Greif Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 6, 2024

There are 9 speakers on the call.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill D'Onofrio, Vice President of Investor Relations and Corporate Development.

Operator

Please go ahead.

Speaker 1

Thank you, and good day, everyone. Welcome to GRAIS's fiscal Q2 2024 Earnings Conference Call. During the call today, our Chief Executive Officer, Ole Roskart, will provide you with an update on our 2nd quarter results driven by our build to last strategy as well as current business trends. Our Chief Financial Officer, Larry Hilsheimer, will provide an overview of our financial results and our fiscal full year guidance. In accordance with Regulation Fair Disclosure, please ask questions regarding topics you consider important because we are prohibited from discussing material non public information with you on an individual basis.

Speaker 1

Please turn to Slide 2. 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 and reconciliation to the most directly comparable GAAP metrics that can be found in the appendix of today's presentation. I'll now turn the presentation over to Ole on Slide 3.

Speaker 2

Thanks, Bill. Hello, everyone, and thank you for joining us. We are excited to discuss another successful quarter for Greif, underpinned by solid execution across the business through the Greif Business System. Before we dive into our results, I would like to widen our lens and discuss key updates on our build to last strategy, specifically touching on each of our 4 missions for value creation. This will help contextualize our continued solid performance despite the persistence and various headwinds our business has recently faced as well as why we believe Greif is positioned for near and long term outperformance.

Speaker 2

First, I will discuss our creating thriving communities and delivering legendary customer service pillars through the principles of the service profit chain. I will then touch on how we protect our future for our customers and our communities. Larry will discuss our quarter results and how we ensure financial strength through strategic capital allocation. As a reminder to all, our vision is to be the best performing customer service company in the world. We consider our primary customers to be our end product customers, our supply chain partners, our colleagues and our financial stakeholders.

Speaker 2

Everything we do focuses on improving our service to these customers through dedication to the principles of the service profit chain, which I'll now discuss on Slide 4. Our service profit chain has created a competitive advantage for Greif through investing in our people. This creates a flywheel for value creation as colleagues are engaged and dedicated to providing legendary customer service. Customers recognize the value Greif delivers from a differentiated product and service standpoint. This culminates in improved customer loyalty and increased share of wallet over time.

Speaker 2

Due to our steadfast conviction in the power of this value creation model, we monitor engagement of our colleagues and customers very closely. Net Promoter Score measure a customer's willingness to actively promote on our behalf, not simply a passive satisfaction in our products. Our Net Promoter Score continue to consistently improve with each survey. Our most recent score of 68 completed this April is well above the average across the manufacturing sector of 49, which reflects that our customers advocate strongly on our behalf. We likewise measure colleague engagements through an independent survey conducted by Gallup.

Speaker 2

This score likewise has continuously improved and the most recent results of the 85th percentile puts drive in the top tier of engagement among all manufacturing companies. We are proud to have been awarded the 2024 Exceptional Workplace Award by Gallup in recognition of our people first culture. This award follows from last quarter when we were named for the 2nd year in a row among Newsweek's Top 100 global most loved workplaces. These statistics are meaningful as they demonstrate our people are with us on our build to last journey. And alongside our bright business system are the enablers, which drive our performance each quarter and are fundamentally changing how we operate and deliver results as a company.

Speaker 2

Let's now discuss protecting our future on Slide 5. At Bright, sustainability is ingrained in our culture, our processes, systems and relationships with our customers and suppliers. It's our belief that in order to provide legendary customer service, we must understand the needs of our customers and create solutions alongside them. This both continuously improves our own sustainability journey and also improves customer loyalty and share of wallet over time. This quarter, we released our 15th annual sustainability report, which provides a comprehensive overview of our 2,030 targets as well as recent milestones and progress.

Speaker 2

Sustainability is another way in which Bright differentiates through the service profit chain and has bolstered our profitable growth over time. We encourage all our stakeholders to read our latest sustainability report, which is available at griit.com/sustainability. Please turn to Slide 6. This dedication to the service profit chain and its resolving value creation flywheel has enabled us to accelerate our growth and transform our portfolio for the future. As we announced at our 2022 Investor Day and have discussed often since, we are pursuing an acquisition strategy to become a global leader in high performance, high margin small plastic containers and jerry cans.

Speaker 2

This product group has an addressable market of over 3,000,000,000 and is favorably exposed to secular growth markets such as flavors and fragrances, food and beverage, pharma and agchem. In March, we completed our acquisition of IPACChem and in doing so have now solidified the global platform that we committed to growing within the high performance portion of that 3,000,000,000 addressable markets. Integration into Glife is going well and we are confident in our ability to capture the $7,000,000 of synergies previously communicated. As a reminder, the primary synergy opportunities are in the form of raw material scale advantage and expected and planned elimination of executive leadership overlap, both of which are already largely in effect. We are extremely pleased with our investments and value creation on the way.

Speaker 2

However, I'll also note that given recent short term softness in the global ag care markets, our revised fiscal 2024 guidance reflects an expectation of smaller contribution for the 6 month ownership in fiscal 2024 than previously communicated run rates. Additionally, earnings for fiscal year 2024 will be impacted by a one time expected $8,400,000 inventory revaluation expense, approximately $6,700,000 of which was included in the 2nd quarter results. This combined operating the combined operating expertise of our Greif and legacy IPAC can colleagues working together over the past 60 days has further strengthened our conviction in the solid organic growth fundamentals of the business as well as long term earnings power of capital we have invested in the small plastic and gerrycan markets. Please turn to Slide 7 as we shift gears to the quarter and a discussion of our recent operating environments. In the past 3 months, we have seen a continuation of the same mix demand trends as in recent quarters.

Speaker 2

In APAC, which as a reminder is approximately 5% of total company net sales was showing positive demand signals in Q1. However, in Q2 trends reversed after the market's strong demand expectations for Chinese New Year fell short of expectations and a quick but significant destocking occurred. That lower level of demand has thus far persisted into Q3. In EMEA, Greif's largest GIP market, positive demand trends have continued for the Q2 in a row with growth coming broadly across end markets, but notably in chemical and lubricant demands. In the Americas, LATAM was flat year over year with mixed demands.

Speaker 2

However, we are encouraged that LATAM saw the same growth in chemical markets as EMEA despite slower demand from Adchem. North America likewise remains mixed, but has improved overall on a sequential basis. Although overall chemical demand remains weak in that region, we anticipate continued sequential demand improvements in Q3 in North America as well as LATAM and EMEA, which is reflected in our revised guidance. We'll be monitoring our key end markets closely and responding to real time demand changes to ensure we fully capture opportunities as they present themselves. Lastly, our North American paper business continues to slow but steady improvements in containerboard driven by our bulk box business, which feeds into e commerce channels, offset by softer, although sequentially improving tube and core demands, driven by stronger construction and film core volumes.

Speaker 2

We also expect this modest improvement trend to continue. In May, we saw that continuation with our paper business showing modest improvement led by construction and film demands in URB and anticipate continued improvements in containerboard driven by the opening of our Dallas sheet feeder. GIP, EMEA, North America and LatAm all showed sequential improvement over April, with APAC demand mixed with slower China demand and stronger Southeast Asia demands. Overall, when talking to our customers, there is generally positivity. However, it remains coupled with our customers indicating continued short visibility to their own demands, resulting in uncertainty to the duration of this improving demand trends.

Speaker 2

For that reason, we are continuing to be prudent on cost managements, while also monitoring end markets closely for more clearly defined signs of improvements. And with that, I will now turn it over to Larry to walk you through our detailed financial results on Slide 8.

Speaker 3

Thank you, Uli, and thank you all for joining our call. Our second quarter results reflect improving but still weak demand and the extremely challenging price cost dynamics in our paper business, resulting in $170,000,000 of adjusted EBITDA, $59,000,000 of free cash flow and adjusted EPS of $0.82 per share. As Ole mentioned, we are leaning on the Greif Business System to serve our customers with excellence, manage costs and diligently monitor our business for signs of an inflection. Greif Business System champions for continuous improvement, accelerates plant modernization and automation as well as creates value through Gemba and 6 Sigma programs. Using these tools, we continue to drive structural cost out and build 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.

Speaker 3

While managing the present, we are also growing for the future through the IPAC Chem acquisition and through high value capital projects such as our recently opened Dallas Sheet Feeder. These investments are critical to our long term vision and strategy and will position us well for outperformance once markets return to a normalized state. We are reinstating the guidance range given our confidence in our view of the remainder of our fiscal year. We are pleased to raise the low end from our prior $610,000,000 to $675,000,000 and add a high end of $725,000,000 Before discussing guidance assumptions, let me provide a segment performance update starting on Slide 9. For GIP, continuing weak but improving demand led to a year over year sales decline of $57,000,000 and margin compression of 1.5 percent year over year.

Speaker 3

In addition, SG and A costs were up year over year in line with our expectations communicated in our Q4 call. This is primarily a result of D and A step up on new acquisitions as well as our ongoing strategic investments in IT and global operating excellence, which while expensed, we view as strategic capital we are investing for long term margin improvement. Despite the incremental cost of these investments, margins rallied strongly by over 4.4% on a sequential basis from fiscal Q1 2024. As Ole touched on, EMEA continued to improve underpinned by strong lube and chemical markets. The Americas remained flat to down as lube and chemical demand improvement has not yet been seen.

Speaker 3

However, North America has seen overall sequential improvement and we do anticipate that recovery to continue into the second half of our fiscal year. Please turn to Slide 10 for PPS results. The continued delayed recognition of announced price increases combined with the rising OCC cost has led to a significant margin compression of over 10% despite flat sales. Our PPS team is continuing to manage controllables well, including successful price increase implementation on our non index based customers. However, the outsized impact of the index driven price cost dynamic, which we still view to not be in sync with real market trends, is a headwind we have and will continue to aggressively work to offset.

Speaker 3

On the volume side, in containerboard, we are seeing modest improvement, while the tube and core end markets remain flat to down. While managing the present, we are also continuing to invest in the future within this product group, resulting in SG and A cost inflation for similar strategic initiatives as discussed with GIP. Please turn to Slide 11 for our updated guidance and outlook. As previously stated, we are providing a guidance EBITDA range of $675,000,000 to 7 $25,000,000 reflecting an increase of $65,000,000 on the low end. The high end of our guidance range reflects recognition of our announced paper price increases as well as continued margin improvement in GIP.

Speaker 3

By contrast, the low end of our guidance range assumes no paper price recognition, slight further OCC cost inflation and no margin improvement in GIP. On the volume side, our guidance change of $22,000,000 to $62,000,000 of EBITDA assumes further contribution of the improving volume trends across most of our products and end markets. As Ole mentioned earlier, our incremental EBITDA contribution from IPAC Chem is less than previously disclosed run rate due to a full year impact of purchase accounting of $8,400,000 as well as short term slowness in the global Ag markets. Lastly, we anticipate volume related as well as inflationary transport and manufacturing headwinds of $19,000,000 to $39,000,000 of EBITDA relative to prior guidance. As for free cash flow, we are leaving our previous guidance unchanged as our midpoint at $200,000,000 for the full year.

Speaker 3

We anticipate that the increase in our EBITDA guidance midpoint of $90,000,000 will not result in incremental cash flow within fiscal 2024. The drivers of this are at the midpoint higher spend on strategic CapEx and efficiency related maintenance projects were $20,000,000 higher cash interest primarily related to the acquisition of ITAX $25,000,000 higher cash taxes of $26,000,000 related to improved earnings as well as the failure of Congress to extend favorable tax provisions. Higher working capital needs to address improving demand of $32,000,000 partially offset by a favorable $13,000,000 of other miscellaneous cash items. As Ole mentioned in his remarks, while we continue to monitor our business near term, it is critical we also maintain a long term lens and invest for the future. As such, I would like to discuss capital allocations on Slide 12.

Speaker 3

Under build to last, which we define as fiscal 2022 through present, we have deployed over $2,600,000,000 of capital. Our capital allocation framework is simple. We first invest in 2 non negotiables, our safety and maintenance CapEx, which keeps our cash machine running and our regular and increasing dividend. While critical, these uses are not a significant portion of total cash generated in that same timeframe and so the rest we devoted towards growing our business and increasing shareholder return. On the growth side, the recent majority has come through developing the leading global small plastics platform, which Poli discussed in his remarks.

Speaker 3

The long term benefits of this business are substantial and we are encouraged by our successful execution of the transactions, our integration progress and synergy realization. We balanced growth with debt reduction at times when it is necessary to temporarily increase our leverage above our long term target of leverage ratio in the range of 2 to 2.5 times in order to capitalize on long term value accretive growth opportunities such as IFAK temp. Given our current leverage, we anticipate in the short term prioritizing incremental debt reduction. We have confidence in the value creation benefits of our capital deployment under Bill De Leste and we'll plan to dive deeper into this topic at our upcoming Investor Day in December. With that, I'll turn things back to Ole for closing on Slide 13.

Speaker 2

All right. Thank you, Larry. I appreciate each of you taking the time to listen to my opening remarks on our strategy and hope that I clearly communicated the value creation, which is occurring through leveraging what we do best customer service to drive growth and transform our business. Our recent capital investments and internal initiatives are setting the stage for the next wave of accelerated growth at Greif. Our Greif business system and dedication to the service profits chain have combined to create a flywheel of success, which is driving growth and our disciplined capital allocation framework.

Speaker 2

We have an Investor Day upcoming this December and plan to discuss in greater detail the changes we are currently making through the Grife Business System to transform our organization for breakout success. Operator, will you please open the lines for Q and A? Thank

Operator

you. Our first question comes from the line of Ghansham Panjabi with Baird. Your line is now open.

Speaker 4

Hi, good morning. This is Matt Krueger sitting in for Ghansham. How's everybody doing today?

Speaker 3

Great, Matt. Thanks, Matt.

Speaker 4

Wonderful. So I guess I just wanted to start off with a quick question on volumes. Can you provide some added detail on the volume cadence across both business segments during the quarter? And then just some early thoughts on how the 3rd fiscal quarter has kicked off would be really helpful as well.

Speaker 2

Sure. Let me give you some comments. Let me sort of zoom out first and give you kind of a regional overview year on year and then we can go into sub space and I'll make some comments on perhaps on the end markets. So if you look at it regionally, so the strongest market was EMEA where we saw an 8% growth and it's also our largest GIP markets. LATAM was flat.

Speaker 2

We were a little bit weaker in North America, minus 5%, and we were down 11% in APAC. The broad improvement we saw in EMEA was across our industrial end markets for the 2nd straight quarter, mostly in bulk chemicals and lubes. In LATAM, we saw pockets strength in both in bulk chemical and paints and coatings. And as I mentioned, we had some softness in AgChem like we've seen most other places. And again in North America, it was we see continued slow bulk and commodity developments and agchem demand is down.

Speaker 2

But sequentially from Q1, we do see improvements. And I made some comments earlier on APAC. Q2 volumes were negatively impacted by seasonality from the Chinese New Year and weaker demand from food and beer. If we look at substrates year on year, the strongest substrate was plastic where we had invested and IBC and we are off low teens year on year. Steel is flat, but it's actually improving up to 10% sequentially.

Speaker 2

And we are down low singles in fiber, but we are improving again sequentially and it's up 10%. And as I said, the end markets are really both chemicals, lubricants where we see strong developments. If we look at also the economic indicators, so the global PMI was above 50 for the last 4 months, including May, which is positive and which is reflective. And these positive signals that we've seen exiting makes us very positive for the future. We stay connected to our customers, our supply chain partners.

Speaker 2

And as demand hopefully keeps increasing, we will react quickly like we have done in EMEA.

Speaker 4

Great. That's very helpful. And then just to follow-up, I wanted to touch on price cost a bit. Can you provide an updated view on the absolute price cost expectation for the year? If you could provide some detail on how that was how that performed this quarter and what you would expect from the upcoming 2 quarters that would be helpful as well.

Speaker 4

It seems like we could be reaching kind of a peak price cost pain point across your business given the pricing initiatives you have in the market. I just want to check the validity of that statement.

Speaker 2

Yes, that's a great question. I think Larry will be

Speaker 3

Jared, what's going to answer that? Yes, I mean, if you look, I mean, clearly, as we looked at what price cost we had relative to Q2 2023, major impact year over year price cost squeeze of about $49,000,000 in paper and about 20 but positive 17 actually in GIP. So you had $12,000,000 of volume benefit in GIP and $27,000,000 of volume benefit in PPS. So trends on volumes good, price cost squeeze very harmful to us. And then looking at going from prior our former guidance to current guidance, we show from that $6.10 low end that we gave, actually price cost benefit in our GIP business of about 39,000,000 dollars and volume of $27,000,000 Within PPS, at midpoint $29,000,000 or I mean, I'm sorry, $16,000,000 price cost lift from prior where we were in 2015.

Speaker 3

If I'm going from prior year to where we are now, obvious squeeze numbers on going from the $8,000,000 of last year to $700,000,000 of this this year within the PPS business. Major squeeze clearly on OCC of roughly $95,000,000 $100,000,000 URB at $5,000,000 in pressure and containerboard about flat. And then in our GIP business, price and cost about $59,000,000 positive and volume about $30,000,000 positive. So hopefully that's what you were looking for, Matt.

Speaker 4

Yes. No, that's very helpful. That's it for me. Thank you.

Operator

Thank you. Our next question comes from the line of George Staphos with Bank of America Securities. Your line is now open.

Speaker 5

Hi, everyone. Good morning. Thanks for the details. I wanted to go to and congratulations on

Speaker 2

the quarter. I wanted to

Speaker 5

go to Slide 11 where you have the waterfall. Larry, if we look at and Oli, if we look at the volume pickup in your guidance, recognizing there are no guarantees in life things could move more positively, things could move more negatively. Where are you right now in terms of that $22,000,000 to $62,000,000 would you say roughly in terms of the volume pickup that in turn informed your improvement in your guidance?

Speaker 3

Yes. I would say George, where we're at in the trend right now is right smack in the middle of that. And so what we did is build a range around it based on as Ole mentioned in his comments, there's still some nervousness in our some of our customers, but there's also some areas where we're seeing there's potential optimism. So we just we build a range around what we thought was possible for the rest of the year.

Speaker 5

Larry, I probably missed this. Ole, I probably missed this, but if you could, either by end market or by substrate, maybe both, could you just give us kind of a quick where are you year on year early in fiscal 3Q in terms of trends you're seeing at the moment on volume?

Speaker 3

You mean, in May? May. Yes. Let

Speaker 2

me just get an overview here. Yes. So exit trends in May that were generally positive, George. Steel and containerboard, they kept improving throughout Q2. Plastic and URB was a bit more mixed on a month to month basis during the quarter.

Speaker 2

But if we look at GIP and then EMEA, they remain sequentially strongest as I mentioned, but also with North America and LatAm improving, containerboard continue to improve and will soon start benefiting from our Dallas sheet feeder, which by the way is operational and it's producing a sheet that's being sold. And in URB, we continue to see construction and film demand increasing in May, despite the mix demand in all of our end markets.

Speaker 5

Okay. My last 2 and I'll turn it over. Just if you could, Oli, give us a bit more color or remind us what you said in terms of year on year in paper, it sounded like containerboard was all right, not gangbusters, but up modestly year on year. Sequentially, Cuban core URB was getting better, but still down. If you could sort of affirm that and discuss what you're seeing early in May there?

Speaker 5

And then what kind of price cost should we expect out of steel and GIP in particular the rest of the year? Do you have improving or sequentially decelerating benefits there? Thank you.

Speaker 2

Yes. So on steel, so that will generally keep improving and I'll maybe touch upon that a little bit later on what we're doing internally self help. In Tubal core, as I mentioned, film cores are positive in social construction. Where we see and which is by the way is our biggest end segment is paper costs. We haven't really seen any major recovery there.

Speaker 2

Whilst we are doing well in paper costs, we are also selling to other paper companies and we haven't seen a pickup there yet. But we hopefully will see that soon. Thank you so much.

Operator

Thank you. Our next question comes from the line of Mike Roxanne with Truist Securities. Your line is now open.

Speaker 6

Thank you, Eli, Larry and Bill for taking my questions. First question I just had on Slide 11. I think, Larry, if I heard you correctly, you mentioned there the $19,000,000 to $39,000,000 of manufacturing headwinds and that's new. What's driving that?

Speaker 3

The predominant driver of that is volume. So with volume pickup, you get more just incremental transport costs and then a little bit of additional manufacturing costs, just volume driven.

Speaker 6

Got you. Perfect. Thank you for that. And then Larry also just can you talk about the pent up operating leverage in the business that could be released maybe once global volumes start to normalize and

Speaker 2

you say you're certainly in your

Speaker 6

early stages depending on region in terms of seeing the volume improvement. Once everything, let's say, is firing all cylinders, what's this pent up operating leverage that could potentially be released and positively impact the business?

Speaker 3

Yes. Basically as this volume picks up, the predominant costs are going to end up occurring in addition to transport is just the raw material cost. But your value add is going to be about 50%. But I'd say generally just assume excess of 20% gross margin pickup on incremental volume. And if you look back, if we get a return to 2022 volume levels, we would end up being picking up about 100 and $60,000,000 of EBITDA.

Speaker 3

And that doesn't even factor in the incremental EBITDA from getting to full run rate on all of our acquisitions and getting back on price cost where we need to be on paper. So we see a path back with returning economic conditions to well over $900,000,000 of EBITDA.

Speaker 2

Let me also just touch on our initial our internal initiatives on cost savings and the impact of our Bright Business Systems. So we're operating at a high level and we're always looking for what we call internally aggregation of marginal gains across our 250 locations. Our sourcing team as an example recently finalized a targeted review in North America, which in a particular area, which reduced total spend for this area by an estimated 8%. They also did a recent view of a certain global indirect material spend, which resulted in an estimated run rate cost savings of 5%. We also recently conducted as an example 2 full scope steel plant operational excellence reviews, which were and these plants were previously underperforming to our expectations.

Speaker 2

And these reviews, they include a full value stream mapping and lean 6 Sigma review. And by focusing on raw material usage and reducing scrap, each of these two plants have seen a sustained EBITDA margin increase of approximately 800 bps relative to their prior performance. I visited a plant recently who have over the past few years made a significant improvement on their NPS and Gallup scores. And when you look at the profitability trend for that plant, it correlates extremely well and with these things and their plant performance is now top tier. So the aggregation of these types of marginal gains, they are a big part of our improved structural margin profiles.

Speaker 2

So we are truly playing on the entire piano as you can hear, spanning from operational and commercial excellence initiatives to supply chain and sourcing and should also mention our automation efforts, which is reflected in our earnings.

Speaker 6

Thank you, Olin. And one quick follow-up. How many of your facilities could be subject to those types of reviews? I mean, how much further runway do you have in terms of improving plant level profitability like that?

Speaker 2

Yes. To be honest with you, I previously I thought, okay, there must be a limit somewhere, but I keep getting surprised. And we have a Gimbat, we have a 6 Sigma program. And just to give you an idea of the size of our 6 Sigma program, we have nearly 700 participants across the globe. Today, we have 400 white belts, 170 yellow belts, 130 green belts and we have 10 black belts.

Speaker 2

And they all have projects of a certain magnitude driving savings to the bottom line. And when you look at the we have deployed this in 250 plants. The things I see and I mentioned some of them, the things I see surprises me, hey, could we really find that sort of savings there? It's just amazing. And you're looking at years years of runway on these initiatives.

Speaker 2

And you can say, okay, you find like 300,000 here and 700,000 there. But when you add it up, that's why we call it aggregation of marginal gains, it becomes big numbers over time.

Speaker 6

Understood. Thanks very much for the color.

Operator

Thank you. Our next question comes from the line of Brian Butler with Stifel. Your line is now open.

Speaker 7

Hey, good morning.

Speaker 8

Thank you very much for taking the questions.

Speaker 3

Hey, Brian.

Speaker 8

You talked about getting to the $900,000,000 EBITDA. I was hoping we could maybe just talk about maybe high level what are those components that get you there and just kind of walk through it, the price cost volume and if there's anything else from the 700 loan?

Speaker 3

Yes. The single largest component of that is just getting back to volume levels of 2022. And that alone is $160,000,000 driver at current margin rates. So we look good on a little bit on volume recovery sequentially, but you look at a 2 year stack, volumes are still significantly off. And obviously, that's evidenced in the economic data with PMI statistics and everything else.

Speaker 3

So getting back to that kind of volume level drives a huge amount of earnings lift for us. And so as Oli mentioned, we undertake all these operational improvement areas to really change our structural cost drivers so that we can even tweak that more and cover other inflationary costs. The other the secondary element is clearly getting back to what we consider much needed, well deserved in price cost in our paper business as evidenced by the price increases we recently announced. And those things can drive a big pickup as well. And then just getting full run rate on and performance level back on the acquisitions we've done.

Speaker 3

And then also this new Dallas Jeepeter business and our containerboard business. You put all those elements together and it drives you easily over that $900,000,000 figure. Okay.

Speaker 8

And you mentioned the recent kind of URB price increases. And how much of that is in the 40 to 70? Is that the low end 0 and the high end 100 percent or some other mix?

Speaker 3

We really expect that we should get full recognition of these price increases. They're needed and deserving. Inflationary costs we've had in all of our production and paper grades are substantial. And we obviously need to earn appropriate returns on the capital. So but yes, look, we're also pragmatic and we still remain burdened by this archaic survey system utilized by Ritchie, which and look, we plus again, we'd love them to become very relevant, move to a data driven automated system to correctly report the true market.

Speaker 3

But as a result, we hedged the upside. I mean, our guidance would have no recognition. And our upside, we've got a range there we put in a range to deal with the RISI system and we also have timing issues related to any time they're recognized. So you look at the $50 linerboard and $80 medium that we have effective June 1, That's recognized this month that would start to come through the P and L in late July and the $50.70 in URB, dollars 50,000,000 to $70,000,000 in URB effective July 18. If that gets recognized timely, then we'd start benefiting in late August to September.

Speaker 3

So that's there's some play in that upside. If we got everything immediately when we rolled it out, then there'd be even more upside.

Speaker 8

And when you think about kind of like the midpoint of what you're assuming there, if that was the rollover, what's the benefit in the 25 from a perspective of incremental EBITDA that you would be able to capture?

Speaker 3

Yes. If you look at our pricing in general, I'd just say a $10 change in

Speaker 1

where am I at? Find my

Speaker 3

Yes, dollars 10 impact on containerboard is $700,000 a month, so roughly $8,000,000 annually and URBs $500,000 a month to $6,000,000 annually. So that should give you the numbers to back into whatever your assumptions would be.

Speaker 8

Okay. And then one last one maybe on the capital expenditures that kind of increased a little bit on the updated guidance. Maybe break that out. Is that all IPAC Chem or are there other gross initiatives that you're spending that $20,000,000 on?

Speaker 3

Very little iBeckm at all. What it really is, is you had some inflationary costs on the Dallas sheet feeder as a strategic growth project, that ran that up slightly over, but that's at full boat going to generate about $2,000,000 of EBITDA a month when fully operational. So money well spent in our estimation. And then frankly, we were producing more cash and some of our engineering group came to us and said, hey, look, there's some high need safety and maintenance projects that we really think we should pull forward. And we didn't want to take the risk of not spending on that kind of thing.

Speaker 3

And since we had the cash capital available, we said move it forward.

Speaker 8

Okay. Nice quarter. Thank you for taking the questions.

Operator

Thank you. Our next question comes from the line of Gabe Hajde with Wells Fargo. Your line is now open.

Speaker 7

Oli, Larry, Bill, good morning. Hi, Gabe. Just a housekeeping question on the $8,400,000 that you called out, Larry. Was that backed out as a one timer or are you flowing that through? I know it's non cash.

Speaker 3

Yes, we flow it through. I mean, it's accounting. We have to mark to basically sales price any finished goods inventory we acquire. So had IPEC chem gone forward with it, it would have been profit, but for us it's not. So that's a 1 year thing.

Speaker 7

Okay. And then I wanted to ask a question about, I guess, Southeast Asia or maybe China specifically. If memory serves on the GIP side, you guys have, I think, 4 remaining plants there. But when we look at, I don't know, EV production and all these different things, it seems like some activity more than others is fairly robust. And again, I know you guys are being selective about customers and what you're doing over there.

Speaker 7

Can you just talk about appetite to grow over there or maybe limiting factors that prevent you from deploying more capital in Southeast Asia in general? I know obviously it's a returns oriented mindset, but just curious about that.

Speaker 2

Yes. We have first of all, we have a very disciplined approach to the way we deploy cash. And as Larry mentioned earlier, when somebody comes with request for safety CapEx, we never say no. And then we have our cash machine with some steel network and other assets and we need to maintain them And we do that and then we have dividends. And then after that, we then start looking at growth CapEx.

Speaker 2

When we have a periodic review of all the requests that comes in and then we apply filters such as ROI and payback and so on. But we also look at the geopolitical aspect of it. And I would say China is not the country that's not the highest priority in terms of geopolitical aspects. So if there is a choice, we would likely and if we would likely do it elsewhere. We have invested in maintenance, safety and some upgrades for automation in China.

Speaker 2

But I would be amazed to say that we've just built a new IBC plant in Malaysia. So it's more the surrounding region we are investing in terms of APAC.

Speaker 3

Yes. The same thing I would add, Gabe, is APAC does have some operations in China. Whenever we assess any kind of projects, we always have, as Ole mentioned, geopolitical as part of our risk factors. Now what does that mean mechanically in our capital decisioning process? It means the hurdle rate for us investing in some place like that is much higher.

Speaker 3

So if it can't meet the hurdle rate, we ain't getting it done. And then the other thing is part of our enterprise risk management program, as we look at those kind of things and we did this in IPAC Chem, you look at what happens if something goes wrong, what's your next plan. And so we have plans to deal with anything that they could evolve as best as we would be able to.

Speaker 7

Appreciate that. One last one on

Speaker 2

Just one last comment on that. So bear in mind, we operate in 41 countries across the globe. So we've done that for decades. So what happens on a geopolitical stage is really part of our disciplined operating system where we always focus on that. And since we are talking about APAC, we do have growth plans in that region.

Speaker 2

And as a result, Matt Leahy has been promoted to lead that region and he's actually already in place to do that.

Speaker 7

Good luck, Matt. I haven't heard you guys talk about IBC deployment here recently. I appreciate obviously the manufacturing backdrop hasn't supported that. Just curious if that's part of the little bit of a tickle up in CapEx. And or on the flip side, maybe you guys have built out that infrastructure.

Speaker 7

I think I understand those lines pretty well, Let's say you're positioned to service your customers on the IBC side when demand does in fact reflect?

Speaker 2

I mean, we have continued to expand on our ITC network, not through acquisition, but primarily organic. We've deployed blow motors and new lines in throughout last year and also this year. And I said then in September, we will formally open our new IBC plant in Malaysia. Last year, we opened a new IBC plant in Turkey and we have put additional lines in many of the existing facilities. So this is an area where we have we've continued to grow and it's also part of our M and A strategy because it's resin based, it's high margin.

Speaker 2

So it's a very attractive market for us to grow in. And we do that on request of our customers as well that when they expand, they tend to come and ask if we could provide them the service on certain locations.

Speaker 3

Yes. And Gabe, you'll remember this, but just to remind everybody, we increased our equity ownership of Centurion last year significantly. And we continue to explore opportunities with other IBC recyclers around the world. Most of them are relatively small, but they fill out our footprint and we continue to have dialogues around those in many geographies.

Speaker 7

Thank you.

Operator

Thank you. I will now hand the microphone over to Ole Rosgaard for closing comments.

Speaker 2

Thank you. Yes, before we end the call, I just want to thank you all for the questions and your continued interest in Greif. We're very proud of our global DRIVE team for utilizing the DRIVE business system to its fullest as you've heard and creating significant operating leverage during this temporary sluggish demand environment. We are equally excited to realize the outperformance we have positioned the business to capture through Build to Last and we'll continue to execute with excellence and provide you with the legendary customer service for which we are known. Thank you to all of our colleagues, our customers and stakeholders for your dedication, loyalty and commitment to Bryte.

Speaker 2

Have a great day.

Operator

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

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Earnings Conference Call
Greif Q2 2024
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