Greif, Inc. (NYSE:GEF) Q2 2023 Earnings Call Transcript

Greif, Inc. (NYSE:GEF) Q2 2023 Earnings Call Transcript June 8, 2023

Operator: Good morning and thank you for standing by. Welcome to the Greif, Inc. Second Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Leahy, Vice President of Corporate Development and Investor Relations. Please go ahead.

Matt Leahy: Thanks and good morning, everyone. Welcome to Greif’s second quarter fiscal 2023 earnings conference call. This is Matt Leahy, Greif’s Vice President of Corporate Development and Investor Relations. And I am joined by Ole Rosgaard, Greif’s President and Chief Executive Officer; and Larry Hilsheimer, Greif’s Chief Financial Officer. We will take questions at the end of today’s call. In accordance with regulation fair disclosure, please ask questions regarding the issues you consider important because we are prohibited from discussing material non-public information with you on an individual basis. Please turn to Slide 2. As a reminder, during today’s call, we will make forward-looking statements involving plans, expectations and beliefs related to future events.

Actual results could differ materially from those discussed. Additionally, we will be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metrics can be found in the appendix of today’s presentation. And now I will turn the presentation over to Ole on Slide 3.

Ole Rosgaard: Thanks, Matt and good morning everyone. Greif posted an exceptional second quarter in the face of historic volume headwinds, the likes of which we have not seen since The Great Recession. Our teams are executing extremely well this year, taking swift action to lower our cost base across our manufacturing network, maintaining discipline on pricing under our value-over-volume philosophy and extracting cash from our businesses by driving down working capital. I could not be proud of our team and the work we are doing to advance our Build to Last strategy. Our performance in the first half of 2023 and specifically, our ability to execute well under challenging market conditions has been a process years in the making.

As we shared with you at our Investor Day last June, the growing benefits of our continued evolution as a company are becoming more visible now and the hard work our teams have put in over the past several years are bearing fruit today. Before discussing our financial results, I would like to highlight several achievements made during our second quarter and specifically recognize the contributions of three of our outstanding teams. On our mission to become legendary in customer service, we have long used the Customer Satisfaction Index or CSI, as we call it, as a metric to reflect overall customer satisfaction we drive in terms of product quality, customer service and our ability to deliver value. We set an aspirational target of 95 out of 100 as our benchmark of success.

And I am proud to recognize our GIP team who, for the second consecutive quarter, produced a CSI score above 95. Our PPS colleagues were not far behind with a score of 93. To continue to provide this level of service in a period of challenging market conditions is a testament to the global Greif team working everyday towards our vision to be the best performing customer service company in the world. Thank you to each of our almost 13,000 colleagues for your unwavering support and dedication to our customers. Our ability to drive legendary customer service is directly related to the engagement and well-being of our colleagues. Our colleagues come first and why our mission, our first mission in Build to Last is creating thriving communities. During the second quarter, we completed our Sixth Annual Gallup Engagement Survey with over 90% of our global colleagues participating.

And I am proud to share that we continue to improve engagement at Greif and remain in the top quartile of all manufacturing companies around the world survey by Gallup, with a 5% jump in engagement percentile compared to last year. In addition, in the past month, it was announced that we rank amongst or among the top 100 Global Most Loved Workplaces in a survey done by Newsweek. While we are placed as a top 100 company in Newsweek’s U.S. based survey for years, we are elated to be counted now as a top global company in the very first year this new survey was conducted. It’s our firm belief that the financial results which we are about to share with you are the direct result of the dedicated engagement of all of our colleagues. Our third mission is about protecting our future with a focus on sustainability, lowering our carbon footprint and driving solutions to support the circular economy.

At Greif, sustainability has always been a cornerstone of our business model and remains critical to our ability to serve customers with excellence and promote a profitable and ethically sound organization for the long-term. This quarter, we published our 14th Annual Sustainability Report, which includes our recently announced 2030 sustainability targets and share a comprehensive overview of our sustainability strategy. I highly encourage our investors to review this report and share your thoughts with us on our sustainability strategy. Finally, a moment of recognition for three of our extraordinary teams at Greif, who are helping us become a stronger, leaner and more scalable and modernized organization, advancing our final mission of ensuring financial strength.

We are a global organization with operations in over 35 countries. And our performance would simply not be possible without the coordination and support of our global operations group, our digital and information technology team and our global supply chain organization. Our Global Operations Group, or GOG, as we call it, led by Kim Kellermann, was formed in February 2022 with the purpose of improving operations through a globally consistent approach to tools, processes and behaviors. Our One Greif approach to safety, driving a zero-harm culture with significantly improved safety measures has lower safety incidents across our manufacturing network by 25% and is improving production level colleagues’ well-being, retention and productivity. Our GOG teams are also champions of continuous improvements, driving our Greif Business System or GBS 2.0 to accelerate plant modernization and automation as well as our Gemba value creation and Six Sigma greenbelt certification programs, all designed to elevate standards of daily performance and execution across the enterprise.

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These collective efforts yield real cost savings as the GOG team continues to drive structural cost out and productivity gains that not only help optimize our current business, but also provides the foundation to accelerate integration and synergy capture as we grow through acquisitions. We are already starting to see the impact of those savings in our financials and this quarter is a prime example of the success of these initiatives. Our digital and information technology team is led by Vivian Bouet, who joined Greif in December of 2022 and is launching a comprehensive modernization effort of our technology ecosystem with a digital-first approach. This transformative strategy aims to capitalize on market opportunities and deliver frictionless order management and delivery experiences to our customers at speed and scale.

Under Vivian’s leadership, we are exploring systems to further accelerate our production automation, leveraging AI for efficiency gains and real-time market intelligence and building technology infrastructure to drive legendary customer service. This multiyear digital modernization strategy will enable Greif to better leverage our scale, accelerate our margin expansion and improve our global operations and service. Finally, our global supply chain, led by Tina Schoner, is also undergoing a transformation to invest in advanced sourcing and supply chain management capabilities, taking a One Greif approach to supply chain. The team is focused on leveraging our global logistics network across GIP and PPS to improve asset utilization and scale benefits.

They are advancing supply chain automation and digitization, revamping our sourcing function to drive better raw material purchasing and terms. They are helping us optimize working capital and advance supply chain sustainability and our circularity model. We expect that this multiyear journey will continue to provide tangible savings as well as improve our purchasing agility to flex quicker with changing demand cycles. We believe this One Greif approach is a key element of our success, enabling better decision-making, cooperative teamwork, group identity and the ability to serve our customers with excellence. The three teams’ profiles exemplify our commitment to being a global best-in-class partner for our customers across the world. I am proud of the work of our GOG, IT and global supply chain teams under Kim’s, Vivian’s and Tina’s leadership.

My sincere thanks to you all. Now I’ll shift over to financial results on Slide 4. Greif posted a strong result in our second quarter with $228.6 million of EBITDA and $185.5 million of free cash flow. Our EBITDA was the second highest Q2 in company history, exceeded only by last year. And our cash conversion ratio was over 80%, well above the long-term target of greater than 50% outlined at our 2022 Investor Day. These results are exceptional considering historic volume headwinds and are a testament to the resiliency of our business model. We remain focused on controlling what we can control and delivering results regardless of market conditions. This quarter, we also advanced our inorganic growth strategy with the majority acquisition of Centurion Container, a business we have watched rapidly grow as a minority partner for the past 3 years.

The Centurion business is an excellent fit as it enhances Greif’s resin-based offering and IBC business in North America, supports our circular economy goals, and offers a margin-accretive organic growth story to the GIP portfolio. We could not be more delighted to take this next step in growing the Centurion partnership. Between Lee Container and Centurion, we have spent nearly $500 million on acquisitions in the past 6 months and yet we still closed this quarter at the midpoint of our target leverage ratio range. Our M&A pipeline remains robust and we intend to continue to deploy capital towards value-accretive targets in the coming quarters. Now I’d like to take a deeper dive into the results of each of our primary segments. Please turn to Slide 5.

Our GIP business posted solid results in the quarter despite persistent demand pressures in all substrates and regions. Quick and decisive cost actions by our teams as well as strict adherence to our value-over-volume philosophy produced yet another strong quarter for margins despite lower sales. This is the Greif business systems in action. On the volume side, all GIP products and geographies showed softness compared to the prior year with global steel and resin-based products both down low double-digits on a per day basis. The North American markets remain our weakest largely due to lower demand within the chemical and coding end markets. LatAm, which has fared better from a volume perspective in the past few quarters, has now started to feel the same macroeconomic effects as other regions and was down low double-digits.

EMEA and APAC volumes were comparatively stronger, though still down year-over-year with some support from automotive and agricultural end markets. However, we did not see a material volume inflection exiting the quarter and into May and are not anticipating one to occur in the back half of 2023. We will continue to focus on our value levels regardless of the demand environment and I commend the global GIP team for their excellent work in the second quarter. Please turn to Slide 6. Paper Packaging second quarter sales declined $135 million year-over-year primarily due to a soft demand environment. We took approximately 97,000 tons of total downtime across our mill system in the second quarter as we faced double-digit per day volume declines in both primary converting operations.

Despite this substantial volume headwind, our margin performance was exemplary with EBITDA only down by $13 million year-over-year owing to our PPS team’s swift and effective cost management actions, which added to the ongoing benefits from lower raw material costs. Demand remains soft in most paper converting end markets throughout the second quarter and into May. We remain conservative in our outlook for PPS volumes in the second half, but expect that our year-over-year declines will ease as prior year comps become easier. Our PPS team remains laser focused on cost rationalization, winning profitable new business and delivering value to our customers during this challenging time. And I am proud of the work our colleagues put forth in the quarter.

I will now turn it over to Larry for Slide 7 to discuss our Q2 financial review as well as revised 2023 guidance.

Larry Hilsheimer: Thank you, Ole and good morning everyone. First, I want to take a moment to echo Ole’s opening comments regarding the contribution of our teams across Greif and our commitment to serving our customers with excellence. The results in the second quarter are truly exceptional considering the macro environment and is a result of the collective efforts of all Greif colleagues. I will repeat a statement I made at Investor Day. I am more excited about the growth and the future of this company than ever before and that conviction only grows with each quarter. Thank you to all of our teams. As Ole mentioned, lower volumes across both businesses compared to the historic Q2 ‘22 period resulted in a year-over-year sales decrease of approximately $360 million.

Despite this, actions by our global teams drove EBITDA margin expansion of over 240 basis points and EBITDA dollars were down only about $22 million compared to Q2 ‘22. In tougher demand environments, it takes commitment and perseverance to adhere to our operating philosophies and to deliver legendary customer service. Our teams did both in the quarter. Our customers remain committed to Greif because they know that our quality and service are unfaltering in every environment. We are reliable and deliver customer value every day. At the same time, our teams know how to manage their business as well and have worked to right-size our cost structure in the face of extended slower demand while remaining agile enough to quickly respond to changing customer needs.

This is not an easy task, and I want to extend my heartfelt appreciation to each of our colleagues for their resilience and dedication to executing well. On CapEx and capital allocation, we continue to pursue value accretive opportunities to grow the business regardless of short-term economic cycles. To that end, we are encouraged that our teams are executing well on our organic CapEx spend, launching several larger projects which will ramp up in the second half of our fiscal year. On the M&A front, I am pleased to report that both the recently acquired Lee Container and Centurion Container businesses are performing in line with expectations. And post-close integration is going well with a line of sight to meet or beat our initial synergy expectations.

Lastly, I’d like to focus on free cash flow. The source of $185.5 million in the second quarter is an extraordinary result. Clearly, we do not expect 80% plus free cash flow conversion every quarter, but I am encouraged by our team’s ability to act and drive cash out of the business during a lower volume period. As we have mentioned several times in the past, Greif is a cash flow machine, and our transformation efforts over the past 7 years are yielding great value to our shareholders. Our results speak for themselves, and we are running a dramatically different business than when Ole and I joined Greif in 2015 and 2014, respectively. I believe our cash flow performance in 2023 is evidence of a stronger, leaner and less economically sensitive model that has earned fresh consideration regarding the long-standing view of Greif being overly sensitive to cyclicality.

Let’s now turn to Slide 8 to discuss our revised ‘23 guidance. In light of the strong second quarter performance and improved visibility for the full year, we are raising our fiscal 2023 guidance. We are moving away from our first quarter low-end guidance and introducing a new range of $780 million to $830 million of adjusted EBITDA for fiscal ‘23, an increase of $65 million at the midpoint over the prior low-end guidance, reflective of our team’s ability to continue to deliver results in the back half of the year. We are also raising our adjusted free cash flow guidance for fiscal ‘23 with a new range of $390 million to $440 million, an increase of $45 million. This reflects our higher expectations on adjusted EBITDA, partially offset by higher cash taxes and higher CapEx as we expect to pull forward high-priority organic growth projects given our strong cash generation.

Slide 7 further outlines key modeling assumptions embedded in our guidance ranges. I’d like to close on Slide 9 by providing an update on our recent capital allocation. As mentioned in Ole’s opening remarks, as we closed the quarter at the midpoint of our target leverage ratio range at 2.25x, a reminder that this ratio includes the nearly $500 million of acquisitions completed in the past 6 months. In that context, you can see how our cash machine is capable of funding organic CapEx as well as sustaining an extended cycle of M&A. Our acquisition pipeline is robust, full of actionable, margin-accretive targets that fit our strategy. And we expect to continue deploying capital in this capacity in the near-term. In May, following second quarter, we also completed our $150 million share repurchase program.

We continue to believe that our own stock offers one of the most attractive capital deployment opportunities available given the significant valuation gap. Due to the highly attractive and actionable nature of some of our M&A opportunities, we do not plan to implement another repurchase plan in the near-term, but the case for further buybacks is very much still on the table. Lastly, as we’ve discussed before but it bears a reminder, our dividend yield remains compelling. And we intend to continue expanding our dividend to further return cash directly back to our shareholders. In closing, I’ve never been more excited for the opportunities in front of us than I am today. Our teams are operating on all cylinders, driving a resilient, dependable, cash-generating business that will fund our value-accretive growth in many exciting ways.

I look forward to the future and the potential for this business in the months and years ahead. With that, I’ll turn things back to Ole on Slide 10.

Ole Rosgaard: I think Larry summed things up nicely. We are extremely proud of our performance this quarter, although we’re not surprised because we see day in and day out the commitment of our teams and the transformative changes underway. Our Build to Last strategy will continue to fuel Greif’s journey and evolution to a higher growth and margin business by taking care of our people and serving our customers with excellence. We are excited for the road ahead, and we will work to continue to produce results worthy of your investments in our company. We thank you for your interest in Greif. Operator, please open the line to questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Michael Hoffman with Stifel. Your line is now open.

Michael Hoffman: Hi, good morning. And thanks for taking the question. Given the revised guidance, can you give us a little bit of proportioning across the two segments, how you want to think about where we’re adding and subtracting relative to the two segments in the guidance revision?

Larry Hilsheimer: Certainly. Michael, thanks for the question. I’ll sort of do a walk. We had low-end guidance at $740 million. And again, that was low end, and we never said that was like midpoint or anything else. I’ll walk you through the various elements and talk about each business. So between lower transportation cost and manufacturing cost as a result of the actions by our leaders, the ones that Ole mentioned as well as our business units, GIP will drive $37 million lift from that and PPS, $33 million for a total of $70 million. From a price cost mix standpoint, the lift is about $51 million in GIP and about $5 million in PPS. Centurion adds about $12 million over the remainder of the year. There is some FX drag of about $7 million relative to where we were.

SG&A is a drag of about $14 million mostly related to better incentives and that kind of thing. Volume is a big drag. You’ve got about $48 million between the businesses predominantly in GIP being worse than what we had given in the first quarter guidance it’s 51 of that with PPS actually slightly better at $3 million than where we were before 3 or 4. And then just the other items, about $4 million of just odds and ends on various items that are below the line kind of things. So hopefully, that helps walk you from the 740 to the 805 midpoint.

Michael Hoffman: Okay. That’s terrific. Thank you. So I’m not a paper and packaging analyst per se. I cover a lot of things. And my coverage in the industrial world is saying that there is still low level growth in the industrial economy. And yet your volume outlook and GIP in particular would suggest that’s not the case. So is this a – how do you think about what’s happening under the structural demand versus there is excess product in the channel that needs to clear. But there is, in fact, actually a stable growth story behind it or do you not see that? I’m curious your view.

Larry Hilsheimer: So just one clarifying thing, Michael. When we went to the 740 last quarter, that was in the face of significant declines in unit sales. And now we’re taking volumes even further down in GIP. So there – the end markets are significantly impacted relative to prior year and even our original guidance at the beginning of the year. But I’ll let Ole comment more specifically on some of the end market impacts.

Ole Rosgaard: Yes. So Michael, if you – the three biggest end markets we have where we see declines is in chemicals and bulk chemicals, particular bulk chemicals like GDI and MDI. They are used to produce the insulation in your fridge, the foam in your seats and that sort of thing, dashboard in cars. So with the fact that people move less around the world, they buy less houses and so on, that means they are buying less fridges and that sort of thing. The other one is paint and coatings. And the reasons there are the same. And then the last one is the loop business. So those three are – those are the three biggest segments, and they are down. We don’t see any more destocking per se. But the order pattern has changed from a lot of our customers.