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Q1 2024 Greif Inc Earnings Call

Participants

Matt Leahy; Vice President, Corporate Development & Investor Relations; Greif Inc

Ghansham Panjabi; Analyst; Baird Equity Research

Michael Edward Hoffman; Analyst; Stifel, Nicolaus & Company

Gabe Hajde; Analyst; Wells Fargo Securities, LLC

Presentation

Operator

Welcome to the gray First Quarter 2024 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, Matt Leahy. Please go ahead.

Matt Leahy

Thanks and good morning, everyone. Welcome to Grace fiscal first quarter 2024 earnings conference call. This is Matt lazy, Greg, Vice President of Corporate Development and Investor Relations. And I'm joined by only Ross garden, Graves, 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 are prohibited from discussing material nonpublic 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. And 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'd like to turn the presentation over to Ole on slide 3.

Thank you, Matt, and good morning, all of covering our first quarter results. I would like to briefly recap our strategy and philosophy of how we lead and serve customers at life. We are a purpose-driven company. We create packaging solutions for life's essentials.
Our 13,000 colleagues around the world serve as a critical supply chain partner for our customers who are delivering the raw materials ingredients foods, beverages, medicines and products that make the world work. Our packaging helps our customers deliver the juice and ketchup on your table paint on the walls, the oil in your car the furniture in your home, the souls on issues, your Amazon boxes and the vitamins on this that it takes, we help our customers to very important work.
Our Build to Last strategy is designed to help us be better stewards of our customers' goods. And our vision is to be the best in the world of customer service. The way we do that is through our four strategic missions, how we work and the principles that guide how we lead support and serve our colleagues and customers. We've built a powerful culture and business systems that drive that both serve as a flywheel to consistently improve our competitive positioning and track and retain great talents and create value as we grow the business.
Please turn to slide 4. We believe the future of global industrial packaging will be driven by a focus on sustainable packaging solutions, including recyclable resin-based products. We have aligned our strategy with these broader industry trends and through acquisition and organic investments, we are slowly transforming our portfolio.
Five product groups shown on slide 4 are the same focus areas communicated at our Investor Day in 2022. And since then, we have made substantial progress on expanding in these verticals. We've executed three transactions and small plastics in the past year in lead Reliance and OPEC and to build global scale in that important and growing markets. We intend to continue to build on our small plastics platform with high-quality, high-margin specialty businesses.
Our focus in IDC centers on building scale regionally at both the manufacturing and the reconditioning level to offer our customers a full lifecycle solution of sustainable products and further our circularity mission, our acquisition of Cinterion container has significantly increased our mix of what's remodeled and because this is a disease and all with a growing margin, this business improves both the environment and our economics, a powerful combination in our Paper Packaging business.
Our growth is focused on unique, high-margin converting businesses that improve our downstream integration as well as our end-market exposures into more stable food, beverage and consumer markets, our cold pack acquisition, datasheet Theta and the Louisville LaSalle laminator investments all need this goal in paper. And while our closures business is predominantly internally focused, we see tremendous potential to grow beyond our current footprint, both organically and through acquisitions.
In summary, we see a long runway for growth in many of our businesses and intend to continue along this path of transforming our portfolio to meet the market needs and better serve our customers.
Please turn to Slide 5 now into the first quarter. Volumes remain under pressure in most parts of the world through the quarter, consistent with our expectations and full-year guidance starting east to west, which is how we normally see volume trends emerge.
Our Aitec business saw some bright spots in the quarter as volumes in our China business improved slightly on both a sequential and year on year basis, China manufacturing PMI remained above 50 for all three months in the quarter and lubricants, which are predominantly used by heavy manufacturing customers, were the primary improving end market in that region.
In Amea, we also saw improving lubricants end market. The end market demand reflective more of the low comparison versus an improving sequential trend as Eurozone PMI remained well below 50 through January.
The agricultural and chemical markets are still working through some of the year end 2023 destocking, and we expect those businesses to improve throughout the year. Our Latin business primarily serves the agrochemical juice and beverage industries and is impacted by planting yields and consumer demand dynamics in those markets.
Volumes in that region remain weak and we do not at present see any material volume inflections. North America still our largest and most diverse region with both rigid and paper packaging remained our weakest market globally in the first quarter, US manufacturing PMIs remained in contraction territory through January 14 consecutive month at or below 50.
This continued low level of industrial activity has driven GIP. volumes, down 19% in the quarter and 36% over two year periods. This a truly historic period for our GIP. business and makes good results from that team over the past year to have even more impressive. We are excited by the prospects when volume trends in Flex. Our PBS. business saw a mix of volume trends with containerboard clearly improving and our boxboard business still trending down slightly.
Overall, it is clear we remain in a difficult point in the cycle, and our teams are doing an excellent job controlling what we can control and focusing on serving our customers. I'm proud of our work this quarter and our continued resilience and commitments as we navigate a tough environments.
I'll now turn it over to Larry to walk through our detailed financial results later.

Thank you, Holly. And good morning, everyone. Turning to slide 6. Greif's first quarter results came in line with our expectations with $128 million of adjusted EBITDA use of free cash flow of $48 million. While our team's execution remains solid, the combined effect of extended slow demand and a significant negative price cost dynamic in our paper business led to a decrease in year over year performance.
We remain focused on execution, leaning on our value over volume, price discipline and cost management with continued focus on cash and working capital as already covered in his opening remarks. While we are managing through the short-term volume trends, we continue to focus on investments that will help us build a better business long term.
One of those investments is our recently launched pilot project with Ion craft, a German-based start-up that has developed a unique chemical, cleaner and fully recyclable barrier technology for plastic containers. This partnership is representative of our commitment to innovation and packaging that meets the growing sustainability demands of the marketplace and will enable us to better serve our customers in many end markets, including agriculture, chemicals and food and beverage, combined with Lee reliance in OPEC M, we think a successful outcome with Ion Trap will offer our customers a full suite of custom packaging and barrier options and provide multiple growth levers for growth for years to come.
Let's turn to segment results starting on slide 7. Our GIP. business has continued to trend consistent with the previous few quarters with a sustained low level of demand, offset by strong execution on price and costs. Volumes remain under pressure in most regions throughout the world and order patterns remain tight as customers face limited visibility to demand improvement.
A-pac in Amea volume showed some signs of life on better petro chemical and lubricant demand as manufacturing activity improved in those regions. While North America remains weak, the GIP. team posted solid results given this backdrop with improving gross profit and flat EBITDA margins on lower sales year over year our teams combined pricing discipline and cost management in GIP. in partnership with our global operations and supply chain teams drove another quarter of solid margin performance in our seasonably slow first quarter. I want to thank our global GIP. colleagues for another quarter of excellent execution in a very tough environment.
Please turn to Slide 8. Our TPS business executed well in the quarter with improving volume trends in containerboard, offset by weaker boxboard demand. Core-based corrugated converting volumes were up 3% and container board mill volumes were up above that level year over year as converting customers began to reorder paper and rebuild low inventory positions as they saw the demand outlook improving in late 2023 and early 2024 our tube and core volumes remain stable sequentially through the quarter, but are still down 4% year-over-year.
A reminder that the largest end market for Tube and Core is the paper industry. So we expect that rising mill volumes in containerboard and elsewhere, if they continue will lift volumes in our URB and tube and core business as well.
On the margin side, our PPS. business was challenged in Q1 with a price cost squeeze driven by delayed recognition of our announced price increases, combined with rising OCC costs, which rose by $55 per ton or nearly 160% year over year. In the fourth quarter,
January published risk. The index prices in both containerboard and boxboard were not at all in sync with what we experienced in the market. This is largely due to what we see as a flawed methodology of industry price tracking by the publication, risky survey-based approach of a small and shrinking third party independent market does not reflect what we see real time in our businesses or with our customers in a time of the increased use of data and analytics and the ability to track market information using automation or artificial intelligence tools, we struggle to find relevance in a survey based method with such a small non representative sample size.
Nonetheless, the lack of paper price recognition, coupled with significant cost inflation, resulted in a 540 basis point margin squeeze in Q1, which we anticipate will largely recur in Q2, but then improve in the second half as we see indices better reflect market prices.
Please turn to Slide 9 for our updated guidance. And now given our lack of any compelling demand inflection, but accounting for the rest of the recognized price increase and other modest improvements, we are raising our low end EBITDA guidance by $25 million to $610 million and maintaining our adjusted free cash flow guidance of $200 million, which is reflective of increased CapEx and working capital expectations for the full year.
Our full year 2024 assumptions remain consistent with our guidance from the fourth quarter, namely our expectation for a continuation of current demand trends, no improvement in risk the published index prices from the recent February publication and no contribution from IPACM., which is expected to close in our fiscal Q2.
As a reminder, we present our guidance based only on a factual evidence available to us at the date we report. We think it makes sense to stick with low end guidance at this time, and we'll revisit and share our updated view, including possibly introducing a broader guidance range during our next quarter call.
With that, I'll turn things back to Oli for a brief close.

Thanks and I will close by simply stating that we continue to demonstrate our ability to control what we can control and drive the business during a down cycle. The investments we are making on the Build to Last to grow and improve all aspects of our business will position us well to better serve our customers and achieve breakout performance when demand returns.
I'm proud of the dedication, commitment and resilience from our global growth teams and excited for what we are building together. We will plan to discuss our business and future in greater detail at an upcoming Investor Day on December 11. Details will be forthcoming, but please make a note your Calibre, December 11.
Before we start the Q&A session, I have an important update for our investors. Medley is moving into a new position to oversee our Asia Pacific operations and build an RPO was played a key role in developing financial planning and analysis and data analytic lytics, a drive for nine years will now take charge of our Investor Relations. This is part of their professional growth plans, and I want to thank Matt for his leadership as our Head of Corporate Development and Investor Relations for the past several years and welcome Bill to the new role.
With that, I'd like to thank you once more for dialing in today, and we will now open the lines for Q&A.

Question and Answer Session

Operator

Certainly, as a reminder, to ask a question. (Operator Instructions)
Ghansham Panjabi, Baird.

Ghansham Panjabi

Hey, guys.
Good morning and congrats to you, Matt, and good luck in the future.
I guess first off, maybe you can give us a sense as to how volumes during the first quarter compare to your initial plan and how things are looking so far in February on there are some of recent indications on ISM. Is that on a global basis seem a little bit better. Just wondering if you're seeing any green shoots associated with that?

So as I said, pension, we know throughout January, no volume has been depressed and we have seen some sequential improvements, but it's not really enough to signal an inflection. We spoke a little bit about Asia-Pac and in Europe where we have seen a little bit of green shoots, but instead of on a spot by spot basis. But I would say that when we speak to our customers, they seem much more positive. It's positive that they have been for a long time, although we haven't seen that materialize into one.

Ghansham Panjabi

Yes.Got it.
And then in terms of the EBITDA differential, the $25 million between the previous low end versus now, is that is that just purely containerboard pricing?

is that predominantly that Ghansham, but we also by the teams have done some good job. So we're lowering our estimate of SG&A for the rest of the year, about $6 million in our closures business has actually turned up or we mentioned a little bit about that in our comments. That's another five of lift.
And then just some other items, $3 million so you had about $11 million of price costs across both businesses have left and then they SG&A six closures, five another three in miscellaneous currency and other stuff.

Ghansham Panjabi

Okay.
Got it. Thanks so much, guys.

Operator

Michael Hoffman, Stifel.

Michael Edward Hoffman

Michael, very much congratulations. And early, I always respect companies retreat mezz position as a strategic role. So good luck to build to your goodwill on the Q&A side of it, can we dig a little bit. And if you picked end market customers that have that individually are two or three of them that if they make a change here in North America, this is going to shift the momentum. It's not 20 elements. It's two or three end markets. Maybe it's only one or two who will be watching at this point to shift their demand outlook

And our really focus on the chemical customers or the chemical end segments, both in the biggest segment is the bulk and commodity chemical, and that has been significantly down and then the next one is speciality chemicals. Those are the really two big ones. And then the third one would be a loop Petro lube oils.

Michael Edward Hoffman

So the lube market seems to have corrected their end market oversupply of the finished goods. The destocking still was there early green shoots there.

As I said, we've seen pockets sort of sporadic progress, but there's still not enough to say that, you know its permanence. We still see a little bit of destocking, but again, it's very sporadic, depending on what end segment we're looking at right now. I'd say it's too early to signal that scenario and inflection points.

Michael Edward Hoffman

Okay. And then on the paper side, there's a whole bunch of new capacity coming online in North America and Latin America, how is that factored into virgin capacity to be making paper? Has that factored into your outlook yet?

We have continued to see some just upwards demand being weak, but like we said, we did see some turn up in containerboard demand through the end of the first quarter and the new capacity. This is the one Mike. We've talked about often over the years that every two years since I've been here Armageddon coming next week in this business.
And yet I think that and the industry has managed to work its way through it and understand that you are focusing on serving the customers and retaining them by providing excellent service, helps combat that in terms of lost customer.
So and it's like I said, we adjusted our guidance up for the price that was recognized by a receipt in January. But again, I'll repeat what I said. It's stunned me that we are still dealing with some survey-based process de-recognized price in this industry when everybody else in the world has moved on to data and analytics. In fact,
Because what we were seeing out on the street was no big pushback on the price. Everybody knew cost driven, factors justified the price and yet it didn't get recognized. So that's the biggest factor in our in our containerboard business.

Michael Edward Hoffman

Right. Okay. And then when you think about sort of where you would like to sort of the next incremental M&A to fill in the white space in the model, what's the sort of key place that you're watching there today?

Well, we estimate that the our focus on M&A is in the resin resin based products with high margins and of people converting products with high margins clicking on paper, you find that in niche markets.

Michael Edward Hoffman

Right. Thank you very much.

Thank you.

Operator

Gabe Hajde, Wells Fargo.

Gabe Hajde

Game forward.
Larry?
Good morning, Mark. Congrats on five four. Yes, you mentioned it briefly about some of the recent acquisitions and sometimes the pushback, though, that we all here is on sometimes companies do acquisitions to mask some weakness in the underlying business or something like that we would contend, hey, look, if you guys can deploy capital in M&A in a period of depressed demand. Maybe you can pick up the deal here and there. I'm just curious if you could give us any specifics as it relates to the couple of deals that you guys have now integrated. And in terms of key learnings, number one and number two, these deals are kind of hitting underlying or economics that run the tenant underpinning those acquisitions?

You know, Gabe, I would say so far, we're extremely pleased on all of these. A big factor for us was cultural fit, and the levy acquisition has been particularly incredible from that perspective. I mean it has gone extremely well. As you know, they're there and you adjust their deal with the same kind of a demand challenges that the entire industry is, but we sort of knew that going in. I mean, it's a broader economic thing, but the results that they are delivering are in line with what we were expecting the integration has gone extremely well.
The reliance is a pretty small one plant kind of thing. It's going very well, too. You know, they're adapting to our safety culture. Our focus on our people and that that will end up being successful. But it's tiny, yes, that can transaction even though it hasn't closed yet. Our integration activities are well down the path and as soon as that closes, we expect that to hit the ground running that the cultural fit it again seems extremely strong. And then in we couldn't be more pleased with coal plant.
I mean, Colfax is just I mean, it's a it's almost like they were part of growth for the last 30 years or so. And yes, these aren't masking anything there, obviously, along the strategic plan that we delivered. And in all of these, we're seeing actually volumes better than our legacy business.

So we're really pleased and gives us to the comment you made about masking the strategy we have we developed three years ago. We announced it to the investment community two years ago. And what you have seen is that we are just executing on the strategy we presented to the investment community. So it's a very intentional booking and not

Gabe Hajde

Appreciate that only another one on, I guess, organic investment and what you guys are doing internally, if memory serves, I think the laminator in Lewisville was up and running and the sheet feeder was sort of underway. Are you guys commercializing that at this point or it's gone. This update us where you're at with the subpoena of the sheet feeder.

We may in the final phases of getting a premise all in-house five permits, and that's holding and we will be operational by end of May of this year and will serve the first customer home June 1.
Yes.

No laminators up and operating and actually even one. Yes, it's going very, very well.

Gabe Hajde

Thank you.

Operator

I would now like to turn the conference back to Matt Leahy for closing remarks.

Matt Leahy

Thank you all again for joining. Have a great day.

Operator

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

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