Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Greif second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star -one. Thank you. Matt Leahy, Vice President of Corporate Development and Investor Relations, you may begin your conference.
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 am 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 two.
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'll 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. Now, I will turn the presentation over to Ole on slide three.
Thanks, Matt, and good morning, everyone. Our teams continue to execute with excellence, resulting in 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 sheets so that we are now near the low end of our target leverage ratio. These accomplishments result from the continued disciplined execution of the global Greif team and the commitments to advancing our Build to Last strategy. I encourage you to attend our Investor Day, which is just two weeks away on June 23rd, where we will discuss Build 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 four 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 2021. 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 demands 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 margins slightly year-over-year despite cost pressures in raw materials, labor, transportation, and energy. We benefited from both our contractual passthrough 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. I now ask you to turn to page five slide. Page five, 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 remained robust. At quarter end, our combined mill backlogs exceeded 8 weeks. Second quarter volumes in our core CorrChoice sheet feeder system were up low single digits per day versus the prior year as box demands in our key end markets remained solid through the quarter.
This was impressive result given the comparison to a historically strong Q2 2021, where our volumes were up nearly 37% year-over-year. Our core CorrChoice 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 roofing cores. I will now turn it over to our CFO, Larry Hilsheimer, on slide 6.
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 four 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 quarter, 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 four 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 in sync with supply chain in those target markets. Please turn to slide seven. We are increasing fiscal 2022 guidance as a result of our team's extraordinary efforts in continuing to deliver for our customers in managing well through a significant inflationary environment. We are raising the midpoint of our adjusted earnings per share guidance by $1 to $7.60 a share for fiscal 2022.
It's reflective of our strong second quarter performance and expectations of continued solid performance in the back half of the year. We still anticipate generating between $380 million and $440 million of adjusted free cash flow in fiscal 2022. While our profit expectations have increased, that improvement will not be fully reflected in free cash flow in fiscal 2022, 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 eight. 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 nine.
Thank you, Larry. In our Q1 call, we provided a brief overview of our new Build to Last strategy. At Investor Day on June 23rd, 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 Build 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.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. If you'd like to withdraw your question, again, press star -one. Your first question comes from the line of Ghansham Panjabi from Baird. Your line is open.
Hey guys, good morning. Thanks for taking my questions and congrats on all the progress. I guess for my first question, you know, 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? How are you thinking about volumes for the two segments for the back half of the year, what's embedded in your assumptions?
Thanks, Ghansham. I'll take that one. Let me take you around the world. First of all, for us, the most material markets are EMEA and the U.S., and they account for about 85% of our GIP global sales. I'll focus my comments there. The story remains very similar to what we shared for Q1. Demand conditions are strongest in the U.S. And a bit softer in EMEA. For the U.S., I can say that steel was up low single digits per day, and that's from a mix of strength in chemical and distributors markets and relative softness in automotive and food and ag. On plastics, we were up mid-single digits per day, and here it was particularly petrochemical demand that was strong.
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 levels to meet their demands. Plastic was down mid-single digits per day. Again, general softness due to ongoing supply chain issues, and IBC essentially was flat per day.
Guys, in the May results in early June continue to be very robust, just as 2Q. We've seen no drop off since Q2, and we expect that will continue through the remainder of the year based on our commercial team's discussions with our customer base.
Okay, great. Then in terms of, you know, 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, you know, timing of the pricing and so on and so forth. Was that a material impact for the second quarter?
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 EMEA, a 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. While it dipped a little bit in March, it ticked back up a little in April.
For the most part, the true pickup was that we didn't have that drop off and an 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. Covering our cost of inflation in a whole broad group of cost categories, the price increases do well. If we went back, you know, three, five years ago, under 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.
Yeah. Awesome. Thanks so much.
Your next question comes from the line of George Staphos from Bank of America. Your line is open.
Hi, guys. Good morning. Thanks for the details and taking my questions. Hey, I just wanted to piggyback, you know, since Ghansham had set it up for us, for the second half then. Larry, what are you assuming for that spread compression over the rest of the year? Said differently, you know, you've obviously had a 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, you know, $0.05 or so. What are you sort of building into your expectations such that numbers 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 through the first half of the year?
Yeah. Good question, George. We are reflecting in the second half of the year, obviously in the GIP segment, we'll no longer have the FPS profits that we had a year ago. You've got, you know, roughly half of their year, which is somewhat near $30 million that will not be in our numbers. With respect to steel costs and that compression, we are predicting that it will go down, but we think it's not a rapid decline. As we've talked many times in the past, for us it's all about pace of incline or decline and timing. We have the faster mechanisms that generally work on calendar quarters. Where it is at the end of June matters.
If we had a real steep decline for some reason in the next few weeks, you know, that would be bad. We don't see that happening, and we don't see a rapid decline before September either. We built in some decline in the second half that will have a little bit of drag. The second half of GIP will be weaker than the first half, but not substantially. As we've talked about previously, you know, we have a little bit of benefit of our two businesses being a little countercyclical to each other. The price mechanism in paper is, it, you know, it lags. You don't get it as immediately as you'd like. You have to work through the RISI process. The second half of PPS is gonna be extremely strong related to pricing. The second half overall looks very favorable.
Thanks for that, Larry. Maybe a 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's some. Is that $5 million, $10 million, $30 million in terms of the spread compression that we should expect there?
You know, I think 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?
Yeah. I think that's roughly correct.
And so George, hopefully that's helpful. If you back out, say, $15 million-$16 million for FPS, you've got the rest related to the continuing GIP business.
Understood. Larry, thanks for going through that. I guess the next question I had for you is on backlogs and paper. This has been a consistent theme kind of across the sectors, certainly for Greif as well, where backlogs are remaining, you know, very, very strong. You know, yet we're hearing about 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 intelligence you've got on this, how much double booking, how much double ordering, how much. You know, you mentioned having some inventory, some extra inventory so you can service your customers well. What do you think exists in the supply chain now that is maybe artificial relative to the 8-week, you know, average backlog that you talked about a little bit earlier? Thank you.
Yeah. Just to make sure to clarify, and then I'm sure Ole will have something to add here. I mean, our only safety stock is in GIP. It's not in PPS.
Understood.
Some places around the world where there were supply chain issues that we experienced in the past, and our teams just do not wanna be in a situation where we can't serve customers. We had, like, a three-month delay into Latin America last year on steel from China that we had to scramble crazily to then end up not missing serving our customers. There's a little bit of pockets like that around the world. It's not hugely significant, and we'll work through that. In the paper end of the business, I would say, George, I've been saying to our teams, I'm afraid we're all gonna talk ourselves into a recession as everybody is out there screaming about hurricanes and other stuff to scare the consumer. We're just not seeing it in our demand chains. We got small pockets where maybe there's a little bit of, you know, concern from our customers, but it's equally offset by other places where they're saying demand is just robust. I don't know. Ole, do you have anything to add to that?
No, just to say that we have seen no abnormal inventory building in our PPS business. We read the same as you in terms of the big box retailers, and we follow that very, very closely. You know, our backlogs remain at eight weeks, and demand is very solid.
Thank you, guys. I'll turn it over.
Your next question comes from the line of Adam Josephson from KeyBank. Your line is open.
Thanks. Good morning, everyone. Hope you're all feeling all right. Larry or Ole, just back 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 gonna weaken much, if at all, and that will be reflected in your consolidated volume performance? W hat exactly are you expecting demand-wise in the back half versus a year ago versus the first half? Any help you can give us there would be appreciated.
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. We're seeing consistent demand trends and for the remainder of the year is what we saw in Q 2. You know, where we see some weakness in May related to the conflict and supply chain issues there. North America continues very robust. Latin America is robust. Frankly, you know, the big drop off in our volume, particularly in steel, is really related to China and lockdowns. As the lockdowns free up there, we tend to see volume pick up pretty aggressively. Now, you know, China's not that big a piece of the pie for us, but we do expect that we'll see some lift in volumes there.
Okay. In other words, you're not expecting any demand erosion really whatsoever i n the back half.
Yeah. We're not hearing it from our customers. I mean, everybody's concerned, but I think the reality is even the most negative of economic forecasts, they're not seeing a recession any time before our fiscal year ends. I think it's consistent with that is what we're hearing from our customers.
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 gonna 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.
Yeah. I mean, you know, 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 is a pretty substantial accomplishment on behalf of our teams. You know, we are expecting to, you know, relatively maintain. That's a combination of the, you know, the investments we made in some expansion of our IBC and plastics business, and then the rest of it is really just working very diligently on these other price increases. Matt Leahy, I'll ask you to maybe, you know, on a relative basis, GIP EBITDA this year versus last year, because I think that'll go to answer, you know, is it roughly flat? I apologize that I don't have that in front of me.
You talking on a first half to first half basis?
No. Year over year. Yeah. Full year to full year, GIP for where we expect and roughly, I mean, not exact science.
Yeah, I think that's right. That's right, Larry. That's correct.
Yeah. Yeah. Obviously, you can do the math based on our volumes. We clearly are having the pickup in the PPS side related to the price increases. You know, nothing really in containerboard. It's predominantly in our boxboard operations, which are, you know, really executing at a high level relative to the performance of that mill system and also, you know, the pricing actions that, you know, were in our opinion way late where they should have been. We're capturing that benefit for the rest of the year.
Larry, if you don't mind, 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. Then can you hazard a guess or roughly frame how much of a total price cost benefit you're expecting in the PPS business this year?
I didn't quantify that, Adam, so no, I can't.
boxboard much more than containerboard in terms of price.
Yes
Cost benefit this year. Okay. Thank you.
Your next question comes from the line of Gabe Hajde from Wells Fargo. Your line is open.
Ole, Larry, Matt, good morning.
Morning.
Good morning, Gabe.
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 two-part question. Again, when we look at kind of industrial production data, it would seem to suggest a fairly challenging backdrop down there. So what's causing the differential there? And then two, 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, you know, relative to prior cycles on the ag side? Because I know that's a bigger piece of your business today than it was maybe five, 10 years ago.
Yeah. In LATAM, again, you know, lube is obviously a big part of our business there as well. It's not just ag chemicals and you know, food and juice and so on. What we have been able to do in LATAM. You know, we put a new leader in place a few years ago, and he's 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.
Okay. Hey, Gabe, 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. What I would say is we think we've got a tailwind of about $36 a ton on OCC for the full year. You know, we've got roughly slightly over $100 of tailwind on containerboard for the year. We've got, you know, call it a couple hundred bucks and a half on URB and, you know, same thing on CRB for the year. Adam, I think those numbers will help you get to the question you asked. Sorry, Gabe.
No, no worries. On the ag, I mean, is there any insight that you can give us, either on, again, on the ag side or food in terms of crop plantings and stuff like that? It seems like obviously there's a lot of disruption over in Eastern Europe, but just how it could impact your European GIP business.
Yeah. In Europe, the season will not be so good on the ag side, because of droughts, and then you also obviously have the conflict. In the U.S. on the West Coast, the season looks very, very strong. What we have over the years, you know, you never have the perfect storm. In my time here, it's always been, you know, you have one region where there's drought and low productivity and then, you know, held up by another region. This year it's Iberia particularly that's down and the Americas that's very strong.
Okay. Switching gears a little bit, I guess, to try to get a maybe a peek under the tent for Investor Day, but you know, your balance sheet is in really good condition. Larry, how would you think about running maybe a little bit below that 2x-2.5x leverage target, given kind of the macro concerns that we see out there? When you think about kind of capital return for shareholders, you know, kind of what's the framework that you think about in terms of, you know, balancing a special dividend or something like that and versus share buyback?
Yeah. I mean, Gabe, when we get to the point, you know, of, you know, are we gonna go down below 2x? I mean, we'll obviously try to forecast ahead and put in a recessionary analysis because I don't wanna be in a situation where we do something and then, you know, 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 know, you look at our cash production for the rest of the year and where we'll be on debt pay down, you know, we could do some type of pretty substantial return to capital shareholders and still not have that risk even with a pretty significant downturn.
We'll go through that analysis before we would do anything down at 2.1x already to get the cash production for the rest of the year to pay down our debt further, and I mean, our EBITDA would have to come down pretty low to put us back above 2.5x even if we did do something substantial in return to shareholders. We'll put that analysis out and we will expand more on this at Investor Day and share our thoughts about growth and return of capital. Excuse me.
Great. Thank you, guys, and good luck.
Thanks.
Your next question comes from the line of Justin Bergner from Gabelli Funds. Your line is open.
Oh, good morning, Ole. Good morning, Larry.
Hey, Justin.
Thinking about your increased guidance for the fiscal year, and, you know, 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 contributing to the higher guide?
A mix of both. You know, when we put our guidance together for the that we put out in our first quarter call, you know, we had factored in you know, our planned price increases for PPS for the remainder of the year and the lift. We've seen better execution on pushing price through in PPS. There's lift in both businesses over where we were in the guidance that we provided earlier in the year. It's about equally dispersed.
Okay. That's helpful. I would have thought a bit more global industrial packaging, so that's interesting. On the price increase front in global industrial packaging and the ability to pass on non-raw material cost headwinds, you know, not to take away anything from the achievements of your team, but is the supply chain environment just making that market tighter even with, you know, volumes that are flattish such that the teams are more easily able to pass on those non-raw material cost inflationary headwinds?
Yeah. I'll take that one. We call that a little bit, Justin. When I came to Greif, Justin , a little bit over 6.5 years ago, we weren't tracking raw material, non-raw material price increases. You know, by and large, we weren't passing them on. As Larry said earlier, you know, we've worked very hard in creating a system where we track and are enabled to pass them on. Today we are passing all of them on. We are ahead of the curve in terms of, you know, the inflationary pressure we get. When we do it, we don't just do it in pockets. You understand, we have PAMs and we have non-PAMs. When we pass on a non-raw price increase, it's to all our customers globally. A small increase has a significant impact. That's something we have been massaging into the organization and that is now part of our DNA, and that's kind of the, you know, the power you see where we're not diluting our margins anymore. What we have now is we have a consistency in our margin profile going forward.
Okay. That 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 competitors getting product to customers sort of in a timely manner, given all the supply chain constraints, making these?
Yeah, I think, I mean, our focus on customer service the past many years obviously helps. We have great partnerships with our customers. When you come with a price increase, it's certainly a difficult discussion to have with your customer, but it's certainly easier when you are acknowledged for delivering, you know, a really, really good service to that particular customer. Those two things go hand in hand.
Okay, great. Thank you.
Your next question comes from the line of George Staphos from Bank of America. Your line is open.
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 Investor 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 know, you were saying earlier and you've used this tagline, certainly, you know, 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, replicate it. Are you seeing any signs that your competitors are actually being successful in that regard? Where do you see on that front that you are, again, recognizing some of this is gonna be proprietary, where you're extending your lead and, you know, creating a greater ability to continue to grow and/or price when you need to price? How would you have us think about that?
Well, first of all, George, I mean, we don't dwell on our competitors. We really focus on our own business and focus on what we can control. You know, 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're putting a lot of investments into that, not just in training, but also in terms of technology, and we will cover some of that also at our Investor Day on June 23rd.
Understanding the focus is on what you're doing right and continue to prosecute that. Is there an area or two 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? Then, you know, 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's any difference at all relative to what you would've been thinking, say, six months or so ago. Thank you, guys, and good luck in the quarter.
Thank you.
Thank you, George. I'll do the first part then pass you over to Larry for the second part of your question. Part of the answer is using technology and AI, and that's really what we are beginning to bake into our business. It's not a short-term thing, it's a long-term thing. We have projects that will run the next four to seven years implementing technology and AI into the business to be able to provide legendary customer service. I'll let Larry answer the M&A question.
Yeah, George, we will spend more time on this at Investor Day. You know, 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? I think most of you on this call who've been around us for a while, we tend to be an early indicator. I think it's good news that, you know, 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, you know, 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 know, you have to be a buyer when somebody's a seller. We're very pleased with what we've been able to accomplish with Caraustar, and we told everybody at the time that we had analyzed the downside in a 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.
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 could sustain and be in our target range in a reasonable period of time. I would say that we don't anticipate seeing transactions the size of Caraustar. You know, you never know until you're in the market and something comes, like if CHEP would come to play again. We would just deploy the discipline 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.
Very much so. Thanks, Larry. Thanks, Ole.
Welcome.
Your next question comes from the line of Adam Josephson from KeyBank. Your line is open.
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? Just to talk about what would have to change in Russia to prompt you to change your mind and in fact, exit the country as many other multinationals have done already.
Yeah. Adam, I'd say, look, Russia's less than 3% of our revenues and profits. It really has very little impact on our results and guidance. It's an issue that we and many companies struggle with, and I agree many have gotten out, although I would say a lot of them that have got out have sales offices and that don't have a lot of employees that they're 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 government would just take it over, and that would mean they'd have more money to fund their war effort, not less.
At least heretofore, our conclusion has been to stay the course and take care of our people. 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. It basically, sales happen there, sourcing happens there. I don't know if you want to add anything, Ole .
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 closely. As Larry said, you know, our focus is to protect our people and our assets. We believe that's best done by us, and that will ultimately also benefit the Ukrainian people, as opposed to giving everything up to the Russian government.
Thank you.
It's a complex situation, obviously, so.
Right. Thank you both. On cash flow, Larry, you know, 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. Obviously expecting a pretty big jump in cash flow in the second half relative to a year ago, even with all these, you know, the inflation, the inventory issues, et cetera, the higher cash taxes. Why are you expecting such a big cash flow second half relative to last year? Where are you biased in terms of the low-end, high-end of that $380 million-$440 million?
Yeah, I mean, you know, as inventory costs flatten out, which they've become stable, you start to have some of that cash flow come through. You know, when you're producing EBITDA, you're generally going to eventually get that cash, and that happens when things start to flatten out. As you're going up, you know, you're building up, and sales have gone up a lot. Just look at it this way, Adam. Our sales are up $900 million. We try to manage working capital in many ways. One of them is this percentage of sales, and ours is generally 10%-11% of sales. It's a $90 million cash drag from that. We have, you know, $100 million or so of cash taxes, as I mentioned.
Even though our earnings are up substantially, you know, we have a benefit of increase in cash flow because last year, the working capital build was 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.
Got it. Okay. You're expecting a big working capital drag, but it was so substantial last year that year on year it'll actually be a $140 million-ish benefit, roughly speaking is what you're thinking.
Yep. Yep.
Got it. Thank you.
There are no further questions at this time. Mr. Matt Leahy, I turn the call back over to you for some closing comments.
Hey.
Thank you.
Matt, before you go, let me circle back and just clarify one thing on something Gabe asked. Gabe asked. He prefaced his call by assuming that the Latin America lift was tied to ag. In fact, it was primarily tied to growth in lubes and bulk and specialty chemicals. There was the big lift in that market. Just to clarify that.
Great. Thanks, Larry. Well, 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 in June 23rd. Have a safe, enjoyable rest of your week. Thank you. Take care.
Thank you.
This concludes today's conference call. Thank you for your participation. You may now disconnect.