Greif, Inc.

Good morning and welcome to Greif's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. If you would like to ask a question, you'll need to press star followed by the number one on your telephone keypad. If anyone should require assistance during the conference, please press star then zero. I would now like to turn the conference over to Matt Leahy, Vice President of Corporate Development and Investor Relations. Please go ahead.

Thanks, and good morning, everyone. Welcome to Greif's third quarter fiscal 2022 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 are prohibited from discussing material nonpublic 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 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'll turn the presentation over to Ole on slide three. Ole Sperlinger Thanks, Matt, and good morning, everyone.

Following on our formal introduction of the Build to Last strategy at our June investor day, We are very pleased to present our third quarter results. We delivered both earnings and EBITDA growth against the historically strong Q3 21 comp, and during a time of economic uncertainty, record inflation, continued supply chain pressures, and the ongoing pandemic. We delivered third quarter adjusted EBITDA of 251 million and adjusted EPS of $2.35 million. But perhaps most impressively, we delivered a record single quarter adjusted free cash flow of 175.8 million. These results are indicative of the Build to Last strategy's powerful value creation when executed effectively by our exemplary global drive team. Our company has also achieved a milestone by ending the quarter below our target leverage ratio range. opening up significant opportunities to accelerate our capital allocation priorities and deploy capital to drive shareholder value and grow our business. Our confidence in the drive team's ability to produce continuous strong results had led us to raise our expected fiscal 2022 guidance, as Larry will discuss later. Please turn to slide four to begin discussion of our detailed results. Global industrial packaging delivered an excellent third quarter. We continue to see solid demand across our global present-based portfolio, with plastic drums down low single digits and IPCs up 10% per day versus a strong prior year comp. Global steel drum volume fell by mid-single digits per day versus the prior year on late quarter weakness in EMEA and APAC, driven by customer challenges around raw material availability, supply chain and labor disruptions, and inventory rebalancing, which impacted order patterns. Our North American end markets remain stable, and our LATAM business continues to outperform with strong volumes across the ag chem, citrus, and lubricant end markets. As a reminder, our GIP business benefits from a portfolio effect of mixed geographic product and end market exposures discussed at Investor Day. Adjusted EBITDA decreased year-over-year by approximately 29%. We are proud of our team's ability to largely offset multiple headwinds when viewed against the historically high performance of third quarter 2021. In addition to the absence of a 10 million contribution from FPS that benefited the previous year as well as a higher year-on-year incentive accruals, the team has also been excellent at taking steps to offset the previously discussed 100 million one-time full-year 2021 benefits related to last year's historic run up in steel prices. Much of the impact of that tailwind occurred during the second half last year. Our teams also faced the continued headwinds of non-raw material inflation, but were diligent in passing along costs ahead of the inflationary curve. Our global GIP team has exemplified relentless execution and discipline during these challenging times. Please turn to slide five. Paper packaging's third quarter sales rose by 131 million versus the prior year due to steady and solid volumes in all paperboard grades and higher average selling prices. Adjusted EBITDA rose by 42 million versus the prior year due to higher selling prices, partially offset by higher raw materials, notably at 10 million headwinds related to higher OCC costs, higher incentives, and the continued and substantial headwinds of transportation, labor, and energy inflation. Third quarter volumes in our core choice sheet feeder system were down 3.5% per day compared to the historically strong Q321. in line with industry box demand, but remain 10% above pre-pandemic levels. Third quarter Cuban core volumes were down 2.4% per day versus the prior year due to softness, mainly in film and textile end markets, being partially offset with strength in our other key end markets, as well as our growing adhesive business. As some may know, we had a fire in one of our production lines at our Riverville mill towards the end of July. Most importantly, we are happy to report that all of our colleagues are safe and unharmed from the event. Thanks to the dedicated efforts of those colleagues, the fire resulted in only 20 days downtime at one of our two lines at the mill. The team did an excellent job of bringing the line back to operation in a short timeline. The time focused on that incident led us to determine we should defer our planned 13 days of maintenance downtime into next year. As a result of that shift, the fire will result in a loss of net seven days of production during the fourth quarter, equivalent to approximately 9,000 tons. That is factored into our fourth quarter guidance. I will now turn it over to our CFO, Larry Gilsheimer, on page six.

Thank you, Ole. Good morning to everyone. Our third quarter results demonstrate our team's ability to perform despite substantial ongoing headwinds. Despite a combined $59 million of non-volume-related raw material, transportation, labor and energy cost headwinds in the quarter, We delivered adjusted EBITDA of $251 million well ahead of prior year. You will note that our EBITDA growth was driven by our paper packaging business, which is exhibiting strength during a quarter where GIP was faced with several headwinds and a difficult prior year comparison. The portfolio effect provided by these businesses act to create stability of earnings over the long term for Greif, and this quarter is no exception. We've included in the appendix of today's presentation a slide from Investor Day which displays this dynamic over the past seven years. During this quarter, we also grew earnings by over 20%, with adjusted earnings per share of $2.35, and most impressively, produced record-free cash flow of over $175 million during the quarter. This cash generation provides proof of another of our core messages from Investor Day, the resilience of the great business system as a highly generative cash machine, regardless of business cycles. Our teams are also executing below the line, where interest expense was a year-over-year benefit to earnings of $0.12 a share as a result of our deleveraging efforts and favorable refinancings. Tax expense was a $0.09 negative year-over-year earnings impact, primarily due to higher income in the United States. Please turn to slide seven. We are again increasing our fiscal 2022 guidance as a result of our team's extraordinary efforts in continuing to deliver for our customers and managing well through an inflationary environment. We are raising the midpoint of our adjusted earnings per share guidance by 40 cents to $8 a share for fiscal 2020, reflective of our strong third quarter performance and confidence in our team's ability to deliver results to round out the year. We are also raising our free cash flow guidance for fiscal 22 with a new range of $415 to $445 million. Continued outperformance on the operating line coupled with improving networking capital management and slightly lower CapEx is driving the upside. We anticipate these networking capital benefits to continue to support strong free cash flow into 2023. Finally, you will find a slide with key modeling assumptions in the appendix of today's deck for use as needed. Please turn to slide 8. Reflecting back to our investor day and the promise we made to continue to provide value to shareholders, we are increasing our quarterly dividend by 8.7% to $0.50 on A shares and $0.75 on B shares. In addition to raising our dividend, we continue to repurchase shares as announced at investor day. Our increasing dividend and commitment to share repurchases offer a compelling shareholder return opportunity. Furthermore, we have reached yet another milestone in delivering our balance sheet to below our target leverage ratio. The strength of our balance sheet affords us the flexibility to pursue new opportunities to deploy capital opportunistically in the coming year. Our acquisition pipeline remains robust, and we are excited about the opportunities to further grow our business. With that, I'll turn things back to Ole on slide nine. Thanks, Larry.

To sum up our thoughts, we are extremely proud of our team's performance in the past quarter. As discussed at our investor day, our focus and disciplined execution on the four missions of our build-to-last strategy ensures that we will deliver exemplary performance in any economic environment. Included in the appendix for today's presentation is a summary of our key messages from Investor Day. We are confident in the ability for our Build to Last strategy to drive long-term value creation, and this quarter is a prime example of that strategy in action. Thank you for your interest in Greif. Operator, can you please open the line for questionings?

Certainly. As a reminder, to ask a question, you'll need to press star followed by the number one on your telephone keypad. We ask that analysts please limit themselves to one question and one follow-up question. Thank you. Our first question comes from Gancham Punjabi from Baird. Please go ahead. Your line is open.

Hi. This is actually Tom Diggins for Gancham. For my first question, could you characterize fundamentals in PPS as you see them right now? We've seen container board momentum for the industry pull back somewhat recently, so I'm wondering how we should think about demand now and going forward relative to earlier this year.

We saw towards the end of the quarter a slight weakening in demand, but I will stress that our demand is still solid and our backlogs are still around seven to eight weeks.

Gotcha. That's helpful. And then can you also characterize the macro in each region? And also, how would you say dynamics have evolved since yesterday? And then also any commentary around what you're seeing across the European customer base? as it relates to net gas shortages would be helpful as well.

Sure, we can walk around the world. If we start out in APAC, what we see out there is basically the effect of the continued lockdowns in China. Those lockdowns prevent transportation across the Chinese regions and that puts a damper on some demands We also see end markets like auto, like construction being affected. That means that there's less demand for paint, less demand for silicone, which all gets transported in our packaging. And also the increased supply chain cost has an effect on the whole region. So that's really why we see a weakening in that region. For Europe or for EMEA, we also see some weakening, not to the extent of APEC at the moment. That is really caused by several things. One is the conflict in Ukraine. It's the inflation in energy prices, gas restrictions. That causes companies to... basically take down capacity for cost reasons. We do see pockets in EMEA where demand remains strong. But in terms of the materials that goes into auto production and some consumer goods are weak. In North America, we see weakness to a lesser extent, but we do see the same picture in terms of auto, which has an effect on paint and some types of chemicals. LATAM is strong, and overall we see strong demand in ag chem. We see strong demand in food-related packaging as well.

That's really helpful. Thank you. You're welcome.

Our next question comes from George Staffos from Bank of America. Please go ahead. Your line is open.

Yeah, hi. This is actually Cash and Keeler on for George today. So I guess just heading into 23, you know, would you be able to provide any initial color on that, you know, for both segments? And then what might be your biggest risk margins as well?

You know, 23 is a long way off, yet particularly given the just uncertainty of the economic path here. I mean, obviously, even the Fed's struggling with that. So, I mean, we're working hard at, you know, building out our budget plans now, and we'll be well prepared to talk about that on the fourth quarter call.

Our next question comes from Adam Josephson from KeyBank Capital Markets. Please go ahead. Your line is open.

Olli, Larry, Matt, good morning. Hope you're well. Thanks very much for taking my questions. Larry, would you mind just going through your volume trends by month in the quarter as well as in August? In other words, compared to the down 2.8 in fiscal 3Q, can you tell us what each of the three months was as well as what August was and relatedly what your volume expectation was? for 4Q is embedded in your updated full-year guidance?

Yeah, we, you know, like we had talked at Investor Day where May and June were, so, you know, they weren't showing really any signs of weakness. Things tailed off a bit in July, leading to, you know, the results we published. As we look at August, it continues the trend that we saw in July. It only went through where we're seeing steel. It's looking down that mid-single digits kind of number on steel. You know, IBCs remain positive up even in August, and our sheet business remains strong in paper. As he mentioned, our backlogs are still close to eight weeks in our paper business. So,

know a lot of mixed signals uh adam but you know overall things are are you know a little weaker but nothing that is uh overly concerning at the moment i appreciate that and just related to all the comment about the the seven to eight week backlogs in your paper business obviously your volumes were down in fiscal 3q obviously you took your occ guidance down by 10 bucks a ton Can you tell me what you're expecting in terms of the OCC decline in September? And relatedly, if your backlogs are still strong in your paper business, why do you suppose OCC prices would be falling by as much as they are?

Yeah, we've built in, you know, it's 127 in August. Then we reflected going down to 107 for September and October. You know, you are seeing people taking a lot of different maintenance downtime within the industry, and, you know, I do think that there is some weakness out there that's driving down demand a bit in the paper industry. But, you know, we continue to do well against our specialty businesses. Our URB and CRB businesses continue to be strong. There are some pieces that are showing weakness, but others not. I mean... You know, you've got residential construction, you know, while you may see housing starts down, you still have housing completions up year over year over a strong 21. Actually, permits went up in July year over year. So we're seeing, for example, if you look down in our URB business, carpet and floor cores and roofing cores are actually up 6% and 12% in August over August. You've got now construction tubes, which goes more into commercial construction, is down 6%. So it's just a mixed bag across the portfolio. And like I said, on balance, still pretty good for us.

And Adam, when you follow housing, you have to remember that, you know, when you sign a contract to build a house, you know, that house will be built from now and then nine, 12 months into the future. And you can't stop that. So you will see demand for housing-related products continue, you know, well into 2023.

Thank you, Ollie.

Our next question comes from Mark Wildey from BMO. Please go ahead. Your line is open.

Thanks. Good morning, Ali. Good morning, Larry. Hey, Mark. Good morning, Mark. Ali, can you just talk with us a little bit first about how you think about your ability to hold on to these recycled box board price gains? I've kind of lost track at this point, but it seems like we've got about $450 worth of price hikes out there in the last 18 months. And if OCC is a little over $100 right now, that's really not terribly much higher than it was two or three years ago. So it seems like you've picked up quite a bit of spread there, and I'm just curious about your ability to retain that spread and how you think about that.

The way I think about it, Mark, is really it's a supply and demand issue. I mean, to put it very simple.

Okay, and can you also – Can you talk a little bit around your leverage targets and whether you might be willing to operate below the low end, below that two times number for some extended period of time?

Yeah, Mark, we don't find that terribly capital efficient, but we're not going to be crazy to deploy the capital and chase things that don't make sense. So to the extent that there is... Nothing for us to acquire that is attractive. We could see that fall some, but as I mentioned in my prepared remarks, our acquisition pipeline is very robust. We are looking at a number of things. We'll remain disciplined in deploying that capital. But yeah, if we don't execute on any of those, I could see us being down for a while so that we have that dry powder to do things. And then we'll continue to look at returning more and more capital to our shareholders to the extent that we don't. So we're not going to be rash about it, but I wouldn't anticipate us falling dramatically below that for a long period of time.

Okay. And finally, Larry, just On the M&A front, can you just give us a sense of what you're seeing out there from sellers? Because it's clearly a really tough financing market for the private equity buyers. In fact, it seems to me it's kind of frozen at this point. I'm just curious if you're seeing an awful lot of sellers just pull back from the market right now.

We're not. We're actually seeing lots of opportunities, but they're not huge opportunities. I mean, we're not talking Karistar-sized deals, Mark, by any stretch. But we look at this as an opportunity for us. Obviously, to the extent that they're having more difficulty financing, we don't have any trouble financing it. We have the dry powder to be able to do this very rapidly, and we'll take advantage of that in the market to the extent that we're able to find transactions that make sense for us and that fit our target objectives.

Okay. Thanks, Larry. I'll drop back in the queue.

Our next question comes from Michael Hoffman from Stiefel. Please go ahead. Your line is open.

Thank you for taking the question. I'd like to tackle the overall commodity book, and you've alluded to fiber, the OCC trend, but could you share with us your thoughts about your mix of resins, steel trends going into 4Q, and how we think about that comparative year over year?

Hi, Michael. This is Oli. Are you thinking of raw material prices? Yes. We have obviously seen a steep a steady but not dramatic decline in raw materials over the periods. We expect to see a continued sort of slight decline of raw materials towards, you know, from now and towards the end of the year. We don't expect anything dramatic on that front at all.

Okay.

And that goes for both steel and resin.

Okay. That's good to know. And then, Larry, on the CapEx side, Is the intention that that gets rolled into next year, is this a supply chain issue? And that's the, you're trying to deploy it, but you can't find the things you want to buy? Just to understand why.

Yeah, that's it, Michael. And it's a bit frustrating for us because that's been a continuing story for the last three years, unfortunately. You know, three years ago, it was sort of a unique situation on a large piece of equipment. But then last year, as the supply chain difficulties became more pronounced, then that became an issue. We thought until like three weeks ago that we were still going to be in good shape on not having to lower our capex spend this year, but then we got told some equipment wasn't going to come in. So yeah, it's all supply chain related. It's not anything related to desire or capability. And So, you know, it will go into next year. And we do have plans, as we've announced, about having a new Texas sheep feeder next year. So that's a major capital spend that will fall into the guidance we'll give for next year.

Okay. And if I can just tweak out a little then, given the trend, I get you're not giving guidance, but just so everybody's modeling intelligently, given the trend on the raws, By definition, numbers year over year are tighter. We're having a flat to slightly down conversation, which nobody should be surprised about, but that's the way to think.

Yeah, I think that's the way to think about it. The one thing that I would talk to you is, you know, as that occurs, cash generation just goes up. I mean, because, you know, the need for working capital declines, the collection on receivables and those things play out. So as you would expect, when we modeled out doing the stock repurchases and the dividend increase, we modeled out a bunch of scenarios. And even in a really tough situation, drop, which we don't anticipate. I mean, we're talking 20% declines in EBITDA over the next couple of years. We still are just printing cash and getting our leverage ratio will remain down below our target range, even if we do some decent sized acquisitions. So yeah, we may see that fall off in earnings if the economy goes south, but cash flow is going to be strong.

Got it. Thank you very much.

Our next question comes from Gabe Hady from Wells Fargo. Please go ahead. Your line is open.

Gabe Hady, Wells Fargo, All the way. Larry, Matt, good morning. Real quick, as we think about, I guess, energy volatility and what could happen over the winter months, can you give us any sort of framework in terms of regional profitability to the extent that your customers perhaps move where they're manufacturing their product and any potential capacity limitations that you might have. So, and again, I don't know specifically, but for example, in Germany, if someone is trying to make XYZ product and they choose to make it in the United States, again, to the extent they have the capability, you know, anything that we should be mindful of that can impact profitability.

Yeah, I think that I wouldn't, I don't think you'll see a lot of that, Gabe. I think to the extent that we see movement, you generally will see like in May it might move to – but the extent that they would move to the united states for us that's that's a very good answer um that'd be like really good but we just we haven't seen much of that in the past um i think the migration would be more the kind that i just mentioned i don't know if you have other thoughts on that no i i agree and then also just remember for if we talk about ourselves so our meals they consume 70 of of our energy and that's in the us and we obviously have no energy

issues with supply here.

It's more in Europe. You see that.

All right. Thank you. And then just one quick one to dial in. I guess this fire issue, which it was fortunate that no one was injured, 9,000 tons of downtime, if I assume maybe $300 a ton of underabsorbed fixed overhead, maybe a $3 million headwind or so to fourth quarter. Is that maybe less than five? Is that fair?

Yeah, that's roughly, and obviously it's already built into our guidance. Yeah, we didn't build anything into the fourth quarter for any kind of business interruption recovery because we don't know the timeline of when that might occur. We're obviously working on that. But we've got high deductibles against that stuff anyway, so it's not going to be substantial. So I didn't put anything in for that.

Okay. Thank you.

Our next question comes from Justin Bergner from Gabelli Funds. Please go ahead. Your line is open.

Good morning, Ole. Good morning, Larry. Hey, Justin. Morning, Justin. On past calls, you've abridged the change in guidance from one quarter to the next. And I was wondering if you might be able to do that for the earnings guide, you know, maybe breaking it down into sort of the benefit from lower OCC. you know, below the line of other factors. And maybe for free cash flow, if you could do the similar thing, you know, between operating capital and CapEx.

Happy to do it. So, yeah, so our guidance to that midpoint was 760 on Q2. Operations, other than our paper business, price and OCC, which I'll break out separately. So both businesses driven mostly by GIP was a pickup of about 17 cents. PPS pricing on mix, because we had built in price increases that we knew we had already announced and executed, but the mix left us with about $0.12 pickup. The OCC drop relative to what we had built in before, it came out at $143.10 versus $152. What we had in is $0.24. Interest expense on some of the variable part of our interest expense is a $0.05 bad guy. Some other expenses, just unrealized currency loss, that kind of thing, was $0.06, and tax and other was $0.02. So five, six, and two on the negative. So that should walk you from $7.60 to $8. I'll pause and see if you get all that.

Yeah, that's great. The positive operations across the businesses, mainly GIP, that's $0.17. Could you just provide a little bit more color there? Was that just better execution, better volume? Yeah, it really is better execution.

really disciplined execution on, you know, selling prices relative to non-raw material price increases. And we got a little bit of benefit of some timing on the decline in some of the steel that played well for us, so minor amounts there. So it's just a combination of those things. And then in PPS, some more integrated tons where we have, you know, plays out better for us in our specialty products, in our core choice operation, and our tube and core business. So a combination of all those things amounted to that $0.17 lift.

Okay.

Great. Thank you. Cash flow side, I'll do the same walk. We started at $4.10 was the guidance. That same operation, it's going to be the same elements, obviously, but $1.9 million on those operations, $7.1 on the pricing, $14.5 on OCC interest expense, down $3.2. Adjusted CapEx was up because we or we are going to spend less than we expected, as I just discussed. And then other things, cash taxes, other miscellaneous stuff is a negative six, nine.

Great. Thank you for all that detail. Second question I had was on repurchases. You repurchased 60 million in the quarter. I assume the 10Q will speak to sort of the price difference. at which you repurchased. That's not an insignificant amount of dollars relative to your market capitalization. Should we think of that as something that you will continue to do in subsequent quarters, unless the M&A activity picks up, or was it more one time?

No, no. We had announced at Investor Day that we executed on the $75 million ASR program. So if you look at our cash flow statement, you actually see two entries related to it, and it breaks it into pieces of $60 and $15 million. And you get delivered, you know, 80% of that on the day one, and that stuff impacts earnings per share. And I'll come back to that impact in a minute. You don't really know the price that ultimately gets paid until the ASR program gets filled out. which will happen over the rest of this year. And then we also plan to do another $75 million in open market, which probably will be about two-thirds B shares and one-third A shares, but that will play out how it plays out in the market. Coming back to the earnings per share impact, a penny a share in this quarter of lift on earnings per share, another $0.03 in Q4, so $0.04 for the whole year. And if it plays out the way we think it is, On that first $75 million, it'll be about $0.15 for the whole year next year. But then we'll execute on the other $75 million open market. Hopefully, it has way less impact per share because hopefully our stock price goes up and it costs us more money to buy it back.

Great. That's very helpful as well. And then just lastly… The $100 million headwind from price cost versus the benefit in 2021, is that still sort of the right number? Has it become a little bit larger or smaller?

No, no. That number was fixed. I mean, that was what we got out of the rapidly increasing prices last year that just wasn't going to repeat this year and didn't. And, you know, we've lost more than that as we've gone through the year just in the normal playback through volume decreases and stuff. But, no, the $100 million is a fixed number.

Okay, great. Thank you.

Our next question comes from Adam Josephson from KeyBank Capital Markets. Please go ahead. Your line is open.

Thanks very much. Larry, just one follow-up on the volume question I had earlier, which is if you're down 3% in 3Q, July was the worst. And then you said, I think August was trending fairly similarly to July. Should we assume that July was down 5% if not more, as was August?

Let me look here. Adam, I'm looking at... Yeah, thanks.

I could ask another one.

I don't remember what July was down, actually. I don't even... Do you know that, Matt? I don't have any idea. But, I mean, if I look at August... versus July on steel globally, it's upper single digits. But I hesitate on that because so much of it is driven by China and just what's slowed down there.

What we also have to remember, Adam, is we're obviously pushing our inventories down, but so are our customers. And there comes a point where you need to replenish your inventories. So whether it's 50%, you know, I don't know, but there is an element of that. So you will see customers starting to, once they come to the end of that cycle, starting to increase their purchases again or their demand again.

Right. I'm just trying to figure out what a reasonable volume expectation is for fiscal 4Q. In other words, what is embedded in your guidance? I assume it's down more than 3%. but I obviously don't know that.

Well, yeah, I said mid-single digits. It's about that. That's on steel and plastics. Yeah, so that's about right.

I was talking total company, but okay, yeah. And then regarding, Mark asked about the sustainability of these URB and container board prices given what's happening to OCC prices and the historic Spread between the two and your response was it's all supply demand. So volumes are falling in tubes and cores and in container board. So is it reasonable to think in light of that, that these, based on the demand trends that you're seeing in tubes and cores and container board, is there any reason to think that these prices are sustainable?

We don't comment on future prices, Adam. You can obviously make your assumptions. We're very comfortable that our business is going to continue to operate well. We're going to obviously try our best not to give up price. you know, because it's very valuable to us. But, you know, to the extent that, you know, demand drops dramatically in the market, yeah, I mean, it's going to follow supply and demand. So if you're projecting that demand is going to drop, I think it's not an unreasonable expectation that prices would at some point come down.

Yeah. Just one last thing along those lines, and I appreciate that, is URB versus container board. You know, URB has historically been more economically sensitive than container board because a lot of container board goes into food and beverage and other non-durables. What do you think a reasonable expectation is for URB versus container board demand if we are going into a pretty meaningful recession over the next year or so?

I mean, our URB, the end markets it goes into is extremely diverse. I mean, if you go back and you look at the pie chart stuff that we've provided over time, I mean, it's extremely diversified. But it's different than container board. I mean, there's a lot of differences in the end market. So I don't think they correlate that closely, and I don't think it is fair to assume that they're worse.

Yeah, go ahead, Oli. Sorry.

Yeah, there's two points. As we also explained during investor day, we rebalanced our portfolio, so we have a lesser extent of container board in our overall portfolio. And that's the comment on demand. So on URB, demand is stable, which indicates that there will be no price pressure, at least at the moment. And also CRB, you have strong demand.

Whereas in container board, Oli?

I didn't comment on that. We talked about our backlogs remain the same. Exactly. Got it.

Thank you.

Our next question comes from Mark Wildy from Bank of America, Bank of Montreal. Please go ahead. Your line is open.

I'll get the right country. I wonder, Larry, can you give us any color on just where you're thinking about the best internal reinvestment opportunities? In other words, if you're going to invest kind of on projects, capital projects in your existing businesses over the next two or three years, what's that going to be focused on? Is it more sheet plans? Is it some... Mill upgrades? Is it IBC build-outs? What would that pie chart look like?

Yeah, I mean, Mark, if we go back and – I appreciate you weren't at Investor Day. for a very good reason, at least from my opinion. But, you know, we're going to do this sheet feeder in Texas, which is a significant spend next year. We'll get us over-integrated in the container board space. We're going to continue to spend in the IBC space. It's a primary focus of us. Small plastics, you know, think jerry cans and that, expanding our business from where we have it in isolated places around the world where we're very – attractive business for us. You'll see us spending more and more on automation and just recognizing, of course, labor components and upgrading our facilities, those kind of things. Those are the primary focuses. I missed anything? No, got it.

Okay. And I'm just curious, are there any opportunities you think that potentially uh recapitalize in the urb business i mean if you look at sort of across the industry you know there are a lot of old center machines that are probably 80 or 90 years old and so i'm just uh just curious about the you know potential to perhaps recap some of that uh that capacity

Yeah, it's something that we've looked at. Mark, I would say to you that our team has not yet been able to convince me that the returns from that type of investment on a wholesale basis make any sense for us. You know, people like to play out 20 and 30-year curves, and you modify one assumption an eighth of a percent, and it changes the answer. And So, I mean, we'll continue to examine it, and we will spend money to the extent needed to make sure that the plants continue to operate well, and we'll continue to explore whether something of the nature you mentioned makes sense, but so far it hasn't.

Okay. Sounds good. Thanks.

Good luck in the fourth quarter, guys. Thanks, Mark.

Our next question comes from Michael Hoffman from Stiefel. Please go ahead. Your line is open.

Thank you for the follow-up. A lot of questions with regards to the economy and supply-demand. How do you think of your own channels and what's in your sort of channels as far as inventory, what your customer channel looks like, and then what your competitor channels look like? That ultimately will be the major shock if we're overstuffed.

Yeah. I mean, yeah, we – we have some places in the world, Michael, where we had some excess inventory related to concerns about supply chain. I have been working that down and will continue to do so. That obviously was one of the big drivers of cash flow in this quarter, year over year. It was a dramatic improvement in working capital, and that focus will continue. In terms of inventories of... of our product in customers. We don't have that many customers who actually keep much of our inventory because you're basically storing air. When you think about it, you know, empty steel drums, empty plastic drums. We do have some customers who actually store them in semi-trailers, And some of them, they pay us rent for them, actually, while they keep them. But that's a small portion of what we have. And I'd say the same thing relative to our competitors in that space. You just don't store that much. And the same goes on the container board side. I mean, the box plants don't store a lot of paper waiting to use it. It's more real time.

So the channels aren't overstuffed. So this really comes down plainly to... what your perception is about an economic cycle.

Yeah, I mean, only mention it. We did have some impact of some supply destocking in the limited group of customers that I mentioned that do store some of our inventory. But, you know, we think that's coming to the end. And, you know, so we would expect order patterns to pick back up, offset by any further drop in the economy.

Yeah, those inventories are safe to stock, Michael? Yes. So they're not huge, so they'll come to an end shortly.

That's very helpful.

We have no further questions. I would like to turn the call back over to Matt Leahy for closing remarks.

All right, great. Thanks, everyone, for joining today. I hope you found the call helpful. Have a safe and enjoyable week, and thank you again. Take care.

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