Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Good morning, everybody. Welcome back to our next session in the 2020 Goldman Sachs Virtual Conference for Industrials & Materials. We're very pleased to introduce our next company, Sealed Air. Today, the company is maybe best known for its Cryovac food packaging, which is primarily for fresh protein, but of course, they get the name of the company from bringing Bubble Wrap into the world a long time back. Joining us on the call today is CEO, Ted Doheny; and CFO, Jim Sullivan. Ted, Jim, welcome to the conference.

Thanks, Brian.

Thanks, Brian.

Yes. I wanted to jump in with a couple of questions in the fireside chat format. I just want to also remind the audience that you can ask questions, electronically submit them through the webcast. And they'll come into my inbox here. I'll have a queue of them, and we'll spend the last 10 or 15 minutes of the presentation trying to address them. So please get your questions in early if we've got them. Be happy to try and make this as interactive as we can, even though we're all probably in different parts of the world right now. Ted, so I just wanted to get into some of the -- I wanted to get into the company-specific initiatives you're working on a little bit later. But first, we started most of these conversations off with just real-time trends, what we're seeing from the virus impacts. It's kind of a very topical conference coming off of earnings, but still kind of in the middle of this period of uncertainty. So I wanted to start kind of with that. On the earnings call last week, you talked about, I think, about 75% of your end markets that are essential, support the stay-at-home environment. You said that in the first quarter, the sales in those markets were net beneficiaries from all the lockdowns and related activity. So for folks on the line, I was wondering if you could give some examples of these products. And what you think was driving that increased demand that we saw in 1Q? And if you're seeing that sort of continue after we got through the initial surge and into April and now, early May?

Okay. Very good. And Brian, you do a nice job getting a lot there in one question. So you might want to bring me back to the Q2. But first, with everybody on the call, I just want to make sure that everybody is safe. And doing these virtual calls, this is becoming very familiar to all of us. We're on these calls, literally all day long. So I hope everybody is safe, and it's really a pleasure to be with -- on the Goldman Sachs Industrial Call. So the deck that we have out there, we actually put a little bit more color in there some -- to help with these examples. So if I can refer to the deck that's on the webcast and is now going to be on our website and also on for Goldman for distribution. But it's the same slide number that we used in our earnings call, Slide 6. And to frame up your first question, this is looking at what's going on in the markets and how we're reacting to this, and we try to make it as simple as possible. The 75% number, it's actually 75%-plus, if you look at the far left and the far right, what's happening going on with the fresh food within the retail and then on the far right, e-commerce. Those markets, right now, through this pandemic are -- we're seeing just tremendous surges. The one in the middle is highlighting where we're actually seeing just the opposite, the markets shutting down. So to your next part of the question is where we're seeing the products. So if you look at that first bucket and what is net positive and proteins and foods and fluids and medical, we put out the Slide 5, if you go back and just some pictures of what's happening into the crisis. And what's interesting is we've heard about the masks. And this has actually happened in the first quarter, the second quarter, to your second part of your question, over 300 million of these masks are being in production right now. And you've seen on television, some of the major industrials that are producing these. We are connected with those. And actually, the machine on the right, that's the new auto bag machine that's actually automatically bagging those masks. And in this crisis, that's how quickly we've been able to move and actually, have a slide later on, we put in the deck of how we actually put our value proposition out there if we do talk about automation, if that's a follow-up. So it's the actual slide we used in getting one of the orders for that machine. The other example, in the middle of that, as we're going through the transition, we could talk about what's going on in the protein markets. I'm sure you'll follow-up on that, Brian, but just as a teaser. This is where the automation is, we're in transition. We have equipment that's going out there as we drive our market-leading Cryovac product, but you can see how we're even imaging this. We're really driving some of the equipment in there. But the other piece on the right is the Bubble Wrap on-demand. It was interesting in Brian's description of the company. To me, it doesn't take -- usually it takes 30 seconds to say we're with the Bubble Wrap company. But this product has been transformed to Bubble Wrap on-demand. How do we keep that market-leading product there at the point-of-use for distribution centers, customers' warehouse, et cetera? That product in the first quarter was up double digit. I think Jim even mentioned that in his comments. So that is being driven quite -- we're seeing that in surge on the e-commerce side. So other products that are going in to help service that, it's really in the food markets for what you see in the retail. I have Slide 7. I can go through some more of the products, but I'll take a pause there to get to the second part of your question, Brian, with -- we'll now roll this into what are we seeing April and Q2. As we shared, we had a pretty strong quarter in Q1 as this market has moved for so dramatically up and down. Going into April, though, everybody's reading what's going on with the meat markets with some of these closures. So we gave -- we took -- dropped our guidance, but Brian, you did a nice job of feathering out that number in the call saying, "Hey, what do you think food's going to be?" And that's 5% down? Right now, it's literally week to week. We are seeing that recovery. We have our facilities ready to go. We're at the table with those customers. So we're planning and hope to beat that. But right now, that market is in disruption, but it will come back. And can give more color on that if you want to follow up on that. So the second quarter, we are seeing e-commerce, though, still extremely strong with our products coming in there, things like we do, and we do very well, the mailers business. We're seeing that conversion in this crisis move even faster where "Hey, can you put it in a mailer, let's -- don't put it in the box," and we're seeing that from the electronics industry. So we're seeing really strong activity from e-commerce and what that -- what our product reaction to that is things like mailers, Bubble Wrap on-demand, our paper systems, et cetera. So strong demand for those products, and I'll take a pause. And Brian, let you if you want more detail or if you want to go to another question.

Yes. No, this is, I think, the topic people are most interested in. I'll stick with it. So on the meat-packing plant shutdowns, we've got a couple of questions from the audience already come in just related to that. So it sounds like there's obviously the disruptions and customers trying to adjust and the whole supply chain adjusting. Can you talk about just -- you said it's very fluid day by day. But are we seeing still some signs of stabilization? We think we have kind of -- maybe the worst of it is now behind us and now it's just a question of how much it recovers. Or do you think that there's still maybe some knock-on effects from either the amount of hogs that got slaughtered or how long it takes to kind of rebuild the supply chain and get more product to the meat-packing plants so that you can package it and get it to market?

Yes. The -- and I hate to be the prognosticator of the hog market. But it is moving. And probably everybody is reading the same things. They're trying to extend the -- or slow down the feed rates for the hogs, et cetera, because there are some major supply disruptions. What we're working with the customers, it's roughly a 2-week period, and we keep hearing that the quarantine. So when you see a plant shutdown, there's that 2-week pause. So we are seeing that. But what we're doing because, as I highlighted in the slide, we're at the table with these majors. These major customers that you're hearing about, we are in those plants. We are connected to them. We have our service teams there. So if that hit or miss in the quarter, it's fluid. Some are coming back. We're feeling that. Is it back to where the ramp-up was at the end of March? No. But we see it coming back, probably can't give you plant by plant, but I think it will come back in the second -- the back end of the second half of this quarter. But right now, it's still in that more disruption than recovery. But we are seeing some come back the line is the direct answer to the question.

And Ted, maybe I could just jump in there real quick. This is Jim Sullivan. I think the other interesting thing is, if you look more globally, we're seeing continued strong trends outside of North America. We haven't seen the same dynamic outside of North America. And that has been helpful, I think, as well to offset some of the challenge with the North American food processors.

I'm glad you said that, Jim. That's kind of where I was -- I wanted to follow up. Just thinking about the potential to maybe ship some of what we would have normally exported from the U.S. to satisfy the demand. Just wondering if the -- retail demand for me is obviously still strong and everyone is eating at home. So that doesn't seem impacted. If it's impacted at all, it's impacted in a positive way. But do you think the amount of export could be challenged a little bit more towards the U.S. market? And is there a meaningful difference in your participation in export volumes versus domestic volumes?

Yes. I think that's going to continue. I don't think it's going to be actually imported to the U.S. to help the U.S. right now. I think the U.S. has enough capacity. It's just getting the supply chains through this. We are -- there's a nationalistic feeling that's going on there. We're seeing the increase in China locally, linking this pandemic to the African swine fever as well and as that markets converting from wet that we believe it's going to even happen faster. So it's more of supporting locally and that's where we're seeing the demand shift to take care of. I think the U.S., if that's the direct answer to your question, this is going to take care of itself with the U.S. markets. We do see the Brazilian market still being quite strong. But as far as the importing in and out of the U.S., probably the U.S. is going to take care of itself. We are seeing the pickup, though, in the Australian side of it. Australia actually helping to cover what's going into China. But right now, the nationalistic side of it, Europe taking care of Europe, Russia taking care of Russia in the short term. Long term, I think the opportunity is out there, so.

And you mentioned the wet markets in China. That's something that you talked about on the earnings call, and I haven't heard you guys talk about that in the past. I think even in the past, if I recall, China hasn't been a significant market for you because maybe they haven't taken food safety issues as seriously as some other regions. But coming out of this crisis, it would stand a reason that they will take it more seriously. Do you think that maybe opens up a huge potential market for you as we start to think about the longer-term implications of the virus and the crisis?

Yes. No question. The meat hanging open and having all kinds of things flying around it in the wet markets, that will change. It's there, though, the wet markets and the same thing, the wet markets are there in Brazil. The meat hanging is attractive to the user. They want to see the meat, they want to see that red color. And I've put it in the slide, if you look at Slide 5, you see our Darfresh on tray in there. And you see that red, that actually -- if it's truly preserved, it's purple. They like the presentation of the meat. We've seen the pickup of our Optidur, the nice presentation of the meat. So that conversion is happening. We're actually seeing the frozen Optidur going into China and that's picking up. So that conversion will happen. I think this crisis will accelerate that conversion for China.

And just to switch a little over to product care, where you're seeing trends there. E-commerce has been a source of strength, and it seems like for bio accounts, it's kicked it up into a different gear even a faster gear than we were -- it was already growing, but now it's just growing exponentially faster than it was with all the lockdowns. And your own product mix there, I think it's a pretty diverse mix of products, you mentioned that the Bubble Wrap kind of starting to see double-digit growth, which is great to see. But some -- one of the questions we often get from investors on the e-commerce channel is just the margin profile of that business versus product care and the broader company. So I guess my question for you is, are there things and steps you can take to improve the margins in that e-commerce portion of the business since it does seem like it's going to be just a bigger part of the mix going forward? Maybe it's on the cost side, maybe we can start to transition to some of the cost benefits from your Reinvent SEE program. But I guess, the question is really just how can we get those margins in the e-commerce channel a little bit higher than they've been in the past?

Okay. Good question. And again, quite complex. And so Brian, help me if I go too far one way on this. So if we look at e-commerce, we look at our product mix and we look at what do we have out there, so maybe Slide 7 would be a good one to point to. So if you look at Slide 7, we made a fundamental shift in our strategy -- in our go-to-market strategy, and it's beyond just product care or food care, it's really our whole portfolio. The product -- the marketing shift is best products, right price, make them sustainable. So we have to have market-leading products. And we do, highly differentiated, high-value products. And the right price is -- where we went up and down historically is raise the price and raise it too much and you either lose the customer, you lose the market, you lose the volume. So that's linking to our operation strategy beneath with hard to reinvent, can we get our costs right? And if the right price save the customers, the savings and move and then, of course, make it sustainable? So if you look at the product, you mentioned that our margins aren't good. The Bubble Wrap on demand that's growing double-digit is higher margin than our Cryovac bags. I mean I hope you take a pause on that. That is -- and that's where we need to go. The mailers, where you think a simple mailer, the volumes of those mailers, we lost that. We're coming back. But as we automate that and bring in some of our automation that we're working on internally, we can make those margins, and that's going to be product-independent. We will drive those margins. Now we got customers listening and all that good stuff. So they'll see where our margins are moving, but that's not the issue. We will be the right price needed, and I feel very confident what we're working on Reinvent. We can be more than competitive for those markets where in the past, they might have said, "Oh, our products aren't -- the margins aren't right." I'm quite confident that we could get there and beyond. You look at the paper product on Slide 5. That was a gap. We didn't have -- we had a paper product, but it was, in fact, that's one of our fastest-growing product lines right now is the paper fill. It's an interesting phenomenon what's going on. Now having paper fill versus void fill with our Bubble Wrap product line is we let the customer make the choice. So "Do you want paper? Do you want plastic?" It now is opening up that sustainability question that actually plastics are actually lower carbon footprint, not by little, but by far. But just let's not throw the plastics in the damn ocean. Oops, I shouldn't say -- in the ocean, I apologize for that. So let's go put that sustainability solution, and now we have recycled Bubble Wrap, game-changing. And let's get the cost right. Now we'd like to charge 10% more because we have recycled content, we're going to try because we think it's the best product at the right price, and we're making it sustainable. So I would ask you, for those who are texting you, don't judge us from the past, it's where we're going. These products will hit our profit profile. And if not, we're going to get the cost right to make sure that we get the right price in the marketplace. But we have highly differentiated products that the market right now and in this crisis, we're seeing them come even harder that we can tell our story. So I think our transformation on Reinvent is going to go even faster.

And that's great to hear. I think that's a perception that's maybe like you said perhaps dated and some of the actions that you're taking, hearing that the void fill could be higher margins and Cryovac is, like you said, that does cause you to pause and think because that's not the perception a lot of people have, and I don't think that was the case a couple of years ago.

Well, my Cryovac team is listening, by the way. I think there's more opportunity on Cryovac. So again, if they're listening, there's lots of opportunity. That brand and those products are really cool. We have a slide in there if you want to go into meet where we're going and beyond. But I don't want you to say that Cryovac, we're happy. We got more opportunities there as well.

Yes. And I do want to go there. I wanted to ask about some of the successes you've had with accelerating your Vitality Index, the vitality rates and the speed of innovation. I know that was something you talked about when you stepped into the job. So if you have -- if there's a slide that we can go to or maybe you can talk about some of the new products and what customers are asking for and what you're kind of looking to roll out to try and move that Vitality Index up.

Sure. How about if we go to Slide 8 and Slide 9. Slide 8 on -- which is talking about Cryovac. And it's talking to automation. So we haven't talked about it and being at your industrial conference is very comfortable with me because that's my whole past, is equipment. So if you look at -- here's an example, and these are actual examples we use with customers, Slide 8 and Slide 9. So this is where we're going with our innovation. So that is our automation. You could see even branding it now, SEE automation that people don't realize how strong we are with equipment. Some of the major customers out there right now that -- in food are asking us, can we help them automate their food systems, their food plants. We are at the table right now on those conversations, just like we're working to automate our facilities, can you help us automate there? So here's actually a picture of the Darfresh on tray. So here's an innovation. If you look at the top picture to the bottom. The red meat and with our scientists and the Optidur and the Darkish on tray, the meat actually goes purple. And purple is the freshest. But right now, that's a preference right now in Europe. Europe understands purple is fresh and make it pretty and a beautiful presentation. Well, the U.S. says no, purple is funny. I'm not going to buy it. So we're working with the picture on the bottom, even though it's under fish. The picture on the bottom is the bag-over-bag design. So they're saying -- the U.S. market is saying, we want red meat. But red meat is now being oxygenated, it won't last those 3 weeks unless we do something different. So we have a proprietary called bag-over-bag design. So we have the meat with our Cryovac package, backing package, and then we put a bag on top but actually a gas inside. And that gas fuses with the material and the meat and keeps that bright red color now for 3 weeks. Beautiful presentation, gets that bright red color. So this innovation is huge for the U.S. for fresh-preserved red meat. And so that innovation rate is moving quickly. We're actually doing -- these slides are from a virtual presentation to the customer. We're doing it all digitally through our design teams, and I hope you'll follow-up within a couple of quarters, and you're going to ask me how we're doing the product. So the index is moving and I think moving faster. The other big piece of the index is if you go to the next slide, Slide 9. We've been talking about automation. We had a gap in our portfolio. We have things like mailers. We can do the discrete products but where the automation is going, can I load my -- load those bags, load those pouches, load those mailers faster? A person loads at these huge warehouse is about 6 a minute. The auto bag, we can take that up to 20 or 30. That side pouch system can load well over 100 a minute, just driving significant automation or labor savings. You can see the numbers on the right. This is actually a slide used for a customer who pushed back. They actually quoted me saying, "Well, Ted keeps saying 30%. We're going to help you take out your cost" and they said that "We want to see the 30%." This is the actual slide we used for the masks, and we got the order. So that -- this is part of that innovation rate. So -- but this is selling a piece of equipment. And by the way, not the old razor-razor blade model, we're selling this equipment because it's tremendous savings for the customer and then all that material that packages it and wraps it and puts it in a bag, that's what we do better than anybody else, that comes through with the equipment. But the equipment is being sold, the equipment is being sold against the savings that is bringing the customer, and this will drive that Vitality Index from that 10%, and we want to double that. And the commitment was we want to double that in 3 years, I think the pandemic is going to help us beat that target.

That's great. And that's I think a good transition to my next question. I wanted to pivot a little bit and talk about the Reinvent SEE program and where we are with that. And when you came into the job, I think one of the things you did talk about was incremental margins and getting them to exceed 25%. That was sort of the target at the time. And to your credit, I think each of the last 6 quarters, we've been at or above that level. This past quarter, significantly above that level. So Reinvent SEE is driving some of that. I think we've seen the benefits from the restructuring program. But as you know, the company has had a long history of doing restructuring. We've seen different waves of it through the years. And so one of the questions we get from investors, too, is, is this just going to be another restructuring program? How is it a little bit different than what we've seen in the past? And in the restructuring, a lot of it is designed to offset some inflation that comes in the business. So what are you doing to kind of structurally take that OpEx inflation out so that we're not constantly having to try and offset some natural level of OpEx inflation in the business?

Okay. Brian, good question. I'm thinking about -- but I want to make sure he's okay because I can't -- we're in the fireside chat, I can't see his eyeballs, so I was going to try to see. But I'm going to give you just 20 seconds, but I'd like to turn it over to Jim. Because what you just highlighted -- by the way, Jim and I both grew up in St. Louis, Missouri, the Show-Me state. So you don't have to tell me what investors are saying, they don't believe us in the past. They've hit me head-on when I joined the company. "Oh, this is a serial restructuring, blah, blah, blah." So I got to listen to that, but we got to show you the difference. We've been showing that quarter by quarter that Reinvent is not a restructuring program. It's part of it, absolutely, but this is fundamentally redesigning the structure of this company. So I'll turn it over to my truthsayer, Jim, to talk to you about what he sees, what we're doing, and I can give more color after he does. But Jim, are you okay if you tackle the nonbelievers of Reinvent?

Sure. No, absolutely. Be happy to. I came in, as you know, Brian, mid-2019, the program had momentum when I came in. I think that momentum accelerated in the back half of the year. But I've had my opportunity here over 3 quarters now to really get underneath Reinvent and of course, in talking to investors broadly, I get this question a lot. And based on what I can see here is, as Ted said, this is really more than just a restructuring program. If you look at the benefits that the company has driven kind of over the last, let's call it, a year and a couple of quarters, over $200 million, less than half of that is coming from your traditional restructuring, which is a part of it, as Ted said, but not the major part of it. What really is going on here is the company has made substantial investment in terms of its process and its capabilities to drive what we believe, over the long term, to be structural advantage in its productivity. And you could see that laid out on Slide 12 of the presentation. We break down the benefits of Reinvent into buckets. And we talk about what's underneath each of those buckets. So really, what I've seen since we've been here is the company promised $250 million over 3 years. We raised that to $330 million without increasing the level of cash investment. So the payoff on this program is substantial. And I would say the pipeline, importantly, and this is where it gets to, this is really part of the SEE operational excellence business system for the future. We're going to eventually stop talking about Reinvent and just talk about this is our ops excellent engine and business system that will drive profitable growth into the future. And certainly, we believe, above the inflation level, which currently is about $50 million a year. Over time, as we automate more of our processes, we hope that inflation will go down a bit. But certainly, that's something we deal with right now, and we've been able to overcome with the substantial savings that we're generating in the business. So pipeline is very healthy. We continue to add to the pipeline, and that's key to this kind of program is you can't just stop. It's not a 3-year and stop. We have to continue to drive the capabilities and the processes to new levels. And time will tell whether we'll be able to really convince our investor base that this is different than the past restructurings. But I feel good about where we're at, and I feel good about where we're going. We'd like to eventually be here soon, a company that is known for its GAAP results and not having a lot of special charges. And if you look at kind of first quarter of '20 versus where we were a year ago, you can already start to see that happening. So great initiative that Ted kicked off here late 2018. I get more and more excited about it. The enthusiasm level within the company broadly is very high. And I think we'll have to continue to drive it forward, but I think we're well positioned.

That's great.

Brian, could I just add one thing? Because you added the question at the beginning. And of course, I -- because I'm a fighter and probably too competitive, even though I don't think I am. So you asked the question, and I took umbrage to what we were in the past, where we're going. But you asked a good question about what is the leverage. The leverage is the measure of what we're doing, underlying that there's structural changes happening. So just go back to history. When we started this journey, we said, let's go to 20%. And why 20%? I knew when we did our internal diagnostic, that this is really a tremendous business. If we truly redesign it as an equipment company, a service company and a materials company, it is -- this is a gold mine. Well, to get there, we said, let's first year because under-promise, over-deliver, we should double the leverage. And we did that, more than that. Then we said, what is the design that you're looking at? When we're designing it, we used the 40%. Well, part of that 40% is the restructuring, as you highlighted. So yes, we need to be north of it. First quarter, in a pretty tumultuous quarter, we did roughly 61% leverage. Compare that to our peers, compare that to the industry because, as I said, we're going to move this to a world-class engine that's underneath. So take a look at that number, that leverage number is telling you that what this engine is doing underneath. It's moving and it's moving fast. So we're designing to that 40%, and we're holding ourselves accountable. We're using it to drive. It's the guardrails to drive our investments. And yes, as Jim highlighted, if we're going to go away and drive out inflation, we got to have productivity driving at 1%. I'll just share with you. I mean when we did our diagnostic, the productivity wasn't there. The product cost, we weren't taking it out. So 1% -- it's easy numbers for me, 1% of a $5 billion company is $50 million. And that covers it. So we got to be driving. That's what world-class companies do. And that's the engine that you're seeing underneath quarter-by-quarter, you're seeing it happen. And I think -- and I apologize if I got maybe defensive to your question. If the engine's moving, it's changing. We got a couple of little issues like markets that are a little tumultuous in front of us, but that's not an excuse. We're going to use that to go even faster.

I appreciate the answer. And as you can tell, sometimes it's the legacy perceptions die hard, but you guys are definitely moving things in the right direction to change that. We've seen that, like you said, on the operating leverage, some of the vitality indexes, and just the whole conversation around automation is definitely new and exciting. We're -- we wish we could talk more about it all, but we're running out of time here. And literally, we've had it right up against the end of the program. So I just wanted to end by thanking you guys both for joining us, thanking the audience for listening on the webcast as well. Hope everybody stays safe out there. I hope everyone enjoys the rest of the conference. But Ted and Jim specifically, thanks so much for joining us today.

Thank you, Brian.

Thanks, Brian.