Q2 2021 Greif Inc Earnings Call
Okay.
Yeah.
Okay.
Good day and thank you for standing by welcome to the growth Q2, 'twenty 'twenty 1 earnings call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded.
For the speaker's presentation, there will be a question and answer session to ask a question during the session you will need.
Star 1 on your telephone I would now like to turn the call over to your speaker today, Matt Eichmann. Please go ahead.
Thanks, a lot Amy and good morning, everyone. Welcome to <unk> second quarter fiscal 2021 earnings Conference call. This is Matt I can I'm joined by Pete Watson price, President and Chief Executive Officer, Larry Hill, Shimer price Chief Financial Officer.
Pete and Larry will take questions at the end of today's call.
For instance, regulation fair disclosure, we encourage you to ask questions regarding issues you consider important as we're prohibited from discussing material nonpublic information with you on an individual basis.
These limit yourself to 1 question and 1 follow up before returning to the queue. Please.
Please turn to slide 2.
As a reminder, during today's call we will make forward looking statements and volume 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 for 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 3.
Matt and good morning, everyone. We really appreciate your interest in growth.
Our purpose at Greif is to safely packaging protect our customers' goods and materials to serve the essential needs of communities all around the world and that common purpose.
This combined with our vision to excel in customer service bonds, our global colleagues and motivates us to perform at our best.
I want to make sure I think for global growth team for these efforts.
In the second quarter, we generated strong year over year volume growth in most of our key global industrial packaging substrates.
We also experienced robust demand in our corrugated sheet feeder network network and significant demand improvement in our tube and cores business.
While inflation remains challenging we are executing strategic pricing decisions and contractual price increases to recover costs and stay ahead of the.
Sufficient curve.
Disciplined focus is helping us deliver solid financial results and reduce our leverage.
Our second quarter adjusted free cash flow grew by more than $47 million versus prior year, and we repaid $235 million of debt.
With improved visibility.
Inflation in the back half for the year, we are reintroducing fiscal 2021 annual guidance and anticipate generating adjusted class a earnings per share of $4.70 at the midpoint.
Finally, we continue to make meaningful progress against our strategic priorities, we recently.
Ability to completed our fourth annual colleague engagement survey, which ranks us in the top decile of all manufacturers. In addition, we published our 12th annual sustainability report, reflecting the progress we've made around ESG and enhanced our customer service capabilities in line with our stated.
<unk> vision.
I'd ask you now turn to slide 4.
The global industrial packaging business delivered strong second quarter results.
Global steel drum volumes increased by roughly 3% on a per day basis versus the prior year, while global rigid <unk> and large plastic.
Drum volumes rose by nearly 8% on a per day basis, and our global ABC volumes were a quarterly record.
Average selling prices were up across all key global substrates year over year due to raw material pass through arrangements and strategic pricing decisions.
Product demand.
Demand was strongest in APAC, where steel drum and rigid <unk> volumes rose by 14, and 11% respectively on a per day basis versus the prior year and benefited from improved industrial trends.
Demand conditions were solid.
A Europe for steel drum.
The rigid <unk> and <unk> rose by mid single digits on a per day basis.
In North America, which features our most diverse product portfolio mix steel drum volumes were down single digits, while rigid rbc's fiber drums, and <unk> display mid single digit growth.
<unk> per day basis versus prior year.
We continue to see improvement across many of our key end markets. For example sales into Petro products and lubricant end markets improved sequentially and were higher year over year.
Coating sales also roos rose due to better auto and construction demand.
And sales into bulk and specialty chemical end markets were negatively impacted by ongoing customer force measure actions and supply chain constraints, but underlying demand still remains solid.
We see little indication of customers rebuilding inventory and while supply chain conditions.
Conditions remain tight we have not experienced any negative material impact related to sourcing raw materials.
Tip's stronger volumes and higher average selling prices drove higher segment sales and gross profit year over year.
<unk> second quarter, adjusted EBITDA rose by roughly.
$7 million due to higher sales, partially offset by higher SG&A expense, mainly attributed to a $13.5 million of higher incentive accruals for this segment for.
The business also benefited from a $7 million FX tailwind and for comparison purposes.
Please keep in mind the G I Pee in a very strong Q2 thousand 20, when the segment benefited from panic buying in opportunistic sourcing benefits.
<unk> strong second quarter performance carried over in May the start of our fiscal third quarter low.
Steel drum.
Rigid IPC buying pumps grew by low to mid double digits on a per day basis versus the prior year due to stronger market demand and an easier prior year comparison.
And then sequentially versus April were basically flat.
May volumes in our filling business improved notably from early in Q2.
Which is 1 indication that conditions in the U S. Gulf coast are starting to pick back up.
Ask you to turn to slide 5.
Paper packaging second quarter sales rose by roughly $55 million versus the prior year due to stronger volumes in our corrugated sheet and tube and core businesses.
<unk> and higher published containerboard and box board prices for.
For comparison purposes. The prior year included $35 million of sales attributed to the divested CPG business.
Paper packaging second quarter, adjusted EBITDA fell by roughly $11 million versus the prior year primarily due.
Significant $24 million recovered fiber and transport cost headwind.
G&A expenses also increased year over year, primarily due to the $11.5 million of higher incentive accruals.
In March we announced a new set of price increases for for recycled box port grades with immediate.
<unk> effect in response to strong demand and cost inflation.
And we have fully implemented increases on non all non risky tide customer contracts and will benefit from this in the fiscal third quarter.
Similar to quarter on demand in our converting operations remain robust.
Second quarter volumes and core choice, our corrugated sheet Peter system were up roughly 37% per day versus the prior year quarter as demand for durables e-commerce growth the auto supply chain and food and beverage remained very strong.
Especially sales, which includes litho laminate bulk packaging.
Packaging and coatings.
More than 31% versus the prior year quarter.
Volumes in our tube and core business accelerated through the second quarter were up nearly 6% versus the prior year.
In addition to continued strong demand in construction and film and market segments demand for textiles.
<unk> picked up this quarter and reflects a double digit increase year over year in this business.
Paper packaging fiscal third quarter is off to a strong start in.
In may our volumes in core choice in our tubes and core business were up both double digits on a per day basis versus the prior year and reflect flat to sing.
<unk> digit growth sequentially versus April <unk>.
Asking now to turn to slide 6.
I'd also like to take a moment to highlight our ongoing ESG efforts that are embedded into our strategy.
In April we published our latest sustainability report outlining the ESP achievements, we made in 2020.
As well as the outcomes from our second materiality assessment, which helped to shape our future priorities.
We also recently announced a new greenhouse gas reduction target and continue to advance projects that will improve our products circularity.
Finally, we are deploying an inclusive leadership program to all global.
Managers throughout the remainder of 2021 to further enhance price already strong engagement engagement culture.
Encourage all of you to visit our website to review our sustainability progress can become more familiar with our strategy.
Like to now turn it over to our Chief Financial Officer, Larry Hill, Sean.
Sure.
Thank you Pete Good morning, everyone. Please turn to slide 7 to review our quarterly financial performance.
Second quarter net sales, excluding the impact of foreign exchange rose by 13% versus prior year due to stronger volumes and higher selling prices in our 2 primary business segments.
Second quarter, adjusted EBITDA fell by roughly 3% versus the prior year quarter while.
While sales were higher cost inflation, especially in transportation and OCC drag on profit in GI. We are implementing price increases in response to strong product demand and to stay ahead of inflation.
<unk> in order to maintain appropriate profitability, we are working diligently on implementing price increases in paper packaging as we respond to robust demand and seek a return to appropriate segment profitability.
SG&A expense rose by roughly $26 million versus the prior year quarter due.
Due to roughly $25 million of higher incentive accruals across the company.
This year over year change is due to an accrual decreased last year as we forecasted a poor Q3 and second half, which this year has swung to an accrual increase due to our anticipated strong second half results being substantial.
Lee over budget.
Our second quarter non-GAAP tax rate was 20%, reflecting a onetime benefit of roughly $4 million from return to provision adjustments and reserve releases due to audit settlements and statute expirations.
Second quarter adjusted class a earnings per share rose by roughly 19%.
<unk> to $1.13 per share.
Finally, adjusted free cash flow rose by 60% to nearly $127 million versus the prior year, primarily due to improved profitability and working capital management, partially offset by a slightly higher cap capital expenditures trailing.
Trailing 12 month average.
Working capital as a percentage of sales improved by 180 basis points year over year to just over 11%.
Please turn to slide 8 to review our outlook and key modeling assumptions.
We have reintroduced annual guidance given better visibility into the remainder of our fiscal year and continued confidence in our.
Businesses improving fundamentals.
Transformation that we commenced earnestly in late 2015 as produce tangible and meaningful change.
With our anticipated fiscal 'twenty 1 results, we will have more than doubled earnings per share since 2015, Despite COVID-19 negative.
Negative impact for closure <unk> divestiture of more than 70, non core were suboptimal talents and without any share repurchase benefit.
In fact, we currently have 600000 more shares outstanding now versus the end of 2015.
We forecast our fiscal 'twenty, 1 adjusted free cash.
Cash flow to range between 285 and $325 million inclusive of between 130 to 150 million spent on Capex and we expect working capital to be a substantial cash used for this year commensurate with our announced price increases to offset cost inflation.
Finally, we assume that OCC will.
Average of $101 per ton for this fiscal year and $122 a ton during our second half we expect fiscal 2021 interest expense to range, 97% to $101 million and our full year non-GAAP tax rate to be between 22 and 26%.
Please turn to slide.
9.
We have a consistent 3 from capital deployment strategy focused on reinvesting in the business returning cash to shareholders and delevering the balance sheet.
During the quarter, we paid roughly $26 million in dividends and repaid $235 million in debt our compliance leverage ratio was 3.2 times.
Times as of April 32021, and we continue to drive toward our targeted range of 2 to 2.5 times as a reminder, we will not engage in any material M&A until we're back within that range. Finally, as we continue to generate cash pay down debt and reduce leverage we will.
We'll shift enterprise value to the benefit of our equity holders and eventually moved to steadily increasing dividend policy with that I'll turn the call back to Pete for his closing comments before Q&A.
Larry and I would ask everybody to please turn to slide 10.
To wrap it up growth delivered really a solid second quarter and I'm pleased with our business performance.
<unk> for making strong progress across all of our strategic priorities are focused on the operating levers within our control.
Our extensive global portfolio of differentiated service capabilities with our sharp focus on operational execution positions us to uniquely serve the needs of our customers.
And generate significant value creation for the benefit of our shareholders and I really appreciate your interest in Greif Amy Please feel free to open the line for questions.
Thank you at this time, we will be able to conducting a question and answer session.
Now for us for any questions as possible. Please limit your questions.
For 1 question with 1 related follow up you May then reenter the queue for any additional question.
First question comes from the line of George Staphos with Bank of America Securities. George Your line is open.
Okay. Thank you hey, good morning, everybody thanks for the detail.
Good morning Zone.
Good to hear your voices hope you're all well.
So my 2 questions.
And then related so we look at the implied guidance for the second half.
<unk>.
This is my phrasing youre going to be looking at some boomer third and fourth quarter earnings.
Certainly inflation has been a.
Major headwind for.
Yeah.
What gives you what 2 or 3 things give you confidence that the guidance you've given is manageable achievable, even with that pretty large headwind right now on inflation.
<unk> question can you talk to what pricing assumptions.
For you guys built into that guidance.
If an existing customer puts in an order today with you.
Specifically here on your day.
What is the price that they are paying.
Versus the May published price.
Thank you.
Yes, I'll comment on <unk>.
Peter.
Ed to it as well.
We have a very high degree of confidence on our.
Pattern of working to stay ahead of inflation.
Particularly in our global industrial products business, where we have.
Stay more direct control on pricing.
With our price adjustment mechanism contracts, but also our openers for other items. The team has been very diligent as we've been talking about inflation for a couple of years now and so as we see things playing out.
In.
Our third quarter.
We have pretty.
Pretty good visibility to the fact that our margins are going to.
Maintain and slightly grow.
Gross profit dollars and we're top of the data maintained into the fourth quarter.
Our volumes in.
The first month of our third quarter grew an exceptional levels and so.
We're not seeing anything slowing that down we're bullish on the economy and more.
Bullish on staying ahead of the inflation in fact in the inflationary time through these Tam.
With mechanisms has actually helped our value add significantly because of just the timing of inventory deliveries against the price increases.
With respect to the.
Paper business.
As Pete commented in his remarks.
We have executed.
Adjusted <unk> dollar of the price increases that we have announced in our non index type business and our <unk> business, 60% of our business is not tied to risky index.
So yes, we have.
Announced $150 since last October and we're getting every dollar.
Dollar of it in the market.
I don't know if you had any other color.
So George from a volume standpoint, again as Larry said.
Spec.
Strong.
<unk>.
The strong second half volume is really consistent with what we've seen in Q2 in terms of pricing to Larry's point.
Just on Europe to give you a perspective, so our backlogs are 9 weeks plus.
This growth.
Our customers are on allocation, we have no capacity to take on any new customers at any price.
Our challenge it is and as we both indicated all our non contract.
<unk> customers are up for $450 ton price.
<unk>.
That's a really a very robust market or price.
Items into into our full year guidance as what we've realized in the index is today. So it doesn't doesn't forecast any future potential price.
Interest, which we're not going to comment on anyway.
Okay.
Great detail I'll turn it over and be back. Thank you.
Yes, Thank you George.
Your next question comes from the line of Gabe Haiti with Wells Fargo. Your line is open.
Pete Larry and good morning.
Good morning, guys.
Thanks for all the detail with Watson.
Yes more of a high level question.
Looking at kind of housing starts and.
Just looking at some different research out there talking about.
Maybe potential for Deere organization and.
Like I said, if I look at the 5 year average for housing.
Sorry, if it was around $125 million and projections for that to be $1.5 million plus.
Hoping you could remind us sort of in your 2 different businesses where your.
Highest exposure to construction and or tangentially.
Whether it's carpet tubes, and cores and stuff like that.
Okay.
And what that business has it looks like maybe over the past couple of years and then what benefits. It can provide I know it's difficult maybe more in the Gis business.
Because you don't have great line of sight as to where some of these paints and coatings et cetera may ultimately end up but just directionally, if thats been a drag and could potentially be like I said.
<unk> done for you.
No. Thanks for the question Gabe so in our paper packaging business and you said it our tube and core.
Some of the key key.
And market share carpet in.
Products that would go into a house and as you know 2019, we had weak tube and core volumes.
It was part of the end markets that were weaker those are starting to recover.
With the growth in home home building and home goods et cetera. So that's part of why we're our tubes and cores were up almost 6% year over year in the quarter.
Our.
Sure.
The rest of our paper packaging business core choice in our mills as you notice our raw material suppliers, so it's more difficult to align.
The end markets in that business, but it does help indirectly for our mills and for our core choice.
Operations that provide products that go into.
New homes and buildings on our GI side, when you look at the chemicals that we produce many of those chemicals are flexible foam or rigid foam and those are all components that either go into furnishings.
Furniture laminates materials.
Does that go into homes. So it certainly has been 1 part of the end market segment.
Has improved and will continue to help our business.
Net supplement with pizza in the game.
Little bit of where youre going not only in construction, but.
We all know what's going on in the auto segment.
Where things have been.
From robust, but shy of where they could be if they had their semiconductors.
It's interesting for us and what.
We've talked about before Pete <unk>.
At long view that we talked about even last year in this same call that we thought the economy would recover well right now and.
And that we thought debt by 'twenty, 2 we maybe be back to an 18 economy and that's still our belief and what's interesting is that the volumes in our the remainder of our year are still projected to be significantly below.
Our 2018 levels.
No.
We have 22 has even more positive in front of us and now a lot of that like construction depends on can they get labor and they get.
Can they get their work done.
Right Okay.
Thanks for that guys and then I guess dialing in on on G. I T and the second quarter I, just want to make sure that I.
I heard everything correctly, if there is directionally, a $14 million swing I think in and incentive comp and then $6 million benefit from raw materials last year that did not recur this year.
Hmm.
And then if I, even if I adjust for the $7 million swing in FX it looks like there's theirs.
It was effectively a 100% drop through.
From from volumes and I know that's not the case. So I'm just curious if you can parse out for us if there was any sort of benefit from better utilization or what the improvement was year over year. I know you guys have taken a lot of cost out so.
I guess really what we're trying to understand or I'm trying to understand is what the benefit is kind of go.
Go forward.
With the normal drop through should be from volume versus <unk>.
Structural cost improvements that you guys have made.
Yeah, you gave us the.
1 of the big drivers.
The improvement in <unk> is really about the margin expansion that you've been seeing.
US drive us over the past few years, and we talked about in prior quarters. The dramatic improvement that we've made in the mechanics of our pass through mechanisms in tightening up what used to be an unacceptable wag and that really drives improvement in a period of time when you are having rapidly increasing raw material costs.
So a good bit of this margin expansion, while we have done a good job of improving our cost management is really the margin expansion relative to pricing.
Processes and some of that is the annual day openers for non.
Non Ross some of it is making sure that in contract renewals, we have been very aggressive on pricing because we knew we were facing into an inflationary period and then the last component is the.
The element of the mechanics of the panel.
The manufacturing.
Cost improvement has actually been a relatively minor part of this so it's really volume and margin expansion are the 2 components.
<unk>.
Harvest volume with certain AD healthy market demand in our end markets, but we're also seeing really good dividends from our strategic capital investments, particularly around.
Non IPC volumes.
And the <unk> reconditioning and our investments in plastic drums. So we've also got 3 additional blow motors that are going into Houston, Shanghai into Central Europe. So.
This strategic growth initiative, and our resin based products will continue to benefit.
That business as well.
Okay. So it's a little bit of a mixed benefit. Thank you guys.
Your next question comes from the line of Mark <unk> with BMO capital markets Mark Your line is open.
Thank you good morning Pete.
Hi, good morning, Matt.
Sure.
I wondered just to start out Larry can you talk with us a little bit about what we should expect from kind of SG&A are in.
In the <unk> in the back half of the year I mean, it is a big jump here in the second quarter and it really.
Offset a lot of the improvement in gross gross profit it's also above 11%.
Sent levels. So I'm, just trying to figure out whether that type of level is something we should expect kind of through the back half of the year.
Sure. The question Mark Dan We continue to focus on how do we drive SG&A costs out of the business.
And some of that has to do with the fact that.
The SG&A that we took over when we acquired Caraustar was higher than than ours, and we continue to work on that some of thats been delayed because of the COVID-19 impact on implementing our ERP system. Unfortunately has pushed us back.
6 to 9 months on various implementations.
That's having some impact on our SG&A costs.
Adjustments that we mentioned.
Just to play just on performance year over year.
That'll play out over time to get back to the.
Our target levels, unless we are far exceeding our.
<unk> net targets, which is the case this year.
So.
Typically, though if I look to the back end.
This year and we we do anticipate debt.
G&A expense for the remainder of the year.
B.
About.
<unk> 21 per share.
A drag relative to what it was in the first half of the year.
And that is because we will start to see more travel and entertainment, particularly relative to last year, but even relative to the first part of this year now we're not going to go crazy on any of that stuff, we're going to manage that.
Be significantly lower than it was pre pandemic, but it is going to be higher in the second half of the year.
And if I look at operations as a whole if I just walk you. So the first half for the year was about 74.
<unk> operations, excluding the OCC impact is going to be a lift of about $2.22.
<unk>.
Thats offset in there is <unk> 21, a share of higher SG&A expenses in the second half of the year versus the first half.
And in part about 13 cents of that as additional incentive increases for in the second half of the year as it is earned out over the remainder of the year.
Then you've got.
A share you see offsetting things about <unk> 60 impact higher OCC in the second half of the year than the first half.
I might as well just finished this walk 7 benefit lower interest expense 51, a share higher tax expense because of higher earnings.
And then there is that for.
<unk>.
The NCI and other miscellaneous stuff gets you to $2.96 for the second half of the year versus the first half 170 for hope.
Thats response gross.
Alright, and then just as a follow on I'd like to kind of double back on George's question around pricing.
You talked about sort of the.
Fact that these open market non index prices.
Had been fully pass through.
Curious if we think about the paper segment overall.
What would be approximate number on kind of just quarter to quarter improvement as we go into the third quarter as I look at.
It seems like you must have had limited benefit.
In the second quarter from the second containerboard price hike.
And I'd also like to get so if you could confirm that and then I would also like to get some sense.
Of where pricing is actually moving in the uncoated business on the converted products. So you've you've raised kind of open.
Open market <unk> prices, but whats happened the tube and core prices and whats sort of a cadence thing for kind of roll through in converted products.
Yes, So let me talk first about containerboard marks.
No.
That flow through the benefit to our mill system started.
At the.
And the last month of our second quarter. So we'll have full capture in Q3 on that $60 per ton increase so we've got for full capture on that downstream in corrugated that's been a very strong market, we've actually got benefit.
Sorry to hear that.
Very quickly after the.
Containerboard increases so Q3 in our corrugated and containerboard system of full implementation that has been offset by.
Higher OCC and higher chemical costs, adhesives, et cetera, but from a pricing standpoint.
We capture that fully plus some are converting in the uncoated. So we've announced $150 a ton. The index is only recognized 80 and as we both said we have.
Raised all our non contract prices for $450 per ton price an immediate effect.
Benefit.
<unk> stream in tube and core it's very similar to our corrugated implementation has been very strong.
We've been very aggressive with it and we are fully capturing that.
That business.
Pricing on the tube and core business and really look at PPS performance overall, our convert.
Business is core choice in tube and core performed at very high levels. The Big Challenge. We had is in our mill system, where you have the price cost squeeze.
With OCC and chemicals and catching up on the price. So you'll start seeing in Q3 and Q4 that realization is price.
Rice.
Uncoated CRB, we don't have downstream capability.
We most recently announced $50 on that effective July 5th.
So the index is only recognized 70 in again.
Non-GAAP.
Contractual.
For customers that are related index are all up.
140, and the $50 will be implemented in July 5th So I hope that covers what you're looking for.
That's helpful. Thanks, Pete Thanks, Larry.
Thank you.
Your next question.
It's from the line of Adam Josephson with Keybanc, Adam Your line is open.
Thanks, Good morning, everyone hope you're well.
Good morning, guys.
Good morning, Pete Good morning, Larry not GAAP.
Larry 1 tack so if I go back to your Investor day in mid 2009.
We're talking about a significant improvement.
And your tax strategy and you mentioned your long term targeted adjusted tax rate range.
It was $26.30.
You hit the low end of your guidance this year youre going to be down to 22. So it strikes me as a net is.
As an exceptionally low adjusted.
<unk> come right even <unk>.
Fair to what you were thinking 2 years ago. When you had mentioned all the improvements you are making in your tax planning. So can you just help and over the past for years and I think you've consistently outperformed your tax rate guidance from the start of each year. So what is your long term tax rate expectation.
<unk> is this your anomalous in any way and just help us understand what's going on there because you've been meaningfully under shooting the mark on tax.
Yeah, I think actually if you look at on an annual basis. Most of the time, we've been within the range, but on the lower end of our range but.
You're right when we did day conference back in 17.
17 debt that was what we've laid out but that was also pre tax reform, which lowered the U S tax rate pretty significantly and that obviously was a benefit of a few points.
On the range that we provided then to where it is now.
The other element that's impacting our tax.
<unk> right is I also had alluded at that point that we had a lot of reserves set up for some planning things that were.
Yes.
Were of a nature that required us to have as reserves established we've worked through a lot of.
The statutes of limitations and a.
A lot of exams in the U S and in other countries around the world and as we've gotten through those we've gotten favorable settlements on a lot of things net that results in those reserves being released.
There is no longer contingent tax liability related to those and those those things are what's causing some of the bus.
Bumping.
And the tax rate on an overall basis, but if.
Think the go forward becomes more difficult to project at this point, just because of what's going on in the.
Within the new administration and their view on U S taxes on corporations, but also the work that they're trying to do.
<unk> to get into setting up.
As minimum taxes on certain.
Areas.
So it's difficult for me to tell you right now what I anticipate our expected tax rate to be I would say that if there was no changes in the in.
In the.
Global current tax structure debt over the next 2 to 3 years I would expect that our range would come down another point or so.
Because of some other things that we've got going on relative to tax planning.
And so I think I think our tax team has done a very very good job.
<unk>.
Executing on the strategies that we were referencing back in that 17 call. We've got another 1 or 2 arrows in the quiver that we're going to do and is fun.
And then it's just subject to what happens on tax reform.
Got it I appreciate that Larry and on cash flow can.
With the you mentioned you expect a substantial working capital drag. This year can you quantify that the reason I ask because your capex is going to be below normal. This year, you'll have a significant working capital drag I'm just trying to project for next year, because obviously the midpoint of your guidance. This year is about 300 next year.
For your commitment is around for 30, so it implies about 100.
$30 million of improvement part of that would be working capital, presumably no longer being a drag and maybe who knows what will happen with EBITDA next year, but I'm just trying to understand the working capital and Capex Capex components, specifically this year versus.
For potentially next year, yes.
And I mentioned in my comments, the phenomenal job that our teams have been doing on managing working capital as a percentage of sales, which is the primary measure we look at it because the cost of inventory is something that's much more difficult to control whether it talked about OS.
<unk> or steel or resin when you look at steel or resin neighborhood effectively both doubled in cost over the last.
8 months and that then translates into I, obviously higher sales prices higher receivable balances and higher inventory and that's what creates the the working capital draw.
While driven by cost it's not driven at all by poor management. It's a matter of fact, our management of working capital has been incredibly strong.
So that's what's causing the drag it's what it meant roughly 80.
I'm going to say if you look at <unk> level.
A drag of <unk> called.
Rag, it's 5 million Bucks Thats pre care star, So it's going to probably be double that.
There are 70.80 measurement problem.
And on Capex I mean, the frustrating thing for us on Capex, as we're ready able and willing to spend but the reality of what's impacted.
Our capex spend is things out of our control.
Troll, it's you can't get the deliveries I mean people are.
Running behind non producing equipment and.
I'm sorry.
I'm sorry.
Oh, yes, the itbs yet.
Yes, it was going to go on to we have not been able to execute as I mentioned in response to Mark's question.
30, a lot of the ERP implementation because of Covid travel restrictions and so that has deferred the spending on the it side as well. So we go and we went into the year with a plan to spend in net $150.170 million range and now obviously, we're looking at $20 million less.
Again, our plan into the future.
We haven't budgeted for next year, yet, but it would be that it would be up higher because we have lots of things we would like to get done.
We're we're captive to what we can get delivered.
Terrific. Thanks, Larry.
<unk>.
Your next question comes from the line of Ghansham Panjabi with Baird Ghansham. Your line is open.
Hi, Good morning, everyone. This is actually Matt Krueger sitting in for Ghansham, how are you doing today.
Matt how are you.
Hey, Im doing well doing well so given all the moving pieces on a year over year basis.
For the for the back half of the year I was just first hoping that you could provide some added detail on the expected weighting of EPS between the 2 remaining quarters for the back half of the year I mean, just given the meaningful acceleration implied some of the comparison issues and then obviously all the pricing that's being layered in any any help there would be would be great.
Sure.
I would say this we get into this every year about what's going to be better Q3, and Q4 and a lot of it just goes to when does the AG season harvest I would tell you that going in our assumption is that it's going to be sort of a normal pattern in debt, our Q3 would be stronger than Q4, but they are not substantially.
Different I mean, you can basically take.
Debt differential on on our EPS from that $2.96.
And divide it by 2 and you skew it a little bit to 3 and a little Alaska for in.
That's essentially yet I mean, it's not there's not a day.
Huge difference between the 2 quarters.
Great.
That's really helpful. And then I was just.
Just hoping that we could.
Get some more detail on what the estimated impact from winter storm year. He was the global industrial packaging business.
Thank you.
Anything you can provide for.
From a volume perspective, and then also any margin impact as well that would be great. Yes.
Yes.
And looking at debt, we had about 41 production days across.
Number of plants no it's not.
So take about 5 days from our 6 days on a few of them.
Our production was just shut down.
It impacted sales so from a volume perspective, it was about a $1.5 million.
Impact we had substantially increased utility costs. After a storm that was another $1 million or so and then we had some broken pipes and those kind of things from free.
Freezing because they have installations.
<unk> non there was another 100.100 200000.
And so you've got about $2.7 million.
Actual cost now Theres a lot of indirect stuff. There that you ended up with force majeure actions going down.
Into some of the businesses of our customers being impacted by things.
And you can get orders and that impacted things, we did not try to.
All of that we do know that our Gulf coast regions.
Yeah.
Volume levels are significantly less than.
The other areas of the world.
That gives us cause for optimism.
Things that going forward and into 'twenty, 2 because as Pete mentioned, we're really.
Just now starting to see volumes in our filling business start to pick up and Thats a very good sign for us. So we're pretty bullish going forward, but it was about $2.7 million.
Okay, Great. That's helpful. That's it for me thank you.
Your next question comes from the line of Justin Bergner with Gabelli Justin Your line is open.
Good morning, Pete Good morning, Larry.
Hey, Justin.
Yeah.
1 big picture question than just a couple of specific cleanups big.
Big picture outside of U R. B are there other.
Your business in industrial packaging, our paper packaging, where youre sort of unable to meet incremental demand.
Supply chains are tightened our demand is really robust.
Our meeting demand for our customers My comment was really that anybody that's new that we don't do.
Parts of square that wed like to do business with.
That substrate, we just can't because.
Our backlogs and our demand is so great, but we have actually grow other parts of our business because of our reliability now that has forced a lot of overtime and a lot of 6 and 7 day work weeks.
Business, but <unk> is a little more severe.
We are doing a really good job, serving our customers and ensuring that we're meeting their needs and actually in our Gis business in our converting business in paper.
We're actually making some inroads because of that reliance.
Our liability and it's all related to our customer service scores continue to improve.
Spite of a tough demand environment.
Okay.
And moving to some specific questions just to clarify the $25 million incentive accrual headwind that was all.
All in Q2, and then there'll be a smaller inc.
Incremental effect in the second half.
Is that incremental to the first half for incremental year on year.
Yes.
25 was a combination of 'twenty for protection.
A combination of last so that was a year over year Q2, and last year, we had that we decreased the accruals for incentives and this year, we increased the accrual for incentives relative to what we.
It had been at budgeted so that was.
That 25% in first.
The second half is about the same again for us.
The remainder of the entire year is about $52.6 million at about $52.6 million is what we're currently planning on a year over year higher incentives.
Okay.
And then lastly, just on the tax rate.
You mentioned that the tax rate might come down a 100 basis points, but that's not from the 26 to 30, that's from the 26 to 30, which initially had come down a few hundred basis points because of the tax reform Bill correct. So it might be.
It's more than 100 basis points down from the 26 to 30 just clarifying.
No no I'm talking about from where we're at now.
We're.
Guiding to where we think we will be going forward.
Okay. Thank you.
I do think sentiment.
And as a reminder, if you would like to ask a question. Please press star.
The number 1 on your telephone keypad.
Your next question comes from the line of Mark <unk> with BMO capital markets. Your line is open for.
Yes.
A few follow ups here real quickly 1 on the land sales.
The gross price.
Absolutely exceptional can you talk with us about sort of how the tax leakage looks.
Yes and.
Now how youre thinking about the balance of the portfolio when the land business. If you know if we ever get down to a point, where just scale in that business as an issue.
Yes sure Mark.
First of all I'll, just say I'll answer your second question first we don't have any intention to liquidate.
For our land portfolio.
We talked about that it for strategic Optionality, we view it that way it obviously helps us on our interest rate and we like we like the business and.
We had some unique circumstances I mean, we always talked about rainy days and I think it was raining pretty hard last year. So we decided.
Any more execute on it and that goes also to the other factor that drove that because of some other tax planning that we had been doing relative to timber gains debt had been deferred from transactions a decade ago.
We.
Recognize that we had.
Some capital loss.
2 that were available for us to utilize.
To offset gains on timber transactions and so that played into what we executed on the gain ended up being more than we thought because as you said.
<unk> got values per acre.
Losses were outside anything the bankers told us they thought they could get which is obviously good news, but as the tax leakage it was minimal.
We were basically able to.
Utilize other tax loss carryforwards that we had available to us to eliminate any federal tax.
Or is that for some small state and local taxes net was it.
Okay.
Another follow on I had was probably perhaps more for Pete.
That is just can you give us a sense of sort of supplies and approximate market share on the IPC business I remember when you bought <unk> about.
11 years ago. It was kind of the number 3 player in the market share at this time.
For the dominant guy than miles there.
So I think your strategy was to kind of expand their geographic footprint and try to pick up share. So I wondered if you could just give us a sense of how big that business right now and sort.
We have where you would see yourselves vis vis the competition and finally, how rapidly is that market growing overall right now.
Yes, Mark So we've got about 30% global market share in <unk>, and <unk> reconditioning and worth third behind the 2 privately held companies shirts and mouser.
We've stated that that is a high growth area, we've made capital strategic capital investments, we now have 20 <unk> low.
Molders around the world, we're in the process of adding 3.
That is a business.
A product line that's growing.
Mid to high single digits.
The fastest growing.
Product line on a global basis.
Our portfolio.
And I think what's really important to us in the last 2 years we've either.
<unk> joint venture partnerships or strategic partnerships with reconditioned.
To create a really compelling.
Telling end of life product service.
And that creates a really circularity play for IDC. So it's really important part and right now our biggest our biggest footprint is in Europe.
We're growing our north American footprint and as I said, we're adding.
Picket line into a into Asia, and our China. So it also from when you look at our product portfolio in Gi.
Prior to this strategy were over 60% of our product mix was in steel drums, that's moved to 50% in our resin based products now.
Our little over 20%, so you'll continue to see that transfer and switch in terms of portfolio mix, a little bit more into resin based products <unk> plastic drums, and less less on steel drums.
Okay, and then if I could slip 1 more Pete I just wanted to talk.
Briefly about the box board business.
1 thing is I'm, assuming that some of that tightness.
Youre experiencing EUR b.
Is the outcome of having shut down mobile.
I'm just curious you've got those 2 COVID-19 mill.
Mills, and I wonder whether you might.
Convert you are be it 1 of those mills and whether in the CRB business. The 2 remaining mills, whether they kind of risk being kind of behind the technological curve. It just seems like with what graphic is doing at Kalamazoo, we're seeing more and more of the.
Of the CRB business.
Moving to Ford Ranier machines that can do kind of <unk>.
Multi plies and maybe offer customers improvements in performance that basis weights.
So just to get your thoughts around potential conversion and you know.
Where do you stand from a technological standpoint.
Point there.
And the EUR beside we close the mill 2 machines mills in mobile is 140000 tons.
That was a combination of it was a really high cost Q4 mill that we ever had economic downtime back in 18 and 19 it was always in that.
That mill.
And it needed a pretty significant amount of capital. So we decided to close at the benefit obviously was that.
It created more volume than the rest of our system. We do have the capability in 1 of our CRB plans to to run both European CRP and we do that now.
So there is a possibility that that machine could run.
For more you RV products in the future I'm not going to set up so we're going to do so it really leaves us with 2 pure play CRB machines, 1 in the Midwest and 1 in the West Coast.
They are operating.
Fairly consistently now.
We have nice niches in those markets. So I wouldn't say, we compete specifically with with some of those newer machines, but we find our niches really high service.
Very responsive so I think those 2 machines will Stacy.
Okay.
What we do in the future regarding our box board system.
We're evaluating some of that but we really don't have anything material to comment on that right now, but we are evaluating that.
Okay. That's really helpful. Good luck in the second half of the year. Thank you Mark.
Your.
Our bench strength comes from the line of George Staphos with Bank of America Securities. Your line is open.
Thanks, Hi, guys. My line disconnected he too quick cleanups for me 1.
Peter I think you mentioned that your B lead times or 9 weeks, if you could affirm that or correct me if I got it.
Incorrectly and really more relatedly what are you seeing right now in terms of your lead times.
And backlog that you can measure them.
On the containerboard side, and then on Capex recognizing it wasn't your choice.
Youre going to be $20 million lower this year.
Where are you finding you can't.
<unk> spend you mentioned ERP systems I think in answering Mark's question earlier are there any places where that lack of being able to install what you wanted is creating stress in your business and therefore is there any sort of important things we need to focus on for 2002.
In terms of what you need to get bolted in so that the year.
Progresses, like you'd like and shall we just similarly expect if youre at 103 to $1.50. This year, maybe next year is pushing closer to 200 as we do normal plus add on another 20. Thank you and good luck in the quarter.
Yes, George just comment backlogs and you RBR at 9 weeks containerboard is <unk>.
Your line weeks, depending on machine. So they are really robust markets.
Those backlogs reflect that on.
And Capex.
For the delay in the ERP system is not.
Anything thats going to material materially impact our operations in any.
No way at all.
It does delay some opportunities for efficiency gains and back office operations and that kind of thing, but it's not it's not significantly material.
The other element on the Capex is growth plans, where we have things, where we're going to put in.
Negative by new.
New paint lines or new other equipment or things like that and we just can't get the deliveries were still able to operate it's not.
It's not impacting that it's just not again, allowing us to get to the improvements that we've been working to build as to whether it will end up.
Resulting in extra spend next year, probably not because you get into just a human capital capacity of what you can get done in a given year. So I would expect but we haven't finished our process yet for budget for next year that will be back in the 150 to 170, but that could change.
We'll talk about that as we go into guidance and our <unk>.
December call.
Alright, thanks, very much Larry Thanks, Peter Good luck in the quarter see you soon thanks George.
Your final question comes from the line of Adam Josephson with Keybanc, Adam Your line is open.
Thanks, very much for taking my.
<unk>.
A 2 part 1 Larry so when you talk about.
Reinstituting guidance, just based on better visibility is that better visibility because you only have 5 months left in the fiscal year at this point or because theres much less macro uncertainty.
And how does that relate to what you might do.
I followed your in terms of giving guidance at the outset of the fiscal year and the other question on <unk>.
Had was I guess given that the beat relative to your initial guidance in the quarter was because of FX and.
And tax both of which are effectively non operational why.
Next pre announce the quarter. Thank you very much.
On your first question it's both.
Adam The fact, we only have 5 months left.
Plus the fact that.
For the economy has played out like Pete and I thought it was going to add it.
<unk>.
Became more reaffirming so we feel very confident about our view of the remainder of the year.
I can't imagine any reason why we would not give annual guidance in December.
That's been our plan is to go back to our old practice.
Relative to the why did we pre announced.
<unk> I've always operated on it if youre going to.
Subsequent changed more than 10% from what you've already got out. There then you probably ought to tell people that when you know it so we use that as our guidance.
As to why and the 1 thing I would comment on is yes. You are right. If you can you can analyze it to say that this was.
Really about FX and tax but that doesn't take into account the phenomenal improvement in operating performance and Gi, which overcame transport higher other costs overtime costs and incentive accrual adjustments. So.
We're pretty bullish about where things are right now.
Thanks, So much Larry good luck in the quarter.
Thank you.
<unk> concludes our question and answer session I will now turn the call back over to Matt for closing remarks.
Very much for joining us everyone today, and we hope you have a great remainder for week.
Pleasant weekend ahead. Thank you.
Yeah.
This concludes today's conference call on behalf of price. We thank you for participating you may now disconnect.
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