GREIF, INC Q2 FY2024 earnings call

Build-to-last strategy & service profit chain: Emphasized creating thriving communities and legendary customer service via service profit chain, with improving net promoter score (68) and high colleague engagement (85th percentile). ### Sustainability: Released 15th annual sustainability report, ingrained in culture, processes, etc., bolstering profitable growth. ### Acquisition strategy: Completed acquisition of Ipackchem, solidifying global platform in high performance small plastic containers/jerry cans, though revised fiscal '24 guidance reflects smaller contribution from six-month ownership and one-time $8.4 million inventory revaluation expense. ### Regional market trends: APAC Q2 volumes negatively impacted by Chinese New Year seasonality and weaker food and bev demand; EMEA saw 8% growth in strongest market with strong lube and chemical markets; Americas had mixed demand with North America and LatAm showing sequential improvement; North American paper business had modest improvement in containerboard offset by softer tube and core demand. ### Greif business system: Champions continuous improvement, plant modernization, automation, gemba and Six Sigma programs to drive structural cost out and productivity gains.

GIP: Continuing weak but improving demand led to a year-over-year sales decline of $57 million and margin compression of 1.5% year-over-year. Despite SG&A costs up year-over-year due to D&A step-up on new acquisitions and strategic investments, margins rallied strongly by over 4.4% on a sequential basis from fiscal Q1 2024. EMEA continued to improve underpinned by strong lube and chemical markets; Americas remained flat to down with North America seeing overall sequential improvement; APAC was down 11% year-on-year. ### PPS: Continued delayed recognition of announced pricing increases combined with rising OCC cost led to significant margin compression of over 10% despite flat sales. Volume in containerboard saw modest improvement while tube and core end markets remained flat to down. SG&A cost inflation occurred due to strategic initiatives similar to GIP.

EBITDA: Provided guidance range of $675 million to $725 million, with low end reflecting no paper price recognition, slight OCC cost inflation, and no GIP margin improvement; high end reflecting paper price increases and GIP margin improvement. Volume-related EBITDA change ranges from $22 million to $62 million. ### Free cash flow: Midpoint guidance unchanged at $200 million. ### Factors: Incremental EBITDA contribution from Ipackchem less than expected due to purchase accounting and global ag markets slowness; $19 million to $39 million of transport and manufacturing headwinds relative to prior guidance.

Demand uncertainty: Continued short visibility to customers' demand, creating uncertainty in the duration of improving demand trends. ### Price-cost dynamics: Outsized impact of index-driven price-cost dynamic in PPS not in sync with real market trends, a persistent headwind. ### Geopolitical risks: Geopolitical aspects affecting capital deployment decisions, with higher hurdle rates for investments in certain regions. ### Pricing recognition: Delayed pricing recognition due to archaic survey system utilized by Richey, impacting revenue recognition timing.

Q: Can you provide added detail on the volume cadence across both business segments during the quarter and early thoughts on how the third fiscal quarter has kicked off?

A: Regionally, EMEA was up 8%, LatAm flat, North America down -5%, APAC down 11%. Substrates: plastic up low teens, steel flat but improving sequentially, fiber down low singles but improving sequentially. End markets like bulk chemicals and lubricants show strong development. Global PMI above 50 for last four months is positive.

Q: Can you provide an updated view on the absolute price-cost expectation for the year, including quarter performance and upcoming quarters?

A: In Q2, price-cost squeeze of about $49 million in paper and $20 million in GIP (with $12 million volume benefit in GIP and $27 million in PPS). Going from prior guidance to current, GIP has $39 million price-cost benefit and $27 million volume benefit; PPS at midpoint has $16 million price-cost lift and $15 million volume benefit. Paper OCC squeeze roughly $95-100 million, URB at $5 million pressure, containerboard flat. GIP price-cost about $59 million positive and volume about $30 million positive.

Q: Where are you right now in terms of the $22 million to $62 million volume pick-up that informed your improvement in guidance?

A: Right smack in the middle of that range, built around potential optimism in some areas and nervousness in others among customers.

Q: What's driving the $19 million to $39 million of manufacturing headwinds?

A: Predominant driver is volume, leading to incremental transport and additional manufacturing costs.

Q: Talk about the pent-up operating leverage in the business that could be released once global volumes start to normalize?

A: As volume picks up, expected excess of 20% gross margin pick-up on incremental volume. Return to '22 volume levels could lift EBITDA by about $160 million, and with returning economic conditions, could exceed $900 million of EBITDA. Internal initiatives like cost savings reviews, Six Sigma, and automation contribute to improved structural margin profile.

Q: How many of your facilities could be subject to those types of reviews and how much runway is there in improving plant level profitability?

A: Have deployed Six Sigma programs with nearly 700 participants globally, 400 white belts, 170 yellow belts, 130 green belts, 10 black belts. 250 locations are subject to such reviews, with aggregation of marginal gains providing significant runway for improving plant level profitability.

Q: What are the components that get you to the $900 million EBITDA?

A: Largest component is returning to '22 volume levels, driving about $160 million EBITDA lift. Getting back to needed price-cost in paper business via announced price increases, full run rate on acquisitions, and performance of Dallas sheetfeeder. All these elements combined drive over $900 million EBITDA.

Q: How much of the recent URB price increases is recognized and what's the benefit into '25?

A: Expect full recognition of price increases. A $10 change in containerboard is $700,000 a month ($8 million annually), $50 linerboard and $80 medium effective June 1 start to impact P&L in late July, 50 and 70 in URB effective July 18 start to benefit in late August to September. Incremental EBITDA in '25 can be backed out from these numbers.

Q: Is the increased capital expenditures all from Ipackchem or other growth initiatives?

A: Very little from Ipackchem. Mostly from inflationary costs on Dallas sheetfeeder strategic growth project and pulled forward safety and maintenance projects due to available cash capital.

Q: Was the $8.4 million one-timer and are there limiting factors in deploying capital in Southeast Asia?

A: $8.4 million is a one-time inventory revaluation expense. Geopolitical aspects are limiting factors, with higher hurdle rates for investments in regions like China due to geopolitical risks, and part of enterprise risk management to assess risks and have plans to deal with potential issues. APAC has growth plans with Matt Lahey promoted to lead the region, and continued expansion of IBC network in the region through organic deployment.