Greif Inc (GEF) 2018 Q3 法說會逐字稿

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Greif, Inc. Third Quarter 2018 Earnings Conference Call. (Operator Instructions)

Matt Eichmann, you may begin your conference.

Thank you, Kelly, and good morning, everyone. Welcome to Greif's Third Quarter Fiscal 2018 Earnings Conference Call. 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 you consider material because we are prohibited from discussing significant nonpublic items with you on an individual basis. (Operator Instructions)

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 metrics, and reconciliations to the most directly comparable GAAP metrics is contained in the appendix of today's presentation.

And now I’ll turn the presentation over to Pete on Slide 3.

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 outlook. And after prepared remarks, we'll conduct a question-and-answer period.

Let me start with the key takeaways. Our trailing 12-month Customer Satisfaction Index score improved both year-over-year and quarter-on-quarter and continues to be led by consistent performance in Paper Packaging and by significant improvement in our Flexible Products & Services segment. Our operating profit before special items and Class A earnings per share before special items rose by 25% and 41%, respectively, versus the prior year quarter, driven by strong demand and favorable pricing dynamics in our Paper Packaging and Flexible Products & Services segments. Transportation remains a significant headwind and our Paper Packaging business overcame a $4.6 million headwind during the quarter. Rigid Industrial Packaging continues to face trucking constraints, but the financial impact was mitigated this quarter by a freight expense adjustment.

Finally, we increased and narrowed our fiscal 2018 Class A earnings per share before special items guidance range. We're also pleased to announce that our Board of Directors approved an increase to our quarterly dividend. The new dividend, payable in October of 2018, pays $0.44 per share for our Class A Common Stock and $0.66 per share for Class B Common Stock and is consistent with our philosophy of returning capital to our shareholders.

Please turn to Slide 4. Greif's third quarter was impacted by the continuation of raw material headwinds, as the segment consolidated volumes were lower versus the prior year quarter, but this view is distorted by 3 isolated challenges: first, we experienced lower volumes in Southern Europe from a weak ag season due to extreme weather conditions; second, we dealt with operational challenge in Brazil, including the impacts of a trucker strike; and third, we continue to experience a hypercompetitive market in China. I'll touch more on these areas in a moment, but excluding discrete challenges in Southern Europe only, steel volumes were up nearly 2% year-over-year, with robust volume demand seen in North America, the Middle East and North Africa, Southeast Asia and Eastern Europe.

RIPS third quarter sales were roughly $13 million higher year-over-year, due to higher selling prices stemming from contractual price increases and strategic pricing. RIPS gross profit was slightly higher versus the prior year quarter as a result of higher sales, improved manufacturing efficiencies and the freight expense adjustment previously mentioned. These tailwinds were partially offset by higher depreciation related to new projects and by significant raw material inflation.

In EMEA, raw material cost per steel unit were up 4.8% versus the prior year quarter. And in North America, they're up 9.7% versus the prior year quarter and 4.1% versus second quarter of 2018. We continue to pass these costs along with our contractual arrangements, albeit to a 3- to 4-month lag. Full recovery will continue to lag until costs stabilize. RIPS operating profit before special items decreased by roughly $4 million versus the prior year; its slightly higher gross profit was offset by an increase in SG&A expense. The segment also encountered a $4.8 million FX headwind versus the prior year quarter related primarily to Argentina.

In North America, volumes were strong. Third quarter Intermediate Bulk Container increased 26% and steel volume drums were up 5% versus the prior year quarter. Latin American steel drum volumes were down 4.8% versus the prior year quarter, with the bulk of that shortfall in Brazil due to the trucker strike and operational challenges at our largest plant in country. In EMEA, Intermediate Bulk Container volumes grew by almost 21%, while steel drum volumes were down 3.5% versus the prior year quarter. The shortfall in steel drum volumes was predominantly caused by the reduction in conical steel drum volumes related to a lack of rain and extreme weather in Southern Europe, which impacted our agricultural customers.

Elsewhere in EMEA, steel drum demand was robust, including an 8.5% increase in demand in Eastern Europe and a double-digit increase in the Middle East and North Africa versus the prior year. We also commenced production at 2 new facilities during the quarter, our Kaluga steel drum plant in Russia and a new IBC facility in Spain. Both are expected to ramp up over the remainder of the year.

In APAC, third quarter steel volume fell roughly 4% year-over-year. The shortfall was in China, where we continue to experience competitive market conditions and make strategic pricing decisions aligned to value over volume. To a lesser extent, steel drum demand in China was negatively impacted by unexpected customer shutdowns for maintenance. We expect to finalize our go-forward strategy in China over the next several months. Elsewhere in APAC, Southeast Asia steel drum demand remains solid, with volumes increasing 5.6% versus the prior year.

Please turn to Slide 5. Paper Packaging delivered an exceptional third quarter, with improved sales margins and profits. PPS generated third quarter revenue of $236 million, thanks to higher selling prices, higher specialty sales and strong unit growth. Our CorrChoice network shipments were up 5.7% and outpaced the industry by 420 basis points on a per-day basis year-over-year.

Third quarter operating profit before special items grew by nearly $25 million versus the prior year quarter, driven by containerboard price increases, favorable OCC costs, strong unit volume growth and increases in specialty product sales. Transportation costs remain elevated and the segment faced a $4.6 million transportation headwind during the quarter, but mostly, it was offset through a mix of Greif Business System efficiencies. Please turn to Slide 6.

Flexible Products & Services continue to demonstrate sustainable improvement, with sales up 9.6% versus the prior year on a currency-neutral basis, while gross profit rose 22% versus the prior year.

Higher sales were driven by improved price and product mix management and broad-based volume demand of 7.1% across the segment. Stronger sales and improved manufacturing efficiencies expanded the segment's gross and operating profit before special items by roughly $3 million versus the prior year.

Looking ahead, we expect FPS operating performance to trend lower sequentially in the fourth quarter, due to planned holidays in Romania and Turkey and the timing of various fertilizer seasons around the world.

And with that, I'll turn the presentation over to our Chief Financial Officer, Larry Hilsheimer.

Thank you, Pete. Good morning, everyone. Please turn to Slide 7 to review our third quarter financial results.

Third quarter net sales on a currency-neutral basis were 5.5% higher year-over-year due to strategic pricing decisions, contractual price changes and year-over-year containerboard price increases. Third quarter consolidated gross profit grew by 16% versus the prior year quarter, due to stronger gross profit performance in our Paper Packaging and Flexible Products & Services segments, partially offset by significantly higher raw material and transportation costs.

Speaking of transportation costs, we recorded an expense reduction adjustment of $4.6 million in RIPS: $2.4 million of it related to prior 2018 quarters, $1.7 million related to 2017 and $0.5 million to 2016. This was discovered as we were painstakingly studying our transportation expense for opportunities to address the cost inflation. We discovered that -- in that review, that in transition from our prior ERP system in North America to an updated version, that one invoice accrual matching process had not been appropriately billed in the updated system and we ended up in an over-accrued position. We have corrected the core problem and the expense adjustment gets cumulative freight expense to the correct level.

Gross profit margin increased by 200 basis points versus the prior year quarter, primarily due to strong demand and a favorable price-cost environment in Paper Packaging. Stronger performance across Flexible Products & Services and the onetime freight adjustment in Rigid, partially offset by raw material inflation, lower volumes and the timing of contractual pass-through adjustments in that segment.

Third quarter SG&A expense was roughly 8% higher versus the prior year quarter, due to higher salaries and benefit costs, professional fees and increased depreciation and amortization related to the ERP implementation. The prior year comparison is also misleading. Recall, we benefited from a onetime $2.9 million tax benefit last year that reduced Latin America's SG&A expense that did not recur this year. Adjusting for that onetime item, the increase is 4.6%. The salary and benefits increase is partially driven by the previously discussed build-out of our shared service center in preparation for streamlining after completion of our ERP implementation. In addition, we incurred professional fees in tax planning and market profit pool analysis related to our strategic growth and M&A activities.

Third quarter operating profit before special items rose by more than $23 million versus the prior year quarter, due to the reasons I previously mentioned. Class A earnings per share before special items rose by roughly 41% versus the prior year quarter, thanks to better profitability and lower year-over-year non-GAAP tax rate. Our year-to-date nontax -- or non-GAAP tax rate now stands at 30%, squarely within the range we previously guided to for fiscal 2018 and is 430 basis points better than the comparable period, thanks to tax planning strategy and tax reform efforts we've referenced on previous calls.

Prior to discussing cash flow, I'd like to comment on foreign exchange, which has been a hot topic in the news lately. Greif transacts in more than 25 currencies around the world and at any given time, we are long some currencies and short others. Specifically, during the quarter, the profitability of our RIPS business in EMEA was negatively impacted by weakness in the Russian ruble and Turkish lira, while the RIPS business in Latin America faced a headwind in the Argentinian peso. The overall FX headwind for RIPS was roughly $4.8 million, with roughly $4 million of it attributable to the weakness in the Argentinian peso.

At the consolidated operating profit level, the FX headwinds in RIPS were largely offset by currency impacts in other parts of the business. Netting all of the moving parts, the overall FX impact for the quarter was a minor $1 million headwind versus the prior year.

Finally, third quarter free cash flow, excluding the additional pension contribution of $65 million, was roughly $81 million or $16 million higher than the prior year quarter. Higher free cash flow resulted largely from improved profitability, partially offset by higher year-over-year capital expenditures for growth-related projects.

Finally, our cash conversion cycle continues to improve despite the current inflationary environment that we operate in.

Working capital days decreased from roughly 57 to 54 days on a trailing 12-month basis year-over-year and have decreased by 9 days since the comparable period in fiscal 2016.

I'll now review our updated fiscal 2018 guidance. Please turn to Slide 8.

We are increasing and narrowing our fiscal 2018 Class A earnings per share before special items guidance range to between $3.53 and $3.69 per share to reflect the RIPS freight adjustment and the stronger performance seen in Paper Packaging and Flexible projects -- Products & Services netted against cost inflation pressures we are experiencing. Our capital expenditure and free cash flow guidance are unchanged.

I’ll close with a final few words on guidance and our key assumptions.

First, currency markets remain volatile, but given the breadth of our portfolio, we anticipate the FX movements will have an immaterial impact on our financial results for the year. It's not an area of concern for us.

Second, as it relates to Paper Packaging, we assume OCC costs of $73 a ton for August, $87 a ton for September and $96 a ton for October, in line with the latest RISI forecast.

Third, as Pete mentioned, FPS' results for the fourth quarter will trend lower than fiscal Q3, but will still represent a significant improvement when compared to Q4 of fiscal 2017. Please also keep in mind that improvements in FPS are reflected in increased noncontrolling interest.

Finally, and similar to other companies, transportation tightness in North America is impacting our in-transit inventory levels. In some cases, we are waiting days or even weeks for appropriate trucks or lanes. We are proactively managing the situation to mitigate the impact to ensure that it does not negatively affect free cash flow for the year.

Now let's turn to capital priorities on Slide 9. A strong balance sheet provides us financial flexibility to maximize value creation. At the end of the quarter, our leverage ratio stood at 2.0x, at the low end of our targeted 2 to 2.5x net debt-to-EBITDA range. We intend to maintain our targeted leverage ratio but would consider temporarily exceeding it if a compelling growth opportunity emerges. We have opportunities to further strengthen our balance sheet in the future. For example, we have $250 million of 7 3/4% interest rate notes due in August of 2019. Based on current market conditions, we expect to pick up between 200 and 250 basis points when we refinance that debt in 2019.

Our capital priorities include investing in organic and inorganic growth opportunities and returning capital to shareholders. Growth investments will be disciplined, guided by our risk-adjusted framework and grounded on clear financial and strategic logic. M&A will be selective and aligned to our core competencies. We will continue to return cash to our shareholders through our sustainable dividend and we'll look to enhance those returns in absence of compelling growth opportunities.

And now I’ll turn the call back to Pete for his closing comments.

Thank you, Larry, and please turn to Slide 10. In closing, we are very encouraged by the overall performance of our business. One of the benefits of our global portfolio is exposure to a variety of substrates end markets. Outperformance in some segments help counter challenges experienced in others. We remain very confident that the business will achieve its stated commitments for fiscal 2018.

Thank you for participating this morning. We appreciate your interest in Greif. Please open the line for questions.

(Operator Instructions) Your first question comes from the line of Gabrial Hajde from Wells Fargo Securities.

First, I wanted to kind of look at price-cost and kind of at a high level on the RIPS segment. Is there a way for you to break out how far you estimate you might be behind, probably the biggest cost components, which I'm assuming is raws and freight? And then the second part of the question, I'm starting to see some relief on the freight side, at least in some of the indicators that I track. Is there any way to, I guess, give us a sense for if you're seeing -- and I know you talked about tightness in the market, but as it relates to the rates, it actually seems like they're starting to come down a little bit on a sequential basis month-to-month. Any help there would be appreciated.

Yes, Gabe, I'll comment on the price-cost lag in Rigid Industrial Packaging. So the biggest area of catch-up is in North America. And anybody has seen the steel cost increase is primarily because of tariffs in the U.S. It's been on a pretty steady incline. We talked about the increases year-over-year and sequentially from Q2 to Q3. It is starting to mitigate now, and what we'd expect to start seeing catch-up in our fourth quarter fiscal year and the first quarter of 2019, to get a more normalized rate of margins. That's assuming that no other changes in steel cost increase from the time -- from now until those times. In regard to transportation, we still see that as a real challenge, Gabe, and it's availability and it's really driver shortage. So we hope they start mitigating, but we have some specific plans that were in place to manage that, both short term and longer term. And I still think that's a big challenge to our business and other industrial companies longer term, structurally, in the transportation realm.

Yes. Maybe let me supplement what Pete said. The one thing I would remind everyone is that on these price adjustment mechanisms, most of them are tied to calendar quarters. And we've seen, as of the end of June, that things had already sort of flattened and turned in Europe and China. But in the U.S., just to give you perspective, if I go back to a year ago, cold rolled was about -- basic index was $906. And in December, it was pretty steady, $892, then it went up to $1,025 in March and $1,117 in June. Now the last 2 months, July popped a couple bucks and then it went down in August. So September is flat. We should, like Pete said, start to see some recovery towards the end of our fourth quarter as we work through the inventories and have the pricing adjustments kick in after that. But it will predominately start to come in the first quarter or should, as long as we don't see a price spike in September.

Okay, that's very helpful. And Larry, you did mention China, which is kind of where I wanted to go next. Can you frame up for us kind of the current dynamics? And I ask sort of in the context of pricing that turned slightly negative this quarter. It had been positive for 4 or 5 quarters, at least, when I look at the data that you provide us. Should we interpret this as Greif responding to the market and starting to defend their turf? Or is this more about just raw material movements over there, which I know can differ, as you pointed out, from what we're seeing here domestically?

No, it's very insightful, Gabe. So as we know, we've talked about this over the last several quarters, it's a hypercompetitive market, mainly from local Chinese competitors. We are -- we have a new commercial team in place. We are responding in some places to protect our turf, but ultimately, our vision and our goals are to create value and operating profit. And we've modeled out various scenarios to determine that balance between volume and margin. Some of that is around protecting turf, but ultimately, and we'll have a decision in the next 2 to 3 months on what our newer strategies, how we go-to-market and what our footprint looks like, to combat the current environment, which we see as being more prolonged than short term in terms of competitive profiles in that market.

Yes. And Gabe, just on that, just giving you the end-of-quarter indexes in China, relative to your comment on the pricing. So at the end of September, it was $640; then at the end of March, it was $620; in the end of June, it's $608. So yes, you're dead spot-on, it's trending that way on the adjustment mechanisms in China.

Your next question comes from the line of George Staphos from Bank of America Merrill Lynch.

I guess my questions are around RIPS volumes. And Pete, I was wondering if we should draw any conclusions from the CSI is really not trending towards your goal. They've been somewhat stagnant, certainly improved versus prior year levels. But should we draw any conclusions from the fact that the CSIs aren't moving and your volumes have been a little bit weak there? You called out a number of one-off things this quarter and the last couple of quarters, there's always been something in RIPS. Do you think there's something structural in RIPS that prevents it from putting up more sustained volume growth? Your thoughts there and then I had a follow-on.

I appreciate the question. So I would say no, I think that there's not a structural alignment between our CSI scores and our volumes. And let me tell you why. If you look at discrete businesses within our RIPS business, we have some exceptional performances on CSI. There's isolated underperforming regions or plants, countries within regions are dragging that down fairly substantially. But more importantly, when we talk to our customers, we get an overgrowing sense that our customers are very happy with the values and the services we deliver. And when you really look at overall, if you take out the discrete -- we'll just take out the one discrete issue, which is really the Southern Europe ag sector, our volumes in Europe grew -- in EMEA grew 2.2% year-over-year, which is on the high end of what we expect in terms of organic growth. North America demand was up 5% on steel drums. Southeast Asia is up over 5%, and whatever the gap is was China, as we've talked about the competitive situation. In Brazil, we've had pretty good growth trends. We just had a controllable issue in Brazil that is in our control operationally, that's a challenge that we're in the midst of fixing. And once we get through that, I expect us to grow in the steel business there. I'd also tell you, our growth in IBCs continue to exceed our expectations, high-teens growth. And -- but your question on alignment is very important, and we take that very seriously. And the lagging performers in discrete regions around the world have a lot of attention from myself and the business presidents, and I'm actually confident that those businesses will return their CSI levels to the standards we expect. So thanks for that question.

Yes, and let me follow on one thing, too, because RIPS, on an overall basis, you look at it, we had $4.8 million of negative drag in the quarter year-over-year from currency, almost $4 million of it from Argentina. Last year in Argentina in the third quarter, we had $2.9 million of a 1991 tax refund that flowed through the quarter. So that's on the year-over-year. We obviously had this $4.6 million adjustment on the transport.

Freight.

But then we also had these conical drums, which is about $2.8 million of drag just related to the drought. So bottom line is, we're actually pretty pleased with our performance in RIPS.

Okay. My follow-on, and I'll turn it over. If you can give us a little bit more color in terms of the swing factors in your fiscal fourth quarter guidance, and what drives the question is, effectively, you raised the lower end of the range and much of that is driven by the freight reversal. In answering Gabe's question, it sounds like the raw material situation is getting better, and yet you seem to call that out, at least to me, to my ears, as the biggest risk factor. So help me understand what are the swing factors? What are you really building in true, sort of fundamental cushion for? And what might be just appropriate prudence in reserve? And then I'll stand down and turn it over.

Sure. Thanks, George. So as you know, we don't give quarterly guidance, but obviously, we're at the last quarter of the year, so it effectively ends up being that now. But I did note that we got some, several comments about, "Well, gee, you're guiding below fourth quarter consensus." Well, that's great, we don't give quarterly numbers. So when I look at it and I say, "What did we update at June?" I'm very pleased that we're able to increase our guidance. And you can look at it as tied to the accounting adjustment on the transport, but we look at it from a slightly different perspective. I mean, from the time we provided that updated guidance in June, we experienced the drought in Europe which cost us about $2.8 million. We had the currency shift that changed from what we had forecast then to $2 million worse than is anticipated at that time. Our tax rate continued to be -- come in just as we had guided, we're not -- yes, nothing shifting on that. Offsetting those negatives, we realized the accounting adjustment of $4.6 million. And despite all that, because of improved operations in our business, we were able to raise our earnings guidance range. So we're actually very bullish on what's going on in our business. And as we said time and time again, many unexpected things happen in business. You need to just manage around them and that's one of the reasons we don't give quarterly guidance. And so yes, we had the $4.6 million. It offset some other unexpected, unanticipated things, and then operations improved and that's what has allowed us to improve the guidance.

(Operator Instructions) Your next question comes from the line of Adam Josephson from KeyBanc.

Pete, you mentioned -- you talked a few times about the discrete or isolated challenges in the RIPS business, I think, in your prepared comments and in response to George's question. A couple of related questions. One is, what happened in Brazil, at your largest plant? You talked about operating challenges there. And two, you called out weather-related problems in each of the past 4 quarters in the Rigid business, be it hurricanes or drought or cold weather, whatever, but the last 4 quarters, weather has been a consistent problem. So it doesn't seem like the weather problem in the last quarter was discrete. It seems more of a continuation of what you've experienced over the past several quarters. So just -- would appreciate your thoughts on those 2 issues.

Yes. Thanks, Adam. So in Brazil, we consolidated 2 operations into 1 about a year ago. And we've had some operating issues in terms of maintenance and in terms of efficiencies that we have had to correct, which caused some throughput issues. We're in the midst of correcting that. And then in addition to that, to a smaller extent, the trucker strike had an impact all throughout Brazil. That really relates to that. With regard to weather, we can't control weather. We just have to operate within it. But in our conical ag season, which really serves the tomato paste business. It's a fairly large portion of our third quarter and part of our fourth quarter, and it was down over 0.5 million drums, when in the past 2 to 3 years, we've had record volumes and record performance in that. So we had, early in the year that was rain. And then it became very, very dry. And so the tomato farmers planted less crops, and then the crops they had were really decimated by the severe heat. So we didn't expect the severity of that, but it happened and we didn't control it. And it was a big part of the demand profile in RIPS EMEA. And again, if you look at taking out that one discrete issue in Southern Europe, our steel drum business grew by 2.2% in overall in that region. So from a demand standpoint, we feel very comfortable with what we're doing and how we're winning in those markets. I can't control weather, and we can't control weather and we can just manage through that and so...

Yes. I guess the only thing I'd add, Adam, is I hear you and obviously, there's been a lot of different weather things. We're obviously just telling you, relative to -- with the guidance we gave in June, what changed? In June, we didn't anticipate drought wiping out the conical business in Europe. So it's just a step-off and it's just explaining the change.

Sure. And just, Larry, on the cash flow, for my second question. It seems as though you're guiding to the biggest free cash flow quarter in the company's history in 4Q. Correct me if I'm wrong there. And I know a year ago in 4Q, I believe, you had the largest free cash flow quarter ever. Is there something that is structurally changing in the company such that you're generating ever more of your free cash flow in the fourth quarter? And if so, can you just help me understand that change?

Sure. And obviously, as we've said before, we have a lot of confidence in our cash flow forecast and that's despite increased CapEx. But to your core question, over time, we have had an increase in our Ag segment business. That's had something to do with it, obviously, the conical business being off this year would drag that. But that's more than offset by the fact that in the paper business, you've had the OCC costs and the paper price increases flowing in the second half of the year. That's what's going on this year. And -- but yes, it's been a subtle shift over time. We actually have not dug in to find out exactly the shifting nature. Actually, we were just talking about that yesterday. We're going to go back and try to look at what else is impacting it. But we know it's those primarily 2 things for this year anyway, but the ag thing has been shifting. We didn't have a big ag business in Europe a number of years ago. We got big in the conical space, which was a nice lift. And despite it being significantly off this year from what we had projected it to be, it's still a nice business and solid second half.

Your next question comes from the line of Justin Bergner from Gabelli & Company.

I just had a couple of clarifying questions. First, the increase in gross profit in Rigid, should I interpret that in light of volumes being negative across your global Rigid business, that there was an improvement in mix? Because I know you indicated that lagging cost recovery was still a headwind.

Yes, Justin, it is. It's a combination of mix, but all -- and we do have some higher volumes, as Pete went through, in some of our more profitable areas. I mean, North America is a nice space for us, and we've taken nice price increases, but also have had volume-driven things. Now we obviously are still trying to catch up on that cost curve on steel, so we're optimistic about what first quarter next year shows for North America.

Okay, that's helpful. Secondly, I just want to make sure I understood what was going on with FX. In the prepared remarks, you mentioned FX headwind of $4.8 million. But then you said something about netting to a $1 million headwind. Can you just clarify what you mean there? How much of the FX headwind is sort of onetime versus ongoing?

Yes, the $4.8 million is in the RIPS segment alone, Justin, and $4 million of that is Argentina alone because of their economic challenges. On an overall basis, for Greif consolidated, it's $1 million for the quarter. So obviously, we have the offset, some of the other business units, primarily FPS with the lira. It ends up favoring us because they translated costs on labor and us selling into the euro market. So a nice tailwind in that business, along with their operational improvements. As to it being a onetime item, I mean, that's very difficult to call, I mean, which way currency markets are going. We try to -- we hedge about half of our currency risk right now and the hedges are working as designed in terms of bottom line impact, and actually, are sort of a negative drag for us this year against some of the currencies. But it's all slight. The bottom line impact, as we said for the year, we expect to be very minor.

Your next question comes from the line of Steve Chercover from D.A. Davidson.

This is probably an easy one. Is there any residual pricing benefit yet to be realized from the spring containerboard hike? That was my first.

No, all the price increase has been fully realized throughout our system.

Okay, terrific. And then I actually don't want to rip on the performance of RIPS because it sounds like there's actually some good things going on. But I'm just wondering, were the startup expenses of the facilities in Europe, did they impact the quarter much? And if so, by how much?

Not really. There was nothing more than what we had built into our plans at all, Steve, and nothing significant. The only thing that's impacting us, I'd say to keep in mind relative to original guidance and to year-over-year volumes is because of the delays in those projects, because of delivery delays on blow molders and just as an aside on that, our primary supplier in that reconsolidated their production facilities from elsewhere in Europe to Czechoslovakia and put them way behind, which then put us way behind on receiving our blow molders. And that has impacted us in not getting those up and operational as quickly as we had thought we would. And that's cost us some earnings this year, and volumes, which has been another challenge we've overcome, which is why, again, I'd go back to we're very pleased with where our RIPS business is.

Your next question comes from the line of Dan Jacome from Sidoti & Company.

Just 2 longer-term questions, I guess. Can you give us an update on the sheet feeder network capacity build that you guys are -- I think, you said you're projecting to be complete by the end of fiscal '19? Sorry if you did provide an update and I missed it. And then my second question was just on taxes. I know at your Analyst Day in '17, you discussed several potential levers in place to mitigate tax. I mean, could you still -- can you give an update on that? If you still see any room for improvement, just on the tax line, in the next couple of years?

Yes, Dan. So I'll answer the corrugator and Larry can handle the tax. But no changes, that Mid-Atlantic corrugator in Northeast Pennsylvania is on track for late 2019, exactly how we've told everybody last quarter. So we're on pace.

Yes. And with respect to taxes, Dan, I couldn't be more pleased with our tax group and the things that they're doing for the company. They've really done great work for us in driving, like our cash tax rate this year will probably be around 18%. And that means we're deferring a lot of taxes out there and that's non-GAAP. And the -- as to future, I anticipate that we will be able to reduce that sort of non-GAAP range. We're now at 28 to 32. I would expect it to move down 200 basis points over time. But tax planning is complicated. You get into a lot of state and local tax environments. And one of the things, I think, we all can be concerned about is, we've got a lot of states in this country that have pension liabilities that they're underwater on and they need to pay for them somehow. So with the federal taxes going down, they might find leeway to raise state and local taxes. So I think it's something to be cautious about.

Okay, fair enough. That helps. And then -- so just remind us again on the new Mid-Atlantic feeder network, I mean, what's going to be the long-term end game? And what are you looking to improve on versus your current asset base? Is it going to be maybe speed to market or more value-added customized containerboard products? Can you just remind us on that? And that's all I have.

No. So the installation of that is consistent with our strategy in Paper Packaging and it'll both have specialty value-added products and asitrade, which makes litho-laminated sheets. It will also have a high-speed wide corrugator. We chose to put it there because it strengthens our regional network to serve our strategic customers in our existing CorrChoice network, but it also is aligned where we have committed customers in that region that are strategic to us. So our view is we build new plants, not with a hope and a prayer, but with committed customers that are strategic to us that we -- helps us grow and enable our customers to be successful. So that's our philosophy as we continue to expand and grow in any of our businesses in Greif, those will be the earmarks on why we'll expand.

(Operator Instructions) Your next question comes from the line of George Staphos from Bank of America Merrill Lynch.

My next 2. Pete, you talked about compelling growth opportunities and evaluating those versus return value to shareholders. And obviously, you study this very closely, as do all companies, and I know you can't get too far ahead of yourselves relative to whenever the press releases ultimately come out. But how would you rate the growth opportunity pipeline at this juncture, looking out 6 to 12 months, versus where it might have been 6 months ago? And that's question number one. And then question number two, just since we're on the subject of cash flow. I think you mentioned earlier just now in answering a question, that cash taxes, Larry, will be around 18%. How long do you think you can keep that kind of -- and maybe not to the basis point, but that kind of differential versus the GAAP rate? And I'll be back.

Thanks, George. So I'll answer the first one and allow Larry to answer the second. So the opportunities 6 months ago versus now, I would tell you we have a very good process we're following. There we've got a very active pipeline. I think the multiples are similar to where they were 6 months ago. I think what becomes available differentiates what was 6 months ago to today. Again, we're going to be very disciplined in what we look at and what we execute on and it's not going to be a growth strategy for growth's sake; it will be how do we improve our cash flow and how do we improve our margins and our profits. So we feel good about what we have in front of us. But it's -- like you said, it's a balance between growth for margin and cash flow versus other opportunities we have to deliver value back to our shareholders.

And George, with respect to the tax -- cash tax rate, I've not asked the team to build that out to where we would think it would be right now, so I don't really have a great answer for you, a detailed answer, but just a couple high-level things to point out. One is, we are continuously working on further strategies to manage and reduce our tax liabilities and part of that is trying to figure out how do you push tax liabilities out? Second is, it can be really bumpy because of some of the provisions in the new tax law that, let's say, in the M&A front, if we bought assets on a business, use provisions, it would allow you to write off the entire amount now. So you could end up having a really lumpy look at taxes. And then finally, as part of tax reform also, you have the 10-year transition tax that you have to pay for elimination of the repatriation provisions. So there's a lot of give and takes. It's not a perfect answer for you. As we go into our budgeting process for next year and looking at cash flow, we'll obviously be looking at what we believe will be the impact for next year and we'll try to look at what does it look like going into the future? But then there's always that caution that, particularly, if you're active in this M&A market, it could be all over the place.

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

Just 2 more from me. Just one on your paper business. Obviously, you've been growing well ahead of the market and kudos to you on that. And as you know, there have been many capacity announcements over the last year, presumably in response to these extremely healthy industry conditions. At some point, given the rate at which you're growing, do you anticipate a need to add capacity as well? And why or why not?

So you're right, attractive markets always draw capital investments. Our strategy, next 3 to 5 years, is to continue to grow our downstream converting business focused on specialty products and higher margins, with the idea of becoming over-integrated. And we think, when you're an over-integrated environment in the industry as we see it today, I think that's a real advantage. So that's our focus. Our mill capital will be predominately around maintenance capital, how do we drive energy cost reduction, how do we drive throughput improvements, how do we lower our cost structure, but it won't be about building significant capacity in any of our mill systems as we sit today.

And just one on the dividend. Just help me with the timing and the magnitude of it. So I believe it equates to about a $5 million annual increase in the dividend. Did that come at the expense of some other capital return? And why announce it at the end of the third quarter? Forgive me for not remembering when you typically announce dividend increases. But any just context around the timing and magnitude would be helpful.

So I'll make one comment and let Larry comment. So I will let you -- I'd tell you that this does not come in at the expense of any growth opportunity at all. That's our -- one of our highest priorities. But we just felt we were comfortable in our cash flow and our earnings profile, and we've not had a dividend in the near term and we thought it was prudent to do to our shareholders, to return some cash back.

Yes, Adam, we've been talking with the board about this for some time. Because as we work through our transformation, we become more and more confident about our ability to be a steady cash generator. And we've been consistently telling people that one of our key focuses is returning capital to shareholders. So we obviously remain very active in M&A pursuits, and we just spent $65 million of -- in extra pension payment. We actually paid $70 million but we only called out the $65 million because we were going to make the $5 million anyway. And the -- but we -- so we weren't prepared to do any stock repurchases or large special dividends. But because of the high confidence we have in our cash flow generation and our extremely low leverage position, we felt it was just appropriate to live up to our commitment to return more capital to our shareholders. And so we increased the recurring dividend and the board agreed and approved it.

Your next question comes from the line of Justin Bergner from Gabelli & Company.

I hope I'm not beating a dead horse. But just on the FX side, the 4 point -- you're essentially saying that there is a $4.8 million headwind in the Rigid segment, which was almost entirely or it was offset to the tune of $3.8 million from tailwinds in the Flexible segment. Is that how we...

Yes, that's essentially it. Yes.

Okay. And was any of the negative $4.8 million related to sort of balance sheet items which changed and ran through the P&L? Or is it mainly transactional headwinds just associated with where your cost base versus revenue base is?

Yes. Predominately transactional and it's income statement, not P&L -- or not balance sheet.

Your next question comes from the line of Gabrial Hajde from Wells Fargo Securities.

Just one quick last one. The volume weakness in Latin America, and I guess, specifically Brazil, is there any way to kind of parse out the strike-related weakness versus what you're seeing in the market? And then also, I guess, this consolidated facility, I mean, from an outside world, the very simple approach would be kind of 10 days over 60-some workdays in the quarter would suggest you were down -- you should be down mid-teens, but in fact, you were only down 10%. So it seems to me that you're actually growing pretty well in other markets. Can I ask you to provide a little bit of color around what you're seeing in terms of market growth and the onetime items?

Yes, sure. Well, Gabe, the bigger miss on volumes was the operational challenges that we had, lesser so on the strike. As you said, it was only 10 days. But we had some issues that are totally within our control that we did not perform well and we are addressing those. I would characterize the market in Latin America as modest and cautious growth. You certainly got some financial tightening with Argentina and their currency and you have political uncertainty, which seems to be a common theme in Brazil. So I would say, it's cautious, but it's more on us and what we did not do well in Brazil and how we operated. And I promise you, that's being addressed. And you should start seeing in the next 3 to 5 months, improvement in regard to our ability to operate more effectively in Brazil.

Your last question today comes from George Staphos from Bank of America Merrill Lynch.

Two things here. One, when we look at your heat map chart, if you will, where you look at volume, price and FX. And we look at third quarter versus the second quarter, certainly, price has been a very good story for Greif over the last few years. But we're starting to see maybe a little bit of diminution in the year-on-year pricing trend. Should we read anything into that in terms of your ability to raise pricing, especially as you're trying to catch up on cost? Or is it purely just mechanical? To Gabe's point, you had some markets where costs were down, and therefore, the mechanical flow-through of pricing was less robust. That's question number one. Question number two, as we think about China and what you might do there, and obviously, you'll give us the details in a few months, do you anticipate lowering your actual productive capacity? Maybe you'll take out some [roofs] and reduce costs and however it is that you'll become more effective than you already are in commercial aspects, we'll hear about that in the next few months. But do you anticipate maybe reducing capacity? Or is it just more of a cost-reduction initiative?

Thanks, George. So to your first question, I think you answered it and Gabe did as well. It's all reflective of the raw material increases are mitigating and they're becoming more flat. You have peaks and valleys, smaller levels within different regions that are driven by price adjustment mechanisms. But we also, because of certain other inflationary costs, have onetime openers in our agreements that we can try to get additional cost increases, and we'll always try to do that. Your second question around China. Our first initiative is always to look at markets and work where the profit pools that are best advantageous to us. And then you look at where your operating capacities are in those regions that have the most attractive profit pools. So our first item is, can we secure better-priced, more value-added margin business and then align our operating capacities to that? Our first priority is to sell more, better business, but the other solution is, we very well could reduce capacities in certain regions in China and we're looking at all those options right now. But we would prefer to grow. It really depends on what we believe is our best chance to make the best operating profits in that country. And quite frankly, we look at every market the same way.

And there are no further questions at this time. I will now turn the call back over to Mr. Eichmann for closing remarks.

Great. Thanks very much, Kelly, and thanks a lot for joining our conference call today. We hope you have a great long weekend ahead.

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