Q2 2022 Greif Inc Earnings Call
Yeah.
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the Greif second quarter 2022 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session if you'd like to ask a question.
During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press. The star one. Thank you, Matt Leahy, Vice President of corporate development and Investor Relations you May begin your conference.
Thanks, and good morning, everyone welcome to <unk> second quarter fiscal 2022 earnings Conference call. This is Matt Leahy Gripes, Vice President of corporate development, and Investor Relations and I'm joined by all the Raw Scott Graves, President and Chief Executive Officer, and Larry Hill, Shimer, Greg Chief Financial Officer will tell.
Questions at the end of today's call.
In accordance with regulation fair disclosure. Please ask questions regarding issues you consider important because we are prohibited from discussing material nonpublic information with you 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. Additionally, we'll be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metrics.
It can be found in the appendix of today's presentation.
And now I will turn the presentation over to <unk> on slide three thanks, Matt and good morning, everyone.
Our teams continue to execute with excellence, resulting in an outstanding second quarter results. We delivered these financial results despite sustained external challenges related to inflationary pressures.
Why chain disruptions and the pandemic.
We delivered record second quarter, adjusted EBITDA of $251 million.
And adjusted EPS of $2 41, which further strengthened our balance sheet. So that we are now near the low end of our target leverage ratio.
These accomplishments result from the continued disciplined execution of the global <unk> team and their commitment to advancing all built to last strategy.
I encourage you to attend.
Our Investor Day, which is just two weeks away on June 23, where we will discuss built to last and growth opportunities in greater detail.
Information about these events can be found in the earnings release, we published yesterday and within today's presentation materials.
Please turn to slide four to begin discussions on our detailed results.
Global industrial packaging delivered an outstanding second quarter results with sales up over 21% year over year versus a strong comp in fiscal Q2 'twenty one.
We continue to see solid demand in our global restaurant base portfolio with plastic drums, and <unk> per day volumes up low to mid single digits versus prior year.
Global steel drum volume fell by slightly more than 1% per day versus the prior year due to COVID-19 related lockdowns in China as well as some customer supply chain constraints in EMEA.
Generally speaking.
Our end markets demand remained healthy through the quarter. Despite many of our G. IP customers facing challenges with their raw material availability and supply chain and labor disruptions, which did impact order patents.
Our continued focus on value over volume helped lift GOP margins slightly year over year, despite cost pressures in raw materials labor transportation and energy.
We benefited from both our contractual pass through mechanisms and incremental non raw material pricing actions in the quarter that we expect will continue to support the business going forward.
Our teams are committed to delivering quality products and legendary service to our customers, which provides us with the ability to effectively manage inflation.
I commend our global <unk> team for their relentless execution and discipline during these challenging times.
I'll now ask you to turn to page five site based <unk>.
Paper packaging second quarter sales rose by $152 million versus the prior year due to higher average selling prices and continued strong volumes in all paperboard grades.
Adjusted EBITDA rose by $49 million versus the prior year due to higher sales, partially offset by higher raw material transportation and energy costs, including a significant $26 million drag.
Drag from higher OCC costs.
Similar to the first quarter demand across all paperboard products remains robust.
In our combined mill backlogs exceeded eight weeks.
Second quarter volumes in our core choice sheet feeder system were up.
Low single digits per day versus the prior year as box demand in our key end markets remained solid through the quarter.
This was impressive result, given the comparison to our historically strong Q2, 'twenty, one where our volumes were up nearly 37% year over year.
Our core choice business, it's still delivering volumes that are substantially above pre pandemic levels.
Second quarter tube and core volumes were up mid single digits per day versus the prior year with similarly, strong durables end market demand, particularly in payroll and moving cost.
I will now turn it over to our CFO , Larry heal Shine on slide six.
Thank you Ali and good morning. Good morning, Thank you for joining US today, Michael Lee I want to start by thanking our colleagues were an outstanding second quarter with record financial results we.
We believe our continued outperformance over the past four years highlights the resiliency of our teams.
Product offerings and focus on providing exceptional service to our customers as well as our substantially improved focus on price increases unrelated to raw material cost changes.
We encourage each of you to attend our upcoming Investor day, where we will discuss our path forward and our plans to grow the business.
And continue to create additional value for our shareholders.
Second quarter, adjusted EBITDA rose by over $70 million year over year, Despite an OCC headwind of $26 million and roughly $27 million of non volume related transportation labor and energy cost inflation absolute SG&A dollars were flat versus the prior quarter, but fell through.
140 basis points as a percentage of sales basis.
Below the line interest expense fell by over 50% versus the prior year quarter due to roughly $13 million.
Due to aggressive debt paydown in the trailing four quarters as well as the recent refinancing of most of our debt portfolio at significantly lower interest rates.
Absolute tax dollars were higher year over year due largely to higher income a larger proportion of income in higher tax jurisdictions as well as nonrecurring discrete items, which benefited our prior year quarter our.
Our second quarter.
non-GAAP tax rate was roughly flat year over year at approximately 20%.
These impacts resulted in an outstanding adjusted earnings growth of over 110% year over year to $2 41 a share.
Finally second quarter adjusted free cash flow was roughly $12 million lower year over year, primarily due to the continued impact of inflation on working capital as well.
Strategic stocking of inventory in certain markets most affected by supply chain constraints.
Our highest priority remains serving our customers with excellence and we anticipate that our inventory position is temporary and will ease and think with supply chain.
Target markets.
Please turn to slide seven.
We are increasing fiscal 'twenty two guidance as a result of our team's extraordinary efforts in continuing to lever to deliver for our customers and managing well through a significant inflationary environment. We are.
We're raising the midpoint of our adjusted earnings per share guidance by $1 to $7 60, this year for fiscal 'twenty two.
Reflective of our strong second quarter performance and expectations of continued solid performance in the back half of the year.
We still anticipate generating between $380 million and $440 million of adjusted free cash flow in fiscal 'twenty two.
While our profit expectations have increased that improvement will not be fully reflected in free cash flow in fiscal 'twenty, two primarily due to higher capex and nearly $100 million increase in cash taxes versus 2021.
As well as the continued drag from higher working capital, which.
Which is tied to increased revenue.
We will continue to drive hard on working capital in the back half of the year and hope those efforts helped us capture some upside to our full year free cash flow guidance.
Finally, you will find a slide with key modeling assumptions in the appendix of today's deck for use as needed.
Please turn to slide eight.
Our outstanding execution over the past few years has resulted in our ability to aggressively deleverage our balance sheet. So that we are now close to the lower end of our target leverage ratio range.
Our solid financial position gives us the flexibility to pursue new opportunities to grow the business and return cash back to shareholders I look forward to diving deeper into our capital deployment strategy at our upcoming Investor day with that I'll turn things back to <unk> on slide.
Thank you Larry.
Our Q1 call we provided a brief overview of our new built to last strategy.
At Investor Day on June 20, <unk>, we will be discussing this strategy and our business is in much greater detail.
Proud of our teams and our continued outperformance and believe the built to last strategy.
All of Us will.
And continue growing and improving the business and better serve our customers.
We highly encourage you all to attend and participate in this engaging session with that I want to thank you for your interest in <unk>.
Operator, please open the line for questions.
At this time I would like to remind everyone.
In order to ask a question press Star then the number one on your telephone keypad, if you'd like to withdraw your question again press Star one.
And your first question comes from the lineup Ghansham Panjabi from Baird. Your line is open.
Okay.
Hey, guys. Good morning, Thanks for taking my questions and congrats on all the progress.
I guess for my first question can you just give us a sense as to how volumes in the month of may progress across each of the segments, especially.
Especially Gi Bill just given all the complexity across the across the world from a operating standpoint.
And how are you thinking about volumes for the two segments for the back half of the year.
What's embedded in your assumptions.
Thanks, Ken I'll take that one so let me take you around the world.
First of all cost the most material markets.
EMEA and the U S and they account for about 85% of our GI peak global sales. So I'll focus my comments that and the story remains very similar to what we shared for Q1 demand conditions are strongest in the U S and a bit softer in EMEA and for the U S. I can say that.
Steel.
What's up single low digit per day, and Thats from a mix of strength in chemical and distributor markets and relative softness in automotive and frugal.
On plastics.
Up mid single digits per day and here it was particularly petrochemicals demand there was strong.
<unk> was up over 20% per day, and Thats, primarily from new lines coming online.
On EMEA steel was down low single digits per day, and really from general softness, particularly in eastern Europe due to the conflict there and supply chain issues, mainly stemming from China Lockdowns impacting.
Impacting our customers' ability to produce at levels to meet their demands.
Plastic.
Mid single digit per day.
And again general softness due to ongoing supply chain issues and IPC essentially was flat.
Got it.
Good day.
<unk> results in early June .
Continue to be very robust just as.
As <unk>, we've seen no drop off in Q2, and we expect that that will continue through the remainder of the year based on our commercial team's discussions with our customer base.
Okay, Great and then in terms of Gi.
Specific to the second quarter, so what exactly drove the operating leverage for that segment.
Asking because in the past you benefited to some extent from a spread.
Raw materials and timing of the pricing and so on it's the report was that a material impact in the second quarter.
Yes.
Mentioned that last year, we had a significant tailwind impact our results positively because of the rapid increase in steel costs throughout the year guidance and that was to the tune of $100 million.
Not having a repeat of that this year at all so that onetime benefit is gone.
What has happened instead is that steel cost have remained relatively flat I mean, we've had some falloff in EMEA.
Slight falloff in in North America, but for the most part is relatively flat. We had thought that we would have a little bit more decrease and in North America in particular and had built that into our second quarter forecast and while it dipped a little bit in March it picked back up a little in April .
And for the for the most part the true pick up.
Was that we didn't have that drop off in it and then.
An impact to us negatively but more importantly, it's just that our teams have become really consistently excellent at getting price increases related to other than materials.
Covering our cost of inflation in a whole broad.
Group of cost categories.
Right.
Do well, if we went back three five years ago.
Under what only was leading VIP, we really started executing well on that and the teams are just doing an excellent job on it now where we used to give back margin, we're not giving it back anymore.
Awesome. Thanks, so much.
Your next question comes from the line of George Staphos from Bank of America. Your line is open.
Hi, guys. Good morning, Thanks for the details and taking my questions.
Just wanted to piggyback.
Ghansham had set it up for us for the second half and so Larry what are you assuming for that spread compression over the rest of the year or said differently.
You, obviously had a really really.
Strong start to the year.
No. Good deed goes unpunished, we look at the back half versus back half last year and at the midpoint, bringing our rolling up.
Five cents or so what are you sort of building into your expectations such that number start to decelerate is it in fact building in more cushion for that spread compression that you were talking about earlier that did materialize through the first half of the year.
Yes, good question George and so.
<unk>.
We are reflecting in the second half of the year.
Obviously in the G&P segment will no longer have the Fps.
Profits that we had a year ago, so you've got roughly.
Half of their year, which is.
Somewhat near $30 million that will not be in our numbers then with respect to steel costs and that compression. We are predicting that it will go down, but we think it's a it's not a rapid decline and as we've talked many times in the past for US it's all about.
Pace of incline or decline and timing.
So we have the pass through mechanisms that generally work on calendar quarters, So where it is at the end of June matters.
If we had a real steep decline for some reason in the next few weeks that would be bad we don't see that happening and we don't see a rapid decline before September either so we've built in some.
Decline in the second half that will have a little bit of drag for the second half.
<unk> will be weaker than the first half, but not substantially.
And as we've talked about previously we have a little bit of benefit of our two businesses being a little countercyclical to each other.
The price mechanism and paper.
It lags.
You don't get it as immediately as the like you have to work through the rest of the process. So the second half of PPS is going to be extremely strong related to pricing and so the second half.
Overall looks very favorable.
Thanks for that Larry I, just maybe point of clarification on that before I get to the second question is there a way to maybe quantify broadly.
Not a lot, but there is some is there a way to is that $5 million $10 million $30 million in terms of the spread compression that we should expect there.
I think we had it.
And Matt let he you've got those statistics.
We have like 55% of our EBITDA in the first half of the year for VIP and then 44 is that roughly right.
Yes, I think that's roughly correct.
And so okay.
George hopefully that's helpful and if you back out say $15 million to $16 million for FBS, you've got the rest related to the continued VIP business.
Understood alright, thanks for going through that.
I guess the next question I had for you is on backlogs and paper and and.
This has been a consistent theme kind of across the sectors.
For <unk> as well.
Where backlogs are remaining very very strong.
Yet we're hearing about a potential slowdowns across the various businesses and really the end markets.
Extent that you can quantify to the extent that youre hearing from your customers whatever you're telling us you've got on this how much double booking how much double ordering how much you mentioned, having some inventory some extra inventory. So you can service your customers well what do you think exists in the supply chain now that is maybe artificial relative to the eight week average backlog.
<unk> talked about a little bit earlier, thank you.
Yes.
Make sure to clarify and then I'm sure you'll have something to add here I mean are only safety stock as in GI is not in PPS.
Understood.
Some places around the world, where there were supply chain issues.
That we experienced in the past and our teams just do not want to be in a situation, where we can't serve customers. So we had like a three month delay in the Latin America last year on steel from China that we had to scramble crazily to two and then end up not missing serving our customers. So there's a little bit pockets like that around the world it's not huge.
Significant and we'll work through that but in the in the paper and of the business I would say George I've been saying to our teams I'm afraid, we're all going to talk ourselves into a recession. There's everybody is that there is premium about hurricanes and other stuff you scared of the consumer but we're just not seeing it in our demand changes, we've got small pockets, where maybe there is a.
A little better.
Concern from our customers, but it's equally offset by other places, where they're saying demand is robust, but I don't know what we do you have anything to add to that no just to say that we have seen no abnormal inventory building in our bps business.
And we read the same issue in terms of the big box retailers and we follow that very very closely.
Backlogs remain at eight weeks.
Demand is very solid.
Thank you guys I'll turn it over.
Okay.
Your next question comes from the line of Adam Josephson from Keybanc. Your line is open.
Thanks, Good morning, everyone hope, you're all feeling all right.
Larry or OLED stack to the demand for a moment, Larry I think he said and thus far in fiscal <unk>, you havent seen any demand drop off.
Should we assume that your expectation for the second half is that demand is not going to weekend much if at all and that will be reflected in your consolidated volume performance or what exactly are you expecting demand wise in the back half versus a year ago versus the first half any help you can give us there.
I appreciate it.
Yes.
On the demand side, Adam we obviously as you would expect when we forecast the remainder of the year. We worked diligently with our commercial teams, who then talk with our customer base.
We're seeing good demand trends for the remainder of the year as what we saw in.
In Q.
Two.
Where we see some some weakness in EMEA related to the conflict and supply chain issues there.
North America continues very robust Latin America is robust.
And frankly.
The big drop off in our volume, particularly in steel is really related to China, and Lockdowns and as the Lockdowns re up there we tend to see.
Volume pick up pretty aggressively now.
It's not that big of a piece of the pie for us, but we do expect that we'll see some lift in volumes there.
Yeah.
Okay. So youre not space. So in other words, youre not expecting any demand erosion.
Really what's now or in the back half and yet we're not hearing it from our customers I mean, everybody is concerned but I think the reality is even the most negative economic forecast, they're not seeing a risk.
A recession anytime before our fiscal year end. So I think it's consistent with that is what we're hearing from our customers.
<unk>.
Got it I appreciate that Larry on the price cost issue I know last year, you had the $100 million onetime.
One time benefit from rising steel prices.
Can you help us with what is embedded in your guidance. This year in terms of price cost either in total or by segment, because obviously and pay for youre going to have a very substantial price cost benefit this year and I was just hoping you can frame it for us. So we have some sense of how big a price cost benefit you're.
Expecting this year on a consolidated basis versus what you experienced last year and what you've experienced historically.
Yes.
You look at on the Gis side.
Obviously, maintaining the margin that we had last year and overcoming the loss of that $100 million tailwind is it pretty substantial.
Accomplishment on behalf of our teams.
We are expecting to relatively maintained and that combination of the investments we've made and some expansion of RBC and plastics business.
And then the rest of it is really just working very diligently on these other.
Price increases.
And Matt I'll add.
Asking you to maybe.
Alright.
On a relative basis G. IP EBIT this year versus last year, because I think that will go to answer.
Is it roughly flat.
Apologize I don't have that in front of me.
You're talking on a first half to first half basis.
Four year.
Right.
For where we expect then roughly I mean, not exactly I think that's right that's right Larry.
Correct Yep.
And obviously.
Do the math based on our volumes, we clearly are having to pick up in in the PPS side related to the price increases nothing really containerboard is predominantly in the.
In our box board operations, which are.
Really executing at a high level relative to that.
The performance of that mill system and also.
The pricing actions that.
We are in our opinion wait wait where they should've been and so we're capturing that benefit for the rest of the year.
Okay.
Larry.
Don't mind.
Can you.
The bulk of the price cost benefit in PPS, you're expecting within paperboard not containerboard, even though there have been obviously substantial price increases in containerboard just make sure I'm clear on that and then can you hazard, a guess or roughly frame how much of a total price cost benefit you're expecting in the TPS business.
This year.
I didn't quantify that Adams no I can't.
Okay.
Export much more than containerboard in terms of price benefit this year.
Thank you.
Your next question comes from the line of Gabe Haney from Wells Fargo. Your line is open.
Only Larry Matt Good morning.
Good morning, Tom again.
One thing that jumped out at me.
Was on the volume side when I look at slide 11.
Latam being up 16%.
N G IP and if memory serves that's predominantly I think an AG business down there.
It's kind of a two part question is there anything else again that when we look at kind of industrial production data it would seamlessly suggests.
Fairly challenging backdrop down there.
So that's what's causing the differential there and then two when.
We listen to farmers, either not being able to get fertilizers or not being able to afford them.
And I think about plantings for the next year.
Typically farmers over plant when when yields are down and stuff like that how could that help or hurt your business.
You know relative to prior cycles on the AG side, because I know that's a bigger piece of your business today than it was maybe 510 years ago.
Yes.
Look there's obviously a big part of our business that is well, it's not just AG chemicals.
Food and juice and so on.
But what we have being able to do in Latam throughout we've put in a new leader in place a few years ago and he is just doing an excellent job and they have actually captured.
Market shifts.
Gain a lot of volume from competition.
Through a sustained.
Our focus on customer service and that's what you see here.
Okay.
Okay.
Gabe.
I don't mind inserting for a minute I want to go back and sort of address the question that Adam.
Just because I found my notes.
So look what I would say is we think we've got a a tailwind of about 36 Bucks a ton on OCC.
For the full year.
We've got roughly.
Slightly over 100 Bucks.
Tailwind on containerboard for the year it got.
I'll call it.
Couple of hundred Bucks and they have on new ERP and same thing on CRB for the year. So Adam I think those numbers will help you get to the.
So the question you asked.
Sorry Gabe.
No no worries.
I mean is there any insight you can give us.
Again.
Side or food in terms of crop plantings and stuff like that it is.
It seems like obviously theres a lot of disruption over in eastern Europe , but just how it could impact your European.
CIP business, yes.
So in Europe .
Season will not be so good on the <unk> sites.
Because of drought and then you also obviously have the conflicts.
Yes.
In the U S on the West coast the season looks very very strong.
And so what we have over the years.
Never has the perfect storm. So <unk> been it's always been I know you have one region, where the Stroud and low productivity.
Hello by another region this year, Siberia, particularly thats down and in the Americas, that's very strong.
Okay switching gears, a little bit I guess.
So trying to get at maybe a peek under the tent for high day, but.
Your balance sheet isn't really good condition.
Larry how would you think about running maybe a little bit below that two to two five times leverage target.
Given kind of the macro concerns that we see out there.
And when you look when you think about kind of capital return for shareholders.
Kind of what's the framework that you think about in terms of.
Balancing a special dividend or something like that versus share buyback.
Yes, Gabe when we when we get to that point.
Of.
Are we going to go down below to mean, we will obviously try to forecast ahead and put it into a recessionary analysis, because I don't want to be in a situation, where we do something and then.
All of a sudden we find ourselves.
In a tough position I don't think we got much.
Risk of that I mean, frankly.
You look at our cash production for the rest of the year and where it will be on debt Paydown, we could do some type of pretty substantial return of capital to shareholders and still not have that risk even with a pretty significant downturn, but we'll go through that analysis before we would do anything.
Down in Q1 already to get the cash production for the rest of the year to pay down debt further.
Our EBITDA would have shut down.
Put us back above two five even if we did do something substantial and return to shareholders.
But that analysis.
We will expand more on this at Investor day, and share our thoughts about growth and return of gas.
Excuse me.
Great. Thank you guys. Good luck.
Thanks.
Our next question comes from the line of Justin Bergner from Gabelli funds. Your line is open.
Oh, good morning, all Hey, good morning, Larry.
Hey, John .
Thinking.
Thinking about your increased guidance for the fiscal year and you know congratulations on the solid performance is the increase in guidance essentially entirely in the global industrial packaging segment or is it better outlook for paper packaging.
Also contributing to the higher.
Mix of both when we put our guidance together for the.
That we put out in our first quarter call we had factored in.
Our planned price increases for PPS for the remainder of the year and the lift, but we've seen better execution on pushing price through in <unk>.
Bps, so theres lift in both businesses over where we were in the guidance that we provided.
Earlier in the year.
And it's about equally dispersed.
Okay.
That's helpful I would have thought a bit more.
Global industrial packaging, so that's interesting.
On the price increase front and global industrial packaging and the ability to pass on.
Non raw material cost headwinds.
No not to take away anything from the achievements of your team.
But as the supply chain environment, just making that market.
Later, even with you know volumes are flattish such that.
The teams are more.
Easily able to pass on those non raw material costs inflationary headwinds.
Yes.
Scrap export, yes, I'll take that one.
Covenant.
Ernie.
So.
When I came to drive just in like six limit of six five years ago.
We werent tracking raw material non raw material price increases.
And by and large we weren't passing them on so as Larry said earlier, we brought very very hot in.
Creating a system, where we track creating a system.
We are unable to pass them on and so today, we are <unk>.
All of them on we are ahead of the curve in terms of the inflationary pressure we get.
And then when we do it we don't just do it in pockets.
So you understand we have pumps and we have non perhaps when we pass on.
Non raw price increase it's to all our customers globally. So a small increase has a significant impact and thats something we have been massaging into the organization and that is now part of our DNA and that's kind of.
The power you see where we're not diluting our margins anymore. So what we have now.
We have a consistency in our margin profile going forward.
Okay understood that's helpful. But just to follow up I mean is the external environment, helping just the the greater.
Greater challenge in sort of.
You and you can I think there is getting product to customers sort of in a timely manner, given all the supply chain constraints, making.
I think I mean.
Our focus on customer service the past many years, obviously helps so we have great partnerships with our customers and when you come with a price increase.
Certainly it's a difficult discussions you have with your customer, but its certainly easier when you are acknowledged for delivering.
Really really good service to that particular customer so those two things go hand in hand.
Okay, great. Thank you.
Your next question comes from the line of George Staphos from Bank of America. Your line is open.
Hi, Thanks for taking the follow on guys.
I wanted to.
Tackle maybe a couple of bigger picture questions and maybe youre going to hit these at the analyst day. So we.
We understand but I guess first off given the success you've talked about that you've demonstrated over the last few years.
On customer service Youre, saying earlier in your views. This tagline certainly legendary customer service or are you seeing any of your peers.
Hey, Grace is doing a pretty good job with this and they are beginning to try to probe the wet edges of what you do replicate it and are you seeing any signs that your competitors are actually being successful in that regard and where do you see on that front that you are again, recognizing some of this is going to be proprietary where you're extending.
Your lead in.
Creating a greater ability to continue to grow and or a price when you need to price how would you have us think about that.
First of all I mean.
We don't dwell about our competitors, we really focus on our own business and focus on what we can control.
And.
Our vision is to be the best customer service company in the World and Thats really where we have a lot of our focus.
With that no we're working very hard to systematically audits, we certainly are putting a lot of investments into that.
Not just in training, but also in terms of technology and we will cover some of that also at our Investor Day on June 20 <unk>.
Okay is there so understanding the focus is on what Youre doing right and continue to prosecute that is there an area or two where we will hear about in a couple of weeks that you feel you have the ability to continue to press ahead, even more quickly on that front and then back to capital allocation.
And whether or not we're going into a slowdown how does that make you think about.
The potential in the mix of organic growth versus M&A.
If there is any different at all relative to what you would have been thinking say six months or so ago. Thank you guys and good luck in the quarter.
Thank you George.
Yes.
Although the first part and then pass it over to Larry for the second part of your question.
Part of.
Yes, it's using technology and AI.
And Thats really what we are beginning to bake into our business. It's not a short term thing. It's a long term thing we have projects that will run.
Four to seven years.
Implementing technology and AI into the business to be able to provide legendary customer service and I'll, let Larry to ask the M&A question.
Yes, George and we will over time on this at Investor day, but.
We have asked our business unit leaders to already developed their plans about okay. What actions would you implement should we start to see.
Evidence of a recessionary trend in <unk>.
Most of you on this call who have been around us for a while we tend to be an early indicator.
I think it's good news that we're.
We're not seeing any real evidence of any recessionary trends at this point.
At <unk>.
Would a recession.
Cause more.
Pause for us.
I would say, yes, but with the Nash correct I mean, we got sort of roundly criticized for doing terrestar when everybody thought there might be a recessionary environment.
<unk> and <unk>.
We explained then you have to be a buyer when somebody's a seller and we're very pleased with what we've been able to accomplish as Terrestar and we told everybody at the time that we had analyzed the downside into recessionary analysis and that even if we saw one that it would maybe only pushed back.
Getting back to our target debt ratio by a half a year.
I guess, what that played out and it's played out well and so we would follow that same.
In executing any.
Transaction that we might be presented and only do it if we felt comfortable that we could sustain.
And our target range in a reasonable period of time.
I would say that we don't anticipate seeing transaction the size of Caraustar.
But you never know till you are in the market and something comes like if it shifts would come to play again, but we would we would just deploy that disciplined process that we have and make sure that we analyzed our downside risk and feel comfortable going into it.
I think that's responsive.
Very much so thanks, Larry Thanks Ali.
Oh.
Your next question comes from the line of Adam Josephson from Keybanc. Your line is open.
Larry Thanks for taking my follow ups I appreciate it.
On Russia could you tell us how much Russia contributed to your sales and earnings in the quarter and for that matter to the guidance increase if at all and then just.
Talk about what would have to change in Russia.
Two.
Prompt you to change your mind and in fact exit the country as many many other multinationals have done already.
Yeah, and Adam I'd say, Russia is less than 3% of our revenues and profits. It really has very little impact on our raise in guidance. It's an issue that we and many companies strive when I agree many have gotten out although I would say a lot of them that have gone out had sales offices that don't have a lot of employees that they are trying to take care of.
For things to change our view I mean, we monitor it on a very regular basis and we're always trying to take into account at least to date, our judgment has been that.
It's very clear that if we were to shut down.
The government would you just take it over and that would mean they'd have more money.
To fund their Laurie interest not less.
So at least here to for our conclusion has been to stay stay the course and take care of our people. So things would have to change fairly dramatically. It's a very minor part of our operations and as we explained before it's it's.
Self supporting we're not putting any capital in at all.
Basically sales happen, they're sourcing happens there. So I don't know if you wanted to add anything all later.
Obviously.
More or less an island Adam for us.
We do have meetings every week, we continue to assess the situation very very closely.
And as Larry said, our focus is to protect our people and our assets.
We believe that's better.
On by US and that will ultimately also benefit the Ukrainian people.
Opposed to giving everything up too.
So the Russian governments.
But.
Thank you Blake stipulation health results.
Right.
Thank you both and on cash flow Larry in the <unk>.
First half it was down about $20 million year over year. The midpoint of your guidance implies I think a $140 million increase for the full year compared to the $20 million decline in the first half so obviously, you're expecting a pretty big jump.
And cash flow in the second half relative to a year ago.
Even with all these <unk>.
Inflation, the inventory issues et cetera, the higher cash taxes.
Why are you expecting such a big cash flow second half relative to last year, and where are you biased in terms of the low and high end of that three eight to $4 40.
Yes.
We basically.
As inventory costs flatten out which they.
It becomes stable you start to have some of that cash flow come through.
And when you're producing EBIT, you're generally youre going to eventually get that cash and that happens when things start to flatten out.
As you are going up.
You are building up and sales have gone up a lot. So just look at it this way Adam our sales were up $900 million, we try to manage working capital in many ways. One of them is as a percentage of sales that ours is generally 10% to 11% of sales. So it's a $90 million cash drag from that then we have 100 million or so cash taxes as I missed it.
So even though our earnings are up substantially.
We have.
A benefit of increase in cash flow because last year.
Working capital build was substantial at $223 million last year.
Because of the rapidly increasing raw material costs.
That rapid increase is no longer there on the <unk> side, and so that will.
Begin to reverse and turn into cash flow through the second half of the year.
Got it okay. So you are expecting a big working capital drag, but it was so substantial last year that year on year, it will actually be up.
$140 million ish benefit roughly speaking strategically what you think yes.
Yep got it thank you.
And there are no further questions at this time, Mr. Matt Lee I turn the call back over to you for some closing comments.
Alright, thank you.
Matt Why don't you go in circle back and just clarify one thing on something Gabe at Gabe asking as a preface his call by assuming that the Latin America lift was tied to AG. In fact, it was primarily tied to growth and looped in bulk and specialty chemicals, there was the big lift in.
In that market, so just to clarify that.
Yeah.
Great. Thanks.
Thanks, very much Rob and thanks, very much to all the callers today, who took part in our earnings call. We hope to see many of you at our Investor Day in June 23rd.
Have a safe enjoyable rest of your week. Thank you take care. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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