Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

Great to see a packed room. My name is Ghansham Panjabi. I'm the Packaging & Coatings Executive Research Analyst at Baird. Welcome again to our conference in Chicago. Just to level set, we covered 2 different verticals. We have 22 companies across those and 21 of those are here and the only one that's not reports next week, so obviously in a quiet period. So it's a fantastic turnout. We hope you get a lot out of it. And with that, it's a pleasure to introduce Sealed Air management. Sealed Air is leaving things off for us. And so from Sealed Air, we have Emile Chammas, Interim Co-President -- Co-CEO, and also Chief Operating Officer, and he's been with the company since 2010. Welcome, Emile. Dustin Semach. Dustin is also interim co-CEO and he's joined Sealed Air as CFO in April of this year. Welcome Dustin. And Susan Yang, who many of you might be familiar with Corporate Treasurer and finance leader. And Susan, you joined Sealed Air in 2013, if we have this correct. So welcome again. I think we're just going to -- we have a company overview slide here. And as we do with all of our companies, maybe Dustin, Emile, maybe you can start off with just an overview of Sealed Air.

Absolutely. So Sealed Air, we're a provider of packaging solutions. So that's both materials, equipment, services, to both food and nonfood segments. We're a global company, 17,000 employees. And roughly speaking, we attack the markets around food packaging, foods and the protein side is our biggest part of the business, be it in red meat, poultry, fish; in the Fluids segment. This is a attractive segment that's been growing for us and recently made an acquisition in that space, which is about 10% of our business. And this is all addressed towards food service and disrupting the rigid to flexible markets. We do have a small medical health care business. And then the rest of our business is around essentially transporting and packaging any kind of goods, whether they're consumer goods, industrial goods and again, providing the total solution equipment, materials and parts and services.

Yes. And just to give you a quick breakdown of some of the numbers and the sub-brands underneath Sealed Air, if you think about BUBBLE WRAP, if you think about CRYOVAC in the food space. These are well named brands, the sub-brands within the kind of representing this portfolios that Emile laid out. If you look at the business overall, it's roughly 65% Food, roughly 35% Protective, right? And then diversified across all geographies, primary presence in North America. And then secondary to that is within broader Europe as well as Asia Pac in both those businesses, whether it's Food and Protective, operate across all those markets.

Okay, fantastic. And I know we had an issue with the WiFi earlier. It is up and running. It's Ritz Carlton conference room, be if you need it. [email protected], is the address to send any questions or you could simply just raise your hand.

So obviously, a lot going on guys in a couple of weeks. Take us through what's been happening? So obviously, you have a interim co-CEO arrangement at this point. Clearly, the Board stepped in and made a very public decision. What is their mandate for you over the near term in context of the obvious, which is a very difficult and uneven macroeconomic backdrop?

The mandate is very simple. It's to accelerate execution. And again, even though right now, we're in this interim status, we're not caretakers of the company and we're empowered to do whatever it takes to drive shareholder value. So the way we're managing right now is I'm focused more on bringing together the innovation, commercial and operations team together, whereas Dustin is focused more on the finance, HR and the rest of the G&A functions, driving our cost takeout to grow program, while our focus on bringing speed to market and better execution with our customers.

Anything to add, Dustin?

The only couple of points I would make is that to Emile's point, it's critical to take away is that, we're here to accelerate. If you look at our last earnings call that happened last week, we announced a number of changes we're making in the short term to really drive and improve execution in a choppy macroeconomic backdrop. Beyond that as well, we talked a lot about our CTO to Grow program. At this point, we announced, if you go back 3 or 4 months ago, roughly $140 million to $160 million restructuring program, which we already solution roughly and executed $40 million of actions, right? So we're really pleased with the progress we've made, but there's a lot more to do in the expectations that we continue to pick that up. One of the other opportunities that we talked about was around portfolio optimization. And portfolio optimization is kind of breaking down both our Food as well as our Protective businesses and understanding what's really optimal and kind of going forward with us as part of overall portfolio, looking for opportunities to create -- unlock further value. And so that's another mandate from the Board in general in terms of making sure that we accelerate.

Okay. So you're looking at Sealed Air from different lenses, right? Chief Operating Officer, Chief Financial Officer. Clearly, you're going to make some progress in parallel because of that, right? What would you say is the top priority for you at this point?

So top priority is, again, accountability, speed of execution and how we go to market. So one of the things that we talked about in the earnings is how we're going to take some of our global resources and bring them closer to the markets within the markets that we serve, segment better in terms of the verticals that we go to in terms of Protective, Consumer Ready and Fluids. And it's about driving that speed of execution from innovation all the way to the marketplace. And the second piece is we're going to invest in those incremental resources around demand generation, lead generation and ultimately winning in the marketplace, which is a very tough environment that we're in. Dustin?

The same, just kind of to reiterate, we were already together, collectively running our Cost Take-Out to Grow program, which is really a word for transformation office in terms of the initiatives that we're running. Part of this is enabled and support Emile and his efforts on the commercial and innovation and supply chain side, also to continue to rationalize and take costs out of our overall G&A functions to go ahead and go ahead and lift earnings as we go into 2024 and into 2025 and beyond that, focus classically on the portfolio optimization piece of it.

How would you answer the question about morale in the organization, just the company has endured quite a bit over the last decade, CEO, CFOs and division heads, et cetera. How would you have us think about that?

I think everybody right now is excited, right? I mean, it's a very abrupt and quick change. But a lot of the focus, if you heard the message last week is kind of getting back to fundamentals I think the organization is receiving that message very well. Despite the uncertain macroeconomic backdrop, and I think that, that's what we're focused on kind of building on that momentum moving forward. Obviously, it's -- this change has been pretty quick, and there's a lot more work to do. But I think as a start, I think people are looking forward and certainly rallying up and supporting us as we kind of make our way through this transition.

Over the last few years, the company has highlighted many different initiatives, automation, sustainability, a lot of things that were topical. And from our advantage point, it seemed like it could actually distract the organization because of the laundry list of different things and initiatives. How should we expect that to change, if at all, going forward?

I think it's important to leave you with that we still believe in automation, digital and sustainability, right? These are key long-term enablers of growth. But the reality is similar to many of our peers in the packaging space, it's been a very difficult couple of years relative to the transition kind of coming out of COVID, right? So I think the word we use, Ghansham, that will come to mind to me is balance, right? And we've already begun to shift that balance. And -- but I'll let Emile kind of jump off that point because a lot of that's happening around on those teams when -- in terms of bringing IND together, bringing commercial together, bringing in the kind of what you mentioned about global resources and it's really bringing balance back to those things that can really help the company in the near term and really improve execution and ultimately improve the turnaround of results.

Yes. So again, so automation, digital sustainability are key enablers of our business, right? Automation is what differentiates us. It allows us to go to the customer with a total solution in mind, both the equipment, materials, the services and ultimately helping our customers be more successful -- and actually, there are parts of our portfolio where we have gaps on the automation, and we're working very actively to bring in those capabilities. On digital, I think there are pieces around that, where right now, we just clarified the focus. So we have brought to the market the first industrial scale, water-based digital printing on flexible materials. And this is something that we're investing in, and it's now about bringing it to market and bringing those benefits both internally to Sealed Air as well to our customers. And sustainability doesn't go away. Sustainability is a given. It's something you have to do and it's part of who you need to be. But what we're changing the focus on -- we're not chasing those 3 as end goals, but these are just critical capabilities to go and execute. So I think that's just a shift in the messaging as opposed to abandoning these critical enablers.

One more question on this, and then we'll jump into the businesses. Timeline for permanence in terms of leadership, how should this audience think about that, again, in an uncertain world where -- everybody here has different opportunities to look at different companies, right?

Of course. It's a great question. As we kind of announced, if we go back roughly whatever it was 2 weeks ago when they announced on the transition, we kind of publicly stated at that point in time the Board has kicked off a search and they have, right? And they're looking both internally and externally. And so they're going to work on that process. That process does take time. And that's what they're focused on. For us, I think what's important to leave you with is that the mandate from them and from us to our current investors and potentially new investors is that we're here to execute, and we have a full mandate to do that, and we've already started.

I will leave you alone on that now. Okay. On to the business. The cost savings program you have underway, maybe just update us back up a little bit, frame it for us, and then just update us on where you are? What's been done?

Yes. So we announced back in July, kind of in conjunction with our Q2 earnings, our restructuring program, we call it Cost Take-Out to Grow. The emphasis there is roughly $140 million to $160 million of cost takeout that's going to happen over the next 2 years. And the emphasis was not just your typical, let's take cost out of the business and try to restructure in light of kind of a declining sales profile, but also what can we do to accelerate growth? And so what is this counterintuitive and what does that mean when you talk about cost takeout and how can that help you grow? Well, the focus is in areas of our business that have become more commoditized that we're focused on competitively repositioning them. What does that mean? How do we make them -- the product more effective for a cheaper price, but still have those attributes that we need in the marketplace to compete with other competition. But this is particularly within our Protective business and pieces of it in pieces of our Food business, we talked about this publicly last week. Beyond that, we're also just taking cost out, right? And we've talked about cost takeout across supply chain, IND, around our G&A functions. So everything from workforce optimization to supply chain optimization on the procurement side as well as footprint rationalization. We've announced last week that we're roughly $40 million of the $90 million to $100 million that we talked about for 2024. So we're already 40% to 50% of the way there and we look to close that gap over the next roughly 90 days.

Yes. Maybe just a piece to add to that is around the portfolio analysis and optimization. So we're going through the entire portfolio globally in understanding what parts of the business we can address through cost takeout to grow and what other pieces that we need to dispose of differently. And we did announce recently those couple of exits where we couldn't find a path to go forward.

Specifically, he's talking about our Kevothermal temperature assurance business as well as our plant-based roll-stock business.

Okay. So this is just a sort of an initial blush at it and getting rid of businesses that lose money or...

In this case, it's really 2 parts to go back to, do we believe this business is a strategic long-term fit? We believe the markets it operates in is a competitively differentiated is our automation piece to that business overall holistically are the end markets it serves, right? Are they high-growth end markets or not? So it's really kind of looking at the portfolio through that lens. And then also, secondarily, which I know we'll probably get to at some point is -- is there an opportunity to help us deleverage faster, right, which is also a key tenet. We don't really talk about that, but naturally, capital allocation is in focus, particularly with our balance sheet. And we talked about strengthening it across Q2 to Q3, but anticipations continue to do that to bring it down below 3.5x in the next 2 years. And is there any way to accelerate that?

Yes. Your business is already incredible, incredibly profitable as a portfolio, right, 20% plus EBITDA margins, in this industry it's not common in terms of sustainability of it. But how much more is there to do on the cost side? That's a question we get a lot in terms of a natural margin threshold. If you see it that way, for a company like Sealed Air.

A couple of points I would make. One is, I think for the -- if you talk about the $140 million to $160 million we've already announced the fact that we're 40% of the way there for just our 2024 goal tells you that there's still opportunity. I think the statement about our margin is also a statement about how well placed we are from a portfolio perspective and how well we compete in the markets that we serve relative to competition. And then from a margin perspective, the key focus and I go back to this growth, right? If you think about our overall volume growth and the incrementals that drives for us to be really successful over here over the next 2 to 3 years, kind of markets coming behind us, but also gaining share in the marketplace. Volume is the key driver and then it becomes a decision point around how much do you want to potentially reinvest in other areas of the business.

Yes. And on the cost side, so beyond those points, it's also looking at each part of our portfolio and how we're going to market. So in some cases, we're going to the market with, I will call it, premium niche solution, and that naturally limits our ability to grow beyond that. So part of the cost takeout is also rethinking how do we potentially complement those solutions with other solutions that allow us to go and grab and grow the business.

Okay. All right. Okay. Let's jump into the businesses. Food, 4 different regions you're exposed to, different cattle cycles and everybody gets been out of shape about, beef production and so on in the U.S., but you also have other regions that you're exposed to. So maybe we could just kind of zoom out and touch on what's happening because it seems like your businesses are quite resilient based on your quarterly report last week on Food.

I think I'll start, particularly hitting the one of the cattle cycle. And the cattle cycle comes up often times in our business. But as it relates because going back to where we play most competitively. It's our bags business and then the combination of that with equipment, and that's primarily within red meat. But it contextualize when people talk about because it is, if you think about right now, the overall beef cycle net-net, it's down globally. So it is a headwind. It takes 3 years typically for that cycle to come back. But if you think about our business holistically, roughly 24% on the macro levels in red meat, roughly 50% of that is in beef. Of that, where Americas is probably the cycle that's been impacted the most, that's roughly 60% of it. So we start chopping that down. When you think about, okay, it's got a 5% downturn next year, you're talking about 50 basis points, 30 basis points of overall top line headwind from that impact. So these things, they do impact our business. But when you take a step back and you think about it and you really start to isolate it, it's not that material of an impact. Before jumping into it. So the statement about resilience is that competitive positioning, but also the fact that we're a very, very globally diversified business and that we operate in many, many markets, which helps you make you even more resilient when you go into a negative cycle...

I'd just add around the global piece. So while the U.S. is down, Australia and New Zealand is up, so it tends to balance itself. Now obviously, the size of the U.S. market is bigger. So net-net, it's still slightly negative, but our Food business has been very resilient contrary to our protective markets.

Okay. Some of your customers have talked about of -- the entire sector have talked about trade downs and weaker consumer and moving away from higher price points into lower ones and meat as one of them as well. How do you see that unfolding for you?

So there has been -- so our strength is on the beef side. Now we play in all the proteins. We play in the poultry side, fish, pork. And again, there, the solutions are different. So that's why as part of our strategy, we're focused on the Consumer Ready piece. This is bringing together the package, the trade, the skin, the printing -- and that's an area of focus for us to drive that. Now in that part of the portfolio, we have opportunities on, as I highlighted earlier, on the automation side, and we're working actively on that closing that gap from an automation perspective.

If we switch to Protective several quarters of, obviously, declines. Where are we in that business relative to 2019 from a volume standpoint?

We're down, right? So if you go back to...

How would you dimensionalize that?

Dimensionalize in terms of overall size?

Yes, quantification of the ...

We're down roughly -- I want to say, if you think about this year, it's primarily driven by the impact we've had in 2023. They're probably down about 10% in volume, so compounding at about 2% a year since 2019. We have the uptick and you come back down over that period of time. And so for what it's worth to just for disclosure perspective, you can see we disclosed the volume and price differential. So this is what he's going to back towards is kind of multi-stacking that across from 2019 to 2023. And so -- and during that period of time, we saw a big uptick during, as you can imagine, during COVID, when e-commerce went to the roof and that kind of lifted our entire Protective business for a period of time. And what you're seeing now is the downhill that some of that's from destocking. And this is where you're going relatively dimensionalizing the business impact is coming from destocking, but it's also coming from a shift from plastic as a substrate to fiber, right? And so the question is, what are we doing to potentially combat that? And one of it is really focused going back to what Emile's focused on from an innovation and things and priorities around continuing to accelerate the pace and rate at which we bring fiber-based solution to the market. This is what you can see relative to, as an example, what Ranpak does, right? We have areas where we compete directly with the Ranpak today, but there's other areas of the portfolio where we could do more from a portfolio optimization standpoint to capture that momentum.

From your lens looking in, did the company underestimate that shift in terms of plastics to paper as an organization or...

Well, so in pieces, we did very well, so on the paper void fill -- actually, that business has done tremendously well, and it keeps growing even through the cycle. In some other areas, we were just very slow to respond. So if you think about the discrete mailer business, we were extremely slow to respond. The good news is we do have a solution in the market and it's starting to pick up a bit of steam, but we're just too late. And when you're the third or fourth to come to market, you're going to have to work a lot more to get to a better place.

I saw that at the trade show. It's actually a good solution compared to what we're used to as consumer, so good luck with that. Let me stop there. Any questions from the audience? I know we've had some WiFi issues. [email protected], if not. Okay. So in terms of automation and also the equipment receptivity, if you will, as we kind of go through higher interest rate environment, consumer -- your customers have their own challenges from a demand standpoint, right? Looking out to 2024, et cetera, has that changed the velocity of your equipment offering, if you will, from a sales standpoint?

Yes. And so similar to what you see from, I would say, broadly speaking with our industry on the equipment side, you have seen a deceleration in sales. So our book-to-bill across fiscal year 2023 is tracking to be about 0.8x, right, which would indicate that we're going to be more challenging going next year. Now we're still working down through a backlog that was built a very strong one. That's what's driven significant amount of our growth in 2023. And so there's some offsets to that, how much backlog can we drive down in 2024, coupled with the fact that we're really strong in automation in many areas of our Protective business, dimensionalize it for you to give an idea we're about roughly $500 million of automation sales this year, that's equipments part of service, of which half and half, where it goes into both the Protective and Food, okay? And so when you think about next year, you have the impact of the sales this year offset potentially by what we can do from a backlog perspective and then also what we're doing to expand our automation offerings. Because if you look at Protective, only a portion of that portfolio is really having materials coupled with equipment and service. And the same thing for Food. And Food we're really strong in that protein market that we talked about earlier. But there's other areas of the business where there's more to do bringing a more fulsome automation solution to market, and that's what we're focused on going into next year.

Maybe I'll just add, not to negate all those headwinds that Dustin just mentioned, the need for automation is still there, and it's even bigger. I mean if you look at what happened to wages, year-on-year wage inflation over the last couple of years. So the return on those investments is still very good. But obviously, in this environment of uncertainty, interest rates, people are hesitating and taking longer on putting [indiscernible] on some of those.

Yes, I can attest to that, that we work with our customers. I see all the pipeline opportunities for the automation keeps increasing is certainly under the current environment, the speed of bringing that into orders are slowing down a little bit. So I do think that is more of a short-term challenge or facing, not so much of a long-term really headwind for us.

Okay. Now the fun stuff, Liquibox. Where are we in that? What did you miss on due diligence if anything?

Yes. So maybe to answer, let me first talk about our Fluids segment. So we have the legacy Fluids business, which is the CRYOVAC fluids. That business is doing well. It's still growing. And actually, our FlexPrep solutions. So this is disrupting the rigid containers in the back of the house and food service restaurants. It's expanding and expanding globally. So our solution is now in more than 25,000 stores and many opportunities to go way beyond that. On Liquibox, we talked about in our earnings call and previously we've addressed the operational challenges. We've also restored the portfolio so we can go after a bigger part of the market. And we see now Liquibox becoming a strong growth driver for next year. And over the longer term, very exciting opportunities there both on the equipment side. So on the equipment side, on Liquibox, it's only 3% of our sales. So great opportunity there to accelerate that piece, but also just the long-term opportunity of disrupting rigid containers, flexibles. It's a cost savings, it's a sustainability story. So we are excited about the growth there.

In terms of -- Yes. Just repeat the question, if you can.

On the call this last week, you mentioned [indiscernible] some of the technology [indiscernible]

So again, so this happened kind of, call it, at the tail end of last year and into this year as we took ownership on February 1. The previous owners were driving towards a simplified portfolio, 1 set of solutions and trying to force it down the marketplace. It was very successful. So if you look at the dairy sector, the market converted. It's a better solution, more sustainable. And beverages, it wasn't that successful. Some players follow suit, but many essentially pre-bought what they had to buy and then essentially walked away from that business. Similarly, in Europe as well, parts of the portfolio were exited for simplification. So there, you're talking more about the wine segment. And essentially, as we took ownership, we saw a lot of volume declines and share losses. So we've quickly had to jump in, restore those. We still believe that solution is the right one long term from a sustainability, from a cost point of view for our customers. But we're having -- this is where we're using the broader company using our CRYOVAC engineers. They're fixing the weaknesses of that solution and offering to the marketplace, and we'll be back into it. And that's a big differentiator versus our competitors in that space.

And I think it's important too because part of that technology was referencing is a monolayer structure versus a mix structure for the overall back component of it. But one of the big exciting pieces of it, which we're still excited about, is the aspect of the fitments business, ability to attach the fitment to the bag, that overall process and how that works, which is different than how we operate within CRYOVAC. And so I think that aspect of it is very -- we're still very excited about and still opening up new applications and new ways to continue to convert ridges to the flexibles.

In our research, we tend to have an opinion, you might have noticed that. As it relates to -- and one thing we've been focusing on is that the company really hasn't proven why the 2 businesses deserve to be together as it relates to improving the terminal valuation multiple, okay? As from your advantage point, what are we -- what should we consider as it relates to something different with that argument?

I think what's important in the context of the statement that you're making is that where we're at relative to the performance of both those businesses, right? So right now, parking to the side, what you're alluding to, which is something more in the transformational M&A category. Step 1 is really to improve execution in the business and the turnaround of our results, right? And so we, right now, between Emile and myself, we believe there's a lot of opportunity to do that. One of the points we didn't hit earlier until we state is, even our Protective business. While it's come down, it's actually stabilized. The volume has been flat since January of this year. It continues -- we're seeing a slight seasonal uptick kind of adding into Q4. And so what's important to us first is to really understand how -- to what degree we can inflect the trajectory of the business from a performance standpoint and continue to focus on deleveraging the balance sheet and opening up more strategic flexibility.

In terms of leverage, cash flow, more importantly, going into next year, any -- you had the IRS cash payment, obviously, this year, which was a pretty significant drawing on free cash flow. Anything that we should keep in mind for next year?

Again, if you look at the guidance for this year, we're focused on. We had a very strong quarter in Q3. That was driven by the fact that we're making significant progress in being able to monetize our working capital, particularly inventory, which stepped up during the COVID period. And so you're seeing that now kind of work its way back out as we think about this year, we're landing around $350 million, excluding that payment, right? If you go into next year, we believe we can continue to drive a higher free cash flow number in 2024. And if you think about our overall kind of capital allocation, kind of, model going forward, it's really focused on debt pay downs. You have about $120 million of dividends. So that leaves you about $230 million to $250 million of debt pay down, and we're focused on over the next 2 years. On a stable earnings profile that gets you to less than [ 3.5% ] in 2 years and obviously with an accelerated earnings profile, which is what we intend to drive, particularly as you go into 2025, the expectation is we can get down even lower. But right now, we're really focused on leverage and focused on cash generation, and this entire company initiative that's between the 2 of us.

Okay. That is a good place to stop. Thank you very much.