Q2 2024 Greif Inc Earnings Call
Okay.
Operator: Good day, and thank you for standing by. Welcome to the Greif Second Quarter 2024 Earnings Conference Call.
Good day, and thank you for standing by.
Speaker Change: Welcome to the Great second quarter of 2024 earnings Conference call.
Operator: 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 the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press R11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill D'Onofrio, Vice President of Investment Relations and Corporate Development. Please go ahead.
At this time all participants are in a listen only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question. During this session you will need to press star one one on your telephone.
Speaker Change: Didn't hear an automated message advising your hand this race.
Speaker Change: To withdraw your question. Please press star one again please.
Speaker Change: Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand, the conference over to your Speaker today building off for Ya, Vice President of Investor Relations and corporate development. Please go ahead.
Bill D'Onofrio: Thank you and good day, everyone. Welcome to Greif's fiscal second quarter 2024 earnings conference call. During the call today, our Chief Executive Officer, Ole Rosgaard, will provide an update on our second quarter results, driven by our bill-to-last strategy, as well as current business trends. Our Chief Financial Officer, Larry Hilsheimer, will provide an overview of our financial results and our fiscal full-year guidance. In accordance with the Fair Disclosure Regulation, please ask questions regarding topics you consider important because we are prohibited from discussing material, non-public information with you on an individual basis.
Speaker Change: Thank you.
Speaker Change: Welcome to <unk> fiscal second quarter 2024 earnings conference call. During the call today are Chief Executive Officer, <unk> will provide you with an update on our second quarter results driven by our build to last strategy as well as current business trends, our Chief Financial Officer, Larry Hill Shimer will.
An overview of our financial results and our fiscal full year guidance in accordance with regulation fair disclosure for you to ask questions regarding topics you consider important because we are prohibited from discussing material nonpublic information with you on an individual basis. Please turn to slide two.
Bill D'Onofrio: Please turn to slide two. During today's call, we will make forward-looking statements involving plans, expectations, and beliefs related to future events, but actual results could differ materially from those discussed.
Speaker Change: During today's call, we will make forward looking statements involving plans expectations and beliefs related to future events.
Speaker Change: 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 that can be found in the appendix of today's presentation I'll now turn the presentation over to <unk> on slide three thanks, Bill and Hello, everyone and thank you for <unk>.
Bill D'Onofrio: Additionally, we will be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metrics that can be found in the appendix of today's presentation. I'll now turn the presentation over to Ole on slide three. Thanks, Bill.
Ole G. Rosgaard: Hello, everyone, and thank you for joining us. We are excited to discuss another successful quarter for Greif, underpinned by solid execution across the business through the Greif business system. Before we dive into our results, I would like to widen our lens and discuss key updates on our Build to Last strategy, specifically touching on each of our four missions for value creation. This will help contextualize our continued solid performance despite the persistent and varied headwinds our business has recently faced, as well as why we believe Greif is positioned for near and long-term outperformance.
Speaker Change: Joining us we are excited to discuss another successful quarter for rice underpinned.
Speaker Change: Underpinned by solid execution across the business through the great business system before we dive into our results I would like to widen our lens and discuss key updates on our build to last strategy, specifically touching on each of our four missions for value creation.
Speaker Change: This will help contextualize our continued solid performance despite the persistence and Veritas headwinds our business has recently faced as well that's why we believe price.
Speaker Change: Is positioned for near and long term outperformance.
Ole G. Rosgaard: First, I will discuss our creating thriving communities and delivering legendary customer service pillars through the principles of the service profit chain. I will then touch on how we protect our future for our customers and our communities. Larry will discuss our quarterly results and how we ensure financial strength through strategic capital allocation. As a reminder to all, our vision is to be the best performing customer service company in the world. We consider our primary customers to be our end product customers, our supply chain partners, our colleagues, and our financial stakeholders. Everything we do focuses on improving our service to these customers through dedication to the principles of the service proper chain, which I'll now discuss on slide four.
First I will discuss our creating thriving communities and.
Speaker Change: Delivering legendary customer service.
Speaker Change: The principles of the service profit chain.
Speaker Change: Touch on how we protect our future for our customers and our communities Larry will discuss our quarterly results and how we ensure financial strength through strategic capital allocation.
Speaker Change: As a reminder to all our vision is to be the best performing customer service company in the world.
Speaker Change: We consider our primary customers she'll be our end product customers, our supply chain partners, our colleagues and our financial stakeholders.
Speaker Change: Everything we do focuses on improving our service to these customers through the indications are the principles of the service profit chain, which I'll now discuss on slide four.
Ole G. Rosgaard: Our service profit chain has created a competitive advantage for Greif through investing in our people. This creates a flywheel for value creation as employees are engaged and dedicated to providing legendary customer service. Customers recognize the value Greif delivers from a differentiated product and service standpoint. This culminates in improved customer loyalty and increased share of wallets over time. Due to our steadfast conviction in the power of this value creation model, we monitor the engagement of our colleagues and customers very closely. The Net Promoter Score measures a customer's willingness to actively promote on our behalf, not simply passive satisfaction with our product.
Speaker Change: Yeah.
Speaker Change: Our service profit chain has created a competitive advantages for growth through investing in our people. This creates a flywheel for.
Speaker Change: Value creation as colleagues are engaged and dedicated to providing legendary customer service customers recognize the value <unk> delivers from a differentiated product and service standpoint.
Speaker Change: This culminates and improve customer loyalty and increase share of wallet over time.
Speaker Change: Due to our steadfast conviction in the power of this value creation model, we monitor engagement of our colleagues and customers very closely.
Speaker Change: Net promoter score make sure our customers willingness to actively promote on our behalf not simply passing satisfaction in our products.
Ole G. Rosgaard: Our Net Promoter Score continues to consistently improve with each survey. Our most recent score of 68, completed this April, is well above the average across the manufacturing sector of 49, which reflects that our customers advocate strongly on our behalf. We likewise measure colleague engagement through an independent survey conducted by Gallup.
Speaker Change: Our our net promoter score continue to consistently improve with each survey most.
Speaker Change: Most recent score of 68 completed this April is well above the average across the manufacturing sector.
Speaker Change: 49, which reflects that our customers' advocate strongly on our behalf.
Speaker Change: We likewise measure colleague engagement through an independent survey conducted by Gallup.
Ole G. Rosgaard: This score, likewise, has continuously improved, and the most recent result of the 85th percentile puts Greif in the top tier of engagement among all manufacturing companies. We are proud to have been awarded the 2024 Exceptional Workplace Award by Gallup in recognition of our people-first culture. This award follows last quarter when we were named for the second year in a row among Newsweek's Top 100 Global Most Loved Workplaces. These statistics are meaningful as they demonstrate our people are with us on our build-to-last journey and, alongside our Greif business system, are the enablers which drive our performance each quarter and are fundamentally changing how we operate and deliver results as a company. Let's now discuss protecting our future on slide 5.
Speaker Change: This call and likewise is continuously improves and the most recent Michelle it's off the 85th percentile puts price in the top tier of engagement among all the manufacturing companies.
Speaker Change: We are proud to have been awarded the 2020 for exceptional workplace Awards.
Speaker Change: In recognition of our people first culture.
Speaker Change: This award follows from last quarter. When we were named for the second year in a row among newsweek's top 100 global most loved workplaces.
Speaker Change: These statistics are meaningful as they demonstrate our people are with us on our build to last journey and alongside our Greif business system Adia enabled us which drive our performance each quarter and are fundamentally changing how we operate and deliver results as a company.
Speaker Change: Let's now discuss protecting our future on slide five.
Ole G. Rosgaard: Great sustainability is ingrained in our culture, our processes, systems, and relationships with our customers and suppliers. It's our belief that in order to provide legendary customer service, we must understand the needs of our customers and create solutions alongside them. This both continuously improves our own sustainability journey and also improves customer loyalty and share wallets over time. This quarter, we released our 15th annual sustainability report, which provides a comprehensive overview of our 2030 targets, as well as recent milestones and progress.
Speaker Change: And sustainability is ingrained in our culture, our processes systems and relationships with our customers and suppliers.
Speaker Change: It's our belief that in order to provide legendary customer service, we must understand the needs of our customers and create solutions alongside them.
Speaker Change: This both continuously improves our own sustainability journey, and also improves customer loyalty and share of wallet over time.
Speaker Change: This quarter, we released our 15th annual sustainability report, which provides a comprehensive overview of our 2030 targets as well as recent milestones and progress.
Ole G. Rosgaard: Sustainability is another way in which Greif differentiates through the service-profit chain and has bolstered our profitable growth over time. We encourage all our stakeholders to read our latest sustainability report, which is available at greif.com forward slash sustainability. Please turn to slide 6.
Speaker Change: Sustainability is another way in which price differentiation to the service profit chain and has bolstered our profitable growth over time.
Speaker Change: We encourage all of our stakeholders to read our latest sustainability report, which is available at <unk> com forward slash sustainability.
Speaker Change: Please turn to slide six.
Ole G. Rosgaard: This dedication to the service profit chain and its resulting value creation flywheel has enabled us to accelerate our growth and transform our portfolio for the future. As we announced at our 2022 Investor Day and have discussed often since, we are pursuing an acquisition strategy to become a global leader in high-performance, high-margin, small plastic containers and jerry cans. This product group has an addressable market of over $3 billion and is favorably exposed to secular growth markets such as Flavors and Frequencies, Food and Beverage, Pharma, and Ag Chem.
Speaker Change: Yeah.
Speaker Change: This dedication to the service profit chain and its resulting value creation flywheel has enabled us to accelerate our growth and transform our portfolio for the future.
Speaker Change: As we announced at our 2022 Investor day and have discussed often since we are pursuing an acquisition strategy to comment to become a global leader in high performance high margin small plastic containers gerrick.
Speaker Change: This product group has an addressable market of over 3 billion and is favorably exposed to similar growth markets, such as flavor and fragrances food and beverage pharma and academic.
Ole G. Rosgaard: In March, we completed our acquisition of IPAC-Chem and, in doing so, have now solidified the global platform that we committed to growing within the high-performance portion of that $3 billion addressable market. Integration into Greif is going well, and we are confident in our ability to capture the 7 million obscenities previously communicated.
Speaker Change: In March we completed our acquisition of AIPAC, Kim and in doing so have now solidified the global platform that we committed to growing within the high performance portion of that 3 billion addressable markets.
Speaker Change: Integration integration is going well and we are confident in our ability to capture the $7 million of synergies as previously communicated.
Ole G. Rosgaard: As a reminder, the primary synergy opportunities are in the form of raw material scale advantages and the expected and planned elimination of executive leadership overlap, both of which are already largely in effect. We are extremely pleased with our investments and value creation along the way. However, I'll also note that given recent short-term softness in the global ag-care market, our revised Fiscal 24 guidance reflects an expectation of a smaller contribution for the six-month ownership in Fiscal 24 than previously communicated run rates. Additionally, earnings for fiscal year 2024 will be impacted by a one-time expected $8.4 million inventory revaluation expense, approximately $6.7 million of which was included in the second quarter results.
As a reminder, the primary synergy opportunities.
Speaker Change: In the form of raw materials scale advantage and expected and planned elimination of executive leadership overlap both of which are already largely in effects.
Speaker Change: We are extremely pleased with our investments in value creation underway. However, I'll also note that given recent short term softness in the global AG Chem market.
Speaker Change: Revised fiscal 'twenty four guidance reflects an expectation of smaller contribution for the six months of ownership in fiscal 'twenty than.
Speaker Change: And then previously commuted communicated run rates.
Speaker Change: Additionally earnings for fiscal year, 'twenty, four will be impacted by a one time expected $8 4 million inventory revaluation expense.
Speaker Change: <unk> $6 7 million of which was included in the second quarter results.
Ole G. Rosgaard: This combined operating expertise of our Greif and legacy IPAC-10 colleagues working together over the past 60 days has further strengthened our conviction in the solid organic growth fundamentals of the business as well as the long-term earnings power of the capital we have invested in the small plastic and jerrycan markets. Please turn to slide 7 as we shift gears to the quarter and a discussion of our region's operating environment. In the past three months, we have seen a continuation of the same mixed demand trends as in recent quarters.
Speaker Change: This combined operating.
Speaker Change: The combined operating expertise of our rice and legacy AIPAC and colleagues working together over the past 60 days that's.
Speaker Change: As further strengthened our conviction in the solid organic growth fundamentals of the business as well as long term earnings power of our capital we have invested in the small plastic and European markets.
Ole G. Rosgaard: In APAC, which, as a reminder, is approximately 5% of total company net sales, positive demand signals were seen in Q1. However, in Q2, trends reversed after the market's strong demand expectations for Chinese New Year fell short of expectations, and a quick but significant de-stocking occurred. That lower level of demand has thus far persisted into Q3. In EMEA, Greif's largest G.I.P. In the market, positive demand trends have continued for the second quarter in a row, with growth coming broadly across end markets, but notably in chemical and lubricant demand. In the Americas, LATAM was flat year over year with mixed demand.
Speaker Change: Please turn to slide seven as we shift gears to the quarter and a discussion of our recent operating environments.
Speaker Change: In the past three months, we have seen a continuation of the same mixed demand trends as in recent quarters.
Speaker Change: APAC, which as a reminder, it's approximately 5% of total company net sales were showing.
Speaker Change: Demand signals in Q1, however, in Q2 trends reversed after the mark after the market strong demand expectations for Chinese new year fell short of expectations and a quick but significant destocking occurred.
Speaker Change: Lower level of demand as thus far persisted into Q3 in EMEA right.
Speaker Change: Largest CIP market positive demand trends have continued for the second quarter in a row with growth coming broadly across end markets, but notably in chemical and lubricant demand.
Speaker Change: In the Americas, Latam was flat year over year with makes demands.
Ole G. Rosgaard: However, we are encouraged that LATAM saw the same growth in chemical markets as EMEA, despite slower demand from Ag Chem. North America, likewise, remains mixed but has improved overall on a sequential basis. Although overall chemical demand remains weak in that region, we anticipate continued sequential demand improvements in Q3 in North America, as well as LATAM and AMEA, which is reflected in our revised guidance. We'll be monitoring our key end markets closely and responding to real-time demand changes to ensure we fully capture opportunities as they present themselves.
Speaker Change: However, we are encouraged that Latam saw the same growth in chemical markets as EMEA, despite slower demand from axiom.
Speaker Change: North America, Likewise remains mixed but has improved overall on a sequential basis.
Speaker Change: Although overall chemical demand remains weak in that region. We anticipate continued sequential demand improvements in Q3 in North America, as well as Latam and EMEA, which is reflected in our revised guidance.
Speaker Change: We will be monitoring monitoring our key end markets closely and responding to real time demand changes to ensure we fully capture opportunities as they present themselves.
Ole G. Rosgaard: Lastly, our North American paper business continues a slow but steady improvement in container board driven by our bulk box business, which feeds into e-commerce channels offset by softer, although sequentially improving, human core demands driven by stronger construction and film core volumes. We also expect this modest improvement trend to continue. In May, we saw that continuation with our paper business showing modest improvement led by construction and film demands in URB. We anticipate continued improvements in container boards driven by the opening of our Dallas sheet feeder.
Speaker Change: Lastly, our North American paper business continues to slow, but steady improvement in container board driven by our bulk box business with speeds into ecommerce channels offset by softer although sequentially improving <unk> core demands driven by stronger construction and film called Volte.
Speaker Change: We also expect this modest improvement trend to continue.
Speaker Change: In May we saw that continuation with our paper business showing modest improvement led by construction and film demands and <unk> and anticipate continued improvements in containerboard driven by the opening of our Dallas sheet feeder CIP EMEA, North America and Latam all.
Ole G. Rosgaard: GIP, EMEA, North America, and LATAM all show sequential improvement over April with APAC demand mixed with slower Chinese demand and stronger Southeast Asian demand. Overall, when talking to our customers, there is generally a generally a positive tone. However, it remains cobbled, with our customers indicating continued short visibility to their own demands, resulting in uncertainty about the duration of these improving demand trends. For that reason, we are continuing to be prudent on cost management, while also monitoring end markets closely for more clearly defined signs of improvements. And with that, I will now turn it over to Larry to walk you through our detailed financial results on slide 8.
Speaker Change: <unk> showed sequential improvement over April with APAC demand mixed with smaller China demand and stronger southeast Asia demands.
Speaker Change: Overall, we're talking to our customers that is generally positive temperature. However, it remains coupled with our customers, indicating continued short visibility so they own demands, resulting in uncertainty to the duration of this improving demand trends for that reason we are continuing to report.
Speaker Change: On cost management, while also monitoring in pockets closely for more clearly defined science of improvements and with that I'll now turn it over to Larry to walk you through our detailed financial results on slide eight.
Larry Hilsheimer: Thank you, Ole, and thank you all for joining our call. Our second quarter results reflect improving but still weak demand and the extremely challenging price-cost dynamics in our paper business, resulting in $170 million of adjusted EBITDA, $59 million of free cash flow, and Adjusted EPS of $0.82 per share. As Ole mentioned, we are leaning on the Greif business system to serve our customers with excellence, manage costs, and diligently monitor our business for signs of an inflection. The Greif Business System champions continuous improvement, accelerates plant modernization and automation, as well as creates value through GEMBA and Six Sigma programs.
Larry: Thank you Julie and thank you all for joining our call.
Larry: Our second quarter results reflect improving but still weak demand and the extremely challenging price cost dynamic in our paper business, resulting in a $170 million of adjusted EBITDA $59 million of free cash flow.
And adjusted EPS of <unk> 82 per share.
Larry: As already mentioned, we are leaning on the great business system to serve our customers with excellence manage cost and diligently monitor our business for signs of an inflection.
Larry: The great business system champions for continuous improvement accelerate plant modernization and automation as well as creates value through gamba and six Sigma programs. Using these tools, we continue to drive structural cost out and build productivity gains that not only help optimize our current business, but also provides the foundation to.
Larry Hilsheimer: Using these tools, we continue to drive structural costs out and build productivity gains that not only help optimize our current business but also provide the foundation to accelerate integration and synergy capture as we grow through acquisition. While managing the present, we are also growing for the future through the IPAC-CHEM acquisition and through high-value capital projects such as our recently opened Dallas Sheet Feeder. These investments are critical to our long-term vision and strategy and will position us well for outperformance once markets return to a normalized state.
Larry: Accelerate integration and synergy capture as we grow through acquisitions.
Larry: Managing the present, we are also growing for the future through the AIPAC, Ken acquisition through high value capital projects, such as our recently opened Dallas seat Theatre.
Larry: These investments are critical to our long term vision and strategy and will position us well for outperformance once markets return to a normalized state.
Larry Hilsheimer: We are reinstating a guidance range given our confidence in our view of the remainder of our fiscal year. We are pleased to raise the low end from our prior $610 million to $675 million and add a high end of $725 million.
Larry: We are re in stating a guidance range given our confidence in our view of the remainder of our fiscal year. We are pleased to raise the low end from our prior $610 million to $675 million and at a high end of 600 $725 million.
Larry Hilsheimer: Before discussing guidance assumptions, let me provide a segment performance update starting on slide 9. For GIP, continuing weak but improving demand led to a year-over-year sales decline of $57 million and margin compression of 1.5% year-over-year. In addition, SG&A costs were up year-over-year in line with our expectations communicated in our Q4 call. This is primarily a result of DNA's step up on new acquisitions, as well as our ongoing strategic investments in IT and global operating excellence, which, while expensed, we view as strategic capital we are investing for long-term margin improvement.
Larry: Before discussing guidance assumptions, let me provide a segment performance update starting on slide nine.
Larry: For GIC, continuing weak, but improving demand led to a year over year sales decline of $57 million and margin compression of one 5% year over year.
Larry: Addition, SG&A costs were up year over year in line with our expectations communicated in our Q4 call. This is primarily a result of DNA step up on new acquisitions as well as our ongoing strategic investments in it.
Larry: And global operating excellence, which while expense we view as strategic capital we are investing for long term margin improvement.
Larry Hilsheimer: Despite the incremental cost of these investments, margins rallied strongly by over 4.4% on a sequential basis from fiscal Q1 2024. As Ole touched on, EMEA continued to improve, underpinned by strong lube and chemical markets. The Americas remain flat to down as lube and chemical demand improvement has not yet been seen.
Larry: Despite the incremental cost of these investments margins rallied strongly by over four 4% on a sequential basis from fiscal Q1, 'twenty 'twenty four.
Larry: As already touched on EMEA continued to improve underpinned by strong lube and chemical markets. The Americas remained flat to down as lube and chemical demand improvements has not yet been seen however, North America has seen overall sequential improvement and we do anticipate that recovery to continue into the second half of our fiscal.
Larry Hilsheimer: However, North America has seen overall sequential improvement, and we do anticipate that recovery to continue into the second half of our fiscal year. Please turn to slide 10 for the PPS results. The continued delayed recognition of announced pricing increases combined with the rising OCC cost has led to a significant margin compression of over 10% despite flat sales. Our PPS team is continuing to manage controllables well, including successful price increase implementation on our non-index-based test. However, the outsized impact of the index-driven price-cost dynamic, which we still view to not be in sync with real market trends, is a headwind we have and will continue to aggressively work to offset.
Larry: Year.
Speaker Change: Please turn to slide 10 for our PPS results.
Speaker Change: We continued delayed recognition of announced pricing increases combined with the rising OCC costs has led to a significant margin compression of over 10% Despite flat sales.
Speaker Change: Our PPS team is continuing to manage controllable as well, including successful price increase implementation on our non index based customers.
Speaker Change: However, the outsized impact of the index, driven price cost dynamic, which we still view to not be in sync with real margin trends is a headwind we have and will continue to aggressively work to offset on the volume side in containerboard, we are seeing modest improvement, while achieving core end markets remain flat to down.
Larry Hilsheimer: On the volume side, in container board, we are seeing modest improvement, while the tubing core and markets remain flat to down. While managing the present, we are also continuing to invest in the future within this product group, resulting in SG&A cost inflation for similar strategic initiatives as discussed with GIP. Please turn to slide 11 for updated guidance and out. As previously stated, we are providing a guidance EBITDA range of 675 to 725 million, reflecting an increase of 65 million on the low end. The high end of our guidance range reflects recognition of our announced paper price increases, as well as continued margin improvement in GIP. By contrast, the low end of our guidance range assumes no paper price recognition.
Speaker Change: While managing the present, we are also continuing to invest in the future within this product group, resulting in SG&A cost inflation for similar strategic initiatives as discussed with GIC. Please.
Speaker Change: Please turn to slide 11 for our updated guidance and outlook.
Speaker Change: As previously stated we are providing a guidance EBITDA range of $675 to $725 million, reflecting an increase of $65 million on the low end.
Speaker Change: High end of our guidance range reflects recognition of our announced paper price increases as well as continued margin improvement in VIP by contrast, the low end of our guidance range assumes no paper price recognition.
Larry Hilsheimer: Slight further OCC cost inflation and no margin improvement in GIP. On the volume side, our guidance change of $22-62 million of EBITDA assumes further contribution from improving volume trends across most of our products and markets. As Ole mentioned earlier, our incremental EBITDA contribution from IFAC-CHEM is less than the previously disclosed run rate due to a four-year impact of purchase accounting of $8.4 million, as well as short-term slowness in the global ag market.
Speaker Change: Slight further OCC cost inflation and no margin improvement in Gi P. On the volume side, our guidance change of 22% to $62 million of EBITDA at Hughes.
Speaker Change: Further contribution of the improving volume trends across most of our products and end markets as already mentioned earlier, our incremental EBIT contribution for iPad is less than previously disclosed run rate due to a full year impact of purchase accounting of $8 $4 million as well as Sean.
Speaker Change: It turns slowly slowness in the global AG markets.
Larry Hilsheimer: Lastly, we anticipate volume-related as well as inflationary transport and manufacturing headwinds of 19 to 39 million of EBITDA relative to prior guidance. As for free cash flow, we are leaving our previous guidance unchanged as our midpoint at $200 million for the full year. We anticipate that the increase in our EBITDA guidance midpoint of $90 million will not result in incremental cash flow within fiscal 24. The drivers of this are, at the midpoint, higher spend on strategic CapEx and efficiency-related maintenance projects for $20 million, higher cash interest, primarily related to the acquisition of IPAC's $25 million, higher cash taxes of $26 million related to improved earnings, as well as the failure of Congress to extend favorable tax provisions. Higher working capital needs to address improving demand of $32 million, partially offset by a favorable $13 million of other miscellaneous cash.
Speaker Change: Lastly, we anticipate volume related as well as inflationary transport and manufacturing headwinds of 19% to 39 million of EBITDA relative to prior guidance.
Speaker Change: As for free cash flow, we are leaving our previous guidance unchanged as our midpoint at $200 million for the full year, we anticipate that the increase in our EBIT guidance midpoint of $90 million will not result in incremental cash flow within fiscal 'twenty for the drivers of this are at the mid point higher.
Speaker Change: Spend on strategic Capex and efficiency related maintenance projects were 20 million higher cash interest primarily related to the acquisition of apex.
Speaker Change: 25 million higher cash taxes of $26 million related to improved earnings as well as the failure of Congress to extend favorable tax provisions higher working capital needs to address in roofing demand of $32 million, partially offset by a favorable $13 million of other miscellaneous cash items.
Larry Hilsheimer: As Ole mentioned in his remarks, while we continue to monitor our business near-term, it is critical we also maintain a long-term lens and invest for the future. As such, I would like to discuss capital allocations on slide 12. Under Bill to Last, which we define as fiscal 22 through present, we have deployed over $2.6 billion of capital. Our capital allocation framework is simple. We first invest in two non-negotiables, our safety and maintenance CapEx, which keeps our cash machine running, and our regular and increasing dividends. While critical, these uses are not a significant portion of total cash generated in that same time frame.
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Speaker Change: As already mentioned in his remarks, while we continue to monitor our business near term. It is critical we also maintain a long term land and invest for the future.
Speaker Change: Actually I would like to discuss capital allocation on slide 12.
Speaker Change: Under build to last which we define as fiscal 'twenty due to the present, we have deployed over $2 6 billion of capital our capital allocation framework is simple we first invest in two non negotiable are safety and maintenance Capex, which keeps our cash machine running and our regular and increasing dividend while.
Speaker Change: While critical these users are not a significant portion of total cash generated in that same timeframe and so the rest we devoted towards growing our business and increasing shareholder return on the gross side. The recent majority has come through developing the leading global small plastics platform, which already discussed in his remarks, the long term.
Larry Hilsheimer: And so the rest we devoted towards growing our business and increasing shareholder return. On the growth side, the recent majority has come through developing the leading global small plastics platform, which Foley discussed in his remarks. The long-term benefits of this business are substantial, and we are encouraged by our successful execution of the transactions, our integration progress, and synergy realization. We balance growth with debt reduction at times when it is necessary to temporarily increase our leverage above our long-term target of a leverage ratio in the range of two to two and a half times in order to capitalize on long-term value-accretive growth opportunities such as IPAC-10.
Speaker Change: <unk> of this business are substantial and we are encouraged by our successful execution of the transactions our integration progress in synergy realization, we balanced growth with debt reduction at times when it is necessary to temporarily increase our leverage above our long term target of leverage ratio in the range of two to two five times.
Speaker Change: In order to capitalize on long term value accretive growth opportunities such as AIPAC Tim.
Larry Hilsheimer: Given our current leverage, we anticipate in the short term prioritizing incremental debt reduction. We have confidence in the value creation benefits of our capital deployment under Bill DeLass and will plan to dive deeper into this topic at our upcoming Investor Day in December. With that, I'll turn things back to Ole for closing on slide 13. All right.
Speaker Change: Given our current leverage we anticipate in the short term prioritizing incremental debt reduction we have confidence in the value creation benefits of our capital deployment under build to last and we will plan to dive deeper into this topic at our upcoming Investor day in December.
Speaker Change: With that I'll turn things back to <unk> for closing closing on slide 13, alright. Thank you Larry I appreciate each of you taking the time to listen to my opening remarks on our strategy.
Ole G. Rosgaard: Thank you, Larry. I appreciate each of you taking the time to listen to my opening remarks on our strategy and hope that I clearly communicated the value creation which is occurring through leveraging what we do best, customer service, to drive growth and transform our business. Our recent capital investments and internal initiatives are setting the stage for the next wave of accelerated growth at Greif. Our Greif business system and dedication to the service profit chain have combined to create a flywheel of success, which is driving growth and our disciplined capital allocation framework.
Speaker Change: But I clearly communicated the value creation, which is occurring through leveraging what we do best customer service to drive growth and transform our business and our recent capital investments and internal initiatives are setting the stage for the next wave of accelerated growth at <unk>.
Speaker Change: Our bright business system and dedication to the service profit chain have combined to create a flywheel of success, which is driving growth and our disciplined capital allocation framework.
Ole G. Rosgaard: We have an investor day coming up this December and plan to discuss in greater detail the changes we are currently making through the Greif business system to transform our organization for breakout success. Operator, will you please open the lines for Q&A?
Speaker Change: We have an investor day upcoming this December and plan to discuss in greater detail. The changes. We are currently making through the greif business system to transform our organization for breakout success.
Operator: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Ghansham Panjabi with Baird. Your line is now open.
Speaker Change: Operator will you. Please open the lines for Q&A.
Speaker Change: Thank you.
Speaker Change: As a reminder to ask a question. Please press star one one of your telephone and wait for your name to be announced.
Speaker Change: Withdraw your question. Please press star one again.
Speaker Change: Our first question comes from the line of Ghansham Panjabi with Baird. Your line is now open.
Matt Leahy: Hi, good morning. This is Matt Krieger sitting in for Ghansham. How's everybody doing?
Speaker Change: Hi, Good morning. This is a this is Matt krueger sitting in for Ghansham, how is everybody doing today.
Ole G. Rosgaard: Great, Matt. Thank you. It's wonderful.
Ole G. Rosgaard: So I guess I just wanted to start off with a quick question on volumes. Can you please provide some added detail on the volume cadence across both business segments during the quarter? And then, you know, just some early thoughts on how the third fiscal quarter has kicked off would be really helpful as well.
Speaker Change: Great wonderful.
Speaker Change: So I guess I just wanted to start off with a quick question on volumes can you provide some added detail on the volume cadence across both business segments. During the quarter and then just some early thoughts on how the third fiscal quarter has kicked off would be really helpful as well.
Ole G. Rosgaard: Here, let me give you some comments. Let me sort of zoom out first and give you kind of a regional overview year on year. And then we can go into substrates, and I'll make some comments on, perhaps, the end markets. So, if you look at it regionally, the strongest market was EMEA, where we saw an 8% growth, and it's also our largest GIP market. LATAM was flat.
Speaker Change: Yeah, Let me, let me give you some comments that maybe sort of zoom out first and give you kind of a regional overview year on year and then we can go into soft space and I'll make some comments on perhaps on the end markets.
Speaker Change: So if you look at it recently saw the strongest market was EMEA, where we saw an 8% growth.
Speaker Change: And its also our largest geos Gi markets Latam was flat, we were little bit weaker in North America minus 5% and.
Ole G. Rosgaard: We were a little bit weaker in North America, minus 5%, and we were down 11% in APAC. The broad improvement we saw in EMEA was across our industrial end markets for the second straight quarter, mostly in bulk chemicals and loops. In LATAM, we saw progress of strength in both bulk chemical and paints and coatings, and as I mentioned, we had some softness in AgChem like we've seen most other places. And again, in North America, we see continued slow bulk and commodity development, and AgChem demand is down, but sequentially from Q1, we do see improvements.
Speaker Change: And we were down 11% in APAC.
Speaker Change: The broad improvement we saw in EMEA was across our industrial end markets for the second straight quarter.
Speaker Change: Mostly in.
Speaker Change: Bulk chemicals loops.
Speaker Change: In Latam, we saw pockets of strength in both in bulk chemical in paints and coatings and as I mentioned, we had some softness in AG Chem Black we've seen most other places and again in North America.
Speaker Change: We see continued slow bulk.
Speaker Change: Commodity developments and Atkins demand is down but sequentially from Q1, we do see improvements.
Ole G. Rosgaard: And I made some comments earlier on APAC; Q2 volumes were negatively impacted by seasonality from the Chinese New Year and weaker demand from food and beer. If we look at substrates year on year, the strongest substrate was Classic, where we have invested, and IPC, and we are up low teens year on year. Steel is flat, but it's actually improving up to 10% sequentially, and we're down low singles in fiber, but we are improving again sequentially, and it's up 10%.
Speaker Change: And I made some comments earlier on APAC Q2 volumes were negatively impacted by seasonality from the Chinese new year and weaker demand from food and Bev.
If we look at soft rates year on year, the strongest Australia.
Speaker Change: Whats plastic and why we have invested in RBC and we are off.
Speaker Change: Low teens year on year.
Speaker Change: Steel is flat, but it's actually improving up to 10% sequentially.
Speaker Change: And we are down low singles in fiber, but we are improving again sequentially and it's up 10% and as I said at the end markets saw really bulk chemicals lubricants, where we see.
Ole G. Rosgaard: And as I said, the end markets are really bulk chemicals and lubricants, where we see strong developments. If we look at the economic indicators, the global PMI was above 50 for the last four months, including May, which is positive, and which is reflected in these positive signals that we've seen emerging. You know, it makes us very positive about the future. We stay connected to our customers, our supply chain partners, and as demand hopefully keeps increasing, we will react quickly, like we have done in Amer.
Speaker Change: Strong developments.
Speaker Change: If I look at also the economic indicators of the global PMI was above 50 for the last four months, including made which is positive.
Speaker Change: And which is reflected in these positive signals that we've seen exiting.
Speaker Change: Okay.
Speaker Change: We don't makes us very positive for the future.
Speaker Change: We think.
Speaker Change: Connected to our customers our supply chain partners.
Speaker Change: As demand hopefully keeps increasing we will react quickly.
We have done in EMEA.
Ole G. Rosgaard: Great, that's very helpful. And then just to follow up, I wanted to touch on price a bit. Can you provide an updated view on the absolute price cost expectation for the year? If you could provide some detail on how that, you know, how it was, how it performed this quarter, and what you would expect from the upcoming two quarters, that would be helpful as well. It seems like we could be reaching kind of a peak price cost pain point across your business, given the, you know, the pricing initiatives you have in the market.
Speaker Change: Okay, Great. That's very helpful. And then just a follow up I wanted to touch on price cost a bit can you provide an updated view on the absolute price cost expectation for the year.
Speaker Change: If you could provide some detail on how that how that would how that performed this quarter and what you would expect from the upcoming two quarters that'd be helpful as well.
Speaker Change: It seems like we could be reaching kind of a peak price cost pain point across your business given the the pricing initiatives you have in the market I just wanted to check the validity of that statement.
Larry Hilsheimer: I just want to check the validity of that statement.
Larry Hilsheimer: Yeah, that's a great question. I think Larry will be sure to answer that. Yeah, I mean, you know, if you look, I mean, clearly, as we looked at what price costs we had relative to Q223, a major impact year over year, price cost squeeze of about $49 million in paper and about 20, but a positive 17, actually, in GIP. So you had 12 million of volume benefit in GIP and 27 million of volume benefit in PPS.
Speaker Change: Yes, that's a great question Larry.
Speaker Change: Sure Kurt answer that yes, I mean, if you.
Speaker Change: Look I mean clearly.
Speaker Change: As we looked at.
Speaker Change: What price cost, we had relative to Q Q2 'twenty three.
Speaker Change: Major impact year over year price cost squeeze of about $49 million in paper and in about 20.
Speaker Change: But.
Speaker Change: Positive 17 out actually in DIY.
Larry Hilsheimer: So trends on volumes, good price cost squeeze, very harmful to us. And then, you know, looking at going from our former guidance to current guidance, we show from that 610 low end that we gave an actual price cost benefit in our GIP business of about. 39 million and volume of 27. Within PPS, you know, at midpoint, you know, $29 million, or I mean, I'm sorry, $16 million price cost lift from prior where we were and 15.
Yes, $12 million of volume benefit in CIP.
Speaker Change: CIP and $27 million volume benefit and PPS. So trend is on volumes good price cost squeeze very harmful to us.
Speaker Change: Then looking at going from our.
Speaker Change: Prior to our former guidance to current guidance.
Speaker Change: Yeah, we we show.
Speaker Change: From that <unk> 10, low end that we gave.
Speaker Change: Actually your price cost benefit in our Gis business.
Speaker Change: Of about <unk>.
Speaker Change: $39 million and volume of 27.
Speaker Change: Within PPS.
Speaker Change: Midpoint $29 million or I'm, sorry, $16 million price cost lift.
Speaker Change: From prior where we were in 15.
Larry Hilsheimer: If I'm going from prior year to where we are now, your obvious squeeze numbers on going from the 819 of last year to 700 million of this year, within the PPS business, you know, a major squeeze clearly on OCC of roughly $9500 million. URB at 5 million pounds pressure and container board about flat, and then in our GIP business, you know, price and cost about $59 million positive, and volume about $30 million positive. So hopefully, that's what you were looking for, Matt. Yeah, no, that's not it.
Speaker Change: If I'm going from prior year to where we are now youre obvious squeeze numbers on.
Speaker Change: For the <unk> 19 of last year to $700 million of debt this year within the PPS business.
Speaker Change: Major squeeze clearly on OCC or roughly 90 $500 million.
Speaker Change: You are be at $5 million of pressure and containerboard about about flat.
Speaker Change: And then in our Gis business.
Speaker Change: Price cost about $59 million positive volume about $30 million positive. So hopefully that's what you were looking for Matt.
Matt Leahy: Yeah, no, that's very helpful. That's it for me. Thank you.
Matt Krueger: No. That's very helpful. That's it for me. Thank you.
Operator: Our next question comes from the line of George Staphos with Bank of America Securities. Your line is now open.
Pat: Thanks Pat.
Pat: Our next question comes from the line of George Staphos with Bank of America Securities. Your line is now open.
George Leon Staphos: Hi everyone, good morning. Thanks for the details.
George Leon Staphos: Hi, everyone. Good morning, Thanks for the details.
George Leon Staphos: I wanted to go to and congratulations on the quarter I wanted to go to slide 11, where you have the waterfall and.
Larry: And Larry if we look at it and only if we look at the volume.
Larry: Pickup in your guidance.
Larry: Recognizing there.
Larry: There are no guarantees in life things could move more possibly thinks would move more negatively where are you right now in terms of that 22 to 62 million would you say roughly in terms of the volume pick up that in turn.
Larry: Informed your improvement in your guidance.
George Leon Staphos: Yes, I would say George.
Speaker Change: Where we're at in the trend right now is bright smack in the middle of that and so what we did build a range around it based on as already mentioned in his comments.
Speaker Change: There is still some nervousness in our in our some of our customers, but theres also some areas where we're seeing there is potential optimism. So we just we build a range around what we thought was possible for the rest of the year.
Speaker Change: Larry.
Speaker Change: I probably missed this early I probably missed this but if you could.
Speaker Change: Either by end market or by substrate, maybe both could you just give us kind of a quick where are you year on year early in fiscal <unk> Q.
Speaker Change: In terms of trends Youre seeing at the moment on volume.
Speaker Change: Yes.
Speaker Change: Yes.
And then just Kevin.
Speaker Change: Scott.
Speaker Change: <unk>, yes.
Speaker Change: So so exit trends in may and will generate positive jaws.
Speaker Change: Steel in container board.
Kept improving throughout Q2.
Speaker Change: Plastic <unk> was a bit more mixed on a month to month basis during the quarter.
Speaker Change: But if we look at G IP and then EMEA.
Speaker Change: They remained sequentially strongest.
As I mentioned.
Speaker Change: But also with North America, and Latam improving.
Speaker Change: Container board continue to improve and we will soon start benefiting form out balance sheet feeder, which by the way is operational and is producing.
Speaker Change: Ashish, that's being sold and in <unk>, we continue to see construction on film demand increasing in May.
Speaker Change: Despite the mixed demand in auto end markets.
Speaker Change: Okay.
Speaker Change: My last two and I'll turn it over just if you could give us a bit more color or remind us what you said in terms of year on year at total in paper. It sounded like containerboard was alright, not gangbusters, but up modestly year on year sequentially Cuban core your B was get.
Speaker Change: Better but still down.
You can sort of affirm that and discuss what youre seeing early in May there and then what kind of price cost should we expect out of steel and VIP in particular, the rest of the year do you have improving or sequentially decelerating benefits there. Thank you.
Speaker Change: Yes, so on steel.
Speaker Change: We will generally keep improving.
Speaker Change: Maybe touch upon that a little bit later on what we're doing internally self help.
Speaker Change: <unk> as I mentioned.
Speaker Change: Film costs are positive and source construction, where we see it.
Speaker Change: This is by the way is our biggest segment is paper costs.
Speaker Change: We haven't really seen any major recovery of that.
Speaker Change: Whilst we are doing well in paper costs, we also selling tool.
Speaker Change: Auto paper companies, we haven't seen a pick up there yes.
Speaker Change: But hopefully we won't see that soon.
Speaker Change: Thank you so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Mike <unk> with <unk> Securities. Your line is now open.
Speaker Change: Thank you Larry and built for taking my questions.
George Leon Staphos: I wanted to go to, and congratulations on the quarter. I wanted to go to slide 11, where you have the waterfall. And Larry, and Ole, if we look at the volume pickup in your guidance, recognizing, you know, there are no guarantees in life. Things could move more positively. Things could move more.
Speaker Change: Yes.
Speaker Change: First question I just had on slide 11, I think Larry if I heard you correctly you mentioned there.
Speaker Change: $19 million to $39 million of manufacturing headwinds.
Speaker Change: That's new whats the whats driving that.
The predominant driver of that is volume so with volume pick up yet more incremental transport cost and then a little bit of.
Speaker Change: Additional manufacturing cost just volume driven.
Speaker Change: Got you perfect. Thank you for that.
Speaker Change: So just can you talk about.
Speaker Change: The operating leverage in the business that could be released maybe once global volumes start to normalize and you say, yes, you're certainly early stages depending on region.
Speaker Change: Servicing the volume improvement.
Speaker Change: Once everything let's say is firing all cylinders, what's what's this type of operating leverage that could potentially be released to positively impact the business.
George Leon Staphos: Yeah, I would say George is at the...
Speaker Change: Yes.
George Leon Staphos: Larry, I probably missed this earlier. But if you could, you know, either by end market or by substrate, maybe both, could you just give us kind of a quick where you are on your early in fiscal three Q terms of trends you're seeing at the moment?
Ole G. Rosgaard: You mean, yeah, yeah. Let me just get, we've got, I think I have an overview here, yeah. So exit trends in May that were generally positive, George, steel and container bought, they kept improving throughout Q2. Plastic and URP was a bit more mixed on a month-to-month basis during the quarter, but if we look at GIP and then EMEA, they remain sequentially strongest, as I mentioned, but also with North America and Latin improving, container bought continue to improve and will soon start benefiting from our Dallas sheet feeder, which, by the way, is operational and it's producing a sheet that's being sold, and in URP, we continue to see construction and film demand increasing in May, despite the mixed demand in other end markets.
Thank you.
George Leon Staphos: Okay, my last two and I'll turn it over to you. Just if you could, Ole, give us a bit more color or remind us what you said in terms of year-on-year. It sounded, on paper, like Container Board was, all right, not gangbusters, but up modestly year-on-year. If you could sort of affirm that and discuss what you're seeing early in May there, and then what kind of price cost should we expect out of Steel and GIP in particular the rest of the year? Do you have improving or sequentially decelerating benefits there? Thank you. Yeah, so on steel, so that
Speaker Change: Basically is as volume picks up.
Ole G. Rosgaard: Yeah, so on steel, that will generally keep improving, and I'll maybe touch upon that a little bit later on what we're doing internally, self-help. In tube and core, as I mentioned, film cores are positive, and so is construction.
Ole G. Rosgaard: Where we see, and which is by the way, our biggest end segment is paper cores. We haven't really seen any major recovery there. Whilst we're doing well in paper cores, we're also selling to other paper companies, and we haven't seen a pick-up there yet. But hopefully, we'll see that soon.
Speaker Change: Predominant phosphagen ended up occurring and currently in addition to transport is just the raw material cost, but your value add is going to be about 50%, but I'd say generally just assume excess of 20% gross margin pickup on incremental volume and if you look back if we get a return to 'twenty two.
Operator: Our next question comes from the line of Mike Roxland with Truist Securities. Your line is now open.
Speaker Change: Volume levels, we would end up being.
Speaker Change: Picking up about $160 million of EBITDA and that doesn't even factor in.
Speaker Change: The incremental EBITDA from getting to full run rate on all of our acquisitions.
Speaker Change: And getting back on price cost, where we need to be on paper. So yes, we see a path back with returning economic conditions to well over $900 million of EBITDA.
Speaker Change: Let me also just talks on our initiatives are internal initiatives on cost savings.
Speaker Change: The impact of our bright business systems, So we operating at a high level.
Speaker Change: We are always looking for what we call internally aggregation of matzo gains across our 250 locations.
Speaker Change: Our sourcing team as an example recently finalized a targeted review in North America, which in a particular area.
Speaker Change: Which reduce total spend for this area by an estimated 8%.
Speaker Change: They also did a recent view of a certain global indirect material spend.
Speaker Change: The solid in an estimated run rate cost savings of 5%.
Speaker Change: We also re.
Speaker Change: Recently conducted as an example to full scope steel plant operational excellence reviews.
Speaker Change: Which were but these plans were previously underperforming our expectations.
Speaker Change: And these reviews. They include a full value stream mapping and lean six Sigma review and by focusing on raw material usage and reducing scrap each of these two plants.
Speaker Change: <unk> seen a sustained EBITDA margin increase of approximately 800 bps relative to their prior performance.
Speaker Change: I visited the plant recently, whoever who have over the past few years made a significant improvement on that NPS and gas cost and when you look at the profitability trends for that plant it correlates extremely well.
Speaker Change: <unk>.
Speaker Change: With these things in their plant performance is top tier so the aggregation of these types of modular gains. They are a big part of our improved structural margin profiles. So we are truly playing on the entire P&L as you can hear spanning from operational and commercial excellence initiatives to supply chain and <unk>.
Speaker Change: Sourcing and <unk>.
Speaker Change: She also mentioned that our automation efforts, which is reflected in our earnings.
Speaker Change: Got it. Thank you I'll leave it bodes well for a quick follow up how many of your facilities could be subject to those types of reviews I mean, how much further runway do you have in terms of improving.
Speaker Change: Level profitability like that.
Speaker Change: To be honest with you.
Speaker Change: Previously I thought okay, there must be a limit somewhere but I keep getting surprised.
Speaker Change: We have a game that we have a six Sigma program and just to give you an idea of the size of our six Sigma program.
Speaker Change: We have nearly 700 petition participants across the globe.
Speaker Change: To date, we have 400 white balance 170, yellow belts, Huntington 30, Green belts, and we have 10 black belts.
Speaker Change: And they all have projects of a certain magnitude driving savings to the bottom line and when you look at the we have to.
Deploy base.
Speaker Change: 250 plants.
Speaker Change: Thanks, I see and I mentioned some of them the things I see the surprises me, hey, could we really find that sort of savings there.
Speaker Change: <unk>.
Speaker Change: And youre looking at years and years of runway on these initiatives.
You can say, okay, you find like 300000 here several hundred thousand their book when you added up.
Speaker Change: That's why we call it aggregation of modular games it becomes big numbers over time.
Speaker Change: Understood. Thanks, very much for the color.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Brian Butler with Stifel. Your line is now open.
Michael Hoffman: Thank you, Larry and Bill, for taking my questions. First question: on slide 11, I think Larry, if I heard you correctly, you mentioned the 19 to 39 million dollars of manufacturing headwinds, and that's new. What's driving that?
Brian Butler: Hey, good morning, Thank you very much for taking the questions.
Larry Hilsheimer: The predominant driver of that is volume, so with volume pickup, you get more incremental transport costs and then a little bit of additional manufacturing costs, just driven by volume.
Brian Butler: Hey, Brian.
Michael Hoffman: Gotcha. Perfect. Thank you for that.
Brian Butler: Right.
Speaker Change: You talked about getting to that $900 million EBITDA.
Speaker Change: I was hoping you can maybe just talk about maybe high level what are those components that get you there and just kind of walk through it you know the price cost volume and if theres anything else from.
Speaker Change: From the <unk>.
Speaker Change: Yes.
Speaker Change: May be the single largest component of that is just getting back to volume levels of 'twenty two.
Speaker Change: And that alone is a $160 million driver at current margin rates. So.
Michael Hoffman: And can you talk about the pent-up operating leverage in the business that could be released, maybe once global volumes start to normalize? And you say you're starting in your early stages depending on region and certainly seeing volume improvement. Once everything, let's say, is firing on all cylinders, what is this pent-up operating leverage that could potentially be released and positively impact the business?
Speaker Change: Good.
Speaker Change: Little bit on volume recovery sequentially, but you look at our two year stack volumes are still significantly off and obviously, that's evidenced in the economic data with PMI statistics and everything else. So.
Larry Hilsheimer: Yeah, go ahead.
Larry Hilsheimer: Basically, as this volume picks up, the predominant cost you're going to end up incurring in addition to transport is just the raw material cost, but your value add is going to be about 50%. But I'd say, generally, just assume an excess of 20% gross margin pickup on incremental volume. And if you look back, if we get a return to 22 volume levels, we would end up picking up about $160 million of EBITDA.
Speaker Change: Getting back to that kind of volume level drives a huge amount of earnings lift for us and so as already mentioned, we undertake all of these operational improvement areas to really change our structural cost drivers. So that we can even tweak that more than cover other inflationary costs.
Larry Hilsheimer: And that doesn't even factor in the incremental EBITDA from getting the full run rate on all of our acquisitions and getting back on price cost where we need to be on paper. So we see a path back with the return of economic conditions to well over $900 million of EBITDA.
Ole G. Rosgaard: Let me also just touch on our internal initiatives on cost savings and the impact of our right business systems. So we're operating at a high level, and we're always looking for what we call internally the aggregation of marginal gains across our 250 locations. Our sourcing team, as an example, recently finalized a targeted review in North America in a particular area, which reduced total spend for this area by an estimated 8%. They also did a recent review of a certain global indirect material spend, which resulted in an estimated one-way cost savings of 5%.
Ole G. Rosgaard: We also recently conducted, as an example, two full-scope steel plant operational excellence reviews, which were...and these plants were previously underperforming to our expectations. And these reviews include a full value stream mapping and Lean Six Sigma review. And by focusing on raw material usage and reducing scrap, each of these two plants have seen a sustained EBITDA margin increase of approximately 800 bps relative to their prior performance. I visited a plant recently that has, over the past few years, made a significant improvement on their NPS and Gallup scores.
Speaker Change: The secondary element is clear.
Speaker Change: Clearly getting back to what we consider.
Speaker Change: Much needed well deserved.
Speaker Change: Sure.
Speaker Change: Price cost in our paper business as evidenced by the price increases we've recently announced.
Speaker Change: Those things and drive a big pickup as well and then just getting full run rate on and performance level back on the acquisitions we've done.
Speaker Change: And then also this new Dallas, Keith Peter business in our containerboard business you put all of those elements together and it drives you easily over that 900 million dollar figure.
Ole G. Rosgaard: And when you look at the profitability trend for that plant, it correlates extremely well with these things, and their plant performance is now top tier. So the aggregation of these types of marginal gains is a big part of our improved structural margin profiles. So we are truly playing on the entire piano, as you can hear, spanning from operational and commercial excellence initiatives to supply chain and sourcing, and I should also mention our automation efforts, which are reflected in our earnings.
Ole G. Rosgaard: To be honest with you, I... Previously, I thought, okay, there must be a limit somewhere, but I keep getting surprised. We have a six-sigma program, and just to give you an idea of the size of our six-sigma program, we have nearly 700 participants across the globe. To date, we have 400 white belts, 170 yellow belts, 130 green belts, and we have 10 black belts.
Ole G. Rosgaard: And just to give you an idea of the size of our Six Sigma program, we have nearly 700 projects.
Speaker Change: Okay, and you mentioned the recent kind of <unk> price increases.
Speaker Change: And how much of that is in the.
Speaker Change: $40 70 or is that.
Speaker Change: The low and zero in the high end, 100% or something some other mix.
Speaker Change: Yeah.
Speaker Change: We really expect that we should get full recognition of these.
These price increases they're needed and deserved the inflationary costs, we've had at all of our production and pay per gate to gate grades are substantial and we obviously need to earn appropriate returns on capital. So, but yes look we're also pragmatic and you were still remains burdened by this archaic survey system utilized.
Richie: Hi, Richie recently, which and look we cant again, we'd love them to become very relevant moved to a data driven automated system directly report the true market, but as a result, we hedged the upside.
Richie: Our guidance would have no recognition and our upside we.
Richie: <unk> got a range there we put in a range too.
Richie: Good.
Ole G. Rosgaard: But when you add it up, you know, you know, and that's why.
Richie: Deal with the risky system and.
Michael Hoffman: I understand. Thanks very much for the call.
Richie: We also have timing issues related to you anytime that recognize though.
Operator: Our next question comes from the line of Brian Butler with Stifel. Your line is now open.
Richie: Look at the <unk>.
Richie: If the dollar linerboard and $80 medium.
Brian Butler: Hey, good morning. Thank you very much for taking the questions. You talked about getting to 900 million EBITDA. I was hoping we'd maybe just talk about, maybe at a high level, what are those components that get you there and just kind of walk through it, you know, the price, cost, volume, and if there's anything else.
Richie: That we have effective June 1st that's recognized.
Larry Hilsheimer: The single largest component of that is just getting back to volume levels of 22, and that alone is a $160 million driver at current margin rates.
Richie: But they would start to come through the P&L in late July and a 50 and 70 <unk> effective July 15 to 17 <unk> effect of July 18th if that gets recognized timely then we'd start benefiting in late August to September so.
Larry Hilsheimer: So, you know, we look good on a little bit of volume recovery sequentially, but you look at a two-year stack, volumes are still significantly off, and obviously, that's evidenced in the economic data with PMI statistics and everything else. So, you know, getting back to that kind of volume level drives a huge amount of earnings lift for us. And so, as Ole mentioned, we undertake all these operational improvement areas to really change our structural cost drivers so that we can even tweak that more and cover other inflationary costs.
Larry Hilsheimer: The other, the secondary element is clearly getting back to what we consider much-needed and well-deserved in price costs in our paper business, as evidenced by, you know, the price increases we recently announced. And, you know, those things can drive a big pickup as well. And then, also, this new Dallas cheat feeder business in our container board business. You put all those elements together, and it drives you easily over that $900 million figure.
Larry Hilsheimer: We really expect that we should get full recognition of these price increases. They're needed and deserve it.
Larry Hilsheimer: Inflationary costs we've had in all of our production, and pay-for-grade is substantial. We obviously need to earn appropriate returns on capital, but we're also pragmatic. And we still remain burdened by this archaic survey system utilized by RISC, which, once again, we'd love them to become very relevant, move to a data-driven automated system to correctly report the true market. But as a result, we have hedged the upside. I mean, our guidance would have no recognition.
Larry Hilsheimer: If that gets recognized timely, then we'd start benefiting in late August or September. So, you know, that's – there's some – some play in that upside. If we got everything immediately when we rolled it out, then there'd be even more upside.
Richie: There are some.
Larry Hilsheimer: And on the upside, we've got a range there. We put in a range to deal with the RISC system. And, you know, we also have timing issues related to any time they're recognized. So, you look at the $50 liner board and $80 medium that we have effective June 1st. That's recognized this month, and it will start to come through the P&L in late July. And the $50 and $70 and URV are effective July 15th.
Richie: Some play a net upside if we got everything immediately when we rolled it out then there'd be even more upside.
Brian Butler: And when you think about kind of like the midpoint of what you're assuming there, if that was a rollover, what's the benefit of the 25% from a perspective of incremental EBITDA that you'd be able to capture?
Speaker Change: And when you think about kind of like the midpoint of what Youre, assuming there if that was the rollover whats the benefit and the 25.
Speaker Change: Our perspective of incremental EBITDA.
Larry Hilsheimer: Yeah, you know, if you look at our pricing in general, I'd just, you know, say a $10 change in... Uh, where am I?
Speaker Change: It will be able to capture.
Speaker Change: Yeah.
Speaker Change: If you look at our pricing in general it's just.
Speaker Change: Say, a 10% at 10.
Speaker Change: $10 change.
Speaker Change: In.
Larry Hilsheimer: Where am I at? Find my...
Speaker Change: We're in my head.
Larry Hilsheimer: Yeah, the impact on container boards is 700,000 a month. Yeah, so roughly $8 million annually, and URBs, half a million a month to $6 million annually. So that should give you the numbers to back into whatever your assumptions would be.
Speaker Change: Yeah.
Speaker Change: Yes, 10 dollar impact on.
Speaker Change: Containerboard is 700000, a month, yes, so roughly $8 million annually and <unk> half a million a month to $6 million annually. So that should give you the numbers back into whatever your assumptions would be.
Brian Butler: Okay, and then one last one maybe on the capital expenditures that kind of increased a little bit on the updated guidance. Maybe break that out. Is that all IPAC-CHEM, or are there other gross initiatives that you're spending that $20 million on?
Speaker Change: Okay, and then one last one maybe on the capital expenditures that kind of increased.
Speaker Change: A little bit on the updated guidance.
Speaker Change: Maybe break that out is that all iPad cam or are there other growth initiatives that youre spending that that $20 million on.
Larry Hilsheimer: Very little IFACM at all. What it really is is you had some inflationary costs on the Dallas Sheep Feeder, which is a strategic growth project that ran that up slightly over budget, but that's at full bulk going to generate about $2 million of EBITDA a month when fully operational, so money well spent in our estimation. Then Frankly, we were producing more cash, and some of our engineering group came to us and said, hey, look, there's some high-need safety and maintenance projects that we really think we should pull forward. We didn't want to take the risk of not spending on that kind of thing, and since we had the cash capital available, we said, move it forward.
Speaker Change: Very little <unk>.
Speaker Change #100: At all.
Speaker Change #101: What it really is as you had some inflationary costs down the Dallas sheet, Peter as a strategic growth project.
That ran that up slightly over but thats full boat going to generate about $2 million of EBITDA when fully operational so money well spent in our.
Speaker Change #101: Estimation, and then frankly, we were producing more cash and add some of our engineering group came to US and said Hey look there's some high need safety and maintenance projects that we really think we should pull forward and.
Speaker Change #101: We didn't want to take the risk of not spending on that kind of thing and since we had the cash capital available we said moving forward.
Brian Butler: Okay, nice quarter. Thank you for taking the questions.
Speaker Change #102: Okay nice quarter. Thank you for taking the questions.
Operator: Thank you. As a reminder, to ask a question at this time, please press star 1-1 or your touch-tone telephone. Our next question comes from the line of Gabe Hayde with Wells Fargo. You want to know...
Okay. Thank you as a reminder to ask a question at this time. Please press star one the line Ryan Touchstone telephone.
Speaker Change #103: Our next question comes from the line of Jay.
Speaker Change #104: <unk> with Wells Fargo. Your line is now open.
Gabe Hajde: Ole, Larry, Bill, good morning. This is a housekeeping question on the $8.4 million that you called out, Larry. Was that backed out as a one-timer, or are you flowing that through? I know it's non-cash.
Speaker Change #104: Only Larry Bill good morning.
Speaker Change #105: Hey, David.
Speaker Change #106: Housekeeping question on the $8 4 million that you called out.
Speaker Change #105: Larry.
David: Backed out as a one timer or are you are you flowing that through.
Larry Hilsheimer: No, we flow it through. I mean, it's accounting. We have to mark to basically the sales price any finished goods inventory we acquire. So had ITAC Chem gone forward with it, it would have been profit. But for us, it's not. So that's a one-year thing.
Speaker Change #108: No it's noncash.
Speaker Change #109: Yes, we flow it through I mean, it's a county.
Speaker Change #110: Mark to basically sales priced any finished goods inventory, we acquire so head AIPAC cam going forward with it would've been profit, but for us it's not.
Speaker Change #110: That's a one year thing now.
Gabe Hajde: Okay, and then I wanted to ask a question about, I guess, Southeast Asia, or maybe China specifically. If memory serves, on the GIP side, you guys have, I think, four remaining plants there. But when we look at, I don't know, EV production and all these different things. It seems like some activity, more than others, is fairly robust. And again, I know you guys are being selective about customers and what you're doing over there. Can you just talk about it, you know, the appetite to grow over there, or maybe limiting factors that prevent you from deploying more capital in Southeast Asia in general? I know, obviously, it's a returns-oriented mindset, but
Speaker Change #110: Okay.
Speaker Change #110: Then.
Speaker Change #111: I wanted to ask a question about I guess southeast Asia, or maybe China, specifically if memory serves on the VIP side you guys have.
Speaker Change #112: Four remaining plants there.
Speaker Change #112: But when we look at I don't know EV production and all of these different things.
Speaker Change #112: It seems like some activity more than others is fairly robust.
Speaker Change #112: And again I know you guys were being selective about customers and what you're doing over there.
Speaker Change #112: Can you just talk about it.
Speaker Change #112: Appetite.
Speaker Change #112: Growth over there.
Speaker Change #112: Or maybe eliminate factors that prevent you from deploying more capital.
Speaker Change #112: In Southeast Asia in General I know, obviously, it's a returns oriented mindset, but just.
Ole G. Rosgaard: Yeah, we have, first of all, a very disciplined approach to the way we deploy cash. And as Larry mentioned earlier, when somebody comes with a request for safety capital expenditure, we never say no. And then we have our cash machine with our steel network and other assets, and we need to maintain them. And we do that, and then we get dividends.
Speaker Change #113: Curious about that.
Speaker Change #114: Yes, we have first of all we have a very.
Speaker Change #114: Disciplined approach to the way we did.
Speaker Change #114: Deploy cash and as Larry mentioned earlier.
Speaker Change #114: When somebody comes with request for safety Capex, we never say no.
Speaker Change #114: And then we have.
Speaker Change #114: Our cash machine, but <unk> still at work and at assets and we need to maintain them and we do that and then we have dividends and then after that we then start looking at growth Capex.
Ole G. Rosgaard: And then after that, we then start looking at growth capex. We have a periodic review of all the requests that come in, and then we apply filters such as ROI and payback and so on, but we also look at the geopolitical aspect of it. And I would say China is not the country that's at the highest priority in terms of geopolitical aspects. So if there was a choice, we would likely do it elsewhere.
Speaker Change #114: When we.
Speaker Change #114: We have a.
Speaker Change #114: A periodic review of all of the requests that constant and then we apply filters such as alloy and payback and so on but we also look at the geopolitical aspect of it.
And I would say China is not the country thats the highest priority in terms of geopolitical aspects. So if there is a choice.
Speaker Change #114: We would likely we would likely do it elsewhere, we have invested in maintenance safety and some upgrades for automation in China.
Ole G. Rosgaard: We have invested in maintenance, safety, and some upgrades for automation in China, but I would be amiss to say that we've just built a new IPC plant in Malaysia. So it's more the surrounding region we are investing in in terms of AIPAC. Yeah, the same thing I would add, Gabe, is AIPAC does have some operations in China.
Speaker Change #114: I would be remiss to say that we've just built a new <unk> plant in Malaysia. So its modest surrounding reach and we are investing in in terms of APAC. Yes. The same thing I would add gave us.
Speaker Change #114: APAC does have some operations in China, whenever we assess any kind of.
Larry Hilsheimer: Whenever we assess any kind of project, we always have, as Ole mentioned, geopolitics as part of our risk factors. Now, what does that mean mechanically in our capital decisioning process? It means the hurdle rate for us investing in some place like that is much higher. So if it can't meet the hurdle rate, we ain't getting it done. And then the other thing is part of our enterprise risk management program, as we look at those kinds of things, and we did this in AIPAC, Tim. You look at what happens if something goes wrong. What's your next plan? So we have plans to deal with anything that could evolve as best as we are able to.
Speaker Change #114: Projects, we always have as already mentioned geopolitical as part of our risk factors now what does that mean mechanically and our capital Decisioning process. It means the hurdle rate for us investing in some place like that is much higher so if it can't meet the hurdle rate and getting it done and then the other thing is part of our.
Speaker Change #114: Enterprise risk management program as we look at those kind of things and we did this in AIPAC Cam you look at what happens if something goes wrong. What's your what's your next plan and so we have plans to deal with anything that they could evolve as best as we would be able to.
Speaker Change #114: Okay.
Speaker Change #115: I appreciate that.
Speaker Change #116: One last one.
Speaker Change #116: One last comment on that so.
Speaker Change #116: And we operate in 41 countries across the globe. So we've done that for decades. So.
Speaker Change #117: What happens on a geopolitical.
Speaker Change #117: On the geopolitical space is really part of our disciplined operating system, but we always focus on that and since we are talking about APAC we are.
Speaker Change #117: We do have growth plans in that region and Thats. The result, mat lately has been promoted to.
Speaker Change #117: Leave that region and he's actually already in place to do that.
Speaker Change #118: Good luck Matt.
Speaker Change #119: I haven't heard you guys talk about excuse me.
Speaker Change #120: <unk> deployment here recently.
Speaker Change #120: Obviously, the manufacturing backdrop hasnt support that.
Speaker Change #121: I'm just curious if that's part of the a little bit of a tick up in Capex.
Speaker Change #122: And on the flip side, maybe you guys have built out that infrastructure.
Speaker Change #123: I think I understand those lines pretty well, let's say you are positioned to service your customers on the IGT side.
Speaker Change #123: When demand does in fact inflect.
Speaker Change #124: I mean, we have continued to expand on our IP.
Speaker Change #124: I'd see network not through acquisition, but primarily organic.
Speaker Change #124: Deployed blow molded and new lines in.
Speaker Change #124: Throughout <unk>.
Speaker Change #125: Last year and also this year and I said in August September we will formally opened our new <unk> plant in Malaysia.
Speaker Change #126: We last year, we opened a new IPC plant in Turkey.
Speaker Change #126: And we have put additional lines and in many of the existing facilities.
Speaker Change #126: So this is an area, where we have we've continued to grow and it is also a part of our M&A strategy because it's resin based it's high margin. So it is a very attractive market for us to grow in and we do that at request of our customers as well.
Speaker Change #126: They expand they tend to come in and ask if we could provide them to service certain locations and gave you you'll remember this but just to remind everybody. We increased our equity ownership of century and last year significantly and we continue to.
Speaker Change #126: Explore opportunities with other ABC recyclers around the world most of them are relatively small, but they fill out our footprint.
Speaker Change #126: And we continue to have dialogues around those in many geographies.
Thank you.
Gabe Hajde: I appreciate that. Um, one last one on to comment on that.
Speaker Change #126: Okay.
Ole G. Rosgaard: I have just one last comment on that. So, you know, bear in mind, we operate in 41 countries across the globe. And we've done that for decades.
Speaker Change #127: Thank you.
Ole G. Rosgaard: What happens on the geopolitical stage is really part of our, you know, disciplined operating system where we always focus on that. And since we are talking about APEC, we do have growth plans in that region. And as a result, Matt Leahy has been promoted to lead that region, and he's actually already in place to do that.
Gabe Hajde: I haven't heard you guys talk about, excuse me, IBC deployment here recently, and I understand, obviously, the manufacturing backdrop hasn't supported that. I'm just curious if that's part of the little bit of a tickle up in CapEx and or... On the flip side, maybe you guys have built out that infrastructure. I think I understand those lines pretty well, such that you're positioned to service your customers on the IBC side when demand does, in fact, inflect.
Speaker Change #128: Now I'll hand, the microphone over to <unk> for closing comments.
Ole G. Rosgaard: I mean, we have continued to expand our IPC network, not through acquisition but primarily organic. We've deployed blow molders and new lines throughout last year and also this year. And I said, you know, in September, we will formally open our new IPC plant in Malaysia. Last year, we opened a new IPC plant in Turkey, and we have put additional lines in many of the existing facilities. So, this is an area where we have continued to grow, and it's also part of our M&A strategy because it's resin-based and high-margin, so it's a very attractive market for us to grow in.
Ole G. Rosgaard: And we do that at the request of our customers as well, that, you know, when they expand, they tend to come and ask if we could provide them the service in certain locations. Yeah, and Gabe, you'll remember this, but just to remind you.
Ole G. Rosgaard: Thank you. Before we end the call, I just want to thank you all for the questions and your continued interest in Greif. We're very proud of our global Greif team for utilizing the Greif business system to its fullest, as you've heard, and creating significant operating leverage during this temporary, sluggish demand environment. We're equally excited to realize the outperformance we have positioned the business to capture through built to last and will continue to execute with excellence and provide you with the legendary customer service for which we are known. Thank you to all of our colleagues, our customers, and stakeholders for your dedication, loyalty, and commitment to Greif. Have a great day!
Larry Hilsheimer: And Gabe, you'll remember this, but just to remind everybody, you know, we increased our equity ownership of Centurion last year significantly, and we continue to explore opportunities with other IBC recyclers around the world. Most of them are relatively small, but they fill out our footprint. And, you know, we continue to have discussions around these in many geographies.
Operator: Thank you. I will now hand the microphone over to Ole Rosgaard for closing comments.
Speaker Change #129: Thank you before we end the call I just want to thank you all for the questions and your continued interest in <unk>. We are very proud of our global <unk> team for utilizing the greif business system to its fullest as you've heard in creating significant operating leverage during this temporary sluggish demand environments.
Speaker Change #129: We are equally excited to realize the outperformance we have positioned the business to capture through built to last and we will continue to execute with excellence and provide you with a legendary customer service for which we're known.
Speaker Change #129: Thank you to all of our colleagues our customers and stakeholders for your dedication loyalty and commitment to <unk> have a great day.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change #130: This concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change #130: Yes.
Speaker Change #130: [music].
Speaker Change #130: Okay.
Speaker Change #130: Good.
Speaker Change #130: Okay.
Speaker Change #130: [music].
Speaker Change #130: Okay.
Speaker Change #130: Okay.
Speaker Change #130: [music].