Sealed Air Corporation

Thank you for standing by, and welcome to the second quarter 2021 Sealed Air 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 the session, you will need to press star then 1 on your telephone. We ask that you please limit yourself to one question. Also, please be advised that today's call is being recorded. If you require any additional assistance, you may press star then 0 to reach an operator. I would now like to hand the call over to Lori Chapman, Vice President of Investor Relations.

Please go ahead.

Thank you, and good morning, everyone. 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 sealthere.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 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 we referenced throughout the presentation. I will now turn the call over to Ted. Operator, please turn to slide three.

Thank you, Lori. And welcome to our second quarter earnings call. We appreciate your interest in C and hope you and your families are staying safe and healthy. We're working through very exciting and challenging times as we transform C. We're accelerating our strategy to take us to world class in everything we do. As you can see on slide three, we're in the business to protect. to solve critical packaging challenges, and to make our world better than we found it. On today's call, I'll recap our second quarter 2021 performance. I'll share our strategy for growth in automation, digital, and sustainability within our global markets. Chris will review our financial results and outlook in more detail. I will then end with closing remarks and before opening the call for Q&A. Let's turn to slide four for review of our second quarter 2021 results. Net sales increased 15% with 9% volume growth led by strength in Americas and Europe, Middle East, and Africa regions. Adjusted EBITDA increased 1% and margins were under pressure at 19.8% compared to 22.6% last year. This year, we experienced higher volumes, additional productivity gains, and pricing actions against dramatic inflationary cost pressures and supply disruption. Also, relative to last year, we had pandemic-induced surges in essential products and minimized expenses due to lockdowns. On a per-share basis, earnings of 79 cents were up 3 cents compared to last year. We generated free cash flow of 102 million in the first six months of the year, which compared to 129 million in the first half of last year. We are raising our full-year sales in adjusted EPS outlook and reiterating our prior guidance for adjusted EBITDA and free cash flow. Our C operating engine is delivering. Sales growth and productivity gains mitigated the adverse supply environment in the second quarter. This engine, coupled with expected price realization, is enabling us to maintain or adjust EBITDA guidance for the full year and drive continuous improvement going forward. I want to highlight our C operating model on slide 5, which clearly defines where we're taking C in the future and what you should expect us to deliver. Our organic sales target is built off in a historically stable packaging market that grows 1% to 3%. We've been adding to this base with our innovations in automation, digital, and sustainability to take us to an organic sales growth target of 3% to 5%. Our operating leverage target is over 30%, which drives adjusted EBITDA growth to 5% to 7%. We're targeting adjusting earnings per share growth of greater than 10% and free cash flow conversion of more than 50%. Our C operating model delivers significant cash for our disciplined capital allocation. We are fueling growth opportunities with our investments in innovation and CapEx. Through C Ventures investments, we're utilizing a balance sheet to incubate disruptive technologies and new business models to accelerate our future growth. We're also returning value to our shareholders through share repurchase and dividends. We approved a new $1 billion share repurchase program and recently increased our dividend by 25%. Our approach to capital allocation reflects our confidence in our vision, strategy, and execution of our C operating engine. Let's turn to slide six, which highlights our market-driven solutions powered by our iconic brand. We encourage you to visit our website where you can read about our innovation and customer success stories. We create measurable value for our customers through automated and sustainable solutions that are designed to maximize food safety, minimize waste, protect goods, and deliver productivity savings. In the second quarter, we had strong growth across our end markets. We are leading a dramatic shift to a touchless automated environment for all customers, resulting in more than 30% growth in our C automation portfolio. We're ahead of our plan to double our equipment business in the next three years. For our food customers, our C automation growth is a result of our integrated touchless systems with our high-performance cryovac materials. Bookings for auto bag and auto box equipment were up more than 50% in the first half of the year, and we're investing more than $30 million in capacity expansion to help meet the strong demand for our equipment solutions. Our automated solutions address labor shortages, productivity, and employee safety. We're at the table with our customers, providing connectivity from our operations to theirs. which is helping all of us exceed our sustainability commitments. Restaurants, sporting events, conferences, and other large public menus are cautiously reopening. Our solutions with high exposure to food service return to growth for the first time since Q1 2020. We're seeing growth in our Cryovac barrier bags utilized across all proteins, including cheese and seafood, and Cryovac pouches for soups, sauces, beverages, and other liquids. Our industrial markets were up double digits in the Americas, Europe, Middle East, and Africa regions compared to last year when there were pandemic-related shutdowns. We continue to capitalize on global e-commerce growth and increased demands for recyclable materials, fiber-based solutions, and automated packaging that minimizes waste. In medical, pharma, and life sciences, We play a key role in the COVID-19 vaccine distribution benefit from growth in online shipments of medical equipment and pharmaceuticals. Now turning to slide seven for an update on C automation. In the first half of the year, equipment systems and service sales were up 26% and accounted for 8% of our net sales. We're 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 bookings for automated equipment are strong. We're confident in our ability to exceed $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. The solutions multiple is why we are so excited about C automation. Let me now turn to slide 8 and talk about sustainability. Sustainability is in everything we do and fueling our growth. We're making significant progress on our 2025 sustainability pledge with nearly 50% of our solutions already designed for recyclability. Our innovation strategy is focused on maintaining the high-quality standards that our customers are accustomed to in food safety, minimizing waste, and protecting goods. We are continuously optimizing our high-performance materials and incorporating more recycled and and or renewable content to drive circularity and make sustainability more affordable. We're also collaborating and investing with partners on mechanical and advanced recycling. As part of SeaVentures, we recently joined the Closed Loop Circulars Plastic Fund. This fund invests in scalable recycling technology, equipment upgrades, and infrastructure solutions to advance the recovery of plastics in the U.S. and Canada. You can see a handful of our solutions designed for recyclability on this slide, with many more shared on our website. Earlier this year, we established a net zero carbon emissions goal across our operations by 2040. We're taking many actions to reduce our energy consumption, such as investing in touchless automation, upgrading air compression systems, and utilizing LED lighting. We're also investing in renewable energy sources, including solar and wind. Between 2012 and 2020, our greenhouse gas emissions intensity decreased by a remarkable 50%. We'll share more details in our upcoming annual sustainability report that will be available on our website in the early fall. I'll 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 9 to review our quarterly net sales growth by segment and by region. In the second quarter, net sales totaled $1.3 billion, up 15% as reported, up 11% in constant dollars. Food was up 6% in constant dollars versus last year, and protective increased 20%. EMEA and the Americas were both up double digits, EMEA up 16% and the Americas up 13%. APAC was flat versus last year with a modest decline in volumes offset by favorable price. On slide 10, you see organic sales volume and pricing trends by segment and by region. In the second quarter, overall volume growth was up 9% on favorable price of 3%. Let's start with volumes. Food volumes were up 4%, with the Americas up 7% and EMEA up 2%. This was offset by a 3% decline in APAC largely related to Australia herd rebuilding. Protective volumes were up 15% with the Americas up 13% and EMEA up 36% while APAC had a modest decline. Q2 price was favorable 3%. You can see that protective had 5% in favorable pricing and food was 1% due to timing of pricing actions and formula pass-throughs. We have implemented several price increases and expect 2021 price realization to be $275 million. On slide 11, we present our consolidated sales and adjusted EBITDA walks. Having already discussed sales, let me comment on our adjusted EBITDA performance in Q2. We delivered adjusted EBITDA of $263 million, up 1% compared to last year, and margins of 19.8%, down 280 basis points. reflecting the impact of the current inflationary environment and supply chain disruptions. We are leveraging our higher volumes at 40% as we experienced a more favorable product mix. Despite favorable pricing in the quarter, you can see how higher input costs weighed on our EBITDA performance with an unfavorable price-cost spread of $36 million. Operational costs increased approximately $13 million relative to last year, This increase reflects investments to support growth, inflation on labor and indirect material costs, as well as the normalization of spend in the quarter. This was partially offset by $13 million in re-invent C productivity benefits. We expect our price-cost spread to improve sequentially in the third quarter. However, we do not expect to see positive price-cost spread until Q4. Adjusted EPS in Q2 was 79 cents compared to 76 cents in Q2 2020. Our adjusted tax rate was 25.6 percent, reflecting a more favorable mix of foreign earnings. Our weighted average diluted shares outstanding in the quarter were 153 million. We exited the quarter with 150 million shares outstanding. Turning to slide 12, here we provide an update on re-invent seats. We have achieved 28 million of benefits in the first half of the year and remain on track to realize approximately 65 million in 2021. Our commercial workstream is accelerating innovation and driving new customer wins in core and adjacent markets. Turning to segment results on slide 13, starting with food, in Q2, food net sales of 737 million were up 6% on a cost-to-dollar basis. Cryovac barrier bags and pouches returned to growth, increasing approximately 10 percent and accounting for nearly 50 percent of the segment sales. This growth reflects the beginning of food service recovery relative to last year when protein plants in restaurants, sporting events, and other large venues were shut down. Sales in case-ready and roll stock retail applications, which accounts for just over 40 percent of segment sales, were down low single digits as supply disruptions impacted our results. In addition, this is against the backdrop of tough comps given the surge in demand from shutdowns a year ago. Equipment, parts, and service sales, which accounts for 8% of the segment, were up nearly 40% in the quarter. We are experiencing increased demand for our automated solutions as our customers around the world invest in their processing plants to upgrade aged equipment and drive productivity. Adjusted EBITDA and food of 158 million in Q2 declined 6 percent compared to last year, with margins at 21.5 percent, down 360 basis points. This decline was related to elevated input costs, supply disruptions, and the timing of pricing actions. On slide 14, we highlight protective segment results. In constant dollars, net sales increased 20 percent to 592 million. Industrial was up approximately 30% relative to last year when automobile and general manufacturers were forced to temporarily shut down their operations. Fulfillment, which is largely driven by e-commerce growth, was up approximately 10% on a global basis led by double-digit growth in automated equipment, inflatable solutions, paper, and temperature assurance. we leveraged our broad portfolio and global scale to meet increased demand despite ongoing supply issues, such as industry-related chip shortages out of Asia. The 30 million investments in capacity that Ted referenced earlier will help us meet increased customer demands for automation equipment. As a reminder, approximately 55% of our protective sales are derived from industrial end markets, and the remaining 45% from fulfillment and e-commerce. Adjusted EBITDA of $107 million increased 17 percent in Q2, with margins at 18.1 percent, down 100 basis points versus last year. Higher sales and productivity gains helped mitigate higher input and supply disruption costs. Now, let's turn to free cash flow on slide 15. In the first half of 2021, we generated $102 million of free cash flow. Relative to the same period last year, Higher earnings and lower restructuring payments were offset by higher employee-related costs and CapEx investments to support growth and innovation. On slide 16, we outlined our capital allocation strategy. We will maintain a strong balance sheet while driving attractive returns on invested capital and supporting profitable growth initiatives. In addition, we have a healthy acquisition pipeline that aligns with our growth strategy. On this slide, I want to highlight our growth investments. We are focusing our CapEx on breakthrough processes, automation, digital, and sustainability. With C-Ventures, we have invested approximately $40 million in early stage disruptive technologies and business models that are expected to accelerate our strategy and innovation efforts. As it relates to returning capital to shareholders, in Q2, we were an active buyer of our stock. We repurchased 6.1 million shares for 299 million during the first six months of 2021, reflecting confidence in our vision, strategy, and execution. And as Ted noted, today we announced a new 1 billion share repurchase program, continuing our commitment to return value to shareholders. This new program has new expiration date and replaces the previous authorization. During the second quarter, we also announced an increase to our quarterly cash dividend of 25 percent. Let's turn to slide 17, review our updated 2021 outlook. We are raising our net sales guidance, reflecting strong first-half sales performance and outlook for the remainder of the year. For net sales, we estimate 5.4 to 5.5 billion, or 10 percent to 12 percent as reported growth, and 8 to 10 percent in constant dollars. compared to our previously provided $5.25 to $5.35 billion range. At the midpoint, the $150 million increase in constant dollar sales largely reflects additional pricing. We continue to anticipate adjusted EBITDA within a range of $1.12 to $1.15 billion. On a reported basis, adjusted EBITDA is expected to grow 7% to 9%. Higher sales are expected to help offset increased material and supply disruption costs. Given the timing of pricing actions, we anticipate a modest sequential improvement in EBITDA in Q3 with a more meaningful improvement in Q4. We are raising our 2021 outlook for adjusted EPS to $3.45 to $3.60, and we continue to expect a 45-55 first half, second half percentage split. Our outlook assumes 153 million average shares outstanding, 1 million reduction from our prior guidance, given share repurchases in the first half, and an adjusted effective tax rate of approximately 26 percent. And lastly, our free cash flow outlook continues to be 520 to 570 million. There is no change to our outlook for 2021 CapEx of approximately 210 million and re-invent Z restructuring and associated payments of approximately 40 million. As you can see on the slide, we wanted to provide a few variables as it relates to our 2021 guidance range. The low end of our range would assume the magnitude and duration of material inflation and supply chain headwinds persist longer than anticipated and a slower pace of food service recovery. The high end implies market and geographic share gains. Continued strength in automation, industrials, e-commerce, and food and overperformance of our sea 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 sea operating engine is delivering results on our journey to world-class performance. We are clearly defining where we are taking sea in the future, and what you should expect us to deliver with our C operating model. We differentiate ourselves in the markets we serve with a broad set of innovative packaging solutions, global service scale, entrepreneurship, and agility. Our people are working hard to exceed our customers' expectations. This is core to who we are. Our talent is driving our transformation to world class. We will continue to focus on zero harm and protecting our people as the pandemic continues. We are reinventing everything we do, from how we innovate to how we solve our customers' most critical packaging challenges. Our strategy is working. We are 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 would like to begin the Q&A session.

As a reminder, to ask a question, please press star then 1. If your question has been answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from Ganshan Punjabi with Baird. Your line is open.

Thanks. Good morning, everybody. In one of your positive variances that you cited on slide 17, you know, you called out share gains in markets and geographies. I was hoping you could give us a bit more color on that dynamic. And then related to that, how much of the share gains would you ascribe towards products that align towards your circularity initiative? Thanks so much.

Thanks, Gancham. And for the two parts to your question, I'm actually going to put that into bands for a second and give that to Chris, and I'll follow up on the second part of that question, Chris, and if you can remind me. But, Gancham, before we get to your question, for everybody on the call, I did want to add some clarity to the Q&A and make a brief comment. Late yesterday, we announced that we received notification from the SEC staff that our previously disclosed investigation has concluded as it relates to sealed air and that the SEC does not intend to recommend any enforcement action against the company. As I'm sure everybody and appreciate, our comments are limited to the SEC documents that were filed publicly, including in our press release in Form 10-Q, which we're going to file later with the SEC. Throughout this process, though, I just want to highlight we fully cooperated with the SEC's investigation, and we are pleased to put this matter behind us. So let's get back to your question, Gansham. And, Chris, if you can handle the first part, and I'll get to the second.

Sure. Are you still there? Okay, let's continue on. So I think you mentioned just in terms of page 17 for our overall slide, if I recall you said that, slide 17, which provides an update on our outlook on net sales, adjusted EBITDA, adjusted EPS, and free cash flow. As we see overall performance in terms of the top line, very strong growth in the quarter, as we mentioned, If I was to change, if we were just to kind of reflect what we said in the May timeframe and bridge it to what we view now in terms of top-line growth, we increased last quarter, we increased the top line by $150 million, and we mentioned that 50% of that was going to be price and 50% of that was going to be volume. This quarter, we're going up another incremental $150 million, mostly driven by price with a small amount of volume improvement. What we're most strengthful for is the is the protective side of our business, especially out of EMEA, where we saw extremely strong growth, as we commented on it in our prepared remarks. So that gave us confidence coming off first quarter, second quarter, first half of the year, leading into the next year to increase our guidance $150 million. And that's how we feel pretty good about the performance. And And the execution in terms of the bottom line, we talked about the price increases, multiple price increases that are necessary in light of this significant inflationary environment that we are in, multiple price increases throughout the year to make up for that difference, hoping to close that gap in the second half. And I did want to comment that our third quarter, we do expect a slight improvement to 2Q, but as I mentioned, that fourth quarter is where we'd see the bigger lift when formula-based pricing and other pricing actions kick in in a more meaningful way. Great.

And I'll handle the second part of the question where Gansham asked about, tell us about the investments and the circularity piece. So I'd like to point, if I could, to slide eight. So if you look at slide eight, we talk about what's going on with sustainability. And as we highlighted in our prepared remarks about our investments, with closed loop, and we're excited about it. We made previous investments, and you've heard us talk about our C-Ventures. We're investing in sustainability, using our balance sheet to go side by side with some really interesting investments that are out there. What we like about closed loop is it aligns exactly where we're going. They focus on sustainability. They're focusing on the carbon footprint, and taking the process from a linear process where you make a product and then it ends up into the ocean or landfill. How do you bring circularity to bring that waste back and recycle it, whether it's chemical recycling, et cetera? But the other part we like about their strategy is that they also connected to earnings growth. So they focus on the circular economy. How do we do that in a way to drive earnings? Also, our investment allows us to see what other interesting incubating technologies that they're looking at so we can see inside and be early investors some pretty exciting technology in this space of recycled products and businesses that are out there. So we're going to be investing side by side, but it really ties into our strategy of linking sustainability to our carbon neutral goals but then also that we're in the business to protect. And in the business part is how we're connecting it to the earnings. Okay? Next question, operator.

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

Yes, thanks. Good morning, everyone. So it's a two-part question. First, I was hoping to get a little bit of color just on volume's If I look through the balance of the year, the volume growth expectations don't seem particularly aggressive. And maybe you can help frame by business, by region, kind of how volumes are tracking relative to pre-pandemic 2019 levels and where you see kind of the opportunities and risks over the balance of the year. And then just to confirm on the pricing side, so it implies about 9% pricing year over year in the back half, I presume more fourth quarter weighted. Can you just clarify for us kind of how we should think about the raw material cost trajectory through the second half? Thanks.

Good. Thanks, Adam. Maybe I'll take the second part first because what we've seen, just coming off the announcement we made yesterday in terms of the press release overall pricing, if we go back to the first quarter call, we talked about an incremental headwind on resins and chemicals primarily. This material inflation heading our way, roughly $150 million. What we're seeing now is more like $300-plus million. And as a result, we have implemented multiple price increases, more to come as we communicated. The realization of that price increase, in my prepared remarks, talking about just the overall, it's the second half, that $150 million increase to the full-year guidance, mostly is driven by price. Your first part of your question is just overall volumes. The strength of protective really can be commented in terms of the Americas and specifically EMEA has been extremely strong. Some of that being on favorable comps clearly towards the second half of the year. But as we look at the second half, the momentum that's moving into that part of the year is we just see protective continue to be strengthened. And there's no one particular area. It's kind of across the board. I don't know, Ted, if you have anything to add as a really overall volume for the second half, but it seems to be, again, leading the Americas and leading out of EMEA with Asia-Pac catching up the second half.

Sure. Good. And, Adam, as you can see how Chris and I are tag-teaming, Chris will tell you to make sure we do what we say we're going to do, and I'll leave you... a little bit of the excitement that we'll get through this journey. As we put in the press release, we went directly to our customers as well about our price increase. So it's pretty significant. What we've swallowed through the engine right now, it's going through the engine. We'd like to get through this in the second quarter, but significant input costs. But behind that, the engine is working. The productivity and the leverage behind that, as Chris highlighted, we're leveraging at 40%. But that input cost, we've got to get through, and we think we'll get through it by the end of the year. We're not going to tell you which quarter because we don't know, but we are aggressively working. That model that we showed on slide five, that will happen, and that's the guide where we're showing you where we're going in 2022 now and beyond. So some of the specifics that we're driving, it's really using our automation to get that through and help our customers. So just I'll give you a little bit of detail. If you look at slide seven, where we look at our whole portfolio, I'm sorry, go to slide six. So if you look at our portfolio of products, of what it's going to do, we do 30 billion packages. So if you just think about that with our whole portfolio, And you took that $30 billion, this $5 billion company, take equipment away. So we're talking about the average price for our package is around $0.16. Well, with this dramatic input cost, that's going to go from $0.16 to $0.18. Oh, and by the way, we're going to make it sustainable. And by the way, we're going digital. So we're going to actually take that probably up from $0.16 to $0.20. And we're being very transparent with the market that's coming. So what do we do? We got to drive automation. So the automation is where our growth is coming, where we can save our customers millions to afford those few cents per packaging. So as we get through this and we swallow this incredible inflationary period, we are spending a huge amount of time with our customers in driving the automation. And to hit that sales growth number and our whole portfolio beyond protective and food, that we are going to be driving the automation, digital and sustainable solutions. And you can see in the numbers that we're excited by going through this double digit, up 30% more, even the bookings, which we're tracking and tracing up significantly. So we're investing there heavily. We're working with our customers. We will swallow this inflationary period. The timing of it, we don't know exactly, But for sure, by the end of the year, we think we're going to do quite well, and we'd like to end on that model. The model will continue to perform going into next year.

Operator, next question, please.

Our next question comes from George Staffos with Bank of America. Your line is open.

Hi, everyone. Good morning. Hope you're doing well. Thanks for the details. Hey, Ted, you kind of took my question there that I had for you, but I'll try a different approach to it. So is the automation allowing you to also upsell the price per package, or is it really more around you need to raise pricing and the productivity that your customers are getting from this is allowing them to absorb the increase in pricing? And are you finding that it is one for one. And then kind of the related part, too, is you gave us color on your automation sales and the initiatives there in food. Could you remind us, I don't remember hearing it, what the automation performance was for protective in the quarter and overall how that's helping you drive more operating leverage across both businesses? Thank you.

Okay. Good question, George, and I'm glad I answered part of your question before. But going back into your detail on how we're doing this with our customers, and just remember, the customers are listening to this call with us as well. So I've been very direct and through this, even this past quarter, been meeting with the CEOs of some of our major customers literally around the world, most of those being virtual. So we've been very open. The package, our pricing is going up on the materials. So your question on the pricing side of it, we want to share with them, again, the package pricing is going to go up a few cents. But the real savings for them, it's millions of how do we automate their operations. And their issues right now are labor scarcity. the safety of COVID. How can we get in there and fully automate? So take these, there are millions of packages and save them money. So we're not talking to them about actually the price increase. We're talking about how we can save them money knowing that those materials are going to be more expensive. At the table with them, we're also learning even more challenges that they're having. we're not the only ones that are experiencing higher input costs to our customers. So again, we're going even further into their facilities and actually bringing our ops teams with our customers to show them how we can potentially help them make their facilities more productive, safer, and driving the level of automation. So yes, it's a pricing discussion, very direct, but it's really how can we save them money So I'll keep pointing to slide seven, and this is how we're selling that automation story to our customers. The second part of your question, I'll start, and maybe if Chris wants to add more detail, your question is, is the equipment and the automation story coming in the protective side? Absolutely, especially with fulfillment centers. We're seeing the automation come into these high-volume fulfillment centers and very aggressively. What we used to do in the old model is we would give that equipment away, even with our iconic bubble wrap. We actually can make bubble wrap on demand by the push of a button and create the bubble wrap right in the fulfillment center. But really the growth in protective has been with AutoBag. The acquisition that we've made with AutoBag and what they're doing with automation has been tremendous for us, especially in this environment bringing our auto bag systems into the fulfillment center so that you can actually load the package more effectively and efficiently and bring those high-value materials around the package is where the growth right now through the pandemic is really, really strong, and we think more to come. And we're taking that to our food business as well. So to our customers, they think industrial products is what we do because if you look at food plant, they actually call that an industrial operation. So just sharing with you, it covers all of our customers. The short answer on the pricing is we've got to save them more money, so we've got to work harder. And automation is a great story to be at the table through these challenging times.

Sure, Ted, and then what I'll do is maybe just add on to George's comments relative to the volume. And what we saw in Q2, we mentioned food up considerably on the equipment side, but protective actually was up also double digits. And if I gave you first half numbers, what we've seen is food be a little bit better than 20% and protective around 30%. So really significant strong strength out of our automation performance for the first half of the year. And we're continuing to guide greater than 250 million customers as you can see in terms of equipment and services, and then that 425 as we talk about. We have opportunities to exceed that 425 clearly. We want to make sure it's in our performance, and hopefully we'll hear a quarter from now talking about how that expectation for 21 is actually going to be greater than that 425. We've got a good pipeline of opportunity.

Operator, next question, please.

Our next question comes from Phil Ng with Jefferies. Your line is open.

Hi, good morning, Ted, Chris, Lori. This is actually John on for Phil. I hope you're all doing well. I wanted to stay on the inflation and price cost. I'm sorry, the price initiatives that you announced yesterday. Could you talk a little bit about what's different, like why you announced these price increases in a press release and how it's compared to some of the other price increases that you've put out without a press release earlier in the year? And then, Chris, I just want to confirm, I think you said essentially that the price-cost spread is now expected to be about a $25 million-plus headwind for 2021 from about flat in the guidance last quarter. Thank you.

Hi, John. I'm going to do the first part and then turn it over to Chris. So, why did we do a press release on this? And it's more than a price announcement. It's actually... a problem solution announcement, you know, going directly to customers because it's been significant. So number one, price increase is coming. It's across the board. It's not just with non-formula, formula, et cetera, et cetera, so it's everywhere. And it's across the world. The second piece of the announcement was it's a solution-based announcement. Please, let's work with you so what we can do to help you in this tremendous environment to bring our automation solutions, our full portfolio to you so we can help you with this situation. So it's directly to the customers. So it's a two-part. So I'll let Chris handle the second part of that question.

Yeah, sure. John, so on the second piece of it, you were right. The first quarter call, we talked about trying to drive pricing actions and productivity, et cetera, to to mitigate the concern on our EBITDA performance. We feel good about being able to maintain the current range, but the dynamic there is driving incremental volume and driving productivity is going to help offset our view of the full year price-cost spread to be negative. You mentioned 25 exactly right. We kind of view it as this 25 to 30 million of negative price-cost spread for the full year based on what we know today. As I mentioned, just driving that volume, incremental volume growth in terms of bottom line performance and productivity to try to help offset that is how we overcome that to maintain our EBITDA range. And we stay committed to that as of now through the first half, obviously, of the year.

Operator, next question, please.

Our next question comes from Jeff DeCoscas with J.P. Morgan. Your line is open.

Thanks very much. Is it the case that as a base case next year, you recoup your negative price-cost spread? And secondly, in the food area, for the third quarter, is it the case that your raw material spreads will get a little bit worse and your protective spreads will get a little bit better, leading to you having a little bit better of a cost spread profile in the third quarter.

Yeah, I'll do maybe the first part, and then Chris, if you want. So, Jeff, to the first part of your question, again, I just keep going back to the slides, why we put the model out there to continue that's telling you where we're going. So, again, as we're swallowing this problem going through the engine, we think, to your question in 22, yes, we will be through this. Yes, we'll be ahead on the pricing, yes, we'll be caught up. And that's what the model says that we're going to do. We just can't make the call right now because we don't know when this inflationary pressure is going to stop. As we've even talked to you at your conference in the past that, hey, maybe it's going to start coming down the second quarter. That didn't happen. Maybe it's going to come down in the third quarter. Don't know. So we're just giving you the guidance. We think we'll be through this going into 2022, we just can't make the call on when in 2021. The part of that, so yes, we will be ahead of the price, have our price ahead of the cost sometime in 2021, and we'll be continuing to drive our model into 2022 as we laid out in slide five.

Yeah, sure. And then, Jeff, as you mentioned, in terms of being able to recoup that cost, You know, inflationary headwind leading into the next year, we will have that favorable. We expect, assuming no additional pressure from an inflationary environment, that we're going to recoup some of that material cost inflation going into next year, given formula-based pricing. But specific to your question, around the second half of the year, maybe thinking through foods contribution as well as protectives, contribution or what that whole dynamic is between material cost inflation and price cost spread. We see both segments being under pressure in the third quarter, as I mentioned earlier. Some improvement from Q2, clearly, but as you look to the fourth quarter, you see both segments contributing positively from a price cost spread. For food, clearly more benefit from formula-based pricing, but we're also implementing price on the non-formula and protective, given the pricing actions we've taken, will start to materialize as well. So you've got this big lift in Q4 as we see the price benefit of the actions, the price-cost spread benefit of the actions we've taken on price.

Operator, next question, please.

Our next question comes from Anthony Pettenary with Citi. Your line is open.

Good morning. Just following up on Jeff's question on food. Can you talk about organic growth expectations for the second half and how those are kind of bracketed out between price and volume? And then within those volumes, is there any way that we should be thinking about case-ready volumes and food service volumes and how those might trend in the second half given the comps?

Yeah, maybe the only thing to add to that is For food, just that whole incremental $150 million in terms of the May's guidance, you know, leading up to today's guidance. On the food piece of it, we don't expect that to be – most of the food increase is going to be driven by pricing actions. There's going to be a slight improvement on volumes. And then protective is going to be continued improvement in volumes as well as price. But I guess I don't – I want to just – be clear that that incremental price or incremental volume that we are profiling in terms of $150 million between the two segments will benefit both segments, but it's mostly on price. Volumes, we don't expect a big change, but maybe to add to that.

Right. So the other, Anthony, the piece on what's going on in the markets that we'll see, and again, if you remember year over year, the first half, what we're competing with that tough comp of second quarter last year when During when the shutdowns hit, the bag business on food was really, really strong. Boy, we leveraged nicely on bags. But behind that, we had food service pretty much shut down with restaurants. And that's the pouch business. We go into our liquids and the tomato paste, et cetera. So we had those two things work. So we see that moving in the second quarter. We just can't tell you the timing on it. So we see the fluids in the pouch business, which is extremely attractive business to us, picking up, and we will be gaining on that in the second half and, again, going into next year. So food is really a tale of two markets, but it's also the same with the protected, where we had the industrial and e-commerce. So that is shifting in the quarter. But behind all that, I just want to continually highlight that engine is working on driving the productivity on both of those internally. So that's giving us our confidence to drive getting through this, driving it through the end of the year and into 2022.

Operator, next question, please. Our next question comes from Salvatore Tiano with Seaport Research. Your line is open.

Yeah, hi, Ted, Bruce, and Lori. Thanks for taking my question. Just trying to understand a little bit the price calls that people have been asking and what should we expect in Q4 specifically. You clarified you expect 25 to 30 million of negative price calls for the year now, with Q3 also in the red, and you're at 55 so far. So does that imply that you should be at least 30 million positive price calls in Q4? Is that kind of how? You're thinking about it. And as we look about the Q4 implied EBITDA, which seems to be based on a modest Q3 increase, probably $320 million or something like that, based on the full-year guidance, how much of that do you think you can sustain on a run rate as we look into 2022?

Sure. Thanks for the question. So you're right. And just in terms of how we look at the fourth quarter, most of the benefit in price-cost spread to our full year still being negative, roughly $25 to $30 million. that fourth quarter shows a significant increase. And again, I'll just go back to my comments in terms of the pricing, mostly formula-based pricing as well as other pricing actions kind of hitting in Q3, but they're going to show a big lift in Q4 based on our expectation. Kind of ending the quarter, you know, a little early to tell because the inflationary environment, just as we were here 90 days ago, if you will, talking about the the full year 21, extremely dynamic environment. Right now, our projections, our estimates for the full year show a nice improvement in Q4 for purposes of margin. Without a doubt, the sustainability of those margins going into 2022, we'll have to assess based on the inflationary environment. As you know, our business ranges from 20%, 21% to 23%, 24% EBITDA margins, just depending on the dynamics in a particular quarter. What we're trying to drive for, not only in that incremental volume growth and the leverage off of that, getting back to our operating model, is to be able to drive EBITDA margins, you know, approaching 24%, 25% over time, given the operating engine in terms of the ability to generate the cash and fuel it back into the business. But Tim, maybe an additional comment.

Yeah, and Salvatore, as you can see, I'll be a broken record. We're trying to make this easy for you, easy for investors to see where we're going. So I'm going to go back to slide five. So we're going to get through this, and as you're working your model, as you're looking what's going through the third quarter and then the fourth quarter, so you can say, whoa, on the third quarter, your leverage is not there. That's why we're explaining it. We're giving you the leverage behind that. what's going on with the engine behind this input cost, and it was actually leveraging at 40%, even higher than our target that you see of the 30. So going into next year, we think we'll be back at that 30% target, probably be ahead of that 30% target in the fourth quarter, but that's net-net. That's where we think and we're pretty confident that we're going to make the operating model work as we get through this. So I just want to keep sharing with you where business is going despite these challenges. We're going to get through it and actually be a stronger, better company on the other side of this.

Operator, next question, please.

Our next question comes from Adam Josephson with KeyBank. Your line is open.

Thanks a lot. Good morning, everyone. Chris, just on your guidance, just want to make sure I understand a couple things. So polyethylene has yet to settle for July. So I'm just wondering, what is your actual polyethylene price expectation, not only for July, but for the balance of the year? And then on the Delta variant, I don't think you've talked about it, but just what is embedded in your guidance in terms of any potential disruptions in Asia or elsewhere from the variant? Thank you.

All right. Thanks for the question. So we have been and we continue to be in this very inflationary environment as it relates to PE. So, again, not to sound like a broken record, but we're in the face of it. We're acting to it. We're managing to it. We're driving product. We're doing everything we can to try to minimize the impact. So you'll dare to maintain that full year guidance. Our expectation is that we're still in this inflationary environment. We do expect it to continue increasing. call it for another month or two. But I'll tell you, that makes us nervous a little bit to even make that statement because of the dynamic we've seen in the past three months. We will react to it accordingly, of course, in terms of driving productivity and pricing actions as necessary. But we're hopeful that this thing starts to plateau, kind of level out, and we continue to kind of move forward. But internally... When you think about our risks and opportunities, and as we like to share with investors when we put it on our guidance slide, kind of the downside as well as the upside to our outlook, you can see the downside clearly still is that dramatic material inflation continues, the supply disruptions, et cetera. But we'll manage through it. But let me focus on the positives. The positives are the global reach of our company, the share gains, the opportunity. We already talked about the equipment piece of it in terms of what we're what we're doing and how we're driving. We hope to exceed that 425, as I mentioned before. And then, you know, between Ted and myself, just continuing to reiterate the operating engine. The backbone that we have in place to drive productivity is there. It's real. It's happening. And we'll continue to pursue it. Regarding the Delta variant and the implications that has on our business, I kind of view it as every week's a new week, almost every day's a new day as we hear more about it. It has us clearly concerned, and one side of the business potentially may do better as it relates to the retail food side, if you will. We did see some early signs of recovery on the service side. We're hoping that that food service, hopefully that continues, but time will tell.

Operator, it looks like we have time for one more question, please.

Okay, and our next question comes from Josh Spector with UBS. Your line is open.

Yeah, hey, guys, thanks for squeezing in my question here. Just looking at Asia specifically, you know, a bit of a step down in 2Q versus 1Q, you know, in both segments you talked about some weakness and you mentioned the herd rebuilding and food. But is there anything else that's changed or, you know, resulted in a lack of growth near term? And how are you thinking about the second half in 2022 for Asia broadly as a result?

Yeah, Josh, good question. Obviously, if we didn't talk about it, it wasn't as a top number driving our numbers, but the Asia-Pacific growth in the quarter was not what we would expect. So we do think we have opportunities. I don't want to give you the answer of timing, et cetera, but we think we have some growth opportunities in Asia. There were some issues. Again, it's the year-over-year comparables. We had a really strong second quarter a year ago in the guidance that we have again similar to the previous question that Adam had we do have the philosophy of under promise over deliver so we have our Asia team is being aggressive on how do we drive growth in such a large region but right now in our guidance we have a tepid number out there but we think we have an opportunity really it's the same issue though It's what can we do in automation? We're driving some significant wins. Those will materialize. Some of them you don't see because they're in the bookings. And the bookings, the good news is while we have confidence, we can now see those bookings numbers are up that will be realized. And so we see some opportunity in H-Pacific. It's a huge opportunity for us, especially same thing, the industrial, e-commerce, and even the food business. If you're If you're reading what's going on with the African swine fever, huge industrial growth opportunity as China is converting from that wet to dry. Some of those huge pork plants, those industrial plants that we're connected with, are under construction, are being built. Will they be realized this year? No. But we see lots of opportunity in Asia-Pacific. As far as our portfolio, when it's only 15%, it's not moving the needle, but we're excited about the opportunity to get Asia Pacific more into our numbers for the future. So we've got some work to do there. Good question.

Thanks, Ted. Thank you all for joining us on today's call. We look forward to speaking with you in the near future. Stay safe and healthy. Operator?

This does conclude the program. You may now disconnect. Everyone, have a great day.