Greif's (GEF) CEO Pete Watson on Q2 2016 Results - Earnings Call Transcript

| About: Greif, Inc. (GEF)

Greif, Inc. (NYSE:GEF)

Q2 2016 Results Earnings Conference Call

June 09, 2016, 08:30 AM ET

Executives

Matt Eichmann - VP, IR

Pete Watson - President and CEO

Larry Hilsheimer - EVP and CFO

Analysts

Chris Manuel - Wells Fargo Securities

Justin Bergner - Gabelli & Company

Mehul Dalia - Robert Baird & Company

Alex Wang - Bank of America/Merrill Lynch

Operator

Good morning. My name is Sylvie, and I will be your conference operator today. At this time I would like to welcome everyone to the Greif Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Thank you.

Matt Eichmann, you may begin your conference.

Matt Eichmann

Thank you, Sylvie. Good morning everyone and welcome to the question-and-answer portion of Greif's 2016 second quarter earnings conference call. Consistent with Greif's commitment to enhance transparency, yesterday morning we posted a slide presentation and recorded remarks regarding our 2016 second quarter results to our website.

I'm now on Slide 2. Responding to your written and live questions this morning are Pete Watson, President and Chief Executive Officer; and Larry Hilsheimer, Executive Vice President and Chief Financial Officer.

Please turn to Slide 3. This morning's question and answer session will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Please review our filings with the Securities and Exchange Commission for more information regarding the factors that could cause actual results to differ materially from these projections or expectations.

During this question-and-answer session, certain non-GAAP financial measures may be discussed, including those that exclude the impacts of acquisitions and divestitures, special items such as restructuring charges, and impairment charges and acquisition-related costs. There are reconciliation tables included in our earnings release and the presentation posted on greif.com yesterday.

The format for today's call is to first respond to questions emailed to investors at greif.com regarding our second quarter results. We will then address live questions in the same sequence. We appreciate those of you who took the time to review our materials and submitted questions in advance. Similar questions have been combined so that we can efficiently address as many topics as possible.

I'd now like to turn the call over to Pete Watson, Greif's President and Chief Executive Officer for few opening comments.

Pete Watson

Thank you, Matt, and good morning everyone. We appreciate your interest in Greif.

Our Company is committed to customer service excellence with high expectation, deliver exceptional value to both our customers and our shareholders. Our path to accomplish this is through a disciplined execution of our transformation process.

Highlights of our second quarter include improved operational performance which expanded our gross profit margin by 90 basis points compared to Q2 2015. Free cash flow expansion which is largely the result of improved operations in greater discipline in managing our working capital and we've revised our fiscal year 2016 Class A earnings per share guidance range up $2.20 to $2.46 a share which reflects our stronger transformational performance.

I'm pleased with our progress that I am quick to acknowledge that we have more untapped opportunities remain in each of our strategic business segments.

With that I’ll turn it back to Matt for questions.

Matt Eichmann

Thank you, Pete. This first question is actually directed for you and it comes from multiple analysts. What are your views on the global industrial markets and what impact are they having on your business?

Pete Watson

Thank you for the question. So, let me walk through our views with the global industrial economy and the markets we compete in and it's really collection of different scenarios and trends. I'll start with the U.S. As many of you know the ISM index rose in May to 51.3 and it’s been over the target expansion range of 50 in the past three months.

The Fed - has the industrial production index has improved since April and our business has really reflected that cautious optimism in North America. Just a point to some examples within that view, our paper packaging business has seen improvement in demand particularly in our CorrChoice Sheet Feeder network both in the second quarter when we had 16% growth year-over-year but we are also seeing similar growth demand patterns in May.

The business also serves a very diverse profile of corrugated box plants in Eastern U.S. and it can be argued that corrugated box plants are seen as one bellwether for manufacturing health in the U.S. If I go over to our North American in rigid industrial packaging business, we have seen sequential improvement since the start of our fiscal year both in our Steel Drum business and our IBC business.

So if I could let me go to the Euro zone. So, our experience in the industrial economy in Europe really remains unchanged in the past six months. We have seen slow and steady growth in the majority of our EMEA region and this is reflected in GDP stats that shows moderate growth across that region as well.

We had experienced better performance in Q2 in certain regions within Western and Southern Europe and specifically in Russia. Our Steel Drum volume was 2.7% higher in Q2 versus prior year and our IBC volumes continue to expand sequentially or 10% increase year-over-year.

If I can move to China, industrial output statistics show 6% growth in May and similar to April’s data but to be quite honest that doesn't feel like that in the business. We continue to see a very broad slowdown which is particularly impacted by continued pressures caused by supply and demand imbalance in a lot of the commodity materials sectors and our steel industry is a perfect example of that statement. Those views really mirror our Steel Drum demand. However I would like to point out in our IBC business we continue to see strong growth with double digit increases year-over-year.

In final let me review Latin America. As many of you know our main concentration of business is centered in Brazil and we are experiencing the same difficult environment of that region as most businesses are due to the political and economic challenges that continue to persist and we frankly don’t see any short term relief in Brazil.

This has negatively impacted our Steel Drum business, it serves the industrial sector. And with that said we did experience positive growth in our plastic drum business in Latin America predominately in Brazil and Colombia due to improved demand in the agri-chemical sector which we have 9% year-over-year increases in plastic drums. We also see hope for positive improvements in Argentina with the new President.

Matt Eichmann

Okay. Thank you, Pete. Larry, next question is for you and also comes from multiple investors and analysts. Please provide greater color on the factors that drove you to improve your earnings and free cash flow guidance ranges?

Larry Hilsheimer

Thanks, Matt. Yes, we're obviously extremely pleased to be able to increase the midpoint of our EPS range by $0.08 a share and our free cash flow midpoint by $8 million despite what Pete described from an economic perspective. But our self-help agenda is really advancing and we’re continuing to gain confidence in the sustainability and trajectory of the improvements that are the result of our transformation efforts and particularly what we're seeing being driven by our new leaders in the business.

We had begun to see that at the end of Q1 and we're cautious at that point about the sustainability but having another quarter of traction has given us the confidence to extend our range, our target midpoints upwards.

We’re particularly focused on the benefits gained by the focus on unplanned downtime, the operational efficiencies, some of the SKU rationalization and ComEx activities in each of the markets.

It's very difficult to pinpoint you, what is one driver because there are not just one driver. When you think about the U.S. consider that in last year in 2015, we closed 8% of our U.S. production facilities and yet we're still seeing improved operations and not that much downfall in sales. So we look forward to continued trajectory, continued improvement and that's what’s reflected into our revised guidance.

Going back also normally our second half of the fiscal year is historically stronger due to seasonality particularly tied to the agricultural markets which also gave us the confidence to improve our guidance.

Our improved free cash range takes into account the better earnings improvement. We’re seeing the focus on having continual improvement in working capital as opposed to year end heroics and we're partially offsetting that with a slightly higher expectation on restructuring charges moving that up $5 million to take into account some other planned actions by our new leadership.

Matt Eichmann

Okay. Thank you, Larry. Sticking with you please, Adam Josephson of KeyBanc writes, what is the expected geographic composition of earnings during the second half of the year?

Larry Hilsheimer

Adam, thank you. As you know we don’t provide earnings expectations by geography. What I will share, that will be disclosed in our 10-Q that we expect to file later today, is that in the second quarter approximately 48% of our sales came from the U.S., 37% from EMEA and 15% from the Rest of the World and we would anticipate that to be relatively consistent through remainder of the year.

Matt Eichmann

Pete, the next question is for you, it comes from Chris Manuel, Wells Fargo and also Adam Josephson from KeyBanc. They both asked about the flexibles business, operating losses continue, we have made a management change but what's path forward and how do you view the business within the context of the current portfolio?

Pete Watson

Thank you Chris and Adam for the questions. So let me start as you know, our flexible products business had an operating loss of $1 million in Q2, it is a $5 million improvement over Q2, 2015 and $0.5 million improvement sequentially versus Q1.

One know we did book a one-time $1 million charge related to a labor dispute during the quarter and backing that out FPS would have been operating profit positive during the quarter. But we will tell you, we are not happy with the pace of change with FPS. The performance trajectory of the business is not acceptable as it relates to our transformation plan and as you indicated in the question, we did make a leadership change in FPS.

Gentlemen Hari Kumar who previously led our FPS APAC business from a loss maker to profitability has assumed the role of Division President. Both Larry and I have great respect and faith in his abilities as a leader and operator and we have high expectations for what he can do.

The FPS team has a very clear path forward on what has to happen. We will continue to be diligent measuring that performance first our milestone goals and we will point to a substantially higher run rate performance by our fourth quarter.

I’d also like to note that we continue to work together with our JV Partner toward meeting these performance standards that both of us expect. We do expect FPS to have positive EBITDA for the full year and like to highlight the four key levers that will drive us to meet those expectations.

One we need to create further cost reductions in that business. We have to improve under-performing operations and specifically Turkey, Mexico and Vietnam, we have labor efficiency gains that were behind in, in our large integrated factories. And finally we have to continue to complete the commercial initiatives that we have embarked on from a year ago.

So we got a lot to do there but, I have a lot of confidence that Hari and their team can get us back on track.

Matt Eichmann

Thank you, Pete. Larry the next question is for you please, it comes from multiple investors and analysts who ask, what FX rates are you assuming in your guidance and what impact does FX have on your improved EPS guidance range?

Larry Hilsheimer

Thanks Matt. As we've talked about in prior calls and in our individual meetings, the complexity of our supply chain with over 220 locations and over 50 countries and the dynamic global markets that we source in particularly given - what’s going in steel markets recently makes specific the terminations of net income impact on a forecasting basis, so extremely difficult.

So, what we have done is try to develop an index that we hope is instructive in terms of what we are facing at least on our revenue basis. So we had explained earlier in year that we believe the year-over-year impact of currency would be 6.5% related to our overall sales revenue. We now believe with this shift that it's more like 5.5% for this year.

So if you wanted to do a rough back in the envelope on EPS impact, we believe it's become 1% more favorable on revenue. If you apply that 1% to $3.3 billion, $3.4 billion revenue you have $33 million. If you say it apply our operating profit margin rate X to paper business, you are going to come down to an after tax basis $0.01 to $0.02 a share of lift for the year.

So, it’s not a major impact to us on a positive side but at least it was moving in a positive direction.

Matt Eichmann

Thank you, Larry. Pete, Chris Manuel from Wells Fargo asks, can you provide a better update or - an update on the current progress of your transformation plan?

Pete Watson

Yes, thanks Chris for that question. So I'd say we are very pleased to date with our transformation efforts and we believe those process initiatives are positively impacting our results. We have assembled a relatively new leadership team as you know and our business leaders are seasoned, experienced operators for driving greater accountability in the business.

I hope that many of you can participate in Investor Day because you get a chance to meet and interact directly with them. I am very happy with the cultural intensity we have focusing on customer service excellence. And our expectation is that process and that mindset will continue to drive results going forward.

Inside our portfolio we've made very good strides in fixing underperforming businesses. We've divested non-core assets and closed facilities and quite frankly had unacceptable long term performance. And we are also starting to see results most from our strategic growth projects.

Our plans to expand gross margins are gaining traction. We are executing on basic fundamental process improvements in all our commercial sourcing supply chain and operations that really comprised the Grief's business system. And we are starting to impede inside DNA of our company the mindset of fiscal discipline which really is around controlling costs in our SG&A area and having a greater intensity and purpose on generating cash through operating working capital efficiencies.

Again we hope to provide much more discreet data at our Investor Day in June in New York City.

Matt Eichmann

Thank you, Pete. Larry, Adam Josephson from KeyBanc he asks, the free cash flow guidance range outlook improved but the range is also wider. Why is that? And what gets you to the top end and the bottom end of that range?

Larry Hilsheimer

Adam, thank you for the question. Yes we did improve our free cash flow range guidance to $130 to $160. When a bunch of accountants and lawyers sit around and talk about these things, you tend to have a lot more focus on downsides than you do upsides, and so you get a little reluctance to move your downside up as much, but we do have great confidence in improving operations.

But we’ve raised the bottom of the range up by 5 in the top up by 10. This is going to be influenced by the obvious things. We also increased our restructuring expense as I mentioned earlier by roughly $5 million. The upside and downside are going to be influenced by what we obviously achieve in operations but also the timing of the cash restructuring payments and then how do we really execute on working capital, the remainder of the year.

As I said earlier, we are trying to become much more disciplined to have that sustain working capital improvement throughout the year. And so lot of moving pieces, but that's the range that we're comfortable with at this point in time.

Matt Eichmann

Thanks Larry. Sticking with you the next couple of questions I guess or few. First is from Ghansham Panjabi from R.W. Baird who asks, how do you perform in Q2 versus your internal expectations given that your results landed $0.10 below consensus?

Larry Hilsheimer

Thanks Ghansham. As you know we don't provide quarterly guidance. So we don't necessarily compare ourselves to discrete consensus though obviously we're quite aware of it. That said, we delivered a very solid operational quarter and it was slightly better than our internal forecast. As noted the discrete tax items impacted our results by $0.11 per share which we expect to recover over the rest of the year.

Matt Eichmann

Terrific. And also from Ghansham Panjabi of R.W. Baird, Larry, what's your higher tax rate during the second quarter?

Larry Hilsheimer

Ghansham, thank you. Obviously that was a major impact to the quarter and that tax expense was impacted by the booking of discrete tax items that had to do with adjustments to reserves, certain change circumstances, lot of changes that kind of thing that require you to book such discrete items.

In addition to discrete items, we're also impacted by the timing of losses in several parts of the world and entities in which we have recorded valuation allowances that effectively do not allow us to take a tax benefit for those associated losses which contribute to the higher tax rate.

We anticipate the performance in some of those operations to improve through the remainder of the year. And we also are anticipating the benefit of several discrete tax items related to transactions and planning strategies to impact the rest of the year and bring us back to our full year tax rate between 39% and 41%.

Obviously that range is always dependent on accomplishment of those improved operations but our confidence level is high. We also expect cash taxes to roughly equal, the book tax expense for the full year.

Matt Eichmann

Thank you. And finally Larry from an unnamed investor, you reclassified your 2017 senior notes to a current liability during the quarter. What's your plan to refinance?

Larry Hilsheimer

Obviously we are quite focused on that and have been for some time. We have been in discussions with most of if not all of our lending partners. We have multiple alternatives to consider thankfully because of our strong performance and balance sheet. And we anticipate moving forward with this process more aggressively late summer early fall for both the 2017 bonds and the existing credit facility and look forward to working with our credit partners in that regard.

Matt Eichmann

Thank you. Sylvie with that, we're going to move over to lot of questions. So I’m going to turn it back over to you please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Manuel of Wells Fargo Securities. Please go ahead.

Chris Manuel

Yes, just a couple of questions for you here. First, Larry, for you, what specifically do you have embedded into your assumptions for working capital for the balance of the year? And then if I'm thinking about the range for both EPS and for cash flow, what would be the items specifically that would take you higher or lower, is it working capital higher or lower or is it volumes higher - what would kind of be the factors that would or environments or conditions that would get you to the top ends and the bottom ends of your ranges?

Larry Hilsheimer

Fair, thanks Chris. On working capital what we're projecting is that on an overall basis for the year-over-year that we will be anywhere from 9 up to 13 down in the range and obviously we’re working hard to have that improvement. But we had shown really strong improvement at the end of last year and as I said Chris, what we are trying to do is get more consistent management of working capital throughout the year.

So obviously in the second quarter we did quite well and we’re going to try to sustain that but at this point that’s where we would look at it on a year-over-year basis.

On the EPS element, I mean it’s really Chris just a combination of a lot of different factors that go into that range on the upside and the downside. We factor in that we know we have additional headwind in the paper business. We talked last quarter of a $15 million headwind on paper for the reminder of the year relative to your initial guidance, that’s more in the $18 million to $20 million range now.

We believe that’s being offset by the improved operations in our RIPS business, little bit of drag from flexible but that’s not a significant impact in our SG&A savings range that we talked about 30 to 35 which had FX benefits of 21 to 23. Those FX benefits will be slightly lower but not dramatically, otherwise we expect that to be consistent.

So it really is going to come down to the range of performance in each of the RIPS businesses around the world. We expect North America to continue to maintain the excellent performance in margins and slight improvements in sales by winning back customers - customer service excellence and continued strong performance in EMEA just executing on opportunities, they’re particularly related to agriculture.

And we are also - some of that range goes around our APAC business. I mean their performance has just been outstanding and yet the economy is not that strong. So we have a little bit of range around what we think they will accomplish in the second half of the year, hopefully that is responsive.

Chris Manuel

Okay. And I have one follow-up for Pete. Look it’s been a lot of movement in the last few months and steel in particular. And at times you guys have done well with raw materials, at times you guys have ended up behind the curve in price cost, if you could as you sit today just remind us of - across the different substrates or geographies or however you choose to do it, where you are with mechanisms that adjust and how much of a headwind just in some of the contractual business that you have could price cost for steel or resin be a headwind in the back half of the year and then I guess is that factored in your guidance?

Pete Watson

Yes, thanks Chris. So let me start with the steel market, it’s many of you may be following but there is a lot of turbulence in the steel markets globally, there is tariffs, the U.S. has put tariffs on imported steel as much as 500% from China and 70 plus percent from Japan, the European Union is following suit but in a much slower and measured pace.

So the supply chain considerations have changed quite dramatically in the past six months. We’ve seen this coming and anticipated it and in regard to Greif's and our sourcing, we have no impact or concerns that are material to our business in rigid industrial packaging whether its supply or price.

So that being said, there are tighter market conditions in the U.S. and Europe which is resulting right now in increasing of our steel raw material. We are correspondingly active in raising prices based on that raw material changes. We do have contracts that have pass-through mechanisms and I think as Larry has indicated in the past, we have a significant number with different variables.

So there are delays in some of them but we also have a lot of business that doesn’t have contracts and in those we’re actively passing along that raw material price increases in the form of higher drum prices as we speak.

We have a very measured and controlled process on that and our teams are very, very focused on that. If you look at China in regard to steel, there is – they are in a world of hurt in the steel industry, because they are being shut out of markets and they have roughly 350 million to 400 million tonnes of extra capacity. So they have to make some dramatic structural changes.

In the meantime, we do not see any significant cost increases on steel to our business. I think that's a much different market in respect to how it impacts our business and we'll continue to manage our business in China and Asia Pacific in a similar fashion that we have which I feel very strongly how we're doing it.

In regard to our guidance and the impact on raw material pricing or increases or decreases whether its paper packaging or rigid packet or FPS, inside our guidance we have taken into account some of that turbulence. And we feel pretty confident that we have to manage that approximately and we got levers in place to do that.

Larry Hilsheimer

Let me supplement little bit what Pete said just. So on look forward you consider this as well. We have talked before that we have many, many different types of contracts for these price adjustment mechanisms, 13 different types in North America well on point-to-point, average-to-average those kind of things and when they come into play, so it’s – there's lot of complexity to figuring out the impact, but as Pete said we haven't built into the guidance, but one thing I will remind folks is that as prices go up, because these price adjustment mechanisms deal with the impact of the relative cost factor in your pricing on the raw material. As the pricing goes up your margin percentage is going to go down, because your profit dollar-wise would stay the same, but the price goes up. Now that's obviously just focused on that element alone and we work hard in the market to make sure that the customers who value what we deliver and work with us we also try to address other costs like increasing healthcare cost and all kinds of other items that we maintain and maintain our margins and then work obviously on the operational component to drive efficiencies in our business and improve our margin percentage.

Chris Manuel

Thank you.

Operator

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

Justin Bergner

Good morning everyone. Quick question, on the guidance are you changing your underlying macro assumptions as it relates to global growth, currency or input cost in your revised guidance. Are you keeping those three factors unchanged or unchanged on a net basis?

Larry Hilsheimer

Justin I covered the FX item earlier, I mean, it’s a very minor impact, $0.01 to $0.02 as I said. On the global macroeconomic things, and Pete went through it in our views. It does not have a major influence on our guidance range. I mean, we have moderately, seemingly improved path in the United States, but that's recent and so we didn't bake lot in for that.

We're really focused on the improvements being driven by our self-help activities and factoring in some things that we know about some successes we have had in the marketplace by continuing to regain customer confidence and more orders.

Justin Bergner

Great. And on the input costs does that affect your status change in anywhere?

Larry Hilsheimer

No. As Pete just was trying to address in response to Chris's call. With 70 plus percent in past mechanism contracts that's sort of ebbs and flows as you go. So the raw material impact to us is relatively minimal. I mean, from time to time we'll have an advantage because our sourcing guys did a good job on something, but even as Chris mentioned sometimes that goes the other way. But in a whole we did not factor that large in our guidance.

Justin Bergner

Okay, great. One more question. On the paper packaging could you just quickly describe the change in [indiscernible] from 15 million to 18 million to 20 million?

Pete Watson

Yes, Justin. So, that's really relative to OCC input cost changes. May and June saw a $5 to $10 increases based on regions where we saw source OCC. So that's where that's coming from. I will note in paper packaging, it's well noted that there has been turbulence in the containerboard market. Our view now is that turbulence is quieted and I think partly that has to do with OCC input cost prices going up, so that's reference Larry suggest in our headwinds.

Larry Hilsheimer

Yes. And just for your follow-up on that, Justin. And we use about 55,000 tonnes a month of OCC.

Justin Bergner

Great. Thanks for taking my questions guys.

Operator

Your next question comes from the line of Ghansham Panjabi of Robert Baird & Company. Please go ahead.

Mehul Dalia

Good morning. This is actually Mehul Dalia sitting in for Ghansham. How are you doing?

Peter Watson

Good. How are you?

Mehul Dalia

Great. Can you talk about inter-quarter trends by business, was there any deviation month-by-month that was notable and how is May in terms of performance?

Pete Watson

Look, I will reference May in terms of performance, but I will comment on some of the growth that we're seeing as it relates to my initial comments on the overall general economy. I think in the U.S. we are starting to see improvements in our volumes April and May.

And again I'd like to probably most common in North America I think that's been most documented that from a couple of years ago, that business had been underperforming and had discipline execution issues and we're very, very pleased with a sequential improvement in that business.

Our new leader Ole Rosgaard is doing an excellent job of controlling the levers. That is a big business in our company. And that is one of the reasons why our continued improved performance is gaining traction because of their improved performance in our business.

Larry Hilsheimer

Yes. The other I guess, to add supplement that we've seen really good improvement in volumes in the core choice part of our paper business. So that's an encouraging sign that our approach on the specialty side of that business has market favor.

Mehul Dalia

Related to your comments on the U.S. when do you expect that business to return to growth and how does –I think it was down 5.5% in the quarter, your U.S. rigid business, how does that compared to the market?

Larry Hilsheimer

You know one thing I'll comment and then let Pete come into it. One think I would remind everybody is we shutdown, close down 8% of our production plants in the U.S. in that rigid business less than a year ago. And so, we are – we've captured some of the business out of those plants and adjacent plants but that's probably 65%, 70% of that business.

So even though you're seeing a contraction of 5%, we're pleased with some of discrete growth opportunities that we have and we've been successful on particularly on regaining customers by showing that we're delivering quality product and quality service, at the same time we've been emphasizing, we're running to value not to volume and so we've walked away from business intentionally where we don't think that the value proposition is appropriate for that customer and let them work with other who are delivering the value that they are interested in.

Pete Watson

And just a few comment discrete comments. So on IBC business in North America, we've the best volume in six quarters that business continues to improve in fiber in spite of our largest customer's plant being closed. We saw a growth quarter-over-quarter. We are starting to enter into the seasonal Ag markets which will be positive for us.

And as Larry indicated in steel, we closed good part of our capacity last year. We have seen sequential improvement in volume in last two quarters and again we've talked about this continuously part of the reason of our improved performance in North America comes the commercial decisions we're making that we're going after value and margin first and volume second.

And so that is a critical component of our commercial approach and our business approach. And again I am very, very pleased with the trajectory of the performance in North American business and we're very happy with the leadership that Ole Rosgaard is providing to our company.

Mehul Dalia

Great. And just one last one and related to the rigid margin that you're talking about. How sustainable is 200 and 300 bps improvement I think that you guys reported in the first half of this year. Should we assume a similar amount in the back half or is there anything notable that's going to offset on that kind of margin improvement?

Pete Watson

So, I'm not going to tell you what we're going to what we think we can improve, but I will tell you we believe these margins are sustainable. There is fluctuation quarter-to-quarter, but we are pulling the levers that drive fundamental improvements in the business and it's never one lever, there is 100 discrete or 150 discrete actions and it's around how we price and manage our product mix. Making smart commercial decisions and we talk about value first over volume.

We've got over 50 key sourcing and supply chain initiatives throughout the company that are driving improvements to gross margin. We've got significant operational plan efficiencies and our whole theme, in our systems around stability of our process and everything from product quality improvements to waste reduction, to increasing machine efficiencies, improving up time effectiveness and we think there's still big upside in that area.

And it also point that we are making significant progress and improving our underperforming operations which for the past two years have been a real drag not only on our operating profit but on our gross margins. We have a very, very clear intend focus to fix those plans, but again as we've demonstrated we're not afraid to close those operations if they can't meet our expectations.

So all those elements are what we are driving to effect and improve our gross margin both in dollars and ratio.

Larry Hilsheimer

I'd just supplement to what Pete said, I’m particularly please with the close on the dollars and percentage, because as we said last quarter, we believe the improvements that have been executed on are very sustainable and we obviously are driving for more. We'll talk lot more about this in the Investor Day about what we believe, but we are committed to the commitments we made, committed to the commitments.

We will restate our commitments that we made a year ago June at Investor Day relative to where we believe gross margins should be able to be sustain on the continuous basis. As I mentioned earlier when raw material prices go up and we have adjustment mechanisms in the contract to maintain your dollar value that can drive down your percentage but maintain your dollar value as you know. And so, that said we still believe that we should be able to sustain this margins at over 20% levels.

Mehul Dalia

Great. Thank you so much.

Operator

Your next question comes from the line of [indiscernible] of BMO Capital Markets. Please go ahead.

Unidentified Analyst

Good morning. Thanks for taking my question. First question I want to come back to RIPS North America. How far along are you with your restructuring efforts there and addressing this surplus capacity issue? You mentioned earlier shutting about 8% of your capacity there. If you can just provide additional color in terms of how much more that has to be done?

Pete Watson

Yes. We've completed what we plan to restructure in our operations to supply and demand. I think it would be foolish to ever say you never done. You always evaluate market conditions and improvements, but I would tell you at this point we are more in a trajectory and how improve and profitably grow that business in the footprint as oppose to shrinking and rationalizing and consolidating.

Unidentified Analyst

Understood. That's helpful. Switching to the restructuring expense, from the first half you'll did about $7.5 million and you'll raise the guidance from the full year. Can you talk about just maybe two or three key buckets maybe regions or products that could have restructuring in the back half?

Pete Watson

Yes. We expect the further restructuring to be primarily focused in three spaces, some in our FPS business, some in Latin America and then some in EMEA in the rigid business.

Unidentified Analyst

And Larry how much of this would be cash component?

Larry Hilsheimer

Both the cash and the expense are, we have a range of 20 to 30 on our restructuring expense and I'm sorry, and then yes, 20 to 30 on the expense and 29 to 38 on cash.

Unidentified Analyst

Got it. And I would imagine that 29 million to 38 million is excluded from your free cash flow guidance to 130 million to 150 million?

Larry Hilsheimer

No. it's included.

Unidentified Analyst

So your 130 million to 160 million is net of the cash you will spend on restructuring. Am I correct?

Larry Hilsheimer

Correct.

Unidentified Analyst

Got it. And switching to FPS, Pete you mentioned that you expect FPS to be substantially higher on a run rate basis by 4Q. Can you in anyway quantify substantially higher and what are the key mile-markers over the next first two quarters and then as you look out?

Larry Hilsheimer

Let me maybe address that. We've said consistently and reaffirm that through Pete's comments that we expect to be EBITDA breakeven for the year. And so, if you look at and we look obviously be better than breakeven, but that's the guidance we are comfortable with at this point relative to where we are year to-date that would give a clear picture to the rest of the year.

Unidentified Analyst

Understand. That's very helpful. Thanks very much. Best of luck for the rest of the year. I'll turn it over.

Operator

Today's final question comes from the line of George Staphos of Bank of America/Merrill Lynch. Please go ahead.

Alex Wang

Hi. It's actually Alex Wang on for George. Thanks for taking the question. First one just on the guidance, if you could clarify I think earlier in your commentary you mentioned that the SG&A savings goal hasn't changed much. You touched on a little bit of tailwind from FX. So, is the right way to interpret the lift in the EPS guidance is really coming from the gross margin side in terms of some of the operational efficiencies you talked about?

Larry Hilsheimer

Yes. That's absolutely correct. So, we've seen great improvement in our RIPS business. It's obviously overcoming that $18 million to $20 million headwind to our guidance, our original guidance in the PPS business and also a little bit of shortfall in FPS. So yes, you've got it. Our SG&A guidance stays the same. The FX benefits only a penny or two lift and the rest falls to the operational improvements.

Alex Wang

Appreciate that Larry. And just as a follow-on to the FPS question. You know the run rate commentary around EBITDA, if we look at it in the second quarter I think you guys were EBITDA positive. So I just wanted to clarify was that more of a run rate comment because if you're really looking at the second quarter, you're ready at the positive, so it's more so just a quantification, but you can provide a little more granularity around that?

Pete Watson

Yes. So my comment on the fourth quarter run rate expectation, it's much higher than positive EBITDA. We're talking about positive EBITDA full year, but our expectations on our run rate are significantly higher and those expectations are to be on a catch-up on what we would expect going into 2017. So that will be a critical point in how we evaluate that business.

Larry Hilsheimer

Yes. We'll be addressing that much further in a couple of weeks at Investor Day. Hari is doing a great job. There's a number of moving pieces in that that he is still working through at this point that allow us to give much better clarity on that.

Alex Wang

Appreciate that. And then lastly, can you remind us how big IBC is, is it greatest product mix and I know the growth strategy has really been in EMEA and Asia, but can you talk about the increase usage of IBC's in North America and how much of that is perhaps some share shifts you're seeing in the market?

Pete Watson

That's a good question. So if you look at waiting at the size of the IBC business EMEA is significantly a largest component of that for our portfolio by lot. North America and APAC have similar size, they are both growing. As you know we’ve struggled North America predominately because the end uses in fracking, in oil which is a big byproduct for IBCs has struggled.

Our growth in North America has to do with revamping our commercial organization and significant improvement in our operations to be able to go to market with a better product and more consistent product, but in North America and Asia Pacific it's a relatively smaller percentage in the rest of our portfolio and Europe is starting to grow fairly substantially.

But as market opportunities present itself, we expect to grow double digits in both North America and Asia Pacific as long as it delivers the right profits and the right value for our company.

Alex Wang

Thanks very much.

Operator

I will now turn the call back over to Matt Eichmann.

Matt Eichmann

Thank you, Sylvie. That concludes our presentation for today. I want to remind you that we plan to host an Investor Day on Friday, June 24, 2016. Details about the event are posted on our website. The replay of this question-and-answer session will be available later today on our website at www.greif.com. We appreciate your interest and your participation. Thank you and have a good remainder to your day.

Operator

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

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