Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Great. Good afternoon. I'm Arun Viswanathan, the chemicals and packaging analyst here at RBC, and thanks for joining us for the afternoon session here at our Global Industrials Conference. We're delighted to have Sealed Air. We're hosting Tobias Grasso -- Tobias Grasso, I'm sorry, and Alessandra Faccin and Lori Chaitman as well from IR. Tobias has had a little bit more experience on the food side, while Alessandra is focused on the protective side so -- as well as the automation side. So maybe we will let each of them kind of handle their respective area. But -- and we don't necessarily have a large agenda here, but we do have several questions that maybe we can run through.

So I guess, maybe as a start off, it looks like overall, the pandemic has a slight potential to be positive for Sealed Air. Maybe if you can just discuss kind of the tailwinds in each segment, how you see them. And if you could kind of help us understand maybe what part of your portfolio is potentially positive, whether as a percentage base of advantage markets or whatever post COVID as a metric, that would be helpful as well. So maybe we could start with...

All right. Hi, Arun, this is Tobias Grasso. Can you hear me, Arun?

Sure. Yes, I can hear you.

Good. So I can start with that. My name is Tobias Grasso. I'm President of the Americas. I've been with Sealed Air for the last 5.5 years. Prior to that, I have a 25-year career in the food and beverage and fertilizer industry with Cargill and The Mosaic Company. To your question, Arun, if you look at -- I would reference even Slide 7 where you see the end markets that we serve and our portfolio and ultimately, how we leverage our brands -- sorry, it was the other slide that was shown. So all our products are designed to maximize food safety, minimize waste, protect goods. Those are things that are top of mind for many of our customers at this point and of course, that are helping us with growth opportunities. So when you look at the -- what we're having to go through right now, post COVID and all that, is the food retail is very strong. And there's a shift in demand from food service to -- from out-of-home to in-home. And so the food retail that has been strong is helping offset that food service decline that we're observing. On the protective side, we are seeing e-commerce, again, very strong activity there with more people buying things for delivery at home, and that's helping offset the industrial decline. When we talk about more long term or things that are impacting our business, will continue to impact, there are 2 fronts which are very important. I would say automation and sustainability. Those, again, are top of mind things for our customers, we hear from them every day. On automation, let me start there, and we'll provide you a couple of references and examples. On Page 9 and 10, we have a reference there on the protein side and another one on the fulfillment side. So I'll cover the example around food, which is the protein side, and Alessandra will cover on the fulfillment side. So if you could go to Page 9 (sic) [ Page 10 ] and if you take the protein segment is a very significant for Cryovac equipment, service and materials. We do have a very strong presence in that segment. But if you -- all of you might have heard what's going on through the protein industry. Protein processing is very complex. Challenges are related to, right now, people safety, labor in general, availability, qualification, speed of processing, volumes become more important and flexibility around serving more of the retail than the food service market. We are expanding from our vacuum equipment centric view to bring automation that significantly increases efficiency, productivity and reduces waste. We are using robotics, visual systems, data management that enables our customers to enhance traceability and better quality, but also to kind of demonstrate their brands and bring good features to the consumers. With this effort, we're taking, Cryovac brand and SEE automation as we're branding our services and technology behind it to another level with breakthrough technologies in this space. For our consumers in the protein space, it means significant savings. We have an investment, of course, that needs to take place, but we look at that with a payback that we estimate at less than 3 years. And for us, for Sealed Air, it means a significant step into automation solutions, which is a big driver for our growth for the future. So I would hand on to Alessandra to talk about the fulfillment automation effort that we have.

Hi, hello, everyone. This is Alessandra Faccin. I have been with Sealed Air for a little over 7 years now. Before Sealed Air, I was in the chemical industry with Dow Chemical. And at Sealed Air, I have been in the finance area and most recently, the last 3 years, and as Lori mentioned, in the protective packaging business, Head of North America. So if you look at Slide 9, that shows us an example of a recent significant win on automation in fulfillment, which we're pretty excited about. Sealed Air was uniquely positioned to solve a major customer packaging challenging in packing footwear and soft goods. Our Autobag automation solution address the market needs in 3 fronts: so first, increase productivity; second, zero harm, touchless solution and less dependency on labor; and third, achieving Sealed Air sustainability goals, but most importantly, our customer sustainability pledge. So our high-throughput fulfillment solution, which you see here in the picture, improved our customers' pack rate by over 7x. So packing at a rate of 25 bags a minute and also provided significant reduction of packaging SKUs by eliminating the various bag size and, of course, minimizing material waste by rightsizing the packaging dimensions. So this is a good example on the protective industry of how our equipment, service and materials strategy is working and the 4 Ps of our Reinvent strategy with the best product, system at the right price and making it sustainable.

Arun, I'd just add on to my comment. [indiscernible] about the second key theme around sustainability. See, if you take a look on Slide 11 and our different solutions and products that are -- carry a lot of the sustainability appeal here and efforts that we have done to really take our products and systems into the -- to solve the sustainability of our customers. So I'll pause there for the next question.

Okay. Great. Thanks for that detail. I guess maybe if we could just kind of go back to the near term. So I know that you are thinking about, I think, 1% constant [ dollar ] growth in food. I guess where is that coming from? How has that been tracking? What gives you the confidence that you're still on track there? And then maybe we can touch on the protective side after that. But yes, maybe you can just give us an update on your food business and if your -- some of your statements earlier are still intact.

Yes. So as I mentioned, the retail food demand has been very, very strong. So what's that doing is driving case ready. So package food that is now sold at the retail level, that was, again, a shift in consumption to the retail from food service. That is supporting and helping with all the case-ready solutions. So films, trays, roll stock are significantly up in terms of sales for that. So that's, again, offsetting some of the food service decline that we saw. Our barrier bags as well with a lot of our customers shifting and putting more emphasis on the retail side. It's also providing support into the volumes that we have. Now fluids is still -- which is more food service oriented, it's a bit slow. But it represents a small portion of our business. And just to illustrate what's happening in the retail level, if I give you just a data point, if you take from the beginning of COVID through the first week of September and take just meats, the sales -- volume sales are up about 18%. It's now stabilizing around 5% to 10%. But if you take that period, there was a significant growth. So that's the shift that I'm talking about and highly impacting where our products are going.

Okay. And I know on protective, it's been a little bit more challenging just given the industrial leverage. And then also, you had gone through some challenges couple years ago on the utility portion of the business. So maybe you could just update us on what you're seeing now in the protective business. I imagine that it would follow some of the industrial recovery. But how are we thinking about protective for the rest of this year? And if there's any metrics you could share about how we should think about '21 as well, that would be great.

So on the protective side, as you mentioned, right, we know half of our end market exposure is in industrial, transportation, general manufacturing and electronics, right? And we need that to stabilize and rebound. The other half is growing nicely related to e-commerce, fulfillment and automation. So we see further penetration in fulfillment as well as COVID-related spike in demand related to essential industries. And I want to talk a little bit just about the Automated Packaging Systems acquisition, which we see definitely being a growth driver with its automated materials and service business model. So the Automated Packaging Systems came to the Sealed Air umbrella a little bit over a year ago and addresses -- the solutions addresses labor shortage, speed to pack and as well as with the recyclability requirements. We have seen strong synergistic penetration in fulfillment. And definitely, the business is holding up better than expected despite having, as I mentioned, the exposure to industrial and manufacturing sector. We have not given guidance beyond 2020. We expect the Automated portfolio to be a growth driver with its automated materials and service business model and also at the forefront of sustainability.

And just -- Arun, just to complement Alessandra here. On the food, we also see equipment coming stronger again. I think we have the opportunity now to do the installations that we're kind of holding back from the restrictions to go into plants and things like that. So that's also very positive in the food space.

Okay. That's helpful. And then I guess, you touched on APS here. I guess initially, we had seen different reactions to the acquisition, I guess. How has it played out in your mind? On the one end, we do see a slightly lower margin profile for that business that you're now bringing up. On the other end, it has enabled a lot of extra share gains maybe in fulfillment, and that's really where the market is headed. So I guess should we expect more growth in that area? And also, is there -- is that an area of continued automation being that strategic growth inorganically that you'd be looking at? Or what's kind of the future opportunity in automation and APS? And if you could quantify that, that would be great.

Yes. So the Automated Packaging Systems was approximately $290 million business when acquired at 14% EBITDA margin. In the first half of 2020, the sales contribution was $142 million and EBITDA at $27 million. So because of the cost synergies implemented over a year ahead of schedule, the EBITDA margin that I just mentioned for the Automated business is now over 19%, which is 500 basis points expansion since the acquisition a little over a year ago. So nice margin expansion there. The integration is going very well and ahead of plan with strong synergistic penetration in fulfillment and also COVID-related spike in demand related to essential industry. So as an example, the N95 masks are -- and other COVID test kits and other examples that are being bagged on an -- on Autobag systems and sometimes at a rate of 60 to 80 bags a minute. So definitely, the Autobag solutions were uniquely positioned to solve those critical challenges and the need to pack at increased pack rate. If you look at on Slide 7, it does show pictures of our Autobag bagging systems. And the side pouch system that I mentioned, the side pouch, bagging over 60, 80, 100 bags a minute, as I mentioned. So very nice add to our portfolio with the acquisition. The business is holding up better than expected despite having the 50% exposure to industrial manufacturing. So to your question about looking at beyond 2020, right, we do expect that portfolio -- the Automated portfolio to be a growth driver with its automated materials in service. Just as an example, when you look at Automated Packaging Systems, 15% of the revenue comes from equipment sales, and between 8% and 9% comes with service and parts. So we're really talking about roughly almost 25% of the revenue, it's coming from equipment, service and parts. Definitely illustrates the model and the growth drivers as -- with our automation and the multiplier on materials, service and parts.

Okay. Great. Appreciate that detail. And then I guess, if we could get back to the near term again. You did reissue guidance on the Q2 call. You were able to reinstate the $1.01 billion, $1.03 billion of adjusted EBITDA and the $350 million, $375 million of free cash flow. Maybe if you could just provide an update there, if there is any? I know we've seen some inflation in resin prices. How should investors be thinking about that dynamic? And I know that you have mostly pass-through in food, but on those formula -- but if you could just help us understand if there's any impact from recent inflation, that would be great.

Sure. So this is Lori Chaitman, I'm Head of Investor Relations, as many of you know. Highlighted here, you can see this is the outlook slide that we provided from our Q2 earnings call. We -- we're -- I mean, are not here to make any changes to that guidance, obviously. Our business is moving in the right direction. Things do feel like they're getting better, and that actually is shown in our guidance from a top line perspective. The food business, we said that the second half volumes, we expect to be on par with where they were last year, which is better than what we saw in Q2. We think protective, the volumes would be down in mid-single digits, was actually better than what we had seen in Q2 as well. Like Alessandra had said, the industrial business is still weak. But we are seeing some strength in e-commerce. That's helping to mitigate some of those declines. And as Tobias said, on the food side, we have still seen strong demand on the retail side, and that's helping to mitigate some of that slowdown in the food service. Equipment is slowly starting to come back, which is really nice to see. And in both businesses, as Tobias and Alessandra highlighted, we're really emphasizing automation, materials and services, which is really great, and from a sustainability perspective, tying that all together. From a raw material perspective, just to remind everybody, we -- obviously, we've all seen the public announcements on the raw materials. And as many of you know, and as Arun indicated, we have formula pricing in North America food. So North America is about half of our food business, of which 60% to 65% is on formula. And those formulas have a 6 month lag. And on average, we keep about 30 to 45 days of resin on hand with the first-in, first-out methodology. So the full year guidance that we provided did assume in an inflationary environment as we head into the end of the year. It is volatile. We're monitoring it carefully. As you all know as well, we're doing a great job on the Reinvent SEE transformation. And our CFO, Jim Sullivan, on the Q2 earnings call, he did indicate that we'd see at least $110 million in benefits from Reinvent SEE for the full year. So again, this is just reiterating what we had said on our most recent conference call and reminding everybody on how our formulas and cost structure works. Hope that helps, Arun.

Yes. That's great. And you mentioned continued good performance in Reinvent SEE. So maybe you could also just kind of highlight for us where you are in that program and if there's any other kind of savings you guys have been able to unveil and if there's any kind of next steps? What are we looking for? I know that you guys were really looking at this as a way to institutionalize higher incrementals within the company. What's the volume there? I guess maybe you can just help us understand what the next steps are as Reinvent SEE kind of ramps up here.