Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Okay. Good morning, everybody. Thanks for joining us this morning for the SEE presentation. I'm Larry De Maria. I'm the analyst here at William Blair that follows SEE. And for a full list of conflicts of interest and research disclosures, please visit our website at www.williamblair.com. Today from SEE, we have Ted Doheny, President and Chief Executive Officer; Dustin Semach, who is recently joined as CFO; and Susan Yang, Automation Finance Leader and Treasurer. As you know, SEE is a global provider of packaging solutions and automation equipment for the food, e-commerce, electronic and the industrial markets. Core brands include the iconic CRYOVAC brand on the Food side. With that, I'm going to turn it over to Ted for a presentation this morning, and we may have some time for some Q&A towards the end. But thank you, Ted.

Good.

All right. Before we start the presentation from Ted, I just want to note that this presentation's webcasted, and also you can download this deck from our investor page at sealedair.com. And we are making some statements today that have a management outlook and also projection for the future. And these statements are based on solely information that we have available as of today and the future may differ from these statements, based on a number of factors. You can find those factors in our most recently published annual reports on Form 10-K, also the -- as updated on quarterly on Form 10-Q or also current reports and 8-K. We will also be using some non-U.S. GAAP measures. You will find in the appendix of this deck reconciliations to U.S. GAAP metrics there. So let me first start with a company overview. SEE is a global company that produces over 30 billion packages. We employ over 17,000 people. We have 110 manufacturing facilities, 39 customer design -- customer packaging design centers, 9 equipment design centers and 9 innovation centers. We have a broad portfolio, global footprint, and those market access put us in a very close proximity with our customers. Since the beginning of last year, we started a transformation, moving our sales and sales service tools online, creating virtual graphic and packaging design studios and offering order entry service on a MySEE platform. These transformation has a significant impact for how our sales team would work. As of Q1, we had about 14% of revenue transacted online already. Our sales team with this tool are able to get freed up from all those non-value added non -- back-end office activities, which is estimated to be actually over 60% of the time. So this transformation allows them to focus their time to develop more customers and improving both productivity, bringing cost efficiencies and enable us to reach more customers like doubling the customer outreach without doubling the salesforce. So on the right side of this slide, you'll see the major end markets we're playing in earlier this year with the acquisition of Liquibox. Our portfolios has shifted to approximately 60% -- 65% for CRYOVAC-based products already, and automation is roughly 9% of our sales or estimated to be $525 million, will grow to $1 billion by 2027. So we're transforming SEE to an automation-led, digitally-driven sustainability packaging company for us. Now let me turn to Ted.

Okay. Thank you, Susan. I'm just going to stand up so I can actually look down. What I want to focus on, especially appreciate Larry here being in a growth conference and hit the #1 issue, how do we grow through a tumultuous market? SEE is coming off of post-COVID world with a lot of issues and challenges, and I want to share with you how we're going to grow through this next phase of our journey. We're using Reinvent 2.0, what we started 5 years ago, of how do we reinvent the company. And 2.0 is now how we're going to supercharge that as we can power through some tough market conditions that we're dealing with. This is our portfolio around the world. And as Susan said, is we're moving now 14% online. In just 3 quarters, that's gone from 5% to 9% to 14%. We want to be over 80% in the next 3 years, and we're well on pace to go do that. The other part of our growth is on the geography is where we have a huge opportunity is outside the U.S. Our Europe and Asia Pacific is a growth opportunity for our products. We'll talk a little bit about that. Let's go to the next one. These are the markets we serve. We're being more definitive on where those markets are. These are our 13 largest markets that we serve through our portfolio. We'll talk a little bit about fluids and liquids, is one of the vertical. But starting with our primary market in consumer-ready, we changed this language in the past. We talked about case-ready and where the markets were going. If you go to the grocery store, you look at the case and you see the packaged proteins, and our #1 market is in red meat. Really, we're behind the scenes, where CRYOVAC is incredibly powerful is in our bags that are in the meat packing plants. And that's where we actually see that those bags going all the way to the consumer, and we see some growth opportunities like you've already seen with turkey, where you see a bag -- turkey in a bag, those are the CRYOVAC bags. We also see right now that we have an opportunity with the sustainability, that's part of the pressure that we're feeling, is how can we use sustainability to actually fuel our growth, looking at different materials, looking at different trays, getting position. And even with their bags, which you now see in the big box stores, you see our bags coming all the way to the store. And that's where we're working with our digital printing that we can actually have consumer-ready products, lower the cost, have a better solution at the customer's location, actually all the way to the home. The next platform, that's roughly a $3 billion platform. The next is the fluids and liquids. We've been in this business for a while with our CRYOVAC. Tomato paste is one of the largest products. We've now cracked the code in some of the quick-service restaurants on condiments. And now with our Liquibox acquisition, this is now $600 million business for us. In a tough first quarter, our fluids business on our legacy product was growing still at double digit. And also, this is a huge opportunity for us on automation. So very excited where the fluids and liquids business can go. The third is the Automated Protective Solutions, using those words very carefully. This is our Protective business. This is the one that's been on the most pressure for us, and how do we convert our portfolio from our iconic brands of BUBBLE WRAP. BUBBLE WRAP on-demand, AUTOBAG, Instapak, where we have very highly differentiated solutions? But really focusing on the automation side, how can we automate our customers' facilities, lower their labor cost, improve their quality and have unique solutions for this market? And I'll talk a little bit about this in more detail. Next. So as far as our protective turnaround, our protective turnaround, we saw it post-COVID, the second quarter of last year, the business under pressure on our volumes, third quarter and fourth quarter. Where we actually been successful is where we do have an automated solution, that we can actually go into our customers' operation and actually automate their packaging and then pull through our materials. The other pressure in this area is on the sustainability. The pressure moving to fiber-based solutions, and we have some pretty interesting products that we're introducing into the market that are paper-based. But with the digital printing, this is where we think we can change the game. Simplifying the packaging, just the packaging you get at home, actually have it packaged at the manufacturer and going straight to the consumer without the overwrap, even without the box. So we think with our online and digital tools, we have some significant growth opportunity focused on our Protective business. Okay, I want to talk about the circular piece in the sustainability of what we're doing, which is a huge part of packaging, everything you read in the paper, what's going on with packaging on sustainability? We're balancing that paper versus plastic. Paper, higher carbon footprint, more sustainable; plastic, significantly lower carbon footprint and also significant opportunities to actually protect the products that we serve. So how do we balance it? Well, we start with our operations. We've made some significant progress in our operations and going fully touchless as we automate our facilities, where we're actually moving that automation to our customers actually finishing making the bags in our customers' facilities, reducing their cost, lowering their carbon footprint, depending whether they're using paper or plastics, and also bringing digital printing. Our investment in digital printing, internally to us, what that means is that we can lower our printing costs, lower our production costs significantly, offering those same savings to our customers but also enhancing the performance and appearance of the product, taking it all the way to the home for the consumer. So we have some exciting opportunities there of what we can do with digital printing. Still it's a small part of our business on the print side, but a significant part of how we go to market as we leverage and you design our products online or service our products online around the globe. Okay. Just real quick, I want to use this example here to show of it all comes together. This is a liquids example, actually with our CRYOVAC product. But now with Liquibox, I want to share with what this means. So if you look in the upper right corner, this is a wine-in-the-box application. This is currently one that we have in place. It's a leader in half bottle converting to a leader in half bag and box solution. So what does that mean for that customer? Well, that on the shelf now with our CRYOVAC technology on the bag, we can actually triple the shelf life. So if you go to a large restaurant, you will get one glass of wine. We don't pierce the bag until that first turn, so you're getting the fresh wine. And then it's sealed. So going from hours with glass in a cork, you can go days and weeks with that. So huge, huge savings opportunity for the restaurant. So what's in that? Well, you think about bags. What we do in this one example, that's 1.5 million bags. We do over 5 billion bags. And so what the bag is doing, you see it coming from the roll, we're actually making the bag in the customers' operations, offering -- instead of shipping bags in a box, we're actually making it. We're putting the fitting on in the operation. The piece of equipment in the middle, we have over 100 of these. And as I mentioned before, our penetration in the fluids business was in tomato paste, do extremely well in the tomato paste business. So if you can visualize, we converted tomato paste from cans. And so what we're able to do with the industrial strength, the abuse protection of our CRYOVAC bags and now putting a fitting on that bag, covering a tremendous application for wine. That system in the middle, the piece of equipment in this particular application, is a $700,000 piece of equipment, takes through 1.5 million bags a year. Now with Liquibox, we have the fitting, 1.5 million fittings. Now with the box capability, we did not do the box in this application, but with our boxing technology or Auto Boxing technology, 1.5 million boxes, bringing the full system together for the customer, this $3 million system has less than a 3-year payback. What does it mean for their operational efficiency? That's pretty much touchless now from when the wine goes into the machine all the way into the box to -- leaving the facility. The waste reduction, we talked about it, not only the waste reduction at the customer's location, wherever the end product goes, but the waste reduction in the process is significant. The digital packaging is something that we're excited about, Here, using our digital printing on paper is easy. The hardest part of digital printing is printing on the flexible material. So this one here with our digital printing, we can do the whole solution and offer -- turn this into over a $100 million market for us that we think we can capture fairly quickly. So I just want to go through in the detail of one example of why we're excited about the fluids business. Okay. Now turn it over to Dustin.

All right. Good morning, everybody. So on the slide here, we're talking about our SEE operating model targets. And what you can see here, kind of going back to the points Ted made, these are our long-term financial targets underpinning the strategy that he's went through. The sales of 5% to 7% is being supported by our large growth platforms, right? This includes the fluids and liquids business, the slide that you just went through. The case-ready, consumer-ready, they talked, too, on the first slide as well as what we're doing in automation and then what we're doing in Protective turnaround. It's a mix of organic and inorganic, a lot of the inorganic contributions coming from Liquibox, which we completed earlier this year. If you look at our overall earnings profile of 7% to 9%, obviously growing ahead of sales. This is being driven by a couple of areas. One, we talked about MySEE, even Susan introduced it in terms of the digital channel and bringing business through our digital channel, which is going to drive productivity in our SG&A footprint, particularly within Protective. Second to that, driving -- continue to drive commercial excellence. We're going through a period right now, as Ted alluded to, around kind of market pressure. And on the backside of that, when volumes return in a more significant way, you're going to see the business drive a lot of operating leverage to the bottom line. And the last point when we talked about digital, not just from a top line perspective, the 1% contribution, but again driving a higher earnings profile. The last point I'll make around EPS is you'll see it growing greater than 10%. We stepped up our leverage profile to complete the Liquibox acquisition. We're committed to debt paydown at this point in time. And as we pay down debt, it's going to continue to drive a tailwind for EPS as we drive down interest expense. The last point I'll see, as you see on the chart, there's a dip down in 2023. That's driven by the higher interest expense that we talked about in -- related to Liquibox, but more importantly, reflecting some of the market conditions that we're going through right now. And what's important is if you look over the past 5 years, you'll see that we've continuously driven improvement from an adjusted EBITDA perspective as well as EPS, demonstrating the earnings power of the business as well as the strong free cash flow generation profile. And the expectation is once we get through this market and on the back side, we're confident we can continue to do it over the next 5 years. Let's go to the next page. I won't spend a lot of time on this page, but might as well hit on this a couple of points as I alluded to on the prior one. One is you continue to see right now, we're about 4% to 5% in terms of CapEx, on target this year to do about $280 million. This is largely going to organic investment, particularly within the platforms I just outlined, right? This is the automation, digital, fluids and liquids, going back to sustainability that in practical terms, these move into fiber-based products in some areas. And then second to that, if you focus on the right-hand part, we talk about we have a consistent dividend, we talk about share repurchases, and et cetera. But in the short term, right now we're really focused on debt paydown and deleveraging the business with a target of 3.5x by the end of fiscal year '23 and a target of 3x by the end of fiscal year '24. Let's go to the next page. So coming back to the outlook. We talked about -- this is coming from our first quarter earnings call, the first half is a challenge. And it has been challenging from a volume perspective going back to end market demand to this post-COVID normalization, right, and it's persistent destocking. We're continuing to see those trends in Q2 but extending from Q1, and we haven't seen signs yet that it's going to alleviate. And so we're still focused on the second half. And what's important to leave you with is that we're focused on near-term actions, where there's from a growth perspective, near term on a cost perspective, streamline the organization and then lastly, as always, focused on free cash flow to drive debt paydown. That's it.

Yes. This is pretty much the prepared remarks for the presentation. So we are open for any questions. I know, Larry, you might have ready something prepared. Or the audience, feel free to also raise your hand and ask any questions you have.

Yes. Thanks very much. I actually have some questions, and feel free, of course, to raise your hand. Let's maybe go back where we just ended, right? You've maintained your guidance after the first quarter, kind of acknowledged there's some further challenges into 2Q. Guidance is still out there for the second half. But can you talk a little bit more about your visibility into the second half and your confidence in a, let's say, return to growth and volume in the second half, especially around Protective? And maybe talk a little bit about the destocking there's a couple of thing going around with destocking, and there is your weakness in the macro around some of the overhang from COVID and e-commerce, et cetera. So can you give us some broader color on what would give us any kind of confidence in the second half?

Sure. So Larry, I'll take the first part of that, and Ted, you can jump in. A couple of comments. One is, it's important to remember, if you look back at the second half of last year, right, that's when you really began to see steeper volume declines. It started in Q2 but then extended in Q3 and Q4. As we enter the second half of 2023, you're wrapping on the volume declines that already occurred in the second half of last year. That's point number one. Point number two is the destocking is persisting, right? We see it across the board, whether it's in the channel or whether it's in our end customers, you're seeing that. And there is limited visibility right now, broadly speaking, in terms of when you're going to see that end. We are seeing pockets where it's alleviating, but it's too early to call it where you're seeing it more broadly across the board, where destocking is ending. Now the question around going into a weaker consumer backdrop, the question is, how far are they going to destock, right? But the point is, at some point, that will end and normal market demand will return, and you're already off a very low comp. So whether it's in Q3, Q4 or the beginning of '24, that's still yet to be determined and. We're working through that as we speak. And Ted?

And just some color if you -- and by the way, welcome to Dustin. In 50 days, I must say, it's been a pleasure having Dustin onboard. It gives me a chance to focus where I've actually been in the last 2 weeks, meeting with their top salespeople around the world and meeting with our customers in the first half and having a high level of trust on the execution side here to take care of those things. The recessionary pressures, when we were going through the first quarter going year, we saw this -- we saw our volume trends start moving down last year from the second quarter, third quarter, fourth quarter. And we look at our portfolio, different parts of the portfolio getting hit first. On the Protective side, that's the area that right now is the biggest focus. Protective down 20% we saw in the first half. We saw this trend moving as we see that portfolio shifting. So if we unpack the Protective side, we look at our product portfolio, where we are with industrial. Industrial getting some of that back, but industrial right now still under some of that recessionary pressure, so not seeing it turn as fast as we want. The other piece is on the geographic side, where China is still not a huge part, 5% of our business. China, under the lockdown, we had a strong first quarter a year ago when China knew they were going to have a lockdown. China still has not recovered. It didn't recover in the first quarter. The second quarter, it's still weak. It hasn't stabilized. We need China to come back. And right now, it hasn't. But we do think in the second half, we have opportunity also as we convert the portfolio. The inflationary pressures that are still out there, and get the question a lot, where are you pricing? Two years ago, when we went through it. We actually handled the pricing. We showed our -- the power we had in the portfolio, But the inflationary pressures are still there. So what we're having to drive and even harder is the automation with our customers because they do want a better product. They want our products. That's the great part of our portfolio. But they want it at a better price, and they have to have it sustainable. The only way you can get that all done is we got to bring automation in. So the second half recovery right now is still in question for us. So first quarter, tough, second quarter following. The second half, can we get that market lift? What's different today than from 6 months ago, we're feeling that recessionary pressure. So we're going to actually have to create that business with our new products, geographic growth and penetrate with our new -- with our platforms.

You mentioned Dustin has been with the firm for 50 days.

He said 51 this morning.

51, time flies. Maybe you could just give us some comments, Dustin, on your first 51 days. And also, tie in some of your skill set from your prior jobs and career and technology and how you're going to fit into the company that's really transformed through digital and automation over the last few years.

That's great. And I appreciate the question. So a couple of comments I would make. One is it really started with a meeting with Ted, right? Because you may be asking why is somebody with the technology background, how does it fit with a packaging company? And one is speaking with Ted, I really believe in the long-term strategy and the vision. We talked about that a little bit today. Irrespective of some of the short-term impacts, I really believe around what we're doing in automation, sustainability and particularly with digital, which I'll get into in a second. Second, I joined because of people and culture. So the people and the culture of the company, it's absolutely incredible. And again, 50 days later, my belief around that is stronger than it was coming in. The next point I would say, it's around going back to my own experience in technology. I went through a number of businesses that were going through periods of transformation. And where I can come in and help is two points. One is to help execute and accelerate, right? Accelerate, particularly on the digital side, where we've already done a tremendous job. You talked about going from 0% 3 quarters ago to 14% today and continue to accelerate that transition up. But also, we're going through periods of where we're stepping into the first time digital marketing as an example and bringing in that prior experience to leverage that, again, to go back to in terms of acceleration. So those layers are some of the main reasons that I'm here.

And you mentioned debt paydown very clearly as probably #1 to capital allocation priority. Can you talk about -- when you want to think about M&A, share repurchases, obviously, the stock is inexpensive at current levels, how do you balance those things? And do you think about in terms of a leverage number you want to get to before you start thinking about M&A and share buybacks?

Do you want to go first?

Yes, go ahead. Well, to protect him, you saw it on the slide where we're thinking about, the other piece of our portfolio that we're looking at is also what part of the portfolio as we also monetize the portfolio. There's a piece out there. The chart that we put out are in our capital allocation, we definitely want to bring our leverage down below 3.5 quickly, and that's what we're focused on pretty intensely. But the balance of that, so we truly don't want to spook anybody with M&A at the leverage we have right now. Same thing with share buyback.

Yes, same. So debt paydown is the #1 priority. With that said, again, with the capital that we are spending, and I go back to that number of roughly $280 million on the full year, there is opportunity there in terms if you think about smaller assets versus organically that you could be taking a look at. But in general, I would say, it's all about monetizing inventory, monetizing working capital, driving earnings power and delevering.

And I think to follow up on the pruning comment. If you think about protective assets, there's a lot of value, especially in automation. And then there's maybe some assets that are in there that are less value than some of the high-end automation equipment. Can you maybe give us an idea of maybe what's in that side that would think about pruning or big parts, little parts?

Yes, it all also depends, too, on timing when you're buying and selling. So the -- if we look at our Protective portfolio, one of the products that we made, the investment in 3 years ago was buying Automated Protective Solutions, APS. So you can see we're even defining that as our portfolio. If we see automation to pull through the materials, that fits very well. Where we don't see automation as an opportunity, we have some -- we're just selling discrete products. We think that would be probably -- could be better some other place. So we're looking at the whole portfolio. But in the interim, improving that [ whole ], improving the profitability, driving the internal automation of those product lines, putting them on our digital platforms, et cetera, so improving the entire portfolio. But if it doesn't fit into automation, then it probably doesn't fit to where we want to go.

Great, which brings up a good point. We're all -- we see headlines all the time around ESG and around packaging. I think Walmart, trying to reduce some of their cardboard packaging, I believe their plastics, Target's replacing some of their bubble wrap. But you have other solutions, right? So can you talk about maybe what you're seeing for some of these large customers, potential customers around what they're doing to change how they do the packaging and how that might be a volume headwind in some areas but might be an opportunity elsewhere? So talk about the technology you can bring to bear when customers like that are thinking about really revamping your packaging technology. .

Well, it's -- well, take one of the large parts of our Protective portfolio is actually our shrink wrap. We actually call it CT film. And I use a quiz internally. It's in our Protective portfolio and ask people what does CT stand for, CRYOVAC Technology. And so if we look at it and actually, I was in Argentina, and one of our teams have already done it, is that technology is pretty impressive to eliminate a box. And what is a lower carbon footprint and can we put that technology and actually eliminate box. And that fits in to the what -- you talked about the Walmart situation, they're looking to eliminate waste. And they're looking to eliminate the over packaging. And so things get over packaged. Working with the manufacturers that are going to the big box outlets, can we actually package without extra material? And that's where actually our CRYOVAC on food, where I gave you the example of bags. If we talk about bags in our business, we own it. In the back of the fresh red meat, over 50% of all the fresh meat you see is touched by a CRYOVAC bag. But by the time it gets to the store, it can be repackaged into something different. But you're going to be seeing more and more of that now coming into a Walmart, that same bag that goes from the processing plant will be in the case. And that's where we're behind that [ trends ]. So it's not repackaged. And you see the label, and we're working on the labels. The label is actually $0.15. Well, the bag is $0.30, the label is. $0 15, get rid of the label. So how do we get rid of the label? We put -- we digitally print on the film. So that's how we're going to help meet that. When they say "Get rid of plastics." Getting rid of plastics, people won't eat. So how do we work with our customers doing a very sustainable method and bring our products? And what we do well is we protect. And how do we take that from the industrial part is really our strength. We're an industrial packaging company. As it's going now to the consumer, we're able to take all that -- not all of the waste off, but really simplify that, so we actually take that article, that's an opportunity for us to grow.

And maybe last question here. Can you just talk a little bit about pricing and your ability to maintain positive price in this environment or -- versus driving volume, per se?

That's always the tough question. The answer is both. So as we're looking with -- when we went through the supply-constrained situation with inflation, it was incredible. Prices literally going up. Containers, I'm sure you've heard the stories. $2,000 container went all the way up to $21,000. It was crazy. So we had pricing pressure, but very careful on how we did that with our customers. So right now, as markets and the inflation has softened, but the inflation hasn't gone away. So it's a great opportunity for us to go head-to-head with our customers and talk to them about how can we actually increase our share of the wallet. And I've been personally involved in many of those conversations with our customers. How can we get more of their business actually lower their costs? And welcome the conversation with delivering the best product at the right price, making it sustainable. So we actually think, so far, that's going to be an opportunity for us. And we'll be competitive on whatever it takes.

Okay. Thank you very much, Ted, Dustin and Susan. And thank you all for being here. We're going to go up to the Richardson room for a breakout. Thank you.