Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Okay. We'll go ahead and get started, everybody. Thanks for joining us. My name is Ghansham Panjabi. The packaging and coatings equity research analyst at Baird. The next presenter will be Sealed Air Corporation. From Sealed air, we have Ted Doheny. Ted is President and CEO, and he's been in that role since January 2018. He started with Sealed Air in September '17, previously at Joy Global. And then, of course, Chris Stephens, Chris, welcome to our conference together at least in our track. Chris is CFO, and he assumed that role earlier this year and previously was at the Barnes Group. So the format of the presentation, it will just be a quick introduction from the company. It's meant to be fireside chat based. So please use the portal, which is how you're accessing this webcast. Just send in any questions that come directly to my inbox, and I will prioritize them accordingly. So with that, welcome, gentlemen, and Lori as well. And I'll turn the floor over to you.

So actually, it would probably be simpler even if we got to questions. But since I'll have to go, when we hit the safe harbor, just to make sure, Ghansham, that we do say that we are having forward-looking statements, et cetera. I want to make sure we have that. But I'd be happy to go straight with questions. But if you go to our first slide, just to open it up on who we are. I do appreciate -- I do want to highlight that this is an industrial conference, and we want the investors to be thinking of us as an industrial automation company. So I definitely want to pivot on that. People do know us as a packaging company. Where we're transforming this business, though, is how do we become a digitally driven, automating the packaging solutions, and that's where we've been on the last earnings call. Even opened it up, thinking of us as a new company, SEE Automation. So we'll leave that and let you get to your questions.

Okay. Great. Thanks again, Ted. Maybe we could just start off with the volumes by segment. Where are we relative to the pre COVID baseline? And I want to spend a lot of time on that slide in terms of all your automation initiatives, et cetera, but maybe we could start off on the volume side.

Good. The -- I'll hold the automation and solutions slide, we actually put a slide in here for your conference based on some of the other questions that came up from the earnings call that I think we could help bring that to life. But as far as where is the business going and what's happening in the third quarter? Again, I just want to state as we're transforming this business to be market-driven from product driven. And when you say break up the segments, we serve multiple different markets, and I'll just highlight the ones in the quarter that were quite strong. If you break it down first by the geographies that we have at the top. First, to highlight red meat, which is a market that we do quite well in. The reason the red meat market was really strong in this quarter is the 2 areas underneath the traditional bags that we go into the meat market, we see there in the equipment, but also the food service coming back. We saw that quite strong in the third quarter, which is nice seeing that come not in post COVID, but very different than when we started the pandemic. The other ones to highlight on the food side, traditional food side, is the liquid influence, and we'll talk about that quite a bit, and that's also connected to the quick service market and some of the new products that we have in that liquids and fluids space. Then the next, looking at the traditional, what we would call the protective side, we have the e-commerce and industrials. E-commerce is still strong, and that's where it's really very broad because e-commerce touches everything as we'll talk about it as -- I'm sure you'll ask a lot of questions on automation. And we are seeing the industrial pickup. We did see the pickup in the quarter. The industrial markets coming back, it's still a start-stop with many of our industrial customers that you have at your conference today that are struggling through a lot of issues, but we did see e-commerce pick up quite nicely in the quarter, and we still think there's more to come with the industrial recovery. So I'll take a pause there. If you want to go deeper or different question.

Yes. Maybe we can focus on the flip side of that. I mean, coming into this year, I mean, you've been on a multiyear journey with Reinvent SEE, just sort of realigning the organization. And it's worked tremendously. You see the margin expansion. You see the resilience through really an unprecedented resin inflation cycle, right, this year. I mean, I've covered the space a long time, and we haven't seen anything like this in terms of magnitude of movement. The question we get a lot from investors that are looking at your name is that was 2021 that year where volumes sort of recovered just naturally? Just based on your end markets, et cetera, versus the comparisons from last year. Operating leverage was exacerbated by Reinvent SEE. But given sort of the program is coming to an end, will incremental inflation -- how are you sort of navigating incremental inflation '22 onwards?

Well, I'll let me do part of this, and let me give Chris a chance to talk about Reinvent SEE, but with Ghansham and talking to our investors, remember, we're talking to 2 investors right now. As I shared, the company now is at a new low and being thought of as an automation company, bringing us to where we're going. So the transformation, and you mentioned resins, people think of us as a plastics company, 20% of our business, we are materially agnostic. So it's really what we're going through in this environment. It's not just resins, it's all materials. They're hitting incredible inflationary environment. So we'll probably unpack that a little bit, but I just want to just highlight that. But as far as where does Reinvent SEE, it's not a program. I take a little bit of umbrage to that. It's really how we're redesigning and reinventing this business. Part of Reinvent, we had restructuring, and we can unpack that and show you where we are, but we're really transforming that into our operating engine and our operating model. So where we see the transitory effects to your question, huge input costs coming at us. So the productivity that's still going on with this engine behind Reinvent, which is now our SEE offering is happening. We're actually seeing very good productivity on that volume that we're bringing in. What we weren't able to overcome with the pricing was that incredible inflationary impact in getting ahead of the pricing. As we shared on the call, we felt like the third -- the end of the third quarter, we started getting close to it. In the fourth quarter. We think we'll be ahead on the pricing piece going into 2022, but we still have tremendous inflationary pressure on the business, not just us with our customers. And so how we're dealing with that is we're going very aggressive with our customers, not just raising the price, but what can we do to help them with different solutions, different materials, taking costs out, bringing in automation, et cetera. So having a very direct conversation on how we can change that. As far as where the model is going, we believe that we're going to beat sales. We think in the margin, the question you kind of inferred there, we've had tremendous margin expansion, but we're not done getting over this inflationary bid. Going into 2022, we think our earnings growth rate will pass our sales growth rate in 2022, which we should have margin lift. That's what we're planning on, and that's what we think we can make happen in the new model. And I just really want to separate what Reinvent is not a restructuring program. That's part of what we had, but it's really a fundamental change of our business model. How do we go to market, how do we perform? And also the markets that we're going after very aggressively, which is the automation, which is bringing sustainability into everything we do and talking more and more about what a digitally enabled company is going to be able to do for us.

Ghansham maybe -- as we say -- maybe Ghansham -- I can add on Page 13. Specific to your point and Ted's comments, very much a successful program, 3 years into it now, and this is presenting the foundation or providing the foundation of our SEE operating engine. And the intent behind that is to continue to drive the productivity, a lot of great discipline, a lot of great process and practices are in place literally to reinvent the company and how we operate and how we go to the market and the structural side, a lot of cost take out, et cetera. But a lot of process change in how we also approach the market. You mentioned in terms of the inflationary environment we're in, we're trying to be extremely transparent with investors to let them know what we're driving in terms of price, pricing actions, which began fourth quarter last year and continued up to today, and we've just commented on the third quarter call and another pricing action going to be occurring in December. To not only get ahead of the inflationary pressures from material, but inflationary pressures in general, and we're seeing it from all angles. So yes, you get that recovery, if you will, in price, but you also get it through the productivity actions you're driving, and that's the SEE operating engine. So moving from this program called Reinvent SEE, if you will, which literally reinvented the company, to shifting towards that operating engine will become our system, if you will, of driving the productivity to offset inflation as we move forward. With the intent of expanding the EBITDA margins back to that 21%, as you mentioned, we got aspirations to be even above that as we continue to execute.

Very good. Maybe we can use that as a segue into 2 components. I want to talk about, sustainability and automation. And Lori, I think there's a nice slide in there with the equipment sort of bridge through 2025. But first off, on sustainability -- yes, that one. First of all, on sustainability, how is your message resonating with customers? And maybe what you could kind of jog us through the major regions that you have exposure to?

Okay. So we'll kind of do it backwards, how I was going to do it. And so you could test if I'm flexible with you. So this slide here, and this -- we're trying to use a circular economy, but being an engineer, I had to make it a novel versus a circular. So this is what our pledge is on sustainability, of course, don't want to call it the plastics pledge, but it's sustainability pledge. Then we got the net zero neutrality goal up there with our environmental. So you can see what we put out there and where we're going. So we're being very visible with our customers. We changed our go-to-market strategy, best solutions, right price make them sustainable. And so the right price right now, and the question you said investors were asking you, we're going very aggressively with price in the marketplace. There's no question. But you don't go to the marketplace. And one of the things we're trying to change from our past, Ghansham, is there was a little bit of an arrogance. So not -- we don't want any. So we're going to our customers saying, if we can't get the price right, we are going to work with them on the cost and find significant savings, and I've been personally involved. And so here's actually an example of what's going on right now, one of our largest market is meat. You see our bags, but you also see the roll stock there in the case ready. This is a real customer example, linking what we're doing in our facilities going fully touchless. This is an actual -- coming from our Simpsonville facility, where we have significant productivity going on and how we make that bag. So we're actually finishing making the bag now in our customers' operations where they're buying into the future. So we actually unroll the roll, don't put it in a box, saving significant amount of boxes. This one case, 87,000 boxes for this one plant. This is a real example in place. So actually, this week, our ESG team is actually meeting with the customer. So talking about who gets the carbon footprint savings on that? Well, first of all, they don't want boxes in a meat plant anyway. So we're working together, having that conversation. And so yes, and this is a customer I met with personally. The bag is actually going to cost a little bit more because we're going to give you a better bag. We're going to make it sustainable and also coming into the conversation, as you know, the shortages that are out there on the materials. So we're actually redesigning the bags as we speak. We're making the bags recyclable. We're putting the right content in there. We're de gauging the material, but all at the same time, with the sustainability in mind, it's got to be in the right price, but where the huge savings are coming for the customer is automating their facility. So we actually had this customer into our plant in Simpsonville. They got to see our automation. They got to see what we're doing on digital, which really opened up their eyes. Could we actually simplify their packaging and use our new digital printing capability to not put extra labels on the package, take the printing off the package. Let us print right there in their facility and huge opportunities to get the right price, make it sustainable and think about the whole stream as well is where is that plastic come back? Can we even get the plastic bag, take it back from them? We send lots of trucks to our customers. Can we take the plastic back and put that into our own recycling stream? So lots of conversations but the great part of our business where they're having these discussions. So actually, instead of running from plastics, we're attacking it. We're part of that sustainable solution. And then also on the carbon footprint, that's a great conversation right now because actually, plastics on the carbon net neutrality is a huge opportunity because significantly lower carbon footprint with a plastic solution. So maybe a long answer to your question, but this is a real-time example of how we're actually going to grow the business, automation is driving this whole thing. Digital is behind it. And by the way, they're designing because of the situation where you and I are talking via phone. We are doing all the design work now remotely through digital means. So lots of opportunity. And then again, digital printing is going to open the doors for us for significant savings going forward in the future.

Excellent. That's a good slide. Your ability to scale that across your footprint, across the different regions. And then also in protective, the opportunity set associated with sustainability. And then again, we'll go to automation after that.

Okay. Same thing, it's the same everywhere. And that's where I'm trying to push the business where we think the segments of food and protective, they all really come together. And so for instance, let's talk about automation, then I'll get to the sustainability side on protective. So if you see that auto pouch system, that's we picked up from APS. That actual example is multiple applications for food. We're now having cheese that you're -- going into pouches. We're doing pet food, et cetera. So multiple opportunities as we automate that. So it goes across segment. And also, a lot of in medical, new segments for us. Is medical part of food? Or is it part of protective? You can see them all coming together. So on the other side of the protective, you see something that's in process, and this is our solutions multiplier. Let me just explain the slide. Of course, I think I make these simple, and you were going to say it's complex. But we're trying to talk about the solutions multiplier on that previous slide. Lori, if you go back one? Another one, Lori? Yes. Right here. So this is whereas we break out where we're going with automation and we put where we're going and the solutions multipliers, 1x is the equipment and system and then parts and service and then the materials piece. So if you go to the next slide. So if you look at one of the examples we have here, if you think of us going forward, to packaging, there's a spirits example that we have right there. Right now, we do a lot of -- we do over 6 million bags in the meat application. We do that many pouches. And you think of us right now in tomato paste, and we do quite well in that area. But this is an area that we just -- a new market for us going into the bag in the box for wine, where we have the great barrier protection of the CRYOVAC bag that actually can double, now triple the shelf life of the wine. So also putting the fitting and putting it in the box. So doing -- now we're going beyond just the bag, doing the box. And now with the digital printing actually printing the box. So doing the full system. So is that food? Is it protective? It's the full solution, taking that. The one to -- next to that is looking at pouches as we're doing more and more for clothing, et cetera, into the fulfillment and even to the industrial space, using our high-speed equipment to load and package it, but also changing the material. So as we work on the sustainability side, we're bringing in more and more paper products, even working on paper products on the mailer is there's a lot of push to go full paper. It goes back and forth, but we're working on that solution on both sides.

Great. And then on the previous slide, in terms of the lead up to equipment systems to 2025, $500 million or so versus, let's say, $250 million this year. Your level of confidence in terms of bridging that differential in terms of backlogs. The segment's going to go evenly in terms of contributing towards that growth, how should we think about that confidence of that visibility, if you will, on the 2x improvement?

Well, as we're trying to get a reputation, as we go to the future, Ghansham, under promise and over deliver. So when we put a number out there and you're getting to know us a little bit, you know me now for 4 years, I can't believe it to be 4 years. That we do what we say we're going to do. So internally, just share with you, and we're very transparent with you and our investors and our customers. Our internal number is a lot faster than that. So that it doesn't have 2025 on it to get there. So the short answer is we think we're going to make it. We unpacked the auto bag here for the APS to show you to make that real, how is the equipment working. So this one here is what we're modeling the whole business for. This is the auto bag business right now. It would be up even higher. So this is on the protective side, answering that question. But we also put some examples there. We have a new Bubble Wrap inflator. We put one of the slides. That was a piece of equipment, we used to give away. So we're doing that differently. Now we have a new system that could actually create bubble wrap on demand. It can create pouches on demand. So we're developing new products. So we think we can grow that a lot faster. And then if we go into food, can we grow the food business faster, Lori, why don't you go to the solutions slide for sec? Slide 8. So here, this -- now go to the next one, Lori, Slide 7, trying to memorize all these slides. So this is the one that we created for you, for your conference to try to help what does solutions mean to us, especially if we're an automation company. This is where we're going to live. So let's connect the past to the future. So CRYOVAC, that rotary vacuum machine, that's been out there for 30 years. So we're not brand-new in this business, but where we want to grow at just an explosive rate that those fresh red meat examples that I gave you on that one slide. We used to get equipment of maybe $100,000, maybe a couple of hundred thousand would be a big one. Now these orders that we're getting. Now, that's why we're talking about bookings because we're getting visibility now like an equipment company, they are multimillion-dollar systems. So to you -- I think you asked the linearity question out there. Well, because what was a couple of hundred thousand is now millions because we're not only doing that -- the rotary chamber machine, the CRYOVAC, that vacuum packaging. We're now finishing making the bag by having an auto bagging system using that technology of auto bag and bringing that in. You see the robotics in there, meat and how you touch it. We are very good on how you touch things with the patents on that robot, developing even the cobots and the full system in place. This one example is a multimillion-dollar system. So you can see what was a few hundred thousand into those same customers is now is a much bigger number. And what's really exciting, guess what, we're going to be packaging faster. So the other example on the bottom, and this is, again, in liquids, where you ask what's growing with the liquids business, we really think we have an opportunity to disrupt the rigid container market. By using flexibles to do things very uniquely. So we -- the barrier materials, like I just shared with the red wine example or white wine here, we can actually protect that with our barrier technology better than a glass bottle. And so putting that into a box and really letting it breathe the right way. Well, this is now the auto pouch system. We've had this for years, doing tomato paste, et cetera. Now bringing this, that system loads pouches between 60 and 100 a minute, multi -- so that machine is $1 million and don't ask the question again, did you give that away for free in the past? Maybe. Are we charging for that? Yes. Are we making great money for that? Yes. Because it's saving our customers huge, a 3-year payback, but the pull-through of that now is $3 million a year, that $1 million a year in pouches, which are really great margins. But the customer is not thinking about our margins. He's thinking or she's thinking about how we could change their portfolio. Their cost structure, their ability and bringing the digital in here, and that's that bag in the box, the whole conversation is about doing things to make their packaging, and that's where you see the inimitable packaging experience that no one else can do. And that's what's exciting. So the automation is making that happen. The materials are -- we're not going away from materials. We're still going to have great materials. But when I'm excited about these examples, these are whole new markets for us to grow even faster than where we are today. So if you're worried about getting to the $750 million and by 2025, I'm not worried about that. We're going to make that happen.

There's a question from the audience. Maybe for you, Chris, it's on organic volume growth outlook for the company. It's 2 different segments. And I would assume some context of all the base effect from this year and next year, it will be less of an issue. So what are your thoughts on that?

Sure. And that's where Lori took us right to the operating model. So what we're trying to communicate to investors is give them a view of over time, you can expect us to grow organically 3% to 5%. And in any 1 particular year, you may be more like this year, as an example, clearly, we're in a significant price benefit year, growing more towards the high single digit, double digits. And then thinking through the earnings projections, getting that 5% to 7%, getting to that 20%, 21% EBITDA margin and continue to grow that. So at this stage, what we're just trying to do is share with investors, it's kind of our -- our Investor Day on a page. It's just as you think of Sealed Air and think as we plan and execute over time, this is what we're kind of holding ourselves accountable to in terms of expectations. It's going to change based on year, based on circumstances. But as we finish out '21 and kind of move ourselves into 2022 -- and we made some comments on the third quarter call. The overall growth for the business, thinking about the margin expectation, we're going to have price tailwinds, if you will, given all the pricing actions that have gone in. We'll see what happens on the material inflation side. It seems to be stabilizing, but if there's other inflationary pressures that we're trying to offset, as we mentioned earlier. But anyway, at this stage just trying to give investors how we look at our company.

Great. Maybe last 2 questions. First on capital allocation and the evolution of that. I mean, obviously, you're seeing a lot of momentum with all these technologies and so on. On the automation side, you -- should we expect more capabilities being added to Sealed Air in terms of sort of aligning towards maybe step functioning automation? How should we kind of think about acquisition dollars, I guess, capital allocation towards acquisition dollars?

You see here in -- I'll start off, Chris, and pass on to color. But if you look at it -- Ghansham, we've been very transparent. We've been using the slide for a while to share with you. And by the way, we have history again. I'm trying to move away from some of it. But we have the history of customers not trusting us. I mean not customers, investors not trusting us with acquisitions. So we're very clear and transparent. And we continually talk about how successful APS is. APS, we paid a 10 multiple. It is going to be by the end of the year, a pay down multiple between 5 and 6 . So exceeding expectations, performing and driving that automation. So we're listing here. The only thing we didn't list, we say invest and acquire. We're also divesting. We made the announcement about Reflectix. It's a small business, very good business but doesn't fit into where we're going with our portfolio. So we are continually actively managing that portfolio. But these are the areas that we want to grow faster in. We need the technology and automation. We need equipment technology. We need some of the digital technology we've invested in. We're even using SEE Ventures, which has been incredibly successful for us on our balance sheet with some disruptive technologies, even participating in the circular economy. But we're doing that very carefully so we can invest. We're giving see-through looks to our investors so they can see what's going on in our balance sheet. But these are the areas that we're interested. The other piece I just want to highlight is the capital. The internal capital on our touchless automation in our facilities. Really some great productivity gains are going on. So we're sharing this where this is an area we want to continue to invest in our internal CapEx.

Okay. Maybe to close out at the risk of opening Pandora's box, Ted. As investors look at your stock price -- and I've seen the story unfold. I mean, obviously, the stocks have done very well this year. And in many ways, you're actually trading by your group in terms of valuation for what you've been able to accomplish. But for those folks looking at the stock and saying, well, maybe all this has already played out, what would you have them think about and you can close this out with that?

I appreciate that. And I say tongue in cheek, but I believe it though when I say we've been -- we continue to hit a new low. Because what we're attracting -- and again, to highlight, Ghansham, this is you. Look at your questions right now on automation from the past. Your questions in the past were about resin, what's going on in packing. This is a new company. We are a 5 -- what love our new investors to think about is look at the other automation companies that you're looking at. This is a $5 billion startup in the automation space. It's living on a very stable market in packaging, has an incredible reputation in packaging. Customers are trusting them to bring automation to packaging. That is a cool place to be. And we just got to continue to perform. And I think us being -- not saying that we're undervalued, let's continue to prove it and bring in those new investors that are looking at an automation company that is undervalued, we think SEE is a tremendous opportunity. And I think our 4 years, that track record is showing we do what we say we're going to do. And we think this is an exciting opportunity.

Terrific. Well done. Thank you, Ted, Chris and of course, Lori as well. Obviously, this does conclude this presentation. Please refer to your schedule for your specific next event, if you will. And with that, operator, would you close this out? Thanks again.

Thanks, Ghansham.

Thank you.

Thanks, Ghansham.

Thank you, Ted.