Sealed Air Corporation (SEE) Earnings Call Transcript & Summary

All right, everyone. I'm Phil Ng, Jefferies paper and packaging analyst. We're delighted to have the Sealed Air management team join us at a very pivotal time with hopefully a lot of positive changes to unlock value. Representing the company, we have Patrick Kivits, newly appointed CEO, and he just joined fairly recently, Dustin, on the CFO side.

Well, Patrick, I guess to kind of kick things off. Just give us a little more background in terms of your history and why -- what you think you could unlock in terms of Sealed Air and why you think it's a great fit to be here?

Thank you. Good morning, everyone. So my background is mostly in specialty chemicals space. So I were 25 years in the specialty chemical industry, mostly in adhesives and in the last 15 years in adhesives for the packaging industry. So very familiar with the packaging industry. And then just before COVID hit, in 2019, I joined WestRock in U.S. and led the consumer packaging division, followed by the corrugated packaging division. So very similar customers, albeit approaching it from a very different substrate angle.

Super. In terms of your background, I think, well, I think the commercial piece is well understood on the operational side in terms of some of the companies you've led at H.B. Fuller and WestRock, there was obviously a lot of change. Can you talk about how you may have approached it and how much of that playbook is replicable at Sealed Air?

Yes. So this is twofold. So my -- I started my career in operations and then about 10 years and I move into the commercial side of things. So what's important that on the H.B. Fuller side, we had a portfolio change, it has all been public. And part of the issue was that we had to close some facilities, build new ones and there were some issues in the process. So that's one of the things I have to fix. In WestRock, I think it's common knowledge that there's been a lot of acquisitions and it was time to do some consolidation. And we had a number of sites that were no longer up to the standards of today. And we started launching some greenfield announcing, another greenfield only like 6 months before I left, which really important to stay up to state-of-the-art facilities to deal with some of the issues of the past, the facilities that have outgrown the capacity limitations. And then maybe on the commercial side, it was really about firing in all cylinders. We've had a lot of examples where there was a lack of focus on commercial and that segues nice into Sealed Air, which I think we'll come into in a minute, where the businesses that I ran were sometimes too generic in terms of focus on very many different ranges of product portfolio and not being as tailored and focused on the specific market segments that we were in. And that has been one of the challenges I've had to deal with in the last 15 years, I would say.

Which is a perfect segue like you said, Patrick. On the commercial front, I think the previous regime ran a little differently. You're trying to promote, to understand, unbundle, the food and protective side. But just kind of help us think through how you're approaching it differently on the commercial side of things? And what were some of the problems, I guess, that held the company back in the previous regime on the commercial side of things?

Well, one of the things that Dustin and Emile who is our COO did before I joined, was already starting to move away from the regional structure. So we have had a reasonable structure for a while, which means that the management focus has been on both Food and Protective at the same time. And we are starting to move into 2 segments, really, where you have Food and Protective separately. From a selling point of view, that was for -- by and large, already the case. But from a management attention point of view, that has been a very serious pivot. And also, how do you align the sales structure, the sales compensation, the commissions that people are making based on what actually matters to them. I think it has been a little bit too generic and maybe one size fits all. And as a result of that, we lost some focus particularly in the Protective area, where we've been most on pressure.

Okay. What are some of the KPIs that you had before and how you're trying to align the sales force from a KPI standpoint? And in terms of the talent, you're obviously looking to rebuild that out from a sales force and even the senior executive side of things. What are the things that you're looking for in terms of leadership that could...

So from a management point of view, so let's just separate between -- sorry, the management and the sales organization. From a management point of view, our short-term incentives have been really focused on the company targets. So the combination of both companies or both part of the company, which is very similar to Dustin and my targets, if you will, right? And if you're in a specific business segment, the ability for you to influence the outcome of your own P&L has been very limited. And we are being much more selective in terms of the ability to reward people for performance in their respective segments. So that is one. On the sales side, we've been focused -- it's much more about growth now. In the past, we were much more focused on maintaining relationships with customers and making sure that we reward people for maintaining those relationships. As we go forward, it is so much more important that we focus on profitable growth. So it's not just growth for the sake of growing but it has to be profitable growth because given where we are, that is really important for us, right? And that tailored towards your respective segments that people are in.

Okay. Super. I think when you look at your Food business, despite a weaker consumer and frankly a headwind from the beef cycle, you guys have put up really strong results on the Food business. You've seen really good growth. What are some of the things you guys are doing differently in terms of this year, perhaps driving that? Some of that's on the commercial front, maybe going after some of these adjacent markets but just kind of help us unpack the momentum you're seeing on the food side and what's driving that?

So part of that is what I just explained, right? So better focus, better alignment of sales targets. People are now more singularly focused on the respective area of that growth in the P&L. So that is one thing. That is a really important premise. Talent management, I think we have to look very hard in the mirror and say, do we have the right people that actually are growing, have the ability to drive that commercial excellence and some of the things we're doing. Bench strength is an important factor there. But also is our equipment deal really aligned to our ability to grow. In other words, how do we position our automation solutions relative to the growth of our materials. I think in some cases, we got a little confused when it looked at, do we run the automation business as a separate P&L? Or do we really tailor it so that we can develop more growth in materials? So these are the things we're focusing on. And then definitely having the right feet on the street, going after the right opportunities. On the commercial excellence front, we have CRM tools in place that a sales force and those type of tools, pricing tools. We haven't been really easy to do business with. So -- and then again, the hard look in mirror, how long does it take for people to get a price? How do we keep track of an order? How do customer calls us and has a problem with an order, which is not very common, but it happens every once a while? Then what do we do? How can we make sure the customer gets the information that they're entitled to? And be that really the state-of-the-art player in this market that actually has the best and easiest way to do business with. Those are all the angles that we're pulling. And we're seeing some early successes on that, particularly on the Food side, where we are now have the ability to more singularly focus on those areas where we can grow and drive the pipelines because it's more about leading indicators and lagging indicators have been using in the past.

Okay. How has the pivot to some of these adjacent markets maybe away from your core shrink bag business to some of these other areas? How is that progress coming along and recapture some share gains? Maybe Dustin, can you chime in to.

Yes, sure. So a couple of comments just to extent what Phil was saying. We're really excited about the Food performance, right? So starting before we go into the adjacent markets. Just as a reminder, we drove 5% volume growth in the second quarter. We drove growth across all product categories as well as across all regions, right? There's a lot to be excited about, which is also a statement about us already being effective and kind of moving to some of those core adjacent markets. So when you talked about the core products, particularly in our Food business is large our shrink bag business, which is used for industrial food processing and shipping proteins. So when you think about other product categories we're going into a really extending beyond shrink bags and if you think about roll stock applications and go back to the first quarter, an example of that, Phil, is when we talked about some of the share gains we had in North America, largely in the poultry space, right, which we expect to be a strong market going into 2025. So again, extending beyond premium beef, shrink bags and roll stock applications, another one was the compostable tray, which is still on track this year. We talked about that during the first quarter, I believe fourth quarter of last year as well. That product category continues to be on track. Our fluids liquids business is another extension of that, which is now the combination of CRYOVAC fluids and liquids as well as Liquibox, which was acquired last year, which continues to perform very well in operating in higher growth end markets and a segment where you're seeing ridges being displaced by flexibles. And so there's some areas, Phil.

Super. I guess after the strong start, some of your comments was a little more perhaps cautious in the back half, which isn't a shock, right? The economy is a little more mixed, consumers showing some cracks. But just given kind of like the shorter cycle of your business, you're kind of signaling perhaps Protective could have another down year. So just kind of give us a little color on what gives you that level of clarity in terms of looking out to perhaps 2025 where Protective a little weaker? And what are your customers telling you whether it's on the Food side or Protective out there in the field?

Sure. So I'll start there. So a couple of comments I would make, and you've kind of answered some of it partial upfront, which is, yes, I do believe we're operating in a more uncertain demand environment, which is going to affect a shorter cycle business like Protective more than Food. But let's start with the positive, which is our food business, going back to this year, is performing quite well, and that's despite having a very challenging North American cattle cycle, which will be again challenging next year. What I mean by that is that we're growing above market today, right? And we expect the Food business to continue to perform going into next year. When we think about the offset, which is what you were -- in terms of being more cautious, it is around our Protective business. And if we go back to the beginning of the year, when we announced our original guidance for 2024. We talked about the fact that look at the first half, we still -- we expect it to still be down better than last year but still down from the prior year in terms of performance. And we expect the second half to begin to lighten up in terms of and hopefully see volume inflection, particularly in the fourth quarter. And that was based on some of the discussions that we have with our largest channel partners. And as a reminder, a good portion of our Protective business goes to distribution, primarily in North America. And those conversations have continued to evolve since the beginning of February and kind of going into now. Obviously, we're heading into August and then going into the second half of the year, where their optimism is faded, and that's largely in conjunction with some of our direct customer dialogue as well as their direct customers in terms of how the second half is going to shape up which is, I think, reflective of the demand environment that we're operating in. And it's not just obviously because as a reminder, our Protective business is focused on fulfillment end markets, but it's also focused on industrial end markets as well. And that's what's driving that more cautious outlook. It's not to say that things could be different but we want -- we think it's prudent in the current kind of demand environment that we're in to be cautious and continue to be cautious.

Okay. When you look at your protective packaging business, it's been under pressure the last few years. Can you give us your take on the challenges what's secular versus cyclical versus perhaps commercial miscues? I think it's kind of very easy to kind of point to void fill on the plastic side and paint a very [indiscernible] picture on Protective. I mean that's not a huge part of what you do. So maybe help us think through your protective packaging business, where it's auto bag, mailers into the pack. How are those trends kind of finding, I guess, in potentially different directions?

Well, first of all, let me say like in general, Sealed Air is like a great business. So we had -- I've always admired Sealed Air for the industry-leading performance in the markets from a margin point of view but also try to find a food processing plant where you cannot find a CRYOVAC. So it's like a really strong value proposition there. And on the Protective side, the bubble, wrap has also been a very strong brand for many decades. Now back to Dustin's comments earlier, there are really 3 areas that are affecting us. One is the commercial down cycle. That is something that everybody has to deal with. The second is the areas where certain plastics, single-use plastics are being replaced by maybe fiber-based materials. I've been very familiar with that in the last 5 years in my prior role. And then the third one is commercial execution. So let's focus on the 2 things that we can control. Let's start with commercial execution. I started earlier about how broad of a portfolio people had to sell as you go through those challenges that plastics are being replaced by fiber, we have fiber solutions. We have very good fiber solutions. We're reviewing them currently in terms of how effective they are against competition. And I think that portfolio gap that we're facing is also a little bit anchored in the commercial execution challenges we've been facing. So if you think about people try to sell everything. Now you are adding fiber-based solutions on top of that. So now you -- it's not a trivial thing to implement fiber solutions. So you need to really make sure you have people that are focused on this very strongly. Otherwise, it all gets a little bit diluted and then someone else might get the first mover advantage. And I think we've seen some of that in the fiber base offering, the mailers, for example, some of the void filling opportunities that we have but we have good solutions. So currently, one of the things we're doing in the strategy work is really looking at our portfolio and how our fiber and other offerings in the entire Protective space stack up against competition and how we can make them better, create better value propositions and actually drive that focus so that will be more commercially oriented towards implementing those solutions rather than having just another tool in the toolbox.

Yes. And the only thing I will follow on with us in terms of kind of going back to some of the performance in the portfolio, complementing some of Patrick's comments were around. Going back to the point about the fill was referencing around void fill, you think about plastic void fill as well as mailers together as a combined category, it's only roughly about 10% of our Protective segment, right? And so if you think about -- if I go back to performance overall in the portfolio more broadly, when you think about 2022 heading into 2023, I would call it a period of broad destocking within the packaging sector, we're really beyond that. What you're seeing now is a number of the portfolio has become bright spots. Our shrink film business is doing very well. Our auto bagging system, which comes from the EPS acquisition in 2019 is performing very well. It's up double digits so far as well as our industrial level inflatables that carry high value, very heavy types of items in transit. And so to give you an example. So again, to Phil's point, it's not all -- if you go back to '22 and '23, where everything goes down, you are seeing green shoots that are becoming more bigger parts of the portfolio heading into kind of the back half of the year as well as into '25.

Super. So Patrick, just given your paper background, you talked about how you think the solutions that Sealed Air has is pretty solid, 3 to 5 years from now, what needs to happen -- or actually 3 to 5 years from now, how do you envision that fiber business looking in terms of your portfolio, like is going to be a much bigger part of what you do? What needs to happen in terms of getting critical mass and scale. I mean, the commercial side is the commercial side, it seems like you have a playbook here but you have the products and the infrastructure to kind of build that out because I think some of your peers generate 20% type EBITDA margins? Do you have the ability going to get there?

So if you think about our portfolio, and Dustin mentioned the size of mailers and void fillers in our portfolio, I think the one thing to remember, a lot of people think this is like the bottom is falling out of this market, right? So you have to remember that there are certain categories that are much harder to replace plastics through fiber. Because if you think about Industrial Solutions, think about everything that is more expensive, it's heavier. Paper-based solutions require more material in order to get the same level of protection, right? So as the products become more expensive and heavier, you're always going to find some solutions that we currently already have in our portfolio. So let's just focus on that area, that's our strength. While we are also pivoting to get more traction in the paper mailer front but also in the void filling area, those are areas that we continue to develop. We do have good offerings there. I think back to some of the statements that I made earlier, let's just look at how they stack up against competition, what we can do to make them better and actually get more -- better adoption in the market with the large players or maybe some of the smaller players that have -- are growing faster than in those areas, we will have to pivot some of the film. But at the end of the day, it's really about managing our entire portfolio in Protective, not necessarily on one category only because that's the fact of being maybe substrate agnostic is going to be really important for us, right? And our primary focus in terms of growth is going to be on profitable growth. So how can we drive profitable growth going forward. So that's a combination of the portfolio. I wouldn't say just down to one particular area is going to be all of them that we have to fire on all of the cylinders.

One more tough question, Patrick, on Protective, unfortunately. I'm sure a lot of people in this room are wondering, you've talked about perhaps putting some of the business on strategic review. You're coming in with a fresh set of eyes. What's your thought process on protective in terms of what you can do, do you keep the whole thing, you sell parts of it. Any color in terms of fixing the business? Any color on time line? Just kind of help us think through the strat review for Protective?

Well, it just does make something very clear, right? So by the focus on Protective, we need to fix it, right? So we understand where the challenges are, no matter what happens next. This is an area we need to fix. By separating out gives us optionality for future. I do think, though, that if you look at our strong distribution network that we have in our portfolio, it's really important that we are much larger than any in the next competitor. If you want to get the strategic benefit of being a player of this size, I think you need to look at the business as a whole, right? But no matter what we're doing, we need to fix our portfolio. We need to fix our commercial execution. Those are the things we are hyper focused on today because those are the areas where we can make the quickest gains.

Okay. That's helpful. And I guess a question for you, Dustin. How do you think about the balance sheet and capital deployment in the next few years?

So a couple of comments. If you go back to roughly 18 months ago kind of post the Liquibox acquisition, really made a commitment to continue to deleverage our balance sheet. We're at 4.1x. And since then, we paid down roughly $355 million of debt and put us down to about 3.8x. Our target is below 3.5x by the end of 2025, which we're well on track to hit. And keep in mind, too, that if you look at just cash generation holistically from the business in the first half. We had a record level of free cash flow, well on track to meet or exceed our guidance this year from a free cash flow perspective and expect to continue to use the proceeds to delever the balance sheet until the end of 2025. However, the 3.5 right now is our target, but we do expect to bring it below 3.5 but again, at that point in time, we'll make the determination, Phil, once we get to the end of '25. But until then, large, expected focus on debt pay down. And just as a reminder, right now, we believe we'll keep CapEx roughly 4% of sales, which we don't see an issue with in the midterm relative to our growth aspirations or any other investments we can make in the comments that Patrick's making relative to our portfolio.

Super. I think both of you guys in just now in recent calls have kind of emphasized profitable growth. I think Sealed Air has always done a great job in terms of taking cost and restructuring. So how are you guys going to attack profitable growth? Like what are some of the major levers? Is it kind of on the cost side? Is it the commercial side? It's probably a little bit of both, but just kind of help us think through what are the main levers and how that's going to play out in the next few years.

So just as -- just as a reminder, really in both businesses, they set the bar relative to industry-leading margins, right? So I would argue that we have been profitably growing for a long time albeit not to the levels that we would like. And so going forward, I think the comments that Patrick is referencing to is particularly as you move into fiber is continuing to make sure that we're focused on driving overall absolute volume growth beyond just pricing and then as well as drive absolute EBITDA growth, right, and make sure that where we're going in the spaces that we're going continue to be accretive for the company, and that's our focus. On the cost takeout side, and I'll make reference the comment you made around restructuring, et cetera, we've talked about our CTO2Grow program, and we are continuing to restructure the business coming off the volume loss that we had from 2022 to 2023. And that effort is ongoing, and it's all in the effort to continue to streamline and make us more effective and more profitable. That will continue to happen and will protect our profitability going forward despite any kind of weakness we'd see in the broader demand environment. But that's largely related to the demand environment while we're -- we continue to restructure and streamline and so the mix right now, Phil, is if you look at the offerings that we have, we feel really good about in terms of profitability. The leverage we have in both businesses from an asset base. We feel really good about and we feel really confident that our cost takeout programs will continue to yield. It really is all about driving volume growth and making sure that volume growth is accretive, which is what Patrick's primary focus is.

Which will also lead to better absorption of our facilities. So as I said it's important.

Okay. Super. Automation has been a big focus in the previous regime, Patrick. You kind of talked about how maybe you're looking at automation with a different lens. And digital has been a something you guys have been focusing on that could potentially unlock a little more growth. Can you tackle both those areas?

Yes. So I think if you look at automation, and so Sealed Air has a very good portfolio of equipment, particularly in the Food side of the business, but also on the Protective side of things. But we need to really think about so what does it do? Does it drive more material growth? Does it become more sticky relationship with customers because you can get longer contracts and these kind of things. That should be the primary focus of our automation business, right? We're not in the business just for selling equipment. We're doing it both. And that's something that we continue to drive further as we develop. If you look at our equipment and have had some very nice demonstrations of our equipment in some of our labs and if you think about the ease of doing operating and if you think the meat processing industry has been faced with a lot of challenges in terms of attrition, people attrition over the COVID period, and it's a job that not a lot of people would like to do. So the more automation we can help our customers with and we're sticky the relationship we'll get on the food side. The same applies on the Protective side, right? So taking out people, making it more productive, helping our customers to be more competitive and productive, that's the primary target of this. That will help us cement the relationship or it will help us drive through more materials. That's the primary focus of our automation business rather than just for the sake of selling equipment, right? You have to look at it holistically. So you can -- it's beginning in some of the parts. So then on the digital front, I mean, we've done a lot of investment in digital, and we are getting a little bit more selective in terms of how we are going to continue to drive that because digital is a term that a lot of people use in general terms. We need to think about what are we doing. We have a lot of digital printing opportunities, how do we deal with digital order processing and other tools that we're having in our system. Can you deal with shorter run lengths, be more flexible in terms of what we can offer to our customers in color management, in terms of how much they need to order. These are the things we're focusing on, but we will be more selective in terms of where do those in these individual initiatives belong so that we can get the biggest bang for the buck from a digital point of view.

And then in this current environment where a lot of your customers are dealing with inflation and weaker demand, are they paying for innovation right now?

Particularly when it comes to productivity improvements, when it comes to yield improvements, this is where they're still focusing on, right? In general terms, with the interest rates being so high, obviously, the appetite for doing high investments on the -- investment on the equipment front, have been a little bit less or lower than they have been before. But I see -- we see some of that come back a little bit stronger now these days. However, we still behind where we were when interest rates were very low but productivity improvements, throughput improvements, customers will continue to invest on those because that will solve other problems in their facilities.

Okay. That is all the time we have for today. Patrick, Dustin, I really appreciate your thoughts, as always. Thank you.

All right. Thank you.

Thank you.