Q3 2023 Greif Inc Earnings Call

August 31, 2023

Okay.

Good day and thank you for standing by welcome to the third quarter 2023 earnings Conference call.

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Now I'd like to hand, the conference over to your Speaker today, Mr. Matt Leahy Mr. Leahy. Please go ahead.

Thanks, and good morning, everyone welcome to <unk> third quarter fiscal 2023 earnings Conference call. This is Matt Leahy, Greg <unk>, Vice President of corporate development, and Investor Relations and I'm joined by only Ross Gardner <unk>, President and Chief Executive Officer, and Larry Hill, Shimer Gripes, Chief Financial Officer, We will take 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.

Please turn to slide two.

As a reminder, during today's call we will make forward looking statements involving plans expectations and beliefs related to future events actual results could differ materially from those discussed. Additionally, we will be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metric.

Fixed can the appendix in today's presentation.

I'll now turn the presentation over to Olivier on slide three thanks, Matt and good morning, everyone.

Our global team executed very well in our fiscal third quarter and posted strong performance. Despite the continuation of historic volume headwinds.

Our teams are leaning on our build to last strategy to drive results in this difficult environment and I could not be proud of the work we are doing to manage and improve the business and better serve customers.

Our performance in the first nine months of 2023 with strong EBITDA performance and margins and free cash flow conversion well above our targeted 50% is a testament to the growing resilience of our business model and our commitment to both manage the presence.

While building the future.

Before further covering our results I want to share an exciting updates on two of our key missions and our built for that strategy.

Thriving communities and submission devoted to cultivating a culture of appreciation inclusion and recognition for all of our internal colleagues and external stakeholders in the third quarter, we launched our colleague stock purchase plan.

Program that enables colleagues from corporate down through production to acquire <unk> class a shares at a discount to market prices.

We believe in the power of ownership to drive greater accountability and commitment to excellence across the organization and this program will provide the means for our colleagues to participate in the economic benefits and value creation.

I am proud to welcome our colleagues to the table as fellow owners of our company and look forward to expanding this program in the months and years to come.

On our mission to deliver legendary customer service each quarter represent latest results of our customer satisfaction index and mechanism. We used to formally receive regular feedback from customers on overall satisfaction with grief in terms of product quality.

Customer service and our ability to deliver value.

Our aspirational benchmark of success is a score of 95 out of one hundreds.

This quarter, our global consolidated score was $94 to just shy of that gold and an exceptional result, given the challenges our customers are facing in the markets.

Brian steadfast commitments to our customers is evidence.

We will provide you and support you and builds on our existing relationships in good times and in bad and you can count on us to deliver with quality and service Excellence every day.

Our dedication and relentless focus on customer service is core to who we are as knock on a station and our excellent CSI call.

This challenging period as a reminder of the value we provide.

Now I'd like to shift focus back to financial results on slide four where I'll turn it over to Larry to kick things off.

And good morning, everyone.

Given Greg overall financial performance relative to the operating environment. We have been in this year. We went to briefly step back from our single quarter results in just take stock of where the company is now relative to our initial view in fiscal 'twenty three guidance provided in December of 2022.

At that time, we had started to see demand start softness in many of our end markets and I discussed on our Q4 'twenty two earnings call, how given our level of uncertainty we had run a robust scenario analysis to arrive at the wide guidance range for 2023 of 820.

8% to $906 million in EBITDA, and $410 million to $460 million in free cash flow.

Frank with everyone. While we considered at the time the possibility of an extended slow demand cycle. We did not wait that heavily as doing so would imply we felt that we were headed into another industrial recession.

Clearly that initial assumption that number was wrong and while we may not be in a broad economic recession global manufacturing PMI remained below 50 for the 11 11 months in a row and our year to date volumes across GIC in PPS are both tracking down mid to high teens year to date.

If that's not indicative of an industrial recession and I'm not sure what is.

Another relevant comparison is the recessionary scenarios slide we outlined at our Investor day in June of last year, showing downside risk to $600 million to $700 million of EBITDA and $260 million to $320 million in free cash flow.

A few points comparing that scenario against our current environment.

Number one recession scaled drum volumes assumed 5% down versus actual Q3 are down over 10%.

Recession, Phil index prices assumed down 20% versus the actual down 15 through July .

Recession mill volumes assumed 5% down versus an actual down over 20% in Q3.

<unk> and containerboard prices assumed 10% versus the actual Q3 down about 8%.

To summarize current steel drum volumes are tracking down double the downside scenario mill volumes are down quadruple the downside scenario and overall pricing declined nearly match our downside scenario.

Yet our current guidance midpoint contemplates EBITDA and free cash flow that is over $100 million above the level, we provided for a recession scenario with only a partial lift from M&A.

Illustrate these points to try to hammer home, how well our teams are executing and I also want to share my heartfelt. Thanks to all of our greif colleagues for their commitment and dedication this year.

Okay. Thanks for letting me take the time to boast about our team's performance, but it is really commendable, how well, we're doing and I would like our investors to keep that in mind as they consider our detailed results. Thanks, Larry and we all set.

Harry just mentioned, we again reported strong adjusted EBITDA of 226, and a half million only 2 million shy of our previous quarter and less than 25 million short of the very strong 2022 comparative periods.

Our free cash generation was also extra ordinary reported at $167 1 million nearly equal to the very strong Q3 of 2022.

But on volumes, which were more or less 15% lower.

As mentioned in my opening remarks that free cash flow figure represents a conversion rate of over 70%, which is well ahead of our long term targets more than 50%.

Our disciplined approach to managing cost and working capital are driving this performance as we are truly play with the entire P&L spanning from operational and commercial excellence initiatives to supply chain and sourcing and automation efforts to drive improvements improvements.

Across our business.

We also announced another step up in our annual reoccurring dividends with our total quarterly dividend now at 52.

And 78.

For class eight and Bcf respectively.

The strength of our balance sheet and growing free cash flow generation has widened our available capital allocation opportunities and we are excited to continue to deliver cash to our shareholders.

Lastly, I'm excited to announce and not in addition to the <unk> portfolio.

This past week, we signed an agreement to acquire 51% ownership in co pack, which I'd like to discuss more on the following slides.

Slide five please.

Co pack is a truly special paper converting business as the number two supplier of bulk and speciality petitions in North America.

For those unfamiliar competition is a device included commonly in corrugated boxes as a method of separating franchise concepts such as glass bottles.

Kopeck manufacturers a wide range of petitions from both <unk> and containerboard and predominantly serves the stable and growing food and beverage markets. They have two facilities in our banner, Ohio and in Fairfield, California sites, which is.

Italy located to serve the high end wine bottling business and that's about it.

This business is immediately mark margin accretive to the global growth portfolio and is expected to contribute to EBITDA before synergies of $15 million to $20 million per year.

While the business is small relative to our global portfolio, several organic and inorganic growth opportunities remain to quickly grow and further scale. This business.

On top of the favorable Standalone financials, Kopecks converting network consumes approximately 25000 tons of paper per year.

Adding incremental downstream integration into our PPS network.

Last but certainly not least co packs management team is an excellent cultural fit to drive we have known and done business with a cold family for years and share a set of values on how to take care of colleagues and serve customers.

We are excited to partner with co pack and this new venture and grow the business together.

I'll conclude by saying that even asked the pro forma impact of this acquisition our balance sheet remains in great shape, and we sit below the midpoint of our targets leverage ratio range. Our M&A pipeline remains robust and we intend to continue deploying capital towards more.

Value accretive targets in the future.

Now I'd like to shift gears and take a deeper dive into our segment results. So please turn to slide six.

Our VIP business produced excellent results with flat year over year gross profit despite volume headwinds of nearly 20% in the Americas and nearly 10% in EMEA and APAC.

Once again the <unk>.

Bricks adherence to our value over volume philosophy in the markets.

The benefits of our cost out actions taken earlier this year and lower year over year input cost led to an adjusted EBITDA lift of nearly $10 million year over year, despite substantially lower revenues.

On the volume sites, all Gi products and geographies showed softness compared to the prior year with global steel and resin based products, both down mid double digits on a per day basis.

Sequentially, our third quarter closely mirrored our second quarter with demand flat in EMEA, and APAC and slightly down in Latam and North America.

Through August we do not have a line of sight into any notable upward demand inflections in our <unk> business and we'll continue to manage this business as we have through the year with a focus on cost and customer service.

I commend our global team for their exemplary performance in the third quarter and throughout 2023.

Please turn to slide seven.

Paper packaging third quarter sales declined $146 million year over year, primarily due to demand weakness across our converting businesses and mills.

We took approximately 55000 tons of economic downtime across our mill system in the third quarter as we faced nearly 10% per day volume declines across our primary converting operations.

The continued low volume environment combined with rising OCC costs during the quarter led to both EBITDA.

And EBITDA margin compression compared to prior year.

Our PPS team utilizes the same playbook, SG IP and reference to value over volume and cost elimination, resulting in a still healthy seven 4% EBITDA margin for the quarter.

Our Pts team is managing the business very well against multiple headwinds and I'm proud of their results and continued dedication during these challenging times.

I will now turn the presentation over to Larry on slide eight.

As only and I mentioned in earlier prepared remarks, our team is executing well in a historically challenging demand environment. It.

It is an enterprise wide effort to deliver these results and my heartfelt. Thanks goes out to each department with being bright for delivering for our customers and our shareholders. This year.

Back to the Q3 financials.

<unk> decreased approximately $290 million year over year, primarily due to lower volumes and the impact of significantly lower steel costs.

Despite this adjusted EBIT declined less than $25 million, leading to over 150 basis points of margin expansion.

Most impressive however was our free cash flow performance.

Cash flow dollars were down only $8 million year over year on substantially higher free cash flow conversion.

Just to remind everyone Q3 of last year was the highest highest third quarter cash flow in the history of our company and we missed it this quarter by only $8 million with 290 million lower sales volume is down nearly 15% year over year, higher capex and $11 million of higher interest costs related to higher rate.

And our recent M&A activity.

That's truly outstanding.

To put it another way on a trailing 12 month basis, our adjusted free cash flow is tracking at $580 million more than double the average annual free cash flow generated between our 2019 and 2021 fiscal years on any measure the cash output of this company is miles ahead of where it once was and we still do not.

I believe that that fact is fully recognized by the market. We have raised the bar on performance and the elevated cash flow dynamic has opened up a lot of possibilities further value creation through M&A and returning cash to shareholders.

And now I'd like to touch on our other capital allocation priorities on slide nine before discussing guidance.

Only discuss the recent acquisition of cold back in his remarks, we're pleased to be taking another step on our investor day commitment to grow downstream integration in our paper system at the same time, we are pursuing our resin based acquisition cap and VIP. We have spent over $550 million on M&A over the last nine months.

But our work is not done and our pipeline remains robust.

We expect to continue generating sufficient cash to fund various actionable opportunities and still maintain a strong balance sheet and.

In addition to pursuing inorganic growth I am excited to announce we are again, raising our dividend fulfilling our commitment we made to investors over a year ago.

While our dividend yield may no longer be industry, leading thanks to some long overdue appreciation in our stock price.

One of the most compelling dividend offerings in our industry by raising our dividend for the coming year by 4%, we are reaffirming our commitment to deliver cash directly back to our shareholders.

As our business grows we expect to grow our dividend at a commensurate rate to ensure shareholders are fairly compensated for their commitment to us and finally as you recall last quarter, we completed our $150 million share repurchase program and while we are not executing on any current buyback programs, we retain an open authorization for two.

6 million shares and May execute further repurchases repurchases opportunistically in the coming year.

With that I'd like to close by discussing our revised guidance on slide 10.

As you can see the midpoint of our guidance for EBITDA and free cash flow remains unchanged give.

Given the closer line of sight to full year results. We are tightening the range by $10 million on each side and now expect full year EBITDA to land between 790% and $820 million and full year free cash flow between 400 $430 million.

Our overall third quarter financial results largely met our expectations. However, the individual drivers different volumes were below plan in nearly all substrates, but margins were better for the reasons previously mentioned as with prior quarters. Our current forward guidance assumes no improvement on volumes through the end of the year. Additionally, we will plan to.

Share our views on fiscal 'twenty four in our Q4 call in early December we expect to finish the year with another quarter of strong performance. Despite the persistent macroeconomic challenges, we face I'd like to remind everyone that the midpoint of our guidance range implies implies the best second best financial performance in Greg's 145 years.

History surpassed only by a record year in 2022.

We are confident that we have set a new bar for performance and expect that we will continue to deliver these exceptional results as we make future progress on our build to last journey.

Okay, I'll hand, it back to you to close on slide 11, Thanks, Larry.

As mentioned our guidance reflects the expectation of the second best year in <unk> hundred 45 year history, and we are extremely proud to be in that position considering the headwinds we have been facing great companies often prove their worth in times of great difficulty through perseverance.

Chris and dedication to excellence.

Build on less is how we demonstrate that perseverance and I see daily and the passion of our colleagues and decision making at every level of our business.

We are well positioned for a demand rebound whenever that comps and in the meantime, we are excited to continue building this business and making progress on our long term strategy.

We thank you for your interest in <unk> operator, please open the line to questions.

Thank you.

As a reminder to ask a question. Please press star one on your phone and wait for your name to be announced to withdraw your question. Please press star one again.

<unk> is the compile the Q&A roster.

One moment please for our first question.

And our first question will come from Michael Hoffman of Stifel. Your line is open.

Thank you.

Larry for taking the questions I look forward to seeing your next week in Paris and London.

When we finished <unk>.

In my notes, if I'm wrong I'm wrong I had in mind.

Note that the.

Cadence in the second half.

What's kind of the sort of EBITDA is going to track around couple of hundred million dollars in the <unk> and then improve modestly in the <unk>.

To hit the midpoint.

The outlook for <unk>, given your again repeated exceptional performance around cost.

The fourth quarter down pretty healthy.

How am I what am I.

Interpretation of the.

The implied EBITDA being 185 versus something that was like.

<unk> 210 originally.

Yes, Michael Youre correct.

Q3 ended up being better on the margin side volume degradation no was more than we expected and we don't see that mark that volume.

Picking up and we've seen agg perform less favorable than we normally do.

So with that that trend it just shifted things a bit we also had anticipated.

Yes that we would have some tax refund item that is in Latin America is like 6 million Bucks, we had anticipated that might occur later it came into the third quarter is actually a noncash item.

As well, which really impacted cash flow a little bit, but it's really those two items.

Obviously, we hope volumes will pick up and surprised us a bit in the fourth quarter, but we have not seen that in August yet.

Okay, and then to that point.

We've talked before about sort of major end markets and VIP for chemical paints and coatings and lubricants.

So are we are hearing the message that it's not worth it.

Just not any better.

Or is some of those got worse.

Hi, Michael.

Our customers.

Telling us that it's not getting worse, but they're also telling us that they don't expect any improvements.

Over the next two quarters. So from what we hear we will be in the second quarter of 2020 fall before <unk>.

<unk>, even any remote chance of improvements.

What we hear from our customers.

And then on TPS.

I cover things that recycle all this OCC and that in my coverage.

Says that they are starting to see improving demand.

So is there a light at the end of the tunnel and all of this.

The finished goods inventory clearing and demand starts to improve.

Yes, Mike were I think part of what <unk> created a little bit of demand on the waste companies for the OCC side of things is really just related to some new.

Mill capacity opening in recycled mills.

Outside of that we're not we saw a couple.

At times over the last month, or so where we saw a spike in orders for a week within the next week. They fell back off so we haven't seen anything sustained that would indicate any lift and we're not hearing anything from our customers.

In the paper business.

That gives them any.

Real solid indications of a of a inflection point.

But it sounds like you feel like you have to hit a bottom if youre getting momentary spikes or probably hit a bottom yes, we hope so I mean.

We think that but.

We thought the second half of this fiscal year would be good and I missed that call. So.

I'm not really good with my Crystal ball.

You and I both.

And then last one for me is why not own 100% of coal.

This is a deal that.

Because of our long relationship with them.

They approached us to help because of growth opportunities, but maybe I'll, let Matt talk a little bit about that because Matt leads our business development efforts.

Dealt with the KOL family on this yes.

Yes, so Michael the reason to not own 100% is that we end the call believe that there is substantial growth opportunity ahead, and we want to have aligned incentives as we try to grow that business together part of the partnership and the reason it makes sense is because they see real opportunities in the market to grow substantially but they need to make sure they have the mill.

City to do it so that's the strategic rationale we're excited about adding into the portfolio from a margin perspective from an end market perspective, but also think that that 51% ownership stake in partnership going forward makes sense for both of us to maximize the growth and value creation that business overtime, yes. They are.

Really respected in the industry.

So are there weren't as their bond kind of thing they are good people there, Ohio people.

And they want to participate in the growth.

Okay. Thank you very much.

Thank you.

And one moment please for our next question.

Our next question will come from the line of Ghansham Panjabi of Baird. Your line is open.

Hey, guys good morning.

And I know, it's very difficult to disaggregate, but on the volume decline in Gi P.

How would you separate end market weakness versus any incremental destocking at the customer level and I'm, just asking that because as raw material prices started to decline for some of your customers. They did start to accelerate.

Destocking and just kind of wondering where we are in that phase.

Hi, Ghansham solid.

We don't think betting destock.

Destocking has come to an end it but it's difficult to us too.

See whether it's really come to an end, but we believe.

While we see now is really this.

Manifestation of extremely low demand in the markets.

If that sales got it.

And then in terms of the margin improvement in <unk>, which has been obviously very notable in context of the volume decline that you've cited how should we think about incrementals as volumes eventually recover and I'm just asking because there are there any big cost reversal headwinds, we should keep in mind in that scenario.

But obviously on that side.

We've taken a lot of cost outs some of it is structural with AWN.

Rooftop consolidations.

We also are able to in that basis to flex really really rapidly as demand goes down.

So if you if demand returns, we obviously have room to.

We can increase our capacity, let's say, 2% to 5% with without any.

Cost increases bumps if demand goes up further than that you would have to add shifts. So youll see variable cost goes up in line with increased demands, but a lot of the cost we've taken out.

True.

Got it and then just one final one on.

Kolpak if you broke out the sales number I missed that so if you could please repeat that and then also as it relates to fiscal year 'twenty four I mean, obviously very early big range of outcomes is based on the macro complexity, etc. But can you give us some of the known variances that we should keep in mind as we finalize our modeling estimates for fiscal year 'twenty four you have co pack.

Obviously, the EBITDA contribution from there.

Any flow through from cost savings and price declines in paper and anything you could share there.

Yes, Ghansham this is Matt on coal pack.

We didn't give a revenue number but EBITDA run rate EBITDA is about $17 million to $18 million.

And then that does not include kind of the incremental benefits that go to the mills from us absorbing more tons.

And you think you can think about that on a full year run rate basis, we're not going to give revenue right now.

Our margins, but that should be instructive as you build the model for next year.

On the other components you can add a portion of the contribution from Lee a couple of months a portion from <unk> and then obviously this when you think about next year from an M&A basis, and then in terms of the other cost elements.

I don't know you were asking for thinking about next year I don't know if we really have that yes, I would just say on the M&A side John .

Between lease and jewelry in.

<unk>, probably a $40 million of incremental revenue this year, we'd take out two maybe on the Tamar things that were up.

Up.

Net 38, and if you look at the numbers we provided on each of those 33 for Lee 20 for Centurion in 17 and pulled back on a full year basis. So you'd have a lift of maybe 28 next year 30 kind of number.

And then on the cost Takeouts, we haven't quantified the.

The rooftop consolidation piece there are there's obviously some permanent cost take out there on structural over time, we've taken out a significant number this year of call it roughly $30 million of overtime some of that.

Shift in volume related, but we think theres somewhere 10% to $13 million or <unk>.

Permanent structural change in how we're running the business.

Okay Super helpful. Thank you.

Thank you.

Again, one moment. Please next question.

Okay.

Our next question will come from George Staphos of Bank of America. Your line is open thanks.

Thanks very much.

Hi, Ali Hillary Matt Good morning.

George.

Congratulations on the performance.

I wanted to.

Lot of the questions I've already forgotten at the heart of matter for you and again with really really good performance in light of things.

When you're talking to your customers only what are they saying about why.

Believe demand isn't lifting yet again I know, that's really really hard to quantify.

You cover so many markets and so many customers, but is there a common denominator, one or two things that they're seeing in terms of why we're not seeing demand lift.

Downstream.

Yes, so first of all when I speak to when I speak to a lot of them are big global customers.

Dave taking plants down they are taking a lot of economic downtime.

It's really back to what we have discussed previously that the economy has shifted from a <unk>.

Buying things to going out and consumer spending.

That money on services instead.

I saw recently a couple of articles from the big box retailers in terms of how they are suffering.

The closest I can get and then.

In terms of.

The interest rates people are not moving houses as they have been means.

It means that they don't buy.

<unk> moved houses that they don't necessarily paint.

First of all the bank so.

To put my finger on one particular item, it's really really difficult.

Understood and on the AG side, you said AG is maybe trending a little bit less positive than you normally would like.

And is there any anything to take away from that.

Yes.

What I've been told it's also on AG is that.

In times of hardship, what the individual farmers tend to do is to use less fertilizer and less volatile, but that sort of thing.

It's just a.

Yes.

Part of it.

Managing that business.

Understood understood can.

Can you talk about.

What price cost benefit you might have gotten from steel.

In the fiscal third and what you might be expecting in the fiscal fourth and then.

<unk> got some earlier question, so should we take away that as things ultimately hopefully pick up.

20 million of costs that will come back into the business on an annualized basis.

George Yes, there was a slight sleep better.

Situation we added.

On a year over year basis on steel because last year, we had a rapidly decreasing as steel cost curve. So we had higher inventory walking through but it was not material for the quarter.

As to that $20 million of differential on that over time number I mentioned.

Yes, it will come back, but that only comes back with.

Sales and and that would be leveraging our fixed cost footprint, okay, because we arent building new factories to get that.

So it'll be adding labor back, but it won't be adding anything on depreciation and other costs that go in so.

Still nice margin lift.

Yes, sure, yes, I get that just in terms of when we do our stack we need to make sure that we have.

Kind of a small negative slice for 'twenty, what I'm getting after volume after incremental margins and so on.

Hey, George it's important to mention one important dimensions those costs don't come back at the same rate sales deal. Okay. So thank you.

It's not one to one relationship demand for improved sales dollars improved cost come right back and they come back a lot more slowly and there is a lot of kind of slack capacity that we have in our system right now and existing shifts. So we can handle more demand at an inflection without layering in incremental costs right away, but over time.

As sales come back Thats, obviously, a good problem to solve that means demand from Korea and so it all it was mentioning if you go up 2% to 3% we don't have to add a dime you go up it could go up 20%, yet you have thrown out a shift or something yeah, and Josh just a final comment on that.

No Im sorry.

Just a final comment on that at this go back to our strategy of value over volume, we will not take on business. So we are running at I won't say full capacity, but healthy capacity utilization in all our facilities, we will not take on business with low margins and then apps.

Costs in our plants in terms of a lot of shifts will produce.

Products that we make low margin so that's not our strategy.

No. It makes sense. So my last question and I'll turn it over.

Same theme in terms of okay, let's get on the other side of the mountain and volumes are better and so on where to hopefully a better <unk>.

94.

Free cash flow conversion has been excellent this year well above your your goal in the last quarter.

Is there a chance that maybe realizing youre not going to guide on 24 that the conversion of 24 may be a little bit below 50% because you do have to add back to working capital you do have to do some other things.

Or no and then tell me a little bit about the program that you're offering your employees to buy stock at a discount.

What did you compare that with in terms of other ways to incentivize performance.

And ownership thanks, guys.

So.

Yes.

Two things on that I mean, it's all going to depend on the pace of the increase of demand George and also then where does the cost of steel and up is the big driver for us in terms of.

What will be the impact on working capital build.

OCC will play into that as well obviously if demand comes back you would think that's going to drive steel cost up in OCC, but.

We would still have our goal to be 50% or better and we have.

Other opportunities within our supply chain.

Initiatives that we believe can keep us at that.

Our goal levels so.

That'll be our focus I mean, obviously the outsized performance that we had this quarter is substantially above our goal, we would love that but we don't see that but just bring in another example, co pack is well above our 50% on free cash flow conversion and we're trying to focus on those type of businesses as well.

<unk>.

Execute on our M&A strategy.

In both the resin business and also in the downstream in our paper business with respect to the.

The stock purchase plan for our colleagues.

This actually emanated from request from our employees, we had a number of request as we went around new plants around the world.

From probably colleagues who had worked at other places that had this and they said hey look we really like what's going on the company could.

Could we entertain something like this and so we presented to the board they approved it.

We had good take up in the first initial.

Quarter of application and have had really nice feedback from our colleagues. So we look forward to it growing from here.

Was there any sort of discussion about like what kind of discount you're giving your employees to buy the stock right.

Others would like a discount to in the market, but yes, it's a 15% discount which is pretty standard in these programs.

Okay.

Alright, guys I appreciate it thanks, so much.

George.

Thank you.

Again to ask a question. Please press star one on your phone some wait for your name to be announced withdraw your question. Please press star one again.

One moment please for our next question.

Our next question will come from Gabe Haiti of Wells Fargo. Your line is open.

OE, Larry Matt Good morning.

David.

I'm curious.

Again, a lot of ground's been covered.

And it's challenging to answer a question like this but.

From you from a competitive landscape standpoint.

More specifically thinking about the more mature markets in North America and Europe .

Do you believe that we've seen sort of higher cost of capital.

Manifests and different pricing behavior or competitive activity in the markets in which you participate.

Or is that something that we still think is on the come.

That would be my first question.

Yes, I don't know that we would necessarily attribute competitive behavior to their cost of capital although.

Obviously in our VIP business one of our primary competitors is very highly levered. So does put pressure on them, but I think it puts pressure in the right direction.

No.

That's a good thing I mean more the place where we're seeing that really play out more is in our strategic M&A activities I mean, it's clearly put.

The P/e model in a much different position than they were two or three years ago.

Puts us in a very very good position relative to what we're trying to do in the market.

So no thats not exactly responsive to what your question was Gabe but.

We see the favorability there we're not seeing anything in the competitor marketplace that I would attribute to their cost of capital at least that we could we could discern.

Sure.

Maybe ask the question a little bit better.

Down demand environment would be just intuitively, how you would think about competitors coming out and maybe being a little bit more aggressive pick up business and keep here.

Are you seeing that or.

It seems like based on your results.

No and in fact, you're able to.

Price for value.

Okay. If I can I can give you a crystal clear yes to that.

Yeah.

Okay.

Alright, and then I guess, just one last one.

Appreciating that there's some math behind it but you made a pretty strong statement that.

So it sounds like you're going to be out.

Doing some M&A there is the pipeline is pretty full.

Is there a point at which share repurchase becomes more compelling than maybe deploying capital on the M&A side or is it not.

A binary decision like that.

I guess my financial return standpoint, yes.

Yes, I don't I don't think it's binary yes, if we found that we could not deploy.

Deploy capital in attractive M&A, along our strategic objectives, then it would become more compelling to start buying shares back because we continue to believe our shares are phenomenally undervalued.

I think our multiples are stupid low but.

But that said the M&A deals we are doing as returns that we've got forecast are quite compelling and to the extent that we continue to have those type of opportunities. We'll go down that path I mean, I don't remember Matt talked about this I mean, the kolpak deals that eight times and then after synergies that we'll get from.

Integration price six so if we can if we can do deals like that that are high margin high cash flow conversion.

At those kind of multiples will be doing that.

For a long time before we do a lot of capital on stock repurchase, but if we can't then we will go the other way and these are not mutually exclusive like I said, we will be doing some stock repurchase stock opportunistically over the next year as well.

Okay last one from me.

Georgia is pushing that working capital a little bit.

Capex has been elevated over the past two years I think I read some articles.

Over the past week or so that you guys made some investments at the river no Riverdale mill.

In Virginia.

From a <unk>.

Lanning budgeting standpoint.

On the Capex side, Larry is that.

Can you give us a ballpark of that maybe its in that 160 range or something like that where you expect it to be down from where we are this year are you seeing.

Enough opportunities in the pipeline organically he might have a $180 million to $200 million of Capex next year.

I think the levels, we've been running the last couple of years or something I would continue to model and I think we've got opportunities, including our whole effort around Digitization I mean.

We believe that there's going to be substantive returns from us digitizing more.

And becoming much more customer friendly.

So we've got the opportunity to deploy capital in areas that we believe will return well for us. So I think that level is good for your modeling purposes.

Great. Thank you.

Thank you.

Once again to ask a question. Please press star one on your phone.

Please for our next question.

Okay.

And our next question is a follow up from Michael Hoffman of Stifel. Your line is open.

I just wanted to make sure I understood. The one answer the unequivocal, yes is the yes, the customers or the competitors are being disciplined or yes. They are being they are acting badly.

I don't know whether you call it acting badly but are they I think the question is are they being super competitive and the answer is yes.

But not irrational.

Otherwise.

We've always got somebody acting irrational somewhere in the World Michael Me, but when you've got as many plants as we do in the number of customers, there's always going to be something where some but some lone wolf out there is is totally irrational, but as abroad.

Answer.

Cross the customer base, no theyre not being irrational.

We're doing it at prices in some cases that were not going to do because we're not going to chase the volume Mike. We've said our focus is on value and delivering the best customer service in the world and being responsive and really treat our customers well and getting paid for the value and I said earlier, we don't need to chase volume Yeah right yeah.

I applaud the action I've seen it across other industries. When you do that you get the kind of results are producing but the other read through to this is the moment volume starts to improve.

Back right off of that so theres, a snap around price potential.

We would love to see that okay, great. Thank you.

Thank you.

And I'm seeing no further questions in the queue I would now like to turn the conference back to Matt <unk> for closing remarks.

Thank you everyone for joining today hope you have a wonderful day.

Yeah.

This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

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Good day and thank you for standing by welcome to the third quarter 2023 earnings Conference call.

At this time all 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 that session you will need to press star one on your phone you will then hear an automated message advising our hand is raised to withdraw your question. Please press star one again.

Today's conference is being recorded and I would now like to hand, the conference over to your speaker today, Mr. Matt Leahy. The Delaney. Please go ahead.

Thanks, and good morning, everyone welcome to <unk> third quarter fiscal 2023 earnings Conference call. This is Matt <unk>, Vice President of corporate development, and Investor Relations and I'm joined by <unk>, President and Chief Executive Officer, and Larry Hill, Shimer Gripes, Chief Financial Officer, We will take questions at the end of today.

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 turn to slide two.

Fixed can the appendix of today's presentation and now turn the presentation over to OLED on slide three thanks, Matt and good morning, everyone.

Our global <unk> team executed very well in our fiscal third quarter and posted strong performance. Despite the continuation of historic volume headwinds.

Our teams are leaning on our build to last strategy to drive results in this difficult environment.

I could not be proud of the work, we are doing to manage and improve the business and better serve customers.

While building the future.

Before covering our results I want to share an exciting update on two of our key mission in our built for that strategy.

Creating thriving communities.

Mission devoted to cultivating a culture of appreciation inclusion and recognition for all of our internal colleagues and external stakeholders in the third quarter, we launched our colleague stock purchase plan a program that enables colleagues from corporate.

Down through production to acquire drive class Acs at a discount to market prices.

I am proud to welcome our colleagues to the table as fellow owners of our company and look forward to expanding this program in the months and years to come.

Our service and our ability to deliver value.

Our aspirational benchmark of success is a score of 95 out of one hundreds.

This quarter, our global Consolidators call was $94 to just shy of that gold and an exceptional result, given the challenges our customers are facing in the markets.

Steadfast commitments to our customers is evidence we will provide you and support you and builds on our existing relationships in good times and in bad and you can count on us to deliver with quality and service Excellence every day.

Our dedication and relentless focus on customer service is core to who we are as an organization and our excellent CSI score June this challenging period as a reminder of the value we provide.

Now I'd like to shift focus back to financial results on slide four where I'll turn it over to Larry to kick things off.

Thanks, Joey and good morning, everyone.

Given <unk> overall financial performance relative to the operating environment. We have been in this year, we want to briefly step back from our single quarter results in just take stock of where the company is now relative to our initial view in fiscal 'twenty three guidance provided in December of 2022.

At that time, we have started to see demand start softness in many of our end markets and I discussed on our Q4 'twenty two earnings call, how given our level of uncertainty we had run a robust scenario analysis to arrive at the wide guidance range for 2023 of 802.

8% to $906 million in EBITDA, and $410 million to $460 million in free cash flow.

I'll be Frank with everyone. While we considered at the time the possibility of an extended slow demand cycle, we did not wait that heavily.

Doing so would imply we felt that we were headed into another industrial recession.

Clearly that initial assumption in December was wrong and while we may not be in a broad economic recession global manufacturing PMI remained below 50 for the 11 11 months in a row and our year to date volumes across GIC in Pts are both tracking down mid to high teens year to date.

That's not indicative of an industrial recession, and I am not sure what is.

A few points comparing that scenario against our current environment.

Number one recession scale drum volumes assumed 5% down versus actual Q3 are down over 10%.

Recession, <unk> index prices assume down 20% versus the actual down 15 through July .

Recession mail volumes assumed 5% down versus the national down over 20% in Q3 <unk>.

Recession, containerboard prices assumed 10% versus the actual Q3 down about 8%.

To summarize the current steel drum volumes are tracking down double the downside scenario mill volumes are down quadruple the downside scenario and overall pricing declined nearly match, our downside scenario and.

Yet our current guidance midpoint contemplates EBITDA and free cash flow that is over $100 million above the level, we provided for a recession scenario with only a partial lift from M&A.

I illustrate these points to try to hammer home, how well our teams are executing and I also want to share my heartfelt. Thanks to all of our <unk> colleagues for their commitment and dedication this year.

Larry just mentioned, we again reported strong adjusted EBITDA of 226, and a half million only 2 million shy of our previous quarter and less than 25 million short of the very strong 2022 comparative periods.

Our free cash generation was also extra ordinary reported at $167 1 million nearly equal to the very strong Q3 of 2022.

But on volumes, which were more or less 15% lower.

As mentioned in my opening remarks that free cash flow figure represents a conversion rate of over 70%, which is well ahead of our long term targets more than 50%.

Our disciplined approach to managing costs and working capital are driving this performance as we are truly playing with the entire P&L spanning from operational and commercial excellence initiatives to supply chain and sourcing and automation efforts.

To drive improvements improvements across our business.

We also announced another step up in our annual reoccurring dividends with our total quarterly dividend now at 52 and.

And 78.

For class, a and B shares respectively.

The strength of our balance sheet and growing free cash flow generation has widened our available capital allocation opportunities and we are excited to continue to deliver cash to our shareholders.

Lastly, I am excited to announce and not in addition to the <unk> portfolio. As this past week, we signed an agreement to acquire 51% ownership in co pack, which I would like to discuss more on the following slides.

On slide five please.

Co pack is a truly special paper converting business as the number two supplier of bulk and speciality petitions in North America.

Those aren't familiar competition is a device included commonly in corrugated boxes as a method of separating franchise concepts such as glass bottles.

Kolpak manufacturers a wide range of petitions from both <unk> and containerboard and predominantly serves the stable and growing food and beverage markets. They have two facilities in a ban on Ohio and in Fairfield, California sites, which is.

Ideally located to serve the high end wine bottling business in Napa Valley.

This business is immediately mark margin accretive to the global growth portfolio and is expected to contribute to EBITDA before synergies of $15 million to $20 million per year.

While the business is small relative to our global portfolio, several organic and inorganic growth opportunities remain to quickly grow and further scale. This business.

On top of the favorable Standalone financials, Kopecks converting network consumes approximately 25000 tons of paper per year.

Adding incremental downstream integration into our PPS network.

Last but certainly not least co packs management team is an excellent cultural fit to drive we have known and done business with the KOL family for years and share a set of values on how to take care of colleagues and serve customers.

We are excited to partner with co pack and this new venture and grow the business together.

I'll conclude by saying that even after the pro forma impact of this acquisition our balance sheet remains in great shape, and we sit below the midpoint of our targets leverage ratio range.

M&A pipeline remains robust and we intend to continue deploying capital towards more value accretive targets in the future.

Now I'd like to shift gears and take a deeper dive into our segment results. So please turn to slide six.

Our CIP business produced excellent results with flat year over year gross profit despite volume headwinds of nearly 20% in the Americas and nearly 10% in EMEA and APAC.

Once again the <unk>.

<unk> adherence to our value over volume philosophy in the markets.

The benefits of our cost out actions taken earlier this year and lower year over year input costs led to an adjusted EBITDA lift of nearly $10 million year over year, despite substantially lower revenues.

On the volume side, all Gi products and geographies showed softness compared to the prior year with global steel and resin based products, both down mid double digits on a per day basis.

Sequentially, our third quarter closely mirrored our second quarter with demand flat in EMEA, and APAC and slightly down in Latam and North America.

Through August we do not have a line of sight into any notable upward demand inflections and LG IP business and we will continue to manage this business as we have through the year with a focus on cost and customer service.

I commend our global team for their exemplary performance in the third quarter and throughout 2023.

Please turn to slide seven.

Paper packaging third quarter sales declined $146 million year over year, primarily due to demand weakness across our converting businesses and mills.

We took approximately 55000 tons of economic downtime across our mill system in the third quarter as we faced nearly 10% per day volume declines across our primary converting operations.

The continued low volume environment combined with rising OCC costs during the quarter led to both EBITDA.

And EBITDA margin compression compared to prior year that said.

Our PPS team utilizes the same playbook, SG IP and reference to value over volume and cost elimination, resulting in a still healthy seven 4% EBITDA margin for the quarter.

Our Pts team is managing the business very well against multiple headwinds and I'm proud of their results and continued dedication during these challenging times.

I will now turn the presentation over to Larry on slide eight.

Ali as only and I mentioned in earlier prepared remarks, our team is executing well in a historically challenging demand environment.

It is an enterprise wide effort to deliver these results and my heartfelt. Thanks goes out to each department within grape for delivering for our customers and our shareholders. This year.

Back to the Q3 financials sales decreased approximately $290 million year over year, primarily due to lower volumes and the impact of significantly lower steel costs.

Despite this adjusted EBIT declined less than $25 million, leading to over 150 basis points of margin expansion. Most impressive. However was our free cash flow performance cash flow dollars were down only $8 million year over year on substantially higher free cash flow conversion just to remind every.

One Q3 of last year was the highest third quarter cash flow in the history of our company and we missed it this quarter by only $8 million with 290 million lower sales volume is down nearly 15% year over year, higher capex and $11 million of higher interest costs related to higher rates and our recent M&A.

Activity that's truly outstanding.

Do not believe that that fact is fully recognized by the market.

We have raised the bar on performance and the elevated cash flow dynamic has opened up a lot of possibilities for further value creation through M&A and returning cash to shareholders.

And now I'd like to touch on our other capital allocation priorities on slide nine before discussing guidance.

Only discuss the recent acquisition of <unk> back in his remarks, we are pleased to be taking another step on our investor day commitment to grow downstream integration in our paper system at the same time, we are pursuing our resin based acquisition cap and GIC we are.

<unk> spent over $550 million on M&A over the last nine months, but our work is not done and our pipeline remains robust.

We expect to continue generating sufficient cash to fund various actionable opportunities and still maintain a strong balance sheet and.

In addition to pursuing inorganic growth I am excited to announce we are again, raising our dividend fulfilling our commitment we made to investors over a year ago while.

While our dividend yield may no longer be industry, leading thanks to some long overdue appreciation in our stock price. It is still one of the most compelling dividend offerings in our industry by raising our dividend for the coming year by 4%. We are reaffirming our commitment to deliver a cash directly back to our shareholders.

For $2 6 million shares and May execute further repurchases repurchases opportunistically in the coming year.

With that I'd like to close by discussing our revised guidance on slide 10.

As you can see the midpoint of our guidance for EBITDA and free cash flow remains unchanged give.

Given the closer line of sight to full year results. We are tightening the range by $10 million on each side and now expect full year EBITDA to land between $790 $820 million and full year free cash flow between 400 $430 million.

Our overall third quarter financial results largely met our expectations. However, the individual drivers different volumes were below plan in nearly all substrates, but margins were better for the reasons previously mentioned as with prior quarters. Our current forward guidance assumes no improvement of volumes through the end of the year. Additionally, we will plan to.

Sure our views on fiscal 'twenty four in our Q4 call in early December we expect to finish the year with another quarter of strong performance. Despite the persistent macroeconomic challenges, we face I'd like to remind everyone that the midpoint of our guidance range imply implies the best second best financial performance in Greg's 145 years.

History surpassed only by a record year in 2022.

We are confident that we have set a new bar for performance and expect that we will continue to deliver these exceptional results as we make future progress on our build to last journey.

Okay, I'll hand, it back to you to close on slide 11, Thanks, Larry.

Grids and dedication to excellence.

Build on less is how we demonstrate that perseverance and I see daily and the passion of our colleagues and decision making at every level of our business.

We are well positioned for a demand rebound whenever that comps and in the meantime, we are excited to continue building this business and making progress on our long term strategy.

We thank you for your interest in <unk> operator, please open the line to questions.

Thank you.

As a reminder to ask a question. Please press star one one on your phone and wait for your name to be announced to withdraw your question. Please press star one again.

Standby as we compile the Q&A roster.

One moment please for our first question.

And our first question will come from Michael Hoffman of Stifel. Your line is open.

Thank you.

Larry for taking the questions I look forward to seeing you next week in Paris and London.

When we finished <unk>.

My notes, if I'm wrong I'm wrong I had in.

My notes the cadence in the second half.

So it's kind of sort of the EBITDA is going to track around couple of hundred million dollars in the <unk> and then improve modestly into <unk>.

To hit the midpoint.

The outlook for <unk>, given your again repeated exceptional performance around cost.

The fourth quarter down pretty healthy.

How am I, what am I my interpretation.

<unk> of the.

The implied EBITDA being 185 versus something that was like.

<unk> $202 10 originally.

Yes, Michael Youre correct I mean.

Q3 ended up being better on the margin side volume degradation no was more than we expected and we don't see that mark that volume.

Picking up and we've seen AG perform less favorable than we normally do.

So with that that trend it just shifted things a bit we also had anticipated.

Yes that we would have to have some a tax refund item that is in Latin America is like 6 million Bucks, we would anticipate that might occur later it came into the third quarter is actually a noncash item.

As well, which really impacted cash flow a little bit, but it's really those two items.

Obviously, we hope volumes will pick up and surprise us, but in the fourth quarter, but we have not seen that in August yet.

Okay, and then to that point.

We've talked before about sort of major end markets and VIP for chemical paints and coatings and lubricants.

So are we hearing the message that it's not worth it.

Just not any better.

Or is some of those got worse.

Hi, Michael.

Our customers.

Telling us that it's not getting worse, but they're also telling us that they don't expect any improvements.

Over the next two quarters. So from what we hear we will be in the second quarter of 2020 ball before <unk>.

Even in a remote chance of improvements.

What we hear from our customers.

And then on TPS.

I cover things that recycle all this OCC and that in my coverage.

They are starting to see improving demand.

So is there a light at the end of the tunnel and all of this.

The finished goods inventory clearing and demand starts to improve.

Yes, Mike we're I think part of what <unk> created a little bit of demand on the waste companies for the OCC side of things is really just related to some new.

Mill capacity opening in recycled mills.

Outside of that we're not we saw a couple.

At times over the last month, or so where we saw a spike in orders for a week within the next week. They fell back off so we haven't seen anything sustained that would indicate any left and we're not hearing anything from our customers.

In the paper business.

That gives them any.

Real solid indications of a of a.

Inflexion point.

But it sounds like you feel like you have to hit a bottom if youre getting momentary spikes you probably hit a bottom yes, we hope so.

We think that but yes.

<unk>.

We thought the second half of this fiscal year would be good and I missed that call. So.

I'm not I'm not really good with my Crystal ball.

You and I both.

And then last one for me is why not own 100% of coal.

This is a deal that.

Because of our long relationship with them.

They approached us to help because of growth opportunities, but maybe I'll, let Matt talk a little bit about that because Matt leads our business development efforts.

<unk> dealt with the KOL family on this.

Yes, so Michael the reason to not own 100% is that we in the calls believed that there is substantial growth opportunity ahead, and we want to have aligned incentives as we try to grow that business together part of the partnership and the reason it makes sense to us because they see real opportunities in the market to grow substantially but they need to make sure they have the mill.

Really respected in the industry.

So are there weren't as their bond kind of thing they are good people there, Ohio people.

And they want to participate in the growth.

Okay. Thank you very much.

Thank you.

And one moment please for our next question.

Our next question will come from the line of Ghansham Panjabi of Baird. Your line is open.

Hey, guys good morning.

I know, it's very difficult to disaggregate, but on the volume decline in Gi P.

How would you separate end market weakness versus any incremental destocking at the customer level and I'm, just asking that because as Rob fuel prices started to decline for some of your customers. They did start to accelerate.

Destocking and just kind of wondering where we are in that phase.

Hi, <unk>.

We don't do things better.

Destocking has come to an end it but it's difficult to us too.

See whether it's really come to an end, but we believe what we see now is really this.

Manifestation of extremely low demand in the markets.

If that sales guidance.

And then in terms of the margin improvement in VIP, which has been obviously very notable in context of the volume declines you've cited how should we think about incrementals as volumes eventually recover and is asking because there are there any big cost reversal headwinds, we should keep in mind in that scenario.

But obviously on that side, we've we've taken a lot of cost outs. Some of it is structural with AWN.

Rooftop consolidations.

We also are able to have that basis to flex really really rapidly as demand goes down.

So if you if demand returns, we obviously have room to.

We can increase our capacity, let's say, 2% to 5% with it without any.

Cost increases spots if demand goes up further than that you would have to add shifts. So youll see variable cost goes up in line with the increased demands, but a lot of the cost we've taken out.

Sure.

Got it and then just one final one on.

Kolpak if you broke out the sales number I missed that so if you could please repeat that and then also as it relates to fiscal year 'twenty four I mean, obviously very early big range of outcomes is based on the macro complexity et cetera, but can you give us some of the known variances that we should keep in mind as we finalize our modeling estimates for fiscal year 'twenty four you have kolpak.

Obviously, the EBITDA contribution from there.

Any flow through from cost savings price declines in paper and anything you could share there.

Yes, Ghansham this is Matt on coal pack.

We didn't give a revenue number but EBITDA run rate EBITDA is about $17 million to $18 million.

And then that does not include kind of the incremental benefits that go to the mills from us absorbing more tons.

And you think you can think about that on a full year run rate basis, we're not going to give revenue right now.

Around margins, but that should be instructive as you build the model for next year.

I don't know you were asking for thinking about next year I don't know if we really have that yes, I would just say on the M&A side.

Between lease and jewelry and co pack and probably a $40 million of incremental revenue. This year, we'd take out two maybe on entertainment things that were up.

Up.

Net 38, and if you look at the numbers, we provided on each of those 33 for Lee, 20% <unk> 17 on pull back on a full year basis. So you'd have a lift of maybe 28 next year 30 kind of number.

And then on the cost Takeouts, we haven't quantified the.

Shift in volume related, but we think theres somewhere 10% to $13 million of <unk>.

Permanent structural change in how we're running the business.

Okay Super helpful. Thank you.

Thank you.

Again, one moment. Please next question.

Okay.

Our next question will come from George Staphos of Bank of America. Your line is open.

Thanks very much.

Hi, Ali Larry Matt Good morning.

Yes.

Congratulations on the performance.

I wanted to a lot of the questions have already sort of gotten at the heart of matter for you and again with really really good performance in light of things.

When you're talking to your customers only what are they saying about why they believe demand isn't lifting yet again I know, that's really really hard to quantify.

You cover so many markets and so many customers, but is there a common denominator or one or two things that they're seeing in terms of why we're not seeing demand lift.

Downstream.

Yes, so first of all when I speak to when I speak to a lot of them are big global customers.

Dave taking plants down they are taking a lot of economic downtime.

It's really back to what we have discussed previously that the economy has shifted from a buying.

Buying things to going out and consumer spending.

That money on services instead.

I saw recently a couple of articles from the big box retailers in terms of how they are suffering.

The closest I can get and then.

In terms of.

Just the interest rates people are not moving houses as they have been means.

It means that they don't buy.

<unk> moved houses.

I said it pains that sort of thing so but to put my finger on one particular item, it's really really difficult.

And on the AG side, you said AG is maybe trending a little bit less positive than you normally would like.

And is there any anything to takeaway from that yes.

What I've been told it's also on AG is that in times of hardship what the individual farmers tend to do is to use less fertilizer and less volatile and that sort of thing.

Yes.

Part of <unk>.

Managing that business.

Understood understood.

Can you talk about.

What price cost benefit you might have gotten from steel in the fiscal third and what you might be expecting in the fiscal fourth and then back to <unk> earlier question. So should we take away that as things ultimately hopefully pick up maybe.

Maybe $20 million of costs that will come back into the business on an annualized basis.

George Yes, there was a slight sleep better.

Situation we added.

On a year over year basis on steel because last year, we had a rapidly decreasing as steel cost curve. So we had higher inventory walking through but it was not material for the quarter.

As to that $20 million differential on that over time number I mentioned.

Yes, it will come back, but that only comes back with with sales and and that we leveraging our fixed cost footprint because.

Because we arent building new factories to get that.

So it'll be adding labor back, but it won't be adding anything on depreciation and other costs that go in so.

Still nice margin lift.

Yes, George I guess I get that just in terms of when we do our stack we need to make sure that we have.

Kind of a small negative slice for the 'twenty, what I'm getting after volume after incremental margins and so on.

George it's important to mention one important dimensions those costs don't come back at the same rate sales deal. Okay. So it's.

It's not one to one relationship demand for improved sales dollars improve cost come right back and they come back a lot more slowly and there is a lot of kind of slack capacity that we have in our system right now and existing shifts. So we can handle more demand at an inflection without layering in incremental costs right away, but over time.

As sales come back Thats, obviously, a good problem to solve that means demand from Korea and so it all he was mentioning if you go up 2% to 3% we don't have at a dime you got.

20%, Yeah, you have to add a shift or something yeah, and Josh just a final comment on that.

No Im sorry, yes.

<unk> costs in our plants in terms of not a shift to produce.

Products that we make more margin so that's not our strategy.

No. It makes sense. So my last question and I'll turn it over.

Same theme in terms of okay, let's get on the other side of the mountain and volumes are better and so on where to hopefully a better <unk>.

Four.

Free cash flow conversion has been excellent this year well above your goal in the last quarter.

No and then tell me a little bit about the program that you're offering your employees to buy stock at a discount.

What did you compare that with in terms of other ways to incentivize performance.

And ownership thanks, guys.

So.

You too.

Things on that I mean, it's all going to depend on the pace of the increase of demand George and also then where does the cost of steel and up is the big driver for us in terms of what will be the impact on working capital build.

OCC will play into that as well obviously if demand comes back you would think that's going to drive steel cost up in OCC, but.

We would still have our goal to be 50% or better and we have.

Other opportunities within our supply chain.

Initiatives that we believe can keep us at that.

At that our goal levels so.

We.

Execute on our M&A strategy.

In both the resin business and also in the downstream in our paper business with respect to the.

The stock purchase plan for our colleagues this actually emanated from request from our employees.

We had a number of request as we went around new plants around the world.

From probably colleagues who had worked at other places that had this and they said hey look we really like what's going on in the company.

Could we entertain something like this and so we presented the board they approved it.

We had good take up in the first initial.

Quarter of application and have had really nice feedback from our colleagues. So we look forward to it growing from here.

Was there any sort of discussion about like what kind of discount you're giving your employees to buy the stock right.

Others would like a discount to the market, but yes, it's a 15% discount which is pretty standard in these programs.

Okay.

Alright, guys I appreciate it thanks, so much.

Thanks George.

Thank you.

Again to ask a question. Please press star one on your phone some wait for your name to be announced literally your question. Please press star one again.

One moment please for our next question.

Our next question will come from Gabe Haiti of Wells Fargo. Your line is open.

Oh, Hey, Larry Matt Good morning.

Hey, David.

I'm curious.

Again, a lot of ground's been covered.

And it's challenging to answer a question like this but.

From you from a competitive landscape standpoint.

More specifically thinking about the more mature markets in North America and Europe .

Do you believe that we've seen sort of higher cost of capital.

Manifests and different pricing behavior or competitive activity in the markets in which you participate.

Or is that something that we still think is on the call.

Would be my first question.

Yes, I don't know that we would necessarily attribute.

Competitive behavior to their cost of capital although.

Obviously in our VIP business one of our primary competitors is very highly levered. So.

Does put pressure on them, but I think it puts pressure in the right direction.

So.

That's a good thing I mean, the more the place where we're seeing that really play out more is in our strategic M&A activities I mean, it's.

Clearly put.

The P/e model in a much different position than they were two or three years ago.

Puts us in a very very good position relative to what we're trying to do in the market.

So I know thats not exactly responsive to what your question was the game but.

We see the favorability there.

Not seeing any thing.

<unk> marketplace that I would attribute to their cost of capital at least that we could we can discern.

Sure.

Maybe ask the question a little bit better.

In a down demand environment would be.

Intuitively, how you would think about competitors coming out and maybe being a little bit more aggressive pickup business and keep here.

Are you seeing that or.

Again kind of it seems like based on your results. The answer is no and in fact, you're able to.

<unk>.

Price for value.

Okay. If I can I can give you a crystal clear yes to that.

Yeah.

Okay.

Alright, and then I.

I guess, just one last one.

Appreciating that there's some math behind it but you made a pretty strong statement that.

So it sounds like you're going to be out.

Doing some M&A theres the pipeline is pretty full.

Is there a point at which share repurchase becomes more compelling than maybe deploying capital on the M&A side or is it not.

A binary decision like that.

Yes, My financial return standpoint.

Yes, I don't I don't think it's binary yes, if we found that we could not deploy.

Yes, I think our multiples are stupid low but.

But that said the M&A deals we are doing the returns that we've got forecast are quite compelling and to the extent that we continue to have those type of opportunities. We'll go down that path I mean, I don't remember <unk> talked about this I mean, the kolpak deals that eight times and then after synergies that we'll get from.

Integration price six so if we can if we can do deals like that that are high margin high cash flow conversion.

At those kind of multiples will be doing that.

For a long time before we do a lot of capital on stock repurchase, but if we can't then we will go the other way and and these are not mutually exclusive like I said, we will be doing some stock repurchase stock opportunistically over the next year as well.

Okay last one for me.

I know George was pushing that working capital a little bit.

Capex has been elevated over the past two years I think I read some articles.

Over the past week or so that you guys made some investments that the rumor mill Riverdale mill.

In Virginia.

At least from a planning budgeting standpoint.

On the Capex side, Larry is that can.

Can you give us a ballpark of that.

Maybe it's in that 160 range or something like that where you expect it to be down from where we are this year or are you seeing.

Enough opportunities in the pipeline organically he might have a $180 million to $200 million of Capex next year.

I think the levels, we've been running last couple of years or something I would continue to model and I think we've got.

Including our whole effort around Digitization I mean.

We believe that there's going to be substandard returns from us digitizing more.

And becoming much more customer friendly.

No.

We've got the opportunity to deploy capital in areas that we believe will return well for us. So I think that level is good for your modeling purposes.

Great. Thank you.

Thank you.

And once again to ask a question. Please press star one on your phone.

One moment please for our next question.

Okay.

And our next question is a follow up from Michael Hoffman of Stifel. Your line is open.

Thank you I just wanted to make sure I understood. The one answer the unequivocal, yes is the yes, the customers or the competitors are being disciplined or yes, they're being they're acting badly.

I don't know whether you call it acting badly but are they I think the question is are they being super competitive and the answer is yes.

So not irrational.

Otherwise.

We've always got somebody acting irrational somewhere in a rural Michael me, but when you've got as many plants as we do in the number of customers. There is always going to be something where some but some lone wolf out there is totally irrational, but as abroad.

Across.

Across the customer base, no theyre not being irrational.

They are doing it at prices in some cases that were not going to do because we're not going to chase. The volume like we've said our focus is on value and delivering the best customer service in the world and being responsive and really treating our customers well and getting paid for the value and I said earlier, we don't need to chase volume.

Yes.

Applaud the action I've seen it across other industries. When you do that you get the kind of results youre producing but the other read through to this is the moment volume starts to improve.

They back right off of that so there's a snap around price potential.

We would love to see that okay, great. Thank you.

Thank you.

And I'm seeing no further questions in the queue I would now like to turn the conference back to Matt <unk> for closing remarks.

Thank you everyone for joining today I hope you have a wonderful day.

This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

Q3 2023 Greif Inc Earnings Call

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