Greif, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Greif Q3 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. We'd like to ask you that you limit yourself to one question and one follow-up during the Q&A. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. Thank you. I'd now like to hand the conference over to your speaker for today. Matt Eichmann, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thank you, Jack, and good morning, everyone. Welcome to Grice's third quarter fiscal 2020 earnings conference call. On the call today are Pete Watson, Grice President and Chief Executive Officer, and Larry Hilsheimer, Grice Chief Financial Officer. Pete and Larry will take questions at the end of today's call. In accordance with regulation fair disclosure, we encourage you to ask questions regarding issues you consider material because we are prohibited from discussing significant non-public information with you on an individual basis. Please limit yourself to one question and one follow-up before returning to the queue. Please turn to slide two. 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'll 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 turn the presentation over to Pete on slide three.

Hey, thank you, Matt, and good morning, everyone. Thank you for joining us today. As we expected, during the third quarter, we faced unprecedented economic turmoil caused by the global health pandemic. But the Greif team responded and delivered solid results through strong cost control and operational discipline. Through that focus, we generated solid free cash flow and paid down debt. This is only possible thanks to the commitment of our global Greif team, their extraordinary dedication to our business and our customers, and the pride they have in safely packaging and protecting critical goods and materials that serve the greater needs of our communities all around the world. The COVID-19 pandemic remains an evolving situation. We are focused on executing enhanced health and safety protocols to safeguard the health of our colleagues and ensure the continuity of our supply chain to serve our customers. During the quarter, we achieved an all-time high trailing four-quarter customer satisfaction index score, which further strengthens our standing with customers. And while profits were lower due to soft industrial demand and a significant price-cost squeeze in our paper-patching business, free cash flow remained roughly flat to the prior year, and we have reduced net debt by more than $260 million versus the prior year quarter. Please turn to slide four. A rigid industrial packaging business delivered solid third quarter results despite significant volume decreases due to weak demand in the global industrial economy. Global steel drum volumes declined by 10% versus the prior year quarter, and demand was strongest in China where volumes rose 6% thanks to an improving economic activity. As you move west to our mayor region, demand was weaker. While the Middle East and North Africa business delivered steel growth of 6% versus the prior year, and the Mediterranean region grew by low single digits, our central and western European steel drum vines declined by low double digits due to weak chemical and lubricant demand. America's region experienced the weakest conditions, with steel drum vines in the U.S. down by almost 20% versus prior year. This was a result of weak demand for industrial paints, chemicals, and lubricants. Global IBC production fell by roughly 1% as we faced weaker demand from specialty and bulk chemical customers. RIP's third quarter sales fell roughly $79 million versus the prior year quarter on a currency neutral basis due to lower volumes and raw material price declines and corresponding contractual pricing adjustments. Despite the decline in sales, RIP's third quarter adjusted EBITDA fell by only $5 million versus the prior year quarter due to lower raw material costs, primarily attributable to roughly a $5 million opportunistic sourcing benefit, and strong cost control that resulted in lower year-over-year manufacturing expenses and segment SG&A expense. Finally, despite considerable external challenges in the quarter, RIP continues to demonstrate improved EBITDA. On a trailing four-quarter basis, the Ridge Industrial Patching business is already delivering profits well within their fiscal 2022 commitment range. I'd ask that you please turn to slide five. I'd like to spend a moment to discuss what we are currently seeing in the market. The weak volumes in Q3 were anticipated and communicated during our second quarter call, but we believe the worst is behind us as our year-over-year steel drum volume comparisons improved throughout the quarter after bottoming in May. That said, the pace of improvement is somewhat slower than what we had anticipated at Q2. This slide highlights major end-market progression for our largest ripped substrates, which is steel drums. And broadly speaking, we continue to see positive demand for food, flavors, and fragrances during the quarter. There is improving demand for chemicals as the auto manufacturing is returning, but we continue to experience softness in industrial paints, coatings, and lubricants. I'd ask you to please turn to slide six. The flexible product segment third quarter sales fell roughly 5% versus the prior year quarter on a currency neutral basis due to soft demand, raw material price declines, and corresponding contractual pricing adjustments. Third quarter adjusted EBITDA was roughly flat for the prior year despite those lower sales thanks to strong cost control resulting in lower SG&A segment expense. I'd ask if you'd turn to slide seven. Paper packaging's third quarter sales fell by roughly $70 million versus the prior year quarter, primarily due to lower published container board and box board prices and the divestiture of our consumer packaging group. We took 10,000 tons of container board economic downtime early in Q3, but none in July or thus far in August. Paper packaging's third quarter adjusted EBITDA fell by roughly $39 million versus the prior year, largely due to product mix and a significant $37 million price cost squeeze. The team also demonstrated strong cost control management and offset some of the headwind through lower manufacturing and SG&A expense versus the prior year. If I could ask you to please turn to slide eight to give you some color on what we're seeing in the PPS markets. Volume in our core choice corrugated sheet feeder network improved by 4% versus the prior year quarter. Volumes have progressively strengthened since May due to improving demand and durables and a recovery in the auto supply chain and solid e-commerce growth. In our tube and core business, fiscal third quarter volumes were down 10% versus the prior year, but showed progressive improvement in the quarter and was down 4% in July. We continue to see some demand weaknesses most pronounced in non-container board paper mill segments and textile end market segments. Film and construction market demand continues to remain positive. I'd like to now turn the presentation over to our Chief Financial Officer, Larry Hilsheimer.

Larry Hilsheimer Thank you, Pete. Good morning, everyone. I'll start by reiterating Pete's comments and thank the Global Grife team for their continued dedication during this COVID-19 crisis. The team's professionalism has been remarkable, given all of the external distractions, and we greatly appreciate their efforts. Slide 9 highlights our quarterly financial performance. Our third quarter was very challenging, as expected. However, we generated solid free cash flow and paid down debt as promised. Third quarter net sales, excluding the impact of foreign exchange, fell roughly 12% year over year due to lower volumes, lower selling prices, and the divestiture of the consumer packaging group. Adjusted EBITDA fell by roughly 22%, with the bulk of the decrement driven by the EBITDA reduction in our paper business that Pete described. All segments achieved reductions in SG&A expense. Below the operating profit line, interest expense fell by roughly $5 million. Our GAAP tax rate during the quarter was roughly 22%, while our non-GAAP tax rate was roughly 23%. We expect our non-GAAP rate to range between 26% and 29% for fiscal 2020. Our bottom line adjusted Class A earnings per share fell to $0.85 per share. We recorded roughly $16 million of non-cash impairment charges in the quarter, of which roughly $11 million relates to the closure of the mobile mill announced at Q2. We also recorded roughly $19 million in restructuring expense, including roughly $9 million to exit a multi-employer pension plan as a result of plant consolidation within our RIPs business. We view this plan exit as a positive development as it prevents exposure to probable increased obligations in the future. Finally, despite lower profits, third quarter adjusted free cash flow held roughly flat at $107 million versus the prior year quarter, thanks to $7 million of lower CapEx and stronger working capital performance. Please turn to slide 10. Given our solid operating performance and better line of sight into customer demand and only two remaining months in fiscal 2020, We are reintroducing our adjusted Class A earnings per share and adjusted free cash flow guidance for this year. We are also providing the key fiscal 2020 assumptions you see listed on slide 10 to assist with modeling. We expect to generate between $3 and $3.20 per share for fiscal 2020, which implies roughly $0.66 per share in fiscal Q4. Profits are anticipated to be lower sequentially from the fiscal third to fourth quarter due to normal business seasonality, higher SG&A due to the incentive releases that benefited the third quarter, less opportunistic sourcing cost benefits, which we do not forecast, softer sales in our high margin filling business in the U.S., and a sequentially higher non-GAAP tax rate in the fourth quarter. We also assume OCC costs of $61 a ton in Q4. More importantly, and in line with our financial priorities, we expect to deliver between $260 and $290 million in adjusted free cash flow for fiscal 2020. We assume CapEx to range between $120 and $140 million for working capital to be a source of cash and for cash taxes to range between $75 and $80 million. We'll reevaluate our guidance practices again at the end of the fiscal year to align to our visibility and to customer awarding patterns, but let me emphasize we have no plans to move to a regular habit of providing quarterly guidance. Please turn to slide 11. Our capital allocation priorities are unchanged and are outlined on the slide. They are funding organic CapEx, de-levering our balance sheet, maintaining steady dividends, and pursuing our strategic growth priorities in IBCs, IBC reconditioning, and container board integration. Our balance sheet is extremely solid with roughly $523 million of available liquidity, including 99 million of cash. Our only near-term debt maturities are senior notes due midway through 2021 with a principal of 200 million euro. At quarter end, despite substantial COVID recession negative impact to EBITDA, our compliance leverage ratio stood at roughly 3.72 times well below our debt covenant of 4.5 due to our success in paying down debt. With that, I'll turn the call back to Pete for his closing comments before our Q&A.

Turn to slide 12. In closing, I just want to thank our 16,000 colleagues again for their commitment to Grife and to our customers. Our diverse global team is highly engaged and is providing differentiated service to our customers. With our industry-leading product portfolio, we are well-positioned to serve a variety of attractive markets around the world as businesses reopen. Through sharp focus on cost control and operating discipline given by the great business system, we are generating solid cash flow despite considerable external headwinds, and our balance sheet is in great shape. Thank you for participating this morning, and we appreciate your interest in Greif. Jack, if you could please open the line for questions.

Certainly. Again, we'd like to ask you that you limit yourself to one question and one follow-up question to allow everyone an opportunity. To ask a question, please press star 1 on your telephone keypad. George Staffis with Bank of America, your line is open.

Hi, everyone. Good morning. Thanks for all the details. I hope you're doing well. Hey, guys, I want to begin a little bit into cash flow in my first question so you know recognizing this is an unprecedented time as you put it the free cash flow guidance range for fiscal 4q is fairly wide by 30 million dollars I was wondering you know what the swing factors are there why it's particularly wide you know given there's only a couple of months left to go and then if you could remind us CapEx is down, I think, year on year in the fourth quarter, yet the free cash flow guide, 4Q versus 4Q last year, is down $90 million. Again, what are the key drivers there that I might be forgetting about in terms of why you'd be pleased with that outcome?

Thank you, George. So in terms of the range of cash flow, well, let me do the last one first. I mean, clearly we have done an extremely good job of generating cash in the last 12 months. If you look at the trailing 12 months, we've produced $322 million of free cash flow. So a lot of those activities began some time ago, and we saw the benefits of those fall out in last year's Q4. But because of the production of cash through the early parts of this year, there's generally just less to generate in the last period of the year. We really had phenomenal performance in working capital management in the fourth quarter of last year. We've become much more consistent in that. But we enhanced our performance again in the third quarter of this year, as we have every quarter. And so it just has evened it out a bit more. But if I look at the range for the last quarter, there's a couple of things going into that, George. We are expecting to complete a number of CapEx projects, but we've run into difficulties, frankly, in having suppliers get us the equipment that's ordered, those kind of things, and obviously we're not going to pay for it until we get it. So there's some flexibility in that range for that, and the other is just where are we going to end up on working capital in the fourth quarter. So we built a relatively wide range in for basically those two. The other thing that can fluctuate a bit is we've got a number of – you know, closures to tax exams that is what ended up helping us, you know, have a substantially lower tax rate in the third quarter. A number of those are ongoing. Some of those could close. You could end up needing to make payments or not. And so those three factors, the CapEx volatility, the working capital volatility, and the tax timing on payments are the reason for the wider range in that fourth quarter guidance, George.

Right. Larry, that's great. Very, very clear. My other question, I'll turn it over. You gave us a little bit of color in terms of what you're seeing out of core choice. Can you talk at all about what you're seeing in terms of the corrugated markets, the container board markets, August? How far is your order book stretching? Any kind of qualitative commentary would be great. Thank you. I'll turn it over.

Sure, George. This is Pete. Thanks for the question. So as you know, in our core choice business, we are a corrugated sheet feeder, so visibility in the backlogs is virtually 24 days. But I will tell you, our demand in August is very strong, with double-digit growth first prior year, so similar to the evolution we saw in July. And our container board system is very solid. Demand is very good, and You know, I can't predict what will happen, you know, in the future, but it appears to be very solid. Our exposure in the end markets are around durables predominantly because we serve independent box makers who customers, their customer demand is very strong, and we also have some exposure to e-commerce. And so at this point, while we struggled in that business at the beginning of the COVID health pandemic, The business has responded very well, and our container board and corrugated system is very strong and healthy at this point. Thank you, Pete. Yep, thank you, George.

Gabe Haney with Wells Fargo. Your line is open.

Good morning, Pete, Larry, Matt. Hope you guys are all doing well. Thanks, Gabe. Pete, maybe I'm trying to understand, and maybe if you can help marry up some of the comments that you're making in container board, and I appreciate your customer set is different, but I feel like some of the end markets are somewhat similar. And is it possible that we could see an acceleration in demand across your RIP segments where you're seeing weakness now? You talked about, you know, some chemicals, coatings, and lubes. I'm more specifically thinking about automotives. and perhaps it's just a function of where things are in the supply chain. Any visibility or thoughts there?

Yeah, so our ed markets are really entirely different between our RIPs business and our corrugated business, predominantly Core Choice. And, again, it's durables. We have exposure to e-commerce, some food. But we also, some of that strength in Core Choice is related to our new sheep feeder in Pennsylvania. So that helps it. And then in the auto industry, those two businesses, so Core Choice really serves customers who supply tier one, two, and three parts supply. Our Rips business supplies customers whose products go into manufacturing one or two product streams down component parts inside a car. So again, the context and the touch points to that segment are slightly different and The auto supply chain comes earlier, and then the resulting impact to RIPs would come a little later.

Yeah, Gabe, let me add a couple things. You know, lubes are a big business for us. A lot of that is automotive use, and mileage is down because of commuting is going away. Now you're seeing some pickup as people drive to vacations instead of flying. But, you know, net-net mileage is down, and particularly in the U.S. The other thing I'd point out is industrial production in the U.S. and capacity utilization. The Federal Reserve just published some statistics, and if you look at your average production utilization from 72 through 19 was at 78%. In April, we were at 60. May, 62. June, 66. And July, 69. When machines aren't running, they don't need lubricants. So, you know, the recovery is not coming back as rapidly as Pete and I thought it might when we talked at Q2. It's coming back gradually, but we need machines running to need lubricants to create demand. We think it's coming. We're seeing stuff, but it's not there yet. Thank you, guys.

And then I guess on the PPS side, I didn't see the slide that you normally put in about synergy realization. I'm assuming that's still on track, but if you could kind of provide any commentary there.

Yeah, we still are, Gabe. You know, if we were just point in time looking at it, it's down slightly but still over $70 million down slightly only because some of them are volume-oriented. You know, in the URB, CRB business being down, it's a little bit down. But we believe as the economy comes back, that number, you know, on those that are down by, you know, capacity and utilization will go back up. But still over $70 million and well on track.

Thank you. Genshin Punjabi with Baird. Your line is open.

Hey, guys. Good morning. You know, Pete, in your prepared comments, you were talking about the RIP space of improvement being a little bit slower, and I think, Larry, you just mentioned that as well. Can you just give us more color on that by region? How do you see this kind of shaking out? China is up, was up 6% in the quarter, and obviously, you know, they've recovered nicely from that initial dislocation. Just curious as to how you're seeing that same trajectory in Europe and also the U.S.

No, thanks, Gansham. So we see the improvement in our global RIPs business, quite frankly, similar to NFPS. The demand conditions are tracking on a very similar path to the geographic-related improvements to COVID-19 health, meaning that China obviously has recovered faster in COVID, and they're our strongest region. We see in EMEA, it is improving overall, but we're still down high single digits first prior year in our volumes there. It's a mixed scenario because it's a more complex region. So the Middle East volumes were very strong, but Central Europe and Western Europe, which is the predominantly highest volume components in that geographic sector are weaker because of chemical lubricant demand. But we are seeing moderate improvement in conditions through the quarter. And then the weakest is North American, South American. Again, it mirrors the transition of the health pandemic. And we still see that as being the weakest demand. in our global portfolio during Q3. Just to give you a little color in August, our global steel drum volumes are improving versus July, but they're still mid-single-digit declines versus prior year. And our IBC growth is normalizing. So we had a little lower quarter than normal, but we're showing double-digit improvements in August, which kind of normalizes the path we're on versus prior year.

Okay, great. And just as a follow-up to that, for 4Q specifically, you know, looking at reps, what are you modeling from a volume standpoint? And then also for PPS, you know, is it reasonable to expect a similar price-cost headwind in 4Q as you saw in 3Q? Thanks so much.

Yeah, so our volumes to the forecast really crossed all of our portfolio. As we see, Vaughn, just slightly in perverse July. And the July volumes were highlighted in the deck. And in regard to the price-cost squeeze, I'll let Larry talk through the bridge and what we see from Q3 to where we are, what we expect in Q4.

Yeah, Gancho, you know, clearly we had that unprecedented spike, unprecedented in terms of cause, spike in OCC in Q3. because of the shutdown of the retail sector and restaurant sector in the U.S., as well as a lot of industrial. So the supply side was squeezed while, as you know, the demand side was up because of the pantry stuffings. And so the OCC costs shot up, and that was what we felt was a unwarranted non-recognition by RISD. The price increases created basically a $36 million year-over-year price-cost squeeze. And actually, if you step back and look at that, we were $44 million down on EBIT a year-over-year, with $36 million of it's that price-cost squeeze. Missing a year ago by $8 million in an economic situation like this, we were quite proud of our team, to be quite frank. But in the fourth quarter, we're predicting 61 on our OCC, so we don't see the same year-over-year price squeeze there, which is actually a lift of roughly $15 million on the year-over-year relative to the third quarter, sequential improvement over the third quarter from where we were. And in the fourth quarter, Gonsham, just to add to Larry's comments and that, you know, I think OCC last year in quarter four of 19 was about $30 a ton. So, you know, relative to the 61 that we're expecting in the fourth quarter this year, that will certainly be a headwind.

Okay, great. Thanks so much. Thanks, Gonsham.

Again, if you'd like to ask a question, please press star 1. Mark Wildey with Bank of Montreal, your line is open.

Thanks. Good morning, Pete. Good morning, Larry. I really appreciated that kind of crisp walkthrough at the start. For my first question, I wondered with this hurricane hitting down on the Gulf Coast today, if you can just talk about, you know, potential fallout from that, what you've seen in kind of past hurricanes down there, thinking mainly about the RIPs business, but maybe you could also address sort of any kind of potential fallout on your land holdings down there.

Yeah, thanks, Mark. So In that Gulf Coast region, just to give you some perspective, we have 10 manufacturing operations that generate roughly $200 million of revenue in the Gulf Coast. As of 8.30 this morning, all of those operations are secure and safe. And the majority of those operations are in the Houston metro area, which thankfully the storm bypassed. But our biggest concern is our thoughts and prayers with all of our colleagues and their families in the region. Hope they're safe and healthy. We don't have view of that yet, but our thoughts are with them. And I think the impacts going forward really are the extent of the damage to our customers' operations, and we don't have clarity on that, but there's certainly – some large paper mills that we supply cores and a variety of products to. There's a lot of petrochemical companies in that region that we supply RIPs products to. So again, that'll certainly be an impact. We have no idea what the extent of that damage will be. today and they're also we would always expect uh disruption in the supply chain on a short term it really impacts our supply resin suppliers who are located there not all of our suppliers are in that region but some of them and we'll certainly see some transportation disruption for a short term so regarding our our land management holdings we obviously do have some holdings in Louisiana And at this point, it's too early to determine what impact that had. But I think we're very fortunate in that the majority of our cluster of operations in Houston were spared. But, again, what that does to our customers is undetermined at this time.

Yeah, and the only thing I'd supplement just to – In trying to put out the guidance range, obviously very early, but looking back at prior storms and stuff, we basically set aside from one to three cents a share as a potential impact. And that was just our best estimate based on prior experiences.

Okay, that's excellent, Larry. That's exactly what I was looking for. As my follow-on, I just wondered, Pete, if you can give us some sense in core choice, what the cumulative impact is on the startup of the sheet feeder in Pennsylvania. And then I think you guys put a bulk packaging plant into Kentucky not long ago. So I'm just curious about, you know, how both of those ramp-ups are going and then, you know, what they add on a year-over-year basis to Core Choice.

Yeah, so the triple wall bulk plant in Louisville has been there for a while. We just added capacity. And some of the e-commerce lift have come from that facility. And the business is doing quite well serving ag customers, industrial customers, some direct to ag markets and some through the independent and integrated box systems. The Palmyra sheep feeder is progressing well, ramping up volume a little slower than we anticipated due to COVID, but it's responding very, very well. When you look at the uptick in July and in August, I think you'll see our base business is up probably 4%, and the remainder of that double-digit growth is the addition of Palmyra sheep. So, again, we're real pleased with how that's progressing. It's getting good response from customers in that market, and we'll be on a good path for that business.

Okay, very good. I'll turn it over.

Yep, thank you.

Adam Josephson with KeyBank. Your line is open.

Pete and Larry, good morning. Hope you and your families are well.

Hey, Adam. Thanks, Adam.

Larry, just on your – thanks for your 4Q commentary. I just wanted to dig in a bit to it. So you mentioned higher SG&A sequentially. I think it kind of comes back. SG&A year-to-date has gone from, I think, 135 at the start of the year down to 120 and 3Q. I'm just wondering what exactly you're expecting in terms of SG&A causing the fourth quarter and then what you think a sustainable quarterly level is given the degree of the declines year-over-year. in fiscal 2Q and 3Q. And then you mentioned, I think you had $5 million of opportunistic sourcing benefits in 3Q. I forget what the number was in 2Q. I know you said you're not expecting more in 4Q. But do you think it's possible you'll get more opportunistic sourcing benefits in 4Q? And just how are you thinking about the sustainability of that benefit in the REPS business?

Sure. Let me take the sourcing first, Adam. Yeah, could we get more? Certainly. And we challenge our sourcing team to do it all the time. We just don't build it into forecasts. I mean, we had roughly $11 million in the – was it $11 million in 2Q? $7 million. $7 million in 2Q and $5.5 in Q3. So, you know, that $5.5 million, by not putting it into the fourth quarter, you know, it's about $0.06 a share kind of thing. In SG&A, it's a combination of, you know, we – when we – completed our forecast for the remainder of the year, looking at the numbers, we knew the impact on incentives. And so we made a bunch of incentive adjustments in the third quarter that won't repeat in the fourth quarter because obviously if we hit our forecast, we've already made the adjustments. um and uh to to a great degree so it's that it also is we had some erp non-capitalizable costs that were delayed covid has required us to slow down we can't travel quite as much we're starting to open that up and catch up we want to try to get those things done so we can leverage that into savings and insights so there's some of that cost going in and then the other is professional fees both related to that and actually some tax planning things we've got going on that we think will benefit us in the future that relate to some regulations that were just issued and some other transactions that we're doing, along with some other professional fees that have been deferred. Some of those are also travel-related things that could not happen and have been pushed off. So all told, we're expecting SG&A to be about $11.5 million higher in the fourth quarter, roughly, and so about 14 cents a share kind of swing there. Since I basically – let me just walk from third quarter to fourth quarter since we're going through that. I might as well just do that. So, you know, third quarter at 85 cents a share. You know, I mentioned the one to three on the hurricane, you know, that's a drop there. We also have the SG&A is about 14 cents. Sourcing is about six. Going the other way, OCC, $0.15 pickup over the last quarter. Then tax is about $0.09 a share roughly because we ended up SETTLING A LOT OF EXAMS, REALLY HASHING THROUGH AND LOOKING AT A LOT OF THE RESERVES WE SET UP FOR VARIOUS TAX POSITIONS OVER THE YEARS AND THE SETTLEMENT POSITIONS THAT WE HAD, THAT ENDED UP FREEING UP ABOUT WHAT EQUATES TO ABOUT A 9% PER SHARE DIFFERENTIAL BETWEEN Q3 AND Q4. SO A LITTLE BIT OF THAT, THE GOOD QUARTERLY RESULT, AT LEAST WE THOUGHT IT WAS GOOD FOR Q3 RELATED TO THIS TAX PICKUP. The other item is a little bit more complex, but it has to do with the success in Core Choice. And Core Choice ran hard, as Pete mentioned, through July. That drove inventories down. We obviously have a mill system. We then sell into Core Choice. Oftentimes they're holding paper inventory. that they have for production needs. What happens is there's intercompany profit tied up in that. The mill profit gets tied up in the inventory held in the core choice system. When it gets sold out, that's recognized. And so you have intercompany profit that's generally tied up. The other thing that causes some of that to free up is if margins squeeze. Well, margins got squeezed. The combination of reduced inventories and margin squeeze in core choice is actually freed up about $6.7 million of profit in the third quarter that maybe usually would have been tied up in ending inventory. In the fourth quarter, that will reverse. We'll probably end up, we think, with about $1.1 million of profit tied up in inventory more than where we are now. So you basically have $7.8 million swing in profitability between the quarters for that item, which is about $0.09. If you take all those items together, it's about 25 cents. It would take you down to 60. Our midpoint on the guidance is 66, so a 10% improvement quarter over quarter in just operations. And, you know, then the range around it is, you know, could be 10 or plus 10 on that just because of the uncertainty of how quickly things will recover in the industrial side of things. So hopefully that's helpful clarity.

Yeah, no, I really appreciate that, Larry. Thank you. And then teach us one. Geographic question, specifically North America. Correct me if I'm wrong, but it sounds like at the moment core choices to stand out and then tubes and cores and rigid, specifically steel drums, are operating considerably lower demand levels than core choice in North America. Can you just talk about what you've seen fiscal year to date in North America specifically and why you think the demand trends are have diverged among your businesses to the extent they have? And if you expect those divergences to continue or reverse for whatever reason?

Yeah, so it really depends on the end market exposure for each of those three businesses. And as I've said, you know, in Core Choice, we have heavy influence in durables and e-commerce. And we're aligned to a lot of independent box customers whose demand is very strong. They have some access to a broader market and market exposure. And we also supply integrated customers as their business gets better. So when you look at tube and core in our RIPs business, the end market exposures are entirely different. They're tied a little bit more to some segments that are struggling. When you look at the big influence in North America and RIPs, you look at bulk and specialty chemicals, they're challenged, and industrial paints and coatings and lubricants where we have no exposure in core choice or corrugated are very, very weak now. And in tubing core, The exposure, again, is different. As I said, we sell the paper mills cores, and the non-container board paper mill cores are weak, and we have pretty heavy exposure to textile-related end segments, and they've been hurt by this COVID. They've reopened, but they're still at a pace considerably weaker in the past. So, again, totally different end segments, and and totally different go-to-market approaches. So a lot of times you might see core choice being a little weaker than the others, and it really reflects their end market segments. Going forward, again, we see incremental improvement from July, and while tubing core is down, it's still down less in July, and we expect a low single-digit growth, excuse me, a decline of low single-digit growth in tube and core. And at this point, we expect our RIPs business in North America to be very weak in what we can see through our fourth quarter.

Thanks so much, Pete.

Yeah, thank you.

Steven Cherkofer, with DA Davidson, your line is open. Thanks.

Good morning. I was a little slow with the star one today, but... Good morning. I just wanted to try and bracket the segments a little more for the fourth quarter and looking at it from an EBITDA basis. So it looks like consolidated, you'll be down 15 to 20 million sequentially. And in paper, you've got less downtime, at least on the corrugated side, and about a $15 million headwind or tailwind from OCC. And then in RIPs, you've got that $5 million non-repeat. So should paper be up and then RIPs is really where things are weaker than anticipated? And I recognize Pete just said North America will be weak.

Yeah, you're going to – you know, we've got that intercompany profit swing that I mentioned on the paper side as well, Steve. So you've got $7.8 million there. going from Q3 to Q4. But, yeah, we do anticipate that being a challenge. On SG&A, about half of that is in the rigid segment and half of it is in corporate costs. So you'll have that impact there. And then the sourcing obviously comes out the $5.5 million on a relative basis. And then you've got the OCC benefit, though, in PPS. So, you know, those are the elements of the trend in EBIT. I hope that's helpful.

Yeah, that helps kind of narrow the gap a wee bit. And then Pete made a point of indicating that RIPs is already at the EBITDA run rate in line with your 2022 commitments. And if I'm right, paper's about 100 to 150 million off. So what are the levers that you intend to pull that will help you close the gap over the next couple of years?

Yeah, I think the biggest thing is, Steve, is, yes, economic recovery. I mean, clearly a lot of our end segments are dramatically impacted by, you know, an economic impact that is worse than anything since the Great Depression. I mean, when you look at the the GDP declines, they're unprecedented in that timeframe of the last 80, 90 years. So industrial production statistics that I mentioned in the U.S. are dramatically off. Obviously, our hope, and I think everybody's hope, is that by the time you get to 22, that's in the rearview mirror by quite a way. And if it is, and we can recover even back to the sort of lukewarm economy that we had before, I mean, it seems like a long time ago now, but Our investor day in 2019, I stood up on the stage and said, we're in an industrial recession, and we were. And the statistics I quoted earlier, I mean, even February of this year was way below the average of the last 40 years of industrial production. So if we get back to that, we have no concerns about hitting our commitments. If you look at the underlying assumptions, and we'll update all this in December, but But, you know, OCC is right about where we had it in the assumptions. Pricing on paper is down somewhat, but we expect our RIPs business – and we talk about it at the benefit of this portfolio of companies all the time – Obviously, we're already hitting their targets. We expect them to be better, and we expect full realization of the synergies that we've identified in the paper business. So I'll tell you that we are extremely confident of hitting those commitments, and we're very confident of paying down the debt and getting back into our two-to-two-and-a-half times range. And we don't think it's a stretch.

Okay, and I'll be a bit of a pig and ask try it one more. And you guys made a really good kind of presentation on OCC at your 2019 investor day. Do you think that the long term price for OCC is going to go back kind of those to the 30 to $50 range?

You know, I think we've been pretty consistent, Steve, saying that we think the longer-term range is relatively about where it is now. And, you know, the range that we gave at Investor Day, I think, was 35 to 75 on our commitments. We think that's the sweet spot. RISD is actually projecting it to go up. We don't feel that way, you know, into, you know, next year. I mean, We think the supply side is picking up. Obviously, China is backed out. Some of that demand is going to go elsewhere. But we think that that forecast of what we thought then remains a good one.

Okay. Thanks, guys. Stay safe.

Thanks, Steve.

George Staffos with Bank of America. Your line is open.

Hi, everyone. Pete, Larry, maybe an unfair question, but you must have – you know, some view on this. So if you take a step back, you know, assume the fourth quarter plays out more or less as you expect, and we are, again, you know, a little bit of swag here, but, you know, or wiggle room, I should say, you know, let's say things in fiscal 21 are relatively normal. What do you think COVID took out of your EBIT or EBITDA? in fiscal 20. Do you have any sort of approximation of what kind of hole that created that will come back to you over the next couple of years? Kind of a similar plan.

Based on our forecast, George, we can identify in the third quarter it was $24 million. It was $33 million of lost business and about a $9 million tailwind from various subsidies, lower travel costs and all that kind of thing. Looking at where we're forecasting for the year, you've got a couple of things. You know, we had the OCC price-cost squeeze impact to us that's, you know, roughly going to be, you know, say, you know, $50 million for the year for the price and the OCC and everything for the quarter. And that's a rough number. It might be a little less than that. But then on an overall basis relative to where we thought we'd be, you know, I think COVID impact for this year would be another $50 million on top of that. So roughly ending up maybe $100 million less than where we thought we'd be. Now, we built some of that price-cost squeeze in. But, you know, roughly we'd end up at $100 million less than where we would have predicted at the beginning of the year.

All right. Larry, I appreciate that. And, you know, this is probably more of a question for the next analyst day, you know, whenever you do that. So you can keep your comments brief here. But what have you learned about the portfolio over this last, you know, three quarters, now heading into fourth quarter, you know, to finish up the year, and the interrelationship and how complementary the businesses are? And perhaps, you know, maybe things you've learned about, they're not as complimentary as you would have expected, you know, through what's been a very stressful period. How do you look at the portfolio now and whether it makes more sense or less sense having gone through COVID? Thanks, guys, and good luck in the quarter.

Yeah, I think, George, we found that we have a very resilient global supply chain dependent or centered on regional supply. So I think that's supporting what we've done over the past three years. And it played well for us in the COVID. And I think our balanced portfolio globally has demonstrated that in normal times, it is a good portfolio. It's balanced. And our ability to serve our customers in a variety of substrates, while it's short-term challenge, I think helps us in the future.

Yeah. And I think there's a couple of things. One, We've seen more and more alignment between our flexible business and our rigid segment in terms of the end market customers we serve. We continue to leverage that more and more. And then the other part is relative to Caristar acquisition. This time of working through this crisis has made us nothing but stronger about our resolve that it was a good acquisition. The leverage that we're getting off of utilizing the skill sets of our mill management team across the entire portfolio is really paying benefits for us. I mean, we can't control the economy and the end market demands, but what we can control we are controlling. We're doing a lot of things to really take cost out of the organization, sort of back to that adage of don't let a good crisis get wasted. It's refined our view. It's caused us to really focus. It's caused us to, you know, strengthen and modify our footprint and leverage the assets that we have. So we're very, very comfortable with the portfolio at this point. Appreciate the thoughts.

Take care, guys.

Dave Haney with Wells Fargo. Your line is open.

Thanks for taking the follow-up. I'm curious, in the URB mill system, are you guys taking any kind of particular downtime or more precedent than any other quarter? And how would you kind of characterize your individual supply demand as it sits today and perhaps more particularly where your inventory position is?

Yeah, so our recycled boxboard mills, we run to demand, and it's very similar to what we've had before. While we have a little lower demand in our tube and core business, we offset that with volume from non-tube and core business. And, again, our inventory position is that we manage our inventories and our working capital very stringently and efficiently. We tend not to try to, in slower demand times, run up our inventories because we just don't think that's the best way to operate. Run to demand and manage our working capital very, very effectively.

Thank you, Pete. And maybe, Larry, if you could – I appreciate it's pretty volatile right now, but there's some fairly sizable price increases that have gone through on the resident side. And, you know, assuming there's some sort of normal industrial markets kind of in fiscal 2021, can you maybe tell us what you're expecting working capital to be in an aggregate basis as a benefit to cash flow this year and then perhaps what the reversal could look like next year?

Yeah, I mean, yeah, thanks, Gabe. We anticipate that year over year our benefit of working capital is roughly in the $60 million to $70 million range of benefits. year over year. We'll tend to run up a little bit of working capital in the first quarter of the year, but then we fully anticipate that in 21, we should be able to, again, manage working capital well, and it should be a nominal either increase or decrease year over year. Although we do believe in certain areas of our business that we have opportunities to improve our working capital even further. The CareStar business has improved dramatically. We still believe there's room there, and we believe there's room in our flexible business. and also in some of our operations, particularly in EMEA, in RIPs. But we're not talking huge numbers, but there are opportunities there that could allow us to drive improvement again next year, even more than what we had this year. Thanks for that. Good luck.

Mark Wildey with Bank of Montreal. Your line is open.

All right. I've got three just real quick ones. First, Pete, I wondered – Yeah, looking in the back of the slide deck, there's a 31.4% drop in what you're calling kind of non-primary product revenues in the quarter. What exactly was the big driver in the drop in those non-primary products?

That's predominantly small water bottles, small plastics. It's a small part of our portfolio.

Okay. The second one is, can you give us some just general sense about the sort of the transition strategy for the CRB business as the graphic contracts will fall away over time?

Yeah. So as we talked about on the divestiture, we have an agreement for one mill for two and a half years and the other two mills for five years. So the transition is going very well. Graphics are a very good customer of ours, not only in paper but other products. We feel really good about our position as an independent supplier of CRB to the independent folding carton community. So we made the right decision. We're really happy. I think it puts that consumer products business in the hands of a more strategic partner, and we're real pleased with how we're operating our CRP mills and our position in the market at this point.

And are those contracts, just not to get too far into the weeds here, but do they just drop off or do they kind of step down over time?

They drop off. One is two and a half years and two mills are five years on a contract. on a similar volume basis on when we stepped off from the divestiture.

Yeah, the thing I would say, Mark, is that's when the contractual obligation ends. Now, when does the actual relationship end is maybe a different question. Our business with Graphic has only increased beyond what they're obligated to, so it's a good relationship.

There's a lot of synergies beyond just the paper that we serve them, many other products.

Okay. All right. That's not hard to imagine. The last one, I'm just curious, you know, there are an awful lot of printing and writing paper mills that, you know, are looking for new products, maybe new owners. And I'm just, you know, wondering whether there might be any opportunity for Greif to look at taking on one of those mills at a point and, and, potentially ending up with a lower cost structure or a better kind of product quality, product mix coming off of a reconfigured printing and writing paper mill versus maybe some of what you're operating right now?

Yeah, so we're never going to comment on hypothetical future situations, but our whole focus is as new mills come on stream is to focus on how do we further integrate the existing capacity we have in our mill system, our converting operations, and we think that's the key to driving the most value. And we're not interested in getting more container board capacity. We're interested in creating a position where we have a one-to-one ratio of tons between converting and mill output.

Okay, fair enough. Good luck in the fourth quarter.

Thank you. Thanks.

And today's last question comes from the line of Adam Josephson with KeyBank. Your line is open.

Thanks, guys, for taking that two follow-ups. One on tubes and cores. I'm just wondering what you think long-run demand trends are in that business, just given what we know are the secular declines in paper demand and the pressure on the textile market. Do you think that's a flat business, long-term, slowly declining business? I'm just wondering what your view of long-run demand there is.

Yeah, we think it's a GDP-plus business. I think we've seen an unprecedented market that's impacted negatively some of the segments. But we've got a very creative sales group that – provide a lot of different product development opportunities we're looking on. So it's a much broader end-use market, and we're focused on how to provide different innovative product solutions. So it's a really talented group, and right now it's challenged, but we think it's a low single-digit growth business that can drive a lot of margin and value through our integrated system in that recycled box board business.

Right. Thanks, Pete. And Larry, just one question on guidance. You mentioned that at your annual stay in 19, you talked about an industrial recession. And of course, this year is COVID. We have no idea what next year will bring. Obviously, you said you have no control over economic conditions. So along those lines, what is your thought about giving guidance, both short term and longer term, in light of the fact that as you said, you have no control over economic conditions, as a result of which you can end up having to revise guidance or pull guidance depending on those economic conditions. I'm just wondering what you think the benefits are of giving both short and long-term guidance versus perhaps not doing it.

Yeah, I think it's a fair question. And you could always go to a period where you just don't give any guidance. Obviously, some people opt to do that. We've opted generally to try to give annual guidance to try to hold ourselves accountable and be as transparent as we can. And that's where I would anticipate us getting back to presuming that things are at a point where you have some level of confidence when we get to December. Is that going to happen? I don't know. We will have to assess it then. I think there's the prospect of do you see a second wave as the temperatures cool and all that kind of thing. And if that occurs, you know, sort of all bets will probably be off. If a vaccine gets developed more quickly and there's a path to when it could be dispensed widely, that could influence things. So very, very hard to predict where we'll be. But I think over time we get the pandemic behind us, I think we'd feel comfortable again moving back to annual guidance.

Thanks so much, Larry. Best of luck.

Thanks. Thanks.

I will now turn the call back over to Matt Eichmann for final remarks.

Thanks a lot, Jack, and thank you, everybody, for joining us this morning. We appreciate your interest and gripe. We hope you have a great remainder of the week and a good weekend ahead.

Thank you. This concludes today's call. We thank you for your participation. You may now disconnect.