Sealed Air Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 Sealy-Aired Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to one of your speakers, Ms. Lori Chapman. Ma'am, please go ahead.

I hope you and your family are healthy and staying safe. Before we begin our call today, I would like to note that we have provided a slide presentation to help guide our discussion. Please visit our website where today's webcast and presentation can be downloaded from our IR site at stillthere.com. I would like to remind you that statements made during this call stating management's outlook or predictions for future periods of 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 has revised and updated on our quarterly reports on Form 10Q and current reports on Form 8K, which you can also find on our website at fieldair.com or on the SEC's website at sec.gov. We also discussed financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. 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 you referenced throughout the presentation. I will now turn the call over to Ted Rahimi, our President and CEO. Ted?

Thank you, Lori, and thank all of you for joining our third quarter 2020 earnings call. I hope you and your families are staying healthy and safe. As the pandemic continues, our customers are counting on us to get things done. Our employees are delivering, and I couldn't be prouder of their efforts. We're focused on zero harm in everything we do, supporting our customers, executing on our reinventing business transformation, and becoming a stronger and better company. On today's call, I'll recap our third quarter results. I'll share how we're growing in an uncertain environment, and how our global markets continue to evolve. I'll share how our growth strategy is centered around automation, sustainability, and digital. Jim will review our financial results in more detail, and then I will close with a reiteration of how our four Ps of reInvent-C are guiding us in this journey. We will end the call with Q&A. Let's turn to slide three for a recap of our third quarter results compared to last year. Adjusted EBITDA increased 8% on sales growth of 2%. Adjusted earnings per share increased 28% to 82 cents, and in the nine months ending September 30th, we generated $292 million in free cash flow as compared to $110 million in the same period last year. We had a solid third quarter. For the first time in six quarters, Protected delivered year-over-year organic volume growth attributable to strength in e-commerce, fulfillment, and automated equipment. Growth in protective was offset by a modest volume decline in food, which was largely attributable to labor challenges at meat packaging plants and the lagging recovery in food service. Based on our execution, results achieved to date and improved demands in protective We're raising our full year 2020 guidance across all key financial metrics. Let's turn to slide four, which we call our movie reel slide, illustrating our diverse end market exposure and the breadth of our solutions that are supported by our powerful brands. You can see a play button on the slide, which is to encourage you to visit our website, where you'll find several videos demonstrating the value created by our platforms. In the first nine months of the year, approximately 64% of our sales were derived from packaging fresh and frozen proteins, as well as other foods and fluids and goods for the medical, life sciences, and pet care industries. There continues to be an imbalance across the food industry with higher demands in the retail channel, including e-food and e-grocery, offset by restrictions and heightened safety concerns across the food service sector. Also, while many meat packaging plants around the world are up and running, they are not operating at full production rates and are managing labor shortages. We saw an increase in equipment sales in the quarter as a result of our focus on our automation strategy, which I'll highlight on the next slide. These favorable trends were not enough to offset the labor challenges in the food service slowdown at large venues, supporting events, hotels, and restaurants. As we plan for a new normal, we're confident that our focus on automation and sustainability will improve the growth trajectory of our food business and drive sales for our high-performance materials. We see an increasing opportunity to grow food equipment and services, which year-to-date accounted for approximately 7% of the segment sales. We're already working with our customers to optimize their plans with automated solutions that improve productivity while keeping people out of harm's way and addressing sustainability requirements. Approximately 14% of our sales were derived from consumer, retail, and third-party logistics, most of which are goods shipped through e-commerce channels. Demand for our mailers, automated equipment, and inflatables, including our bubble wrap on demand, were exceptionally strong in the first nine months of the year. The surge in e-commerce continues to create demand for our products and services. Our solutions are designed to minimize waste, reduce carbon footprint, increase speed to pack, while at the same time drive to zero harm and address labor scarcity. We are taking our digital printing capabilities to the next level by enhancing our packaging materials, which is important for the at-home buying experience. We continue to shift our portfolio to address the ever-changing needs of the e-commerce channel, which will be a key element of our protective growth strategy. The remaining 22% of our sales serve industrial, transportation, and consumer electronic segments. While these segments improved more than expected in the third quarter, they're still below prior year levels. Now turning to slide five. you can see how we are accelerating our C automation solutions to meet the demand for a touchless environment. This is driving growth for the next phase of our re-invent C business transformation. We have a plan in place to triple the size of our equipment sales, which is now estimated to be 200 million in 2020 to over 500 million by 2025. You can see on this chart how the pull through Our multiplier on services and materials over the life cycle of equipment sales creates tremendous value. We modeled a conservative 3X solutions multiplier to illustrate the $5 billion plus potential opportunity over the 10-year equipment life cycle. With C-Automation, we're taking our integrated solutions approach by eliminating waste, increasing productivity, and keeping people out of harm's way. Our targeted savings for our customers of greater than 30% will ensure an attractive payback for our systems. The implementation of our C-SMART services will enable connectivity to our customer systems and give us the opportunity to proactively and remotely optimize our installed base and machines. Our high-performance materials integrated with automated equipment and services provide a compelling value proposition to the packaging industry. Let me now turn to slide six and give you an update on our leadership actions. We are fully committed to zero harm for our employees, and we're working diligently to ensure strong alignment with our customers, suppliers, operations, and the communities where we live and work. Our local, regional, and corporate crisis management teams remain proactive, and our business continuity plans are still in effect. We've had numerous challenges to overcome, but the disruption to our operation has been minimal, and our global scale has mitigated business continuity risks. We recognize our new normal will be here for the foreseeable future and have been improving productivity across our geographies, supply chain, and product portfolio. We are investing in e-commerce and digital platforms and capabilities to ensure connectivity. We believe these investments will be a growth engine for us in the future. I'll now pass the call to Jim to review our results in more detail. Jim? Thank you, Ted. Let's turn to slide seven for a review of our year-over-year net sales by region. In the third quarter, net sales totaled $1.2 billion, up 2 percent as reported, and up 3 percent in constant dollars. In constant dollars, North America Our largest region, representing 60% of our sales, increased 3%. Asia Pacific was up 1%, and EMDA was flat. South America was up 13% due to U.S. dollar index pricing. On slide 8, here you see our organic sales volume and pricing trends by segment and region. In the third quarter, Volume overall increased 1%, with 4% growth in protective and a 2% decline in food. By region, North America was up 2%, APAC was up 1%, and EMEA and South America were down 2% and 3%, respectively. Volume in protective was driven by strong growth in e-commerce and fulfillment of about 15%. partially offset by a 2% decline in industrials, both of which exceeded our expectations. North America and APAC delivered 6% and 8% volume growth, respectively. This was partially offset by a 5% decline in EMEA, where we have more exposure to the industrial sector, particularly automotive. In food, volume declined in all regions. North America declined 2 percent, EM, EA, 1 percent, and both South America and APAC were down 4 percent. While equipment was strong, labor challenges in meat packaging plants and the slow recovery in food service weighed on our volumes globally. South America was also impacted by the soft economic environment in the region. reducing local consumption of fresh red meat. And APAC, herd rebuilding on Australia impacted volumes as well. On slide nine, we present our year-over-year consolidated sales and adjusted EBITDA bridges for the third quarter and first nine months of the year. Organic sales in the quarter were up 1%. with higher volume contributing $8 million to the top line. Acquisitions added $24 million, or 2%, which was the month of July sales from automated packaging systems. This acquisition closed August 1, 2019, so sales for the months of August and September 2020 are included in our organic results. negatively impacted sales in the quarter by 12 million, or about 1%, mostly due to year-over-year declines in the Argentinian peso, Brazilian real, and Mexican peso, partially offset by a stronger euro. Adjusted EBITDA of 259 million increased 18 million, or 8%, compared to last year with margin up 120 basis points, to 21 percent. Reinvestee benefits totaled $32 million in the quarter, $29 million in operating cost savings, and $3 million in price-cost spread improvements. Operating costs in the quarter included labor and other non-raw material cost inflation of about $13 million and higher incentive-based compensation of $6 million. We also incurred $4 million of incremental spending related to COVID-19, which was offset by lower travel expense. Adjusted EBITDA continued to benefit from favorable price-cost spread movements this quarter by $9 million. However, with resin prices increasing, we expect this trend to change in the fourth quarter. The automated acquisition contributed 4 million of adjusted EBITDA in the month of July. The integration of automated has gone very well, and sales and cost synergies realized since completion of the acquisition are ahead of plan. The adjusted EBITDA impact from prior volume on a consolidated basis this quarter was negative 7 million due to the sales mix between reporting segments. Adjusted EPS in the third quarter was 82 cents compared to 64 cents in the third quarter of 2019 due to higher adjusted EBITDA, lower net interest expense, and lower taxes. The adjusted tax rate in the quarter was 20.6%, down from 28.5% in the third quarter of 2019. This year's lower tax rate favorably impacted by the recently issued U.S. GILTI regulations. Turning to slide 10, here we provide an update on reInvent-C, which continues to progress in earnest and is driving structural operating leverage in the business. Our reInvent commercial work stream is progressing with targeted growth achieved in automation and sustainability, which is helping alleviate pandemic-driven weakness in some end markets. The commercial strategies, capabilities, and governance processes implemented with this new reInvent Workstream are robust and provide a solid platform for driving revenue growth in the markets we serve. In 2020, we are now expecting to realize approximately $120 million of year-over-year re-invent seed productivity benefits to adjusted EBITDA. This is up 10 million from our previous guidance. In 2021, we continue to estimate over 50 million of additional year-over-year productivity benefits as re-invent seed transitions from restructuring to our ongoing continuous improvement operating system. Cash restructuring payments associated with Reinvent-C were $59 million in the first nine months of the year and are now expected to be about $85 million for the year, with an estimated $40 million carryover into 2021. The total cash cost of Reinvent-C is still expected to be approximately $215 million, and this amount has not changed since the transformation was publicly announced in December 2018. Turning to segment results on slide 11, starting with food. In the third quarter, food net sales of $705 million declined 3 percent as reported and 1 percent in constant dollars. Equipment, parts, and service sales currently represent about 7% of the segment. We're up over 15% year-over-year due to strength in North America and EMEA. In North America, most of the equipment sales were replacements and upgrades to help improve our customers' plant productivity. In EMEA, we delivered a new pork automation solution which will drive incremental material sales in the future. BrioVac materials, which comprise the remainder of the food segment sales, were down about 3% as a result of labor challenges in the meat processing plants around the world and the slow recovery in food service. Shrink bags and vertical pouches, which are disproportionately sold into the food service channel, together were down about 5 percent and accounted for nearly 50 percent of food sales. Adjusted EBITDA in food declined 7 million, or 5 percent, to 152 million, with margin down 30 basis points at 21.6 percent. Lower sales volume, unfavorable product mix, and currency were partially offset by re-invent seed benefits favorable price-cost spread. In the fourth quarter, for food, we expect constant dollar sales to be down about 1% on a year-over-year basis and the adjusted EBITDA margin to be roughly in line with the third quarter. We anticipate improvements in product mix and operating costs, which will largely mitigate the projected decline in price-cost spread. On slide 12, we highlight results from our protective segment. In the third quarter, protective net sales of 533 million were up 44 million, or 9%, as reported. Organic sales were up 3%, with volumes up 21 million, or 4%. Automated packaging systems made a strong organic growth of 7% in the quarter. demonstrating the value proposition of its work cell automation, sustainability portfolio, and our sales synergy efforts. With the spike in e-commerce shipments, we are experiencing strong demand for our automated equipment, discrete and automated mailers, and inflatables. From an end market or customer segment perspective, e-commerce and fulfillment account for approximately 45% of our protective sales. The remaining 55% of sales are industrials, where trends are improving, but still below prior year levels. Adjusted EBITDA of $109 million increased $25 million, or 29%, and the margin expanded 320 basis points year over year to 20.4%. Growth in adjusted EBITDA was attributable to higher volumes, reinvent C benefits, lower operating costs, and contribution from the automated acquisition. Lower operating costs in the quarter were partly driven by a $7 million of inventory step-up charge reported in the third quarter last year as part of the automated acquisition, and as well as the realization of cost synergies associated with the acquisition. In the fourth quarter, we expect protective volumes to be up year over year at a lesser rate compared to what we experienced in the third quarter. This outlook is based on continued strength in e-commerce and automation in North American and APAC, partially offset by weak economic conditions in EMEA. Now let's turn to free cash flow on slide 13. Year-to-date, we generated $292 million of free cash flow, compared to $110 million in the same period in 2019. The $182 million year-over-year improvement was largely driven by higher adjusted EBITDA, the impact of the NOVA PACS legal settlement in the same period a year ago, more CapEx due to pandemic-related project delays, and lower reinvent restructuring payments. Trade working capital was a use of cash in the first nine months of 2020, which is a typical seasonal pattern for the company. Our underlying working capital metrics remain well-controlled, and we do expect working capital to be a source of cash in the fourth quarter. Overall, for the full year 2020, we are raising our free cash flow guidance to approximately $450 million from our previous range of $350 to $375 million due to higher expected adjusted EBITDA and lower cash outflows with taxes, reinvency restructuring, and CapEx. Lower tax payments are largely from an approximate $30 million refund expected in the fourth quarter associated with the retroactive application of the revised U.S. GILTI regulations back to 2018. Slide 14 highlights our leverage, liquidity, and debt maturity profile. We ended the quarter with net leverage at 3.3x which is down from 3.4x in Q2 and 3.8x at this time last year. The deleveraging accomplished in the third quarter included 20 million of share repurchases. Our priority is to continue to delever, and we do expect our net leverage to come down further by the end of the year. As a reminder, Leverage covenant in our credit facility has a maximum ratio of 4.5x, and the covenant calculation at the end of the third quarter is 2.8, which is lower than our reported net leverage ratio due to certain allowed favorable EBITDA adjustments in the credit agreement. So with significant cushion against our financial covenant, over $1.4 billion of liquidity and no debt maturities until August 2022. We have good financial flexibility. On slide 15, we outline our capital allocation strategy. We continue to take a disciplined approach to strengthen our balance sheet while driving attractive returns on invested capital. We are investing in growth markets, and disruptive products and technologies. Approximately 40 percent of our organic CapEx is currently focused on growth, including breakthrough production processes, product innovation, and automation. Maintenance and cost productivity projects comprise the remaining 45 percent and 15 percent of our organic CapEx, respectively. Regarding shareholder returns, for the time being, we are maintaining our dividend at current levels. And in the context of our overall leveraging objective over the next several quarters, we expect to continue opportunistic share repurchase activity. Turning to our 2020 outlook on slide 16, we are raising our consolidated net sales outlook to be up about 1 percent as reported for approximately $4.85 billion. This compares to our previous estimate of net sales in the range of $4.725 to $4.775 billion. On a constant dollar basis, net sales are now expected to increase approximately 3%, which compares to our previous guidance, constant dollar growth in the range of 1 to 2%. A higher sales growth is driven by protective, which is now expected to increase approximately 7% in constant dollars as compared to our previous estimate of up approximately 3%. We continue to expect food deliver approximately 1% constant dollar growth. We now expect a negative impact from currency translation on sales of approximately $90 million for the full year. For adjusted EBITDA, we are revising our outlook to approximately $1.4 billion, which is $20 million above the midpoint of our previous range. This implies an adjusted EBITDA margin of approximately 21.4% for the year, which would be an improvement of 130 basis points from 2019. Unfavorable currency translation is now expected to be approximately $20 million on adjusted EBITDA, which compares to our previous currency forecast of a negative $25 million. we are increasing our guidance for adjusted EPS to approximately $3.05 from $2.85 to $2.95. Our outlook for adjusted EPS is based on approximately 156 million diluted shares outstanding. The adjusted tax rate in 2020 is now expected to be approximately 26% reflecting the benefits of the recently revised U.S. GILTI regulations. As previously mentioned, we are raising our free cash flow guidance to approximately $450 million. Our adjusted EBITDA to free cash flow conversion is now expected to be over 40% in 2020. Let me pass the call back to Ted for closing remarks. Ted? Thanks, Jim. Before we open up the call for questions, turning to slide 17, I wanted to reiterate our four Ps of reInvent-C. We always start with our purpose statement. We are in the business to protect, to solve critical packaging challenges, and to leave our world better than we found it. Our performance continues to improve as we are progressing towards world class. We're keeping people out of harm's way. while strengthening our business through the crisis. By operating as 1C culture, we are enabling fast decision-making. Our strategy to deliver the best systems at the right price and make them sustainable is working. Our broad and innovative product portfolio, global scale and agility has enabled us to address the evolving customer needs across our end markets and geographies. Our 1C operational excellence processes are driving flawless quality, world-class productivity, and yield improvements, as well as customer service enhancements that are creating customer references. You can see the structural changes of reInvent-C reflected in our operating leverage so far in 2020, with more to come. Sustainability is in everything we do, fueling our growth, and in this pandemic, still top of mind. We're enhancing our portfolio and innovating to meet our 2025 sustainability pledge and drive a circular economy for plastics. I'm excited to share that since announcing our investment in Plastic Energy Global, we collaborated with Plastic Energy, SABEC, Bradbury's Cheese, and Tesco to lead by example where we've been able to create a micro-circular loop for food-grade packaging We are embedding our environmental, social, and governance in diversity and inclusion priorities into our core business strategy and values. We will continue to proactively manage ESG and diversity and inclusion risk and leverage opportunities to drive success. This is reflected in our culture and our purpose. We've delivered three solid quarters in a very challenging and unpredictable environment. A reinventing business transformation is our operating engine driving profitable growth above inflation. We are reinventing everything we do, from how we innovate to how we solve our customers' toughest challenges with the power of one sealed air. I'm proud of how our people continue to execute through this pandemic, and I want to thank all of our employees and our plants and our innovation centers out in the field and working remotely for their dedication and commitment to business continuity. Finally, I would like to highlight we have Carl Diley on the call with us. Earlier today, we announced that Carl is planning to retire in April 2021. Carl has had an incredible 40-year career at Sealdare and has held many leadership roles along the way. Most recently, he took on the role as Chief Commercial Officer and has been instrumental to the success of our re-invent seed business transformation and closer to home, reinventing our iconic Cryovac brand. For me personally, Carl has been a tremendous partner and I'm grateful for his tireless efforts to transform our business from the best in packaging to world class. We've been so fortunate to have Carl as a part of the Sealed Air family. He has made Sealed Air a special company. We all wish Carl the very best in his retirement and look forward to a smooth transition with him in his advisory role. With that, I now open up the call for questions. Operator?