Greif, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2023. Greif manufactures industrial packaging, paper packaging and related products, and manages timberland. Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial results
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $1,308.9 | $1,667.3 | $2,579.9 | $3,231.6 |
| Gross profit | $311.8 | $338.7 | $563.4 | $628.4 |
| Gross margin | 23.8% | 20.3% | 21.8% | 19.4% |
| Operating profit | $181.1 | $190.1 | $337.5 | $262.1 |
| Net income | $116.0 | $126.7 | $209.1 | $145.3 |
| Net income attributable to Greif | $111.2 | $125.1 | $201.1 | $135.4 |
| Adjusted EBITDA | $228.6 | $251.0 | $393.1 | $447.8 |
| Diluted EPS, Class A / Class B | $1.90 / $2.88 | $2.09 / $3.15 | $3.44 / $5.19 | $2.27 / $3.40 |
- Q2 sales fell 21.5% year over year, primarily from lower Global Industrial Packaging prices and volumes, weaker Paper Packaging & Services volumes, and the prior-year-period contribution of the divested Flexible Products & Services business. Gross profit declined, but lower raw material, transportation and manufacturing costs helped lift gross margin.
- Q2 operating profit and net income declined despite improved gross margin. Adjusted EBITDA was down 8.9% year over year.
- For the first six months, sales fell 20.2%; operating profit and net income increased, while Adjusted EBITDA declined 12.2%. Comparisons were affected by prior-year impairment and debt-refinancing charges and current-period divestiture and acquisition-related gains.
- Q2 SG&A decreased to $137.2 from $147.4, mainly due to lower incentive compensation. SG&A as a share of sales increased to 10.5% from 8.8% as sales fell.
Segment performance
- Global Industrial Packaging: Q2 sales were $748.2, down from $971.7; operating profit rose to $111.3 from $108.0, including a $9.8 gain on the previously held Centurion interest. Adjusted EBITDA fell to $121.2 from $130.9. Lower selling prices and volumes weighed on results; cost reductions partly offset the impact.
- Paper Packaging & Services: Q2 sales declined to $554.8 from $689.3, principally on lower volumes. Operating profit fell to $67.6 from $80.1, and Adjusted EBITDA to $104.9 from $117.4. For the six months, operating profit benefited from a $54.6 gain on the Tama Paperboard divestiture.
- Land Management: Q2 sales were $5.9 versus $6.3 and operating profit was $2.2 versus $2.0.
Cash flow, debt and liquidity
- Six-month cash from operations was $243.7, up from $161.6. Investing used $451.0, including $447.5 for business acquisitions, partly offset by $105.6 in business-sale proceeds. Financing provided $215.6. Cash increased by $11.4 to $158.5.
- Capital expenditures were $91.1 for the six months. Greif paid $57.9 in shareholder dividends and repurchased $59.6 of shares during the period.
- At April 30, 2023, reported long-term debt, net of current maturities and financing costs, was $2,206.1; total debt before those deductions was $2,294.2. Cash was $158.5. Total debt increased from $1,918.7 at October 31, 2022, in part reflecting acquisition financing.
- Revolving credit availability was $393.5 under the $800.0 facility. The company reported compliance with its credit agreement covenants. Management said operating cash flow and available credit sources should be sufficient for anticipated needs for at least 12 months.
- Current assets were $1,481.7 and current liabilities $937.4 at April 30. The company also had $353.2 outstanding under accounts-receivable credit facilities, including $258.3 under the U.S. facility and $95.0 under the European facility.
Material changes, outlook and risks
- Greif acquired Lee Container in December 2022 and increased its Centurion ownership to 80% on March 31, 2023. The acquisitions expanded the Global Industrial Packaging business; purchase-price allocations remained preliminary. Six-month acquisition cash spending was primarily for these transactions.
- The Tama Paperboard divestiture generated $100.2 in net cash proceeds and a $54.6 gain. The Centurion step acquisition generated a $9.8 remeasurement gain. These items, as well as the $62.4 prior-year impairment tied to the FPS divestiture and prior-year debt-extinguishment charges, affect period comparisons.
- Management expected lower customer demand patterns experienced in the first half to continue through the second half, subject to normal seasonal increases. It expected steel prices to increase slightly, resin prices to remain stable, old corrugated container prices to increase slightly, and transportation, labor and utility costs to remain relatively stable. The filing provides no quantified earnings or revenue guidance.
- Interest expense increased to $23.4 in Q2 from $13.2, and the reported actual rate on 2022 Credit Agreement borrowings was 6.19% at April 30. Interest-rate exposure is partly hedged through swaps. Subsequent to quarter-end, Greif entered a $300.0 term loan to refinance part of existing borrowings and extended the U.S. receivables facility maturity to May 17, 2024.
- Disclosed risks include economic and demand weakness, pricing pressure, raw-material and energy volatility, supply-chain disruption, foreign-exchange movements, acquisition integration, customer and supplier consolidation, leverage and interest costs, pension funding, environmental and legal exposures, cybersecurity, and climate-related regulation. Environmental reserves were $19.8; management said adverse developments could require additional charges. The company reported no material change in risk factors from its 2022 Form 10-K.
Important facts for investors to verify
- How much of the sales decline reflects lower demand and pricing versus the FPS divestiture, currency effects and other portfolio changes.
- Whether lower demand persists in the second half and how expected input-cost changes affect segment margins and cash generation.
- Debt levels, borrowing rates, covenant headroom and refinancing effects following the May 2023 term loan and receivables-facility extension.
- The final purchase-price allocations and realized performance of Lee Container and Centurion, including integration costs and expected benefits.
- The quality and repeatability of earnings: current-period divestiture and remeasurement gains, prior-year impairment and debt charges, and non-GAAP Adjusted EBITDA adjustments.
- Potential changes in environmental, tax, pension and other contingencies, and the performance of the acquired businesses excluded from the current-year internal-control assessment.