Greif's (GEF) CEO Pete Watson Hosts 2016 Investor Day Conference (Transcript)

| About: Greif, Inc. (GEF)

Greif, Inc. (NYSE:GEF)

2016 Investor Day

June 24, 2016 09:00 AM ET


Matt Eichmann - VP, IR

Pete Watson - President and CEO

Tim Bergwall - Division President, Paper Packaging and Land Management

Hari Kumar - President, Flexible Products & Services

Larry Hilsheimer - EVP and CFO

Michael Cronin - Group President, RIPS EMEA

Chester Tsai - President, Asia Pacific

Ole Rosgaard - VP, RIPS North America


Adam Josephson - KeyBanc

Mark Wilde - BMO

Matt Eichmann

Everybody, good morning. Thank you very much for coming to our Greif 2016 Annual Investor Day. Some of you have traveled from all over the country, really appreciate you making the time to get in. Everybody's contributed time today. We really appreciate you sitting with us this morning and like to welcome everybody on the webcast as well too. My name is Matt Eichmann; I head up the Investor Relations efforts here at Greif. And I'm just going to take you through a couple of slides very quickly on housekeeping and logistics and we'll get into the brunt of the presentation.

Just from a safety perspective, if we have to evacuate this room for fire or any other type of emergency, there are multiple exits and multiple stairwells but what I will tell you is the easiest way to get out is to go through these double doors to my right, make a left and there's a staircase in that back hallway that takes you right outside. So, in the event of having to get out of here quickly, please do that. Within the room itself if you don't mind please muting your phones or silencing your devices just for the benefit of all that are in the audience today, we would greatly appreciate that as well.

We also have a considerable amount of food and beverage outside and in the hallway there that you all have seen. It will not bother us whatsoever if you want to get up and grab something to eat or drink or recharge or coffee, so please do that at any time; you've seen where it's at.

This is our Safe Harbor. Obviously, we'll be talking about forward-looking statements today. And I would just encourage you to review this at your convenience; it's also in the presentation that you have at your table.

And finally, just the agenda for itself; I won't take you all the way through this slide other than to point out that we'll have a couple of different Q&A sessions this morning. So, about halfway through the presentation, we'll do the first Q&A session and at the end of the presentation, we'll do the second Q&A session. If you have a question when we get to the Q&A, please raise your hand, we'll bring a microphone over to you. We are webcasting today's event. So, it's really important that we have microphones and that you ask your question over the mic so that everybody can hear you. And we'll get to that first Q&A, about halfway through the presentation.

Okay. So, with that, we're ready to commence. And I'd like to welcome Greif's President and Chief Executive Officer, Pete Watson.

Pete Watson

Well, good morning everyone and thanks for being with us. And then interesting -- some of interesting events this morning and late last night, so I appreciate your commitment to come, and look forward to giving you a story about what we're doing in Greif and our transformation.

Today, we're going to talk really about three objectives to achieve. One, we want to introduce you our leadership team at Greif; we're going to provide you an update, transparent view of our transformation process and confirm our commitments to our 2017 financial performance; and we also want to give you the opportunity to address questions to any of the leadership team we have here.

So, let’s start first, why invest in Greif. If you look at why -- what we're doing and why we think we're on the right path, it's all about our vision toward customer service and being the best customer service company in industrial packaging, there's a big focus on that. We think we have a lot of risk mitigation components of our business. We have a diverse portfolio, a diverse product line mix and we're in diverse regions of the world. And we think everything we're doing in the transformation process, all the activities we're doing to drive better execution discipline will drive more reliable, more sustainable earnings and cash flow. And today, we’re really looking forward to having the opportunity to demonstrate to you what we’re doing in the businesses and why we think it’s sustainable. I’m very confident in what we’re doing; I’m very, very pleased and encouraged by what our team is doing; and I’m really excited about the future of Greif.

So, we are global leader in industrial packaging. As we mentioned, we have a diverse global platform. What I’d like to do is introduce to you the Greif team that’s here. So, I’ll first start with Rigid Industrial Packaging, our President -- Group President of EMEA, APAC and our global key account sales team is Michael Cronin. The President of our RIPS Americas Group, which is North America and Latin America is Ole Rosgaard. And then, we have our Division President from Asia-Pacific all the way from Taiwan, Chester Tsai. So, to transition to our next largest business Paper Packaging and Services, we have a Division President of Paper Packaging and Land Management, Tim Bergwall. And our Flexible Products and Services, we made a change as most you know three months ago, like to introduce you to Hari Kumar, as a President of our Flexible Products Business.

Also like to introduce you to other members of our executive corporate team, you know all him, but, Larry Hilsheimer, who’s our Executive Vice President and CFO. We have Gary Martz; where is Gary? He’s our Executive Vice President and General Counsel. DeeAnne Marlow is our Chief Human Resource Officer; and David Lloyd, who’s our Corporate Controller and Treasurer. I’d also like to introduce, and most of you know him Mike Gasser, the Chairman of Greif. And we’re really pleased that he could be with us show support and get a chance to visit with all of you.

So, our path to transformation started 18 months ago. And I’m very pleased with the progress we’re making. We still have a lot more to go. But again, I think we’re making the progress we expect at this point. And I’m here today to confirm our commitments to the 2017 targets we set 18 months ago. And Larry Hilsheimer will go over that in great detail during his presentation.

So, when you go through our vision and the foundation of the transformation, which is our vision in industrial patching, we expect to be the best performing customer service Company in the world. And that’s really critical as we go forward, where we’ve got a huge emphasis on serving our customers profitably.

We have three strategic priorities that we’re executing on. It is building teams aligned to deliver value; it’s our focus on customer service excellence; and achieving transformational performance. And we call that the service-property chain. And it’s really about engaging our teams, to delight our customers to drive profitable growth. And what I’d like to do is review these three priorities and talk a little bit about it.

Our first priority is about our teams; how do we engage our teams; how do we build teams? So, we’ve built a really good team, a team I’m very confident in, collection of people that really form a very cohesive team and focused on doing the right things. They’re engaged; they’re getting their people engaged; and there is a real focus on delivering value. And I expect that you’ll see that trend when they’re talking.

The other thing I’m really impressed with is not only taking the top talent we have, but we’ve been very impressed with the capability and the talent we’ve been able to attract to Greif. About half of the people in our talent -- in our executive team is new to Greif within two years. And I think our value proposition to people, both inside Greif and outside Greif is very strong; we’re are very happy with where we’re going. The other big thing talking about teams is we’re creating a culture of accountability and discipline, and that’s really important. It’s really driven by the behavior of our leaders that are here today. And ultimately that rests on my shoulders. You’ll see the whole premise; we need to execute with discipline in our operations. And that starts with accountability and it starts with our leadership. So, I expect that you’ll see a lot of theme throughout the meeting.

Our second priority is about customer service excellence. So, when you look at studies, studies will show, when you have high customer loyalty that drives profitable growth. And that’s one of the large premises of this transformation and what we’re going to do. We need to be the best performing company on customer service in every single market we compete in around the world. And we cannot be weak in any of the links. We have to be consistent in our brand and we have to win in markets through customer service, and that’s we expect to do. And our expectation myself and our leaders is that they have to operate from the market back and the expectation they are very engaged with our sales group and very engaged with our customers. And I think you’ll see that theme throughout the day.

If you look at, how we’re going to measure customer service, it’s really two metrics. The first is our customer satisfaction index. And quite frankly, that’s an internal measurement about do we do what we say what we’re going to do with our customer? Do we meet their needs on a daily basis? And that’s involved do we deliver on-time and in full? Do we meet the quality requirements of our customers every day? Do we reduce the number of complaints we have? And then when there are complaints, how rapidly and how successfully do we convert those complaints to solve customer problems?

Our goal is to achieve over 95%. As you can see in this chart, we’ve made great improvement from 2015 Q1 to where we are now. But, if you look at what our baseline goal is of 95%, we’ve got a lot of opportunity to improve. And I would expect when you talk to us and when we publish these metrics, you’ll see continuous improvement in this measure.

The second metric is the net promoter score. Some of you may have heard this but it’s a methodology that’s very popular in business. It talks about an external measure through customer survey, and what we’re really trying to do is score our customer loyalty. And really quickly what it does is it’s a survey that asks customers would you promote Greif to others or you see a differentiated experience, and they would promote us to other people. Others let’s say were unsatisfied and their detractors, so they would not recommend Greif to someone else, or there is people that passives. They like what you’re doing but you’re not differentiated either way, you’re not differentiated in a positive way, you’re not differentiated in a negative way. And so the score takes detractors minus the promoters and that provides the score.

So, if you look at manufacturing companies, the top tier best-in-class is over 50 and majority of those best companies are 50 to 60. So, our net promoter score globally as a company is 40. So, this is a baseline where we are and our expectation is to continue to improve. And again, if customer service excellence is the foundation for our performance, we expect to be in the top tier. And so that’s one of the key metrics we’ll use to ensure that we are creating customer loyalty. And we’ll tell you, we’ve got one business that is scoring in the 95th percentile of all companies and you’ll get a chance to see that during the presentation.

Finally, we’ve got three elements of how we’re transforming our performances. And it’s really about how we optimize and strengthen our portfolio, how we are expanding our margins through fundamental operating improvements and then how we operate with fiscal discipline. So, let me go through one at a time.

We talked 18 months ago about we needed to do three things in our portfolio. We need to divest companies or businesses that were not core to Greif in our mindset or we were not the natural owner in a given region; we didn’t think we could win effectively in the market. We also said there is underperforming plants and operations that we are really going to fix or close. And then there is targeted growth area. So, I want to talk through what we have done today. We have had 22 divestitures since the end of 2014; we have closed 13 operations. It’s difficult for us to do. Part of transforming your company is about making difficult decisions, and we’ll do that. We’ve also targeted growth in two areas, the Paper Packaging business and our global IBC network. As you can see, we’ve made great volume growth and value advantage in both of those businesses. You’ll get a chance to hear the Rigid Industrial Packaging Presidents talk about their IBC strategy of growth and you’ll also hear Tim Bergwall talk about what they are doing growth wise in Paper Packaging.

Last, we’ve built three brand new facilities, predominantly to serve strategic customers. In Germany, we’ve built an IBC and reconditioning plant to serve the growing customer base in Europe. We have built a state-of-the-art large steel drum plant in Saudi Arabia aligned to a specific and strategic customer. And then we’ve expanded our core CorrChoice sheet feeder network in the U.S. just recently.

So, expanding our margins, so, we’ve talked a lot of about this. Our goal is to expand our margins enterprise wide through a disciplined execution and what we call Greif business system, and we’ve had many people talk about this. The thing that’s different in the last seven or eight months from the past five years is that we’re going from a decentralized grade business system to a centre-led Greif business system. When I say center-led, the gentlemen there and myself are the centre. And what we expect a very demanding process standard way we do business day-to-day, both commercially, operationally and how we do sourcing and supply chain. And how we align those activities together as one, drives values. What we’re trying to do is where we drive out waste and cost, how we price and target business for selling. And quite frankly those activities we may do that customers don’t value and aren’t going to pay for. So, it’s a holistic view of how we run our business from a standard process and a disciplined execution of our day-to-day business.

We also have a very, very sharp focus on price and product mix management, and I’ll tell you what our first focus is, is how do we grow the quality of our market share, which is about extracting value in our business and then secondly the quantity of market share, which is about volume. And you can have either/or but I will tell and we’ve talked about it significantly in the past 6 months since I’ve been CEO, value trumps volume. And the quality of the market share to me and for our business is much more important than the quantity. We are not going to chase volume to chase volume, we’re going to go after quality and what we expect to provide our customers and get paid appropriately for it.

Our gross margin target is 20%. We feel really good about the trend we’re on. I will tell you I think we’ve got bigger opportunity there. And we’re doing this in spite of pricing pressures in the Paper Packaging business. I think that part of our risk mitigation portfolio is when we have one business that's lower, we have another business that can do better. So again, this is about how we operate fundamentally and execute and have the discipline to drive change and drive improvement day-to-day.

And finally, it's about operating with fiscal discipline. We talked about we have to have a cost structure that we can afford and we have to generate cash out of operations. So, if you look at where we are going, we're making good improvement. Our SG&A year alone will drive $30 to $35 million in reduced SG&A costs and our cash flow will be 2X improvement over a year ago, and we're doing that through building execution discipline in our businesses every day. And I'll reemphasize, it is very, very important to Larry and I and our leadership team to drive cash out of operating working capital efficiencies, which should be a source of cash, not a user of cash.

So finally, what I’d like to do for the remainder of the day, you're going to hear from our leadership team. And what I expect you’ll hear is a commitment to the vision about customer service excellence and about being the best performing customer service in each of the markets we serve. You are going to see that there is a focus on execution discipline in our three strategic priorities and then most importantly how we are creating economic value to that process.

So, with that, I'd like to introduce you to Tim Bergwall, who is our Division President, of Paper Packaging and Land.

Tim Bergwall

Great. Thank you. Good morning, everyone. My name is Tim Bergwall. I have been with Greif for 14 years; the last three years I’ve been running the Paper Packaging Group, and the six years prior to that I was running our Mill System. As many of you know, the landscape is changing pretty quickly in the corrugated and container board industry. We've had a lot of new entrants in our industry. We've had a lot of new mill capacity, about 2 million tons since 2011, and we've had a lot of acquisitions downstream as those new entrants and those growing mill systems try to raise their integration.

So, what I would like to do this morning is talk about where does Greif fit into all that; what are we doing to grow; and what are we going to sustain our financial performance?

So, I will start with just the strategic goals overall. We do want to grow, as Pete mentioned, we're earmarked for growth in our business, but we want to do that in a balanced way between our mills and our downstream converting so that our integration goes up and we don't see it go the other direction. We added about 50,000 tons of capacity to our mills last year and now it's time to grow that converted side of the business, so we don't lose ground on integration. Our goal is to be over-integrated over time, so we want to be over a 100%.

Reshape our portfolio through growth in specialty products. We are a smaller niche player within this industry. There are a lot of things we can do to grow specialty and that's what we're working on. I'll talk more about that in a minute. We want to continue to expand our customer service model. We think we have a very good model. We've got some plans to make it even stronger. And then lastly, we want to keep focusing on people development and our continuous improvement teams. And I'll go into a little bit more detail on that.

So, for those of you who aren't familiar with us, I'll just give you a very high level summary of our business. We've got two paper mills, we produce about 760,000 tons a year of container board, and we've got a large sheet feeding network that also does some converting of products. That business will produce about 9 billion square feet a year of product. So, when you look at the containerboard consumption associated with that plus the fiber drum plants that we have all in Greif is consuming about 640,000 tons of containerboard per year. So, if you compare that to the 760,000 tons that we produce in our mills, it would imply integration rate somewhere in the low 80% range. And I say imply because, there are times when we choose not to integrate, we want to be buying opportunistically from our converting sites and selling opportunistically from our mills, and there are times when we will bring that integration back in house. This year is an example we're up a little bit versus last year.

So, when you look at our go-to-market model, the one thing that we would like to talk about is that, we really are a non-conflict partner to the entire industry. And that's because we're really not in the box business. We don't have box plants in the market battling with our customers, we're raw materials supplier and we also make products that are complementary to what they are trying to do for either further conversion or simply the broker items that we might make and make and resell. So, the value proposition really is three things, it’s high service; it's a broad range of products that we offer, all of these are viewed as being valuable by corrugated convertors; and it is resources. So, when I say resources, what we will do is in a given market, we will apply resources to our customers’ business to help them grow and to help them drive out cost, continuous improvement people, safety people, we even send in maintenance people and electricians if they need help. So, in doing that, it really helps us establish deeper relationships. We astound that the model really helps our loyalty and it helps us grow, and it makes us a partner that they really appreciate.

An example of the fact that we're really selling everybody in the industry is the pie chart. If you look at that pie chart, this is 2015 sales from the CorrChoice business. 34% of our sales actually go to companies that have corrugators. So, as you think about a changing or a shifting industry regardless of who owns that box plant, there's an opportunity for us to sell them because they see value in what we do.

I want to go a little bit deeper on our customer service model. As Pete mentioned, CSI, Customer Satisfaction Index is something that we're measuring. We spend a lot of time and effort on the fundamentals, things like on-time delivery; complaints; how quickly can we resolve them. And we've been able to maintain a score of around 95% for several years. We measure this every day, every week. We have performance sessions every month with our operators at every plant and we've always got our eye on that ball. The real differentiator for us though other than the fundamentals is our service model. And it's really having the shortest lead times in our markets, being able to turn around a very complex mix of business quickly. An example of that is the CorrChoice sheet feeder network. Their average lead time is 18 hours. Each plant will process about 500 orders per day and we do all of that literally overnight. So, it's a model that we're trying to replicate with other products. And what I mean by that is we want to have the shortest lead times in every product category and have unprecedented service. So, whether it's triple wall or coated products or even containerboard, we want to have a lead time that's the shortest in the market and that's even on complex mix needs.

The last thing I’ll point out on this slide is the net promoter score. We've actually been measuring net promoter score since 2012 in Paper Packaging, and we finished our last survey last month and we actually scored an 80, which is very high. When you compare that to other manufacturers that are benchmarked, companies like Caterpillar, John Deere, 3M, they’re are scoring around 55, 60. So, we're clearly -- an 80 is a very high score. So, it's a nice confirmation that our value proposition is being viewed as something customers care about. But I think more importantly, those surveys also contain open-ended questions, and we're learning a lot about what new things we can do to expand that lead even more.

Turning to growth, we've had six growth projects in the last 12 months that we've completed. The big one was obviously the modernization of our Riverville mill, about 50,000 tons more of capacity, improvements in our product quality, energy reduction, things like that. So, what I wanted to highlight is some of the changes that we've made in our converting, some of the growth in the converting area. The first one is the Litho-Laminated Line, which is up in Mason, Michigan. We've been in the Litho-Lam business for a while. And this is basically a graphic top sheet; it's got the graphics on it. We marry that to single faced corrugated and that gets sold out to converters to make it into displays and graphic boxes, things of that nature. It's a growing business; it's growing at about five times that of brown box. And we found that our asset was oversold up in Michigan; so, we've added another one. It's installed, it's running very well, it has some capability that no one else has in North America, things like double wall product, [ph] which is going to be a great product for us. So, that the install went very well.

In the middle of the screen, you see our specialty coater. This is a new business for Greif and the basic model is that we take paper from our containerboard mills, standard grades of brown paper, and we coat them with either solid colors or functional coatings. And so, it's been a great way for us to take a standard grader product and sell it into the market with a value added approach. So, whether we run that for a sheet feeder system or if we sell those coated rolls on the outside, that's going to be a nice growth engine for us as well. When you think about things like wax replacement corrugated, some of the trends that are out there, that speaks to a coating business. So, we think that's going to grow quickly.

And then lastly, Pete mentioned the new corrugator. We did add a high-speed corrugator to our Concord, North Carolina facility. That was a nice complement to that site, so, 110-inch corrugator that was already there, they had bumped up on capacity, that new line is running very well. And when I say high-speed, that asset will run about 60,000 lineal feet per hour. That compares to the rest of our fleet which runs about 37,000 lineal feet per hour. So, almost two times that of the rest of our fleet; and the rest of our fleet is very well catalyzed as well.

So, when you look at all these projects together, our volumes through the first six months of the year are up about 14%, within the CorrChoice sheet feeder group. Our mill volume is up about 3%. And our specialty sales are up 15%. And that's all versus a backdrop of a corrugated industry that's only growing about 1.8%, when you compare it to our fiscal year. So, clearly we're outpacing the market.

Shifting to cost, obviously we've had some headwinds with pricing, index pricing moving on medium. OCC has ticked up a little bit in the last few months. So, continuous improvement in driving down cost is a very critical thing for us. And this is a core competency of Paper Packaging. We've been doing it for a long time; we have a dedicated continuous improvement manager on every location; we have continuous improvement teams; and we have a very structured process around doing annual diagnostics, having a plan to capture value and attacking those projects one at a time. When we complete one, new projects enter the funnel. So, I want to show you some examples of that. Our energy and our mills is down about 14%. That's consumption; that was second quarter versus the last prior couple of years. And that's a big cost category for a mill. Other than fiber, energy's the highest cost. So that 14% on a runway would be about $4 million a year, so that's a really nice project. Now, we obviously got some of that gain from the shoe pressing install, but we’ve had dozens of projects in energy and they all contributed that number dropping the way that it did.

I also want to comment on efficiencies in our mills, and specifically Riverville, which is our biggest site. Metso, which is a big equipment supplier to the pulp and paper industry, did a study of a 138 containerboard machines around the world, and they looked at total efficiency, which really means in short how often are you up, what does your uptime look like, how well do you run that asset. And we were ranked number four and number 18 out of a 138 machines. So really a nice conformation that that continuous improvement theme and our group has got world class uptime.

And I'd like to shift to the sheet feeders for a minute. They've also had a continuous improvement engines running pretty hard. Every year, we go down in waste in the CorrChoice group and we go up in productivity. If you look at, since the transformation started, waste is down 12% and our productivity is up 6%. So, if you think about what is the value of waste production, for every 1% that we go down in waste, it's worth about $3.5 million a year in value to us. So that 12% means we're roughly at 6%, we drop to 12% down to about five, and we've got plans to take it even lower.

Shifting into operating working capital, we are down about $10 million versus last year. So, we're making great progress there. There's a lot of levers that we're pulling on here. If you look at our inventories, which is obviously a critical thing we look at especially when the demand picture is a little bit more challenging, it's down. Our inventory is actually down versus last year. We've introduced a new operations planning role in our group, new tools, new process and that just helps us see demand trends faster; it helps us to understand our consumption more effectively and we can make better decisions on a day to day basis.

Daily sales outstanding, DSO is also down. This time last year, we were about 45 days and that's down to 37. We've been doing things like electronic fund transfers, a lot more attention on our aging, holding customers accountable to pay us based on our commercial agreement, things like that. So just a lot of time and attention on the fundamentals, and we've also got some interesting things going on with unearned discounts and accounts payable.

So just to conclude and have some key takeaways on Paper Packaging. We really feel like we're well-positioned in a shifting industry. And what that means is there's some ownership changes going on within our industry but we're very confident we have a high integration level and we believe we have a value proposition that's compelling and that's really confirmed by our customers. So, regardless of who owns that box plant, we believe we'll have business there. And then lastly, we have a very strong leadership team in Paper Packaging. They've been in their roles a long time; they're very seasoned; they're very experienced and they spend a lot of their time developing people and making sure that their continuous improvement engines are running hard. So, we have a talent pool that as we grow, we've got leaders that can draw upon to run a growing business.

So that concludes my comments. And look forward to any questions that you might have. I'd like to introduce my colleague Hari Kumar who runs our Flexible Group.

Hari Kumar

Thank you, Tim. Good morning and welcome again to the Greif Investor Day. Thanks for taking time today to better understand our businesses. My name is Hari Kumar. I serve as the Division President for the flexible business for the past three months. I've been with Greif for six years; four of those six years were actually in the flexible business. The last role I had in that business was to lead the Asia Pacific turnaround. It took three years and in Asia, we saw sustainable profit improvement. China adds consequently, which is a large business that we have in that region is the largest profit maker in the flexible portfolio. After I left the flexible business, I worked two years leading the Greif’s transformation initiatives very closely with the leadership team here and also across the Greif portfolio.

I want to introduce you and give you a good insight on how we're going to turn the flexible business around. So, obviously the sense of urgency here means that we're planning intact as much as possible towards the end of this fiscal year, so in less than five months from now. The turnaround is focused on four levers. Number one, delayering the organization: What we're trying to do here is to take the leadership team closer to our customers and markets but also closer to where the issues are and to our employees. The reason that's important is we believe that that will make us take faster decisions, make right decisions. And the central leadership team we have right now is very lean. For example, all the fix business that reports directly to me, I’m responsible for making sure that we turn this business around. The focus again is on making this leadership team do less of review and updates and more of problem solving. Obviously there is an SG&A element to it. We’re trying to reduce cost. For me, at least, it’s a side benefit. We’re almost two-thirds of the way to execute this first level.

Second is to fix our underperforming assets that are three big ones Turkey, Vietnam and Mexico. Each one of them are underperformer for some customized reasons or for some specific reasons. So, obviously the solutions are different. We have to develop a customized solution, which we have done. And I’ll share that a little later in the presentation. We’re almost happy to executing that lever.

Number third is to balance the network through centralizing third-party sourcing. We are the largest bag maker in the world, but we also buy a lot of bags through third-party providers. Right now, we do it in a decentralized way or commercial officers going into multiple vendors and buy bags. So, we’re going to centralize that and gain benefits of better pricing, more efficient buying as well as quickness, our speed in buying that right product. So that’s a big lever for us in turning this business around.

Once we finish the first, second and third, we believe that we’ll have a stable platform for this business to grow. So, we’ll focus on growth, growth in certain targeted geographies from specific market segments as well as in key products.

Customer service excellences: If you look at the chart here, the scores have improved over past six months. But this business is not where it needs to be. You all saw Tim’s slide on Customer Service Index; we want to be like that, 95% plus. And it’s good that we have a business right here in Greif that as a world class performance. So, all we’ve got to do is to learn from our own businesses; there are pockets, there are some businesses Flexibles that are actually being very well. So, what we’re trying to do is to get the best practices together, look at things we’ve done well in the past and not so well in the past and learn from those, and train our associates to do things better. We are trying to create the culture, customer service excellence through concentrating, through feedback, through communication, through a framework that we have developed within Greif, and also making sure that our customers have a good experience and they buy bags from us and also are loyal and delighted with those services. So that’s kind of the long-term plan.

We’re also actively responding to some key customer requirements. So recently, we launched a new and updated product on Type D. A Type D bag is a bag that is anti-static. So, these are bags that when customers fill their products, they eliminate the static electricity build up. So, this is something that a lot of the customers wanted us to develop and we did. And so, we’re going to launch that; we actually launched that in some specific markets.

Second one is the Infant Food Technology. This is the marquee customers approached us for making high hygiene bags for them to put infant food products such as milk powder. It’s an extremely high hygiene, very, very high standard of requirement. So, we’re building a state-of-the-art facility in Izegem, in Belgium and the construction there is targeted to commission in November.

On portfolio improvements, we closed five facilities and we sold non-core assets out of five. So, we think we have a balanced portfolio. So, we’re focused on making that balanced portfolio work a lot stronger. So, we’re focusing on the underperforming assets. Turkey is a big one there. There are two major priorities; one is to get the cost down, second is to improve the productivity. As most of you know, we had in-house labor at Turkey a few months back and so our costs are higher. So, we want to make sure that the costs go down. The way we’re doing that is to make sustainable improvements around 15% in Phase 1. And right now in the past three months, the Turkey business is showing about 14% to 15%, so we’re right where we need to be. Overtime in terms of number of hours, has dropped more than 50%. So, we’re happy with that, but again it’s not enough.

Vietnam is a little different problem; it’s a smaller problem. We’ve made a leadership change there and a person that’s very experienced and running construction operations is in-charge of running Vietnam right now. And we’re also going to fix -- we’re going to also put some volume into Vietnam from not only the local market in Asia, but also from rest of the business. And we’ve asked the Chinese operations, which is another best performing operations in flexible to also support Vietnam. So I think, we’ll be able to fix Vietnam within the next four or five months.

Mexico is a tough one. Mexico is a biggest challenge we have. It used to be a small workshop making 25,000 to 30,000 bags and we expect that this business will make four times more bags. So that’s a big add. It has the machines for that kind of work; it has a demand for that kind of work, because we get it from the U.S. market, where we are pretty strong. But what it doesn’t have is two things. One, the Mexican operation requires talented people, so we put together a good HR team to look at sourcing of labor there where we can get better labor, how we can make them more skilled and how we can retain them, and very target at specific training, especially on first-line supervisory skills that can make our labor more effective in their jobs. We’ve also landed the best technical team we have in Mexico. There they are for the past 2 months to help the team build at the technical capability so that we can scale the Mexican operations. Last and equally important, we’re also focused on targeting high-end market segments. I mentioned Izegem. The picture that you see at the top is the site as it is being constructed. I was there last week. It’s on track, there are no issues there, we don’t face any challenges; we’re four days ahead of schedule. We definitely hope to launch it in November.

Gross margin improvements, three actions we’re pursuing. One is to buy raw material at a good price, lower than the raw material index. The team in Turkey is doing a good job so far maintaining that spread. So, we’re happy with that. We just need to continue to focus on maintaining that level of performance. Number two, we talk about centralizing third-party sourcing. I already mentioned the reasons why it’s important. It gives us better prices; it’s more efficient. We’re going to source the third-party buying in our Germany office because they’ve done it really well in the past, they have a good team and they use unified methods and a simple tool to make that happen. So, we’re going to double down on that and make sure that we can balance the portfolio and build margins. On labor costs, the focus is on reducing labor costs in Mexico, Vietnam and Turkey. Last, we’re year also pursuing high-end bags and higher end value-added services to build up the margins.

In terms of fiscal discipline, I think this is a good story for flexible business. We’ve already taken out about 360 basis points in SG&A, that’s about a €10 million business -- €10 million cost out. But, we’ll continue to do more. I think the target is at least 500 basis points over last year. And as I mentioned, I think we’re already two thirds away into that execution strategy. We’ve already taken out 15 days of inventory days outstanding from large commercial operations. So, that project is going well and the next one is to focus on the days payable and make it -- and prolong them.

Finally, I’m going to leave you with some key takeaways. So, I know that all of us know that flexible business has been underperformer for several years, four years now. So what’s different about this time? I think there are three key differences. Number one, we’re doing this internally. We’re not relying on outside consultants or third-party experts, not that there is anything wrong with it but we’re relying on in-house expertise. What that does is, A, you get volume; second, there is more execution confidence; and third, there are large -- there are some pockets of flexible that does really well. So, we’re going to look at the practices that work well within our business and then try to customize that into the other parts of the business. So that’s the one difference.

Second, as you all know Greif bought four leading legacy companies and with that came a lot of talent. I don’t think in the past we fully leveraged that talent. So, right now, we’re putting our business, we’re putting a large part of the initiative on this legacy talent that we have. These are people that have won in the market before. They know the markets; know the customers and know the process. So we’re going to leverage them fully to execute the turnaround this time.

And lastly, I think we’re going to fully leverage the success that we have seen in the other parts of Greif business. I mentioned already China. So, that’s something that we will replicate from the success in China. Ole Rosgaard, who heads Americas business, was recently with us in Turkey. Ole’s turned the business around in seven months. So, our team there was very excited to hear and talk about how he did it. They were challenged, inspired, excited and confident that this can be done here too. And I think as we concluded there, the business, the flexible business has all the right ingredients. We just have to make sure that we mix and match them in what makes sense for each of the businesses.

Thanks and with that I invite Matt Eichmann for the Q&A.

Question-And-Answer Session

A - Matt Eichmann

Thanks Hari, I appreciate it. Ladies and gents, if you have questions at this time, please feel free to raise your hand and wait for the microphone. Thank you.

Adam Josephson

Thanks. Adam Josephson, KeyBanc. Tim, just a couple of questions for you. Thank you for your presentation by the way. One on the inventory issue you discussed. You mentioned your inventories are down versus last year. As you know many of your peers have talked about the need to carry more inventory on account of logistics problems or otherwise. It sounds like you have not had that problem. Can you just discuss why your experience might have been different or if it has been different?

Tim Bergwall

Yes, thanks Adam. Actually, we do use rail out of the Riverville Mill. We’ve actually been moving more freight over the road. We’ve experienced the same problems with rail quite frankly, so larger percentage of our shipments is going over the road. But the thing -- and we’re integrating more. So, we controlled more it internally. But, we have not experienced any issues lately. And so, we’re comfortable with moving those inventories down and still maintain the service levels that we need.

Adam Josephson

And then two others, Tim, just one on the integration issue. You talked about obviously the increasing integration in the domestic market. That obviously has not prevented the 2 million tons of capacity since 2011 that you referenced earlier. Some have said that they think this increasing integration well somehow prevent future capacity additions. What's your view of that issue?

Tim Bergwall

Yes. It's a great question. How attractive will it be to continue to build out more containerboard capacity, the only one that I am aware of is on the docket right now. It’s about 400,000 tons, which is I believe three rivers. Other than that, there aren't too many things announced. So, we may move into an environment where it's not as attractive. As more people integrate their systems, the question is going to be how it shakes out downstream, in my opinion. But, I don’t look for a lot more growth in capacity, really don’t.

Adam Josephson

And just one on ecommerce, Tim; it's been a much discussed topic. Can you try to quantify any impact positive or for that matter negative that it's had on your business? And do you have any view as what impact it’s had on the market as a whole as it relates to volume, pricing, logistics and the need to carry more inventory otherwise? Thank you.

Tim Bergwall

Yes, sure. Ecommerce has definitely helped the industry. I don't have numbers in terms of shipments; I have heard a lot of percentages thrown around. And we're not really an end box user; we're really selling sheets. But a lot of our customers’ report that they are growing with ecommerce channels. We also like it from an OCC perspective because a lot of those boxes end up in the household; they get recycled more readily at the curb and obviously that helps the OCC generation in the country. But in terms of a bright spot in corrugated boxes, I would say that's definitely one of them.

Mark Wilde

It’s Mark Wilde from BMO. I’ve got a couple of questions for Tim and then I also had a question for Hari. Tim, I wondered if you could just address a little bit more the movement of the big integrated to buy more downstream, converting but also to expand around sheet businesses. And then some of the sheet guys like Schwarz have been actually themselves backward integrating to the mill side of the business. So, how does all of that play for you? And then, secondly, can you talk about any trend you see toward light weighting in the business?

Tim Bergwall

Yes, I'll be happy to, Mark. Thanks for the questions. On the first one, yes, a lot of the players are shifting, no question, in terms of ownership and what they are pursuing. I've heard numbers thrown around that an independent market represents about 15% of shipments. Right? And so, recently the Fibre Box Association has kind of changed that definition, and they said okay, what percentage of shipments are going to box plants that have an equity position in a mill, right? And it's actually they’re saying 12.4%; I mean I believe it’s even lower than that. So, the view is I think the trend will continue, and that's why we talk a lot internally about our value proposition and making sure that's compelling enough that we can continue to sell people that have an equity position in a mill. I didn't share that percentage in the presentation, but about 24% of our sales go to companies that have an equity position in a mill.

So, I think the short answer is we're going to continue to see changes. I agree, we do have some folks that are in the sheet feeder business that are backward integrating now. These are not massive numbers by the way in terms of total volume but they are -- there is definitely movement there. I am sorry. Remind me Mark, your second question was…

Mark Wilde

Then the other one I had for you was just on the sole issue of kind of light weighting in packaging?

Tim Bergwall

Yes, I think it's coming and I see that trend as a positive for Greif because what happens is when you start using lightweight liner in corrugated packaging, the medium becomes more important because that's where you get a lot of your rigidity and lot of your stacking strength. So, as lightweight liners come on, the requirements for high-performance medium, which we manufacture, will grow. So, that's a good thing. We also make some lightweight mediums. We make 18-pound and we make 20-pound in Ohio. We have seen that grow a little bit but it's in non-traditional markets, things like micro food clamp shelves for food service products, honeycomb things like that. It hasn't really grown too much in the box business. But I think the light weighting will continue. I think our equipment gets every year; we get better compression out of a box less crush things like that. So, but it will take time. We've also seen some of the big guys move into light weights.

Mark Wilde

Then I had a couple of questions for Hari. I wondered, first, the aspirations in this business just from a revenue standpoint are a heck of a lot smaller than they were five or six year ago. Can you talk about sort of what markets you’ve opted to focus on now and how that might be different than it was in the past? And then, I also am just curious, this business seems more like being in the garment business rather than being in something like right other traditional industrial packaging businesses? And I wondered, if you can just sort of address whether this business kind of fits as well in the Greif portfolio just given real cost, kind of labor cost, you can ship the product around more easily than say barrels and drums, which are much more localized products?

Hari Kumar

Thank you, Mark. The first one, where are we targeting for growth? I think we're targeting in some geographies that we haven't grown as well in the past, so Asia would be one example. In the U.S. market, we have a good position but we can be a lot better. We are already targeting growth in some specific segments such as instant food segment I talked about where we're building out a state-of-the-art sort of the clean room in Izegem in Belgium. So that's new growth opportunity but on a specific segment. I talked about the Type D, which is again a product driven growth. So, the growth is coming from products, from geographies and from segments. Second question, Mark, I think you said, you asked about, does it fit it into the Greif portfolio. We – there are a lot of customers that buy products -- rigid products as well as flexible. So, obviously, there's a customer overlap. And there's definitely some differences, because the flexible business is a little bit more labor intensive. And you had also raised this question of the comparisons with the garments. I think that's a fair point. I think there's a lot of discussion on can this business be automated, because it's similar to garment. And I think I'm not an expert on this but I’ve talked with a lot of technical experts and what they say is that the garment business is of course consumer oriented, ours is industrial packaging, so, there's one difference, but the garment business has not been able to automate a lot of these stitching and sewing. I think we're in a similar situation. We won't be able to automate a lot of the sewing work that we do, may be some parts of it can be. So, we're kind of in that space but also different.

And the last point I want to make is the bag making is very customized. So, the fabric maybe standard, although even the fabric is not but the bag making is very customized, every order of every customer is different. The fabric weight is different, the stitching styles are different, the loops are different, it’s really-really customized.

Unidentified Analyst

I've couple of questions for each but will start with you, since you are on it. Looking at this from the outside, we don't have all the metrics or different things you get to look at regularly, what would be the key milestones as from the investment community perspective that we could see or watch to know you're making progress along the way. Is it, getting to EBIT positive or what have you in certain timeframes or what would be your -- beginning to see revenue begin to grow, components of it. What would be the milestones?

Hari Kumar

I'll also request Larry to jump in. But, I think there're maybe two critical milestones and again a very short window. So, there's a growth milestone, which we can talk about at a later point. But right now, first, we're already EBITDA positive, this business is already EBITDA positive. We're hoping and working really hard to make this operating profit positive by the end of this fiscal year, although that looks like that's going to be a challenge; we're hoping at least break even. But definitely, the accumulative results of all the actions we're taking should put this business at operating profit positive on a run rate basis for next year. I don't know Larry if you wanted to add anything to that.

Larry Hilsheimer

Yes, we've talked about the fact that we have this process internally. This is a business that we're joint venture partnering. So, as we manage this, we have to work through that with our joint venture partner about where are we at various points. Clearly, we've stated that we've not been happy with the rate of progress, and that’s why we made the change we made. Right now, we're very happy with the pace of change occurring in the business. And as we've stated from the get go, the new strategy that we rolled out over a year ago which Hari has taken over and he's now sort of putting into motion at a much faster pace, we believe that this business has the potential to have margins that are comparable to our other businesses, but the timeline is longer. We talked about by 2020 we expect this business to have margins that are in excess of 20 and that we still expect it to have operating profits above 10. Right now that lens is still a positive one, the view is positive. But we'll continue to monitor. And as we move forward, if we fall off of that path, then we'll have other decisions to make. But right now, we're enthusiastic about what Hari's observations are that he shared this morning, we believe that task is still one that we can accomplish.

Unidentified Analyst

Second question I had for you Hari was, originally when the strategy was put together, envisioned to have a lot of commonality across your drum customers and the other pieces of the RIPS business. Where is that today? That's one of the things we haven’t heard a lot about, as we're seeing significance, so, it’s been several years now. What is kind of a commonality; is there a common sales force you're using to go out and move a lot of the product or is there significant mix through distributors et cetera?

Hari Kumar

I think there's commonality that I don't that [inaudible] I think we've tried to close [ph] the customers together in the past and it didn’t work, but that doesn't mean that it does not work in the future. I think we should try that. Definitely some of our customers want us to do it because they want to see a unified supplier which we are in many cases but it just hasn't worked in the past. So, Ole, Michael and I have had some discussions where customers want us to see come together, we just haven't doubled down on that.

Unidentified Analyst

And your mix that you sell direct versus through distributors today?

Hari Kumar

We sell mostly direct, but in some markets like in Asia, like in Korea and Japan, we sell through distributors. In Spain, and Italy, we sell through distributors. I think everywhere else we're direct. So, our mix between direct and distributors is about 85-15 or 80-20 at best.

Unidentified Analyst

And then, I did have a follow-up question for us as well, Tim. Over the past year or two, we've seen quite an erosion when we see linerboard prices -- liner board prices stay relatively stable, we've seen many recycled grades and medium as well falling. So the gap's -- one of the things we watch is the gap that's gotten big and continues to get bigger. Why do you think that is and what can happen potentially to arrest some of that widening and maybe turn it around? Because you’ve got significant weighting obviously to recycle grades.

Tim Bergwall

It’s a great question and we do use craft liner in our system, we trade for it. So, I don't have a lot of visibility to what's going on in the open market craft prices but I do with recycle liner. And the hypothesis would be that a lot of those integrated producers that control that craft linerboard are really integrated higher level and moving that through their own systems. And the new entrants, the new capacity that's come on has been all recycled. And so, if those mills fight to fill up their mills and get their capacity utilization up, there's been some erosion, some pricing method to use there.

Unidentified Analyst

Many of those folks that you're referencing also have extensive box network, so they're selling all the way through to the end customers. Over the last five years or so, Greif has kind of worked the opposite direction. Got rid of most of the box assets but expanded a bit in the corrugated stuff. Is that -- how do you view that today, maybe that would be a different path you'd want to take. Do you think that's important to control the end customer, not just the sheet customer?

Tim Bergwall

I don't think it is. I mean I think it's the -- the future model when you look at it would be how many unique things can we do within the confines of the sheet feeder and then sell it as spoken hub model out into the market. In other words, we have a lot of geographies we haven’t even penetrated yet. So, if you look at our model, which we think is successful, we're really only doing that east of the Mississippi. So, there's a lot of new real estate revenue markets we can address. So, it is sustaining from that perspective. Now the other thing I tried to draw on the slides is that even though we have a lot of customers that have equity in a mill, they still see value in what we do. They outsource a lot of stuff to us. So, you can be a small niche player and you can get literally outsourced orders from a lot of integrated companies, and that's really what we're doing today. So, the growth as we look at it is more of what we're very-very good at, which is running successful sheet feeders and then having another converting business inside of that where we can make products that are also valued by that same base of customers.

Matt Eichmann

Great, thanks Tim. We have questions coming over the webcast, and Pete, I think this is probably best for you. It's from Ghansham Panjabi from R. W. Baird. He writes, related to the initiative on improving customer service, what specifically is driving your improvement, and is there a way to benchmark where Greif is relative to the peer group on customer service?

Pete Watson

Yes, thank you Ghansham, I appreciate you participating via the web. So, what's most important is we have benchmarks that are industry benchmarks, both in the customer service index and also the net promoter score, but most importantly what we want to do is understand face to face more customers, are we meeting their needs or not and how can we create greater value one. And that's just face to face basic selling skills, but also we want to have a continuous improvement, both our net promoter score and our customer service index, and the view is we have to get better every single quarter and we have to serve our customers better every single quarter. And growth and profitable growth is a driver of that. So, we talked about the service-profit chain and I think if we do the right things in regard to understanding the needs of the customers, deliver on their needs, better than everybody in the market, you will see profitable growth.

Matt Eichmann

Okay, thank you Pete. The question from the room?

Unidentified Analyst

Thank you. Hari, this question is for you. You mentioned maybe untapped talent that you seem to be focused on. Just wondering what maybe wasn't tapped in the past and how are you going about it and maybe what kind of incentive structure, what changes you've made to try to help drive the business.

Hari Kumar

What I meant was, leverage the talent more, especially the legacy talent. So, when we bought these four companies Sunjut, Unsa, Ligtermoet and Storsack, there was a lot of talent in those businesses. They were all top players; they were the top four. And there's a reason why we bought them because they were good at what they did. I think what we're trying to do now, which we didn't do so much in the past was to fully leverage that talent that we have. So, a lot of these people were still in businesses that they were doing, they were probably underutilized. So, we're just making them do a lot more. We're leading with our strength as opposed to either hiring people from outside. So, the point here is that some of these folks especially the two individuals that I have in mind, Simon who was in one of the legacy business who's driving the growth business, they have tremendous experience in winning in this market, they know the customers. They just didn't do as much in the past. So, we're just loading them up and making them do more of the growth part of the work.

Unidentified Analyst

Any change in terms of incentive structure or how are your key leaders being compensated.

Hari Kumar

So, for this year, it was already decided, right, so we couldn’t change it but definitely next year. That will be a significant change we'll make to provide that incentives to actually impact.

Unidentified Analyst

My last question for you is Larry just mentioned I think 2020 kind of targeted 10% operating margins. How do you -- how involved have you been in kind of coming to that target and what do you see is the key levers that you need to pull to be able to achieve that?

Hari Kumar

Yes. So, the last two years, I spent within the drive business leading the transformation effort across all the businesses. So, I was also closely involved in the planning and targets setting for the flexible business, but from outside. So, I’m very familiar with the strategy of 2020 and the targets there. Right now, I think as you saw in my presentation, we’re having laser focus on the next five months. Let’s fix the business, get it on a stable platform, then we’ll grow it. We’ll take it step-by-step, right, so there is sequence to that. But definitely, I think the plan is doable. We’re off to a late start slightly, so hopefully we can catch up. So not really sure how much of that will come when but definitely that end goal is something that we believe in.

Unidentified Analyst

One more question for Tim. Just that businesses perform well for a period of time, I guess that there is macro issues that are affecting it. But, I wonder more kind of as you think of about maybe both on the balance side, I think opportunities in the risks as you kind of weigh them going forward, where are you most optimistic and where are you kind of worried most about execution going forward?

Tim Bergwall

Yes, great question. I think that -- well, let’s start with sort of the input cost side of the equation. I think moving forward some of the projections that we’ve seen from the likes of receipts [ph] would lead us to believe that we’re not going to see too much volatility in fibre, OCC specifically, that’s good. I think they said, it would go up $10 in next quarter and then the quarter actually that would go down 10, which is basically an equal movement. But what we’re really focused on is growing the specialty business, so the overall economy, making sure that we can penetrate some new market. And we’re very confident that the way we’ve aligned our sales teams and our coverage and the products that we’re rolling out are going to be effective in helping us grow. So, not a lot of concern other than the overall economy quite frankly.

Adam Josephson

Tim, just two more for you while you’re out there, just one back to OCC for a second. If in fact OCC prices stay range bound for the foreseeable future, what do you think that means in terms of competitive dynamics in the U.S. containerboard market and the extent to which recycle producers can continue to remain very competitive with the kraft linerboard producers?

Tim Bergwall

Yes. I mean, it’s a very insightful question, right, because you’ve got -- they look at cash cost I think in some cases, and when raw materials and inputs go up, that could impact the way they address market. So, I think with it remaining where it is, I don’t think we’re going to see too many changes. But, it’s -- I’m speculating at this point. So, if it were to go up, if OCC were to go up, that may change some things in the market, but again, Adam, I’m speculating.

Adam Josephson

Okay, sure. And just one other one, I get this question a lot. Europe is about 70% recycled and we’re just about the opposite. Are there any structural reasons why you think we -- given that you are large recycle producer that the U.S. market cannot become increasingly more recycled as Europe is; are there any particular structural differences that you are aware of that perhaps others are not that would cause the situation remain just as it is?

Tim Bergwall

I think it is growing with more recycle content. In fact, I think if you look at even virgin linerboard producers, you would see that as those mills grow, they’re using more recycled furnish to get there. That’s not necessarily new pulping capacity; they’re using more recycled in their furnished. So, I think it is growing. The other comment I would make is that the technology is changing. So, when you see recycle mills, they’re making very good liner now. They’re not quite where most of the kraft producers are, but some of the brand new mills, particularly those that have very sophisticated stock prep systems, are making very, very good paper.

Matt Eichmann

Great. This is going to be the last question for this period. We’ll do another Q&A period towards the latter half of the presentation, but just to stay on track.

Mark Wilde

Hi. It’s Mark Wilde again. I just had a couple of questions for Pete Watson. One, I wondered, Pete, if you can just update us on kind of where you’re at in terms of thinking about the portfolio. Last year, you said, everything is going to be under review. What we’ve got now kind of what we’re going to have going forward? And then, I wondered, if you -- either you or Mike Gasser, could just give us some thoughts on sort of lessons learnt from this whole flexible packaging exercise over the last five or six years?

Pete Watson

Sure. So, the first question -- we’re going to -- I’ll make comments and I’ll address that at the very end, Mark. And if you have any questions after it, we’d be glad to answer it. In regard to lessons learnt about FPS and I would say this overall where we’ve been in the last four or five years and where we are now. I think what we’ve learned is we have to have operators running in the business that have grown up in the business and understand how to basically operate and execute in a disciplined fashion. I think it’s important to note especially in FPS. Some of the fundamentals and the strategy went in has changed dramatically, not [indiscernible] just changed. And I think it’s important for us that we have to adapt with that change and we have to find ways to compete in those markets. You asked a great question, I don’t know if it was Chris, you or Mark, but the differences in that business, it is a textile business but the similarities are we’re serving similar markets. And so that’s where synergies are. So, I think how we can go to market with some of those large food customers or chemical customers that we can have a portfolio of products we can sell to them, I think we need to do a better job of. And I would say in that business too is we’re treating that like any improved performance business. We have plans; we have benchmarks on how we measure it; and we make decisions, as Larry said, along the way based on how we’re progressing.

Matt Eichmann

Great, thanks Pete. Ladies and gentlemen, that’s the end of the first Q&A period. I’d like to invite Michael Cronin, our Group President for RIPS EMEA. And again, we’ll do Q&A towards the latter half.

Michael Cronin

Thank you, Matt. Good morning. My name is Michael Cronin. The accent is Irish but I’m a European. So, I can start with that. I’ve had about almost 40 years’ experience in packaging. I’ve spent a long time with Alcan Packaging, flexible. I had responsibility for a paper packaging business with SCA for a numbers of years. I’ve worked as a CEO for a private equity. I’ve been the General Manager since I was 28. My father tells me, I’m a jack of all trades and master of none but I disagree with him.

I was -- as far as one of the highlights of my career before I joined Grief was when I was with Alcan, we acquired Alcan, was a number one packaging business globally and we acquired the French based Pengana, [ph] number two and I was responsible for integrating these businesses to create a $6 billion global flexible packaging business. The point of saying that really is that I’ve got a lot of experience on integration and a lot of experience and knowledge of cultural differences especially in Europe.

The reason I’ve joined Grief was that I really liked the focus that Pete and his team had around people and customers and I saw the great value potential in a business that can focus all of its efforts on people and customers, and then leading to value growth. So, the theme of my discussion which is this morning is going to follow through those steps.

If I could start with before we created the organization structure that we have today, we had a relook at the business plan and the strategy and rigor Pete mentioned in his introduction. And one of the things that we’ve been doing is taking a much more rigorous view of the market economics, so not just looking at where the volume is but looking at where the attractive growth potential is and where the attractive markets are. So, really look at then -- based on that and looking at our competitive positioning within those markets, so looking at what we need to do to make ourselves more competitive. And really that leads you then into looking at the competitive advantage the customer needs, and that’s why the real focus then on customer service index, and I’ll say a little bit more about that later. That then leads us -- that gives us a platform then to grow the business, so people, customers’ growth. It sounds rather simple; it’s not -- it is simple but it’s not easy. And let me tell you what we are doing about each of those.

Organization, I’m only going to talk about Europe, the European part of my responsibilities today. We have a team that’s all focused on one goal, driving growth, driving value growth but we’ve got different emphases on different parts of Europe. Western Europe is about delayering, about making decisions closer to the real decision point. Central Europe is about more looking at the system view of the business. And then Southern Europe, there is some very attractive growth opportunities for us in Southern Europe. So, what I have done is reorganized the team around those particular focuses.

So, if you look down at customer service, all of my colleagues today have spoken to you and will speak to you about customer service excellence. So, you’ll have heard about customer service index, you’ll hear a lot about the NPS score. Our view of customer service excellence is really to give the customer -- delight the customer, simple as that, based on delivery performance, based on quality and based on a truly excellent sales force, world class sales force.

So, what we’re doing around that is we’re measuring customer service index with the same rigor that we introduced and measure our safety performance. And the safety performance improvement over the last four years has been very significant. So, we see that the rigor of nurturing and driving customer service index will lead to an improvement in the customer experience. No point in delivering product on time if the product is faulty. So, we have to have a real emphasis on the product quality.

What we’ve done in EMEA is to build a quality council. And quite simply, the Quality Council, the key focus with the Quality Council is to report to me on a monthly basis on the top ten issues and the action plans to eliminate those top 10 issues. And if we keep addressing the top 10, we'll improve our quality. So again, rather simple. It's not easy, but we can do this, we can improve the quality. The steps assessment of the salesforce then is to ensure that we have a top class, a world class salesforce interfacing with customers. What we're giving there is we've assessed each and every one on the sales forces. We've made some changes while helping people close the gap between where we want them to perform and where they are performing today. So we see a real improvement potential in the quality of the sales force.

The profit margin is really the profitability of the work that we do and the customers that we have, but the profit margin analysis goes a little further than just gross profit or net profit. It includes the total cost of dealing with the customer. So, it involves a view of the complexity, of the working capital requirements. So it's wider view. So where really drilling down as acutely as possible to identify where the quality is.

On net promoter score, a lot of people get hung up on the metric of the net promoter. What I try to encourage people to do is to look at the difference between a promoter and a detractor, because you're going to have a lot of promoters, but if you have a lot of detractors your score still remains low. So you really got to focus on improving the detractor score.

And again, there is a real solid reason for doing that. There is evidence that would tell you that detractors are 2.3 times more likely to leave than a promoter. And a detractor costs more to deal with. So really good reasons to improve the customer performance. There is also good evidence to support that high net promoter score leads to better growth. So really good solid reasons for focusing on customers.

When we look at the transformation and on the portfolio basis, what we've done in EMEA so far is that we are looking all the time on our underperforming assets, our sub performing. My view there is always sub performance. As you drive performance up there is always some that struggle to get to that level. So this would be a continual process. And what I try to do is go simply look at fixing, selling or closing. And most of the time we fix things. Sometimes we don't. And since 2014, we've sold or closed seven underperforming assets.

I mentioned before that looking at the profit pill analysis, this is really looking at our competitor base to understand where the attractive markets are. So where people are making money today? And for all extent really target that attractive growth. So not growth for the sake of growth, but clever growth and we've been able to do that. There’s a couple of examples here. Our IBC growth is gaining momentum. We've had significant investment already in the IBC markets. In Europe we see further opportunities on IBCs in Southern Europe, in Spain in particular and we're building a plant currently in the Netherlands specifically for IBC.

We have the Jubail plant coming online. It's now complete. We'll be supplying during 2017. We've got a very attractive customer in Saudi Arabia and we're very confident about the growth prospects there. Continuing then with the transformation and looking more specifically at the gross margin, we're really trying to drive operating profits in each and every one of our units. What we're doing with at business level, at the translevel is looking at extended value stream mapping. Extended value stream is more than manufacturing. I think a lot of the times manufacturing businesses get hung up on reducing manufacturing costs. What the extended value stream gives you is a total view of your order to cash. So it looks at working capital, it looks at complexity, it looks at what drives your efficiencies. And we have an operation support group. This is a central small group with experience in lean manufacturing, and they are rolling out across the businesses, training our operating businesses in these principles, and we see potential in that.

The next big change in EMEA is how we review? How we look at supply chain? In our business in the past we've looked at supply chain on a country by country basis or a plant by plant basis or a customer by customer basis. What we’re getting now is more taking a system view of supply chain. So looking at the complete region, where we take steel from and where we eventually deliver it to and then for our conversion processes to be in the right place from a cost perspective. And then a clear focus on product mix and product management. So this leads us to finding where the good opportunities are within our customer base, looking at how we can take complexity out, how we can make a better margin from existing price levels?

I said a little bit a few times about our supply chain optimization, but really for me that if you have a very lean supply chain and you base it on very clear accurate forecasts from your customers, that leads to a lower cost base or helps us to reduce the cost base. It also helps to improve our speed of delivery. So our customer service index goes up and that leads to a delighted customer. And as I said earlier with the net promoter score points, that happy customers enable us to support our current price level and margins. So there's a good reason for looking at the supply chain on this more system wide view.

Our fiscal discipline then, with a revised organization, what we've done is we've put in place clear responsibility and authority levels across the business, so people who can make decisions on pricing, on delivery times, on inventory holding, on credit terms, and we have more evidence now, we've given the ability to people to make decisions at the right level at the right time, but with clearer policy levels and a clear organization structure. It enables us to make faster decisions while we're facing customers. A renewed focus on cost functional teams of operations and sales to make sure that the -- where there's complexity that our sales teams understand that complexity and help the operations to reduce complexity or where there's a price issue, we can get that information across the network in a faster, more efficient way. So, really cross functional teams working on improving margins.

I use the word leveraging the best in class because I would -- I'm clear that within our business today we have a lot of examples of being best in class. And what we really need to do is rather than learn how to be best in class we need to transfer it quickly and leverage it across all of our businesses. I'll give you an example here where our operation working capital management is already at best in class in some of our businesses. So, we've got a team focused on just spreading the best practice. And then we've got an SG&A reduction program in place, and we're on a very clear -- and we're tracking against a very clear glide path to get us to the level that we need to be at.

So the three key takeaways and what we're focusing on is people, customers and attractive growth. Key takeaways that I'd like to leave with you is we've got a very fact based analysis of the market today, a competitive analysis, fact based, not just supposition, but real hard facts and that supports our business planning. We've got a new and refocused organization structure in place, all very clear on where the -- what the direction is and how -- what the level of authority did they have. So we can make quick decisions where they need to be made. Best in class operations both in terms of manufacturing but also in terms of fiscal discipline, we just need to leverage that across the network. And then looking at the business in an aggregated way, and not in an individual plant or a country based view. So I believe that from this perspective, this for me is the proof of the value potential in Greif. People, customers and then leading us to attractive growth.

So I hope I've convinced you guys of my excitement about it anyway and I’ll be there for questions later on. And in the meantime I'd like to introduce my colleague, Chester Tsai.

Chester Tsai

Thank you, Michael. Good morning ladies and gentlemen. My name is Chester Tsai, responsible for Asia Pacific. So I will read the Asia Pacific. Asia Pacific is modern, cultural, dynamic regions. You can see that we encourage [indiscernible] from the Japan, over south to down to Australia, South East, Taiwan and lasts also in India. And I felt -- you can see the dynamics, the difference. Since 1996 I started in-charge of the business in the Asia Pacific across all the countries. So that's helped me manage the complexity of the business and tie to the -- deal with a difference. So I was so lucky. I experienced the massive the growth -- economic growth in Asia Pacific, particularly in China in my 27 years of working experience. So it is my honor today to update you what we have done in Asia Pacific on business improvement, and what we will continue doing to sustain the improvement we have.

In Asia Pacific our strategic goal is expanding market presence and the margin we have. The key is to align our teams in [indiscernible], our customer service experience and by creating the value to serve the customers better. So, for the market presence, we learned from the Europe's IBC's experience, the IBC so called the intermediate bulk containers, so called IBC. The market growth rates is higher than the last year's market growth rates. In China it's along 10% the market growth rates for IBCs. So we did see IBC is a growing opportunity for us. And in IBC's we feel a positive trend is also a good opportunity for us, by [indiscernible] the IBC experience what we have. So for existing deals on [indiscernible], we try to grow the wide shares in premium market segment so that we be more focused on the quality of the market shares instead of the quantity of the market shares.

So all of this, we will continue to leverage growth business systems as a measurement tool to improve our business qualities. So in here we can see the – when we talk about expanding market presence, we stop on the mindset for the customer service actions and then we will growth in the IBC and part six we [ph]. Will upgrade our business on large scale terms by the management tool we have, our growth business systems. So this is the strategic directions we have introduced. When we aligned our keys, our customer service excellence and then we need to -- we also have the PD key parameters to check on the performance. The first one parameter is the customer service index as shown in the slide here.

So you can see China’s relative low in the Q3 last year was driven by the China's performance balance on the lower. So we know improved China performance will drive Asia Pacific improvements. That is why we started buildings, close function communication platforms for better -- less [indiscernible] between the sales and operational teams to develop corrective actions. By doing that China has seen 32% performance improvement on the customer satisfaction index. This continues effort we need to target; the regional target we’re going to have. Other than that, we'll build the sales incentive trends. In short, we have more greater focus on the customer satisfactions, the margin and the receivables improvement. By emphasizing the sales involvement on the full transactions cycle we have, that means our order to cash. By doing that we also keep the -- have a more clear context communication with the customers, because in itself in the past sales mean only to sale products, but they didn't get involved in the full transaction cycles.

So now we have more to manage and gain vote on that. So all in that another parameter, I'll check that on the performance of customer service, where you can see is the net promoter score. We can double it at least once at least in the Q4 last years and followed by that we have a second wave surveys in May this year. So we learnt from the wave once surveys the results. We look at all the gaps, service gaps what we have and then we start to ask our salespeople to go out, talk to individual customers, what are your feedbacks, what the gap service you see on that. So based on that we come back, have a closed function communication, the salespeople are feedback. We ask all the cross functional people to see in there to walk out the correct [indiscernible] support continuous improvement. So you can see that by doing that our customer satisfaction index in the survey wave two have increased 32% for most in the promoter ratio is what we have out of the 420 customers’ feedbacks.

So want me to the continued efforts on the monthly space on customers' feedback and the service gap. We are going to do that on a monthly basis to meet the customers' satisfactions. So we as we mentioned, the IBC is growing the market for us. So from the chart you can see in here, so in the past we did the growth we captured the growth opportunity as a threshold [indiscernible]. The reason we capturing this because we diversified the market segment and we participated at the R growth [ph] and the pharmaceutical segment we have and a couple of mix. The fact is we did the geographic expansions [indiscernible] channel all we have. We’ve grown the distribution channel to serve North China, West China and South China, in the meantime we build all the distribution channel in South Korea to serve the South Korea’s markets and we have direct sales in the East China coverage and then we have a South East Asia, our ex sales [ph] coverage.

By doing that we can expand our geographic expansions on IBC participations. So other than IBC we also growth portfolio in the past few terms. We pursued Singapore as a growth opportunity, by building the new machines with the secure that customers on a contract base of all contract to parties [indiscernible] the customers. By this opportunity, we can penetrate more, participate more in the high standards for greater market in Singapore. Besides Singapore’s positive churn, we also add supply capacities in Philippines by utilize the spare machine, great intel, all we have to capture growth opportunities. And for the existing last years on business, we optimize our capacity by the consolidation and the divestures, but in the meantime the most important we continue – we’re on all the print sides two shift follows the pocket double size that we have.

In here, you can see in the past few quarters Asia Pacific's, we continue to improve our gross improvements. That is and this is a continuous effort so what came from the five Chairmen that we have in here. We came from operations, we came from customers, we came from sales, we came from sourcing and the working capitals. Now operational wise, we fix underperforms our breakings by the efficiency improvements. From customer wise, we recognize our customer mix and then in the sales wise, we did integrate --have our sales and operational pending integration process we have.

So by doing this so for SNLP process, by doing that, the main sales people provide a better sales forecast and then we can print our raw material, production scattering and demonstrates our controls and then by doing we provide a [indiscernible] service to meet customer needs. So this come from the called SNLP process. Beside this follow sourcing, we switch on the lower to be integrated meal to stabilize our long-term supply capability, because the China government now try to driving, cutting the surpass capacity, particularly for the steel mills. So that’s why the deal was integration deal new as well strategic more stabilize a long-term supplies or we have. This has come from sourcing part.

In the meantime, we negotiate longer than credit terms. China’s secured [indiscernible] working capitals and they extend the payment base that we have. So all our efforts have combined together and then you can see that we continue increase our margin levels as chart are showing here.

So all of this, I think, just allow me to give a summary. I think our principal is to establish operating disciplines, control, how we can control. I’ll talk as well, be link customer service excellence to our performance review by the customers and special index and the net promoter scores.

Our target will be continue to profitable growth, similar different market segments, customer mix and then by the meantime have a product line expansion and [indiscernible] expansions. By all of this only can be done by peoples. So we build strong teams through parent reviews, employee deployments and organization’s health index improvements. In the meantime, it was high to force the cultures as we fit in the certain campaigns, try the employees self-awareness with commitments. And create a working environment for our employees. So there will be employee engagements and empower employee for better executions.

So but the most, most important as we can do [indiscernible] what we have, the most importance are come from a customers, here it from customers, employee, shareholder and the management teams that we have. So thank you for your attentions. And then pass the floor through to Mr. Ole Rosgaard.

Ole Rosgaard

Thank you, Chester. Good morning. Let me first start off saying that I’m really excited about having joined Greif and I’m also excited about having the opportunity to address you this morning, to tell you about all the things that we’ve been doing in Greif the last 10 months.

Before I joined Greif 10 months ago. I spent 10 years in private equity. I worked for the largest roofing manufacturer in the world, being responsible as President for Central and West Europe. During this time, I performed four major turnarounds, some transformations, I divested and I acquired companies. But I also grew my businesses organically and I created double-digit growth for our shareholders.

Since joining Greif, I have so far visited 61 facilities and part of what I do is, it’s very much to do with people. I have to be out there. I have to be in the plants. I have to see what’s going on. It’s not something I have done. It’s something I continue doing. So I’ve been visiting 61 facilities. I’ve been engaging our managers and all our supervisors in the plants, and by doing so, I get some very valuable information and insight into what’s going on.

At the same time and I also visits and speak to customers and I haven’t countered them, but I met and spoken to hundreds of customers. This has also given me a lot of valuable insights. So I can see which actions we needed to take in the business. And more importantly, I have been able to prioritize those actions for maximizing shareholder value.

When I joined Greif 10 months ago in what I can see some of you have referred to as the crown jewel of Greif RIPS Americas. And I found a business that had substantially declined four straight years in a row. I found a demotivated organization with a not so clear sense of direction. Since then, we have eliminated or replaced 14 senior positions. And these are positions such as Presidents, Vice Presidents, Directors and Plant Managers. We now have what I would consider a solid leadership team in RIPS North Americas. We also have a very competent organization with a very clear direction and being very motivated.

With our organization, we have designed and we have agreed for strategic goals designed to improve our business fundamentals. The high needs of these four goals, we of course have a very specific set of metrics. On top of that we have asked each single plant and each commercial organization to develop 10 specific initiatives towards these goals. We have targeted our CapEx and our old spending towards supporting these activities driving the business towards these goals. In fact, we have actually doubled our CapEx spending compared to the last year in this respect.

Execution is extremely important here, so I personally participate in the follow-up sessions with each single plant, every single month to make sure we have accountability and to make sure we have a sense of urgency in the business. As Pete said and as my colleagues have said, customer service is really, really important. In fact, it’s critical to our future success. So a lot of our initiatives are designed around providing an exceptional customer service to delight our customers.

In RIPS Americas, we have the past months increased our customer satisfaction index by more than 14%. At the same time, through the initiatives we are driving through the organization, we have reduced customer complaints by more than 30%. And also in order to focus our organization on customer service, especially the part of the organization that interacts with our customers. We have delivered very focused customer service training and so far we have delivered more than 500 training sessions with our colleagues in customer service.

We have also introduced activity management in sales. And by doing so we have been able to increase the number of customer visits and this is with the same amount of people by 57% since we introduced activity management late last year. All this drives the organization towards the customer, it drives a much higher degree of customer service and it delights our customers. They see us more; they feel Grief is really providing them with a lot of value.

Leveraging our relationships with our customers, leveraging our leading market position is important and we have done this in particular in IBC and I’ll use this as an example where we the past six months have grown our IBC sales by 7%. But as we said earlier, our focus is not volume first, its value first. So value first, volume second. So at the same time we could probably have grown more in terms of volume, but the 7% volume increase we’ve had, we’ve actually managed to increase our margins by 7% on that as well. And it’s a coincidence that it’s both 7%. So margins have gone up 7% in our IBC. And we have closed down three steel plants and we have divested 7 non-core assets and we are currently undertaking a major rooftop consolidation. Again, that helps us with prioritizing value over volume. In order words, our product share in the market is quality rather than quantity.

Since the beginning of the year, we have grown our overall margins with 4%. We have done this by having an extreme focus on our plants, driving continuous improvements in the plants, driving lean, and that some of these initiatives we have implemented has been focused on. The result of that is we have reduced on plant downtime by over 10%. We have looked at our product mix, our segmentation. We have implemented non-raw material price increases and we have introduced a variable compensation in sales rewarding meeting or exceeding budgets in value. We have also cascaded our targets, our bonuses down to the plant level, rewarding the very same things.

Generating cash coming from private equity is something that is extremely important also for our business. So that has also been a focus area. Since the beginning of the year, we have been driving that very hard and so far we have accomplished a 90-day payment improvement on our suppliers. Currently we’re targeting our DSO where we will be improving our DSO by 30% before the end of this year. And we have since 2015 reduced our discretionary spending with 19%.

We continue, and we’re not there yet, but we continue to set the bar extremely high for the organization. We are increasing the standards every single day. We want to be best in class. And I would say that our business fundamentals are now in a much, much healthier state than they used to be and we are on a very good path to become best in class in what we do. We are improving and sustaining our profit performance and cash flow generation, and we are growing our volume profitably.

So, in other words I would end the session by saying that Greif is in a very good position to capture and sustain further value in the markets and deliver shareholder value. And I’ll now pass you on to Larry Hilsheimer.

Larry Hilsheimer

Thank you, Ole. And let me just say once again, thanks to all of you for making the investment of your time this morning. We truly appreciate it. I’m very excited to be here with you today. Hopefully we’ve accomplished part of our mission so far today to introduce you to what we believe is an excellent team to carry us forward, and not only to accomplish our objectives but to exceed them. I’m going to spend time this morning talking about four things. One is the transformation of our finance organization. The second is I’m going to talk to you about why we believe our SG&A savings that we’re going to deliver are sustainable. The third, I’ll talk a little bit about our capital priorities and our process and our structure. And finally, I’ll end with reconfirming our commitments that we made a year ago to you today, which somehow has shifted in that years’ time.

But let me -- before I get into that -- you’ve had this common theme throughout the presentations today about service profit chain. A little bit of background and why is the CFO talking about this stuff. In the early ‘90s I was in my office late one evening and I was catching up on things and I came across this Harvard Business Review article, and it was an article written by Jim Heskett, Len Schlesinger and Earl Sasser and I read it, and I read it again. And within a few weeks I read it five or six times. I walked away from that believing and I still passionately believe today it is the secret to success in business. I absolutely believe it. I had the great fortune in that one of those authors ended up moving to Columbus, Ohio right down the street from me, and he became the Vice Chairman of Limited Brands, Len Schlesinger.

So I had the opportunity to spend some nights in my backyard with an adult beverage learning more about the background and the thoughts and what led it and the evidence, and all it did was reconfirm for me what I believed. I believed passionately in it, and one of the things that’s key is great teams. You don’t have delighted customers unless you have great teams. You can imagine my satisfaction reading in the Bloomberg and Forbes couple of weeks ago when Warren Buffet was giving a speech down the road and he talked about how every one of you who want to be successful in business are -- wake up in the morning and write in lipstick or whatever else you want to do on your mirror delight customers. That is the secret to business. It reaffirmed what we’ve been talking about all morning, and it also correlated to what has made me happy about joining Greif.

I walked in with this passion and I ended up getting introduced to [indiscernible] Pete Watson. Pete Watson and I matched extremely well. He didn’t really know what the service profit chain was by term. What he knew it by was by life. Here is a man who for over 20 years now every year reads a book called the Servant Leader, and he lives it. So we are very aligned at what we’re trying to do to drive this Company forward and we’re already seeing success as each of our leaders has talked about this morning. But we’re very passionate about what we’re trying to accomplish and we’re very confident that we’re going to.

Let me talk to you a little bit also about our talent organization, because I view our organization as having two key customers. One is our investors and the investing public. We have a fiduciary duty to make sure that we report things correctly, timely, accurately and provide good forecasts, and that’s our responsibility.

Our other customer is internal. Our internal customer is our business units. We have to deliver them the information and insights in tools to allow them to make correct business decisions based on correct data. When I got to Grief, the talent level in our organization was not what it needed to be for a Company of our stature, history and what our investors deserved. We've totally changed data our financial organization. Our financial reporting organization led by David Lloyd is now world class. We've had great talent with that organization and we've worked through our issues over the past couple of years and we feel very confident about where we're at. We're still working through our system integration. We've told you that we'll be one primary system by beginning of 2018. That will help us immensely. Working with 50 some systems and trying to pull all that together from over 50 countries in the world and diverse and decentralized finance teams was a recipe that did not put together a credible tight controlled system.

We now have incentives around controls for all of our finance people. It's in every one of the goals and outside of finance. Because if you really live this, you know what Sarbanes-Oxley as you realize controls is not finance. Controls goes throughout the organization and has the great support of each of these business leaders who set the tone at the top of each of their organizations and Pete does a fabulous job of setting the tone from the top. And we want to be and we're on the path to being world class in financial reporting. Our FP&A group is led by Chris Luffler. Chris has changed out entire organization in that group and I again feel very comfortable that we have really, really good talent. We're hitting our numbers. We're delivering what we're saying and we’ve told you sometimes we're going to try to beat them, but we give you what we know at the time we know it.

And then we've improved our treasury group and we've improved our tax group. We have brought in talent around currency management and we've brought in world class talent in our tax organization, and I'm very excited about the team we have and they are passionate about delivering value to you into our internal customers. SG&A, let me just talk about that for a moment. We get the question. Do you think this is sustainable? What we've done, and I've said this from the very beginning, we have focused on doing things that are not just flavor of the day. It's not about hey, stop travelling for the next two months. That's not what this is about. This is about culturally changing how we operate, making sure that we have sustainable things, making sure that we have controlled processes and procedures internally so that we manage to make this desk sustainable. I've mentioned in the past, we are a very social group. One of the great things about Grief is it is a team that really works well together and like each other around the world. Part of what drove that before is we traveled a lot and we spent a lot of money on travel. We've changed that culture. We do still travel to serve external clients, meet with the external clients and there'll be some other travel, but we have cut it down dramatically. We have significantly enhanced our usage of video conferencing and it is a very sustainable long term savings element of our plans.

We've put in processes a control process so that each professional fee spend in excess of $5,000, which is a very low number obviously for an organization of our magnitude has to be approved by people in this group. And so we've built disciplines, we've put it in process and we're executing on it. The other is our capital allocation process, which ties into our next topic. We used to have a decentralized, basically go spend what you depreciate or what your depreciation expense is in each operating business. It was siloed. It wasn't focused on what's best for Grief on an overall basis. It was the natural evolution of a company that's done a lot of acquisitions. I've seen it many times in my group. It wasn't, you can't say that was bad or wrong, it was just different than what we needed to do going forward.

And so we've now centralized the process. Things get prioritized based on what's the best return opportunity for Grief or we've mentioned that this year in North America we've doubled our CapEx spending. And yet our CapEx overall has come down. Prior years we were spending money in our paper business. We'll continue to do what's going to deliver the best returns for our shareholders and that's going to change for us. In terms of our capital structure, as you know, we have one of our bonds coming to maturity next year. And just to restate something that we’ve talked about a little bit in the earnings call, we are well into our process of evaluating our alternatives and we have many.

Some of our bankers are here in the room which we appreciate on the financing side and they're very willing and able to help us because of our strong balance sheet, our improving operating metrics and our path forward. So we're excited because ultimately we believe that it will significantly reduce our interest expense going forward as well.

As near term priorities on our CapEx and our capital uses, we're going to continue and make sure we fund our maintenance needs because that's our driver of what produces profits. We can't let down on our maintenance spend, our capital projects and priorities. We'll continue to fund those. Second and I can't state it strongly enough, I’ve tried to say this the last few years, and we will pay our dividend, we've always paid our dividend and we will never stop paying our dividend. And we -- it is very important to us, it’s important to our shareholders and we have had confidence about paying that over the past few years. Obviously our confidence continues to grow as our improvement continues. So -- and then finally we want to pay down our debt. We talked about a target capital structure of 2 to 2.5 times of EBITDA, and we are very close to that already at the end of Q2 and we'll clearly be within that range.

So let me move now to just reminder slide. We rolled this slide out in January of 2015 and when we told you, looking back, at that time I told you, I just reflected on things and so I locked myself in a room, looked at a lot of old data and to me it seemed that we should easily be able to obtain and meet these metrics on an ongoing basis, after a hard period of transition. So we’ve set a ratio. They said we should be above 20%. On an enterprise basis for gross profit we should be below 10% on SG&A and we should be delivering operating profit at a 10% or above level, and we committed that we will deliver that.

We also said that we're going to target working capital at 7.5% or below in sales and we're working very diligently on that. You heard Ollie and Michael and Hari and Tim all talk about their initiatives on working capital. Every one of them keeps that focus on with their management teams on a weekly basis and Pete and I probably sometimes wish we weren't as involved in it, but we are.

So now let me move to reconfirm what we laid out a year ago. The only thing that's changed from a year ago on the operating profit line is really just the difference in the currency assumption a year ago, which was based on April '15 kind of rates and now April '16 kind of rates. So the range has moved down $10 million. Obviously you can see that. And a corresponding change in cash flow with a little bit of broader range related to some of our working capital target adjustments. Net sales obviously have gone down dramatically. It's about a $140 million of currency impact. It's about $70 million related to some acquisitions in our FPS business and capital investments that we decided ultimately not to execute on.

We thought the pricing was too high, the returns were not adequate for what we think our shareholders return. So we backed away from those. And then you have about 60 million on the pricing impact from the -- in the paper business and then the remainder has to do with our assumptions on growth. Last year just organic growth, even though it was relatively meager, industrial economy just hasn't even delivered the 1% to 2% that we talked about then in our spaces. And so that leaves you at the 3-5. You can look and see obviously the gross profit that we're now committing to is above 20%. We’ve remained SG&A at the 10% target level. So that's great on a consolidated basis, and what we reconfirm today, our commitments that we made a year ago at the consolidated basis.

Let me now move to each of the segments; paper packaging. Paper has obviously been impacted as Tim discussed earlier today by both the pricing indices, and also by OCC cost, but the business continues to operate at very high levels in terms of returns, gross profits that are well in excess of 20%, and operating profits well above our 10% target on an overall basis. So still a great performing business for us. It's one that has obviously a cyclical nature to it, less so than it historically did, but still we face those challenges.

Flexibles, you heard Hari talk about what we're going to get accomplished. Again 2017 run rate for them is just a way post along the way to where we’re ultimately going to get, and so some of the targets have been modified slightly because as we’ve told you we're slightly behind where we expected to be, but on the ultimate path and we will be stage gate looking at this business on an ongoing basis. But we're very confident that the team's going to deliver.

Rigids. Rigids has outperformed what we expected, and I attribute that to the leadership that we brought in. Michael and Chester and Ollie are doing just a fabulous job of really driving improvements in us delivering margin and return for our shareholders. And so we have to step up and it goes back to what Pete said at the beginning. The diversity of our portfolio allows some risk mitigation for the benefit of our shareholders. So we're very pleased with where this business will be coming out of '17 on a run rate basis and we will work to even exceed these numbers as we were on each and every business.

Land management, I just will just briefly touch on -- we continue to be very pleased with our management team in that business. They turn over every rock and stone literally looking for ways to generate profit for us, and they do an excellent job in doing so, just very steady performers and a good asset in our portfolio. So let me just close by coming back to the beginning slide on commitments. We're very pleased that we're able to commit to you that we will achieve this and we're very confident that we will. You know, obviously the events of last evening, we’ll all have to wait and see what the longer term implications are for currency markets, for the economy and all of those things. And we’ll play through those and we believe that the diversity of our portfolio provides us a good position to be in relative to others, and we’ll just continue to manage and execute against our disciplines to provide the best return for you.

So with that, let me close and turn it back to Matt, who will conduct our Q&A session.

Matt Eichmann

Great. Thanks a lot Larry. Ladies and gentlemen, if you have a question just feel free to raise your hand please.

Adam Josephson

Larry, hi Adam Josephson. Thanks for your presentation. Just a couple on – one on the paper business. You talked about, I think a 60 million hit on price, but it looks like the run rate target went down by about $230 million. So can you just help me bridge that -- what seems to be that gap?

Larry Hilsheimer

Yes. The other piece was I mentioned the potential acquisitions was about $70 million, that we had built in the sales number on that business. And the other has to do with more the mechanics of the integration. Maybe Tim you want to talk about that a little bit.

Tim Bergwall

Yes. The change there about half actually, around $100 million Greenfield projects that we’re planning on doing with the size and to delay those beyond 2017. Still good opportunities but we just didn’t feel the timing was right. You look at the rest of that difference and it’s a lot of the tonnage that we integrated into our own system, we’re not selling that yield to market anymore. So those sales go away. Basically eliminations when you roll it up. The other big chunk of that, that Larry mentioned was the price erosion in both the mills and downstream, the [indiscernible] group.

Adam Josephson

And just a couple of others. Larry, can you, I don’t think you talked at all about FX sensitivity, right just in light of what’s going on today. Any updated Euro exposure, house exposure anything that?

Larry Hilsheimer

That’s fair question Adam. And what we’ve been trying to do as we provide our guidance is talk about this sort of overall index to our overall portfolio, and we talked about at the beginning of the year. If you looked at it -- we looked at it, about 6% impact to sales on where we begin the year with guidance. So from top-line last year to this year, we looked a 6% impact. At the second quarter call, we talked about that moving down, because the dollars strengthening had not continued on the path that we’d originally assume and we knocked that down to 5%.

With last night’s activities, that index will change. We haven’t computed what that is yet, because obviously it’s moving all over the place for one. But if in looking at it, as we’ve tried to plan for what might happen coming out of this, and we try to think of different factors, but if you said the pound and euro sort of lost 5% to the dollar, through the rest of the year, it’s roughly a 1 million to 1.5 million impact us on the bottom-line. And we had factored that into the guidance range that we gave.

So if it’s more than that, then you can sort of look at on that sensitivity basis. But as we’ve talked about. The problem you get, and I was talking to someone else this morning. I think if anybody tells you that no matter how much wargame planning or scenario planning they had, if they really say I have a firm hand or what the impact of the vote last night is going to have on my business, then their business is either very limited or concentrated or they maybe fooling themselves. Because this -- we believe the web that this thing is going to have and the impacts are wide and probably not well understood. We’ve talked about the complexity of our supply chain and the shifting places where we acquire our raw materials. And so what’s going to happen to the Singapore dollar. What’s going to happen in India?

Those are things that you don’t have privy to what are individual contracts and ours move all the time. So hopefully that gives you a little sense that we don’t think the impact for the remainder of this year is significant to us on a bottom-line basis. And we’ll continue to try to inform on what do we think the top-line impact would be as we develop our thoughts of where this is going to play out.

Adam Josephson

Thanks. And just one last one on restructuring. What cash restructuring cost are you assuming as part of your top-line rate?

Larry Hilsheimer

For '17 itself, not the run rate coming out of '17, we’ve talked about $25 million. We’ve talked about at roughly is where our best thing is that. We expected to drop after that and we’ve talked about coming out of '17 and into '18. We don’t expect to have the kind of restructuring charges, we’ve had. Now that said, business conditions change all the time and we want to make sure that we’re continuously looking at the portfolio of our plants and our operations and businesses. And if the opportunity or need exist, we’re not going to not do it, just because we said, we’re going to go lower. But our full anticipation is that will drop to a more moderate level and we haven’t even actually quantified is it 5 or 10.

Adam Josephson

And just related to that on restructuring. I know, it’s a fine line between cutting too much and cutting just the right amount to get your business where you need to get them. How do you think about that and how do you avoid cutting too deeply to effect employee morale and your operating performance?

Larry Hilsheimer

And I don’t mean to be grim with this response at all. I mean that’s -- we work closely. That’s why we have great leaders in our business operations. And those are things we talk about and debate and then DeeAnne weighs in from an HR standpoint. And just I want to paint the DeeAnne and the HR – she’s a business person with a lot of great experience. And so we sit at the table as an executive leadership team and then we try to get input and feedback from our other support teams within the businesses because we have good talent that has been in this business for a long-time and then we try to make the decisions that we think are the right ones for that existing business.

Unidentified Analyst

Thank you. Just a couple of question. If we could go little deeper into some of your assumptions here. So you’ve set forward new run rate coming out of ’17, so A, could we think of these sort of as ‘18ish target? And then B, one of the components from listening to the different presentations was significant amounts of working capital coming out. What is the contribution or how does that look from here to there?

Larry Hilsheimer

Thank you, appreciate it, Chris. Two things. One, no you shouldn’t look at our run rate commitments coming out of ’17 as ’18 targets. It’s meant to be what it is, that what we’re trying to say is we believe that if you look at the last couple of months of ’17, we should be operating at those levels. But then we want to move up from there. Now, we have not gone through our process and Pete will make some closing comments and address some things. We haven’t talked about ’18 yet. And there is some good reasons we haven’t. But we expect to grow from that run rate and have better results in ‘18 than what we’re coming out of ’17 on run rate. That’s our obligation and so that’s the game plan.

In terms of the working capital contribution, what we talk about when Pete mentions that we look at working capital as a source, part of that ties into we believe that we have opportunities to manage down our inventory by having a more full supply chain. I believe Michael Cronin talked about it today in multiple situations where you’re looking at it from -- interacting with the sales force and the customers. Jester mentioned, so did Harvey and Tim and the team have executed on it well. But planning that, we have not been the best at supply chain management. We’ve been very good sourcing, okay. But we‘ve maintained more inventory than we did, Michael talked about. Each plant was sort of managing their own supply chain and if you think of Europe in the footprint, you can take out cost by managing that more efficiently. But you don’t need as much in every plant if you manage it more efficiently across the thing.

All that background, go back to Pete’s comment, we believe over time that working capital ought to be a source of cash, but there clearly is a level of inventory that can’t go below. You are only going to be able to go so far in managing your payables and your receivables. You can look to do financing through securitization of receivables but what you can do is try to manage those levels to stay stable as you grow the business. And that, by the incremental growth in your business and profitably you generate more cash out of your working capital management. That’s what we’re talking about.

Unidentified Analyst

Yes, so just to maybe be specific if you’re looking at this 205 to 225 as a run rate, does that contemplate $20 million to $30 million or a number that comes out over that timeframe and then it stays at a steady state, I don’t know 7% of sales, 10% of sales or something like that as the organization grows or shrinks.

Larry Hilsheimer

Yes, we’re trying to maintain and get to this 7.5% of sales is the target goal for us. That one is the one that we’ve said -- every one of those other ones we’ve said, that’s a rock hard commitment. That one’s a target that we’re shooting for. It’s an aspiration. We’re confident we can get there, but it’s tough and that’s why there’s more variability in that range and cash on the bottom target, but that’s how we’re looking at it and yes your number is about accurate in terms of how much it contributes.

Unidentified Analyst

Okay, that’s helpful. And then I had a couple of questions for the two gentlemen from the Regions here as well. One of the components that was laid out in the past was, there was divest, fix, protect and grow and obviously the growth market over the last couple of years has not lived up to maybe what we’d anticipate it. If you could help us through your different pieces, whether it’s only in the North America component or Mr. Cronin when you’re thinking about European stuff, where are you seeing within your business mix, pieces growing, pieces being stable or how is that maybe tracking versus thoughts or what is your anticipation as you look forward for the next few years, pieces that will be growing where you can monetize that nicely et cetera?

Michael Cronin

I can answer that.

Unidentified Analyst

What I'm kind of referring to is you thinking of steel, plastic, fiber or whether it’s reconditioning of whether its IBC, et cetera.

Michael Cronin

Yes. There will always be substrates where you can grow more than other substrates but my answer will be sort of globally. I can’t talk so much for the past but looking forward we are targeting the organization to grow above market growth and we have a percentage, we have agreed with the organization that in order to exercise best in practice in commercial excellence, we have to grow more than the market is growing and some of the initiatives I mentioned earlier are specifically designed to deliver that growth.

Unidentified Analyst

Okay, but within your unit, is that feasible. You’ve got pretty big market shares for example North America.

Michael Cronin

Yes, is the answer. It’s feasible. It’s of course area wise is perhaps easier but it’s feasible.

Unidentified Analyst


Michael Cronin

And on top of that the IBC market growing at 6% to 7% compound rate and the steel market is growing at 1% to 2%. So that gives you an indication of where the global market is going and therefore where our focus is?

Mark Wilde

Okay. It’s Mark Wilde from BMO. I just had a couple of questions. Ole, I think you mentioned some more roof top consolidation coming yet and I wondered if you could put some color on that? And then for Larry, I wondered if you could just talk about what you’re doing to kind of mitigate the risk going forward from going to a common operating system platform. By the time that causes disruption for companies, you’ve got a lot of different facilities you’re going to be rolling this into?

Ole Rosgaard

I was only talking about one roof top consolidation Mark. So it’s one we’re currently undertaking. It’s a major one. It’s actually in Brazil which is part of the Americas. As you know, Brazil is in turmoil, politically, economically, and we have a few underperforming clients and businesses there, and like we have done in North America, we are rolling out the same program in Latin America to improve and fix the underperforming businesses we have there. And one of them is a roof top consolidation which will bring two plants together and they will then make a profit.

Larry Hilsheimer

And Mark I will address your second question. And this is one actually that have a very high confidence level in. The reason I have very high confidence level is how far along we are in the process of this rollout of our SPP align [ph] system. And we are now at this time redoing North America and the reason we’re doing North America is because that then facilitates us to do Latin America. Once we get through that we will be with about 80% plus of our revenue on this system. Then we have a lot smaller places to complete the rollout on, but we’ve executed this virtually throughout Europe, in most of our European operations, and we’ve had virtually no problems. Audrey Corman [ph] who is also our European controller has done a fantastic job of working tightly with Doug Lingrel and our IT team at executing this really flawlessly. They were ahead of our schedule and were below our budget and we’ve had no down time to speak of caused by it. But they have executed extremely well. We’ve got good talent and we’re very confident.

We’ve got other elements that tie into that, fulfill [ph] systems, our financial reporting system and things like that. We’re working through all those. You have blips but I would tell you that based on my experiences, both my career at Deloitte and HY that that’s -- we are doing very well and we’re very confident about executing and getting done by early 2018.

Mark Wilde

Pete, this question is actually for you. I’m wondering -- you brought in a lot of a talent and so I’m wondering kind of the themes around what you were focused on in attracting that talent? And then also I think Ole did a good job of kind of sharing what he has done from a compensation standpoint to motivate through the chain. I’m wondering if that’s been replicated, how you are incentivizing the executive leadership and how that’s changing.

Pete Watson

Yes, thanks for the questions. I’ll answer the last question first. So our incentive alignment is similarly said about. Our leadership is tied on a short term basis [indiscernible] and our long term is based on EBITDA. What we’ve also done, which not everybody talked about it, but we are aligning our commercial teams to incentive based on value as opposed to volume. It is not exactly the same in every single market and every single region because of cultural differences and because of transitioning from a former compensation model for our commercial team to where we want to go. But again what we want to do is compensate and reward our commercial team and our plants team toward what our end target was, delivering value to our shareholders and earning profit and cash.

The first question, my view in terms of -- and I’ll answer it this way, and help me if I’m, if I answer it correctly. When I look at developing teams and I felt like this for 25 years. I come from an athletic background and in a business and I look at three attributes in when we hire and recruit talent inside and outside. They have to be highly competitive and people that have winning in their background. And winners come in all shapes and sizes. And I think successful people are successful in everything they do in life. They are successful personally, they are successful professionally. Those type of people find ways to win. And so on a profile people looking at what jobs we put them in and recruiting people, I think that’s a big profile. The other is intelligence, So it’s not only IQ but it’s EQ and I think emotional intelligence is very, very important in how somebody’s a leader.

And then lastly, which is really critical to me, I think people have to be street smart. If you are operating business, you have to be street smart, understand the market and what it takes to win and what it takes to be successful, not only building teams, but giving value to customers. And last, I think you got to fit the culture of an organization. And I think two things I’ll tell you. Our expectation is all of our leaders have to be servant leaders. And servant leaders basically understand who your customer is internal and external and serve their needs. And last I think you have to have honesty, integrity and be the right type of person that we expect to be around. So, those are the three characteristics I look for in people. I have learned that over a period of time and I think if you look at the talent we've brought in and the people we’ve put in new positions, I think those three characteristics and attributes are pretty consistent and even throughout our organization you'll find that.

Mark Wilde

I'm just wondering as a follow-up, as you think about where you were maybe a year or so ago, there’s been macro headwinds, done a really good job on the self-help to drive margin and I'm just wondering, as you try to reevaluate the forecast for your run rate at '17, is this still mostly a self-help story or -- and is that becoming a more of challenge or you're really going to need the top line to really start growing to take next steps from here?

Pete Watson

And a great question. So what we try to talk about, and you’ve heard a lot of these people and our leaders tell, but we need to control what we can control. If we rely on a windfall from the economy, I think we're wrestling in the wind to be honest with you. So as Larry talked about and these gentlemen talked about it, the industrial economy growth is not huge. It's not very encouraging with the exception of the IBC market, with the exception of some of our downstream paper packaging growth targets. So our growth element is in line, basically industrial production with some exceptions and you've heard the exceptions. But what we focus is on all the levers we can control both in the market and in our operations and I think philosophically if you worry too much about things you can't control, it distracts you. And I'm a big believer, and all of us are as you control the levers you can control and there's plenty of levers, more than you can handle to be honest with you. So we have to execute a high percentage of those controls that we have full authority on and we're going to do that. So if we get unprecedented improvement in the industrial economy that’s going to be a windfall but we're not basing our projections on that. I think that’s fool’s goal personally.

Matt Eichmann

Question that just came in Pete, from Ghansham Panjabi, [indiscernible] and I think you’re probably the best person to answer this one. He asks your customers and end markets are consolidating in some cases. How did that impact the business? Your internal improvement story is working but do those sorts of consolidations end up with you having to share more savings with customers?

Pete Watson

So, whether it's paper packaging or rigid packaging, the chemical sector, there's a lot of consolidation going on with our customers and with our supply base. Now that’s the reality we face. I think when you look at consolidation, we need to be positioned well with the customers and segments that we can perform very well in. And I think when you do that, you have a better chance to align and win in a consolidation. We talked about a consistent brand of customer service excellence across all the many companies we have in all many regions and if you have weak spots in your brand and you perform really well in three regions, and not one and the other, that disrupts your ability to win in these consolidations. So I believe you really focus on being excellent in the fundamentals with customer service and as consolidation occurs you put yourself in a position to show your customers value you bring and expect that you can win more than you lose.

Matt Eichmann

Any further questions at this time. Okay if not, Pete I'll turn it back over to you, please.

Pete Watson

So I've been the CEO for seven months, and what I've spent a considerable amount of time is along with our Grief leaders, is engaging our people all around the world, visiting our operations and meeting many of our customers, whose sole purpose was highly align and engage our teams with our vision and our strategic priorities to deliver value.

We talked about the Grief investment thesis. You've seen the actions we're taking and the transformation process that we're engaged in. I feel very, very good about where we're heading as a company. I'm excited about our future and I believe the actions we're taking will make Grief a very attractive investment opportunity for people. I'll also tell you that many of us in the leadership team have personally invested our money in Grief because we believe in the team and we believe in our plan.

So, going forward, we've still got significant amount of opportunity we have to do and levers we have to pull to reach our 2017 commitments. I will tell you that myself and Larry Hilsheimer and the Board of Directors and a small select group are charting a path on what is the next growth platform for Grief, that we call activity growth. So we will be looking critically at our portfolio of businesses, not only our business types but where we are located around the world and we'll look at market opportunities that can give us growth for the future path for Grief.

I will tell you very adamantly that our first priority is going to be to execute on this transformation plan. We will not be distracted from our course. All of our focus in our business is how do we commit and achieve our transformation targets. But we want to thank everybody for their, I know it's really a privilege to have all of you spend the full morning with us. We thank you for your interest in Greif and hope you have safe travels home and have a great day. Thank you.

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