Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Greif Inc (GEF, Financial) reported net growth in all regions globally for fiscal Q3, despite choppy individual end markets.
- The company experienced sequential improvements in EMEA, its largest GIP market, for the third straight quarter.
- APAC region showed signs of recovery after significant destocking post-Chinese New Year.
- Greif Inc (GEF) successfully divested Delta Petroleum Company, aiding in debt reduction.
- The company is making excellent progress on its strategic missions and operating model changes, which are expected to drive future growth.
Negative Points
- Current leverage remains high at 3.66x, even though it would be 3.59x pro forma adjusted for the Delta sale proceeds.
- GIP EBITDA margins were down 200 basis points year-over-year due to cost inflation and non-recurring benefits from the previous year.
- PPS margins continued to lag due to partially unrealized paper price increases and significant input cost inflation.
- Volumes, while improving, are still significantly down compared to 2022 levels, indicating a slow recovery.
- The company faces competitive pressures with some market participants pricing at loss-making levels to maintain volume.
Q & A Highlights
Q: Can you help me understand the margin contribution or benefit you've received as a result of the mix shift and how incremental margins on the poly-based products compare to the total portfolio average?
A: Our M&A selection criteria ensure that target companies have EBITDA margins at or above 18% and free cash flow in excess of 50%. The polymer-based segments we target typically have margins up to mid-20%. While current acquisitions are accretive, they don't drastically change overall margins immediately. However, long-term trends should push us towards an 18% margin. (Ole Rosgaard, CEO)
Q: Relative to your expectations from the last quarter, where is the price-cost range tracking in your guide?
A: We benefited from better-than-expected price increases and value-based pricing in GIP. Raw material costs also provided some upside. While volumes were slightly below expectations, miscellaneous cost improvements helped offset this. We anticipate further price recognition in 2025, particularly in containerboard. (Lawrence Hilsheimer, CFO)
Q: Can you give us more color on customer sentiment and competitive activity in the current environment?
A: Despite positive volume trends, competition remains high with some market participants pricing at loss-making levels. We maintain a value-over-volume approach, focusing on customer relationships and operational excellence. Our superior quality and legendary customer service often lead customers back to us after chasing lower prices. (Ole Rosgaard, CEO)
Q: Is the reorganization by substrate versus geography something customers have been pushing for, or is it a natural evolution?
A: The reorganization aims to serve customers better by focusing on specific material solutions. This will improve quality and drive margins. The commercial organization will become an enabling function, enhancing sales and cross-sales. This structure is designed for growth and will also improve M&A integration. (Ole Rosgaard, CEO)
Q: What do you attribute your outperformance in global industrial packaging to, despite challenging market conditions?
A: Our long-term focus on customer service and operational excellence drives our outperformance. We have a reputation for legendary customer service, which leads to customer loyalty and willingness to pay a premium. This focus allows us to deliver solid results even in a challenging environment. (Ole Rosgaard, CEO)
Q: What percentage of your PPS business is non-indexed, and are you fully implementing the announced price increases with those customers?
A: About 35% of our URB customers are non-indexed, and we've had great success in implementing price increases with them. While it's not 100%, it's pretty close. (Lawrence Hilsheimer, CFO)
Q: What has to happen for you to achieve the $160 million in normalized volume environment?
A: We need a macroeconomic improvement, including interest rate cuts that drive production and housing demand. Other factors include recovery in APAC and overall economic conditions. Our current volume dynamics are primarily driven by macroeconomic factors. (Lawrence Hilsheimer, CFO; Ole Rosgaard, CEO)
Q: What is the timeline for implementing the operating model evolution, and will there be any short-term impacts?
A: The change will be completed by fiscal '24, with some costs involved but not material. We will be operating under the new model starting November 1. (Lawrence Hilsheimer, CFO)
Q: How do you view the market organic growth for polymers versus other segments?
A: We are growing in polymer-based products due to their higher margin profile and lower cyclicality. We are also expanding organically, adding new lines and plants globally. (Ole Rosgaard, CEO)
Q: Is there a horizon where you won't be able to outperform in Europe despite your model and customer service?
A: We believe we can continue to outperform due to our focus on customer service and growth in less cyclical segments like food and pharma. We are also adding more capacity organically. (Ole Rosgaard, CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
