Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

All right. Good morning, everybody. My name is Matt Roberts. I'm the packaging analyst here at Raymond James. In this morning, we have Sealed Air, also known by its corporate brand named SEE, which is a global provider of packaging solutions, including materials, equipment and services for both food and protective end markets that include proteins, fluids and liquids, medical and life science, e-commerce, logistics and industrials. Now many of you in this room are likely familiar with their branded products. You've either open a box with Sealed Air Protective Packaging, package an item up at home using BUBBLE WRAP, unwrapped meat, sealed and CRYOVAC or perhaps you've enjoyed a glass of wine out of a Liquibox. With us today are Emile Chammas, the Interim Co-President and CEO as well as COO. Dustin Semach, Interim Co-President and CEO and CFO; and Susan Yang, VP, Treasurer.

So maybe to start, if you could just provide maybe a high-level overview of the company, the business segments and why customers really choose your products versus peers?

Yes. Thanks for having us, Matt. So as you said, SEE or Sealed there is a $5.5 billion company. We're a global premium packaging company. And our footprint is across the globe, more than 100 plants. Our business is 2/3 in the food business and about 1/3 in the protective business. And ultimately, what do we do, we avoid -- we give damage protection for all those goods that you're shipping, whether you're shipping it yourself, whether you e-commerce, industrial, and on the food side, it's about preserving food by extending shelf life by protecting those products. And ultimately, what we provide is a total solution. So we give the material science to protect your goods, we provide the equipment to give you operational efficiency as well as the services that go with it. And ultimately, that's what differentiates us. It also -- we play across just about every end market, whether you're in electronics, your in medical, your in food business, you're in the fluids business. And this is our unique combination of those 3 legged pieces of the stool that we give to our customers.

And you've recently hosted your fourth quarter earnings call. So maybe if you could revisit the volume backdrop on how either each segment or business line is performing and basically, your outlook through the year?

Sure, Matt. My name is Dustin Semach, and it's a great question. So a couple of comments I would say. One is we looked at the fourth quarter that came in line with our expectations, kind of reflecting the end weakness and the weakness in our end markets across both our protective and food segments. On a positive note, we saw the seasonality pick up, so from Q3 to Q4 sequentially. We saw the holiday ramp within our Food business and Protective business, which was a change from 2022 where our businesses were primarily protective came down and declined. So as we think about fiscal year '24, we're seeing our food business up about 1 point in volume. That's really supported by the strength of some of our share gains, how we're performing in retail end markets as well as the benefits of our fluids and liquids businesses that Emile alluded to earlier, which participate in higher end markets, largely due to the transition from ridges into flexibles. If you go to protective, it's down about 1 point from a volume perspective. So think of it as foods up 1 point, protectives down, the total company is roughly flat from a volume perspective. And that's really reflecting, if you go back to Protective overall holistically, it came down in 2022 sequentially. And it bottomed out around Q4 of 2022 and is sequentially stabilized throughout 23 and going into '24, that's the same expectation. There are some positive indications from -- if you go back to the markets that we serve, whether it's electronics, industrial, fulfillment, but there is some positivity and momentum building in some of the early market indicators. But right now, we're not reflecting that in our outlook as it currently sits today. And so we're looking at about down 1 point, and that's reflecting the end market weakness as well as the continued shift from flexibles to fiber.

Dustin, on the food side, how leveraged is that segment to proteins and within proteins, how leverage is that to the cattle cycle? And what are you seeing in terms of the cattle cycle in both the U.S. and international markets?

Yes, it's a great question, Matt. So the primary area we do serve within our food business is the protein segments. And within that, the -- again the focus is -- it's not the only one because we also serve as Emile alluded to earlier fluids and liquids, et cetera, but it's our primary exposure. And when you think about fresh red meat, which is the biggest portion of it, that's roughly 24% of total company relative to revenues, and about half of that is actually in beef. About half of that number is actually within the North American cattle cycle. So what he's alluding to is, obviously, the cycle itself is kind of going through a trough. If you look at fiscal year '23. That was the first down year in many years. It was down about 3.5%. If you look at fiscal year '24, the expectation of that cattle cycle will be down again in about 4% range. But if you really net that out, the 25% going to 12%, going to kind of 6%, you're looking at maybe a 30, 40 kind of bp time headwind to overall growth. And the expectation, it does take quite some time for that to come back, but it's not material in terms of overall headwind, which has partly given us confidence that we can continue to perform in 2024.

That's helpful. Make sense. And also on the recent earnings call, you did allude to longer-term normalized growth for both food and protective. So what are those longer-term normalized growth numbers? And when do you think we'll be tracking towards that level?

That's a great question. So within our food business and really in both businesses, I would say the long-term outlook is kind of low single-digit volumes once we normalize. And so really, what is that normalization for our overall food business, that's really reflective of low single-digit protein end markets with a higher single digit, mid-single-digit fluids businesses and the combination of those 2 over time getting there. And this is kind of as we move past some of the protein cycles that we're working through right now in terms of down cycles. And then when you look at Protective, it's really 50-50. Think of it as broadly speaking, between fulfillment as well as industrials. And industrial is obviously going through a cycle and our fulfillment business was impacted. And what we believe is longer term, there's 2 trends there happening, which is -- if you think about e-commerce holistically, the mid-single digit, high single digit, it's being offset by some of the shifts to -- from secondary packaging to primary packaging. Sometimes you hear the term ship in own container. The second one is obviously the shift from flexibles to fiber, right? A lot of what we focused on during our last earnings call was talking about some of the strides we're making in that area to continue to expand our set of fiber solutions. We feel confident that we can get there in terms of we participate in that end market growth, which puts us into -- you kind of knock off the growth rate down to low single digits.

Okay. In those projects, you did touch on some of those structural headwinds that you are facing within that segment. So is that why we shouldn't use e-commerce sales as a decent proxy for that business?

It's good as a starting point, right? E-commerce -- and when you say sales really is what is reflective of is volumes. Another part of the issue that you've seen over the past couple of years is that you've seen e-commerce continue to perform, but underlying volumes, that was largely driven by price, and you're seeing that begin to normalize out in 2024. And so it's about volume returns. But if you think about volumes being mid-single digit, then you knock that down to some of those other structural headwinds and that gets you to the low single-digit growth that we think is sustained over time.

Okay. Thanks for the clarification. Now Emile and Dustin, it was last October when the transition occurred, with both of you now being interim co-CEOs. So since you all -- since that time, what's really the biggest shift or action plan that you've implemented to drive either volume growth or margin growth or both?

Yes. Thanks for that, Matt. Yes, let me just remind us, it's been 4 months, short, but it seemed like a very long time. So a couple of things. First one, we undertook is around reorganizing the company to operate in a better way. What do I mean by that? Over the last 4, 5 years, we've been operating under this 1C purely regional model. Essentially, we went to market. The commercial team was one team going to market. And ultimately, this took us further away from the customers, further away from the markets. And we've reorganized that, and we've launched that new organization now a couple of weeks organized back around logical operating units into food and protective not only in terms of the frontline salespeople, but in terms of also bringing the resources, way too many resources have moved to the global center, move those resources back into those operating units and enabling quicker decision-making into the market. Two is we put around that, we restructured all the management incentive plans, the sales incentive plans back to give people in terms of that direct accountability for the business that they manage. The second piece is around our cost takeout program and accelerated that program, a program to deliver $150 million of savings. We're well underway with that. We have more than $65 million already actions. And so what are we doing there? We're looking at the whole portfolio. So we've already announced at the end of last year, we've shut down a couple of parts of the portfolio, the Kevothermal business which is those vacuum insulated panels and the plant-based roll stock. We're looking at our footprint and rationalizing our footprint. We've already closed 3 sites. We have 4 that are in motion, and we're looking more of that. So really in terms of -- holistically in terms of getting the company to operate better but also more efficiently.

Okay. That's helpful. And I want to get back to some of that portfolio optimization as well. But you did touch on the now distinct sales teams between food and protective. So now that you have a separate sales team, what synergies really remain between having both of those businesses? And I mean having different sales organizations on the ground, do you think that will change the pace of innovation or how you approach customer demand moving forward?

Yes. Absolutely. So it's more than just the sales teams, right? It's operating units around those segments. Because remember, our customers -- our solutions are very different for these 2 end markets. Our go-to-market is different. One is mostly through distribution. The other one is mostly direct. But it's not just the sales team about how do you empower those operating units with the whole staff of R&D representation, operations, finance, marketing and portfolio and also moving a decision power, which was too lopsided towards global back into those operating units. And as we've stated publicly, one of the trends in the market, taking the protective side, the shift from plastic to fiber, even though that was recognized, we were way too slow in terms of acting on it. And so part of the organization is how do you enable that, right. Now in terms of what is the synergy between food and Protective, that has nothing to do necessarily with the structure that we organized, mostly there, what we do have is the biggest one is on the purchasing side where you can leverage the spend of the total company versus each one of the units. Obviously, SG&A efficiency and to a smaller level, some technical -- from a technology perspective, where there's some pieces which are common to both.

Okay. That's helpful. And you also brought up the structural cost savings program that you all embarked on. Could you just tell me what savings you've realized to date and what buckets of savings still forthcoming?

Sure. So I'll take that one, Matt. So going back into the middle of 2023, we announced a restructuring program called caustic up to growth, targeting $140 million to $160 million of savings by 2025. What we've communicated and committed to in 2024 is executing $90 million of in-year cost savings. We're well under our way and we've delivered about $65 million to date, and Emile went through a lot of the actions, so I won't repeat those around footprint rationalization, right? So consolidating our manufacturing footprint around SG&A productivity, right, which is looking at all of our individual functions are they structured the right way, are they placed in the right locations. Going back to some of the portfolio optimization, some of the benefits that Emile alluded to earlier, the business lines that we've shut down. Some of those are negative margin businesses as an example. So they're a lift to 2024 and 2025. And and then some of the work that we're doing around the broader operating model and organizations that we talked about commercial, et cetera. So it's really all in to purposes for touching every aspect of the business, making sure that not only is it cost efficient, but it's more effective. And we're $65 million in already. We see line of sight already to the $90 million a year and then achieving our 2025 number as well. So we're well underway, really confident about our progress, which is an acceleration kind of coming out of Q3.

Okay. And Emile or Dustin, whoever wants to take it. So when we think about those cost savings in 2024 and into '25, then we have volume restoration getting back to that 1%. I mean what is the margin potential of each segment? And what's the time line to driving higher margins, do you think?

Yes, it's a great question. So if you really think about -- let's start with 2024, right? If you think about the cost takeout program, our guide for EBITDA was flat, right? And so there's 2 things that we're overcoming. One is price impacts this year. So if you think about a lot of that is carryover from 2023 coming into 2024, as well as the restoration of some of our compensation pools that we discussed during our Q4 earnings call. And so really, once you get past that, Matt, if you go back into 2025, what we're pointing towards this acceleration and a return to EBITDA growth outsized relative to revenue growth and which will get us back to margin expansion.

And if anybody in the audience has a question, feel free to ask, raise your hand or we do have one. Is there a microphone? Or if you want to...

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So we don't have any -- today, we do not have any co-located plants inside our customer facilities. Okay?

You actually ship -- you don't provide a packaging service, you provide...

No. Our services is around the equipment that we have. So if you go to our customers' plants, they'll be buying our materials, they will have our equipment, and we'll have our service people, helping services plants.

Can you give any color potentially on the margin split between the equipment and the materials and...

So roughly in both segments, it's close to 10%. So 10% of the sales of each business is what we call in the equipment side, and that's -- about half of it is the equipment itself, the other half are parts and services.

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Both models, so depending on the segment, both models exist.

And going back to your question about margins, materials are higher typically. It's in the kind of lower teens for EBITDA. But really, you don't really sell them independently as a combined solution. So it's not -- it really is a packaging solution, not necessarily equipment and/or materials.

But ultimately, in every part of our business, where we have those 3 legs of that of that 1 stool is where we have the most differentiation, the more stickiness and the most value we can create, right? So where we have the materials, equipment, services, these are those best and stickiest business because multiple fronts. Obviously, you provide the value that your package, your materials give. The equipment provides the operational efficiency and the service around it that complements the whole piece in terms of driving for all those levers.

Any others from the crowd? Okay. So in regard to sustainability, so you've recently discussed more sustainable products in the pipeline. So maybe if you could just give us a high level some detail around examples of what you currently have or what's in the pipeline?

So we talked about -- on the protective side, we talked about the shift in certain segments from -- to fiber. And this is where we said we were slow to start, but we are bringing those to market. So whether it's on the paper mailers, on our AUTOBAG offering, which is a material with a piece of equipment, so you can package your goods. We've just introduced our first fiber version for those that require it. But even on the remaining business accelerating into the high recycled content, which is 50% recycled 100% recycled. We also just announced at the food show a couple of weeks ago, the launch of the first compostable food tray into the market to displace expanded polystyrene. As we know that regulations are coming into place to move away from expanded polystyrene and we're the first ones to launch that industrial compostable tray. And the beauty about it is not only that it performs well. It's a complete drop in for the customers. There's no need for them to change anything in their equipment and their processes or their supply chain going in there. So those are some -- in terms of sustainability, some of the ones that either we have just brought to market or bring into market this year.

Okay. And you mentioned high recycled content. How does that change the cost structure of these items versus what's currently in place? And how is the price equation different in those? Basically, I mean, how is the margin of those products compared to...

Yes. So it depends. In some cases, obviously, there's a certain market for recycled resins. In some cases, it's parity, in some cases, cheaper than virgin. But I'd say on the whole, it's basically the same, right? And where you're just taking one of your existing products and introducing that more sustainable solution, typically the market doesn't pay for it, right? It's something that they want and do it except when you bring something unique like the compostable trade where this product does not exist in the market, and obviously, that carries a different premium versus you're just making your products more sustained.

And along with that, as you do roll out new products and innovation is a focus, should we expect any associated increase in CapEx spending related to that? Or is it still well within your longer-term target?

Yes. So right now, in terms of our capital allocation, we're about a 4% CapEx, 4% of sales. And again, we believe within that operating model, there's enough space there in terms of where we allocate that, whether more towards introducing some of those new products or supporting the existing business. So we don't see a material change.

Okay. Speaking of uses of cash. You recently laid out the target of getting to below 3.5x levered by the end of 2025, I believe. So should we expect your free cash flow generation primarily to be used for debt paydown? Or given any consideration buybacks where shares are currently trading?

Yes, I'll take that, Matt. You're right. Our short-term capital allocation focus will be on the debt paydown. So prior to last year, our capital allocation has been split between M&A and the share buyback. But given where our balance sheet is right now, essentially the main focus after getting all the free cash flow will be geared toward the debt paydown. So in 2023, from the peak of Q2, we've paid down about $280 million gross debt. And then thinking about each year from a free cash flow generation, we usually have $350 million to $400 million free cash flow. We have $120 million of a dividend payout, then the rest will be basically all go towards debt paydown. And that will pretty much give us about 0.2x turn each year. So end of last year, Q4, our leverage ratio was 3.9x and each with 2 years, that gets us to 3.5x.

Thank you, Susan. Now you've also discussed some recent product line exits and have discussed the ongoing portfolio review. So what parts of the business remaining are considered noncore, if there are any other remaining and when you make those decisions, I mean, what factors take precedent? Is it margin profile generating cash for deleveraging or shifting more towards automation? I mean, what are some of the factors at play when you make those decisions?

That's great. It's a great question. So just as a reminder, some of the portfolio optimization work that we've done so far that we've spoken about today and one new piece of information, which is we exited our Kevothermal business, which is our temperature assurance panels that you ship as an example, COVID vaccines. They did very well during COVID has come down in the exit that business in the middle of last year. If you think about our -- with the announcement in Q3 around plant-based rollstock, right? And then most recently in our earnings call was an exit of a piece of our business in Argentina. And so going back to your point about are we looking at other areas of the business? Absolutely. We've talked in the past about some areas of protective that may be more commoditized that we don't see as being aligned to our longer-term objectives. Those objectives in terms of where we have competitive differentiation. I'll go back to Emile's points around where we have service automation, right, as well as strong material science and differentiation. It's the combination of those 3 things that really come together that drive the competitive moat and differentiation in our product set relative to our competition. And so we are continuing to evaluate. We have identified in our portfolio where we think things fit longer term for us and where they don't. But right now, at this point in time, we're really focused on the transformation that we've undertaken and executing better, delivering better, maximizing the opportunity set in all of our businesses, and we'll evaluate this continued decisions longer term. And so if your point, Matt, about what are the things that we're thinking about is really across all those dimensions. And then it's a tight question of timing.

Okay. And of those 3 lines that you did discuss, can you give any color on how much revenue or EBITDA with shed on that or basically the volume headwinds that you're seeing from that in 2024?

Sure. It's about 0.5 point. So far, what we announced. There's 3 items I just previously discussed, is about 0.5 point in each segment, right, in terms of impact from a volume perspective. EBITDA in both cases, they were largely negative margin businesses, so it's actually an uplift from a EBITDA perspective.

Thank you and with that, do we have any more questions from the gallery? All right. Well, with that, thank you all for joining. Thank you for participating. And we do have a breakout following this downstairs in [ Corteva ] 4.