Earnings Call Transcript - GEF Q1 2024

Matt Leahy, Vice President of Corporate Development and Investor Relations

Thanks, and good morning, everyone. Welcome to Greif's fiscal first quarter 2024 earnings conference call. This is Matt Leahy, Greif's Vice President of Corporate Development and Investor Relations. And I am joined by Ole Rosgaard, Greif's President and Chief Executive Officer; and Larry Hilsheimer, Greif's Chief Financial Officer. We will take questions at the end of today's call and in accordance with Regulation Fair Disclosure, please ask questions regarding issues you consider important because we are prohibited from discussing material non-public information with you on an individual basis. Please turn to Slide 2. As a reminder, during today's call, we will make forward-looking statements involving plans, expectations, and beliefs related to future events. Actual results could differ materially from those discussed. Additionally, we will be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metrics can be found in the appendix of today's presentation. And now I'd like to turn the presentation over to Ole on Slide 3.

Ole Rosgaard, President and Chief Executive Officer

Thank you, Matt, and good morning all. Ahead of covering our first-quarter results, I would like to briefly recap our strategy and philosophy of how we lead and serve customers. At Greif, we are a purpose-driven company. We create packaging solutions for life's essentials. Our 13,000 colleagues around the world serve as a critical supply chain partner for our customers who are delivering the raw materials, ingredients, foods, beverages, medicines and products that make the world work. Our packaging helps our customers deliver the juice and ketchup on your table, the paint on your walls, the oil in the car, the furniture in your home, the soles on your shoes, your Amazon boxes, and the vitamins or medications that you take. We help our customers do very important work. Our Build to Last strategy is designed to help us be better stewards of our customers' goods, and our vision is to be the best in the world at customer service. The way we do that is through our four strategic missions, how we work and the principles that guide how we lead, support, and serve our colleagues and customers. We've built a powerful culture and business systems at Greif that both serve as a flywheel to consistently improve our competitive positioning, attract and retain great talent, and create value as we grow the business. Please turn to Slide 4. We believe the future of Global Industrial Packaging will be driven by a focus on sustainable packaging solutions, including recyclable resin-based products. We have aligned our strategy with these broader industry trends, and through acquisition and organic investments, we are slowly transforming our portfolio. The five product groups shown on Slide 4 are the same focus areas communicated at our Investor Day in 2022, and since then, we have made substantial progress on expanding in these verticals. We've executed three transactions in small plastics in the past year in Lee, Reliance, and Ipackchem to build global scale in that important and growing market. We intend to continue to build on our small plastics platform with high-quality, high-margin specialty businesses. Our focus in IBC is on building scale reachable at both the manufacturing and the reconditioning level to offer our customers a full lifecycle solution of sustainable products and further our circularity mission. Our acquisition of Centurion Container has significantly increased our mix of washed, rebottled, and reconditioned IBCs, all with a growing margin. This business improves both the environment and our economics, a powerful combination. In our paper packaging business, our growth is focused on unique high-margin converting businesses that improve our downstream integration as well as our end-market exposures into more stable food, beverage, and consumer markets. Our ColePak acquisition, Dallas Sheetfeeder, and Louisville Litholaminator investments all meet this goal in paper. While our closures business is predominantly internally focused, we see tremendous potential to grow beyond our current footprint, both organically and through acquisition. In summary, we see a long run rate for growth in many of our businesses and intend to continue along this path of transforming our portfolio to meet the market needs and better serve our customers. Please turn to Slide 5. Now into the first quarter. Volumes remained under pressure in most parts of the world through the quarter, consistent with our expectations and full-year guidance. Starting from east to west, which is how we normally see volume trends emerge, our APAC business saw some bright spots in the quarter as volumes in our China business improved slightly on both a sequential and year-on-year basis. China manufacturing PMI remained above 50 for all three months in the quarter and lubricants, which are predominantly used by heavy manufacturing customers, were the primary improving end market in that region. In EMEA, we also saw improving lubricants and end market demand reflected more of the low comparison versus improving sequential trends as eurozone PMI remained well below 50 through January. The agricultural and conical markets are still working through some of the year-end 2023 destocking, and we expect those businesses to improve throughout the year. Our LATAM business primarily serves the agrochemical juice and beverage industries and is impacted by planting yield and consumer demand dynamics in those markets. Volumes in that region remain weaker, and we do not currently see any material volume inflections. North America, still our largest and most diverse region with both rigids and paper packaging, remained our weakest market globally in the first quarter. U.S. manufacturing PMIs remain in contraction territory through January, the 14th consecutive month at or below 50. This continued low level of industrial activity has driven GIP volumes down 19% in the quarter and 36% over a two-year period. This is a truly historic period for our GIP business and makes the results from that team over the past year and a half even more impressive. We are excited by the prospects when the volume trends inflect. Our PDS business saw a mix of volume trends with containerboard clearly improving and our boxboard business still trending down slightly. Overall, it is clear we remain in a difficult point in the cycle and our teams are doing an excellent job controlling what we can control and focusing on serving our customers. I'm proud of our work this quarter and our continued resilience and commitment as we navigate a tough environment. I'll now turn it over to Larry to walk through our detailed financial results.

Larry Hilsheimer, Chief Financial Officer

Thank you, Ole, and good morning, everyone. Turning to Slide 6. Greif's first-quarter results came in line with our expectations with $128 million of adjusted EBITDA, a use of free cash flow of $48 million. While our team's execution remains solid, the combined effect of extended slow demand and the significant negative price/cost dynamic in our paper business led to a decrease in year-over-year performance. We remain focused on execution, leaning on our value over volume price discipline and cost management with a continued focus on cash and working capital. As Ole covered in his opening remarks, while we are managing through the short-term volume trends, we continue to focus on investments that will help us build a better business long term. One of those investments is our recently launched pilot project with Ionkraft, a German-based startup that has developed a unique, chemically inert and fully recyclable barrier technology for plastic containers. This partnership is representative of our commitment to innovation and packaging that meets the growing sustainability demands of the marketplace and will enable us to better serve our customers in many end markets, including agrochemicals and food and beverage. Combined with Lee, Reliance, and Ipackchem, we think a successful outcome with Ionkraft will offer our customers a full suite of custom packaging and barrier options and provide multiple growth levers for Greif for years to come. Let's turn to segment results starting on Slide 7. Our GIP business has continued to trend consistent with the previous few quarters with a sustained low level of demand, offset by strong execution on pricing costs. Volumes remain under pressure in most regions throughout the world and order patterns remain tight as customers face limited visibility to demand improvement. APAC and EMEA volume showed some signs of life on better petrochemical and lubricant demand as manufacturing activity improved in those regions, while North America remains weak. The GIP team posted solid results given this backdrop with improving gross profit and flat EBITDA margins on lower sales year-over-year. Our team's combined pricing discipline and cost management in GIP, in partnership with our global operations and supply chain teams, drove another quarter of solid margin performance in our seasonally slow first quarter. I want to thank our global GIP colleagues for another quarter of excellent execution in a very tough environment. Please turn to Slide 8. Our PPS business executed well in the quarter with improving volume trends in containerboard, offset by weaker boxboard demand. Corrugated converting volumes were up 3% and containerboard mill volumes were up above that level year-over-year as converting customers began to reorder paper and rebuild low inventory positions as they saw the demand outlook improving in late '23 and early '24. Our tube and core volumes remained stable sequentially through the quarter, but are still down 4% year-over-year. A reminder that the largest end market for tube and core is the paper industry. So we expect that rising mill volumes in containerboard and elsewhere, if they continue, will lift volumes in our URB and tube and core business as well. On the margin side, our PPS business was challenged in Q1 with a price-cost squeeze driven by delayed recognition of our announced price increases combined with rising OCC costs, which rose by $55 per ton or nearly 160% year-over-year for the quarter. The January published RISI index prices in both containerboard and boxboard were not at all in sync with what we experienced in the market. This is largely due to what we see as a flawed methodology of industry price tracking by the publication. RISI's survey-based approach of a small and shrinking third-party independent market does not reflect what we see in real-time in our businesses or with our customers. In a time of the increased use of data and analytics and the ability to track market information using automation or artificial intelligence tools, we struggle to find relevance in a survey-based method with such a small non-representative sample size. Nonetheless, the lack of paper price recognition, coupled with significant cost inflation resulted in a 540 basis point margin squeeze in Q1, which we anticipate will largely recur in Q2, but then improve in the second half as RISI indices better reflect market pricing. Please turn to Slide 9 for our updated guidance and outlook. Given the lack of any compelling demand inflection, but accounting for the RISI recognized price increase and other modest improvements, we are raising our low-end EBITDA guidance by $25 million to $610 million and maintaining our adjusted free cash flow guidance of $200 million, which is reflective of increased CapEx and working capital expectations for the full year. Our full-year 2024 assumptions remain consistent with our guidance from the fourth quarter, namely our expectation for a continuation of current demand trends, no improvement in RISI published index prices from the recent February publication, and no contribution from Ipackchem, which is expected to close in our fiscal Q2. As a reminder, we present our guidance based only on factual evidence available to us at the day we report. We think it makes sense to stick with low-end guidance at this time, and we'll revisit and share our updated view, including possibly introducing a broader guidance range during our next quarter call. With that, I'll turn things back to Ole for a brief closing.

Ole Rosgaard, President and Chief Executive Officer

Thanks, Larry. I will close by simply stating that we continue to demonstrate our ability to control what we can control and drive the business during a down cycle. The investments we are making on the Build to Last, to grow and improve all aspects of our business, will position us well to better serve our customers and achieve breakout performance when demand returns. I'm proud of the dedication, commitment, and resilience from our global drive teams and excited for what we are building together. We will plan to discuss our business and future in greater detail at an upcoming Investor Day on December 11. Details will be forthcoming, but please make a note in your calendar, December 11. Before we start the Q&A session, I have an important update for our investors. Matt Leahy is moving into a new position to oversee our Asia-Pacific operations and Bill D'Onofrio, who has played a key role in developing financial planning and analysis and data analytics at Greif for nine years, will now take charge of our Investor Relations. This is part of their professional growth plans, and I want to thank Matt for his leadership as our Head of Corporate Development and Investor Relations for the past several years, and welcome Bill to his new role. With that, I'd like to thank you once more for dialing in today, and we will now open the lines for Q&A.

Ghansham Panjabi, Analyst

Hey guys, good morning. Congrats to you, Matt. Good luck in the future. I guess, first off, maybe you can give us a sense as to how volumes during the first quarter compared to your initial plan and how things are looking so far in February? There are some recent indications on ISM, et cetera, on a global basis that have seemed a little bit better. Just wondering if you're seeing any green shoots associated with that?

Ole Rosgaard, President and Chief Executive Officer

Yes. So as I said, Ghansham, throughout January, volume has been depressed. We have seen some sequential improvements, but it's not really enough to signal an inflection. We spoke a little bit about APAC and in Europe, where we have seen a little bit of green shoots, but it is on a spot-by-spot basis. What I would say is that when we speak to our customers, they seem much more positive than they have been for a long time, although we haven't seen that materialize into volume yet.

Ghansham Panjabi, Analyst

Got it. And then in terms of the EBITDA differential, the $25 million between your previous low end versus now, is that just purely a containerboard pricing?

Larry Hilsheimer, Chief Financial Officer

Yes, primarily that, Ghansham. However, our teams have performed well. We are reducing our SG&A estimate for the remainder of the year by about $6 million. Additionally, our closures business has shown improvement, which Ole briefly mentioned in our comments, resulting in another $5 million of adjustments. There are also other factors contributing an additional $3 million. In total, that's approximately $11 million of cost adjustments across both businesses, including $6 million in SG&A, $5 million in closures, and $3 million in miscellaneous currency and other considerations.

Michael Hoffman, Analyst

Hey Matt, congratulations. And Ole, I always respect companies who treat Matt's position as a strategic role, so good luck to Bill too.

Ole Rosgaard, President and Chief Executive Officer

Thank you.

Michael Hoffman, Analyst

On the Q&A side of it, can we dig a little bit into end market customers? If there are two or three of them that, if they make a change here in North America, could shift the momentum? It's not 20 of them; it's two or three end markets. Maybe it's only one or two. Who are we watching at this point to shift their demand outlook?

Ole Rosgaard, President and Chief Executive Officer

Yes. I would really focus on the chemical customers or the chemical end segments, both in the biggest segment are bulk and commodity chemicals, which have been significantly down. The next one is specialty chemicals. Those are the two big ones. Then the third one would be lube, petrol lube, and oils.

Michael Hoffman, Analyst

So the lube market seems to have corrected their end market oversupply of finished goods and destocking. So is there early green shoots there?

Ole Rosgaard, President and Chief Executive Officer

As I said, we've seen pockets of sporadic progress, but it's still not enough to say that it's permanent. We still see a little bit of destocking. But again, it's very sporadic, depending on what end segment we're looking at. But I would say it's too early to signal that's an inflection point.

Michael Hoffman, Analyst

Okay. And then on the paper side, there's a whole bunch of new capacity coming online in North America and Latin America. How is that factored into virgin capacity making paper? How is that factored into your outlook?

Larry Hilsheimer, Chief Financial Officer

Yes, we have continued to see just demand being weak. But like we said, we did see some turn up in containerboard demand through the end of the first quarter. The new capacity is something we've discussed often. Every year since I've been here, Armageddon is coming next week in this business. Yet I think that the industry has managed to work its way through and understand that focusing on serving customers and retaining them by providing excellent service helps combat that in terms of loss of customers. So, as I said, we adjusted our guidance up for the price recognized by RISI in January. But again, I will repeat, it stuns me that we are still dealing with some survey-based process to recognize price in this industry when everybody else in the world has moved on to data and analytics and facts. What we are seeing on the street was no big pushback on the price. Everybody knew cost-driven factors justified the price, and yet it didn't get recognized. That's the biggest factor in our containerboard business right now.

Michael Hoffman, Analyst

Okay. And then when you think about where you would like to sort of look next for incremental M&A to fill in the white space in the model, what is the key place that you're watching today?

Ole Rosgaard, President and Chief Executive Officer

As we've said, our focus on M&A is in resin-based products with high margins and paper converting products with high margins. And on paper, you find that in niche markets.

Gabe Hajde, Analyst

Ole, Larry, good morning. Matt, congrats. On Slide 4, you mentioned it briefly about some of the recent acquisitions. And sometimes the pushback that we all hear is that companies do acquisitions to mask some weakness in the underlying business or something like that. We would contend, hey, look, if you guys can deploy capital in M&A in a period of depressed demand, maybe you can pick up a deal here and there. I'm just curious if you could give us any specifics as it relates to the couple of deals that you guys have now integrated in terms of key learnings, number one; and number two, if these deals are hitting the underlying or the economics that were underpinning those acquisitions.

Larry Hilsheimer, Chief Financial Officer

Yes. Gabe, I would say, so far, we're extremely pleased. All of these, a big factor for us was a cultural fit. The Lee acquisition has been particularly incredible from that perspective. It has gone extremely well. They're dealing with the same kind of demand challenges that the entire industry is, but we sort of knew that going in. It's a broader economic thing. The results that they are delivering are in line with what we were expecting. The integration has gone extremely well. Reliance is a pretty small one-plant operation and it's going very well too. They're adapting to our safety culture and our focus on our people, and that will end up being successful. But it's tiny. The Ipackchem transaction, although it hasn't closed yet, our integration activities are well down the path, and as soon as that closes, we expect that to hit the ground running. The cultural fit again seems extremely strong. We couldn't be more pleased with ColePak; it's almost as if they were part of Greif for the last 30 years. These aren't masking anything. They're aligned with the strategic plan that we delivered. In all of these, we're seeing actually volumes better than our legacy business. So we're really pleased.

Ole Rosgaard, President and Chief Executive Officer

I gave this comment about masking. The strategy we have redeveloped three years ago. We announced it to the investment community two years ago. What we have seen is that we are just executing on the strategy we presented to the investment community. It's very intentional and not opportunistic.

Gabe Hajde, Analyst

Appreciate that, Ole. Another one on organic investment and what you guys are doing internally. If memory serves, I think the Litholaminator in Louisville was up and running and the Sheetfeeder was sort of underway. Are you guys commercializing that at this point? Or has it gone operational? Just update us on where you're at with the Sheetfeeder?

Ole Rosgaard, President and Chief Executive Officer

The Sheetfeeder, we're in the final phases of getting fire permits and that sort of thing. We will be operational by the end of May of this year and we will serve the first customer on June 1.

Larry Hilsheimer, Chief Financial Officer

Yes. The Laminator is up and operating. Actually, it's going very, very well.

Matt Leahy, Vice President of Corporate Development and Investor Relations

Thank you all again for joining. Have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Goodbye.