Q2 2020 Greif Inc Earnings Call
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Thank you to calling a good morning, everyone welcome to Great second quarter fiscal 2020 earnings conference call.
On the call today are Pete Watson, Grace, President Chief Executive Officer, and Larry Hilsheimer, Grace Chief Financial Officer, Pete Larry We'll take questions at the end of today's call.
In accordance with regulation fair disclosure, we encourage you to ask questions regarding issues you consider material because were prohibited from discussing significant nonpublic information with you on an individual basis.
Please limit yourself to one question and one follow up before returning to the Q.
Please turn to slide two.
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'll be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metrics can be found in the appendix of today's presentation.
And now I turn the presentation over to Pete on slide three.
Thank you Matt Good morning, everyone. We really appreciate you joining us today.
About half a great for like the all for our thoughts and best Swiss it wishes to all of you.
Who have been impacted by Kobe 19, pandemic can express surfaxin admiration for a brief healthcare workers.
First responders in the front line to the health crisis I'd also like the Recognizer 16000 global colleagues at Grace and their families for their during spirit and perseverance is we've been adapting to new ways of working and communicating that I really inspired by the efforts in the I'm proud of our performance in the global.
Seem a that as we've delivered during the crisis.
<unk> 19 pandemic remains an evolving situation, we continue to monitor the latest updates.
Our global and regional pandemic task force or meeting multiple times weekly to ensure we safeguard the health of our colleagues in the continuity of our supply chain to serve our valued customers.
Our purpose a great is to safely package and protect critical goods materials that serve the greater needs of communities all around the world.
And given our position Grace has been identified is it a central business.
As we continue to operate all of our production facilities in more than 40 countries.
Our global portfolio is uniquely capable of fulfilling customer needs worldwide, and our sourcing and supply chain is well supported with extensive alternate backups in place for all critical products and components.
If you could please turn to slide four for an overview the core.
We continue to make really strong progress across all of our strategic priorities.
Our second quarter, adjusted EBITDA, and adjusted free cash flow, both improved versus prior year quarter, with especially strong performance in our global rigid industrial packaging segment.
In addition to improve financial performance, we completed our third annual Gallup colleague engagement survey, scoring in the 80 90 percentile of all manufacturing companies.
We also recorded our best ever trailing fourth quarter customer satisfaction index score.
We firmly believe there's a linkage between engage colleagues and customer service excellence to improved financial performance.
We also published or 11th annual sustainability report, which reflects the progress we've made to reduce our environmental footprint and build a more circular supply chain as part of our overall business strategy.
Lastly, we completed several portfolio optimal optimization moves aligned to advancing our strategy.
First we acquired a minority stake in center in container, which is expanding I B C. Reconditioning <unk> capability in North America, and we have an optional path to full ownership in the future.
Second we completed the sale of the consumer packaging group to graphic packaging for $85 million subject to customary closing adjustments, enabling us to refocus on our industrial franchise.
Demise or capital expenditures and pay down debt.
Third we announced yesterday the closure of our mobile, Alabama uncoated recycle Bucksport mill, that's part of our ongoing network cost optimization initiatives.
We also consolidate too rigid industrial packaging operations, one in Brazil, and the other in the West coast the United States.
We examine ongoing or portfolio performance in that business.
I like to now review our business performance by segment and if you could please turn to slide five.
Origine doctoral packaging business delivered a solid second quarter, we generated record global IVC production with volumes, 26% higher versus the prior year quarter. Thanks, primarily to our new IVC investments in total Lou which is not a b C recondition or in Europe and our two.
[music], new IVC plants, one in Houston, Texas, and the other and Kaluga Russia.
Global steel drum volumes declined by 70 basis points first the prior year quarter.
Steel drum demand in AMEA, which is our largest steel drum region grew by 60 basis points and North America increased by 1.6% due to strong first half of the quarter fuel, partly by increased customer stocking and new customer growth.
Still drum volumes in Asia Pac roughly flat versus prior year, well volumes in Latin America were down nearly 16% due to weak demand for lubricants as well as a loss of a low margin high volume customer.
Rich second quarter sales fell roughly $9 million first the prior year quarter on a currency neutral basis due to raw material price declines in corresponding contractual pricing adjustments, which was partially offset by strategic pricing actions and better volumes in certain regions.
Rip second quarter, adjusted EBITDA rose by roughly $23 million first the prior year quarter due to favorable product mix.
Lower raw material cost, including roughly $7 million of opportunistic sourcing benefits and lower segment SGN a expenses, all partially offset by the impact of lower sales.
For comparative purposes rips in our second quarter of 2019, adjusted EBITDA was negatively impacted by a 1.5 million dollar customer bankruptcy bad debt write off that was previously disclosed.
I like to know how do you turn to slide six.
Given the extraordinary time, we find ourselves and I want to spend a moment to discuss what we're currently seeing in the market.
What a great strengths is our broad end market exposure in our business is not overly dependent on anyone customer or any one segment.
Broadly speaking during the quarter, we experience additional demand for pharmaceuticals, Sanitizers and disinfectants, partly due to the pandemic in volume softness and lubricants paints and coatings as economic activity slowed.
Looking ahead, we anticipate cerebral these end markets improving as economies reopened and those currently strong will remain that way.
I'd ask you to turn to slide seven.
Our flexible products and services segment second quarter sales fell roughly 9% burst of prior year quarter in a currency neutral basis.
Soft demand raw material price declines and corresponding contractual pricing adjustments were the main drivers.
Our second quarter, adjusted EBITDA fell by roughly $1 million first the prior year due to lower sales, which is partially offset by lower segment as cina expense.
We estimate that F.P.S. lost roughly $600000, an adjusted EBITDA during Q2 due to government mandated operated capacity reductions in Turkey aimed at preventing the spread of co. The 19 in that region.
Those restrictions are slowly being lifted and we anticipate operating at full capacity in fiscal <unk>, our fiscal third quarter.
But please ask you to turn to slide eight.
Our paper packaging second quarter sales fell by roughly $16 million versus the prior year quarter, primarily due to lower publish containerboard and recycle prices volumes were also negatively impacted by 24000 tons of containerboard economic downtime taken in the second quarter.
Paper packaging second quarter, adjusted EBITDA fell by roughly 4% burst of prior year as lower sales Rowley, partially offset by lower segment SGN a expense and by the incremental adjusted EBITDA contribution for 11 more days of care store assets. This year.
We estimate the P.P.S. experienced roughly an 8 million dollar adjusted EBITDA headwind during Q2 from non essential customer closures.
For comparison sake paper packaging second quarter in 2019, the adjusted EBITDA was negatively impacted by 9 million dollar inventory step up charge that was previously disclosed.
During the quarter, we announced a $50 per ton price increase for all grades of uncoated encoded recycled board effective with shipments beginning may 13th of 2020, which were continue to continuing to implement.
Yesterday, we announced the closure of our you are be mill in mobile, Alabama as part of our ongoing network cost optimization activities and then further enhance our capital deployment efficiency.
The total capacity the smell was 140000 tons, which includes a shutdown of our mills number one paper machine that was accomplished in October of 2019.
We thank all of our colleagues imobile for their hard work and we're committed to supporting them through this transition.
I'd like to ask you to slow turning to slide nine.
Similar to our rigid packaging or view ought to provide a little bit more commentary and what we're seeing in the paper packaging end markets.
Our core choice corrugated sheet feeder network consists of six state New York facilities East of the Mississippi River that service a mix of independent and integrated corrugated box plants.
During the quarter sales to integrated customers were softer as he internalized some of the volumes previously outsourced to us in their own networks.
Sales to independent customers were negatively impacted by lower durable goods demand as a result of the slowing economic activity and all the automobile manufacturing closures.
Similar to our rigid industrial packaging business, our tube and core business serves a diverse mix of end markets. We estimate that roughly 40% of our top 10 coupe tube and core customer markets were labeled as non essential businesses during the health crisis in Q2, which drags on our results.
We're particularly impacted by weak demand in qual yard in carpet segments.
Film core volume growth was solid versus the prior year, we expect demand for construction and protect aboard products to moderately improve over the remainder of the year.
I'd like to now turned over the presentation to our Chief Financial Officer, Larry Hilsheimer on Slide 10.
Thank you Pete good morning, everyone.
I want to ready reiterate Pete's comments do all of those impacted by Cobot 19, and express my thanks to each of our colleagues for their dedication and professionalism. During these very challenging times.
Slide 10 highlights our quarterly financial performance overall gripe generated very solid results second quarter net sales, excluding the impact of foreign exchange fell roughly 3% year over year. However, adjusted EBITDA rose strongly by roughly 12%.
That improvement was driven largely in reps.
But all segments and the corporate center recorded reductions in S. DNA expense.
Currency was a modest $2 billion headwind to total company results compared to prior year.
Below the operating profit line interest expense decreased by roughly $4 million and our bottom line adjusted class a earnings per share rose, 17% versus the prior year quarter to 95 cents per share.
During the quarter, we recorded a 38 million dollar loss related to the CPG divestiture, roughly 36 of that 38 million dollar relate relates to a portion of the PPS segments goodwill that we're required to allocate to the transaction that noncash charge has no.
Associated tax benefit, which is why our GAAP tax rate was more than 62% during the quarter.
Our second quarter non-GAAP tax rate was 32.6% and we continue to expect that rate to range between 27 and 31% for fiscal 2020.
Finally second quarter adjusted free cash flow improved by roughly $33 million versus the prior year quarter to a source of 70 million $79 million due to increased EBITDA and lower capex.
Please turn to slide 11.
Given the continued uncertainty caused by Cobot 19, we are withdrawing our fiscal 2020 adjusted class a earnings per share and adjusted free cash flow guidance as it is very difficult to estimate projected near term business performance with precision.
We are providing the key fiscal 2020 assumptions you see listed on slide 11 to assist with modeling.
In terms of what we saw in May in reps steel volumes were down roughly 8% on a per day basis versus may 2019, as customers destock, well ibcs were up slightly over 10% per day.
MPS core choice volumes were down single digits on a per day basis versus may of 2019, while volumes in our tube and core business were a bit softer than that.
Demand for corrugated sheets in tubes, and cores improved between April and May This year. So we're hopeful that we're beginning to see a positive trend as businesses reopened.
We currently believe our fiscal third quarter will be our weakest volume quarter before overall demand recovers later this year.
I think it's important to point out you know at this point that our quarters, obviously differ from most as many companies talk about their second quarter being or weakest, our third quarter will be our weakest. Please turn to slide 12.
We can't control how long this pandemic will last or determined what the ultimate impact will be to our global customers that said, we have taken steps to prepare to portfolio for an economic downturn by identifying variable cost reduction actions determining potential back office reductions or delays in hiring open positions.
And optimizing capital spending plans and working capital requirements. In fact, we've already implemented actions to generate roughly $40 million of EBITDA benefit over the remainder of fiscal 2020.
We believe our business today is significantly better positioned to whether a prolonged economic slowdown than it was in 2008, we've optimized our portfolio by closing or divesting 62, underperforming or noncore assets, while replacing him walking away from over 400 million of low margin business and securing.
New higher margin business of over 400 million via organic growth activities, resulting an EBITDA growth of over 65% since fiscal 2015.
We've expanded into newer and higher margin packaging substrates like the IVC and penetrate penetrated less cyclical markets such as food pharma and agriculture. We've also implemented a single ERP platform across the majority of our business, enabling better and faster decision, making which is critical during a downturn. Please.
Please turn to slide 13.
Our balance sheet is solid with substantial access to liquidity and a well structured debt maturity profile. We currently have 690 million of available liquidity undrawn on our revolver and another 72 million of cash and equivalents.
Only near term debt maturity, our senior notes due midway through 2021 with a principle of 200 million Euro.
At quarter end, our compliance leverage ratio stood at 3.6.
Well below our stated covenant of 4.75.
Given current market uncertainty to be prudent we are reducing our postponing noncritical expenses, including capital investments. We now anticipate spending between 120 and 140 million on Capex in fiscal 2020, roughly 10 million of the Capex reduction relates to the sale of CPG.
Roughly 24% of our remaining forecasted capex is earmarked for various growth projects and could be reduce further if needed.
Lastly, our largest pension program, which resides in the U.S. is fully funded from Iteris is standpoint with no required contributions for the next three to four years, although we currently intend to continue making contributions.
While our financial position is strong we will continue to evaluate our liquidity needs and options to reinforce our balance sheet as needed.
Please turn to slide 14.
Weve used this slide for a number is a number of quarters and point and the point is that our capital allocation priorities are from they are funding organic capex delevering, our balance sheet, maintaining steady dividends and pursuing our strategic growth priorities in Ibcs, IVC reconditioning and containerboard energy.
Operation.
Consistent and predictable capital allocation, we believe is critical to value creation. So what you see here is what you're going to get.
With that I'll turn the call back to Pete for his closing closing comments before our Q and say hey, Thank you Larry and if everyone could please turn to slide 15.
In closing I want to thank all of our 16000 global colleagues again for their commitment to grice and to our customers.
Well a lot is behind US there will be more uncertainty ahead as countries in communities reopened their economies.
That said I'm extremely confident gripes ability to navigate these uncertain times, we have a highly engaged in motivated team focusing on providing differentiated service to our customers, we're well positioned to serve a variety of end markets through our industry, leading product portfolio and our commitment to customer.
Service Excellence.
We are successfully advancing our strategic priorities on our balance sheet is strong.
Thank you for participating this morning. It were we appreciate your interest in growth and we look forward to taking your questions.
Okay remind us ask the question you want me to Chris.
So one on your telephone so we draw your question. Please press the pound key.
Just limit yourself to one question on one follow up.
He's done by why become part of the Kewaunee roster.
Your first question comes on the line of George Stifels of Bank of America.
Minds open.
Thank you hi, guys good morning.
Good morning, George questions.
Thanks for all you're doing on Kogut and congratulations on the quarter.
My two questions first in terms of the main volume trends Pete can you talk a little bit about geographic trends you might be thing and.
Kind of a parent statical here there was a comment about trend getting better between April and May and I wasn't sure what that was referring to the second question.
On asked unit cost reductions.
You did a great job there I think the year on year number was down roughly $20 million.
How much of that is sustainable going forward.
Is there any kind of one off that may be dissipates over the course, the year and what do you think you can do from some of these additional cost reduction efforts that you talked about.
Generally thank you.
Yes, George let me talk about some of the volume trends from April or May for your question, then I'll I'll ask Larry to comment on the S gene a.
So you look at volumes overall I think you first have to look in over the last four months the global health crisis, I think we've done a really excellent job in demonstrating we've really resilient.
And battle tested supply chain, so our sourcing and materials or regional but by design and we've had no.
Disruptions at all been very stable in our operational footprint is very diversified as we've talked about.
We've done an excellent job to demonstrate or a customers that we can deliver and very challenging times is both reliable and dependable.
Our value propositions, we always talked about security of supply and customer intimacy. So there's been some challenges, but if you looked at our volumes from April to match May transition.
Talk about on a per day basis because may.
Compared to a year ago as two less days. So if I could let me just walk through rips and then talk to about paper because they are slightly different end transitions on volumes from April may.
In our rigid business in large steel drums on a global volume basis per day.
Our law large steel drum business globally is down about 5%.
That evolution really is a line to the geography is around the world that are consistent with how economies are recovering to the co that 19 cases.
So in China for example in May the PMI was above 50%, which is a significant change in the last two or three months.
And the large steel drum volume in a pack was up 1% on a per day basis compared to April.
And if you look at Amelia May is volume a large steel drums were down 7% on a per day basis compared to April and North America was down double digits, no that's really reflective as economies reopened.
And.
Businesses are our transgressing across his health crisis, and I'd be seeing reconditioning, it's a much stronger basis.
It's not as high as the breakneck pace that we had in Q1, but we're still up 10% versus prior year and again, that's with two less days. So while we are challenged.
April may and steel drums around the world, we still see positive growth or IVC and I B C. Reconditioning and again, that's talking about a transition April to May.
As we talked about Lark comments earlier and prepared remarks, I think we're going to have more challenged volumes outlook and steel in our third quarter, which is made through July.
And Ibcs, we still expect to see double digit growth of 10% plus in that range for our third quarter.
If you look at paper packaging those trends are slightly different so we had a little more challenging volumes in paper packaging, particularly converting.
If you look at our volumes in our mill system.
We expect on a per day basis to be up 3% in may compared to April on a per day basis.
May backlogs in the ended June it's early June the backlogs in our mill system are very steady with four to five weeks of backlog.
You are be volume is improving in may compared to April up 1% burst may on a per day basis, and our CRP volume continues to be very steady particular in our team, Iowa in Sweetwater, Georgia facilities.
For full disclosure, we did take 5000 tons of economic downtime in containerboard on the West coast only that's really reflection not a market demand just a delay in AG orders in that market.
If you look at our volumes in April may and are converting operations paper in core choice, which is really tied into our containerboard system.
On a per day basis may versus April were up 6%.
And what we saw in the last eight days of May really strong volume at a core choice and I think thats reflective of the durable manufacturing businesses, such as the automotive plants starting to reopen in full up their supply chain needs.
Again this is a business as you know that has backlogs and visibility of less than 24 hours.
So we don't have tremendous visibility out past tomorrow, but again theres more positive signs that our may volumes on a per day basis are much improved verse.
First April and tubes and cores.
Or may volumes were flat to April on a per day basis.
And again, we have some high exposure in that business to our non essential businesses that are starting to gradually open without disruption and in that business through Q3, we expect gradual improvement from may into June and July.
Again overall I think in our paper packaging were cautiously optimistic.
That as the health crisis continue to recovers.
We can see improvement sequentially from may through the end of the third quarter and our paper business.
So I'll pause and then ask Larry to comment on SGN a.
Great. Thank you Pete and George with respect to the SG Nay when you really break it down year over year that second quarter, Yeah about 12.3 million of salary and benefit reductions 2.5 in travel and entertainment.
Professional fees were down about 3.2 depreciation of our I T O N system cause depreciation actually be up about two and half million.
And other miscellaneous things across the board local taxes bad debts. So it's kind of things what we're down about three and a half so overall about 19 million.
When you look at it is that sustainable we've had we've been focused on reducing our asked you in a cost for some time as you know.
Committing to get down below 10% by 2022.
So some of the reductions are just part of that effort. We obviously it put in a lot of actions as I mentioned to reduce costs, we did adjust incentives in the second quarter, which you pump the number up a bit but the long term.
If I got to the Chase we do expect that are SDMA will continue to run it at substantially lower levels than last year.
Thank you very much here.
Thanks George.
Your next question comes from the line off.
I'm just have some of Keybanc your line is open.
Pete Larry Good morning, I Hope you and your families are well yeah. Thanks Adam.
Yeah, Mike My two questions one on Pete if I mean, I'll start with Richard margins. Obviously, you had a phenomenal margin corner you mentioned many things obviously you had the S. Gionee reductions you also talked about opportunistic sourcing you had.
You had a timing benefit can you just talk about.
What exactly drove that rigid margin in the quarter, how much was opportunistic sourcing what exactly that was and how much were timing benefits of raws falling and prices not catching up et cetera, and then what your expectations are in terms of margins in that segment normalizing thereafter.
Sure.
Yes, I'll make a few comments and Larry can get into specific financial impacts of each of those categories, Adam but yeah. We were really pleased with the ripped performance and when you look it to.
That business, we consolidated that into a global organization nine months ago, only rosgaard leads that and he is really a leading a tranche organizational transformation and longer term.
We continue to expect to get benefits from a lower cost structure, a more efficient manufacturing footprint and also a continued push to.
Growing our higher margin products. So we really feel good about the improvement trend in that business.
The details really as we talked about we had favorable price and product mix, meaning we had higher margin growth products. We've talked about the IB see in reconditioning results, we had lower raw materials and advantageous cost.
For all material sourcing and we did a really cost the aggressive cost reduction activities. We consolidate two plants one in Brazil in one of the U.S.
Larry talked about organizational SGN, a rich reductions that we had a lot of discretionary spending.
Reductions and I'll, let Larry walk through the bridge and what those dollars men in each of those categories. Thanks, Pete I just to add Adam on it on a value add percentage.
We went from 45.8% to 50% in reps, so really nice improvement that 1% of that with some the sourcing opportunities and you know.
Yes, most companies would not need a sourcing group, if you're going to be able to buy it index prices. What you have them. Therefore is to work to markets and see if you can find opportunities in a dislocated market like we're in currently those opportunities surface more often and so our team did a great job of sourcing about 7 million of raw material cost Ben.
Fits relative to index prices.
Some of that benefit got offset by currencies in terms of how that translates over to U.S. dollars.
Last part of that benefit, but then also timing on you know we talked in recent years about the timing of our Pam adjustments being a drag on us it actually turn round for us a bit in this quarter's that was it the sourcing was about 1% the timing was about 1% and then the other 2.2% was just.
Really good activities around managing.
Pricing for non raw materials, we've been talking about how that's been ongoing for last year or two in some of that started to flow through.
In our quarter, if I go to overall adjusted EBITDA and you look down through those are the others are the pickup and asked DNA some change and just allocations because the PBS business getting bigger they get a bigger relative share of our corporate allocations, just obviously shift depreciation.
Actually was a drag as we implement the RP system and other things and there's a few other a negative things that are offsetting that get us to that 4.4%.
Increase in our EBITDA margin.
I really appreciate that and just on the LCC situation, obviously, it's been a roller coaster ride this year and.
Defied I think everyone's expectations, both on the way up and now I think on the way down so price June prices are coming up tomorrow I think.
Most people are expecting a decline. The question is how big of a decline. So can you talk about how much of a drop you're expecting in owes you see in June and perhaps thereafter, as well and and how that's influencing your thinking about the you RV price increase considering that you are be demand has been really challenging. So the increase appears to be tied to oversee C.
Which is about to drop I think by at least 20 Bucks. Upon so can you walk us through your thinking in there in euro cc expectations for the balance of the fiscal year. Thanks for your.
Adam we're expecting a $30 per ton decline based on our exposure to see markets and our recovered fiber group.
Oh wait and see definitively tomorrow, I know people have different opinions.
Regarding our price increase was really predicated on cost inflation as well as market demand as I as I indicated.
Our volumes were up in our Boxboard mills over 4% versus prior year.
And again in May verse April going into May our volumes continue to be steady we had steady backlogs four to five weeks. So when you look at cost inflation, though cc. There's a 90 Tyler a ton increase from January to present in a third.
The dollar ton decline in pricing that occurred in February on Boxboard products, you are being CRP, which created a 120 dollar price cost squeeze. So we are moving forward on the price increase in from mid May and we need to maintain acceptable margins for our shareholders and that's our position.
Thanks, Pete Yep, Thank you Adam.
Your next question comes on the line those Ghansham Punjabi of Baird. Please go ahead. Your line is open.
Hey, guys. Good morning, ARIA Hey, guys are you doing.
Yes. Good. Thank you I guess you know can you can you Pete given some more details on the end market verticals for reps that you have a blending the pie chart on slide six.
A lot of companies in the chemicals spectrum and industrial that our downstream from you have talked about 20% plus declines in April.
The bulk of the World was shut down in the month and your volumes were actually up in North American and EMEA region. During the quarter. So can you help us reconcile that outperformance what did share gains play Oh.
With those part of that as well.
Yes, so it's a good question and really it's a case of has in the have nots on the end market exposure is in our global rips business.
And as you can imagine we saw a really strong march sequentially in our quarter. So February was was fairly consistent March was very very strong and in the second half of April we saw a fairly strong firearms and it started tailing off at the end of April and as I indicated.
My comments to Georges questions in May, but if you look at the end markets, where we saw really strong volumes on a global basis were exposures to farm and personal care, we had a lot of customers transition some of their manufacturing capabilities to alcohol based disinfectants.
As I indicated in March we had really strong restocking in the middle of the quarter.
And it continued into early April the offset of that was lower demand and lubricants paints and coatings and as you can imagine.
When the economy shut down mid March through April lubricant business is really negatively impacted by their reduced amount of commercial and industrial vehicle traffic as well some lower a manufacturing activities and honestly central businesses. So.
The said that the us exposures to our I be seeing reconditioning business or much more positive because they're more geared to some of those products that we're having stronger.
End market growth and our steel drum while were flat year over year I think that's reflected in more of the commodity and bulk <unk> lubricants and bulk and commodity chemicals, but I think we benefited just from a from over stocking.
In March and April you know, our large plastic drum business was up 2.5% in the quarter and that exposure again was to farm and personal care with a little bit lower AG Chem demand.
Mainly because of access to labor in some delayed seasons.
We also had a little bit of addition, because we added new capacity U.S. and what we're doing well and that markets.
But again in the IB seen reconditioning, we that demand exposure food disinfectants in detergents really were beneficial to us in the quarter.
We expect some of those markets to maintain their strength, but it's very clear that destocking is occurring at the end of April into May and we expect through arc third quarter that Destocking is normalized.
It is easy to your other part of your question Goncz I'm on a share pickup.
We we feel very confident and know that weve gained share of wallet and new customer business and we attributed directly to our focus on customer service at the same time you Pete mentioned in his comments, we walked away from another very low margin high volume customer and.
Okay.
And we've also walked away from some other low margin business in other parts of the world, but net net we feel comfortable that we're gaining market share in the places we're targeting.
I think what's real and then more my second question in terms of.
Sorry go ahead.
This is a comment was we you know our growth initiatives strategic growth initiatives Ibcs, but also in Jamal, Saudi Arabia that business really continues to go very well and their exposures are outside of the middle East. So we're real pleased with the investments we've made and they're starting to show up in some of our growth.
And the profit assumptions.
Okay and then for my second question you know in terms of the opportunistic sourcing you benefited in Twoq you is there should we assume that there's.
A positive component for the third quarter as well and then just in terms of your base raw material basket forward on for the cost structure for reps.
The Paps continued to be favorable in Threeq, you as well.
To the same extent.
Yes.
Got into my would.
Those things tend to be opportunistic I think it's hard to build those into your model and count on them recurring as I mentioned, we do a charge our team.
In sourcing to achieve some of those we we budget in.
Achieving a benefit to a index spread.
But.
We do think there'll be some in Q3.
Thus far it would not say it would be at the level of Q2.
Okay perfect. Thanks, so much since they say.
Thanks, Jonathan.
Your next question comes on the line off Mark will be of bank of Montreal. Your line is open.
Thank you good morning, Bake morning, Larry.
Mark.
I Wonder just going back to the Adam's question around ULCC is it possible to get a sense of what euro sixc costs look like in the second quarter and then best as you can estimate now based on May and what you're seeing in June where you might end up in the third quarter.
Yes, we basically you Mark if you go back we saw obviously see about 82 Bucks a ton in April and it rose up to 119 in May so really steep jump up you know our view is we think things will continue to trend down but the.
Challenge with trying to project out much is one and one of the reasons. We withdrew guidance is you know if opening the country backup creates another spike in severe hospitalizations and things you know who knows where this thing goes because.
Clearly the.
Drawdown shutdown of retail and restaurant trades impacted this the source of both Cc dramatically and Yeah. Then you combine that with really strong demand in the entire.
Paper space.
So we have our view that it's going to be at least 30 Bucks tomorrow, we do think that it should trend down if we don't run into a spike because you have those businesses.
You know opening up and that source should be coming on.
And we think the demand side. It is probably a little weaker just particularly if you look at export and that kind of thing. So we think theres a path down, but we haven't really tried to forecast exactly where we think that ends up beyond the next a reduction tomorrow Mark.
You have a sense Larry can you give us any kind of a ballpark number for what you might have averaged during the second quarter was a little art from the outside the kind of know out is rolled through your inventories than we we know that quite happened during the quarter.
Yeah do you remember what the average number was my Matt Yes. So I'd say February March and April we just ran those numbers 37 in February a 47 in March roughly 82 Bucks in April yeah. So.
Let me get on an average cost per quarter.
Okay. That's.
That's really helpful and then.
I wondered.
Just on on downtime, you mentioned 24000 and containerboard in the second quarter dissolve the only amount that you've taken in maybe the 5000 on the West Coast Pete mentioned.
Yes, it was really isolated mark to a specific delay and some customer orders and it wasn't really reflective of the demand pattern, we're seeing and in our containerboard system.
Yeah Okay.
Last one for me is just kind of related to that one of your bigger competitors like walking away from some sheet business last month, when they reported I wondered if you can just give us some more general color about what you're seeing.
In both pricing and volume in that sheet market.
Yes, well our exposure in our core choice business, because we sell predominantly to independent box makers and we also sell the integrated box plants. It's really two worlds most of our exposure or not most but a large percentage is is to durable markets and the automotive plan exposure.
Users with them going down really.
Put a challenge in our volume so anytime you have a market in the sheet market.
Is very consistent with ours with others when it gets.
Volume sensitive to the market can get little chippy, and I think there's experience so that throughout the quarter.
You know, it's it depends on what a.
Me back up you have some integrated box plants that will decide because their volumes might not be really strong they will get in the sheet market for a short term.
And their methodology might be different than a true sheet feeder so that that attributes that shipping this but oh, we try to stay fairly core to what we do which is real high product complexity LOE was high turnover of orders low low msf.
Order quantities and try to take a value a value approach so.
There is chip in us but.
That is pretty common in this type of environment. So, it's nothing new or unusual mark in our view.
Okay. That's helpful. Thanks, Good luck order thank you Mark.
On your next question comes from the line, though Steve Shekel far off the beaten your line is open.
Thank you good morning, everyone.
Dave.
So just to clarify was there about 4 million dollar transfer from rips to paper packaging in terms of overhead in the quarter and is that the the run rate.
That's about it Steve Yep.
Okay.
That's that's fair, it's kind of late in the session as well.
And then.
Pete said that fiscal Q3 will be the weakest from a demand standpoint, and looking back over many years Grace has been very much second half story. So I guess I'm wondering if that's still the case.
Yes from a from a demand standpoint. The reason we pulled guidance is it is uncertain, but our best guess today is that as re re a economies reopen.
The pace of our volume we'd be dictated on how disrupted supply chains are.
And the the velocity of de stocking in our rips business and so that'll that'll that'll determine how we evolve in our Q3 on volumes.
We do know that in our rips business the conical season, which is AG related we're optimistic that that'll be a b a positive.
Position.
We believe in in the West coast, the U.S., but that will be positive.
Volume for us in our fiber business in steel drum business, our Latin America juice season AG season has been delayed.
So that's some potential upside, but it's just too uncertain with.
What we see in the rips business I'll tell you in paper were a little more optimistic I think our volume trough was in April in our paper business in our converting business and our margin trough will be may because as we've talked about the FCC squeeze, but I think you'll see see quite.
Movement in that business in Q3.
Because the exposure to durables and the economies are reopening all that said if you don't if you had a.
Control reopening the economy's without any real significance of still apply disruption.
And you don't have a severe second wave of coded cases, we see an evolution in Q3 toward the end of Q3 and improving in Q4.
Yes, Steve IDE supplement what Steve what Pete said, I mean, Pete and I tend to be pretty optimistic people generally I have to put up my CFO had sometimes be pessimistic by profession, but.
You know when you're when you.
When we tried to go through our normal forecasting process.
Our business unit leaders are doing everything they can to talk to all of our customers yeah, our customers aren't able to tell a much out more than 15 or 30 days in and most of what we hear tends to be a bit pessimistic, but then every time, we get the weekly results they seem to be still going fine obviously made trail down a lot.
And as Pete mentioned, we think thats tied to Destocking, but we we tend to be a GDP industrial production type of business in all of the predictions of the economist I mean are showing the second calendar quarter or the year just diving down in the 30 plus percent down well that happens that should have a net.
It does impact on our business and so those disparities between how Pete and I are feeling about things in some of the optimistic things we see measured against what we're seeing is all the economist telling us it's going to be Armageddon.
Habits at a point, where we just decided we need to pull guidance.
Yeah did you see Larry that you had $40 million in EBITDA benefits in the second half of the year Leukoscan.
Actions initiatives that that we've taken which also plays into the answer to the question from George about do we believe we'll be able to continue seeing yes, you nailed down low.
Some of those there there's some revenue items, there's some cost items those kind of things, but yes, 40 40 million for the second half year.
Well, that's good alright so.
Despite the volume from from earnings standpoint could still be.
Yes.
A push or even skewed a bit towards second half.
Obviously, the worst was in Q1.
Right in the quarter just.
I'll just leave it there okay. One other oddball question.
I've been watching too much TV, just recently I've seen ads for these baxter bags from waste management that carry 33.
3300 pounds and it looks exactly like one of your Flexibles are you familiar with those that an opportunity here you know what I'm talking about.
I have been wash not much TV, Steve, but I see.
Fixture.
But I would be lion teams like it intelligently talk about if that's an opportunity to or not but I will ask Hari Kumar and I promise you will have a response to me by Tomorrow [laughter]. Thanks for your yeah, It's a Facebook.
Thanks.
Well done it's a flexible dumpster, that's what it is.
Okay, and I think I'd call waste management.
Thanks, Steve.
Your next question comes from the line of Justine back now Oh Kimco Research your line is open.
Hi, good morning.
Good morning, Larry.
Justin how are you.
Good. Thanks, you guys are well.
Addition, I guess to start this sourcing benefits.
Eric rises 7 million in the second quarter.
With some carryover benefit a third quarter. If we were to look back prior to the second quarter, what type of levels with the sourcing benefits have run that sort of quarter to quarter was material or is it sort of de minimis prior to the central corridor.
It was that slightly less in the first quarter adjusted and if you go back further and actually if you went back in our transcripts a couple of years a number of years ago. We were almost regularly talking about strategic sourcing benefits they faded away in 18 and 19 and.
Virtually had none and you look at the year over year comparisons and we would talk about that.
But like I said, when you get the dislocated markets, where things are being disheveled and customers businesses and industries are shutting down suppliers end up having supply that they don't have nowhere to place and you have those opportunities if you're sourcing groups out doing a good job.
Great. That's helpful. So it's sort of like I mean, it's sort of like a trading type.
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Profit when the opportunity presents itself I guess that's right.
Yeah I'll move on to the second question, which is.
Well first of all came down for five below yet is that mainly because of the proceeds from the sale and if so should I read into sort of similar interest expense as.
Sort of a harbinger that why your withdrawing the free cash flow guide one might not expected to be too dissimilar from your prior guide.
Or maybe I expected number that you're.
Yeah, just said, okay, great I feel comfortable answering your question, but I'll actually have David Lloyd our treasurer answer, it's because he's sitting right here and he'll he'll be much more articulate an accurate than me, yes. So that the interest expense decline is really driven off of a couple things. Obviously, we had a fairly heavy pace of debt repayment during the quarter.
You know at least part of which was driven by proceeds from the CPG divestiture, obviously variable interest rates were at significant lows and so we benefited.
From that significantly as well and then we've done some things in the portfolio as well to drive drive some lower interest costs also.
And then on continue.
Yes, so I think the.
What we have forecasted in the in the past is not going to change a whole a heck of a lot from an interest rate standpoint. So.
Most of our rates are fixed at this point and yeah.
And then I guess for the second part of that question. I mean is that presumptuous to sort of assume based on interest expense not changed too much that.
The free cash flow.
Thank you.
While sort of pulled is.
There's no reason to expects its be too dissimilar from the prior year.
Yeah, I mean, it from the impact of interest expense, that's true I mean, obviously with us.
Pulling back on providing guidance I mean, the main driver of cash flows obviously operations and yeah. So.
Thats why we are not giving free cash flow guidance for the remainder of year either Justin.
But we do feel very confident about how well our.
Treasury groups, managing cash around the world and how well our business is doing focusing on working capital. So we feel very good about what our cash flow for this year.
Be but it's all going to be relative to results and.
Obviously as we said, there's just too many variables out there right now for us to give any kind of.
Guidance range around that.
Okay. Thank you for answering that question.
The best.
Thank you Justin.
Your next question comes from the line of keep Haiti of Wells Fargo Securities. Your line is open.
Hi, Good morning, Pete Larry Matt I Hope, you're you and your families are doing well.
Thank you gave same for your guide.
Thank you I guess I'll I'll try to take a stab again at the.
At the guidance question, just trying to tie in P. to your comments about volume trajectory.
Can you I guess, maybe any sense of directionally.
If the volume environment plays out as you expect that EBITDA would be down on a sequential basis from fiscal Q2 is that what I'm hearing.
Well I mean, it's hard to predict that but again, we expect our volumes and a rigid business to be much lower in Q3.
Some caveats is how fast supply chains recover and weather disruptions determines the evolution of that within the quarter into Q4 I think it also depends as economies are recovering from the health crisis and you look at the case rate improvements do you.
Have any disruptions or.
Negative events on the medical side that could hamper.
You know that recovery I think there just a lot of unknowns.
That that could be a variable that could impact it but as what we know today, we think we're going to have a tougher volume month in reps in Q3.
Worsen made and slowly improve in June and July.
Better view in Q4 in paper I think you're going to see on improving scenario in volumes. All those I mentioned April was a lower point for our converted products in April but again the variables on how fast the durable market opens how fast the automobile manufacturer.
True plants open what's the demand of consumers is or disruption during the health crisis is really challenging to predict a we're trying to give you our best view of the volume scenarios across both rips and paper, Yeah and gave you think about it.
Auto like Pete explained earlier had it has a big impact on our core choice volumes and they peaked up toward the end of May as some of the auto I came back online, but and you nice articles in the Wall Street Journal today about consumer demand and some of the dealers not having enough inventory on F. One fiftys another kind of vehicles.
But then you have the challenges they have because their supply chain is so complex and so some of them or haven't struggles because they can't get parts from Mexico or whatever.
So it that it just makes it really really hard to give you a solid answer or where do we think things are going.
Understand not a problem alright, maybe this will be hopefully this is easier with I guess close in the second machine and mobile, Alabama I'm assuming the.
You know the residual that business would be kind of redistributes other facilities, but can you give us a sense of what fixed cost savings might look like and is that I'm, assuming that part of the 40 million that you talked about or is that above and beyond or something separate yeah. There is that I gave there's about a million and a half just shy of that for the remainder of the year really.
Good to closure nights, a 5 million on annual basis, and just to put this in context.
You know you recall before we ever got into co, but we've been talking since last June about being in industrial recession. So we kicked off a process last fall of going through in reviewing every single one of our plants across all of our businesses that has led already the closures of the two rips plants that Pete mentioned, then that was also the Genesis of.
The closure. This plan, it's just not an efficient one and you're right. We shifted all the business too we will shift all that business to other facilities. It just wasn't a cost effective.
Operation Unfortunately, and gave just from a customer transition its little easier for us because over 95% of our customers not facility for all consumed internally within our own tube and core facilities.
Interesting okay.
And I guess, maybe the last question you I think Larry It made a comment of alternative sourcing of alternative.
Products within rips outside of materials, which I think is maybe 60% or so the cost of goods sold wheel.
So that sounds like it's a sustainable go forward benefit.
Anyway to put a number on that or quantify for us.
Yes, it wasn't I, maybe I'm, maybe I misstated something there we have it was pricing and other actions that added to that margin a value add if that's the comment your relating to.
You might remember us talking about as we reach a it yeah initiated our contracts on renewals, we put in for openers for other price areas.
Other than just the standard raws.
So yeah, we do we do think and expect that those things should continue in our business, but what you won't see as the year over year, because obviously as you go through that once but we do think a lot of that'll be sustainable in our margin.
Understood. Thank you guys. Good luck thanks Kate.
On your last question comes on the line also I've done just assume of Keybanc. Your line is open.
Pete Larry Thanks, So much for taking my two follow up questions. One is just going back to what I gave was getting at just in terms of the timing of EBITDA. So.
When you went into the year, you're thinking Threeq, you would be the high point and that second half EBITDA would be higher than the first off now obviously that was pre cobot sell a great deal has changed.
Is it still reasonable to assume that to age would be better than one age or you. Just you have no way of knowing no. One really has much visibility and so that that's statements probably out the window and there's really no wait and now.
What do you feel about that Adam I think well first of all I Didnt have chances I hope you in your family at all Thanks Barnwell.
Second third quarter is clearly not gonna be what normally is that that's you know painfully obvious to us and like I said, if the economist are right about where the calendar second quarter is you know we should see negative impact in June but.
But again Pete Nike.
Having optimism about it so it's just all over to place about where we think it could be what we do not think Threeq you is going to be what we thought it would be we do expect that will start to see recovery in July and then through the deal our fourth quarter.
But trying to predict how strong that is gonna be yeah, I mean, I listen to more economists calls than I ever have in my life and I always listen do a lot and the range is all over the place.
So we can get a handle on it to feel sure confident to give you real true guidance.
No I understood and just one last one on on paper bond. So I think you said core choice volumes are down single digits in may and that tubes, and cores are down a little more than that could could you be a little more precise about the extent to which the core choice in tubes and cores are down year on year in May and then just more broadly we've looked at container.
The board volumes and past recessions and they've averaged down about 6%.
In the months in which the U.S. was technically in recession, and usually you RBS a bit more economically sensitive than even containerboard, so who knows how long. This recession will last but just based on the economic conditions. You see do you think containerboard and or you RB volumes are are more likely to be upward.
Yes, it's.
Once of the year on a year over year basis.
Yes, So let me let me just refer reiterate what I've mentioned about core choice in tubes, and core volumes to my comments were about.
Transitions from a from April to May.
What wasn't referencing what our quarter volume so in core choice.
From a may April and May on a per day basis, they're up 6% and if you remember in May we have to less working days than a year ago. So that's why I'm referencing sequential evolvement of corrugated so.
6% up from April May and the fine the last eight days at core choice has been incredibly strong and I referenced as durable manufacturing businesses that were closed in deemed non essential during the shutdown that included automotive, they're starting to fill up open up and starting to fill up their supply chain.
Hey needs in that business core choice has a lot of exposure to durables and automotive. So that was my comment on April may transition, we don't really have any backlog down 24 days. So other than telling you what I know today.
I'd be thrown it started a dark or trying to think beyond that in tube and core.
Relative to May or May volumes first April sequentially they are flat.
And again going forward, we have a high exposure a non essential.
Businesses that are gradually reopening in based on.
How they come up whether their demand is positive or there's disruptions in their supply chain would dictate what our trajectory is on volume in that business in Q3.
In regard to your second question to trying to project, what our volumes may be a new in box Board and containerboard you know that's a hypothetical question that it's because the uncertainty we have right now I just not going to go there and try to predict what those two businesses will do beyond what we know today.
Yeah. Thanks, just one on the your year over year again in core choice and and tubes and cores Pete I did hear you correctly write down single.
Single digits in court yeah.
Yes, so so if you're talking about Q2 volumes, our Q2 volumes in core choice for flat versus prior year.
And our tube and core volumes Q2, this year versus Q2 prior year is down 5%.
That was in Q2 and then in May Yeah, I'm, sorry go ahead, mark or yen May I said that the.
Yeah.
Of course choice was down eight high single digits into of course slightly more than that and that's because I didn't say, there's two less working days. So the it's a tough comp over quarter equals out but on a may to make comparison that it's just not not equal that's why I referenced on a per day basis April may.
So the down eight is not on a per day, it's too it is well it is as well add them on a year over year basis, but so, yes core choice and tube and core for down.
So.
One high single digits, one low double digits.
Got it thanks, so much in and best of luck in the quarter Pete Larry.
Thanks, Adam.
[noise]. There's another question from charge Stifel Bank of America. Your line is open.
Hi, guys I'm, sorry about that I know I got dropped from the Q I'm. Just I was curious just to be put 30 seconds of comments on the C. OSI scores that you're seeing in rips you saw some nice improvement there. Thanks guys. Good luck in the quarter.
Absolutely did last question yeah.
Yeah. Thanks, Georgia, we are seeing increased see OSI scores across the whole portfolio.
And North America, and APAC now are at a 95% level. So early pleased that that.
A big part of the improvement those a may or may is driving toward that low 90% range. So I think again, having one global organization with a very singular focus is making a significant impact as Larry mentioned earlier, I think thats driving some of the opportunities.
We're seeing with new customers, our expanded wallet share in some of our rigid packaging a customer base. So thanks for the question.
Yeah. Thank you, we'll take the rest offline have a great day.
Yeah.
And your last question comes sums align those just came back now Oh Kimco research your line is open.
Oh, Thanks for the follow up just quickly the 40 million or cost actions that you are targeting for the second half just verified none of the benefit there was in the second quarter and then how much of that 40 million is sort of structural.
Versus a temporary yes.
Beyond the second half fiscal year.
Yeah. They just in the vast majority of it is is variable.
And not structural the structural stuff was already built into our budget and process for the year. So we're not counting that because we had already planned it.
Towards our focus is getting down below 10%.
By 2022.
Great. Thank you.
Thank you.
There are no further questions. How this time I tend to called buckles, that's their presented.
Thanks, very much to comment thank you very much for joining us today.
I appreciate your interest in great Hope that you have a nice we can add.
Take care.
Hi, Matt.
Gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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