Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Good morning. This is Jeff Zekauskas, chemical analyst at JPMorgan. It's my pleasure this morning to welcome you to the [ 2021 ] JPMorgan Virtual Industrials Conference. Our conference is virtual in the interest of health and safety. And we very much appreciate your attendance today. There's going to be a fireside chat. If there are questions that you have, you can submit them by e-mailing me at [email protected] or submit questions online on the JPMorgan conference website through the ask a question feature. It's my pleasure to introduce Ted Doheny, the CEO of Sealed Air, and he's been CEO since 2018. Prior to joining Sealed Air, Ted was CEO of Joy Global. And he spent decades at Ingersoll Rand. Ted is joined by Chris Stephens, who's the Chief Financial Officer of Sealed Air. Chris was CFO with the Barnes Group for 11 years. And maybe Lori Chaitman is there, who's the Head of Investor Relations. Ted is going to make a brief presentation, and then we'll begin our chat. Ted?

Great. Thanks, Jeff. Maybe not decades at Ingersoll. I'm a lot younger than that. So I appreciate that. And actually, it's a pleasure to be here with JpMorgan. And a pleasure to talk to all of you about Sealed Air. I'd like to open it up with just a little bit of background of the company. If we go to Slide 3 in the deck, we start with our purpose statement. We're in the business to protect, to solve critical packaging challenges and to make our world better than we found it. We're leading with automation, digital and sustainable growth strategies. So if you move to Slide 4, we call this our movie reel slide. Sealed Air is a global leader in high-performance automated packaging solutions for food, proteins, liquids and for protecting goods that are shipped all around the world with our broad portfolio, diverse end markets and iconic brands. The play button in the center of the slide is to encourage you to visit our website to see more. We design our packaging solutions to maximize food safety, minimize waste, protect goods and increase productivity. We're a global organization with 65% of our sales derived from the Americas, 20% from Europe, Middle East and Africa and the remaining 15% from Asia Pacific. Now if we move to Slide 5, we see our 2020 results in our SEE operating model. I'd like to point out our strong results for 2020. We delivered over $1 billion in adjusted EBITDA and nearly $5 billion in sales. Our top line increased 4% with industry leading margins at 21%. Margins were up -- our top line increased 4%, and our margins were up -- hit 21%. We were able to do 130 basis points improvement, and we had strong operating leverage of 77%. We converted more than half of our EBITDA into free cash flow, generating $556 million in 2020 in cash and an ROIC of 15%. I'd also like to highlight we're giving our 3-year outlook beyond 2021. Our SEE operating model is expected to deliver organic sales growth of 3% to 5% with a 30% operating leverage. We're investing heavily in automation, digital and sustainability, and we're looking for digital growth from automation, with equipment sales going from $250 million in 2021 to greater than $500 million by 2025. But Jeff, before I turn it back to you, I did want to comment a little bit about what's going on as we're navigating the current environment. The raw material environment is extremely volatile right now, and it's changing from week-to-week, and especially, as you know, dealing with all of the chemical companies that are out there. We're staying close to our suppliers and our customers, and we're taking price actions. Demand trends, though, have stayed consistent, as we ended year-end with automation, e-commerce, food retail, protein exports that are all positive, and industrial has also picked up. We're leveraging our global footprint to meet our customers' ever-changing demands, and we're addressing some significant supply disruptions. We're working with our customers to drive savings through our new innovations and automation. This is helping to alleviate continuous raw material increases we're all facing. We're staying disciplined on what we can control, driving our Reinvent SEE business transformation, taking cost and productivity actions and accelerating new product development, and we're getting price while gaining share with new innovations and automation. Our solutions strategy is resonating with our customers, delivering the best system, at the right price and making them sustainable. With that, we're confident we'll be able to meet our commitments. So Jeff, let me stop there and turn it over to questions.

Your growth expectations over a longer period of time are now 3% to 5% growth. What gives you the confidence that you can achieve that?

Well, first of all, looking at -- the first step is we've a very diverse portfolio, multiple different markets. And so we think we should be able to beat just general GDP, also accelerating our innovations and also bringing some of the sustainability solutions. We think we could take that another 100 to 200 basis points. And then we're quite excited about what automation means to us with an additional 100% -- or 100 basis points. So we're pretty confident that we believe we can make that happen. And starting in 2021, we think we're well on our way.

So you have 2 large businesses, Food Care and Protective Care. Do they grow at the same rate? Does one grow faster than the other as a base case?

Well, in today's environment, everything is different. So -- and actually, if you look at the portfolio, we call the movie reel slide, you'll see, Jeff, that we actually cover many, many different markets. And so historically, we defined the company's food and protective. But if you look at food and you look protect, the sub piece is growing at much different rates. So let's take 2020. Our 2 top product lines, one for food and one for protective. Our largest [ end ] fresh red meat, which was our bag business, actually declined. So we had growth last year, but our largest product line was down. Look at protective, our largest, most profitable product line, which is Instapak, also down. But if you looked at the whole portfolio, we had other products growing at double digit. So the short answer to the question, do they grow the same, no, quite different, what's underneath, but we think collectively, we have a lot of growth opportunities. The 2 that I talked about from last year should be opportunities this year, especially as we get through the pandemic. Our bags business, which was directly related to food service, which is restaurants, fast food, et cetera, being way down, that should come back. On the Instapak side, that's the industrial, also coming back. So that coming back in that other part of our portfolio with many pieces growing at double digits, we're feeling pretty good about our growth prospects.

Why is it that a rebound in the restaurant industry is good for your Food Care business, Ted?

Well, if you look at the restaurants, we do bags. Our [ currency ] actually adjusting to Cryovac line, we do almost 6 billion bags a year. So those big bag -- we bag the meat multiple times as it goes to those restaurants. So this is the big bag business that's going into fresh red meat that goes into the restaurants before the meat is prepared. So having that market open up to us would be very good to our bag business. Now the other part that's exploded is the retail business. As you've seen in the grocery stores, the meat section. You also see going to e-groceries. We're doing a lot of work in that, as the grocery stores are changing and achieving very fast. It's another -- it will help our bag business as that goes forward as we get through the pandemic. So we think there's more and more opportunities in the bag business on the fresh red meat side.

So there are various meats that people eat, whether it's chicken or pork or beef. And sometimes there are swine flus, there are difficulties with herds. So there are cyclical factors. I would imagine that affects your business. When we look at 2021 and 2022, are there positive cyclical factors of this kind that can touch the Food Care business?

Sure. The -- well, all those problems become opportunities, of course.

Yes, exactly right.

So -- and you didn't mention the slight thing called COVID-19 as well. So things continue to hit. So does that help our business? Yes, because it drives food safety, it drives the hygiene, it drives automation. So there are more people in the world that need to get protein. There's more people in the world that want it safe and secure. So we think those secular trends are actually very positive for our food business, especially in emerging markets where, like one of our large markets is in Brazil or China, where it's going from a wet market to a prepared market instead of hanging the meat, having a pre-package, so you can get more proteins to more people. We think the packaging opportunities will continue. When you mention things like the swine fever, or other pandemics that come out it, it's just a higher level of safety and security, as they prepare that food. And it goes even beyond fresh red meat or poultry. Fish is an opportunity for us. And even other parts of the food industry, the secure packaging, we see that secular trend to continue.

Ted, can you talk about how automation is something that speeds the growth of the Food Care business?

Sure. So if you look at -- you've seen on television, you see the meat packaging plants. And one of the great benefits we have on our strong history, especially with our Cryovac brand, we're in those meat packing plants. The largest ones in the world, we're there. So when you see, they're using our packaging material, you see lots of people around those lines. In today's COVID environment too close, not at that safe distance. You see people moving, putting the meat actually into a bag, into a package. So with automation -- and this trend has been out there for a while. It's now just being accelerated with what's going on with COVID. How do we automatically or using now our new company, auto bag that meat. And so how do we do it safely and securely? So we're bringing our scientists and our technicians and our engineers at those meat packaging plants. So what can we do to actually do it safely and do it touchless and touchless is our theme, so actually measuring the touch points in an operation and how do we make a touch list, removing people from harm's way, so they can monitor the operation rather than being in dangerous locations. Plus, we're bringing in more sophisticated technology. We're bringing in scanning, artificial intelligence, so we actually know it's going inside the bag. We're using trackability, traceability identification, as we work on our smart packaging, so to help the customers know exactly what goes into that bag, so they can track and trace it if -- as you forecasted, other crisis will be in the future, how do you know where your material is or the meat and do some really interesting and exciting things. So we see automation is not just a productivity play, but a security play. Also in automation, as I shared, Jeff, where on the retail side, where it's going to e-groceries, what you're seeing with people picking in the packing [ in ] the back of the stores, that trend is moving extremely fast. So we see the automation trend to be here for quite some time, it will drive even a higher level of packaging because you'll be able to package more stuff faster.

What I've noticed over time is that your margins in this business make their way upward. Can you talk about why that's the case and that the growth has been steady. It's not historically been so sharp. What is it that makes the business more profitable for Sealed Air over time?

Well, I don't think it's always over time. We've -- with our Reinvent in our transformation, we've made some concerted efforts to go after our productivity and our efficiency. So if you go pre '18, we had 3 divisions. We had Diversey. So we had 3 different businesses. So we've been on a journey to transform the company to be focused on the markets we serve and looking at the efficiencies that we go to market, everything from our SG&A, how do we go to a market, to a retailer productivity, to our factory productivity, et cetera. So when we look at the business and we've benchmarked everything that we work on, and that's part of our 4P'S of Reinvent, focusing on world class performance, we've seen a tremendous potential to be even more efficient than we are today. So since '18, we've moved probably well over 250 basis points on our margins. We think there's even more to go. And that's why with the operating model, we put that 30% leverage out there. So where do we see that? It's in the efficiencies of how we produce and how we make and bringing automation to our own facilities, we're actually measuring the touch points of our own facilities. We looked at our extrusion process with the average age of our extrusion lines were -- it was over 25 years. So we're investing heavily on that efficiency and our own internal productivity. And then on the automation piece, it's only $250 million going to $500 million. And as we share, we like to underpromise, overdeliver. So I can just share with you, our internal numbers are much higher than that. We actually used equipment in the old model to subsidize our materials. So we would give the equipment away, so we could sell more materials. And what we missed is the opportunity was to really dedicate on this equipment, so we can focus on the productivity of our customers facility, drive significant savings and actually then pull materials through at even a higher rate. The other part is to work on our designs and accelerate our innovation. So we definitely believe there's even more margin opportunity with some new technology that we're putting in place, such as digital printing. And we think we have some significant cost and volume opportunities out there. So I don't want you to think that 21% is where we're peaked by any means. We think we have quite a bit of runway left.

When I've looked at your Reinvent Sealed Air program, I've been struck and impressed at how small the severance component is. That is, it seems that drive that the company has had, has really been around general process and thinking through all of the steps of manufacture and changing that rather than simply being a gross headcount production. Is that fair?

I think it's everything. It's probably not a good answer, but that's what we talk about. And then I'm glad you said that, Jeff, is because internally and externally, Sealed Air was considered and I've been hit a serial restructurer. And -- so when we did the big program, we had to deal with that. And so our theme on reinventing the company is that we want to reinvent everything from how we innovate to how we solve and really bringing all that together. And we found the inefficiency of the company was we were focused so much on what function you're in, what region you're in, Food Care, Product Care, when you mentioned that already, where those products actually go between those divisions. And started focusing on what productivity can we bring to the product. So we analyze everything in the company. But we did do some restructuring. We do have people costs in there. We had high inefficiencies. Our SG&A, we felt it was too high when we benchmarked it, so we had some opportunities there. We're putting a lot of pressure on our product development. We're actually going outside for some of our development because we weren't moving -- that vitality rate was not high enough. So putting pressure on our new product development. So I think it's everything. And I do appreciate you highlighting it's just not getting rid of people. It's actually getting the people more productive and putting [ then ] in high-value positions rather than repetitive task positions, those are the ones we're going after very quickly with our automation.

So I guess just the final question on Food Care. Do you have a large market share? And do you gain market share over time?

Yes. And how we have to gain share because it's a great question, especially if you look at fresh red meat, we have pretty good market share in fresh red meat. So the way to gain market share is, how can we do something even more with our customers. I'm meeting with one of our largest customers this next Wednesday, [ and I've met ] with the top 5. And so we talked to them about their problems. They really don't want to buy more packaging. Well, they want to buy more packaging if they could sell more meat. That's where we're bringing automation in right now where we think we can grow share because we're not there like we could be. So we think we have some pretty strong share opportunities in fresh red meat, but that automation goes beyond red meat. It goes into the other parts of our portfolio. So short answer, I don't think we have enough share.

What I believe about Sealed Air is that you buy about 1 billion pounds of polyethylene a year. And polyethylene prices have really moved remarkably and that maybe since December, inclusive of what's going to happen in March where I think prices are probably going to go up about $0.07 a pound. Maybe prices are up $0.25 a pound. And so that's $250 million of additional costs that you might have to bear, depending on the sustainability of the prices. How do you deal with that?

I knew you would get into chemicals [ as the question ] in there. So...

So it's the only part.

Well, I -- I'm the equipment guy solely over there. But as I shared with you, I know the chemical industry now better than probably ever wanted to. But you're absolutely right. It's been incredible, as you know, sitting on the other side of the fence with the company that I'm on a Board, [indiscernible] pounding those price increases on the industry. I mean it's a pounding, Jeff, and I'm sure you're seeing them smile in their meetings. It's relentless of what's going --

Up and every month since May of last year. Every month's had more [ increase ].

Well, let me give you some insight. It's every week.

I was going to say it's every week.

It's -- and I'll just make a couple of comments, but then let Chris get -- chime in here too because he gets to watch that. So we started the price increases, Jeff. We started actually in February, we got an announced coming in March. We have another one coming in April. It's really, really difficult. And I don't want to pretend it's anything it's not, and you actually have the numbers. What we're having, though, to be the leader in what we do as you identify the industries, you got to be out there in front. But I'm being very, very directive with our team. I don't want it to be the old Sealed there, when we raise price, lose our customers. We got to get price. We can't do it the way our chemical friends do it to us. We got to go direct. But I should say that I have to [ get ] credit. I've been now called twice by our chemical suppliers. And -- because they heard me say this before, they're calling me to let me know it's bad. So I appreciate that. But -- well, good for them. They say it with a smile. But we've got those price increases out there. We just have to do more, Jeff. It's [indiscernible] just that simple. We got to do more. But we got to do it with our customers in a way. This one is a little bit different than the past because the costs are going up everywhere, Jeff. So having that conversation with the customer, we just got to be there early to let them know what's going on, and we're working hard. The other part that's really tough is the supply disruptions. It's like the automotive industry with the chips, et cetera. These supply chains were so tight. And some of the chemical crackers are down, and they're going to let them stay down. They like this pricing environment. So we're working through it. Short answer, we're trying to get the price out there, probably never doing enough. But we're working through this. The formula side of the business, we have to wait because we have contractual formulas with our customers that 3 to 6 months. So that's starting to kick in this quarter. That's probably a 6 months, but this first quarter is going to be tough. Second quarter is going to be tough. But you know what, we're going to have to deal with it, and it's a great excuse to go talk to our customers and bring in new innovations, talk about sustainability, talk about automation, but it's really, really tough. Chris, I'm sorry if you want to add anything to that?

Yes. Maybe just to build on Ted's comments. As we kind of approached this year, recognizing we were in the face of these material cost headwinds and the pricing actions and the time, especially the formula-based pricing, the quarters for them to kick in, we recognize that this year was going to be a challenging from a -- we kind of put it into this 45, 55 first half, second half in terms of the earnings outlook for the full year. And that was in early February. Thanks, Jeff, to your point and to Ted's comments every week, they're changing on us. But the company has got in place, the formula-based pricing to get their protection. It just takes some time for that to be implemented. And then also wanted to just build upon the SEE operating model, things that Ted were commenting on. I've been with the organization coming up on my third month here and just being able to see the structure, the infrastructure and the operating model in place and the actions it drives. You made a comment, Jeff, in terms of the restructuring being a small element of it. It is an operating model for the entire company. It's across Sealed Air. And you can see the pipeline of opportunity, the productivity improvements that we want to make as an organization, given our global footprint that are taking shape. So in one respect, clearly, pricing is going to help us offset but we're not losing sight of the productivity benefits that we're going to get from our operating model. So...

So just -- so quickly, when I think optimistically about Sealed Air and its ability to cope with higher raw material costs, the way I think of it is Sealed Air is a big purchaser of polyethylene. And so maybe for you guys, there's a lag before you feel the prices that are going up. Maybe it's 30 days, maybe it's 60 days, maybe it's 90 days. But you certainly -- I would think you certainly have time to make your customers aware of the price increases that are coming. Now they may be stressed by the absolute amount that they have to pay. But I would think that you should be able to cushion yourselves relatively well, especially if maybe you have 90-day price protection. Is that a fair characterization? And is it the case that really the stresses from the higher raw materials are not so great on Sealed Air this year?

No. The stress is there, Jeff. And the reason being is because it's difficult, and it's part of -- and this is just the direct -- going back to the customers repeatedly and not simple numbers, but big numbers, is challenging. So we have to have the organization do it, be out there. We've announced the formal price increases, as I said, from November, March and April. But from November to March, they've been going [ up ] dramatically. And so I appreciate your comment. By the way, I believe, and under promise [indiscernible], I guarantee you the alarms in our business are not as casual as you say, "Oh, we take care of that stuff". It's DevCon 4 with us right now. It's a big deal.

Just a last comment. I think April is the [ end]. You never know about these things.

[indiscernible] said that a year ago about April. So let's be careful.

Jeff, I was going to ask you that question. You've obviously been associated with the industry very, very long, your thoughts in terms of the outlook.

So it's tough. It's tough because maybe 6% of U.S. polyethylene capacity got knocked out by the storm. And there's is a company called [indiscernible] that's been out because of difficulties in negotiating their raw material supply, which took a few more percent out of the industry. And so it's very short, and there are large turnarounds. And so what will happen is everyone is going to operate at much higher rates of utilization to try to build inventories back up. And all things being equal over a couple of months' time that should be the case. You might have something to feel in April, but maybe things will flatten out for a while and then begin to edge down. So we'll see. You can text here or you can tell me whether I was correct or incorrect. When I think about the Protective Care business, Sealed Air, and I think about some of the conference calls, what doesn't seem to come up is Amazon, like -- which seems like the big gorilla. Can you talk about your relationship with the large packagers in the world or the users of automated packaging? And can you talk about the degree of innovation, which is going on? And how you're approaching that market?

Sure. And Jeff, we try not to use a customer's name, but as you know -- if you say e-commerce...

E-commerce. Yes. Okay.

If you don't say that other name, you're not really in e-commerce, right?

Okay. All right. That's good.

Our -- so we'll use that. So as I mentioned, our 2 top product lines, both in food and protective are down. So if they're down and our business was up, what's happening? And so it's -- the e-commerce is extremely strong for us right now. And it's strong both in discrete products and what our discrete products are actually like a mailer sending out discrete mailers a few hundred million, almost 1 billion of those mailers out to -- in primarily the e-commerce players. Where we're the play, though, where we gained in those large -- the gorillas has been through automation. That's been the gain in 2020. We made the purchase of APS, perfect name, Automated Packaging Systems. One of their iconic brands is now, and you see even on our Slide 4, as we put it up there, it's the Autobag system, perfect for e-commerce, where in those huge centers where a person can do 5 or 6 a minute, now with our Autobag systems, taking those up to 8 to 10 to 12. And then what we've brought in is our automatic shrink tunneling systems. So we actually can do, one of the crazy ones I talked about, we have a slide in there, is 50,000 pairs of shoes a day. I mean those are the kind of volumes that they work. So that is going through an automated solution that's using material, the equipment's a [ $0.25 million ], but it pulls in 3x that amount just in materials. So where is that going? It's driving to automation. They can't get the people, removing people from harm's way. So with our Autobag systems and our high-speed flow systems, that's where we see really some strong input. Also the second part you hinted there is what's going on in the sustainability front. It's interesting when I joined Sealed Air, they weren't into sustainability. Now it's all about sustainability. Bringing in paper. We even highlight our portfolio, now you being a chemicals guy won't be happy, but over 15% of our portfolio is fiber, and that's growing at double digit. So we're giving their customer that opportunity, but also showing the carbon footprint of paper being significantly higher than the plastics. So we're putting all that out there. So bringing in sustainable solutions, recycled content and automation. So we've actually gained share in e-commerce, not happy, still like to gain a lot more.

Is the gaining in share in e-commerce, a function of the development of your equipment business. That is, is the productivity of the equipment strong enough to pull in more customers? Or is it more that you're getting bigger shares of the customers that you have?

I think the equipment is the biggest piece, Jeff, for us right now. It's really having an interesting solution because our customers are really struggling with people availability and getting people, training the people. So the automation is probably the lead piece there in the growth. And then by -- while we're there, it's opening up the opportunity to bring more of our portfolio in with the customer because we are there on the automation, whether it's a different type of mailer or a different type of bag, or even with our digital printing, can we do like our core view product? Do they need -- all they need is a bubble in a box, that's simple. So they're getting rid of stuff, actually reducing the amount of packaging, but we're going to do the whole thing for them. So I think it's an opportunity for both. The equipment is definitely the hot thing to talk about to gaining the share but while we're there, we can get more of the materials and grow our share of the wallet.

To the customers of the bagging equipment, do they want a machine that uses anyone's material or they're tolerant of machines that would only use, say, Sealed Air material? Do they want something universal or can they contend with something specific, in general?

That's a great -- you must be in our development meetings. Great. And that's what we're trying to change from the old Sealed Air mindset. Because -- especially with Cryovac. Well, we wanted only to use our material, so we governed our material on the equipment doing. But what you then do is you suboptimize how good that equipment could be. So our strategy being an ex-equipment guy, you got to have the best equipment there is. So our equipment's got to be material agnostic. And so what does that mean? So on e-commerce right now, we're even looking material that can do plastic and paper type mailers. Now to do the high speeds, it's got to be unique, so it handles it appropriately. We're also bringing in new technology. We're actually creating the bag in the equipment. So bringing our super material in or high-density material, put it in roles, eliminating all the boxes, in having significant savings. So the customer is thinking about saving, savings, not saving a couple of pennies a bag. Oh my gosh, you can save me millions. Oh, what material you're using? Well, we're using Cryovac material. Well, that's pretty good, versus -- putting one material versus we're selling a system. So if it's using our materials, that tends to be where it's going to go. But we have to design for -- to be material agnostic because the equipment has to live on its own. And -- but I believe, Jeff, that we'll be able to pull in the best materials because, guess what, that's just going to put more burden on us to have the highest performing materials that also can stand on their own.

In the way Sealed Air has conceptualized itself, you've talked about getting higher margins on the equipment. But I would imagine that the margins on the equipment are relative to the equipment business. That is -- doesn't it depend on the way that other -- your competitors are pricing their products? Or is it a different kind of sale that you put together the equipment and then either paper or plastic materials that you would sell over time?

Well, you put the system together. And -- because I always think, Jeff, when I'm having these conversations, our customer is listening and our people are listening. So if you saw the slide, I'm very pedantic out there that we're focusing on customer savings. And I've been with the CEOs of these major companies. "Oh, your material is too expensive. You guys are too expensive." So I opened the conversation, yes, we're always going to be the most expensive, but we are at the right price. But let us get into your system and find some waste, just like we're doing in our plan, we will save you millions and that's where we're going. So the conversation moves. It's not how much your materials cost or how much your equipment cost, how much money can we save you. And that's the pole. And that's what I think a world-class equipment company does, and that's where I came from in my past. You focus on what you save, what the cost is, you forget. Because you're saving them so much money. And that's -- and by the way, some of those savings are in their operations that we want to help pay for that equipment. So I do think there are separate discussions but it is truly about saving. To your question about other equipment companies on how much money they make, I think we have opportunities, and we've already benchmarked, who's the best out there, and we're looking at other equipment companies. We have some significant margin expansion opportunity there as well.

All right. Thank you very much for your presentation, Ted. It sounds like the businesses are coming together. And when we get a little bit of raw material relief, we'll see what the company can [ really do. ] Thanks so much.

Well, thank you. And tell your chemical friends to ease up on the pricing for us.

Okay. I'll see what I can do.

All right. Thanks, Jeff.

Thank you.