Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

All right. Thank you, everyone, and good afternoon. My name is Adam Samuelson. I'm the agri business and packaging analyst here at Goldman Sachs. I'm very happy today to be hosting Sealed Air. From Sealed Air, we've got their President and CEO, Ted Doheny; Chris Stephens, their Chief Financial Officer; Lori Chaitman, who helps -- who runs their Investor Relations effort. I'm looking forward to having a great fireside chat with Ted, Chris and Lori. But before we get into that, I do want to just remind the audience that there's a box in your webcast window that you can enter questions. They're going to come to me. Would love to get questions from the audience and we're getting a bunch through other sessions we've hosted over the last 1.5 days. So please do send them in, and we will get to those over the course of the presentation.

With that, Ted, maybe just to begin, you guys just reported a strong first quarter. You increased your outlook for the year on both sales and EBITDA. Talk about what you're seeing in the business today. What's the real sources of strength that's making you more confident in the business outlook as we go into the second half of the year?

Great, Adam, and thank you for having us. It's a pleasure to be here with you at your conference and especially It's the Industrial and Materials Conference, which fits into Sealed Air's portfolio quite well. What we're seeing in the first quarter is we're seeing a pretty diverse marketplace that we're dealing with coming out of this COVID-19 that just continues to go on and on. So we think we had a fairly strong first quarter results. As you highlighted, we did take the year up and we continue to see our markets still in a tumultuous state. We see the e-commerce market quite strong. Everybody is buying at home, I can see you're in your home right now. So it's driving the huge part of this e-commerce and how do we package goods to come at home and still driving our safety, still driving minimalistic on the packaging. And also on the food side, we are seeing that still struggling with the restaurants and the food service being slow. And also we are seeing some strength on the retail to stay with us. But overall, we see our business in a good place. We see enough strength to take the year up. But the biggest issue for us right now is what's going on in some of the input costs with our materials, et cetera. So through a tough market, we think we're doing pretty well, and we think there's a lot more good things still to come.

All right. That's really helpful. I want to come to the raw material cost question in a second. But maybe sticking on the -- kind of on the volumes that you're seeing. Obviously, a tremendous amount of disruption both in the economy and some of your very specific customers as we think about the prior year, especially from 2Q onwards. How is the business doing relative to 2019? Are we at or above pre-COVID levels? Where are we still below? And how do we think about that trajectory as we get to the end of the year?

Okay. So if you go back to 2019, if you look at our protective side, we are definitely -- those volumes are coming back and actually stronger. We've had 3 really strong quarters in a row on the protective side. But if you look underneath the protective side, if we talk about food -- I mean, not food, if we talk about our industrial versus the e-commerce, industrial is not back to the 2019 levels. We are seeing that turning a bit, especially in Europe and Asia, we see that strong coming back. On the food side, we are not seeing the food service side, the restaurants that we talked about, but we are seeing strength in retail in some of our products. So It's a mixed bag back to '19. I don't know if that's helpful.

No, it is, because I think it does help frame where we can be going, going forward as the world continues to normalize. So you brought up the point earlier on significant raw material costs and your ability to absorb those. Some of that is the pricing actions that you've taken. But help us think about how that -- how well you think you ring fence those inflation headwinds, the pricing actions that you have in place, how that might differ between the food and the protective side. And maybe just what lessons have been learned from prior inflationary cycles that the experience for Sealed Air is different this time?

No, good question because it is a little bit different than where we've seen inflationary pressures in the past because of how quickly this hit. So this is almost like having a hurricane effect, then we had the ice storm effect. All beneath that, a supply chain that was somewhat strained through even the COVID-19. So a lot of things hitting very strong. So we don't have actually inelastic pricing. So different than maybe the chemical companies that would just push that pricing at really egregious levels in the quarter, we work very carefully with our customers. We have formulas. So we got the pricing out there earlier on the protective side. We still have a lag on the food side. So we saw it hit us pretty hard. We are pushing pricing with the market. What we are doing a little bit different is -- not a little bit, a lot different, that we do not want to lose share. We are going with our customers very directly. It's very difficult situation. We're not the only ones who are pushing price right now. The inflationary environment is incredibly strong. But we're looking to bring our new products to our customers. We're talking about sustainability as we're leading with price, but one thing we're really doing differently this round is talking about automation. How can we actually bring savings and more efficiency and productivity as we talk about automation in this environment. The timing on that is what's the challenge. Because the prices are going up so fast, the costs are going up so fast, that we have a lag. So we saw the pressure in the first quarter. We expect even more pressure in the second quarter. We do believe we'll be on the other side of this and bring that operating leverage that we put in our model out there, but we won't see that traditional leverage or the model leverage until the second half of the year. So we are pushing the price, Adam. It's just not dollar for dollar in the first quarter because it has gone up so dramatically. And I'm here in Charlotte today. And we're just numb to crises. You can't get gas right now in Charlotte. So we have another issue that's hitting, but we will work through this. And I think we're in a really good place. This time, relating to, I'll say, even Sealed Air in the past, on how we're doing it with their customers. And just to highlight again, being very careful that we want to do this collectively with our customers, and it's tough, but we want to do it face-to-face or in this environment virtually.

And maybe you mentioned something you're doing differently is automation, but I'm just trying to make sure we understand what has changed versus prior inflationary cycles? Is it the way you contract or the way you engage with customers? Is it more contractual that's built in with inflationary escalators? Just to make sure we can dimensionalize what's different this time?

Well, the contract on the food directly, the contracts are there. We actually -- a majority of our business is in the U.S. on food, and we have probably 40% on contract. So we have a lead lag on that. So we have a 3- to 6-month period. So we're still going to feel that effect through the second quarter as we catch up. Differently on the -- I'll say, on the protective side, we saw the polyethylene prices going up pretty aggressively. Going into the fourth quarter, we issued a price increase. We've already done 3. So -- but maybe what is different is we are going more directly and talking about the customers these inflationary pressures on how do we get the price right away. It's just taking more time because we're not just doing it and just raising the price as if they're getting to commodity. And it's more than just the price, it's the disruption in the supply chain. We're seeing our freight costs go up dramatically and actually being short of supply. So we're actually air freighting product around the world just to meet that demand. So it's pretty significant of what's going on in the marketplace with input costs.

And is there any difference in terms of the receptivity between the food and the protective side to those pricing actions? It sounds like the food side has got some more contractual things built in at this point. But any differences between those different customer sets?

I think if customers were listening right now, they -- nobody likes it. Nobody. So I think the contractual side, because you're dealing with contracts there. But it's such a state of -- because people are short of supply, what can we do? And in our business, though, where we have contracts, Adam, it's relationships with our large customers. So we don't want to hold them hostage. And I'm very sensitive to that with our relationships that we are going to be there to take care of our customers and not let a contract ruin the relationship. Though we've had our suppliers, some suppliers declared force majeure, we are working very carefully with our customers in a very, very tough environment. The contracts will take care of themselves, but we need to have these discussions very directly.

Okay. And Lori just brought up the Sealed Air Automation Solutions slide, which I think she guessed what my next question was going to be, because I did want to pivot there. So this is a new strategy that you've been in place for a couple of years that you brought to the company. You've done an acquisition to help build some scale. You have a target of doing $500 million of equipment and systems on the automation side by 2025. Talk about the confidence in getting there. Talk about how that starts to differentiate Sealed Air versus your competitors. And how do we think about that not just being a revenue growth accelerant on its own, but a source of kind of higher material volume as your tax rate on that equipment goes up or should go up.

Well, no, you had lots of questions in there. So how about if I frame it up of why we're doing this, what it means and where we're going. So the first part of the why here, if we talk about packaging. What we're doing is we're helping customers put our special materials and package their special goods, whether it's in e-commerce, a halogen light for an automotive company, how do we do that special so it doesn't break, to fresh red meat, which we do extremely well in the [ shop fly ]. So how do you do more of that faster? So equipment is not something that's new to Sealed Air. It's been part of the culture. It was more of a razor, razor blade model. That's what we're pivoting off of. So doing the equipment to sell materials, we're doing it differently as -- no, we're focusing on the customer's operation now, on how do we automate how they package their goods. And that's fundamentally the shift. So we had equipment in the portfolio. We actually have, believe it or not, if you look at that solid blue line, 100,000 pieces of equipment. So -- but with the old subsidy style model versus a value-creation model, we weren't -- and we're not as connected to that as installed base is where we're going and what we need to do. So your second question in there was APS. So how do we go faster? We have we invested. We spent $0.5 billion on Automated Packaging Systems. Love the name, Automated Packaging Systems, primarily in the protective side. But their Equipment business, which we liked, is 15% of their sales was equipment. Then they had their parts and service that actually pulled through the materials at a high solutions multiple that we have here on the slide. So that automation piece has done quite well. So now to your question on confidence, just like you, you get confidence in the numbers. So our Equipment business, if you unpack this, if you're going to take it to this $500 million from $250 million, if you're going to double it, what's your growth rate? Well, in this first quarter, our growth rate on equipment alone was 29%. So the growth rate on APS equipment, just on bookings, was over 50%. So we're seeing that move and the initiatives that we have in place and even more that we have in place, we see that trajectory. We have a high level of confidence that we're on that path. So I'll take a pause if that helped or if you want me to give a little bit more detail.

No. No, that's incredibly helpful. And then if we think about that then in the context of how it drives the Materials business, I mean, clearly, you're not trying to give away the equipment like you were previously. But it would also seem like there isn't as much embedded increase in acceleration, in attach rate or material throughput when you kind of roll this through your medium-term outlook. And I -- just how do you think about the value created on the material side as you now have that solution in place with the customer?

I think that's opportunity. I think we put the solutions and part of our strategy, it's threading a needle here, Adam. We want to underpromise, over deliver, but not underpromise too much where you don't see the value, but not overpromise and then we don't do what we say we're going to do. The pull-through effect on materials is significant. So what you see here is a 3x multiplier on the pull-through is actually the low end. The reason we're doing that because part of our fleet is going to be an upgrade of equipment, not total additional pull-through. But we definitely see this, whether it's a meatpacking plant, and I'm sure from your past experience, you know the food -- the protein industry. You've seen those plants. I mean, when you look at all the people around trying to load that precious meat into the bag. As we automate that, we are going to do it safely. We're going to do touchless. But to our customers, is they're going to see their productivity go up significantly because they're going to be packaging more meat faster. So that means more bags. So our bag content is actually going to increase. So we're going to have a better bag. It's probably going to go up in cost, and we're already talking about our bags going up in cost. Because to go fully automated, we need a better bag to go make that happen as we put the automation, but we're going to be saving them millions into their meat packing plant. That's the pull that the customer is very interested where we say, "Hey, we're going to save you millions in your facility and the pull-through of materials will come with it." So a long answer to a simple question, we are excited. We're actually going to increase our Materials business with the automation strategy.

And maybe if I'm thinking about the automation strategy in a different light, is there any meaningful difference in terms of the customer set you're serving? Is it more SKU food versus protective? Or where are you seeing -- is the receptivity across all customers? Or have you found that this is really hitting the mark with specific kind of -- specific book of business?

I think it's everywhere. If you look at our movie reel slide that Lori has up here now, I'll just highlight one that we don't talk about that other than if you see on our website is cheese. In the protein, we've done quite well. Our touchless operation on cheese, we actually have multiple facilities in Europe. We have, I think, a video, I'm not sure if it's out on the website yet. Even in Russia, where it's entirely touchless from the forming of the cheese when it hits the conveyor through the shrink tunnels, all the way into -- through the warehouse, all the way in the truck. So we're seeing those operations move quickly. The meat piece has not gone as fast, and that's because if you see, we have one of the slides where we actually have a cobot and robot, and we're working now with e-groceries and the meat, is actually how you touch the meat is really, really important. That's why they have people there moving it, but we're bringing in some technology that we can actually hold the meat without bruising it to actually help that process and drive that automation. So we think we have some really interesting opportunities there. But then to the other part, are we seeing it move in fulfillment centers? Yes. On the protective side, that's where we actually had a lot of automation. We just -- maybe we're subsidizing it too much. So I'll give you an example. Ubiquitous Bubble Wrap. And we think about -- actually, our Bubble Wrap on-demand is one of our highest -- our fastest-growing systems. Right now, it's still more in the subsidized model, but the machine, you push a button, it actually generates Bubble Wrap and blows it up right at a fulfillment center. But we're working on some of the automation there to put high-volume shrink tunnels on conveyor lines, and that's been moving very quickly. And then finally, where Lori was pointing the slide, with our Autobag machine with APS, the acquisition, that is going extremely well. As far as doubling our Equipment business in 5 years on the chart internally, we'd like to double this in half the time. This business, the Autobag concept is doing extremely well, and those are primarily in fulfillment centers. And then the SidePouch system that you see on the bottom is now how do we even load pouches faster. Another system on the left is pouches in liquids, where you see the bag in the box, another area for us that we're quite excited. So I'll go on and on and on. This is -- the automation is everywhere and because it makes sense. I mean it -- if you read in the paper everywhere, people can't get people. I mean labor is a huge issue for every industry. And anything that's packaged, the automation is a big deal. Our focus -- just to give you -- just to be very clear, is where we can save our customers the most money the fastest. That's how we're queuing up.

All right. No, that's really helpful. Other kind of key topic that comes up, and you alluded to this a little bit, is the question of sustainability. And obviously, you're largely plastic packaging solutions provider, but also serving some markets where plastic is very difficult to switch out from a substrate perspective. How do you think about sustainability as both a risk and opportunity for the company as a driver of growth going forward?

Well, first of all, I'm a greeny, Adam. It's a total opportunity. When I joined -- took over was when the war of plastic started. So we attacked it. And so if we look at our portfolio, our portfolio is actually material agnostic. But when you're over 80% plastics, what are you going to do with it? So we've gone at that very aggressively that we're going to be offering the best solution at the right price and make it sustainable. So we're bringing the sustainability conversation into every conversation with the customers, whether they ask about it or not. We're changing our capital allocation, as we've talked about, investing in the circular supply chain. But if you look at our portfolio, and we already talked about automation. Automation, we use a lot now to help our customers pay for sustainable packaging. Because sustainability, when you go green, it's more expensive. So we've got to find more cost out to help them drive sustainable product. Then it brings science in. And we have our scientists and our engineers are really working on extremely creative solutions that we can de-content the material. So you have thinner plastics, but you don't want to lose that performance characteristic. So thinner plastics that actually do a better job. We're looking at all kinds of materials. We're looking at plant-based materials. We're even in -- some of the development is still a few years away, we're looking at organic material. So this sustainability issue, it's not a threat. It's totally an opportunity. And what I'm excited about is we are leading with it. We're not running from it, we're attacking. And it gives us then a chance because I'm on the Alliance To End Plastic Waste. So I'm dealing with that. And we just signed up for the carbon neutrality pledge as well. When you go paper versus plastics, the carbon neutrality benefit of plastics is significantly better than paper. So we got to make sure that we talk about that and help our customers drive that. In our major customers, we're actually working on those pledges together. Can we take boxes out of the content. And literally, we ship millions of boxes for our products. Can we look to package them differently with no box? And so lots of exciting opportunities to attack the sustainability issue and lead with it and not run from it in anyway.

And maybe in that vein, you talked about a couple of -- over 80% plastics. Does that number change over time in a meaningful way? Or is it just, look, we're finding better uses for the plastics that we have?

I think it's changing because, one, we're getting better at measuring it because we didn't measure it before. So because we're also counting being fully connected to our customers. I'll give you an example from pellet to making a bag, how do we create that bag in our customers' facility, do the final operations where we create our Autobag in customers' operations. We think we can eliminate 6 million boxes just in our Cryovac material. So is that -- do you call that paper, because the boxes took those roles to a customer now that you're making high-density rolls in their facility? The answer is yes, but we got to do it together. So where that change comes over time, I think because the plastic offers such tremendous packaging, safety, reliability and all that good stuff, I think we're going to always be more plastic than paper. I think we're actually going to be eliminating some paper in the process. Also as we get into recycled content, Adam, both recycled paper in our content and recycled plastic, I think the form of that is going to change quite dramatically, especially with our pledge out there.

Okay. And so a final one on kind of the medium term, and then I want to get some capital allocation questions in maybe for Chris. But as you're coming towards the end of a multiyear kind of productivity program, Reinvent SEE, as you call it, there's been a lot of restructuring. But how do we think about that program going forward? How does that become a productivity enabler and a driver of margins for the company?

Let me turn that over to Chris. The only thing I would disagree with you, we are not coming to the end of our productivity program. We're turning that into an engine that is the -- what the new Sealed Air is all about. So with that, I'll turn it over to Chris.

Sure, Adam. I guess being new to Sealed Air, great to join the team, recognizing a lot of great effort the past 3 years under Ted's leadership around Reinvent SEE. And so from a program point of view, you're right, kind of coming to an end as it relates to that program. But the migration and the backbone that's in place to drive additional productivity, what we're calling the SEE Operating Engine is that, that is going to continue to help us drive productivity improvements, profitable growth, cash generation, which leads to the model. Those model in terms of the targets we've established longer term. So we're coming to the end of the program for purposes of the benefits and the cash outlay specific to what was announced back in '18. But as we move forward, you're going to hear us talk about the productivity improvements, the profitable growth, margin expansion, et cetera, et cetera. And what gave us confidence in the first quarter and what gave me confidence, to be honest with you, as the new CFO of the company, because my credibility is on the line here as well, is just to dig in with the leadership team of the company of coming off a good year in 2020. We put guidance out for 2021. We talked about the first half, second half dynamic given the material cost inflationary pressures and the pricing actions that are going on as well as additional productivity actions. To think about us growing that top line 3% to 5% converting on adjusted EBITDA of 5% to 7%. When you get to the earnings per share side of it in terms of trying to grow consistently double-digit growth and then generating that free cash flow, enables us to put that money kind of back into the business, which gets into the capital allocation discussion. But feeling good about coming off 2020 and then setting the guidance for 2021. This year -- and we just came off a very strong first quarter in terms of that top line growth. And as we're profiling out this year, a good part of that increase in sales top line growth for 2021 is a result of the pricing actions. Now that will turn. Resin costs will eventually come down. And when they do come down, it gets back to the formula-based pricing. That will then adjust. So in some years, we're going to see that pressure from a top line, but it's nothing more than, I'll call that top line volatility, but never losing sight of that adjusted EBITDA performance given the engine that we continue to fuel. And that's the way to think about it. You got the backbone, you got the processes in place coming off the past few years, that's going to continue to accelerate our earnings generation, our cash generation to fuel the future.

Okay. That's really helpful. So maybe sticking on the capital allocation topic. With first quarter earnings, you did lower your financial leverage target a little bit? Or is it closer to 3.5% or below versus the 3.5% to 4% previously? What's the thought process behind that shift? Any implications that we should be really mindful of?

No, I think it's coming -- ending last year at 3.1x, recognizing that the team entered the year at a higher level. As we kind of concluded here on the first quarter at 3.2, just thinking about the investments, thinking about the earnings generation, cash burn, et cetera. I think there really was not necessarily a need for us to identify 3.5 to 4x. And so 3.5x or below is how we think about as we execute going forward. Does that mean we're always going to remain there? No. If we have the right opportunity from an organic investment point of view or an M&A opportunity, et cetera, other things related to a capital deployment, then we're going to look to do that. But we wanted investors to know that we're thinking about it as this 3.5 or below. Not to live in this 3.5 to 4x, but 3.5 and below. So that's going to, I won't say modify, but it's going to be present when we think about major investments, whatever they may come from a capital allocation point of view. So that said, we just want to be mindful to let our investors know that's how we're thinking about that financial leverage ratio, 3.5 or below.

Okay. That's really helpful. And so maybe, again, thinking about that cash deployment, I mean, you saw in the first quarter, a nice step up in share repurchase activity. But help us think of the balance between buybacks and M&A? And maybe specifically on M&A, is it technology around whether it's automation or material or is it customer kind of acquisition in terms of geography or a market segment where you don't participate? Help us think about the key priorities there?

So I'll ask Ted to kind of add to my comments, but just to kind of start off. As we saw the end of 2020 kind of entering in the first quarter, just an opportunistic opportunity knowing we've got the authorization to be able to buy back our shares. We average up to $44 per share, buying back the shares that we did roughly 4 million shares in the first quarter. We felt it was an opportunistic opportunity given where we were trading and knowing where we were heading. And so we acted and we acted appropriately and it's a nice -- obviously, a nice return given where we're currently trading. In general, think about the buyback of offsetting any dilutive effect, but we will be opportunistic and may do more than that as we think about the future. But that's all prioritized around, call it 3 elements. One is just investment in ourselves, which is on the left-hand side, just things -- the opportunities that we have to kind of fuel our future on an organic basis. And then secondarily, thinking about the M&A opportunities, APS, very successful acquisition for the company. The pipeline of opportunities, to your question, is where do they reside? I'd say they reside in all of the above, in terms of where we're thinking about those opportunities, I just want to highlight Ted's point, is that it's not a matter of us, at least my view early on here, is going out in the auction process, finding out what becomes available. It is going to be a relationship-driven type of M&A approach where we're -- where we want to make sure that we go after a particular company, and again, I'll use APS as an example, to get to know them, to know that how they're going to fit into our long-term strategy, build those relationships over time. Some of the companies we look at are privately held, to the extent they have interest in moving forward with us, time will tell. That's a balance. That's a relationship that needs to form over time, and we'll continue to work that. And then the shareholder-friendly type of actions, share repurchase. The Board has us authorized. We have approximately $500 million left. And then thinking about the dividend, the payout ratio as well. So It's a balance of all 3. And at the end of the day, I mean, when you think about the ROI of the company, 15%. I mean an incredible performance from a return on that invested capital and being kind of that market leader at that level. We're not here to lower that. We're here to maintain that and improve it over time, which is a significant increase above our cost of capital. So a good stewards of our investors' money in terms of how we're investing in the future.

And just quickly, Chris did a nice job there, and it's great for me also with Chris. I don't want to highlight. It's only been 4 months, but it's great to have Chris on board to go do that. So it's pretty exciting. And Adam, just so you know, and I've shared this before, I'm the activist in the company, the activist. And we have incredible competition out there. We have public, we have private equity, and we want to move faster than those -- our competitors out there. So on the share repurchase, we're aggressive there. We just -- we know more than people on the outside, and we want to take advantage of those things. And that's where you saw the share repurchase there, and that's part of our engine. We also want to send a message to our new investors. They bought in on the floor that we think there's a lot of runway on this engine. And if you look at -- we also want to be very transparent. Chris said something that's very important to me on -- we don't make an acquisition unless you know that company very well. So we have a lot of relationships out there. Just like APS, we knew them well 12 months in detail before we did anything. So we're giving you some of the insight of what we're looking at over there on the slide. You even see we're giving you insight on what we're putting on the balance sheet with SEE Ventures. These are disruptive technologies and business models that we bought into that are doing extremely well. Right now, they're not monetized, but they're doing extremely well in the marketplace. It's giving us insight to some things that are really interesting. The other thing it does for us is it puts pressure on our innovation team. So we're showing you where we're going. We're showing you what we're looking at in automation and equipment. Can we go faster? We also are sharing with you on our CapEx. As we're driving automation internally, we've increased the CapEx. We're up now to the 4% target. Right now, just on speed, is how quickly we can move that. So I just want to share that we're being very transparent where we think we can go and to fuel this engine, as Chris talked about before, we're excited. And if you go back to the model and you do the math and you see that conversion rate on our earnings to cash, we're going to be generating, in just the next 3 years, over $2 billion worth of cash. And we think we have some exciting opportunities to deploy that cash to drive some significant growth for this business.

Great. Well, I think on that note, I think we're going to have to leave it, I don't think we have a lot of time. Ted, Chris, Lori, I want to thank you all for taking the time and being with us today. I want to thank everybody on the webcast for listening in. Hope everybody has a great day. Thanks, everyone.

Thanks, Adam.