Greif, Inc. (GEF) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Greif's First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, we will a question-and-answer session. [Operator Instructions] Thank you. I would like to turn the call over to your host Matt Eichmann. You may begin.

Thank you, Chrishpher, and good morning, everyone. Welcome to Greif's first quarter fiscal 2019 earnings conference call. Joining us on the call today are Pete Watson, Greif's President and Chief Executive Officer; and Larry Hilsheimer, Greif's Chief Financial Officer. Pete and Larry are available to answer questions at the end of today's call. In accordance with the Regulation Fair Disclosure, we encourage you to ask questions regarding issues that you consider material because we are prohibited from discussing significant non-public items 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 is contained in the appendix of today's presentation. And now, I turn the presentation over to Pete on Slide 3.

Hey, thank you, Matt, and good morning, everyone. I'll begin today's call by providing a summary level review of our quarter, and then our CFO, Larry Hilsheimer will expand on our financial results and discuss our fiscal 2019 outlook. After prepared remarks, we'll conduct a question-and-answer period. We delivered a solid year-over-year first quarter results despite significant external headwinds. Our first quarter adjusted EBITDA and adjusted Class A earnings per share were up 15% and 33% respectively versus the prior year, thanks to strong performance by our paper packaging and flexible product segments. Our rigid businesses sales and profitability were challenged by a slowing global economy and continued uncertainty related to trade tension. It was also negatively impacted by foreign currency and I'll comment more about that on each segment's business performance in a moment. During the quarter, we announced an agreement to acquire Caraustar Industries. The transaction was completed on February 11. Caraustar is vertically integrated paper packaging company and well established leader in the production of uncoated recycle paperboard and coated recycle paperboard. They operate one of the largest recovered fiber businesses in the US, are a leading manufacturer of tube and cores and produce a variety of other products that serve industrial and consumer end markets. Our new Greif colleague shares our vision of providing industrial leading industry-leading customer service and efforts are underway to integrate the business into Greif. I'll now review our business performance by segment and please turn to Slide 4. The Rigid Industrial Packaging business experience a challenging first quarter largely related to weak demand and certain global markets and foreign currency headwinds. International volumes were solid throughout much the world, but very weak specifically in West and Central Europe and China. We also experience weak demand in Argentina due to recessionary effects. In North America, large plastic volumes were up almost 9% versus the prior year quarter. Intermediate bulk container volumes were up more than 15% versus prior year. Steel volumes, however, were down roughly 5% with a bulk of that shortfall in the US Gulf Coast where export customers have been negatively impacted by trade tariffs and customers continue to ship more products via bulk packaging. The Gulf Coast weakness was also negatively impacted by our Specialty Packaging and Services business where volumes were down almost 8% versus prior year. In Latin America, steel drum volumes were weak versus the prior year due to recession and environment in Argentina and down in Brazil from operating challenges being addressed by our new management in that region. In EMEA, intermediate bulk containers volumes grew almost 9% while steel drum volumes were down roughly 4% versus the prior year quarter. Similar to quarter for the shortfall and steel drums was driven by continued weak demand in Western and Central Europe tied to trade uncertainty and weak economic conditions. Backing out that region shortfall EMEA steel volumes have been positive for the quarter as we saw a very good buy and demand grow in southern Europe, the Middle East and North Africa. In APAC, our first quarter steel volumes fell roughly 10% versus the prior year. China volumes were lower versus the prior year quarter, while steel volumes in Southeast Asia fell slightly due to the divestiture of a business in the Philippines. The impact of China's slowing economy on the region and margin mixed pricing decisions. RIPS' first quarter sales were roughly $18 million lower versus the prior year quarter as a result of FX headwinds, but on a currency neutral basis RIPS' sales were roughly 1% higher versus the prior year quarter as higher selling prices from index price increases and strategic pricing decisions offset volumes softness. Despite lower RIPS first-quarter adjusted EBITDA was flat to the prior-year, overcoming a roughly $4 million FX headwind and a $1.5 million correction adjustment related to the Philippines divestiture. The business demonstrated improved manufacturing efficiencies and lower SG&A expenses in the quarter. In light of continued market softness, we have proactively taken steps to reduce our fixed and variable cost structure. We executed on the Philippines divestiture, completed the closure of a facility in China; completed the closure of business line in Malaysia and had plans to exit facilities in the US and in Africa. We are further streamline our SG&A and have rationalized our footprints and parts of APAC, Europe and the United States. We are being realistic about global economic conditions and are focusing our attention on areas that we can control to better adapt to market changes. Please turn to Slide 5. Our Paper Packaging segment delivered a strong first quarter. Sales for the quarter up nearly 7% thanks to higher selling prices, solid unit growth and higher specialty sales. Our CorrChoice network corrugated shipments were up 3.8% versus the industry was up 1.7% in the same period. First quarter adjusted EBITDA grew by more than 29% versus the prior year due to higher sales, improved price cost mix and better manufacturing efficiencies. We are further enhancing our existing paper packaging portfolio. Last year, we announced a new corrugated sheet feeder that is set to commence construction in eastern Pennsylvania and that will include specialty converting. We are also adding another Asitrade machine to existing operations in Cincinnati. That Asitrade will be the third in our network and will further enhance our specialty offering and improve integration. Please turn to Slide 6. FPS continues to deliver solid results. The segment generated sales of roughly $75 million in the first quarter excluding the impact of FX, sales were down roughly 1% versus the prior year quarter, primarily due to market softness in France in the Benelux region. Gross profit improved by roughly 15% versus the prior year quarter, thanks to improve manufacturing efficiencies across the network. Those improved efficiencies coupled with lower SG&A and a beneficial FX tailwind help explain flexible's adjusted EBITDA by almost 55% versus the prior year. We continue to be encouraged with the improvement of this business. I'd like to now turn over the presentation to our Chief Financial Officer, Larry Hilsheimer.

Thank you, Pete. Good morning, everyone. Please turn to Slide 7. Before I address financial results or highlight changes made to nomenclature within our reporting. First, we are using adjusted EBITDA beginning this quarter and going forward. Adjusted EBITDA is a commonly used metric within the packaging industry and closely aligns to our long-term incentive plan. Second, we will be utilizing adjusted free cash flow which we define as cash from operations less purchases of PP&E plus acquisition related cash costs. Given we just completed the Caraustar acquisition and will incorporate that business into our future results; we thought it made sense now to transition to these metrics. On to the quarter's specifics. First quarter net sales excluding divestitures and foreign exchange were 2% higher year-over-year due to index price changes, strategic pricing decisions and volume improvement in paper packaging. First quarter gross profit was roughly flat to the year ago quarter due to strong performance in our paper packaging, and flexible products and services segments, partially offset by softness in certain regions and the Philippines correction adjustment that Pete mentioned in rigid. That divestiture also triggered a roughly $0.03 per share headwind due to earnings due to a tax indemnification requirement. First quarter adjusted EBITDA rose by roughly $14 million versus the prior year quarter due to higher year-over-year EBIT. DD&A was flat to the prior year quarter. Below the line first quarter interest expense and other expense were down $1.6 million and $7.9 million respectively versus the prior year quarter. Last year's first quarter other expense included a sizable currency loss related to hedging activities. Stronger adjusted EBITDA and a reduction in interest and other expense drove first quarter adjusted Class A earnings per share to $0.65 per share. Our adjusted tax rate during the first quarter was 35.1% roughly flat to the prior year quarter and in line with the midpoint of our fiscal year range of 28% to 32%. As a reminder, the application of FIN18 reporting may cause fluctuations in our quarterly effective rates from time to time. First quarter adjusted free cash flow improved by roughly $46 million versus the prior year quarter. First quarter of CapEx was roughly flat to the prior year. The improvement in free cash flow was driven primarily by improved profitability and better working capital management. Before addressing guidance, I'll quickly touch on our recent acquisition of Caraustar Industries. Please turn to Slide 8. As Pete mentioned, we announced our agreement to acquire Caraustar Industries on December 20 and closed the deal on February 11. We consider the acquisition strategic rationale compelling and we expect the deal to generate significant value creation. Caraustar enhances Greif's consolidated margins and free cash flow, strengthens and balances our portfolio, offers excellent cultural fit and represents a close operational adjacency to our existing mill operations. Integration efforts are well underway and we have a clear line of sight into realizing at least $45 million of synergies over the next 36 months. Caraustar's financial results will be reported within Greif's paper packaging and services segment going forward and the businesses robust free cash flow will enable rapid debt repayment. With the addition of Caraustar, we have revised our fiscal 2019 guidance higher. Please turn to Slide 9. We now expect to generate between $3.60 and $4.00 in adjusted Class A earnings per share in 2019. Our updated fiscal 2019 guidance incorporates the market issues in RIPS previously discussed and the recovery of the European conical market later this year. Also a negative and untimely rapid decline in the US CRU index steel pricing that occurred in December, which will cause a temporary price-cost squeeze in RIPS North America. Price decline is expected negatively impact our Q2 RIPS margin before improving in the back half of the year. Updated guidance also reflects the $20 a ton medium price decline RISI announced. Offsetting that decline is our updated OCC assumption of $65 a ton for the remainder of fiscal 2019. We previously utilized RISI's OCC forecasting guidance, but are discontinuing that practice as Caraustar's recycled fiber group provides better insight into the market. Finally, our revised 2019 guidance incorporates roughly 8.5 months of Caraustar benefit. A few additional words on Caraustar. Our revised guidance reflects a roughly 16% per share headwinds from various one-time items related to the acquisition that we have not adjusted out of earnings, including an inventory mark-to-market revaluation estimate. The impact of other purchase accounting adjustments in approximately 30 days of double coupon payments tied to the timing of 2019 senior notes retirement. These items will not recur in the future. We have revised our fiscal 2019 free cash flow guidance range higher to between $215 million and $245 million, which include anticipated capital expenditures of between $170 million and $190 million and less of a use of working capital than initially forecasted due primarily to software sales and active management of working capital. Turning to capital priorities on Slide 10. We've revised our capital priorities now that the Caraustar acquisition is complete. Reinvesting in the business remains our top priority and we have no plans to alter our existing dividend. However, beyond those two items, we will be prioritizing debt pay down until our leverage returns to the 2x to 2.5x range. Before I go further some of you have expressed concerns surrounding the level of debt, growth rate and perceived cyclicality of the Caraustar businesses, especially given where some believe we are in the cycle. We think it's important to deal with these concerns head-on, As to the financing of the acquisition, we used all debt and no equity given our desire have all the benefits of the transaction accrue to our shareholders and our view that our stock price is substantially undervalued. Our bank debt and bond offering were both very well received by the market, and we're substantially oversubscribed leading to an attractively priced debt offering in a roughly 50 basis point reduction in our overall weighted cash interest rate to approximately 4.9% following the acquisitions closing. Further dissuading the use of equity again is that our shares we believe are currently materially undervalued. Our conviction has been demonstrated by a broad group of our management buying stock on the open market as of reason. Given our anticipated free cash generation, we expect to deleverage by half a turn or better each year such that we'll be back within our targeted leveraged range within 36 to 48 months at the latest. With that I'll turn the call back to Pete for his closing comments before our Q&A.

Hey, thank you, Larry. And please turn to page 11. In closing, during the first quarter our company benefited from a well-diversified global portfolio. While we did experience challenges by weaker market conditions in parts of the world, we are taking decisive actions that are aligned with market realities. With a recent acquisition of Caraustar, our global portfolio becomes equally balanced, with stronger long-term earnings power and free cash flow generation. Thank you for participating this morning and we appreciate your interesting. Christa, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Ghansham Panjabi from Baird. Please go ahead. Your line is open.

Hey, guys. Good morning. So I guess first off on the guidance, the initial guidance versus the revised guidance, understanding you have Caraustar in here now, I'm just trying to understand legacy Greif and how have you adjusted legacy Greif EPS lower if at all relative to your initial guidance.

Sure, thanks, Ghansham. Let me walk through this sort of slowly, obviously, we talked about the weakness in certain markets and I know you follow a lot of the chemical companies, You've seen what's going on with a lot of our core customers specifically in Benelux and German regions with their troubles with the Rhine River levels and also things as we talked about in the Gulf Coast region. So if I start with our original range of $3.55 to $3.95 I would first adjust it up by $0.11 on both the high and low end for the change in medium and the difference in our OCC cost assumption that would take you to the $3.66 to $4.06. The impact of the weaknesses and the play out as we see that through the remainder of the year for our legacy business would be on the low end of it an impact of $0.26 worse to maybe $0.21 on the high end which would then take you from $3.40 to $3.85. And then for Caraustar it's from $0.20 to $0.15 share betterment so that you've got bottom to the range of $3.60 to $4.00 and so hopefully those are the steps. If anybody has any questions about I can walk through that again, but the other thing I would highlight on that is as I mentioned in my prepared comments, there are $0.16 of one-time items in that as Caraustar numbers so when you look at the $0.15 to $0.20 think of it more $0.31 to $0.36 on an ongoing basis and that's only for 8.5 months obviously. So does that helpful, Ghansham?

Yes. It's very helpful. And I guess just from my follow-up, Larry, and y Pete as well for RIPS specifically how are you thinking about volumes unfolding for the segment the rest of fiscal year 2019? Are you embedding any sort of macro recovery for the segment as relates to your guidance and I know you call that the steel related price cost issue for the second quarter, but just focusing specifically on volumes. Thanks so much.

Yes, Ghansham, so our full-year forecast for volumes, we are calling a negative 1.5% overall year end rate on steel drums. That's really relative to the feedback we're getting from our global customers who see a continued weakness through their second half and a more normalization of current destocking environment. And hopefully at easing in global tensions. We are continuing to see a good full-year growth in our plastic substrates. We see low single-digit growth in plastic drums and high single digit groups for IBC through the year.

Your next question comes from the line of Mark Wilde from BMO Capital Markets. Please go ahead .Your line is open.

Good morning, Pete. Good morning, Larry. I want to say we appreciate having that slide deck out last night with the earnings. I wondered just on the paper and paper packaging group, there have been some reports in pulp and paper week of ongoing weakness in recycled container board grades. I think you've kind of touched on that with the medium, but also they're talking about some weakness in the corrugated sheet market and I wondered if we could get your perspective on what's going on in those markets.

Yes. So in regard to the recycled container board, let me back up, so in terms of North American what we're seeing in paper packs, we had really strong volumes in our paper packaging segment and our corrugated sheets were up 3.8% which is almost double what the industry was the same period. We are seeing a little bit of easing of that growth rate now, but it is still growing. In regard to recycle paper prices, to be honest I was surprised at the price change it was published because our domestic pricing for medium was flat from Q4 to Q1 and it may appear the small percentage that industry has a higher degree of influence on spot market participation. I think in corrugated sheets, again, we had good growth last quarter. We're still growing but it's less than a 3.8% and I think it be really important to see what happens in March in regard to the growth patterns, but that that's what we're seeing now. Again a growing market in corrugated sheets but not to the same pace as we saw in Q1.

Okay and just as a follow on, just a couple things around OCC .I just --I wondered how you think about sort of the sustainability of this for a $65 price historically that's quite a long ways below kind of the long term medium and the long term trend. And it's also just pretty unusual to kind of see this combination of very high container board prices and very low OCC costs. Usually OCC tends to move up and down with container board. And then just finally on OCC, can you just give us some sense now from the Caraustar business? What's it actually cost to just go out and collected process OCC? So how close is the $65 to the cost of collection of processing?

No, thanks Marks. The relationship your first question the container board pricing and the pricing cost of OCC. My view is that container board pricing are quite frankly any paper pricing that we participate in whether it's URB or CRB or container board is driven by supply and demand and that obviously is reflected in operating rates in the industry, and weeks of demand and inventory. And you all know what that is. In regard to OCC with the regulatory changes in China that's created a different parallel than you described earlier. And I think as long as the restrictions and contaminants in China are in place which I expect they will be for a period of time, I think you'll have a lower than normal environment of cost of OCC so regardless of where that goes, I think it'll be --there'll be cycles but again I think that the volatility would be less cyclical than we've seen in the past because China is not engaged in the market as they have been in the past. So to me it's a new norm on OCC collection cost.

On collection cost, Mark, I don't think we have a firm handle on that but obviously as you get down to this level, gets closer to that set point which you would then think might have some impact on supply.

Your next question comes from the line of Steven Chercover from Davidson. Please go ahead. Your line is open.

Thanks, good morning, everyone. Just want to ask where you are on the path through realizations in RIPS? Is there still more to come and does the scattered geographic weakness that you're encountering undermine that ability to push things through?

No, yes, so Steve thanks for the question. The pass-through mechanisms are working actually as designed and it's really the volume implications of these weaknesses that are impacting us, and just to give you a little context around that. If I and I'll just focus on North America for a minute, if I look at the value add so our sales price per unit versus material cost per unit, a year ago in the first quarter of 2018 that was $13.41, it expanded to $13.79 a unit. So we actually have gotten back to where we were before the things started to bite us a bit. And so it's --they're actually operating appropriately. What has been really impactful is the significant increase of transportation cost per unit on a year-over-year basis, which those are not caught by the PAMs and you have to get into your other openers to go in and negotiate price increases. And one thing that our teams have been really good about is as we've been renewing contracts, which historically that was the only time you ever got to go in and negotiate for those and the contracts might be two to three-year contracts. We now have gone to having annual openers, but the steel unit in the US. Just to put this in context, the transportation cost per unit in Q1, 2018 was $2.25 a unit; in Q1, 2019 it was $2.65 a unit. So that obviously 40%-- $0.40 per unit squeeze on steel obviously was very impactful and as you might expect we've been working to try to push through other price increases as we have those opener discussions, but also looking to take action in the transport area. And we have started to see mitigation in transport cost relative to increasing its but more gone flat but you still have that year-over-year impact. And, Steve, just add a little bit more give you some of the other substrate data, for large plastic it moved from 13.50 to unit to 13.55 and on IBC's that moved from 48.32 to 52.48 and in fiber it moved up about $0.50 as well. So all of them are working well. And as designed it's really the impact of the volume that's impacting us and then the transport cost.

Okay. I'll read the transcript to get all those numbers, but thanks for the detail. Is it fair to say that at least for lapping lot of the impact of that the first steel duties and transportation it should be less of a headwind?

Well, yes and no. And I mentioned this in the transcript that we've talked about this historically. The one thing that's really not good for us is when you have rapid decreases or increases in the index. The steel cost index and unfortunately for our shareholders and the steel cost index decreased rapidly in December and we have in our Pam contracts as we mentioned in the past maybe 18 different variations, but they really come down to two across the contracts. And they're average for the quarter, calendar quarter. So October, November, December and then you have point-to-point and most of the point-to-point are from the --at the end of the quarter. And so a rapid decrease that we saw in December is not helpful for us. And that's what are driving that significant reduction in our forecasts of our operations in the --in our legacy business is all attributed to that and the volume. So really unfortunate timing for us to have that happens. So unfortunately the headwind is again in front of us.

Okay and perhaps this is the biggest softball but it's super early, any observations now that you have the keys to Caraustar. Does your conviction on the merits of the deal increase given the ongoing current to your volume headwinds you encounter in RIPS.

We are --we couldn't be more positive. I think Steve, yes, thanks for the softball. We are extremely pleased with the talent of the business unit leadership. Their engagement in really rapidly integrating into Greif. They're proud to be part of Greif and they are excellent operators. We talked about $220 million EBITDA run rate when we did the transaction. I feel extremely confident to tell you that when we come to our June Investor Day, we'll be talking about a number north of that. And with the financing rates that David Lloyd and his team were able to drive for us on getting that deal done because the debt markets love the deal. And we were substantially oversubscribed, drove the interest rate much lower than we expected. And effectively we're looking at interest cost that's basically $70 million - $75 million in what will be our fiscal 2020 which makes that deal obviously if you're buying something at a 8x multiple, you got a 12% yield and you're paying 5% interest, it's an accretive deal. So we're really excited about it and really expect that we will do better on synergies as well. So, yes, we're really bullish. Thanks for the softball.

Your next question comes from the line of Adam Josephson from KeyBanc. Please go ahead. Your line is open.

Pete, Larry and Matt, good morning, and thanks for taking my questions. Just, Larry, on the guide back for the guidance. Correct me I am wrong, I think you said your outlook for rigid for the year is down $0.21 to $0.26 as some of which is volume related, some of which is the decline in the steel index price if I'm not mistaken. Now three months ago you had seen, you're seeing weakness in Europe and China. And you didn't have a lot of positive demand commentary in rigid. So I'm just wondering what got particularly incrementally worse three months later in that business, how much is even weaker demand and how much is that steel cost issue?

Yes. So the steel cost issue is a major component of it, Adam. Also there's some currency headwind for us. Although, we had a good bit of that we do have a forecast of some net currency impact to our earnings that's flowing through relative to that business. But, yes, we're hearing and seeing more weakness than we thought and there was the hope that we would see things turning around more quickly. The weakness in the Gulf area that we talked about particularly in our specialty packaging service, which is a nice business for us, was also not existent at that time to the levels that we're now seeing it. Now I would say this is where we're at currently we have not baked in any substantial increase if the trade agreement is reached and the economy bucks back up. So this is where we are. I mean if you follow some of the chemical companies at all, and you look at their reports they're talking about softness in the first half of their year and then it coming back in the latter half of their year. Well, our fiscal year then it excludes the last two months of their year. So we didn't bake in any big lift for that.

Okay, thanks, Larry. And Pete just on container or just to follow up on one of Mark's questions about the historical relationship between container board and OCC prices. And I think you said that in your mind the two are not linked; it's more about supply demand. So a couple questions related to that. First, if memory serves in early 2017 you guys announced a price increase and I think RISI said you tied it to escalating input costs including OCC NAT gas and transportation. So correct me if I'm wrong there. And two, if it's --if prices are related to supply demand and container board inventories are to 16 year high and operating rates are falling by the month, would you agree that supply demand conditions are deteriorating? Thank you.

Yes, no, as I mentioned I think operating rates and weeks on hand of inventory drive paper pricing. And there are cost inputs that can influence positive or negative of that, but again I think operating rates and inventory rates drive pricing. And I think I agree with you right now that they are not positively driven, but we don't comment on future pricing going forward. I will tell you again I was very surprised at the $20 change in medium and $10 in the West Coast because I think that was a small percent of the industry that was participating in spot markets. Going forward, I think if operating rates don't change and if inventory rates don't change then I think you're right, there's potential for change but I don't necessarily see OCC cost or energy cost as a primary driver for getting a price increase or giving price back. I think it's all based on supply and demand factors which are operating rates and inventory.

Your next question comes from a line of Gabe Hajde from Wells Fargo Securities. Please go ahead. Your line is open.

Pete, Larry, good morning, gentlemen. And a question going back to the comment you made, Pete, about a shift toward more bulk shipping for some of your customers. And I guess really the question is how early are we in that shift or can you provide us any color or elaborate on how that could impact sort of the steel drum volumes over the next 12 to 18 months? I mean it seems like that could be an issue that's more structural in nature as opposed to something trade related or otherwise?

So really result revolves around-- we have two big steel operation, drum operations; one in the Netherlands and one in the Gulf Coast to the US. And those markets are export markets for our customers, and they ship drums on the export market. So with the trade tariffs being impacted and which are disrupted global trade flows, we are seeing less demand for drums and therefore their customers are shipping more in bulk to different markets domestically. So I think the big driver to how long that condition persists dictates on the current negotiations on trade. I think today where there's uncertainty about the trade tariffs and what goes forward, I think if an agreement is settled between the US and China, I think there's more clarity and there's a more definitive path forward, but until that time we have to assume that those conditions in the Gulf Coast and Netherlands will persist until a trade agreement is reached.

Okay. I guess to clarify it doesn't sound like this is a customer initiative necessarily to change the way they're doing business. This is more related to trade.

Yes. It's changes in supply chains based on trade, and it's had an impact specifically in those two big producers of steel drums in the Netherlands and our Gulf Coast in the US.

Okay, bigger picture question. I don't want to necessarily draw correlation so the last time you guys made large-scale acquisitions, but when I look at the Net Promoter scores it looked like they had all kind of come down a tick here in this first fiscal quarter. And at the same time you guys were obviously in the midst of doing diligence and executing upon the largest transaction in the company's history. Is there anything that you can provide us in the outside world that lets us gives us comfort that resource allocation won't necessarily be a problem going forward as you integrate this business?

Yes. I think when you talk about Net Promoter Score; we don't do that quarterly, Gabe. We do that twice a year and that's actually increased fairly significantly not where we want it to be, but it's 50 which is five point shy of the standard of 55 we expect. I think maybe you're referring to a customer satisfaction index. Actually a paper packaging it is on part 96 plus percent and as it relates to the resources required to effectively integrate Caraustar, we actually think that's one of the strengths of our paper packaging business, and we think they'll bring a lot of benefit to the Caraustar team on how to drive execution strategies to improve customer satisfaction. So we don't see these integration efforts of having any distraction to our rigid industrial business or flexible business. We have a lot of attention on the RIPS business because of where we are, and we feel very confident that they're getting plenty of attention and plenty resources to execute to their best of their ability.

And let me add to that, Gabe, just to maybe give comfort because I think it'd be a common reaction of are we going to be distracted and focus on sort of the new shiny object kind of thing. We've tried to learn from the lessons of the past as we've talked about before. And so we had a very structured process by which we approach this acquisition and also what we did to build out the integration framework. And we have supplemented our internal resources by hiring an external group from KPMG who --their sole purpose in life and the only thing they do all the time is integration work. And we've got resources across supply chain, human resources, and finance across the entire spectrum and we have a very structured process that we're working through that does not take away resources from any of our other operating units. We focused really heavily on making sure day one went phenomenally smoothly and between Pete and I and Tim and Bala, we within the first couple days hit over half of the people and with personal meetings. So half of the 4,000 people and by the end of next week it'll be closer to 3,000. So we and the cultural fit seem really great and we go back to the operational adjacency. You think about what they do. They operate mill systems, going down into converters and sell into specialty markets. It's exactly what we do in paper packaging. So the integration of the front line businesses is going extremely well. Everybody is excited in that and then the back office things are going along just as planned. As we said it's going to be a three-year kind of process because we need to integrate their systems, which we're not going to defer like it happened in many situations in the past. So we feel very comfortable and it's not that it's not distracting from our focus on our other core businesses.

Your next question comes from the line of Mark Wilde from BMO Capital Markets. Please go ahead. Your line is open.

Yes, just a couple of follow-on. Pete, can you just walk us back through the recent restructuring moves that you've made in RIPS? And I think you mentioned a couple looking forward, I'm trying to get a sense of sort of at the end of the day kind of the size of that RIPS footprint now versus say where it was five years ago. And then also if you could just talk a little bit about the vendor challenges in the IBC business that you've called out in the release.

Sure, so in RIPS, we've either closed or in a process of closing four operations. We talked about the closure in China. We have removed an operating line in Malaysia. We have announced a closure of a fiber drum plant in the US, where we'll consolidate that business into one of our other Texas operations. And we've closed a business in Africa. At the same time, we divested a business in the Philippines small and remote but not necessary strategic to our company and our customers. So that was really the portfolio changes. We've also addressed significant variable manufacturing cost by reducing manufacturing shifts in those regions that we talked about, they're heavily impacted by weak demand from the economy. That would be Western Europe, parts of the US and China. And we're also taking active efforts across the entire portfolio to reduce our SG&A cost structure. And we've made some announcements in our Q4 and we also made some announces and changes in our first quarter. We also part of that, Mark, we've got some isolated manufacturing operations in the RIPS that are underperforming, and so we've got some intensity about fixing the performance of those manufacturing operations. As it relates to the vendor problem, it's a manufacturer of blow molders for IBC. They've had some numerous problems that have delayed one of our installations in the US, but I will tell you that we are not cutting back in any of the strategic growth organic plans and we continue to focus on how we're growing our plastic strategy. I think you've seen by the unit volumes that we are improving in both our plastic and IBC businesses.

And follow on your question about the supplier vendor issue, Mark. Yes, we had a real struggle with one of our key suppliers. They moved their manufacturing operations, it caused significant delays and delivery of equipment and then one of multiple of the blow molders we ordered from them so only one of them that were also delayed was not operational and it's had a significant impact on what we had projected to be our results for this year. And obviously we're seeking recourse on that matter.

Your next question comes from the line of Dan Jacome from Sidoti & Company. Please go ahead. Your line is open.

Hi, good morning. Just two quick questions. CorrChoice looks like a bass line sustainable growth rate at this point looks like up 4% maybe even 5%. Do you have confidence that can persist into the next year or two? And, if yes, what drives that confidence? And then just a very high-level question on IBC global industry capacity trends. Can you give us a little teaser on what you're seeing out there or is the marketplace at this point status quo? Thank you.

So the first-- and the first question I'll say that the CorrChoice model is really driven on high service intensity and specialty product offerings. And we've invested a lot of money in the specialty product business, triple wall, litho-laminator Asitrade coatings, specialty coatings and that has been very successful in partnering with some strategic customers that are growing their businesses. So we're aligned with really strong customers who are winning in their markets we in turn are enjoying that growth. We have traditionally grown in that business in excess of industry growth rates as we build out capability as we indicate in Pennsylvania with a new sheet feeder and additional specialty capabilities in Cincinnati, we expect to grow in advance of market rates. Whether that is 3 to 5 percentage you indicated, I can't predict that but I feel very confident in that business model to serve customers and grow our business profitably. If you could just repeat your second question, Dan.

Yes. I was just wondering about the global capacity on the IBC product itself. Is the marketplace in terms of potential new capacity introducing the market, is there anything like that we should expect or is the marketplace status quo? I'm just trying to get a sense that the robust pricing power you have is sustainable. Thank you.

Yes. So the IBC global market is growing at pace of about 7% to 9% globally a year. And the additional capacity we're adding or others in that markets are adding do not outstrip that growth. So you don't necessarily have an unbalanced supply and demand scenario with more capacity coming on than demand. So we see that again as a very vibrant business, the most vibrant business in our rigid portfolio. And again as we've talked about we're a little bit behind the curve on building that capacity, but customers have encouraged us and we've got very long-standing relationship with customers that want us to supply the diverse portfolio of products that we do. So we're moving forward on that. And along with that is our need to build out and improved reconditioned business in IBC's that's part of the strategy.

Our final question comes from a line of Adam Josephson from KeyBanc. Please go ahead. Your line is open.

Thanks Pete and Larry. Just Larry, just a couple on cash flow if you don't mind. The cash flow guidance, forgive me for missing it, how much of the $40 million increase was attributable to Caraustar? How much is lower working cap? How much is change in your underlying EBITDA guidance ex Caraustar? Can you just help me with that?

Yes. Let me do the same kind of walk I did on EPS, Adam. So if you start top of the page with a range of 175 to 205, just add in $25 million for working capital improvement on both ends of that scale. So that our overall range that we provided around working capital with the beginning year would just go up 25 on both ends. Interest expense is up $70 million related to the acquisition over what we had built in our model previously. And then CapEx is up $40 million. The operations from and other things from our legacy businesses $15 million to $25 million. So $15 million off of the beginning $175 million and $25 million off the 205. And then Caraustar $140 million to $150 million add. So that gets you down to the $215 million to $245 million. And I'll just point out that interest expense has $4 million of double up on interest expense coupon payments just because of the way the mechanics work on the take out of the bonds. And so that won't repeat and as I said earlier, interest expense this year ends up being roughly in that $125 million range and is exactly what we expect it to be in full 12-month year next year in 2020.

Larry thanks and just related to the adjusted free cash flow and adjusted EBITDA. How much cost are you planning to exclude from this adjusted free cash flow? I just asked because I know in years past you talked about kind of moving away from all these restructuring charges that you incur in years past and you've had a number of impairment charges as well. And you talked about just kind of cleaning up the P&L and the numbers and now it seems like you're moving back somewhat in the opposite direction of using more adjusted numbers. And I'm just wondering how you feel about just using more adjusted numbers in lieu of kind of moving to cleaner financials.

I think it's a pretty standard that you end up excluding acquisition related costs relative to this. I don't --Matt, you remember the number of acquisition related costs. Yes, no, that's the integration cost. That's the integration related.

If you go to back of the release, Adam, there's a reconciliation to future operating cash flow. Try and do that estimate.

Thank you, Matt. But relative to the overall question, Adam, obviously we talked today about a number of actions we're taking related to what we see is getting out of some markets that we don't think it makes sense to be in, small things like Philippines and that kind of thing. And I also had stated in the past when companies are highly acquisitive you end up with restructuring costs. We don't have any things in our sights relative Caraustar but I guess that could be a possibility as things play out. I also mentioned in my prepared remarks that we did not end up excluding the $0.16 worth of one-time items that I would tell you that most people probably would have excluded. And then also we do nothing on equity compensation which a lot of people do. So we try to play it straight, but so we feel good about our numbers.

And this concludes our question-and-answer session. I will now turn it over to Matt for closing remarks.

Christa, thank you very much and thank you everyone for joining us on our conference call today. We'd like to remind everyone that the 29 Investor Day will be held on June 26, 2019 at the Sofitel Hotel in New York City. The event itself will start at 9 a.m. There will be a breakfast before that. There's information posted on our website about the upcoming investor day or feel free to reach out to us if you have any questions. Thank you again for joining us and we hope you have a great weekend ahead.

This concludes today's conference call. Thank you for your participation. And you may now disconnect. Have a great day.