Q4 2024 Greif Inc Earnings Call
Good day and thank you for standing by.
Speaker Change: Welcome to the GRIFE Fourth Quarter 2024 Earnings 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 the session, you will need to press star-1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star-1-1 again. Please be advised that today's conference is being recorded. We would now like to hand the call over to Bill Donofrio, Vice President of Corporate Development and Investor Relations. Please go ahead.
Thank you.
Speaker Change: Thank you, and good day, everyone. Welcome to Grice Fiscal Fourth Quarter 2024 Earnings Conference Call.
Speaker Change: During the call today, our Chief Executive Officer, Ole Rosgaard, will provide you an update on the operating model optimization effort we have undergone over the past year, which will be an important lead-in to our Investor Day next week.
Speaker Change: He will also provide his thoughts on fiscal 2024 as well as the current market landscape.
Speaker Change: Our Chief Financial Officer, Larry Hilsheimer, will provide an overview of our fourth quarter financial results, as well as our 2025 guidance.
Speaker Change: In accordance with Regulation Fair Disclosure, please ask questions regarding topics you consider important because we are prohibited from discussing material non-public information with you on an individual basis.
Please turn to slide two.
Speaker Change: During today's call, we will make forward-looking statements involving plans, expectations, and beliefs related to future events.
Speaker Change: Actual results could differ materially from those discussed. Additionally, we will be referencing certain non-GAAP financial measures and the reconciliation to the most directly comparable GAAP metrics that can be found in the appendix of today's presentation.
Speaker Change: I'll now turn the presentation over to Ole. Thanks, Bill, and good morning, everyone, and thank you for joining today.
Ole Rosgaard: Before we start, I just want to address one matter. Yesterday, we released our 2024...
4Q and Full Year Earnings.
Speaker Change: Let me turn this over to Larry to address, before we proceed with the remainder of the
Speaker Change: prepared remarks. Larry. Thank you, Ole. Good morning. Despite our usually dependable quality controls, we had an error in our original earnings release in which we had incorrectly included $16 million of income tax expense related to a gain on the disposal of a business.
Speaker Change: As a result, our originally reported Q4 net income, excluding the impact of adjustments, was $49.6 million, and our diluted Class A earnings per share was $0.85 per share. As corrected, those figures are $65.5 million and $1.13 per share, respectively.
Ole Rosgaard: Ole, I'll turn it back to you on slide three. Thanks, Larry. And again, we apologize for this, and what I usually say in-house is that we can all fail at times, and when we do, I usually tell our organization, that's just the learning moments. We just learned something new, and that's something we should be happy with.
Speaker Change: As Bill mentioned, next week we are hosting our Investor Day in New York City. Today, I will begin our presentation by highlighting a few key messages, which will be core to the information you will hear at our Investor Day.
Speaker Change: The half-day event will be attended by our entire executive management team, as well as each of the leaders of our new strategic business units.
Speaker Change: We highly encourage in-person attendance, which will allow you to engage with our leaders one-on-one and deeply understand the value we are creating under our Build to Land strategy.
Please turn to slide four.
Speaker Change: Over the past year, we have fundamentally changed how we operate as a company, organizing in a manner that will allow us to fully leverage our core competitive advantages and enable us to double the size of the company in the future.
Speaker Change: Going forward, we are operating and reporting results based on our four material solutions.
Speaker Change: customized polymer solutions, doable metal solutions, sustainable fiber solutions, and integrated solutions.
Speaker Change: So aligning operations by material solution greatly enhances our ability to leverage our five distinct competitive advantages.
Speaker Change: First, it allows us to more efficiently utilize our robust scale and global network of facilities to be more agile and serving our customers even better.
Speaker Change: Second, it aligns operations to capitalize on our deep subject matter technology expertise within each material solution, partnering even closer with our customers to meet their unique needs.
Speaker Change: Third, it enables further innovation and growth of circular packaging solutions. Fourth, it organizes our extensive portfolio of solutions in a manner that optimizes cross-selling and margin expansion.
Speaker Change: Each of those four competitive advantages results in a fifth, all-encompassing advantage, utilizing our world-class culture to deliver legendary customer service, which drives loyalty, share wallet increase, and premium margins.
Please turn to slide five.
Thank you.
Speaker Change: A key benefit of this operating model optimization for our investor community is enhanced visibility to the performance of the underlying products within our portfolio.
Speaker Change: So that ends. After the market closes today, we will be releasing fiscal year 2023 and 2024 recast financial highlights to assist you in understanding the new seconds.
Speaker Change: We have strong conviction in the synergies of operating this diverse, comprehensive portfolio of products, which enables us to serve our customers more fully than other industrial packaging companies.
Speaker Change: That said, we have also made clear that the biggest growth opportunity we see from a total addressable market and in-market growth perspective is in polymer-based products.
Speaker Change: This evolution has been occurring for years, and now our polymer business is large enough to warrant individual segmentation to more clearly display the performance of those products. This informs our decision to continue deploying capital in this space.
Speaker Change: We also plan to grow further in our caps and closures business, which is a key integrated solution.
Speaker Change: While smaller at present in terms of the overall portfolio, we also expect this business to grow over time. We'll be highlighting underlying growth expectations in each of these segments next week at InvestorDate.
Speaker Change: We will utilize the rest of this fourth quarter 2024 presentation.
Speaker Change: to serve as the closing chapter of our global industrial packaging.
Speaker Change: and paper packaging and service segments and discussing our quarterly results in the context of GIP and PPS for the final time.
Please turn to slide 6.
Speaker Change: Over the past three years, we have fundamentally changed the way our business operates and have made significant strides on our Build to Last strategy.
Speaker Change: We have allocated over $1 billion of capital to margin and growth accretive acquisitions, optimized our business model, enhanced and accelerated the Griff business system into GBS 2.0, and invested in technology and innovation.
Speaker Change: The collective impact of these changes provide us with the confidence to now announce a formal business optimization effort of at least $100 million of cost reductions to be completed by the end of fiscal 2027.
This is Mr. Chips.
which is a combination of sGNA rasterization.
Speaker Change: Network Optimization and Operating Efficiency Gains enabled by GBS 2.0 has come as a result of the accumulated learnings of our strategic progress, acquisition integration, and business model optimization.
Speaker Change: This initiative will be supported by further investments in technology and innovation. We plan to talk more about the drivers and impact of this program at Investor Day next week.
Speaker Change: Now, let's turn our attention to Q4 results on slide 7.
Speaker Change: Our business continues to operate with excellence against the historic period of industrial contraction.
Speaker Change: Since tracking of U.S. industrial activity began in 1948 by Institute of Supply Management, we have not seen an industrial contraction longer than the current period, which is 25 months through November.
Speaker Change: Our performance during the protracted length of this cycle has been impressive.
Speaker Change: But it is critically important to keep this soft macroeconomic environment in mind as Larry presents our 2025 Guidance.
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Speaker Change: In the fourth quarter, EMEA remained the strongest region, although volumes were down slightly on a sequential basis.
Speaker Change: On our Q3 call, we commented on the notable less bullish sentiment from our global customer base heading into Q4.
Speaker Change: A sentiment that has remained overall pessimistic into November and was taken into consideration when formulating our fiscal 2025 guidance.
That's it.
Speaker Change: We are still outperforming market expectations in EMEA, which we attribute not to any specific market but rather to our ongoing business model optimization that is driving increased demand and cross-selling opportunities in both our polymer and metals business.
Speaker Change: Our largest market, North America, has not seen the same recovery as the year. In GIP, demand remains choppy with polymer-based products continuing to offset softness in our durable metals business.
Speaker Change: Overall, GIP North America still has significant untapped operating leverage, with volumes down almost 18% on a two-year basis in the quarter.
Speaker Change: We fully anticipate a recovery of those volumes, which we believe are the result of this extended demand contraction cycle.
Speaker Change: In PPS, demand has been okay, although it is still down over 4% on a two-year basis in the quarter.
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Speaker Change: has shown a few consecutive quarters of year-over-year growth on the same store basis.
Speaker Change: and is running at over 90% operating rates, while our URP business is still mixed and is currently operating at over 80% operating rates through November.
Speaker Change: As a reminder, APAP and LATAM are small pieces of our portfolio.
Speaker Change: LATAM is improving, while APAC has continued to be soft, but the overall offset of those regional demand factors is about neutral on a year-over-year basis in the quarter.
Speaker Change: And with that, I will turn things over to Larry on slide eight to walk through our financial results. Larry? Thank you, Ole. And thank you all for joining our call this morning.
Larry Hilsheimer: Our fourth quarter results demonstrate our consistent ability to execute regardless of the operating environment. Fourth quarter adjusted EBITDA was $198 million compared to $202 million last year.
Larry Hilsheimer: However, our business also experienced an unplanned $2 million headwind from Hurricane Helene.
Larry Hilsheimer: Fourth quarter, adjusted free cash flow was $145 million compared to $136 million last year as our teams acted decisively on the bearish demand sentiment that we identified exiting Q3 and reduced working capital to appropriate levels.
Larry Hilsheimer: While managing results in the present, we continue to take steps towards the future. As Ole mentioned, we finalized our Operating Model Optimization effort, which unlocks significant new value levers for DRIVE, and that we are excited to talk about more next week at Investor Day.
Larry Hilsheimer: This quarter, we completed our 14th Net Promoter Survey, resulting in a score of 69. This rating is well above 51, which is considered the benchmark for world-class in the manufacturing industry.
Larry Hilsheimer: That level of customer engagement is proof of our significant competitive advantage of legendary customer service.
Larry Hilsheimer: At Investor Day next week, we will provide information that shows the high correlation between NPS and financial performance to clearly outline the significance of our continually increasing customer loyalty and advocacy.
Larry Hilsheimer: Lastly, we are now just over eight months into our ownership of IPAC-CHEM and have made significant progress on integration and synergy capture.
Larry Hilsheimer: As we have noted in the previous few quarters, the ag sector was impacted by significant de-stocking in the year and has continued to operate at low volume since then.
Larry Hilsheimer: While we have high convection in our business case financials, we anticipate that overall EBITDA contribution in the first full year of ownership will be less than that business case which I will touch on in guidance.
Larry Hilsheimer: Please turn to slide 9 to walk through the GIP results.
Larry Hilsheimer: As Ole stated in his global market overview, we are very proud of the results our GIP team provided, given the uncertain and various demand environment we experienced in Q4. We finished the quarter up $4 million on adjusted EBITDA dollars, but down 70 basis points on EBITDA margins.
Larry Hilsheimer: Pricing competition has been intense in our GIP business, but our team is finding ways to win and sticking to our value over volume philosophy, resulting in resilience. Exiting Q4, sentiment is generally pessimistic.
Please turn to slide 10 for PPS results.
Larry Hilsheimer: Our paper business experienced an adjusted EBITDA dollar decline of $8 million and adjusted EBITDA margin decline of 240 basis points year over year. However, EBITDA margins improved sequentially by 220 basis points as a result of some recovery of the price, cost, and balance that our business has endured throughout the year.
Underlying demand in our paper business remains mixed.
Larry Hilsheimer: Container board and corrugated volumes are solid and operating rates are 90-plus percent. While URB and tube and core volumes have continued to lag due to soft paper core demand. This is driven by the overall box board industry, which is generally less positive than container board.
Larry Hilsheimer: We anticipate that margins in the new sustainable fiber solution segment will continue to improve heading into fiscal 25 due to the continued flow-through of recognized paper pricing and the recent favorable OCC changes which is contemplated in our guidance.
Please turn to slide 11 to discuss capital allocation.
Larry Hilsheimer: Now, three years into our Build to Last strategy, we have deployed capital exactly according to the priorities we laid out in our 2022 Investor Day. Next week, I will provide an update on our GoForward Capital Allocation Framework, which will fuel the next evolution of growth for Greif.
Larry Hilsheimer: Our top near-term priority is debt reduction. Our recent acquisitions coupled with the low EBITDA denominator in our leverage ratio calculation resulted in a 3.53 leverage at the end of fiscal 2024 relative to our target range of 2 to 2.5 times.
Larry Hilsheimer: When demand recovers, the EBITDA denominator will quickly scale down our ratio. However, in the intermediate time, we will focus on paying down debt to get within our target range.
Larry Hilsheimer: In 2019, we made an acquisition at the beginning of an industrial recession, and we were still able to pay down debt in advance of our externally stated target, and we'll utilize that same playbook now to manage leverage during this industrial recession.
Larry Hilsheimer: Please turn to slide 12 to discuss our fiscal 2025 outlook.
Larry Hilsheimer: Given the continued market uncertainty and mixed demand trends, which we have commented on throughout prepared remarks today and in previous quarters, we feel it is most prudent to again present low-end only guidance to start fiscal 2025.
Larry Hilsheimer: We have yet to see any significant inflections, positive or negative, that give us confidence in presenting a range.
Larry Hilsheimer: It is important also to remember that we are changing our fiscal year in 2025.
Larry Hilsheimer: Next fiscal year will be 11 months long and end on September 30th with a two-month long fourth quarter.
Larry Hilsheimer: For that reason, our guidance was calculated on an 11-month basis. To help you understand our low-end guidance, I'd like to provide you with a few key drivers which can bridge you from 2024 on an 11-month basis to Fiscal 25's 11-month guidance.
Larry Hilsheimer: Fiscal 24 does not have any significant seasonality impact at year-end, and so a fair comparative starting point is simply taking year-end invested EBITDA for fiscal 24 of $694 million, dividing it by 12, and multiplying it by 11.
Larry Hilsheimer: That gets you to a $636 million starting point for an 11-month 24.
Larry Hilsheimer: From there, we have assumed a few key tailwinds heading into Fiscal 25.
Larry Hilsheimer: First, $83 million of price-cost uplift, most of which is coming from RISD-recognized paper pricing.
Larry Hilsheimer: and OCC change as of the date of this call with price cost in polymers, metals, and integrated largely neutral year over year.
Larry Hilsheimer: Second, a $19 million incremental uplift from MNEG, which represents the incremental ownership period of IPAC-CHEM less the fiscal year, even a contribution from our disposed-of Delta U.S. business.
Larry Hilsheimer: Third, an organic volume uplift of $76 million based on the continuation of exit rate trends in each of our new segments.
Larry Hilsheimer: That volume tailwind is primarily driven by an assumption of mid-single-digit growth in polymers and fiber solutions, despite low single-digit headwinds in metals and the integrated.
Larry Hilsheimer: Those tailwinds bring you from 636 up to 814. We also have several headwinds assumed in guidance. Let me take you through those to help you understand how we end up at 675 million as our low-end guidance number.
Larry Hilsheimer: First, a $19 million headwind from unfavorable year-over-year FX driven by the strengthening U.S. dollar.
Larry Hilsheimer: Second, $34 million headwind from items such as a $10 million shift from cost of goods sold into SG&A in our new operating model.
which is also reflected in the operating business elements.
Larry Hilsheimer: A $10 million increase for medical and other benefits, and additional headwinds from increased IT costs due to license fees, cybersecurity investments, and investments in commuter customer digitization, which we refer to as Greg Plus.
Larry Hilsheimer: In addition to these headwinds to SG&A, our fiscal year-end change creates a headwind of 12-month contractual fees as applied to 11-month fiscal years. For example, your audit fees and tax fees don't change because you have an 11-month year.
Larry Hilsheimer: The final headwind is considered in this low-end guidance. We also assume an incremental $86 million in manufacturing and transportation cost headwind, partially attributable to the increased volume assumption, but also factoring in incremental inflationary costs.
Speaker Change: Those factors all center tailwinds and bring us to the 675. Remember, this is low-end guidance, so it assumes the full impact of all potential headwinds, but only explicitly known tailwinds. With that, I'll turn things back to Ole on slide 13 to provide you with a preview of our upcoming Investor Day.
Thank you.
Speaker Change: Thank you all for dialing in today and for your continued interest in Grive. Next week at Invesco Day, we will demonstrate to you that Grive is a global market leader for essential industries.
Speaker Change: well-positioned to deliver continually stronger earnings power and, proactively, allocating capital for the highest shareholder return.
Speaker Change: I'm proud of the work our global teams have done since our last Investor Day to accelerate our Build to Last strategy, and we anticipate our event next week will be compelling, insightful, and a valuable use of your time.
Speaker Change: Registration is still open and so please email our team at investadayatbribe.com if you are interested in attending and that is investadayatbribe.com
Speaker Change: Thank you for your time today. Operator, will you please open the lines for Q&A? Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
And one moment for our first question.
Speaker Change: Our first question will be coming from Daniel Harriman of Sidotian Company. Your line is open.
Speaker Change: Thank you. Hey guys, good morning. Thanks for taking my questions. I don't want to steal too much from next week's Investor Day, but looking out for the future of the company.
Speaker Change: Obviously, customized polymer solutions is going to be the focus, but where else could we expect to see some incremental investment?
if it's not solely in the polymer solutions.
Speaker Change: And then, Larry, just regarding where you are from a leverage perspective, if you could just provide a little bit more commentary regarding how you feel about that level, given what you've been able to accomplish in the past after acquisitions in a difficult environment. Thanks.
Speaker Change: Hi, Daniel. Thanks for the question. Obviously, Polymer Solutions is a start-up.
You know the primary place where we invest for growth
Speaker Change: And in that business, we can also achieve a free cash flow conversion in excess of 50%. So that's why it's so attractive to us to invest in that market.
Speaker Change: The runway that we will also demonstrate at Investor Day is very, very long in that market. But saying that, we still have a fiber-based and a metals-based business.
Speaker Change: The primary investments we will do there, especially in metals, will be automation. It will be maintaining the cash machine that that generates.
Speaker Change: and automation and I will be amiss if I don't mention caps and closures as well which is also polymers. It's a relative small part of our overall business but it's a very very attractive business that we intend to expand in.
Yeah, the thing I would supplement with that is...
Speaker Change: And we've mentioned this often, is we also will continue to consider
Speaker Change: downstream, integrated, very profitable businesses for our paper operation, much like the CoalPak transaction we did, which we are very, very pleased with.
Speaker Change: So those are opportunities that are not as much a focal point, but we will be opportunistic on those as well.
Speaker Change: Relative to the leverage ratio, we feel very, very comfortable where we're at right now because of the impact of this industrial recession.
Speaker Change: and how rapidly we will be able to change that ratio as recovery occurs. With a $160 million volume gap, just at normal margin rates,
Speaker Change: That alone, if replaced, would take us down rapidly to below three, and the cash paydown would aggressively take us further down from there. So, we're comfortable where we're at, but it is a priority focus for us to pay down that debt ratio.
Speaker Change: Okay guys, thanks so much and best of luck in the coming year.
Thank you very much, Daniel. Thanks, Daniel.
Thank you. One moment for our next question.
Speaker Change: And our next question will be coming from Ghansham Panjabi of Baird. Your line is open.
Thank you. Good morning, everybody.
Speaker Change: How did the buckets, how did the savings kind of flow through across the various elements that you cited? I think SG&A network and productivity. Thanks.
Speaker Change: Yeah, thanks Ghansham. First of all, we're not fixing anything that's broken here. I just want to stress that. We are very good, but we want to be even better. That's our ambition and that's why we started the program.
So, and as I said, it's the...
Speaker Change: The way we have now organized ourselves, combined with the high level that we operate our business systems at now, and Lean Six Sigma, has really enabled us to do this now. There's three buckets. Obviously, the first bucket is SG&A.
Speaker Change: The second bucket is network organization. We operate 254 facilities around the world and we do believe that we can optimize that further. And then we simply have operating efficiencies driven by our great business systems. Patti will talk more about the network optimization benefits.
Speaker Change: in the new structure during Investor Day, and Kim will also talk about GBS 2.0 and how we are accelerating that in the new structure.
Speaker Change: As to when, it's difficult to say. Obviously, we would like the $100 million to come sooner rather than later, but we anticipate realizing the full savings as outlined before the three fiscal years are out.
Thank you very much.
Okay, great. Thank you. And then in terms of
Speaker Change: You know, just as it relates to your outlook for next year, obviously you're starting off at the low end, and we can do the math on adjusting for 12 months versus 11, which is a construct of your guidance. What is the base volume assumption in there? You know, Larry, you mentioned quite a few things. I just want to clarify as to what the starting point is for volumes across your legacy businesses, if you can.
Speaker Change: And, you know, what gives you confidence on being able to hit that number? Because it seems quite large, 76 million EBITDA improvement specific to the volume component.
Speaker Change: Yeah, you know, we are seeing, you have been seeing that uplift in our container board and corrugated business for some time now, Ghansham.
in June of this year, and that is ramping up.
Ole Rosgaard: And we had a significant contractual win in the recent months that will contribute a lot. Ole, what was the sum? Yeah, we won the business from the U.S. Postal Service, and that's 55,000 tons.
Ole Rosgaard: that you know that was the effect of that and just to give you an idea of Ghansham how Dallas cheat feeders
Ole Rosgaard: Total capacity is around 120,000 tons. So that's a major win for us. And that's a multiple year contract. Yeah, and that contract will be serviced not only out of Dallas, but our other sheet heater facilities as well. But it was a significant win. So we have great confidence in the fiber side of the business.
Ole Rosgaard: You know, our IBC investments that we've made, we have nice growth.
Yo Prospects, and they're...
Speaker Change: So, let me give you just broadly, you know, 68-70 million in our fiber business, 27 million roughly in our polymer solutions business across all three platforms. However, in our metal solutions, we're actually looking at volume contraction of roughly about 19-20 million roughly, Ghansham, so hopefully that's helpful for you.
Okay, thanks so much.
Thank you.
One moment for our next question.
Speaker Change: Our next question will be coming from Matt Roberts of Raymond James. Your line is open.
Matt Roberts: Maybe if you could help me kind of frame what a high-end scenario could look like, you know, without speculating on price. Some of your peers in container bird space have recently announced that price increases and
Matt Roberts: Given your independent mix and early read-throughs on demand, what are you hearing from customers in regards to that passing through? And ultimately, what kind of price-cost range could be reasonable pending any further price increases or further decrease in OCC?
Thanks Matt.
Speaker Change: You know, obviously, if we had real confidence in a high-end range, we'd put a range together. But I'll give you some things that could happen. And look, the biggest driver for us going with low-end guidance is just the uncertainty of when is this industrial recession going to turn.
Matt Roberts: and that can just create such a wide variety of things. You put any high-end number, then everybody's going to focus on a midpoint.
Matt Roberts: So, it's fool's folly, I think, to put something out, but that said...
Matt Roberts: We also just rolled out this week to our customers a price increase in the container board space, 70 bucks on liner.
and 100 on medium effective January 1st.
Matt Roberts: Obviously, the demand dynamics in that space are very strong right now and we believe supports that price increase.
Matt Roberts: You know, the other is the volume inflection. You know, we still have out there this roughly $160 million of volume-centered...
Matt Roberts: gains that will come when the industrial economy recovers to levels of our 21 volume levels.
So that's 21 or 22. 22, I'm sorry. Thank you.
Matt Roberts: So those things are just very powerful drivers there. You add to that, what do we gain out of the $100 million initiative?
Matt Roberts: that we spelled out this year. So there's a lot of drivers for upside.
Speaker Change: And like we said, we build in all the negatives and none of the positives. So, you know, this gives us optimism for a fairly good year. Hey, Matt, if I can just interject a few comments as well. So, if we look at...
Speaker Change: So the length of this volume contraction that we have and how the market operates in terms of what will drive recovery.
impacts chemicals and loops and...
Speaker Change: and people buying fewer durable goods, and then also when you look at U.S. auto sales, that's been below the long-term average for three years now.
Speaker Change: And you look at the PMI, the comments I made earlier, they're still below 50.
Speaker Change: Most of these things are interest rate driven and so when the interest rate hopefully will keep going down that will start opening up the existing home sales and that will have a major effect on not only our business but our customers business as well so that's that's one to watch.
Speaker Change: Are you having to give any price for share gains on that space or, on the contrary, are competitive price pressures still lingering in that business that you discussed last quarter? Thank you again for taking the questions.
Thank you. Bye. Bye.
Speaker Change: First of all, I don't comment on individual plants, but if you look at the overall polymer space that we operate in, our chosen end segment is the premium end of that market where we can achieve margins in excess of 18%, in fact well into the 20s.
Speaker Change: That's an important factor to mention. The other drivers in that market is, in particular, in the ag-chem market. And with the acquisitions we made, we are now the global leader in packaging for agrochemicals. That market is growing, and it's driven by the...
Speaker Change: population growth that we see you know in the world also there's less arable land to farm food on that means that there's a
Speaker Change: demand for higher yield on the land that's available which sort of ties into why we have focused on really getting into becoming a leader in that market.
Speaker Change: So, I'm confident we will continue to grow in that market and we will continue to enjoy and yield good margins and helping our customers grow as well.
Thank you very much.
Certainly, sir. Thank you all again.
Thank you. One moment for our next question.
Speaker Change: And our next question will be coming from George Stappos of Bank of America Securities. Your line is open.
George Stappos: Hi everyone, good morning. Hope you're doing well. How are you? So I want to, I know you covered it a little bit just now, but can you talk a little bit about the variance in IPAC-Chem relative to the deal model?
George Stappos: Can you talk about some of the underlying drivers? Obviously, you've covered a little bit. Can you quantify kind of where you are with that and why you remain confident going forward? Secondly, I want to push back a little bit on the cost optimization.
George Stappos: Obviously you spent a lot of time developing this, you quantified it, and you gave us a target by 27.
George Stappos: that would suggest you have some window in terms of the cadence. So, you know, tell us what might be able to hit the numbers for fiscal 25 and what is giving you the biggest pause in outlining the goal. I had a couple of follow-ons.
Speaker Change: I'll let Larry answer the first question, but before I do that...
Speaker Change: George, let me just say that when we closed the deal on IPAC, Kevin,
After that...
We saw this...
Speaker Change: contraction in the agrochemical markets. That obviously played into our business case a little bit there. But, you know, that's going the right way now. And let Larry go through the numbers.
Larry Hilsheimer: Yeah, I mean, you know, you look at we had that eight million dollar inventory cost adjustment impact that we had our uplift
from IPAC compared to 24 is $26 million.
Larry Hilsheimer: That will still leave us short of our business case, which we thought was about 57 plus 7 of synergies. With the volume decreases, we are about 4 million on run rate on synergies that's all volume dependent coming out of this year. But we have high confidence in obtaining that once we get the volumes back. The farmers are doing everything they can to manage their bottom line right now.
Larry Hilsheimer: using less, diluting things, all that kind of thing. Eventually, things will come back, and obviously, you have to buy things when they're for sale, and it was a strategic buy, and we're confident on the long-range profitability of that business.
Speaker Change: In terms of your other question, George, to put this in context, I mean, we literally just arrived at our decision to initiate this cost takeout effort in the last couple weeks.
Speaker Change: We announced it to our colleagues yesterday. We have ranges on each of those three elements that Ole mentioned, but we have not identified, you know, how much we're going to be able to get done in
Speaker Change: 25, you know how much will get done in 26 and 27. We're extremely confident of the hundred million dollar number over that three-year period. We are not confident about how much in each year or how much in each bucket at this point in time.
Speaker Change: Okay I mean I'll leave it there but Larry I would assume if you have a goal that you think you can get to by 27
Larry Hilsheimer: You had to have been able to build that up somehow, right? It doesn't just show up, right? We built ranges, George, based on benchmarking data, based on our analysis of things we have in our Six Sigma program and all that. But these ranges...
Larry Hilsheimer: Do not have identified, okay, you can do this by this month of this year, this month of this year. We haven't laid all that out yet.
Larry Hilsheimer: You know, it gets back, you've been fair all the time in saying, look, I don't run a business, I'm not in there every day doing it. I just say, at this point, just respect that that's how it works. It's hard to get in. You gotta, there's a lot more work to do.
Speaker Change: This is not a target we will achieve in 2027, it's one we have been working on for a while and so, as Larry said, it's difficult to tell you that the next quarter will be this or that. But it's definitely not back-loading, I can tell you that as well.
Speaker Change: Yep, understood. Listen, you're fair to say, right, we don't run businesses, but we do advocate for your investors, and that's what we're trying to do here. Can you talk a little bit about...
Speaker Change: You tariffed, and what some of the positives or negatives might be in terms of how you evaluate the volume outlook for 2025 and beyond. I know it's difficult, but what do you know right now that you can share?
Speaker Change: I mean, we obviously had experiences from the last time that terrorists were imposed. You have to remember that we, by and large, source our raw materials locally.
Speaker Change: We produce locally and we sell to our customers locally, and that means, you know, tariffs won't really play into our business.
Speaker Change: So, and that's something we don't calculate it with, but it benefits us. So that's the net effect of tariffs.
Speaker Change: Okay, net of whatever it might do for trade, and obviously, you know, more trade would be better for you than worse. Last thing, and I'll turn it over again, appreciate all the thoughtfulness on the guidance and the build-up.
Speaker Change: Any help you can give us in terms of how the first portion of the year, first quarter of the year will look relative to the latter quarters. I'm guessing it'll be a slower ramp. It builds in terms of earnings power over the rest of the year, but anything there would be helpful. Thank you, guys.
Speaker Change: Yeah, I mean, George, you know, we usually, our first quarter tends to be a slower ramp, and obviously...
Speaker Change: Although not built into our guidance, we would clearly expect that to...
Um, you know, uh, uh...
them would play through on a longer basis.
Speaker Change: Also, we do have a little bit of a drag in our metals business in the first quarter, because
Steel prices have been decreasing since about July.
Speaker Change: And what that does tends to do is lowers our margins because as the index price changes on our
Speaker Change: Price Adjustment Mechanism contracts were bleeding through slightly higher-priced inventory. So you have a little bit of that impact in the early part of the year that will then play out positively through the rest of the year. Larry, forgive me, for me, did you say your price increases were effective February 1 or January 1? I'm sorry about that. January 1, but they tend to roll through on a delayed basis through the contract mechanisms.
Thank you. I'll turn it over.
Thank you.
Thank you. And one moment for our next question.
Thank you.
Speaker Change: And our next question will be coming from Gabe Hajde of Wells Fargo. Your line is open.
Ole, Larry, good morning.
Thank you.
Speaker Change: I'm pretty sure I know the answer to this, Larry. You've, I think, referenced it twice now about the $160 million of underabsorbed fixed overhead, but in the context of the $100 million savings opportunity that you laid out, some of which is, looks like rooftop consolidation, et cetera, does that limit your way or your ability to unlock or kind of monetize that underabsorbed fixed overhead from a volume standpoint?
Yeah
Speaker Change: To your point, we're 25 months into what feels like an industrial winter.
Speaker Change: Have you guys started to do any work, and perhaps this $100 million is a little bit reactionary in the sense that, is there any structural change in demand that you might be seeing from your customers from, I've got three things that kind of popped into my mind. The EV transition, in other words, less lubricants and additives and different things like that for ICE engines versus EV.
Speaker Change: Maybe a permanent shift in consumer preferences for experiences versus stuff. And then, you know, maybe a push towards multi-family living versus, you know, single-family houses given affordability.
Speaker Change: Yeah, I'd say three on that. Let me take those actually sort of in reverse.
Speaker Change: So, you know, pent-up housing demand has never been higher in this country right now. I mean, Columbus, Ohio, happens to be the most under-housed market in the United States. You know, so I don't think there's a permanent shift to multifamily. You know, I think there, right now, there's a lot of pent-up demand of people sitting in...
Speaker Change: multifamily who would love to you know get into single-family housing but also let me be clear the real driver for us is less about new homes than it is about existing home sales.
Speaker Change: And existing home sales are now at the lowest point they've been since 1995.
Speaker Change: So, when people move those homes, they freshen up the home they're selling.
Speaker Change: You know, they paint it. People come in and say, well, you need this to look better. Take the carpet out, put this in so you can stage the house to sell it. That causes people buying things. Then you also go to the new house and you go in. Yeah, I fall in love with it. And then one spouse or the other decides when you get in. Oh, I didn't really like this room this way. I'm going to change this.
Speaker Change: I mean, that stuff just drives a lot of product sales, a lot of demands, particularly in the lubricant business. You know, in terms of consumer demand and that kind of thing, and just shifts to experiences rather than stuff.
Speaker Change: I mean, look, that could be a long-term macro trend, and that would have consequences.
Thank you. Bye.
Speaker Change: I haven't read anything that indicates people think that that's a long-term thing. On EVs, the third element you mentioned, the analysis we did of that a number of years ago is that the vast demand for our lubricants is not in the vehicles or it's really in machinery and industrial plants.
Speaker Change: And, ironically, within the EVs themselves, a lot of the axles and all the things that actually need lubricants...
Speaker Change: There's actually as much in an EV as there is in a historical combustion engine car.
Speaker Change: And it's driven by people who run their cars longer. And EV has plateaued out, and what you see grow is hybrids, which still requires loop. So we don't see any effect of that.
Thank you.
Speaker Change: 100% Listen, I mean we'd love to see you guys unlock that $160 million. It's just, um...
Speaker Change: We're kind of scratching our heads trying to understand what the impediment has been from a volume standpoint.
Speaker Change: I'm just going to say, in terms of putting more color to that $100 million, we will be doing that at Investor Day next week, actually. Both Kim Kellerman and Patty Mullaney will cover that in their presentations.
Speaker Change: Well, I was going to go there. I mean, I know George kind of tried to dissect the different pieces and maybe Ghansham, but is any of this also in response to things maybe your customers are doing in terms of consolidating their own footprint and trying to be proactive there?
I'll leave it there.
Speaker Change: No, we don't. I mean, it's not related to that. Obviously, if our customers did something that resulted in us not needing a particular plant, we would obviously address that, but this is not related to that in any fashion.
Speaker Change: Okay, last question. Maybe putting a little bit too fine a point, but you gave us some data points, so I want to try to use them appropriately.
Speaker Change: The diligence, math, or EVA TA associated with IPAT-CHEM was 57 and the 7 million of synergies.
Speaker Change: I think you said $26 million was the contribution in fiscal 24, and then you told us $19 in fiscal 25, but that was IPAC-CHEM less Delta.
Speaker Change: I'm seeing a $94 million inflow of cash from the sale of Delta. Maybe that's $10 million or so of EBITDA that goes away. So, I mean, you guys are pretty close on IPAC-CHEM, or is that not the right math?
Speaker Change: Yeah, so on Delta, we sold Delta for about $90 million, which was 8.5 times.
Speaker Change: The headwind in Q4 was about $4 million, so the net of that is $7 million. They were a little back-ended on the results for...
Speaker Change: Delta. On IPAC, Kim, the lift year-over-year is $26 million from last year. I think we get to what a $42 million run rate in our low-end guidance for the year for IPAC this coming year. So still $27 million short of our business plan which is all demand trend driven, Gabe. So hopefully that helps you. And that $42 is in 11 months. Yeah, I'm sorry. Yeah, it's 11 months.
Yep, okay. Thank you guys.
And one moment for our next question.
Speaker Change: Our next question will be coming from Brian Butler of Stiefel. Your line is open.
Hi guys, thanks for taking my questions.
Thank you. Thank you.
Speaker Change: Maybe since you're kind of going down the path of re-segmenting and you have a low-end guidance for 25, can you give some color around the new segments and maybe what organic growth is kind of built into that low-end guidance?
Speaker Change: Yeah, I mean, when we look at what we're seeing in our, you know, corrugated business, you know, a lot of the growth is, as I said, is tied to the investment in our Dallas sheet feeder, you know, kind of business.
The...
Speaker Change: and tubes of course about, you know, four, we've got, you know, two to five on, you know, container board and corrugated sheets kind of range. Our plastics would get three percent roughly and then like I said in our metal solutions it's really low single digits down.
Okay.
Speaker Change: And then, on the $100 million in savings, I know we've kind of gone over this a couple times, but I'm going to just maybe ask it another way. It's not $100 million all coming in 2027, so there's something in 2025. You don't know what that is, but you have zero in your low-end guidance. Is that a fair statement? That's just... Yes.
Okay.
Speaker Change: So there's, again, whether it's $5 million or $20 million, I don't know, but it's something other than zero.
Great, we'll get something in this fiscal year.
Speaker Change: And just to remind you, Brian, it's 24, 24 is our baseline, the 24 fiscal year.
Thank you.
Speaker Change: Right, so starting this year, but you're going to get the savings over the next three years. There wasn't any savings in 2004.
Right, yeah
Right, okay.
Speaker Change: All right, I think that was all my other questions been asked, so thank you very much.
In one moment for our next question.
Speaker Change: Our next question will be coming from Michael Roxlin of Truist. Your line is open.
Speaker Change: Yeah, hi guys. Thanks for taking my questions. This is Nico Puccini on for MicroOxalant today.
Speaker Change: I guess just, I apologize if I missed it earlier in the call, but does your guidance assume full implementation of the container ward price increase?
No, it has none of it in it.
Speaker Change: Got it. And then just, I guess, switching to URB, what are you seeing there and what are your thoughts on?
you know, where price might go for URB.
Speaker Change: Yeah, we don't talk on future price increases. You know, as we've said, the demand in that segment, operating rates have been in the 80s.
Speaker Change: You know sort of stable demand, but no no real pickup The drag is really in paper cores for most of the box board grades of paper And we haven't seen robust lift or any kind of inflection in that business much across the rest of our portfolio being the same other than container board
Speaker Change: Understood. And then just last for me, just on on index pricing in general, is there
Speaker Change: Has there been any more discussions or any any thoughts around switching?
Speaker Change: maybe further away from index pricing to a value-added pricing model in paper.
Are you being away from the Richie model? Exactly, yeah.
Speaker Change: I mean, we're not part of that. We don't discuss that. We are, in container ball, a small player.
So, to my knowledge, there's been no developments.
Okay, understood. Thank you.
And one moment for our next question.
Speaker Change: Our next question is a follow-up from George Staffos of Bank of America Security. Your line is open.
George Stappos: Hi guys, thanks for taking the follow-on. Can you provide perhaps a bit more color on what you're seeing in the box board markets? And I was curious if I heard you correctly to one of the prior questions, you're looking for growth?
George Stappos: in URB and CRB, and I thought you said maybe 8%, correct me if I'm wrong, and how do I, in tube and core you have up four.
and yet...
Based on your answers
Speaker Change: to, I think, Mikko's question earlier. Other than container boards, you're not seeing much of a lift in any of the paper markets. So help me put all those boxes together. No pun intended, thank you.
Speaker Change: If we just look at, first of all, on the corrugated markets, our demand is up 2% year over year. That excludes Dallas. And if you look at the AFPA numbers, then the industry is down 2%, so we've experienced growth there.
in Cuban core.
Speaker Change: We're down slightly over here, and we're flat from a Q3, but if you look at the spiral wound products we make, we're actually up 2%, but that's offset by softness in speciality products like end protectors and adhesives.
Speaker Change: The North American market improvements really supports, you know, pay-per-tube demands, although it's from a low base. So...
Thank you.
I don't know if you have any...
Flaring in, can't go further to that.
I think that's it, y'all.
Okay, thank you.
In one moment for our next question.
Speaker Change: Our next question is a follow-up from Gabe Hajde of Wells Fargo. Your line is open.
Gabe Hajde: Thank you guys for taking the questions. As it relates to the $100 million,
Gabe Hajde: You called out $86 million of inflationary headwinds this year, Larry, and then 34 of sort of what I see as discrete items, medical technology, things like that. So the question is, is that $86 million sort of a new inflation treadmill that we should think about for GRIFE on a go-forward basis? And then secondarily, are you incurring any costs, whether it's through OPEX or CAPEX to implement this $100 million? And again, I appreciate we're kind of feeling some thunder from next week.
Speaker Change: Yeah, the inflationary cost increases was, you know, our overall increase in manufacturing costs. So we had some of it's related to just volume impact that we've said. And, you know, it's all we're tying in all these cost increases into obviously low end guidance. But the, you know, so so you've got costs that, you know, left from acquisitions at a time when demand is low. So you've added manufacturing costs.
but the volume and pressure is down.
Speaker Change: because of just the demand dynamic. So, yeah, you've got that margin squeeze that's just related to that, that then goes back to that $160 million lift if the volume recovery comes about. You might remember when we talked about that the last quarter, we talked about...
Speaker Change: is about, in our old segments, you know, 90 million was in the GIP space, about 56 in PPS, about 20 million in acquisitions, still live up to that roughly 160-170 number.
Speaker Change: So yeah, there's inflationary labor costs and those kind of items in there, but it all comes just into the overall manufacturing cost lift that we'll be going after part of that through operational efficiencies. And Kim and Patty will talk more about those things next week.
Speaker Change: Okay, and are there any costs, discrete costs this year in fiscal 25 with implementing this hundred million dollar savings?
Speaker Change: Most likely there would be. I mean, you know, obviously to the extent that things go to, if we do any plant consolidations, or to the extent that you do any headcount moves, there will obviously be some severance-related costs.
Speaker Change: That'll generate that long-term benefit obviously, but and that goes obviously into the whole
Speaker Change: equation of do you move forward on something like that or not.
Thank you.
Thank you.
Speaker Change: And I would now like to turn the call back to Ole Rosgaard for closing remarks.
Speaker Change: Thank you. And thank you once more for your interesting life. And we all hope to see you next week at Investor Day. Thank you.
Music
I Am Homeless
The End
Thank you. Thank you.
Speaker Change: Aadit Shrestha, Matt Leahy, Gabe Hajde, Aadit Shrestha, Lawrence Hilsheimer, Aadit Shrestha,