Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Good morning, everyone. My name is Ghansham Panjabi. I'm the Packaging & Coatings Equity Research Analyst at Baird. I just want to extend a warm welcome to all of you to -- back to our industrial conference in person in Chicago. We have 18 companies out of 22 in our coverage universe here through Thursday, and it's a real pleasure to introduce Sealed Air as -- to kick things off. From Sealed Air, we have Ted Doheny, President and CEO since 2018. Ted, I think you're back here after 4 years when you first started the company. Previously, Ted was CEO of Joy Global for several years. We also have Sergio Pupkin. Sergio is SVP and Chief Growth and Strategy Officer. And Sergio has been part of the Sealed Air leadership team since 2016. And it's a pleasure to introduce Susan Yang as well. Susan is Corporate Treasurer and Finance Leader for SEE Automation. If I missed any titles, please correct me. She's been with the company since 2013. So we're going to start off with a brief introduction. This is meant to be interactive. There's also some directions on where to e-mail the questions. And I will prioritize them, I promise. So with that, Ted, let me introduce you.

Great. Hopefully, you know who we are, but I just have a couple of slides just for those who might be new to Sealed Air. I always start with -- this is our purpose and vision. As Ghansham highlighted, it's now been 4 years, and January will be 5 years with the company. And we're on a transformational journey. We developed a thing called reinventing the company. And I get asked a lot, when is that over? And I say never. And that doesn't mean restructuring is never over, so I just want to make sure to get that clear. But the vision is really important because that's really where the transformation has been a part of. How do we take and move from really being the best in packaging to be a world-class company, a digitally-driven company, driving ourselves to automated packaging solutions, And we'll talk about that, and we'll talk about, hopefully, our new exciting acquisition. But we're purpose-driven, and this is a part of being a leader of a company that you get a chance to put your mark on how you do that, and the how is very important. And the first is we're in the business to protect, and really opening up that landscape of what we do to protect and what that means. The second piece is solving our customers' toughest challenges. And that's also -- that's where the money is. And that's where we really differentiate ourselves in what we do. And then the third piece, if you go back one, Susan, so I don't forget. And this is a leader, which is really important, to make our world better than we find it. And we'll talk about that. So now to the next slide, thanks. So kind of what we do, we do about 30 billion-plus packages. So we're in many, many different markets. But if you define the markets of where we actually are very strong, it's the fresh red meat, and we'll talk a little bit about that, about over 20% of our business, but all the way to the industrials. And what we do is we package things that are very, very special for the markets that we serve. Love to highlight the one in the middle there, with fluids and liquids. And part of our transparency with our investors and in the market, we've been teasing this one out for a while, that fluids and liquids is actually our fastest-growing market and most profitable market in our portfolio. So how do we grow that faster? And I have my friend Sergio here. Sergio is also in charge of R&D. So part of our reinvent is putting huge pressure on our scientists of how do we grow faster in this space. So looking at this space, where it's growing for us well over 20% of the highest margin with our business, but how do we grow faster. So a market opportunity came up. We've been looking at this portfolio in this space, and it came available to us because we did preempt on the market and brought this in the portfolio. And we'll talk about -- I'm sure Ghansham will have questions, so quite excited. So this is what we do. I just want to show one more slide, if we can show our model. If we can go to the model, Susan. Go back. And to make it easier for investors, so if we could go back here, this is the model, this is the operating model, where I get asked the question. In 2018, we laid out what we call our 4 Ps of reinvent. The first P is the performance. How do we move and going to world class in everything we do. We introduced ROIC. We introduced EVA. We introduced operating leverage. And the first time I met Ghansham he was like, well, what do you mean by operating leverage? Well, we've inculcated that into our culture, and that has been driving where we go. Also in the model, it's -- we've had some challenges. And why it's important, if you look at the last 4 years, we had little things. The first month I took over, we had this thing called war on plastics. So what do you do? Part of the culture is attack these problems, join the alliance to end plastic waste, looked at our portfolio. And our portfolio is 20% fiber-based. So really attacking the problem, little issues like COVID, China shutdown, et cetera, et cetera. But if you look below the line, despite that, we've added in 4 years, over $400 million of EBITDA, $1.3 billion in sales. And how is that operating leverage? Over that 30% target. So where are we going? We're going to go do that again. So I'm sure we'll talk about what that future looks like. But the model is very important. And this is what we did, and this is where we're going. One of our cultures in the 4 Ps is our people, is you get what you measure. Really, really important.

Terrific. Thanks for that intro, Ted. Maybe starting off, earnings per share, roughly $2.50 in 2018. We have you at $4.15 for this year. What were the big drivers of that outperformance? And more importantly, how has the culture evolved at the company under your leadership? How did you do it?

I have to go back to the 4 Ps again. So if you go back, if you look at the chart, now let's say just -- I'll do it from memory, Susan, so I should have the 4 Ps memorized. It was a culture change. So when we took over the business and looked at it and what had happened over the last few years, the company had gone through some changes. Had the divestiture of Diversey, a whole different business. So we looked at what is the performance we wanted. So we set those targets and made the targets real. What are investors looking for? And so these are the targets that we laid out. And so we did that. The second piece, if you look at the products, and we moved the model from being a product-driven company to a solution to market-driven company. So what does that mean? So we want to have the best products at the right price and making them sustainable. And that's -- on the automation, that side of that, how do we develop products not that we want to sell but the market actually demands? So product -- lots of product changes. The process change in our operational excellence, where I asked you earlier, love you to come and see our facilities. Seeing is believing the change we made on our operational excellence. Significant changes in our operations. We invested in the capital. The capital investments in the facility, we're running around 3% CapEx as a percent of sales. We move that, and we're going to be moving to 4% and looking to move that to 5%, some significant opportunities on the operating performance. The sustainability I have to mention is we're going after the sustainability issue: Making sustainability a part of what we do. Our products of what we offer and the packaging, we are the most expensive, we are the highest margin. With our customers, they don't feel it that way because what we do is better than anyone else. So the automation is really, really important of how we automate, whether it's a meat packing plant, a fulfillment center for whatever we do, and now with liquids on how we automate.

Ted, you've been very consistent with this algorithm starting with 5% to 7% sales growth. Packaging is, generally speaking, a very mature industry. A lot of companies struggle for growth. Maybe you can tie in those 3 sort of pillars, automation, digital, sustainability, to kind of build up to that 5% to 7% .

Yes. So let's unpack what's in behind the [ 5, 3 ]. So we looked at -- what we liked about our markets, we shared what gets packaged? Everything. So we can actually choose the markets that we want to serve. But the baseline of our algorithm says that we think the GDP, 1% to 3%, the markets we serve, 1% to 3%, over time, feels like a good baseline. So what are we going to do beyond the 1% to 3%? Well, we have M&A in there, as far we're a strong cash-generating business. So part of our capital allocation, we said we'd like to look at 2% to 4% in that algorithm for M&A. Well, we -- the last significant M&A we had was 3 years ago, which was APS, roughly a $300 million business. We haven't done anything in a couple of years. Now Liquibox coming in, pushing that number to 4% for next year, not this year. Underneath that as well is looking at the automation, what we're doing with equipment. We believe the equipment should be a growth driver in the 1% to 2%. Also, the innovations that Sergio has, how do we drive our innovation rate at a higher pace. And so 1% to 2% on innovation. So unpacking all of that, we have churn underneath though as well, because we need new customers in new markets that we've got to grow beyond where we are. Because when we introduce new products sometimes, guess who you sell it to, you sell the new products to who you know. How do we grow by market? How do we grow by geography? So another 1% to 2%. Adding those up, that's what we're working on behind that to get to that average over the last 4 years of close to 6% CAGR over the last 4 years, soon to be 5.

How does mix play into that?

Product?

Product mix.

Well, we also can control that. So if you look at the mix right now, how -- traditionally, we call it food and protective. Food was roughly -- 50?

56.

I was going to say 55, thank you. 56. Now with Liquibox, we're going to move that to 60-40. The food business, higher margins. But if you look at the protective side, there's a mix in that as well. So part of this we've actually divested some of the business just 1% last year. So we're looking at that portfolio. So we're looking at the mix, not food versus protected, but the whole portfolio. We want to drive businesses that we think can hit those operating targets.

Okay. Maybe a question for you and Sergio, on Liquibox, strategic merits, what attracted you to the asset? Maybe if you could start off on the capabilities you're getting.

Why don't we -- why don't we look at first here, and then I can give it to Sergio, we can actually go next to the most powerful slide here is on why Liquibox is coming up. But if we look at why we're interested in this business, if we think about liquids and how liquids are packaged, we have a very fast-growing business, and we package things like tomato paste. And as you can see, there's carrots. And how we have equipment, we have automated filling equipment. We have our CRYOVAC barrier protection bags, very durable and reliable, this business roughly a $250 million business growing at well over 20%, well over 30% operating profits. So we know this space where the CRYOVAC barrier material comes in, so we've been looking at it. Sergio, if you want to talk about the market?

Yes, absolutely. So we see a great market opportunity, tailwinds from e-commerce and sustainability. Bag-in-box is becoming more and more an attractive format. And when you think of it, we have a fluid business. And we said fluids purposefully because we have a mix of liquids and solids there that we do with a technology, which is called form-fill-seal, so the customer made the package in location. And that's one part of this very large market that is growing very fast. And now we are adding the capability from bag-in-box where this is a it's a pre-made bag. So that one will be filled through the fitment at the customer facilities. With that, we create a platform where we go to a much larger portion of the fluid business. And these e-commerce and sustainability trends really has a tailwind because a bag-in-a-box compared with a hard pail of plastics is 90% reduction in the carbon footprint. So it's really contributing to decarbonize and helping customers to manage better, and this is what attracts us. We went from now -- when approved, $240 million, that is our liquid -- or fluids business, now adding liquids will be a $600 million that we are seeing, within 3 to 5 years to becoming more than $1 billion business.

Why don't we show one picture here. For those who aren't familiar with what bag-in-a-box is. Susan, if we can go back, go back one -- why don't you go to the next one? So if we hold here, so we think about what do we do packaging, you're packaging a liquid. So a bag in a box. So the bags, if you see the lemonade, this is a real example, the transformation we're working with on the CRYOVAC side that fits very nicely into Liquibox as well. So right now, this is lemonade. So how does lemonade get to a QSR? The lemonade's actually made or they have a processing plant that comes in. So put it in a bag. So guess what, we do bags very well. We actually do 1.5 billion bags. Well, we put the bag in. They slice over the top, you dump it in the urn and the QSR. That's very costly, et cetera, if you think about it. So can we put the bag in a box in fitment. Now if you look at Liquibox, we do those fitments, which is really a big deal, that's what's really hard. That's the technology that we're really excited about, how you seal that fitment to the bag. We do 1.5 billion bags in liquid, but we only do about 10 million fitments. We outsource that. That's what they own. They also own how that gets attached. So we've been looking at that technology now for years, as we've been looking at this space. They do a different ratio of how they do the fitment. So now you put that bag, you put it in the box, now you have something -- you have that rigid container that holds the bag and it's very easily dispensed. An industry that we've been growing in together, but for us right now is if you think of wine. So right now, wine, you would think -- and especially I used to live in Europe, you would never think someone would put wine in a plastic bag. Well, that market is being converted. Why? Well, if you put the wine in the bag, we now -- our scientists can preserve that -- the wine better than in the container, especially better than a cork. So what happens, you have a 1.5 liter bottle of wine at a restaurant, you order 1 bottle, what do they do with all that wine? They throw it away. The amount of waste and wine in restaurants is close to 30%. So with the bag-in-the-box or as you think about bringing the wine home, you have a dispenser, you actually control the oxygen transmission rate, significant opportunity. You will see this market getting converted very fast. Now that's just wine. Same thing with iced tea that you see in QSRs, fruit juices, et cetera. The bag-in-the-box is a significant sustainability, productivity improvement. So go to the details. The fitments are what we wanted, the -- some of their customer base is quite exciting that they do with Liquibox, major customers in the bag in the box.

I think the restaurant guys pretend they throw it away, they [ throw ] my challenge. Sergio, in terms of the growth rates there, what exactly is it replacing? What is that technology replacing? Is it metal food cans? Is it...

The bag-in-the-box? So ours, like the out of pouches that you see there, they go against, typically the #10 can. So you put tomato paste in one of those, you'll save space, it's easier to ship, it's much more flexible. And now with bag-in-a-box, we can extend what we have to dairy, beverages. One of the most popular applications of bag-in-box is actually what goes into a soda fountain, the syrup. And those used to be metallized box, and that's not recyclable. One of the jewels of Liquibox is this innovation called Liquipure, where the metallized box is now -- are recyclable based on PET instead. So that is being adopted very, very fast by the beverage industry, because you go from nonrecyclable to recyclable, and it's very appealing.

Sergio since we -- it's rare that you join us at these conferences. Anything else you'd like to highlight from an innovation standpoint? You're in charge of R&D, anything on automation that you're particularly excited about?

Yes. We put our innovation engine to work to do a lot, because we have sustainability in mind, automation in mind, digital in mind. So I would break down sustainability into those 3. With sustainability in mind, there are a number of strategies. One is that we are converting all of our formulas to meet our pledge, and that to help our customers lower their carbon footprint. We're also changing our mix, incorporating much more fiber base into our portfolio, from the mailers to what we do with rightsizing boxes, to what we do with void-fill paper. All of that portfolio has been growing very fast, and we have been filling that. In terms of automation, we have a mix of what we bring from other partners, but then we have our secrets to that to make it more productive, to make it connected, to make it -- adapted to our customers. So we have a number of innovations that are fueling that vision of 1 billion in automation. And the third pillar, which is digital, is fundamental. We've been investing in digital printing that is coming online, and we are giving to packaging -- transforming packaging into digital packaging. And this is what we are doing from innovation is we give the digital twin to each pack, and we will be able to do unique identities, unique images. We think it's going to be really revolutionary in terms of how digital packaging is commercialized as opposed to simple packaging. It's the opportunity to connect the supply chain with the consumer.

Okay. Let's switch to the current operating environment. Audience, thanks for your questions. Again, please feel free to email and thank you to those that have already. In terms of the current operating environment, what does it feel like? You've managed many different businesses over your career, seen a few different cycles. Take us through what you're seeing at this point.

Well, the first thing, it has come up a couple of times. What we're seeing, first of all, which now people are finally saying, inflation, everybody is talking about, and we've seen this for a while. So the operating on the supply side is actually -- it normalized. So where we had some major, major supply issues, we've seen that normalize, but we still have some specialty issues. And especially on the automation side, we still are playing catch up. What's going on in the markets around the world, I'm not here to forecast, but it feels like there is a tough market on the recession coming. Part of our strategy is, we plan for the worst and we hope for the best. So we are driving -- and Sergio talked about, we're driving our innovations, we're driving our growth to take share from where we're not, because we think it's going to be a tough market for us next year. So as far as the geographies around the world, we've got the issues with China, but we see some major growth in the other areas around China. So where they're local, we're investing in those other countries. So we actually see Asia is an opportunity for us. China is still going to be tough for a while, but we see others. Europe is just really, really tough right now. Really tough. So we have to take business -- we have to take share and offer some significant savings to our customers right now because the inflationary pressures in Europe are really tough. On the U.S. side, we think we have some opportunities especially in some of those areas, and we talked already about liquids and where we're going. The post-COVID stuff, we have capacity. We have capabilities to move into other areas. So we think the U.S. and -- has opportunities for us that we think we can grow. We have the products and solutions that we think we have an opportunity. But right now, we're going to have to go against a tougher market. If we looked at that model, the growth algorithm for the GDP that we're looking at next year is going to be lower than previous years.

And price cost has been a pretty significant driver of margins this year. How do you expect that to evolve next year?

Well, the pricing right now, we set our pricing to try to beat our inflationary costs. So we think next year, hopefully, we'll have -- that will slow down. But right now, inflation at least for the first half of the year, we think it's going to continue to come. The volume piece, we have to go get it. And specifically, we had some issues on the food side. Where we didn't have product, we think we can get some of that back. And so we actually think we can turn that volume piece on the food side. The protective side, we're working through that with the channels. We got the de-stocking bits in front of us. But we think also we got to get it through new products, and we got to go to where we're not.

This question from the audience on Liquibox. If I were to paraphrase, just your comfort in acquiring this asset at the valuation you did in context of a more uncertain macro.

Well, we looked at the underlying markets that we feel pretty good about. We see and we looked at QSRs and we talked about QSRs and looking at, let's say, it is a tougher recessionary market, that actually is growth, and we've actually seen their growth recently. And watching their business in this tough market, that's growing just like our fluids business in this market. If we look at our fluids business that we have here on this slide, over half of our fluids business right now services the QSR market. So we think this acquisition into a tougher market fits very well. On paying for it right now, that's the tough question that we're getting. You're going out and paying for this, paying $1 billion right now in a really, really tough market on interest rates that Susan is doing the work on. Well, guess what? This is available right now, so we had to look at that. So if you look at our valuation at $1 billion in 2027, we're using the currency of what we did in APS, we're pretty confident. Running those tough financing numbers against this, it hit our model. And if we do what we did in APS, that $1 billion that you see at 2027 internally, I'd be very disappointed if we didn't do that by 2025. The other thing on operating leverage, just to highlight here, this business -- our total business is -- our leverage is over 30%, change in profit divided by the change in revenues. This business leverages at 40%. So -- and when you're talking about what's in the portfolio, this growing faster, this is how we're going to continue our margin expansion through the short-term issue. But beyond that short-term issue, this is going to be leveraging much nicer than the portfolio.

And there's a related question on the margins of Liquibox over time, and lots of different private equity firms. When you buy from them, typically margins are pretty good. And then usually there's a follow-up period associated with that. So your comfort levels in terms of the sustainability of the margins there.

Well there's a lot of doubt in that question.

I'm just paraphrasing.

So, obviously we've looked at the -- from this business at the outside. We know we've looked at other assets in the space, other companies in the space. We've looked at their operating margins. Operating margins similar to us, when you put us back as your pick of the year, you see having these kind of operating margins, you don't get these by accident. So if we look at where our margins have gone, we know what that means. So their operating margins, 23.5%. The other assets that we looked in this, they're significantly higher. So they have something there that they're doing well in their dues. So we looked at the technology, we talked about it, it's that fitments and how they attach. We liked that. The other parts that we're looking at them, what their margins are in something called bags. They do a few hundred million bags. We do 7 million bags. We are pretty good at making bags. So that technology, and we looked at our cost synergies that we have at 30% -- 8%, been challenged already. That's a high number, we think those cost synergies, they're real. Yes, a private equity runs the business a little different, so we're watching that. We're not naive of what that could be. But we see the synergies here on the business are nice, but we also see synergies of what this can do to make SEE a better company, just like we did at APS. So again, we're putting on our model of 40%. This has -- this is a Susan number of 10% on the component. I'm very disappointed if this grows at 10%. If we -- because we compared this, the other question we get is, why aren't you buying back shares right now? So what our analysis is how does this compare to buying back shares? Especially with the market today when -- borrow $1 billion at today's interest rate. This, just like APS is -- at the numbers that we have at 10%, that 2027, this is equivalent to share buyback. We had our internal numbers. We put this up and we do the same thing we did with the APS. This is over 50% more accretive than buying back our shares, and that's the bottom line. And that's my job is to do what's right for the business. So we're always looking at the share buyback. We've been in the market. This was the most attractive, much more attractive than buyback. And we also ran our ROIC on it. We're very ROIC-focused. Same thing. We get that internal target north of our cost of capital, north of our target of getting double-digit ROIC. So it checks all boxes.

In the last 30 seconds, I'll ask one big question. In terms of what you had started the conversation with before, when you started, there was obviously a lot of issues with war on plastics and so on and so forth.

More than just that.

Sure. There's a big audience here, very talented, lots of money to manage. Why should they look at your name? And maybe you can tie that into your comments last week on guidance specific to 2023, which you had a lot of confidence on.

I actually would -- it's been a while, we put the model out there, doing things differently. I believe being a public company different than I've been courted from the dark side as a CEO of now twice. We're public. We put this out there, and we did something different, and that's just -- you get what you measure. We put our target. We have challenges ahead, Ghansham. I would argue in the last 4 years, we've had some significant challenges. Look at that curve of what we did in 4 years. So to investors, I'm investing heavily as a CEO, over 80% of my entire cash compensation goes into the stock. So I believe that we're going to -- this is what we did. I think we're going to do more. The question to get to that 5% to 7% right now with the markets going down to make that curve happen, we had to feed the engine. And we had to feed the engine so we can get to that 5% to 7% or even higher with this acquisition. Not any acquisition, because then it had to feed the earnings, it had to feed the EPS and it had to feed the cash. This is what we did. This is where we're going. For years, we did what we said. So I just signed up for another 5. So I have no intention of not making that curve real.

Okay. We'll have to end it there in the interest of time. The breakout will be in Salon A. I want to thank Ted, Sergio and Susan for their very generous time. The next presenter in this room will be Avery Dennison, which will be hosted by me as well. Thank you.