Sealed Air Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Sealed Air (SEE)

Sealed Air (NYSE:SEE)

Q4 2013 Earnings Call

February 06, 2014 10:00 am ET

Executives

Lori Chaitman

Jerome A. Peribere - Chief Executive Officer, President and Director

Carol P. Lowe - Chief Financial Officer and Senior Vice President

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Usha Chundru Guntupalli - Goldman Sachs Group Inc., Research Division

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Anthony Pettinari - Citigroup Inc, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Albert T. Kabili - Macquarie Research

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

Scott L. Gaffner - Barclays Capital, Research Division

Rosemarie J. Morbelli - G. Research, Inc.

Chip A. Dillon - Vertical Research Partners, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Four 2013 Sealed Air Earnings Conference Call. My name is Matthew, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

And now, I'd like to turn the call over to Lori Chaitman, Vice President of Investor Relations. Please proceed, ma'am.

Lori Chaitman

Thank you, and good morning, everyone. Before we begin our call today, I'd like to note that we have provided a slide presentation to help guide our discussion. This presentation can be found on today's webcast and can be downloaded from our IR website at sealedair.com.

I would like remind you that statements made during this call stating management's outlook or predictions for the future are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled Forward-Looking Statements in our earnings release, which replies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on our quarterly reports on Form 10-Q, which you can also find on our website at sealedair.com.

We also discuss financial measures that do not conform to U.S. GAAP. You may find important information on our use of these measures and their reconciliation to U.S. GAAP in the financial tables that we have included in our earnings release.

Please note that we will end the call by 11 a.m. today.

Now I'll turn the call over to Jerome Peribere, our President and CEO. Jerome?

Jerome A. Peribere

Thank you, Lori, and good morning, everyone. 2013 was a solid year for Sealed Air. We made significant progress on our Get Fit strategy. We increased EBITDA, excluding SARs, on a year-over-year basis by 7% in 2013 and this is only the second time the company has delivered EBITDA margin growth in 11 years and that should speak for this leadership team. I'm also very pleased that we held firm on our pricing initiatives, reinforced our efforts in the fourth quarter. And in the fourth quarter, we delivered favorable price/mix trends in every division in every region. Our free cash flow performance was outstanding. In addition to our forecast on reducing working capital as the Grace settlement became more likely, we put forth a tremendous effort over the last few months of 2013 to generate cash. We generated $509 million of free cash flow.

The Grace settlement is a significant development and what I would call a major milestone. It brings closure to an important legal matter after more than a decade. We will no longer incur interest on the settlement liability and we anticipate meaningful cash tax benefits. This will provide us with additional financial flexibility and cash generation in future years.

And we're very happy with what we have accomplished in 2013. Not only have we started to change our go-to-market strategy, but we also rebranded the company, reorganized Diversey Care, reengaged our employees and set the foundation to reimagine the company. Along the way, we are improving the delivery on our objectives. Since we started this journey, we have heard -- we have heard -- you have heard us back -- talk about a more disciplined pricing strategy and passing on our raw material cost increases. We started that initiative in Q1 and Q2 with moderate success, but fully executed in Q4 with our price increase in North America effective as of November 1. You can count on us to continue to be very disciplined on this in the future and in light of the recent and announced cost increases in benzene, propane and polyolefin.

Let's now turn to our performance by region for the quarter and the year, which you will see on Slide 4 and 5 of our presentation, for a quick look at our fourth quarter and year-end performance. In the quarter, we continued to see solid sales growth in AMAT and Latin America, with constant dollar growth of 8% and 7%, respectively. Developing regions in total increased 9% in the quarter, accounting for approximately 26% of our sales. Sales in North America increased by 4% in constant dollar, which was mostly from our Food Care and Product Care divisions. Trends in developing regions have been consistent all year. North America performance has also performed relatively well.

In Europe and in Japan, Australia and New Zealand, or JANZ, we experienced more positive trends in the fourth quarter compared to the first 9 months of the year. In Europe, constant dollar sales increased 3%, led by 5% growth in both France and Spain and 2% growth in the U.K. Holland was essentially flat. Germany declined very slightly and Italy declined by 5%. But these 6 countries combined accounted for approximately 22% of the fourth quarter sales and sales in JANZ increased 3%, which was led by a 5% increase in New Zealand.

Slide 6 outlines our price/mix and volume trends for the quarter and for the year. Overall, as I said earlier, we delivered positive price/mix and increased volumes in Q4 for the whole year.

Let me now take you some more details by division. And turning to Slide 7, Food Care sales increased 4% in constant dollars with approximately 4% growth in packaging and nearly 5% growth in hygiene. We reported growth in all regions, led by 11% in AMAT and 7% in Latin America as these volumes continued to increase in the high single-digit low double-digit levels in this region. In North America and Europe, we increased sales approximately 4% and 3%, respectively, despite the ongoing single-digit declines in base production. And JANZ also increased sales by 2% with 11% growth in New Zealand. On a global basis, we are seeing strong growth in the fresh red meat and smoked unprocessed market segment, primarily driven by an increase in demand for our case-ready, quick and easy open solutions. In hygiene, we delivered 4% growth driven by strength in emerging markets with our clean-in-place solution and in beverage and brewing, despite the overall market conditions.

The trends we experienced in the fourth quarter and for the full year on a regional basis and market basis were very similar, with the exception of Europe and JANZ. For the year, Europe is -- was essentially flat on a constant currency basis, but delivered positive growth trends in the fourth quarter. Despite continuing negative trends in certain European countries, we gained share in the quarter and increased demand for our advanced product solutions and started to see a more stable economic environment. JANZ was also flat for the year, but delivered positive trends in Q4, as growth in New Zealand accelerated from Q3 to Q4.

Our favorable price/mix performance was -- of just over 3% in the quarter, was attributable to our focus on driving pricing discipline within Sealed Air and our continued shift toward a more favorable product mix. For 2014, we expect beef production in Latin America and AMAT to continue at a similar growth rate that we experienced in 2013. This is expected to be offset by expected single-digit declines in North America and Europe.

As it relates to our Food Care business in developing -- in the developing regions, we will continue to benefit from not only rising beef production, but also increasing hygiene standards and demand from our innovative solutions. With the protein market expected to decline again in 2014 in North America and Europe, our growth in these regions will continue to depend on driving demand for our value-added services, including integration of systems automations, advanced food safety solutions and new products that provide convenience and drive consumption.

I wanted to briefly highlight the EBITDA margin performance that Food Care delivered in the quarter. While unfavorable supply chain costs and catch-up on incentive compensation for strong full-year performance negatively impacted adjusted EBITDA margin for the quarter, Food Care adjusted EBITDA, excluding SARs, increased by 8% for the full year 2013 and full year margin improved to 15.2% from 14.3% last year -- the year before, in 2012.

Slide 8 highlights the results from our Diversey Care division. Diversey Care net sales on a constant currency basis were up 3%, driven by another strong performance in the developing regions and growth in all of our core sectors led by building care services. On a regional basis, constant currency sales growth in Q4 was up by approximately 13% in Eastern Europe, 8% in Latin America and 6% in AMAT. We have experienced similar growth trends in developing regions throughout the year. In Europe, constant dollar sales increased 3%, led by double-digit growth in France, Spain and Sweden. And this is our first quarter in 2013 where we saw positive trends in Europe while -- and while the recovery is fragile, this performance is worth noting.

As we experienced volumes -- as we anticipated, volumes in North America improved from the decline we experienced last quarter and sales were essentially flat in Q4 on a year-over-year basis. For the full year and for the first time in 10 years, Diversey Care in North America delivered top line growth. As we anticipated, volumes in North America improved from the decline we experienced last quarter and sales were essentially flat in the fourth quarter.

For the full year, again, we have experienced this top line growth. These trends -- this performance was attributable to growth across all core sectors as a result of new customer wins and product launches. On a year-over-year basis, adjusted EBITDA, excluding SARs, increased 10% in the quarter and 6% for the full year. Adjusted EBITDA margin in the quarter and for the full year was just north of 10%. This improvement was primarily driven by a more favorable mix and price cost spread, realization of cost synergies and our rightsizing initiatives.

Looking forward now for Diversey Care, we believe that we will continue to deliver strong performance in developing regions, albeit at a slower pace due to currency devaluations in many of these countries relative to 2013 and see more stability throughout Europe. As it relates to our strategy for Europe, we will continue to focus on bottom line improvements and eliminate business that is not aligned with our profit expectations. Our growth in North America will be driven by our ability to successfully execute on our targeted growth strategy. I want to reiterate what we said last quarter, which is that we are very focused on improving the earnings or quality of this division, including the ongoing cost savings initiatives and eliminating customer and portfolio bleeders.

Turning to Slide 9. Product Care delivered 5% constant currency sales growth with 5% growth in North America and approximately 2% growth in Europe. We had a mid-single-digit growth in the U.K. and Italy and Germany was essentially flat, but France declined by 2%. These year-over-year trends in Europe are an improvement from last quarter again. We are encouraging, but we are -- but at the very same time, the recovery is slow and we are planning appropriately.

In terms of pricing and product mix, I am pleased to report a positive impact of 1.7% in the quarter on a global basis. This is a direct result of our decision to hold firm on pricing, walk away from low-margin businesses and focus on growing our packaging systems and cushioning business, which is benefiting from our focus on the e-commerce market. I also want to point out that U.S. Product Care delivered 3% in favorable pricing in the quarter despite our price increases being effective as of November 1. And I'm very pleased with this performance and reaffirm our resolve as we face new resin and raw material increases in the first quarter.

The decline in adjusted EBITDA margin on a year-over-year basis for the year was primarily due to raw material costs increases not fully offset by price increases and favorable product mix and higher supply chain cost. This suggests that we still have a lot of opportunity to improve on each of the items that I just mentioned.

And now, I'll turn over the call to Carol, to provide additional comments in the fourth quarter and our outlook for 2014.

Carol P. Lowe

Thank you, Jerome, and good morning, everyone. If you are following along with our presentation, Slide 10 provides a bridge for net sales growth on a year-over-year basis for the quarter and full year. We delivered 3% growth in the fourth quarter and 2% growth for the full year. Currency had a 1% unfavorable impact on the quarter and full year 2013, primarily due to declines in Latin American currencies, most notably in Argentina and Brazil. For the quarter, volumes contributed $27 million and price/mix was $52 million positive, driven by favorable trends in all divisions and in all regions. For the year, volumes contributed $114 million and price/mix was $94 million positive, primarily due to favorable trends for Food Care and Diversey Care.

Slide 11, just like the adjusted EBITDA bridge, excluding SARs, for the fourth quarter and full year 2013, for the quarter, adjusted EBITDA was essentially flat compared to last year. Favorable mix and price cost spread of $26 million and cost synergies of $28 million were largely offset by $31 million in unfavorable supply chain cost and $17 million in performance-based compensation. The unfavorable supply chain costs were primarily related to $12 million of nonmaterial inflation, $8 million of LIFO adjustments and $4 million for timing of inventory adjustments. We recorded additional performance-based compensation of $17 million in the fourth quarter. This is in recognition of our strong year-over-year performance for the full year 2013 in the areas of adjusted EBITDA, working capital management and other key financial metrics.

For the year, adjusted EBITDA, excluding SARs, increased to $1.07 billion from $1 billion in 2012. The 7% increase in EBITDA was attributable to $112 million of cost synergies, $41 million of favorable mix and price cost spread and $40 million in volume. These increases were partially offset by $25 million in performance-based compensation, $34 million in selling, general and administrative expenses and $61 million in the Other category you see on the bridge. The Other category includes $46 million of unfavorable supply chain cost primarily related to nonmaterial inflation. As a reminder, we have previously communicated that our annual salary, wage and benefit inflation is approximately $55 million to $60 million. The increase in SG&A expense and approximately $25 million of the unfavorable supply chain costs are related to this compensation inflation.

In 2013, SARs expense was $38 million, as compared to $18 million in 2012. As of December 31, we have 1.3 million SARs outstanding, which compares to 1.9 million I shared with you on the October earnings call for Q3. Of the 1.3 million SARs outstanding, 800,000 are unvested. In 2014, 500,000 will vest with the remaining 300,000 vesting in the first quarter of 2015. Based on our recent experience, we expect SARs to be exercised within a few months of their vesting date.

Now, turning to Slide 12. We generated $509 million of free cash flow, a $238 million improvement over 2012. As Jerome indicated earlier, we put forth a tremendous effort in the last few months of the year to accelerate cash generation in preparation of the Grace Settlement. The year-over-year increase in free cash flow is primarily due to higher net earnings and significant net working capital improvements. We made meaningful progress on collection of customer past dues and we reduced our day sales outstanding by more than 3 days. We also reduced our days on hand inventory by 4 days and increased our days payable by 2 days. Our simple working capital, as a percent of net trade sales, improved from 19% at the end of 2012 to 17% at the end of 2013. We are confident that we can not only maintain this improvement, but can continue to leverage improvements in our investment in working capital.

Cash restructuring payments were $107 million in 2013, which was less than the $140 million we guided to in our October conference call. As we have shared in the past, timing of execution of certain restructuring activities can be uncertain especially in Europe. Our CapEx in 2013 was $116 million, compared to $123 million in 2012. SARs cash payments totaled $46 million for the full year 2013, as compared with $24 million in the prior year. Looking forward, our primary use for free cash flow generation continues to be focused on reducing leverage.

Our outlook for the full year 2014 is summarized on Slide 13. Net sales are expected to be approximately $7.7 billion, with organic growth of approximately 3% to 4%, which is due to positive trends in both price and volume. This will be offset by product rationalization of approximately 1% to 2% and an estimated unfavorable impact of more than 2% from foreign currency translation.

Going forward, we will provide our outlook with a few changes from past practices. For adjusted EBITDA, we will include the noncash profit-sharing expense in our guidance, as it is an actual expense for the company and it's estimated to be approximately $40 million in 2014. Additionally, we are providing guidance for adjusted EBITDA and earnings per share excluding the impact of SARs. We anticipate adjusted EBITDA, excluding SARs and including profit-sharing expense, to be in the range of $1.05 billion to $1.07 billion. This compares to $1.038 billion in 2013 or an increase of 1% to 3% on flat top line. We expect adjusted EBITDA to improve in each of our 3 core divisions.

We expect depreciation and amortization to increase to approximately $315 million from $307 million in 2013. This increase is due primarily to bringing our long-term incentive compensation in line with market. We are committed to align our employees with our shareholders and this includes providing market-competitive share-based compensation.

Now that Grace is behind us, we estimate interest expense to be approximately $295 million. The core tax rate for 2014 is expected to be approximately 25%. We estimate adjusted earnings per share, excluding SARs, to be in the range of $1.50 to $1.60, an increase of 8% to 15%, as compared to 2013 adjusted earnings per share of $1.39, also excluding SARs. Please note that our guidance for earnings per share has always been net of profit-sharing expense.

Now, let's turn to our guidance for free cash flow. We anticipate 2014 free cash flow to be approximately $410 million. CapEx is estimated at $170 million. Our restructuring payments are estimated at $150 million. We expect cash interest to be approximately $280 million. Cash taxes are estimated at approximately $100 million.

To wrap up, I want to say that we made a lot of progress in our financial performance and disciplines in 2013. The entire company is committed to continuous improvement and we very much look forward to the year ahead.

And now, operator, can you please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of George Staphos of Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

Two-part...

[Technical Difficulty]

Lori Chaitman

Operator, if need be, you could move to the next question, then we can go back to George.

Operator

Next question then comes from the line of Alex Ovshey, who is from Goldman Sachs.

Usha Chundru Guntupalli - Goldman Sachs Group Inc., Research Division

It's actually Usha Guntupalli on behalf of Alex. A quick question on the pricing growth. Could you remind us how much pricing growth is factored in your 2014 EBITDA guidance?

Carol P. Lowe

So, what -- the amount we gave for the organic growth, it's slightly more on pricing than it is on volume, but we will benefit top line for both price as well as volume. But again, that's being offset by currency, negative currency impact, as well as very intended product, customer and geographical rationalization to improve the quality of the business. So again, we said 3% to 4% organic growth with that more heavily weighted on pricing.

Usha Chundru Guntupalli - Goldman Sachs Group Inc., Research Division

Got it. And is your target to mostly offset resin inflation? Or is your target to get pricing over and above resin inflation?

Carol P. Lowe

The minimum is resin inflation, but we also have inflation above just our resin cost. We have other nonmaterial inflation, whether it's utilities and things like that. And our expectation is to be more than whole, so that we see margin expansion. Jerome, I don't know if...

Jerome A. Peribere

So let me repeat what I said 1 year ago and not wavering an inch on this. We have, in Sealed Air, we have a very clear and determined left brain and a very clear and determined right brain. The left brain is about discipline and Get Fit. A very clear element of the Get Fit component is to start by recouping our cost increases. And you heard in my prepared remarks that we have not been very successful in Q1 and Q2 with our price increases compared to our cost increases. Remember that in the U.S., resin prices went up by $0.12 in January of last year. And we have implemented those cost increases, but -- those price increases, but not fully. I was dissatisfied toward the year as to the rate of implementation. And I must clearly say that I was quite happy with our result, determination and the systems that we have put in place with regards to our October announcement effective November 1. And there is -- there's all kinds of things, including a cultural change that we needed to make sure was happening in our various markets. And I must admit that our people saw that it was possible and we're not here in the business of absorbing those costs. So we need to make sure that our people start by understanding that very clearly that we are not in the business of absorbing it completely or partially. And for 2014, we're going to continue to raise this. The resin suppliers have announced $0.04 for February. There's a very large supplier who has announced a $0.06 for March and we're not going to be waiting. You're going to see very soon that we are announcing officially price increases to cover for those costs because we can do that. So that's the left brain, or that's the part of our Get Fit, which belongs to the left brain. The right brain is about changing the game. And this is where we are also determined to improve and change our go-to-market strategy where we are going to -- or in where we're starting to make progress in charging our customers for the value that we create. That is if you have attended our Investor Day in September, you saw 2 arrows. There was a dark one starting very dark and lightening up with our Get Fit because we will have achieved the discipline, the cost control, et cetera, et cetera, over the years. And there's another arrow, which was starting light in the shade and going darker and darker in -- for our Change The Game. This means that as we become very, very focused industry by industry, as we're here to add value to our customers, we are then going to be able to charge for the value we create. If you want just one example, in the meats business, I was last week at a conference with a very large meat producer. And I told him that in essence, we are in the business of helping them value their meat more expensive. This goes to better shelf life, to better hygiene, to improved packaging. That's what we are in the business of. And they say, "If you can do that, we're onboard." We're onboard because we are going to make sure that we are going to be -- that as we add value to them, we're going to be able to add value to ourselves.

Operator

Your next question is now from George Staphos of Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

I'm not sure what happened before with the transmission, but thanks for getting me in the queue. Real -- just brass tacks kind of question here in 2 parts. You, I think, said your adjusted earnings pre-SARs is $1.39 for the year that just passed. I think in the past, the benefit of Grace would be something in the low teens from an earnings per share standpoint and realizing that's a full year number, but we'll use it to start. If I just add the 2 together, I get in to the low end of your guidance range for the year. And

[Audio Gap]

Carol P. Lowe

the low end. We will have benefit on cost savings that were estimating additional synergy costs. Those, we have factored in approximately $80 million that will benefit in 2014. However, a lot of that is utilized by that $55 million to $60 million in annual inflationary costs that we see. Now, a lot of you would say, "Carol, you told us last year, it was $55 million to $60 million. Why is it still $55 million to $60 million when we've had headcount reductions?" One of the challenges that we faced is that we do have a pretty large employee base and some highly inflationary economy specifically in Latin America. And that has created a drag where we're not realizing quite as much of a reduction in that annual compensation increase. What our forecast represents in total is we've conducted a very detailed bottom-up forecast that our divisions have put together, they believe in, they have high confidence in. We've always said that this new management team for Sealed Air, we're going to be very prudent

[Audio Gap]

...in our expectations. Please rest assured, we clearly have internal stretch goals, but what we're presenting to you today is something we feel very confident about.

Jerome A. Peribere

So let me add just a little bit of

[Audio Gap]

Operator

Next question is from Ghansham Panjabi of Robert W. Baird.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Just given the increase in Europe from a volume perspective, understanding that comps are easy. Jerome, should we start to expect that the next leg of pricing for the company starts to focus on that region? I assume that raw material prices could start to book higher if the recovery there is sustainable.

Jerome A. Peribere

So, Ghansham, good to hear from you. The pricing -- the cost raw materials increases right now are fairly widespread but depending on the region and depending on the raw material. Benzene prices have gone -- have been shooting very high and this is affecting MDI and this is affecting the propylene chain. So our Instapak business is affected and we are announcing price increases. We have announced price increases in Europe. And we are announcing price increases in North America to that effect. The polyolefin business prices are mostly coming from -- in North America and the market is somewhat softer in Europe. But we also have announced some price increases in our films and polyethylene-based products. Bearing in mind also, there are some price increases affecting the nylon base. So the reality is that the raw materials are increasing in different areas at different levels, but what has been a very clear trend is that the benzene prices have been very firm, and this is -- and therefore, we need to react quickly in that.

Operator

Your next question comes from Anthony Pettinari of Citigroup.

Anthony Pettinari - Citigroup Inc, Research Division

At your Analyst Day in September, you guided to 2016 sales of, I think roughly, $8.3 billion to $8.5 billion. And when I think about sales guidance for 2014 being basically flat and that top line growth guidance maybe being back-end loaded to 2015, 2016, I'm just wondering how we should think about that. Is 2014 just really impacted by the FX headwinds? Or are you expecting some sort of contribution from emerging markets or a price that you expect to really accelerate in 2015, 2016?

Jerome A. Peribere

So 2 points here. One is that you need to compare at equal, equal

[Audio Gap]

is that I would have done faster in 2013 in retrospect is go stronger at the low-quality businesses. We need to continue and we will this year continue to streamline for bleeders or for low-return customers. This is applying to every single of our product line in every single of our 3 divisions. So I am -- I want growth, but I don't -- I first want quality growth. And to have quality growth, you need first to have a streamlined and clean portfolio. And that's going to continue in 2014, which is affecting our top line growth in general. So we really take at heart this Get Fit. We're taking it very, very seriously because it is our disciplined approach, which is going to make a different company.

Operator

Our next question comes from the line of John McNulty of Credit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Question on working capital, or maybe 2 related questions on it. The first is it looks like you took a really serious push on working capital, especially in the fourth quarter. I'm wondering on the inventory side or the inventory reduction side, if that reduction had any operating issues or resulted in any operating issues, or maybe you didn't run at optimal rates across your normal platform and if that had any impact on, say, the margins? And then just as a follow-up, how should we think about working capital improvements and the potential for that in 2014? Because it did seem like you had some really, really big improvements in the fourth quarter in 2013 overall.

Carol P. Lowe

John, great questions. In terms of unabsorbed overhead, which is what we would have experienced if we had a lot of inefficiencies, in total for the company, no, on a collective basis, we did not. The negative impact that we did see is the LIFO adjustment that I referenced, because it spoke specifically for our Product Care business, as we reduced some inventory levels and because of the way LIFO works, we ate back into levels as far back as a basis to 1994. And because of that, we had that LIFO -- negative LIFO impact. So that's really the main obvious thing that we saw. We're very confident about our ability to continue to monetize working capital to create good cash flow for the company. One thing we were able to push really hard on the last couple of months of the year was accelerating collection of past dues. We've shared publicly in Q3 that our past dues were approximately $200 million. We still have $160 million of past dues. So we still have opportunity. Our cash flow that we're forecasting, if you do the walk, you'll see that the primary difference going from the $509 million for 2013 to the $410 million that we're forecasting -- for 2013, $410 million for 2014, is driven by the increase in restructuring charges to $150 million, as well as the increase in CapEx. So those are the 2 primary drivers for the decrease. We do believe we have additional opportunity in working capital and that will be part of our stretch goal internally.

Jerome A. Peribere

So remember what short-term incentive compensation is based for our people. It's based on EBITDA and we almost reached our objective there; on productivity improvement, which is measured as expense to gross profit; and on working capital as a percentage of net sales too. As Carol said in the prepared remarks, we have improved 200 basis points, from 19% to 17%, and we're going to continue to improve. We can do that. Have we put a very strong stretch goal in Q4 internally? The answer is yes. And it is yes because the Grace settlement was coming and we wanted to come with a lower debt situation. So there's been a very strong push. But we are organizing this improvement, and our internal goal for this working capital to net sales is to improve over 17%. And that's a pretty nice thing. You mentioned also the quality of our business in Q4. At the end of the day, there are 2 things which have affected our cost base there. Number one is that our incentive compensation in 2012 was slightly below 70% for the incentive compensation was paid at slightly below 70%. And in 2013, it has been very slightly above 100%, so there's been some catch-up and which generated $17 million in there. And then the elements of inventory reduction and all of those things have played a small part in it also.

Operator

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

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Back to -- a follow-up on George's question earlier about your guidance. So EBITDA was up about 8% last year. You're guiding to up about 2% this year. And I just want to make sure I understand the puts and takes. FX was about a 1% drag on sales last year. This year, it will be 1% to 2%. $30 million lower cost savings this year compared to last year. And anything in terms of price over costs that you're assuming in '14?

Carol P. Lowe

So that -- Adam, the currency impact is actually more than 2%, not 1% to 2%, on the top line and the impact on the bottom line on the EBITDA as well. We do -- we -- again, I reference the salary and comp and benefit inflation. We obviously have expansion in margin, which is what we're forecasting. We do have to have positive mix and price cost spread and that's factored in our EBITDA as well. And I also -- I talked about the approximately $80 million in cost synergies and we'll also have volume growth that will positively impact. But we will have, in addition to the salary labor wages and benefit cost increases, we will have some other nonmaterial inflationary costs also.

Jerome A. Peribere

So you see, the currency thing here will depend on, at the end of the day, altogether, as to what the euro is doing. We had an Australian Dollar, peso or real or Canadian dollar and a U.K. pound devaluation in 2013 compared to 2012, but this has been partially offset by a slight strengthening of the euro when you compare to '12 and '13. We are -- you have seen all of these emerging countries devaluation happen in the last 4 to 5 weeks or even less than that, but we don't anticipate that the euro is going to revalue compared to the U.S. dollar. And therefore, we are a little bit prudent in that sense. What are we doing? Well, in the emerging countries where we can move to -- when we can move to dollar base, we're moving to dollar base. And In several countries in Latin America, we're moving to dollar-based pricing. And when we can't move to officially dollar-based pricing, we are implementing major price increases. This is what has happened in Q4, in our Brazilian market, for example where we went for major, major price increases in real in order to offset this kind of situation.

Operator

Your next question comes from the line of Al Kabili of Macquarie.

Albert T. Kabili - Macquarie Research

Just wanted to clarify, Carol, on the '14 outlook, how you're thinking about pension expense. Because I would think that's a tailwind there. And so with the tailwind, I'm trying to understand what other offset might be to that.

Carol P. Lowe

Okay, so Al, I'm going to look real quick, I don't have the number right in front of me. But it's pretty much in line. It was a -- just not even a noticeable increase when we put together our 2014 plan.

Lori Chaitman

Do you have another question, Al?

Albert T. Kabili - Macquarie Research

Pension expense is going to be flattish. And then are you -- and then as far as incentive comp, which was a big headwind in the fourth quarter, how are you thinking about incentive comp '14 versus '13? Is that -- a headwind, flattish on the base guidance?

Carol P. Lowe

So if we perform the plan, which we've shared with you, it would be flat because we were just slightly above 100% payout factor for 2013 and we would -- we expect and plan to be no less than 100%. So in terms of the numbers we've shared with you, it would be about flat.

Albert T. Kabili - Macquarie Research

Okay. And target is -- and the target comp -- incentive comp, the target bogey is the EBITDA that you communicated...

Jerome A. Peribere

We don't normally give that.

Carol P. Lowe

Our plan that we've communicated in the past, it's weighted, a portion on EBITDA and as Jerome talked about, a portion on working capital improvement and a portion on a support expense as compared to gross profit. So...

Jerome A. Peribere

So we're going to keep having these same 3 criteria, which are EBITDA to our internal plan, which is -- and then, our productivity improvements as measured by expense to gross profit ratios and our working capital as a percentage of net sales improvements. Same criteria as last year.

Operator

Your next question comes from the line of Christopher Manuel of Wells Fargo.

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

I kind of want to come back to the same -- because I'm still, I think, missing a couple of elements when I think about the EBITDA bridge '13 to '14. If I started the $1.04 billion that you did this year and I look at the movement to next year, it's kind of in that $12 million to $32 million of higher EBITDA. And if I start from the earlier comment you made that price would be more of a component of the organic revenue growth on a year-over-year basis, if you have a couple points of price within there, that could be upwards of $150 million of improvement. The $80 million of cost savings, I get something that should be in the kind of low mid-200s is where you could improve. And I recognize you had the offsets of -- you've talked about $60 million of inflation, et cetera. But there's still, Carol, seems to be a gap that I'm having a difficulty bridging. Can you maybe give us that...

Carol P. Lowe

I think you're a little high on the mix and price cost spread that you're looking at.

Jerome A. Peribere

One thing is the price. The other thing is price cost spread.

Carol P. Lowe

Yes, because it has to fall down...

Jerome A. Peribere

We are anticipating some cost increases again for resins and other type of raw materials. So that is the situation. So the first question in the Q&A was about margin expansion and, one, is pricing discipline to recoup our cost increases; number two is margin expansions through what I talked about. So we are anticipating price, but not very much margin expansion. That's one. The second thing is that you have seen that we are talking about product rationalization. And in product rationalization, you are -- we're going to be weeding some product lines or some products. And as a result of that, our overall volume projection is not very large.

Operator

Your next question comes from the line of Scott Gaffner of Barclays.

Scott L. Gaffner - Barclays Capital, Research Division

Just going back to the guidance here for a minute. If I look at the EBITDA growth year-over-year on a percentage basis, it looks like your -- you think you'll grow at about 30 basis points year-over-year. But if you continue to do that in 2015 and 2016, it does look like you'll come up short of the 14.5% to 15.3% EBITDA margin that you outlined for 2015.

Carol P. Lowe

So one thing, Scott, and it's a good point, but remember, we have $150 million in restructuring items that we're looking at that we'll start getting additional benefit for that as we move forward. And we haven't realized all of that benefit at this point. We continue -- we'll have $80 million. We'll have additional benefit as we move forward in 2015 and 2016. That will also help us. But we -- we're very confident in the 2016 numbers that we've provided. There's -- we wouldn't back off of those at all from a margin standpoint.

Operator

Your next question comes from the line of Rosemarie Morbelli of Gabelli.

Rosemarie J. Morbelli - G. Research, Inc.

If we look at the debt repayment, Carol, you paid down about $400 million in 2013. Could you give us a feel for how much you expect to pay -- to repay in 2014? And the timing of the cash going into Grace's asbestos fund, as well as the tax credit in 2014.

Carol P. Lowe

So we -- the timing was that we actually funded on Monday. So that's -- this past Monday, that's when the funding went in for the Grace settlement. We have $150 million for the 12% bonds that are outstanding that we'll pay middle of this month, actually on February 14. So we'll make that payment. With the cash flow generation, the free cash flow of $410 million, again, principally, all of that will be utilized to reduce debt. So it will be around that $400 million that we'll reduce debt in 2014. As it relates to the tax refund, that actually will come in 2015, because we made the payment in 2014. It will be based when we file our 2014 tax return in early 2015 and we will get more than $200 million in 2015 that we'll also use for leverage reduction.

Operator

Your next question comes from the line of analyst Chip Dillon.

Chip A. Dillon - Vertical Research Partners, LLC

A couple of questions, actually to follow up on that one on the tax benefits. If you look at the total value of the -- what you gave, $200 million would be certainly well below the corporate tax rate of 35%. So I'm kind of wondering, are there other sort of less visible benefits, whether you're paying less in estimated taxes in '14 or less in cash taxes than you otherwise would? And then on a separate basis, there was a great rundown on the SARs. And it would seem like this year, let's say 800,000 were actually exercised. Would that be roughly about a $40 million guesstimate as to what that number could be for this year?

Carol P. Lowe

So, Chip, as it relates to the taxes -- and we've said it's more than $200 million, part of the challenges we have -- in terms of carrying -- how much we'll carry back versus carry forward, we have to take into consideration where we're at on certain foreign tax credits, how those have been treated. And our tax department does a phenomenal job of making sure they get the most benefit for us that they can. So as we move forward and when we file the 2014 return, they'll look at our position for all of those. So that's why we're saying more than $200 million. We've previously communicated it could be up to $250 million. Again, it's going to depend on our position on other tax credits and certain tax initiatives. With respect to the 25% tax rate that we're guiding to for 2014 versus where we're for the 22% for 2013, one thing that's impacting that right now is that the U.S. Congress has not approved certain things such as R&D credit and look-throughs for intercompany transactions. We expect them to go back and do that retroactive. But right now, we have no assurances, so that's also negatively impacting our core tax rate that we're presenting. So you see a little bit of that happening as well. And then the second part of the question, remind me, Chip, again, what you were asking, I'm sorry. I got going on taxes so much, I forgot the second part.

Lori Chaitman

Operator, can you unmute Chip please?

Carol P. Lowe

Right. Okay, we'll put you back in the queue. My apologies.

Operator

Your next question comes from the line of John McNulty of Credit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Yes. Just one follow-up question on the shares that you're transferring over as part of the -- or transferred over as part of the settlement or trust with Grace. Is there any lock-up period on those, or can those hit the market at any specific point? Are there any restrictions on how quickly those can be transferred out of the trust? Can you give us some color on that?

Carol P. Lowe

So John, it's 90 days -- 60 days, I'm sorry, that there'll be a lock-up on that. They have to be registered and everything. So we -- they've transferred and issued and they've always been in our outstanding share count. So it's not a negative impact from that standpoint, but it will be 60 days.

Operator

We now have Chip Dillon again.

Lori Chaitman

Sorry, about that Chip.

Carol P. Lowe

All right, Chip...

Chip A. Dillon - Vertical Research Partners, LLC

No worries at all. It was great, the rundown on the SARs and it looks like that's going to be finally behind you in 1 year or so. But I think you mentioned, Carol, that about 800,000 would likely vest this year. And if we guessed -- is the way to kind of think about it is where we just sort of take that number, if they were all exercised and multiplied times the stock price? Or just kind of remind us. Because of I did that, I would get to about $40 million in expense this year.

Carol P. Lowe

Yes. So it wouldn't be expense. That would be -- your math is correct, but that's the cash impact because they are converted to cash when they're exercised. They don't actually get Sealed Air equity, it's cash settled. The expense is already recorded up to the current stock value. There is a slight discounting we do for any unvested shares because some shares end up being forfeited if people leave and what have you. But generally, the way to think about it is whatever shares are there for the SARs, it's the change in the share price that impacts our expense.

Operator

Your next question comes from investor Scott Hendricks [ph].

Unknown Attendee

The strong free cash flow generation and balance sheet de-leveraging gives you more options for capital allocation over the coming years. My question is, with shares trading at a low teens multiple on cash EPS, how do you weigh buybacks versus dividends versus further de-leveraging, both philosophically and in terms of the timing?

Jerome A. Peribere

So priority number one is de-leveraging. And when we will achieve the ratios we have talked about previously, then we -- then the board will decide how much of share buyback and how much of dividend distribution.

Carol P. Lowe

And as a reminder, it's about 3.5x to 4x that we feel comfortable that we would be able to look at options to return value to shareholders.

Operator

Do you have time for one more question?

Lori Chaitman

No. Operator, we're going to move to Jerome closing out, please.

Operator

Okay, thank you. Ladies and gentlemen, thank you for that. Thank you for your questions. I know hand over the call to Jerome Peribere for the closing remarks.

Jerome A. Peribere

Well, thank you very much to all for your very active and very insightful questions. I'd like to conclude by thanking our customers and our shareholders for their ongoing support. I would also like to thank our employees around the world for their commitment to improving the operating and financial performance of Sealed Air. And the progress that we made in 2013 was no short of being remarkable, but there's still a lot of work to be done.

Confident that our plan to improve Sealed Air's quality of earning is well underway and we expect to see continuous improvement throughout 2014 and the future years. 2013 performance is a true testament to our leadership team and their commitments, with very clear direction for our business. And we are very confident that we have the right strategy in place, focused on providing significant value and innovative solutions to our customers, becoming more nimble and, in the end, creating a better way for life.

We look forward to speaking with you on our next meeting call, currently planned for April 30 of this year. Thank you so much and have a great day. Bye-bye.

Operator

Thank you for joining today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Thank you.

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