Q3 2021 Greif Inc Earnings Call
Good day and thank you for standing by welcome to the Great fiscal third quarter of 2021 earnings Conference call. At this time all the participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.
During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Matt Eichmann. Please go ahead.
Thanks, Wendy and good morning, everyone welcome to <unk> third quarter fiscal 2021 earnings conference call.
Matt Eichmann I'm joined by Pete Watson, Vice President and Chief Executive Officer, Larry Hill, Shimer, Gries, Chief Financial Officer.
<unk> <unk> Chief operating officer, we will take questions at the end of today's call.
According to the regulation fair disclosure. Please ask questions regarding issues you consider important because we are prohibited from discussing material nonpublic information, making it on an individual basis.
Please limit yourself to one question and one follow up before returning to the queue.
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.
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.
Thanks, Matt and good morning, everyone. We appreciate your interest in Grace and <unk>.
Hope that you and your families are staying safe and healthy during the pandemic.
<unk> delivered robust third quarter results, we executed with discipline to deliver record quarterly adjusted EBITDA of $238 million and adjusted class a earnings per share of $94.0, fueled by strong volumes and ongoing strategic pricing actions as we continue to experience strong demand our CRO.
Our global portfolio.
Our leverage ratio fell at two eight times and our board approved a two cents and a 3% increase to our class a and class B quarterly dividend, respectively payable on October one.
Also increasing our adjusted earnings per share and adjusted free cash flow guidance, reflecting our strong year to date results and positive outlook for the remainder of the fiscal year.
Finally in late June we announced the planned executive leadership transition that will occur next year. Upon my retirement on February one 2022, only raw scar will assume responsibility for Grace jet next Chief Executive officer until that time, only will serve as chief operating officer and work closely with me and.
Our executive leadership team on his transition.
He's a servant leader and a proven team builder the demonstrated commitment to customer service excellence and disciplined operational execution.
Attributes along with his extensive manufacturing industrial packaging experience makes him the ideal leader to take great Ford only like to ask you to say a few words, thanks, Pete and good day, everyone. It's great to be with you as Pete mentioned my name is only loss costs and I'm excited and humbled to be named US life's next CEO.
I look forward to joining these calls in the quarters ahead and to working more closely with all of you in the future.
Head of global industrial packaging, my focus was on driving and delivering the operating and business results that our customers and shareholders expect.
C O that focus continuous across the wider portfolio and as Pete says I'm working closely with the executive leadership team.
Fiscal 'twenty to 'twenty, two business plans and we'll share more about my priorities for the future as though I assume my new role with that I'll turn the presentation back over to Pete on slide four alright. Thank you all.
On slide four the global industrial packaging business delivered outstanding third quarter results, our global steel drum volume increased by 8% per day, well global rigid IV sees in large plastic drum volumes, both rose by more than 25% per day.
We also saw mid teens improvement are filling volumes versus the prior year quarter with demand accelerating specifically in APAC.
Third quarter average selling prices were up across all key global substrates year over year due to raw material pass through arrangements and strategic pricing actions.
In North America, which features our most diverse product mix all of our key substrates recorded low teens volume growth or better versus the prior year, thanks to generally improving industrial conditions.
Latin Americas steel drum volumes rose by 15% on a per day basis versus the prior year and benefited from improved industrial trends and a strong agricultural citrus season.
In EMEA third quarter steel drum and rigid IPC bonds increased by roughly 5% and 28% per day, respectively with strong improvement across most key end markets.
And finally in APAC steel drum volumes rose by 7% per day versus the prior year demand was solid in China, but a little softer in southeast Asia due to COVID-19 related lockdowns that we continue to monitor across parts of that region.
Across Gi T. We see little indication of customers rebuilding inventory supply chain conditions remain tight and our team is managing this challenge very well.
We have not experienced any significant raw material shortage some of our customers have which has negatively impacted our demand in certain regions.
Labor availability is becoming more challenging which is not unique to grace and has impacted the productivity of some plants in both Gi Pn paper packaging piece.
Disruptions are not material enterprise level, but certainly present operational challenges nonetheless.
Tip's key end markets are healthy we experienced a double digit performance volume demand year over year for bulk chemicals specialty chemicals and lubricants in most parts of our global portfolio.
Volume demand for paints and coatings also strengthened especially in the U S and EMEA and.
In volume demand for solid food taste weakened versus the prior year quarter, but this was largely a result of pricing and margin decisions on our part that impacted conical demand in southern Europe.
CIP stronger volumes and higher average selling prices resulted in higher segment sales and gross profit year over year Tip's third quarter. Adjusted EBITDA was a record and rose by roughly $62 million due to higher sales, partially offset by higher SG&A expense, mainly attributed to higher insert.
Of accruals.
The business also guidance for $9 million operating tax recovery in Brazil, and an 8 million dollar FX tailwind.
Please recall that <unk> Q3, 2020 results included an opportunistic sourcing benefit of $5 million.
Did not recur.
Looking ahead <unk> is off to a solid fourth quarter with August volumes comparable to our trend in July.
Also like to comment that our thoughts and prayers are also with those that were impacted by hurricane either earlier this week.
The damaged from Ita is extensive and dramatic at this time and what we know we do not anticipate a material impact to our fiscal 'twenty one fiscal results from the storm, but ask you to please turn to slide five.
Paper packaging third quarter sales rose by roughly $120 million versus the prior year attributed to stronger volumes and higher selling prices due to increases in published containerboard box board prices.
Adjusted EBITDA rose by roughly $18 million versus the prior year due to higher sales, partially offset by higher transportation and raw material headwinds, including a $24 million OCC drag SG&A expenses rose year over year, primarily due to higher incentive accruals.
We are actively executing on price increases in response to robust demand and cost inflation. Since early June we've announced five price increases, including a total of $100 a ton on CRB.
$120 a ton in total on you are big and $70 a ton on containerboard.
As of August the published index is recognized $50 a ton on the CRB increases $50 a ton on the U R. B increases in a $110.0 a ton on linerboard or medium respectively.
Demand in our current converting operations remain remained very very strong third quarter volumes in core choice. Our corrugated sheet feeder system were up roughly 27% per day versus the prior year and are anticipated to stay strong through the fiscal fourth quarter.
Third quarter specially sales, which includes litho laminate triple bulk packaging and coatings were up more than 38% versus the prior year.
Third quarter tube and core volumes were up nearly 18% per day versus the prior year and accelerated by mid single digits versus Q2.
Thanks to improved demand for textiles in protective packaging and continued strength in the film and market segment paper.
<unk> is off to a solid start in August volumes in core choice in our tube and core business are comparable to july's actuals similar to my comments about <unk>, we do not anticipate damage caused by Hurricane Iowa.
Material impact to our paper packaging results in Q4.
I'd like to now turn it over to our CFO Larry Hill Shimer.
Thank you Pete Good morning, everyone. Please turn to slide six to review our quarterly financial performance Big picture. It was an outstanding quarter.
Third quarter net sales, excluding the impact of foreign exchange rose, 34% versus the prior year quarter due to stronger volumes and higher selling prices and were a record.
Adjusted EBITDA Rose by 78 million and was also a record as Pete mentioned EBITDA results include a $9 million Brazilian tax refund from overpayment of revenue based taxes to the government that occurred in prior periods and were wrongly loving that refund reduced SG&A keep in mind, our adjusted EBITDAR.
Resolve overcame more than a $50 million of combined OCC and instead of headwinds versus the prior year, making our performance that much more impressive.
Interest expense fell by roughly $6 million versus the prior year quarter due to lower debt balances lower interest rates and a lower interest rate tier on our credit facility as a result of our substantial debt repayment.
Our third quarter, GAAP and non-GAAP tax rate were both 22% and were flat to prior year third quarter adjusted class a earnings per share more than doubled in dollars 93 per share finally third quarter adjusted cash flow fell by roughly $43 million versus the prior year.
While profitability improved significantly working capital was a substantial cash used compared to a source in the prior year due to the run up in raw material prices and corresponding.
Cost increases that said our team is executing with discipline and controlling what Ken was superb results as trailing four quarter working capital as a percentage of sales improved by 190 basis points year over year to 10, 7%.
Please turn to slide seven to review, our outlook and key modeling assumptions.
As Pete mentioned, we are increasing our adjusted earnings per share and adjusted free cash flow guidance, which reflects our strong year to date results and positive trajectory for the remainder of fiscal 'twenty one.
At the midpoint, we anticipate generating class a earnings per share of $25.0
Which is 50 cents per share more than our guidance Q2. This improvement is largely due to stronger volumes and favorable pricing more than offsetting the additional OCC headwinds, we expect to incur for the remainder of fiscal 'twenty one.
With our anticipated fiscal 'twenty. One result, we will more have more than doubled earnings per share since 2015. Despite COVID-19 negative impact the closure <unk> divestiture of nearly 99 core are suboptimal plants and without any share repurchase benefit.
Also keep in mind that we currently have 600000 more shares outstanding now versus the end of 2015.
We now anticipate generating between $335 million and $365 million and adjusted free cash flow with a bias to the upside of that range at the midpoint adjusted free cash flow has improved by $45 million relative to our Q2 guide due to improved earnings slightly lower capital expenditures and cash.
Cash tax savings, partially offset by higher working capital usage commensurate with our announced price increases to offset cost inflation.
Please turn to slide eight.
We employ a consistent three pronged capital deployment strategy focused on business reinvestment debt reduction and capital returns. We have asks you executed on an aggressive deleveraging plan and repaid $370 million in total debt since Q3 2020, our compliance leverage ratio improved by nearly a full turn over.
To that time period, and we now anticipate reaching the high end of our targeted leverage ratio range by the fiscal year and.
Given the dramatic improvement in our leverage profile and confidence in strong future cash generation. The board approved a four 5% increase to our quarterly dividends effective. This year. This is a first step towards a practice of steadily increasing our dividend as we just.
<unk> discussed in prior earnings call.
With that I'll turn the call back to Pete for his closing comments alright, Thanks, Larry and if everyone could please turn to slide nine.
I want to personally thank our global growth team for executing with discipline to deliver outstanding third quarter as we continue to strive towards our vision of being the best in customer service. Looking ahead, we are well positioned to benefit from ongoing strength and improving trends in our key end markets our extensive global portfolio.
<unk> differentiated service capability and sharp focus on operational execution enable us to best serve our customer needs, while generating significant shareholder value. Thank you for your interest in Grace and Whitney If you could please open the lines for questions.
As a reminder to ask a question you will need to press star one on your telephone please limit yourself to one question and one follow up question to withdraw your question. Please press the pound key please standby will be compile the Q&A roster.
Yeah first question is from the line of Ghansham Panjabi with Baird.
Thank you good morning, everybody.
Good morning Ghansham.
And congrats Pete and only on your new roles, which you're best in the future.
I guess on the industrial packaging side and the operating leverage you delivered which was quite substantial can you give us a bit more insight into whether there was any sort of mixed benefit.
For that segment.
Looking at volumes, which basically reversed the decline from <unk> to <unk>.
And in 'twenty, So I guess I'm trying to understand what drove the extent of the margin expansion, even with cost inflation to the extent you experience.
So I'll talk a little bit about the volume and a little bit margin.
Larry can add but from a volume standpoint, Ghansham, we had some low benchmark comparisons versus the prior year, but all of our end markets were very healthy I think in my opening comments. The only segment that we had lower volumes was the food solid food business, where thats more relative to the decision we made on price and margin in southern Europe.
Our volumes in all our substrates are strong the end markets are very healthy we don't see much change in that going forward.
And we continue to execute with discipline on some of our self self help initiatives.
That we've talked about we're very disciplined in our pricing actions both on executing on pricing for raw materials to our pam's. We've done a really good job in that business of getting non raw material increases I think 55% of our contracts include an opener the teams have done an.
<unk> job and we're executing very well operationally.
And driving a lot of self help initiatives.
Through a variety of our actions to drive better margins. So we're really pleased and <unk>.
Excited we think there's good upside going into next year, Larry any other thoughts yeah ghansham.
I take it down to three things one.
We have been maniacal on our approach to staying ahead of inflation and our teams have executed extremely well.
The annual openers that we built into the contracts over the last four or five years have really provided.
Way to offset those other increasing costs. That's number one number two is the <unk>.
Execution of the Pam and making them way more efficient and shutting down the lag period that has benefit us greatly in a period of highly accelerating raw material cost.
And so we've had some nice tailwind from that and third is our focus on really getting rid of underperforming operations. I mentioned previously where we were where we are now up to about 89 plants, we have over $500 million of revenue we've walked away from on low very low mark.
<unk> business that was 2% our EBIT or so.
So all of those things combined are what's driven the margin where it is.
And we expect to continue to execute.
Going forward.
Got it and just for my second question I know, it's early but any reason why we should not use the <unk>.
Back half of this year's EPS run rate at a minimum as a baseline for fiscal year 'twenty two EPS adjusting for any seasonality I mean, you have a lot of pricing coming through and.
You seem to be in a good spot any reason why that would not be the case.
No.
Very clear thank you.
Your next question is from the line of George Staphos with Bank of America Securities.
Hi, everyone. Good morning, Thanks for taking my question.
Congratulations Peter again.
I guess to start.
Okay.
So if you can talk about the cost inflation you you incurred in the quarter.
Mentioned $26 million.
Terms of OCC, if I heard you correctly.
The portal, including OCC of variable cost pressure year on year in the fiscal third quarter.
Station and other input costs and then because you had about 250 million of pricing and then how does that.
Built into your assumptions.
For the fiscal fourth quarter again on variable cost inflation year on year.
Including our SEC transport and the like.
Yes, George so.
And the.
Paper business. The inflationary element Q3 over Q3 was about 36 million $24 million of that was OCC. The.
The other was related to chemicals adhesives et cetera transport was another.
$13 million just on.
Higher volumes, another 21 million when you take into account.
Labor other temps and additional transport on.
Just core volumes so substantial in the paper business.
Let me back up on the G IP.
We had.
Raw material price increases.
Around $46 million.
Currency.
Okay.
Drag of about $8 million and then we had also.
Manufacturing and transport.
I have another 22 from higher volumes inflationary.
Manufacturing and transport of $10 million I'm, sorry, the $46 million was actually our price increases I don't have a number on the raw material cost year over year do you have that Pete.
Hi.
C fly for others for other pieces and 36 in total, but just to give you a sense George.
Cold rolled steel was about three times more expensive right now than it was a year ago and similar ratio on RASM.
So im sorry, Larry I didn't quite get that you said the 46 million in CIP was actually your selling price increases.
So it was broad and non raw price increases.
Yes, I was reading the wrong way.
Alright.
Guess, what I'm getting at if I look at your guidance and I take the run rate of pricing that got.
Into the fiscal fourth quarter.
Again, not labor, but all the other variable cost pressures it seems like your guidance is fairly conservative.
And as building in room for maybe another $50 million. It seems like a incremental cost inflation I don't know if you can talk to those specific factors, but any color there would be great and then my other question I'll turn it over.
I heard you comment a little bit about the third quarter excuse me the fiscal fourth quarter, but could you give us a bit more detail in terms of what trends youre seeing volume metrically across the businesses early in fiscal fourth thank you.
Yes so.
What we're seeing on volumes in the market in August which is the first month of our fiscal for the trends are very similar to what we saw in July.
So again healthy end markets.
Our volume trends will continue to be strong.
You do have to remember our fourth quarter of last year, our volumes started picking up from the Covid drop off so the increases will not be as substantial as they were in Q3, but theres still be pretty strong and we feel really good about the market and the demand.
<unk> for our fourth quarter, and both PPS and the.
And GDP.
And Georgia, I don't have I don't think.
Clear data on the raw material component, we do expect that R. R.
Margin in our VIP business will be slightly lower in Q4 than it was in Q3, because we don't anticipate steel costs going up.
As much and so we've had a catch it will have a catch up where.
Pricing indexes did not increase but we have some higher cost steel coming in to our inventories.
But still very healthy margins.
Okay. Thank you I'll turn it over.
Your next question is from the line of Mark <unk> with BMO capital markets.
Thanks, Good morning, guys, Peter just wanted to say congratulations to both.
Mike I can remember six years ago.
The company was in a much tougher situation when you took over and Thats.
It's nice to see you kind of getting ready to go out with the strong performance.
<unk> are really if you can help us a little bit more on what is left in terms of pricing you've talked about sort of the board price initiatives you have but.
Im also just curious in terms of kind of a lag roll through.
Tubes, and cores in corrugated sheets and converted products.
So if you could just help us think about that issue.
Thanks, Mark and I appreciate the kind words.
I've got to tell you we've got a very deep bench here at price and we've got a great talented team and I have very very high.
Belief that we're going to have a great great future growth. So to your question on what's left of the.
The mill increases so as we said containerboard is a 60 and medium 15 liner its been recognized will start getting impact in September with full impact by October so not a full Q4 impact, but it'll just be accelerating through the quarter on Europe.
We have a $50 ton increase that has been recognized and again the impact will start in September and be fully realized to October what's left on <unk> as we announced $70 on September 13th.
We fully expect that to be recognized as backlogs and demand for that product is very very strong at this point and don't see any change in the future.
On CRB, we announced a $50 and was recognized in two pieces one of 30 and one in 'twenty.
Our recognition or impact won't be the calendar 2022 due to contracts in that business. We have also announced a $50 ton increase for August 30th for CRB, and we fully expect that to be recognized as well again business conditions are strong our backlogs are long.
Long.
And we're really bullish on this business right now.
Okay.
My second question I'm, just curious about.
Potential investments in the Europe business I mean, you've got one really large competitor there.
Picked up a very efficient machine in Wisconsin, a few years ago. They are rebuilding their main complex down in the southern U S.
<unk> remain competitive with them.
As they improve their asset base do you need to make incremental investments in your system.
Yes, so you can make a good point and our largest competitor has done some investments.
As you know they.
We have taken a stranded medium machine.
And converted it to a.
Wider in a very efficient European machine, but we've got a plan for how we're going to improve our <unk> system.
And it combines both our mill system and are converting capability.
We don't see that we're going to have a significant disadvantage and cost and that I think what's more important is what we do and how we go to market and create a differentiated advantage high touch.
From a customer service standpoint, and how do we create value for our customers and grow that business through that customer service differentiation, but we are looking at ways to improve the overall cost structure and footprint of that mill system, and we will have more to come into 2022.
Okay, and if I could slip just one more is it possible to just remind us sort of the roll off on the graphic our CRB contract.
It is not going to go specifically into it mark only because that's between us and graphic but its rolling out through the three different mills sequentially, starting next year and into late 'twenty four.
Sounds good thanks, Dave.
Okay.
Your next question is from the line of Adam Josephson with Keybanc capital markets.
Good morning, Pete Congratulations and all the best of luck to both of you.
Yeah.
Larry one on G. IP just on your fourth quarter assumption and then I've.
Our full year question.
So you had the two the FX benefit the Brazil benefit there is seasonality typically in that business and that profitability is normally lower <unk> versus <unk>, you mentioned that the steel price issue can you just help me with what your expectations are for the profitability in that business in four Q and then I'm going to.
Again ill ask a full year related question.
Adam I don't have the breakdown of.
That business.
What are the elements that you just spoke of so let me just walk through just what we anticipate and what changed from our prior year guidance I can talk broadly at the factors that are going to impact.
G IP, which will have lower profitability in the fourth quarter for some of the reasons you mentioned, but we had previously guided to $74.0, a share we're now up to a midpoint of $25.0, and just roughly you've got.
82 cents of operational improvement that is related to volume and prices.
Net by about 42 cents of OCC.
Interest expense is up 5% lift taxes, a penny left and then we've got other on equity earnings and stuff, that's roughly <unk> <unk> on the midpoint. There is ranges around all of those but yes, we won't.
Have any more tax refund from Brazil in this current year.
And likely not in the future, although theres a slight possibility we may get something further down the line.
The element of steel cost catch up as Youre accelerating rapidly you clearly have some benefit of the inventory that you have already purchased at a lower cost as things accelerate.
The curve has started to flatten a bit although there's been a recent cold rolled steel cost increase again in the U S. But the rate of increases has.
Dramatically decreased and so you'll have some.
Margin.
Squeeze as that plays through the inventory we don't anticipate.
Relative to the given current economic projections by most economists that theres going to be any kind of dramatic drop in steel cost, which would be the only thing that would really be problematic for us, but we do see.
Little bit of a squeeze in the margin and then the seasonality impact that you mentioned.
Clearly plays out in the fourth quarter so.
A step down in profitability in the fourth quarter for VIP is a correct assumption on your part.
And just two more one on the so if I look at the full year, Larry lets say that your EBITDA in that segment ended up being call. It $450 million. If I look at the previous four years, it was somewhere around $300 million per year.
So you'd be going from basically 300 to $54.0, which is.
It's a 50% jump.
Can you help us with is that the right baseline in your mind to go off of for next year. I mean, the improvement is truly dramatic and Cabana Bowl and I'm just trying to understand if you think that is kind of the right baseline or are there. Some perhaps temporary factors such that that is not the right.
Baseline to go off of for next year.
Our team has been doing an outstanding job of improving operational and I do want to Matt pointed out I think I Might've said 89 facilities closing.
It's actually 79, so stated that but like I said, we've walked away from a lot of unprofitable business. We've replaced virtually all of it with more profitable business by winning through our focus on customer service and an improved margin business. So I think the.
The basics of what you're saying I'm not going to get into specific numbers, but are accurate.
We will as the steel cost.
Flattens.
Some market margin degradation, but we also have a lot of continuing self help.
Efforts going on we have additional capex projects on blow molder.
A few other operations that are going to continue to improve so it's a good baseline to work off of.
Is the bottom line answer your question.
Thanks, so much it and then just one more if you don't mind can you.
However, you want to answer this in other words include the price increases you've announced but haven't been recognized just limit the answer to those that had been recognized but if you add all of them up containerboard Europe V CRB.
What would the impact be on your your revenue in paper packaging next year and similar similarly, if you take the assumed <unk> OCC price and you just flat line it through next year what would.
That would be yes, yes, if we take all of that and go with the assumption that Pete and I have of the <unk>.
Recognition of the last price increases, we announced new play through OCC at the current level, it's about $180 million lift on the bottom line.
Alright, Thank you Larry.
Your next question is from the line of Gabe <unk> with Wells Fargo.
Good morning.
Pleasure working.
He pleasure working with you and look forward to working with you going forward.
Yes, thanks Clay appreciate it.
A lot of questions have been asked but I want to kind of come back to what Adam was dialing in on and I think maybe instead of focusing on margins because raw materials can play.
And what those numbers shake out to be even if I go back to kind of.
Coming out of the global financial crisis.
I think the comments.
Pretty consistent in that.
EBITDA I think kind of peaked out around.
$366 million in 2010, and so taking into account all the business that you've walked away from them asking sort of in the context of you guys have given kind of fiscal 2022 our.
Financial objectives.
Is there anything in that business that you can point to or <unk>.
At.
Whether its mix of business from a product standpoint, or geographic standpoint that makes it structurally different than kind of what the business was before appreciating obviously, you told US you walked away from $500 million of Reds.
Yeah.
Dave I would make some guidance pizza so big picture. If you think about it we've been consistently talking to all of you about the fact that we've been focused on building our business in plastics and <unk>.
Pretty big structural change.
Relative to the margin profile, particularly after we walk away from the core business, we had and the other is a bigger focus on the end markets. We serve so we we have shifted away where.
If you went back to that post financial crisis time that you spoke of we were weigh more heavily dependent on the chemical companies than we are today and so those are two big structural shifts for us that I would mention that Pete.
Three things, how we've improved the overall structure and how we lead that business first it's much more improved price discipline. So we've talked a lot. This year about the improvements to our contracts and pam's insurer shorter pass throughs also about the non material non raw materials.
This increases but more importantly, we are much more coordinated in that business with one leader under earlier asked guard, we've centralized all pricing desk with really strong analytics. So I think technically we are better at what we do we have a better overall view of the markets on it.
Global basis, which most of our customers are global in nature. So I think we are much more consistent over our strategy the value over volume, which goes to Larry's point, we've walked away from a lot of unhealthy business and we've gone after markets that are that are growing higher than.
Have opportunities to be more profitably can also look at what <unk> done from a customer service initiatives. We started in 2015, they had a 57%.
<unk> score now they are above 95%, so our ability to serve our customers across our global portfolio has dramatically improved.
Larry said, our strategic growth initiatives are in to the resin based products Idc's <unk> reconditioning and plastic drum. If you remember five years ago, I think our total percentage of products or revenue in steel was over 60%. It's now at 50.
51%, so that growth is in better profitable business in higher growth markets that the plastic drums, and the <unk> address and third we've talked about this and it's really important and we've got some tremendous self help initiatives.
Larry said, we've closed significant shops that we're losing money at low EBITDA, we've done rooftop consolidations to reduce our fixed cost structure and we've done some structural changes to our SG&A costs as part of running this as a global business. So when you look at all of that <unk>.
<unk> done a really tremendous job of changing to trajectory of that business.
And we feel really confident that it's sustainable and can grow. So we're real pleased with that business and the potential we have in the future.
Thank you guys for that the other one is on capital allocation I mean, obviously, you guys kind of bumped the dividend here and you've talked about that.
And you talked about investing in the business on slide eight one of the things I think you've put in prior slide decks as kind of your framework for which you can kind of filter and think about inorganic or M&A.
Can you remind us a little bit maybe Larry as to how you think about M&A.
I guess from a financial standpoint, and sort of how does that.
Coincide with with the way management is incentivized.
Thanks Gabe.
Look we will remain committed to spending the capital needed to make sure that we feed the cash machine, we have meaning we will spend what we should on maintenance capital I think youll see us doing more and more around automation given the labor.
Components of things so highest priority is always making sure that we save and grow what we have.
And then we will continue to focus on getting our debt leverage ratio down to work.
We target, but obviously, we're very close and expect to be there at the end of this fiscal year now. So we've talked previously about you were in the middle of our strategic plan focusing on <unk>.
Wrapping that up by the early part of next year and then we will communicate out to all of you about what our go forward look is relative to M&A and that kind of thing, but we also recognize that we are going to be in a situation.
Really having a lot of excess capital very shortly and so to the extent that we.
Don't meet our criteria, which is.
That same chart that we showed many years ago around the various return criteria that we have given the risk of a potential investment will continue to apply and to the extent that we don't <unk>.
Find opportunities that fit our appetite than we will be returning even more capital to our shareholders.
This is Pete I just wanted to make one comment on that so I think we've done a phenomenal job of deleveraging the balance sheet, but I just wanted to make it clear regardless of what our debt leverage ratio is we're going to be really disciplined in our process to capital allocation I think that's important we're going to stay true to our strategy and our priorities. So so.
I feel really good about that process that we've put in and again, we're going to have a very very disciplined approach for how we allocate capital to create the best value for the shareholders.
Alright, I appreciate that gentleman I just.
There was an initial response to the <unk> acquisition and questions around timing and such.
So I just wanted to kind of refresh.
How you guys think about it.
Thank you.
Thanks Gabe.
Again to ask a question. Please press Star then the number one on your telephone keypad.
Your next question is a follow up from the line of George Staphos.
Hi, everybody. Thanks for taking the phone Pete I was wondering if you could talk.
Where your volume trends are.
The end market relative to where they were and then.
And Larry if you could I think you commented a little bit on this on the last call.
Yeah.
Okay.
That there should continue to be growth.
Great.
The markets for the company.
Looking at fiscal 'twenty, two in fiscal 'twenty, three because a lot of the questions obviously.
From the analyst today ourselves included is hey, you have had a great year, but you also have a tough comparison now so where's the growth going to come from essentially.
Yes, I think I got most of your points, George but you broke up pretty significantly on the part that you addressed to me, but I'll try it and if I don't hit it.
Then maybe come back to you but.
I'll, let Pete go through your first question first on end markets in that and then I'll try to attack yours on what are we seeing growth in the future, yes, So George let.
Let me comment first on our paper packaging segment so our.
Our business models to serve both integrated and independent corrugated.
Corrugated box plants raw materials.
And then on tube and cores, we certainly have a direct model pretty widely dispersed and market segment. So.
We are that model has really accelerated our customer service model in a really tight supply chain environment. So I think it's enhanced our paper packaging.
Sure.
The value proposition.
And with our strategic investments in that business, we've really taken advantage of.
The e-commerce.
So we've grown significantly in that segment compared to we were two years ago. So I think thats one big trend.
And I also think the pandemic, our tube and core business really damaged some of some of those markets and they are coming out of it very well as you can see by our growth of 18% year over year, and we see really good strong trajectory of our end markets in our tube and core business in August and going forward.
So I think we're really well positioned.
In the end segments, there I'd like to ask only to comment on those end segments strengths.
<unk> if you can.
George.
Thanks, Pete Hydro.
So my only question.
So we see the end markets that we serve at the moment very strong in particular.
Following speciality chemicals are strong.
Lubricants oils in paints and coatings and adhesives.
Most end markets are strong and we expect them to remain strong in the foreseeable future.
And I think one thing you should look at the trend George from a standpoint of.
Disinfectant and cleanliness, which I think is going to be a bigger factor post pandemic.
Some of those end products and chemicals, we produce.
That will continue to improve and again are our greater access to IV season, IPC recondition, it really positions us well to some of those growing markets.
And George relative to what at least what I think I heard your question of Hey, This is great. We've had a wonderful.
'twenty one.
It makes it firm.
Comparable challenge and how might we be focusing on growth in Europe, a lot of it is going to be sort of hey things remain the same we are going to continue to leverage our focus on customer service. We have we believe gained some market share we recovered the business that we walked away from.
More profitable business, and we attribute that to winning customer share because we are a reliable supplier.
And we are a value add supplier and our teams have done a great job of building those relationships with the customers in both the CIP in PPS business and we will continue to leverage that second is back to the strategy of continuing to extend in the plastics and the <unk> in our plastic drum businesses and extending that.
And then.
Third we'll be looking at over integration in our paper business and what do we continue to do we've been very pleased with the success in Palmyra, even through Covid and coming out.
That's been a fantastic.
Operation for US and then the last I would say it goes back to the process. We're working on right now which is our strategic focus in determining what is our growth plan going forward.
Which is.
Sort of in the sausage works right now and again, we'll talk about that next spring.
Thanks, Larry can you hear me, okay or is it still chopping if it is not as good in that business.
Good now okay. That's good.
To everyone.
Sure.
I guess the question I have a follow on is just on plastics.
Do you feel you have sufficient.
Aaron penetration both in RBC.
So that you get.
In both plastics and metal.
Guessing from your comments.
Do because it seems like it's okay.
I think Europe, we have.
Unfortunately, it broke up again, but I think your question was do we feel like we have a market position to begin to leverage that more fully.
We've said this often before virtually every one of our ABC.
Capex spend has been a situation, where we have been approached by customers, who want us to serve them and we have over.
Over 50% of the volume committed before we even do a project. So we're being asked by customers because of the great service. They were writing them to get more into the <unk> business as we do more and more that virtuous cycle in the recycling component really starts to drive the margin improvement and we did the <unk> acquisition a couple of years ago.
We did the investment in the in the recycling group here.
In the United States, we did another small deal in Italy. So we continue to do.
The execute on that whole recycling component of IV season plastics. So I mean, we are a significant player in plastic drums already I mean in the U S. We're largest players so.
We have the opportunity to expand our business in EMEA and in Asia.
Asia. So there is a good growth path in front of us.
George to comment on Larry's reconditioning comment a big part of our strategy is grow that circular business economy model right and it's very very important to customers, where not only are we supply and that new IDC, but we have.
System in place to collect it and repurpose it whether it's cleaning and reconditioning and sending it back out to customers or by using it for recycled PCR that we can go back and increase the amount of resin. This recycle in our in our products and it's really important.
The customers and you'll see going forward, we need to improve and increase our ability to do that that in turn will really enhance our overall position in that market and were or not we're behind some others, but we're making quick.
Movement to catch up.
Our customers have responded very well based on our growth the growth rates in that business.
Yeah.
We will take the next question we May have lost George.
Okay.
Okay. Your next question is a follow up from Mark Woody.
Thanks, I've got three quick follow ups first Larry can you give us a sense of both the gifts and paper of the year over year increase in the incentive accruals in the third quarter.
Yes.
<unk> incentives increased corporate wide mark was $27 million.
Third quarter over third quarter.
The breakdown of that ends up being about $6 million in PPS $8 million in and PPS and then the rest of the corporate functions and other units.
Okay, Alright second question.
Ali.
You've had a change in leadership recently at your primary competitor.
And I, just wondered whether you're seeing any changes in behavior. There that you would.
You'd be comfortable talking about.
<unk>.
Thanks for the question, we are primarily focused on our business customers.
The primary function is to serve our customers.
Hospital.
Okay. So no no change in behavior that you've seen in the market.
No.
Okay. All right then the last one.
Pete and Holly I'm just curious.
Any learnings from the sort of early teens experience.
In M&A that didn't go well as you think about sort of the strategic plan going forward things that you've learned you don't want to do again.
Yes, so back when we got back into.
Acquisition mode in 2017, and 18, we did extensive learnings on what went right and what went wrong. Both in process, which includes this risk management structure and framework.
And how we went about doing diligence.
<unk> fits to our business and also how we execute and determined.
The value we can we can create so I think we demonstrated that in not only the caraustar acquisition, but some of the other smaller acquisitions we've done.
So we're really pleased part of this process we're involved in now.
Has to do with re learning so let's go back and looked at what we did really well in the past few years and what we need to improve on so we're always in this mindset of continuous improvement.
And again, it's really important that we stay focused on what drives shareholder value.
And not be excited about growth for growth's sake, it's got to be accretive to our current portfolio into our the value we can deliver.
Sure.
Learning and we're improving in what we want to do is get the reputation that we are great execute as in our business operationally and our strategic intent and I think we're we're making good progress on that or anything you'd like to add to it.
Yeah, I'll just add one thing mark.
I'm a big believer in checklist, maybe it's back from my public accounting experience, but.
We have created checklist of all the lessons learned and whenever the business units have to present, an opportunity to get P&I, whether it's a capex project or a.
Acquisition opportunity every one of those items on that list that came out of all of those learnings has to be addressed so.
We're very formalized about it structured and I think it will pay off for us continuously going forward, yes, I think mark.
We'll only as demonstrated in the last five years here. He has really strong execution very disciplined approach to business. So I think going into this role create.
Really stronger discipline in how we evaluate acquisitions and more importantly, how we execute them going further so so feel real good about where we are and what we're going to do going forward in a very disciplined approach to capital allocation.
Okay. Thanks, Good luck in the fourth quarter and as we look into next year.
Yes, thanks, Mark Thanks, Bob.
Yeah.
Your last question is from the line of Adam Josephson.
Thanks, a lot Pete Larry appreciate it.
One on the tax rate. So if you end up at the low end of your range at 20%. This year your tax rate will have gone from 27% last year to 20 this year.
Do you consider that a sustainable level.
Thereafter or is there something unusual this year that you would point us to.
We had some.
Additional free up of reserves as some.
Tax.
Exams were completed but not substantial I do believe.
With the caveat of whatever happens in Washington, and other government capitals around the world on.
On changing rates, but if rates were to stay stable in the current tax system, then low twenty's is very sustainable for us.
So.
<unk>.
Obviously.
Can't predict at least I don't im not willing to predict yet what's going to happen in Washington or in other places around the world, but if it were stable we'd be.
Very confident and staying in that rate.
Yeah, No I appreciate that and just on your OCC assumption and thought so you're assuming I think a five dollar increase sequentially in September slashed October.
Some people I've talked to expect a lot more than that in September can you just talk about why why you appear to be assuming a fairly modest increase sequentially in September October and.
And what you think the sustainability of these kind of price levels is obviously, we're at the high end of the historical OCC price range box demand has been the best it's ever been so it comes as no surprise I guess that OCC is behind a bit strange, but how sustainable do you think these price levels.
Our and why why not expecting more of an increase in in September. Thank you.
Obviously, you know we have.
A relatively sizable player in the recycled paper business and so we go to our team for what they believe is going to happen.
Obviously, we're not blind to what.
Comments are being made at conferences and things that are driving some other people's views.
That said, we've said, we estimate $5 and the average and as you know we have a range. So.
Our range contemplates the numbers that have been throwing then thrown out there by others. So yes.
We're totally comfortable with the guidance, we provided if that does happen as to the sustainability I think it's going to be very interesting to see how things play out because as you Matt mentioned production of containerboard.
<unk> boxes and everything else is like.
Like all time highs, while that means theres a whole lot of supply out there. It's just how are we getting a collected and obviously the day supply of OCC is not matching the supply and production of container Board and I think everybody would acknowledge it has a bit to do with the change in where stuff is going obviously more is going to E. Commerce then.
Historically, it happen and the Big driver, we believe is labor and it says much labor for collection, but it also in the merger and so we have active dialogues going on with.
The large haulers waste and Republic, and regional ones like Rumpty and others to try to understand what's going on in their business and what we're hearing.
Bring is they're all somewhat optimistic that as some of these unemployment supplements roll off that they'll have more success in getting labor back into their operations, if that happens that should lead to more collection and more supply.
So.
I'll say hopeful I, wouldnt say optimistic, but hopeful and believe that.
<unk> costs should trend back down over time as the labor.
Boehner into this gets.
<unk> addressed either through more employment or through more automation in their operations.
Got it thanks, so much Larry and best of luck in the quarter.
Thanks.
Yeah.
At this time there are no further questions I will now hand, the call back to Matt Eichmann for closing remarks.
Alright, well. Thank you very much way named we'd like to thank everybody for their participation today and your question Hope you all have a really nice weekend take care of that.
That does conclude today's conference call. Thank you for joining you may now disconnect.
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