Greif, Inc. (GEF) Q3 2019 Earnings Report, Transcript and Summary

Good morning. My name is Jack and I will be your conference operator today. At this time I would like to welcome everyone to the Greif's Third Quarter 2019 Earnings 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] Thank you. Matt Eichmann, Vice President of Investor Relations, you may begin your conference.

Thank you, Jack, and good morning, everyone. Welcome to Greif's third 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.

Thank you, Matt, and good morning, everyone. Let me start today's call by providing quarterly highlights and a review of our business segments. Then our CFO, Larry Hilsheimer will discuss our financial results and our fiscal 2019 outlook. And as Matt remarked, following these prepared remarks we'll conduct a question-and-answer period. So overall, we are very pleased with our third quarter performance. Our adjusted EBITDA increased by roughly 39% versus prior year quarter and our adjusted Class A earnings per share grew by 5% versus Q3 a year-ago. And our global portfolio operated very well, but continues to experience weak demand, plus slowing industrial economy and uncertainty caused from trade tensions. Our financial results also benefited from a full quarter of contribution from our Caraustar acquisition, which exceeded deal assumptions and we’re very pleased with the pace of our integration process. Finally, we achieved our best ever trailing four quarter of customer satisfaction index score and we recognize at the end of the quarter for a leadership and sustainability with a second consecutive gold rating by EcoVadis, an independent rating agency that’s specializes in corporate social responsibility evaluation. Please turn to Slide 4, as we are going to review our business segments. Rigid industrial Packaging & Services segment operated well during the quarter, but was challenged by weak demand as a result of a declining industrial manufacturing environment continued uncertainties surrounding trade tensions. Global IBC volumes grew by nearly 5% and continues to be an important strategic growth opportunity for us. Global steel drum volumes declined by roughly 6% versus the prior year quarter. Steel volumes were strong in the Middle East and North Africa due to growing industrial demand and in Southern Europe, thanks to a better agricultural season than prior year. Steel drum volumes were most challenged in APAC and the U.S Gulf Coast due to trade uncertainty and reduced chemical import demand from China and elsewhere in the U.S due to general softening conditions. RIPS third quarter sales were roughly $46 million lower versus prior year and on a currency neutral basis RIPS sales fell by $29 million versus the prior year due to the volume softness, partially offset by higher selling prices from strategic pricing decisions. RIPS third quarter adjusted EBITDA was flat to prior year despite lower sales, a $3 million foreign currency headwind and $3 million of less favorable opportunistic sale -- sourcing opportunities. And for comparison purposes, RIPS results in Q3 of 2018 benefited from a one-time transportation expense reduction adjustment of $4.6 million that was disclosed a year-ago. We continue to execute in a range of cost reduction activities in parts of our portfolio to help counter the softer market demand conditions we face. They include rationalizing our manufacturing footprint, managing our variable cost to align to demand and targeted SG&A reductions. I would like to now to please turn to Slide 5. Paper Packaging's third quarter adjusted EBITDA rose by roughly 109% versus the prior year. Caraustar's quarterly adjusted EBITDA contribution was $65.4 million and exceeded its anticipated run rate. Segment adjusted EBITDA also benefited to a lesser extent from a higher-margin paper specialty products, which accounted for 20% of our legacy paper sales during the quarter, our best ever performance. Paper packaging's third quarter sales grew by $294 million versus the prior year quarter due to Caraustar's contribution, partially offset by softer market conditions and lower published prices in our container board businesses. Volumes were also impacted by planned and extended maintenance downtime taken during the quarter. If could please turn to Slide 6. We are ahead of schedule with the Caraustar integration plan and continue to uncover additional synergies that will expand EBITDA and drive greater efficiencies in our business. As we mentioned in the June 2019 Investor Day, we expect to achieve run rate synergies of at least $65 million by the end of fiscal 2022 and have $15 million of synergy baked into our 2019 outlook. There are currently over 260 synergy opportunities we are exploring and quantifying that could lead to increase the over $65 million that’s already been identified in our process. Some of the early wins driving that synergy capture include: a carrier freight rebuild that yield greater savings and initially contemplated, accelerated integration of heavyweight liner board from Caraustar Mills into the CorrChoice sheet feeder network and alignment of key systems and back office platforms for efficiency gains and cost reduction. Finally, during our June Investor Day, we announced a strategic review process for the consumer packing business. That assessment remains under way and we anticipate completing it prior to our fiscal year-end. Please turn to Slide 7. FPS delivered solid third quarter results and is performing the plan despite ongoing market softness in Western Europe. Segment sales were roughly 10% lower than the prior year quarter, but on a currency neutral basis fell by 6%. Gross profit margin was higher versus prior year, thanks to lower price raw materials and improved product mix. Third quarter adjusted EBITDA was roughly flat to the prior year. And as we mentioned at our June 2019 Investor Day, we are developing a comprehensive strategy to profitably grow FPS in the future. We anticipate sharing high-level details about that strategy likely by the end of the calendar year. I'd like to now turn over the presentation to our Chief Financial Officer, Larry Hilsheimer.

Thank you, Pete, and good morning, everyone. Please turn to Slide 8. Third quarter net sales, excluding the impact of foreign exchange and gross profit were roughly 26% and 29% higher respectively versus the prior year quarter, primarily due to Caraustar's contribution, partially offset by market softness in RIPS and our container board operations. PPS also had an extended maintenance period as Pete mentioned. Third quarter adjusted EBITDA rose by more than 39% versus the prior year quarter due to Caraustar's contribution, partially offset by lower EBITDA in FPS and our legacy paper business. Below the operating profit line, interest expense rose by roughly $22 million. Other expense falling [ph] to other income versus the prior year quarter due to lower pension expense and less expense related to our foreign currency hedges in transactions versus the prior year. Adjusted Class A earnings per share rose 5% versus the prior year quarter to $1.26 per share and our adjusted tax rate during the third quarter was 27.7%. Both our GAAP and non-GAAP rates benefited from a one-time recycling credit that reduced tax expense by $3.1 million or roughly $0.05 per share, which will not recur in the future. We continue to estimate that our adjusted tax rate will range between 28% to 32% for the fiscal 2019 year. Third quarter adjusted free cash flow grew by $26 million versus the prior year quarter. The improvement in free cash flow was driven primarily by Caraustar's contribution and by stronger working capital performance in our legacy Greif’s business. Please turn to Slide9 to review our fiscal 2019 guidance and key modeling assumptions. We're pleased to maintain our fiscal 2019 adjusted Class A EPS guidance range, especially in light of the challenging macroeconomic conditions present in the market today. Our updated fiscal 2019 guidance, while static, incorporates the lower than previously expected volumes we have and are experiencing as well as $9 million of incremental depreciation and amortization expense as a result of higher than anticipated purchase price allocations to acquired operating assets and amortizable intangibles. Those headwinds are offset by various positive tax related developments and lower than planned interest in other expense items. We establish our guidance by assessing the range of possible results both up and down after updating our forecast each quarter. While we are confident in our range, we view the likely results of having more downward than upward bias at this point given the economy. For example, we have forecast no further economic downtime in our container board mill system beyond what we've experienced to date. Our fiscal 2019 adjusted free cash flow guidance range is also unchanged at $230 million to $250 million. Although flat to our Q2 free cash flow guidance, our current view is that the bias on this metric is to the high end of the range. Thanks to current and anticipated improvement in our management of operating working capital, cash tax management and slightly lower capital expenditures than previously forecast. That said, there remains the possibility of lower cash generation due to the same risk impacting our EPS guidance range, thus, the maintenance of the range. CapEx spend has been driven lower-than-expected due to weather-related delay impacts on construction projects and we now expect to spend between $150 million and $170 million for this fiscal year. Finally, we assume OCC prices of $33 per ton for the remainder of our fiscal year in our fiscal guidance. As a reminder, every $10 movement in OCC equates to a roughly $1.2 million change in EBITDA per month. Turning to capital priorities on Slide 10. Investing in our existing business through appropriate maintenance projects and organic growth opportunity remains our top priority since the cash, our existing business generates will fund our aggressive deleveraging plan. Our net debt declined sequentially by roughly $40 million versus the second quarter and given our anticipated free cash generation, we expect to return to our targeted leverage ratio of 2x to 2.5x within 36 months from the date we acquired Caraustar. Our leverage ratio at the end of Q3 was roughly 3.6x. Finally, we have no plans to alter our industry-leading dividend, which today pays a compelling yield of roughly 5%. With that, I'll turn it back to Pete for his closing comments before our Q&A.

Thank you, Larry. And we're now on Slide 11. In summary, we delivered solid third quarter performance, despite an extremely challenging macroeconomic environment. We're taking proactive steps to mitigate the market softness we face and are focused on operating levers within our control to drive value. We remain well-positioned to serve a variety of the attractive markets through our industry-leading product portfolio and demonstrated commitment to customer service excellence. Thank you for participating this morning. We appreciate your interest in Grief. Jack, if you could please open the line for questions.

Certainly. [Operator Instructions] Steve Chercover with Davidson. Your line is open.

Thanks. Good morning, everyone.

Good morning, Steve.

Hi, Steve.

So, my first question is just on your guidance on slide 9. What constitutes the $15 million reduction in other expenses? And that's a pretty big shift for in three months for known, unknown as we would call them. Is there some discretion in the timing of those other expenses?

Hi, Steve. Good question. This item of other income and expense has been running in that $10 million to $15 million range for a number of years. One of the primary items that runs through that line is the impacts of our hedge program on cash flow, for currency as well as gains and losses on transactional currency matters. The fact of the matter is that at the second quarter we didn't feel comfortable changing what we thought it would end up being through the rest of the year, although it's been trending and reflecting a more stable currency market than we've historically had. The other aspect is that we've continued to invest in the capabilities we have in this arena and it allowed us to become much better at managing that item. Just one small example is we centralize our balance sheet hedging around our accounts receivable program, and we generally been averaging a couple of million dollars losses per year in that. This year it's 43,000. And it's just that we've gotten more comfortable and confident about how we’re managing it. The other big item in there is in pension. There's about a $6 million improvement in that and it really relates to the returns related to the payment that we made in the prior year. We had built some of this into our guidance range when we were dealing with the second quarter, but we didn't really talk about it specifically and we’ve just gain more comfort and it's just shown up in the actual numbers as we've evolved out. But the -- so big items, we had about $4 million related cash flow hedges, about $2 million net on other currency transactions, and about $6 million on pension items.

Okay. Thanks, Larry. And my second question, I know we will have to wait till the end of the year for an update on the potential disposition of the consumer business, but has the announcement of a new CRB machine which doesn't change capacity, but changes perhaps industry cost structure, change the tone or frequency of inquiries? If you don't want to take that, just tell us how potential disposition might impact $65 million synergy target?

Yes. Steve, so this is Pete. So the announcement really is a net neutral to capacity. So I'll leave that question that we really don't comment on competitors and what they're doing. But I don't think it has any impact on the process that we're moving through this right now on that CPG business. And again we will disclose that most likely before the end of our fiscal year. And your second part of that question, Steve, I’m sorry.

I’ve got it.

Okay.

So he is asking about the synergies and what happened to the $65 million. And, Steve, as we look at it about 15% of the synergies that we've identified to date would relate to that piece of the business and 85% would remain. And I will tell you that I'm highly confident that above $65 million is going to be growing. As we noted in our prepared comments, we have a lot of yet to be quantified ideas that are still being pursued. So a little bit of disproportionate amount of the synergies are with the remainder of the business.

Okay. Thank you both.

Thanks, Steve.

George Staphos with Bank of American Merrill Lynch. Your line is open. George Staphos, your line is open. Your next question comes from the line of Matt Krueger with Baird. Your line is open.

Hi. Good morning. This is Matt on for Ghansham. Just wanted to quickly ask, can you provide some added detail on how you were able to keep the operating profit flat in the Rigid Industrial business, despite some significant volume headwinds that you’re seeing across the segment? Was there anything unique to this year's quarter or the comparison from last year that kind of diminish the impact or the visible impact from the lower volumes?

Matt, this is Pete. So in spite of the volume drops and the challenges in that market, we had improved gross margins year-over-year. And when you eliminate the $4.6 million in the transportation adjustment that I referenced in my comments, we are real pleased, we’ve got a very strong active pipeline on cost reduction activities. We've made some strategic pricing decisions that's improved our overall performance in both EMEA and APAC. And again, we've been very proactive since the beginning of the end of 2018 regarding those cost actions and really around our portfolio management, we closed or consolidated seven facilities in Rigid Packaging since the end of 2018. We've taken pretty significant actions at our SG&A costs were we've reduced our salaried workforce by 5% in that business. And we've done a significant amount of operating improvements in our business to drive out variable cost to align our cost structure demand. So, again, I think our team has operated very well and again both EMEA and APAC have had actually really good quarter. The big challenge we have in the whole picture is the economy and the performance in our North America business. So, overall, pleased with how we’ve responded and control the operating levers that are within our control.

Great. That's very helpful. And then, can you provide some added detail around the cadence of volume growth throughout the quarter? Just with a particular emphasis on whether the volume declines that you’ve seen across your businesses accelerated or decelerated as the quarter were on kind of on a monthly basis? And then, obviously, any earlier trends into August are always helpful.

Sure, Matt. So let me talk about Rigid Industrial Packaging first. So in the quarter, our steel drum volume was weak as we talked about. But in July they were slightly better than the overall Q3 volumes. In IBC's where we are up 5% in July, our volumes were double-digit growth, which is more in line with what we've experienced in the past couple of years, and August looks favorable as well. And I think, overall, if you wrap a bow around geographies, I think our most challenged geography and demand in our Rigid business is North America at this point both in the quarter and what we see going forward.

Great. That’s helpful. That’s it for me. Thanks.

Yes, thank you.

George Staphos with Bank of America Merrill Lynch. Your line is open.

Thanks very much. Thanks for taking my question and thanks for all the details. Good morning. I just wanted to piggyback on that last question from Matt. So, Pete, can you comment a bit about how Rigid is doing. You saying it's doing a bit better, but are you still in the negative category in terms of volume trends in North America, and then more broadly for the segment as fiscal fourth quarter have started relatedly IBC decelerated. It sounds like it was a one-off blip related to trade war, but if you had any color about whether that’s a correct premise or not and what's going on in IBC more broadly as you’ve been trying to gain share there, that would be helpful. That’s question number one. Question number two, Pete or Larry, if you can comment quickly, what are you doing in terms of working capital management. That's really been driven by operational improvement relative to anything that may be driven by factoring, extending payable terms and more sort of financial and less operationally driven types of improvement in working capital, if any at all. Thank you. I'll turn it over.

Yes. Thanks, George. So on the volumes in Rigid, so as we talked about in the quarter, we are negative in July, slightly better but they were still in the negative volume trend and we see a similar trend in August. When you referenced IBC, then your premise is exactly right. We had one month of a hiccup and it was around some extended maintenance work done in operation in Germany and the U.S. But July and August, again, referenced back to a double-digit growth, which has been very consistent with our growth strategy. And I would also tell you that the acquisition we did in the Netherlands during the quarter, Tholu, is very favorable in the short stint we’ve had. We don't see that trend changing much going forward as we look at it today. If you look overall regionally, I would say EMEA is probably the most promising market in regard to our volume. It is slightly negative and the most challenging right now is our North America overall demand portfolio and a big part of that relates to the trade tension. I think I’ve referenced before 41% of our steel drum production is located in the U.S Gulf Coast and our customers located there ship steel drums when they export product, and that's been significantly hampered due to trade tensions, but overall to softer general industrial economy in the U.S.

I will address your operating working capital question, George, and no real financial engineering driving that at any significant level. It's really pretty much basic blocking and tackling. We've had certain groups who have done phenomenal jobs at really improving dramatically their working capital management, particularly our APAC group in our Rigid's team who made -- just focused effort. They have a lot opportunity, but they've delivered very, very well. We have instituted a better S&OP process, although we have further opportunity there to get better on the planning and coordination of how much inventory, of the different types of steel in particular that we need to maintain and just managing that better. One big area of gain has been our treasure [ph] business, our culture's business, which has operated relatively independently and autonomously previously. And so what we ended up discover is we had a lot of excess inventory because we had in their plans and then some sitting in our Rigid plants. And we are doing that on a coordinated basis now and really driving out a lot there. We are extending payables, but as much as we can, but I’d tell you that's a global phenomenon on both sides of the equation. So that's happening to us on the AR side and those two tend to net out. So it really comes down to managing, making sure you're collecting when its do, so you don’t have long. And then also not related to working capital, but it certainly helps on cash and profitability is making sure we are taking advantage of every discount. So it is basic blocking and tackling at a detailed level and the teams are doing a good job.

Thanks, Larry.

Gabe Hajde with Wells Fargo Securities. Your line is open.

Good morning, gentlemen. I had to try to get in on some of the detail here, but I’m looking at the volume kind of discrepancy by geography and there is a disconnect and I think, Pete, you talked about where your steel drum capacity is and how some of those products get exported. But I also noticed APAC was down kind of almost a 11%. I think part of that is due to the fact that you close the facility, but the question is really if trade tensions stay where they’re at or even escalate, do you have the capabilities over in Asia to maybe capture some of the volumes you’re losing here domestically, or is the structure too fragmented to capitalize on that? And then question number two is more on the guidance. I don't think it was explicitly stated, but I'm assuming that you guys are embedding flat benchmark prices for the relevant products that you ,make, if you could confirm that. And then if there were any changes more in the Caraustar business, how will that flow-through. I know it's somewhat speculative, but it's something were to change here in the last couple of months. I'm assuming that would impact more fiscal 2020, but just any help there would be appreciated.

Yes, Gabe, on the steel drum volumes, it's going to be a global perspective. We have four regions that are more sensitive to trade where our customers are exporting their product in our drums and that’s the U.S Gulf Coast, it's the Benelux, it's Singapore and it's China. And that represents about 38% of our global portfolio of steel drum production. So that certainly had an impact. What you referenced to whether China is benefiting from any of that disruption in the supply chain flow due to trade, I think it's a little too early to tell. But if you look at that macro number you referenced on China that does include shutting down a operation in China and we did that because some of the margins were not very good. So we've selected out of some of those accounts, that's part of the reduction. We also divested our business in the Philippines, which also is part of that double-digit negative trend. So I would say, over sequentially over the last six months, while our volumes in steel drums are negative in APAC, they're not quite as significant as the total number reflects. And one other dynamic in Singapore is there's a new competitor in steel drums and that's creating a little local tension around volumes. But again, our aim as we've always talked about is how do we drive excellence to our customers, and how do we make decisions based on value over volume and we will continue to evaluate the right decisions that create growth in EBITDA and margins. So hope that answers your question, Gabe.

That’s probably the first part. And, Gabe, on your pricing, in Rigid's business, no significant movement is anticipated in the Rigid business. And with respect to your question on Caraustar and price changes, the lag on the CRB stuff place through some of that was just implemented in the last quarter and we will carry forward. We are not anticipating any other price changes in the near-term. Anything that would play in now would probably impact next year as opposed to this year.

Thank you.

Roger Spitz with Bank of America. Your line is open.

Thank you and good morning.

Good morning.

In the LTM period, how much EBITDA did Caraustar have before it was acquired and how did that split among those quarters?

So, if you go back to when we announced the acquisition, we talked about Caraustar having a run rate EBITDA as of September 30 timeframe of $220 million. There is not a whole lot of seasonality in that business, so it's relatively stable throughout the year. So, obviously, having EBITDA of $65 million in this quarter we're quite pleased on a relative basis, even though there are clearly some challenges in some segments of that business as well. So the team has been doing a good job on operating and obviously taking advantage of some of the synergies is helping us drive some of that detailed performance.

Thank you. And my follow-up is, are you able to provide your 2018 EBITDA for consumer packaging business that’s under review. And you spoke about the sale process having started, I guess in June. Can you say where you are in that process for instance, have you received your initial nonbinding indications of interest from potentially interested parties?

So we’re not going to talk about the -- that sub-segment EBITDA at this point, particularly given what we've got going on in the process. Process is moving along. No binding situations at this point, but we're very pleased with how the process is moving along and as we talked about or Pete mentioned in his remarks, we anticipate this being brought to conclusion by the end of our fiscal year.

Thank you very much.

Ketan Mamtora with BMO Capital Markets. Your line is open.

Good morning, Pete, Larry.

Good morning.

Good morning, Ketan.

First question, your Paper Packaging volumes were down close to 9% this quarter. Is there any way to kind of breakout how much -- how your volumes perform in the legacy business versus Caraustar kind of at a high level?

Sure, Ketan. So and you’re right. We had weaker volumes in the Paper Packaging business. And those primarily in the legacy side around container board into a lesser extend corrugated. To give you a little more context, we had a planned and extended maintenance outage in our Riverville, Virginia Mill, which is the largest site in our system. We took 17 days to complete a capital dry and upgrade, along with a variety of other capital projects and give you a reference as a comparison to one year ago in Q3 2018. That's nine days more than our planned outage a year-ago. So that's one big part of it. In our corrugated volumes, we are down about 2.4% for the quarter. Regarding Caraustar, recycled box for business, the CRB and URB mill demand was less robust than one year ago, but the overall view continues to reflect a very stable supply and demand environment. So hope that gives you a little more clarity around that -- those numbers, Ketan.

Yes, it does. And is there any way to quantify, Pete, how much of an impact that incremental 9 days was on your results?

It's probably 17,000 tons there about. And so 60,000 tons at $400 a ton of round numbers [technical difficulty].

Got it. Okay. And then did you all take any economic downtime this past quarter in Paper Packaging?

No, we did not take any economic downtime. We run to demand in the -- the downtime is all relative to the plan and extended maintenance downtime we talked about in Riverville.

Got it. That’s very helpful. I will turn it over.

[Operator Instructions] Adam Josephson with KeyBanc. Your line is open.

Thanks. Good morning, everyone. Larry, just following up on Roger's question about Caraustar and the EBITDA contribution. I think you -- Larry you said it's not that seasonal quarter-to-quarter. So if I annualize the Caraustar EBITDA, I get to about an annualized EBITDA of $2.60, which would obviously be higher than the pro forma EBITDA of 220 that you provided when you announced the acquisition last December. So was there anything unusual in the quarter or do you actually think that 260 of EBITDA is an achievable number just based on what happened in the quarter?

You know, obviously, that performance stand. We obviously print the numbers, so yes, we do think that that performance is indicative of what it can obtain. When I talked about lack of seasonality, I mean it's -- there is some, but it's just not that significant from quarter-to-quarter, Adam, I mean couple of million dollars here and there. But do remember that when we did that 220, we had a $100 ton OCC assumption in it. So, the significant pickup there and obviously with what's going on in container board space, one of the end markets that that business serves is has been impacted as well. So there's a lot of give-and-take. So if we -- as we play out, I don't anticipate the economy being where it is two or three years from now, where it is today, hopefully it's better than it is. And so we are very, very bullish on the performance of this business.

Thanks. Just two other clarifications, one on volumes. What were Caraustar's volumes in the quarter? And then in terms of the variation of line star -- the flow of volume throughout the quarter and you mentioned August was down. Was August down more or less than what total volume was down in fiscal 3Q?

So, in regard to Caraustar as we referenced, the year-ago is very robust. So it's less than a year-ago, but still very stable in our view and as it relates to supply and demand environment. Regarding tube and core business, Adam, our volumes in the quarter was aligned with the industry rates that’s been publicly disclosed by other companies. And at this point we're looking at total recycled box board system numbers. I don’t know if that explains what you’ve asked?

Yes, I was just -- the one other thing, Pete, was just that total company volume in 3Q is down 6.6. So you mentioned August was down. Was that down roughly in line with what fiscal 3Q is down or was it appreciably different?

So in August what we're seeing is steel drums are similar to Q3. IBC volumes, we expect to be equal to or better than what we saw in the quarter and again July and August look much more favorable. So I think in our RIPS portfolio, it will be very comparable. In container board, the paper business, we're seeing a little improved demand in our corrugated volumes and also in our URB and CRB systems that we’ve seen Q3 and Q4 that's part of what we forecasted.

Yes, although that -- just to be clear on that. So we are starting to see some positive things. We did for the month of August, we did have a 11,000 tons of economic downtime in our container board system.

Thanks, Larry. Just one on cash flow, if you don’t mind. So that -- can you just talk about the CapEx guidance reduction, what that was attributable to. And then, Larry, you mentioned in the context of holding cash flow guidance, the same if $10 million lower CapEx. I think you’ve more favorable working cap. Can you quantify that? I think you said more favorable cash taxes if you would mind quantifying that as well, just so we understand the moving parts. Thanks so much.

Yes. Yes, certainly. So the big driver has been a number of construction projects that we have that have been impacted by weather impacting the corrugated that we're putting in Eastern Pennsylvania just slowed down things, because of the amount of rain earlier in the year. Yes, you can't put in the concrete pad, they just pushes you back on everything. So that's been -- that’s the biggest element. There's also been other construction projects that have been just impacted by the lack of labor force in the construction industry has put a slowdown on getting things completed. So those are the two primary items. But let me just walk you on the midpoint. So midpoint previously was $240 million, CapEx at another $10 million to that. Interest savings of $5 million, working capital roughly $7 million improvement over the improvement we had already talked about in the last quarter. Taxes netted with some additional restructuring is about another $8 million up, and then operational just performance $30 million down and obviously working capital is an element of operations, but we broke out those two. So 240 plus 10 plus 5 plus 7 plus 8 minus 30 gets you back to $240 million.

And Adam just on that CapEx fees, I mean, I think it was a significant delay for weather. I mean its 20 or 25 days that we lost for construction on the new sheet feeder in Pennsylvania. So to Larry's point, tight labor markets and also that weather impact.

Yes, and we have been forecasting to get that thing up and operational in October and that's not -- and that’s not playing out, yes.

George Staphos with Bank of America Merrill Lynch. Your line is open.

Thanks for taking the question. Pete, can you go back through what's gone in your view, particularly well in terms of the integration process with Caraustar. Are there one or two items in particular that you’ve been able to move the football the most on and if there's a way to quantify what those might be. That’s question number one. My second question, can you talk at all about what your people are saying about the hurricane season this year, whether it's going to be worse or normal or better than normal. And if you’ve seen any sort of shutting in recently, just given [indiscernible] and what that might mean for your volumes in this part of the quarter? Thank you.

Yes, around the synergies with the Caraustar acquisition, I think the biggest is the cultural compatibility. We’ve teams that are highly focused, very aligned on what the targets are and working very diligently in a very detailed fashion on the challenges and the opportunities. And as I mentioned in my comments, so that $15 million that we expect to be accretive in this fiscal year, the biggest part is the sourcing opportunities we had relative to transportation. I think we've been very pleased with how the value we're driving on that. And regarding the hurricane season, at this point, we don't have any concerns because we can't forecast what may or may not happen. So we certainly have operations that are in the strike zones, if a major hurricane occurs. We had a storm right now looking at Florida, but we don't project and try to forecast what may or may not happen with that. But certainly if a large hurricane hits the Gulf Coast, that has a significant impact on our major customer base and at our operations.

Hey, Pete, just on the sourcing and transportation, I do remember you saying that earlier in the call now. Is that eliminating deadhead or what's driving the better procurement on transportation. Thanks for the double-dip there. And I will turn it over.

Yes. So its twofold. So we got a more advantageous opportunity as a buyer, but we also have much broader and larger spend and we have accumulated lanes. So in certain regions, we have more spend and we have more leverage on those lanes and we're also looking at supply chain routes from suppliers to our facilities back to our customers, backhauls and looking at the total closed loop supply chain system that transportation has a benefit. So a combination of the market, but also a combination of a wider spread of opportunity we can source and be more important in larger opportunities in buying from Canada to our supplier transportation.

Yes, one small example, just an easy pick up was related to the recycled fiber group that we got. We -- purchasing OCC for our mills before we're incurring a decent amount of transport costs because of the location of Riverville Mill, and that's been reduced dramatically just because of the expertise and the sourcing capabilities of that group.

Thank you very much.

Gabe Hajde with Wells Fargo Securities. Your line is open.

Thanks for taking the follow-up. The tax efficiency that you talked about, Larry, just I think the prior expectation had been book and tax -- excuse me book and cash tax rate. So we would kind of converge the past couple of years I think cash has been in the low 20s. Anything that you are finding there, and I appreciate if the dynamic market or dynamic situation. But just any thoughts on what cash taxes could look like going forward?

Yes, I think you know I did tax [indiscernible] the first 20 years [indiscernible], the primary objective of a tax advisor is to figure out how pay your taxes a lot later than you need to. Your book taxes are harder to manage to find permanent tax adjustments. So it's been a focus since I arrived working with our tax team and challenging them to find opportunities to develop strategies and plans on ways to defer the taxes and they’ve done a lot of good work around that. But beyond that, they’ve also -- we had opportunities where we’ve gotten the tax group working cohesively with the business groups. One was the example of this recycling credit. It's a Kentucky matter that ends up driving $3.1 million into this quarter that is something that we will take advantage of on a cash base is actually over time, but the GAAP rules have us book it now. The other is in R&D credits where we really significantly enhanced our capture of things that qualify for R&D credit. And I will tell you I'm optimistic looking to the future because one of the things that we've not done as well as I think we can and our tax leaders agree is on state and local tax planning in the U.S and now that our domestic footprint is larger with our acquisition I think there'll be opportunities there. So I continue to see our GAAP and non-GAAP rates converging over time and our overall rate trending downward, but also looking to having more cash deferral benefit out of things. Gabe, I hope that's responsive.

It is. Thank you very much.

Ketan Mamtora with BMO Capital Markets. Your line is open.

Thank you. Just turning to flexible packaging. Pete, your comment earlier about strategies to profitably grow the FPS business and you -- appreciate that you said you would provide more color by calendar year-end. But at a high level, is M&A also part of that discussion? Could you comment anything about that at all?

Yes. Sure, Ketan. So we've been going through this process for this past year and we’re looking at how do we grow the profits of that business. Part of that is capital projects and innovation and how do we deliver and provide more innovative products to serve our customers around food safety and products and services that have higher yields and margins. And part of that is looking at potential acquisition targets, but I will tell you that market is highly fragmented. So it would have to be a very special opportunity that kind outlines our strategy. I hope that gives you some perspective. But we will provide a lot better clarity to you at the end of this calendar year when we’ve completed that task.

But at this point, is it fair to say that FPS has on the right to grow?

They are. They’re performing very well and like all of our portfolio businesses, you always have to continue to earn that right to grow. So we're happy with the progress we are making. We’ve got great leadership under Hari Kumar and we expect that to be a growing profitable business in the future.

Sounds good. Very helpful. I will turn it over. Good luck for the rest of the year.

Thank you.

Adam Josephson with KeyBanc. Your line is open.

Thanks everyone for taking my follow-up. Just two follow ups. One, Larry or Pete on margin. So I asked about Caraustar earlier and obviously you talked about lower OCC helping get to that $65 million of EBITDA. And then Rigid, someone asked about volume -- with volumes being down 6, how is profit flat? You talked about all these cost take out you've been doing. The result was yet a 16% adjusted EBITDA margin for the total company, which was the highest in any quarter and at least a decade from what I can tell. So is it your view that that's a sustainable margin level now for the company?

Yes. So we believe it is. And we look at Caraustar, as Larry pointed out, while we got lower input costs in OCC, then the assumptions were as Larry referenced. We've got very strong margins and cost controls. So again we look at volume -- excuse me, value over volume and that industry has enjoyed some very strong and consistent environment in regard to price in both the URB and CRB structure as well as in tube and core. We’ve got an improving consumer packaging group business. And again a very active synergy capture realization, which is all been part of how our gross margins have improved in that business. When you look at our Rigid business, again, volumes maybe down, but our value add margins and our gross margins are better. And we're also pivoting to plastic, which as we move forward with the IBC reconditioning upgrades are gross margin mix over time. So, again, we're controlling the levers we control. It's strategic pricing decisions, how we drive out cost. How we rationalize our footprint to make sure that we have system that's aligned to demand. And again, I reemphasize our focus is on how do we serve customers through a value proposition that's driven on value versus chasing volume all over the world.

Thanks, Pete. And just one clarification on the August trend you mentioned. So I think you said containerboard things are looking better, but you took market related downtime of, I think 11,000 ton. So can you help me square those two statements that things are looking better, but you took market downtime in the month?

Yes. So let me clarify that. The containerboard, the backdrop is similar to what we see in Q3 and Q2, and as Larry referenced, we took a 11,000 tons of downtime in August. We are not forecasting any further downtime at this point. By reference to corrugated volumes that in July and August, our corrugated volumes were trending much better in Q4 than they did in Q3.

Thanks, Pete.

Yes, sir.

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

Thanks. So Riverville's probably the only people paper mill in your fleet where maintenance could be a needle mover. Can you quantify the financial impact of the maintenance you took there in Q3?

So we would capitalize large percentage of that maintenance downtime. I think the best driver of how it impacted was a 16,000, 17,000 tons that we did not achieve because of the downtime of maintenance. So if you take that times, you pick what our margin is in that business and that would be relative to an opportunity going forward, Steve.

Okay.

And, Steve, just 16,000 tons was the incremental amount over the prior year maintenance downtime and Matt talked about roughly 400 a ton kind of number. It's like $6 million to $7 million.

Thanks, Larry.

There are no further questions at this time. I would now like to turn the call back over to Matt Eichmann for your final remarks.

Thanks very much, Jack. Thank you very much everyone for joining us today on our conference call. We hope you have a nice long weekend ahead.

This concludes the Greif’s third quarter 2019 earnings conference call. We thank you for your participation. You may now disconnect.