Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Hi, everybody. My name is Neel Kumar, paper and packaging analyst at Morgan Stanley. We're very happy to have Sealed Air with us. With us from the company is Ted Doheny, CEO; Jim Sullivan, CFO; and Lori Chaitman from Investor Relations. And just for your reference, there is a slide deck available on the webcast and the Sealed Air website. Before we begin, I need to read a disclaimer. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you're a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay. Great. So we can get started now. Ted and Jim, thanks again for joining us.

One of the key topics you've touched upon in recent earnings calls has been driving top line growth through automation and sustainability. So maybe you can just kick it off with automation. What is the vision around your automation strategy and the opportunity there? Can you provide some examples of recent investments to extend your portfolio of automated patching systems?

Great. Neel, this is Ted, and I appreciate being on the call and especially being at the Morgan Stanley Industrial Conference. We're quite comfortable to be in the industrial space, especially personally from my background, and excited to talk about what automation means to Seal there. We definitely believe this is the next big thing for our transformation and our journey of the company. If you refer to Slide 8 where we talk about to your question on what is our vision and where are we going to the business, it starts with equipment and the system that it provides, the service and the materials. And what we have on the bar chart is to show where we're going to the business. And just breaking out the equipment, the system part of that, we have a plan in place to triple that over the next 5 years, more than triple it. And what that means in the pull through, if you look at what the equipment pulls through from service and the materials, and the multiplier of that is tremendous opportunity. We believe roughly 200-plus basis points of our commitment to beat the market. And we believe this is definitely the catalyst to get us to our aspirational 5% growth in the business. So really, really important. And what's exciting is we're not starting from ground zero. We're actually changing our model. We're changing it significantly. But we have a tremendous amount of equipment in our portfolio already today and installed base. But the first part, if you look at the slide, it starts with a different way to market that we don't need to subsidize our business with equipment, giving it away free or putting it in materials, actually focus on the automation and on the savings we bring to the customer. Automation is top of mind of our customers, especially today in the pandemic, how do you keep people out of harm's way. If you look at a meat packaging plant, it's incredibly important to bring safety and productivity and the savings that's driving it. Our divining rod is we're looking for 30-plus percent savings for our customers, and that's what's paying for the automation, the equipment, the pull through. The second part of our strategy and vision is really bringing our brands. And especially, we have tremendous equity in our product brands with Cryovac, with Bubble Wrap. And our brands actually have a high digital quotient. So as we drive to automation and where we're going with e-commerce, that we're building a SEE automation. And our customers think of Sealed Air as an industrial company because they look it to us in their packaging, how can they do it better, more efficiently. And so the good news is in our customers' eyes, they're looking for us, and we're already at the table. Then the exciting part is we're building off a pretty significant fleet of equipment out there. And how do we get connected to that fleet? We -- again, we don't need to give it away. It's -- we're going to pay for it with the savings, but how do we get connected to our fleet? And then finally, what's the exciting part is putting the automation system in there, driving higher level and packaging more things, whether it's more meat into a package, more products into our Bubble Wrap packaging or our high flow e-commerce systems. So -- and as far as that's the model, quite excited what it can mean to the growth of the business. And we really think we have a differentiated position with our customers in the market to make this happen.

Great. That's very helpful overview. And just moving to sustainability, I guess the other -- another aspect of your strategy, you've talked in the past about having to separate plastics into 2 categories: nonessential and essential plastics. So can you just talk about how your product offering is more geared towards the latter, your market leadership in those offerings and what really differentiates you from other plastic positions?

Sure. Well, I'd like to always start -- if we go to our slide we put and continue to put in the deck with our 4P'S of Reinvent. And the S of the 4P'S is sustainability. It is in everything we do. So then if you would point to Slide 11, to answer the question, so where is sustainability showing up in our product lines? And we break down sustainability into probably 3 areas. We all know about plastics and the war on plastics, and what we're doing to attack plastic waste. But it's also about carbon footprint and what we can do to help on the carbon footprint. And the third major area of sustainability is food waste and what we're doing. So if we look at our portfolio, again, looking at the equipment, the system, the service and the materials, we're making a lot of headway in attacking this issue, whether it's a food packaging plant where we're actually bringing recycled content. There's a press release by one of our customers this week in Tesco, a large retailer in Europe, using recycled content, partnering with us to get recycled product into their packaging. So big P'S. But also on the sustainability side, looking at the fulfillment. We've already been able to reduce in the fulfillment centers with our mailers literally millions of boxes. Actually, with our largest customers, over 1 billion boxes have been reduced through packaging with our mailers and more sustainable, lower carbon footprint solutions. So lots of investment on our side. We changed our strategy, best product in system, right price and make it sustainable. Whether the customer's talking about sustainability, which they all are, we'll bring it to the table. We recognize it's actually going to cost more to do it, so we're working on our costs because we do believe we got to have it at the right price to do it. So lots of examples, but it's at everything we do. Sustainability is part of how we think we can differentiate ourselves and actually grow the business in the process. We do believe that sustainability is going to fuel our growth.

And I believe one of the first steps you made after joining the field there was moving the sustainability team from marketing to R&D. What kind of impact did that have on your organization and how did it propel innovation?

Good question. When you said impact on the organization, probably a little bit of shock at the time. If you actually look at our journey on Slide 5, and Slide 5 shows the earnings performance of where we are since we started, our transformation. And it started with changing the metrics, but sustainability was one of those things upfront where we had a lot of our innovation -- actually, even call centers was in corporate. So we moved this into -- underneath our innovators, and they actually reported at the time and they actually -- communications. So don't talk about it, what are we doing to change the designs. Don't put the cost at corporate; put the cost in the business. So -- and we had to change people. If we look at the 4P'S, our Chief Innovation Officer, who actually was in the press release with Tesco today is, first and foremost, on sustainability, driving these actions to make it happen. We also put metrics on our innovation team so that it's speed to market, how do we increase our innovation rate. We also changed our CapEx. What percent of our CapEx is going into innovation. And we also looked at our M&A. And if you looked at our capital allocation slide, you'll see we're investing. If we can't do it fast enough with what we have, we're going to go buy the technology and go make it happen. So it's been a significant change in the culture, in the processes, in the people. And I'm pretty excited that -- exceeding expectations. There was a lot of debate when we signed that sustainability pledge, which you see it's even one of the episodic events on that chart. When they debated with me at the time, it was -- is it impossible to hit that? Or is it improbable? And we all aligned, it was tough, but what do we need to do to change the organization to make that happen? And I'll say 2 years later, I'm pretty excited. We're actually ahead of schedule, and I think we're going to beat that pledge and I think we're betting on it.

Okay. And then how would you say the pandemic has impacted your customers' demands for both automated solutions as well as sustainable products?

Good question, and I'll just try to point to a picture. If you look at our Slide 6, Neel, if we can -- the pandemic, it shows up also on our internal chart of our progress on reinventing the transformation. It's been a huge challenge. Everybody listening on the call knows how different it is, those packages that are showing up at your home. A lot of people are actually realizing what we're doing. If you go to the store, you see that the food on the retail side, what's there, what's not there. Restaurants, just a significant amount of restaurants right now that are shut down, and some may never come back. So what it means to meat packing plant right now, that we saw the boom in March where they couldn't keep up, and then all of a sudden in May, shut down. So dramatic impact to our customers. So if you look at Slide 6, we kind of show it with a few pictures of the transition, and post crisis, similar to a question you actually asked before we started the call, when do you think the new normal is going to come? We don't know. We're planning for at least another year away. But how do we now go post crisis and bring automation again back into the -- how do we do things better, faster and safer? How do we bring the sustainability that's not going away? And so as far as our customers, the crisis has made this need go be more important. And then just quickly, if you look at Slide 7, that's our portfolio. And that -- this is what's been dramatic, and we call this our movie reel slide, where if you look at the shift in the portfolio, and this is second quarter, where you look up top and you see where it's gone from the protein foods and fluids, that market of 64% of our business; the industrial, which has been down dramatically; and then e-commerce, which has been very strong. Well, the effect on our portfolio, if you look at the Cryovac barrier bags, our largest, most profitable product line, as I shared on the call, was down 5%. It's pretty dramatic. Our largest product and most profitable product line in protective was down 26% with Instapak. Despite all that, the total portfolio was roughly flat. So what happened? We made significant gains in our Korrvu product, our Bubble Wrap on demand, our mailer business that was fueled by the e-commerce, up double digit, close to 15% -- over 15%. On the food side, we saw great gains in share with our printed films, our case-ready, our Darfresh, our lidded films up in the double digit to make up for our premier Cryovac barrier bags being down. Again, that restaurant business, that food service being down. So how has it affected our customers? It's been dramatic. How have we responded? I've been impressed how quick and how agile we are to be able to respond and remain flat and more excited as we figure out what this new normal is to get back to a high-growth engine for the business.

Great. And just speaking maybe about recent results, after the last quarter, you'd reinstated your pre-COVID EBITDA guidance. I was just curious as to what gave you confidence in doing that despite all the different uncertain variables at play in the second half of the year? And then more specifically on Reinvent SEE, can you just talk about what kind of contribution it's had on performance year-to-date?

Good. How about if I let my partner, Jim Sullivan, handle that? So Jim could speak a little bit. And then if Jim wants me to add some clarity on that, because we have a lot of good discussions on guidance and putting that back in place. And Jim can share also some of the questions on to Reinvent which we also have in the deck.

Sure, Ted. This is Jim. And I think, Neel, fundamentally, we want to be credible. And with what we were seeing early in the second quarter, there was a lot of uncertainty. We didn't quite know how demand trends were going to play out in the pandemic. We didn't know if our customers were going to be able to operate or if we were even going to be able to operate. So clearly, at that point, we decided it was prudent and credible for us to withdraw our full year guidance. But coming through the second quarter, and as you know, we did quite well in terms of our execution in the second quarter. We did see more clarity around customer demands in both of our segments, and the combination of having 6 months of actual results with strong execution, and that clarity improved, albeit still a bit uncertain, gave us the confidence to go ahead and put that guide back up there. And as you said, we pretty much reinstated the EBITDA guidance. We actually raised our cash flow guidance. The company continues to be very focused on cash generation, and we're doing quite well there. Reinvent SEE, as everyone knows, has really been the strategic underpinning of the improvement that we've seen in the business really over the last couple of years. We are on track to deliver at least, and the words at least are important in this context because we do see opportunity to overachieve on that particular guide as we look to the back half of the year. The total program has delivered -- is expected to deliver over the period $330 million of benefits. That's up, in terms of benefits, about 30% from what the company thought it could achieve when it launched the transformation. And we've been able to accomplish that with cash investments being aligned with what we thought we would need to do. So the program, let's call it the restructuring aspect of Reinvent because Reinvent will continue into the future. We will continuously look to reinvent how we do our business to improve it. But the restructuring aspect of the program will wind down in '21, and it will become just the company's operational excellence engine that will drive ongoing benefits in excess of inflation. And so beyond the project implementation aspect of Reinvent, we're very bullish about what this is going to do for the company well into the future. I've been involved, as you might imagine, like, 35-plus years with companies in transformation. So when I landed in Sealed Air mid-2019, I can tell you really quickly, I was impressed with how the company was approaching it, and if you will, the stickiness of this into the future. I'm very confident in our ability to continue to keep this thing going into the future.

Great. And maybe just turning to the fluid, in particular. Last quarter, you had 2% volume declines. And I think that came in ahead of expectations of mid-single-digit declines. Can you just talk about what kind of led that upside? And then just thinking about the second half of the year, I think you do expect there to be some sequential improvements. Can you just talk about how trends are tracking so far versus your expectations in food retail and food service?

Yes. This is Ted back, Neel. Again, if you look at Slide 7 and then maybe I can go through an example or 2. So if you break that out, what's happening in food, boy, it's been literally month-to-month on the whole business through this crisis. So the food service, as you mentioned, the food service, being the restaurants I talked a little bit about earlier, has been extremely slow. Retail, especially early on, was surging with people buying what they can to stores. We are seeing some leveling of those both back. We don't want to lose some of the share gain that we made. So we actually think there's upside opportunity. The thing that we're excited about, if you look again at the slide, we have one of our examples that we're working on the protein side on the automation again. Now in the quarter, we did mention that with our equipment going in on some of these major automation projects we're working, we worked slow through the crisis, getting people into our customers' facilities, facilities being -- starting and stopping. We do see we're going to make some progress on that in the second half. So we do think that's some upside. So getting started -- actually, jump-starting on our automation program. So we think that will be helpful and actually drive a higher level of growth, but we got to get those installs in place. So I think the food has an opportunity against those headwinds. And once the world will hopefully come to a new normal, we think we can go and drive our growth, just like I mentioned in our plan, above the market and putting the audition on top of that even higher to get to that 5% growth where we want to get to.

And it seems from -- Reinvent SEE contributed to very strong margins in the second quarter of 25% for food, which was an all-time high. I also know that price cost benefits played a key role in the quarter. But do you think the segment could eventually achieve a sustainable mid-20s EBITDA margin?

I would be disappointed that, that's -- if we only achieved that. If we look at it and if you think about the model that we share there with you, if we look at the automated solutions model, if you look at that $175 million worth of equipment today, that the margin on that equipment is basically breakeven. Driving the volume, driving the margins by focusing on savings, bringing an automated solution, our plan on that $500 million number is to actually bring our equipment to world-class levels of profitability. So definitely believe that, that margins and where we are on the food business, not happy where they are. Not happy because I think we can do so much more because the value we're bringing to the customer is significant. And it's not to be the old way where we go raise the price to go get those margins, it's truly going to be fueled by the savings that we bring to bring some pretty significant solutions and savings to our customers. If you look at that example on Slide 10, this is example of a customer that's actually in place, multiple customers in the protein area. And you can actually see the robots on there. And the people are asking me because I'm bringing that up quite a bit with our robots and cobots. We're putting intellectual property into that network, working with these customers, driving just a significant level of efficiency, productivity and safety. And the savings are paying for all of that. So the equipment piece is going to be even much larger than it was in the past and profitable. Sharing the savings with those customers. So it's also going to be working at a much higher level of productivity, so pulling more packaging materials through. So we definitely see this as not only will it drive the growth, it'll drive the profitability and drive the margins. So our design is to take those. We're not close to peaking on the margins for our food business. We think there's a lot more to go.

That's great to hear. And then I guess moving to protective. Kind of similarly there, you did have volume performance a little bit better than expectations. And I believe industrial-related performance was part of the reason for that. So I was just curious as to how end market trends are tracking for your industrial customers so far in the third quarter.

Yes. I have to actually talk about the other side because we talked a lot about protective, growing the protective. And I just want to highlight, I feel pretty good about what's going on in the quarter, what happened in the second quarter. Just huge shifts in volume. So I want to -- the mailer business right now, that's been significant. By the way, introduced in less than 12 months, a recycled content mailer with more to come on that. So taking that business well into the double digit, including our Korrvu and our Bubble Wrap on demand, also the Bubble Wrap on demand driving the recycled business. So I just want to highlight that. We want to grow that protective side in the same aspiration to get to that 5% against the market. So the industrial side, to answer your question, we did see it move up in the second quarter. So -- and is what we're watching in the marketplace. The real issue where we do quite well is in automotive. And even if you look at one of the slides that we have on Slide 11, you can see our Korrvu product. And what you see inside there is a headlight, a halogen headlight that we package right now. We do some of that special packaging with Instapak. And now we're even driving it through our Korrvu product. So we see the automotive coming back, but not fast yet. We do see it turning. So right now, we see that as opportunity for the second half, but not back to where it was before the crisis. But the other parts are more than making up, so I'm actually -- I think we're making some really significant progress. I have to highlight, though, the big player that's really exceeded expectations on the protective side is our acquisition with our automated packaging packing systems. Having that product line, that level of automation, has really helped us through this tough time. Part of their business was also connected to the industrial side. So they saw that impact. But we're seeing that level of automation pick up. So I think that could be part of our upside on the second half despite the challenges that are ahead of us.

Great. And you highlighted initially about the mailers and how that's been a pretty strong boost to volumes protective. I was curious as to how long you think e-commerce demand will remain elevated. And are there any structural changes in e-commerce packaging as a result of COVID that could be beneficial going forward?

Yes. I mean, Neel, I don't -- anybody who says that e-commerce is going away. I think it's going to be with us. I think e-commerce even going B2B, that's where we think we'd like to lead as the B2B approach on e-commerce, and we think that's an opportunity for us to change the game. But -- so yes, the packaging designs are changing. If you look at Slide 7, introduced a product in there you see in our Korrvu doing spirits, doing wine with just a simple bubble. The Korrvu product is really using our barrier technology and having it suspended in a box and having a beautiful presentation on it. The other part of e-commerce is connected to digital. So as we go automation, you'll see on that slide, you'll see the SEE mark all over. And as we look to bring digital packaging in where we can actually let the consumer -- now you getting at home, you put your phone in front of the package, you fire off the SEE mark, and it tells you what's inside the package. It tells you -- maybe if it's the meat, it tells you a recipe on how to make it. If it's a product, if it's a bottle of wine, it tells you about the wine. And it connects to our customers' apps and website. So we think the digital -- and we're investing heavily in the digital printing -- that we can put that augmented reality right into our SEE mark so you don't need an RFID chip, and you make it lower cost, friendly and sustainable. So when you look at that digital package, you could even look at the plastic, what do you do with it, which is the biggest problem of plastic waste. People don't know what to do with the plastic. So e-commerce is with us, and we're trying to get ahead to do some pretty special things to make the packaging side of e-commerce better for our customers, better for the users and better for the environment.

Great. I have one question that came in from the audience. So given case-ready is much more -- in a much more competitive market, what is Sealed Air's competitive advantage? And what risk you see from paper-based solutions?

Good question. I think we have -- in case-ready, we have a tremendous position in the marketplace. As I shared, getting in this crisis, we've actually had some share gain. Part of the gain is the digital printing piece on it. Can we even be more cost-effective and to get into adjacent markets with it? Our Darfresh or Optidur having a lower content of plastic with still giving the right barrier protection, we have a competitive advantage. As you saw -- well, if you haven't seen, please look at the press release from Tesco this week in Europe to see now actually bringing recycled content, which is extremely important in the European environment, into a case-ready material, is a big deal. Definitely a differentiated market advantage for us. So we're going to continue the investments in our case-ready solutions, doing different lid films. We're working our lid film business, in the crisis, was up 11%. So -- and part of that is share gain. So we can continually differentiate. And again, on the automation side, helping our customers with the automated solution on the packaging. So we think we're just going to continue to go fast, bring innovation. And we think we can be very price competitive. I'll share with you very openly, I've been meeting with the top customers. I'm pretty open that, yes, we are the most expensive, but we will not price ourselves out. If the price is wrong, we're going to find the savings and work with them together to go get it, and we're working on our cost. But we will have the best product at the right price, and we'll make it sustainable. And I think we got even more share gain and new products that we can fuel that growth, and case-ready is a big piece of our portfolio to make that happen.

Great. So I think we're actually about out of time. So I think we can end it here. Thanks again, Ted, Jim and Lori, for your time. Really appreciate it.

Thanks, Neel.

Thanks.