Earnings Call Transcript - GEF Q4 2023

Operator, Operator

Good day and welcome to the Greif Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Matt Leahy. You may begin.

Matt Leahy, Vice President of Corporate Development and Investor Relations

Thanks, and good morning, everyone. And first, let me apologize for the technical difficulties on our side. We were dialed in and for some reason, we lost audio and we've been troubleshooting for the last several minutes. We truly appreciate your patience. Welcome to Greif’s fourth quarter fiscal 2023 earnings conference call. This is Matt Leahy, Greif’s Vice President of Corporate Development and Investor Relations, and I'm 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're prohibited from discussing material and non-public information with you on an individual basis. Please turn to Slide 2. As a reminder, during today's call, we'll make forward-looking statements involving plans, expectations, and beliefs related to future events and actual results could differ materially from those discussed. Additionally, we'll be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metrics can be found in the appendix of today's presentation. And now with that, I'd like to turn the presentation over to Ole on Slide 3.

Ole Rosgaard, President and Chief Executive Officer

Thanks, Matt, and good morning everyone and let me also apologize for the technical difficulties we had this morning. Looking back on fiscal year 2023, the second fiscal year on our Build to Last strategy, I'm humbled and in awe of the progress of our global Greif team has made despite extraordinary macroeconomic headwinds. This year challenged us to execute with continued precision and excellence in a complex operating environment. I'm proud to say that in the face of ongoing demand challenges, the hard work from our teams resulted in the second best year in Greif's history on an adjusted EBITDA and adjusted free cash flow basis, surpassed only by our exceptional performance in 2022. Year-over-year, we improved both our EBITDA margins and our free cash flow conversion, even as primary product sales declined double digits across our businesses, a true testament to the commitment of our teams to operational excellence and our value over volume philosophy. Fiscal 2023 was a banner year for investing in the long-term health of Greif. We launched new organic growth projects in both PPS and GIP, completed four acquisitions, and announced the fifth in Ipackchem for an aggregate capital commitment of over $1 billion on M&A. We maintained our focus on returning capital to shareholders by increasing dividends per share by 7.5% and completing our $150 million share buyback program earlier in the year. And we did all this while maintaining a leverage ratio within our target range of 2.0 to 2.5 times. At Greif, we often talk about managing the present while creating the future. We're doing both exceptionally. As we close out fiscal 2023, I'm proud of what we have accomplished and where we are going. But make no mistake, managing challenges can be hard, especially when business is under pressure. And our business has been under pressure for some time, and we are continuing to face near-term headwinds which Larry will cover with our low-end guidance and modeling assumptions for fiscal 2024. But as proven throughout 2023, we are built to handle exogenous impacts to our business by controlling what we can control. Our execution will remain strong and we will weather this storm and I have full confidence in our mission and our global Greif team. After Larry provides a review of the fourth quarter, I will share with you a broader update about our growth strategy for future value creation on the Build to Last. Larry?

Larry Hilsheimer, Chief Financial Officer

Please turn to Slide 4. Thanks, Ole. In our fourth quarter, we generated nearly $200 million of adjusted EBITDA, $130 million of adjusted free cash flow, and $1.56 of adjusted earnings per share, despite the complex operating environment. Our team's execution from the plant floor through corporate functions over the past year was truly extraordinary, and I would like to thank our colleagues for their hard work and commitment to delivering exceptional results in these difficult times. Later in the presentation, Ole will expand commentary around our recent M&A. But for now, I will remind our investors that the ColePak and Reliance acquisitions both occurred during the fourth quarter. Therefore, Q4 results did not include the full contribution of these businesses, which along with Ipackchem in early 2024 will provide a benefit to our performance in the coming year. Let's turn to segment results starting on Slide 5. The fourth quarter in GIP saw more of the same challenges we have now faced for five straight quarters, an extremely weak industrial sector with demand at staggeringly low levels. Compared to Q4 of fiscal 2022, global volumes in steel drums were off 8%, large plastics off 14%, and fiber drums down 19%. Only IBCs and small plastic volumes increased year-over-year. On a two-year stack basis, nearly all substrates globally in GIP are tracking down mid-teens. A reminder for investors related to this historic demand period in GIP. More than 85% of basic and specialty chemicals globally are consumed by the industrial sector. Global PMIs have been trending negatively since December of 2021 and tracking below 50 since September of 2022. Existing home sales in the US are tracking at the lowest level since 2010. This is truly an unprecedented time with no comparable period, including The Great Recession, where we saw a steep drop in drum volumes that quickly recovered. While this is sobering data, we take pride in the results we have delivered. Those results have enabled us to continue to invest strategically in our Build to Last initiatives focused on the future while managing costs and operations effectively. We are excited about the results of our GIP segment and what they will deliver when the industrial economy recovers. Please turn to Slide 6. Paper packaging's fourth quarter sales declined $84 million year-over-year, primarily due to lower volumes and growing price cost pressures. We took approximately 62,000 tons of total downtime across our mill system in the fourth quarter compared to 35,000 in Q4 of last year. Container board fared better than URB with less economic downtime and better volumes in converting. But overall, the continued low volume environment combined with rising OCC costs during the quarter led to both EBITDA dollar and margin compression compared to the prior year. Our PPS team continues to control the controllable as well and did an extraordinary job on managing working capital to close out the year. Please turn to Slide 7, where I'll discuss 2024 low-end guidance assumptions. As Ole mentioned in his opening remarks, and I've covered as well, we are sitting at a truly historic moment in time for Greif’s businesses with prolonged volume headwinds across GIP and markets we serve and now a material price cost headwind in PPS with rising OCC and lower RISI published prices. It's a challenging time to give full year guidance because we do believe the demand environment will turn positively, we just don't know when. Given these multiple near-term headwinds and low visibility to a sustained recovery, we made the decision to present a low-end guidance to start fiscal 2024 of $585 million in EBITDA and $200 million in free cash flow. This guidance methodology is simple. It presents a continuation of demand, price, and cost trends for both businesses through the duration of fiscal 2024 at current levels. In addition, this guidance does not include our recently announced price increases in container board, which we don't include in guidance until recognized by RISI, and it also excludes any impact from Ipackchem, which we expect will close sometime in calendar Q1. Our hope is that our actual fiscal 2024 results will end up significantly above this low-end guidance. However, we've always stated that we do not guide based on hope. Our downside view is driven by current price cost in PPS and no volume inflections in 2024.

Ghansham Panjabi, Analyst at Baird

Hey, guys. Good morning.

Ole Rosgaard, President and Chief Executive Officer

Good morning, Ghansham.

Ghansham Panjabi, Analyst at Baird

Just making sure the audio is working. I guess first off on the EBITDA bridge, Larry, $819 million generated fiscal year 2023. Can you just give us more color in terms of the non-volume variances? I'm just trying to reconcile down to the year $595 million, which would be a pretty significant step-down relative to the almost $200 million you generated in EBITDA in Q4.

Larry Hilsheimer, Chief Financial Officer

Certainly. We are seeing a year-over-year impact of about $29 million due to the strengthening dollar against our currencies. Throughout the year, we experienced a number of one-off items, including a $6 million insurance recovery related to a fire with costs incurred in 2022, another fire recovery, legal recoveries, and utility refunds issued by EMEA due to high costs from governmental initiatives. We also had a tax recovery in Brazil of around $6 million from an operating tax. These items collectively totaled $29 million, and we do not expect them to recur. When you combine these factors, it’s nearly $60 million. Additionally, there's a paper pricing element and cost price squeeze in PPS amounting to approximately $140 million year-over-year. This does not factor in the recent price increase we announced, set to take effect on January 1st. Regarding GIP, there’s a $17 million cost drag year-over-year due to index timing on our forecast. We also have investments related to our new segment structure, costing us about $6 million, which we believe will yield significant benefits in the future. We are also investing in our IT digitization efforts, which will provide strong benefits moving forward, although GAAP rules require us to expense these costs. Net of expected benefits, this investment is about $8 million, and we anticipate seeing more benefits in 2025 and beyond. Lastly, there are an additional $5 million in inflation-related matters. This should help us adjust from $819 million to $585 million.

Ghansham Panjabi, Analyst at Baird

Okay, that's super helpful. And then the volume recovery, the 100% of $170 million, like the scale that you gave us, is that relative to two years ago? Is that just to make sure I have that right?

Larry Hilsheimer, Chief Financial Officer

That's just relative to 2022. So yeah, I guess that'd be two years ago, according to what we're going to do. If we went back actually to what we look at sort of the last normalized year because of COVID, everything else going on, and go back to 2019, the volume recovery would be even higher numbers. But yeah, the $174 million is relative to 2022.

Ghansham Panjabi, Analyst at Baird

Got it, thank you. Could you provide more details on the green shoots you mentioned? Lastly, regarding the CapEx guidance, is it based on the lower end of the assumptions? If so, would you consider increasing it if the year performs better than expected?

Larry Hilsheimer, Chief Financial Officer

Yeah, on the green shoots, it's mostly just what we started to see in our container board business, Ghansham. We've seen, I don't think we're ready to call it a trend yet or an inflection point, but certainly the last couple of months have been much better and our mill system is full at the moment and backlogs are good. So that's what we're talking about. We really haven't seen it anyplace else. And in, I'm sorry, what was the second part of that?

Ole Rosgaard, President and Chief Executive Officer

CapEx guidance.

Larry Hilsheimer, Chief Financial Officer

Thank you. CapEx guidance, yes, Ghansham, we've said, hey look guys, if we actually end up with a year that's at this low end, we're going to manage our CapEx spend to just not have anything to do with our strength because obviously we could do more, but more just to manage it appropriately for investors. So if we do see an inflection point, we would probably up our CapEx, but it wouldn't be proportional on that same ratio. Obviously, there's a core amount of CapEx that we have to do every year to make sure we maintain critical maintenance. And obviously, that's what impacts our cash generation ratio.

Ghansham Panjabi, Analyst at Baird

Okay, terrific. Thank you so much and happy holidays to all of you.

Larry Hilsheimer, Chief Financial Officer

Thank you, Ghansham.

Operator, Operator

And one moment for our next question. Our next question will come from Cashen Keeler of Bank of America. Your line's open.

Unidentified Analyst, Analyst at Bank of America

Yeah, hi. Good morning. This is Cashen on for George. He had a conflict this morning, business-related. So just on container board, I know you're not including it in guidance here, but I guess can you generally just speak to your rationale behind the price increases and then, you also talked to some improvement just on container board. It's trending better relative to URB. So just on the demand front there, can you talk at all just how that may be trended throughout the quarter and what you're hearing from your customers on that front as well?

Ole Rosgaard, President and Chief Executive Officer

We are raising prices due to inflationary cost pressures that we, like others, have encountered. Clearly, the cost of OCC has increased. We provide excellent services to our customers, and demand has been strong. We have announced this price increase, which will take effect on January 1. That sums it up.

Unidentified Analyst, Analyst at Bank of America

Okay. And then on demand and container board.

Ole Rosgaard, President and Chief Executive Officer

Yeah, you've got that trend stuff there.

Larry Hilsheimer, Chief Financial Officer

You're talking about fourth quarter?

Ole Rosgaard, President and Chief Executive Officer

Yeah.

Larry Hilsheimer, Chief Financial Officer

Yeah, so the mills, let's see here, yeah, mills are 0.5% and in sheets and CorrChoice, 2.8%. In boxboard, we were down 6.9%, and tube and core down 7.6%.

Ole Rosgaard, President and Chief Executive Officer

Yeah, so sequentially a significant turnaround because we've been running negative.

Unidentified Analyst, Analyst at Bank of America

Okay, understood. Appreciate that color. And then, I know you've done a number of acquisitions or announced a number this year, and, Ole, you talked to M&A being part of the story, kind of longer term here. And on past calls, you've talked to stuff maybe in the kind of immediate term pipeline. So at this point, is there anything that you could potentially execute on in the coming year? Or how can we kind of think about that?

Ole Rosgaard, President and Chief Executive Officer

We haven't closed on Ipackchem yet. That will close here in the first calendar quarter. Given the volume situation we have at the moment and our guidance, we're not sort of going out aggressively to buy, but we have the means to do something, and we remain opportunistic over the next six months in terms of what's available. And we're not going to miss a good opportunity to do a good deal.

Larry Hilsheimer, Chief Financial Officer

Yeah, the thing I would also just share is even if we had hit this low end, if that's all that happens this year, we still are well within any of our debt covenants and will be in great shape going forward. I mean, even if we got to just like recovering 50% of our volume this year, we would, with Ipackchem, we'd still be right around 3 on a leverage ratio. Obviously as we recover, we think there's significant upsides. And to put a little point on that, so we're out at $585. If we recovered paper and pricing margins to the average of the last five years, we'd pick up $101 million. If we recapture the volume, we already said that's $174 million. If we add Ipackchem in there, say roughly $60 million, we're up to $920 million. If those things happen, we're already back down in our debt ratio target.

Unidentified Analyst, Analyst at Bank of America

Got it. Understood. And then just one last one and I'll turn it over. Just with the change in terms of your fiscal year, is it possible at all to quantify what the inflation might be or what costs you might incur related to that?

Larry Hilsheimer, Chief Financial Officer

Yeah, the fiscal year change thing is relatively minor. It's a couple of million dollars kind of thing for that element of it.

Unidentified Analyst, Analyst at Bank of America

Got it. Thanks. I’ll turn it over.

Operator, Operator

And one moment for our next question. Our next question will come from an analyst of Stifel. Your line is open.

Unidentified Analyst, Analyst at Stifel

Good morning. Thanks for taking my questions. If you could just talk about what you're watching as indications of change in the business fundamentals and what needs to happen to support a positive outlook coming, and you would feel more comfortable providing guidance range.

Ole Rosgaard, President and Chief Executive Officer

Well, what needs to happen is, I mean, obviously there's a lot of factors involved, but if we see an interest rate reduction, we will probably see some improvements in the housing sector. And the housing sector, when people move houses, drives a lot of the business we see from our paint in segments, but also on container boards. That would be a huge positive, probably the biggest, I would say. And then you have all the issues on geopolitical conflicts we have around the world, that has an effect as well. Those would probably be the biggest.

Larry Hilsheimer, Chief Financial Officer

I appreciate your request for reflection on last year. In our first quarter call, we provided low-end guidance, and by the second quarter, we offered a broader range. We are attentive to developments and will ensure timely information is shared. However, I want to remind you that a year ago, during this call, our paper customers expected a rebound in January, while our chemical clients anticipated better conditions in the second quarter. As we reached the first quarter, concerns about the situation were increasing. This situation reminds me of The Great Recession, where we experienced a rapid turnaround once demand picked up. I hope we begin to see a recovery that aligns with some of the points Ole mentioned, as we are well equipped to respond.

Matt Leahy, Vice President of Corporate Development and Investor Relations

And just to add to that. This is Matt. So when you just look globally at industrial production, ISM PMIs were peaking in May of 2021 and trending down almost since then. They've actually been trending negatively globally since September of 2022 in a contractionary period for over 12 months. Our global industrial business is levered to some of those trends, if not directly. So I think if you look for a turn or recovery in PMI or ISMs, that could also indicate we're probably seeing a demand recovery as well.

Unidentified Analyst, Analyst at Stifel

Thanks a lot. And just about the cadence of pricing volume by quarter, maybe within each segment, it seems like within both, they have the toughest comp in Q1 and sequentially improves and maybe it's flat year-over-year, sort of kind of what you built into your guidance. Am I thinking about this correctly?

Ole Rosgaard, President and Chief Executive Officer

Yeah, we didn't really look at the price cost. I don't, I'm not ready to answer that on a quarter-by-quarter basis. I didn't go back and look at where we were on each, but I guess just off the top, things trended throughout the year, obviously with OCC going up in the paper business throughout the year and we got price cuts more back half of the year. So, that would say that you'd be better at the end of the year than at the beginning. But then we've got our price increase announced that we are implementing on January 1. So that would obviously help in the first, more in the second quarter than the first.

Larry Hilsheimer, Chief Financial Officer

And just so you know, the first quarter tends to be the lowest in our business cycle as well.

Unidentified Analyst, Analyst at Stifel

All right, just one last one for me. So the deals that you've already closed, what's the rollover contribution to sales, EBITDA and free cash flow assumed in the guidance from that?

Larry Hilsheimer, Chief Financial Officer

I can give you, EBITDA is roughly $20 million in terms of the contributions to 2024. Generally these businesses collectively are running at a 60% free cash flow conversion. We haven't guided to that, but I'm not sure what the CapEx needs are next year, but that's directionally accurate in terms from an EBITDA perspective.

Unidentified Analyst, Analyst at Stifel

All right, thank you for taking my question.

Operator, Operator

And one moment for our next question. Our next question will come from Roger Spitz of Bank of America. Your line is open.

Roger Spitz, Analyst at Bank of America

Thank you. Good morning. First, what was IBC's fiscal Q4 volume increase on a percentage basis? And would you have for steel, plastic, fiber and IBCs the full fiscal year 2024 volume changes on a percentage basis?

Ole Rosgaard, President and Chief Executive Officer

Hi, Roger, I can give you that the first one in Q4 was a contraction of 4.3% on IBCs.

Roger Spitz, Analyst at Bank of America

Okay, I misunderstood you. So you're saying you don't have the full year data for all four?

Ole Rosgaard, President and Chief Executive Officer

Full year is a contraction of 9.5%.

Roger Spitz, Analyst at Bank of America

Okay. Why do the small plastic packaging businesses have higher margins than your legacy large packaging? Isn't small plastic packaging more fragmented and large packaging really only has maybe three producers with maybe 80% global market share? So a less fragmented business.

Ole Rosgaard, President and Chief Executive Officer

Yes, number one, it is a less consolidated business across the globe. There's a lot of players. It's also a more sophisticated product to produce. On small plastics, you can kind of split it up into three buckets. You have a commodity market, then you have the middle, a little bit commodity, a little bit premium, and then you have the premium market, which is really where we operate, where you have things like barrier technologies, you have special designs and that sort of thing.

Larry Hilsheimer, Chief Financial Officer

One thing to supplement Ole's answer because Ole was answering on IBCs on a same-store basis without the impact of the Centurion acquisition. So on Centurion, with Centurion in, our volumes on IBCs were up 2% and for 2024 we would expect them to be up 12% year-over-year.

Roger Spitz, Analyst at Bank of America

Got it. Thank you very much for your time.

Larry Hilsheimer, Chief Financial Officer

Thank you.

Operator, Operator

One moment for our next question. Our next question will come from Gabe Hajde of Wells Fargo. Your line is open.

Gabe Hajde, Analyst at Wells Fargo

Good morning, guys.

Ole Rosgaard, President and Chief Executive Officer

Hey, Gabe. I'm sure you've been called worse.

Gabe Hajde, Analyst at Wells Fargo

I wanted to ask something, a little bit that's been in the publications here recently about imported uncoated recycled boards. And just historically speaking, not been really a paper grade that's been imported and I think for a variety of reasons, one of which is there are probably other paper grades that are higher price points that could be justified to be imported but I'm just curious if you all have seen this in the past, or if in fact you can confirm that it's something that you've seen in the marketplace. And I’ll stop there.

Ole Rosgaard, President and Chief Executive Officer

Yeah, Gabe, it's something that there's always been some, it is really minor in the overall market. We've seen a little bit more, but it's not substantial.

Gabe Hajde, Analyst at Wells Fargo

Okay. And I guess to revisit the bridge question, I apologize in advance, but you, Larry, laid out, I think, a lot of the negative factors to get to the $585 million, but weren't necessarily giving yourselves credit for any of the positives that would be included, even taking into account sort of what your assuming in the guidance and what you're experiencing today, at least on the containerboard side. And what I mean by that is it sounds like the system is full at this point, which would imply no economic downtime in the containerboard mill system. So, Matt threw out plus $20 million for acquisitions. I don't know if I have the exact number correct. I want to say there was about 120,000 tons of economic downtime in your seaboard system. Assuming some of that comes back, those are all the additive, sort of just based on what your assumptions are today. Is that the right way to think about it?

Ole Rosgaard, President and Chief Executive Officer

Partially. I mean, we have built in some relatively minor growth in from containerboard in the year, but it's like $60 million. Now we also are closing down our Santa Clara mill, so that would take a little bit out. But yeah, you're right. We're being relatively conservative in that low-end guidance. I mean, it's low end because it's low end.

Gabe Hajde, Analyst at Wells Fargo

Okay. Santa Clara, remind me is that CRB?

Ole Rosgaard, President and Chief Executive Officer

Yes.

Matt Leahy, Vice President of Corporate Development and Investor Relations

No, it's containerboard.

Larry Hilsheimer, Chief Financial Officer

CRB?

Ole Rosgaard, President and Chief Executive Officer

No, it’s containerboard.

Gabe Hajde, Analyst at Wells Fargo

Is there a tonnage on that?

Ole Rosgaard, President and Chief Executive Officer

Oh, boy, we have that somewhere. We'll get that, Gabe.

Gabe Hajde, Analyst at Wells Fargo

Okay. All right. That'll be it. Thank you.

Operator, Operator

And I'm showing no further questions. I would now like to hand the call back to Matt Leahy for closing remarks.

Matt Leahy, Vice President of Corporate Development and Investor Relations

All right. Well, thank you everyone again for your patience today and our challenges at the beginning of the call. We hope you all have a wonderful holiday.

Operator, Operator

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