Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

All right. Okay. All right. Well, thank you, everyone, for joining. My name is Adam Samuelson. I'm the packaging and agribusiness analyst here at Goldman Sachs. Happy to continue our Industrials and Materials Conference this morning with Sealed Air. We're thrilled today to have the President and CEO, Ted Doheny; as well as their Senior Vice President and Chief Operating Officer, Emile Chammas, here with us. This is going to be an interactive session. It's going to a fireside chat monitored by myself. We'd love to get questions from the audience in the room. I believe there is a way to do questions virtually in the webcast as well. So we will get to those. We love those questions. But maybe first, Ted, thank you for being here. Maybe just to start with level set. Think about just reported first quarter earnings last week. Just maybe just for the audience, just remind us kind of the key things that drove a very strong first quarter, increased outlook for the full year, where some of the opportunities and benefits have come on price/cost, the volume demand environment that you're seeing and what is hardly a stable macro environment these days?

Sure. Thanks, Adam. It's a pleasure to be here in person. It seems like it's been a long time doing these conferences, doing everything virtually. So yes, we're just a week off of reporting earnings last week, and we're pretty pleased with how the business is doing through incredibly tumultuous environment. And every quarter, it's something else that's attacking us. And attacking the business, but we feel pretty good. As far as the first quarter, before I open up, it just the things that we'll keep talking about or where we're going on automation, digital and sustainability. So in the first quarter, we actually brought out and we did our opening of where we're going digital. So I hope you ask me questions about that. That was a big deal and something we're very excited about. As you can see in our opening slide, where we're taking the business to become a digitally-driven, automated, sustainable packaging solutions company, really in the transformation, we think, is well under the way. And we're excited about a lot more to come. Though we did have a good first quarter. We're pretty excited about what the future is. I left the package here up you see it on the right, which are our food business, to give you a little bit of a feel of where digital is going. If you see the piece of salmon there that's in our packaging, we have some very special packaging that extends the shelf life on fish. But what you see there now digitally is you don't see the label on the package. And I'm sure we'll talk about that as some of the efficiencies. In the quarter, just to show we continue to perform since we had to reinvent some pretty steady performance. And what we've done differently is we're giving you where we're going for the next 3 years or every quarter, we show you where we're going to be accountable. We did up the growth a little bit to talk a little bit about what digital means and we continue to perform as promised. Just the last part of the opening on what's going on with the portfolio. We talk about our business. These are our top 13 markets that are moving pretty dramatically every quarter. The biggest one is the fresh red meat that we're doing quite well. The red meat market was up slightly, but our performance was up stronger, and that's through the automation that we'll talk about where we're taking automation into our largest market, but also into some of the other markets, and especially as markets are shifting quite dramatically now. And hopefully, this post-COVID period we can talk about where the markets are moving. We'll take a pause there and leave this as kind of a picture of what we do.

Yes. No, that's really helpful. I think maybe just given how volatile the environment has been, especially on the supply chain and the cost side, and we're fortunate also to have Emile here. Just maybe we can -- as we think about where we're going, let's think about where we've come from and how the company has evolved. And I want to ask the question in the context of the Reinvent SEE productivity program that you've had, that has been underway in the company for several years. And just help us understand kind of how the operations of the company has changed today versus where you were and how that's enabled you to navigate the supply chain and inflationary challenges that have been pretty pervasive over the last couple of years.

How about if I tee it up real quick and then since we do have Emile here, he's responsible for making all that stuff happen. One thing that we put in the appendix that we've been talking about what does Reinvent SEE means? So if you look at our appendix, a race to the back here, and this is our 4Ps of Reinvent SEE, and it's beyond restructuring. We went hard at the beginning with restructuring, on how do we change the people, the performance, the processes and then bring sustainability into that, but went quite aggressively and hard, but this is our game plan. This is the map that we're going after. And then the last piece, and then I'll turn it over to Emile about what's coming is to put -- I can't navigate here quick enough. But if you go to the model, and here's the model. And this is -- you can see the heavy part where the heavy lifting we did at the beginning, but a pretty consistent improvement on our operating model, and we think we have more to come. So turn it over to Emile.

Yes. So just to add a couple of points to that. So with the Reinvent will become this -- we've gone from this siloed organization into this much more nimble organization focused on how we innovate to solve -- this is how we're taking the entire company and putting them to rethink that end-to-end spectrum all the way to the customer. And what we're using to drive hard this continuous benefits and to navigate us through these challenges are in terms of how flexible and nimble we are internally to use multiple sources of supply, all the way through into the customer and our 3 pillars of digital, automation and sustainability is not just an external focused value proposition to our customers. It's actually what we do. This is how we're driving internally the entire organization all the way through to our customers.

Okay. That's really helpful. So maybe if we dig into that a little bit, just think about some of -- in an environment that does see pretty dramatic inflationary pressures, both on direct materials like resin, but cross freight, labor, the whole gamut of your supply chain. How does that impact price the way you go to market, the pricing decisions? How does that go-to-market approach changed? And then maybe we can then move that into how you're going to market differently on equipment. But first, maybe just think about it from the base material side.

Sure. I'll turn it over to you on materials, but how we go to market on the selling side, what has changed is on the automation piece. If we think about packaging, how do our customers put things into package from a meat packing plant to an e-commerce center and how they do that. So the materials part of your question I'll leave it to Emile, we use multiple different materials to make that happen. We're materially agnostic as we keep saying. 15% is fiber-based, but the large base is the resin. So if you want to talk about what's changed in resins as we -- in our go-to-market strategy.

Yes. So the current environment we're in, it's both an inflationary environment, but also a massive scarcity problem. And that's what makes us very different versus the past. And it's actually helped accelerate the changes that we need to make. So as we deal with those challenges, we're really looking at all our materials and product formulations. And as we try to solve the inflationary and supply challenges, we're actually designing new products that are more sustainable, that are more common across and that we're bringing to market. So whether it's plant-based materials with fiber-based solutions or just a completely rethink of existing products, okay?

And just in the current environment, as you look at what -- where the supply chain challenges and availability and scarcity are most pronounced. I mean just specific geographies or product areas that you're seeing kind of be more problematic or less problematic?

It's every day, a different problem in a different geography and a different item. So you have the big well-known events, the weather events from last year on the chemical industry. So either sometimes you can't get a material or if you have it in one region, you don't have it in the other, then the freight becomes an issue to get it there. What we are seeing and Ted and Chris talked about that in the earnings is the -- on the equipment side, we're starting to see the impact there in terms of availability of certain components and how quickly we can design our way out of it. But it's literally a different theme every day of the week. Obviously, most recently with the China lockdown issues, and that's going to have more ramifications that are yet to uncover as well as what's going on in Europe. So that's all about our DNA. Our operating engine is to be nimble to be able to not only solve today's problem but try to anticipate what is coming towards us.

Okay. So maybe taking that and just talk about maybe the equipment and automation solutions -- kind of investments that you've made in the business that you've grown. And just I'd love to hear you reflect on kind of how you think your offerings differ from competitors today and where the real -- where are the competitive advantage that Sealed Air brings to the market that you think provides you a lasting kind of value proposition with your customers?

Well, the great advantage we have is our history because we're embedded with our customers, whether it's iconic bubble wrap, it's around every e-commerce center or again, into the food. So our materials are there. The equipment has been part of our past, but it was more of something to augment our materials business to sell more materials. Where we've really shifted is to focus into our customers' operations on what do they do in the packing area. And if you look at here, as an example, where you can see, this is a meat packing plant, we're taking a look at it from in that whole operation, how do you load it? How do we automatically load the meat into the package? How do you do the vacuum or Cryovac process? How do we do those vacuum tunnels, vacuum chambers and an automated [ touchless ] operation? How do we then pack it? And now with -- we have some pretty unique vision systems that actually can look and see in side, look at the process, understand what shouldn't be there, what is there and bringing some of these digital tools, which has now led to our digital packaging. So we think we're well-positioned. We're there. So the actual equipment, we've had equipment working with third-party suppliers and then our own equipment over the years. What we've accelerated is our focus in looking at more improving our presence and even looking in the acquisition world. One of the great acquisitions for us in the last 2 years is with APS, Automated Packaging Systems, using their auto bag system and actually taking that even into food and how do you automate the process. So lots more to come. We're looking at actually more into that space so we can grow our equipment faster.

And as you think about some of the different industries and end markets that you serve and have long heritage of supplying materials to, where would some of those e-commerce food, red meat, where would some of those rank in terms of where are they in the adoption curve of really buying into the whole solution model and are what new markets, new customer sets are some of these capabilities unlocking?

I think it's in all our markets, Adam. Food being our largest market, we're very aggressively looking at what we can do in automation and fresh meat. But we're also one of the highest growth in the last quarter is going into the fluids and liquid space. We do 5 billion pouches. So we're in there on how do you fill liquid pouches. So bringing our automation technology and bringing digital into that space. We think we have significant growth opportunities in the liquid in the fluid space. E-commerce, we've been there for a long time, what can we do to further advanced e-commerce and e-commerce even bringing in, as we shared this time, we've now developed a paper bubble wrap mailer and really changing the game. So we think all of our markets that we serve, automation, digital and sustainability are the drivers for that. So where we are, we think we can grow more, and we're pretty excited about some of those markets that were not strong in today like fish where I gave you that first example. It's our 13th largest segment that we think we should be able to grow by bringing automation into the seafood, we think we have lots of opportunities for growth.

Okay. And as you think about the value proposition to the customer in terms of the labor savings and you think about the value proposition to you in terms of the life cycle throughput of those kinds of machines. On the fourth quarter call, you kind of framed this notion of a solutions multiplier. And I'd love to hear you reflect on, I think we see some of this right here on the slide, kind of where -- at the high end of that solutions multiplier, a 10x that I would imagine that's not something you're capturing fully capturing today. I'd love to hear kind of where you think you are on really capturing those solution multipliers and where some of that bigger increments and growth opportunities can be most pronounced?

Great. Especially when I'm talking on earnings call, we're also talking to investors, but we're also talking to customers. And we're also talking to our people. So our customers, and we talk about price right. So what our customers are not interested in us raising price in this highly inflationary market that Emile talked about, what are customers interested in, how do we save them money. So how the solutions multiplier works and the first part of the solutions is how can we bring a system in to save them money, whether we're reducing their labor content, reducing their throughput, productivity, et cetera. So if we use these examples, we'll talk about it. So we price our system on savings. So I've been asked before, is this customer using your stuff. If you hear them talking about payback, there's a high likelihood they're dealing with us. And we put it out there a 3-year payback. So this one interesting example. We have 2 of them here, one in a protective side, one is food. If you look at the first one on tires. Working with UPS, one of their biggest problems that we ask, what are the problems you have, we're the innovation partner with UPS? Tires. So what's the problem? So they surcharge tires that it's like something like EUR 16. A tire is a really difficult thing to put through a fulfillment center. So we work with Continental, we work with UPS. And you see the RFID, if you follow UPS, they want to put an RFID chip on every package, over 20 million a day. So -- but they -- how do they pay for that? So we have this equipment that we sold here to Continental, an auto wrapping system. It's very similar. It's a shrink tunnel, and that wraps the tire, $2 million piece of equipment, pulls through the materials and the service over a 10-year life, that has over a 10x multiplier, so 10x that $2 million charge. But to a customer, it's about what's my payback? The savings for UPS is over $1 million just in how they handle the tires. But to Continental, their payback is less than 3 years for that full system. So that's how we price it. It's not by how much it costs, it's by how much we save. And if we can't get the cost right or below 3 years, we work on it. We work on the system. We look for ESG issues, what can we do to help them environmentally, et cetera, to bring that payback under 3 years.

Okay. And does that -- if we're thinking about maybe to that end, on the sustainability point and thinking about shifting materials and a lot of customers, especially in the food industry, want to reduce the use of plastics where they can. How would a shift to fiber play into that payback equation? Or where is that -- where are we on that value proposition to actually push that even further?

Great question. So if you look at the materials, the one above that is cheese. Right now, cheese is one of the most automated processes that we've worked on. We have over 50 fully automated cheese processes working on around the world. So to your point on the environmental, the sustainability side, we're constantly working with them to get fully recycled material. So we're working at different layers to have recyclability even using our digital to share with people on what you do with material. On the example there with the tire, we're using different materials, as you can see that it's also matching the carbon footprint with plastics. So you can see it doesn't have a box, minimal cardboard, minimal plastic and recyclable plastics. So we're constantly working with materials as well to get recycled content into the plastics.

Okay. All right. That's great. So maybe this is the slide -- you also see on this slide, and I think it's -- have it elsewhere as well, that the digital component with the cheese and if I go back to the earnings call last week, you rolled out and what you now call prismiq. And would love how you think about digital and the opportunity to add value and I'd love to hear you talk about how that is the next kind of level to this, in terms of creating value yourselves and your customers.

Sure. What prismiq is,is a branding that we have on a digital printing. We do over 30 billion packages a year. So how you print on the package, whether it's printing on that Butterball Turkey or printing on a box, you put into these high-volume lines. So we now have the ability with digital printing to have unique printing per package. So there's tremendous cost simplification there. But what it means to the customer is now they have a unique -- their brand, their printing per package. I can let Emile talk about what it means to us on our operations, which is tremendous. If you want to talk about what prismiq means to the operations.

Absolutely. So you look at this slide, the middle column there in terms of prismiq is the digital training capability. And this is a proprietary solution that we have developed, started with an acquisition about 3 years ago. And it's really being able to bring this technology to our types of materials, but specifically where the code hasn't been cracked is on these shrinkable stretchable materials. So we're able now to bring it in an affordable way internally to ourselves as well as to our customers. So if you think of the current way of printing, in terms of the footprint, these are solvent-based inks, you have to go through multiple process from the graphics into making plates, to stopping the machine, to mount them. You have to predetermine ahead of time for each customer how many prints they need. So all that is done with digital printing. These are water-based inks. And you go almost instantaneously from the graphic that you've decided on to the package and not only that, every impression can be now serialized. So it helps connect the brand owners to the consumer. And for us, the ability not only to just print differently, also to be able to incorporate this technology into our process so that printing doesn't become a separate event, a separate manufacturing step. And now we're taking this all the way to our customers where they'll be able to print on demand in their facility based on their needs. And you see here on some of the pictures, actually, where we have some of these installations. We're starting into our customers' operation and how to bring that value to ourselves and to our customers.

So maybe I ask it this way, if you're sitting in our shoes or sitting in the shoes of an investor, how do we measure success of prismiq? Is it margin gains internally because you're -- it's variable cost productivity because your operations are just getting that much more efficient? Is it an acceleration of mix because you're adding value to the customer? Is it more sell-through on this whole solution? Trying to think about how should we measure this over the next few years as a successful initiative?

I think it's yes, yes, yes. So part of digital, everything we do, we print today. So the printing process on the cost side is significantly different. So if we look at this picture of -- this is our largest machine, this is the actually the largest -- well, I get corrected. It may not be the largest -- I would say, the largest, fastest digital printer in the world. This is what we have in Simpsonville, which is the largest food packaging plant in the world. What the space on this, and Emile can give you more detail, this is roughly 1/10 the size footprint of our current flexographic and printing systems. If you came in, you see this huge printing area where we have these big roles, plates, you have to etch it on, and you have runs of thousands of times to get the cost -- now we can actually print on a per unit basis, very multiple sizes, we go front and back, et cetera. But the other thing you'll notice when you see a printing operation, you can smell when you're getting close, some of the acetones, et cetera, so significantly on the cost side. So yes, to that first answer. So then what does it mean to the market, is we now have the ability to let the printing that customer experience. So if you look at a store now, what do you see over most of the meat when you go to a store? You see all those labels. Now imagine, all you see is a beautiful piece of chicken and a beautiful piece of meat. And with the digital code, we can give you -- enhance that buying experience and let you know everything about what you're buying. But then take it all the way home in your refrigerator, we can now connect food, your phone and connect to the producer who's ever made it tell you more about the product. So that yes to your second, we think enhanced sales opportunities, enhance growth and market opportunities by connecting to the branding efforts and the growth prospects of our customers. So we think both. It's going to help drive growth, and it's going to be much more efficient for us on the cost side.

Okay. Great. Well, I only have little time. I'm happy to keep going, but if there's questions in the room, I think we do have mics that can circulate if anybody in the room has any questions, I'm happy to pause for questions in the room. Just a question upfront this microphone was webcast.

Have you seen any softness or changes in customer buying patterns in the recent quarter or last 2 months? And I guess in periods of economic softness, what happens to equipment sales and lead times to customers?

The -- definitely -- the question we're getting are we still seeing the inflationary pressure? Yes. We're seeing market shift definitely post-COVID, what's going on with e-commerce and where it's going. We shifted a lot of our portfolio. We were actually packaging COVID-19 kits, et cetera. So we are seeing a shift in demand from our portfolio. We're still seeing the meats in the food business, fairly strong. We've seen actually our QSR, the quick service restaurants business go up, and we've seen our liquids business pick up quite a bit. But to the second part of your question, what's going to happen if there is a demand and everybody is predicting, not everybody, but there's a strong feeling that we could be having a recession coming. That's where we actually are looking right now, how do we accelerate our automation and grow into some of these areas right now because of some of the supply constraints we've had, because of some of the COVID issues? How do we grow those new products into those new markets and accelerate that growth? So we got a plan -- we hope for the best, but we got to plan for the worst. So that's where we're moving. We think automation is a great strategy. Digital is a great strategy and the sustainability is not going away. Even in COVID, we've been driving our sustainable efforts. So on the other side of that curve, we're just going to have to go create growth now into new places. I'm not predicting the recession is coming, but we're planning.

And maybe keying off of that, are you seeing -- for some of the larger equipment type sales or -- are you seeing that our capital investments by your customers, are you seeing them maybe slow down that approval process in any way, the backlog for equipment is still growing nicely? But have you seen any changes in customer behavior that would signal maybe a little bit more reticence to spend capital?

It depends in the market that we're dealing with that. I don't -- we serve so many different markets. So it depends on the market. One interesting part of equipment that's changed the behavior of Sealed Air is selling equipment. We're selling multimillion-dollar systems. So we're talking at high level. We're not talking where we used to be talking to purchasing. So these are major systems going in place. So they're releasing capital ahead of time. So the capital that we're seeing for our equipment is with a perspective of looking at that 3 to 5 years out. So we're seeing still heavy on the food side, on the automation. We're seeing automation now and I gave you the example in the automotive industry to break bottlenecks. But the issue on the medical side and what's happening with COVID, that part that we don't see that picking up. So moving some of those resources, I'm trying to think of others that on the downside, but that's probably the medical side is the one that's going to be shifting dramatically.

The labor -- the rapid labor wage inflation that's happened not only in this country, but across the world as well as scarcity of labor for some of these operations, if anything is still accelerating the desire for automation. So glad to see how that evolves but...

That's not going to go away.

Okay. All right. Well, I can -- I will keep doing that. As we think about maybe on that non-resin, non kind of direct material inflation and maybe this is best directed to Emile. I mean you talked about supply chain challenges everywhere, and it changes daily. But as you look at your footprint and you look at your areas of spend, where are the biggest pinch points right now? Talk about your employee retention and kind of actively opening vacancy rates, I guess, in terms of employees and you have got the workforce that you need to keep your operations moving the way you need to.

Sorry. So you asked about the pain points today or?

Yes. The pain points on the non-resin direct material side.

Yes. So on the non direct material side. And I think Ted and Chris shared that in the earnings last week, where it's about double the historical rate. So it's going up to about $100 million a year. And 2/3 of that is labor and about 1/3 is nondirect material-related that could be the energy costs, some of the MRO-type of materials and so on. And this is where back to our strategy of the digital automation sustainabilities. The problems that we're trying to solve for our customers are the same problems we're trying to solve for ourselves. And we're driving that internally through what we call touchless operations and breakthrough process. So we're actually measuring every single touch that goes on in the company every day. And these are in the tens of millions of touches that [ go ] on. And by looking at that and driving our automation with our breakthrough process completely rethinking how we make things. And digital is also helping to accelerate because in the past, instead of making products in multiple steps, then you take it offline and then you go print it and you bring it back and you convert it. So we're driving this hard in terms of how do we take essentially from the raw material into the finished product without touching it? And it's not just in the plants, it's also in the back offices in terms of what it takes for us to do business with our customers. And it's resonating when we're bringing customers. So we're actually bringing in to our plants and say, "Hey, let us show you what digital automation sustainability, what it means for us and what it could mean for you." And actually, at the brand launch of prismiq 10 days ago, we had one of those major customers in. And I was telling Ted this morning, we just got an email saying, "Hey, can we sit down and talk about this touch less analysis and how you guys have driven it and can you come to our plants to talk to us about it?" They didn't tell us come and sell us a product, come and sell us a machine. So it's really resonating in terms of the problems we're trying to solve for them are the exact same problems we're trying to solve for ourselves.

Okay. Well, we've got a couple of minutes left. And I see we have a sustainability slide up. So maybe I'll end the conversation here and just looking at some of the long-term pledges you have around recyclability and reusability and recycled content. And I'd love to hear you reflect, Ted, on where you think the biggest kind of challenges are to hitting or exceeding some of those goals? And in particular in the context of plastic packaging, how we go from just recyclability to actually getting that plastic recycled and how you think about those infrastructure kind of challenges and where you think the biggest opportunities to make forward progress are?

Yes. I think as Emile was talking about here, we -- this is our circle. It's not a real circle. It's a bathtub of how we bring all this together. I think on the plastics side, as you can see, we have our environmental goals, which are really the carbon neutrality competing with sustainability, which is the plastic side. So how do you keep those balances together? So what we're actually doing is spending a lot of time doing this together with our customers. I joined the alliance then plastic waste with our major chemical suppliers, but we're also working with fiber-based products. We're working on some really cool technology right now on the compostable side. So short answer to the question, I think we're going to exceed all of our challenges. And we've also brought it into our business strategy. So it's not doing it because someone's telling us, we're actually bringing the story to our customers as we keep saying automation, digital and sustainability into the packaging. Let us help you take care of that. We're also investing in those recycling streams. We're using our SEE Ventures, investing in closed loop and other recycling entities so that we understand. We're studying chemical recycling. So what can we do with our products and actually change materials, but then also how do we get it back? Because that renewable material is going to be hard to get and costly in the future. So we're thinking about that. And then the last piece, I just can't highlight enough, is doing this together with our customers. As Emile talked about, we're sending our operations team not just the touch [ list ], but we're also bringing our ESG teams in to talk to our customers to think about how do they accomplish these goals together. So I think we're well on the way, and I think it's a good business opportunity. I'd even like that we talk of ourselves as an ESG company. That's what we do to make packaging, everything needs to be packaged. How do we do it? Do it the right way as we say here, the best solution is the right price and make everything sustainable.

All right. Great. Well, I think we're just about out of time. So I think we're going to leave it there. Ted, Emile, thank you so much for joining. Thanks, everybody, in the room for attending. Thanks so much.

Thanks, Adam.

Thank you.