speak for anyone specifically in terms of Who you compete against just conceptually versus maybe where you guys are in your journey or From a balance sheet perspective and feeling pretty comfortable where you're at.

Speaker 6

Have you seen anything to date in this Kind of tough economic backdrop or would you say that kind of anecdotal feedback from your commercial folks Is that no, the competitive response has been pretty disciplined up to now on the GIP side?

Speaker 4

Yes. On the GIP side, I mean, We have always talked about you get sort of rogue individual markets around the world from time to time. That's Pretty much a constant. But you're right, we are in an extremely good position from a balance sheet Perspective, closing $500,000,000 of acquisitions and having

Speaker 3

Our debt

Speaker 4

target still be right in the middle on our leverage ratio And we just completed a financing in Farm Credit System, which I mentioned, which by the way frees up our entire Facility giving us $800,000,000 of totally available capacity, at 6%, 6.5% rates. And yes, from a competitive standpoint, we know at least one of our very, very good competitors is not quite in that situation. So yes, we look at it with optimism, but yes, we're also realistic about things. I mean, They're going to continue to be good competitors, going to be competing for the business. And We think they act in an appropriate way and haven't heard anything differently from our team.

Speaker 4

So these proposals being these RFPs for business will be tough as they always are and you'll work through the negotiations, but our teams have a good story to tell about the value that we deliver, Particularly how well we served our customers through the pandemic when sometimes that wasn't true across the board.

Speaker 3

And just in addition to that, we've seen quite a few Boomerang customers as well, as we call them, where They've gone away from us and this is more on a regional or local basis. They've gone away from us for whatever reason and then 6 months later they're back knocking on the door. And we have several examples of that. And I would say that's due to the exceptional service we provide our customers.

Speaker 6

Thank you for that, Oli. One last one on the price cost bridge that you talked about, +51, I think GIP was plus 56, paper was minus 5. I'm trying to compare contrast that to if I just take the Incremental $20 a ton cut in containerboard and assume that's applicable for call it half of the year or something like That's maybe $10,000,000 and then the increase in the OCC assumption would maybe translate to another $10,000,000 So I'm curious if there's something I'm missing or If it's more timing related and we have to carry that through in the fiscal 2024.

Speaker 4

Yes. Just to clarify, The 56 on a total company basis was 51 positive for GIP and 5 positive for PPS. Relative to the guidance we originally gave. And obviously, within that guidance, we had different assumptions on pricing in OCC. But maybe a better way to get at it for you relative to PPS is talking about Q2 over Q2 year over year.

Speaker 4

So we are on an overall basis down $10,000,000 On pricings and up $48,000,000 on costs throughout the two businesses. Some of that in the cost side It's actually related to working capital management, because when we sell from our mill system into Core Choice, If that gain in the mill system hasn't been it doesn't get recognized until that core choice inventory gets sold. So when the team does a really good job of driving down inventories at core choice in a quarter, then it frees up that intercompany profit. So you have the element of about $39,000,000 of OCC benefit and about a $9,000,000 of that free up of Profit elimination by driving down your inventory, offset by containerboard price impact of $12,000,000 down and CRB Actually, the opposite way of $2,000,000 up. Hopefully, that's helpful.

Speaker 6

Thank you.

Speaker 1

I show no further questions at this time. I would now like to turn the call back to Matt for closing remarks.

Operator

Very good. Thank you everybody for joining today and hope you have a nice day.

Speaker 1

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Greif Q2 2023
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