Greif, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Grice Q4 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speakers today. Matt Eichling, please go ahead.

Thank you. Good morning, everyone. Welcome to Grice's fourth quarter and fiscal 2020 earnings conference call. I am joined today by Pete Watson, Grice's President and Chief Executive Officer, and Larry Hilsheimer, Grice'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 to 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 question before returning to the queue. Please turn to slide two. 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 three.

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 Grife 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 through it 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 that's safety, customer service excellence, and discipline operational execution. And this focus builds additional momentum for our team as we head into fiscal 2021. Carestar'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's strategic rationale. We also have embedded Grice'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 Equivatus, placing Greif among the top 3% of all suppliers evaluated by this firm. And finally, we made great progress toward our 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'd like to now review our quarterly results by business segment, and if you could please turn to slide four. A Ridge Industrial Packaging and 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 seem to correlate to COVID-19 trends. Demand in our fourth quarter was strongest in China, where steel drum volumes 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 new business winds. 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. RIP's 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. RIP's 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 as planned plastic capital expansions ramp up, We're seeing rising steel prices in the U.S. and the Maya 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 will plan accordingly. I'd ask that you please turn to slide five. On a global basis, RIP 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, especially chemicals and industrial paints as manufacturing levels improved and auto production recovered. Food demand was lower year over year due to a weaker conical season in southern Europe related to unfavorable harvesting conditions and migrant worker availability in Europe. I'd ask that you please turn to slide six. The flexible products and services segments fourth quarter sales were roughly flat to the prior year quarter on 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 to Flexibles results versus the prior year quarter. I'd ask that you please turn to slide seven. Paper packaging's fourth quarter sales fell by roughly $33 million versus the prior year quarter due to lower published container board and box board prices and the divestiture of our consumer packaging group, which is 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 a significant $33 million price cost squeeze versus the prior year. We are currently executing on price increases for container board, uncoated and coated recycled box board grades. Please turn to slide eight. So volumes in core choice, which is our corrugated sheet feeder system, we're up nearly 30% per day versus the prior year quarter from improved durables demand, auto supply chain recovery, and e-commerce 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 tube and 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 end markets and weaknesses in textiles. I'd like to now transition the presentation over to our Chief Financial Officer, Larry Hilshimer, on slide nine.

Larry Hilshimer Thank you, Pete. Good morning, everyone. I'll start by echoing Pete's comments and offer my thanks to our Global Grife 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 and rips. The divestiture of the consumer packaging group and lower year-over-year published container board and box board 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 results, and there were no material opportunistic sourcing benefits captured in the fourth quarter. Our fourth quarter adjusted Class A earnings per share fell to 78 cents 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%. We've emphasized 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 1-21, we expect to generate between 48 and 58 cents 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 planned mill maintenance downtime. We anticipate sales and profits in our rigids business will be lower due to seasonality consistent with prior years. Compared to fiscal quarter 120, 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 loose 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, will 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 a 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 TerraStar 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 seven and three eighths Euro $200 million senior notes, which mature that month. Please turn to slide 11. As discussed at 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 in fiscal 22 looks 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 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 drags on profitability. While our RIDGIDS 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, and to a lesser extent, our original $220 million run rate for Kerastar 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 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 Euro $200 million senior notes due in July, we have no other sizable maturities due until fiscal 24th. We anticipate that our first quarter capital investments to be in the range of $30 to $40 million. As we continue to generate cash, pay down debt, and reduce leverage towards our target range of two to two and a half times over time, we will shift 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.

Hey, thank you, Larry. Fiscal 2020 presented new challenges for our company, and I'm incredibly proud how our Greif team adopted and responded to these difficult times. Through a sharp focus on operational discipline and execution levers of the Greif 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 and the world emerges from the COVID-19 pandemic. We thank you if you're interested. Greif and Jacqueline, if you could please open the lines for questions.

Certainly. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. Please limit yourself to one question and one follow-up question. Thank you. To withdraw your question, press the pound or hash key. Your first question comes from George Staffos from Bank of America Securities. Your line is open.

Hi, thank you. Hi, guys. Good morning. 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 it, I'd missed it. And then on paper, you had mentioned there was an $8 million drag that you were expecting, I believe, in the upcoming quarter. I was curious if you could give 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 that are in the market right now? I would assume it's more like a fiscal 2Q event, but any thoughts would be great. Thank you. Yeah, 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, you know, the board determined, particularly given the, you know, really great cash performance and more importantly, just managing the health and safety of our workers worldwide, that 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 accrued radically through the year. So it has an outsized impact on the fourth quarter. Obviously, if you just that 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 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 profits. 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 until 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 a 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 increases?

Yeah, George. So all three price increases, container board, 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.

Thank you, Pete.

Yeah, thank you, George.

Your next question comes from Adam Josephson from KeyBank Capital Markets. Your line is open.

Pete, Larry, Matt, good morning. Hope you're well. And thanks, as always, for taking my questions. 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?

Yeah, it's a fair question, Adam. I mean, our view of it is that, you know, our investors would like to have some idea of what this company look like once you're beyond, you know, this whole COVID travesty. And, you know, our general, we, 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 at 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 is back and we 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.

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. And I ask 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?

Yeah, 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, you know, 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 exactly the same, essentially, if you adjust for those. So it's in your midpoint, right about $160 million range.

Great. Thanks so much, Larry.

Your next question comes from Mark Wilde from Bank of Montreal. Your line is open.

Thanks. Good morning. Good morning, Mark. Hey, Mark Wilde. I want to just dig into a couple of the segments, if I could. First, over in RIPP, 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 were that tough. And 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.

Yeah, 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. The U.S. also has been hurt in the last year and a half through some of the trade tariffs, where our largest concentration of steel drum production is in the Gulf Coast. That is predominantly an export-heavy industry. 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. And I would tell you that our plastic drum vine in North America is 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.

Yeah, Mark, you've seen some of that trade-up and trade flows. The tariff thing that Pete mentioned, which impacted at the beginning of the Trump administration and then that following year, You know, we've seen, you know, pickups in other areas of the world, like in, you know, shipments out of our SADAR facility in Saudi Arabia and those kind of things. So it does, it's just shifted. 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 and Kerastar 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. Yeah, it's a good observation, Mark. And let me just walk you through it. You know, we've got a $12.5 million impact from pricing, about 21.8 on OCC, and a few chemical costs that increased. Core choice volumes pick us up about 5.8 million. The synergies year over year pick up in PPS itself was about 2.7 million, another 1.8 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, you know, in second quarter, it went down a little bit. So, So it's just a phenomenon of 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, 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 whether it's going to go permanently. So hopefully that's helpful. I mean, the primary thing is the cost price squeeze, which, you know, is about 41 cents a share in and of itself. Okay. Sounds good. I'll turn it over.

Your next question comes from Don Abbey from Baird. Your line is open.

Hey, guys. Good morning. Happy holidays. Thanks. Yeah, so I guess first off, you know, 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 midpoint. 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. I mean, there's just so much going on with your numbers with COVID in fiscal year 20 and price, cost, and paper. So any incremental color would be helpful.

Yeah, sure, Josh. And I think hopefully this will be helpful. What we've tried to do is walk from where we were before on the commitments. And you think back, what we took was our 18 results across the businesses. We added in the $220 million of run rate from Caristar. We added in then with $60 million of synergies. We had some for our Tholu acquisition, and we had just some other organic growth related to CapEx, our Palmyra addition and all those. And that got us to the fundamental pieces of each of the businesses. So let me take you and walk you from where we were on the midpoint in each of them previously to where we are now with the big elements. And PPS at that time had a midpoint target of about $510 million. We've got a $10 million drop that is really related to a long-term decision we made that really we believe will drive profitability over the long term, and that was the closure of our mobile mill facility. Very inefficient mill system, low profit, one that we know over time the closure of that's going to drive more profitability, but it hasn't. In that shorter period through 22 actually is a decrement to where we were before of about $10 million, but then we'll drive profitability after that. The other related item is we have seen a need to increase our manufacturing costs short-term in some of the acquired facilities and even some of our legacy around improved safety protocols, all those kind of things that will continue. Is it disinfecting, all those kind of things, but also just some inefficiencies in how we've been operating that we believe we will turn around over time. But through 22, we won't have turned those around yet. Insurance and freight, we're in a really hard market in property and casualty insurance, and we, through discussions with our brokers and consultants, we don't see that turning around. And freight costs are up, which I think is relatively well known. It's been a decrease in the number of drivers as part of the whole impacts of things. So that's about $15 million. I think I mentioned manufacturing cost was about $20. And then the other was in that $220 in the original, they had been running at about $5 million of profitability in the CPG business, but it had begun to deteriorate. And We had a path to turn it around, but it was going to require a lot of capex to get us back to an acceptable level, which led us to then sell the business and get rid of that what was not a productive asset for us and avoid the capex. And we did so also with a long-term supply contract where we agreed in those contracts to prices that were slightly less than what we have on our internal contracts selling to ourselves. So that was about $8 million. So you take those items, you've got $10 million on the mobile, you've got CPG is about $8 million. The manufacturing cost item is 20, insurance and freight is 15, and then you've got 1 million of other minor stuff. So it takes you from 510 to 456 as a midpoint on PPS. On RIPs, it's essentially looking at this and just – improvements in operating profit, some things that we see happening in that business where we believe that will increase our profit by $11 million. And then we've got another net $5 million or so of SG&A benefits that we have plans to achieve incremental to where we were at the time of the last commitment. So And then just some other decreases in expenses from some of the things that we've done around cash flow hedging, lower pension costs, and those kind of things. So that's nine. So you go from 302 to 307 in those two. So PPS is obviously the major, major item.

Got it. And then just, you know, finally, I guess, you know, 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., et cetera. Just what are you embedding for volumes specific to 4Q? Sorry, your fiscal year 1Q by segment. And, you know, how 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 a focus on finishing out the year from a cash flow standpoint. So what do you see in real time, and then what are you embedding for your fiscal year 1Q? Thank you.

Yeah, gotcha. This is Pete. So you're exactly right. All of our customers across our entire portfolio are managing their inventories very tightly. Some because conditions are tight, but others are really managing their working capital as we have, which means shorter orders, more frequent deliveries, and lower order quantities. So our Q1 forecast, our volumes embedded in that in our RIPs business, steel we're forecasting to 1% to 2% growth on a global basis. IBCs were pointing to high single-digit growth through the Q1. A large plastic drum, which is predominantly a U.S. product, is mid-single-digit growth. And our FIBCs and FPS were guiding to flat growth. In paper, again, it's an extremely strong market. Our mills are forecasted to be like they were currently. We have very high backlogs and very high operating capacities. Our core choice sheep feeders were embedding in the forecast 20 to 5 to 30 percent growth, which is very similar to what we had in Q4. And our tubing core growth, we've seen improvement. We're embedding in the guidance 1 to 2 percent volume growth. Again, we're seeing improvement. It's still uncertain beyond Q1.

Perfect. Thanks so much.

Yep, thank you.

Your next question comes from Steve Truecover from DA Davidson. Your line is open.

Thanks. Good morning, everyone. Hey, Steve. Hey, Steve. Good morning. So a couple questions on paper packaging, and one is just to want an emphatic clarification. So the decline in the profit in EBITDA in paper, that's due to the price declines earlier in 2020, but it's got nothing to do with divestitures of the consumer packaging. Is that correct?

That's correct.

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

Let Pete talk about the timing of when those things flow through, because I think that's probably the biggest issue. 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 of these things. Pete, I'll walk you through it.

Yes, 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.

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 week, then it hasn't happened. So it would not be incorporated in any forward thinking.

That's correct, Steve. Yeah, and Steve, I mean, you know, really – There's very little benefit, like I'll repeat what Pete just said, very little benefit of those price increases in our first Q. We'll get some of the container board because it will be effective in January, but most of the other price increases will be beneficial in Q2. And we still have the big year-over-year impact of OCC costs impacting us negatively in Q1, which is really about $12.3 million of drag year-over-year.

Okay, and one final one, if I could. Were you surprised to see OCC print up $10? I mean, there's so much container board being consumed for the full year. What is your outlook? Do you think that we're still going to be – pretty awash in OCC?

Yeah, it was a surprise to us because it's not what our team has been seeing on the street, Steve. Clearly, the residential collection process is different than the commercial process. But you're right, there's a lot being made. And so over time, we do believe that that will result in supply and demand getting maybe back more in balance. But, you know, right now it's a little higher than where we had expected it to be. And, you know, obviously we're not building up for your guidance. But, you know, we think it would stay in that or mitigate down a little bit. It might pop up a little bit, but then come back down.

And, Steve, this is Pete. I'd also tell you from the street, OCC is readily available. There's no tightness. That's what really surprised us. So we've guided to Q1, and then RISD has a forecast annually that's higher, but it's too early to determine what that might look like.

Okay. Thanks, and happy holidays.

Thank you.

You too, Steve.

Your next question comes from Dave Hodge from Wells Fargo. Your line is open.

Pete, Larry, Matt, good morning. Hope you all are well. Thank you, Dave.

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, you know, it was roughly around number $40 million benefit this year. I'm assuming it's going to be a drag is kind of what you indicated earlier. I think fiscal 18, when you had similar magnitude price increases flowing through, you had expected working capital to be, I want to say, a $30 million to $40 million headwind. So, you know, just in that of itself could be a $70 million swing year to year. Anything else you'd point us to, or if you can comment there, and then anything on cash taxes would be helpful. Sure. So, yeah, Gabe, I think that the – Your analysis is appropriate. Obviously, the challenges that are causing us to not give guidance for the year go directly to being able to predict where we think sales will go, are there going to be broad shutdowns, all those kind of things. And clearly, as sales go, that's a big driver of working capital. And then the other is cost of raw materials. And as Pete mentioned, the steel business or steel costs in particular are driving up. because the steel manufacturers had shut down blast furnaces, and they take a long time to come up, and the auto production has grown more rapidly than they were anticipating. So steel's in a shortage. Prices are going up. That drives up. Obviously, we're seeing OCC go up. All those things are caused drag on working capital. What I will share is, you know, we really, the magnitude of improvement that our teams made in this year was incredible. We measured things on a trailing 12-month percentage of sale basis. That's what part of our incentives are based on. Moving a 12-month average is really, really difficult. And so we moved it pretty dramatically. I mean, you know, half percent and slightly more, actually. But on a monthly basis, I'll tell you, we started the year at 14 percent and dropped to 9.9. So we are at a very, very low level at the beginning of the year. Now, despite that, our objective in our incentives next year is to drop it even further. So the measure that we hold ourselves to is dropping our working capital. But if the presumptions that you laid out about, okay, recovery and some sales go up and we have these costs of inventories, it would still be a use of capital in some fashion. So, yeah, you know, we had dramatic improvement in fiscal 20, but it wasn't year-end heroics. It was doing well all year. And we expect that performance to continue on a go-forward basis, but we obviously won't have that opportunity to drive significant one-year gains on it going forward. Okay. Anything, I guess, unique in pension? Nothing, really, no.

Okay. And then, Pete, I think in your prepared remarks, you mentioned some investments in RIPs. some of which I think were delayed COVID-related.

Can you expand on, I suspect some of those or most of those are around the IBC business, but just magnitude of spend and timing of expected returns?

Yeah, so the reference was about plastics, both IBCs and blow mowers for large plastic trums. We're coming into the second year of those investments, Gabe. We disclosed those a year ago. So we just expect to ramp up, particularly in large plastic trums and IBCs that are in line with our growth projections for Q1 2020. You know, we're probably talking about $15 to $20 million in capital investments over the past year. And, again, we've had good execution of that, and we expect better execution this, you know, upcoming second year of those capital jobs.

All right. Thank you. And one last one in the paper business. Larry, again, in prepared remarks, you mentioned a little bit higher mill maintenance in this first fiscal quarter. I'm curious just if you can lay out for us, maybe relative to fiscal 2020, obviously it was 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 about. Yeah, we actually made the decision in the fourth quarter to delay a lot of our scheduled capital maintenance because demand had increased so dramatically. And so we pushed some of that into this year. And so there will be a year-over-year increased cost. You know, exactly what that will be right now, we don't have lockdown because they're still working on exactly what they're going to do. But it's somewhere, you know, $9 million to $10 million kind of, you know, increase for us. For the full year?

Throughout the year.

Yeah, throughout the year.

Thank you, guys. Good luck. Thank you, Gabe.

Your next question comes from Justin Bergner from G Research. Your line is open.

Good morning, Pete. Good morning, Larry. Hey, Justin. Hey, Justin. 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 or is that going to be spread throughout the fiscal year?

It's just a year thing. It's sort of, if you go back to our third quarter call, you'll see that we talked about it then and realized it as our inventory levels went down at the end of that third quarter, but then they went down even further in the fourth. And, you know, we expect our teams to manage the inventories in that business well. And so, again, It won't build back up and won't have an opportunity for recovery again in the future if we stay at those levels.

Okay. Maybe part of what you initially said was a little hard to follow. So the $8 million is mostly in the first quarter or spread out throughout fiscal year 21?

We recognized it mostly in the third quarter of this year is when it mostly came in. So that's where you'll see it on the year-over-year basis. But it's an annual thing, not necessarily a quarter. It won't be one quarter, first quarter over first quarter, that kind of thing. It shifts around every quarter generally. It's just an accounting phenomena when you're selling out of your mill systems. Imagine if there was two separate businesses, two separate companies, and one was our mill system selling into converting facilities. When our mill system sold it, you'd recognize the profit then. However, since it's an intercompany thing, we can't recognize it for gap purposes until it's sold outside of Greif. And so it gets deferred, and then, you know, as those inventory levels come down, then you pull it into profit. Okay.

Got it. All right. So I'll think about that as spread over fiscal year 21. And then the transportation insurance headwind, 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 as also – being representative of what you might experience in fiscal year 21?

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

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

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

And then lastly, your presentation mentioned SG&A accrual 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 business is resuming strength and There's more payout across the organization.

Yeah, 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. So 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.

Okay. Thank you for taking all my questions.

Absolutely.

Your next, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from George Stathis from Break of America. Your line is open.

Hi, thanks for taking the follow-on. Pete Lowry, 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 comment 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. Does it suggest that you may try to be proactive if you can in building inventory, even if you don't get a benefit like you did last year from proactive working capital management or procurement? 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 Caristar and the drop in your fiscal 22 guidance, and we always look at your long-term guidance as more aspirational than fine point, because for any business, there's so many different moving parts. Nonetheless, should we take away from your commentary that Caristar, 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, you know, the businesses turn up, both from a demand and pricing standpoint? Or would that be a wrong assumption to everything you thought it would be and then some? And if so, please explain why. Thanks, guys. Good luck in the quarter and happy holidays.

Yeah, George. So on steel, we've got in EMEA in the U.S. a short-term trend. you know, supply and demand imbalance. As we've talked about, Larry commented, you've got a really fast recovering auto industry. You've got the steel industry's restarting blast furnaces. So you have this three-month period where there's challenges. So that will not impact our inventors. In fact, our inventors are quite low right now and expect to be through Q1 next We do expect that steel supply and demand balance to become balanced and more normalized, you know, after January. So, again, it's a short-term dislocation. We don't see any major significant impact at this point. But we are monitoring it. We have our attention up. Our sourcing team is doing a really good job ensuring that. The only potential downside could be if we need steel, if we have to buy it on the spot price, in the short term, you could pay higher prices. That's to be determined, but that is a potential risk. In regard to CareStar, I'll make one comment and then Larry talk. But when we bought CareStar, we knew that we would have to spend some money, and we knew that operationally in their mills there were some opportunities to improve. And that doesn't change. We still feel that way. We've got a good team in place, and we're working diligently to do that. But there is opportunities in the mill manufacturing industry. capabilities. We're aware of it. We're working on it. And it's no surprises at all.

Yeah, George, I would just supplement what Pete said. If you go back to our deal assumptions, we've talked about a $220 million run rate and $45 million of synergy, so $265 million. If you look at where we're at now, and that included having CPG in there at like $5 million. Well, we got $80 million for selling off the CPG plants, and we you know, obviously avoided capex going forward. So we feel really good about that five coming out of there. So if I start with, you know, 215 and I say 45, I'd be at 260 was our deal assumptions. Right now, if I type the 215 and I add in 60 million of synergies, I'm at 275. If I back off even the manufacturing costs that we don't think we'll have turned around by then, I'm still in really good order of the deal metrics that drove us to do that. So we're real happy about it. And we believe that we've made a very good decision on closing Mobile, and that will even become more profitable for us in the system over time. It's just that not by 22. And we'll also get the manufacturing cost item turned around, but we're not going to compromise on our safety of our people, and that's driving some of this. All right. Thank you very much.

Today's last question comes from Adam Josephson from KeyBank. Your line is open.

Thanks so much, Pete and Larry. Pete, just one on the North American situation. So obviously in the quarter, RIPs was weak and paper was phenomenally strong. Can you just give us some context as to precisely how unusual? the state of affairs is for you. And obviously, it's all pandemic related. But what do you think a return to more normal conditions might look like, both in the RIPs and A business, as well as the container boarding URB businesses in North America?

Yes, I'll comment on RIPs again, confirm some of the comments I made to Mark. You know, the substrates we have in North America are heavily weighted to steel. We also have plastics, growing plastics in IDC business. But again, the end markets that we serve in RIPs in North America have recovered at a slower pace sequentially than Asia and AMEA. 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 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 percent 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 a market-related issue. But we do expect that to gradually improve. You know, in regard to paper, as you know, we've got incredible volume improvements. Our mills have incredibly high backlogs. You know, our core choice business is up 30 percent. When you take out the new Palmyra business, organic demand growth, 17 percent, up year over year. heavy emphasis from e-commerce, durable goods has improved, particularly the auto supply chain, and we're involved in serving raw materials to box plants that are really strong and home consumables, which are all strong. You know, will that continue, that strength? You know, I think the e-commerce markets are absolutely will be a permanent shift because the consumer buyer behavior has done that. So that is more of a long-term trend. And I think we're really well positioned to take care of that. And Core Choice, you know, we run short runs, customized sizes. We have very short delivery cycles. We have the capability to run really lightweight fiber board grades. And those are all capabilities that are attractive and support e-commerce demands. and the SIOC packaging protocols for Amazon. So, you know, 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.

Yeah, no, it seems like a common comment, Pete. And Larry, just one last one for you on interest, the $110 to $115. If I just annualized the 4Q number, I'd get to $104. And then he refied the July 21 notes at a much lower rate. So I would think that you'd be lower than the $1.10 to $1.15 for the year. Just tell me what I'm missing. And then, again, health and happy holidays to all of you. Thank you.

Yeah, 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, you know, 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 decline. turn back around until third quarter, fourth quarter. That's just our normal seasonality pattern where the debt's 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 um 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 near the other thing on the uh on the refinancing there are some ticking fees that uh relative to having that loan uh structure in place There will be some cost offset in this year, but, you know, that will 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.

Thanks so much, Larry. Happy holidays. Yep.

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

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.

Be well.

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