Earnings Call Transcript - GEF Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Greif Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Thank you. I would now like to hand the conference over to your speaker today, Matt Eichmann. Please go ahead.

Matt Eichmann, Speaker

Thank you, and good morning everyone. Welcome to Greif’s fourth quarter and fiscal 2020 earnings conference call. I'm joined today by Pete Watson, Greif's President and Chief Executive Officer; and Larry Hilsheimer, Greif's Chief Financial Officer. Pete and Larry will take questions at the end of today's call. In accordance with Regulation Fair Disclosure, we encourage you to ask questions regarding issues you consider material because we are prohibited from discussing significant non-public information with you on an individual basis. Please limit yourself to one question and one follow-up before returning to the queue. Please turn to Slide 2. As a reminder, during today's call, we will make forward-looking statements involving plans, expectations and beliefs related to future events. Actual results could differ materially from those discussed. Additionally, we'll be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metrics can be found in the appendix of today's presentation. And now, I turn the presentation over to Pete on Slide 3.

Peter Watson, CEO

Hey, thank you Matt and good morning, everyone. We really appreciate you joining us on today's call. First, I want to start by recognizing and thanking the global Greif team for their unwavering commitment this past year, first to each other and secondly to our customers. Fiscal 2020 was unlike any year we've ever experienced, and throughout all our colleagues' dedication to our business and our customers was extraordinary. And I'm incredibly proud of their effort during the COVID-19 pandemic. We made notable progress across all of our strategic priorities in fiscal 2020 starting with customer service. Both our Customer Satisfaction Index scores and our most recent Net Promoter Score survey improved versus the prior year, and we achieved all-time best scores. We remain laser focused on controlling those areas within our control, and safety, customer service excellence, and disciplined operational execution. And this focus builds additional momentum for our team as we head into fiscal 2021. Caraustar's integration remains well on track. Through fiscal year-end 2020, we have captured roughly $63 million in identified synergies since announcing the acquisition, and we still expect to achieve synergies of at least $70 million over 36 months from deal close. The business continues to demonstrate strong strategic fit and robust cash generation, in line with the acquisition strategic rationale. We're also embedding Greif's strong sustainability program deeper into our business during the past year. In the spring, we published a company-wide purpose statement that describes the very essential nature of our business. We're also very pleased to be recognized again for sustainability leadership, and we were awarded our third consecutive gold rating from EcoVadis, placing Greif among the top 3% of all suppliers evaluated by this firm. And finally, we made great progress toward financial priorities. We delivered exceptional adjusted free cash flow of roughly $346 million, we reduced net debt by approximately $294 million in total debt, and we returned more than $104 million in dividends to our shareholders. I would like to now review our quarterly results by business segment and if you could please turn to Slide 4. Our Rigid Industrial Packaging & Services business which is led by Ole Rosgaard delivered solid fourth quarter results capping off a year in which the business demonstrated resilience in a very challenging operating environment. Global Steel Drum volumes declined by roughly 1% versus the prior year quarter on one less production day. On a per day basis, Global Steel Drum volumes rose by 1% and Global IBC production rose by roughly 3% in the quarter and by 6% on a per day basis versus the prior year. We continue to see pockets of strengths and weaknesses in various parts of the world that seemed to correlate to COVID-19 trends. Demand in our fourth quarter was strongest in China, where steel drum volume rose by roughly 21%, thanks to improving economic activity. While demand in Central and Western Europe steel drum volumes rose by 5% partly due to the new business wins. The Americas region experienced the weakest conditions with U.S. steel drum volumes down almost 12% versus the prior year. This was mainly a result of weak demand for bulk and specialty chemicals and lubricants that are specifically referencing that region. Our RIPS fourth quarter sales fell roughly $39 million versus the prior year quarter on a currency neutral basis due to lower volumes and lower average sales prices from contractual pricing adjustment mechanisms related to raw material price declines. RIPS fourth quarter adjusted EBITDA fell by roughly $4 million versus the prior year quarter, primarily due to higher SG&A expense. And please keep in mind that in Q4 2019 results included a one-time $7 million Brazilian tax recovery that was recorded as income in SG&A, which distorts the year-over-year comparison. Looking ahead to fiscal 2021, RIPS is really well positioned to benefit as the industrial economy improves and as COVID recovery takes place and this planned plastic capital expansions ramp up. We're seeing rising steel prices in the U.S. and EMEA due to supply and demand imbalance. This has been caused by faster auto production recovery than anticipated and supply stock replenishment, which is currently outpacing industry steel supply levels as blast furnaces restart. While we expect no issues regarding sourcing of steel, we are watching this dynamic closely and we'll plan accordingly, and I ask that you please turn to Slide 5. On a global basis, RIPS steel drum demand trended positively through the fourth quarter. And broadly speaking, we saw positive demand for bulk and commodity chemicals and improving demand for lubricants, specialty chemicals, and industrial paints as manufacturing levels improved and auto production recovered. Food demand was lower year-over-year due to a weaker harvest season in southern Europe related to unfavorable harvesting conditions and migrant worker availability in Europe. I ask that you please turn to Slide 6. The Flexible Products & Services segment’s fourth quarter was sales roughly flat to the prior year quarter and a currency neutral basis due to strategic pricing decisions and partially offset by lower volumes. Our fourth quarter adjusted EBITDA rose by $3 million versus the prior year due to higher gross profit. We did have significant devaluation in the Turkish Lira, which provided roughly a $4.7 million tailwind, the flexibles results versus the prior year quarter. I’d ask that you please turn to Slide 7. Paper Packaging's fourth quarter sales fell by roughly $33 million versus the prior year quarter due to lower published containerboard and boxboard prices and the divestiture of our consumer packaging group, which was partially offset by higher mill and corrugated sheet volumes. Paper Packaging's fourth quarter adjusted EBITDA fell by roughly $31 million versus the prior year, largely a result of significant $33 million price cost squeeze versus the prior year. We are currently executing on price increases for containerboard, uncoated, and coated recycled boxboard grades. Please turn to Slide 8. So, volumes in CorrChoice which is our corrugated sheet feeder system were up nearly 30% per day versus the prior year quarter from improved durables demand, auto supply chain recovery, and ecommerce growth. Looking ahead the business sees continued strong demand and all of our special product portfolio has record backlogs. We assume OCC will average $69 a ton in fiscal quarter one. In our tubing core business, fourth quarter volumes are roughly flat to the prior year quarter on a per day basis, but we did show sequential improvement over the last three months. We continue to see strong demand in film and construction markets and weaknesses in textiles. I'd like to now transition the presentation over to our Chief Financial Officer, Larry Hilsheimer on Slide 9.

Larry Hilsheimer, CFO

Thank you, Pete. Good morning, everyone. I'll start by echoing Pete's comments and offer my thanks to our global Greif colleagues for their unwavering commitment this past year. The team delivered strong results and exceptional free cash flow despite operating in a choppy industrial economy with considerable COVID-19 uncertainty. Fourth quarter net sales, excluding the impact of foreign exchange fell by roughly 6% versus the prior year due to demand softness in RIPS, the divestiture of the Consumer Packaging Group and lower year-over-year published containerboard and boxboard pricing partially offset by improved volumes in our paper segment. Fourth quarter adjusted EBITDA fell roughly 17% versus the prior year quarter primarily due to lower sales and a significant price cost squeeze in our paper business. SG&A expense was roughly $9 million higher but the prior year period included the one-time tax recovery of $7 million that Pete mentioned. Quarter four SG&A expense exceeded the prior year's figure after backing out the tax recovery, partially due to a discretionary short-term incentive awarded by the Board late this year that otherwise would have been ratably accrued for throughout the year. The controllables in this year's quarter, including travel, professional fees, salaries and benefits were all lower versus the prior year. Finally, FX was roughly a $3 million tailwind on a consolidated quarterly result and there were no material opportunistic sourcing benefits captured in the fourth quarter. Our fourth quarter adjusted Class A earnings per share fell to $0.78 per share from $1.24 per share in the prior year quarter. For fiscal year 2020, we delivered adjusted Class A earnings per share of $3.22 slightly above the guidance range provided at quarter three. Our fiscal 2020 non-GAAP tax rate was 27%. These emphasize our focus on generating free cash flow and paying down debt in previous calls and that's exactly what we did this quarter. Fourth quarter adjusted free cash flow was outstanding and rose by roughly $24 million versus the prior year. Fiscal 2020 adjusted free cash flow rose by roughly $78 million versus the prior fiscal year and benefited from strong working capital performance in the fourth quarter throughout the year and lower capital expenditures in line with the range we communicated at quarter three. Please turn to Slide 10. Given the continued COVID general uncertainty, we are providing quarterly guidance. We will revert back to fiscal year guidance when it's practical to do so. In fiscal quarter one '21, we expect to generate between $0.48 and $0.58 in adjusted Class A earnings per share. On a sequential basis, we anticipate the paper business sales will be lower and manufacturing expense will be higher due to plan mill maintenance downtime. We anticipate sales and profits in our Rigid's business will be lower due to seasonality consistent with prior years. Compared to fiscal quarter one '20, our paper business will experience a significant price cost squeeze. Our RIPS business faced COVID-related uncertainty this year that was not present in Q1 of 2019. Finally, we expect first quarter working capital and free cash flow to be cash uses in line with our normal business seasonality. This year's losses will likely be greater than that of the prior year quarter primarily due to announced paper price increases and their impact on our accounts receivable balances, only partially offset by increased accounts payable and well-managed but higher cost inventories. We think it will be helpful to share several other points to be mindful of when modeling fiscal '21. First, we expect higher year-over-year freight cost and insurance premiums which will flow through cost of goods sold and SG&A. Second, we anticipate higher year-over-year SG&A expenses due to higher planned incentive payouts in fiscal '21 and an increase in professional fees and travel that was delayed or postponed during COVID this year. Third, we do not budget for or anticipate any opportunistic sourcing benefit in fiscal '21. But we, of course, aim to take advantage of market dislocations as they occur. We achieved roughly $18 million in opportunistic sourcing benefits in fiscal '20. Fourth, we expect roughly $8 million drag in our paper business as a result of the profit elimination due to higher anticipated margins year-over-year. Fifth, we expect realization of at least $7 million more of synergies related to our Caraustar acquisition. And finally, we expect lower year-over-year interest expense as a result of lower overall debt levels and the favorable rates we locked on our recently announced term loan A3. We plan to draw on the term loan in July of '21 to finance our existing €200 million senior notes which mature that month. Please turn to Slide 11. As discussed in our third quarter call, we are providing an update to our fiscal '22 commitments today. Underlying these commitments is our assumption that the global economy and fiscal '22 will look more or less similar to that of fiscal '18. That is, there is no lingering material impact from COVID-19 and that we return to positive industrial production growth in major markets around the world. Our adjusted EBITDA range is $785 million to $865 million, or $35 million lower at the midpoint than what we shared in June of 2019. Across our global business, we are assuming higher insurance and freight rates which drag on profitability. While our Rigid's commitment was revised slightly higher primarily due to improved product mix and additional efficiencies, our paper business commitment was reduced for several reasons. First, we assume higher manufacturing expenses than previously contemplated due to upgrade repair, maintenance and safety standards and to improve throughput resilience in our network. We previously assumed the benefit of those enhancements in fiscal '22, but the impact of COVID-19 has delayed some of that work. Second, we optimized our URB mill network with the closure of the Mobile mill, while volumes are now lower than what was assumed in 2019, we anticipate that our profits will be higher longer term as we realize price increases and remove less profitable tons from our system. Third, to a lesser extent, our original $220 million run rate for Caraustar included a small EBITDA contribution from CPG and that was divested this year. Bigger picture, despite the lower adjusted EBITDA, our adjusted free cash flow range remains intact at $410 million to $450 million, due primarily to improvements in cash taxes, lower capital expenditures due to our footprint optimization, and lower cash interest payments from lower debt balances and lower interest rates. Please turn to Slide 12. Our capital allocation priorities are unchanged and include reinvesting in our business, paying down debt and returning cash to our shareholders. At year end, our balance sheet is in great shape with roughly $538 million of available borrowing capacity on our revolver. Other than the €200 million senior notes due in July, we have no other sizable maturities due until fiscal '24. We anticipate that our first quarter capital investments to be in the range of $30 million to $40 million. As we continue to generate cash, pay down debt and reduce leverage towards our target range of 2x to 2.5x over time, we will shift the enterprise value to the benefit of our equity holders. With that, I'll turn the call back to Pete for his closing comments before our Q&A.

Peter Watson, CEO

Hey, thank you, Larry. Fiscal 2020 presented new challenges for our company and I'm incredibly proud of how our Greif team adopted and responded to these difficult times. Through a sharp focus on operational discipline and execution levers of the great business system, we're generating free cash flow and paying down debt in line with our financial priorities. And looking ahead, the demand environment is improving and we are positioned well as businesses improve in the world emerges from the COVID-19 pandemic. We thank you for your interest in Greif and Jacqueline if you could please open the lines for questions.

Operator, Operator

Certainly. Your first question comes from George Staphos from Bank of America Securities.

George Staphos, Analyst

Thanks for the details. Congratulations on closing the year. I had two questions. First, Larry, can you talk to that year-end incentive accrual or Pete if you could, I just wanted to get a little bit more detail on that, and what the effect was. If you had mentioned that I'd missed it. And then on paper, you had mentioned there is an $8 million drag that you're expecting, I believe, in the upcoming quarter. I was curious, if you could give it a little bit more detail on that, if I heard correctly. And relatedly, assuming normal progressions in paper, when should we expect to see most of the benefit from the price actions are in the market right now? I would assume it's more like a fiscal 2Q event, but any thoughts there would be great. Thank you.

Larry Hilsheimer, CFO

Yes. George, great to hear from you and thanks for your questions. I'll let Pete deal with the timing on the price adjustments after I address your first two. On the year-end incentive adjustment, the Board determined, particularly given really great cash performance and more importantly, just managing the health and safety of our workers worldwide, they moved us to our threshold level of incentive on our operating profit level part, and it was basically net-net, an $8 million item that came in in the fourth quarter that otherwise would have been included ratably throughout the year. So, it has an outsized impact on the fourth quarter, obviously, if you just add out, it shows that we really performed way better in the fourth quarter than what we had talked about in the third quarter call, obviously, some of that related to demand in our paper business, but also increased performance around the world as we mentioned. Second item, the $8 million drag is actually a year-over-year thing. And this is the item that I mentioned in our last call about intercompany profit. So, we sell from our mill systems into our converting facilities, there is a profit that happens that flows in our mill systems, but we can't recognize that for accounting purposes till we sell to the external customer. That will not build back up, because we're going to manage our inventory, our working capital be consistent or down year-over-year. So, it's basically sort of one-time permanent result because of our dramatically improved management of working capital in that business. Pete, you want to cover the timing of price increase?

Peter Watson, CEO

Yes, George. So, all three price increases containerboard, URB, and CRB will be implemented through the first quarter, but we'll have no material benefit in Q1. We'll see starting in February, which is the beginning of our Q2, full realization of all three of those price increases.

Operator, Operator

Your next question comes from Adam Josephson from KeyBanc Capital Markets.

Adam Josephson, Analyst

Larry, regarding the fiscal '22 guidance, just a couple of questions there. So, you initially gave the guidance in mid-19, you're having to reduce it by 4% now, and you're saying that it embeds an assumption that the global economy will have fully recovered from COVID? I guess why make that assumption when you just had to reduce the guidance you gave initially, particularly given that you're not inclined to give fiscal '21 guidance because there's so much uncertainty, so presumably there'd be just as much if not more uncertainty about fiscal '22? So, I guess why continue to provide even a fiscal '22 target for that matter?

Peter Watson, CEO

Yes, that's a fair question. Adam. I mean, our view of it is that our investors would like to have some idea of what this company looks like once you're beyond this whole COVID situation. Our general view, as you and everybody else does, we monitor and watch everything we can get around COVID and the path and the predicted success of vaccinations. We watch and listen to all the economic analysis, we use some private groups that we do work with around their forecast of the economy and those kind of things. We put all those together. The general view of most is that the economy is going to improve and going to come back robustly at some point in either late '21 or the latest early '22. I mean, you’ve got Goldman and Morgan Stanley on the close end of the optimism, and you got some others on the far end. And so, we thought it was a reasonable assumption to say that we think the economy's back and needed to have some assumption to be able to work to give our investors some idea of what will this company be doing at that point if the economy is to return to that level?

Adam Josephson, Analyst

I appreciate that, and just one follow up. So, if you're assuming the economy gets back to pre-COVID, then why cut your CapEx guidance for fiscal '22? Because I would think you wouldn't need to do that if the economy is going to be functioning perfectly normally. I asked just you cut your CapEx guidance last year, you're cutting it for fiscal '22. So, can you just give us some sense of how much lower you're expecting your cumulative CapEx to be over that period and why?

Larry Hilsheimer, CFO

Yes, we really haven't cut it Adam. It really goes to all the facilities we've closed and when we disposed of the CPG business, we indicated that there was going to be a reduction on an ongoing basis there. So, we were previously a little bit higher, but it had to do with our footprint. When we closed more facilities, the CapEx needed on a recurring basis goes down as well. We've long talked about the fact that when we get done with SBP, we're going to have a drop off in some of our IT CapEx. So, it's really not reduced, and it's essentially the same if you adjust for those, so it's in the midpoint right about $160 million range.

Operator, Operator

Your next question comes from Mark Wilde from Bank of Montreal.

Mark Wilde, Analyst

I wanted to just dig into a couple of the segments if I could. First over in RIPS, the volume was down about 8% in North America. I'm just curious about what's going on here. It doesn't seem like the comps for that stuff, in most other packagers are actually reporting North America is one of their better global markets, for you guys it's the weakest global market. So, can you give us some additional color behind that? I think you talked about kind of lubricants and petroleum products being weak, but I'm just a bit puzzled about why this would be the weakest regional market.

Peter Watson, CEO

Yes. So in North America, Mark, obviously, our paper business has been very dynamic. But in our Rigid business, the end-use segments that we serve, and it particularly relates to steel drums, is down. If you look around the globe, we saw similar drops during COVID. But the recovery points have moved from east to Europe to starting to see it in North America. But I think it has to do with the substrates and the products that we serve. In the U.S. also has been hurt in the last year and a half through some of the trade tariffs, our largest concentration of steel drum production is in the Gulf Coast. That is predominantly an export-heavy market for us where our drums are used for export shipments. So it's a combination of end use impact to COVID and also the tariffs impact. I would tell you that our plastic drum volume in North America has recovered well, we're mid-single digits in plastic drums and low single digits in IBC. So I think it's related to the substrate in those end markets, but they are recovering through November, and we expect to see better improvement in Q1.

Larry Hilsheimer, CFO

Yes, Mark. In some of the trade up and trade flows, the tariffs that Pete mentioned impacted us at the beginning of the Trump administration and in the following year. We have seen increases in other areas of the world, such as shipments from our Star facility in Saudi Arabia. So it just shifted.

Mark Wilde, Analyst

Okay. And then I wondered if we could just toggle over to the paper business, you were down year-over-year, about $31 million, you're pointing to $33 million of negative price costs. But at the same time, you're also pointing to $40 million for the full year in Caraustar synergies and then 8% volume growth. So just putting all of those things together, I would have expected a smaller year-over-year decline in the paper business.

Larry Hilsheimer, CFO

Yes, it's a good observation, Mark. And let me just walk you through it. Yes, we got $12.5 million impact from pricing about $21.8 on OCC and a few chemical costs that increased CorrChoice volumes pick us up about $5.8 million. The synergies year-over-year pickup in PPS itself was about $2.7 million and another $1.8 million or in corporate. And if you think about it, we started recognizing synergies in fiscal '19 more in the third and fourth quarters with the most in fourth quarter. We then started this $40 million annual increase, there was more in the first quarter of $20 million, second quarter went down about $30. So it's just a phenomena if you're looking at the fourth quarter on that year-over-year where we had picked up some in '19 and it's just that year-over-year comparison. The other remaining piece is then stuff that has to do with the incentive element that I mentioned that flows into PPS, corporate allocations went up to PPS this year because their revenue is a higher proportion. And we've talked about that in prior quarters. And then, we have just some manufacturing cost increases that some of which are inefficiencies driven out of just operating in a COVID environment that don't meet the necessary criteria to exclude it cleanly in SEC because you don't know where it's going to go permanently. So hopefully that's helpful. I mean, the primary thing is the cost price squeeze, which is about $0.41 a share in and of itself.

Operator, Operator

Your next question comes from Ghansham Panjabi from Baird.

Ghansham Panjabi, Analyst

Yes. So I guess first off, it looks like it's about $180 million EBITDA differential between what you realized in fiscal year '20 and what you're sort of guiding for fiscal year '22 at the mid-point. I was just curious as to how we should think about each of the segments from a contribution standpoint towards that $180 million or so improvement. And there's just so much going on with your numbers with COVID in fiscal year '20 and price cost in paper. So any incremental color would be helpful.

Larry Hilsheimer, CFO

Sure, Ghansham. I hope this information is helpful. We tried to review our previous commitments, starting with our 2018 results across the businesses. We included the $220 million run rate from Caraustar and $60 million in synergies, along with contributions from our Tholu acquisition and other organic growth linked to capital expenditures and expansions. This assessment provided us with the key components of each business. Let me guide you through the changes from our previous midpoint estimates. For PPS, we initially had a target midpoint of about $510 million, but we adjusted down by $10 million due to a long-term decision to close our Mobile mill facility, which was inefficient and not profitable. Although this closure will enhance profitability over time, it reduces our earnings by about $10 million in the short term. We also foresee increased manufacturing costs in some of our acquired and legacy facilities due to enhanced safety protocols and operational inefficiencies, totaling around $20 million. Furthermore, we are facing challenges with insurance and freight costs, contributing about $15 million to our totals. In our original $220 million, we also noted a $5 million profitability in the CPG business, which has declined. Turning it around would necessitate significant capital expenditures, so we opted to sell the business and avoid those costs, agreeing to a long-term supply contract at prices slightly lower than our internal contracts, amounting to approximately $8 million. Adding these adjustments together, we arrive at a new midpoint for PPS of $456 million. For RIPS, we anticipate improvements in operating profits that should boost our profits by $11 million and another net $5 million in SG&A benefits from our plans since the last commitment. Additionally, we are seeing reductions in expenses from cash flow hedging and lower pension costs, totaling about $9 million. This means RIPS will rise from $302 million to $307 million, while PPS represents the significant change.

Ghansham Panjabi, Analyst

Got it. And then just, finally, I guess, I mean, obviously, you guys have recovered from the first lockdown. And here we are looking at the second one in Europe, especially, possibly parts of the U.S., etc. Just what are you embedding for volumes specific to 4Q? Sorry, your fiscal 1Q by segment? And are customers kind of thinking about managing inventories? I mean, you talked about working capital maximization, I assume your customers are doing the exact same thing as they focus on finishing out the year from a cash flow standpoint. So what do you see in real-time? And then what do you embedding for your fiscal year 1Q? Thank you.

Peter Watson, CEO

Yes, Ghansham. This is Pete. You're correct. All of our customers across our entire portfolio are managing their inventories very tightly due to the current conditions, and many are also managing their working capital similarly to us, which leads to shorter orders, more frequent deliveries, and lower order quantities. For our Q1 forecasts, we expect 1% to 2% growth in our RIPS business globally. We're anticipating high single-digit growth for IBCs in Q1, while the large plastic drum segment, mainly in the U.S., is projected to have mid-single-digit growth. For our FIBCs and FPS, we're guiding for flat growth. In the paper sector, the market remains robust, with our mills showing very high backlogs and operating capacities. We're forecasting 20% to 30% growth for our CorrChoice sheet feeders, similar to what we experienced in Q4. We have seen improvement in our tubing core and are expecting 1% to 2% volume growth. While improvement is evident, the outlook beyond Q1 remains uncertain.

Operator, Operator

Your next question comes from Steven Chercover from DA Davidson.

Steven Chercover, Analyst

So couple questions on paper packaging, and one is just want to emphatic clarification. So the decline in the profit EBITDA in paper that's due to the price declines earlier in 2020. But it's got nothing to do with divestitures with consumer packaging, is that correct?

Larry Hilsheimer, CFO

That's correct.

Steven Chercover, Analyst

Okay, great. And with respect to your guidance, I presume it incorporates the containerboard CRB and URB price hikes that have occurred in pulp and paper entered weak, but not the pending CRB hike for January?

Larry Hilsheimer, CFO

Let Pete talk about the timing of when those things flow through. Because I think that's probably the biggest thing, obviously, as we saw people's write ups last night about the disconnect between our earnings guidance, and I think what people were thinking on timing and these things, Pete will walk you through this.

Peter Watson, CEO

Hey, Steve, so we're obviously only guiding the first quarter. And while we are executing on the price increases, there's no material impact to our benefit until Q2. So at the end of January and starting in February, we'll have full impact to all three price increases through the integrated system.

Steven Chercover, Analyst

Okay, but just to, I guess, drill down a little bit. Let's not talk about guidance, but just as you contemplate things, if it's not printed in pulp and paper weak, then it hasn't happened. So it would not be incorporated in any forward thinking.

Peter Watson, CEO

That's correct, Steve.

Larry Hilsheimer, CFO

Yes. And Steve, this is Pete. So, I'd also tell you from the street, OCC is readily available, there's no tightness. That's what really surprised us.

Operator, Operator

Your next question comes from Gabe Hajde from Wells Fargo.

Gabe Hajde, Analyst

I appreciate the reticence to give a full year outlook. But if you can help us with maybe a couple of the moving pieces on the free cash flow bridge. Larry, I think you gave us some pointers on EBITDA but obviously working capital, it was roughly around number $40 million benefit this year, I'm assuming it's going to be a drag, it's kind of what you indicated. I think fiscal '18 when you had similar magnitude price increases flowing through, you would expect the working capital to be, I want to say a $30 million to $40 million headwind. So just in that of itself could be a $70 million swing year-to-year. Anything else you would point us to? Or if you can comment there, and then anything on cash taxes would be helpful.

Larry Hilsheimer, CFO

Sure. I believe your analysis is accurate. The challenges we face in providing guidance for the year directly relate to our ability to predict sales trends, including potential broad shutdowns. Sales performance is a significant factor in working capital. Additionally, the cost of raw materials is a concern. As Pete mentioned, steel costs are rising due to manufacturers shutting down blast furnaces, which take a considerable time to restart, coupled with faster-than-expected growth in auto production leading to a steel shortage. This situation increases prices and affects other costs, such as OCC, all of which impact working capital negatively. I want to highlight the impressive improvements our team achieved this year. We measure our performance using a trailing 12-month percentage of sales basis, which is part of our incentive structure. Adjusting a 12-month average is challenging, yet we made significant strides. At the start of the year, we operated at 14%, which then decreased to 9.9%. This was an exceptionally low figure at the beginning of the year. Our goal and incentives for the next year are to further reduce this rate. While we experienced substantial improvement in fiscal '20, it wasn't consistent throughout the year. We anticipate maintaining that performance moving forward, although we may not see significant one-year gains in the future.

Gabe Hajde, Analyst

Okay. Anything, I guess you need attention?

Larry Hilsheimer, CFO

Nothing really now.

Gabe Hajde, Analyst

Okay. And then, Pete, I think in your prepared remarks, you'd mentioned some investments in risks, some of which I think were delayed COVID-related. Can you expand on, I suspect some of those are, most of those are around the IBC business, but just magnitude of spend and timing of expected returns?

Peter Watson, CEO

Yes. The reference was about investments in plastics for intermediate bulk containers and blow mowers for large plastic drums; we are entering the second year of these investment stages, which we disclosed a year ago. We anticipate a ramp-up, particularly in large plastic drums and IBCs, that aligns with our growth projections for the first quarter. We are looking at approximately $15 million to $20 million in capital investments over the past year. We have executed well in that area and expect even better execution in the upcoming second year of these capital projects.

Gabe Hajde, Analyst

All right, thank you. And one last one in the paper business. Larry, again, in the prepared remarks, you mentioned a little bit higher mill maintenance in this first fiscal quarter. I'm curious if you can lay out for us, maybe relative to fiscal 2020. Obviously, there's an abnormal year, if you're expecting higher on an annual basis, year-over-year maintenance, and then any timing related items that we should be talking.

Larry Hilsheimer, CFO

We made a decision in the fourth quarter to postpone much of our planned capital maintenance due to a significant increase in demand. Consequently, we moved some of that maintenance into this year. As a result, we anticipate a year-over-year increase in costs, although I don't have the exact figure right now since we are still finalizing the details. We expect the increase to be in the range of $9 million to $10 million.

Operator, Operator

Your next question comes from Justin Bergner from G.Research.

Justin Bergner, Analyst

Just a couple of cleanup questions. The intercompany profit elimination that one-time headwind, I think you mentioned was $8 million, is that all going to be experienced in the first quarter? Is that going to be spread throughout the fiscal year?

Larry Hilsheimer, CFO

It's just a yearly situation. If you refer back to our third quarter call, you'll note that we addressed it then and recognized it as an issue. Our inventory levels decreased at the conclusion of the third quarter, and they declined even more in the fourth quarter. We anticipate that our teams will effectively manage the inventories in that sector, so if they do not increase again, we won’t have an opportunity for recovery if we maintain those levels.

Justin Bergner, Analyst

Okay, got it. All right. So think about that as being spread over fiscal year '21. And then, the transportation insurance headwinds. You mentioned it was a $15 million reduction to how you're looking at the fiscal year '22 EBITDA. Should I think of that $15 million number is also being representative of what you might experience in fiscal year '21?

Larry Hilsheimer, CFO

It's more like $12 from '20 to '21.

Justin Bergner, Analyst

Okay. And the fiscal year '22 EBITDA guide just to clarify, is that sort of run rate at the end of fiscal year '22, or is that what you expect to deliver for the entirety of fiscal year '22?

Larry Hilsheimer, CFO

It's what we expect to deliver for '22. Obviously, subject to our assumption, our broad assumption on the economy.

Justin Bergner, Analyst

Okay. And then, lastly, your presentation mentioned SG&A accruals headwinds. Is that something that you're trying to suggest might be a little bit larger than folks on our side of the table are modeling or is that just normal accrual headwinds, because the businesses resuming strength and there's more payout across the organization.

Larry Hilsheimer, CFO

Yes. Look at it this way, when you have a dislocating event like this pandemic, and the impact on the broad economy, it dramatically impacted our business, you have an automatic governor, so to speak on our profitability tied to incentives, as performance goes down, incentives go down. And so if we look, even with the discretion that our Board decided to do when you look at what normal incentives would be next year, based on just the target comp of our entire management team way down deep into the organization, we're not talking just me and Pete and a few people up here, we're talking about all the way through our management teams down to plant managers and everything. The impact on cost, year-over-year, if we would hit 1.0 target, the target next year would be a $27 million increase in expense to hit that. But we deal with this all the time. It goes up and down. And we factor that into the guidance and things we give.

Operator, Operator

Your next question comes from George Staphos from Bank of America.

George Staphos, Analyst

Pete, Larry, could you give us a bit more, I don't know parameters guardrails, however, you want to call it in terms of what we should take away on your comments related to steel, are you concerned that pricing might pick up a little bit more quickly than you're able to recover through your contracts and normal mechanisms? It doesn't suggest that you may try to be proactive if you can in building inventory, even you don't get a benefit, like you did last year from proactive working capital management or procurement. Now, what do you want to take away on that comment on steel? Should we be building that in as a headwind? That's kind of broad question number one. Question number two. As you think about Caraustar, and the drop in your fiscal '22 guidance, and look, we always look at your long-term guidance more aspirational than fine pointers for any business, there's so many different moving parts. Nonetheless, should we take away from your commentary that Caraustar, maybe in some elements of manufacturing wasn't quite at the levels that you had thought, and might not be able to flex profitability as much as you'd want it. As the business turned up both from a demand and pricing standpoint, or would that be a wrong assumption? So everything you thought it would be and then, if so, please explain why. Thanks, guys. Good luck in the quarter and happy holidays.

Peter Watson, CEO

Yes, George. In EMEA and the U.S., we are currently experiencing a short-term supply and demand imbalance in steel, as we have previously mentioned. With the auto industry recovering quickly and the steel industry restarting blast furnaces after a challenging three-month period, this situation will not affect our inventories. In fact, our inventories are relatively low right now and are expected to remain so through Q1. We anticipate that the steel supply and demand will become balanced and more normalized after January. Therefore, this is a short-term dislocation, and we do not foresee any major significant impact at this time. However, we are monitoring the situation closely. Our sourcing team is doing an excellent job, and the only potential downside could occur if we need steel and have to purchase it at spot prices in the short term, which could lead to higher costs. This is still uncertain, but it is a potential risk. Regarding Caraustar, I will make one comment before handing it over to Larry. When we acquired Caraustar, we were aware that investments would be necessary. We recognized that there were operational improvement opportunities in their mills, and that remains true. We have a capable team in place and are diligently working on enhancements within the mill manufacturing capabilities. We are aware of these opportunities and are actively addressing them, so there are no surprises.

Larry Hilsheimer, CFO

Yes, George. I would like to add to what Pete mentioned. Referring back to our deal assumptions, we've discussed a $220 million run rate and $45 million in synergies. This brings us to a total of $265 million. Currently, if we factor in having CPG included, like five companies, we've gained $80 million from selling off the CVG plants, which allows us to avoid capital expenditures going forward. We're quite optimistic about achieving that amount. Starting with $215 million and adding $45 million, I reach $260 million based on our deal assumptions. Right now, if I consider $215 million and include $60 million in synergies, I'm looking at $275 million. Even if I account for manufacturing costs that we don’t anticipate resolving by then, I'm still aligned with the deal metrics that motivated us to proceed. We're very pleased about the decision to close Mobile, and we expect it to become more profitable in the system over time, though not by 2022. Additionally, we will address the manufacturing cost issue, but we won't compromise on the safety of our people, which is influencing some of this situation.

Operator, Operator

Today's last question comes from Adam Josephson from KeyBanc.

Adam Josephson, Analyst

Pete, regarding the situation in North America, RIPS performance was weak this quarter, while paper showed exceptional strength. Could you provide some insight into how unusual this situation is for your company? It's clear that these conditions are linked to the pandemic. What do you anticipate a return to normalcy will look like for both RIPS and the containerboard and URB businesses in North America?

Peter Watson, CEO

Yes. I'll comment on RIPS again, confirm some of the comments I made to Mark. The substrates we have in North America are heavily weighted to steel. We also have plastics, growing plastics in our DC business. But again, the end markets that we serve in RIPS in North America have recovered at a slower pace sequentially than Asia and EMEA. And that is normal for the course of what we've seen from other companies and inside our company. We are starting to see improvement in North America sequentially, we saw that through Q4. And we in our assumptions in the Q1 forecast, we continue to see that. Again, the big challenge in our steel drum business in North America were the tariffs that dramatically impacted our Gulf Coast operations. That's 40% of our volume production in North America. So that weighs heavily on it. I will tell you there's industry data in North America that in the steel drum industry and our numbers are actually higher than what the industry volumes are. So while, we don't like the volumes in RIPS North America, we do know that we're not losing market share, and it's more of a market-related issue, but we do expect that to gradually improve. In regard to paper, as you know, we've got incredible volume improvements. Our Mills have incredibly high backlogs. Our CorrChoice business is up 30%, when you take out the new Palmyra business, organic demand grew 17% year-over-year, heavy emphasis from ecommerce, durable goods has improved, particularly the auto supply chain and we're involved in serving raw materials to box plants that are really strong in home consumables, which are all strong. Will that continue to add strength? I think that ecommerce markets absolutely will be a permanent shift because the consumer buyer behavior has changed. So that is more of a long-term trend. And I think we're really well-positioned to take care of that. In CorrChoice, we run short runs, customized sizes, we have very short delivery cycles. We have the capability to run really lightweight fiberboard grades, and those are all capabilities that are attractive in support ecommerce demand and the SIOC patching protocols for Amazon. So, I'm not going to say it's going to be 25% or 30% growth. But right now, it's really strong, and we don't see in our forecast through Q1, any change in that but it's pretty amazing. It's the strongest paper market I've seen in the 34 years I've been in business, Adam.

Adam Josephson, Analyst

Yes. Now it seems like a strong comment. And Larry, just one last one for you on interest, the $110 to $115. If I just annualize the 4Q number, I'd get to $104. And then, you refied the July 21 notes at a much lower rate. So I would think that you'd be lower than the buck 10 to a buck 15 for the year. Just can you just tell me what I'm missing? And then again, health and happy holidays, all of you. Thank you.

Larry Hilsheimer, CFO

Yes, Adam, it's a good observation. Remember though, recall that we generally will increase our debt loads with our first quarter tends to be our weakest quarter of the year and we're building up. So we end up going more into our lines. And so that's a big factor, we won't really start to see that turn back around till third quarter, fourth quarter, that's just our normal seasonality pattern where the debts higher in the first part of the year runs up, comes back down. The other thing that you have is an impact of capitalized interest. So some of the interest expense we get paid, that we pay on debt ends up getting capitalized into projects. And you even saw some of that in our fourth quarter where there's some of the interest dollars we spend end up not hitting interest expense. Those capital projects, it just depends on when they play out in the year at least where we've modeled so far more of those going to hit later in the year. The other thing on the refinancing, there are some ticking fees that relative to having that loan structure in place. There'll be some cost offset and this year, but that'll mitigate over time as well. So it's more that it's more front-end loaded in the first year as we build up things and then pay down the debt as the year goes through.

Operator, Operator

This concludes today's Q&A session. I will now turn the call back over to Matt Eichmann.

Matt Eichmann, Speaker

All right. Thanks a lot, Jacqueline. Thanks a lot, everybody for taking part in our call this morning. Hope you have a safe holiday season ahead.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.