Greif, Inc. (GEF) Q3 2016 Earnings Report, Transcript and Summary

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Greif Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Matt Eichmann. You may begin.

Thank you, Julie. Good morning everyone and welcome to the question-and-answer portion of Greif’s 2016 third quarter earnings conference call. Yesterday after market closed, we posted a slide presentation and recorded remarks regarding our 2016 third quarter results to our website. I’m now on slide two. Responding to your questions this morning are Pete Watson, President and Chief Executive Officer; and Larry Hilsheimer, Executive Vice President and Chief Financial Officer. Please turn to slide three. This morning’s question-and-answer session will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Please review our filings with the Securities and Exchange Commission for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. During this question-and-answer session, certain non-GAAP financial measures may be discussed, including those that exclude the impact of acquisitions and divestitures, special items such as restructuring charges, and impairment charges and acquisition-related costs. Reconciliation tables are included in our earnings release and the presentation posted on www.investor.greif.com yesterday. I’d now like to turn the call over to Pete Watson, Greif’s President and Chief Executive Officer for a few brief remarks.

Thank you, Matt. Good morning, everyone. We appreciate your interest in Greif. I’m pleased with our most recent results as they come despite external challenges we faced during the quarter. I’d like to highlight a few key items in our quarter, which include sustained operational improvement, particularly in our Rigid Industrial Packaging segment. This is evidenced by our second consecutive quarter of achieving gross margins in excess of 20%. Free cash flow expansion, which is a result of improved operations, more disciplined capital spending and improved working capital efficiencies, continued improvement in our journey toward customer service excellence, and we’ve increased and narrowed our 2016 Class A earnings per share guidance range. Our new guidance is $2.36 per share to $2.56 per share. We acknowledge that significant opportunities still exist in each of our strategic business segments and remain focused on unlocking additional value from our portfolio. Before we start, I’d like to ask our CFO, Larry Hilsheimer to make a brief comment.

Thank you, Pete. We have reposted this morning our appendix exhibit of the impact of price, volume and foreign currency impact to net sales. We have done so to better reflect actual performance, which was previously distorted by a shift in the classification of specialty products in EMEA through our LN implementation and the mechanics of the computation for this chart. This reflects the complexity of our product mix and difficult -- and different price levels. This has caused us to commit that we will modify how we report this on a go forward basis to provide more clarity into volume, price and FX components of our key products. Julie, please, if you would open the call for questions?

[Operator Instructions] Your first question comes from the line of Adam Josephson from KeyBanc. Your line is open.

Pete, Larry and Matt, thanks, and hope you are well this morning.

Great. Thank you, Adam.

Pete, just my two will be on containerboard. Are you announcing $50 a ton price increase along with many of the other producers?

Yes, we are.

And can you just talk about just why just in light of the sluggish industry conditions that have persisted all year and given that many producers’ input costs are obviously quite a bit lower than they were couple of years ago, even OCC, which has moved up by 30 bucks a ton in recent months isn’t any higher than it’s been over the past three years or so, and year-to-date is lower than it’s been in years past. I am just trying to understand the basis for the increase? Thank you very much.

Thanks for the question. And due to the last couple of weeks, if I could, why don’t I start with the chain of events and talk through what Greif is going to do, if you are okay with that, Adam?

Sure, Pete. Thanks.

As everyone knows, RISI Pulp and Paper index several weeks ago published a reduction in the price of medium by $15 a ton; and quite frankly, we were very surprised by that change, and the reason why is our pricing had not changed from Q2 to Q3. In our view and I think I stated this in the second quarter comment was in a broader market, we saw that the volatility on pricing had really quieted down. So, recent containerboard price increase, I am not surprised at all. Let me kind of explain where we are in this. Several weeks ago, we did announce a similar $50 a ton price increase in Latin America; we just sell semi-chem medium there, and we have a very small position but the rationale for what we did and why we are announcing -- have announced the containerboard increase in the North America is same. So back to your question, we have communicated and announced the $50 a ton price increase on all containerboard grades effective October 1st. And our rationale for Greif while we are increasing prices and made those two announcements, it’s been well over three and half years since the last increase. Overall, we have had inflationary cost eroding our earnings. And as you guys all know, this type of business requires significant capital spending, which we have done. And our shareholders expect and deserve a better return on their investment. And my responsibility as CEO is to make actions and decisions to do that. So that’s our rationale.

Your next question comes from the line of Chris Manuel with Wells Fargo. Your line is open.

I wanted to -- kind of two different topics I want to ask about, if I could. If I could follow up just for a second on the containerboard stuff, I know it’s not as big of a piece of your business, so you’re not as a big of a player in the market, so maybe it makes it a little tougher to answer this. But, how would you think about perhaps [indiscernible] the efficacy of getting price within the market; do you feel that maybe it’s little easier and recycled versus kraft as we sit today or do you think that -- how’s reception been thus far?

It’s little premature to talk about specifics, and we don’t necessarily make any comments about our specific commentary with our customers; all that is always private between us. But, I don’t see a distinction between the ability to get increase whether it’s semi-chem or whether it’s kraft or whether it’s recycled. I think again, I think we feel very bullish about the increase, and I think it’s needed based on the rationale I explained. So, no, I’m very bullish on what I think the result will be.

Okay. And then, if I could ask a couple of other questions regarding the drum business, and then I have a question for Larry as well. As we look across -- I haven’t admittedly haven’t looked at your new slide deck. But it looked as though volumes were really up a lot in the EMEA region and they looked down a good chunk in North America. Could you maybe give us a little bit more color as to what might be happening particularly in -- I think we understand what’s happening in Latin America but perhaps what’s happening in North America and Europe, so, we’re up double digits and down double digits in different regions with respect to volume?

Yes. Let me make a comment and then let Pete address the primary question, Chris. I think when you look at the reposted chart there that will address your question in EMEA. It was distorted by some specialty product classification and just a computation mechanic. So, we try to clean that up. It was an item that we identified yesterday and we had the decision to make whether to go ahead and post it yesterday. I made that call and we have been looking at it and determined it’d be better to reclassify the things and show it in a way that eliminated that distortion. So, you will see that in the reposting. But, Pete can talk to the results worldwide.

Chris, if I could, I’ll also may comment a little bit on what we’re seeing to the volumes and I’ll specifically talk through the volumes in each of those two regions. As you guys know, I think we indicated that RIPS global revenues were up 1% when you factor out FX and divestitures, and really there is three main inputs, and then I’ll go specifically. We did have a weaker ag season in both North America, predominantly California and EMEA, Southern Europe. We did have some isolated weak global markets, as you indicated. And we continue our focus on trying to generate value versus volume. And it’s back to the quality, the market share we’re trying to achieve as opposed to quantity. And I think that’s indicative of gross margin dollars are higher than a year ago. But, if you look at EMEA, there is a slowing industrial demand and in the last four months, we’ve seen successive slowness in the economic data. And although the PMI’s still over 50, it is slowing. And I think this morning, the Eurozone manufacturing data was just released and it’s consistent with that theme overall that we’re seeing a slowing Eurozone. In July and August, we saw an anomaly of our volume. So, the last two weeks in EMEA in July, we saw significant departure in volume and that lasted until the first week of August, roughly 10 days into August. However, at this point, the volume trends are back to normal. So, we should start feeling better about where we’re in EMEA after that. If you look at the discrete substrate, steel, we’re up a 0.5%. IBCs, we continue to grow, were up 8% in EMEA. And plastics is a one area that we saw significant decline; we’re down 11% on our plastics business. That is an area where we’re seeing significant raw material increases and we have taken a stronger position on pricing. That is also a small subset; we have a less raw material contractual pass-through. So, it’s an open negotiated position. And the other point is we have certain regions within that plastics business, specifically Italy and the Nordic regions where we didn’t feel that our margins were acceptable. So, we’re making some price and product mix decisions along with the raw material increases and taking certain stands and focusing on value versus volume with some of those eroded margins. So that gives you a view I think of Europe. Specifically inside the Europe, as we referenced, there is a weaker ag market, mainly around tomatoes in Southern Europe. That business or that segment was going well until there was sudden and extreme rain that kind of radically stopped that crop. Some other points around that globe, Russia continues to exhibit really strong growth, primarily because of the alignment with some strategic customers. Western Europe overall is I classify as stable across the Western European geography. Central Europe is flat and, we’re starting to see improvement in that region from August. The Middle East, while it’s not a very big region for us, the volume is actually quite good with the exception of Saudi Arabia and that’s predominantly due to some weak lube oil segment. And I go back to the final point is, in all our RIPS, we’re making pricing product mix decisions based on the quality of our market share and making the right margin in our decision. So that gives you EMEA. Let me just make some comments about North America. I’d tell you, as guys know, it is a slow growth environment but it’s one of the better and more stable markets we participate in. You’ve had slow improvement and slow growth, although it’s not exciting. Overall, our steel drum consolidation, which is driven by our need, a year ago our returns in that business weren’t acceptable. We completed that in August of 2015. So, the comparisons in Q4 will be more balanced on a comparable manufacturing footprint. And also, we are taking some price product, mix management decisions, as I have referenced before. Again, our gross margins in North America were significantly higher than 2015 with less revenue. But we had a very, very strong performance in that business. If you look at the details, IBC volumes were up over 12%. Our plastic business in North America was up 0.5%. And where our volumes were lower significantly were steel and fiber; they are about 7% to 8% lower. I referenced the fiber impact was basically the slower ag system, that is typically we get a really big bounce. The steel business I referenced before and our consolidation that business and our activity and our conduct in the market. So, specifically in the West Coast ag system or season, the California tomato crops were down 15% through industry data that we get versus prior year and the other alarming issue in that segment was their inventories was up 37%. And because of that, we experienced some of our larger customers destocking during that time period. So, you have a slower season yet destocking which caused lower than typical ag volume in our fiber business. The one comment I’ll make in North America about the chemical sector that is a larger component of our steel drum business in North America, we feel confident we are not losing wallet share with our key customers. One big factor in [audio gap] and the export markets in the North America chemical segments are down 8% versus a year ago. I’ll also just make a short comment on APAC. So, the strength there is our IBCs are up 7%; our plastics business in South East Asia up 9%. Our steel volumes are flat versus prior year. The only comment on that economy is the region is challenging and competitive; it’s got a really diverse competitive market. But I think the growth patterns are fairly stable than what we’ve seen in the past few quarters. So hope that answers your question, Chris.

It does; it’s very helpful. And I just -- one more follow-up along the lines to that, then I’ll jump back in the queue. So, apologies, I just relooked at your new slide with the volumes in. So that’s -- the question was a little off. But, I guess, as we look forward, if you are doing some pricing actions or things in the region, perhaps that has a year or so before we anniversary some of that. But I guess really where I wanted to go and think to is on an ongoing basis, would your volumes begin to track -- if you have pricing actions that are going to kind of have a tail to them perhaps not. So, we are still growing modestly in North America and in Europe, should volumes begin to -- what’s your view on base level business? Does it begin to tick back to track more in line with the markets over the next three, six, twelve months probably up modestly or how do you envision that playing out?

You characterized it pretty well. I think as we move forward, I think we should align more with industrial markets. But also our focus is -- we were impressed with our volume improvements around here for time being and our margins eroded. Volume is strictly a vehicle to profit. And so every decision we make will be toward driving value and profit. So, I would agree that going forward after Q4 and on, we should be more aligned industrial markets but we are not going to let that drive our behavior in a performance. And one other comment that’s -- whether that’s worth for your consumption or not is there was less days in Q3 than Q4, Q3 this year than Q4 last year, but just as a reference point.

Yes. Q3 to Q3 was one day less this year and that will turn around in Q4. The other thing I would add to Pete’s answer there is as we’ve said before, Chris, our focus is on really excelling in customer service and value. And our objective once we’ve stabilized is to grow slightly better than the production. So, we won’t be satisfied with just continually losing market share by any stretch.

Okay, that’s helpful. I’ll jump in the queue, guys. Thank you.

[Operator Instructions] Your next question comes from the line of Justin Bergner with Gabelli & Company. Your line is open.

First off, could you just help us understand what’s going on, on the tax line; what the adjusted tax rate in the third quarter; will the reduction in the tax rate continue on into the 2017 fiscal year and beyond or were these all sort of onetime reductions in tax? Thank you.

Thanks, Justin. Tax continues to be a topic that confounds, as we’ve talked in prior quarters. And just the mechanics of the GAAP rules in FIN 48 cause a lot of distortion quarters-to-quarter, as we have explained. Out of this, the tax benefits that are related to discreet items free-ups of some of our FIN 48s as a result of resolutions of exams and also the tax benefits of a rebalancing of our debt footprint worldwide with a related tax benefit is about $0.17 for the entire year but it also fell entirely in the quarter kind of time frame so. That drove a significant drop in the quarterly tax rate along with what we’ve explained before about how the FIN 48 rules work relative to entities, legal entities within geographies that have valuation allowances required under GAAP rules because of losses without a clear path of demonstrated profitability. Some of those could turn around and be beneficial in the future as we execute on our transformation plans and drive profitability in some of those entities. Justin, to your question relative to the non-GAAP rate for the quarter, difference on these things end up being related primarily to impairment items but it would be 10% in the quarter. So, obviously, -- well, not obviously, one of the items that creates difference between tax expense for book and tax is related to impairments. So, as we get out of the realm of having impairments over time, that difference will mitigate as well. And then, as the valuation allowance entities become profitable, we’ll get them back to a more normal picture from a tax perspective.

Great, thank you. So, I mean, what should I think about as sort of normal after you…

Yes. And the short term, say, the next year or two, I think that our sort of normal recurring tax rate would be somewhere in the 35% to 40% range; it’s all going to depend on tax events and those kind of things impacting matters. Over time, I will certainly be testing our tax group to try to drive our overall tax rates down in the 30% to 35% range, hopefully the lower end of that. And then the big focus for most tax items is to really figure out how your cash tax rate is lower by entering into situations where you’re employing tax strategies that allow you to defer the time you pay the tax.

Okay, that’s helpful. Switching gears to some more in fundamental drivers of the business. Your adjusted operating profit margin, I guess a climbed above 10% in rigid packaging of this quarter. And I was just trying to figure out, is that a sustainable level or there is kind of seasonal benefits in the third quarter or the raw material benefits; how should I think about sort of the portion of that margin enhancement that’s sustainable growth forward?

Justin, this is Pete. Thanks. We believe that type of margin and operating rates are very sustainable, and that’s our expectations.

Okay, great. But it does look like the third quarter generally is the higher margin quarter from a seasonal point of view?

That’s fair.

Okay, thanks. And then, if I could just ask one question on containerboard pricing, clearly, there is some good questions asked earlier. What will you sort of be looking for to see whether or not the price increase? Initially it looks like, it’s going be accepted in the market by you and AIP? [Ph]

Well, I can’t comment on anybody has or not. But the key is come October 1st, as we deliver and build at a higher price, that’s typically how you determine how it’s been accepted. And again, we have a large percentage of -- our intake is internally integrated. So, I have full expectations that it will be successful.

Your next question comes from the line of Steve Chercover with Davidson. Your line is open.

First question, you said that your divestiture should be complete by the end of this year. So, should we expect restructuring cost to decline materially in 2017?

We have stated that we expect our primary divestiture to occur, obviously we continuously look at our portfolio, Steve, but the elements that related to our transformation as first laid out, your statement is correct. Our restructuring charges, we indicated in our filings that we expect those to mitigate in the first quarter of 2018. As we continue to focus on how do we streamline our organization, we expect further charges at a lower level than we have been running but through ‘17.

Okay, thanks. And then, again, I think there is -- along the same theme, there is no material acquisitions for the rest of this year. If you hit your financial targets for 2017, will you -- to go back in time, will you earn your right to grow; and if so, in which vertical?

Yes. Steve, at the Investor Day conference that we had in June, in the closing remarks that Pete made, he shared with the team that himself and me and a very, very small group had already began focusing on and as we should, assuming we achieve our objectives and we re-earn the right to grow, where are we going, what are we doing and how do we go about that. And we said at that time, we would have much more to talk about it at our Investor Day next June. So, we are focused on that. And obviously we are confident we are going to hit our transformation objectives.

Okay; and final question. Is there a way that you can get away from pass-through pricing mechanisms?

Do you have any reference to which business, because it might be a slightly different answer in each business, or you’re talking about just general, Steve?

I am talking in general, because it occurs to me that it’s a slippery slope. Once you start having pass-through mechanisms, you have to get rebates when input costs go down and ultimately you just become almost like a utility.

Yes. I think it depends on your position in the market. Most customers prefer a pass-through mechanism because it’s controllable, manageable and eliminates volatility in actually negotiating trouble. So, I think it would be hard to go entirely away from that, although there are some instances where it makes sense for both us and the customer not to have it. But broadly, I doubt whether we can holistically move away from that type of arrangement.

I mean, would it be a nice to have objective?

Depends on the business you are and your position in the market to be quite -- and I am not trying to be acute [ph] but it really just depends on the region and your position in the market, would dictate whether it’s a benefit to you or not and then whether or not you can negotiate that with your customers in the market. And the other issue you have to -- we have all have to remember is we have competitors who could cause stir with that as well.

Got it, okay. Thank you very much.

Thank you.

Your next question comes from the line of Ghansham Panjabi with Baird. Your line is open.

Hey, guys. Good morning.

Good morning, Ghansham.

Hey, Pete, I think you said demand in Europe normalized in August after some weakness late in your Q3, so imagine that’s July. August I would imagine is also quite a weak month of Europe in general. So, as you kind of look out to September and beyond, can you perhaps share what your customers seem to be indicating about European demand for the rest of the year, maybe some recent conversations or something like that?

Thank you, Ghansham. So, the slowing in July and August could be tied to the holiday season in Europe. But going forward, I would expect that we will see similar trends that we’ve seen in the last four months. You’ve got to remember, there is still expansion, it’s just slowing. And at this point, since we’ve seen volumes improve in August through the end of August, talking to our team there, we do not have any significant concerns that that trend will change.

Okay. And then, on IBC, the strong demand for that particular product; is that a shift away from other alternatives in your portfolio or is this specific to a particular product or end-market? It just seems high at up 8% in North America and Europe?

Yes. So, two points, there are -- our customers are transitioning from some packaging mediums to IBCs, a lot of times it’s more efficient in their supply chain. And secondly quite frankly, as our position is smaller and so as we are growing and adding capability around the world, those increases are higher; and as we grow footprint, those would stabilize slightly more. But in general, the growth rates for IBCs are at a higher rate globally than steel drum or fiber drum or plastic drums.

And then, one final one maybe for Larry; Larry, I’m sorry if I missed this, if you’ve covered this already. But what’s driving the higher free cash flow above and beyond the CapEx reduction? And, can you just kind of update us on working capital as well for 2016? Thanks.

Yes, certainly. Thanks for the question. I mean, effectively, there is the element of the taxes which is about 14 or so. And then, we also have about 7 on pick up of just the midpoint of our CapEx range and the balance is just a continued improvement in our working capital elements. Those three times essentially total up to the move of our range. Now, on a go forward basis, we remain committed to delivering on our transformation commitments. The operational improvements that we’ll continue to deliver through next year and also continued focus on further improvements in working capital management will help us deliver on those commitments. And we do have one bid of tailwind going into next year, we’ll be refinancing our bond and will have some pickup even on interest expense cash out next year as well.

Okay. Thanks so much, guys.

Your next question comes from the line of George Staphos with Bank of America. Your line is open.

Thanks for the details. A lot of my questions have already been asked. But, I just want to take another tack or try on Ghansham’s question. Can you comment at all in terms of what kind of volume year-on-year you are seeing midways through the fiscal fourth quarter? Can you talk at all about in the percentage rates, what they get down to what they are looking like now across some of the key geographies, obviously Europe is where you saw a bit of a slowdown or product lines?

Yes. So, what we have is visibility -- that I have visibility in the probably the first three weeks of August, which is dangerous to make assumptions from three weeks. But again, in Europe, we’re quite pleased that we started seeing volumes trend back to more normalized volume trends, across all of Europe. I think I commented, there are a few weak spots. Saudi Arabia is one that’s been weak from all of Q2, although it is not necessarily material to our RIPS business overall. And I would say in North America, we don’t see any dramatically different trends from the first three weeks in August, from what we saw in the third quarter. And that’s one of the typical exceptions is that fiber tends to slow down in Q4 because a large input of the ag season on the West Coast since that didn’t happen, we tend to see flatter -- we will see a flatter trend in that segment. Does that answer what you’re talking at George?

Pete, a little bit, and I don’t want to belabor it, but in Europe, would trending back to normal rate be low single-digit growth that you’re saying on an ongoing basis? And I’m just trying to put some sort of numbers to the word. [Ph]

So, in steel, we’ve been running between 1% and 2.5% to 3% in steel throughout the year. I think that will be probably toward the lower end of that only because what we see the trending of the manufacturing data. I think IBCs will continue to grow at a similar rate this year and hopefully we expect next year because of some of the additions we’re making in that business. In North America, I think you will start seeing [audio gap] but mainly in steel because, we’ll have a fair comparison based on our consolidation efforts change in Q4 last year. So, it’s just a more even comp. And I think our IBC business will continue to grow in North America as well, at a rate to similar to what we’re seeing this year or potentially higher, again, as we’ve added capability.

Okay. Thanks for that, Pete. The next question I had, I’m, guessing it’s largely pass-through, but -- and certainly your margin improvement ultimately is the most important arbiter here. But, when you talk about emphasizing price if you will or value over volume, and I then look at some of the percentage increases in price mix, either in the table and the slide deck or the table in your press release, the percentage changes are not that significant. So, is there a way to kind of define for us how much is pass-through and why we’re seeing a bigger pick up in pricing, given the obvious emphasis on value?

Yes. There is a lot of components go into the gross margin line and from a pricing, because we have a high pass-through mechanism, when you look at our raw materials, whether it’s predominantly steel, because that’s about 65% of our substrate volume in RIPS, you have pass-through mechanism, when it goes up, we pass that through and it goes down, we do the same, there is lags and depending on the timing. So, it’s not always clear. But I think there is three big parts of what we’re doing from a gross margin standpoint. It’s we are making decisions on where we participate and where we don’t. And that’s based on the margins we get. Secondly, it’s supply chain and sourcing initiatives. As example, we have got 50 to 60 different initiatives whether it’s in transportation; whether it’s in sourcing that we do it was indirect materials that we do constantly to try to create value. And then another big part is our operating costs, our operating execution levers. One of the biggest areas there has to do is unplanned downtime in our operations, and that really speaks to improved reliability and consistency in our manufacturing operations. And there is a variety of levers that drive that. I think my point on value over volume is we have to and we are changing our culture that volume is strictly a vehicle for profit. And we are not going to be slaves to chasing volume in competitive arenas where the margins are eroding. We have to be smart about where we participate and where we choose to participate and with the right strategic customers. So that doesn’t necessary mean that you are always going to get high margins because it is a competitive environment but it’s based on the decisions you make in circumstances that drive our behavior which is profit first and volume second.

No, that makes sense Pete. And I appreciate the thoughts on that. I don’t know if there is a way to quantify maybe an aggregate for the Company, what the effect off pass-through was year-on-year in the quarter? If you had it somewhere in the deck or the release, I really I apologize for missing it.

No, we don’t have it in there, George, and we’ve never really tried to quantify it ourselves. It’s a thing that we can look at and see whether it’s something that we could do but we have not yet done it.

And the other thing Larry has talked about, we have multiple, multiple number of the pass-through mechanisms and the question how reliable and how much time it would take to do that. We know what increases we are getting decreases in material and how that will behave and we track that. But to roll it up would be very challenging. And I am not just sure it would us a different story and make us change what we are doing running the business, if that makes sense to you.

It does. And look, margin again will be the final arbiter and again congratulations to you on your performance there. From where we sit having that would be helpful in terms of our valuation view but again we don’t necessarily want to create a lot of work for you all and the disclosures become much better. So, again, we thank you for all that. My last question, I’ll turn it over and come back in queue. Can you talk a little bit about your progress in reconditioning and how that’s going and how that’s helping, if at all your IBC growth? Thank you, guys.

No, that’s great question. So, our belief is the biggest opportunity in RIPS and reconditioning is tied with IBCs because that’s of a more supply chain strategy. We are -- in mandate [ph] Germany, we have refigured our manufacturing footprint for IBCs in that region, consolidated and improved, and part of that is putting integrated new IBC recondition facility in one, in Central Germany and that is almost completed. And we are building a similar capability in the Netherlands. And we have other partners around the world that we also do that. So, that is our focus in reconditioning.

Hey George, it’s Larry. Why don’t you ask your additional question now? Because I think we’re going just take Adam and Chris and end after that. So, if you have an additional question, we’ll be happy to address it now.

Sure. I mean, I guess the last question I had was just what are next steps recognizing you’re pleased with your performance to-date or the improvement and furthering the turnaround and flexible, what are the next operating metrics or key mile markers? Is there any next capital investment that you need to make? Obviously you are working on Mexico there. Any thoughts there would be helpful. And with that good luck in the quarter.

And George, you are referencing just FPS.

Correct.

The big next milestone as we’ve talked about is Q4. And you can see on what we’ve released is we expect to have EBITDA of $3 million in Q4. We’re really pleased with the pace and activity that’s happening there, both in managing or on the performing operations and what we’re doing in the market and operationally. But that is a big -- that’s a big milestone for us. Our leader Hari Kumar is confident in the activities that they are going and everything we’re doing is poised to that as that is the next milestone.

Okay, I’ll turn it over. Thank you.

Your next question comes from the line of Adam Josephson with KeyBanc. Your line is open.

Larry, Pete, thanks so much for taking my follow-ups. I’ll try to make them quick. One is just back to the containerboard price increase. Can you talk about what impact do you expect that to have on your fiscal 2017 financials?

Yes, sure. So, because it’s a little bit convoluted right now, as you know, let me talk if I could real quick about this fourth quarter. Our fourth quarter as you know is August through October. So, we’re going to have a balance between agreements that we have the $15 a ton medium reduction and then plus a beginning a blending of the $50 ton increase on containerboard. So, we’re talking about an estimated 1 million to 1.5 million impact in Q4 on the negative side, depending on the timing. And in 2017 and really starting in our Q1, Adam, which is November to January, we expect to have the $50 ton increase on containerboard in. There might be a month delay for our corrugated product sheets. So, we’ll be getting that during early Q1, our Q1, which is November. And then probably, if you just take our volume and if you can use for a reference, about 550,000 tons as medium and 200,000 tons as linerboard and do the math on the 50 and the 15, that will give you a fairly clear view of what we think that impact will be in 2017.

So, by 2Q 2017, you think you will be at that full run rate of benefit if you will? So, call it 10 million…

And the key would be as our Q2 is January through March. So, we should start having good run rates in our Q1.

Okay. And just to be clear, your annual capacity is what, 730,000 tons or so?

We’re going to expect to produce about 750,000tons today. And I’d just say 550 for medium and 200 for a linerboard as a good reference point.

Okay, thank you. And just two other quick is SG&A was 93 in the quarter. Larry, can you just remind me what you expect the eventual quarterly run rate to be?

What we’ve said, Adam, is we want our SG&A to below 10% of revenue. So, obviously, it tends to be a little bit of a moving target. But when we laid out our commitments in June, it would be that three kind of level, so obviously below 330 for the year. So, it fluctuates a little quarter to quarter because of some things and you get instinctive accruals that vary throughout the year. But that kind of ballpark is where we should be.

Great, thanks. And just one more on the macro, Pete, you talked earlier about North America, the ISM PMI just for August just came out this morning; it was 49.4, a bit below expectations and owing to modest contraction. Does that surprise you at all? I know you earlier talked about continued slow growth in North America. So, is that a surprising number to you?

Adam, I saw the European numbers that came out, I have not seen that, the North American one. So, it actually, to go down the 49, that is surprising. I haven’t got chance to look at it. So, I’ll leave that comment.

I totally understand. Thank you.

Today’s last question comes from the line of Chris Manuel with Wells Fargo. Your line is open.

I just had one follow-up for Larry. [Indiscernible] I have a couple of questions for you too. I wanted to ask, and I know you are not going to like this question necessarily because I’m going to ask you about 2017 a little bit. But, where we end up this shift for free cash flow, let’s say end up towards the middle of your range. Help me perhaps, kind of walk through what some of the puts and takes are for ‘18 and -- I’m sorry for 2017 versus 2016? And I’m presuming it’s going to be a bigger number in 2017 than 2016. But some of the puts and takes there obviously, higher earnings, CapEx probably in the similar range but the one I guess where I guess stuck is kind of on working capital. I mean, if you do have paper price increase that would be a negative to working capital, even though it will help nicely on earnings. If you have steel prices are up, 50% in the last month or two, how would you think about some of the puts or takes to 2019. You said earlier restructuring expense may be down a shade of the different pieces, 2016 versus 2017 for free cash flow?

Yes. And I will make some comments on it, Chris, but I’ll just be very direct. I’ve not relooked at what I think 2017’s projections would be except to just do a gut check on, do I think we’re able to get there based on what we looked at before. And I have absolute confidence that we will get there. But, if I just go to your pieces and parts, CapEx, this year in the fourth quarter numbers that we laid out, obviously we said down a little bit. That has to do with discipline in our process. So, when we take tentative approval in our budgetary process on a project, we tell the teams when you come for real spend, you have to redo your business case with actual bids. That sometimes puts pressure in the process where the bids delay and some things get pushed back. So, CapEx is probably slightly lower right now than where I’d expect it to be. I think it stay consistent with what we said before sort of 99 to 119 or call it 100 to 120, somewhere in that range. So may be slightly more on CapEx but we are just beginning that process for our budget for next year. So, we haven’t landed on number yet. The second element would be, as I mentioned, we anticipate some element of tailwind from interest cost savings. Third element is I do expect further cost reductions in our SG&A spend and just operating results, as you mentioned that will drive a lot. And then working capital, we do expect to get another $10 million to $30 million of kind of savings out of next year and hopefully even more depending on what we are able to accomplish this final quarter as well.

Okay. One last question. When you laid out your original -- I don’t know certainly but it was 205 and maybe 225 or something like that, one rate for free cash flow coming out of 2017. Did that contemplate a debt refi in it or not?

We had contemplated that there would be some savings, we’re probably looking at slightly more now than we did then.

Okay that’s helpful. Good luck, guys. Thank you.

Thank you, Chris.

Your next -- today’s last question comes from the line of George Staphos with Bank of America. Your line is open.

Hi, guys. I know you are running out of time and thanks for letting me back in the queue. I had one last question I forgotten to ask. So, when we look at your decisions on pricing in containerboard and the decision to go out with $50 per ton price increase effective October, it would suggest us that from what you’ve seen in the business, August trends have been relatively good. Otherwise, we would have expected that maybe one would have wanted to see what the data looked like middle of September. So, can you talk a little bit about whether that data and that industry information was relevant or really not that relevant in terms of how you are setting your pricing strategy. Thanks Pete, thanks Larry, thanks Matt, will talk to you soon.

Yes. Thank you, George. So, I’ll comment on what we see and how that impacts our decision. So, actually, our backlog in our mills is actually better now than it was at the beginning of Q3, which would suggest we’re seeing some improved activities. And our CorrChoice Sheet Feeder system continues to have good growth; I think we’re up 4.1% quarter-over-quarter and we still see a good growth opportunity there. So, again our biggest decision on the announcement has to do with what we believe we have to do to provide the right return for the capital invested in the business and offset the increased cost that we have seen over the past three and a half years eroded our margins. So, I hope that answers your question, George.

Yes, that’s great. Thanks very much guys.

Thank you.

I would now like to turn the call back over to Matt Eichmann for closing remarks.

Great. Hey, thanks a lot Julie. That concludes our presentation today. The replay of this question-and-answer session will be available later today on our website at www.investor.greif.com. We really appreciate your participation and your interest. We hope you have a good remainder of your week. Thank you.

This concludes today’s conference call. You may now disconnect.