Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Delighted to have you join us today at Jefferies Industrial Conference. We have Sealed Air up first. Representing the company, we have Chris Stephens, the CFO; and Emile Chammas, the Chief Operating Officer. And I'll hand it off to Chris now. Thanks a lot, guys.

Thanks, Phil. Good morning, everyone. Thanks for joining us. Okay. So myself and Emile, we're going to tag team through the presentation, hopefully allow time for some Q&A as we get to it. Let me start off with the safe harbor and Regulation G statement. We will be making forward-looking statements. We do use non-GAAP measures, so we do encourage investors to take a look at our website for some reconciling information. We feel that these better represents our operating -- core operating results of the company. Turning to the SEE company overview. We're based in Charlotte, North Carolina. We have over 16,000 employees. And you get a sense on this page of the -- just the size and breadth of our manufacturing facilities globally. We operate under 3 regions in terms of the Americas, EMEA and APAC, with a lot of opportunities for us to continue to grow really in all 3 areas. And then on the right-hand side, you can see the end markets that we serve, proteins and other foods being greater than 50% of our company. At the same time, industrials, transportation, electronics, making up 23%, and the rest down there. So the opportunities for us for growth really across all end markets, and that you'll see a good part of that during today's presentation. So let us start with our purpose. We are in the business to protect, to solve critical packaging challenges and to make our world better than we find it, which drives our vision as to become a world-class digitally driven company, automating sustainable packaging solutions. And you can see some of the brands that represent Sealed Air at the bottom of this slide. One of the things that we introduced last year to investors was our operating model. We kind of -- we talked to it as -- at our Investor Day on a page. And it provides a framework of what you can expect out of our company over time. And the growth targets that we project over time being 5% to 7%, 7% to 9% on adjusted EBITDA, greater than 10% in terms of adjusted EPS. And then the free cash flow conversion, which we define as operating cash flow less capital expenditures, which is your free cash flow over adjusted net earnings, we expect to grow that over time greater than 90%. With that, let me turn over to Emile to talk through some of the changes and challenges that we've gone through transforming our company.

Yes. Thanks, Chris. So as part of our operating model that now we're sharing externally and in terms of what gives us confidence and credibility around achieving that, and again, just for purposes of illustration, these squiggly lines, as we call them, that's what we've been dealing with. As we've transformed the company, we've built this capability that we call this operating engine. And despite everything that's going around us inside, external, whether it's lockdowns, bird flus, cattle cycles, as we transform -- keep continuing to transform the company towards this automation, digital sustainability. We've been -- this operating engine that we built, we've been powering through all that external noise towards this journey. So this gives us, so far, confidence in our ability to power through as we continue growing the company and achieving our operating model targets.

Very good. Thanks, Emile. And as you could see, the checkmarks just signify what we've been able to do as a company over the past several years. So we've got 6% CAGR in terms of sales, 9% CAGR in terms of adjusted EBITDA, better than 20% CAGR on adjusted EPS. And then I mentioned that the free cash flow conversion, which over the past 3 years have averaged over 90%. So this drives us. So it's not in any one particular year. It's over time. This is what you can expect in terms of our performance as we look to the business to continue to drive productivity, drive growth and drive global expansion, again, around automation, digital and sustainability. On this next slide, SEE solutions to packaging challenges. What we've been communicating and conveying and realizing with several of our larger customers is to be able to provide a payback less than 3 years by making investments in our automation equipment. And we have several examples here on this slide, auto load, auto pouch, AUTOBAG. The technology that we're able to provide really fuels our growth over time. So getting the opportunity, which I'll talk about, the multiplier effect here in a second, but getting the opportunity to get into our customers' operations show how we can improve the productivity, improve safety, reduce people from harm's way, if you will, and drive growth for them is the main selling item, and it's getting a lot of traction as we move forward. On the bottom side of this slide, we like to give representation of the end markets we serve. And given fresh red meat, e-com retail, the electronics, we talked about that. We had some good growth in fluid and liquids this past quarter that we communicated last week during our earnings call. So SEE automation, equipment and systems, service and materials. So we did a deep dive on our fourth quarter call in February, and it was around automation. And the automation side of it is, we were trying to provide a visibility, if you will, for our investors that we view it as the multiplier effect, which I'll get into in a second. But the opportunity that we saw for our equipment, systems and service sales were up 5% year-over-year in constant dollars. We're working through these supply challenges that we communicated last week. And we had a book-to-bill of 1.0, where we have been trending better than 1.0 for the past several quarters. We do expect that to return to better than 1.0 as we move forward. So we're on track to deliver $500 million -- approximately $500 million in equipment sales this year despite some of the headwinds that we have faced that we've communicated. At the same time, when we announced it last year and continue to make the investments, we expect to double our equipment capacity. One of the areas that we are conveying to our customers that are interested in improving the operations and productivity out of their businesses is that we are investing in ourselves. And you'll see that in our CapEx investment, which as a company, we view going from 4% to sales to roughly 5% over time and putting that capacity in place so we can meet this demand. So then down below, on the bottom left, you could see that we expect to do approximately $500 million in revenue on that this year and to grow that greater than $1 billion with some M&A opportunities that we're looking at given our capital deployment, which I'll talk to here in a second. Okay, so the multiplier effect. So the opportunity for us is as we have the opportunity to install that equipment and systems, you couple that with the automation and integration, you add on top of that the technical service side and thinking about just being able to service that equipment over time, and then put the materials as a part of that, the multiplier effect, if you will, is just that. And we have examples where we're able to grow the sales, based on that original sale, anywhere from 5x to greater than 10x depending on the application and depending on the deployment of that equipment. So that's the multiplier effect, and we're getting a lot of traction and providing our customers that payback, prove to them that their initial investment in the equipment will be able to save them over time and get a less than a 3-year payback. So we did a deep dive on the sustainability side on this most recent earnings call. I encourage you to take a listen to last week's call. We did automation deep dive on our fourth quarter call. We got into digital after the first quarter, and we just most recently did a deep dive on the sustainability side. So talking about the net positive circular ecosystem, we've got targets out there in terms of how we're looking to drive our company over time. Thinking about the fiber-based applications, we view ourselves as material-agnostic, but growing the fiber-based portion of our business to be greater than 20%. And then we've got our objectives out there to be 50% recycled/renewable content, and then 100% of our products will be designed for recyclability, reusability over time. And then, of course, our net-zero carbon emissions target by 2040, I'll have Emile talk to it. A pretty large initiative that we've had this past few years, that's just being implemented in one of our facilities in California. So then down below, you can see our SEE operations, the touchless sustainability, thinking about connecting that to our customers' operations via the automation side of it, whether it's auto load, AUTOBAG, couple that with digital printing. And then improving the experience for our consumer, for our end customer that we see over time as a result of that and several initiatives that we have with partners that were looking to drive this circular economy around our ecosystem, as we refer to it. So we did a deep dive with investors. It was very positively received. So purpose driven, so SEE's net positive circular ecosystem. On this slide, we identified that our solutions play a vital role in driving downstream benefits, resulting in positive impacts that greatly exceed the investment that our customers may make. And then you get into the sustainability solutions, talk about the customer benefits, and you can read through some of the items that we have on the society benefits, et cetera. The -- a couple of highlights maybe is to eliminate that product damage, talking about ensuring product safety, flawless quality and, again, in our purpose there in terms of our -- we are in the business to protect, solve critical packaging challenges and to make our world -- make the world better than we find it. So proving to our customers that the benefits that they will receive will far exceed the investments that we're making. Okay. Emile?

So maybe I'll jump in here, Chris. Just talk briefly more detail about how do we drive our profitable growth while generating these benefit society. So it starts both internal, external, with our materials, with our systems. So it starts with the customer needs. On the material side, just a couple of examples around how do we bring this to life with the BUBBLE WRAP air pillows that you see out there with introducing the recycle-ready materials. Even our most iconic brand, BUBBLE WRAP, which started the company, even though that's a small part of our portfolio, we just launched about 3 weeks ago the paper BUBBLE WRAP that were launched in this region, but we're going global over the next periods as well as through our automation and systems in terms of how do we take waste out of our customer systems. And then from there, from the products, the solutions and systems moving, we have to enable the circular economy in the value chain. And that's something that we can't do on our own, and that's why we partner with our suppliers. You see here examples of -- with ExxonMobil on the previous chart. You saw SABIC mentioned with our materials and solutions through the retailers, but also closing the loop back and working with recycling capabilities to be able to bring those materials back and bring it back into the chain. And then all the way into what do we do internally within our operations with our net-zero goals. And here, you see that the -- just a picture of our Madera, California plant, we just went live about 6 weeks ago. We installed more than 10 acres of solar panels and essentially pretty much powers the entire plant that we run in California. So that's the first of many to come. But also when you bring this all together, and that's what we talk about, being net positive, so it's not about being net zero because the value that our products bring to our customers, to society are massive. When you reduce the food waste, all the carbon that's wasted through that food waste. So when you bring it all together, that's our purpose and how do we bring this net positive circular total ecosystem to deliver those benefits while driving profitable growth for our company.

Very good. And the Madera, California facility, we're actually going to be out there in a couple of weeks. So that facility, as Emile mentioned, to be able to have the electricity needs, almost 100% of its electricity needs via that solar farm. So we're going to be out there to celebrate with the team in the opening of that activity, which is happening, which is good. Okay. Purpose-driven allocation -- capital allocation strategy. As we communicate to investors, we've got a strong balance sheet, which I'll talk to our capital structure here in a second. But the opportunities to invest in ourselves is our first priority. We're not shy of making the investments in innovation, making the investments in our capital expenditures for growth opportunities as well as capacity. And we typically have looked at our CapEx, roughly 4% of sales. We're guiding more towards approximately 5% part of our operating model over time. And then we try to provide -- we peel that back to give investors a sense of where we are spending that -- those precious dollars on the CapEx side, but we don't starve capital. We go through the opportunities for purposes of the business case and be able to feed our investment in ourselves. At the same time, if you think about just the innovation piece of it, a good part of this year, is specific innovation-related objectives. One thing that I think is a big strong backbone of the company is to make sure that the investments take place because they are for benefits over time. If we're facing some sort of short-term challenge, there's other discretionary spending that we look to manage cost management, if you will, as we would normally do. But we make sure that we don't lose sight or starve the investments that are going to benefit our future. On the right-hand side, you get a sense of the returning capital to shareholders. We've got a strong balance sheet. Our net debt leverage ratio at 2.8x as we just closed out this past quarter. We talked about free cash flow conversion and our outlook to be roughly 85% to 88%. We do have an attractive dividend in terms of the current dividend payout ratio of roughly 19%. We raised our dividend last year most recently. And share repurchases, we've been more active in terms of recognizing there's value in our own stock, and we've been pursuing that. And this past year, at least year-to-date, we've repurchased 3.9 million shares for roughly $250 million as of June 30. And we've got $646 million remaining under our current authorization. So that -- the focus of our identifying that return on invested capital, to exceed the cost of capital, is fueling the operating engine to drive additional EVA. I mentioned the balance sheet in terms of well positioned to fund future growth. We've been pretty active the past several quarters in terms of looking at those debt maturities and make sure that we go ahead and replenish that for purposes of the longer term. So what we try to provide investors is what is that current liquidity in terms of what we have immediate access to, which is roughly $1.4 billion, to deploy if those opportunities present themselves. And then our most nearest maturity is not until September 23 of next year, which we're taking a look at, which will be opportunistic in terms of getting back into the market. So balance sheet is in good shape in terms of being able to provide the liquidity and the maturity profile that gives us financial flexibility. And then last week on our earnings call, we had a chance to update our investors in terms of our guide for the full year. We decided not to actually change our guidance. So what you see up top here is what we communicated after our first quarter results. Some underlying things have changed, but the top line messaging is that given the performance first half of the year and what we expect for the second half of the year, we maintained our guidance. Typically, we'll tighten after the second quarter. But given the opportunities as well as the challenges, we felt it best to have that, a little bit wider range. And then we try to provide a little bit of, I'll call it, the pluses and minuses around that outlook. Thinking through the downside, the inflationary pressures if they continue. We've been successful from a price point of view. We've got ahead of that pretty quick, what we refer to as price realization. So our realization was negative last year, meaning we were not able to capture price to offset those costs, where this year, we expect to be just 1% type of positive. When you think about the price realization that we're going to get, price we're going to get relative to the cost, both on the material and the nonmaterial side is just about 1% is how we're guiding for the full year. So we're able to drive that -- those pricing activities to cover that significant amount of cost. So we'll see how that plays itself out in terms of the inflationary side. Supply disruptions, if they do persist, we're actually seeing improvement in the supply side of it, the equation. So we're hopeful that, that continues to make -- week-to-week, continue to make improvements. And the escalation in energy prices continue. Probably the one area that's gotten a lot of attention in the past several weeks, if not months, has been in -- what's going on in Europe specifically. So significant increase in energy prices and our ability to combat that via productivity and price continues to drive us. But those are -- those play to the negative side. On the positive side, automation. I mean the demand is there. The customer is -- they're eager to take on that additional equipment. We're working through the supply constraints. We're working through the capacity constraints to be able to satisfy their demand. And then the service side, which is this post-COVID venues reopening, think about conferences like that, think about large venues that are occurring, it's definitely helping our Food business on the food service side. So hopefully, that continues to accelerate. And then, of course, our SEE Operating Engine outperforming will allow us to be on the high end of that guidance. What we try to provide investors also is just given those 4 metrics, what we've previously said versus what we're communicating this time. Okay. With that -- and there's some additional information in the appendix to read through. But with that, we want to open up for Q&A.

Chris, the automation story is obviously really exciting, some of that's being suppressed by supply chain. But help us kind of think through what you're seeing out there in terms of uptick from customers bidding in order activity. And then your longer-term 5% to 7% growth target, how should we think about that in a moderate recession, right? Do some of these initiatives kind of help buffer some of that volatility? Protective, historically, has been a little more volatile in nature during a downturn. So any color would be helpful.

Sure. Let me kind of comment on the -- I'll comment on the automation piece for purposes of the demand side that we're hearing from our customers. I'll let Emile talk through some of the supply constraints that are getting better, but they've clearly persisted us. So the automation piece of it is pretty significant in terms of the demand profile. We have a large installed base of our equipment through the years. When you think about what is going to be, I'll call, maintenance capital on their side from a customer point of view, replacing what they currently have with much more sophisticated, much more advanced automation, is driving a significant amount of demand and interest from our customers. A lot of it has to do with us, too, in terms of getting into our customers, engaging with them, especially this environment of high inflation, pricing, passing on price to make sure we maintain, if not, gain share. So getting into their operations, identify where those opportunities lie has been pretty meaningful in terms of very strong interest. But Emile, maybe you can talk a little bit about just thinking through some of the supply constraints. We all hear about the chip shortage, et cetera, but maybe a little bit of...

Yes. But maybe even beyond just on the demand piece, I mean, just recently in Japan with Ted Doheny and Alessandra Faccin, who leads our Asia Pacific region. And Japan for us have been, I'm going to call it, mostly protective market. We have some key suppliers there, both on the automation as well as from a chemical standpoint, and we visited existing customers, potential future customers. And even there, the level of automation requirements is massive. We visited a pork plant. And in terms of what we can bring into that market, we've even seen people who serve the QSRs or even things like in mayonnaise. And if you go to a supermarket, our solutions, not only the automation piece, but also on the digital piece, things tend to be wrapped, overwrapped again, printed. And so the demand not only in existing markets, but in these other markets in Japan, specifically, that's more of a midterm outlook, we continue to see massive growth. On the supply side, I mean, you all hear about it. There are issues here and there. On the chemical side, it is getting better, although some specialty materials are still quite tough. Just to give you a perspective, we've done more reformulations in the last quarter than we typically do in a year. And that's just the engine and the muscle memory you got to have to deal with it. So on the electronics side, it's getting a little bit better, but things are quite tough. And maybe just finally, I mean, you've seen the chart earlier in the deck, the demand is so high at some of our solutions where typically would be a 12- to 16-week lead time. Some of our key systems are pretty much sold-out already for next year. I mean it's just how strong the demand is on automation, and we don't see that...

Sure. Yes, great. And then, Phil, the second part of your question is really just thinking about the outlook for the second half of the year, thinking about '23 and the opportunities that we have beyond just the automation, digital sustainability side that we referred to. But again, it's those end markets, the reopening on the food service side, we have opportunities to gain share, without disclosing any customers' names, but just for purposes of us being able to win back business, gain share. And then that global growth, as the world continues to focus on the sustainability side, that's fueling our growth, the opportunities that we have to help them achieve their objectives, our customers' objectives. So the circular side, which we deep dive, like I mentioned on the second quarter, is providing a lot of growth opportunities for us.

Great. And then we got time for a quick one. Reinvent SEE has been a nice engine for EBITDA growth. $60 million was kind of the game plan for this year. How should we think about that in the medium to longer term next year?

Sure. So Reinvent, a very successful program for the company, moving to the SEE Operating Engine, meaning we've got the backbone to drive productivity, which we'll continue to do. But every year, the mantra, if you will, is to drive the productivity to offset that nonmaterial inflation. So you're right, this year, we were guiding roughly $60 million. Given supply constraints and inefficiencies, we're down more towards that $45 million range. But I'd call it $50 million to $60 million is what you can expect for us to continue every year to drive productivity based on our current structure of operations.

Okay. Super, guys. really appreciate your time. Thank you for all your great insights.

Very good. Thank you. Thank you for your interest.