Q3 2020 Greif Inc Earnings Call
Can you will need to press star one on your telephone keypad, we'd like to ask you that you limit yourself to one question and one follow up during the Q in a please be advised on today's conference is being recorded if you require any further assistance. Please press star zero. Thank you I'd now like to hand, the conference over to your speaker for today that I can.
<unk> Investor Relations and corporate Communications. Please go ahead.
Thank you Jack and good morning, everyone welcome to Grice third quarter fiscal 2020 earnings conference call.
On the call today are Pete Watson, Vice President and Chief Executive Officer, and Larry Hilsheimer Grice, Chief Financial Officer.
Pete Larry we'll take questions at the end of today's call.
Accordance with regulation fair disclosure, we encourage you to ask questions regarding issues to consider material because we are prohibited from discussing significant nonpublic information with you on 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 will be referencing certain non-GAAP financial measures and reconciliations 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.
Hi, Thank you Matt Good morning, everyone. Thank you for joining us today.
As we expected during the third quarter, we faced unprecedented economic turmoil caused by the global health pandemic, but the gripe team responded and delivered solid results through strong cost control and operational discipline.
Through that focus we generated solid free cash flow and pay down debt.
This is only possible thanks to the commitment of our global Greiff team.
They are extraordinary dedication to our business and our customers and the pride they have and safely packaging and protecting critical goods and materials that serve the greater needs of our communities all around the world.
The coded 19 pandemic remains an evolving situation. We are focused on executing enhanced health and safety protocols to safeguard the health of our colleagues and ensure the continuity our of our supply chain to serve our customers.
During the quarter, we achieved an all time high trailing four quarter customer satisfaction index score, which further strengthens our standing with customers.
And while profits were lower due to soft industrial demand and a significant price cost squeeze and our paper packaging business free cash flow remained roughly flat to the prior year and we have reduced net debt by more than $260 million versus the prior year quarter.
Please turn to slide four.
Our rigid industrial packaging business delivered solid third quarter results. Despite significant volume decrease decreases due to weak demand in the global industrial economy.
Global steel drum volumes declined by 10% versus the prior year quarter and demand was strongest in China, where volumes rose, 6%, thanks to an improving economic activity.
As you move west to our mayor region demand was weaker.
While the middle East in North Africa business delivered steel growth of 6% versus the prior year and the Mediterranean region and grow by grew by low single digits, our central and western Western European steel drum volumes declined by low double digits due to weak chemical and lubricant demand.
The Americas region experienced the weakest conditions with steel drum volumes in the us down by almost 20% versus prior year. This was a result, a weak demand for industrial paints chemicals and lubricants.
Global IVC production fell by roughly 1% as we face weaker demand from specialty in bulk chemical customers.
Rips third quarter sales fell roughly 79 million dollar first the prior year quarter on a currency neutral basis, due to lower volumes and raw material price declines and corresponding contractual pricing adjustments.
Despite the decline in sales reps third quarter, adjusted EBITDA fell by only $5 million first to prior year quarter due to lower raw material cost primarily attributed tribute able to roughly a 5 million dollar opportunistic sourcing benefit and strong cost control that resulted in lower year over year to.
Operating expenses and segment SGN a expense.
Finally, despite considerable external challenges in the quarter Rip continues to demonstrate improved EBITDA on a trailing four quarter basis.
Rigid industrial packaging businesses already delivering profits well within their fiscal 2022 commitment range.
I'd ask the please turn to slide five.
I'd like to spend a moment to discuss what we are currently seeing in the market.
The weak volumes in Q3 were anticipated and communicated during our second quarter call, but we believe the worst is behind us as our year over year still drove drum volume comparisons improved throughout the quarter after bottoming in may.
That said the pace of improvement is somewhat slower than what we had anticipated a Q2.
This slide highlights major end market progression for our largest rip substrates, which is steel drums.
But broadly speaking we continue to see positive demand for food flavors and fragrances during the quarter. There is improving demand for chemicals is the auto manufacturing is returning but we continue to experience softness in industrial paints coatings and lubricants I'd ask you to please turn to slide.
Six.
The flexible product segment third quarter sales fell roughly 5% first the prior year quarter on a currency neutral basis due to soft demand raw material price declines and corresponding contractual pricing adjustments.
Third quarter adjusted EBITDA was roughly flat for the prior year. Despite the slower sales thanks to strong cost control, resulting in lower SGN Ace segment expense.
I'd ask if you turn to slide seven.
Paper packaging third quarter sales fell by roughly $70 million first the prior year quarter, primarily due to lower publish containerboard and box board prices and the divestiture of our consumer packaging group. We took 10000 tons at containerboard economic downtime early in Q3, but not in July or.
Thats, thus far in August.
Paper packaging third quarter, adjusted EBITDA fell by roughly 31 $39 million versus the prior year, largely due to product mix and a significant $37 million price cost squeeze.
The team also demonstrated strong cost control management and offset some of the headwind through lower manufacturing and SGN a expense first the prior year.
If I could ask you to please turn to slide eight to give you some color on what we're seeing in the PPS markets.
Volume in our core choice corrugated sheet feeder network improved by 4% versus the prior year quarter.
Volumes have progressive lease strengthen since may due to improving demand and durables and a recovery in the auto supply chain and solid ecommerce growth.
And our tube and core business fiscal third quarter volumes were down 10% versus the prior year.
But showed progressive improvement in the quarter was down 4% in July.
We continue to see some demand weakness is most pronounced in non containerboard paper mill segments, and textile end market segments film and construction market demand continues to remain positive.
I'd like to now turn the presentation over our to our Chief Financial Officer, Larry Hilsheimer.
Thanks, Good morning, everyone I'll start by reiterating Pete's comments and thank the global gripe team for their continued dedication. During this coded 19 crisis. The teams professionalism has been remarkable given all of the external distractions and we greatly appreciate their efforts.
Slide nine highlights our quarterly financial performance, our third quarter was very challenging as expected. However, we generated solid free cash flow and paid down debt as promised.
Third quarter net sales, excluding the impact of foreign exchange fell roughly 12% year over year due to lower volumes lower selling prices and the divestiture of the consumer packaging group.
Adjusted EBITDA fell by roughly 22% with the bulk of the detriment driven by the EBITDA reduction in our paper business that paid Pete described.
All segments achieved reductions in SDMA expense.
Below the operating profit line interest expense fell by roughly $5 million, our GAAP tax rate during the quarter was roughly 22%, while our non-GAAP tax rate was roughly 23%, we expect our non-GAAP rate to range between 26 in 29% for fiscal 2020.
Our bottom line adjusted class a earnings per share felt the 85 cents per share.
We recorded roughly $16 million of non cash impairment charges in the quarter, which roughly 11 million relates to the closure of the Mobo mill announced at Q2.
We also recorded roughly $19 million in restructuring expense, including roughly $9 million to exit a multi employer pension plan as a result of plant consolidation within our rips business.
We view this plan exit as a positive development as it prevents exposure to probable increased obligations in the future.
Finally, despite lower profits third quarter adjusted free cash flow held roughly flat at $707 million versus the prior year quarter, thanks to $7 million of lower Capex and stronger working capital performance. Please turn to slide 10.
Given our solid operating performance and better line of sight into customer demand and only two remaining months in fiscal 2020, we are reintroducing our adjusted class a earnings per share and adjusted free cash flow guidance for this year.
We're also providing the key fiscal 2020 assumption GC listed on slide 10 to assist with modeling.
We expect to generate between $3 and 3020 cents per share for fiscal 2020, which implies roughly 66 cents per share in fiscal Q4 profits are anticipated to be lower sequentially from the fiscal third to fourth quarter due to normal business seasonality higher SGN a due to the.
Santa of releases that benefited the third quarter.
Last opportunistic sourcing cost benefits, which we do not forecast.
Softer sales in our high margin selling business in the us and a sequentially higher non-GAAP tax rate in the fourth quarter. We all also assume most cc cost of $61 a ton in Q4.
More importantly, and in line with our financial priorities, we expect to deliver between 260 in $290 million and adjusted free cash flow from fiscal 2020.
We assume capex to range between 120 $140 million for working capital will be a source of cash in for cash taxes to range between 75, an $80 million.
We'll reevaluate our guidance practices again at the end of the fiscal year, two aligned to our visibility into customer ordering patterns, but let me emphasize we have no plans to move to a regular habit of providing quarterly guidance.
Please turn to slide 11.
Our capital allocation priorities are unchanged in are outlined on the slide they are funding organic capex delevering, our balance sheet, maintaining steady dividends in pursuing our strategic growth priorities in Ibcs, IVC reconditioning and containerboard integration.
Our balance sheet is extremely solid with roughly $523 million of available liquidity, including 99 million of cash.
Our only near term debt maturities, our senior notes due midway through 2021 with a principle of 200 million Euro.
At quarter end, despite substantial covert recession negative impact to EBITDA, our compliance leverage ratio stood at roughly 3.72 times well below our debt covenant of 4.5 due to our success and paying down debt.
With that I'll turn the call back to Pete for his closing comments before our unit. Okay. Thank you Larry and if everyone could please turn to slide 12.
In closing I, just want to thank our 16000 colleagues again for their commitment to greifs into our customers are diverse global team is highly engaged and is providing differentiated service to our customers.
With our industry, leading product portfolio, we are well positioned to serve a variety of attractive markets around the world as businesses reopened through sharp focus on cost control and operating discipline given by the Greif business system, we are generating solid cash flow, despite considerable external headwinds and our balance sheet.
It is in great shape.
Thank you for participating this morning, we appreciate your interest in Greiff, Jack If you could please open the line for questions.
Certainly again, we'd like to ask you thought you limit yourself to one question and one follow up question to allow everyone an opportunity.
To ask a question. Please press star one on your telephone keypad, George Staphos with Bank of America. Your line is open.
Hi, everyone. Good morning, Thanks for all the details hope you're doing well, hey, guys I want to dig in a little bit into cash flow and my first question. So.
Recognizing this is an unprecedented time as you put it.
The free cash flow guidance range for fiscal Fourq, you is fairly wide by $30 million I was wondering what the swing factors are there why it's particularly wide given there is only a couple of months left to go and then if you could remind us.
Capex is down I think year on year in the fourth quarter yet.
Free cash flow guide for Q versus Fourq, you last years down $90 million again, what are the key drivers here that I might be forgetting about in terms of why you'd be pleased with that outcome.
Thank you George.
So in terms of the range of cash flow.
Let me do the last one first I mean.
Clearly in the we have done an extremely good job of generating cash and the last 12 months. If you look at the trailing 12 months, we've produced $322 million of free cash flow.
So you know a lot of those activities.
Began some time ago and we saw the benefits of those fallout in last year's Q4.
But because of the production of cash.
Through the early parts of this year. There is generally just left less to generate and last period of the year, We really had phenomenal performance in working capital management in the fourth quarter of last year, we become much more consistent in that.
But we enhanced our performance again in the third quarter of this year, but as we have every quarter and so it just is even it out a bit more but if I look at a range for the last quarter Theres couple of things going into that George we we are expecting to complete the number of capex.
Projects, but we've run into difficulties frankly in having suppliers get us.
Equipment disorder dose kind of things and obviously, they're not going pay for it till we get it so theres some flexibility in that range for that and the other it just where are we going to end up on working capital during the fourth quarter. So we built relatively wide range in for basically those to the other thing that can fluctuate a bit is we've got a number of.
[music].
Yes closures to tax exams that is what ended up helping us.
Have a substantially lower tax rate in the third quarter, a number those are ongoing and some of those could close you could end up needing to make payments or not and so those three factors that capex volatility the working capital volatility in the tax timing on payments or the reason for the wider range in that fourth quarter guidance.
George.
That's great very very clear my other question I'll turn it over can you give a little bit of color in terms of what you're seeing out of core choice can you talk at all about what you're seeing in terms of targeted markets containerboard markets August how far is your order book stretching and kind of qualitative commentary would be great. Thank you Walter.
Sure George This is Pete Thanks for the question. So as you know in our core choice.
Business were linear corrugated sheet feeder so visibility in the backlogs is virtually 24 days, but I will tell you.
Our demand in August is very strong with double digit growth first prior year. So similar to the evolution we saw in July.
And our containerboard system is very solid demand is very good and.
I can't predict what will happen in the future, but it appears to be very solid our exposure in the in end markets are around durables.
Predominantly because we serve.
Independent box makers, who customers.
Their customer demand is very strong and we also have some exposure to E commerce and so at this point so while we struggled that business at the beginning of the co. Good health pandemic. The business has responded very well and our containerboard and corrugated system is very strong unhealthy at this point.
Thank you Pete yes, Thank you George.
Gave any with Wells Fargo. Your line is open.
Good morning, Pete Larry Matt will be has all been well.
Thanks.
TV I'm trying to understand and maybe if you can help.
Marry up from the comments that you're making in containerboard I appreciate your customer set is different.
But if you like from the end markets are somewhat similar in is it possible that we could see an acceleration in demand.
Cross your rip segments, where you're seeing weakness now you talked about.
In chemicals coatings and moves.
More specifically thinking about automotive.
And perhaps it's just a function of where things aren't in the supply chain any visibility or thoughts there.
Yes, our end markets are really entirely different between our rips business and our.
Corrugated business predominately core choice and again its durables, we have exposure to E commerce.
Some food but.
We also some of that strength in core choice is related to our new sheet Peter in Pennsylvania.
So that helps it.
And then in the auto industry those two businesses so core choice really serves.
Customers, who supply tier one two and three parts supply our rips business supplies customers, whose products go into manufacturing, one or two product streams down.
Component parts inside a car so again, the context and the touch points to that segment are slightly different in.
The auto supply chain comes earlier, and then the resulting impact to reps would come a little later.
Yes, David let me add a couple things one is.
Lubes or a big business for US a lot of that is automotive use in mileages down because of commuting is going away now you're seeing some pickup as people drive the vacations instead of flying but net net mileages down and particularly in the us.
The other thing I'd point out is industrial production in the us in capacity utilization.
The Federal Reserve just Pago, some statistics and if you look at.
Average production utilization from 70 twos Weve 19 was at 78%.
In April we were at 60 May 62 June 66 in July 69, when machines aren't running they don't need lubricants. So you know the recovery is not coming back as rapidly as Pete and I thought it might when we talked at Q2 is coming back gradually but we need machines running the need lubricants.
Create demand we think it's coming we're seeing stuff, but is not there yet.
Thank you guys.
And then I guess on the on the PPS side I Didnt see the sliding normally put in about synergy realization I'm, assuming that's still on track, but if you could kind of provide any commentary there. Yes. We still are Gabe I mean, yes. If we were just point in time looking at it it's down slightly but still over 70 million down slightly.
Only because some of them or volume oriented.
In the EU, RBC, RV business being down to little bit down.
Right.
We believe as the economy comes back that number.
Non knows that are down by.
Yes.
Pasadena and utilization will go back up but still over 70 million and well on track.
Thank you.
Ghansham Punjabi with Baird. Your line is open.
Hi, guys good morning.
Pete in your prepared comments you were talking about the rip space of improvement on being a little bit slower and I think there you just mentioned that as well.
Can you just give us more color on that by region.
How do you see this kind of shaken out because China is up was up 6% in the quarter and obviously they were recovered nicely from that initial dislocation just curious as to how you're seeing that same trajectory.
In Europe and also the U.S. no. Thanks, Concho. So we see the improvement in our global rips business quite frankly, similar and Fps. The demand conditions are tracking on a very similar path to the geographic related improvements to covert 19 health, meaning China.
Lastly, as recovered faster encoded and there are strongest region.
We see in AMEA.
It is improving overall, but we're still down.
High single digits first prior year and our volumes there it's a mixed.
Scenario because of some more complex region. So the middle East volumes were very strong.
But central Europe in Western Europe, which is the predominantly highest volume components in that.
That.
Geographic sector are very are weaker because of chemical lubert demand, but we are seeing moderate improvement and conditions through the quarter.
And then the weakest is north American South American again, it mirrors the transition of the health pandemic.
And.
We we still see that as being the weakest demand in our global portfolio during Q3.
Just to give you a little color in August.
Our global steel drum volumes are improving versus July, but they are still mid single digit declines versus prior year.
And our IVC growth is normalizing. So we had we had it a little lower quarter than normal, but we're showing double digit improvements in August which kind of normalizes. The path. We're on the adverse prior year.
Okay, Great and just as a follow up to that for Fourq you specifically on looking at Red. So what do you modeling from a volume standpoint, and then also for CP.
Is it still is it reasonable to expect a similar price cost headwind in Fourq you as you saw in Threeq you. Thanks, so much.
So our volumes to the forecast really across all of our portfolio as we see vine just slightly in perverse July.
In the July volumes were highlighted the deck.
And in regard to the price cost squeeze I'll, let Larry talk through the bridge, what we see from Q3 to where we are what we expect in Q4, yeah Ghansham.
Clearly we had that unprecedented.
Bike unprecedented in terms of cause spike in ODC in Q3, because of the shutdown of the retail sector in restaurants sector and you asked it as well as lot of industrial so the supply side was squeezed while as you know the demand side was was up.
As of the pantry staffing and so the LCC cost shot up and that with what we felt was.
On warranted.
Non recognition by resi at a price increases.
Created.
Basically $36 million year over year.
Price cost squeezed naturally if you step back and look at that were 40 $44 million down on EBITDA year over year were 36 million noticed that price cost squeeze.
Missing a year ago by 8 million in an economic situation like this we're quite proud of our team to be quite Frank.
But in the fourth quarter were predicting 61 on our own C.C.. So we don't see the same year over year.
Price squeeze there, which is actually lift of.
Roughly 15 million Bucks on the.
Year over year for the four.
Relative to the third quarter sequential improvement over the third quarter.
And from where we were in the fourth quarter guys from just add to Larry's comment that I think RCC last year in quarter 419 was about 30 Bucks at time. So you know relative to the 61 that we're expecting the fourth quarter. This year that will certainly be headwind.
Okay, great. Thanks, so much yeah. Thanks.
Again, if you'd like to ask a question. Please press star one Mark will the with bank of Montreal. Your line is open.
Hi.
Good morning, eight good morning, Larry I really appreciated that kind of Chris walk through that to start I for my first question I wondered what this hurricane hitting down on the Gulf Coast. Today. If you can just talk about potential falloff from that what you've seen in kind of past hurricanes down there.
Thinking mainly about the rips business, but maybe you could also address sort of any kind of potential followed on your your land holdings down there yeah no. Thanks, Mark so.
In that Gulf Coast region, just to give you. Some perspective, we have 10 manufacturing operations that generate roughly $200 million of revenue in the Gulf coast as as a 30. This morning all of those operations are secure and safe and is majority of those operations are in the Houston Metro area, which.
Thank fully the storm bypassed.
At our biggest concern as our thoughts and prayers with all of our colleagues and their families. In the region hoped are safe and healthy we don't have.
Dealer that yet but.
Our thoughts through them and I think the impacts going forward really are the extent of the damage to our customers operations and we don't have clarity on that but theres certainly.
Some large paper mills that we supply cores in a variety of products to there's a lot of petrochemical companies in that region that we supply rips products to serve again that that will certainly be an impact we have no idea with the extent of that damage will be today and they are also we it was always expect disruption.
In the supply chain on a short term that really impacts our supply resin suppliers, who are located there not all of our suppliers are in that region, but some of them and we'll certainly see some transportation disruption for short term so.
Regarding our.
Our land management Holdings, we obviously do have some holdings in Louisiana and at this point, it's too early to determine what impact that had but.
I think we're very fortunate in that the majority of our cluster of our operations in Houston or spare that again.
That does to our customers is undetermined at this time and the only thing IDE supplement just to.
In trying to put out the guidance range you know, obviously very early but looking back at Pryor storms and staff, we basically set aside from one to three cents a share.
As a potential impact.
Yes, Thats just.
That was just our best estimate based on prior experiences.
Thats excellent where that's exactly what I was looking for.
My follow on I, just wondered Pete if you can give us some sense.
In core choice, what the cumulative impact is on the.
The startup of the sheet theater in Pennsylvania, and then I think you guys put in.
Okay packaging plant into Kentucky, not long ago. So I'm just curious about how both of those ramp ups are going and then what they add on a year over year basis to core choice.
Yes, so the triple Walpole plant in lieu of those been there for a while we just added capacity to that business and.
Some of the ecommerce lift to come from that facility.
And that business is doing quite well serving.
Pag AG customers industrial customers, some direct to AG markets in some through the independent and integrated box systems, the Palm Irish sheet feeder is progressing well.
Ramping up volume.
A little slower than we anticipated due to coded but its responding very very well.
When you look at the uptick in July.
And in August I think you'll see our base business is up probably 4% and the remainder of that double digit growth is the addition of Pallmeyer. So again, we're real pleased with how thats progressing it's getting good response from customers in that market in the.
We'll we'll be at a good path for for that business.
Okay very good I'll turn it over yep. Thank you.
Adam Josephson with Keybanc Your line is open.
Pete Larry Good morning, Hope you and your families are well payout makes sense.
Just on your thanks here for Q commentary just wanted to dig in a bit to it. So you mentioned higher SGN a sequentially I think a set of comp comes back.
As seen a year to date has gone from I think 135 started the year down to 120 in Threeq you I'm just wondering what exactly you're expecting in terms of SGN a cost in the fourth quarter and then what you think.
A sustainable quarterly level is given to the degree of the declines year over year in fiscal Twoq and Threeq you and then you mentioned I think you had 5 million of opportunistic sourcing benefits in Threeq Q I forget what that number was into Q. I know you said youre not expecting mourn for Q, but do you think it's possible.
You'll get more opportunistic sourcing benefits and for Q and.
How are you thinking about the sustainability of that benefit you in the rips business sure. Let me take the sourcing first Adam yes.
Could we get more certainly and we challenge our sourcing teams do it all time, we just don't build into forecast I mean, we add roughly 11 million in the.
With that 11 million in the into Q, seven 7 million in Twoq, you and five and a half in Q3.
So that five and a half million by not putting it into the fourth quarter is about six cents a share it kind of thing in ask DNA. It's a combination of we when we completed our forecast.
For the remainder of the year looking at the numbers, we knew the impact on incentives and so we made a bunch of incentive adjustments in this in the third quarter that won't repeat in the fourth quarter because.
Obviously, if we hit our forecast we've already made the adjustments.
And at two to a great degree. So it's that it also is we had some ERP non capitalizable costs that were delayed covert has required us to slow down we can't travel quite as much we're starting to open that up and catch up we want to try to get those things done. So we can leverage that into savings.
Insights so there's some of that cost going in and then the other is professional fees both related to that and actually some tax planning things. We've got going on that we think will benefit us in the future that relate to some regulations that were just issued and some other transactions that were doing along with some other professional fees that have been differ.
Some of those are also travel related things that could not happen and had been pushed off. So all told we're expecting yes, you need to be about $11.5 million higher in the fourth quarter roughly and so.
14 cents a share attentive swing there.
Since that basically let me just walk from third quarter to fourth quarter since we're going through that Michael just do that.
Say third quarter at 85 cents a share I mentioned, the one to three on the hurricane.
The drop there.
We also have the ask DNA is about 14 cents sourcing is about six going the other way, though cc 15 cents pickup over the last quarter. Then tax is about nine cents a share roughly because the.
We ended up settling a lot of exams really hashing through in looking at a lot of the reserves, we set up for various tax positions over the years EM is settlement positions that we had that ended up freeing up about.
What equates to about a 9% nine cents per share differential between Q3 in Q4, so a little bit of that.
The good quarterly result leased we thought it was good for Q3 related to this tax pick up the other items a little bit more complex, but it has to do the with the success in core choice.
And core choice ran hard as Pete mentioned through July that drove inventories down.
We obviously have a mill system. We then sell into core choice oftentimes they are holding paper inventory.
They have for production needs what happened is theres intercompany profit tied up in that the mill profit gets tied up in the inventory held in the core to a system when it gets sold out that's recognized.
So you have an.
Intercompany profit this generally tied up.
The other thing that causes some of that to free up is if margin squeeze low margins got squeezed the combination of reduced inventories and margins squeezing core choice actually freed up about $6.7 million of profit in the third quarter that may be usually would've been tied up in ending inventory in the fourth quarter that will reverse.
First we'll probably end up we think with about $1.1 million of profit tied up in inventory more than where we are now. So you basically have 7.8 million dollar swing in profitability between the quarters for that item, which is about nine cents. If you take all those items together, it's about 25 cents it would take it down to 60.
Midpoint on the guidance is 66, so 10% improvement quarter over quarter, and just operations and then the range around it is could be 10 or.
Plus 10 on that just.
Because of the uncertainty of what how quickly things or recover in the industrial side of things.
So hopefully that's helpful clarity.
I really appreciate that Larry. Thank you and then can you just one.
Geographic question, specifically North America is it correct me if I'm on but it sounds like at the moment core choices the stand out and then tubes and cores in rigid specifically steel drums are.
Operating considerably lower demand levels than core choice in North America can you just talked about what you've seen fiscal year to date in North America, specifically and why you think the demand trends have diverged among your businesses to the extent they happen and if you expect those divergences to come.
And you or reverse for whatever reason.
Yes, so really depends on the end market exposure for each of those three businesses and as I've said in core choice.
We have heavy influence in durables and E commerce.
And we're aligned to a lot of independent box customers, whose.
Demand is very strong they have some access to a broader market end market exposure and we also.
Supply integrated customers as their business gets better so when you look at tube and core our rips business the end market exposure entirely different.
They are tied a little bit more tool to.
Some some segments that are struggling when you look at the big influence in North America, and rips look at bulk in specialty chemicals their challenge.
And industrial paints and coatings and lubricants, where we have no exposure in core choice or corrugated are very very weak now.
And in tube and core.
The exposure again is different as I said, we sell the paper mills cores and the non containerboard paper mill coarser week, and we have pretty heavy exposure textural related end segments and they've been hurt by this co that theyve reopened, but they're still at a pace considerably weaker.
During the past.
So again totally different end segments.
And and totally different to go to market approaches. So a lot of times you might see core choice.
Being a little weaker than the others and it really reflects their end market segments going forward again, we see.
Incremental improvement from July and.
And while tubing course down it's still down less in July and we expect to a low single digit growth a decline excuse me a decline of low single digit growth and tube and core.
And at this point.
We expect our rips business in north.
North America to be very weak as what we can see through our fourth quarter.
Thanks, so much but yes. Thank you.
Steven Chercover.
With D.A. Davidson your line is open.
Thanks, Good morning, I was little slow start one today, but b.
Good morning, I, just wanted to try and.
Bracket the segments, a little more for the fourth quarter and looking at it from an EBITDA basis. So it looks like consolidated you'll be down 15 to 20 million sequentially.
And in paper, you've got less downtime at least on the corrugated side anyway to $15 million headwind or tailwind from ULCC.
And then in rips you've got that 5 million dollar non repeat.
So should people be up and then which is really where things are weaker than anticipated in there and I recognize Pete just said North America will be week.
Yeah, you're going to it.
You know, we've got that intercompany profit swing that I mentioned under paper side is well, Steve. So you get 7.8 million dollar detriment going from Q3 to Q4, but yes, we do anticipate.
That being a challenge on ask DNA.
The the about half of that is in the rigid segment and a half of it is in corporate costs. So you'll have that impact there and then the sourcing obviously comes out the five and a half million dollars on a relative basis. So.
Yes, and then you've got the FCC benefit though in PPS. So.
Those are the elements of the.
Trend in EBIT I hope that's helpful.
Yes, Hello kind of narrowed the gap, we get and then Pete made a point of indicating that replaces an already at the EBITDA run rate in line with your 2022 commitments and if I'm right papers about 100 160 million off so what are the levers that you intend to pulled will help you closed.
The GAAP open next couple of years.
Yes, I think the biggest thing is Steve is yes, economic recovery I mean, clearly a lot of our end segments are.
Dramatically impacted by.
An economic impact that is worse than anything since the great Depression, I mean, when you look at the the GDP declines there they are unprecedented in that timeframe of the last 80 90 years. So.
Industrial production statistics that I mentioned in the U.S.R.R. dramatically off.
Obviously, our hope and I think everybody's hope is that by the time you get the 22, that's in the rear view mirror by quite a way and if it is and we've can recover even back to the sorta lukewarm economy that we had before I mean.
It seems like a long time ago now, but you know our Investor day in 2019, I said up on the stage and said we're in an industrial recession, and we work and this statistics I quoted earlier I mean, even February of this year was way below the average of the last.
40 years of industrial production. So if we get back to that we have no concerns about hitting our commitments.
If you look at the underlying assumption that we will update all this in December but.
Oh, Ccs right about where we added in the assumptions pricing on papers down somewhat but are we expect our rips business and we talk about it at the benefit of this portfolio companies. All time, obviously, we're already hitting their targets, we expect them to be better and we expect full realization of the synergies that we've identified.
In in the paper business so.
I'll tell you that we are extremely confident of hitting those commitments and we're very confident you're paying down debt and getting back into our two to two and half times range.
And.
We don't think it's a stretch.
Okay, and I'll be a bit of a pig in asked trying to get one more and you guys made really good kind of presentation on ULCC at your 2019 Investor day.
Do you think that the long term.
Price proceeds going to go back kind of those to the 30 to $50 range.
I think we've been pretty consistent Steve, saying that we think the longer term range is relatively about where it is now and you know the that range that we gave at Investor Day, I think was 35 to 75 and our commitments, we think thats the sweet spot risk is actually projecting it to go up.
I don't we don't feel that way.
You know in to next year I mean, we think this supply side is picking up obviously, China is backed out some of that demand is going to go elsewhere, but.
We think that that forecast of what we thought that is remains a good one.
Okay. Thanks, guys stay safe.
Thanks, Steve.
George Staphos with Bank of America. Your line is open.
Hi, everyone.
Larry maybe in an unfair question, but you must have some.
Some view on this a few take a step back.
In assumed the fourth quarter plays out more or less as you expect and we are.
Again.
A little bit of slack here, but.
We're wiggle room, I should say, let's say things in fiscal 2001 are relatively normal.
What do you think Cove it took out of your EBIT or EBITDA.
In fiscal 20.
You have any sort of approximation of what kind of hold that created that yeah. We'll come back to you over the next couple of years kind of similar plan. Once you cannot pay based on our forecast.
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George I mean, we can we get identified in the third quarter was 24 million Bucks Dave's $33 million of lost business and about a 9 million tailwind from.
Various subsidies level lower travel cost and all that kind of thing looking at where we're forecasting for the year you've got a couple of things we had the LCC price cost squeeze impact to us, it's roughly going to be safe.
50 million for the year, but by the price and RCC and everything for the quarter.
And that's that's a rough number it might be a little less than that but then on an overall basis relative to where we thought we'd be.
I think cobot impact for this year would be another 50 million on top of that so roughly ending up maybe $100 million less than where we thought we'd be what now we've built some of that.
Price cost squeeze them, but roughly we'd end up but at 100 million less than where we would have had predicted the beginning a year.
All right Larry I appreciate that.
And.
This is probably more of a question for the next analyst day whenever you do that so you can keep your comments brief your but what have you learned about the portfolio over this last three quarters now heading into Fourq fourth quarter to finish up the year and interrelationship then and.
How complementary businesses are.
And perhaps.
Maybe things you've learned about they're not as complimentary as you would have expected through what's been a very stressful period. How do you. How do you look at the portfolio now and whether it makes more sense or less sense, having gone through covert thanks, guys and good luck in the quarter.
Yes, I think George we sound that we had a very resilient global supply chain.
Depended they are centered on regional supply so I think thats.
Supporting what we've done over the past three years and that played well for us and the co that and I think our balanced portfolio globally has demonstrated that that.
In normal times it it is a good portfolio, it's balanced than it to.
Our ability to serve our customers in a variety of substrates.
While it's short term challenge I think helps us in the future and I think there's a couple of things one we've seen more and more alignment between our flexible business in our rigid segment in terms of the end market customers we serve.
We continue to leverage that more and more and then the other part is relative to care Istar acquisition.
This time of working through this crisis has made us nothing but stronger about our resolve that it was a good acquisition.
The leverage that we're getting off to utilizing the skill sets of our middle management team across the entire portfolio.
Is really paying benefits for us I mean, we can't control the economy in the end market demands, but what we can control we are controlling and we're doing a lot of things to really take cost out of the organization sort of back to that adage of don't let a good crisis get wasted.
It's refined our view, which caused us to really focus it's caused us do.
Strengthen and modify our footprint and leverage the assets that we have so.
We're very very comfortable with that portfolio at this point.
Appreciate the thoughts take care guys.
You.
Gave any with Wells Fargo. Your line is open.
Thanks for taking a follow up.
Okay and that you are the mill system are you guys take any particular downtime or more pressing has been quarter and how would you kind of characterize your individual supplied ma'am.
They and perhaps more particularly where your inventory position is.
Yes, so our box recycle Boxboard mills, we run to demand and it's very similar to what we've had before while we have a little lower.
Demand at our tube and core business, we offset that with volume from non tubing core business.
And again, our inventory position is that we manage our inventories working capital very stringently Ana.
We tend not to try to.
And in slower demand times run up or inventories because we just don't think thats the best way to operate run the demand and manage our working capital very very effectively.
Thank you Pete and maybe Larry if you could I appreciate it it's pretty volatile right now, but theres some.
You know fairly sizable price increases that have gone through on the resin side and assuming there's some sort of normal.
Industrial markets kind of in fiscal 2021 can you maybe tell us what you're expecting working capital to be and an aggregate basis as a benefit to cash flow. This year and then perhaps what the reversal could look like next year.
Yes, I mean, you had Thanksgiving, we we anticipate that year over year, our benefit of working capital is roughly in that is $60 million to $70 million range of benefit.
Over a year over year.
We will tend to run up little bit of working capital into first quarter of the year, but then.
We fully anticipate that.
21, we should be able to again manage working capital well and it should be a nominal either increase or decrease year over year, Although we do believe in certain.
Areas of our business that we have opportunities to improve our working capital even further.
Yes.
Care Star business has improved dramatically we still believe there is room, there and we believe there is room in our flexible business and also in some of our operations, particularly in EMEA.
In reps, but we're not talking huge numbers, but there are opportunities there that could allow us to drive improvement again next year, even more than what we had this year.
Thanks for that good luck.
Mark will be with bank of Montreal. Your line is open.
All right I've got three just real quick launch first.
Pete I wondered looking in the back of a slide deck, there's a 31.4% drop and what you're calling kind of non primary product revenues in the quarter, what exactly was the big driver in the drop in those non primary products.
Thats predominately small water water bottle small plastics.
It's a small part of our portfolio.
Okay.
The second one is up can you give us some just general sense about the sort of the transition strategy for the CRB businesses.
The the graphic contracts will fall away over time.
Yes so.
As we talked about on the divestiture, we've been agreement for one mill for two and half years and the other two mills for five years, so the transitions going very well.
Graphics are very good customer of ours, not only in paper, but other products.
We feel really good about our position as an independent supplier of CRB to the to the independent folding carton community. So we made the right decision, we're really happy I think it puts that CR.
Consumer products business in the hands of more strategic partner and we're real pleased with how we're operating RCR females and our position in the market at this point in our those contracts just not to get too far into the weeks here, but they just drop off or do they kind of step down overtime.
They drop off one is two and half years.
Two mills are five years on a on a.
The similar volume basis on when we stepped off from the from the divestiture Yeah. The thing I would say Mark is that's when the contractual obligation and is now when does the actual relationship and is maybe a different question. We're so our business with graphic is only increase so.
In beyond what they are obligated to so it's a good relationship there's a lot of synergies beyond just the paper that we serve them. Many many other products.
Okay, all right Thats not hard to imagine last on I'm just curious.
There are awful lot of.
Printing and writing paper mills that.
We are looking for.
New products, maybe new owners and I'm, just wondering whether there might be any opportunity for right.
We'll look at taking on one of those mills at a point and potentially ending up with a lower cost structure.
Or a.
About or kind of product quality product mix coming off of a have a reconfigure printing and writing paper mill versus maybe some of what you're operating right now.
Yes, so we're not we're never going to comment on hypothetical future situations, but our whole focus.
As this.
As new Mills come Onstream is to focus on how do we further integrate the existing capacity we have in our mill system or converting operations and we think thats the key to drive in the most value and.
We're not interested in getting more containerboard capacity, we're interested in creating a position where we have a one to one ratio is tons between converting and mill output.
Okay Fair enough good luck of a fourth quarter. Thank you Hank.
In today's last question comes from the line of Adam Josephson with Keybanc. Your line is open.
Thanks, guys, you're taking two follow ups Juan on tubes, and cores I'm. Just wondering what you think long run demand trends are in that business, just given what we know where the secular declines in paper demand on.
The pressure on the tax still market do you think that's a flat business long term slowly declining business on just wondering what your view of long run demand Maris, Yeah, We think it's a GDP plus business.
I think we've seen an unprecedented market.
Impacted negatively some of the segments, but we've got a very creative sales group that.
Provide a lot of different product development opportunities. We're looking on so it's a much broader end use market and we're focused on how to provide different innovative product solutions. So it's early talented group and right now its challenge, but we we think it's a low single.
Digit growth business that can drive a lot of margin and value through our integrated system in the recycle boxboard business.
Thanks, Pete and Larry just one question on guidance that you mentioned that.
At your analyst day in 19, you talked about in industrial recession and of course this year's co bid.
We have no idea what next year will bring obviously you said you have no control over economic condition. So.
Along those lines, what do you what do your thought about giving guidance, both short term and longer term in light of the fact that as you said you have no control over economic conditions as a result of which you can end up having a revised guidance or or pull guidance, depending on those economic conditions I'm just wondering what you see the Ben.
That's our giving both short and long term guidance versus perhaps not doing it.
Yes, I think.
Yes, it's a fair question and you can always go to a period, where you just don't give any guidance I mean, obviously some people opt to do that we've opted generally to try to give annual guidance to.
To hold ourselves accountable and be as transparent as we can and that's that's where I would anticipate us getting back to.
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Presuming that things are at a point, where you have some level of confidence.
When we get to December.
Is that going to happen I don't know you know we will have to assess it Dan I think theres the prospect of you'll see us second wave as the temperatures cool and all that kind of thing and if that occurs sort all bets will probably be off if a vaccine gets developed more quickly and there's a path to when it.
Could be dispensed widely that could influence thing so very very hard to predict where it will be but I think over time, we get the pandemic behind us I think we feel comfortable again moving back to annual guidance.
Thanks, So much Larry best of luck.
Thanks.
I will now turn the call back over to Mark Matt Eichmann for final remarks.
Thanks, a lot Jack and thank you everybody for joining us. This morning. We appreciate your interest in Greiff. We hope you have a great remainder of the weaken a good weaken ahead. Thank you.
This concludes today's call. We thank you for your participation you may now disconnect.