Q1 2021 Greif Inc Earnings Call
Peter.
Okay.
Okay.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the glass first quarter earnings call. At this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session to ask a question during the session and you would need to press star one on your telephone if you would like to withdraw it.
Your question press the pound key please be advised that today's conference is being recorded if you require further assistance. Please press star zero and would now like to hand, the conference over to your speaker today, Matt Eichmann and thank you you may begin.
Thank you Dorothy and good morning, everyone, welcome and Brian's first quarter fiscal 'twenty and 'twenty, One and earnings conference call. This is Matt Eichmann and I'm joined by people option price, President and Chief Executive Officer, Larry Hill, Shimer price, Chief Financial Officer, Pete and Larry I will take questions at the end of today's call and.
In accordance with regulation fair disclosure, we encourage you to ask questions regarding issues you can sit and important because we're prohibited from discussing material nonpublic information with you on an individual basis.
Please limit yourself to one question one follow up before returning to the queue. Please.
Please turn to slide two.
As a reminder, during today's call we will make forward looking statements involve and plans expectations and beliefs related to future events.
Actual results could differ materially from those discussed. Additionally, we will be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metrics can be found in the appendix of today's presentation and.
And now I'll turn the presentation over to Pete on slide three.
Thanks, Matt and good morning, everyone.
Price delivered solid first quarter results and we're well positioned for longer term success as the world recovers from the COVID-19 pandemic.
Our performance has been delivered despite continued challenging circumstances.
And Eric Thanks, Glen Great Global team from the resilience and dedication over the last three months from there.
And operational standpoint, we generated strong year over year volume growth across most of our packaging substrates and saw continued robust demand and our containerboard and corrugated sheet feeder network.
We're experiencing and inflationary cost headwinds across our portfolio and we will overcome them through commercial activities contractual arrangements and a continued laser focus on performance levers that are within our control.
And also continue to make strong progress across our strategic priorities for reduced our net debt by approximately $279 million versus the prior year quarter and were once again recognized for our sustainability leadership by several well respected third parties.
We also formed a new reporting segment global industrial packaging to align our leadership and our organizational structure and a common and market segments, which I'll discuss more in a moment.
Finally, we decided to take advantage of favorable market dynamics to address the COVID-19 related shortfall and our deleveraging plans by entering into an agreement to divest 69200 acres of timberlands and Alabama to Weyerhaeuser company for approximately $149 million proceeds from there.
Net sales will be applied to debt repayment.
And I'll ask if you please turn to slide four.
We recently combined our rigid industrial packaging and flexible products and services business into a new reporting segment called global industrial packaging.
It's new business led by <unk> will build upon the considerable improvement we've made to our global portfolio over the last several years.
Finally, our rigid and flexible business and the global industrial packaging aligns operational practices.
And procedures as well as go to market strategies under a single global global leadership team.
This results in a business with unmatched product offering capable of exceeding customer needs throughout the world and all.
Also enhances cross selling and service offering to customers and common end use markets and enhance the scribes business system effectiveness.
To assist with modeling we recast our 2020 financial performance for certain segment information and filed an 8-K with data yesterday.
If I could ask you to please turn to slide five.
First quarter volumes were strong across much of the global industrial packaging business.
Global rigid IPC volumes rose by roughly 6% on a per day basis versus the prior year, while global flexible Abcs rose by more than 15%.
Global steel drum volumes declined by roughly 1% on a per day basis versus the prior year.
Product demand was strongest and APAC, where steel drums rose by three 5% on a per day basis versus the prior year and benefited from improved and industrial trends and a favorable comp and China.
Demand conditions also showed improvement travels to Europe, specifically, we experienced strong demand throughout eastern Europe, where steel drums, and rigid <unk> rose by roughly 9% and 11% respectively.
And I and demand was most challenging North America, where COVID-19 impact was present it and this year's volumes that were not in the prior year.
Seeing broad based improvement and many of our key end markets, but the pace of recovery areas. For example, sales to lubricate and bulk chemical customers rose by single digits globally versus the prior year quarter due to better auto demand and generally improving industrial conditions worldwide.
Thanks, and coating sales were up low double digits versus the prior year did better auto and construction demand, while sales to pharma and personal care markets remain robust Jason.
<unk> and beverage sales were weaker versus the prior year as COVID-19 continues to constrain restaurants and other similar entertainment venues.
Tip's stronger volumes and higher average selling prices drove higher segment sales first quarter adjusted EBITDA rose by roughly $13 million versus the prior year quarter, primarily due to higher sales, partially offset by higher transportation expenses.
Business did benefit from $3 5 million FX headwind excuse me tailwind and opportunistic sourcing behind our roughly $1 $5 million similar to last quarter. We are closely monitoring steel and resin prices as tight supply conditions exist for our key raw materials.
The majority of our business is covered by price adjustment mechanisms, which passed law raw material inflation, albeit at a lag while supply conditions remain tight to date, we have not experienced any material financial impact relative to sourcing raw materials and the current market.
If I could ask you to please turn to slide six.
Paper packaging is first quarter sales rose by roughly $7 million.
Versus the prior year quarter, despite the divestiture of our consumer packaging group due to stronger volumes and our mill network corrugated sheet and tube and core business.
Paper packaging first quarter, adjusted EBITDA fell by roughly $22 million.
Versus the prior year, primarily due to a significant $30 million OCC transport and chemical cost headwind.
We recently announced a new set of price increases for containerboard and uncoated recycled box port grades and in response to strong demand and expect full realization of those and our fiscal Q3.
Our converting operations continue to experience robust demand volumes and core choice, our corrugated sheet feeder system were up nearly 36% per day versus the prior year quarter due to strong durables e-commerce growth auto supply chain, and food and beverage demand backlogs and that business continue to growth and <unk>.
Actually products backlogs and our specialty law.
Volumes and our tube and core business were up roughly 5% per day versus the prior year quarter with strong demand seen specifically and film and construction and market segments.
Demand for paper mill of course improves sequentially, while the tax total demand remains soft versus the prior year quarter.
I would like to now turn over the presentation of our Chief Financial Officer, Larry helps Shimer. Thank you Bea. Good morning, everyone. Please turn to slide seven to review our quarterly financial performance first quarter net sales, excluding the impact of foreign exchange rose by roughly 2% versus the prior year due to.
Home improvement and higher average selling prices.
<unk> industrial packaging and paper packaging segments.
And we're coming to $53 million.
Dollar sales reduction related to the divestiture of the consumer packaging group.
First quarter, adjusted EBITDA fell by roughly 6% versus the prior year quarter.
While sales were higher and SG&A slightly lower year over year, despite a negative FX impact cost inflation, especially in transportation and OCC was a drag on products.
Strong demand for our products has led us to implement price increases to return to appropriate levels of profitability.
Our non-GAAP tax rate for the quarter was 19, 7% and the first quarter adjusted class a earnings per share was <unk> 61 per share.
Consistent with prior years first quarter adjusted free cash flow was a cash outflow and was roughly flat to prior year.
Please turn to slide eight to review our guidance.
And fiscal Q2, 'twenty, one we expect to generate between 96 and $1 <unk> and adjusted class a earnings per share.
We anticipate global industrial packaging second quarter, adjusted EBITDA to improve sequentially from the seasonally weak first quarter, but it will not be quite as strong as the prior year second quarter during.
During which we benefited from pandemic related pre buying and and opportunistic sourcing benefit of $7 million.
We anticipate the paper business and second quarter, adjusted EBITDA to increase sequentially from quarter, one primarily due to continued strong volumes and the flow through of announced price increases partially offset by additional mill maintenance downtime.
We assume OCC average is $82 a ton and fiscal Q2, roughly $26 per ton higher than the prior year quarter.
This equates to a year over year headwind of roughly $11 million.
Finally, I'll share a couple of thoughts on fiscal 'twenty and 'twenty, one as a whole.
We anticipate net interest expense be and the range of <unk> $99 million to $104 million of roughly $14 million lower year over year as a result of lower debt levels and the favorable rates, we lock and on our term loan <unk> III.
Plan to draw on the term loan in July of 2021 to refinance our existing seven 375 euro $200 million senior notes, which mature that month.
And we anticipate depreciation and amortization to be and the range of $238 million to $248 million.
And we expect our non-GAAP tax rate to fall between 23% and 27% this year.
Finally, we anticipate spending between 150 and $170 million on Capex with the bulk related to maintenance needs. We anticipate working capital to be a cash used commensurate with our announced price increases and raw material inflation.
Please turn to slide nine.
As Pete mentioned in his opening remarks, we have entered into an agreement with weyerhaeuser to sell them 69200 acres of timberland for approximately $149 million and cash.
It will be a very tax efficient sale is taxable gains on the transaction will be completely offset for federal taxes through other identified tax losses.
The negative financial impact we've experienced from Covid, coupled with robust current timberland prices seen in the market maintenance and opportunistic time to bring acreage to market land monetization and provides an accelerant to our ongoing deleveraging process.
To the satisfaction of customary closing conditions, we anticipate the transaction will close and calendar second quarter of 2021.
Please turn to slide 10.
We have three pronged a three pronged capital deployment strategy focused on reinvesting in the business returning cash to our shareholders and delevering the balance sheet.
As we continue to generate cash and pay down debt and reduce leverage towards our targeted range of two to two five times, we will shift enterprise value to the benefit of our equity holders and moved to a steadily increasing dividend policy.
With that I'll turn the call back to beat for his closing comments before our Q&A.
Thank you, Larry and I'd ask everyone to turn to slide 11.
So in summary growth delivered a solid first quarter performance. Despite continued challenging circumstances due to COVID-19.
But looking ahead, our key and markets are rebounding volumes are strong and we're taking proactive steps to offset and recoup cost inflation.
We are focused on operating levers within our control to drive value and we're well positioned to benefit as the world recovers from the pandemic. Thank you for your interest and growth and Dorothy and if you could please open the lines for questions.
Very quickly.
Can I ask a question press star followed by the number one on your Touchtone phone to remove yourself from the queue press the pound and the interest of time, we ask that you. Please limit yourself to one question and one follow up if you have more question press star one to get back into the queue and we will address additional questions as time permits. Please.
And while we compile the Q&A roster.
Our first question comes from the line of Gabe <unk> with Wells Fargo.
Pete Larry Matt.
And then.
I guess from the second quarter Guide, Larry can you give us a sense for that.
And the maintenance downtime.
I guess, both on a per client basis, as well and expense and then just kind of maybe compare it to last year.
I seem to remember that that happened later in the year.
From a timing perspective.
Q2, and our Q2 basis GAAP year over year there'll be a similar amount of downtime tonnage production and cost. However on a sequential basis from Q1 to Q2, its about 7000 tons.
Two and a half to $3 million of.
Incremental cost and the second quarter over the first quarter.
Okay, and then I didn't hear I heard pretty robust volumes per IDC and I think part of that is obviously from industrial.
Market kind of picking back up a little bit.
And you guys had a.
A reasonably aggressive expansion plan, there, where you were kind of co locating.
From the rich facilities.
Can you update us on where those are where we stand and are they.
Complete at this point and then do you envision and are continuing to add capacity and the <unk> side.
And again, thanks for question and so we had 6% growth and Richard Rbcs and really good strength in Asia and in Europe and Thats.
We're really pleased with the expansions we've done so far as you remember we've done a couple of small tuck in reconditioning IPC businesses, which has aided our profitability as well. So we don't have any new announced ITC expansion and it's certainly a high strategic priority for us and we're evaluating the right.
<unk> and in the future.
Okay.
Your next question comes from the line of Mark Willoughby.
With BMO capital markets.
Jesse Barone on for Mark Good morning, guys.
Good morning.
First question, just kind of thinking about the new.
Global industrial packaging, Simon could kind of talk about what you're expecting from a margin basis there.
And we still kind of expect that load and kind of a mid teens margin there.
Yes.
It's really isn't day synergy play this is more a market play and it's our beat and I've thought about running the business and have been running it.
And for some time, we match up we had a lot of over and I think and customers we get to go to market.
Gather and.
So it in and of itself is not going to drive margin expansion. However.
Our objective is to continually increase our GIC margins and expect to do so over the next day air and have an excess of note to point so.
But unrelated.
Okay, Great and then just a quick follow up can you just talk about kind of the impact of the U S. Gulf Coast shutdowns on your drums apparel business.
Yes, sure well, so and the weather impact obviously is affected both businesses and our.
Our rigid operations, we had about eight plants that were shut down for five days, and Texas, and Arkansas really encompass both steel drove Richard <unk> and plastic operations.
And the.
Important to note in the Gulf Coast on our steel production.
For our U S business North America business, that's roughly 30% of our production is and that Gulf Gulf region, So that will negatively impact volumes and <unk>.
February flat North America business, we do believe the strength and other regions around the world will offset that loss of volume.
From a packaging paper packaging standpoint affected five operations, and our industrial tube and core business and.
And included five large customers, who were down and we expect for several weeks. So it will impact our volumes and tube and core and late February and early March.
No material damage to our operations.
Due to that.
Great. Thank you I'll turn it over.
As a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Ghansham Panjabi with Baird.
Hi, good morning, and it's actually Matt Krieger sitting in for Ghansham. How are you all day today.
And how are you and then.
Great great doing well.
I guess from my first question.
And the level of inflation.
Permeating throughout the market can you talk a bit about what has changed from a price cost recovery scenario for greif.
Versus the last time, you saw kind of this cost inflation cycle in 2017, and 2018, I guess I'm asking specifically related to.
And how the repeat industrial business has changed but any details on the on the other businesses would be helpful as well.
We've made a number of improvements as we've gone through our transformation efforts over the value.
And number of years.
One of the biggest was really morally more tightly aligning the timing of our Pam adjustments to market realities, we used a lag a lot more we've got them now where the lag is very limited.
And so the.
And some of the.
About unusual timing things that we ran into and the path are much less likely to be as significantly impacting us. So the vast majority of our business is on the Pam contracts. The other big improvement that we made was the introduction of annual openers for other than raw material price increases.
And we have that now and over half of our business and the GIC portfolio and that permits us to go in and address issues like.
Rapidly increasing transportation costs and other elements so.
We think we're much better positioned than we were then and we're seeing that play through our business.
Great.
That's very helpful and that makes sense and just as my follow up question.
Given the significant year over year variability from a demand and from a volume perspective and.
And of the 2000, Twenty's and 'twenty 'twenty, one time frame for you can you give a consensus as to her.
Volumes are likely to progress kind of by segment.
Throughout the remainder of your fiscal 2021, what are some of the puts and takes that we should think about it as we think about that kind of year over year variability.
Yes, so I'll comment on February volumes, because we're almost through there and again, we guide just through Q2, so I'll make some comments about.
And our volume assumptions and that Q2 guidance.
Global industrial packaging business and as the volumes are really similar to what we experienced from Q1, the exception to that and we'll be what I referenced.
And the North America steel volume that were impacted to the weather and the Gulf Coast and again, 30% of our production and North America has impacted growth.
Coast.
Also said, we expect total regions of the world and offset that growth on volume and margins.
So from a paper packaging standpoint, again, we are really strong demand and our backlogs and our mill system remains strong.
Second scenario on February two.
Q1 core choice remains robust.
Q1, and again, our industrial tubes, and cores will be flat and February primarily due to the weather impact that are referenced in flight and those operations.
And the southwest.
And Q2 from a volume assumption standpoint.
Our steel volumes were projected to be flat.
Resin based products, which are plastic drugs, rich and Ibs C and <unk>.
Flexible oddly cease and we're forecasting and our Q2 guidance to grow by mid single digits.
And it's also important to note and the global and bolster fracturing sizes and the supply chain and clean.
Needs to be really challenging, particularly on steel.
And paper packaging, our volumes and our mills and core choice.
Got to be very robust similar to Q1 and then.
And of course, we expect growth.
Growth from our assumptions and Q2.
Great.
That's very helpful. Thank you very much.
Yes.
Just before we go on before we go into the next question and I just wanted to clarify something on games question.
I think I Miss day.
And we'll actually have a headwind on year over year Q2.
<unk> tons.
And about 15000 tons and some of that was that actually later in the year as you and actually stated.
Alright.
Your next question comes from the line of Adam Josephson with Keybanc capital market.
Pete Larry Matt Good morning, Hope you're well.
And again.
Hey.
One question Larry on the Timberland sales can you just talk about what the EBITDA associated with that Timberland is and can you compare.
I guess the value per acre of your remaining call. It two and 3000 acres to the $21 50 that you are getting from wire Houser and this transaction just given the different geographies et cetera.
And so.
Good questions Adam.
And EBITDA associated with this acreage is less and $2 million a year.
And the.
In terms of the comparable valuation of the acreage I mean, obviously you don't know until you go to market, but theyre very similar.
Portfolios and.
We have just an outstanding timber management team with outstanding assets across all of them, which is what drove that value and so I would say, it's fair to assume they would be similarly valued.
Got it okay. Thank you for that Larry and.
Just in terms of the <unk> guidance, just based on your interest expense guidance tax rate guidance et cetera, I am getting to an EBITDA number of call. It mid to high 100 <unk>.
Thinking about it which would imply a slight decline year over year compared to the 181 last year.
And thinking about it the right way.
Yes.
The thing I'd.
You mentioned just to remind people.
And the interest expense and our first quarter, we actually received a relatively significant patronage dividend from our farm credit.
Lenders of roughly $4 million to $5 million. So when you try and annualize it that you might get some distortion there and them.
And obviously, we will have the benefit of the reduction is related to the use of the proceeds from the land sale.
Alright, Thanks Mark.
Your next question comes from the line of day with Wells Fargo.
Thanks for taking the follow up real quick I was just curious if you can give us a sense you gave us obviously the underlying assumptions for volume.
I'm just curious more on the automotive side, if youre seeing any kind of disruptions from the.
From a chip shortages that we're reading about <unk>.
You mentioned not experiencing to date, and you sort of I guess cost headwinds or material availability issues, but as it relates to ocean freight or anything like that.
And you kind of hesitation or and you guys have been able to maybe buy steel ahead or anything like that just give us a sense from a risk mitigation standpoint again.
Yes, so on the auto industry semiconductor shortages to date, we have not had any material impact to growth we are watching it closely.
Really keyed into our customers and again, we supply customers, whose customers serve day.
Auto supply chain, so to date and nothing material or no impact and we'll just have to watch it closely and regard to steel had conditions are very very tight.
All around the world.
We have a pretty.
A regional supply chain. So we have good redundancy and balanced across and so we're not dependent upon one region.
Which mitigates some of that transportation and freight transportation and ocean going vessels.
But it is tight and we expect to continue to be tight probably through the second through the first half of the calendar year.
And at that point I think some of the.
Steel mills that were down for maintenance and some of the blast furnaces that are restarting.
Should improve that another factor and that is the auto makers had pretty good demand and that pulls a big big amount of steel so tight conditions.
Had no material impact at this point, but we are operating with very low inventories.
And.
Lead times are growing so we will have more and more to report and the second and of the second quarter.
Thank you.
Your next question comes from the line of George Staphos with Bank of America Securities.
Hey, Thanks for taking my question is actually done by products on the Libra George sorry.
Turning now and I was just wondering if you can discuss.
Cut the costs and other one off pressures and paper from <unk>, how large that effect was and then also how big of a burden.
Expecting and fiscal <unk>.
And in the first quarter.
And the impact between OCC and chemical costs and some of the related.
Other raw.
Raw materials was about $30 million year over year.
And a drag and as we go into.
<unk>.
<unk> cost year over year based on our 82 dollar assumption for us out to about $11 million headwind year over year.
Okay. Thanks for that.
And then I was wondering if you might be able to provide some color on this fall.
North America, and global industrial business.
Yes, so and.
And as the North America business, the one positive note.
And our resin based products, so large plastic drums were up mid single digits.
And our fiber business was up 4%. So we did see growth in those segments steel was the weakest segment, but a part of that weak demand also is related to COVID-19 and we had some lower operating rates and a few of our plants due to the impact of staffing.
So we can we see that sequentially that business and still growing.
But predominantly the other main substrates seem to be improving sequentially from from our Q4 to Q1, and we expect to see similar sequential improvement.
<unk> from the challenges we had with weather in.
In Q2.
Thank you Dan.
Our next question comes from the line of Adam Josephson with Keybanc capital market.
Thanks, everyone I appreciate it Larry just on working capital can you quantify roughly are precisely what kind of drag you're anticipating this year.
And it's.
And clearly going to be a use this year our teams did such a phenomenal job last year of <unk>.
Really.
And they are significantly just given how good demand is given the new capacity coming on but obviously, that's not happening and I don't know if you attributed to the fact that China's not taking anything or that there have been some supply disruptions and the us what do you attribute the still love OCC prices too.
First of all we don't consider them too low but.
And.
Because we still believe long term when you get the economy back open and retail establishments and restaurants and all of that.
And come back that we will see more supply side, because it's just way more efficient and on that and and and the residential collection and that's tied to the E. Commerce stream that said all of the and we've had discussions with some of the national players and even regional players and and.
And and recycling businesses and all of them have plans to enhance.
Their collection systems presidentially.
That's part of what were we believe will will help mitigate further increases.
And has the economy is just slowly starting to reopen and we thank all of that will help.
Like we said, we've got $82 and our assumption. We don't think there is risk of a significant increase.
There is some risk and that yes, and do we have something built into a range for that yes.
And I appreciate that and just one last one so if I think about implied <unk> guidance for EBITDA, I think 180, EBITDA would be down about $15 million and and I think and the products you set out a target a management incentive target of EBIT growth of about 30, So if I'm right about that and that would imply second half.
Ebert slots EBITDA growth of about 45 and hit that number and so I'm thinking that what's embedded and there is that paper packaging would would be dramatically better year over year and the second half because of all these price increases and might thinking about it generally the right way.
Yes, so I.
I wouldn't tie too much back to that and Sam target I mean, we worked with our job committee and we provide them information and.
Come up with what they think is a reasonable target so.
Like we said, we don't have a clear picture on the second half of the year and if we did we'd be providing guidance for the rest of the year. So.
It's probably all I can say about.
Sure no. Thanks Claire.
Your next question comes from the line of July Sparkles with Bank of America Security.
Hey, I just wanted to ask one ball on question just overall I know you talk about global industrial packaging and you're not expected and insignificant.
Synergies associate with that but I was just wondering what opportunities that might be a purpose and day Sir.
Yes, so from efficiency sample and when you look at all the number operations, we have around the world. There's a lot of opportunities to continue to standardized practices particular around the growth business system. So operational effectiveness best practice and all of our operations and also.
Sharing sharing those best practices from regardless of where they are around the world. So I think when you have one single global leadership on there all the raw start you.
You get more aligned improvement and both commercial and operational effectiveness.
And onto that and if you look at our and.
Results that were really starting to.
Have you and R. G IP business I mean, the improvement and our gross profit over the last four years, not just tissue first quarter.
Numbers and and.
And even actually so first quarter 18, 76 first quarter 1984 first quarter 2010, and five first quarter of 21 and 12, one we've shuttered over 42, gifv plants, and we walked away from $450 million and revenue and only $9 million.
We also are by closing those and you look at what we spend on average clan for Capex, and just say 270, 300000, a year and $11 million to $12 million Capex and it was going to be required we walked away from by shattering and plant. So those are the type of things.
As we've driven that improvement through our old risks business. We put this together will continue to drive forward and see continued improvement and our in our opt.
Operating metrics.
Okay. Thanks for that additional income.
And if there are no further questions I will turn the call back over from that.
Thanks, very much Dorothy and thanks, the audience for joining us today, and we hope you have a great remainder of tier week.
Thank you, ladies and gentlemen that does conclude today's conference call and you may now disconnect.
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Okay.
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And.