Prepared remarks
Good day, and thank you for standing by. Welcome to the Greif Third Quarter 2025 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill D'Onofrio. Please go ahead.
Good morning, everyone, and thank you for joining Greif's Fiscal Third Quarter 2025 Earnings Conference Call. Today, our CEO, Ole Rosgaard, will provide a strategy and market update, followed by our CFO, Larry Hilsheimer, with a review of our financial results. Please turn to Slide 2. In accordance with Regulation Fair Disclosure, please ask questions regarding topics you can consider important because we are prohibited from discussing material nonpublic information with you on an individual basis. 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. We will be referencing certain non-GAAP financial measures and a reconciliation to the most directly comparable GAAP metrics that can be found in the appendix of today's presentation. This quarter's results reflect our planned containerboard business divestment within discontinued operations. Unless otherwise noted, the financials and commentary presented today will relate to our continuing operations. I'll now hand the call over to Ole on Slide 3.
Thank you, Bill, and good morning, everyone. Thank you for joining us. At the outset, I want to recognize our 14,000 colleagues around the world. Their execution discipline, bias for action and commitment to our strategy make the difference. While all colleagues' contributions are meaningful, today, I want to briefly go off script to recognize one in particular, Gary Martz, Executive Vice President, General Counsel and Secretary to Greif will be retiring later this year. Gary is a cornerstone example of what makes Greif so special. Over distinguished 20-plus year career at Greif, he has impacted so many lives through his work. For myself, Gary has been a constant source of servant leadership, reason, coaching and strategic vision. And I know that both I personally and Greif colleagues globally are foundationally better because of his guidance. I'm sitting in the room with him right now, and I can see from his face that even now, he prefers to be recognized only as part of the greater Greif team.
But today, we need to recognize him as an individual, too. Gary, thank you for everything you have done for us and best wishes for your upcoming retirement. Dennis Hoffman, Greif's Deputy General Counsel, will assume Gary's role effective October 1. Dennis has worked closely with Gary for the last 15 years, and we have full confidence in his ability to carry on Gary's legacy of legal excellence. Thank you both for your commitment to Greif. Now back to the quarter. We're taking cost out and transforming the business. At times, that work can be uncomfortable. But our people know that is not how the company grows, moves from good to great and ultimately creates shareholder value. We continue to accelerate our portfolio transformation and cost optimization. The divestment of our containerboard business is planned to close at the end of the month and our planned timberland divestment set for October 1 for favorable tax planning purposes.
Cash proceeds net of tax for these transactions will be approximately $1.75 billion, which we anticipate will put our leverage ratio below 1.2x. These divestitures sharpen our portfolio to concentrate our efforts on markets where we have the greatest ability to grow and deliver margin expansion, capital efficiency and durable shareholder returns. Additionally, as of Q3, we have achieved $20 million in run rate savings towards our $15 million to $25 million fiscal 2025 commitments, about $15 million of which is SG&A and the remainder through network optimization, such as the Merced, California closure, which was announced earlier in August. Another key component of our cost optimization is operating efficiency gain. To that end, we want to highlight a smaller but equally meaningful change occurring in one of our shop floors. Recently, our colleagues in the Welcome, North Carolina tube and core plant improved progress efficiency related to changeovers, which improved line efficiency by over 40%.
At Investor Day, we spoke about the aggregation of marginal gains. This is a great example. The stand-alone impact of this project is not material to Greif as a whole, but when all facilities take the same mindset and drive from good to great, it will really move the needle. It is regular wins like this that increase our conviction in outpacing our stated $100 million cost reduction commitment. Please turn to Slide 4. Our Q3 results once again show that the markets we've chosen to invest in are the most resilient even in a mixed macro environment. Customized polymer volumes were up 2.2%, led by low double-digit growth in small containers, offset by mid-single-digit declines in intermediate bulk containers (IBCs) and large drums. Our focused end markets, Agrochemicals, Pharma, Flavor & Fragrance and Food & Beverage continued to outperform, underscoring the power of our portfolio shift. Durable metals volumes declined 5.8%, reflecting low double-digit softness in North America and low single-digit declines in EMEA.
Housing and petrochemicals have been sluggish all year, and bulk chemical markets trended downwards in Q3, which also drove softness in EMEA. Our strategy in this business remains value over volume and cash generation, which is evident in our improved year-over-year gross profit margins. Sustainable fiber volumes declined 7.6%. URB Mills operated at above 90% capacity. However, converting was mixed with tube and core down low single digits and fiber drums down high single digits due to sluggish North American industrial end markets. Integrated Solutions volumes grew 2.6%, led by strong volumes in recycled fiber. So from a big picture point of view, our volume performance clearly shows our strategy is working. But for the time being, customer sentiment remains cautious and the macro economy as a whole is not robust. We will consider that operating environment as we look to full year 2026 guidance next quarter.
Thank you, Ole. Hello, everyone. As a reminder, the Q3 financials are presented excluding the containerboard divestment, except for free cash flow, which compares total operations to prior year total operations. Adjusted EBITDA dollars increased $4 million, while EBITDA margins increased 70 basis points, driven by improved price/cost in our Fiber, Polymers and Integrated segments, which more than offset volume softness across the portfolio. Free cash flow rose by almost 400% to $171 million in the quarter. This result once again demonstrates the resilience of our business model regardless of macroeconomic conditions. Please turn to Slide 6. In Polymers, sales improved on volume, price and mix with growth concentrated in our target end markets. Gross profit dollars increased by over $10 million and gross margins increased 150 basis points as we continue to drive structural cost improvement through Greif Business System 2.0.
Metals saw lower sales from both price and volume as industrial demand softness persisted in North America and increased in EMEA. Gross profit dollars were about flat, but gross margin was up due to value over volume discipline and Greif Business System 2.0 gains. Fiber sales were down due to the converting demand softness Ole spoke of. However, gross profit dollars were up $8 million and gross margins were up 360 basis points due to better RISI published price/cost dynamics. Integrated Solutions, excluding the prior year impact of the Delta divestment was about flat on both sales and gross profit with gross margin down 160 basis points due to product mix. Please turn to Slide 7 to discuss guidance. Our revised 11-month guidance midpoint of $730 million of EBITDA is raised $5 million from the previous low end to current midpoint and revised free cash flow midpoint of $310 million is raised $30 million from our previous low end to current midpoint.
The increase in EBITDA is due primarily to better SG&A from cost optimization gains, while our price cost and volume assumptions are largely unchanged. The increase in free cash flow is primarily from the EBITDA increase plus lower expected CapEx spend, which is timing related to ongoing maintenance and growth projects. As the containerboard divestment is not finalized, we have not adjusted full year guidance for the impact of the divestment. Our combined adjusted EBITDA guidance includes contribution of $122 million in sales and $25 million of EBITDA in each August and September related to containerboard, which is driven by the prime season for our profitable triple wall business. This is in addition to the Q3 year-to-date contribution of $872 million of sales and $168 million of EBITDA from containerboard. I'll now turn it back to Ole for closing on Slide 8.
Thanks, Larry. We are executing our Build to Last strategy with discipline and conviction, reshaping the portfolio, optimizing our cost structure and leaning into markets where our competitive advantages are strongest. We're doing this at a time when demand recovery is still ahead of us, which means that as volumes return, the operating leverage in our business will be significant. This only strengthens our confidence in achieving our 2027 commitments and in our ability to consistently deliver lasting value for our customers, our colleagues and importantly, our shareholders. Operator, will you please open the lines for questions?
Questions and answers
Our first question will be from George Staphos of Bank of America Securities, Inc.
Congratulations to Gary and Dennis as well. Nice touch, Ole. From my vantage point, I had a few questions. Number one, can you tell us how much of the guidance raise for the year was related to containerboard? I know you said it was really SG&A, but was there any notable change there relative to containerboard? Second question, can you tell us about price cost trends as we're entering the fiscal fourth quarter and really kind of the horizon into '26. To the extent you can comment relative to metal. And then lastly, I know you were happy with the growth in your targeted areas in polymers, but I was a little bit surprised to see some weakness in IBC. And so can you tell us how trends, maybe it's in EMEA, are starting to affect the polymers business?
George, I'll let Ole address the polymer stuff. But first on your guidance question, no containerboard impact in raising that played through as we expected. Generally, the guidance raise and realized that was off of our low end. And so some of the detriment we've seen in what's going on in metals worldwide actually probably brought us down from what we would hope for. The raise is primarily related to SG&A cost reductions taken relative to our optimization plan. On the metals pricing going into the year, steel costs have been relatively flat at this point. We don't really see any inflections going on. So we don't expect anything with significant index changes going into the calendar quarter or now new first quarter, we don't anticipate anything significant, George. And I'll turn it over to Ole on the polymer question.
Yes. On the polymer, the growth markets, George, the ones I mentioned earlier, Food & Beverage, Agrochemical in particular, where we are the global leader. We expect those demand trends that we've seen simply to continue. And just to comment on metal as well. The metal index has been largely stable through Q3, and we don't see any impact expected going forward from that as well.
Yes. I'll supplement one thing, George, and I made this in my comments, we had anticipated containerboard being good in this last part of the year because this is the time of year when people are harvesting watermelons and pumpkins and buying their triple wall boxes for those things going into the grocery stores and stuff. So these months are always our most profitable in that part of the business.
Okay. Just a point of clarification, if I could, and I'll turn it over. One, do you have a sense of what the current normalized EBITDA would be for containerboard? I mean we can add up what you've reported with what is coming on...
I look at the trailing twelve months through July, which was $218 million. It was $211 million when we finalized the deal and is now $25 million per month, but that's a notable figure. Historically, our first quarter has always been the weakest, and I expect that trend will continue for BCA in our discussions.
Okay. And EMEA has not had an effect on the Polymers business so far in Industrial? You didn't really talk about IBCs.
No, the main segments are experiencing a decline. If you look at the large chemical companies and their recent earnings, you'll see that reflects the current market situation in both EMEA and North America, with North America being the weakest.
Yes. And IBCs, like we said, were down, offset by double-digit growth in the small polymer product.
And our next question will be coming from Michael Roxland of Truist.
This is Nico Piccini on for Michael Roxland. I guess just first off, congrats on the strong cash flow performance thus far this year. Just curious on how you think the business should perform from a cash generation perspective following the divestitures and how do you weigh capital allocation opportunities at your forecasted lower leverage ratio?
Yes, all of our businesses generally maintain consistent cash flow generation, so we don't anticipate any significant changes. Our goal remains a 50% free cash flow generation relative to our performance, and we are currently above 40%. Any businesses we acquire will need to meet that 50% plus free cash flow conversion unless there are compelling reasons otherwise, like acquiring a capital-intensive business with a 30% margin that generates 40% cash flow, which we would find acceptable. We expect our cash flow generation to be strong, especially since we're in a good position with capital available due to recent debt paydowns. However, our primary limitation on deploying capital has typically been the availability of human resources to execute projects. In this quarter, we saw a decrease in our capital expenditures, partly due to adjustments we made to our initial guidance for the containerboard business, as we removed projects that were no longer viable for the new buyer.
We took a strategic step back to assess and prioritize our portfolio of projects, which, combined with some delays in equipment deliveries, affected our CapEx. We expect the proceeds from the two transactions to save us about $120 million in interest costs next year if we do not pursue any acquisitions. Some of these savings are related to the timing of tax payments; for instance, we initiated the Soterra deal on October 1 for tax benefits, permanently saving us $13 million and an additional $4 million due to payment timing. There are also future tax savings linked to this. Altogether, this puts us in a strong position to allocate capital toward high-return organic CapEx projects and we are actively exploring these opportunities alongside our acquisition plans.
And Nico, let me just lay out the allocation priorities we have. Obviously, the first one is dividends, safety and maintenance of our equipment. And after that is debt paydown, but obviously, we're in a very good place now with our leverage. And then the significant last one is organic growth. And as Larry mentioned, we have a solid pipeline of opportunities for organic growth that we're working on.
Got it. That was very helpful. Just following up maybe on the EBITDA guidance discussion. Can you just help me frame how that top end is hit and if that's just better performance on the SG&A and cost out? Or is that maybe a volume return?
No, that’s pretty much settled. The range really just depends on the volume for the month. It’s a very narrow range, obviously. This gives us a range for when volume increases or decreases. That’s the main factor, with only minor other considerations.
And our next question will be coming from Ghansham Panjabi of Baird.
Going back to the question on capital allocation, Ole, as you consider your balance sheet and the decisions you've made regarding portfolio adjustments recently, is increasing your exposure to more defensive end markets a strategic priority for you when considering acquisitions? How should we view your approach to different verticals in the portfolio? Please share your strategic thoughts on this matter.
I mean, as we laid out on Investor Day, we started off with the end markets. That's where we start looking. How big are the end markets and which end markets are growing faster than GDP in general. And those are the ones I mentioned, the Food & Beverage, Agrochemical, the Pharma and so on. And then after that, we then look at what products are sold into those end markets that are part of our core business. And that is our polymer-based containers and caps and closures. And that's really where our focus is. Of course, we have a legacy business in Durable Metals and so on. And that's also core business, and we maintain that. But generally, that, as you know, is our cash cow and all the cash and the earnings we generate there, we invest in these growth markets.
Okay. And then as it relates to guidance, just given there's so much going on with your divestitures and also you're changing the number at your fiscal year, etc., is it as simple as $730 million at the midpoint of guidance for EBITDA for 2025 for 11 months and then you would strip out the containerboard impact, which is $168 million and then adjust obviously for 12 months. Is that how we should think about a baseline for the starting point for next year?
Yes. I think generally, I mean, obviously, we've got our cost optimization, and we should realize $25 million or so in '26. And then we already said we'd have a run rate of $50 million to $60 million coming out of next year. So that's the other element that would go into it, Ghansham.
Okay. Perfect. And then just finally, as it relates to the operating environment, again, a lot of event-driven uncertainty with tariffs, etc. Is there any change that you see plus or minus as it relates to perhaps your view when you last reported as it relates to the operating environment as you dug through the various regions you're exposed to?
If you're asking about tariffs, the impact we see from them is still less than $10 million, which is not significant for us. Operating in 40 countries, we source, manufacture, and sell locally, so tariffs don't really affect us.
And in terms of the demand environment for your customers as it relates to tariffs, any change there, good or bad?
That's a little bit harder. We haven't really seen any changes yet. However, it's clear that some of our large chemical customers are not doing well, and we are monitoring that closely. If you look at the regions, North America and EMEA have remained soft, and we haven't seen any significant changes. The biggest shift has been in polymers, particularly with the strategy we've chosen. We see that as the area of growth, which clearly shows that our strategy is the right one.
Our next question will be coming from Gabe Hajde of Wells Fargo.
I want to revisit the kind of starting point for '26, and I recognize you're not giving '26 guidance. But I thought the $730 million number, it technically includes another, I guess, $50 million from August and September in there. So really, we're kind of talking about, like you said, a $218 million number or $220 million. So $730 million less $220 million is a starting point, and then we got to annualize it, so 11 months to 12. Is that correct?
Yes, that’s correct. I missed that part of Ghansham's question. You're right about that, Gabe.
Okay. Well, there's a lot of moving parts. So we're just trying to keep our bearings over here. The other one, a little late in the call, I think you guys had bought out, I saw in the cash flow statement, a minority or a noncontrolling interest to the tune of $40 million. What was that?
That was on our North American IBC recycling business that we had purchased 3 years ago. Is that right?
That was on our North American IBC recycling business that we had purchased 3 years ago. Is that right?
So we bought out the remainder of it.
Yes, we owned 80%, and we bought out the remaining 20%.
Perfect. And last one for me. It seemed like at the Investor Day, the pipeline was pretty full on M&A. And I appreciate that these things can move around and you don't necessarily dictate when people are ready to sell. But can you talk about maybe just broadly the market for M&A and things that you're working on?
I would say the same as last time; we have a very solid pipeline. We have smaller acquisitions and larger ones, and we continue to maintain close communication with the owners of all these businesses. We don’t determine the timing of events, and we’re not sure when things will happen, but it’s crucial for us to stay informed. The companies we engage with fit our strategy. To remind you, within Polymers, we are interested in businesses that generate at least an 18% EBITDA margin and have a 50% free cash flow conversion. They operate in four growth segments that I mentioned earlier, and when opportunities arise, we are prepared to act. Currently, we are very satisfied with our position and the leverage we have created.
Our next question will be coming from Matt Roberts of Raymond James.
You spent some time already talking about capital allocation, but maybe I'll try again. So given your leverage, so at the land, you'd be at 1.2x. I mean that's well below the long-term 2 to 2.5x range. So what is an upper leverage range you would be comfortable with following any potential deal? And as you look at those target markets, whether that's pharma or other ones, how do asking multiples compare to prior deals you've done? And given where volumes are currently and the commitment to $1 billion in EBITDA in '27, does that 1.2x leverage figure allow for a greater immediacy or appetite for a more transformative deal?
Yes. Ole has already discussed the target markets we are focused on within our M&A pipeline. Currently, we are not aware of any transformational deals available in the market. We don’t see any deals around the $3 billion mark at this time. Regarding our leverage ratio, we aim for a target of 2 to 2.5 times. However, as we've demonstrated previously, if we identify the right strategic fit in companies that generate the free cash flow we seek, it enables us to reduce debt quickly. Our debt ratio has improved from 3.6 to 3.1 over the last three quarters, reflecting that we address our leverage ratio effectively. We could pursue a $1 billion deal now while remaining within our target ratio range. Even a $2 billion or $3 billion deal could be manageable if the businesses align with our criteria, which we are committed to following. Ultimately, our decisions will depend on the quality of opportunities that come to market. We have been engaged in potential deals previously, but we backed out when we realized they didn’t meet our expectations. We will continue to search for the right opportunities that fit our vision.
Very good Larry. I appreciate the color there. Great analogy. Switching gears, if you could stay on the same analogy, that would be great. But fiber, you've seen a lot of moving pieces there, containerboard coming out, land out, drums are now in this segment since you've resegmented. So with the $218 million coming out in containerboard in 11 months, I mean, how should we think about what's remaining in that fiber business in '26 in terms of margin or driving cost out of that business, recognizing there's still some price to flow through? Just any color you could give there on that fiber for 2026.
I'll make a comment and then Ole can add on. I mean, one of the key tenets of our strategy that we've talked about before, but we haven't talked about today is we want to be #1 or #2 in a market. And we are #1 in fiber drums in the U.S., and we're #2 in our URB business. So we like those positions because it means you're a market leader on what's going on and not the back end of the tail of the dog like maybe we were in containerboard. So we like the dynamics of the business right now, the demand on the fiber drum part is weak because of industrial. But anyway, that's a high-level thing on...
Yes. I can't come up with an analogy like Larry. But if you look at our URB business, we are clearly one of the leaders in that business, and we like that business. And that's primarily tube and core, but then we have our fiber drums as well. So our URB capacity right now is around 630 tonnes. We have some CRB capacity, 65 tonnes, but that's a swing mill that we can swing to URB. So our focus is really on URB where we are well integrated into our converting assets.
Okay. That's all very helpful. And maybe if I could squeeze just one more in here. On Integrated Solutions, that margin came in lower in 3Q, volumes are still up. So what drove the variance in margin quarter-over-quarter within that segment? And what is expected on a go-forward basis to get that back above 20%? And in that Integrated Solutions, I mean you discussed potential investments in closures as well. How do you think about maybe longer-term external sales impacting the longer-term growth rate in that Integrated Solutions business, if material at all?
OCC was the main factor causing the margin squeeze, even though there has been a slight improvement in the paper industry. Our recycled fiber business is seeing higher sales, but we are all aware of the current costs associated with OCC pricing. The key benefit of that business lies in maintaining a secure supply chain for OCC, which was a significant challenge for many in the past. It is crucial to ensure a stable supply to support our core operations. Regarding margins, we have a strong confidence in our caps and closures segment as it represents one of our highest margin businesses. Any targets we are pursuing in caps and closures will greatly surpass the levels we have outlined in our M&A strategy.
And I would now like to turn the conference back to Ole Rosgaard for closing remarks.
Thank you, operator, and thank you again for all your thoughtful questions today. I want to leave you with this. Greif today is a fundamentally stronger, more focused and more resilient company than ever before. We are simplifying our portfolio. We're strengthening our balance sheet and unlocking significant efficiencies that will create durable shareholder returns. We are not waiting for the macroeconomic environment to improve. We are creating our own path forward with execution discipline, a bias for action and a clear Build to Last strategy. As demand recovers, our sharpened portfolio and operating leverage will amplify results. We have line of sight to our 2027 commitments, and I'm confident that the actions we are taking now will position Greif to deliver outsized value for years to come. To put it simply, Greif is a company you can invest in with confidence. Thank you.
And this concludes today's conference call. Thank you for participating. You may now disconnect.