Sealed Air Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2021 Sealed Air Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. We ask that you please limit yourself to one question at that time. Please be advised that today's conference is being recorded. If you require any further assistance, Please press star then zero. I would now like to hand the conference over to your host, Lori Chaitman, Vice President of Investor Relations.

Thank you, and good morning, everyone.

I hope you and your family are healthy and staying safe. With me today are Ted Duhini, our CEO, and Chris Stevens, our CFO. 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 website at fieldair.com. I would like to remind you, that 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 at feelthere.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 relief. 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 as we referenced throughout the presentation. I will now turn the call over to Ted. Operator, please turn to the next slide. Okay.

Thank you, Lori, and thank all of you for joining our first quarter earnings call. We had a solid start to the year despite the ongoing pandemic and winter storm Uri impacting the global supply chain. Our team has been doing a great job leveraging our supply network to ensure business continuity. As you can see on slide three, our purpose, we're in the business to protect, to solve critical packaging challenges, and to make our world better than we found it. Our purpose is clear and continues to guide us. On today's call, I'll recap our first quarter 2021 performance. I'll share how we are managing through the current environment, how our global markets are evolving, and the growth opportunities we see ahead. We're leading the way with automation, digital, and sustainability. Chris will review our financial results and outlook in more detail. I will end with closing remarks before opening the call for Q&A. Let's turn to slide four for a review of our first quarter 2021 results. Net sales increased 8% with strength in e-commerce, automated equipment, food retail, and industrials. Adjusted EBITDA increased 6%. volume growth and re-invenc productivity improvements more than offset material inflation and supply disruption costs. EBITDA margins were 21.2%, a modest decline compared to last year. Our operating leverage of 16% was impacted by the inflationary environment and timing of our price actions and formula pass-throughs. This near-term pressure is expected to continue through the second quarter. Adjusted earnings per share was 78 cents of 7%. We generated free cash flow of $36 million, which compares to the use of cash of $8 million in the first quarter last year. We are raising our 2021 outlook across all key metrics to reflect our first quarter results, top-line momentum, and operating leverage improvement in the second half. Looking beyond 2021 on slide five, we want to reiterate the objectives of our C operating model. Automation, digital, and sustainability is expected to drive above market growth. Our organic sales target is 3% to 5% or approximately 200 basis points above our addressable market growth. We serve a stable market that historically has grown 1% to 3% a year. With innovation and sustainability, we expect to accelerate growth on our basis business to 2-4% and add another 100 basis points of growth with automation. Our operating leverage target is over 30%, which translates into adjusted EBITDA growth of 5-7% per year. With our capital allocation strategy in place, we're targeting adjusted earnings per share growth of greater than 10%, and free cash flow conversion greater than 50%. Let's turn to slide six, our movie reel slide, which pictorially shows some of our new solutions powered by our iconic brands. You can see a play button on the slide, which is to encourage you to visit our website, where you will find exciting success stories. Our automated and sustainable packaging solutions maximize food safety, protect goods, minimize waste, and deliver savings to our customers through increased productivity. In the first quarter, we had strong growth across our protective and markets, led by e-commerce retail and consumer goods, logistics, medical and life sciences, and the recovery in industrials. We're leading a dramatic shift to a touchless, automated environment and fulfillment centers, resulting in double-digit growth in our automated solutions portfolio, further enabled by our APS acquisition. In consumer goods and logistics, we're capitalizing on global e-commerce growth. In medical and life sciences, we're playing a key role in the global COVID-19 vaccine distribution and benefiting from growth in online shipments of medical equipment and pharmaceuticals. Our industrial markets, including general manufacturing, electronics, and transportation, has gained momentum since year-end, particularly in Asia Pacific and Europe, where we have a high exposure to electronics and automotive end markets. In the Americas, we experienced favorable trends despite the winter storm supply disruptions. there continues to be an imbalance across the food industry with strong demand in the retail channel offset by softness in food service. We were encouraged by our performance given the end market environment and the tough year-over-year comparable, particularly in North America. We saw strong growth in our automated equipment and favorable trends in retail applications across all proteins, including cheese and seafood. Going forward, we expect food service to recover at restaurants, sporting events, conferences, and other large public venues reopen. On a global basis, our meatpacking customers are investing in automation and materials that improve productivity, enhance employee safety, and address their sustainability goals. We are at the table today. staying connected online with our customers, demonstrating our new automated, touchless, and sustainable solutions. In Europe, we're gaining momentum with our industry-leading Cryovac barrier bags optimized for recyclability. We're experiencing an increase in demand from quick-service restaurants. They're investing in new Cryovac auto-pout solutions for soups, sauces, condiments, wine, and spirits. Our high-performance, sustainable materials are integrated with automated equipment and services, disrupting the rigid container market. Now turning to slide seven for an update on C automation touchless solutions. Equipment, systems, and services sales were up 18% in the quarter and accounted for 8% of our net sales. We are on track to achieve approximately 425 million, or 12% growth, in 2021, of which more than $250 million will come from equipment and systems. Our sales pipeline for automated equipment is strong, and we are confident in our organic target of over $500 million by 2025. When you factor in a 3x-plus solutions multiplier, including growth in parts and service from the installed base and the flow-through of materials This results in a $5 billion-plus potential growth opportunity over the 10-year solutions lifecycle. We're working closely with our customers to prioritize projects that create less than a three-year payback. We're creating tremendous value for our customers and are excited to lead the way to a more touchless digital environment. Now let me turn to slide eight and share how we're leading through this pandemic. We are investing in our own e-commerce platform to drive our transformation to a digitally-driven, world-class company. Our smart and intelligent packaging value proposition is enabled by our proprietary digital printing technology. This is enabling unique designs on high-speed packaging systems in multiple colors, food-grade ink, and even invisible inks that, with our unique C-marks, will enable blockchain tracking to billions of packages. Our vision is to digitally connect sustainable packages inside our facilities to our customers and to consumers' homes through e-commerce. I will now pass the call to Chris to review our results in more detail. Chris?

Thank you, Ted, and good morning, everyone. Let's start on slide nine to review our quarterly net sales growth by segment and by region. In the first quarter, net sales totaled $1.3 billion, up 8% as reported, up 6% in constant dollars. Food was flat in constant dollars versus last year on a tough comp, and protective accelerated 14%. Our fastest growing region was Asia Pacific, which delivered 12% constant dollar growth. EMEA increased 7%, which is the highest organic growth rate for the region in the last four years. And our largest region, the Americas, was up 4%. On slide 10, you see organic sales volume and pricing trends by segment and by region. In the first quarter, overall volume growth was up 5%. Volumes in food were flat with favorable trends in Asia Pacific and EMEA, offsetting a 2% decline in the Americas. Protective volumes were up 13% with double-digit volume growth in all regions. As Ted indicated, on a global basis, strength in e-commerce, automation, and food retail, and improving trends in industrials more than offset softness in food service. Q1 price was favorable 1%, mainly due to U.S. dollar-based index pricing in Latin America. Most of the pricing actions corresponding to the current raw material and supply chain environment are taking hold in the second quarter. and formula pass-throughs largely in food North America are just beginning to turn. On slide 11, we present our consolidated sales and adjusted EBITDA walks for the first quarter. Having discussed sales results, let me comment on our adjusted EBITDA performance. We delivered adjusted EBITDA of $268 million, up 6 percent compared to last year, and margins of 21.2 percent down 40 basis points. You can see on our EBITDA wall that higher volume and operational benefits offset higher input costs. Adjusted EPS in Q1 was 78 cents compared to 73 cents in Q1 2020. Our adjusted tax rate was 27.6 percent, essentially in line with last year's adjusted rate in the same period. Our weighted average diluted shares outstanding in the quarter were 155 million. Turning to slide 12, here we provide an update on reInvent-C. In 2021, we remain on track to realize approximately 65 million of reInvent-C benefits with roughly 50% flow-through from actions taken in 2020. Our commercial workstream is accelerating innovation and driving new customer wins in core and adjacent markets. As Ted noted, we are seeing strong growth in our equipment order pipelines. in both food and protective. Turning to segment results on slide 13, starting with food. In Q1, food net sales of $702 million were flat on a constant dollar basis. Similar to the year-over-year trends we experienced in the fourth quarter, cryovac materials were down slightly due to low single-digit declines in barrier bags and pouches, which combined represents nearly 50 percent of segment sales. and have the highest exposure to food service. This was offset by modest growth in case-ready and roll stock retail applications, which represents just over 40 percent of the segment. Equipment, parts, and service sales, which accounts for approximately 7 percent of the segment, were up approximately 10 percent in the quarter. Our customers around the world are investing in their processing plants to upgrade aged assets and drive productivity. We are also seeing equipment opportunities in Asia and Eastern Europe, where emerging countries are focusing on domestic production of multiple types of proteins. Adjusted EBITDA in food, 157 million in Q1, was essentially flat compared to last year, with margins at 22.3 percent, down 30 basis points, given higher input costs and timing of pricing. On slide 14, we highlight protective segment results. In constant dollars, net sales increased 14 percent to 565 million. Fulfillment, which is largely driven by e-commerce growth, was up approximately 20 percent on a global basis, with similar growth trends across all regions. Industrial was up high single digits, driven by end market strength in general manufacturing, electronics, and automotive. we leveraged our broad portfolio and global scale to meet increasing demand despite supply disruptions. I also want to highlight approximately 55% of our protective sales are derived from industrial and markets, and the remaining 45% from fulfillment and e-commerce. Adjusted EBITDA of $110 million increased $17 million, or 18% in Q1, with margins at 19.5%. up 30 basis points. Now let's turn to free cash flow on slide 15. In the first three months of 2021, we generated $36 million of free cash flow compared to a use of cash of $8 million in the same period a year ago, largely driven by higher adjusted EBITDA, lower restructuring payments, and a $24 million tax refund we received in the quarter associated with the retroactive application of the revised U.S. GILTI regulations. On slide 16, we outline our capital allocation stretch. We will maintain a strong balance sheet while driving attractive returns on invested capital and supporting our profitable growth initiatives. On this slide, I want to highlight our organic growth investments. We are focusing our CapEx on breakthrough processes, automation, digital, and sustainability. With C-Ventures, we are investing in early-stage disruptive technologies and business models that are expected to accelerate our strategy and innovation efforts across sealed air. As it relates to returning capital shareholders, in Q1, we were an active buyer of our stock. We repurchased 4 million shares for $177 million, reflecting confidence in our vision, strategy, and execution. We have approximately $500 million for additional share buyback remaining under current Board authorization. And you can see in the takeaway, we updated our financial policy leverage ratio objective to be 3.5 times or below from previously communicated 3.5 to 4 times. Let's turn to slide 17 to review our updated 2021 outlook. We are raising our guidance across all key metrics, reflecting strong Q1 performance and outlook for the remainder of the year. For net sales, we now estimate 5.25 to 5.35 billion, or 7 to 9 percent as reported growth, and 6 to 8 percent in constant dollars. This compares to our previous guidance of 5.1 to 5.2 billion, or constant dollar growth of 2.5 to 4.5 percent. The higher sales guidance reflects increased volume growth in protective and additional price in both segments, given the current supply chain environment. In food, we now expect constant dollar growth of 4% to 6%, as compared to previous guidance of 2% to 4%. And in protective, we now expect constant dollar growth of 8% to 10%, which compares to previous guidance of 3% to 5%. On a reported basis, adjusted EBITDA is now expected to grow 7 to 9 percent. We anticipate adjusted EBITDA to be in the range of $1.12 to $1.15 billion, a $20 million increase at the midpoint from previously provided guidance. Higher sales from volume and price are expected to offset increased material and supply disruption costs. In terms of currency, we now expect favorable FX translation on 2021 sales and adjusted EBITDA of approximately 1.5 percent. We are raising our 2021 outlook for adjusted EPS to $3.40 to $3.55, and we continue to expect approximately 45-55 first half, second half percentage split. Our outlook now assumes approximately 154 million average shares outstanding. a $3 million share reduction from our prior guidance reflecting our share repurchases in the first quarter. We continue to estimate an adjusted tax rate of 26 to 27 percent. And lastly, our revised free cash flow outlook of $520 to $570 million reflects the higher range for adjusted EBITDA. There is no change to our outlook for 2021 CapEx of approximately $210 million and re-investee restructuring associated payments of approximately $40 million. As you can see on this slide, we wanted to provide a few variables as it relates to our 2021 guidance range. The low end of our range would suggest a slower recovery in food service and supply chain headwinds persisting longer than anticipated. The high end implies continued strength in equipment, e-commerce, and food retail, along with an acceleration of the industrial rebound and overperformance of our C operating engine. With that, let me now pass the call back to Ted for closing remarks. Ted?

Thanks, Chris. Before we open up the call for questions, I want to emphasize how our 1C operating engine is driving sustainable earnings power. We're capitalizing on growth opportunities in front of us and investing in our futures. Our broad and innovative portfolio, global scale, and agility truly differentiates us in the markets we serve. Our focus on automation, digital, and sustainability is accelerating our growth in our core business and enabling us to expand into new and adjacent markets. We're making significant progress on our plastics pledge with nearly 50% of our solutions designed for recyclability. Our C operating excellence processes are driving productivity improvements, flawless quality, and enhancing customer experiences. We're on a journey of transforming sealed air to a world-class sustainable company automating global packaging. We're reinventing everything we do from how we innovate to solve our customers' most critical packaging challenges. Our strategy is working. Our team is delivering, and we are focused on creating sustainable long-term value for our stakeholders and making our world better than we found it. With that, I'll now open up the call for questions. Operator, we'd like to begin the Q&A session.

Thank you.

As a reminder to ask a question, you will need to press star then 1 on your telephone. To withdraw your question, please press the pound key. We ask that you limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Josh Spector with UBS. Your line is now open.

Hey, guys. Thanks for taking my questions and congrats on the strong quarter here. On your protective organic results, they came in much stronger than we expected, and my guess is stronger than you expected. So I guess what surprised you positively in the quarter that you didn't expect a couple months ago? And looking at your full year guide for protective, you basically doubled your guidance. Can you give us some context of how much that increases better volumes versus higher pricing?

Hey, Josh. I'll be part of it, and Chris is going to go through the bridge if we need to. As far as what surprised us, I actually have to say our European team, what's going on in e-commerce, exceeded expectation. Extremely strong. E-commerce, it just continues to go. As we know in the pandemic, everybody is using e-commerce, and your packages are showing up at home, and We continue to do quite well. Also, we saw with our medical pickup there with the vaccine, what we're doing on packaging, some really interesting solutions, pickup, that was stronger than anticipated. On the industrial side, we saw the industrial pickup in Europe. We saw a pickup in Asia. It's still flat to slightly down in the U.S., so we didn't see the industrial pickup, so that might tie into the second part of your question. on the second half of the year. And then the real issue in protective was automation. Really exciting, the penetration with APS and what that did. Our bookings are up significantly with our equipment in APS, which is in the protective side, so quite strong. And then to the second part of your question, we see that continuing for the second half of the year. We've got some challenges there, as you asked about pricing. We saw the pricing going up. Well, we saw our costs going up in the fourth quarter. We had price increases. We've already done three. So what happened in the first quarter with URI and the supply chain with our input costs going up definitely surprised us by it kept going up. So we didn't get totally on top of all of the price on that. but we think we have opportunity to catch up. The second quarter, though, still going to be tough on the resident side, but net-net quite pleased with how the protective is working and actually quite excited. We think we even have more opportunities in the second half, especially with industrial coming back in the second half of the year. We think we see some strong growth continuing.

Very good. Maybe, Josh, just to kind of elaborate on the full year comment, When we looked at the midpoint at what we communicated in February versus what we're communicating in May, taking up that midpoint $150 million, as you noted, given the top line beat in protective in Q1 and our confidence, as Ted was commenting, in terms of our full year, that increase on the volume side is all driven on protective. The other half of that increase of that $150 million reflects the pricing actions that have basically been already in place a good portion of that coming through our formula-based pricing, which we're starting to see the beginning of that being the early part of the second quarter here in April going into May. So we're going to start seeing the benefits of that turn. However, just specific to the second quarter, one of the things that we wanted to highlight, as we did last time, was given the EPS range between first half and second half, given that material dynamic. And that's that We're still on track. Even though we had a good beat, feel very good about the first quarter in terms of our performance, and we're raising our full year guidance, that 45-55 split between first half and second half is what we still anticipate. Thanks for your question. Operator, next question.

Thank you. Our next question comes from the line of George Staples with Bank of America. Your line is now open.

Hi, everyone. Good morning. Thanks for all the details. My question is going to be on sort of general concept of flow-through and leverage. So, Ted, you had talked a lot about all the things you're doing on the food side of the business and how the customer is excited about the automation solutions that you're bringing, yet we're not yet seeing the volume growth in that segment. When do you think we'll see the food volumes turn positively for Sealed Air over the course of 2021-2022? And why haven't we been seeing it so far? And then, you know, for both you and Chris, if we look at slide 17 and we talk about the revenue guide increase, which is $150 million, there's only about a $20 million improvement in EBITDA, which is a low relative incremental margin. Why wouldn't we see an incremental margin pick up on the $150 million that's more commensurate with the 30% plus that you typically target? especially since you said the revenue growth is coming from protective, where margins have been surprising on the upside, and pricing, which is pure margin. Thank you, guys.

Thanks, George. We'll see if we can unpack that. That was very clever. That was, I think, a bunch in there, but I'll try to unpack a piece, and Chris, you can work. First of all, let's talk about what we're seeing in food, and if you'll stay on slide 17 where he asked, If we looked at the first quarter, what's going on with food, we're still in this pandemic environment where the food service is down year over year. We're still in the stay-at-home environments with restaurants, et cetera, being down, and also the quick service. We're seeing a pickup there, but that's still down. What that does to the portfolio on to leverage, our largest product lines, two of them, and actually most profitable are are bags and pouches that are affected. So actually in the quarter, the bags and pouches were actually slightly down. So it actually has a deleveraging effect. So to your question then on the second half of the business, as we see this recovery coming back, we would expect that would leverage quite nicely into that 30% leverage as we look for that growth. The top-line question that you asked where we increased our guidance, you're exactly right. We actually, if you take the beat, that's a 13% leverage on the raise. So we've got to get through the second quarter. We've got input costs going up substantially that we're trying to manage on the price. As you know, on the food, we have that lag going back with our formula prices. So really Q2 is going to be see can we get that catch-up where you will see that nice leverage coming through. But right now in the guide, we don't have the leverage returning until the second half of the year on the food side.

Yeah, and maybe just only to add to that, just for protective Q1, in terms of the growth, that contribution margin on the incremental volume, we're seeing a nice flow through, 30 plus percent. It's really the dynamic of the material headwind that is impacting the overall PG ratio as we to the top line. And then, as I mentioned before, in terms of that full year, the full year guidance of up $150 million on the midpoint of sales, half being by volume, half being on the price side. That price side is good because it's offsetting the material headwinds, so we're hoping to get the price cost spread near zero by the end of the year. That's what our guidance reflects. So that's how we're looking at the full year. The dynamic between us having our lowest quarter kind of in Q2, given the material headwinds and pricing starting to kick in, that's what kind of drives our 45-55 in terms of giving some color on first half, second half. Okay, operator, next question.

Our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.

Yes, thank you. Good morning, everyone. Good morning. All right, so I was hoping, maybe a two-part question. One, obviously a lot of channel and regional noise on a year-over-year basis as we go kind of March onwards, given your end markets and some of the disruptions that happened at some of your key customers last year. So I was hoping just on a volume basis across food protective in the major geographies, you could kind of help us think about volumes relative to 2019 levels as we think about kind of how the company exits And the second part of the question is around the equipment kind of side and just maybe talk about your kind of sales pipeline and funnel just as you kind of are working on automation projects with customers and kind of the confidence level on the 250 million of equipment sales this year, which would seem to imply a pretty meaningful acceleration in growth over the next three quarters.

Okay. How about let me jump on my favorite subject of automation first, and then Chris could help going through some of your volume questions. We already had some color there. Good questions, Adam. On the automation is definitely something we're quite excited about. So if you look at slide seven, we're trying to lay out where we're taking automation is what we're calling touchless. So as you highlighted, we have 250 there. We feel pretty confident that we're on track with that. If you unpack the equipment, just in the equipment piece, in the first quarter, that's almost up 30% on our equipment sales. Just looking at APS, which is the big driver of equipment, our APS bookings are up 60%. So we're seeing a very healthy pipeline, and we're seeing that through both food and protective. So that we feel quite confident. And to get to that 500, as you obviously see, we're expecting to double that business. So we think we're on track with that and the growth rates. And we see that to continue through the second quarter and then the second half of the year. I also want to highlight that's really connected to the automation is that large fleet. We actually have, it's an incredible number, over 100,000 pieces of equipment out there in our fleet. And as we're really changing the strategy to be an equipment company, really focused on the automation, it's also taking care of that fleet. So that other part is that parts and services out there and staying connected to that installed base. We think we have some more upside on that potential. So automation and where the final piece to your question, what does this mean to our customers today? This is what the pandemic is really driving in this touchless system that we're talking about. How do we make a meatpacking plant safer? How do we take people out of harm's way? How do we bring a much higher level of automation and security to the process? We had one of our largest meatpacking customers with us in Simpsonville just last week where we're actually showing our automated systems and the largest meat packing plant, a meat packaging plant in the world, of how we're going to extend our touchless system into their plants. So really excited about the opportunity we have and equipment to keep that going and growing. And I'm very confident we're going to exceed the expectations of this chart. Great.

And then Adam, let me provide some color on your first part of the question. Just talking about the regional noise. I'll start off with food. Food, as we mentioned, on a constant dollar basis was flat. America's was actually down 1%. At EMEA, we saw a modest growth of 1% and Asia-Pac at 5%. The big story for us for the quarter is on protective. Double-digit growth across all regions in our protective segment, for the total company being up 14%. So we see that continuing. And, again, that gets back to our kind of full year guide. That volume increase, part of our $150 million of our midpoint increase, half being volume, half being price, that volume is really driven by what's going on in protected. Okay.

Great. Thanks, Chris. Next question, operator.

Thank you. Our next question comes from the line of Gansham Pangerby with Baird. Your line is now open.

Hi. Good morning, everyone. This is actually Matt Krieger sitting in for Gonsham. How are you all doing today?

Good. How are you, Matt?

Great. Great. Thank you. So I guess I just wanted to dive a little bit in on the cost basket. And I was hoping that you could provide some added detail about what your assumptions are for your key raw material, freight, labor, and other cost inflation buckets for the remainder of the year. including whether or not you're assuming any sort of reversal across any of these inflationary drivers during the second half. In addition to that, any kind of detail on quarterly cadence is helpful as well.

Sure, Matt. So clearly in a pretty volatile environment, just thinking of material inflation starting in the fourth quarter of last year and really continuing through April. We're hopeful that we've seen a little bit of steadiness in terms of how we're currently thinking about it, Our full-year guidance assumes things start to level off. We entered the year anticipating raw materials being up roughly 5%. Our latest is now we're thinking it's going to be in the 10% category. Although we all read about increases 20%, 30%, 40% even significantly, a lot of what we buy, especially resins, which has not had as dramatic of an increase, although we are seeing it. Freight is the other item that we... that we experienced in the quarter, we're doing everything we can to satisfy customer demand. So air freight unfortunately has been driving not only getting product to us but getting product to our customers, mostly on the input side where we've incurred incremental, roughly three to four million of incremental costs to make sure we can satisfy the demand on whatever that's coming towards our way. But again, going back to the full year, we're assuming it starts to level off. We've reflected that in our updated guidance for the full year. Okay. Thanks for this. Operator, next question.

Our next question comes from the line of Jeff Zakalkis with JP Morgan. Your line is now open.

Thanks very much. Is the price cost penalty in the second quarter going to be the same as in the first, or worse, or better? And in your equipment sales to the protective market, which are growing very, very quickly, are you growing faster than the market for equipment? And if you are, why are you growing faster? What is it that customers like about your machines versus other people's machines?

Well, I'll let Chris do the better or worse, and then I'll talk about what I think is the why we're growing faster than the market.

So, Jeff, we do expect the challenges to be there in the second quarter, kind of peaking in terms of the price increases that we've been, again, reading about, hearing about. The impact on us typically lies in about 30 to 45 days. So we're starting to feel, we have been actually feeling the brunt of it, which is coming into the second quarter. So we actually expect our price-cost spread to be a little bit worse in the second quarter than the first. However, as we think about first half, second half, we expect that to rebound as we have full-fledged pricing in place with formula-based pricing as well as other price increases that we have announced and are starting to kick in. We expect that to turn in the second half of the year. And again, that really just drives us. What we're trying to provide is just color is how we're going into this year, thinking this 45-55 first half, second half split on EPS and just trying to provide investors kind of a good view of how we're managing through it. And I would suggest that our ability to manage through Q1 to deliver these kind of results, we know it's coming, it is coming, and we've been planning for it in terms of what the impact is on Q2. Internally, we're managing and measuring our ability from a price point of view, the stickiness of that price in the markets we serve as well as with the customer impact. So just staying very close to it. I can tell you it's top of mind for us as a company across the entire company, just talking about how to manage this dynamic, doing the best we can to leverage our really supply chain, global supply chain network, and being able to satisfy demand as we move forward.

And I'll handle the second part of the growth, but Jeff, now you can't answer me, so I can speak to you without you answering, but you did predict at your conference that these costs would peak April 1st. So I now know that that was your prediction or maybe your predilection. So we see it going past April 1st on the cost side. But on the growth on protective, what we're excited about is just highlights just a couple of things. One is our presence of where we are and how quickly we've been adapting the portfolio. We're growing our paper products at double digit. We've introduced new paper products that are going and doing quite well. Our equipment business, we already highlighted, equipment business is up almost 30% just the equipment, and that's across the board, food and protective. We're also seeing as we shifted, as I highlighted, to the different markets and the movement with e-commerce. We're really being quite aggressive in getting the right product at the right price. And then I also got to bring in sustainability. We are definitely seeing the sustainable issue coming forward with, do you want paper? Do you want plastics? Either one, how do we make that sustainable? So we're seeing some good opportunities. And the last one that I think we even have more opportunity on the second half on the protective side with the The return of the industrial market, we did not see that as strong in the U.S. We saw it stronger in Europe. So we think we still have some upside opportunity. And that also ties into keeping that leverage going because that's where we leverage both on the food, getting the bags back, and getting that Instapack volume back. We'll leverage quite nicely to get us back over our leverage targets at the back end of the year. Operator, next question.

Our next question comes from the line of Anoja Shah with BMO Capital Markets. Your line is now open.

Hi, good morning. I wanted to come back to the automation and equipment and your strategic focus around that. Clearly, APS was a very successful acquisition. Are you open to more M&A here? Are there even attractive targets in this market, or is it more of an internal growth type focus?

Yes, if you go to our capital allocation slide on 16, so you can see just before we did the acquisition of APS, we start communicating what we're thinking about we're working. So we do have internal focus on organic on the equipment. We have a pretty strong portfolio of equipment that we're strengthening, working on. We're also looking at where we have gaps in our portfolio. So we do think we have some opportunities there where we are looking at very closely on how we can drive automation. So part of our capital allocation is we're looking at that area. So how do we keep that really strong growth going? That $500 million target, though, on equipment, that's all internal. So we think there's even additional opportunity to grow our equipment business above and beyond that $500 million target for 2025.

which will require M&A. Okay, operator, next question.

Our next question comes from the line of Arun Vishwanathan with RBC Capital. Your line is now open.

Hi, thanks for taking my question. I'm just curious, you know, as you think about resin cost inflation and pricing, I know that there's the formula-based pricing in food, but when you think about protective, can you just discuss the environment there for pricing opportunities? Is it fairly competitive, or given a strength in volumes, is it a little bit more constructive as far as pricing goes?

Well, first of all, we've been putting pricing out in the protective since last year, so We do believe we are a leader, so not cavalier on the pricing. We are working very carefully with the customers. We think this is a great opportunity, actually. When we go and talk, just don't send an email, but working on the aggressive price increases, we've already done three. Have we been out there as much as the residents have gone, as fast? No. We think we have an opportunity to get that to turn, hopefully by the end of the second quarter. But as far as the opportunity, we're not looking to lose share, actually gain share in this marketplace. So being the leader in the market, and that's what we're challenging our team with, to go get the price and not to lose share in by bringing in our larger portfolio, bringing in automation, bringing in sustainability, but it's a very, very tough environment on the input costs right now. I don't know if Chris feels that.

That's good.

Operator, next question.

Our next question comes from the line of billing with Jefferies. Your line is now open.

Hi, Chad. Hi, Chris. This is John Bunyan sitting in for Phil. I wanted to touch on the leverage that you took down to less than three and a half times. Is that a factor of just the better operating leverage from your re-invent still there, initiatives that are clearly driving results, or should we read into that that the M&A pipeline might be not as robust, at least for the foreseeable future? And when do you think you can get below that 3.5 times target? Is that by the end of this year?

So let me take that one. Just thinking through the leverage ratio, ending year end last year at 3.1, we ended this quarter at 3.2. Looking forward, just getting to your point in terms of our ability to operate and execute in this environment, recognizing we are a good cash generator. and our cash flow generation being able to, over time, reduce that debt, but at the same time not lose sight of what the investments we want to make, which first and foremost is invest in ourselves in terms of where the organic growth opportunities are. As you saw, we were an active buyer of our stock in the first quarter. Our average share price is roughly $44 per share. We felt it was clearly a good opportunistic time to get back in the market, given how we ended the year on the cash side of the equation. But we definitely don't want to lose sight of the fact that we've got a pipeline of opportunities on the M&A front. Earlier comment was made in terms of success of the APS acquisition, which absolutely has been. So the pipeline is there. We will continue to look at just where we are for availability, the end markets, the environment we're in to deploy capital on M&A as we continue to grow. Would we maybe go above that leverage ratio? Potentially. But we want to work that back down to three and a half or less over, I would call it a reasonable period of time, call it 12, 18 months. And that's why we felt it was appropriate, given the cash generation, all the benefits of reinvency and the progress being made over the past two or three years, we don't need to necessarily stay in this three and a half to four times. We can stay below three and a half and continue to have a lot of availability to reinvest in ourselves, as well as look at opportunities for M&A.

And just the only thing to add, Chris, that was a great answer there for John, is if you look at the cash generation, if you go to our slide five of the model, because there's the second part of your question, this engine is delivering strong earnings power. And we're putting that out there and showing that. So just doing the math on that to 2024, that's close. This engine generating $2 billion of cash. So... We think we can be very prudent, but it's not a message at all that we don't see a pretty strong, robust pipeline to continue to fuel this business. So, operator, next question.

Thank you. Our last question comes from the line of Anthony Petanari with Citi. Your line is now open.

This is actually Brian Bergmeier sitting in for Anthony. Okay. Do you anticipate any impact on protective packaging from the chip shortage possibly impacting automotive or electronics demand in 2Q or the second half?

No, it's a good question. We're definitely seeing that impact of our customers, especially in the automotive industry. We are seeing some pieces in the electronics, but actually electronics has been quite strong for us. So We're not seeing the chip shortage directly as much as others for the packaging.

Operator, was that it on the questions?

So with everyone, I want to thank everyone for your time. Really appreciate the interest in sealed air, and we look forward to talking to all of you in the near future. Thanks very much, Operator.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.