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Text: This is Matt Eichmann.
I'm joined by Ole Rosgaard, Greif's president and chief executive officer; Larry Hilsheimer, Greif's chief financial officer; and Matt Lady, Greif's vice president of corporate development and investor relations.
We will take questions at the end of today's call.
In accordance with regulation fair disclosure, please ask questions regarding issues you consider important because we're prohibited from discussing material, nonpublic information with you on an individual basis.
Actual results could differ materially from those discussed.
Today is my first quarterly earnings call as Greif's president and chief executive officer.
And I'm excited to be with you.
My plan today is: to review the state of our business; to briefly share our new Build to Last strategy and its key components; to introduce Greif's new executive leadership team; and finally, to engage meaningfully in a Q&A session.
Our fiscal 2022 is off to an outstanding start.
We delivered record financial results in the first quarter despite a challenging operating environment, complicated by the pandemic, supply chain disruptions, and inflationary pressures beyond our control.
We also announced the pending divestiture of our 50% ownership in the flexible products and service business for outstanding value, solidified our net leverage position, and increased our profit expectations for fiscal 2022.
These accomplishments results from disciplined operational execution and the commitment of our global Greif team.
I would like to briefly share our new Build to Last strategy review.
I will summarize the strategy's high points today as we will dive much deeper into it at our investor day on June 23 and review our continued growth plans.
The Build To Last strategy consists of four missions: creating thriving communities, delivering legendary customer service, protecting our future, and ensuring financial stream.
Mission 1, creating thriving communities.
It's about achieving zero-harm environments and creating an even more engaged, diverse, and inclusive workplace in the future.
Thriving communities will help us win in the war for talent.
Our second mission, delivering legendary customer service involves finding ways to serve customers better each day.
This mission includes implementing new technologies that will increase our agility and help us deliver faster and more comprehensive customer solutions.
Legendary customer service, combined with Greif's unmatched global portfolio and product offerings, forms a powerful business competitive advantage.
Mission 3, protecting our future.
It's about embracing a low-carbon world and further enhancing our focus on product circularity.
Greif is already a sustainability leader today, evidenced by our recently awarded fourth consecutive EcoVadis Gold rating.
But we will take additional steps to mitigate risks associated with climate changes and capture opportunities related to product circularity and sustainable solutions for our customers.
Finally, our fourth mission.
Ensuring financial strength entails generating high-margin EBITDA growth to deliver a growing sustainable profit and cash flow stream that enhances shareholder value creation.
The Build to Last strategy is founded upon our bedrock, the Greif Way, which has guided our business for many years and remains the focal point of our culture.
I look forward to sharing more about Build To Last with you at our investor day.
I'm fortunate to be surrounded by an exceptional team charged with helping to activate the Build To Last brand.
These extraordinary service leaders possess extensive industry knowledge and a demonstrated commitment to disciplined operational execution and customer service excellence.
Their rich and diverse set of skills and experiences along with proven records of performance will drive even greater success at Greif in the future.
I hope you will join us at investor day in June to interact with them.
Finally, before jumping into our results, I would like to announce some changes to our investor relations team.
Matt Eichmann, who you know well, has been promoted to chief marketing and sustainability officer effective March 1.
Matt has done an outstanding job representing Greif to the investment community the last six years, and I'm excited to have him take on this exciting leadership opportunity.
Matt Lady, who currently leads our corporate development team, has added the role of Investor Relations to these responsibilities.
Matt Lady has extensive buy-side experiences and has been instrumental in executing Greif's acquisition strategy and portfolio changes since joining our team almost four years ago.
I'm confident that Matt Lady will be a strong leader in the Investor Relations role and will build upon Matt Eichmann's efforts to improve investor communications, share insights on our business and financial condition, and ensure that leaders across Greif understand what our investors and owners expect of us.
Global Industrial Packaging delivered an outstanding first quarter results.
Global large plastic drums and IBC volumes grew by roughly 8% and 11% per day, respectively, versus the prior-year quarter.
Global steel drum volume fell by 4% per day versus the prior year due to customer supply chain and labor issues despite strong underlying demand.
Similar to quarter 4, the biggest volume shortfall was in APAC, reflective of our decision to implement strategic pricing actions and supply chain disruptions that negatively impacted our customers' operations.
Generally speaking, our end markets remain healthy.
Customers report solid order backlogs and strong underlying demand, but continue to face external supply chain disruptions and labor challenges.
We also hear that our customers' customers have depleted inventory levels, which should eventually translate to a tailwind for Greif.
GIP's generally stronger volumes and higher average selling prices resulted in significantly higher segment sales year-over-year.
The business' first quarter adjusted EBITDA rose by roughly $35 million due to higher sales, partially offset by higher raw material costs.
During the quarter, we continued to experience favorable price cost conditions.
Given timing, inventory costs and the structure of our price adjustment mechanisms, we anticipate GIP's price/cost benefit to deteriorate as we move later into the fiscal year.
Finally, we received several questions about our Ukrainian and Russian businesses that I want to address directly.
This is an evolving situation that we continue to monitor and assess continuously with a dedicated task force.
We are appalled by the ruthless aggression we have witnessed in the Ukraine over the last several days.
We operate one flexibles plant in the country that has been temporarily closed.
Our primary focus has been and will continue to be the safety and well-being of our Ukrainian colleagues and assisting them and their families any way we can.
In Russia, we operate nine facilities.
The business predominantly source raw materials locally and service local customers.
It possesses a very minimal cross-border exposure and contributes less than 3% to total company operating profit annually.
We do hedge roughly half of our ruble exposure.
In times of crisis, we lean on our values and use the Greif way to guide our direction, while extremely upset and aghast by the aggressive actions taken by the Russian government.
As with our Ukrainian colleagues, our focus is on all Greif people.
We remain in full support of our Russian colleagues and continue to operate in Russia with also their well-being as our priority.
In January, we announced an agreement to divest our 50% ownership in FPS.
Although we have worked closely with our joint venture partner in the last 12 years, we evolve to have differing views on the future of this business.
The sale of our 50% stake in flexibles will generate net cash proceeds of approximately $123 million, subject to customary closing conditions.
We anticipate the deal closes by the end of March 2022, and have incorporated the divestitures impacts into our financial fiscal '22 guidance.
Until we refine this further, you can assume FPS ballpark annual adjusted EBITDA contribution to be roughly $35 million.
For context, seven years ago when FPS was struggling, we tried to market considering that this position with virtually no interest.
Now we're selling our half of FPS for substantially more than the best offer at that time for the entire business.
The team has driven considerable improvements in the business and demonstrated professionalism throughout.
Paper packaging's first quarter sales rose by roughly $129 million versus the prior year due to stronger volumes and higher published containerboard and boxboard prices.
Adjusted EBITDA rose by roughly $24 million versus the prior year due to higher sales, partially offset by higher raw material, transportation, and utility costs, including a significant $42 million drag from significantly higher OCC costs.
Similar to the fourth quarter, volume demand across the business remains strong.
At quarter end, our combined build backlogs still exceeded eight weeks.
First quarter volumes in our CorrChoice [Inaudible] system were up roughly 0.5% per day versus the prior year.
E-commerce, automotive parts, food, and durables demands all remained very solid.
First quarter [Inaudible] core volumes were up by 4.6% per day versus the prior year, with demand strong across almost all end markets.
I will now turn you over to our CFO, Larry Hilsheimer, on Slide 9.
By my count, this is the 13th consecutive quarter that we have met or exceeded consensus expectations.
First quarter adjusted EBITDA rose by $58 million year-over-year despite an OCC index headwind of $42 million and roughly $33 million of nonvolume-related transportation and manufacturing labor inflation.
Absolute SG&A dollars rose $17 million versus the prior-year quarter, mainly due to higher health, medical, and incentives costs, but fell 200 basis points on a percentage of sales basis.
Below the line, interest expense fell by $8 million versus the prior-year quarter, due primarily to refinancing our 2021 euro notes with a low rate bank debt.
We expect interest expense to fall further as we utilize proceeds from the flexes divestment on debt repayment and also benefit from having refinanced on Tuesday, our 6.5% 2027 senior notes with additional bank debt, utilizing a mix of floating and fixed rates below 3.5%.
Our first quarter non-GAAP tax rate was roughly 31% and significantly higher year-over-year due to increased pre-tax income, with a higher proportion of that income in the U.S., and less positive discrete items than the prior year.
Even with significantly higher tax expense, our first quarter adjusted Class A earnings per share was still more than double to $1.28 per share.
Finally, first quarter adjusted free cash flow was $19 million cash outflow and lower year-over-year, primarily due to higher capex-related maintenance and organic growth investments in IBCs, plastics, and specialty corrugated products.
Our core capital priorities remain unchanged: reinvest in the business to create value and support growth; return excess cash to shareholders via an attractive and growing dividend; and maintain a compliance leverage ratio between 2 times to 2.5 times.
As promised, we're back comfortably within our targeted leverage ratio range and anticipate further downward bias in the near future.
Balance sheet strength provides us with financial flexibility to pursue value-accretive opportunities.
And we are currently finalizing our strategic planning process to determine the focus of growth activities going forward.
We will share more with you at investor day in June.
We are increasing our fiscal 2022 guidance despite eliminating flexibles income for the period of April 1 to October 31, which was present in the guidance we issued at Q4.
We have overcome that headwind and increased the midpoint of our adjusted earnings per share guidance by $0.45 to $6.60 per share for fiscal '22, reflective of solid first quarter performance, announced paper price increases, and lower interest expense.
We have deliberately kept a wider range than normal given uncertainty introduced by the unfortunate events in Europe.
We now anticipate generating between $380 million and $440 million of adjusted free cash flow in fiscal '22.
While our profit expectations have increased since Q4, that improvement isn't fully reflected in free cash flow, primarily due to higher anticipated cash taxes and increased working capital, largely due to announced price increases.
Finally, you will find a slide with key modeling assumptions in the appendix of today's deck for use as needed.
It is important to take a step back from time to time and look at the bigger picture when considering investment opportunities.
At Greif, we don't run our enterprise with a quarter in mind.
Instead, our value creation model is focused on performance over the long term.
As I've just shown on the prior slide, we have a track record of delivering on our guidance expectations.
The execution discipline we've demonstrated to grow profits over the long haul, no matter the circumstance, has fueled sustained outperformance you will see here relative to a broader bucket of industrial companies.
Despite sustained outperformance, we continue to trade at a substantial discount relative to other packaging firms, which mystifies us.
Clearly, I understand that it is investors who determine our value.
However, our opinion is that our equity deserves a much closer look given the substantial discount present in our stock today.
I am very proud of our team's first quarter performance.
As Greif's legendary customer service comes together, with execution discipline and unmatched product portfolio, a proven and disciplined capital allocation strategy, and sustainability leadership to form a value-creation engine that benefits our shareholders and other stakeholders alike.
Looking ahead, we are well-positioned to benefit from ongoing strength and improving trends in our key end markets, and our future is bright.

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q1 earnings per share $1.28 excluding items.

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