Bussiness

Greif details cost reduction strategy, value in business unit restructuring

Published

1 week ago

December 12, 2024

Admin

Greif details cost reduction strategy, value in business unit restructuring

Greif held its investor day Thursday, and the presentations heavily focused on explaining the company’s just-announced plan to cut $100 million in costs over the next three years and newly implemented business restructuring.

The underlying theme of the day, and main impetus for the business unit reorganization, was growth.

“We have just delivered the best financials in our 147-year history,” said CEO Ole Rosgaard. “We have a clear path to double down on growth. We have an optimized organization for growth.”

The company strives to achieve $1 billion of earnings before interest, taxes, depreciation and amortization by 2027 and 18% EBIDTA margins. Executives repeatedly mentioned the economy’s lingering “industrial recession” as a headwind. But they expect volumes and other conditions to improve soon, which will help Greif achieve its new financial targets.

Plant investments will not only go toward underperforming facilities in need of improvement, but also those that exhibit solid performance with room for additional capacity, executives said.

They described an ambition to further enhance the focus on customers. Greif is not always the cheapest option, Rosgaard acknowledged, but it provides value to customers via a commitment to technology and innovation as well as customer service.

Cost-cutting plan

Executives announced on Greif’s Dec. 5 earnings call a plan for $100 million in cost reductions by the end of fiscal year 2027, from a 2024 baseline, but they gave little other information — even when analysts asked for more detailed breakdowns. At the time, executives said the concept was brand new and more would be shared at the investor day event. CFO Larry Hilsheimer joked about that tactic at investor day.

“My customers weren’t too happy with me last week. I didn’t give them enough details. So we’ll give you more details today,” he said.

Responding to analysts’ request last week for a year-by-year cost reduction breakdown, Hilsheimer offered the following: A range of $15 million to $25 million would be delivered the first year; $50 million to $60 million, cumulatively, the second year; and $70 million to $90 million, cumulatively, the third year. The total should then be $100 million going into 2028, he said.

“We’re not fixing anything broken. But we have high ambitions, so we want to enhance our cost base,” Rosgaard said.

Business unit restructuring

Executives also shed additional light on the benefits they see in moving away from the dual-business segment structure — global industrial packaging and paper packaging and services. The company now has four reporting segments — customized polymers, durable metals, sustainable fiber and integrated solutions — and also will have a geographic focus on three regions: the United States; Europe, the Middle East and Africa; and the rest of the world.

“We’re not organized based on substrate. We’re organized based on the way the customer buys … across those solution groups,” said Chief Commercial Officer Tim Bergwall.

The product mix shift is intended to focus on higher margin end markets that are less cyclical. That’s the thinking behind the decision to focus on the polymers segment for greater investments, which executives announced on last week’s earnings call. Rosgaard also described the ambition to double the size of Greif, which requires a different operational strategy than in the past.

“We realized that if we wanted to double the size of the company, we could not continue acquiring companies and then stick them into these two [business units],” he said. “Had we continued to do that, we would go mile wide and an inch deep. We want to go a mile deep, instead.”

Besides polymers being less cyclical and more profitable, metals already is one of Greif’s largest business units, along with fiber. Therefore, the company has basically maxed out its growth prospects for products like steel drums, Rosgaard said. Going forward, investments in the metals business will not be for driving growth, but for plant modernization and automation — similar to the strategy for the fiber business.

Expanding on fiber investments, Chief Business Unit Officer Paddy Mullaney discussed how Greif’s bulk corrugated product manufacturing facility that opened in Dallas in June enhances the company’s presence in a high-margin business. Greif installed technologies there including a triple-wall corrugator and jumbo press lines. The containerboard capabilities at the Dallas facility are intended to capture share in e-commerce, automotive and agriculture sectors.

Executives also described the desire for the new business structure to allow a more integrated approach that allows coordination across the units. For instance, if customers traditionally purchase bottles and caps separately, there could be an opportunity to bundle the two.

“We used to be fairly siloed in the way that we went to market. We had a number of independent businesses and very little cross-selling … and even going to customers, you’d bump into several Greif reps,” Bergwall said. “But we’re certainly taking advantage of our scale now, making sure that we’re coordinated and have better coverage across our markets and our customer base.”

Caps and closures is one of the three subsectors that falls under the new integrated solutions unit. Recycled materials and paints, linings and adhesives are the other two.

An analyst noted that consumer closures is an interesting focal point for Greif, considering the company generally is viewed as a industrial packager. Rosgaard explained that few caps and closures producers are solely focused on industrial packaging, and most of them have at least some presence in consumer products.

“We will slowly move into that space,” he said. “But we’re not going to go in … 100% in water bottle caps and closures and that sort of thing. We will be very, very smart about it.