Sealed Air Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 15 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the First Quarter 2024 Sealed Air's Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Sullivan.

Operator

Please go ahead.

Speaker 1

Thank you and good morning everyone. With me today are Emile Chammas, Interim Co CEO and COO and Dustin Semak, Interim Co CEO and CFO. Before we begin our call, I would like to note that we have provided a slide presentation to supplement the call. Please visit sealedair.com where today's webcast and presentation can be downloaded from our Investor Relations page. Statements made during this call stating management's outlook or estimates for future periods are forward looking statements.

Speaker 1

These statements are based solely on information that is now available to us. We encourage you to review the information in this 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. Many of these factors are listed in our most recent annual report on Form 10 ks as revised and updated on our quarterly reports on Form 10 Q and current reports on Form 8 ks. We discuss financial measures that do not conform to U.

Speaker 1

S. GAAP. You will find important information on our use of these measures and the reconciliation to U. S. GAAP in our earnings release.

Speaker 1

Included 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 reference throughout the presentation.

Speaker 1

I will now turn the call over to Emile and Dustin. Operator, please turn to Slide 3. Emile?

Speaker 2

Thank you, Brian, and thank you for joining our Q1 earnings call. Today, Dustin and I will review Sea's financial performance, provide updates on the markets we serve, discuss relevant trends and highlight the significant progress made on the transformational actions discussed on our previous calls. Lastly, we will conclude with our 2024 outlook before opening the call for questions. We closed the quarter with sales of $1,330,000,000 and adjusted EBITDA of $278,000,000 delivering strong results despite the continued challenging market dynamics in the protective segment. Our first quarter results reflected for the first time since quarter forward 2021 year over year volume growth across all regions of our food business, continued volume stabilization and protective and strong execution related to our CTO to grow initiatives.

Speaker 2

Through the focused efforts of our teams around the world, we delivered positive free cash flow of $78,000,000 in the Q1 compared with a negative $13,000,000 in the same period a year ago. Dustin will provide a more comprehensive overview of our financial performance shortly. Now let us move on to our market and business update. During the Q1, our food segment delivered low single digit volume growth across all regions, primarily driven by our string bag business, which benefited from the carryover momentum of enhanced holiday demand and new customer wins from the 4th quarter. In the U.

Speaker 2

S, beef production was down low single digits year over year for the Q1. For the rest of 2024, U. S. Slaughter rates are expected to decline at a more rapid pace in the offline quarters. In South America and Australia, cattle cycles are at their peaks driven by robust domestic consumption and heightened export activities.

Speaker 2

Against the flat global proteins market in the Q1, we drove volume growth, gained share and delivered double digit growth in automation. Following its successful launch last quarter, our new compostable tray continues to gain traction in the market. Additionally, we are actively engaged in the development and introduction of more sustainable packaging solutions such as recycled ready barrier display films, poultry bags and post consumer recycled trays to address evolving market needs and support food processors and retailers in meeting their sustainability goals and regulatory requirements. The regulatory landscape concerning plastics continues to evolve rapidly with recent attention being directed towards polyvinylidene chloride or PVDC due to chemical similarity to PVC. PVC is used as a very thin barrier layer and multilayer films within our protein shrink bags.

Speaker 2

Our shrink bag business that contains PVDC is approximately 1 third of our food segment. This barrier material plays a vital role in preserving the quality of fresh proteins, extending shelf life, enabling global distribution and minimizing food weights and its environmental impact on greenhouse gas emissions. Currently, there is no alternative to PVDC that matches its performance level. Through close collaboration with our suppliers, customers, industry associations and government agencies, we actively advocate for the essential role packaging plays in mitigating food waste and ensuring safe, affordable food on a global scale. For decades, we've been assisting our customers in adapting to the changing regulatory environment and safeguarding their food supply chains.

Speaker 2

We already provide alternative barrier layers to PBDC such as EVOH among others, particularly for applications with lower performance requirements. As the market leader in string bags, we continue to be best positioned to help food processors navigate the evolving regulatory landscape and deliver market leading solutions that combine world class material science, equipment and technical services. Transitioning to Protective, revenue performance in the Q1 was in line with expectations. Industrial portfolios continue to be under pressure across all regions contributing to a low to mid single digit year over year volume decline for the segment. As discussed on our last quarter's call, the pricing environment remains pressured as we compete in a low volume, low visibility environment.

Speaker 2

In the Americas, volume growth was less than 1% as growth in box rightsizing solutions and recovery in retailer fulfillment sectors were offset by industrial weakness. EMEA experienced continued double digit volume decline primarily driven by intensified sustainability pressures across all portfolios and destocking from our APS product line. The electronics sector in Asia is improving from last year. However, uncertainties around China's economic recovery continues to temper short term regional growth expectations. Consistent with our previous discussions, we still anticipate an L shaped recovery across the protective segment.

Speaker 2

The organizational changes implemented in February, which established dedicated commercial teams for both food and protective are beginning to gain traction. The renewed focus on our protective channel and direct customers has created positive momentum internally and has well been received by our customers. Similar to food, we strive to protect products in transit in a sustainable way. Our strategy entails a dual pronged approach. 1st, within our flexibles portfolio, we are continuously increasing the level of recycled content in our product lines.

Speaker 2

2nd, we are in the process of adding more fiber solutions to our portfolio, which will enable us to fully serve our channel partners in all segments within our markets. As an example, we are expanding our paper mailer offerings with various sizes to match the versatility traditionally associated with plastic and hybrid mailers. Moreover, we've developed more resilient paper coilers as a sustainable fishing solution to address demands of protecting high value heavyweight products. Additionally, we are introducing fiber alternatives within our APS solutions, enabling substrate agnostic capabilities for our automation portfolios. This approach ensures that existing equipment installations can accommodate both providing our customers with enhanced flexibility in their distribution processes.

Speaker 2

The transformation outlined in previous quarters continues at SEEK. We are focused on improving underlying business fundamentals by improving our commercial effectiveness, innovation processes and overall talent. Overall portfolio footprint optimization continues to progress with 3 plant closures last year and another 4 in process in 2024. Throughout the Q1, we continue to wind down pieces of the portfolio announced last year and we continue to evaluate the rest of the portfolio and footprint for further opportunities. As mentioned earlier, we continue to accelerate our cost takeout initiatives and it is driving improvements to our bottom line.

Speaker 2

With the actions implemented so far, we have achieved an annual run rate savings of $78,000,000 Continuing with this momentum, we are confident in our ability to achieve approximately $90,000,000 in year over year cost savings in 2024. Finally, we are in the process of pivoting our digital and automation strategies and we'll have more to share in subsequent calls. Now I'd like to turn it over to Dustin to review our financial results. Dustin?

Speaker 3

Thank you, Emile, and good morning, everyone. Moving to Q1 results, let's turn to Slide 4. Net sales were $1,330,000,000 in the quarter, down 1% on a constant currency basis. Adjusted EBITDA in the quarter was $278,000,000 up 4% compared to last year. Volumes were flat year over year for the quarter with growth in the Food segment across all regions offset by declines in Protective, primarily in EMEA.

Speaker 3

As reported, adjusted earnings per share in the quarter of $0.78 were up 5% compared to a year ago. Our adjusted tax rate was 25.9% compared to 24% in the same period last year. The increase in the tax rate year over year was driven by discrete impacts related to our share based compensation. Our weighted average diluted shares outstanding in the Q1 of 2024 was 145,400,000. Dollars Turning to Slide 5.

Speaker 3

In Q1, inorganic growth from Local Box contributed 2% to total company sales or approximately $23,000,000 As anticipated, we saw lower pricing across both the Food and Protective segments, primarily in the Americas and EMEA regions, following the reduction of resin costs from the post COVID peak in 2022 to the middle of 2023. Year over year volume improved in the Food segment across all regions through carryover momentum from last year's holiday season and new customer wins. Protective volumes were down 4% year over year driven by a rebound in Americas more than offset by declines primarily in EMEA. First quarter adjusted EBITDA of $278,000,000 which included $4,000,000 in organic contribution from Liquibox increased $11,000,000 or approximately 4% compared to last year with margins of 20.9 percent up 110 basis points. This performance was mainly driven by accelerated savings from our caustic out to grow and productivity efficiencies, partially offset by unfavorable net price realization.

Speaker 3

Moving to Slide 6. In the Q1, Food net sales of $868,000,000 were down 1% on an organic basis, primarily due to declines in price, partially offset by positive volumes led by carryover holiday benefits within our Food business, solid equipment performance, cattle cycle tailwinds in Asia Pac and Latin America along with share gains of our case ready solutions in the poultry market. Food adjusted EBITDA of $190,000,000 in the Q1 was down 3% with margins at 21.8%, down 100 basis points compared to last year. The decrease in adjusted EBITDA was mainly driven by unfavorable net price realization of $10,000,000 partially offset by higher volumes. Protective 1st quarter net sales of $461,000,000 were down 7% organically, driven by lower pricing in Americas and EMEA and volume declines primarily in EMEA where both industrial and fulfillment end markets remain soft and sustainability pressures are accelerating.

Speaker 3

Americas volume rebounded with strong Automation Solutions offsetting continued industrial weakness. Protective adjusted EBITDA of approximately $90,000,000 was up 11% in the Q1 with margins at 19.4%, up 3 20 basis points. The increase in adjusted EBITDA was driven by cost control actions which included CTO to grow savings partially offset by unfavorable net price realization of approximately $10,000,000 in lower volumes. On Slide 7, we review our Q1 net sales by region. On an organic basis, Americas was down 2% primarily due to lower pricing.

Speaker 3

Volume turned positive year over year for both segments for the first time since the end of 2021 with robust equipment placements in both businesses and strong volume within Food. EMEA declined 7% organically on lower pricing, persisting market softness and sustainability challenges in the protective segment, while food volumes grew mid single digit. Asia Pac was flat organically as tailwinds from Australian cattle cycle and improving electronics performance were offset by continued weakness in the industrial markets. Now let's turn to free cash flow and leverage on Slide 8. Through the Q1, we generated strong free cash flow of $78,000,000 compared to $13,000,000 use of cash in the same period a year ago.

Speaker 3

The primary driver of this improvement was higher earnings, lower incentive compensation payments and better working capital management, partially offset by higher interest costs. During the Q1, we further reduced our total debt by 28,000,000 dollars ending the quarter with a net leverage ratio of 3.9 times, flat from the end of 2023. Our total liquidity position was $1,400,000,000 including $353,000,000 in cash and the remaining amount in committed and fully undrawn revolver. We continue to focus on driving net debt to adjusted EBITDA to below 3.5 times by the end of 2025. Let's turn to Slide 9 to review our 2024 outlook.

Speaker 3

We are pleased with the strong finish to the Q1 and encouraged by the momentum that is building in parts of the business. The strength of the Q1 is giving us more confidence in our full year guidance. We continue to operate in a low visibility environment, especially in Protected and we have better visibility into how this momentum translates into the second half during our next call. For now, we are reaffirming our full year 2024 outlook. Looking ahead to the Q2, we anticipate a slight sequential decline in sales, reflecting the dynamic low visibility environment and subsiding holiday demand from last year.

Speaker 3

As a result, 2nd quarter net sales, adjusted EBITDA and adjusted earnings per share are expected to be ranged around $1,300,000,000 $260,000,000 $0.64 respectively. Turning to Slide 10. We remain committed to restoring underlying fundamentals by executing in the market, progressing our transformation, delivering CTO to grow savings and deleveraging the balance sheet. Lastly, I'd like to close by thanking the global C team at the center of our transformation for their efforts in solving our customers' most critical packaging challenges day in day out. With that, Emile and I look forward to your questions.

Speaker 3

Operator, we would like to begin the Q and A session.

Operator

Thank Our first question is going to come from the line of Ghansham Panjabi with Baird. Your line is open. Please go ahead.

Speaker 4

Hey guys, good morning.

Speaker 3

Hey Ghansham.

Speaker 4

I guess good morning. Emile, I guess on your characterization of the food segment as it relates to the various trends across your geographies as you look out for the rest of the year, is that pretty much in line with your initial view coming into the year, especially as it relates to the North American cattle cycle? And then related to that, what drove the upside specific to food in the Q1? A lot of companies have called out at the customer level called out timing of Easter, etcetera. Do you think that played a role as well?

Speaker 4

Thanks.

Speaker 2

Thank you, Ghansham. Thanks for your question. Overall, in terms of the underlying market trends, they're more or less in line with our initial expectations. Although the if you look at the North American cattle cycle even though it's down year on year it is slightly better than initially thought. We have strength in the other two regions in Latin America in terms of their cycle as well as in Australia and New Zealand where the market is up double digits.

Speaker 2

And as in our prepared remarks, we did highlight the strength in Q1 came from a couple of pieces. 1 is carryover in terms of the holiday demand, but also in terms of new customer wins across several sectors. And so we're very encouraged in terms of the momentum of that business.

Speaker 3

And Ghansham, the only thing I would follow on there too, it was a broad base, as Emile alluded to, in terms of overall regions, but also across many of our portfolios, right, which was well received obviously for the Q1 and demonstrating some of the strength in not just our shrink backs business, but across the board of roll stock as well.

Operator

Thank you. And one moment for our next question. And our next question is going to come from the line of Adam Samuelson with Goldman Sachs. Your line is open. Please go ahead.

Speaker 3

Adam, are you on mute?

Operator

All right. We can move to our next question. And our next question is going to come from the line of George Staphos with Bank of America Securities. Your line is open. Please go ahead.

Speaker 5

Thanks. Hi, everyone. Good morning. Thanks for the details. I guess my question centers around sustainability, the transition that you're trying to achieve, particularly within protective.

Speaker 5

So I guess the question is this, Sealedor has always had fiber based solutions and protective packaging. What factors to the extent relevant in terms of the going forward model allowed you to, to some degree maybe fall behind in terms of share and lose share in fiber based? What's it going to cost to bring out these new programs and new SKUs? And what's the uptake been as you've been talking about this with your customers. So differently, how much is it going to cost and how much volume do you think you can regain as you bring out these new products?

Speaker 5

And are you seeing more demand for this from your larger or smaller customers in protective packaging? Thank you guys.

Speaker 3

All right, George, this is Dustin. And again, I appreciate the question. So a couple of comments I would make going back starting with why haven't we been able to kind of gain share with lost share in fiber considering our portfolio. So you're correct that in many cases we already have a very strong portfolio in fiber. The statements that Emile alluded to earlier today is that our intention is to really round that out, complete it and to make it more fulsome across the board.

Speaker 3

He alluded to the paper coiler as an example as well as continue to extend our fiber based mailers in terms of sizes, etcetera. So going back to the past, we talked about this a little bit on the kind of towards the end of last year around this commercial reorganization. So if you go back 3 or 4 years ago, we really consolidated our sales teams into regional teams. And as a part of that, lost some focus on our overall protective business, right, being roughly 35% versus food being more dominant in terms of the total portfolio. And so part of that reorganization was really to drive that focus, that intentional focus on the protective business holistically.

Speaker 3

And so right now our customers as well as our internal teams, because for them they're really excited about the dedicated marketing teams, the rededicated focus on I and D. And so just being more intentional about driving that business forward. The second piece is from a customer reception, they're noticing it as well. So we Neil and I have had an opportunity to sit down with some of our distributors, direct customers and they're noticing the difference in terms of just focus and they're very excited that kind of our recommitment on some of these different offerings again to advance portfolio. And it's more of a timing for us in terms of when we bring it up to market.

Speaker 3

In terms of cost, think of it as right now in terms of our guidance, our capital allocation from a CapEx, etcetera, that's all really today fully baked into our overall guidance and encapsulated in the our kind of total top line and bottom

Speaker 2

line. Thank

Operator

you. And one moment for our next question. And our next question is going to come from the line of Matt Roberts with Raymond James. Your line is open. Please go ahead.

Speaker 6

Hey, good morning, Emil, Dustin. Thank you for the time. I think last quarter you previously expected EBITDA to sequentially improve throughout the year, I believe. Now I know 1Q impressively came in higher, partially due to some holiday carryover. Could you quantify that holiday carryover or any of the cost takeout acceleration in the decline now expected again in 2Q?

Speaker 6

Is that more volume related or have any of the price flow through expectations changed? And any put stakes there would be helpful. Thank you.

Speaker 3

Yes. Matt, this is Dustin. I'll take this one. And so a couple of comments I will make. One is we are continuing to accelerate our cost to grow program.

Speaker 3

We're really excited about, obviously the improvements we've made. We talked about the $78,000,000 in terms of run rate we're already on and the confidence that gives us at this point in time really being at the end of Q1 and being able to achieve that full $90,000,000 And candidly, we're not going to stop there, right? I mean, in general, I think driving cost conscious mindset into the organization is driving benefits to the bottom line and you're seeing some of that. That a lot of that is going to be continued momentum, right? So that's kind of baked into the forward looking guidance.

Speaker 3

But when you go to Q2, right, there's really 2 impacts, I would say, more broadly overall. One is, you have FX coming down roughly the U. S. Dollar strengthening, so some of that decline is just purely FX, but probably roughly about $10,000,000 The rest of the there's a little bit price in terms of sequential pressure, but it's relatively small. Think of it as roughly $5,000,000 And then on volume, it's about $15,000,000 That's really the subsidization if the holiday demand kind of subsiding from Q1, which was stronger than we really originally expected.

Speaker 3

However, baked in that is also the momentum of the gains that you saw. So you go back to Q1, it was a mix of that carryover, but also a number of gains, particularly in poultry that we're really excited about that continue to ramp throughout the rest of the year, which is again going to continue to drive some of that as you kind of get beyond Q2 then you get into Q3, Q4, you're going to see food continue to ramp and kind of be in this low single digit range from a volume perspective with pricing subsiding as we go throughout the year in terms of an impact.

Operator

Thank you. And one moment as we move on to our next question. And our next question comes from the line of Jeff Zekauskas with JPMorgan. Your line is open. Please go ahead.

Speaker 7

Thanks very much. You were talking earlier in the call about the risks connected with PVDC. Is the issue, the bill in California, that's being weighed or is it a European issue? Have your competitors already changed over to different material? That is, do you feel like you're lagging behind in technology?

Speaker 7

Are there particular dates that it may be good to be aware of in terms of when this packaging may or may not be used?

Speaker 3

All right, Jeff. Thank you for that question. I'll try to be as comprehensive as possible.

Speaker 2

Thank you.

Speaker 3

So we're addressing PBDC. There's a couple of comments I'll make. We've talked about a third of the overall business in food specifically being PBDC. But another point is about a third of it is also EVOH, right? And to hit your question directly, are we lagging behind?

Speaker 3

Absolutely not, right? The intent of the conversation is to really demonstrate. One is that our offerings, is this really the PBDC specifically our shrink bag business is really around 3 pieces, right? It's the strength of the material science and that can be whether it's PBDC or EVOH, we offer both today as well as the technical services capability and then you combine that with our automation. That's really the strength that was driven us to become the market leader in that segment and will continue to be.

Speaker 3

And so we're continuing to navigate that landscape and make sure that whether it's our manufacturing footprint or other aspects, we're able to candidly do both. And that's generally the way you would update the technology across our manufacturing footprint. And as it relates to your specific question around California itself, at this point in time, there's no specific dates. California recently in roughly Q1 of this year, earlier than Q1, kind of announced what's called AB-two thousand seven hundred and sixty one, which is a bill related to it's really a toxins bill broadly that speaks to both PFAS, which we've already eliminated within our food packaging and then as well as PBDC. And the broader comment is we're continuing to work at this point in time that bill is not in a place where it's enacted.

Speaker 3

We'll continue to make sure that we advocate with agencies and our coalition to make sure people understand the impact that you have more broadly with how we how PBDC plays an important role in mitigating food waste across the globe.

Speaker 2

And maybe I'll just jump in to add a couple of pieces. So one is ultimately we offer our customers what they would like and in many cases we help them in terms of coming up with different solutions to address any potential regulation. So we approach it multi front, right. 1 in terms of working with industry associations to make sure the legislators understand the benefits of the different packaging. PBDC in this example, it is the best barrier layer out there.

Speaker 2

2 is within our portfolio, we are offering multiple solutions both on the food and the non food side. We talked earlier about the fiber part of the portfolio. So and then finally, in some cases, customers are reaching out to us to solve problems that were not in our portfolio and we gave the example of the compostable fiber tray that we launched last quarter. So again, this was in response to specific customer coming to us and asking us to help them solve that problem with the EPS challenge. So really approaching it from end to end and impacting those issues.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Michael Ruxlin with Truist Securities. Your line is open. Please go ahead.

Speaker 8

Thank you, Dustin, Gabriel, Brian and Luis for taking my questions.

Speaker 2

You already touched on it a little bit in

Speaker 8

terms of momentum building in the business. You already spoke about food in terms of new customer wins, especially around poultry. Any other pieces that you can comment on that have inflected or that doing better? And then secondly, Emil, you mentioned pivoting your digital and automation strategies and you said you comment you want more comments later on, on future quarters. But can you get a sense

Speaker 2

of what's happening there?

Speaker 8

What are you reevaluating?

Speaker 3

Any color

Speaker 8

you can provide about what the strategy around digital and automation?

Speaker 3

Yes. Thank you. And I'll take the first part and then Emil is going to take the second part of that question. So just in terms of kind of what's doing better and underlying, I would tell you in general across the business, particularly within food, bags specifically, right? So if you think about despite some of the issues that you're having in the overall protein cycles that we talked about holistically, our bags business, so think of it as poultry is more on the overwrap and think of it as in our Wolfstock portfolio, if you think about our bags business, we're really firing on all cylinders across all three regions.

Speaker 3

And so that's really the momentum. And I think what's happening is what you've seen is it's no it's obviously no surprise to anybody in terms of our protein cycles around particularly around BFR. But what you're still seeing is strong retail demand. And so you're seeing a lot more exporting activity right now happening across the globe as a result of that. As you think about the major industrial food processors trying to make sure that they're getting the right supply to where the strongest demand is.

Speaker 3

And so we're obviously helping them through that. So I would say that's the biggest area. And as you go back to protective, I'm talking about some of the areas that were better in Q1. We're really strong around our APS offerings where we talked about a lot during 2023, some of the destocking activities that happened. There's still some of that in EMEA, but in general, we talked about strength in Americas as well as Asia Pac, again APS plays a part in that.

Speaker 3

Our box rightsizing solutions performed very well. But we also have pockets of green shoots and think of it as strength films, inflatables and a couple of the areas that we're inflecting back to positive volume. So again, we're remaining cautiously optimistic. If you look at kind of the outlying periods for protective, you're going to see volume kind of improve. Q2 will be very similar to Q1, but then Q3 and Q4, our expectation right now is that business will continue to inflect.

Speaker 3

And on food, Q2, you're looking at a little bit of flattish volume, going back to the reasons we discussed earlier, but then that Q3 and Q4 will be strong, kind of low single digit volume growth driven off the back of those wins and just the momentum that's building in that broader business.

Speaker 2

Yes. And then jumping in on the digital automation, again, as we said, we will talk more about this in future calls, but let me just hit a couple of those highlight points to you, the things that we already started discussing in the last quarters. So first one on automation. So if you think about our business where we build strength is where we have superior materials technology to offer to our customers, the company buys strong automation solutions as well as service. And that's been the drive.

Speaker 2

And we mentioned in the last call that a big where we have gaps in that portfolio is in a couple of areas. 1, if you think on the protective side that we've announced partnerships around getting the 3 d write box solution and we are starting to get some gains from that partnership. 2nd, we announced recently in one part of our road stock portfolio where we've announced a partnership around trays and Overwrap and we are working there with more partnerships to come to complete that offering. But also on the fluid side, on the Liquibox, Liquibox automation sales are very small percentage in terms of the overall portfolio. And there we're working on a couple of partnerships, which we hope to announce in the next couple of quarters around being able to offer full automation solutions.

Speaker 2

So again, if you think about it, our approach to the market is superior materials, automation accompanied with surface. Then jumping in on digital, again, 2 pieces there that we're going to be exploring further in the next upcoming calls. One is on the digital commerce. So today we have about 22% of our sales that are going through that channel. And as we talked in the past, we pivoted from just continuously investing in more capabilities in terms of using the investments we've made to drive into commercial success, both from a top and bottom line.

Speaker 2

And then the second piece that we've talked about, which will come to market in the back half of the year is around our digital printing technology where we're introducing for flexible, shrinkable materials, the first commercial scale digital printing capabilities with water based things. So again, more to come, but those are 2 key pillars in terms of our growth strategies.

Operator

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Edlain Rodriguez with Mizuho Securities. Your line is open. Please go ahead.

Speaker 9

Thank you. Good morning, everyone. So Dustin and Emil, so just kind of looking ahead like the next 2, 3 years, just wanted to get a sense of like what keeps you awake at night? Like what do you see where that has like the most opportunities and what concerns you the most? Like when you're thinking about the business portfolios, again, what keeps you awake at night?

Speaker 9

Or do you sleep like a baby?

Speaker 3

I appreciate the question. So I would say a couple of things. It's what we're really talking about on our call today. A lot of things that we're working on is part of our overall transformation really to address those really maximize the opportunities we have and minimize the risk that we see ahead of us. And if you really think about that and break it down in a number of areas.

Speaker 3

One is we recognize kind of coming off the volume losses in 2022 and 2023 that there was work to be done in the overall cost structure. We feel like we have that well underway and the 78% going to the 90%. The second piece is around the commercial reorganization where there was a sense that we had lost some focus on the overall protective business. We completed that reorganization in the Q1 of the year in February. We're really excited about the traction that's gaining, but that work will be ongoing in terms of us continue to drive commercial execution, commercial excellence.

Speaker 3

And so those areas, we it's too early to call in terms of the intangible benefit that we'll get relative to driving overall growth, but we're quite optimistic already as we sit here in April just a few months away from that initial organization. The second piece is around the overall portfolio, right? And I think that area as we talked about, we're excited about some of the things we're going to drive in 2024, but that work will be ongoing. As you think about completing the portfolio from an overall fiber, it's not just the fiber piece, going back to the earlier question, I believe George had, it's also about making sure that we can commercially execute well in that area, not just across our direct customers, but our channel partners. We're continuing on that work.

Speaker 3

And then we feel incredibly well positioned as we mentioned earlier about some of the sustainability challenges that we're facing on with food and protective, the fiber and protective. But on food, as we talked about earlier today around PBDC and focus on certain plastics, but we feel incredibly well positioned. But we'll have to obviously continue to manage through that transition and from here on.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Gabe Hajde with Wells Fargo. Your line is open. Please go ahead.

Speaker 10

Good morning, Amil and Dustin. I have one confirming question for us nonmaterial scientists on the call. So this PV DC discussion, to be clear, it's a middle layer within a multilayer 9 11 layer film with no direct food contact. And more importantly, yes, prevents contamination, food waste. And you can today change the formulation at your customer request, although it may compromise some of these, again, extended shelf life attributes.

Speaker 2

To answer that question

Speaker 3

sorry, go ahead. Apologies.

Speaker 10

Yes. No, go ahead.

Speaker 3

Yes. So to answer that question, the answer is yes. It's a thin barrier level that manages oxygen transmission rate within our multilayer films. To be clarified, we already offer both today, right? And it's really based on customer preference market need.

Speaker 3

And so at any point, if something changes from a regulatory environment, we'll be well positioned to manage that transition. But it's already offered today. It is that there's no food contact associated with it. It's obviously fully FDA compliant.

Operator

Thank you. And one moment as we move on to our next question. And our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open. Please go ahead.

Speaker 11

Yes. Thank you. I appreciate you guys getting back in the queue. I guess,

Speaker 2

I wanted to just get

Speaker 11

an update on price cost. Certainly, there is still pricing pressure in Protective as well as food. But just price if I'm looking at the business of the quarter, price cost seems like it was a much smaller drag on the business year on year than maybe had been previously contemplated? And maybe put another way, can you help us bridge some of the year on year margin expansion in the protective business? And just help us think about where volumes were still negative.

Speaker 11

Help us think about how you got that much kind of leverage and EBITDA expansion in the on protective side? Thank you.

Speaker 3

Adam, great question. And I'll start with just kind of giving you a bridge holistically around net price realization. So I appreciate the question. And just to start there, we expect net price realization to be in the order of magnitude around $80,000,000 negative year over year, right? That's about $140,000,000 of price offset by benefit and direct materials of about $100,000,000 and then offset by some of that inflationary, albeit much smaller than prior years around think of it as labor and nonmaterial cost as well.

Speaker 3

So it's about negative 40. I guess you to that negative 80. That's actually about $15,000,000 worse than we had originally anticipated and a lot of that's coming from a little bit of, I'd say, increased price pressure that we see overall. And that's being offset by the productivity benefits more broadly in the business. Not because keep in mind, while we're driving our caustic up to grow program, which is restructuring holistic business, we're always continuously driving productivity in the underlying business.

Speaker 3

And a lot of what you're seeing in protective, if you go back to that cost takeout program, you go back to Q1, which keep in mind was a very low quarter in 2023 for Q1 specifically for protective, that a lot of the actions that we've been taking in terms of cost control, productivity, footprint rationalization, SG and A optimization have all really been targeted in that effective business and that's why you're seeing some of the benefits you're seeing today.

Operator

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Christopher Parkinson with Wolfe Research. Your line is open. Please go ahead.

Speaker 3

Great. Thank you so much. Can you just take a step back and just looking at some of the businesses that you're referencing and the movement in food and improvements, Can you just take a step back and talk about a little bit more how you are thinking about your product portfolio? What you're seeing by geography? Obviously, there's been a lot of noise across protein markets the last few years.

Speaker 3

It seems like things are turning generally for the positive, but I'd love to hear your perspective on how confident you are to fully benefit from these improvements or at least stabilization, let's say, for the balance of 24? Thank you. Yes. Thank you, Chris. And so I'll start with Food and I'll move to Protective.

Speaker 3

And so we feel really strong about Food holistically. Going back to where our strength is, we continue to be the market leader in our overall bags business. We continue to gain share. We're really good about that outside of kind of the market ebb and flows on kind of global proteins, particularly as it relates to fresh red meat, specifically beef. And in this note, we've talked about the fact that this year is obviously a down year in the cattle cycle and it's going to take a couple of years to work through that.

Speaker 3

But we feel really good about our placement from a portfolio perspective. And again, it's that combination that drives it around material science, automation as well as technical service. When you think about it, when we talked about in Q1 or excuse me, during Q4 earnings call and what we're still focused on and Emile alluded to it a little bit earlier is really rounding out our roll stock portfolio. We see that as an area of continued growth. Rob, we're not the market leader in that space today and that's part of what creates a much larger market as well, much more fragmented.

Speaker 3

And so we feel our focus from a portfolio perspective is continuing to round out that offering set and make sure that's competitive in the marketplace. And so we're targeting specific applications that we're going after. An example would be today the strength of our poultry business, but extending that into other areas. Then when you move to another 3rd piece just from a category perspective is the trends, right? We see a huge opportunity, think about sustainability themes around EPS, that kind of the bands coming in place for that, the post war trade relaunch.

Speaker 3

But there's many other formats from a trade perspective that we're working on that we're excited about. And so we continue to see that as a potential opportunity to just true net new growth going forward. And think of that as multiyear beyond just 2024 but into 2025 and 2026, right? And then as we shift gears and you go to protective and you think about the portfolio there, it really is that completion of in completing the overall fiber based portfolio and continue to extend some of the automation capabilities that we have. And the focus there, Emil alluded to it earlier around the paper mailers, which is huge opportunities.

Speaker 3

You think about the e commerce trends around a shift away from boxes into mailers more broadly. If you think about we talked about 2 d rightsizing that we already have today, 3 d that we're beginning to generate sales on that will come into play in the second half of the year. It's those areas that give the optimism. The area that we're still looking at and cautiously optimistic about is the rest of that broader portfolio. Think of it as utility, I think it's classically bubble wrap, foam, etcetera, where you still see kind of weakness in Q1.

Speaker 3

And a lot of the channel checks doing and talking to our distributors kind of as you think about the rest of the back half of the year, they continue to be no different than we talked about in Q4, optimistic about the second half, but no one at this point in time true line of sight, right? So that's the area that we're continuing to work and gain momentum. And I want to turn to Emile.

Speaker 2

Yes. Just going to add one area that we haven't talked a lot about the last months, but it's on the Fluids segment as well. We continue to be excited about the Fluids segment and the growth there, be it through some of our innovations around flex prep for the food service area. But also if you think about it holistically with all the sustainability and recycling pressures out there, there's going to be more and more pressure for people who are in rigid business, be it plastic or non plastic to go towards flexible. So we're well positioned in terms of not only driving growth through our own innovations, but also how do we take advantage of those sustainability trends to penetrate further in terms of rigid to flexible conversion.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Anthony Pettinari with Citi. Your line is open. Please go ahead.

Speaker 12

Good morning. Dustin, on the last call, you talked through the net pricing outlook for 2024 and I'm just wondering if there's any update on those items. I think you talked about $60,000,000 negative net price and with some moving pieces from raw material prices and the bonus pool restoration. So I'm just wondering if there's any material changes there. And then the $20,000,000 EBITDA drag from net price in 1Q, was that in line with your estimates, better, worse, any thoughts there?

Speaker 3

Yes, great question. So I mentioned this a little bit earlier and I'll break down kind of where we're at today. We're about $15,000,000 worth $15,000,000 to $20,000,000 year over year. Our net price realization is driven primarily the increase in pressures a little bit from a pricing standpoint. We're roughly negative $140,000,000 of price offset by $100,000,000 of benefits of direct material cost.

Speaker 3

And then that's being offset by inflationary pressure and non material, non labor cost as well as labor cost. And that kind of brings you back down to roughly a net $80,000,000 number for the full year. Q1 was really driven by so that's net price realization. We feel good about that for the remainder of the year as we kind of manage throughout this. And again, we're obviously really focused on cost control right now.

Speaker 3

When you think about Q1, the benefits in a lot of ways was just kind of the performance from a volume perspective, the leverage that drives the business. We've talked about it, but not enough in the sense of that is as volume comes back and it's restored, particularly you've seen the food in Q1, but you're seeing it even somewhat protective as that business has stabilized is that you're seeing that the ability to have been the business to drive leverage in it, operating leverage. And then that's also benefiting from just continued focus on CTO to grow, being cost conscious, broader productivity benefits in the business and you saw that materialize in Q1, right? And so from a bonus restoration perspective, it's really just in line right now for the full year. So we're still driving towards you still have that impact.

Speaker 3

That impact is already embedded in everything that we just talked about in our guidance as well.

Operator

Thank you. And one moment for our next question. And our next question comes from the line of Yaron Viswanathan with RBC Capital Markets. Your line is open. Please go ahead.

Speaker 13

Great. Thanks for taking my question. I guess I just wanted to come back to a similar line of questioning around the bridge. So my understanding was, you're expecting about plus $90,000,000 from cost takeout to grow. And it sounds like you're now expecting minus $80,000,000 for net price cost.

Speaker 13

So that's a plus 10 net. And then you have the minus $60,000,000 for incentive comp. And so that's a minus $70,000,000 net. And so when you think about volume, looks like if you think about flat volume, really it would be kind of negative volume that would get you to that kind of flattish EBITDA year on your outlook. So could you just update on how you guys think volume should progress from here?

Speaker 13

I know food outperformed a little bit, but protective is still down. It looks like it's down about 22% on a 2 year stack. So does that kind of flatten out as you move forward? Or how do you think about volume and relate that to the bridge? Thanks.

Speaker 3

Sure. Yes. So I'll come back to the bridge as a last point. But just talking about volume progression throughout the year, if you look at the total company level, right, and you think about how volume is going to continue to progress, if you think about right now today, we drove about half a point of growth in Q1. And then if you think about as you go to Q2, we're down about a 0.5 and then you're going to expect the rest of the second half of the year really in this think of it as total around 2%, 2.5% per quarter.

Speaker 3

That drives you to about a point of volume growth in the full year. It's really being driven all by food. So if you break it down by overall businesses and you go back to food for a second, food volume you're looking at 3% and that's the strength that we talked about earlier today at length. And if you think about Q2 is flattish for the reasons that we've already outlined And then those wins coming through in the broader business, you're looking at low single digit growth that gets you to about 2% to 3% for the full year. And then if you go to Protective, Q2 is going to be a similar result.

Speaker 3

It's improved year over year from Q4. So if you think it was down 5%, now you're down 4%. It will continue to be down 4% in Q2. Then as you get to the second half of the year, it begins to improve, right? And we talk about that to where we think that it will inflect kind of during the Q4 timeframe, right?

Speaker 3

So if you think about bridging for the full year holistically, that net price realization of negative $80,000,000 that we talked about the plus $90,000,000 then you have a negative $40,000,000 roughly rate of the bones restoration and a positive $20,000,000 related to volume and these are all again rough numbers.

Operator

Thank you. And one moment for our next question. Our next question comes from the line of filling G with Jefferies. Your line is open. Please go ahead.

Speaker 14

Hey guys, congrats on a strong quarter in a choppy environment. I guess my question is on productive. Looks like volumes have stabilized, but you did call out perhaps EMEAs, little weaker, you're seeing some destocking and sustainability pressure. Is that a material risk and how to think about your demand profile this year? Appreciating comments around being refocused on the commercial team on protective and kind of driving fiber on the protective side.

Speaker 14

How does that margin profile look and aspiration when we think about 2025, give us some perspective is how big this could be and when we look at the recovery next year, are some of these headwinds that you've called out limiting your ability to grow or we should see a typical recovery in that business like we've seen in past cycles?

Speaker 3

Yes. So a great question. And I'll start with the EMEA comment and you're right, we did rightly call that out. It was down significantly in Q1. And really that's an extension coming out of 2023, where I would say if you go back to 2022 where the volume really came down that business, EMEA came a little bit later in that cycle in terms of volume decline.

Speaker 3

And it's kind of think of it as last in and last out relative to this. So as we progress, we see Q1, we see that business substantially improve as we go to Q2, Q3 and Q4. The sustainability pressures are still being overall we did make the comment around the acceleration and the acceleration is that shift to fiber where you see it more quickly happening within the EMEA business than you do you see it relative to our Asia Pac or obviously our U. S. And North American business or Latin American business.

Speaker 3

And right now we don't see that because keep in mind our EMEA protected business is, I want to say roughly 20% of the total protective business that we see. 1, the work that we're doing from an overall portfolio perspective will allow us to begin to participate in a more meaningful way in the growth in that transition, which will help offset some of the sustainability pressures that we just discussed. And then more broadly, we still believe that business is set up for a cyclical rebound. I go back to we're anticipating an L shaped recovery. We're still expecting that throughout this year.

Speaker 3

A lot of that will be dependent on how we perform in the second half. And as we mentioned on the kind of prepared remarks, obviously, we're looking forward to come back in that discussion in August and that give you more clarity because again, we still are operating in a low visibility dynamic environment. But there's nothing from our point of view as we think about the underlying market growth trends that come with a rebound that we should be able to participate in that, albeit in EMEA as an example, maybe at a slightly lower rate until we get our portfolios out of where we need it to be.

Operator

Thank you. And one moment for our next question. Our next question is a follow-up question from George Staphos with Bank of America Securities. Your line is open. Please go ahead.

Speaker 5

Thanks so much. Hi, guys. I just want to come back to my earlier question and it's really around what are your customers asking you in particular in both segments relative to your product offerings? I know it's kind of a broad question, but within Protective, do you see any difference between what your smaller distributor customers are asking for from Sealed Air relative to the larger ones? So for example, are the larger ones really more focused on fiber and the smaller guys are really more focused on pricing or service?

Speaker 5

Is there a way to differentiate and in turn kind of I know it's in your guidance, but what's it costing you? And then when you get that fixed, maybe piggyback a little bit on what Phil was getting at, what's the uplift? When you get that resolved, what does that mean in terms of revenue and earnings? Similarly, in Food, we know you have the product offering that you think you need. We know that customers basically dictates whether they want PVC or EVOH or any other barrier layer in their bags or whatever.

Speaker 5

Do you have given your portfolio right now, basically offering whatever the customer is, if they want to pivot to some other structure, you are not constrained from a supply chain standpoint, you can offer whatever they want and not have it impact your earnings or would it? Thanks. And I'll turn it over and good luck in the quarter.

Speaker 3

Yes. Thank you, George. So to come back to the point about protective, I would say that keep in mind when you think about our distribution footprint, your larger distributors tend to kind of offer the full breadth and depth of the entire portfolio where you could have regional distributors offering different pieces of it not holistically. So some of the needs are dictated by obviously the pieces of the portfolio that they all collectively sell. And I would tell you in general, there is a desire to have a broader fiber footprint, which is what's leading to us means.

Speaker 3

Obviously, customer feedback, whether it's directs or within our distribution that are leading us to kind of think about and shape our overall portfolio, where are they seeing demand where we don't have it right now more broadly? And so I think that that's really been the focus area. And going back to your question around the intangibility, well, I just want to hit come back to that one point. You also made a comment about is service different, etcetera. It depends.

Speaker 3

It really depends again on the portfolio itself because the service models that you have are really structured around those individual areas where if somebody is selling a lot more of automation portfolio, you're obviously going to have a lot more technical service as it relates to servicing those machines, but it's really dependent on that portfolio mix. So what we're focused on is getting that optimum mix in each individual distributor and then the rest of it will kind of follow suit. I Again, our technical service has always been a bright spot in terms of competitive differentiation and it continues to be in our distribution as well as direct customers recognize that. When you think about our overall Food business more broadly, I think that a couple of comments I would make. The answer is yes.

Speaker 3

We obviously offer both today. Our customers dictate what they want in that portfolio. We feel really good about because specifically the question you asked about really relates to our shrink bag business. And we feel well positioned to continue to offer either type of materials or bags that they would like at any given point in time. And so we're in constant dialogue, no different than our distributors.

Speaker 3

We're in constant dialogue and know myself with our direct customers, our largest customers to really understand what their needs are, how sustainability pressures are shaping their thinking around their overall needs in terms of what's also important for their supply chain. Because I'll tell you that's the most important part. A lot of these those discussions are less about sustainability and more about performance, and we continue to be well positioned there. It's roll stock that we mentioned that we need to continue to do more work. And then again, we're really excited about the play that we have with our fluids and liquids business and the opportunity that presents to continue to displace rigid from an application perspective.

Speaker 3

And so I feel really well positioned there. Right now, going back to your question about cost, it is embedded and there's nothing in our portfolio. If you think about it over time, this isn't the first time that we've had some type of pressure, we've shifted our portfolio navigated these type of scenarios. It's embedded in our earned capital outlay for 2024 and it's part of our broader kind of as we think about kind of getting to where we need to from a deleveraging standpoint in 2025, it's embedded in that as well.

Operator

Thank you. And one moment for our next question. Our next question is a follow-up question from Gabe Hajde with Wells Fargo. Your line is open. Please go ahead.

Speaker 10

Thank you for taking the follow-up. We didn't spend a whole lot of time talking about automation. Emile, you kind of teased out that you guys will be, I guess, updating us in the second half in terms of strategy or resources there. But just was that a drag here in the first half? We're reading a lot about delayed CapEx projects from just industrial companies in general, lack of visibility, higher costs, financing costs, etcetera.

Speaker 10

And then just kind of what the book to bill ratio has been trending like? And then could that be things normalize in the 2025? I think on the food side, your customers are pretty well incented to use your equipment. Could that be kind of an incremental tailwind for you in 2025?

Speaker 2

Thanks. Yes. Thank you for that question. So actually, we did say in our prepared remarks, actually in the Q1, we saw in the food business our automation sales up double digits. But for the year, we're still in line in terms of where we guided.

Speaker 2

It is going to be flattish driven by all those factors that you highlighted. In terms of book to bill ratio, we're at 1, right. So some of that is burning through some of the backlog. So again, there are hesitations out there in terms of triggering investments from our customers. But if you look at our customers' profitability profiles, it is significantly improving.

Speaker 2

So we are still optimistic about the future. But this business, as you can imagine, is lumpy in terms of when exactly it comes, when you install, when you can recognize the revenue. So again, our outlook on automation for this year has not changed. We're off to a good start. And we do believe that cyclicality will come back and we're going to be ready to take advantage of that.

Operator

Thank you. I would now like to hand the conference back to Emile Sharma for closing remarks.

Speaker 2

Thank you. I'd like to thank everyone for their time today. And just to reiterate, we are pleased with the Q1 results and we're excited about the momentum building in the business and the progress we are making on transformation. And we look forward to speaking to all of you again in August. Thank you.

Speaker 2

Yes. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Sealed Air Q1 2024
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