Greif Inc (NYSE: GEF) Q2 2022 earnings call dated Jun. 09, 2022
Corporate Participants:
Matt Leahy — Vice President of Corporate Development and Investor Relations
Ole Rosgaard — President and Chief Executive Officer
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Analysts:
Ghansham Panjabi — Baird — Analyst
George Staphos — Bank of America — Analyst
Adam Josephson — Keybanc — Analyst
Gabe Hajde — Wells Fargo — Analyst
Justin Bergner — Gabelli Funds — Analyst
Presentation:
Operator
Good morning, my name is Rob and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Greif Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Matt Leahy, Vice President of Corporate Development and Investor Relations, you may begin your conference.
Matt Leahy — Vice President of Corporate Development and Investor Relations
Thanks and good morning everyone. Welcome to Greif’s second 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. In accordance with Regulation Fair Disclosure, please ask questions regarding issues you consider important because we are prohibited from discussing material non-public 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 2. 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 that can be found in the appendix of today’s presentation.
And now I will turn the presentation over to Ole on Slide 3.
Ole Rosgaard — President and Chief Executive Officer
Thanks Matt and good morning everyone. Our teams continue to execute with excellence, resulting in an outstanding second quarter results. We delivered these financial results despite sustained external challenges related to inflationary pressures, supply chain disruptions and the pandemic. We delivered record second quarter adjusted EBITDA of $251 million and adjusted EPS of $2.41 which further strengthened our balance sheet, so that we are now near the low end of our target leverage ratio.
These accomplishments results from the continued disciplined execution of the global Greif team and the commitment to advancing our built-to-last strategy. I encourage you to attend our Investor Day, which is just 2 weeks away on June 21st where we will discuss built-to-last and growth opportunities in greater detail. Information about this event can be found in the earnings release we published yesterday and within today’s presentation materials.
Please turn to Slide 4 to begin discussion of our detailed results. Global Industrial Packaging delivered an outstanding second quarter results with sales up over 21% year-over-year versus a strong comp in fiscal Q2 ’21. We continue to see solid demand in our global resin based portfolio with Plastic Drums and IBC per day volumes up low to mid single digits versus prior year. Global steel drum volume fell by slightly more than 1% per day versus the prior year due to COVID-related lockdowns in China as well as some customer supply chain constraints in EMEA. Generally speaking, our end markets, demand remained healthy through the quarter despite many of our GIP customers facing challenges with their raw material availability and supply chain and labor disruptions which did impact order patterns.
Our continued focus on value over volume helped lift GIP margin slightly year-over-year despite cost pressures in raw materials, labor, transportation and energy. We benefited from both our contractual pass-through mechanisms and incremental non raw material pricing actions in the quarter that we expect will continue to support the business going forward. Our teams are committed to delivering quality products and legendary service to our customers, which provides us with the ability to effectively manage inflation. I commend our global GIP team for their relentless execution and discipline during these challenging times.
And I’ll ask you to turn to Page 5 slide — Page 5 please. Paper Packaging second quarter sales rose by $152 million versus the prior year due to higher average selling prices and continued strong volumes in all paperboard grades. Adjusted EBITDA rose by $49 million versus the prior year due to higher sales, partially offset by higher raw material, transportation and energy costs, including a significant $26 million drag from higher OCC costs. Similar to the first quarter, demand across all paperboard products remains robust. At quarter end, our combined mill backlogs exceeded 8 weeks. Second quarter volumes in our core choice sheet feeder system were up low single digits per day versus the prior year as box demand in our key end markets remain solid through the quarter. This was impressive result given the comparison to a historically strong Q2 ’21 where volumes were up nearly 37% year-over-year. Our core choice business is still delivering volumes that are substantially above pre-pandemic levels. Second quarter tube and core volumes were up mid single digits per day versus the prior year with similarly strong durables end market demand particularly in paper and moving costs.
I will now turn it over to our CFO, Larry Hilsheimer on Slide 6.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Thank you. Ole. Good morning. Thank you for joining us today. Like Ole, I want to start by thanking our colleagues for an outstanding second quarter with record financial results. We believe our continued outperformance over the past 4 years highlights the resiliency of our teams, product offerings and focus on providing exceptional service to our customers as well as our substantially improved focus on price increases unrelated to raw material cost changes. We encourage each of you to attend our upcoming Investor Day, where we will discuss our path forward and our plans to grow the business and continue to create additional value for our shareholders.
Second quarter adjusted EBITDA rose by over $70 million year-over-year despite an OCC headwind of $26 million and roughly $27 million of non-volume related transportation, labor and energy cost inflation. Absolute SG&A dollars were flat versus the prior quarters, but fell 240 basis points on a percentage of sales basis. Below the line, interest expense fell by over 50% versus the prior year quarter due to roughly $13 million due to aggressive debt pay down in the trailing 4 quarters as well as the recent refinancing of most of our debt portfolio at significantly lower interest rates. Absolute tax dollars were higher year-over-year due largely to higher income, a larger proportion of income in higher tax jurisdictions as well as non-recurring discrete items, which benefited our prior-year quarter. Our second quarter non-GAAP tax rate was roughly flat year-over-year at approximately 20%. These impacts resulted in an outstanding adjusted earnings growth of over 110% year-over-year to $2.41 a share.
Finally, second quarter adjusted free cash flow was roughly $12 million lower year-over-year primarily due to the continued impact of inflation on working capital as well as strategic stocking of inventory in certain markets, most affected by supply chain constraints. Our highest priority remains serving our customers with excellence and we anticipate that our inventory position is temporary and will ease and sink with supply chain in those target markets.
Please turn to Slide 7. We are increasing fiscal ’22 guidance as a result of our team’s extraordinary efforts and continue to deliver for our customers and managing well through a significant inflationary environment. We are raising the midpoint of our adjusted earnings per share guidance by a USD1 to USD7.60 a share for fiscal ’22, so selective of our strong second quarter performance and expectations of continued solid performance in the back half of the year. We still anticipate generating between USD380 million and USD440 million of adjusted free cash flow in fiscal ’22. While our profit expectations have increased, that improvement will not be fully reflected in free cash flow in fiscal ’22 primarily due to higher capex and nearly $100 million increase in cash taxes versus 2021 as well as the continued drag from higher working capital which is tied to increased revenue. We will continue to drive hard on working capital in the back half of the year and hope those efforts help us capture some upside to our full year free cash flow guidance. Finally, you will find a slide with key modeling assumptions in the appendix of today’s deck for your use as needed.
Please turn to Slide 8. Our outstanding execution over the past few years has resulted in our ability to aggressively deleverage our balance sheet, so that we are now close to the lower end of our target leverage ratio range. Our solid financial position gives us the flexibility to pursue new opportunities to grow the business and return cash back to shareholders I look forward to diving deeper into our capital deployment strategy at our upcoming Investor Day.
With that, I’ll turn things back to Ole on Slide —
Ole Rosgaard — President and Chief Executive Officer
Thank you, Larry. In our Q1 call, we provided a brief overview of our new built-to-last strategy. At Investor Day on June 21st, we will be discussing this strategy and our businesses in much greater detail. I’m proud of our teams and our continued outperformance and believe the built-to-last strategy will serve us well in our path ahead and continue growing and improving the business and better serve our customers. We highly encourage you all to attend and participate in this engaging session. With that, I want to thank you for your interest in Greif. Operator, please open the line for questions.
Questions and Answers:
Operator
[Operator Instructions] And your first question comes from the line of Ghansham Panjabi from Baird. Your line is open.
Ghansham Panjabi — Baird — Analyst
Hey guys, good morning. Thanks for taking my questions and congrats on all the progress. I guess for my first question, can you just give us a sense as to how volumes in the month of May progressed across each of the segments, especially GIP just given all the complexity across the world from a operating standpoint, and how are you thinking about volumes for the 2 segments for the back half of the year. What’s embedded in your assumptions?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Thanks Ghansham. I’ll take that one. So let me take you around the world. First of all, for us, the most material markets are EMEA and the US, they account for about 85% of GIP global sales, so I’ll focus my comments there. And the story remains very similar to what we shared for Q1, demand conditions are strongest in the US and a bit softer in EMEA, and for the US, I can say that steel was up single low digits per day and that’s from a mix of strength in chemical and distributor markets and relative softness in automotive and [indecipherable]. On plastics, we were up mid single digits per day and here it was particularly petrochemical demand that was strong and IBC was up over 20% per day, and that’s primarily from new lines coming online. On EMEA, steel was down low-single digits per day and really from general softness, particularly in Eastern Europe due to the conflict there and supply chain issues mainly stemming from China lockdowns, which are impacting our customers’ ability to produce at said levels to meet their demands. Plastic was down mid single digits per day and again general softness due to ongoing supply chain issues, and IBC essentially was flat per day.
Ole Rosgaard — President and Chief Executive Officer
Ghansham, the May results and early June continue to be very robust just as 2Q. We’ve seen no drop off since Q2 and we expect that that will continue through the remainder of the year based on our commercial teams discussions with our customer base.
Ghansham Panjabi — Baird — Analyst
Okay, great. And then in terms of GIP specific to the second quarter, so what exactly drove the operating leverage for that segment. I’m asking because in the past you benefited to some extent from a spread between raw materials and timing of the pricing and so on and so forth. Was that a material impact in the second quarter?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah, you know, we mentioned that last year we had a significant tailwind impact our results positively because of the rapid increase in steel costs throughout the year, Ghansham, that was to the tune of $100 million. We are not having a repeat of that this year at all. So that one-time benefit is gone. What has happened instead is that steel costs have remained relatively flat. I mean, we’ve had some fall-off in May, slight fall-off in North America. But for the most part, it’s relatively flat. We had thought that we would have a little bit more decrease in North America in particular and had built that into our second quarter forecast. And while it just a little bit March, it picked back up a little in April, and for the part, the true pickup was that we didn’t have that drop-off and impact to us negatively, but more importantly, it’s just that our teams have become really consistently excellent at getting price increases related to other than materials, so covering our cost of inflation in whole broad group of cost categories [Technical Issue] do well, if we went back 3-5 years ago and when Ole was leading GIP, we really started executing well on that and the teams are just doing an excellent job on it now. Where we used to give back margin, we’re not giving it back anymore.
Ghansham Panjabi — Baird — Analyst
Awesome. Thanks so much.
Operator
Your next question comes from the line of George Staphos from Bank of America. Your line is open.
George Staphos — Bank of America — Analyst
Hi guys, good morning, thanks for the details and taking my questions. I just wanted to piggyback, since Ghansham had set it up for us for the second half. And so, Larry, what are you assuming for that spread compression over the rest of the year, said differently, you’ve obviously had a really, really strong start to the year. No good deed goes unpunished. We look at the back half versus back half last year and at the midpoint earnings are only up $0.05 or so. What are you sort of building into your expectations such that number start to decelerate, is it in fact building in more cushion for that spread compression that you were talking about earlier that didn’t materialize for the first half of the year?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah, good question, George. And so we are reflecting in the second half of the year obviously in the GIP segment will no longer have the FPS profits that we had a year ago. So you’ve got roughly half of their year which is somewhat near $30 million that will not be in our numbers. Then with respect to steel cost and that compression, we are predicting that it will go down, but we think it’s a — it’s not a rapid decline and as we’ve talked many times in the past, for us, it’s all about pace of incline or decline and timing. So we have the pass-through mechanisms that generally work on calendar quarters. So where it is at the end of June matters, if we had a real steep decline for some reason in the next few weeks, that would be bad. We don’t see that happening. And we don’t see a rapid decline before September either. So we’ve built in some decline in the second half that will have a little bit of drag, so the second half of GIP will be weaker than the first half, but not substantially, and as we’ve talked about previously, we have a little bit of benefit of our 2 businesses being a little counter-cyclical to each other and the price mechanism in paper, it lags, get it as immediately as we like, get to work through the rescue process. So the second half of PPS is going to be extremely strong related to pricing and so second half overall looks very favorable.
George Staphos — Bank of America — Analyst
Thanks, Larry. I just — maybe point of clarification on that before I get to the second question. Is there a way to maybe quantify broadly, you said, it’s not a lot, but there is some, is there a way to — is that $5 million, $10 million, $30 million in terms of the spread compression that we should expect there?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
You know, I think we had — and Matt Leahy, you’ve got those statistics. What we have like what 55% of our EBITDA in the first half of the year for GIP and then 44%, is that roughly right?
Matt Leahy — Vice President of Corporate Development and Investor Relations
Yeah, I think that’s roughly correct.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
And so, okay. George, hopefully that’s helpful. If you back out say USD15 million to USD16 million per FPS and get the rest related to the continuing GIP business.
George Staphos — Bank of America — Analyst
Understood. All right, thanks for going through that. I guess the next question I had for you is on backlogs in paper and this has been a consistent theme kind of across the sectors, certainly for Greif as well where backlogs are remaining very, very strong. We’re hearing about a potential slowdowns across the various businesses and really the end markets. To the extent that you can quantify, to the extent that you’re hearing from your customers, whatever your intelligence you’ve gotten on this, how much double booking, how much, double ordering, how much — you mentioned having some inventory — some extra inventory, so you can service your customers well. What do you think exist in the supply chain now that is maybe artificial relatively a weak average backlog that you’ve talked about a bit earlier. Thank you.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah, and just to make sure to clarify, and then I’m sure Ole have something to add here. I mean, our only safety stock is in GIP, it’s not in PPS.
George Staphos — Bank of America — Analyst
Understood. Understood.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Some places around the world where there were supply chain issues that we experienced in the past and our teams just do not want to be in a situation where we can’t serve customers. So we had like a 3-month delay into Latin America last year on steel from China that we had to scramble crazily to — and then end up that missing serving our customers. So there is a little bit pockets like that around the world. It’s not hugely significant and we’ll work through that, but in the paper end of the business. I would say, George. I’ve been saying to our teams. I’m afraid we’re all going to talk ourselves into a recession as everybody is out there screaming about hurricanes and other stuff to scare the consumer, but we’re just not seeing it in our demand chains, we got small pockets where maybe there is a little better concern from our customers, but it’s equally offset by other places where they’re saying demand is just robust but I don’t know, Ole, do you have anything to add to that?
Ole Rosgaard — President and Chief Executive Officer
No, just to say that we have seen normal inventory building in our PPS business and we read the same issue in terms of the big-box retailers and we follow that very, very closely, but our backlogs remain at 8 weeks and demand is very solid.
George Staphos — Bank of America — Analyst
Thank you, guys. I’ll turn it over.
Operator
Your next question comes from the line of Adam Josephson from KeyBanc. Your line is open.
Adam Josephson — Keybanc — Analyst
Thanks, good morning, everyone. Hope you’re all feeling all right, Larry or Ole, just shot to the demand for a moment, Larry, I think you said thus far in fiscal 3Q, you haven’t seen any demand drop-off, should we assume that your expectation for the second half is that demand is not going to weaken much, if at all, and that will be reflected in your consolidated volume performance? Or what exactly are you expecting demand-wise in the back half versus a year ago versus the first half? Any — [indecipherable] appreciate it.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah, we — on the demand side, Adam, we obviously as you expect when we forecast the remainder of the year, we work diligently with our commercial teams who then talk with our customer base. And we’re seeing the demand trends and for the remainder of the year is what we saw in Q2 where we see some weakness in EMEA related to the conflict in the supply chain issues there. North America continues very robust. Latin America is robust, and frankly, the big drop-off in our volumes, particularly in steel is really related to China and lockdowns and as the lockdowns free up there, we tend to see volume pickup pretty aggressively, now. China is not that big a piece of the pie for us, but we do expect that we’ll see some lift in volumes there.
Adam Josephson — Keybanc — Analyst
Okay. So you’re not expecting — so in other words, you’re not expecting any demand erosion really whatsoever in the back half?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah, we’re not hearing it from our customers, may everybody’s concern, but I think the reality is even the most negative of economic forecast, they’re not seeing a recession anytime before our fiscal year-end. So I think it’s consistent with that is what we’re hearing from our customers.
Adam Josephson — Keybanc — Analyst
Got it. I appreciate that, Larry. On the price cost issue, I know last year you had the $100 million one-time benefit from rising steel prices. Can you help us with what is embedded in your guidance this year in terms of price cost either in total or by segment, because obviously in paper you’re going to have a very substantial price cost benefit this year, and I’m just hoping you can frame it for us just so we have some sense of how big a price cost benefit you’re expecting this year on a consolidated basis versus what you experienced last year and what you’ve experienced historically?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah, I mean, you look at on the GIP side and obviously maintaining the margin that we had last year and overcoming the loss of that $100 million tailwind, that is a pretty substantial accomplishment on behalf of our teams and we are expecting to be relatively maintain and that combination of the investments we made in some expansion for IBC and plastics business and then the rest of it is really just working very diligently on these other price increases, and Matt Leahy, I’ll ask you to maybe on a relative basis GIP EBITDA this year versus last year because I think that would go to answer — is it roughly flat — then I’ll hand —
Matt Leahy — Vice President of Corporate Development and Investor Relations
Are you talking on a first half to first half basis?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
No, year-over-year GIP for where we expect then roughly, I mean not exact —
Matt Leahy — Vice President of Corporate Development and Investor Relations
Yeah, I think that’s right, that’s right, Larry. That’s correct.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah. So and obviously do the math based on our volumes, we clearly are having picked up in the PPS side related to the price increases, nothing really containerboard is predominantly in the, in our box board operations, which are really executing at a high level relative to the performance of that mill system and also the pricing actions that where in our opinion where they should have been and so we’re capturing that benefit for the rest of the year.
Adam Josephson — Keybanc — Analyst
Larry, if you don’t mind, just can you — so the bulk of the price cost benefit in PPS you’re expecting is in paperboard not containerboard, even though there have been obviously substantial price increases in containerboard, just make sure I’m clear on that. And then can you hazard a guess or roughly frame how much of the total price cost benefit you’re expecting in the PPS business this year?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
I didn’t quantify that, Adam, so no I can’t.
Adam Josephson — Keybanc — Analyst
Okay, but boxboard much more than containerboard in terms of price cost benefit this year.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah.
Adam Josephson — Keybanc — Analyst
Okay, thank you.
Operator
Your next question comes from the line of Gabe Hajde from Wells Fargo. Your line is open.
Gabe Hajde — Wells Fargo — Analyst
Ole, Larry, Matt, good morning.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Good morning, Gabe.
Gabe Hajde — Wells Fargo — Analyst
One thing that jumped out at me was on the volume side. When I look at Slide 11, LATAM being up 16% in GIP, and if memory serves, that’s predominantly I think an ag business down there. So kind of a 2-part question, is there anything else [indecipherable] when we look at kind of industrial production data, it would seem to suggest fairly challenging backdrop down there. So what’s causing the differential there. And then 2, when we listen to farmers either not being able to get fertilizers or not being able to afford them and I think about plantings for the next year, typically farmers over plant when yields are down and stuff like that. How could that help or hurt your business relative to prior cycles on the ag side because I know it’s a bigger piece of your business today than it was maybe 5, 10 years ago.
Ole Rosgaard — President and Chief Executive Officer
Yeah, so, LATAM, Gabe, loop is obviously a big part of our business as well. It’s not just ag chemicals and food and juice and so on. But what we have been able to do in LATAM through our — we put in a new leader in place a few years ago and he is just doing an excellent job and they have actually captured market shares and gained a lot of volume from competition through a sustained focus on customer service and that’s what you see here.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Gabe, I mean if I — don’t mind inserting for a minute, I want to go back and sort of address the question that Adam raised just because I found my notes. So, look, what I would say is we think we’ve got a tailwind of about 36 bucks a ton on OCC for the full year. You know, we’ve got roughly slightly over 100 bucks tailwind on containerboard through the year. We’ve got, call it, a couple of hundred bucks and a half on URB and same thing on CRB for the year. So Adam, I think those numbers will help you get to the to the question you asked. Sorry Gabe.
Gabe Hajde — Wells Fargo — Analyst
No worries. And on the Ag, I mean is there any insight you can give us again on the Ag side or food in terms of crop plantings and stuff like that as it seems like, obviously there’s a lot of disruption over in Eastern Europe but just how it could impact your European GIP business?
Ole Rosgaard — President and Chief Executive Officer
Yeah, so in Europe, the season will not be so good on the Ag sites because of droughts, and then you also obviously have the conflicts. But in the US on the West Coast, the season looks very, very strong and so what we have over the years, you never have the perfect storm, so from my side here, it’s always been you have one region with a strong and long productivity and don’t have lot by another region, and this year, Siberia particularly that’s down and the Americas, that’s very strong.
Gabe Hajde — Wells Fargo — Analyst
Okay. Switching gears a little bit, I guess to try maybe a peek under the tent for I day, but your balance sheet is in really good condition. Larry, how would you think about running maybe a little bit below that 2 times to 2.5 times leverage target given kind of the macro concerns that we see out there, and when you look — when you think about kind of capital return for shareholders, kind of what’s the framework that you think about in terms of announcing a special dividend or something like that versus share buyback?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah, I mean, Gabe, when we get to the point of — are we going to go down below 2, I mean, we’ll obviously try to forecast ahead and put in a recessionary analysis because we don’t want to be in a situation where we do something and then all of a sudden we find ourselves in a tough position. I don’t think we’ve got much risk of that, I mean frankly you look at our cash production for the rest of the year where we will be on debt pay down, we could do some type of pretty substantial return of capital to shareholders and still not have that risk even with a pretty significant downturn, but we’ll go through that analysis before we would do anything — down at Q1 already we get the cash production for the rest of the year to pay down of debt further, I mean our EBITDA would have come down pretty [Technical Issue] put us back above 2.5 even if we did do something substantial and return to shareholders, but look at that analysis that and we will expand more on this at Investor Day and share our thoughts about growth and return of [Technical Issue] excuse me.
Gabe Hajde — Wells Fargo — Analyst
Great, thank you guys. Good luck.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Thanks.
Operator
Your next question comes from the line of Justin Bergner from Gabelli Funds. Your line is open.
Justin Bergner — Gabelli Funds — Analyst
Good morning, Ole. Good morning, Larry.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Hey, Justin.
Justin Bergner — Gabelli Funds — Analyst
Thinking about your increased guidance for the fiscal year, congratulations on the solid performance, is the increase in guidance essentially entirely in the global industrial packaging segment or is a better outlook for paper packaging, also could —
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
— mix of both, when we put our guidance together for the — that we put out in our first quarter call, we had factored in our planned price increase for PPS for the remainder of the year and the lift — we’ve seen better execution on pushing price through in PPS. So there is lift in both businesses over where we were in the guidance that we provided earlier in the year. And it’s about equally dispersed.
Justin Bergner — Gabelli Funds — Analyst
Okay, that’s helpful. I would have thought a bit more global industrial packaging, so that’s interesting. On the price increased front in global industrial packaging, the ability to pass on non-raw material cost headwinds, not to take away anything from the achievements of your team, but is the supply chain environment just making that market tighter even with volumes that are flattish, such that the teams are more easily able to pass on those non-raw material cost inflationary headwinds?
Ole Rosgaard — President and Chief Executive Officer
[Technical Issue] So, when I came to Greif just like 6.5 — little bit over 6.5 years ago, we weren’t tracking raw material — non-raw material price increases and by and large we weren’t passing that on, so as Larry said earlier, we’ve worked very, very hard in creating a system where we track, creating a system where we enable to pass them on. And so today, we are passing all of them on, we are ahead of the curve in terms of the inflationary pressure that we get, and when we do it, we don’t just do it in pockets and just to — so you understand we have [indecipherable] and we have [indecipherable], when we pass on a non-raw price increase, it’s to all our customers globally, so a small increase has a significant impact. And that’s something we have been massaging into the organization and that is now part of our DNA. And that’s kind of the policy you see where we are not diluting our margins anymore. So what we have now is we have a consistency in our margin profile going forward.
Justin Bergner — Gabelli Funds — Analyst
Okay. Understood. That’s helpful. Just to follow up, I mean, is the external environment helping just the greater challenge and sort of you and your company just getting product to customers sort of in a timely manner, given all the supply chain constraints, making these —
Ole Rosgaard — President and Chief Executive Officer
I think our focus on customer service for the past many years obviously helps. So, we have great partnerships with our customers. And when you come with a price increase, it’s certainly it’s a difficult discussion to have with your customer, but it’s certainly easier when you are acknowledged for delivering really, really good service to that particular customer. So those 2 things go hand in hand.
Justin Bergner — Gabelli Funds — Analyst
Okay, great. Thank you.
Operator
Your next question comes from the line of George Staphos from Bank of America. Your line is open.
George Staphos — Bank of America — Analyst
Hi, thanks for taking the follow-on guys. I wanted to tackle maybe a couple of bigger picture questions, and Ole, maybe you’re going to hit these at the Analyst Day. So we understand. But I guess, first off, given the success you’ve talked about that you’ve demonstrated over the last few years on customer service, you’re saying earlier in your views as tag line certainly legendary customer service, are you seeing any of your peers, saying, Hey Greif is doing a pretty good job with this and they’re beginning to try to probe the wet edges of what you do replicated and are you seeing any signs that your competitors are actually being successful in that regard. And where do you see on that front that you are, again, recognizing some of this is going to be proprietary where you’re extending your lead and creating a greater ability to continue to grow and or price when you need to price, how would you have us think about that?
Ole Rosgaard — President and Chief Executive Officer
First of all, George, I mean, we’re not going to dwell on this, we really focused on our own business and focus on what we can control and our vision is to be the best customer service company in the world and that’s really where we have a lot of our focus. Are we there? No. Are we working very hard and systematically on it? We certainly are and we’ve put a lot of investments into that, not just in trading, but also in terms of technology, and we will cover some of that also at our Investor Day on June 23.
George Staphos — Bank of America — Analyst
Okay. Is your — so understanding the focus is on what you’re doing right and continue to prosecute that, is there an area or 2 where we’ll hear about in a couple of weeks that you feel you have the ability to continue to press ahead even more quickly on that front? And then back to capital allocation and whether or not we’re going into a slowdown, how does that make you think about the potential and the mix of organic growth versus M&A, if there is any difference at all relative to what you would have been thinking, say 6 months or so ago. Thank you guys and good luck in the quarter.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Thank you, George.
Ole Rosgaard — President and Chief Executive Officer
I’ll do the first part and also ask Larry for the second part of your question. Part of the answer is using the technology and AI and that’s really what we’re beginning to bake into our business. It’s not a short-term thing. It’s a long-term thing. We have projects that we run the next 4 to 7 years, implementing technology and AI into the business to be able to provide legendary customer service and I’ll let Larry answer the M&A question.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah, George. And we will speak for time in this at Investor Day, but we have asked our business unit leaders to already develop their plans about, okay, what actions would you implement should we start to see evidence of a recessionary trend? And I think most of you on this call, who have been around us for a while, we tend to be an early indicator. So I think it’s good news that we’re not seeing any real evidence of any recessionary trends at this point. You know, would a recession cause more pause for us? I’d say yes but with an asterisk. I mean we got sort of roundly criticized for doing Caraustar when everybody thought there might be a recessionary environment coming at us, and we explained then, you have to be a buyer when somebody is a seller and we’re very pleased with what we’ve been able to [indecipherable] Caraustar and we told everybody at the time that we had analyzed the downside in recessionary analysis and that even if we saw one that it would maybe only push back our getting back to our target debt ratio by half a year. Well, guess what? That played out. It’s played out well, and so we would follow that same discipline in executing any transaction that we might be presented and only do it if we felt comfortable that we can sustain and be in our target range in a reasonable period of time. I would say that we don’t anticipate seeing transaction the size of Caraustar but you never know you’re in the market and something comes like [indecipherable] would come to play again, but we would just deploy that disciplined process that we have and make sure that we analyze our downside risk and feel comfortable going into it. I think that’s responsive I hope.
George Staphos — Bank of America — Analyst
Very much. Thanks, Larry. Thanks. Ole.
Operator
Your next question comes from the line of Adam Josephson from KeyBanc. Your line is open.
Adam Josephson — Keybanc — Analyst
Larry and Ole, thanks for taking my follow ups. I appreciate it. On Russia, could you tell us how much Russia contributed to your sales and earnings in the quarter and for that matter to the guidance increase if at all. And then just talk about what would have to change in Russia to prompt you to change your mind and in fact exit the country as many, many other multinationals have done already?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah and Adam, I’d say Russia is less than 3% of our revenues and profits. It really has very little impact on our raising guidance, it’s an issue that we and many companies struggle and I agreed many have gotten out although I would say a lot of them have got out at sales offices and that don’t have a lot of employees that are trying to take care of. For things to change our view, I mean we monitor it on a very regular basis and we’re always trying to take into account at least to date our judgment has been that it’s very clear that if we were to shut down, the [indecipherable] just take it over and that would mean they’d have more money to fund their war interest, not less. And so at least therefore our conclusion has been to stay the course and take care of our people. So things would have to change fairly dramatically, it’s a very minor part of our operations. And as we explained before, it’s self-supporting. We’re not putting any capital in at all. And it basically, sales happen there, sourcing happens there. So — [indecipherable] add anything or later.
Ole Rosgaard — President and Chief Executive Officer
Yeah. Obviously, it’s more or less an island, Adam, for us. We do have meetings every week. We continue to assess the situation very, very closely, and as Larry said, our focus is to protect our people and our assets and we believe that’s on — that’s best done by us and that will be ultimately also benefit the Ukrainian people as opposed to giving everything up to to the Russian government — [Technical Issue] situation obviously, so —
Adam Josephson — Keybanc — Analyst
Thank you both. And on cash flow, Larry, in the first half, it was down about $20 million year-over-year. The midpoint of your guidance implies I think a $140 million increase for the full year compared to the $20 million decline in the first half. So obviously expecting a pretty big jump in cash flow in the second half relative to a year ago even with all these — the inflation and the inventory issues etc, the higher cash taxes. So why are you expecting such a big cash flow second half relative to last year? And where are you biased in terms of the low and high end of that [indecipherable]?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah, I mean, we basically — as inventory costs flattened out which they become stable, you start to have some of that cash flow come through. And when you’re producing EBITDA, you’re generally — you’re going to eventually get that cash and that happens when things start to flatten out, as you’re going up, you’re building up and sales have gone up a lot. So just look at it this way, adam, our sales were up $900 million, we try to manage working capital in many ways. One of them is as percentage of sales, ours is generally 10% to 11% of sales. So it’s a $90 million cash drag from that, then we have $100 million or so cash taxes as I mentioned. So even though our earnings were up substantially, you know, we have a benefit of increase in cash flow, because last year working capital build with substantial at $223 million last year. Because of the rapidly increasing raw material costs, that rapid increase is no longer there on the GIP side and so that will begin to reverse and turn into cash flow through the second half of the year.
Adam Josephson — Keybanc — Analyst
Got it. Okay, so you’re expecting a big working capital drag, but it was so substantial last year that year-on-year it’ll actually be $140 million-ish benefit roughly speaking, is what you’re thinking?
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Yeah.
Adam Josephson — Keybanc — Analyst
Got it. Thank you.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Thank you.
Operator
There are no further questions at this time. Mr. Matt Leahy, I turn the call back over to you for some closing comments.
Larry A. Hilsheimer — Executive Vice President, Chief Financial Officer
Matt — circle back and just clarify one thing on something Gabe asked. Gabe asked [indecipherable] by assuming that the Latin America lift was tied to Ag, in fact, it was primarily tied to growth [indecipherable] bulk and specialty chemicals there was the big lift in that market. So just to clarify that.
Matt Leahy — Vice President of Corporate Development and Investor Relations
Great, thanks, Larry. Thanks very much, Rob, and thanks very much to all the callers today who took part in our earnings call. We hope to see many of you at our Investor Day on June 23. Have a safe and enjoyable rest of your week. Thank you. Take care.
Operator
[Operator Closing Remarks]