Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Okay. I think we're ready to go. Good afternoon, everybody. My name is Ghansham Panjabi. I'm the Packaging and Coatings Analyst at Baird. Thanks again for joining us for our Virtual 2020 conference this year. And it's real privilege to introduce Sealed Air management. From Sealed Air management, we have Ted Doheny, Ted's President. He's been President and CEO since January 2018, joined Sealed Air in 2017. Previously at Joy Global, CEO from 2013 to 2017, and at Ingersoll Rand for many years prior to that. Also, Jim Sullivan. Jim is SVP and CFO. He joined Sealed Air in June of 2019, that's about 1.5 years. And he was at -- also at Joy Global as CFO prior, along with many other roles in the industrial and chemical industry prior to that. And last but not least is Lori Chaitman. Lori has been investor -- Head of -- V.P. of Investor Relations since 2013, and many of us have interacted constantly with Lori, and she was at Monster Worldwide, along with several other firms prior to that. So I'm going to turn it over to the management of Sealed Air. We're going to run through a brief overview of the company. Please use the portal, as you have been doing, to send questions in. And this is meant to be interactive so we look forward to all your questions. So with that, Ted and Jim and Lori, welcome.

Thanks, Ghansham.

Thanks, Ghansham.

Thank you.

Did you want to give us a quick overview of the company? I see you have your slides up, Lori?

Sure. We're -- actually, I was just ready to go straight into the questions, but be happy to -- we'll describe the company pretty quickly, I'm sure, with whatever the questions are.

Yes. Maybe just give us a view of the segments and the geographic split. Our conference services team wants us to kind of go through the company's introduction wise.

Okay, sure. Yes. Sealed Air, been around for many, many years, leading packaging supplier, the businesses we serve, pretty much ubiquitous, anything that's packaged, both what you're seeing at home, what's in the industry. The picture slide we use to tell our story is Slide 5 in the deck, and we serve the protein market, foods, meat with our iconic Cryovac brand. We're into industrial and electronics served with our iconic bubble wrap brands. And then also the fast emerging market of e-commerce that is really part of all those industries in the future with everything going on the web. It's been around for over 70 years. The geographic mix, 60%, a little over 50% in the U.S., but we serve all the markets around the world, from Europe to Asia Pacific, Latin America. So pretty embedded around the world. Simple overview. Most people know who we are. The exciting part is probably where we're going. We'll leave that for the questions.

Okay. Great. So Ted, just kind of stepping back, you've been CEO for almost 3 years of the company. Take us through the evolution of the company over that time line. Obviously, you've had a fair amount of success with Reinvent SEE. Maybe take us through the initial construct, what you've accomplished so far? What's left? And how the program has also evolved over time since you kick-started that process?

Sure. If we go back, I can't believe when you said 3 years, it will be 3 years in January. So it seems very quick, but then long. So if you look at Slide 3, when I came into Sealed Air, Lori, if we can I end with the 4 Ps. But when it came into sealed air, looking at the business, what I really saw was similar to previous companies that you mentioned -- I was with Joy Global and Ingersoll Rand, an iconic company with just a great history. And from my outside look in and then as an insider, I saw just a tremendous opportunity here. Some good, some bad and ugly, and where did we need to take the business. So we started with this vision of how could we take the company that's arguably the best in packaging and take them to world-class. So -- and you called it evolution, the people that I'm working with, probably call it a revolution versus evolution of how we did this. So we said, hey, let's look at some of the metrics. So what does world-class mean in financials, that means we got to grow. So we got to grow faster than the markets we served. And we looked at our whole portfolio that was basis protective and food, but just look at all the pieces underneath, and let's beat those markets. And then to bring in really operational excellence. Really, really good pieces and parts of the company. But the operational excellence -- didn't see it there, especially when we said world-class, that's when people froze and said, boy, there's an opportunity. So we look at some of the metrics there as well. And we said, hey, a world-class company has productivity that's beating inflation. It has leveraging capability, where we were with our productivity. Can we be leveraging a percent a year above our costs? Could we look at leverage above 30%, et cetera? So we put those metrics in place. And then the other metrics was the ROIC. We looked at our capital allocation. There was some history of acquisitions, obviously, with Diversey. It was a little bit off-center. So the evolution of the business has moved pretty dramatically. So in 3 years, sales, we moved up about 9%. We've moved EBITDA over $200 million, 280 basis points of margin expansion and more to come. So the next piece there that we hit, when I got here actually was in January of 2018, where the war on plastics hit. So the sustainability issue instead of running from it, we've actually attacked it. How can we actually focus on sustainability and really drive not just the war on plastics, but carbon footprint. And do some really interesting things there. So took that head-on, and lots more to come.

Okay. Jim, if I could ask you a similar question, this is my first time hosting you at our conference. Just your observations in your 1.5 years as it relates to the internal initiatives and the organizational alignment towards the next phase, which is going to be growth. And Ted, I want to come back and really spend some time on automation as well. But let me start off with Jim first.

Yes, Ghansham. So I've been here almost 18 months now and really came about 6 months after the company. There is Ted's leadership launch, the Reinvent transformation. So I've been able to see, over the past year, really how this has transformed the company and driven significant structural productivity benefits. And as we sit here today, I think as we even look into 2021 and the pipeline of opportunities is very robust. We will be shifting the Reinvent transformation from a restructuring oriented project to just our regular way, continuous improvement system. And it's transitioning very well. And the pipeline of opportunities, as I said, continues to fill up and show forward opportunities. So a great example, in my view, is shortly after I joined the company, the company did the APS acquisition. And if you look at the time we acquired the company, this was a 14% EBITDA margin business. And of course, over the past year, with about 50% of the portfolio tilted towards industrial, the top line has been relatively flat, which has performed better than some other industrial positions we have in the company. But if we've taken that margin from 14% to 20%, and we exited the third quarter, and we feel really good about being able to sustain that into the future. And I think it's really a good example of how the power of the Reinvent productivity engine can translate across different assets. And so we're very proud of that. I think additionally, it's worth mentioning that as we kind of wind down the restructuring aspect of Reinvent for our productivity, we're really just getting started with the Reinvent commercial workstream. And a lot of the developed capabilities and governance processes that really underlie the improvement in our cost structure, we think, are going to be translated into the top line and drive above-market sustainable growth into the future. And then just the final comment I'll make from where we were a year ago to now is the significant improvement in our EBITDA to free cash flow conversion. The time I joined the company, we were in the high 20s. And this year, we think we're going to be over 40%. And of course, the strong cash generation has really helped us improve the balance sheet. In August of last year, we were levered pro forma for APS at about 4x. We exited the third quarter at about 3.3%. And even though we now introduced share repurchase back into the capital allocation mix. We think we're still going to be able to move leverage down by year-end about 3.2x. So really good balance sheet, great liquidity position and our EBITDA cash flow conversion is really where you want it to be going forward, over 40%.

Thanks for that, Jim. And then maybe that's a good segue into the commercial aspect. On Slide 6 of this presentation, you have the -- you had this in the earnings review as well. And Ted, maybe just take us through this because I want to hear about the evolution of how the company is -- I mean, clearly, automation is one of the big themes that's come out of this COVID issue, right, in terms of labor content, decontenting, and reducing proximity of labor, et cetera. And you guys have fantastic capabilities from an automation standpoint in Cryovac. And you have made a lot of progress, especially with APS and product care. But take us through the slide in terms of the opportunity set, and in particular, the $5 billion-plus growth opportunity that you highlighted over the life cycle?

Sure. What's exciting about this is equipment has been in Sealed Air's business for years. What the shift we're making in the strategy is moving it from having equipment to actually subsidize getting more materials to actually have equipment stand on its own and really drive the automation with our customers and how do our customers put more things into a bag, into a package and do that safely, effectively and with a high level of productivity. So we're building on what we have. So the $200 million -- when we first announced this actually for 2020, we were at $175 million. Already after the third quarter and where some of the penetration is going, we took that to $200 million to get to the $500 million. So I'll talk about that bridge in a second. But the first issue is really focusing on automation with the savings. And we have some examples in the deck even on fulfillment, where especially on the protective side, where we had that old Razor/Razorblade model, where actually some of the major successes this year have been how do we actually load those packages at a significant higher rate and not repackage. So we use our systems to drive the savings. And the savings actually paying for the equipment, and we're even going beyond equipment. We're going into the full system, the digital, the communications, et cetera. And the key element of this first piece is focusing on big numbers, 30% savings is really our divining rod with the customer. The second piece is how it ties into the bridge as well as bringing in the SEE automation brand. You mentioned Cryovac and your Bubble Wrap, but how do we bring our Sealed Air automation in brand around it because we use a lot of third-party equipment players over our history. But how do we bring that in and put our brand and actually bring that equipment in place? So do we potentially need to look at some M&A in this space? Probably. But right now, we have very good partners in this space, and our brand is strong enough to pull that through. And then also bringing our service element around that. So the last issue there that I just want to highlight is not to forget that the equipment is actually going to bring through the material even faster. So that multiplier effect we'll get to. So how do you get from $200 million to $500 million over the next 5 years? One thing, as you know, execution is really important. We like to under-promise and over-deliver. So our internal plan is much more aggressive than this. The pull in the market is there. We're seeing it. We're feeling it. But also, as I mentioned, that third-party working with our partners, where in the past, we would go side-by-side and not bring that into our offering. We're looking right now to bring that full system in, and the savings will allow us to actually bring that equipment in, charge for that and be able to get to that $500 million even quicker than 5 years. I have probably more detail just to show an example, if we go, Lori, just go to one of each. This one here is equipment, just to put some numbers behind this. The productivity of putting this system in place. This is actually packaging shoes and where we can put our film away where you don't need all that extra boxing, very simple. But this piece of equipment is roughly $0.25 million. And we put this piece of equipment in to packaging instead of a person loading a package at 5 to 6 a minute, we're up to 40 a minute. So driving much higher volumes and the material pull-through is $750,000 worth of material for one of these systems. So you can see that multiplier effect coming in. And the payback for this example, this is a second and now third quarter example as well, is less than a year for the customer. So the equipment doesn't need to be given away, actually the payback for the customer's very, very attractive. So here's an example. And the same thing. If you go to the next one on the food with the Cryovac system. And this is really bringing the automation we're doing. And I remember when you first asked about automation a couple of years ago, what does that mean? We're bringing automation, that's part of our savings that you're seeing on our factory side where we have many, many process from you take a pellet to a bag. And we're working on continuous flow, and that's where a lot of our savings is coming through. Well, we put all those bags in a box. So now we're bringing that automation to put a high-density roll right into our customer's system, informing the bag, filling the bag, sealing the bag, printing the bag into our customers' operations, offering significant savings as they're driving automation. So examples for both of our businesses, and this is what you're seeing on the news, especially with the meat packaging plants because the labor issue was there before the crisis, but the crisis is making it worse because you don't want people in contact loading all those bags in a meatpacking plant. So bringing automation in is, we think it's going to be a growth driver, and that's where that $500 million is coming in. We think it's a 1% to 2% growth opportunity on our existing business of today.

Great. And the investments that you've made in terms of technical talent to be able to commercialize these opportunities -- because clearly, post-COVID, I would assume there's a lot more engagement with your customers on both sides of your portfolios, right, both portfolios. So what are the investments you've made? How should we think about CapEx dollars evolving over time as you really start to make a bigger push towards this massive opportunity set you've outlined?

Well, we did -- before the crisis hit, we shared that we're going to move that CapEx up as we are working on some of our internal automation and our growth. We said to 4% of sales. Actually, right now, we're tracking below that. We're still keeping that out there. So we think the 4% number as a guide is right. Some of those investments, if we look at our capital allocation slide that's now in front -- we might be investing in pieces along the way to get there. We've been investing in digital printing. And if you think about where packaging is going, Ghansham, we have over 100 graphic artists that work with our customers to make their brand and their packaging come to life for that at-home environment or even in-store environment. So we're investing heavily on digital and the digital printing, so we could actually give that experience and actually with digital printing, how can we even drive our costs down into our facilities at a step function improvement in our costs. So some of that investment is in that 4%, not all -- it's not all extrusion lines, which are very expensive, but there will be some. But as you see, we even put the allocation down below to actually shift our capital allocation on growth and productivity. And we think that 4% number should be able to fuel where we're going. If we see something more transformational, that would probably be in our M&A bucket. But right now, we think that $200 million is a good number.

And going back to what Jim said in terms of Reinvent SEE moving away from the productivity phase towards commercial. What do you think this nets out in terms of a realistic algorithm starting with core sales up on top all the way down to EBITDA, et cetera?

Well, let's start with the sales piece. We're guiding that we have stable markets. We want to beat our markets. So we're using that 2% to 3%. We want to beat the market. We think our growth streams now by adding automation, adding digital and adding sustainability. We think the sustainability could be part of that growth. We think there's another 1% to 2% on top of that. So then taking that all the way down to the EBITDA as we shared part of our Reinvent and where you see we're guiding you by our leverage of 30%, we don't think the -- getting into the low 20s on our returns, we still think we have some margin expansion capability to get into that mid- 20s, and that's where we're designing to. So from the top line, we think this is a stable market that we can grow, beat our markets, adding to it now with some new initiatives. And then on the bottom line, we still think we have some margin expansion capabilities to take us to that mid-20s that we said we were designing to with Reinvent.

Got you. I'm going to take some questions from the audience that have come in and audience, thanks for those and keep sending them in. I will definitely get to these. And a follow-up to what you just said. The question is on digital printing. And what inning are you in terms of deployment of that technology?

We have the investment made. We have the intellectual property in place. We have the people in place. We actually went outside to get that on that investment. So we are now actually deploying some of those resources to our own facilities, but we're looking for the markets that would be most attractive to as well. For instance, with our major automation sites, do we actually want to bring the digital printing and actually put it in our customers' facility. So we're in the early stages on that one. Internally, we've got the technology tested. So we're in the deployment stage.

Got you. Another question from the audience on the opportunity set for Sealed Air from cold chain packaging, especially health care, biologics and, of course, the vaccine deployment.

Great question. And you saw -- if you go to slide, go to our -- we call it movie reel slide real quick. Part of our shift, it's just been pretty dramatic. If you look at our portfolio this year. The subject last year was can you grow the protective side. Now the protective side is growing. Huge shift in the portfolio. We've been packaging the COVID-19 respirators. We've been packaging the testing kits. We've been -- our Autobag is now doing the masks. The 300 million mask are out there. So we're shifting to that market, and that's where we want to go. So lots of questions right now on the cold chain with the vaccine coming out. Some of the producers have very, very low temperatures for storage with the biothermal. So we're connected right now to the supply chain, piece of that and working on that as we speak as we continue to shift the portfolio. We have a lot of intellectual property. Even if you look at the biomedical that we're doing with our Cryovac technology in the bags that are out there in the medical industry. So the biothermal piece that we're working with our product line, even with our Instapak, we're thinking what are the thermal capabilities at Instapak that we can quickly deploy to those markets. So we're shifting the portfolio as we speak, and that will definitely be a key area for us in actually the next few months.

Got it. Maybe I'll just finish up on the questions from the audience. Question's on potential divestiture activity in 2021. And I guess maybe a broader question as you position more directly into automation to obviously commercialize the many different things that you're working on. Is there a portfolio reshaping that will occur on the margin? How should we think about that?

Yes. We actually map that, Ghansham, which is one of the charts, I'm sure you'd love to see is we have our entire portfolio mapped out, what's growing, where we're going, where the investment is. It's -- I don't know how not to say it without using the BCG matrix, but ours is kind of on steroids. And so we have been divesting part of our portfolio over the last 3 years. Some not as effectively as we would have liked. Obviously, some of those divestitures could have been cleaner. But we are looking at the portfolio as we speak. Does it fit into those markets that we're talking about that are growing? So on the fringe, not a wholesale divestiture of any of the businesses. But on the fringe, we are looking at businesses that just aren't -- don't hit our growth profile.

Got you. And then in the last few minutes that we have, maybe we'll tie it towards the near term. The lockdown's in Europe that's occurring, there's speculation about the U.S., just given the flareups here. Have you seen any shift in business momentum across your 2 segments? I asked you this on the earnings call on protective, and it didn't sound like that was the case, but what about the food side? And how should we think about that aspect?

Yes. It is moving. You're obviously watching the news since we're embedded in these countries. The Europe piece, what's going to happen with this next wave in the lockdown. So we're already seeing that. We don't think it will be the same effect. As you know, it was just total shutdown earlier in the year. But we are seeing that definite change in Europe, especially in the last few weeks, significant change. What does that mean to our business? Again, we're moving the portfolio. Different parts of the world, we're moving quicker. On the protective side, we're seeing some of our mailer business really kick in as people are looking for simpler packages, we actually have a sustainable solution that we're actually launching this quarter on sustainable mailers. Actually, we're calling it a presentation pack. Again, really focusing on the sustainability side of that. On the food side, where we are in Europe, the retail market will still be strong as there's more of the e-grocery look, fit and feel. The food service, the same issue in Europe and the United States will be challenged. But right now, the shift is we think on the industrial side with the car piece, we should feel that industrial come back but just still not to the full effect where we were post-crisis. So Europe is the one that -- definitely with the resurgence happening, it's going to definitely be pushing our portfolio again, but we now have 3 quarters of experience to where that's going to go.

Got you. No, that's a good answer. And then maybe just sort of finally, as we kind of think about your company, your cash flow conversion versus your peer group, which is exceptional. Your margin profile relative to...

It's okay.

It's improving. Your margin profile and you have a lot of internal initiatives, et cetera. There is still a big valuation disconnect between you and your peer group relative to those 2 dynamics. What do you think investors are underestimating? And then maybe I'll tie it into the final question is, as people are listening in, making their own decisions about how to position for next year and cyclical rotation and offense and all that kind of stuff, we see thrown around. Why should they consider Sealed Air as part of that mix as you think about positioning for the world perhaps getting better next year?

Okay. Well, I leave part of that for you to decide because that's what your job is. Maybe changing your...

I wanted to hear your view.

Right. I -- we'll give that. But it would be nice if you went from a top hit to change that A to at V. But so if we look at what we're dealing with, Ghansham, is if you look at -- you're a good numbers guy, people are looking at us building out our patents from regression models. So the good to bad, the ugly of the past is in there. What we're focusing on doing some things that are significantly different. And we started the conversation, not an evolution, but it's the revolutionary change of Sealed Air. So that's not in the models. What we focus, though, is on what we can control. We've had 11 quarters in now of doing what we said we were going to do. We've had a lot of excuses. We've had COVID-19. We've had all kinds of issues hit, and you might even ask about some of those governmental issues. But despite all of those, we continue to execute and do what we say we're going to do. And that's what our focus is on the business. We will earn the right of trust and being reliable. We do what we say we're going to do. We're built on stable markets, which is a good thing. And really the exciting part of the future of where this automation, digital and sustainability is going. That's the fuel the next stage of the Reinvent. And we're really trying to separate, reinvent from restructuring. And I'm really just really careful. And even if you notice this slide, it's not just a structural change, it's a cultural change. And that's the part we'll just keep executing, do what we say we're going to do, do it better than anybody else, and then we earn that right. And so I'll leave it back to you then. When you see it, you feel it. And you recommend it. So we think our execution will differentiate us. And it's over time. You got to do it every quarter. And no matter what the excuses are we got to execute. And I feel very good that we got the team in place. And it's a different team. It's the people behind all this, and that's where I spend a lot of my time. Do we have the right people in place. Do we have the right products in place, the right processes and always end with the 4 P'S, but this is real. We're pointing to world-class. So that's how we measure ourselves. If we're not world-class, we don't feel good about it. Acting as one company, just dramatic changes of what that means. Changing the metrics internally, changing the reward systems. You asked about the -- where the markets are going with the vaccine. We're using our biothermal film naturally in our core view product now. So moving all that stuff very, very quickly to those markets. In this piece on the products, this is what we're fortunate about. The best products, the right price, make them sustainable. The old model was we kind of priced ourselves in trouble. Now our cost structure is in a good place. We can attack these markets and go get them. And I think that's very different from the past, where we didn't have the cost structure in place, we couldn't attack these new markets, and I feel good about that. In this operational excellence culture, it's still -- that is evolutionary. We're working on. It's not there yet, but we're heading in the right direction. And the reason I'm saying not there yet. There's a lot more good to come.

That is a good spot to end. Ted, Jim and Lori, thanks again for joining us. Audience, next presentation will begin in 3 minutes. And thank you again for your participation, everyone. Thanks, again. And see you all there. Take care.

Thanks, Ghansham.