Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Greif Inc (NYSE:GEF)
Q2 2019 Earnings Call
Jun 6, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the Greif Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Matt Eichmann, you may begin your conference.

Matt Eichmann -- Vice President, Investor Relations and Corporate Communications

Thank you, Jack, and good morning, everyone. Welcome to Greif's second quarter fiscal 2019 earnings conference call. Joining us on the call today are Pete Watson, Vice President and Chief Executive Officer; and Larry Hilsheimer, Vice Chief Financial Officer. Pete and Larry are available to answer your questions at the end of today's call.

In accordance with Regulation Fair Disclosure, we encourage you to ask questions regarding issues 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 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.

Peter G. Watson -- President and Chief Executive Officer

Thank you, Matt, and good morning, everyone. I'll begin 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. Following their remarks, we will conduct a question and answer period.

So starting with our second quarter summary, we continue to make solid progress toward our strategic vision of becoming the best performing customer service company in the industrial packaging. Our Companywide customer satisfaction index score topped 90% in the second quarter for the first time since we introduced the metric. We also completed our eight NPS survey and registered our best ever score of 57, which is in line with top performers in the manufacturing space. We're allocating a significant part of both our human and financial capital to achieving our vision and great progress is being made.

Our second quarter adjusted EBITDA and adjusted Class A earnings per share grew roughly 31% and 7% respectively versus the prior year quarter. Our rigid business was challenged by a weak demand environment and uncertainty from trade tensions. Our flexible business performed to plan, despite market softness in the Benelux. And our paper packaging business financial results improved significantly, with the addition of Caraustar, but we experienced weaker demand during the quarter. We completed the acquisition of Caraustar Industries on February 11th and integration is well under way. We've been highly impressed by the energy of our team in identifying new synergies not previously contemplated during the due diligence process.

Please turn to Slide 4. The Rigid Industrial Packaging & Services segment was a challenged in the second quarter by persistent weak demand in certain global markets. Global steel drum volumes declined by roughly 4% versus the prior year quarter, while IBC volumes grew by nearly 12%. Steel volumes were particularly strong in the Middle East, North Africa and both Southern and Eastern Europe, but more challenged in higher volume regions of West and Central Europe, APAC, and the US Gulf Coast due to trade uncertainty, reduced chemical import demand from China.

Global IBC volumes are strong across the entire portfolio, as we continue to advance our pivot to plastic initiative with double-digit volume growth versus the prior year in North America, EMEA, and APAC. RIP second quarter sales were roughly $30 million lower versus prior year. However, on a currency neutral basis, RIP sales grew by roughly $2 million versus the prior year due to higher selling prices from strategic pricing decisions, partially offset by volume softness.

RIP second quarter adjusted EBITDA was down roughly 4% versus prior year due to lower sales and partially offset by lower segment SG&A expense. Adjusted EBITDA was also negatively impacted by roughly $4 million of FX headwind by $1.5 million bad debt write-off tied to a customer bankruptcy, which we expect to be recovered this year and roughly $3 million less favorable opportunistic sourcing than in Q2 '18.

I'd ask you to please turn to Slide 5. As previously mentioned, we completed the acquisition of Caraustar Industries on February 11th and included the results in Paper Packaging financial results subsequent to that date. Paper second quarter sales improved by nearly $284 million versus prior year, largely due to Caraustar's contribution, partially offset by softer market conditions in our container board business where we took roughly 27,000 tons of economic downtime during the quarter.

Second quarter adjusted EBITDA rose by roughly $41 million versus prior year, largely due to Caraustar's contribution, but also due to improved price and cost mix. Looking ahead, we assume OCC prices of $38 a ton for the balance of the fiscal year. And as a reminder, every $10 a ton movement in OCC equates to a roughly $1.2 million change in EBITDA per month.

I'd ask you to please turn to Slide 6. I want to highlight the great work our integration team is doing to uncover synergies that will expand EBITDA and drive greater efficiencies in our business. Recall that we announced Caraustar's acquisition on December 20th, we announced that at least $45 million in annual run rate synergies will be captured within 36 months of deal close.

Over the last several months, we've uncovered additional opportunities, and we now expect run rate synergies will be at least $60 million over the next 36 months. The bulk of the incremental synergy relates to greater-than-anticipated freight lane savings and revenue synergies, not initially contemplated during the due diligence.

Please turn to Slide 7. FPS delivered solid second quarter results, despite ongoing market softness in Western Europe. Segment sales were roughly 8% lower than prior year. But excluding impact of FX, fell only by 1%. Gross profit fell by roughly 6% versus the prior year quarter due to lower sales, partially offset by lower labor and manufacturing costs across the network. These improved efficiencies together with lower SG&A and the beneficial FX tailwind of $2 million helped Flexibles generate slightly higher adjusted EBITDA versus the prior year.

I'd like to now turn over the presentation to our Chief Financial Officer, Larry Hilsheimer.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Thank you, Pete. Good morning, everyone.

Please turn to Slide 8. Second quarter net sales, excluding the impact of foreign exchange and gross profit, were more than 29% and 27% higher respectively versus the prior year quarter, primarily due to the Caraustar contribution, partially offset by softness in RIPS and our legacy Paper Packaging business.

Second quarter adjusted EBITDA rose by more than 31% versus the prior year quarter, again primarily due to Caraustar's contribution and partially offset by the RIPS business headwinds that Pete described in his remarks. Below the operating profit line, second quarter interest expense rose by roughly $21 million, while other expense was roughly flat to prior year. Second, our stronger adjusted EBITDA and lower tax expense drove second quarter adjusted Class A earnings per share to $0.81 per share.

Our adjusted tax rate during the second quarter was 27.4%. As a reminder, the application of required FIN 18 reporting may cause fluctuations in our quarterly effective rates from time to time, and we continue to expect that our adjusted tax rate will range between 28% and 32% for fiscal 2019. Few additional words on earnings. Our initial estimates of purchase price accounting adjustments for our Q1 call and guidance discussions proved to be too low. The assets we acquired were determined to have a higher value than previously estimated, which resulted in incremental inventory cost as well as depreciation and amortization charges that impacted our quarterly earnings.

Second quarter earnings were reduced by one-time $9 million inventory acquisition step up charge, $2 million of which is incremental to our Q1 guidance and is now reflected in our anticipated full year results. Similar to discussion on our first quarter call and unlike some other acquisitive companies, we have not adjusted this one-time item out of earnings. We also encountered $3.5 million of incremental intangible asset amortization and fixed asset depreciation during the quarter as a result of incremental valuation step-ups and shorter depreciable lives than originally contemplated. The impact of these increased valuation adjustments impact the current year full-year estimates and are captured in our revised fiscal 2019 guidance that I'll discuss shortly.

Second quarter adjusted free cash flow improved by roughly $16 million versus the prior year quarter. Second quarter CapEx was roughly $9 million higher versus the prior year. Improvement in free cash flow was driven primarily by improved profitability related to Caraustar and stronger working capital performance in our legacy Greif business.

Please turn to Slide 9, and I'll review our fiscal 2019 guidance and key modeling assumptions. We now expect to generate between $3.70 and $4 in adjusted Class A earnings per share in 2019. Our updated fiscal 2019 guidance incorporates a drag associated with the various purchase price accounting adjustments that I just mentioned, Caraustar synergies previously discussed and lower forecasted interest expense. It also reflects the containerboard price decrease risk we announced in May, offset by our updated OCC assumption of $38 a ton for the remainder of fiscal 2019.

Final guidance incorporates the containerboard economic downtime and RIP softness we experienced that we won't recoup this year. We assume that RIPS demand will improve slightly in the back half of the year in line with our chemical customers' expectations and based on current ag forecasts. We also contemplate sequential improvements in PPS, though with demand remaining less robust than in the prior year. We've also tightened our fiscal free cash flow guidance range to between $230 million and $250 million, which includes anticipated CapEx of between $160 million and $180 million. CapEx has been slightly reduced as a result of poor weather and vendor-related delays impacting several of our CapEx projects.

Turning to capital priorities on Slide 10. Our capital priorities were updated following completion of the Caraustar acquisition. Investing in our existing businesses through appropriate maintenance projects and organic growth opportunities remains our top priority, as that is what will allow us to fund our aggressive deleveraging plan. We have no plans to alter our existing dividend, which today pays a compelling yield of roughly 5%. Given our anticipated free cash generation, we expect to return to our target leverage ratio of 2 times to 2.5 times within 36 months, despite the recent softness we have experienced.

With that, I'll turn the call back to Pete for his closing comments before our Q&A.

Peter G. Watson -- President and Chief Executive Officer

Thank you, Larry, and please turn to Slide 11. So wrapping up, it's really busy second quarter. We closed on the Caraustar acquisition; we commenced with business integration; identified new synergies that make the acquisition even more compelling. Our teams have responded well to the challenging market environment and are delivering a solid performance. This is a really exciting time at Greif. We look forward to sharing more about our future plans at the upcoming Investor Day in June. Details about Investor Day can be found on our website. We encourage you to attend. Thanks for participating this morning and we appreciate your interest in Greif.

Jack, if you could please open the lines for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Gabe Hajde with Wells Fargo. Your line is open.

Gabe Hajde -- Wells Fargo -- Analyst

Good morning, gentlemen. Thanks for taking the question.

Peter G. Watson -- President and Chief Executive Officer

Hi, Gabe.

Gabe Hajde -- Wells Fargo -- Analyst

Wanted to ask about Caraustar and sort of outside of the newly discovered synergies, can you just talk about how the business was performing sort of from an operational and commercial perspective? Maybe give us an insight as to what the volume environment look like.

Peter G. Watson -- President and Chief Executive Officer

Yeah, Gabe. We're very pleased with Caraustar and the response in the first three months that we've owned it. As we talked about, the integration is going very, very well. The engagement, the teams is excellent. If you look at the market, the market is pretty representative of what we've talked about overall in the US. Because we own -- we didn't have them an entire quarter, I'll reference the calendar first quarter January through March, partly we own them and partly we didn't.

And overall, the system was about 3.8% down. And when you look at our calendar or -- excuse me, our fiscal year from February 11th to the end of April, they're just a tad weaker than that 3.8%. So not much different, but I will say we're pleased with the strength of the operating rates in both CRB and URB. And overall, we're very, very pleased with what we've seen in the first three months.

Gabe Hajde -- Wells Fargo -- Analyst

All right. Thanks for the detail there, Pete. And then, I wanted to drill down a little bit into European RIPS volumes. It sort of strikes me a little bit as peculiar seeing up volumes just looking at some of the industrial production data that we look at over there. I've read some reports about some folks holding onto a little extra inventory just as contingency planning around Brexit. Is there any insight you can give us there?

Peter G. Watson -- President and Chief Executive Officer

Yeah. So when you look at EMEA's RIPS volume, I'll talk first about steel because steel is our largest product line, one in RIPS, but also more heavily weighted in Europe and EMEA. The big challenge is Western Europe, predominantly around Benelux, as we've talked about, that's typically an export market for our customers. And that has been very weak for the past two quarters and had a lot of impact. In Central Europe, particularly around Germany was weak, as you've noted in everything you've read. But where we saw really good strength was in Eastern Europe, included is Russia. That demand is very good, we're up 6% in that region.

The Middle East, especially around Saudi Arabia, was up 14%. And I think that's testament to the operation that we have supporting our joint venture in the Middle East in Jubail, Saudi Arabia. And we had really good improved ag markets in Southern Europe, particularly around this upcoming cornichons tomato season, they were up 9%. So, we're really bullish on that region of the world.

And the other really positive comment was in the IBC growth. We had double-digit growth in our entire IBC portfolio and Europe certainly has a large piece of that. And it's part of our growth strategy in how we offer a wider range of diverse products to our existing customers, and that's again critical in terms of how we offer IBCs to our global customers.

Operator

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

Adam Josephson -- KeyBanc -- Analyst

Pete and Larry, good morning, and thanks for taking my questions.

Peter G. Watson -- President and Chief Executive Officer

Hey, Adam. How you're doing?

Adam Josephson -- KeyBanc -- Analyst

Hey. I'm fine, Pete. Thanks for asking. Hope the same goes for you. Just wanted to follow up to Gabe's question about Caraustar, so I think you said Caraustar's volume was down 3.8% in calendar 1Q and something more than that in your fiscal quarters. I assume it was down more than 4% in the quarter on which you own them, but that you're pleased with the operating rates. Can you help us with what the operating rates were in that business, were they sub 90%? Just a little -- I mean I would think with volume down in excess of 4%, it would be hard for operating rates to be much higher than 90% or so.

Peter G. Watson -- President and Chief Executive Officer

Yes. So the operating rates. And I'll talk about CRB and URB because that's the predominant substrate in their mill system. So, CRB is very strong. I believe it's over 96%. And we ran a good capacity there. In URB, operating rates and I'm quoting RISI statistics. The most recent that I've seen was about 94%. So, those industry rates remained strong and the second quarter when I referenced was 4% as a boxboard system that we are down. So, slightly worse than it was in calendar Q1, Adam.

Adam Josephson -- KeyBanc -- Analyst

Okay. Thanks, Pete. And just on the containerboard side, obviously, you took the 27,000 tons of market downtime. When was the last time you had to take economic downtime in that business? When in the quarter did you take the downtime? Was at the beginning, the end or was it evenly spread throughout? And then, are you assuming any more containerboard economic downtime in the latter two quarters of the year? Why or why not? Thanks so much, Pete.

Peter G. Watson -- President and Chief Executive Officer

So I've been here 20 years, and this is the most economic downtime we've ever taken. In regard to -- during the quarter, it was really spread out throughout the quarter. It wasn't heavily weighted toward the end or the beginning. And then in regard to our forecast, the only downtime we are projecting in the second half, we took regularly scheduled maintenance downtime in our Riverville operation in May and it was seven days on our linerboard machine and 11 days on our semi-chem medium machine and that was really to upgrade and automate technology in our back-end of our machine. We will also have scheduled fourth quarter regular maintenance downtime at our -- another containerboard mill at that time, but there is no economic downtime projected or forecasted today in our containerboard system other than maintenance downtime.

Operator

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

Ghansham Panjabi -- Baird -- Analyst

Hey guys, good morning.

Peter G. Watson -- President and Chief Executive Officer

Good morning, Ghansham.

Ghansham Panjabi -- Baird -- Analyst

So I guess, first off on RIPS. Obviously, volumes have been impacted to some extent due to tariffs, especially in the US. We now have incremental tariffs both with China and possibly Mexico. How have these two dynamics sort of shape your assumptions for the back half of the '19? In other words, how should we think about volumes across the various regions for RIPS for the rest of the year? I know you mentioned you're following customers' plans, but I'm not sure how update they are relative to the sequence of recent events on tariffs. Thanks.

Peter G. Watson -- President and Chief Executive Officer

Ghansham, I'll make a few comments, then Larry add some color to it. So as you said, our Gulf Coast in the US is little over 40% of our steel drum production in the US. And that's a big export market for our customers. So, that's been really hampered us. And around the world, Benelux is also a large export market for our customers and that is also close to 40% of the European steel demand, so big impact there. And then China, obviously, has had collateral damage as well in that regard.

So, in regard to the second half, the only change from our volumes from what we experienced in Q2 is around our ag season in Europe. We expect that to be very favorable and that is going to create a little bit higher overall steel drum demand by 2%, as we're projecting going forward. Again, as I mentioned, Eastern Europe and Saudi Arabia and Southern Europe continue to do well. So aside from the ag markets in Europe, we're basically saying we're going to be even from or similar to what we did going forward. I will tell you some of our customers in the chemical side are much more optimistic in the calendar second half and I think a lot of that depends on how far trade progresses going forward. Larry, any other comments you'd like to make?

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yeah, the only thing I would add is -- and this is just supplementing what Pete said, we are expecting a really solid second half from EMEA based on what we've learned about what's going on in the ag markets. But also as Pete mentioned, things just continue to be really strong in Eastern Europe and Saudi in particular, some of the other Southern European markets are good and even supplemented by ag. So, we're expecting the EMEA volumes to be very strong in the second half, offsetting further weakness in the US, which is really a standard almost exclusively around the Gulf Coast and is tied into what we're hearing from our chemical customers.

And so, when we built out our guidance range for the remainder of the year, we took what our teams forecast. And then, for the lower-end of our guidance range, we build some additional softness in case things don't recover in the part of our year that falls in the second half of the chemical company. So, I think we've built that cushion in APAC, we've continued to show the drop year-over-year that relates to the shutdown of our Ningbo plants there. So, they're doing relatively well.

In Latin America, we're really pleased with the improvement in operations that we're seeing with the new leadership we have down there. So volumes in the second half of the year there. We're projecting slightly up, as we are also hearing good news in the ag markets in South America.

Ghansham Panjabi -- Baird -- Analyst

Okay. And I guess just as a follow-up, specific to RIPS once again, even with volumes being sort of weak in the second quarter in year-over-year basis, margins were basically flat with Q2 of last year. Was that driven by raw material costs being lower freight costs mix, can you just give us some color as to the bridge on an operating profit or EBITDA basis specific to RIPS? Thanks so much.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Sure. In an aggregate basis, there are lot of moving parts, but it -- primarily driven by pricing actions that we've taken on things other than the raw materials. You might recall that in the first quarter call, I mentioned that we had a steep drop in cold rolled steel cost in December and the index that was going to create a little margin squeeze in the US. We did have that. We did though have success on driving some supplemental price increases that helped us manage against that margin squeeze a bit and had some help on some transport spot benefits. So on an overall basis, it was really just sort of hand-to-hand combat on managing the price cost squeeze. Steel costs were relatively consistent with all of our forecast going into the quarter, and it was really just managing the other elements of our pricing discussions with our customers.

Matt Eichmann -- Vice President, Investor Relations and Corporate Communications

And Ghansham, clearly right. So last quarter, we talked about some of the actions we were taking down (ph) variable costs and some of that take-out that we were doing there. So I think you're seeing some of that play through as well too.

Ghansham Panjabi -- Baird -- Analyst

Yeah. Thanks, Matt.

Operator

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

George Staphos -- Bank of America Merrill Lynch -- Analyst

Hi, everyone, good morning. Thanks for the details. I just wanted to come back to the question on RIPS volumes and just point of clarification. So, if we think about it directionally you expect EMEA to be up, North America to be down, APAC to be down and Latin America to be up. And I don't know if you are commenting in aggregate, what you expect for RIPS volumes for the back half, but if you had a view on that I would take that in your confirmation of what I just said on your guidance. I had a quick follow-on.

Peter G. Watson -- President and Chief Executive Officer

Sure, George. On an overall basis, we expect that steel volumes in the second half of the year will be up about 2.5% unit-wise. Plastic, we expect to be up 1% to 2% and IBCs up high-single low -- high single to low double digits.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Okay, fair enough. And Larry, if you can go back to Caraustar and I guess congratulations on the performance on that so far. Where did you find the incremental revenue synergy? That's interesting. Congratulation on that. Revenue synergies though tend to be the most surreal and difficult to capture at least from our vantage point. So where are you finding the confidence, if I heard you correctly on the revenue synergy? And then also, if you could comment, part two of that Caraustar question, can you remind us what the one-off costs that you took in earnings in this quarter were? Thank you.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yeah, the one-off costs, let me address that quickly because that's simple. That's $9 million, and inventory mark-up at the valuation-- so, we bought assets. So, it's treated as we bought the inventory at market value, so it flips through in the first quarter, a lot of companies exclude that and then adjust it back. We just felt like that was -- you can always get criticized for those things. Maybe we'll get criticized because we didn't, but it's a $9 million item. Sure it would have been nice to run that through, would have been a nice pop in earnings, but that'll come back next year and Pete wanted to comment on the other part.

Peter G. Watson -- President and Chief Executive Officer

Yeah. Revenue synergies are really internally. So it's not that we expect to get external revenue. So, it's things that we are buying internally within Paper Packaging or the Rigid Packaging business or the Flexible Packaging business that we can internally supply to ourselves, example corrugated that Caraustar buys in their business. We can either supply it through our plant in North Carolina or trade tons for corrugated supply, things like an asset trade sheets -- top sheets go into our consumer products group business. We have an adhesive plant as part of our tube and core business that there is opportunities to supply adhesives to our corrugated plants into our fiber drum plants. We are experimenting with some of the liner out of one of the mills in Caraustar to supply and enhance our fiber drum business.

So, it's all internally based. We feel very positive and confident about the opportunities and the teams are working very well together, try to make sure those happen.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yeah. And these are just things that when you're in that really limited due diligence period and you might remember, we had pretty short period, particularly when you consider holidays from when we announced the deal to when we closed, since there weren't any antitrust issues. So we didn't have time to really vet all these revenue opportunities and our teams have been doing a really great job of discovering them because it's across the entire enterprise, not just the paper business.

Operator

(Operator Instructions) Your next question comes from the line of Justin Bergner with G.research. Your line is open.

Justin Bergner -- G.research -- Analyst

Good morning, Pete. Good morning, Larry. Thanks for taking my questions.

Peter G. Watson -- President and Chief Executive Officer

Hi, Justin.

Justin Bergner -- G.research -- Analyst

I have a couple of clarification questions on those revenue synergies. So those are really sort of cost synergies associated with sourcing internally that will show up as sort of inter-segment sales prospectively. Is that how we should think about them?

Peter G. Watson -- President and Chief Executive Officer

Well, I guess, you can look at it either way, Justin. These are things that other companies were selling into us that we're now selling to ourselves. So I guess you can look at it on either side of that equation.

Justin Bergner -- G.research -- Analyst

Okay, that's helpful. And then on the, I guess, add backs for Paper Packaging associated with restructuring charges and acquisition-related costs to your adjusted EBITDA, were those all associated with Caraustar or any of them associated with the legacy combined Paper Packaging business?

Peter G. Watson -- President and Chief Executive Officer

Every -- all of those that we adjusted out were related to the transaction. Now some of the debt extinguishment costs related to debt instrument that was in existence that we've paid off bond debt or other lines, but everything ties back to the Caraustar acquisition.

Justin Bergner -- G.research -- Analyst

Okay, that's helpful. And on the Caraustar operating rates, if they were 96% and 94% this quarter with the system sort of down 4%, does that mean that if we were to look back a year, they were in the high-90s the operating rates for both parts of the Caraustar business?

Peter G. Watson -- President and Chief Executive Officer

Yeah, Justin, so the operating rates I quoted were from RISI. And you're correct, last year, the operating rates were probably 97% to 100% for parts of 2018. You are correct.

Operator

Your next question comes from the line of Kurt Yinger with Davidson. Your line is open.

Kurt Yinger -- Davidson -- Analyst

Yeah. Thanks and good morning, Pete, Larry and Matt.

Peter G. Watson -- President and Chief Executive Officer

Hi, Kurt.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Hi, Kurt.

Kurt Yinger -- Davidson -- Analyst

Just taking a step back and looking at RIPS, obviously, there's a lot of well-advertised challenges there as it relates to volumes, but how much do you think sort of is your growth lagging due to maybe under indexing to plastics versus steel? And how are you thinking about going forward, maybe moving the portfolio more toward plastic to maybe better approximate sort of the overall market growth?

Peter G. Watson -- President and Chief Executive Officer

That's a really good point. And as you know, the steel portfolio is little bit more than 55% of our total product offering in RIPS. And that's a slow growth business that generates a lot of cash. It's an important offering to our customers. And as you know, we have a very broad product offering, and it's important for us to be a strong player in a major Number 1 market share in that region. But our focus there, how do we optimize that system, how do we drive more efficiencies to drive our cost to serve our customers. But the plastic is our pivot to growth, we talked about that in Investor Day. We'll continue to talk about that in Investor Day in June.

We've executed I think very well in our IBC strategies, we've been growing double-digit growth. We've also executing on improving some technologies and adding capacity in certain markets that our customers are aligned to. It's a very important part of our strategy to continue to offer a broader portfolio of products and we have the largest footprint -- global footprint in industrial packaging. So, it's important for us to broaden. Right now, we're roughly 22% to 23% of plastics revenue in that RIPS business. So again, our ultimate goal is to drive that to a higher level and have a more balanced RIPS portfolio. So the growth rates in plastic are single-digit globally in IBC and probably low to mid-single digits in plastics. So that's exactly what our strategy is, and we're really looking forward to explaining that in greater detail in Investor Day in June.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yeah. Kurt, I'll just supplement that and we will get into more of this at the Investor Day. But I think one of the things that's gotten lost in the shuffle over the last couple of years because you've had a lot of volatility in steel prices and you've had obviously the impacts of tariffs, but we also -- we've shuttered in last four years 51 plants or operations are sold. The vast majority of that had to do with steel drum plants. It had with it $400 plus million of revenue, maybe $100 million or that or so shifted into other operations and the rest of it we walked away from. We also walked away from a lot of contractual business that was not profitable. So there is -- I think there is a very valid point that gee, we haven't grown this business, but we've replaced all of that with more profitable business. So, we'll spend more time on that. But while we've been shifting to plastic, we've also been trying to clean up the portfolio.

Kurt Yinger -- Davidson -- Analyst

Right. Okay, thanks. And that's a helpful color. And just secondly on the housekeeping front, looking forward, how should we think about the cash sort of costs related to the acquisition looking into 2020 kind of compared to the $35 million that you've incorporated in the adjusted free cash flow guide for this year?

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Kurt, I'm not following your question. We had one-time costs associated with the transaction. We have some accounting non-cash cost on depreciation and amortization that are increases. But in terms of actual out-of-pocket cost from cash, we will have some use of working capital, although we think that's a big opportunity because the legacy Caraustar business really focus on managing working capital very well and we've got a heightened focus on that. And then, David and his team in treasury did a great job of actually locking in at fixed rates lower than we expected on our interest costs, so that our annual interest expense cash cost will be less than what we had originally forecasted. What was that -- how much is the difference on that?

Peter G. Watson -- President and Chief Executive Officer

From the original model, it's $23 million.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yeah, $23 million annually. You might remember we have a little bit of double up this year where we adjusted process of cashing out the 19 bonds that some of that will fall off and goes into that as well.

Operator

Your next question comes from the line of Dan Jacome with Sidoti. Your line is open.

Dan Jacome -- Sidoti & Company -- Analyst

Hi, good morning.

Peter G. Watson -- President and Chief Executive Officer

Hi, Dan.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Hi, Dan.

Dan Jacome -- Sidoti & Company -- Analyst

So, just staying on RIPS. Sorry, if I missed it. On the last call, you talked about the industry moving at least temporarily to a bulk shipping bulk container and some sort of substitution throughout on the -- I think it was the steel drum. Did you see that this quarter? I'm assuming you saw some of it? I'm just trying to figure out directionally you saw that, call it problem or headwind, increase or worsen quarter-to-quarter.

Peter G. Watson -- President and Chief Executive Officer

Yeah, I think we talked about in the US, predominantly the Gulf Coast, where it's a big export market and which has been impacted by trade. To move product, it's more efficient in country sometimes to ship in bulk packages -- bulk shipping, which is tankers or railcars or whatever. So, we continue to see the same trend. I wouldn't say it's getting any less or worse, Dan, it's about the same.

Dan Jacome -- Sidoti & Company -- Analyst

About the same. How sustainable do you think that trends -- temporary substitution is? Could it continue, or do you think that this is something just given the big change in global trade flows that this is kind of more like a one-off for now this year?

Peter G. Watson -- President and Chief Executive Officer

So I'd tell you customers would prefer to ship in bulk because it's more cost effective. But depending on what their customers need and lot size and specialty products relative to their sector, would go in small packaging which is drums, and then certainly, as the trade tariffs change, that alleviates and opens up markets where drums are more utilized. So, I think the trade in the US basis in the Gulf Coast will be a big driver to our steel drum volume in the US.

Dan Jacome -- Sidoti & Company -- Analyst

Yeah, Dan, I'll just supplement. As we said, some of our guidance assumptions ties into what we're hearing and reading from a lot of the chemical companies about their views on the second half of the year and lot of which assumes a trade agreement with China ends up being reached. I think a broader question is, what is the long-range implications on supply chains that have been sort of rerestructured as a result of this, but the nice advantage for us is some of what that means is, they end up buying from other places that we sell from now. We're seeing significant growth out of our Saudi operation and that was built to ship into Asia and predominantly China. So I do think the big driver of the decrease in demand is the dramatic drop in auto production in China, and that impact that has on importing chemicals into the country. And hopefully, if that turns around, we see a rebound in volumes in steel.

Operator

Your next question comes from the line of Daniel Gardner with Bearings (ph). Your line is open.

Daniel Gardner -- Bearings -- Analyst

Hey guys, good morning.

Peter G. Watson -- President and Chief Executive Officer

Good morning.

Daniel Gardner -- Bearings -- Analyst

Just a very quick one from me. It looks like you make some successful moves in terms of SG&A cost reductions and variable cost reductions in the quarter. Just wondering whether you could give us a little bit more detail on what that consisted of?

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yeah, I mean, we've been focused on managing costs for quite some time as we've seen economic weakness. And so, we've done some consolidation plans, and we've continued on our journey on back office improvements as we've rolled out the implementation of our ERP system. That said, the addition of our Caraustar Group provides us further opportunities to streamline and take out costs as the SG&A piece of our PPS businesses is out, way higher than it has been historically. Now Caraustar is a different model and we won't be able to get to the levels that we were in that business, but we do believe there's opportunities to continue to streamline that business, particularly after we get the ERP system implemented in there. But more specifically to your question, yes, we took specific actions on streamlining back office and consolidating few operations.

Daniel Gardner -- Bearings -- Analyst

Okay. That's helpful. That's all for me.

Operator

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

Adam Josephson -- KeyBanc -- Analyst

Pete, Larry and Matt, thanks again for taking my question. Just one on your OCC assumption, Larry. So you're assuming $38 for the remainder of the year, so for the last six months. You would obviously know what it was in May. If I look at June, the national average price is down to $25 now. So again, I don't know how your price compares to the national average. But it would seem as if you've built in still quite a bit of cushion as far as OCC. I don't know if you're expecting OCC to go up for the balance of the year or not, so hoping you could help me with that. And then, if you did mark to market OCC for what it actually was in May for you and then what it just went down by yesterday, what would the number be compared to the $38 that you're assuming?

Peter G. Watson -- President and Chief Executive Officer

Yes, so good question, Adam. Thanks for it. So just to give some color, in the first quarter guidance, we talked about assuming $65 for the rest of the year, we experienced $57 on average across our portfolio in the second quarter. In May, we were down to $38. The national average doesn't include all the little commissions and premiums you pay to get it to your plant and all that kind of stuff, so ours is -- based on that $38, we did not incorporate yesterday's $5 decrease into our range. So if you play that out, that would be another $0.03 to $0.04 for the rest of the year, that's sort of not built into our guidance range. Hopefully, that's helpful.

Adam Josephson -- KeyBanc -- Analyst

Perfect. A couple of other ones, Larry. The pro forma leverage at quarter end, can you give us that, and then, what you expected to be down by year-end?

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yeah, it was 3.65 times at the end of the quarter. I didn't look -- David, you know what pro forma...

David C. Lloyd -- Vice President, Corporate Financial Controller

We expect to -- hoping to drive it below 3.5 times by end of the year.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yeah, 3.5 times. And like I said, Adam, we are extremely confident, very hard to emphasize how extremely confident we are that we will be below within our 2 times to 2.5 times in 36 months.

Adam Josephson -- KeyBanc -- Analyst

And Larry, just on the earnings -- the guidance bridge. So I know you raised by $0.05, interest expense came down by basically the same. So operationally, guidance didn't change, but within that obviously, OCC was, call it, $0.20 positive, Caraustar synergies were a $0.15 positive, that is $0.35 that was offset by $0.35 of other operational stuff. Can you just help us with how much was it to the low containerboard prices, lower containerboard volume, the acquisition accounting change, et cetera?

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Let me walk through our bridge with you. And so, if you just put at the top of your page, the $3.60 to $4 that we rolled out at Q1, and on RIPS to go volumes on the low end, take off $0.15 for worst case and $0.10 on the best case, interest expense is $0.06 on both ends. PPS for the economic downtime that we already occurred that's $0.13, that's a done deal across the board. And on PPS, on our synergy capture, we put a range on it. So maybe $0.20 to $0.15. I put it on the low end on the $0.20 and $0.15 on the top just to -- because I have a little conservatism in myself on the high end. And then for PPS, on the OCC, we reflected the $0.68 -- $0.38 from $0.65. So that's about $18 million, $19 million for the year. But then, we have the price declines. That's about 3 (ph). And then, we just took some volume impacts across the entire portfolio to reflect what we've been seeing in our businesses and that we put in about just shy of $10 million. So again, on the low end, a $0.12 increase. On the high end, a $0.02 increase. And then, the inventory step-up was a $0.02 decrease, because that was up from the $7 (ph) we estimated at Q1 to Q2. So you put all those together and Matt can walk through all that with you later in more detail if you missed any of it, but it takes you to the $3.70 to $4, if you put all those things together.

Operator

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

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thanks very much for taking the follow-on guys. I guess the first question I had, and these are bigger picture now. Relative to what we've seen in the last four to six quarters across the paper business across industrial. I know we'll hear a lot about this at Investor Day. Larry and Pete, how are you managing the business perhaps differently than would have been the case say early '18 or end of '17? Are there anything that you're doing particularly more acutely or with more focus across those two businesses than would have been the case prior or currently?

Peter G. Watson -- President and Chief Executive Officer

Yes. So I wouldn't say we're managing the business any differently. You have to add the integration of the acquisition in Caraustar and the complexities that involves in managing the paper business because there's scheduling planning correlation between their mills and the legacy mills. So other than the integration, I think we're managing the business as we normally do. We drive very heavily in performance management, very metric-driven in how we lead the business, very strong focus on the Greif business system fundamentals and operational excellence, commercial excellence and pricing discipline. We continue to look at our portfolio and looking at opportunities how we create more efficiency in our network.

So other than Caraustar, creating opportunities in our Paper Packaging business, there's not a lot of differences. The only issue, I would say. So, our focus is how we pay down debt rapidly. It may miss some opportunities -- bigger opportunities that we could have done otherwise, but we're real happy with what we did with Caraustar. And we don't think that has any impact on how we will long-term move our strategy trying to diversify our RIPS portfolio with plastic initiatives and continue to drive opportunities to create more integration in our Paper Packaging System to our mills.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yeah, the only thing I'd supplement that with, George, is really a heightened focus on managing our costs -- our manufacturing costs through our GBS system and our SG&A cost. I mean, for the past six to eight months, we've been talking to our business and finance leaders about obviously there's something going on in the industrial economy. So, we need to be on top of managing our costs as well as we can.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Yeah, and that's where I was going with the question. I would imagine you'd doing -- you'd be even tighter on cost, even tighter on working capital, even tighter on receivables because something seems to be happening in terms of what's been a very, very uneven volume outlook, not just for you obviously, but across the rest of the business. If you have anything else to add there, I would take it.

And then relatedly, if I look back at the RIPS model long term, Larry, I think you said you've between the plant shutdowns and/or divestitures, it's been roughly $400 million of revenue. But you've been able to keep most of that profitability. When I look at EBITDA going back to 2010, there has been a fairly sizable drop off roughly $100 million in RIPS between what you're reporting in 2010, 2011 and the current rate. How much of that is the effect of the plant shut and divestiture program? How much, if any, is just the evolving mix change in your business? Are you losing profit dollars when you shift out of steel into IBC? Anything else that you have in that and why it bottoms here and hopefully improve from here going forward would be helpful. Thanks guys, and good luck in the quarter, and we'll see in a couple of weeks.

Peter G. Watson -- President and Chief Executive Officer

Yeah. And George, I'd tell you, I will spend more time looking back. To be frank, I haven't looked back at 2010 or '11. I mean, I got here in 2014 and we've been trying to fix things since and the numbers that I quoted you relate to what we've done in the last four years since we announced transformation and I'll just go back and say, our operating profit has gone from (ph) $266 million to $308 million to $335 million to $391 million to whatever it's going to be this year is a lot higher. So I feel pretty darn good about what we've done. We've shattered a lot of stuff that didn't make profit, but I'll get some answers to that question as we go into Investor Day. Matt, you can remind us, we'll go back and try to figure out the answer to that, but my comment was related to serve our starting point on transformation and what we've been trying to get done since then.

Relative to your add-on to your prior question, you're absolutely right. I mean, we've told -- I wrote my board report -- for our board meeting this week, and I said I quoted the old Buffalo Springfield song where I said there's something happening here, but it isn't (ph) exactly clear. Unemployment at lowest rates ever. GDP numbers looking good. Consumer confidence up, and yet the industrial production is shrinking. PMI indexes are down. And so, what we're encouraging our teams is, hey, we got to have all of the levers ready to pull. I mean in some segments of our business in certain geographies is already like you're in a recession, but then we've got others that are knocking it out of the park. And so, we're trying to be nimble and react to the markets that we play in and try to make the right decisions in a way that is smart and not just a meat cleaver across the organization that would cut the legs out of the places that are doing well. So, we're just trying to manage the fundamentals the way that we think you should, and take advantage of the opportunities we can and manage through the weaknesses where we have to.

Operator

Your next question comes from the line of Justin Bergner with G.research. Your line is open.

Justin Bergner -- G.research -- Analyst

Thanks for the follow-ups. First question is somewhat out of the box. Given the dramatic decline in OCC prices and these sensitivity of your business to OCC, is there any way that you could find a market participant to be a counter-party to allow you to buy OCC on a forward basis, so as to derisk the debt pay down from the Caraustar acquisition?

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

It's interesting. Although, remember, Justin, we're in the OCC business also. I mean, we bought that as part of the Caraustar system, so we can -- we managed through that. I mean right now, you've got a situation where the pricing on OCC is so low that you're having a bunch of stuff dumped into landfills, which is not the greatest scenario. So we don't see -- first of all, this stuff is big bulk. So, you don't store it. There really isn't a futures market for it. So you'd probably eat your advantage away in storage. But yeah, it's interesting. I'd think about more. Thanks for the thought.

Justin Bergner -- G.research -- Analyst

Okay, great. And then, the second follow-up was just in regards to the bridge, two things came at me a bit fast, the Caraustar synergy capture of $0.15 to $0.20, was that not in the prior guide to any extent?

Peter G. Watson -- President and Chief Executive Officer

No, it wasn't. We didn't put anything into that bridge, probably just a mix on our part.

Justin Bergner -- G.research -- Analyst

Okay. And then, you mentioned volume declines at the tail-end of your bridge statement. Was that the economic downtime for PPS of the $0.13, or was that a different part of the bridge?

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Let me supplement my prior comment on why we didn't add synergies in. We didn't put any in because you might recall when we announced the deal, we talked about recapturing $15 million in the first 12 months, $15 million second 12 months, and $15 million in the third. While we knew that we would have some executive departures very quickly, we also knew there would be some dis-synergy things and offsets of various comp changes for people internally who are taking management roles that kind of thing. And many of those things, it was just uncertain how fast we could get any of the synergies in. As our teams aggressively got going, we've obviously gained a lot more confidence about what they can deliver this year, and we're very pleased. So, it was a conscious decision to not do it. So my statement about amiss was not appropriate. My team would be very insulted.

So on the second piece, Justin, the PPS economic downtime was -- it is obviously a done deal for what occurred and that is the $0.13 per share impact from the 27,000 tons at $400 a ton of value add. The volume impact that I talked about was across our system, our core choice and our new system for Caraustar along the lines of like the 4% that we had in the time that we own Caraustar in our second quarter. Just sort of projecting out for the rest of the year what we expect to get across our boxboard and our core choice network for the rest of the year, and we estimate that to be $10 million, down relative to what we had built into the guidance at the end of the first quarter.

Operator

Your next question comes from the line of Dan Jacome with Sidoti. Your line is open.

Dan Jacome -- Sidoti & Company -- Analyst

Thanks for the follow-up. Just a quick one on Caraustar. I'm trying to drill down a little further into the some of the products. I know when you announced the transaction in December, you talked about the growth trajectories or assumed volume trends for some of the portfolio, I think you didn't assume much of any growth for tube and core. But if you have liberty to give us some more color, what are you assuming for protective packaging and then perhaps folding carton? Thanks.

Peter G. Watson -- President and Chief Executive Officer

So, you're talking about downstream converting operations in Caraustar.

Dan Jacome -- Sidoti & Company -- Analyst

Yes.

Peter G. Watson -- President and Chief Executive Officer

So, you've got really two businesses, industrial packaging group, which is predominantly tubes and cores, and some protective packaging. In our forecast, we are projecting at a similar rate that we saw in calendar Q1 and fiscal Q2. And the CRB folding carton business is similar as well. So the mill side is on the same path. So, we're really forecasting similar rates as we talked about for Q1 and Q2.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Yes. So, Dan, you may recall we said production overall for our boxboard business was 4% down in the second quarter. So, that's the rate assumption.

Dan Jacome -- Sidoti & Company -- Analyst

Why was folding carton and protective packaging down in the quarter? They looked similar. You've given us a blended rate. Was there any growth in the portfolio at all?

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

Just for competitive reasons, Dan, we're not going to go down into the product line.

Operator

We have time for one final question. Your final question comes from the line of Adam Josephson with KeyBanc. Your line is open.

Adam Josephson -- KeyBanc -- Analyst

Pete. Thanks so much for taking my follow-up. Just last one on Caraustar. So, Caraustar was down about 4% volume-wise in the quarter. Your core volume was also down 4%. Would you say Caraustar is any more or less economically sensitive than the legacy portfolio. And if it's not any less economically sensitive, I guess just help me again understand the diversification benefits of owning Caraustar along with containerboard and steel drums?

Peter G. Watson -- President and Chief Executive Officer

Yeah. So, let's just talk about the tubes and core business, because it's a largest downstream. So it is a very diverse segmentation -- their customer segmentation is very diverse. Two segments that [1:00:41] have particularly hurt the tube and core business as a paper mill core is certainly one of the products lines that they supply and construction. Those are two Industries. We know why the cores and paper mills are down. For obvious reasons, we discussed it and you've talked about it in your publications.

The construction with wet weather in the US has been slowed. So, those are two key reasons why that business [1:01:09] is a little slower. But I think when you look at the rationale for Caraustar, you get an integrated system of uncoated and coated recycled boxboard which has very strong industry dynamics. And then, we have integrated downstream products that we can add value in niche markets, and we feel that it's really paralleled to our containerboard core choice model. They're just different products and different substrates.

Adam Josephson -- KeyBanc -- Analyst

Adam, supplementing that, I mean, the end markets that Caraustar serve is very, very broad. I mean how many SKUs did it have? Do you remember that, Matt. How many SKUs we said we had in [1:01:52] different?

Matt Eichmann -- Vice President, Investor Relations and Corporate Communications

14,000.

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

14,000. And it's spread across a whole plethora of different end markets, consumer, industrial. So it's way more diversified than our general portfolio.

Adam Josephson -- KeyBanc -- Analyst

Thanks, Larry. Appreciate it.

Operator

This concludes the Q&A period. I would now like to turn it back over to Matt Eichmann for closing remarks.

Matt Eichmann -- Vice President, Investor Relations and Corporate Communications

Well, thanks, Jack. We appreciate everybody's time today, and we look forward to seeing everybody at Investor Day later in June. Details for the event can be found on our website at greif.com. Thanks a lot and have a great weekend ahead.

Operator

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

Duration: 0 minutes

Call participants:

Matt Eichmann -- Vice President, Investor Relations and Corporate Communications

Peter G. Watson -- President and Chief Executive Officer

Larry A. Hilsheimer -- Executive Vice President and Chief Financial Officer

David C. Lloyd -- Vice President, Corporate Financial Controller

Gabe Hajde -- Wells Fargo -- Analyst

Adam Josephson -- KeyBanc -- Analyst

Ghansham Panjabi -- Baird -- Analyst

George Staphos -- Bank of America Merrill Lynch -- Analyst

Justin Bergner -- G.research -- Analyst

Kurt Yinger -- Davidson -- Analyst

Dan Jacome -- Sidoti & Company -- Analyst

Daniel Gardner -- Bearings -- Analyst

More GEF analysis

All earnings call transcripts

AlphaStreet Logo