Sealed Air Q3 2022 Earnings Report

Sealed Air EPS Results

• Actual EPS: $0.98
• Consensus EPS: $0.91
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: N/A

Sealed Air Revenue Results

• Actual Revenue: $1.40 billion
• Expected Revenue: $1.47 billion
• Beat/Miss: Missed by -$69.14 million
• YoY Revenue Growth: N/A

Sealed Air Announcement Details

• Quarter: Q3 2022
• Date: 11/1/2022
• Time: N/A
• Conference Call Date: Tuesday, November 1, 2022
• Conference Call Time: 10:00AM ET

Sealed Air (NYSE:SEE) is a global packaging company that develops and manufactures a wide range of materials, equipment and services designed to protect, preserve and promote products. Best known for inventing Bubble Wrap® protective packaging, the company serves customers across food and beverage, e-commerce, electronics, manufacturing and healthcare industries. Sealed Air’s solutions help businesses reduce product damage, extend shelf life and improve operational efficiency.

The company’s product portfolio is organized into three primary segments. Food Care provides equipment, films and trays for food processing, packaging and sealing under the Cryovac® brand. Product Care delivers protective packaging solutions such as Bubble Wrap®, Instapak® foam and automated paper systems designed to safeguard goods during storage and transport. Equipment Care offers packaging machinery, software and services that integrate with customer production lines to optimize throughput and minimize waste.

Founded in 1960 by Alfred Fielding and Marc Chavannes, Sealed Air has grown through both innovation and strategic acquisitions to serve customers in more than 120 countries. Over its history, the company has introduced pioneering technologies—such as inflatable protective solutions and modified-atmosphere packaging—and expanded its global footprint with operations in North America, Europe, Asia Pacific, Latin America and the Middle East.

Headquartered in Charlotte, North Carolina, Sealed Air is led by President and Chief Executive Officer Ted Doheny, who took the helm in 2023. Under his leadership, the company continues to focus on sustainability initiatives, including lightweight packaging designs and recyclable materials, while leveraging digital and automation technologies to drive growth and improve customer outcomes.

Sealed Air Q3 2022 Earnings Call Transcript

Key Takeaways

• Sealed Air agreed to acquire Liquibox, a leader in Bag-in-Box sustainable packaging, for $1.15 billion on a cash-free, debt-free basis, targeting 13.5× 2022 adjusted EBITDA and $30 million of cost synergies within three years, with closing expected in Q1 2023.
• In Q3 2022 net sales rose 5% to $1.4 billion (constant currency), adjusted EBITDA increased 12% to $293 million (20.9% margin), and adjusted EPS was $0.98, driven by positive price realization and productivity gains despite volume headwinds.
• The company lowered its 2022 outlook to $5.65–5.75 billion in net sales (3% reported growth), $1.20–1.23 billion in adjusted EBITDA (~21% margin), and $460–500 million in free cash flow, reflecting higher inventory builds to mitigate supply risks.
• Sealed Air is accelerating its strategy around automation, digital and sustainability: digital sales doubled from Q2 to represent nearly 5% of revenue, fluids & liquids grew over 30% YTD, and automation rollout remains a key growth and margin driver.

Presentation

[Operator]

Thank you for standing by, and welcome to the Q3 2022 Sealed Air earnings conference call. At this time, all participants are on a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. To ask a question at that time, please press star one one on your touch-tone telephone. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Mr. Brian Sullivan, Executive Director, Investor Relations, and Assistant Treasurer. Sir, you may begin.

[Brian Sullivan, Executive Director, Investor Relations, and Assistant Treasurer at Sealed Air]

Thank you, and good morning, everyone. With me today are Ted Doheny, our CEO, Chris Stephens, our CFO, Sergio Pupkin, our Chief Growth and Strategy Officer, and Susan Yang, our Automation Finance Leader and Treasurer. Before we begin our call, I would like to note that we have provided a slide presentation to help guide our discussion. Please visit our website where today's webcast and presentation can be downloaded from our IR website at sealedair.com. Statements made during this call stating management's outlook or predictions for future periods are forward-looking statements. These statements are based solely on the information that is now available to us. We encourage you to review the information in the section entitled Forward-Looking Statements in our earnings release and slide presentation, which applies to this call. Additionally, our future performance may differ due to a number of factors.

[Brian Sullivan, Executive Director, Investor Relations, and Assistant Treasurer at Sealed Air]

Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K, which you can also find on our website or on the SEC's website. We discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. In the appendix of today's presentation, you will find U.S. GAAP financial results that correspond to the non-U.S. GAAP measures we referenced throughout the presentation. Before we start the call, I would like to highlight our press release on our exciting new acquisition of Liquibox, along with a separate press release for our Q3 earnings.

[Brian Sullivan, Executive Director, Investor Relations, and Assistant Treasurer at Sealed Air]

For today's call, we'll include a summary of the Liquibox transaction, and we'll have an extended call. I will now turn the call over to Ted. Operator, please turn to slide three. Ted?

[Ted Doheny, CEO at Sealed Air]

Thank you, Brian, and thank you for joining our third quarter 2022 earnings call. Starting on slide three, the graphic is showing where we are taking packaging with automation, digital, and sustainable solutions. We start with our purpose. We are in business to protect, to solve critical packaging challenges, and to make our world better than we find it. This enables our vision to become a world-class digitally driven company automating sustainable packaging solutions. Our purpose and vision lay solid foundations to drive value creation for our people, customers, and shareholders. Moving to slide four. Today, we announced that we have entered into a definitive agreement to acquire Liquibox, a global leader in sustainable packaging for the fluids and liquids industry and the pioneer innovator of bag and box solutions. We're truly excited about this transaction.

[Ted Doheny, CEO at Sealed Air]

This highly strategic acquisition resonates deeply in the core of our transformation journey to provide market-driven solutions. Fluids and liquids have been the fastest-growing and most profitable area for CRYOVAC, growing more than 30% year-to-date. We are going to combine Liquibox development, innovation, and converting capabilities, fitments and dispensers technology, and strengthen it with CRYOVAC's broad portfolio of performance films, global operations, and barrier bag technology to partner with customers and create savings through innovative world-class solutions. During our call today, Chris and I will discuss the details of the transaction. Afterwards, we'll discuss our Q3 results and our updated 2022 outlook and initial thoughts for 2023. On slide 5, we illustrate Liquibox business, its pioneering bag-in-box technology and broad solutions portfolio.

[Ted Doheny, CEO at Sealed Air]

Liquibox is a leader in the fast-growing fluids and liquids space, partnering with diverse customer base by providing a full range of integrated solutions and systems. Its track record of innovation and sustainability has supported strong revenue and earnings growth while solidifying long-term loyal customers. Liquibox brings us valuable new capabilities with its expertise in fitments and dispensers portfolio that are highly complementary to SEE automation and CRYOVAC fluids and liquids business. On slide six, we outline how this highly strategic acquisition fits into our vision of becoming a world-class digitally driven company automating sustainable packaging solutions. This combination brings together two leading innovators in sustainable packaging, disrupting rigid containers for the global fluids and liquids industry. Liquibox expected 2022 full year revenue is $362 million, an adjusted EBITDA of $85 million, representing a margin of 23.5%.

[Ted Doheny, CEO at Sealed Air]

Secular trends in the fluids and liquids space like e-commerce and sustainability provide compelling new growth opportunities. Liquibox increases our exposure to attractive end markets like consumer packaging goods, wine and spirits, quick service restaurants, and enables us to create a new platform when combined with Cryovac. With the acquisition, SEE advances its commitment to sustainability and circularity, including key growth drivers with disruptive technologies like Liquibox's new innovation branded Liquipure. This is the first recycle-ready bag and box format. Liquibox's solutions and technologies are well aligned with SEE's Net Positive Circular Ecosystem strategy. Moving to slide seven. With complementary operations and technologies, Cryovac's food packaging enters a new competitive arena while creating an economic value through strong cost and growth synergies. Cryovac's and Liquibox's combined solutions will comprise automated filling equipment, best in class bag and box, and highly engineered fitments and dispensers.

[Ted Doheny, CEO at Sealed Air]

This will enable profitable growth into fast-growing categories such as food service fluids and consumer goods. Liquibox's e-commerce ready solutions will benefit from SEE's integrated approach to digital and the advancement of prismiq digital packaging and printing solutions. By expanding our fluids and liquids capabilities, we're broadening the scope of CRYOVAC solutions and making it more resilient to grow in a recessionary environment. Quick service restaurant customers will benefit from reduced waste and productivity benefits through CRYOVAC and Liquibox's automation and high-performance barrier bag solutions. When adding Liquibox blue chip customer base to CRYOVAC's global footprint, we will unlock geographic and cross-selling synergies to address a potential $7 billion in revenue opportunities. Now Chris will walk through the attractive financial case.

[Christopher Stephens, CFO at Sealed Air]

Great. Thanks, Ted. Turning to slide eight, we outline the transaction details. The purchase price for Liquibox is $1.15 billion on a cash-free, debt-free basis, representing an estimated enterprise value over 2022 adjusted EBITDA multiple of 13.5x and a multiple of 10x after including only cost synergies. We plan to execute cost synergies of at least $30 million on an annual run rate basis to be fully realized within three years, driven by our CRYOVAC footprint, joint resin purchases and SEE operational excellence. At closing, we anticipate pro forma net leverage to be about 3.5x and expect to utilize our strong cash flow generation to quickly de-lever post-closing within 12-18 months.

[Christopher Stephens, CFO at Sealed Air]

Subject to the receipt of applicable regulatory approvals, reviews, and other customary closing conditions, we expect closing to occur in the first quarter of 2023. We do not anticipate any changes to our corporate family ratings. While we acknowledge a challenging economic environment, we believe the opportunity presented to seize this transaction is unique and worth pursuing given the prospects of value creation outlined. Moving to slide nine. Similar to our automated packaging systems transaction, where we reduced our purchase multiple by 6x adjusted EBITDA in three years, we plan to reduce the purchase multiple of the Liquibox acquisition by at least 5x over a similar period. The significant growth synergies are likely going to bring this multiple down even further over time. This transaction checks all internal financial hurdles that we use to evaluate any investment.

[Christopher Stephens, CFO at Sealed Air]

We expect the transaction to be immediately accretive to SEE earnings per share on an operational basis, excluding impacts of purchase accounting. The Liquibox acquisition brings a strong strategic business into the Cryovac portfolio. When combined with SEE, it creates significant top and bottom line synergies, helping raise SEE's valuation. We expect the acquisition to create potential of over $1 billion in net incremental enterprise value by 2027. We are deploying our proprietary M&A playbook developed and enhanced through several transactions in recent years, including the successful APS acquisition and integration. We are planning a seamless integration process, welcoming the Liquibox team while driving the SEE operating model to create significant economic value for our shareholders. Ted?

[Ted Doheny, CEO at Sealed Air]

Thanks, Chris. Now turning to slide 10. Our SEE Operating Model highlights our sales, earnings, and cash profile for what we have done and where we're going. The model shows our specific financial targets built on our internal principle, you get what you measure. Subject to receipt of regulatory approvals in the first quarter of 2023, Liquibox will be contributing 4%+ sales growth next year at a greater than 30% operating leverage. Chris will provide more color regarding 2023 later in the call. Let's turn to slide 11, which highlights how we are moving to be a market-driven company fueled by our iconic brands. Our solutions create value for our customers, focusing on automation, digital, and sustainability, which will deliver growth faster than the markets we serve. We would like to highlight a change this quarter that we're leading with digital.

[Ted Doheny, CEO at Sealed Air]

Digital online sales are embedded in our three regions and will help streamline order processing, improving cost, and creating growth by reaching new markets and customers. Our online sales now represent almost 5% for the quarter. Digital sales more than doubled versus Q2, and we're making this happen by bringing online some of our largest customers and distributors. Despite numerous headwinds, we continue to perform and serve our customers across our diversified portfolio. We experienced very strong growth again in fluids and liquids this quarter. In fulfillment industrial markets, we experienced reductions in volume as destocking efforts continued all along the value chain. Our diversified geographic footprint and portfolio allows us to adapt to changes in market conditions. At a global level, we have demonstrated our ability to grow through varying cycles. In food, we expect our business to be resilient to market conditions.

[Ted Doheny, CEO at Sealed Air]

Our largest market, fresh red meats, which makes up 22% of our sales, is expected to be stable. The softening of the cattle cycle in North America is expected to be balanced with the improvements of the cattle cycle in Australia and the continued drive of automation globally. As we enter the fourth quarter, normalization of supply chain shortages will represent an opportunity to regain share in our roll stock case-ready business and drive automation growth further. Our strategy is to create growth regardless of the headwinds by innovating with new products and expanding into new end markets and geographies, as demonstrated with Liquibox through a strategic M&A. I would like to highlight that with Liquibox, the pro forma impact between the two segments of food and protective would move to 60% food, with fluids and liquids becoming roughly 10% of the portfolio.

[Ted Doheny, CEO at Sealed Air]

Now let's turn to slide 12 to discuss Q3 results. We delivered strong earnings in the quarter, exceeding our SEE operating model despite the impact of recessionary pressures on top line and a challenging global operating environment. Our SEE operating engine continues to perform. In the quarter, on a constant currency basis, net sales were up 5% and adjusted EBITDA was up 12%. Adjusted earnings per share of $0.98 was up 14% compared to a year ago and up 19% on constant currency. Free cash flow through Q1 was a source of cash of $137 million. We continue to invest in our people and our business as we accelerate our journey to world-class. Now Chris will review our financial results in more detail. Chris?

[Christopher Stephens, CFO at Sealed Air]

Great. Let's start on slide 13 to review our third quarter net sales of $1.4 billion by segment and by region. In constant dollars, net sales were up 5%, with 9% growth in food, while protective was down 2%. By region, all grew, EMEA up 7%, APAC up 5%, and Americas up 4%. On slide 14, I'd like to highlight a strong improvement in profitability, with Q3 adjusted EBITDA of $293 million increased $22 million or 8% compared to last year, with margins of 20.9% up 170 basis points. This performance was driven by positive net price realization, which we define as year-over-year price realization, less inflation on direct material, non-material and labor costs, as well as productivity gains, which more than offset lower volumes and FX impacts in the quarter.

[Christopher Stephens, CFO at Sealed Air]

Productivity gains of $6 million in Q3, that was a total of $6 million in the quarter, and we now expect approximately $30 million for the full year, down from previous expectations of approximately $45 million due to supply disruptions, labor challenges, and lower volumes. As it relates to adjusted net earnings in Q3, our adjusted tax rate was 25.6% compared to 24.9% in the same period last year. In the quarter, we were an active buyer of our stock with approximately 114,000 shares we purchased at a cost of approximately $30 million. Our weighted average diluted shares outstanding in Q3 2022 was 146.6 million compared to 151.4 million in Q3 2021.

[Christopher Stephens, CFO at Sealed Air]

At quarter end, we had $616 million remaining under our authorized share repurchase program. Turning to segment results on slide 15, starting with food. In Q3, food net sales of $830 million were up 9% on an organic basis, which consisted of 13% price realization to help offset inflationary pressures across all cost categories and volume declines of 4%. Volume declines of 5% in Americas, 2% in EMEA were partially offset by 3% volume growth in APAC, led by strong demand for our automated solutions and share gains in that region.

[Christopher Stephens, CFO at Sealed Air]

In Americas and EMEA, the volume decline was primarily attributable to customers seeking to dual source our case-ready roll stock products as a result of supply constraints we experienced in late 2021 and early 2022. We estimate this impact represents a sales decline of approximately 3% compared to prior year. Excluding this 3%, our Food business was slightly better than the low single-digit overall food retail market decline. Our team has worked tirelessly to navigate through the shortages, obtain additional supply, and reformulate where necessary to meet customer needs. Thanks to the efforts of our teams, we are working through the sales cycle and now have the product and inventory to get this business back. Food automation sales, which include equipment, systems, parts, and services, account for approximately 7% of segment sales and were up mid-single digits.

[Christopher Stephens, CFO at Sealed Air]

Food adjusted EBITDA of $185 million in Q3 increased 14% in constant dollars compared to last year, with margins at 22.3%, up 110 basis points. Protective net sales of $571 million were flat organically, with positive price realization being offset by 12% volume declines in the quarter. Market contractions and the negative economic outlook have and will continue to put pressure across fulfillment in industrial end markets. As for protective automation sales in the quarter, which account for approximately 9% of the segment sales, they were up mid-single digits, fueled by Autobag placements. Despite end market weakness in the quarter, protective adjusted EBITDA of $109 million increased 12% in constant dollars in Q3, with margins at 19.2%, up 230 basis points.

[Christopher Stephens, CFO at Sealed Air]

Now let's turn to free cash flow on slide 16. September year-to-date free cash flow was $137 million compared to $223 million in the same period a year ago. The $86 million decline was mainly driven by higher use of cash for inventory as compared to 2021, given raw material cost inflation and stock builds to mitigate potential future supply disruptions. We are expecting inventory levels to normalize over time as we win by gaining share and growing our business globally. On slide 17, we outline our purpose-driven capital allocation strategy focused on maximizing value for our shareholders. We maintain a strong balance sheet while driving attractive returns on invested capital and supporting portfolio growth initiatives. We have highlighted fluids and liquids on the slide in the past as an attractive opportunity we are now actioning with the Liquibox transaction.

[Christopher Stephens, CFO at Sealed Air]

Let's turn to slide 18 to review our updated 2022 outlook and our initial thoughts for 2023. We now expect our 2022 net sales to be $5.65 billion-$5.75 billion, down from $5.85 billion-$6.05 billion previously. At the midpoint, this assumes a 3% growth on a reported basis and an organic growth of 8%, driven by a 13% growth from positive price realization, partially offset by 5% volume declines. Full year adjusted EBITDA is now expected to be $1.21 billion-$1.23 billion, down from $1.22 billion-$1.25 billion, and assumes adjusted EBITDA margin of approximately 21%, in line with prior estimates despite the top-line pressures.

[Christopher Stephens, CFO at Sealed Air]

Full year adjusted EPS of $4.10 at the midpoint assumes depreciation and amortization of approximately $245 million, an adjusted effective tax rate of approximately 25.5%, net interest expense of approximately $165 million, and 147 million shares outstanding. Lastly, we now expect full year free cash flow in the range of $460 million-$500 million, down from $510 million-$550 million. This represents a cash conversion range between 77%-82%. As we look ahead to 2023, with the anticipated addition of the Liquibox transaction, we expect to be in line with our SEE Operating Model despite headwinds we face in several of the end markets we serve.

[Christopher Stephens, CFO at Sealed Air]

To summarize, we had a solid quarter from a profitability perspective, working through the challenges and opportunities in our control. This is a testament to the SEE team as we are focused on executing our growth strategy, driving productivity, generating world-class cash performance, and executing our SEE Operating Model as we go. With that, let me pass the call back to Ted for some closing remarks.

[Ted Doheny, CEO at Sealed Air]

Thanks, Chris. Let's move to slide 19. Before we open up the call to questions, I would like to highlight our 2021 Global Impact Report was published last week and can be found on sealedair.com. I'm very excited about the report because we've expanded the breadth and quality of our disclosures by referencing global standards and frameworks and illustrated this with powerful examples of how our people are leading the way in sustainability. These are exciting times for SEE. The Liquibox acquisition is highly complementary to the SEE Operating Model. Together, we're determined to drive value for our people, customers, shareholders, and society. As is customary, we plan to provide our full 2023 financial outlook during our Q4 call in February next year. With that, I'll open up the call for questions. Operator, we'd like to begin the Q&A session.

[Operator]

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star one one on your touchtone telephone. Again, to ask a question, please press star one one. We ask that you please limit yourself to one question. Thank you. One moment please for our first question. Our first question comes from George Staphos of Bank of America. Your line is open.

[George Staphos, Managing Director and Senior Equity Analyst at Bank of America]

Hi, everyone. Good morning. Thanks for the details. My question is gonna be on the longer-term outlook and how Liquibox fits in, Ted and Chris, and thanks for taking my question. Liquibox, you know, has been around for a number of years. Obviously, you have a box, you have, you know, a flexible bag within the box, and you have fitments, which would, you know, from an outward look or look from outside, I should say, would tend to look like maybe not the most sustainable package. Tell me how you see this fitting into the sustainability story. Tell me about Liquipure and how that's leveraging the growth. And then relatedly, as we look at the automation chart that you have later in your deck, it looks like you've taken those expectations down this year. You know, what's going on there?

[George Staphos, Managing Director and Senior Equity Analyst at Bank of America]

How does that affect the longer-term outlook on automation? Thank you, guys.

[Ted Doheny, CEO at Sealed Air]

Thanks, George. I'll try to see if we can go through those, break that up into three parts of the question. The first part, let's talk about Liquibox and what it is and how that ties into your question about sustainability and how that fits in. If you look at slide six. If you look at the picture of what we have with CRYOVAC, where we have. You're familiar with our FlexPrep, and we lead in tomato paste, and we do condiments, et cetera, especially in the QSR space, which is rapidly growing. If you look at the Liquibox, what do they do? They put bag-in-box, and one of their leading products is actually QSRs as well, with the bag, putting that in for syrups, et cetera.

[Ted Doheny, CEO at Sealed Air]

The sustainability side of a bag-in-box is, first of all, the productivity of putting a flexible package versus a rigid container, much lighter, and actually the sustainability side versus on the CO2, significantly better actually on the CO2 footprint side. If we look at the business side, if you look, you have a bag, you have a box, and you have a fitting. We do on the bags. On the fluid side, we do roughly 1 billion and five bags. We do less than 10 million fitments. We actually get the fluid, get the liquid out of the bag. Liquibox is inverted. They do hundreds of millions of bags, but they do over 1 billion fitments. Their secret sauce is those fitments on how you actually dispense the liquid from the box.

[Ted Doheny, CEO at Sealed Air]

In the industrial application, they actually have quick disconnects to that. The Liquipure product on the sustainability, which was the second part of your question, is replacing. In this business right now, there's a lot of metallized containers on the bag. They actually, for the barrier protection, use metal, which is not something that's good for the recyclability. The Liquipure product is has no metal, but that's very similar to what we do with CRYOVAC. We also have a highly recycled content bag, so trying to connect the dots there. I'll link the equipment question together here, which is really what's exciting about this for both businesses. As we mentioned, the fluids business is growing. It's our fastest-growing business in our portfolio. How we do that is we have the equipment that actually fills those pouches.

[Ted Doheny, CEO at Sealed Air]

We do millions of pouches for that, so we form, fill, and seal. Liquibox has the same equipment. Their real technology is how do you attach that fitment, but they do have filling equipment. Their filling equipment is less than 3% of their portfolio. Our filling equipment is around 5%-8%, so we see that as a significant growth potential for us. Flipping it, that I hope that was clear enough. If we go to slide 30, if you look at the equipment, which we put in the appendix this time because we had so much information, our enthusiasm for automation is still there. Just in the quarter right now, and we still think this is our highest growth. By the way, this is the major pull we're getting from our customers due to labor shortages, et cetera.

[Ted Doheny, CEO at Sealed Air]

In the quarter, you did highlight we've had supply disruptions out there, and it's really on the electronics piece. The backlog is still strong. We were hoping to break $ half a billion this year. Right now, we're forecasting, it looks like it's at $475 million. To your long-term question, actually, our enthusiasm in the automation is even higher, especially with the fresh red meat, our largest market. The automation is the fastest-growing piece of that business. Actually put a quote. This is a direct quote at the bottom from one of our largest customers, actually converted customer coming back to CRYOVAC. The quote is pretty powerful. "We're moving the business to you." Because of where you're taking the business and what this will mean for us.

[Ted Doheny, CEO at Sealed Air]

Automation is the key for packaging right now, and so very excited about the potentials and the investments that we're making in our automation to drive growth further. It does big, big play on the liquid space as well. Okay. Next question.

[Operator]

Thank you. Our next question comes from Ghansham Panjabi of R.W. Baird. Your line is open.

[Ghansham Panjabi, Senior Research Analyst at Baird]

Hey, guys. Good morning. Congrats on the transaction. I guess first off, on the, you know, 23%+ or so EBITDA margins for Liquibox based on the numbers you shared with us, how has that progressed over time, especially during periods of, you know, economic, incremental economic weakness? I know it's a relatively small asset. Just given that it increases the proportionate EBITDA percentage for food to over 60%, is the acquisition part of an initiative to sort of lower portfolio cyclicality, or is it just more opportunistic, just like APS was? Thank you.

[Ted Doheny, CEO at Sealed Air]

Good question, Ghansham. If we can go to slide nine. Slide nine is this is really why we're so excited about Liquibox and where it fits in, and it ties to your question. If you look at where this fits into our model, we're acquiring a business that's right now into our portfolio that last year was 3%. This year it's at 5%. It's been growing very profitable, much more profitable than the portfolio and actually the most profitable piece of our Cryovac. With that said, we're putting a 23% operating profit business of $362 million into that pro forma, and that's what you see. Now that's making that 10% of SEE. The second part of your question was the growth profile, where it is and where was it.

[Ted Doheny, CEO at Sealed Air]

The growth last year was north double digit. The profile has been in that greater than roughly 7% historically. The third part of your question was the markets that it served. One of the large markets is the quick service restaurants. We're seeing the bag-in-box is a real productivity environmental play. We see it serving markets that are very sensitive to a recessionary environment. Just like we saw our liquid business during COVID, when the QSR shut down, we felt that. When COVID's coming back and now you see those long lines at many of these QSRs, we're there behind the scenes, and so is Liquibox on what they can do on the productivity on those beverages.

[Ted Doheny, CEO at Sealed Air]

We think this is a really strong growth for us right now in the tough recessionary markets, but even higher growth going forward. What we're looking at the business all the way out to 2027, taking this segment to be over $1 billion into the portfolio. Quite excited about the target. I have to just mention again, it's really, really important that this is an opportunistic right now. We recognize the markets are tough. We recognize financial markets are tough. We looked at the payback and where this fit in right now having this available and compared it to APS.

[Ted Doheny, CEO at Sealed Air]

APS, we said that we would get that pay down, that reduction of six, and we said we would get that leverage down in three years, and we actually did it in a year and a half. Our plan is to beat those targets you see right there on Liquibox, and very excited about what this means for not only the short term, but the long-term growth of the C business, especially in our food and Cryovac. Okay. Next question.

[Operator]

Thank you. Our next question comes from the line of Lawrence De Maria of William Blair. Your line is open.

[Lawrence De Maria, Group Head of Global Industrial Infrastructure at William Blair]

Thank you. Good morning. Congratulations, everybody. First, you made some comments around 2023 and the SEE Operating Model, which obviously implies 10% EPS growth, may seem a bit stretchy going into recession and the softer exit run rate, aside from the easier comps from this year. What gives you confidence to hit those kinds of numbers, 10% EPS, incrementals, et cetera? You know, what are you doing to give people on the call the confidence? Secondly, obviously, this puts you at number one or number two in the bag-in-box technology. A big asset already went earlier this year, which you did execute on. Why does this fit better, or where does this give you that maybe surely get into? Why does this, you know, in other words, fit in with Sealed Air better than the previous acquisition?

[Ted Doheny, CEO at Sealed Air]

Good. Thanks, Larry. Chris, I'll jump in and help me if I forget to go through the second question. If you go to slide 18, we tried to lay this out, Larry, which I appreciate you asking, referencing to the model. As I mentioned before, we introduced the operating model. It's really important to show what we did and show where we're going. As I mentioned in my prepared remarks, you get what you measure. The operating model states what we plan to do and compare it to what we did on sales and earnings and how we turn that into cash. If we look at 2023, to answer your question, in the model, we say that we want to beat the markets we serve.

[Ted Doheny, CEO at Sealed Air]

Our model says that, hey, we're in a very stable environment. The markets, the GDP of 1%-3% is what we should be beating. Well, going into next year, as you highlighted, there's a lot of challenge on what the GDP, what the global markets are gonna be. In our model, we actually said that actually next year it could go down -2% to 1%. We put that in our model. We already have, we know we have the 4% acquisition with Liquibox in place, so we see that will be a positive to go against that. We also do believe that with our innovations coming with some of the sustainability solutions, we think we can get that 1%-2% growth into next year. We also think we can get share gain.

[Ted Doheny, CEO at Sealed Air]

As Chris highlighted in his remarks, part of especially the Food business with these shortages, especially on that specialty resin, that costs this business, as Chris highlights, 3%. We now have that material, we have it in place, and we're gonna go get that business back. Also, just highlighting the Food segment, we think is resilient through these cycles. Flat, how do we create growth? Even beyond what we just talked about in the acquisition, we think we could create growth, especially with our automation play. Then how do we drive all that to earnings? We've done for five years now, well, four, almost five. Our operating engine drives a greater than 30% leverage. We've proven that. We can get our price realization. We've proven that. We can get more.

[Ted Doheny, CEO at Sealed Air]

The negative, just to highlight again, industrial and fulfillment market pressures are, we'll see them in the third quarter, we'll see it in the fourth quarter, and we think for sure we'll see it in the first half of 2023. When that turns, we'll be a more efficient company with better products to serve it. With that said, we think the model, we can drive the model and what we did in the past, we think for 2023, we can make that happen.

[Christopher Stephens, CFO at Sealed Air]

Very good.

[Ted Doheny, CEO at Sealed Air]

Okay. Did I get the second part of his question?

[Christopher Stephens, CFO at Sealed Air]

Yeah, pretty much. I would just add, maybe to Ted's comments, just to kind of talk about the value creation within this portfolio. We identify the cost synergies, you know, kind of within our control, very specific to what we've been able to do, building off the APS success, as we mentioned in our prepared remarks as well as in the Q&A. The opportunity for us to just grow on a global scale, given the Cryovac footprint and capability and the opportunities for the end market, where as we see it move to bag-in-box is tremendous, and that's where we're really excited. On slide nine, we lay out that financial profile.

[Ted Doheny, CEO at Sealed Air]

Why don't you go back? I now remember. He asked me, how does this compare to other bag and box opportunities and without mentioning names. If we look at this, what we're excited about this business versus other technologies. If you look at that fitment, and again, doing well over 1 billion fitments, they're just like Cryovac. The Cryovac secret sauce is how do you put these layered materials together to protect the product like no other. That is the Cryovac secret sauce, the barrier protection that we have from fresh red meats to fluids or wherever we put it. Even now as we're penetrating the wine market, we can protect wine in a bag as well as a bottle.

[Ted Doheny, CEO at Sealed Air]

Well, if you think about the bottle of wine that's now going bag-in-box, that's where the markets are going. If you pull a cork off a bottle of wine, the wine starts getting bad. How long do you have? If you have a fitting and you have it, you turn the fitting, and you get one glass at a time. Many restaurants waste significant amount of their wine because they throw those bottles away. Also, with our CRYOVAC technology and also the Liquipure technology that we can protect as well as a bottle. How do you know if the wine is good? You smell the cork. That's not good enough in the markets that we serve. Our barrier protection protects that, and now with the fitting, offer a really unique advantage to the market.

[Ted Doheny, CEO at Sealed Air]

To compare to other players who are out there, barrier protection, CRYOVAC, the leader in the world. Fitments, Liquibox, the leader in that. Putting that solution model together, we're excited for what this can mean for our customers and our business going forward.

[Operator]

Thank you.

[Ted Doheny, CEO at Sealed Air]

Next question.

[Operator]

Our next question comes from the line of Adam Samuelson of Goldman Sachs. The line is open.

[Adam Samuelson, Senior Equity Research Analyst at Goldman Sachs]

Yes, thank you. Good morning, everyone. I guess maybe digging into some of the just end market considerations in the short term. Ted, you talked about economic pressures certainly impacting the Protective segment. Can you talk about maybe customer inventories as you see them and channel inventories as you see them? How much is potential destocking impacting your outlook in the impact of the third quarter and into the fourth quarter? Just a clarification question, because you talked about a view that your red meat business can be pretty stable moving forward despite the contraction in U.S. cattle. Can you maybe

[Christopher Stephens, CFO at Sealed Air]

Just to frame exactly the US red meat beef part, how much is of the total 22% that's red meat, how much is actually US beef versus international beef versus pork? I think just helps dimensionalize kind of that part of the business relative to the observable declines we see in the cattle herd.

[Ted Doheny, CEO at Sealed Air]

Well, if I can take that exact question first, so I'll forget that. North American is roughly-

[Shuxian Yang, VP, Treasurer and SEE Automation Finance Leader at Susan]

Ted.

[Ted Doheny, CEO at Sealed Air]

Oh, Susan.

[Shuxian Yang, VP, Treasurer and SEE Automation Finance Leader at Susan]

Sorry, Ted.

[Ted Doheny, CEO at Sealed Air]

Susan's gonna answer for me.

[Shuxian Yang, VP, Treasurer and SEE Automation Finance Leader at Susan]

Yeah, sorry for jumping in. Maybe I can answer that. You see on the slide on the market sectors, we talk about 22% is fresh red meat of the total company. Fresh red meat is actually made up of both beef and also pork. The split is roughly 55-45. U.S. certainly is a fairly large part, we would say about two-thirds of it. If you really look at the U.S. cattle cycle impact, it's really impacting about a little less than 10% of the total company revenue there. If you think through, if cattle cycle just say it was 5% down on an overall total company, that will be less than 0.5% of the impact there.

[Ghansham Panjabi, Senior Research Analyst at Baird]

Also on the other side, with all the different proteins, what we're projecting for next year is the Australian cattle cycle is actually coming back this week. The pork side of it is gonna have recovery 2023 from the bird flu we're experienced this year. In addition, in the protein market, the case-ready solutions where the retail market is also a booming solution there. We'll be expecting all those offsetting positive factors to alleviate the cattle cycle impact.

[Ted Doheny, CEO at Sealed Air]

Good. Did you put a number on that booming, Susan? Well, Adam, I'm actually being exposed here live that you see one of my management principles that I like to surround myself with people smarter than me. I'm actually very excited to have Susan with us on the call. The other part that you had there, you talked about this destocking, which is real, and it's showing up more in the protective side of the business. Your direct question was, are we seeing it in third quarter, fourth quarter, and then what it goes into? There's no question the destocking is out there, as we've seen it with our inventory, and you could look at what our customers' inventories are, et cetera. There is a destocking play. How long will that take to work out? Don't know.

[Ted Doheny, CEO at Sealed Air]

We definitely think probably part of the fourth quarter, you're seeing that in our implied guidance, but that too will change. I would like to highlight, though, as I keep mentioning digital, as we're putting our customers and distributors online, we're getting just such better visibility. Part of that inventory, we do not want distributors to have. We wanna take care of that for them. We want our distributors and our sales teams to be totally servicing our customers. We think we have an opportunity to get better at that going into next year. The direct answer to the question, the destocking is into the fourth quarter, probably in the first half of the next year. As Chris highlighted, we have the inventory, and we have the preferred products, and as I highlighted specifically on food.

[Ted Doheny, CEO at Sealed Air]

We're actually using that inventory right now to be very aggressive out there, and we want the business. We have the inventory, and we have the marching orders to go get it. Okay, next question.

[Operator]

Thank you. Our next question comes from John McNulty of Jefferies. Your line is open.

[John McNulty, Analyst at Jefferies]

Hey, good morning, Ted. Good morning, Chris. I just wanted to touch on the CapEx. It pulled down a little bit in the updated guide. Is that more driven by you know, maybe pulling back a little bit on the growth opportunities as you now have Liquibox coming into the operations, or is it just getting pushed out to the right because of supply disruptions?

[Ted Doheny, CEO at Sealed Air]

It's the second. We actually see many investments in which the CapEx obviously competes with our capital allocation. We have some really significant productivity opportunities on CapEx, and it's just getting it done with the other supply constraints that are out there in that part of the business. Yeah.

[Christopher Stephens, CFO at Sealed Air]

Sure. I just add that that's all it really is just think it through timing. We were guiding roughly $250 million for the full year as we kinda closed out the third quarter, just taking a look at what we could execute on here in the fourth quarter, working with the equipment suppliers, if you will, on the CapEx needs. It's been reduced. It doesn't change our priority. We definitely are not starving our capital needs from a business point of view. We talk about, you know, traditionally being roughly 4% of sales, actually moving more towards 5% of sales as we move forward, given the opportunities around our strategic direction around automation, digital, sustainability. It was nothing more than timing. It doesn't reflect anything different than that.

[Ted Doheny, CEO at Sealed Air]

Okay, next question.

[Operator]

Thank you. Our next question comes from the line of Vincent Andrews of Morgan Stanley. Your line is open.

[Vincent Andrews, Managing Director at Morgan Stanley]

Hi. Thanks for taking my question. Just a two-part. First, I guess, on Liquibox, I was wondering if you could give us a little bit more color on, you know, what the CapEx, D&A and interest expense, that will come along with that deal. Then separately, there's a lot of opportunity for growth here, both from a regional and, end market penetration, that you indicated. Can you talk a little bit about the timeline of achieving maybe some of these, revenue synergies? And how do you, how should we think about in terms of CapEx and cost, you know, as a follow-up on that last question, what that might be in the coming years as you think about taking, you know, advantage of those opportunities and what investments you might need to make?

[Ted Doheny, CEO at Sealed Air]

Great. Actually, I'll let Sergio answer that. Sergio's led this process, and he's gonna exceed all those targets that we set out. Sergio, you wanna take that?

[Sergio Pupkin, Chief Growth and Strategy Officer at Sealed Air]

Thank you, Ted. In terms of CapEx, Liquibox has been quite stable with 3% of the revenues, and we built that into our model looking forward. From our side, there are certain synergies that may require CapEx to execute the growth, and those are also factored into the model. You can say that all of those also fit within the CapEx projection. When it comes to realization of the growth synergies, we have a model on how do we integrate to execute as fast as possible. We have geographic opportunities and cross-selling opportunities. The same that we've done with automated packaging system, we distribute those targets among our sales force and go after that. We know that there is a very interesting base of customers where those can be realized seamlessly.

[Sergio Pupkin, Chief Growth and Strategy Officer at Sealed Air]

The other part, which is the cost synergies, I think that Ted mentioned before, we are planning within three years, and those are factored within the three years. In the case of APS, we executed three years in 18 months, and we see here a lot of opportunity to accelerate. In principle, you should count that the $30 million can be executed in the three years.

[Ted Doheny, CEO at Sealed Air]

Less.

[Sergio Pupkin, Chief Growth and Strategy Officer at Sealed Air]

Focus.

[Ted Doheny, CEO at Sealed Air]

Thanks, Sergio. Next question.

[Operator]

Thank you. Our next question comes from the line of Anthony Pettinari. Your line is open.

[Anthony Pettinari, Managing Director and Senior Equity Analyst at Citigroup]

Good morning. I was wondering if it's possible to talk about kind of the volumes that are implied in the 4Q guide in food and protective, and maybe how that tied into kind of the trends you saw in October.

[Christopher Stephens, CFO at Sealed Air]

Sure. Let me take that one, Anthony. On fourth quarter, as we just profile out, you know, the quarter-over-quarter performance, let me focus on the positive in terms of just that price realization we expect to see the benefit in Q4, recognizing we started to go positive on net price realization fourth quarter last year. That's gonna start to diminish, but we do expect that favorability to continue into the first half of next year. Then you get to the overall volume side of the equation. We still anticipate Protective is gonna be under pressure, you know, kind of that mid-teens down, if you will, in Q4. We're doing several things to see if we can work that and improve that number, but right now we're conservatively kind of forecasting that.

[Christopher Stephens, CFO at Sealed Air]

Food, relatively stable, maybe up low single digits as we work through the inventory challenges we mentioned before, at least the supply challenges, and looking to win back that business in the case-ready roll stock. That's the implied assumptions around that. For total SEE, we would still expect our volumes to be down mid-single digits, get favorable net price realization, and that's what's reflected in our updated full year guidance. We wanted to provide, just like we committed to doing on the last quarter call, give some color to our investors as it relates to 2023. We've commented on Liquibox, and then you get into what we anticipate to see in 2023. We were able to cover that as well. Operator, next question.

[Operator]

Thank you. Our next question comes from Christopher Parkinson of Mizuho Group. Your line is open.

[Christopher Parkinson, Managing Director and Senior Equity Research Analyst covering Chemicals, Agriculture and Packaging at Mizuho]

Great. Thank you. Just a quick corollary of what you're just saying on Protective. Could you just quickly parse out, you know, what you're seeing from the various geographies in Protective? It seems like Europe is still difficult broadly from a macro perspective. Asia is sluggish now, but perhaps could be a little bit better on a sequential basis. In the U.S., we're getting mixed signals, but more negative as of late. If you could just state your own opinions on, you know, what you're hearing from your customer base, that would be incredibly helpful. Thank you.

[Christopher Stephens, CFO at Sealed Air]

Specific to the protective side, and I'll talk specifically around the fourth quarter, and maybe just break it down by region. APAC clearly is feeling the effects of just overall reductions in PC shipments. You're hearing, you know, the noise and the news just around the electronics side being significantly down coming out of Asia. We're feeling the effects of that without a doubt. I also wanna comment as it relates to China, on the protective side, just think of the zero COVID policies also impacting our business. When you get to EMEA, the e-commerce space is down 20%+, and we're feeling it.

[Christopher Stephens, CFO at Sealed Air]

Americas, to your point, down, but not, you know, not as bad as what we've seen or what we're hearing out of our businesses on the APAC and EMEA side. Overall, the protective end markets, you know, the industrial fulfillment is clearly under pressure. That's what we see, anticipate that in the fourth quarter.

[Ted Doheny, CEO at Sealed Air]

Yeah. The only other color to add to that is what we're driving against is what we're doing on automation. We think we have some opportunities, especially on the protective side. We talk a lot about the food, but we think we have an opportunity. Also, what's interesting on the Asia Pacific, where we did have a penetration and actually growth different, is we are seeing penetration in the world because of, as Chris highlighted, the China condition, we're seeing the markets outside of China growing, and we're there locally with them. The Philippines, Vietnam, Thailand, these are small numbers. Our second largest region, Australia. We're seeing those as bright spots as we drive through on the protective side. Okay, next question.

[Operator]

Thank you. Our next question comes from the line of Adam Josephson of KeyBanc. Your line is open.

[Adam Josephson, Analyst at KeyBanc]

Good morning. Thanks everyone. Just a two-part question on Liquibox, Ted and Chris. I think Ghansham asked what the historical margin profile has been compared to the implied 23.5% margins this year. Forgive me, I didn't catch your answer. Any help you could give me on what margins for this business have been historically? Just relatedly, can you just talk about the recent history of this business, what Olympus did with it? I know Liquibox was forced to divest assets in order to proceed with its acquisition of DS Smith's Plastics business in 2020. Any difficulties you anticipate with getting Justice Department approval, et cetera, would be helpful. Thank you.

[Ted Doheny, CEO at Sealed Air]

No, good question. Adam, I think also we got Sergio on the call here, who's led this process. Just the high level piece before Sergio gives you some of the details. What we liked was their historical growth and their historical profitability. We looked at what they did in a tough market where you can test a business on what they do with price and how they did that. We looked at that very carefully. We, as the question that Larry asked earlier, we've been looking at this space for years now, we know others in this space and how they performed and their profitability. Having a higher than average profitability was sending a message to us as to the quality of the business behind it. Also, having our friends at Olympus Partners, a private equity running business.

[Ted Doheny, CEO at Sealed Air]

We do have experience with family-owned business, private equity-run business, and of course, public business. We did, you know, look carefully at what Olympus did with the business, not as carefully as we are now that we have a deal. We liked that part of the business, how they performed, what their profitability was, and how they executed in this market. That again, the market is what we were extremely attracted to. I'll turn it over to Sergio to give you more details to your question.

[Sergio Pupkin, Chief Growth and Strategy Officer at Sealed Air]

Absolutely. Liquibox has been on a steady profitability increase trajectory. We look back at starting at 2014, and we found it now in 23%. There are a number of drivers to that. 23% is, like said, Ted said, what came with pricing, but also the efficiencies they drove into their converting process. I may highlight that in 2020, they acquired Maverick, which is the best technology for the bag-in-box converting, and now it's proprietary. Out of the DS Smith acquisition, once they clear all the different regulatory and started to put that, they were extremely good in the integration and extracting synergies of that. They've been very effective at consolidating the manufacturing assets, and now they have a modernized locations where they are very, very productive.

[Sergio Pupkin, Chief Growth and Strategy Officer at Sealed Air]

Really steady trajectory since 2014 as we look at double-digit growth in the EBITDA line. I would also highlight that their ability to innovate, like for example, with Liquipure, is driving margin because not only reducing that laminated metallized film delivers a much more sustainable product in terms of recyclability, it also improves margin profile. As you replace a very large part of the portfolio from the metallized laminate to the PET and EVOH-based different films, you improve the margin profile looking forward. In terms of DS Smith, like I said, I think that the integration has been a very good job. Last highlight is that we are acquiring the flexibles part of that acquisition comes with Liquibox. The other part of DS Smith is retained by Olympus Partners.

[Ted Doheny, CEO at Sealed Air]

Sergio, maybe just a little bit more color 'cause the question a couple of times on how significant the fitments are adding to this full solution. Their technology is separating from others in the market with, 'cause you mentioned Maverick. I think the fitments is really important. We all talk about bags because we, of our Cryovac world, the fitments is something that they really have some innovation on.

[Sergio Pupkin, Chief Growth and Strategy Officer at Sealed Air]

Yeah, absolutely. Liquibox has a very broad portfolio, and a lot of intellectual property around fitments and dispensing. You combine the fitments with the tap valves or the valves for like VINIflow or the ones for wine, that gives them a lot of scope to do many things with the bags. From bags that we're connecting to the soda fountains at QSR, from the ones that will be dispensing dairy, from the ones that we're doing the wine, from the ones that, for example, turn the product into being ready to be shipped in containers and compatible with e-commerce. Those kind of things are tailwinds as you go replacing and disrupting rigid containers and driving plastic savings versus a plastic bottle of 90%.

[Sergio Pupkin, Chief Growth and Strategy Officer at Sealed Air]

I mean, the sustainability benefits and what you can do with all those dispensing technologies added to the bag is a very significant contribution.

[Ted Doheny, CEO at Sealed Air]

We have a sustainability slide in the deck, and we'll probably, I'm sure there'll be more follow-up questions. You'll see the sustainability of bag in the box is a significant conversion driver of the rigid containers. We have a slide highlighting that, but I'm sure we can follow up later on with questions. Next question, operator.

[Operator]

Thank you. Our next question comes from the line of Jeffrey Zekauskas of JPMorgan. Your line is open.

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at JPMorgan]

Thanks very much. Just a few small questions. Why is the free cash flow $50 million lower for this year and that your EBITDA changes are pretty small? What's your cost of debt with Liquibox, and have you fixed it, or this will be floating rate debt that will depend on LIBOR? Lastly, can you talk about the geographic distribution of Liquibox's revenues and what's their market share in fluids and liquids?

[Christopher Stephens, CFO at Sealed Air]

All right, Jeff. Let me, so multiple questions in there. Let's go one at a time. Free cash flow.

[Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at JPMorgan]

Okay.

[Christopher Stephens, CFO at Sealed Air]

The main driver in terms of our change of our outlook is on the working capital side. We mentioned before the inventory levels that we have based on not only the raw material inflation, that's reflected in our numbers, but also the pre-buys to make sure we had the inventory in place. Couple that with some headwinds that we've experienced on the protective side, given the volumes. We're in a situation where we are looking to adjust our free cash flow down, not so much because of EBITDA, but because of the working capital performance in the business.

[Christopher Stephens, CFO at Sealed Air]

As it relates to the transaction itself, I'll ask Susan, who's obviously leading up on the treasury side, thinking through the financing for this deal, thinking about the debt as well as the cash on hand to use the funds.

[Shuxian Yang, VP, Treasurer and SEE Automation Finance Leader at Susan]

Yeah. Thanks, Chris. For the acquisition here, the purchase price is $1.15 billion. We have secured a $1 billion bridge loan to finance it. The rest will be coming from cash on hand. As of now, we're gonna be working toward a takeout option with a combination of bank loans and high-yield bond there. It's a mixture of both the floating and the fixed rate. At this point, our estimate is the average interest rate is around about 6.5%. We will see, we'll be working with our banking groups to execute the deal here.

[Christopher Stephens, CFO at Sealed Air]

Got it. Last question, Jeff. You just talked about the geographical sales footprint for Liquibox. Roughly 76% of their sales is what we would consider the Americas in terms of just on an equivalent, just kinda comparing them to how we regionally split our business. 13% on EMEA and the remaining balance, 11% in APAC. Very much a good, a nice overlap as it relates to our overall global positioning. Again, it gets back into our global footprint with CRYOVAC is the opportunity for us to work those cost synergies on a quick basis, which is reflected in our financials. The opportunity, the upside opportunity are those sales synergies, which we're reflecting as an opportunity not reflected in the financials to justify this deal.

[Christopher Stephens, CFO at Sealed Air]

We're very much excited about both top line and bottom line improvements.

[Ted Doheny, CEO at Sealed Air]

Okay. Next question.

[Operator]

Thank you. Our next question comes from the line of Joshua Spector of UBS. Your line is open. Mr. Spector, your line is open.

[Joshua Spector, Executive Director of Chemicals Equity Research at UBS]

Sorry, you cut out for a second there. I couldn't hear you. Thanks for taking my question, squeezing this in. I just wanted to follow up on the food volume impact. The 3% loss due to dual sourcing, is that typical that you would win that back that quickly? That's not a longer-term decision by that customer in terms of how they source supply. As you've talked about regaining share multiple times through the call, how do you do that and protect your profitability, and assuming competitors also have more supply available as well? Thanks.

[Ted Doheny, CEO at Sealed Air]

Well, in the food business, it was a specialty barrier, and the problem was the markets were actually rationing the supply. We didn't lose it because one product was better. We just didn't have the product. That was the tough situation there. As far as the second part of the question, can we get it back? We feel pretty confident in the food business that we would be first choice. As far as the pricing of doing that also ties in very, very well with our automation right now. Again, the strategy to have the best product, which we believe we have, at the right price, well, we gotta have the product. The price to make that right, and then also the sustainability piece.

[Ted Doheny, CEO at Sealed Air]

Part of the challenge that we had when we lost that product source, our engineers redesigned, down-gauged, materials. They did that in an amazing amount of time because we were literally without product. We think getting that share back is a matter of time. As I put the quote in the slide on the automation slide, we already have the customers coming back. The food business for us is very sticky. It's hard to change, so you don't wanna lose it. Losing it because we didn't have a product, that part we feel we can get that back, and we're gonna be going after that aggressively now in the fourth quarter and into 2023.

[Operator]

Thank you.

[Ted Doheny, CEO at Sealed Air]

Next question over here.

[Operator]

Our next question comes from Mike Roxland of Truist. Your line is open.

[Mike Roxland, Managing Director of Equity Research at Truist]

Thanks very much. Appreciate you squeezing me in here. Just hoping to get a little bit more color around the e-commerce moderation and maybe any impact on your mailers, especially around Instapak, which is your most profitable piece in the protective portfolio. I think, Ted, you mentioned some that you're gonna continue or aggressively addressing the decline there. I wonder if you could just provide some initial color as to what specific things you're doing to address the weakness in e-commerce, especially with your forecast of volumes being down mid-teens in 4Q. Thanks.

[Ted Doheny, CEO at Sealed Air]

Okay. Well, let me just make sure that the mailers aren't the largest piece of protective on the e-commerce side. If we look at our protective business, actually, our Instapak is the largest, most profitable piece. That one was hit with the industrial right now. As far as the e-commerce piece, if you look at slide 11, the mailers piece going plastic versus paper, that's the sustainability play there. Part of our mailer downturn in e-commerce was the market wanting to have a paper product. What we have been in development is our paper bubble. We have introduced that. In response to your question, why we have confidence, we're already up to 1 million. We're looking to take that to 10 million in the next 12 months, and we want to recapture over 100 million mailers.

[Ted Doheny, CEO at Sealed Air]

Why is that important? That competes with the plastic bubble mailer that we have as well. Right now, though, the paper is actually 30% more costly as you go sustainable. We're bringing automation in again. How do we do that in an automated fashion to put it in the warehouses, et cetera? We think we could get that business back. It does with e-commerce going down, so it's a double hit. We actually think when we get through this, hopefully short-term on the e-commerce side, we'll have a new product in place to gain some share. Okay, next question.

[Operator]

Thank you. Our next question comes from the line of Arun Viswanathan of RBC. Your line is open.

[Arun RBC, Sr. Equity Analyst at Viswanathan]

Great. Thanks for taking my question. Wanted to go to slide 18 and ask a couple questions about the image you have for the SEE Operating Model. It looks like you know you have guidance this year obviously of $1.22 billion on EBITDA for the midpoint. Then looks like you're highlighting a bar that's maybe around $1.5 billion for 2025. Just wanted to understand that trajectory. It looks like what would it imply is maybe some contribution from Liquibox maybe three quarters next year plus maybe $15 million of synergies.

[Arun RBC, Sr. Equity Analyst at Viswanathan]

In 2024, you'd get the rest $50 million synergies and see maybe 7%-9% EBITDA growth, which would put you at $140, and then another 7% in 2025 would get you to that $150. Is that the right way to think about it? If so, is it the right assumption that essentially most of the growth in 2023 is from the acquisition? Thanks.

[Christopher Stephens, CFO at Sealed Air]

Very well said, Arun.

[Arun RBC, Sr. Equity Analyst at Viswanathan]

Yeah.

[Christopher Stephens, CFO at Sealed Air]

Yeah, you know, I was gonna say, just to add on to that. I mean, that's very much driving what we do. Again, this is over time, just thinking through the operating model. The levers we're gonna pull on organic growth, clearly going into next year, the opportunity for us is to add Liquibox into the portfolio is helping us to get back into that sales range, as we mentioned, that 5%-7%. EBITDA, you know, the earnings profile over time, every year, you know, can be some variations of good to the bad of that. Over time, that average to be 7%-9%. You can see the elements of what we are driving on from an operating engine point of view in terms of executing to fit within our model.

[Christopher Stephens, CFO at Sealed Air]

Ted, maybe to add some color.

[Ted Doheny, CEO at Sealed Air]

Yeah. You stated again, behind the model, and I apologize, on slide 18, you have to look at the shrunk down model. We have it earlier in the presentation, you could see it. Again, just what's in the model, and that's what we're running the business to, is we say again, the markets we are designing to should be stable. We have very diversified market of 1%-3%. In the short term, we've said that we think 2022, the end of 2022 and going to 2023, we actually have markets under pressure. That 1%-3% could be -2% to +1%. That's what we're having to work against. Exactly as you said, the M&A coming in at 4%. Our model says 2%-4%.

[Ted Doheny, CEO at Sealed Air]

We didn't have any acquisitions of size over the last two years. We actually had divestitures. As you can see the model down below of how we performed over the last four years and projecting that going forward. I do wanna highlight as we continue to talk about the innovations coming through and automation and digital and the share gain, et cetera, are how we see that curve going, as you highlighted all the way to 2025. We're telling you where we're going. Again, I wanna highlight, we believe you get what you measure, and that's what we're designing. To Chris's comment, where you mentioned on the earnings, we expect margin expansion. We're showing you how we're doing that. That operating leverage of the greater than 30%.

[Ted Doheny, CEO at Sealed Air]

Spent a lot of time on the call talking about our fluids and liquids. That business is north of the average of 30%. That business has been leveraging closer to 40%. When we put that operating engine, that's for the whole portfolio, but certain parts of the portfolio are actually moving at a higher rate. The other part of the margin expansion is price realization. Through this tremendous inflationary period, that is what's been giving the lift and margin expansion for us. Going forward, the same, the same issue. We wanna make sure that we again have the best products at the right price, and we're gonna make them sustainable.

[Ted Doheny, CEO at Sealed Air]

The only two other things to highlight is on the top side of where we're going on digital and what digital does for us on growth, and then also as we get more efficient on our operating leverage and showing up and why we're gonna have margin expansion. Your numbers were right, that follows the model. Okay. One more question, operator.

[Operator]

Thank you. Our final question comes from the line of Gabe Hajde of Wells Fargo. Your line is open.

[Gabe Hajde, Research Analyst at Wells Fargo]

Morning, Ted, Chris.

[Ted Doheny, CEO at Sealed Air]

Morning

[Gabe Hajde, Research Analyst at Wells Fargo]

One quick one, I guess, on M&A with Liquibox. Does this take you out of the market for other transactions, or do you feel like there's still more opportunity out there or assets coming to the market that you guys will be looking at? Thanks.

[Ted Doheny, CEO at Sealed Air]

Yeah. If you go to our capital allocation, we'll show you what we've been looking at and what we're quite interested in. We are very serious about this, our capital allocation, where the leverage ratios are, and Susan highlighted that we're 3.5, and we wanna take that down very fast. The model is generating, as you heard in the last question, if you plug that into cash over the next two to three years, the model will be generating well over $2 billion of cash. Where do we put that? Right now, short term, it's gonna be paying down debt, getting that leverage ratio down. As far as what else are we looking for, are we out of the market? We're looking. We've looked at well over 100 different deals over the last four years.

[Ted Doheny, CEO at Sealed Air]

We've done 14, and some of those have been divestitures as well, which APS being the largest until now we have Liquibox. We are looking, but we wanna be fiscally prudent, financially prudent and watching that very carefully. We think the cash generation of the business will have us in the market for those other things that we identified that we think would make the business significantly stronger going forward. With that, I wanna thank everyone for their time today on the call. We're excited about the opportunities of Liquibox. I hope you felt that in the call, and how we think it's gonna accelerate our growth for the future, in February. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating and have a great day. You may now disconnect.

Participants

Executives

• Brian Sullivan, Executive Director, Investor Relations, and Assistant Treasurer
• Christopher Stephens, CFO
• Sergio Pupkin, Chief Growth and Strategy Officer
• Ted Doheny, CEO

Analysts

• Adam Josephson, Analyst at KeyBanc
• Adam Samuelson, Senior Equity Research Analyst at Goldman Sachs
• Anthony Pettinari, Managing Director and Senior Equity Analyst at Citigroup
• Arun RBC, Sr. Equity Analyst at Viswanathan
• Christopher Parkinson, Managing Director and Senior Equity Research Analyst covering Chemicals, Agriculture and Packaging at Mizuho
• Gabe Hajde, Research Analyst at Wells Fargo
• George Staphos, Managing Director and Senior Equity Analyst at Bank of America
• Ghansham Panjabi, Senior Research Analyst at Baird
• Jeffrey Zekauskas, Managing Director and Senior Equity Research Analyst at JPMorgan
• John McNulty, Analyst at Jefferies
• Joshua Spector, Executive Director of Chemicals Equity Research at UBS
• Lawrence De Maria, Group Head of Global Industrial Infrastructure at William Blair
• Mike Roxland, Managing Director of Equity Research at Truist
• Shuxian Yang, VP, Treasurer and SEE Automation Finance Leader at Susan
• Vincent Andrews, Managing Director at Morgan Stanley