Greif, Inc. (NYSE:GEF) Q4 2023 Earnings Call Transcript
Greif, Inc. (NYSE:GEF) Q4 2023 Earnings Call Transcript December 7, 2023
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: 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 comfortable 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: 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 depression 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 [Technical Difficulty] 2023, we are built to handle [exonerous] (ph) 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: 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 ‘22, 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 industry -- 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 ‘24 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 ‘24 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. We have seen some green shoots, but no identified compelling trends yet to give us conviction that a recovery is emerging. Note that if volumes recover 50% of the GAAP to 2022 volumes, our EBITDA would increase approximately $85 million. And 100% recovery would add approximately $170 million. Our business is designed to weather short-term cycles. We continue to delight our customers. We are firing on all cylinders and controlling what we can control. We're proud of our teams, and we know that we will continue to execute through this difficult time and come out on the other side a stronger, better business.
The investments we are making under Build to Last are laying the foundation for breakout performance in the years to come, and I'd like to hand it back to Ole to cover more about our long-term strategy and growth plans. Ole?
Ole Rosgaard: Thanks, Larry. If you could please turn to Slide 8. Build to Last is about producing quality results on an annual basis. But it's also more than that. It's about leading through our values. Our purpose, vision, and missions all reflect our goal to better serve our colleagues and customers throughout the world. And I would like to briefly highlight a few achievements in 2023 on each of our missions and how they set us up for future success. The Customer Satisfaction Index has long been one of our most reliable measures of success in delivering legendary customer service, which directly aligns to our vision of being the best performing customer service company in the world. Our aspirational target is 95% and we are proud that in 2023 our average score was 94%.
We also recently completed our 13th Net Promoter Score survey of nearly 5,000 customers, receiving a result of 68, a new Greif record, and a leading score within the manufacturing industry. Consider the macroeconomic context of these results. Our customers clearly know we are devoted to serving them with excellence, particularly when times are tough and we are being rewarded for it. Under creating thriving communities, we completed our Sixth Annual Gallup Survey this year with over 90% colleague participation and the results again showed an improvement in engagement, placing us firmly within the top quartile of all manufacturing companies surveyed across the world. We also show our industry leadership through our commitments to sustainability under Protect Our Future.
And this year, we published our 14th annual sustainability report with our new 2030 targets around climate, waste, circularity, supply chain, and DE&I. This mission is a foundational element of our long-term success and I highly encourage our investors to visit the sustainability page of our website to read more about our initiatives. Please turn to Slide 9. Now that we have two years under the Build to Last strategy, we want to provide a broader update on some ongoing internal strategic initiatives that we believe are the pillars of driving long-term value creation for all stakeholders. First, we share with you the benefits throughout 2023 from centralizing our global operations, supply chain, and IT functions under the One Greif banner. We are building out these functions to serve a larger footprint of businesses in the future with the expectation of a growing scale advantage.
Second, in alignment with our One Greif mentality, we are executing an organizational shift from geography-based operations to substrate-based operations. This structure was piloted in 2023 in GIP North America and resulted in planned and regional level operating efficiencies, improved best practice sharing, and better decision making around capital investments and growth. We will use this fiscal year to prepare and plan to update you with a more complete picture as we get closer to implementation targeted for the beginning of full year 2025. Additionally, we plan to change our fiscal year end to September 30th, beginning in fiscal year 2026. This change has been requested by our investors and analysts for years. And we believe it will better align us to the standard industry calendar and increase our exposure to the investment community.
Importantly, all these initiatives have been part of our Build to Last strategy from inception and our expectations is they will make us better at driving results, improving transparency and increase equity value creation. Enacting these changes takes time and effort, which will result in some short-term SG&A cost inflation in the coming fiscal year. But we firmly believe that these changes will lead to a better and more successful Greif in the future. In addition to the internal work being done, I'm also excited about our recent growth through targeted M&A. Please turn to Slide 10. At our Investor Day in 2022, we outlined Greif’s acquisition priorities in three areas. Unique downstream converting in paper, sustainability alliance reconditioning services, and pursuing a roll-up acquisition strategy in the resin-based jerrycans and small plastics markets.
These acquisition verticals share the same very attractive attributes. They are aligned to growing end markets, hold strong circularity characteristics, and enjoy an elevated margin profile. With a growing addressable jerrycan market of $3.1 billion, we see a great opportunity to be the global leader in this high-performance packaging sector as we have the technical capability, product offering, and scale to service customers in all our markets. We accelerated our growth in this market over the past year with the acquisitions of Lee Container, Reliance Products, and look to bolster our position following the close of the Ipackchem acquisition, which we anticipate by the end of our fiscal second quarter. In summary, we will enter 2024 positions to become one of the largest, most technically sophisticated, small plastic product offerings in the world.
Please turn to Slide 11. Another objective of our acquisition path is to build greater balance in our portfolio from an end market and substrate perspective. The transactions announced in fiscal 2023 give Greif greater exposure to secular growth trends in agricultural and specialty chemicals, as well as exposure to newer markets for us in pharmaceuticals and medical diagnostics. The jerrycan and small plastic product line is extraordinarily versatile and our teams are excited about the follow-on organic growth potential as we serve and grow with customers in these markets. Additionally, you will notice that nearly 75% of the acquisitions completed or announced in fiscal 2023 were resin-based, improving our overall sustainability profile as most of these products can be recycled and reused and require less energy and materials to manufacture.
Please turn to Slide 12. A final note on acquisitions. In addition to the improved end market mix and sustainability benefits, we are also buying great businesses. These companies are the companies we are acquiring and those in our M&A pipeline are materially margin-accretive and have better free cash flow characteristics than our legacy Greif business. Over time, this path, along with the work our teams are doing to continuously improve our base business every day will drive our performance towards our long-term goals of 18% plus EBITDA margins and well over 50% free cash conversion. We will continue to utilize our strong balance sheet and remain disciplined on acquisitions going forward while actively lowering our leverage through a combination of debt paydown and EBITDA growth.
Our capital allocation strategy will remain balanced, ensuring the financial strength and growth of the business for years to come. In closing on Slide 14, let me remind you of the reasons I'm so excited for the long-term growth prospects at Greif and why we remain well positioned to weather this historically soft demand and pricing environments. I have full confidence in our ability to control what we can control and excel through successful execution of our built-to-last strategy. We have proven over the past two years that we have the team and strategy to perform in complex operating environments. We have managed the business tightly while also investing for the future. We have accelerated our growth through M&A and high-impact organic growth projects.
And lastly, we are keeping a long-term lens regarding our operations and business strategy. The cumulative impact of our efforts will result in a more robust, efficient, growth-orientated, and defensible business model, which we believe positions Greif for success and strong earnings growth as the cycle normalizes. We thank you for your interest in Greif. And, operator, will you please open the line for questions?
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