Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Well, good morning, everybody. I'm Larry De Maria, analyst here and follow Sealed Air. Thanks for coming to the presentation today. For a full list of conflicts of interest and disclosures, please visit our website at www.williamblair.com. Today from Sealed Air, we have Chris Stephens, Senior Vice President and Chief Financial Officer; and Susan Yang, VP Automation, Finance Leader and Treasurer. Ted Doheny, CEO, unfortunately get called away on a client duty, which is obviously understandable. But pleased to have Chris and Steve -- Chris and Susan, so thank you very much.

Very good. All right. Thanks, Larry. All right. So Susan -- good morning, everybody, and thanks for joining us. So Susan and I are going to kind of tag team through this presentation. Given a little bit of where we are going as a company focused on automation, digital and sustainability, we wanted to really deep dive into the automation side. So Susan, in addition to her treasury responsibilities, also is leading on the finance side around automation. We had a video on one of our sheets -- or one of our presentation pages. Unfortunately, not able to show it to you, but we're hopefully to get it to our website. But it may work actually, it does work very good. So good. Well, very good. By the way of background, I joined the company about 1.5 years ago as CFO. And Susan's been with the organization about 5 or 6 years on the finance side, most recently Treasurer, and again, Finance Leader for our Automation business. So maybe just to first to start off, obviously, the Safe Harbor Regulation G statement. We do make forward-looking statements. At the same time, we do measure our performance on a non-GAAP basis, so please refer to our website for additional information on that. All right. So our vision statement, become a world-class digitally driven company, automating sustainable packaging solutions. To summarize, we are basically the focus of the company, great brand recognition in terms of what we have both on the food and protective side. But automation, digital and sustainability is driving our growth, and it's driving our capital allocation, which we'll get into. We're identifying the organic, inorganic as well as shareholder-friendly actions, which we'll speak to. So like I mentioned, we're going to deep dive into those areas in terms of where we're going, not so much of where we have been. Last year, about -- I guess it was mid last year, we want to pull together what we call our Investor Day on a page. And what the intent of this slide was to give investors a good feel for where you could see our performance, so where you can identify or track our performance over time. So our SEE Operating Model is acceleration to world-class performance. First, starting on the top line. We had tremendous growth, organic growth last year. A little bit tougher organic growth this year, but we're really driving on the price side, which I'll get into in a second. But over time, sales being 5% to 7% of growth. We just recently launched our digital brand called prismiq, which we just announced on the first quarter earnings call. We'll actually get a little bit into that during the presentation pages. So the digital side is twofold. One is it's enabling us to put digital printing on our packaging, on our materials for the customers. There's a tremendous amount of excitement of how fast we can transition from these paper labels and move to an electronic version of that, if you will, to capturing a lot of information. And then also moving our sales activity from less than 5% today is digitally captured to greater than 50% over time. Meaning, we've got an online platform called MySEE, recently launched, converting customers from the traditional order activity more to that online version. We've got a vision to grow -- to be greater than 50% of our sales driven in a digital way via MySEE. And then earnings, just thinking about conversion, that incremental dollar growing at greater than 30% allows us to grow our EBITDA margins 7% to 9%. We're roughly a 21% EBITDA margin business today with plans of continuing to drive productivity and growth globally to drive that even further. And on the performance of earnings per share, the model is identifying double-digit EPS growth greater than 10% over time, and we identified here for you what we've been able to do since 2017. And then cash conversion, which we do on an EBITDA basis, clearly driving our ROIC, which is roughly 15% to 16% greater than our weighted average cost of capital. But we did recently revise this conversion ratio to greater than 45% versus greater than 50%, mainly on the heels of the investments we have on CapEx. And we, as a company, typically spend about 4% of our CapEx as a percentage of sales and moving that up to that 5% range as we continue to invest in the growth, sustainability efforts for the company. So that's our SEE Operating Model, we're getting a lot of favorable feedback from investors to at least showcasing where we're going as we move through the years and painting a picture in 2025. Our SEE Solutions, solving critical packaging challenges. This page is just depicting our sales on a geographic basis given 2022, as we look at roughly 2/3 of our business be in the Americas, and you can see the rest in terms of EMEA and Asia. And there's that reference to less than 5% of our sales today is captured online and with the intent of growing that to be greater than 50%, as I mentioned, in 2025. And then it's breaking our business down in terms of the end markets we serve. Fresh red meat, you got e-commerce, retail and industrial, so you get a sense of what markets we serve on a global scale across the world. We've got roughly 100-plus locations. It's very much a local-for-local business in terms of having our operations and activity where our customers reside. So down below, you'll see SEE Automation plus digital, plus sustainability. The intent is to grow greater than our market growth or greater than the market growth. And we're getting a tremendous amount of traction, which Susan will get into here in a second as it relates to the equipment side. But what we've identified and laid out for investors is the auto loading side in the Middle East SEE AUTOBAG's with prismiq, prismiq being our brand around digital printing. And then you've got AUTOBAG's. We are coming up with a paper -- a paper-based bubble wrap, and no, it doesn't snap. I tried; Susan has tried. So when you do get it in the mail, whatever package you may get from whatever retail channel, but it does provide us a very good, sustainable, reusable package that helps on the environmental side for sure, that's coming out in the second half of the year. And then you can see the depiction of the digital side. The exciting part is to be able to take through digital printing to be able to take a -- put that on the package. So the information that's at your fingertips through a smartphone goes beyond just identifying where it came from. It literally will take the user, if you will, or the customer, our customers end customer, to their website for purposes of stickiness in terms of retention. So that -- the digital printing is an incredibly high demand with our customer base right now, and we can do it pretty quick. The traditional way is you build that template, you've got the inks, you're literally going through a process that takes, I'd say, weeks, if not months, depending on the application that we can do within a day or 2. So digitally printing images onto our packaged material for our customers then to get as creative as they want in terms of what they want their end customer to see. Okay. With that, I'm going to turn it over to Susan.

Thank you, Chris. Yes. So on this page, you're talking about how SEE there is taken on the automation business. So first, on the bottom left is a chart on sales projection. 2021, we ended the year close to $450 million. You see the light bar is the equipment sales. The darker green bar is more parts and service, which is the repetitive sales for the year. And by 2025, we're going to take this, double the size of it, going above $1 billion. Organically, we're growing double digits, expect to get to $750 million with a bit of a help of M&A and also the digital initiative, Chris had mention there. We will exceed the $1 billion there. So what gives us the confidence in this projection? Behind this is all customer savings we're expecting to bring there. And we're there with a customer operation, helping them, identifying opportunities to reduce labor, improve productivity, increase their quality and then reduce waste of materials. So on the right side, you see a line chart of rolling 12-month bookings we're seeing for our major equipment product lines. So since the end of 2019, we have seen that booking picking up tremendously. Overall portfolio is already up at 60%. If you look at just the Q1 itself, our overall portfolio booking for equipment is above 20%. And AutoVac's, which is the red line really sticking up, actually just Q1 alone, doubled from that of last year there. So the demand is very strong. It's driven by market and also driven by the fact that we're bringing value to our customers here. The other important piece of the automation story is equipment coming in as more like a one-time sales. However, going with the equipment, we're expecting to have more repeated sales on the parts, services and additional materials. So the arrow there where it says 3x to 10x, which I do have one slide later to explain, that's the pull-through that we're expecting for our product line of equipment here. And 2022, right now, we definitely have some short-term headwinds that everyone is hearing about. It is the supply shortages, particularly some key electronic components to make equipment, and FX headwinds, sanctions to Russia and also COVID lockdown continue to be a concern overall. But it does not change the long-term trend for the overall market. We're really investing heavily trying to double our capacity in the next 3 years to meet the demand here. So this is the slide I know that Chris said, we'll see if we can actually make the video work. Before we go there, just to tell you, this is the example of an automated line for meat packaging plant. So you know in the meat packaging, traditionally, all those processes are done manually. People lining up or putting the meat into a bag, and then people sealing it or putting a label on, put in the boxes. So we have a fully automated line. It starts with autoload. You see the machine is actually open a bag and basically shovel the meat in there. And it goes to a vacuum machine, vacuum the air out, seal the bag. And then it go to auto pack, you see a robotic arm actually picks it up, put it into a box there. Throughout all these, we also have the Vision System, actually looking at how the performance is going, try to identify errors or problems before it actually is too late. And the Vision System, the other thing is using artificial intelligence to really measure each of this process. How fast the line speed is? Do you have any problems? Bottleneck, if there is a bottleneck in upstream, how to slow down the downstream to actually given the optimal performance there. And at the end of that, we also talked about digital. And instead of in the past, printing on the label, sticking on the package, we're now able to actually print on the package itself. At the same time, putting a personalized or individualize the digital ID there so that our customers can actually scan, and even the consumers can scan using their cellphone to learn about the product information, sustainability indicators or any recipe recommendations, anything you can think of through that scannable ID there. So before I jump to the next slide, let me try if this is going to work. The video is actually a more -- a digitized version. It's more animation on the autoload process. [Presentation]

All right. I hope you enjoyed this animation here. So next page, we're talking about the solution multiplier, I mentioned it before. So how should we think about this? I mentioned equipment sales are one-time. Depending on the type of equipment, it could have a useful life of 10 years. In some cases, the food equipment, it's 20 years, 25 years. So we -- the way we look at it, when we sell an equipment, we consider that as a one-time, 1x revenue for the equipment there. And then in order to make the equipment running smoothly, you will have to have maintenance services and you check up your spare parts. Over the useful life, usually those parts and services could be another 1x of the revenue of equipment. And at the same time, if we're in the customer plant helping them to automate the entire process, there are additional revenue coming stream on that, that's the additional 1x or 2x. And then materials going through, same thing, is every year, you're going to have additional revenue. So over the 10 years life, those could be pretty substantial. So I'll give a couple of examples here. The first one on the top is a touchless cheese packaging there. So this is a line we developed a couple of years ago since the launch. We have sold more than 20 units of it, and we actually have over 50 of it in the pipeline right now to be delivered there. The materials to package the cheese actually, on a 1-year basis, the revenue of the material is pretty much equivalent to the revenue of the equipment. So you think about the 10-year useful life, then it's a 10x revenue for the materials versus the equipment there. So it's quite large. The other example down there, the tire packaging, we actually worked with UPS together. It's -- by the way, it's a new market we're entering. We didn't have this kind of business before. For UPS, it's a hassle to ship the tire. Not only it's very difficult to pack, it also has the friction between the tire and the conveyor. It actually damages their conveyor quite a bit there. So we have this shrink-packaging machine where we put the tire through and shrink wrap it there and put digital printing, and UPS actually wanted to do the IFRD on there. So a packaging line is close to about $2 million, and the materials we sell over the life cycle is another 3x of the machine value there. And what's there for UPS? First of all, it's 8x faster packing speed for them and reduce labor by 50% and reduce the material used package by 2/3, and we're actually converting the PVC to entirely 100% recyclable materials. So it's achieving both labor savings, automation, sustainability goal there. And the savings are definitely less than 3 years, and they're able to put the IFRD investment in there. So it is there for both us and for them together. And the next few pages, I'll touch on the digital journey we're just launching here. So first of all, what does it mean for digital, what we'll see there? We look at it from 3 critical pillars there. Number one, Steve -- as Chris talked about launching the MySEE platform. So essentially, it's more of a sales and service journey for us. How do we give a customer a unique experience? So going forward, they can order everything online, so it eliminate all those paperwork's, phone calls. It's much more efficient there. And they can also have online access to our graphic designers. We're going to put an online designing tool there so they can do things much more efficiently to their -- at their time. And also having the completed, finished graphics sent to digital printers right away instead of having to make a place before you print out there. And then we are also doing -- connecting all the equipment's together to provide remote monitoring, remote diagnostics, remote user acceptance test. Second part of it is more in our operations and processes, not only for Sealed Air but also for the customer there. Digitize everything, improving touches in the plants there and getting efficiency with the people working together. The third one is about disruptive technology, which I'm going to get into a little further. prismiq. So we launched the prismiq about a month ago. So the portfolio of prismiq combines digital design service, digital printing and smart packaging. I talked about the digital design service. You do it in online, you send it to the printer. So you eliminate the place, you eliminate the prototyping in weeks or months, everything can be done in hours right now. The digital printing, you print on the package itself. You don't have to have a label, so eliminate that step, eliminate the waste. And also on the smart packaging, as you're printing, you print on a unique ID, and this ID can be read by consumer, could be read by the customer. You don't need an RFID reader, you do just need the cell phone to scan it, and it has all kinds of information you need. It really is going to connect our customer with Sealed Air and also helping our customer to connect with their own consumers. I know the -- in our customers, they're all talking about the last mile to reach their consumer or what we call the home experience. With this user ID, you can help their consumer to really scan and look up the information they want and what kind of a brand image or messages the customer want to convey. So it's a perfect tool that's out there. The digital printer. This is a key one we -- in part of the overall prismiq portfolio. We launched that. We actually had this printer installed in Simpsonville, that's our biggest plant in the world here, and it's a one-of-a-kind proprietary technology. What is unique about this printer? It's white web, water-based ink. It has 10 color, including a metallic color and an invisible ink there. And it's a food-grade ink and it's continuous running, you don't have to stop it for adding ink. Everything can run at the same time as you're adding different color ink and as the design goes through, so it's dramatically reducing the time of changeover. It reduced the time when the prototypes has to be done. So what it means there is I can have additional design of graphic stuff very shortly. And also I can go to my small volume customer now because what used to be cost prohibitive to print small quantity of designs, now, it's no more. You can do that much faster. So it's a -- we see that as a growth opportunity. It's a new segment of small volume customer that can enter into. And not to mention the internal cost reduction for us, right? Eliminating the plates, eliminating the changeover and getting things much smoother. Again, one more thing on the digital ID, same thing. It printed on, no scanner, get everything carried out. So a great tool there for all of us. We have it installed in our plants. We're going to install it for all our plants, and then this also can be a tool for our customers. So it's another area in terms of automation, digital from a revenue stream for Sealed Air. The next page here, this is our -- you see our sustainable goal, environmental goal here, which is a net 0 carbon emission by 2040. By 2025, we're pledging to get 100% solutions designed for recyclability and reusability. 50% recycled, renewable content, also getting to 20% fiber based in our product portfolio. Right now, in 2021, we're about 15% fiber-based. We are confident we can get there with the launch of paper, bubble wrap mailers and a few other innovative product lines we're developing right now. So how do we put all these 3 things together, automation, digital and sustainability? You can see the circle, or we call it a bathtub chart here. We start from our own operations first. You see the pictures of robotic arm. We're measuring the touches in our plant in every process. We put in robotics and automation to help improving the processes, improving the productivity, reducing touches there. We're also installing using the renewable energy. You see there is 2 pictures. This is a solar -- solar panel farm for one of our plants. We are 100% for that plant using solar energy here. That's a step towards sustainability, too. So we're doing all of these in our own plants. We're accumulating experiences. We want to share with our customer as we are designing the automation solution for them. We're bringing this experience with them using our own tech service engineers to help them install their machines and making things running smoothly there. And the last piece, digital, this is the other part. We talked about connecting Sealed Air with our customers, connecting customers with their consumers. So digital with the design and the printing and the smart packaging can bring it all together here. So we talked a lot about the different technologies and strategy. I'll pass on to Chris to talk about capital allocation.

Great. Thank you, Susan. So just the last couple of slides here. Maybe just building off that one picture, that solar farm, it's a Madera facility in California. It's actually going online. It's like 99%, 98% of energy will be coming from that solar farm. So looking to replicate that to the extent we can in other parts of our operations. So purpose-driven capital allocation. What we've been communicating with investors for quite some time now is that the investments that we're making in ourselves for the organic growth, whether it be on the CapEx side or the R&D side, that is our first priority. To try to get at building out our capability from an R&D point of view in terms of where we're going, automation, digital sustainability. If you get into the CapEx side of it, we actually increased, as I mentioned earlier, increased our CapEx investment to be roughly more towards 5% versus 4% of sales. This year, we're guiding to $250 million. In terms of full year last year, we spent around $210 million. So as we say internally, we're really not looking to starve capital. The extent that we have opportunities that's going to either feed the growth side for purposes of overall volume growth, the sustainability, the digital piece that we talked about, it's getting -- it's definitely getting fed. From an ROI point of view, we're a good ROI company, roughly 15% to 16%, so good stewards of capital to invest in what we have. Secondarily would be the inorganic opportunities. We have a SEE Ventures, which we make investments in disruptive technologies that will enable us to accelerate our vision around the 3 pillars being automation, digital, sustainability. At the same time, we're also looking at acquisitions that feed those 3 things as well. Our most recent large acquisition was APS in 2019, an equipment manufacturer as well as materials. But that piece of it, we're trying to replicate that type of an acquisition as we look at the pipeline of opportunities. They are out there. We're just going to -- we're trying to get the other side to also agree with the deal. So we continue to work an active pipeline on M&A. And then the shareholder-friendly actions, we actually increased our dividend last year. We're roughly a 20% payout ratio today, and we'll look at the dividend periodically. It's not that we have a necessarily a specific policy. We just like it to be competitive and internally look at roughly a 20% to 25% payout ratio. We have been more aggressive on the stock buyback in the past year or so, given what we did last year as well as what we've done so far year-to-date, we purchased $200 million in shares in Q1 of '22. So we balance the organic, the inorganic, followed by shareholder-friendly actions that we will take. And again, you can see the takeaway, driving an ROIC greater than our cost of capital and very much fueling the EVA side of our business. The most recent outlook that we've provided in the May timeframe coming off of our Q1 results, you can see it reflected here. We actually increased our top line as well as bottom line guidance versus what we communicated in the February timeframe. Most of the sales, just to talk about the environment we're in, it's get a price. You've got a tremendous amount of material inflation hitting us for the past year or so. We have been raising price accordingly. But with -- doing it with a mindset, doing with care to gain share. Meaning, we have -- we know we have opportunities to help our customers drive productivity in their operations that was showcased by Susan, looking at the equipment side, the automation side. So how do we help them our customers drive productivity, and that's getting a lot of traction. But the pricing, price cost spread, as we call it, definitely very favorable, and Q1 expected to be favorable for the first half of this year. It gave us enough confidence to increase our top line guidance. And then given the favorability on price cost spread, even when you look at that number, the non-material inflation is also reasons why we're having the price increases in addition to driving productivity. So we increased our guidance on adjusted EBITDA and in adjusted EPS. Free cash flow, we kept the same. $510 million to $550 million is how we're profiling the full year, and you could see some components down there below highlighted. I did want to mention that we are moving from Reinvent, a very successful program for the company that's coming to a conclusion, to our SEE Operating Engine, and that operating engine is going to be our productivity engine as we move forward in time. Meaning, there'll be opportunities potentially for us to continue to consolidate operations, drive productivity and what we do internally. But we wanted to get away from the larger programs and move into just an operating engine in terms of this is how we execute and drive productivity. The other thing we provide investors is a little bit on the downside of our ranges as well as the upside. And you can see the 3 on the right -- on the left-hand side, just the inflationary pressures continue. We all see it. We all feel it, that's for sure. The supply disruptions persist. It's good that Shanghai is opening back up. We'll see how that, that's going to take some time for it to relieve itself, but that should help the second half of the year. And then energy prices escalating. We just introduced this as the downside to our outlook, especially over in Europe. As the energy prices increase and our ability to absorb that either through productivity benefits or passing on price, we have to manage. We're going to manage what we can control. And then on the positive side, you see the automation equipment and system sales. COVID venues reopening. We're definitely getting the favorability on the service side from our food business and the operating engine outperforming. So investors like us to -- they've actually got a lot of good feedback based on give us a sense of what's going to end up on the low end versus what's going to end up on the high end of our range. And with that, I want to thank you all for your time and interest in Sealed Air. Thank you.

Okay. Thanks very much. Of all the presentations this week, that's the first one that I've seen to end with one second left.

We know.

So we're going to move up to the Mar room for a breakout session. Hope to see you up there. Thank you very, very much.

Thank you, everybody.

Thank you, Larry.