Earnings Call Transcript - GEF Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to Greif’s Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers’ presentation, there will be a question-and-answer session. I would now like to turn the call over to your speaker today, Matt Eichmann. Please go ahead. Thanks a lot, everyone. Welcome to Greif's second quarter fiscal 2021 earnings conference call. This is Matt Eichmann. I'm joined by Pete Watson, Vice President and Chief Executive Officer; Larry Hilsheimer, Greif's Chief Financial Officer. Pete and Larry will take questions at the end of today's call. In accordance with Regulation Fair Disclosure, we encourage you to ask questions regarding issues you consider important because we're prohibited from discussing material non-public information with you on an individual basis. Please limit yourself to one question and one follow-up before returning to the queue. 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 reconciliations to the most directly comparable GAAP metrics can be found in the appendix of today's presentation. And now I turn the presentation over to Pete on Slide 3.

Pete Watson, CEO

Thank you, Matt, and good morning, everyone. We really appreciate your interest in Greif. Our purpose at Greif is to safely package and protect our customers' goods and materials to serve the essential needs of communities all around the world. And that common purpose, combined with our vision to excel in customer service, binds our global colleagues and motivates us to perform at our best, and I want to make sure I thank the global Greif team for these efforts. In the second quarter, we generated strong year-over-year volume growth in most of our key global industrial packaging substrates. We also experienced robust demand in our corrugated sheet feeder network and significant demand improvement in our tube and cores business. While inflation remains challenging, we are executing strategic pricing decisions and contractual price increases to recover costs and stay ahead of the inflation curve. This disciplined focus is helping us deliver solid financial results and reduce our leverage. Our second quarter adjusted free cash flow grew by more than $47 million versus the prior year, and we repaid $235 million of debt. With improved visibility into the back half of the year, we are reintroducing fiscal 2021 annual guidance and anticipate generating adjusted Class A earnings per share of $4.70 at the midpoint. Finally, we continue to make meaningful progress against our strategic priorities. We recently completed our fourth annual colleague engagement survey, which ranks us in the top decile of all manufacturers. In addition, we published our 12th annual sustainability report, reflecting the progress we've made around ESG and enhanced our customer service capabilities in line with our stated vision. The Global Industrial Packaging business delivered strong second quarter results. Global steel drum volumes increased by roughly 3% on a per-day basis versus the prior year, while global rigid IBCs and large plastic drum volumes rose by nearly 8% on a per-day basis, and our global IBC volumes were a quarterly record. Average selling prices were up across all key global substrates year-over-year due to raw material pass-through arrangements and strategic pricing decisions. Product demand was strongest in APAC, where steel drum and rigid IBC and FIBC volumes rose by 14% and 11%, respectively, on a per-day basis versus the prior year and benefited from improved industrial trends. Demand conditions were solid throughout most of Europe, where steel drum, rigid IBCs, and FIBCs rose by mid-single digits on a per-day basis. In North America, which features our most diverse product portfolio mix, steel drum volumes were down single-digits, while rigid IBCs, fiber drums, and FIBCs displayed mid-single-digit growth on a per-day basis versus the prior year. We continue to see improvement across many of our key end markets. For example, sales in the petrol products and lubricant end markets improved sequentially and were higher year-over-year. Paint and coatings sales also rose due to better auto and construction demand. Sales in the bulk and specialty chemical end markets were negatively impacted by ongoing customer force majeure actions and supply chain constraints, but underlying demand still remains solid. We see little indication of customers rebuilding inventory, and while supply chain conditions remain tight, we have not experienced any negative material impact related to sourcing raw materials. GIP’s stronger volumes and higher average selling prices drove higher segment sales and gross profit year-over-year. GIP's second quarter adjusted EBITDA rose by roughly $7 million due to higher sales, partially offset by higher SG&A expense, mainly attributed to $13.5 million of higher incentive accruals for this segment. The business also benefited from a $7 million FX tailwind. And for comparison purposes, please keep in mind that GIP had a very strong Q 2020 where the segment benefited from panic buying and opportunistic sourcing benefits. GIP's strong second quarter performance carried over in May, the start of our fiscal third quarter. Global steel drum and rigid IBC volumes both grew by low-to-mid double digits on a per-day basis versus the prior year due to stronger market demand and an easier prior year comparison, and that sequentially versus April were basically flat. May volumes in our refuelling business improved notably from early in Q2, which is one indication that conditions in the U.S. Gulf Coasts are starting to pick back up. I'd also like to take a moment to highlight our ongoing ESG efforts that are embedded into our strategy. In April, we published our latest sustainability report outlining the ESG achievements we made in 2020 as well as the outcomes from our second materiality assessment, which helped to shape our future priorities. We also recently announced a new greenhouse gas reduction target and continue to advance projects that will improve our product circularity. Finally, we are deploying an inclusive leadership program to all global managers throughout the remainder of 2021 to further enhance Greif's already strong engagement culture. I encourage all of you to visit our website to review our sustainability progress and become more familiar with our strategy.

Larry Hilsheimer, CFO

Thank you, Pete. Good morning, everyone. Please turn to Slide 7 to review our quarterly financial performance. Second quarter net sales, excluding the impact of foreign exchange, rose by 13% versus prior year due to stronger volumes and higher selling prices in our two primary business segments. Second quarter adjusted EBITDA fell by roughly 3% versus the prior year quarter. While sales were higher, cost inflation, especially in transportation and OCC, dragged on profits. In GIP, we are implementing price increases in response to strong product demand and to stay ahead of inflation in order to maintain appropriate profitability. We are working diligently on implementing price increases in Paper Packaging as we respond to robust demand and seek a return to appropriate segment profitability. SG&A expense rose by roughly $26 million versus the prior year quarter due to roughly $25 million of higher incentive accruals across the company. This year-over-year change is due to an accrual decrease last year as we forecasted a poor Q3 and second half, which, this year, has swung to an accrual increase due to our anticipated strong second half results being substantially over our budget. Our second quarter non-GAAP tax rate was 20%, reflecting a one-time benefit of roughly $4 million from return to provision adjustments and reserve releases due to audit settlements and statute expirations. Second quarter adjusted Class A earnings per share rose by roughly 19% to $1.13 per share. Finally, adjusted free cash flow rose by 60% to nearly $127 million versus the prior year, primarily due to improved profitability and working capital management, partially offset by slightly higher capital expenditures. Trailing 12-month average working capital as a percentage of sales improved by 180 basis points year-over-year to just over 11%. Please turn to Slide 8 to review our outlook and key modeling assumptions. We have reintroduced annual guidance given better visibility into the remainder of our fiscal year and continued confidence in our business’ improving fundamentals. The transformation that we commenced earnestly in late 2015 has produced tangible and meaningful change. With our anticipated fiscal '21 results, we will have more than doubled earnings per share since 2015 despite COVID-19's negative impact, the closure and/or divestiture of more than 70 non-core or suboptimal plants and without any share repurchase benefit. In fact, we currently have 600,000 more shares outstanding now versus the end of 2015. We forecast our fiscal '21 adjusted free cash flow to range between $285 million and $325 million, inclusive of between $130 million to $150 million spent on CapEx. And we expect working capital to be a substantial cash use this year commensurate with our announced price increases to offset cost inflation. Finally, we assume that OCC will average $101 per ton for this fiscal year and $122 a ton during our second half. We expect fiscal 2021 interest expense to range $97 million to $101 million and our full-year non-GAAP tax rate to be between 22% and 26%. Please turn to Slide 9. We have a consistent three-pronged capital deployment strategy focused on reinvesting in the business, returning cash to shareholders, and deleveraging the balance sheet. During the quarter, we paid roughly $26 million in dividends and repaid $235 million in debt. Our compliance leverage ratio was 3.2x as of April 30, 2021, and we continue to drive toward our targeted range of 2x to 2.5x. As a reminder, we will not engage in any material M&A until we're back within that range. Finally, as we continue to generate cash, pay down debt and reduce leverage, we will shift enterprise value to the benefit of our equityholders and eventually move to a steadily increasing dividend policy.

Pete Watson, CEO

Okay. Thank you, Larry. And I'd ask everybody to please turn to Slide 10. And to wrap it up, Greif delivered really solid second quarter results, and I'm pleased with our business performance. We're making strong progress across all of our strategic priorities and are focused on the operating levers within our control. Our extensive global portfolio, differentiated service capabilities with our sharp focus on operational execution positions us to uniquely serve the needs of our customers and generate significant value creation for the benefit of our shareholders. And I really appreciate your interest in Greif. Amy, please feel free to open the line for questions.

Operator, Operator

Your first question comes from the line of George Staphos with Bank of America Securities.

George Staphos, Analyst

So my two questions, and they're related. So we look at the implied guidance for the second half, and you're going to be looking at some improvement in third and fourth quarter earnings. Yet, certainly, inflation has been a major headwind for you. What gives you two or three things that give you confidence that the guidance you've given is manageable, achievable even with that pretty large headwind right now on inflation? The related question, can you talk to what pricing assumptions you have built into that guidance? And if an existing customer puts in an order today with you, specifically here on URB, what is the price that they are paying versus the May published price?

Larry Hilsheimer, CFO

I'll comment on some of this, and Pete will probably add to it as well. We have a very high degree of confidence on our pattern of working to stay ahead of inflation particularly in our Global Industrial Products business, where we have, I'd say, more direct control on pricing with our price adjustment mechanism contracts, but also our openers for other items. The team has been very diligent as we've been talking about inflation for a couple of years now. And so as we see things playing out in our third quarter, we have pretty good visibility to the fact that our margins are going to maintain and slightly grow in gross profit dollars, and we're confident that that will maintain into the fourth quarter. Our volumes in the first month of our third quarter grew at exceptional levels. And so, we're not seeing anything slowing that down. We're optimistic about the economy and we're optimistic about staying ahead of inflation. In fact, in the inflationary time, through these adjustment mechanisms, we have actually helped our value-add significantly because of just the timing of inventory deliveries against the price increases. With respect to the paper business, as Pete commented in his remarks, we have executed every dollar of the price increases that we have announced in our non-indexed type business. In our URB business, 60% of our business is not tied to the RISI index, so we've announced $150 since last October, and we're getting every dollar of it in the market.

Pete Watson, CEO

Yes. So George, from a volume standpoint, again, as Larry said, we expect to have strong second half volumes really consistent with what we've seen in Q2. In terms of pricing, to Larry's point, just on URB, to give you perspective, so our backlogs are 9 weeks plus in this grade. Our customers are on allocation. We have no capacity to take on any new customers at any price. That's how challenged it is. And as we both indicated, all our non-contract customers were up to the full $150 a ton price, and that's a really robust market. Our price guidance into our full-year guidance is what we've realized in the indexes today. So it doesn't forecast any future potential price changes, which we're not going to comment on anyway.

Operator, Operator

Your next question comes from the line of Gabe Hajde with Wells Fargo Gates.

Gabe Hajde, Analyst

I have a high-level question regarding housing starts and some research indicating potential deurbanization. The five-year average for housing starts was around 1.25 million, with projections rising to over 1.5 million. Could you remind us of your exposure to construction in your two businesses, particularly in areas like carpet, tubes, and cores? Also, how has that business performed over the past couple of years, and what advantages could they offer? I understand it may be challenging in the GIP business due to limited visibility on where products like paints and coatings might eventually be used, but could you share if this has been a drag on the business or if it might offer medium-term benefits?

Pete Watson, CEO

Thank you for the question, Gabe. In the Paper Packaging business, particularly in our tube and core segment, some key end markets are carpet and products used in homes. As you may recall, we experienced low tube and core volumes in 2019 due to weaker end markets. However, these areas are starting to recover, driven by growth in homebuilding and home goods. This recovery is a factor behind our nearly 6% year-over-year increase in tube and core volumes for the quarter. Regarding our paper and packaging business, CorrChoice operates alongside our mills and sources raw materials, which complicates the alignment with end markets. Despite this, it indirectly supports our mills and CorrChoice operations, supplying products used in new homes and buildings. On the GIP side, we produce chemicals that are used in flexible and rigid foam applications, which are essential components for furnishings, furniture, and materials for homes. This segment of the end market has shown improvement and will continue to positively impact our business.

Larry Hilsheimer, CFO

I'll supplement what Pete said, Gabe, because a little bit of where you're going, not only in construction, but we all know what's going on in the auto segment that where things are robust but shy of where they could be if they had their semiconductors. What's interesting for us and what we've talked about before, Pete, and I had a long view that we talked about even last year in this same call that we thought the economy would recover well right now. And that we thought that by '22, we'd maybe be back to an '18 economy, and that's still our belief. And what's interesting is that the volumes in the remainder of our year are still projected to be significantly below our '18 levels. So we believe '22 has even more positive in front of us. And now a lot of that, like construction, depends on whether they can get labor and get their work done.

Gabe Hajde, Analyst

Right. Okay. And then I guess dialing in on GIP in the second quarter. I just want to make sure that I heard everything correctly. There's directionally a $14 million swing, I think, in incentive comp, and then $6 million benefit from raw materials last year that did not recur this year. And even if I adjust for the $7 million showing in FX, it looks like there’s effectively a 100% drop-through from volumes, and I know that's not the case. So I'm just curious if you can parse out for us if there's any sort of benefit from better utilization? Or what the improvement was year-over-year? I know you guys have taken a lot of costs out. So I guess, really what we're trying to understand or I'm trying to understand is what the benefit is kind of going forward, what the normal drop-through should be from volume versus structural cost improvements that you guys have made?

Pete Watson, CEO

Yes. I mean Gabe, one of the big drivers of the improvement in GIP is really about the margin expansion that you've been seeing us drive over the past few years. And we talked about it in prior quarters, the dramatic improvement that we've made in the mechanics of our pass-through mechanisms in tightening up what used to be an unacceptable lag, and that really drives improvement in a period of time when you are having rapidly increasing raw material costs. So a good bit of this margin expansion, while we have done a good job of improving our cost management, is really the margin expansion relative to pricing processes. And some of that is the annual openers for non-raws. Some of it is making sure that in contract renewals. We have been very aggressive on pricing because we knew we were facing into an inflationary period. And then the last component is the element of the mechanics of the adjustments. The manufacturing cost improvement has actually been a relatively minor part of this. So it's really volume and margin expansion that are the two components.

Larry Hilsheimer, CFO

And Gabe, one of the parts of it is volume. We certainly had healthy market demand in our end markets, but we're also seeing really good dividends from our strategic capital investments, particularly on IBC volumes and the IBC reconditioning and our investments in plastic drums. So we've also got three additional blow molders that are going into Houston, Shanghai, and Central Europe. So this strategic growth initiative in our resin-based products will continue to benefit that business as well.

Mark Wilde, Analyst

I wanted just to start out, Larry. Can you talk with us a little bit about what we should expect from kind of SG&A in the back half of the year? I mean, it's a big jump here in the second quarter. And it really offset a lot of the improvement in gross profit. It's also above the 11% level. So I'm just trying to figure out whether that type of level is something we should expect kind of through the back half of the year?

Larry Hilsheimer, CFO

It's a valid question, Mark. We are focused on reducing SG&A costs in our business. When we acquired Caraustar, the SG&A costs were higher than ours, and we are actively working to address that. However, some progress has been delayed due to the impact of COVID on our ERP system implementation, which has set us back around 6 to 9 months and is affecting our SG&A costs. The incentive adjustments we mentioned are based on year-over-year performance and will gradually help us return to our target levels unless we significantly exceed those targets, which is the case this year. Specifically, for the remainder of this year, we expect SG&A expenses to be about $0.21 per share higher compared to the first half of the year, as we anticipate more travel and entertainment relative to last year and the beginning of this year. We will manage these expenses carefully to keep them well below pre-pandemic levels, but they will be increased in the second half of the year. Looking at the overall operations, the first half of the year had an EPS of $1.74. Excluding the OCC impact, operations are expected to result in a lift of about $2.22 per share. This accounts for a $0.21 per share increase in higher SG&A expenses in the second half compared to the first half, with about $0.13 of that being additional incentive increases. Additionally, OCC will have a negative impact of around $0.60, which is higher in the second half than in the first half.

Mark Wilde, Analyst

I'd like to revisit George's question regarding pricing. You mentioned that the open markets for non-indexed URB prices had been fully passed through. I'm interested in understanding the overall improvement in the Paper segment as we move into the third quarter. It appears that the second quarter may not have benefited much from the recent price increase in containerboard. Could you confirm this? Additionally, I would like to know how pricing is changing in the uncoated sector for converted products. You've increased open market URB prices, but what is happening with tube and core prices? What is the timing for pricing changes in converted products?

Pete Watson, CEO

Yes. So let me talk first about containerboard, Mark. As you know, that flow through the benefit to our mill system started at the end of the last month of our second quarter. So we'll have full capture in Q3 on that $60 a ton increase. So we've got full capture on that. Downstream and corrugated, it's been a very strong market. We have actually got benefit of that very quickly after the containerboard increases. So Q3 in our corrugated and containerboard system will have full implementation. That has been offset by higher OCC and higher chemical costs, adhesives, et cetera. But from a pricing standpoint, we've captured that fully, plus some on our converting and uncoated. So we've announced $150 a ton. The index has only recognized $80. And as we both said, we have raised all our noncontract prices to full $150 a ton price and immediate effect. Downstream and tube and core, it's very similar to our corrugated implementation. It's been very strong. We've been very aggressive with it, and we are fully capturing that business pricing on the tube and core business.

Operator, Operator

Your next question comes from the line of Adam Josephson with KeyBanc.

Adam Josephson, Analyst

Larry, regarding tax, back in your Investor Day in mid-2009, you discussed a significant improvement in your tax strategy, mentioning a long-term targeted adjusted tax rate range of 26 to 30. If you meet the low end of your guidance this year, your rate will drop to 22, which seems exceptionally low compared to your earlier expectations. Over the past four years, you've consistently exceeded your tax rate guidance each year. Can you clarify your long-term tax rate expectations? Is this situation unusual, and can you help us understand why you are significantly undershooting your tax targets?

Larry Hilsheimer, CFO

Yes, if you look at our annual performance, we've typically stayed within the lower end of our projected tax rate range. You are correct that during our 2017 conference, we outlined expectations based on the tax structure at that time, which has since changed significantly due to tax reform that lowered the U.S. tax rate. This change benefited our projections by a few points. Additionally, we had set up many reserves for specific planning matters that required those reserves to be in place. We've successfully navigated through various legal limitations and tax examinations both in the U.S. and internationally, leading to favorable settlements and the release of some reserves as those contingent tax liabilities have dissipated. This situation is contributing to some fluctuations in our overall tax rate. Going forward, it has become more challenging to predict our tax rate due to changes in the current administration's stance on corporate taxes and efforts to establish global minimum taxes in some sectors. If the tax structure does not change, I anticipate that over the next two to three years our tax rate range could decrease by about a point due to ongoing tax planning initiatives. Our tax team has done an excellent job executing the strategies we discussed in that 2017 call, and we have some additional strategies we plan to implement, although their effectiveness will depend on future tax reform developments.

Adam Josephson, Analyst

Got it. I appreciate that, Larry. Regarding cash flow, could you clarify the expected substantial working capital drag this year? I'm curious about the specifics because your capital expenditures will be below normal this year, leading to significant working capital pressures. I'm trying to project for next year since the midpoint of your guidance this year is around $300 million, and next year, your commitment is about $430 million. This suggests an improvement of about $130 million. Some of that would likely come from working capital not being a drag anymore, and it's uncertain how EBITDA will perform next year. I am trying to understand the working capital and capital expenditure aspects, particularly comparing this year to next year.

Larry Hilsheimer, CFO

Yes, I mentioned earlier that our teams have done an outstanding job managing working capital as a percentage of sales, which is our primary measure. The cost of inventory is challenging to control, especially with rising costs of materials like OCC, steel, and resin. Over the past eight months, the costs of steel and resin have roughly doubled, leading to increased sales prices, higher receivable balances, and larger inventory levels, which contributes to working capital pressures. This situation is entirely driven by costs and not by poor management; in fact, our management of working capital has been very strong. The impact has been about $35 million, which is comparable to 2018 levels before Caraustar's influence, and it may double that figure. Regarding capital expenditures, the frustrating aspect is that we are prepared to invest, but external factors have hindered our spending. We're facing delays in equipment deliveries, and due to COVID travel restrictions, we have also been unable to move forward with much of our ERP implementation. Therefore, our initial plan to spend between $150 million and $170 million has now decreased by about $20 million. Looking ahead, although we have not yet finalized our budget for next year, we expect that spending will increase as we have many projects we want to complete, but our progress is dependent on delivery capabilities.

Operator, Operator

Your next question comes from the line of Ghansham Panjabi with Baird.

Matt Krueger, Analyst

This is actually Matt Krueger sitting in for Ghansham. So given all the moving pieces on a year-over-year basis for the back half of the year, I was just, first, hoping that you could provide some added detail on the expected weighting of EPS between the two remaining quarters for the back half of the year? I mean just given the meaningful acceleration implied some of the comparison issues and then obviously, all the pricing that's being layered in? Any help there would be great.

Larry Hilsheimer, CFO

Sure. Every year we discuss whether Q3 or Q4 will perform better, and it largely depends on when the agriculture season harvest occurs. Our expectation is that Q3 will show stronger performance than Q4, although the difference isn't substantial. You could take the difference in our EPS from $2.96, divide it by two, adjusting slightly toward Q3 and a bit less for Q4. Ultimately, there's not a significant disparity between the two quarters.

Matt Krueger, Analyst

Great. That's really helpful. And then I was just hoping that we could get some more detail on what the estimated impact from winter storm Yuri was on the Global Industrial Packaging business? Anything you can provide from a volume perspective? And then also any margin impact as well would be great?

Larry Hilsheimer, CFO

Yes. We had around 41 production days across various plants. There were about 5 or 6 days when production was halted, affecting sales, resulting in an approximate $1.5 million impact on volume. Additionally, we faced significantly increased utility costs after the storm, amounting to around $1 million, and incurred damages from broken pipes due to freezing, totaling another $100,000 to $200,000. Altogether, this resulted in about $2.7 million in actual costs. There were many indirect effects as well, including force majeure actions affecting our customers' operations and their ability to fulfill orders. We didn't quantify all those impacts, but we are aware that volume levels in our Gulf Coast regions are notably lower than in other areas worldwide. This gives us reason for optimism moving into 2022, especially as we've started to see an uptick in volumes in our filling business, which is a positive indicator. Overall, we maintain a hopeful outlook, despite the $2.7 million impact.

Operator, Operator

Your next question comes from the line of Justin Bergner with Gabelli.

Justin Bergner, Analyst

One big picture question and then just a couple of specific cleanups. Big picture, outside of URB, are there other parts of your business in Industrial Packaging or Paper Packaging, where you're sort of unable to meet incremental demand?

Pete Watson, CEO

Supply chains are tight. Our demand is really robust. We are meeting demand for our customers. My comment, Justin, was really about anybody that's new that we don't do business with that we would like to do business with in that substrate, we just can't because our backlog for the demand is so great. But we have actually grown other parts of our business because of our reliability. Now that has forced a lot of overtime and a lot of 6- and 7-day work weeks, but URB is a little more severe. We are doing a good job serving our customers and ensuring that we're meeting their needs and actually in our GIP business and our converting business. In paper, we're actually making some inroads because of that reliability. It's all related to our customer service scores continue to improve, in spite of a tough demand environment.

Justin Bergner, Analyst

Okay. Then moving to the specific questions. Just to clarify, the $25 million incentive accrual headwind, that was all in Q2, and then there'll be a smaller incremental effect in the second half. Is that incremental to the first half or incremental year-on-year?

Larry Hilsheimer, CFO

The $25 million or $24.6 million was a combination from last year, reflecting a year-over-year comparison for Q2. Last year, we reduced our accrual for incentives, while this year, we increased the accrual for incentives compared to our budget. That accounts for the $25 million in the first half. The second half will look similar. Overall, we are planning for approximately $52.6 million in higher incentives year-over-year for the entire year.

Justin Bergner, Analyst

Okay. Lastly, regarding the tax rate, you mentioned it might decrease by 100 basis points, but this is not a change from 26 to 30; rather, it's a decrease from the initial 26 to 30, which had already reduced a few hundred basis points due to the tax reform bill. Just to clarify, is it more than 100 basis points down from 26 to 30?

Larry Hilsheimer, CFO

Oh, yes. No, no, yes, I'm talking about from where we're at now and where we're guiding to where we think we'll be going forward.

Operator, Operator

Your next question comes from the line of Mark Wilde with BMO Capital Markets.

Mark Wilde, Analyst

Yes. Just a few follow-ups here real quickly. One, on the land sales. The gross price that was just absolutely exceptional. Can you talk with us about sort of how the tax leakage looks? And how you're thinking about the balance of the portfolio in the land business if we ever get down to a point where just scale in that business is an issue?

Larry Hilsheimer, CFO

Yes, Mark. To address your second question first, we do not plan to liquidate any more of our land portfolio. We see this as a way to maintain strategic flexibility. It supports our interest rate position, and we're pleased with the business overall. We had some exceptional circumstances last year, which we often refer to as preparing for rainy days. We decided to act on it. Additionally, we had some tax planning related to timber gains that had been deferred from transactions a decade ago, allowing us to use available capital losses to offset timber transaction gains. The gain we realized was higher than anticipated, as we achieved values per acre that exceeded the expectations set by the bankers, which is positive news. As for tax implications, they were minimal. We effectively used other tax loss carryforwards to eliminate any federal tax liability, with only a small amount of state and local taxes due.

Mark Wilde, Analyst

Okay. Another follow-on I had was probably perhaps more for Pete. And that is just, can you give us a sense of sort of size and approximate market share in the IBC business? I remember when you bought Poste about 11 years ago. It was kind of the #3 player in the market, sort of kind of the dominant guide and miles. And so I think your strategy was to kind of expand their geographic footprint and try to pick up some share. So I wondered if you could just give us a sense of how big that business is right now? And sort of where you'd see yourselves vis-a-vis the competition? And finally, how rapidly is that market growing overall right now?

Pete Watson, CEO

We currently hold about 30% of the global market share in IBCs and IBC reconditioning, ranking third behind the privately held companies SCHUTZ and Mauser. We consider this area to be high-growth and have made strategic capital investments in it. Our operations include 20 IBC blow molders worldwide, with three more being added. This product line is experiencing growth in the mid to high single digits, making it the fastest-growing segment in our portfolio globally. Additionally, over the past two years, we have formed joint ventures and strategic partnerships with re-conditioners to develop a strong end-of-life product service, enhancing the circularity of IBCs. Currently, our largest presence is in Europe, but we are expanding in North America and are also adding a second line in Asia, including China. In terms of our product portfolio, GIP has shifted from over 60% steel drums to 50% and now has resin-based products making up just over 20%. We expect this trend to continue, with an increasing focus on resin-based products, IBCs, and plastic drums, while decreasing reliance on steel drums.

Mark Wilde, Analyst

Okay. And then if I could slip one more, Pete. I just wanted to talk briefly about the boxboard business. One thing is, I'm assuming that some of that tightness that you're experiencing in URB is the outcome of having shut down Mobile. But I'm curious, you've got those two coated mills. And I wonder whether you might convert to URB at one of those mills? And whether in the CRB business, the two remaining mills, whether they kind of risk being kind of behind the technological curve? It just seems like with what Graphic is doing at Kalamazoo, we're seeing more and more of the CRB business move to Fourdrinier machines that can do kind of multiples and maybe offer customers improvements in performance and basis weights. So just to get your thoughts around potential conversion and where you stand from just a technological standpoint there?

Pete Watson, CEO

Yes. On the URB side, we closed a mill with two machines in Mobile, which had a capacity of 140,000 tons. This decision was influenced by the mill's high operational costs and the need for significant capital investment. Closing it allowed us to increase throughput in our other facilities. We have the capability at one of our CRB plants to produce both URB and CRB, which we are currently doing, and there is potential for more URB production in the future, although that is not certain. This leaves us with two dedicated CRB machines, one in the Midwest and one on the West Coast, both operating consistently and serving specific niches in their markets. We do not compete directly with newer machines but instead focus on providing high-quality service. Therefore, I expect these two machines will remain as CRB. We are assessing our boxboard system, but there are no significant updates to share at this time.

Operator, Operator

Your next question comes from the line of George Staphos with Bank of America Securities.

George Staphos, Analyst

I have two quick follow-ups. First, Pete, you mentioned that URB lead times are nine weeks. Can you confirm that or correct me if I'm mistaken? Also, what are you currently seeing in terms of lead times and backlog on the containerboard side? Regarding CapEx, I understand it wasn't your decision, but you are going to be $20 million lower this year. Where are you finding that you can't spend? You mentioned ERP systems earlier; are there any areas where this limitation is causing issues for your business? What should we focus on for 2022 to ensure things progress as planned? Should we also expect that if you're at 130 to 150 this year, next year might be closer to 200, factoring in some normal growth plus an additional 20?

Pete Watson, CEO

Yes, George, just to kind of backlogs in URB are at 9 weeks. Containerboard is 8 to 9 weeks depending on machine. So they're really robust markets, and those backlogs reflect that.

Larry Hilsheimer, CFO

Yes. On CapEx, George, the delay in the ERP system is not anything that's going to materially impact our operations in any negative way at all. It does delay some opportunities for efficiency gains and back-office operations and that kind of thing. But it's not significant. The other element on the CapEx is growth plans where we have things where we're going to put in like new paint lines or new other equipment or things like that, and we just can't get the deliveries. We're still able to operate. It's not impacting that. It's just not allowing us to get to the improvements that we've been working to build. As to whether it will end up resulting in extra spend next year? Probably not because you get into just a human capital capacity of what you can get done in a given year. So I would expect, but we haven't finished our process yet for budget for next year, that we'll be back in 150 to 170, but that could change, and we'll talk about that as we go into guidance in our December call.

Operator, Operator

Your final question comes from the line of Adam Josephson with KeyBanc.

Adam Josephson, Analyst

I have a two-part question, Larry. When you mentioned the possibility of reinstating guidance due to improved visibility, is this improved visibility a result of having only five months left in the fiscal year or is it because there is less macroeconomic uncertainty? Additionally, how does this impact your plans for guidance at the beginning of next fiscal year? My other question is regarding the recent quarter's performance, which exceeded your initial guidance due to factors like foreign exchange and tax, which are non-operational. Why did you decide to pre-announce this quarter?

Larry Hilsheimer, CFO

In response to your first question, it's both. We only have five months left in the fiscal year, and the economy has unfolded as Pete and I anticipated, which has confirmed our outlook. We feel very confident about our projections for the rest of the year and expect to provide annual guidance in December, as we plan to return to our previous practice. Regarding the preannouncement, my approach has always been that if there is going to be a change of more than 10% from what has already been communicated, it's best to inform people as soon as you are aware of it. That's the rationale behind our decision. Additionally, while you are correct in noting that the analysis may show this was primarily influenced by foreign exchange and tax factors, it's important to also acknowledge the significant improvements in our operating performance in GIP, which outweighed challenges from transportation, higher other costs, overtime expenses, and incentive accrual adjustments. Therefore, we are quite optimistic about our current situation.

Operator, Operator

Thanks very much for joining us, everyone, today. And we hope you have a great remainder of your week and a pleasant week ahead. Thank you.

Operator, Operator

This concludes today's conference call. On behalf of Greif, we thank you for participating. You may now disconnect.