Sealed Air Q4 2022 Earnings Call Transcript

Participants

Corporate Executives

• Brian Sullivan, Executive Director, IR & Assistant Treasurer
• Edward (Ted) Doheny II, CEO & President
• Christopher J. Stephens, Jr., SVP, Chief Financial Officer
• Emile Chammas, SVP, Chief Operating Officer

Analysts

• Arun Viswanathan, RBC Capital Markets
• George Staphos, Bank of America Co.
• Ghansham Panjabi, Robert W. Baird & Co.
• Phil Ng, Jefferies Financial Group Inc.
• Anthony Pettinari, Smith Barney Citigroup
• Angel Castillo, Morgan Stanley
• Adam Josephson, KeyBanc Capital Markets
• Adam Samuelson, The Goldman Sachs Group, Inc.
• Lawrence De Maria, William Blair & Company

Presentation

[Operator]

Good day and thank you for standing-by. Welcome to the Fourth quarter and full-year 2022 Sealed Air Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded.

I would now like to hand the conference over to your speaker today, Brian Sullivan, please go-ahead.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Thank you and good morning everyone. With me today are Ted Doheny, our CEO, Emile Chammas our COO, and Chris Stephens, our CFO. Before we begin our call, I would like to note that we have provided a slide presentation to help guide our discussion. Please visit sealedair.com where today's webcast and presentation can be downloaded from our Investors page.

Statements made during this call stating management's outlook or predictions for future periods are forward-looking statements. These statements are based solely on 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. 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 the reconciliation to U.S. GAAP in our earnings release. 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.

I'll now turn the call over to Ted. Operator, please turn to Slide 3. Ted?

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Thank you, Brian, and thank you for joining our call today. Today we'll discuss our Q4 and year-end results, our 2023 outlook, reinvent SEE 2.0 and our acquisition a Liquibox. After that, we'll open up the call for your questions.

Starting on Slide 3, the graphic is showing where we're taking packaging with automation, digital and sustainability solutions. We start with our purpose. We are in the 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 company partnering with our customers on automation, digital and sustainability packaging solutions.

Moving to Slide 4. We're excited to announce that on February 1, 2023 earlier than originally anticipated we completed our acquisition of Liquibox, a global leader in sustainable packaging for the fluids and liquids industry, and the pioneer innovator of bag-in-box solutions. Fluids and liquid is our fastest-growing and highest-margin product-line within our CRYOVAC portfolio. This is a fast-growing attractive market for us as flexible packaging is disrupting the rigid container market. Liquibox springs to see new competitive capabilities and is highly synergistic with our existing business. The combined Liquibox and CRYOVAC business in 2023 is expected to exceed $600 million, representing more than 10% of our portfolio. Our plan is to turn the fluids and liquid business into a $1 billion vertical by 2025 with an operating leverage of over 40%.

Liquibox will enable us to open significant new opportunities for growth in areas like ready-to-drink liquids, wine and spirits, consumer packaged goods, quick-service restaurants and other attractive spaces as the best suitable and cost-effective alternative to rigid containers. The combined business will leverage upon CRYOVAC technologies for freshness and shelf-life extension, broad market access and global footprint.

To the question of why now, we've been investing in this attractive space for quite some time. Our team identified Liquibox as a prime target in our M&A pipeline and the most coveted asset in the fluids and liquid space. As the window of opportunity was getting closer, we pre-empted a potential auction process. We quickly close the transaction within three months, two months earlier than originally anticipated. I've appointed Emile Chammas, to lead the fluids and liquids vertical, deploying our proprietary integration playbook, delivering on our target revenue ambitions of greater than $1 billion and achieving cost synergies of approximately $30 million before year three. Under Emile's leadership SEE's and Liquibox's cross-functional teams are highly energized to implement the plans they have been jointly developing.

Let's turn to Slide 5, which highlights how we're moving to be market-driven, customer-first company, fueled by our iconic brands. Our solutions focus on automation, digital and sustainability, create value for our customers by improving their productivity, sustainability and enhancing their competitive advantages while allowing SEE to deliver growth faster in the markets we serve. Our digital online sales have now ramped up to 10% of our total sales in Q4, doubling that from Q3. This digital transformation will be a driving force behind the evolution of our go-to-market strategy in source of new innovation, while enabling us to reach more customers effectively and efficiently.

Our online sales platform, MySEE empowers us to reach new customers and new geographies for highly profitable BUBBLE WRAP Inflatable solutions. In the quarter we converted two of our largest distributors to online partners to make this happen. Our CRYOVAC's fluids and liquids business grew over 20% in 2022. Now with the addition of Liquibox, we expect this new vertical to be over 10% of our portfolio with a 40% operating leverage. The fresh proteins we saw retail going down in Q4 driven by declining customer spending. Consumers are trading down from premium proteins and customers are working through excess inventory.

Leading with SEE automation, we were able to win with major customer conversions. Fulfillment, industrial and especially electronic markets were significantly down in Q4, destocking amplify this trend. The outlook for these markets is to stay challenged in the first-half with a rebound in the second half of 2023. We plan gains from new innovations in automation that were constrained over the past 24 months. Following our investments to double capacity, including our new developments in fiber-based solutions we're well-positioned for growth in the second-half of 2023. We're excited about the recent launch of our new line of paper BUBBLE WRAP mailers and high-recycled content content BUBBLE WRAP filler solutions.

Moving to Slide 6, following, the success of Reinvent SEE we now advance to the next phase of our transformation with Reinvent SEE 2.0, moving from the best-in packaging to a digitally driven world-class automated solutions company. Starting in 2018 Reinvent SEE built and solidify the foundation for the next phase of SEE's journey through development of the SEE operating model and our growth platforms, including leading with automation, digital and sustainability. Reflecting on the last five years, we've met or exceeded our operating model targets, sales growth has compounded at 5% versus are 5% to 7% target, adjusted EBITDA has been 8% versus our targeted range of 7% and 9%, adjusted EPS growth has compounded at 18% versus our goal of over 10% and we've averaged 89% free-cash flow conversion over the last three years.

2022 was challenged on free-cash flow with the building of working capital as we fought through supply constraints and volume headwinds. Reinvent SEE 2.0 focuses on high-quality, profitable growth and improved productivity. The Liquibox transaction accelerates our growth platforms, highlighting our transformation from product to customer-first solutions approach. Our digital transformation will empower us to attack new areas of opportunity and will drive profitability through accelerating the use of automation in our own operations. By moving the business online, we'll focus efforts to grow faster than the markets we serve through a simplified, more digitized organization, reducing our cost structure by $35 million to $45 million over the next 12 to 18 months.

Let's now discuss how Reinvent SEE 2.0 will fuel our SEE operating engine. Turning to Slide 7, we've updated the SEE operating model out of 2027 with Reinvent SEE 2.0 targets. On the left-side of the slide we outlined SEE operating model growth assumptions. In 2023, we expect a flat growth performance despite a 3% market decline. The downturn in the first-half will be recovered by a strong second-half. Liquibox were at 6% profitable growth to the total SEE for the full-year. We are confident our SEE operating engine will convert sales at more than 30% operating leverage, resulting in continued margin expansion. The combination of the SEE operating engine, our high-performance culture, digital transformation, fleet of acquisitions and strong free-cash generation will deliver world-class growth and returns in the next 5 years.

Let's turn to slide 8 to discuss Q4 and full-year results. In the quarter, on a constant-currency basis, net sales were down 4% and adjusted EBITDA was down 7%. Despite the tough environment, we maintained adjusted EBITDA margins above 21%. On a full-year basis and constant-currency net sales were up 6% and adjusted EBITDA was up 10%. Our margin expanded by 110 basis-points, setting a new record in earnings for SEE.

Adjusted earnings per share in the quarter of $0.99 were down 7% compared to a year-ago and up 20% for the full-year of 2022 on a constant-currency basis. Free-cash flow through Q4, though disappointing was a source of cash of $376 million. We continue to invest in our people and our business as we accelerate our journey to world class.

Moving to Slide 9. We updated our SEE automation growth plan. Full-year 2022 automation sales were up $475 million, up 10% in constant dollars. In Q4 we had a record quarter with equipment sales of 24% year-over-year, driven by food equipment, which was up 30%. We continue to work with our customers to deploy automation solutions that create savings and fast returns by addressing labor shortages, inflation, safety and productivity. Our bookings continue to outpace revenue for 2022 and though supply shortages linger we expect to deliver double-digit growth in 2023 to achieve revenues greater than $525 million.

We are aggressively expanding our SEE Automation Solutions portfolio and driving faster growth by integrating equipment and technologies like robotics, vision systems, digital printing from a network of strategic suppliers. In 2023, we're expanding our SEE Automation solutions in auto bagging, filling and boxing with a respected fiber-based materials.

Now, I'll turn it over to Chris, who will review our financial results in more detail.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

Thank you, Ted and good morning everyone.

Let's start on Slide 10 to review our fourth quarter net sales of $1.4 billion by segment and by region. In constant dollars, net sales were down 4% with 4% growth in Food, while Protective was down 15%. By region, we grew EMEA by 5%, offset by a decline declines in Americas at 7% and APAC of 3%. In constant dollars, full-year net sales were up 6% to $5.6 billion. Food was up 11%, while Protective was essentially flat. By region, we were up 6% in Americas, up 7% in EMEA and up 2% in APAC.

On Slide 11, we summarize our Q4 and full-year 2022 performance. Primarily driven by inventory destocking and lower demand in our Protective end-markets and FX headwinds, we had a challenging fourth quarter with sales down 8% as reported versus Q4 2001. However, for the full-year, we delivered reported sales growth of 2%. Q4 adjusted EBITDA of $297 million decreased $33 million or 10% compared to last year with margins of 21.1%, down 40 basis-points. For the full-year, adjusted EBITDA grew 7% to $1.21 billion with margin expansion of 110 basis points to 21.5%. This performance was driven by positive net price realization, which we define as year-over-y-ear price realization, less than inflation on direct material, freight, non-material and labor costs as well as productivity gains, which more than offset lower volumes, higher operating costs and unfavorable FX impacts. As it relates to adjusted earnings per diluted share in Q4 of $0.99, our adjusted tax-rate was 26.1% compared to 26.2% in the same period last year.

On a full-year basis, our adjusted earnings per diluted share was $4.10 with an adjusted tax rate of 25.4% compared to 26.1% in 2021. We had no share repurchase activity in Q4, but, repurchased approximately $280 million or 4.5 million shares in 2022. Our weighted-average diluted shares outstanding in Q4 2002 was 146.1 million and 147.1 million for the full-year. At year end we had $616 million remaining under our authorized share repurchase program.

Turning to quarterly segment results on Slide 12, starting with Food. In Q4 Food net sales of $874 million were up 4% on an organic basis, which consisted of 7% price realization to help offset inflationary pressures across all cost categories and volume declines of 3%. Food adjusted EBITDA of $202 million in Q4 increased 2% in constant dollars, compared to last year with margins at 23.1%, down 20 basis-points. Protective Q4 net sales of $532 million were down 14% organically, with price realization of 6% being offset by volume declines. We expect market contractions in the negative economic outlook to continue to put pressure across our Protective fulfillment and industrial end-markets in the first-half of 2023. Protective adjusted EBITDA $102 million was down 15% in constant dollars in Q4 with margins at 19.2%, only down 10 basis-points despite the end-market weakness and customer destocking activity.

Looking at Slide 13, we can see full-year segment results starting with Food. Food net sales of $3.3 billion were up 11% on an organic basis, which consisted of 13% price realization to help offset inflationary pressures and volume declines of 2% overall. For the year, adjusted EBITDA of $755 million was up 13% in constant dollars with margins of 22.8%, up 70 basis-points. Food automation sales for the year, which include equipment, systems, parts and services account for approximately 8% of segment sales, were up high-single-digits. Protective net sales of $2.3 billion were up 1% organically, with price realization of 12% being offset by volume declines of 11% in the year. Adjusted EBITDA of $466 million was up 9% organically with margins of 20% up 160 basis-points. As for Protective automation sales in the year, which accounts for approximately 90% of the segment sales, they were up double-digits, fueled by our auto boxing solution.

Now let's turn to free cash flow on Slide 14. Full-year free-cash flow of $376 million compared to $497 million in the same-period a year-ago. The $120 million decline was mainly driven by increased inventory, reductions of accounts payable and higher cash taxes, which were partially offset by favorable adjusted EBITDA. With regards to the reduction in accounts payable we expect this non-structural use of cash in 2022 to benefit 2023 as we monetize working capital to drive growth and delever.

On Slide 15, we outlined our purpose-driven allocation strategy focused on maximizing value for our shareholders. We maintain a strong balance sheet, while driving attractive returns on invested capital and supporting profitable growth initiatives. We capitalized on the strength of our balance sheet by engaging our bank group in Q4 in accessing the bond markets last month to successfully finance the Liquibox acquisition. We expect to delever throughout the year estimating 3.5 times or below by the end of 2023.

Let's turn to Slide 16 to review our 2023 outlook. We expect net sales to be in the range of $5.85 billion to 6.1 billion, which at the midpoint assumes mid-single digit growth on a reported basis and low single digit growth organic. We expect Liquibox to contribute between $340 million to $360 million in sales in 2023, 1,003, given the 11 months under our ownership. We expect full-year adjusted EBITDA to be in the range of $1.25 billion to $1.3 billion, which assumed adjusted EBITDA margin of approximately 21%. Full-year adjusted EPS is expected to be in the range of $3.50 to $3.80 assuming depreciation and amortization at the midpoint of approximately $275 million, an adjusted effective tax-rate between 26% and 27% percent, net interest expense of approximately $275 million at the midpoint and approximately 146 million average shares outstanding. The lower 2023 adjusted EPS is largely driven by non-operating items such as higher pension expense of $0.08 and higher base business interest expense of $0.27. And lastly, we expect 2023 free-cash flow in the range of $475 million to $525 million, which implies a free-cash flow conversion of greater than 90%.

As noted in our earnings release, we have reached a tentative agreement to settle the Legacy IRS tax matter related to the CRYOVAC acquisition from W.R. Grace. Our 2023 free cash flow range excludes any potential cash settlement as the tentative agreement is subject to further review and approval. As it relates to Reinvent 2.0, we plan to include both the cost and the benefits in our adjusted results as we accelerate our digital transformation to drive higher levels of productivity and operating efficiency. As we've highlighted before in our SEE operating model on Slide 7, our digital transformation will be driving 1% growth over time by broadening our sales reach, making it easier to do business with us and delivering 30 basis-point operational efficiency gains.

So as we look ahead to 2023, we anticipate continued softness in the first half. We will remain disciplined to drive the necessary actions to preserve our margins and generate strong free cash flow. With the successful integration of Liquibox and the strong value-creation we expect this acquisition to have with our CRYOVAC Brand. At the midpoint of our 2023 sales guidance, we expect to be in line with our SEE operating model sales target of 5% to 7%.

With that, let me now pass the call-back to Ted for some closing remarks.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Thanks, Chris. Before we open up the call for questions, I wanted to share some insights from my travels around the world as we've increased our face-to-face meetings in the post COVID environment. I've been able to meet with our employees, our largest customers and see some of our latest automation solutions in action. It's great to see the progress in our own facilities around the world. Our investments in touch-less automation eliminate billions of touches, while providing higher-quality materials and removing people from harms way.

It's also been uplifting for me to see how embedded we are with our customers in hear firsthand how we help them to incredible challenges in their facilities. It was exciting to see our latest automation solutions in action and hear from our customers, how much they value our partnership. Our automation, digital and sustainability focus is driving value with our customers and our internal operations. Finally, I'm really energized by the cultural fit and working relationship with the Liquibox Bags team as we jointly uncover more opportunities.

With that. I will open up the call for questions, Operator. Victor, we'd like to open up now for the Q&A session.

Questions and Answers

[Operator]

Sure. [Operator Instructions]

Our first question comes from the line of Arun Viswanathan from RBC Capital Markets, your line is open.

[Arun Viswanathan, Analyst at RBC Capital Markets]

Great for taking my question. Good morning. Yes., I just wanted to understand, you're thinking on growth this year. So it sounds like there is some challenges on the volume front, we noted a challenging macroeconomic background. How do you see volumes evolving, I guess, both in Protective and Food as you go through the year you all face some easier comps, I guess in the back-half, but. Maybe we can just start with that. Thanks.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Thanks. Arun. I'll open up with that. And so as we shared in our opening comments, we're seeing the first-half of the year still be challenged on the volumes and bulk business. Starting with the Protective side we have definitely seeing, as you have been seeing in the major markets especially things like things like electronics and e-commerce So, we're still feeling pressure. We're still going to feel the destocking in the first-half of the year into the first-quarter. On the second half of the year, we see a rebound, we still think in our guidance we have our Protective still down a couple of percent, in our guidance, but we definitely think we should have a strong rebound in the second-half of the year. And especially with some of our new products coming in place we think we can power through that. And as we talked about with Reinvent SEE and moving further on digital with their distribution, again I think we have some upside potential.

On the Food side, as we see that shifting with the volumes in the still under pressure, also having a steep destocking, still the same story the first half will be challenged, but we do think we have some significant opportunity for growth in the second half and we're actually guiding to see the Food volumes up a couple of percent. On the Food side as well as the Protective, we really see the automation kicking in. It's still really tough out there for our customers with getting labor, inflation, etcetera. So we see some of that pick up coming in we did this as we highlighted, we had strong automation in the fourth quarter. So we see that continuing into the second-half of the year.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Ok, next question.

[Operator]

Thank you. One moment for next question. Our next question comes from the line of George Staphos from Bank of America. Your line is open.

[George Staphos, Analyst at Bank of America]

Hello everyone, good morning. Thanks for the details and congratulations on the progress through 2022. My question is on Liquibox. Can you talk to the amount of synergies you're building into the EBITDA contribution you expect from the business this year and relatedly Bagging box, you see competition across several key characteristics of the package. Where would you say, whether it's the carton, the valves, the material you're seeing competitors catch up to, Liquibox or were you seeing yourselves putting distance between yourselves and your peers in that market. Thanks, guys, good luck in the quarter.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Thanks, George. I'll open it up. And since I have Emile here on the call. I'll let Emile give some insight to that. As far as the growth on the synergies that we have in the model, we have the $30 million of cost out there, we feel pretty confident on that, Emile can talk to you about that. What we're most excited leading to the second part of your questions of where we see the growth synergies for what Liquibox already has. And in talking with them and learning with them and actually hearing much more in the marketplace, their market position is actually something that we could actually expand. The teams have met with our internal teams of what we're doing on liquids and what we've done, especially with our FlexPrep products and where we've had some significant penetration in the quick-service market. In bringing a full solution we think we could actually extend their market leadership with the two teams together and what I'm excited about just our first month together with team is what the growth opportunities are, but Emile if you want to cover that a little bit.

[Emile Chammas, SVP, Chief Operating Officer at Sealed Air]

Absolutely. Thank you. Thanks George for the question. I guess, just to remind ourselves, we're only a day eight since we closed the acquisition. But, let me address the question in a couple of different ways. First of all, there is obviously the competitive set of Liquibox, but really the piece around that is at $7 billion of addressable market and how we convert rigid to liquids. And within the Liquibox capabilities or strengths around the fitments, the lightweight and down gauging even of existing solutions and it's all about the sustainability LipidPure is a unique product in the markets that allows for the further recyclability. And the team is I've met over the last couple of weeks, pre-close only to certain extent what we could share but since eight days ago, we now can fully work together with team incredibly excited in terms of the opportunities, bringing that Liquibox expertise into the markets and coupling that with Sealed Air's capabilities around extrusion, around sourcing and footprint, so we see tremendous opportunities in terms of the short term ones, leveraging the footprint of Sealed Air on markets where Liquibox is not present today. The customer relationships on both sides to advance the Fluids segment as well as in terms of how we drive the synergies. Since you asked about the synergies, on synergy side we're [Indecipherable]

Obviously the market piece that I've just talked about, but also internally, how do we collectively buy better obviously Sealed Air, as you know George we buy more than a billion pounds resins versus a smaller size of Liquibox, around the Food expertise, this is what's the CRYOVAC extrusion, the thin structure piece of it and then really that company, that small companies have done a tremendous job with the resources they had and now bringing in a much larger company, how we can even accelerate the fact they were in terms of the touch automation within their plans and then bringing them into our digital capabilities in terms of how we go to market using MySEE as well as digital printing. So again day 8, but many grey opportunities that we hope to update you on upcoming quarterly calls.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Okay, thanks Emile. Next question?

[Operator]

One moment. Our next question comes from the line of Ghansham Panjabi from RW Baird. Your line is open.

[Ghansham Panjabi, Analyst at Robert W. Baird & Co.]

Thanks, good morning everybody. I guess first-off back to the 2023 question. How should we think about the weighting between first half and second half on EBITDA and EPS. And then on your 2027 financial targets, which has been obviously very helpful, it's going to keep focused on the algorithm, how you think the waiting changes between Food and Protective from a portfolio standpoint. I guess, I'm just I'm asking because you have so many internal initiatives outlined and acquisitions, etcetera, with the portfolio become more effectively recession resistant than what we have currently.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

Yeah, thanks for your question, Ghansham. So let me maybe address your first part there. So, as we typically do to try to provide, although we don't give quarterly guidance, we try to provide with our investors an understanding of first half and second-half, and we've made some prepared remarks, in our prepared remarks just thinking about the first half softness is what we expect to see. So, talk about maybe 46%-47% in terms of the first half followed by a rebound, an expected rebound in the second-half is somewhat reflected in our guidance for the full-year. And I'll have Ted add some additional color, but as we continue to drive the business in terms of putting expectations out there in our operating model we have 2025, we've now adjusted debt to 2027, main item in there is coming in with the Liquibox being added to our portfolio and the excitement we have in terms of driving that growth and the expectation that automation is going to continue to be a big portion of our overall sales as we pursue that. But Ted, maybe some additional thoughts.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Yeah, Ghansham, on the second part of the question is removing the portfolio as you look at into 2027. So you see the shift in where we're very consciously talking about CRYOVAC and that there are Food business and moving our portfolio, moving it from where it was 45%-55% to now over 60%, the Fluids portfolio, if you look at it being over 10%, it's actually another percent because part of the Fluids is into our medical space. So you can see it's becoming a very strong part of our portfolio going forward and shifting that strong growth to the Food side of the business in our portfolio.

But the other side of our portfolio to highlight, it's in the Reinvent SEE as we drive to digital and the automation, is really looking at our portfolio to be a full automation portfolio. So what does that mean? where we leading with equipment, where we can automate our customer's facility and have that pull through materials. One of our fastest growing product lines has been in the fiber-based solutions, both Food and the Protective, and bringing automation into that space and as Emile was talking about with Liquibox right now, they do very well and we do very well with Bags and now we have fittings, but the box part is, it's a significant opportunity as we bring some of our auto boxing digital technology and to pull that materials through. So the portfolio is shifting in two ways, shifting to be a stronger portion of our portfolio to that very stable, high profitable business as we're adding Fluids, but also, as we continue to shift the portfolio to a full solutions model with that automation and pull-through on materials, So we think exciting for where the portfolio shift.

One other piece Just to highlight, I highlighted in my prepared remarks is looking at the Liquids and Fluids portfolio is now going to be leveraging at a 40%, where the operating engine, despite all of our issues with the engine has been performing and operating at a really strong leverage over and now putting a part of our portfolio that's actually going to be more profitable than the existing base. So that 40% leverage is really going to be driving earnings over the next 5 years.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Okay, next question?

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Phil Ng from Jefferies, your line is open.

[Phil Ng, Analyst at Jefferies Financial Group]

Hey guys, good morning. In your full-year guidance, I believe you're baking in some share gains by few points versus the market. Just wanted to get a handle on what's driving that? Have you kind of recapture some of the share that you may have lost last year on the Food side. It's good to see equipment sales bounced back pretty nicely in the fourth quarter. Are most of the supply chain issues on the equipment side behind you and that's the opportunity as well as the access to materials, I think on the specialty chemicals side?

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Yes, so just to express we were getting ahead on those supply chain issues on the equipment side. So. I think we're in a good shape. I think we can grow that business and you'll see that strong growth coming back and expecting more. The first part of the question, remind me Chris.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

So just thinking through the Food number we talked about.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Okay, the share gains.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

Yeah share gains.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

The share gain on Food. Yes, definitely we see that in our guidance. The part of the Food, we have added 2% for the full-year growth on Food and part of that is the share gain, but on the second-half we see some of that market coming back. We now have that specialty resin that we highlighted before. We're in a really good position with our Food business. I mean our CRYOVAC materials and automation is the preference in the marketplace and as we're driving that, now having the material we think we can get that share back and that's in part of our guidance. That's against a tough first-half outlook. So, short answer is yes, we expect that share gain back, both materials and we expect more share gain on the automation.

[Phil Ng, Analyst at Jefferies Financial Group]

And did [Indecipherable] at this point.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Well, partly we identified that in the fourth quarter, with the equipment coming in that's identifying that that's coming. So part of that strong fourth quarter gain on the equipment, the answer is yes. More to come, more to come. right.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

And then specific on the food side, given the specialty presence, challenges is getting that back online, getting that in place, the business that we have elsewhere for us in terms of dual sourcing or loss of share, we've been making slow gains in the fourth quarter and expect that to continue every quarter as we execute in 2023.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

On the Protective side just if you're asking was focused on the Food, but we also think same thing as we get through the destocking. And again just really highlighting as we move especially where on the Protective side where we have a distribution, moving those distributors to online partners as we go further digital with MySEE, we definitely think we would expand our reach and our capability when we get through some of this destocking on the Protective side. So we think we have some share opportunities there as well.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Okay Next question?

[Operator]

One moment for next question. Our next question comes from the line of Anthony Pettinari from Citi. Your line is open.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Good morning. Following-up on I think Ghansham's question and I appreciate all the detail on first half versus second half, but I am just wondering if you could provide any color or put a finer point on how 1Q EPS might compare to 4Q. You talked about the Protective volume weakness and. I guess the cost saves are more second half weighted and I think you have two months of Liquibox. So just wondering how 1Q EPS might compare to 4Q. And then just some packages have talked about steep slowdown in December but then kind of really strong start in January. I'm just wondering if you saw a similar dynamic across either of your businesses.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

Sure, Anthony. As you know, we don't give quarterly guidance, we would like to give you guys as well as investor is just the feel for the first half and second half, but we definitely from a sequential point of view expect earnings per share in Q1 to be down, going into that's so you kind of from a modeling point of view, think of it as 46%-47% first-half and then, as you may split it, we would expect Q1 to be the softer quarter, given what is going on mostly in the Protective side coming off some pretty strong growth on automation in Q1, don't necessarily expect to see that same level of growth in Q4 in terms of Q1. So anyway, some headwinds basis in Q1 that's is reflected in our view of that first half and second half.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Operator, next question?

[Operator]

One moment. Our next question. Our next question comes from the line of Andrew Castillo from Morgan Stanley, your line is open.

[Angel Castillo, Analyst at Morgan Stanley]

Hi, good morning and thanks for taking my question. I was just hoping we could unpack a little bit more of the kind of 2023 growth, you talked about volumes, but. I guess, if I look at the organic growth that was outlined as maybe -1 to +3 kind of implies flattish to modestly up, and then I think Liquibox contribution, if you just look at the EBITDA margin that business has implies that the EBITDA full-year guide based on those two factors would kind of put you at the high-end of the guide, just with that starting point. So just curious, should we kind of view that as conservatism or is there any other kind of factors that as we think about maybe a more base business kind of flattish and contribution from Liquibox that maybe you're offsetting some of it, whether it's anything on the cost side or kind of costs of ramping up that business or incubating it.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

Okay, thanks for the question, Andrew. So let me get on to a few point, let me unpack it. So we talked about overall Food being up and 23 low-single digits from a volume perspective as well as the price as we continue to benefit from some price actions that we took in 2022 that will continue to benefit us in 2023. That's on the Food side. FX is for both segments, providing some level of headwind when you think about it on a reported basis. But when you get to Protective, Protective is where the pinch point is. I mean, that we saw in the second half of last year we continue that outlook to be negative for us unfortunately in the first-half of this year. So roughly down low single digit growth. We don't expect much in the way of price activity in the first half given where we are recovering the inflationary pressures that we've seen and that will continue to evolve as we execute in 2023. So hopefully that gives you provides a little bit as color.

And then the automation piece is just a overlay and recognize automation for both Food as well as Protective is less than 10% of each segment sales. But that overall growth algorithm growing that business double-digits is what we expect that we shared on Slide, something Slide 9 in our in our earning supplement.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Yeah, and just again to highlight to your second part of your question on Liquibox. So basically the simple story is we're seeing flat years first half being challenged, second half being recovery. So that the question of the conservatism could be is just, are these markets that we're facing in the first-half, are they as tough as we're seeing. The optimism is moving on to the high end of the guide is if we get through that first half we definitely see the opportunity in the second half. On Liquibox alone we saw in the model we put the $30 million of cost out in the first three years. Emile is in the room and is definitely working on the cost side of that, even though he said 8 days, 8 days official, but. I think we really see some good opportunities on the cost out there quick on the Liquibox, but the parts on the Liquibox that we're really excited about is the growth side. That's we're working with the team right now that's been fairly resilient, it's into the markets that we really like with the quick service and is converting rigid container market. So that's really the upside. Can we do more? and I'll just highlight again, if you look at the numbers what we have in for Liquibox that's going to be leveraging better than the rest of the core business. So that's the upside on the earnings and, and just want to highlight it, we didn't mention it, but paying down that debt quickly. That's how we're going to get the EPS back to where the model says, it should be and we want to pay-down that debt very fast and that's what we're focused on.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Okay, next question?

[Operator]

One moment for the next question. Our next question comes from the line of Adam Josephson from KeyBanc. Your line is open.

[Adam Josephson, Analyst at KeyBanc Capital Markets]

Hey, Chris, good morning. Thanks very much for taking my question. In terms of guidance, just a two-pronged question. One is obviously there are cost levers you can pull, and you are able to achieve your EBITDA guidance, volume, and free-cash flow, Obviously, last year were a lot harder for you. How much confidence would you say you have in the various components of your guidance, just given your experience last year, specifically with volume and free cash flow. And just Chris, can you tell me what your proforma leverage is now as well as what exactly your working capital expectations are for the year. Thank you very much.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

Yes, so good. So let me just answer the second-half of your question. I will come back to the overall guidance, but for purposes we anticipate right now Q1 to end at a leverage ratio of roughly 3.5 times, and continue to kind of work that down recognizing our working capital improvements in terms of the normalization that we talked about, getting inventory reduced, selling through that inventory, but then those receivables, we would see that working capital cash generation come through. Using that excess cash to pay down debt, it would be would be priority one. So the overall guidance, as you see on Slide 16, we provide our full-year view, we've got outlook ranges that we'd like to provide to give you guys as well as investors a sense of what we're seeing on the potential downside of our guide versus the upside range and now let's say you can kind of read through them yourself. But specific to your question on sales. We are pretty confident that we recognize the first half, second half discussion.

We discussed for if I break it down on a regional basis, one region I wanted to highlight for us is APAC recognizing China opening up again. And Ted recently being over in Asia just listening to our team over in APAC is that although it is somewhat muted initially we're not too bullish in terms of how quickly that's going to come back, but we would expect second-half improvement out of our business in China to help to help give us some confidence in terms of the top line sales. Food will continue to be resilient regardless of what happens in terms of the consumer behavior in terms of what they choose to buy since we play in most if not all of the proteins. You get to the Protective side, we're hopeful that it's the first half type of situation, every quarter getting better and better in terms of Protective end-markets, but that's a little bit on the cautious side and we talk about the destocking potentially persisting. And then the other element of our four metrics that we provide, you mentioned free-cash flow. I'd say the confidence is pretty high. We saw the reduction in inventory and start to occur second half of the year even more meaningful in the fourth quarter that will continue in the first half of the year and we would expect that, that cash generation would show a better profile than what we've seen in 2022. So that's what gives us confidence. I'd also want to highlight that we're very conscious to make sure when we think about the cost actions, when we think about the investment actions we do not want to starve areas that's going to help our future growth. So capex as an example, you can see, we expect to spend more next year than we did in the prior year. We think about innovation and the things that we're doing with reformulations to be able to meet the markets and meet our sustainability goals, etcetera, etcetera, we are not holding back on investments in our business thrive where we're going.

[Emile Chammas, SVP, Chief Operating Officer at Sealed Air]

Maybe let me just add-on the working capital just to kind of give the confidence. So in a nutshell what happened last year? First six months disruptions across the world on every single category of items we were buying, and our lead times to our customers on many product lines where extended by more than five times the normal lead time. So we have to build the inventory to make sure that we're not starving the growth. And as we go over that essentially, our inventory peaks in Q3 period last year. At the same time the end market started softening, customers started destocking as they saw their lead times were returning back to normal and that's why got caught in that crunch, but from that peak to trough by year end we did take-out more than $150 million in inventory. The second piece is all those materials supply issues are behind us. There is ample supply of materials. The one area that is much better, but still impacts a little bit on long-lead times, that's on the electronics side, but we're managing through that. And so we are going to continue driving our working capital where it is, but that's the short story what happened last year. It wasn't a fluke, couple of things will happen exactly at the same time when we just power through and to make the rest happens. Hey guys, thanks for taking the question.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Next question, operator?

[Operator]

One moment for our next question. Our next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

Yes, thank you and good morning everyone. A lot of ground has been covered, a couple of just cleanup type questions if I may. Maybe first, interested in the new SEE 2.0, the contribution from digital growth is anticipated. I mean so I think what that is doing a pretty meaningful mix driver and how digital plays into your revenue growth and value capture that coming with pretty healthy incremental margins and that's probably being a disproportionate driver of some of the operating leverage that you're forecasting. And then. I just want to be clear on some of the changes in the way guidance is now being couched that restructuring costs are going to be included in the EBITDA guidance, not stripped out as a special Items. So. Chris, there is a $23 million restructuring that's included in 2023 outlook. I just want to be clear that that's in the $1.25 billion to 1.3 billion of adjusted EBITDA.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

Yes, so let me answer maybe the second half of your question, I'll let Ted comment around the digital piece of it, as it is a very much a big portion of what we're identifying as opportunities for Reinvent SEE 2.0. So on the restructuring side, what we've profiled out on page 16 is that restructuring mainly consists of the continuation of Reinvent. The program from several years ago, kind of concluding on that particular transaction as well as some of the restructuring as we've identified on the integration given the M&A deal. What we're specifically identifying to your point is that Reinvent SEE 2.0 costs as well as the cash profile as we continue to execute that over the next 12 to 18 months, you can see what we've targeted for overall structural changes and benefits that will it is currently not reflected in our guidance at the same time, we view it as a potential upside as we continue to manage costs in terms of what is in our control and how we're looking to change the structural dynamic of our company to brought by for margin expansion. So on future calls we will continue to update yourselves as well as investors on how we're executing that particular program.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

And on the digital side, if you look at Slide 7, and as you highlight on 2.0 we're highlighting where digital is hitting on the sales side incremental sales and there's a few things that we would identify as a digital sale. The one that is very clear is when we start bringing our digital printing and actually put digital printing connected to our equipment and adding digital in incremental sales to our automation, digital also shows up as we work with our packaging and be able to actually put digital coding on the coupon on our packaging, letting our customers be able to mark the products as we've talked before about track-and-trace as we get our digital printing deployed around the world. But also the digital is our access to market that going with MySEE, we think we can actually increase our capability. And then the last piece is on the digital printing, especially as we've talked about even with our fiber-based products, they are actually doing the printing with corrugates, fiberboard pulling it in to some of our other solutions. So we think we have some growth opportunities there. So that's that 1% incremental to what we're already doing in the model.

But the second part is also in there that we're putting digital into the savings as we're driving our operating engine as we are creating our digital platform on MySEE, working more effectively and efficiently. Some of our largest customers want to interact with us digitally, just like they've done in the COVID, whether it's designing a product online using our design studio being fully touch less from designing the product and actually sending those digital signals to our factories, extreme but not significant savings to our customers. So it's part of that engine of how we're going to convert those additional sales to a more efficient and effective operation. And it's also connected to the touch less piece that meals team is just really doing some exciting stuff with our factories as we're driving touch-less automation and the digital is a big piece of making all that happened.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Okay, operator. I think we have chance or time for one more question.

[Operator]

Thank you. One moment for our last question. Our last question will come from the line of Larry De Maria from William Blair. Your line is open.

[Lawrence De Maria, Analyst at William Blair & Company]

Okay, thank you and good morning. First a clarification and then a question, 275 D&A versus run rate, it seems like a big jump. Can you just clarify what's in there and why the jump? And then secondly, you highlighted 18% EPS growth CAGR over the prior 5 year. We just did an acquisition, invested heavily in digital, driving automation, but you only claim to over 10% growth, but it seems like the setup for next 5 years is arguably better than it was the prior 5 years. Can you just talk to that and like why it shouldn't be better than over 10%.

[Christopher J. Stephens, Jr., SVP, Chief Financial Officer at Sealed Air]

Sure, let me address your kind of the D&A related question and then we'll get into the growth aspect. So first, as it just relates to the D&A, really reflection of the investments, incremental investments we have made in our business, as you know, we've increased pretty meaningfully the capex profile. In our business. So the jump in D&A is primarily driven by the those investments in the amortization as well. Yes.

[Edward (Ted) Doheny II, CEO & President at Sealed Air]

Okay, so. I'll take the second part. Larry, if you if we look at our operating model slide. So exactly as you said, if you look at that backward slope of the last 5 years at 18% and then you see the challenge we have in 2023 on EPS as Chris has highlighted, specifically, the biggest one being the interest rates and again how do we pay-down that debt as fast as possible. So if you look at the slope of that curve from where it is in 2023 to 2027, it's actually the 15% growth rate, but the target that we had out there is greater than 10%, let's continue to go beat, what we say we're going to do. So it actually the slope of that curve is higher than 10%, but we're also recognizing we took the dip in 2023 to get there. We think the model, to your point, especially as we're adding higher-margin as we continue to have margin expansion we think beating that 10% EPS growth into 2027 is more than possible.

[Brian Sullivan, Executive Director, IR & Assistant Treasurer at Sealed Air]

Well, thank everyone for that ends our call for today. We are, and hope you feel the excitement, we're really excited about the opportunity with Liquibox brings to us and how it's going to accelerate our growth through the future and we look-forward to speaking with all of you in May. Thanks everybody for your time.

[Operator]

[Operator Closing Remarks]