Earnings Call Transcript - GEF Q2 2025

Bill D'Onofrio, VP of Investor Relations and Corporate Development

Thank you, and good day, everyone. Welcome to Greif's Fiscal Second Quarter 2025 Earnings Conference Call. Today, our CEO, Ole Rosgaard, will begin with an update on our colleague and customer engagement as well as progress on our cost optimization commitment. He will then discuss key global market trends. Our CFO, Larry Hilsheimer, will walk through second quarter financial results and 2025 guidance. Please turn to Slide 2. In accordance with Regulation Fair Disclosure, please ask questions regarding topics you consider important because we are prohibited from discussing material nonpublic information with you on an individual basis. 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 the reconciliation to the most directly comparable GAAP metrics that can be found in the appendix of today's presentation. I'll now hand the call over to Ole on Slide 3.

Ole G. Rosgaard, CEO

Thank you, Bill, and good morning, everyone. I want to start by recognizing our more than 14,000 colleagues across the world. Their discipline, focus, and execution continue to drive strong performance. In Q2, we made further progress under our Build to Last strategy. Despite ongoing macroeconomic volatility, our resilient business model and emphasis on controlling what we can control give us confidence in the road ahead. That confidence is reflected in our decision to raise full-year guidance, which Larry will walk through shortly. Our culture remains a core competitive advantage. I'm proud to report that we have once again been named one of Newsweek's Top 100 Most Loved Workplaces in the world. This marks our third consecutive year on the list. In addition, we received Gallup's Exceptional Workplace Award for the second year in a row. Our colleague engagement score places us in the 86th percentile of all manufacturing companies globally, which is with a remarkable 94% participation rate. These recognitions speak to the pride our teams take in their work and the environment we have built where people feel empowered, valued, and connected to our purpose. That engagement drives legendary customer service. Our fiber team was recently honored with the Supplier Innovation Award from the U.S. Postal Service. USPS joined us in 2024 and is now a key customer for our Dallas sheet feeder facility. This award is a strong validation of the long-term value and customer loyalty we create. Sustainability also sets us apart. While we view it as the right thing to do, it is also a clear business advantage. This marks our 16th consecutive year of publishing a sustainability report, a rare track record in our industry. Our sustainability strategy is central to strengthening customer relationships and pursuing durable, high-margin growth. Please turn to Slide 4. Our cost optimization efforts are progressing rapidly, thanks to our team's focus and willingness to embrace change. As of quarter end, we have achieved $10 million in run rate savings toward our full year commitment of $15 million to $25 million and $100 million total commitment compared to our 2024 baseline. A few highlights of projects underway. Thank you to our colleagues in Warminster, Alsip, Welcome, and Oshkosh. Our operations and engineering teams are embracing change and utilizing Six Sigma practices to advance scalable and structural change in process efficiency and scrap production across our metal and fiber production plants. Second, we made a strategic decision to close our L.A. paperboard mill, removing 72,000 tons of capacity. While difficult, this step streamlines our network and improves long-term performance across our fiber operations. These are just two of many projects underway. Each day, our conviction grows in our ability to achieve or exceed both our 2025 and 2027 commitments. Across the board, our strategy is working. We are sharpening our competitive edge, optimizing operations, and expanding in high-return markets that position us well when demand accelerates. Please turn to Slide 5. Our portfolio continues to show resilience with especially strong performance in the areas we are investing. Polymer Solutions volumes improved year-over-year with small containers and IBC both up. That impact was partially offset by lower large polymer drum volumes due to softer industrial demand. Our polymers growth was driven by our target growth end markets of agrochemicals, food and beverage, pharma, and flavors and fragrances, which all showed year-over-year growth. This contrasts with metals, which was down 5% year-over-year due to exposure to the chemical and lubricant markets, which continue to be softer. Fiber Solutions volumes were down slightly compared to last year but improved each month throughout the quarter. Our corrugated business outperformed and was up high single digits per day versus an industry decline of 2%. This differentiation was driven by strong independent demand. Integrated Solutions saw continued growth led by recycled fiber, while external volumes in closures, paints, linings, and adhesives held steadily as we managed our own internal needs versus external demand. It is interesting to note that last year was a leap year, giving one additional day of business as well. Demand remained stable across all regions outside North America. In North America, softness persisted due to greater exposure to industrial end markets. The key takeaway across the previous four slides is clear: our strategy is working. We are investing in resilient, high-growth markets, reinforcing our competitive strengths, and optimizing our cost base simultaneously. This all prepares us to capture even further upside when demand meaningfully rebounds. Please turn to Slide 6. In closing, I want to briefly touch on a topic that demonstrates the resilience of our business model. On tariffs, we are staying ahead of potential disruption. Year-to-date, we have not seen major demand shifts tied directly to tariffs, but we continue to monitor demand patterns and talk closely with customers to identify any potential impacts on our end markets. Our network of more than 250 facilities in over 40 countries allows us to buy, produce, and sell locally. This flexibility minimizes disruption, serves our customers' needs more flexibly than competition, and allows us to obtain a fair price for the additional exceptional service and adaptability we provide our customers. Our global sourcing team continues to assess risks. We reaffirm that our maximum direct cost exposure is less than $10 million annually, although that figure at present is even lower due to mitigation actions and tariffs currently in effect versus worst-case scenario. Meanwhile, we are capturing more value through network flexibility and pricing. We are also benefiting from pass-through mechanisms in our metals business as steel producers respond to raw material inflation. With that, I'll turn it over to Larry to walk through our Q2 financial performance on Slide 7.

Lawrence Allen Hilsheimer, CFO

Thank you, Ole, and good morning, everyone. For the second quarter of fiscal 2025, adjusted EBITDA increased by $44 million compared to the previous year, reaching $214 million, and the adjusted EBITDA margin improved by 300 basis points to 15.4%. These results highlight our effective cost management, strong business model, and our team's dedication to creating value. We generated $110 million in adjusted free cash flow, an increase from $59 million in Q2 of 2024, and adjusted EPS rose to $1.19 from $0.83 in Q2 of 2024. The sale of our Land Management business, Soterra, is progressing well, and we are pleased with the level and quality of interest we have received. The funds from the Soterra sale, along with our growing cash flow, will be used to pay down debt in line with our capital allocation strategy discussed at Investor Day. Our decision to close the L.A. paperboard mill, although very tough due to its impact on our colleagues, illustrates the next phase of optimization for Greif. At our Investor Day in December, we mentioned that we have capitalized on most opportunities identified in the lowest quartile of our analysis. We are now aiming to elevate our operations from good to great across our network of over 250 facilities. We are thoroughly exploring untapped opportunities to boost our return on invested capital within each quadrant. This could lead to either strategic investments or closures, as we have seen with L.A., but our focus will always be on maximizing long-term returns on capital. In our Customized Polymer Solutions segment, adjusted EBITDA rose by $19 million year-over-year to $53 million, driven by volume growth, an improved product mix, and ongoing disciplined pricing strategies. Our Polymer segment is performing well given the current demand environment, as our target growth markets are proving to be more resilient than others. However, sales in Durable Metal Solutions declined year-over-year due to the softness in industrial end markets. A key focus for us is to leverage operational efficiencies in metals when these markets recover. We are pleased to see encouraging gross margin improvements year-over-year through our value-over-volume strategy. In Sustainable Fiber Solutions, adjusted EBITDA increased to $80 million from $50 million last year, with EBITDA margins improving from 8.5% to 13.3%. RISI recognized a $40 a ton containerboard price increase in February, contributing to this quarter's upward results. While we appreciate the progress in price versus cost in our fiber business, we feel the market remains out of balance. The recently recognized $30 a ton URB price increase by RISI should enhance margins further, and we believe strong demand justifies the full implementation of our previously announced $50 to $70 a ton price increase from March. These increases will help us push our fiber business toward normalized margins near 20% and get us closer to our goal of exceeding 18% margins for the enterprise. Integrated Solutions delivered $17 million in adjusted EBITDA, showing slight growth from the previous year. Although we saw strong volumes in Q2, the product mix tilted more towards recycled fiber, resulting in a lower sales mix, leading to modest year-over-year growth. Sales for closures increased year-over-year as we continue to expand this business, although paints, linings, and adhesives experienced lower external volumes during the quarter. We are updating our guidance for fiscal 2025, raising the low-end expectation for adjusted EBITDA to at least $725 million from $710 million. We are also increasing our adjusted free cash flow guidance to $280 million from $245 million based on improved EBITDA and better management of operating working capital. This adjustment reflects the enhanced price/cost performance in Q2 and higher expectations for the second half of the year. Since this is a low-end guidance increase, we have tempered the impact with a more conservative volume assumption compared to our previous guidance and considered the negative EBITDA impacts from higher incentives driven by better performance. Volume remains the largest variable that could enhance this low-end guidance, and while we are not issuing a range due to changing market conditions, we are confident in this adjusted low end. This increase is based on our proven capability to execute, demonstrating that Greif can maintain performance even in a challenging industrial environment. Our price/cost performance, especially in fiber, is on an upward trajectory, polymers continue to show growth, and our disciplined cost structure supports margin expansion. We are adjusting our guidance because our actions are yielding results, and we are confident in our ability to maintain this performance throughout the remainder of the year. I will now turn it back over to Ole.

Ole G. Rosgaard, CEO

Thanks, Larry. Let me close by underscoring what this quarter confirms. Our strategy is working. We are expanding margins, growing EBITDA, and generating strong free cash flow even in a challenging macro environment. We set ambitious cost optimization commitments at our Investor Day, and we are delivering exactly as planned. Our commitment to achieving $1 billion in EBITDA and $500 million in free cash flow by 2027 is unwavering. As we have consistently done with every commitment we have given in the past, we are also delivering on this commitment. We remain focused on what we can control. The culture we have built centered on high engagement, agility, and disciplined execution continues to be a powerful competitive advantage for us. I have never been more confident in our team or more optimistic about Greif's future. We are building a stronger company and doing it the right way for our customers, for our colleagues, and for our shareholders. Thank you for joining us today. Operator, will you please open the line for questions?

Operator, Operator

And our first question will be coming from Ghansham Panjabi of Baird.

Joshua S. Vesely, Analyst

It's actually Josh Vesely on for Ghansham. Ole, you provided some good commentary on tariffs, and it seems like demand fluctuation was relatively minimal. But I'm just curious what those conversations with customers look like as it relates to kind of what they're seeing in end market demand and how they're thinking about that on a go-forward basis.

Ole G. Rosgaard, CEO

Yes. So I mean, generally, the sentiment is really unchanged. If you look at housing, for instance, sales of existing housing is at its lowest since, I would say, 1995. And auto build, it is lowest in 3 years. And the tariffs that we keep talking about, they're just reoccurring themes. And all this really impacts, especially our chemical customers. And until we see an improvement in existing house sales, which is linked to the interest rates, we don't really believe, and our customers don't really believe they'll see any demand improvement either. Did that answer your question?

Joshua S. Vesely, Analyst

Great. Yes. No, that's great color. And then maybe just for my follow-up, I just wanted to clarify on some of the raw material inflation that you're talking about that was tariff-related. Just any more color on what you guys are seeing there and what the near-term impact on EBITDA margins might be for the year?

Ole G. Rosgaard, CEO

As I mentioned, the maximum worst-case impact for us is around $10 million, but we’re not anywhere near that. Our team has effectively minimized that impact, and we are currently much lower than that amount. Therefore, it’s really not material.

Lawrence Allen Hilsheimer, CFO

Yes. And Josh, the other element of that, obviously, is we've already seen steel producers in the U.S. push up cost or price. That then implies against our lower base inventory and provides some lift in margin that while temporary, until things catch up, will provide additional spread. So this increase in tariffs to the 50% level would probably end up being helpful above our low-end guidance.

Ole G. Rosgaard, CEO

And it could actually end up being a tailwind for us, Josh. And again, I just want to remind you that we operate 250 facilities in over 40 countries. So most of our business is done locally. We source raw materials locally. We manufacture locally, we sell locally, which obviously means that tariffs don't come into play.

Operator, Operator

And our next question will be coming from Michael Roxland of Truist Securities.

Michael Andrew Roxland, Analyst

Congrats on all the progress. The first question I have is on SG&A, which we believe remains elevated. I think there was a slight decline sequentially in SG&A as a percentage of revenue, but still above the average for last year. So I'm just curious as to what's driving the elevated SG&A. And what level of SG&A as a percent of sales are you targeting and over what time?

Lawrence Allen Hilsheimer, CFO

Yes, there are several factors at play. I've noted an increase in incentives due to your team's strong performance, which has had some impact. We also have the full quarter contribution from Ipackchem. Additionally, currency effects are raising SG&A despite providing a positive lift to the bottom line. We acknowledge that our SG&A is currently higher than we believe it should be in the long run. As part of our cost optimization efforts, we aim to reduce SG&A to below 10% as volume recovers and revenue increases. It does become slightly inflated during acquisitions due to depreciation related to intangibles, but that is our long-term target.

Michael Andrew Roxland, Analyst

Very helpful. To summarize, there are some factors such as incentive compensation and Ipackchem, along with a bit of foreign exchange impact. However, the expectation is for accelerating revenue to reduce that ratio, which is primarily driven by market conditions.

Lawrence Allen Hilsheimer, CFO

Yes, it's a combination. Ultimately, there will be an impact on the ratio due to the recovery of volumes. Our cost optimization is a key focus for us, and we've announced a $100 million initiative for business optimization across our entire platform. This initiative affects both business operations and SG&A, and it targets areas beyond our '24 levels. So yes, it's a combination of factors, and I wanted to highlight the long-term impact. We're aiming to reduce the ratio to below 10%, which will involve some revenue recovery, but much of it will still come from cost reductions.

Michael Andrew Roxland, Analyst

Got it. And I appreciate all the color. Then just my second question, Larry, you mentioned strong URB demand, which you believe should warrant the full price increase of $50 to $70 a ton. So if you get that incremental $20 to $40 a ton in URB pricing, all else equal, what type of incremental EBITDA should we expect you'd generate? And what type of margin would you have in sustainable fiber as a result of that? And then quickly, just lastly, just do you see the potential for further rationalization in CRB and maybe just becoming solely focused on URB and containerboard?

Lawrence Allen Hilsheimer, CFO

Let me answer the last piece first and then come back to the incremental impact on pricing. So the remaining CRB machine we have is actually a swing machine. So we could swing between URB and CRB depending on the market demand. And right now, we're a niche player in our space. We're happy with the operations there, and we don't really have any plan to make it full-time URB or we're just taking advantage of whatever we can get in the market. Relative to the impact of pricing, about a $10 a ton change in URB pricing is about $530,000 a month for us. So hopefully, that gives you something to work with.

Ole G. Rosgaard, CEO

And Mike, just an added comment to what Larry said. So on the CRB, we will continue to optimize paper grades by highest return. And if we swing a machine to URB from CRB, that's what we will do, if that's what it provides us.

Operator, Operator

Our next question will be from Matt Roberts of Raymond James.

Matthew Burke Roberts, Analyst

First question, on the volume, I believe you said not giving a range, but maybe could you just help me understand what underpins the $725 million guide? And related to tariff impact on volumes, I know you noted no demand shifts, but in light of Liberation Day in early April, could you provide some incremental color into demand in April, whether there was any front running ahead of that or how trends have progressed in April and May? It seems like more recently, there's a window open in the tariffs. So I'm wondering if you've seen any spike more recently there.

Lawrence Allen Hilsheimer, CFO

Yes, Ole can add to what I say. However, we haven't observed any trends directly linked to tariffs, even when talking to customers. In the U.S., the situation is much more influenced by interest rates, homebuilding, and the resulting demand on the chemicals industry and even auto production. Although that might be indirectly connected to tariffs, what we found is that moving our prior low-end guidance from $710 million to $725 million accounted for approximately $53 million in price/cost benefits. Specifically, Metal Solutions increased by $17 million, Polymer Solutions also rose by $17 million, and Fiber Solutions went up by $26 million, while Integrated saw a decrease of $8 million due to lower OCC costs. Regarding volume, we experienced a decline of about $5 million in Metal Solutions, about $5 million in Polymer Solutions, and down $30 million in Fiber Solutions compared to where we were before.

Ole G. Rosgaard, CEO

Matt, just on tariffs, so direct impact, that's something we can control. And so there is no direct impact on us. But one thing we cannot control, that's the indirect impact. And when tariffs affect the overall demand in the markets, that obviously has an effect on all of us, which is something we can't control. But we do have the flexibility to adapt production for customers, and we will price for it. And then all ranges of these outcomes are considered in Larry's revised guidance.

Matthew Burke Roberts, Analyst

Thank you very much for the incremental color there. For my follow-up, specifically in polymer, you noted business wins and market-driven growth in target end markets. Could you elaborate on what you're expecting in those target end markets for the rest of the year? And more specifically, on those new business wins, what areas were they in? And what do you attribute those to? Is it greater scale? Or are you starting to realize cost-saving benefits following acquisitions? Is it customer service tools providing a benefit as Greif+ is rolled out further? Just any incremental color there on those new market wins.

Ole G. Rosgaard, CEO

Let me take a step back and refer to our Investor Day, where we outlined our entire strategy. Our growth strategy is centered around specific end segments, which include agrochemicals, food and beverage, flavors and fragrances, and pharmaceuticals. These segments are growing at a rate faster than GDP, which is why we've chosen to focus on them. The products that cater to these segments are polymer products, which is why polymers are a key focus in our strategy. This quarter, we've observed that these end segments have shown to be more resilient compared to others, aligning with our expectations. Additionally, we've experienced year-over-year growth in these areas. Overall, our polymer growth stands at 1.5% year-over-year. However, our legacy polymer business, particularly large polymer drums in North America that serve the chemical and industrial sectors, is facing a decline. Despite this, we have still witnessed overall growth in the polymer markets.

Operator, Operator

Our next question will be from George Staphos of Bank of America Securities.

George Leon Staphos, Analyst

My initial question is about paperboard in general. Considering the closures in L.A. and Austell, how do you anticipate these will impact your blended cost per ton and margins once the business normalizes? Additionally, with these closures, will you need to adjust your operations or inventory management due to having fewer production facilities? This might require holding more buffer stock or making other operational changes. I'm interested in understanding the cost per ton implications of the closures and any necessary operational adjustments. I have a follow-up question as well.

Lawrence Allen Hilsheimer, CFO

Yes, George, I don't have the answer for you on what the cost per ton impact is. What I can tell you is that with the closures of Pittsburgh and L.A. and Austell, after we get through the transitionary cost that sort of offset that stuff, that will be an annual bottom line EBITDA cost impact of a positive $10 million a year to the bottom line. As we said, on each of those facilities, the end customer mix, we shifted what made sense to being served out of our existing mill footprint. And so obviously, that all factors in to drive a lower average cost per ton and higher margin that drives to that bottom line $10 million impact for that. But yes, I haven't looked at what the average cost per ton impact is, unfortunately.

George Leon Staphos, Analyst

And just on the operations, aside from optimizing your production relative to your target end markets, anything else that you would relay to us that we'll be able to discern, watch, monitor in your financials?

Lawrence Allen Hilsheimer, CFO

Yes. I mean, it's obviously all part of, as you noted, our cost optimization, our cost-out program. And I would just add to that $10 million on the bottom line for fiscal '26 and forward.

George Leon Staphos, Analyst

Okay. That's fine, Larry. I was getting more into sort of how you run the business, but I'll leave it there. I guess on the cost-out program and the progress you're making towards the goal of, on the high end, $25 million this year and the $10 million I think you've got through 2Q, are the categories of benefit the same throughout the year? Do they evolve? And if they do evolve over the course of the next couple of quarters, what does that mean in terms of the business and the margin, both the rest of the year and into 2026? And I'll turn it over there, and I'll come back if I can.

Lawrence Allen Hilsheimer, CFO

Ole may provide additional insights, but essentially, we have implemented a mix of operational cost savings and reductions in SG&A expenses. To highlight, the $10 million figure represents the run rate we anticipate for this year, while we expect to realize $5 million in actual savings this year. The $10 million I referred to from the closure of three mills will not affect this year's financials, as it is aimed at supporting our long-term goals, contributing $20 million toward our target of $100 million. This entire initiative is designed to improve both our cost structure and revenue potential, whether it relates to manufacturing costs or SG&A. We are very encouraged by our progress so far and are increasingly confident in achieving our commitment of over $1 billion by 2028 as we continue to move forward each month.

Ole G. Rosgaard, CEO

George, just to give you some color. You'll remember that last year, we reorganized the business, which was really the precursor, the planned precursor for doing the business optimization. And the business optimization, we have more than 70 work streams in motion at the moment. And they are SG&A rationalization, network optimization, operating efficiency gains, and so on. So in terms of the millions we're talking about, we're playing on the whole P&L, and we will continue to do that. And there are things that are in flight that we can't talk about on the earnings call. But I can just mention again that we have over 70 work streams in flight.

Operator, Operator

Our next question will be coming from Gabe Hajde of Wells Fargo.

Gabrial Shane Hajde, Analyst

I wanted to ask about Slide 8. You mentioned some price and volume impacts in the metals business. I'm curious if you're highlighting anything specific from a competitive perspective or if this relates to steel. Also, revisiting the question that Matt Roberts mentioned on Slide 6, it seems like there are two separate items. You have an identified impact of up to $10 million, but it's unclear if that's related to volume or cost. Could you clarify that? Additionally, two bullet points down, you mention a potential positive impact from rising steel. If you haven’t already, can you provide a quantification for that? Or was that included in the $17 million of favorable price/cost that you referred to in response to another question?

Lawrence Allen Hilsheimer, CFO

Yes, it is included, Gabe. What we are talking about regarding the metals business is that in the U.S., the cost index has risen, which has triggered our price adjustment mechanisms against lower-cost inventory. We haven't accounted for any potential impact from the newly announced increase to the 50% level on tariffs since it is speculative at this point. Can you repeat your first question on Page 8?

Gabrial Shane Hajde, Analyst

Yes. I mean it just says in the Metals segment, sales were impacted by both price and volume. And I didn't know if that was competitive price or if you're talking about the positive price impact.

Lawrence Allen Hilsheimer, CFO

No, it's talking about the positive price development. Yes, the price/cost mix was positive. The volume was negative.

Ole G. Rosgaard, CEO

And the negative volume was mainly attributed to North America, which relies on the industrial sectors of chemical.

Operator, Operator

Our next question will be a follow-up from George Staphos of Bank of America Securities.

George Leon Staphos, Analyst

Larry, Ole, I seem to remember in the discussion that you said on the increase in the guidance on the low end, you were still building in some, I guess, additional volume downside. That might not have been your phrasing, but nonetheless, in the worst-case scenario. If I got that correctly, can you tell us a little bit about where you are sort of baking in a little bit worst case on volume?

Lawrence Allen Hilsheimer, CFO

Yes, we did have a walk, and I provided the numbers regarding the volume impact, which shows a negative $40. Much of that was already seen in the fiber business during the second quarter. As we mentioned, it improved each month throughout the second quarter. I was comparing it to our position in Q1. We have also noted a decrease in metals and incorporated some adjustments for polymers. However, we anticipated a worst-case scenario when setting our low-end guidance. What we've presented is the low end, but we are very confident in achieving it. The factors I mentioned include that current demand was largely as expected, a slower start for fiber in Q2 that improved later, backlogs are now at their highest in two years, along with some cautionary elements.

George Leon Staphos, Analyst

Understood. And on pricing, you mentioned ultimately that you still think $50 to $70 per ton was, and again, this is my phrasing, not yours, appropriate relative to the tension in the URB market. With that, if that's correctly sort of phrased, are you still attempting to get a full price hike in the market? Or have you, at this juncture, stopped and you've taken what you've taken?

Lawrence Allen Hilsheimer, CFO

No, no, we're obviously still working that price increase in the market where we're not on index-type contracts.

Ole G. Rosgaard, CEO

And to support that, our backlogs are actually stronger in over the past two years at the moment.

Operator, Operator

And I would now like to turn the conference back to Ole Rosgaard for closing remarks.

Ole G. Rosgaard, CEO

Thank you. I want to say thank you for your time today and also for your continued interest and investment in Greif. We remain committed to continue delivering exceptional results and are focused on accelerating our performance towards our 2027 target of $1 billion in EBITDA and $500 million in free cash flow. We are confident that our relentless pursuit of operational excellence and customer-centric growth will create enduring value for all our stakeholders. Thanks again for joining us today.

Operator, Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.