Sealed Air Corporation

Good day and thank you for standing by. Welcome to the Sealed Air Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participant lines are in listen-only mode. After the presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star then 1 on your telephone keypad. Please be advised today's conference may be recorded. If you require operator assistance during the call, please press star then 0. I'd now like to hand the conference over to Lori Chapman, Vice President of Investor Relations.

Thank you, and good morning, everyone. With me today are Ted Duhini, our CEO, and Chris Stevens, our CFO. Before we begin our call, I'd like to note that we have provided a slide presentation to help guide our discussion. In addition to our results and outlook, Ted will go through a deep dive on C, automation. Please visit our website where today's webcast and presentation can be downloaded from our IR website at sealthere.com. Statements made during this call stating management's outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled Forward-Looking Statements in our earnings release and slide presentation, which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K which you can also find on our website or on the SEC's website. We discuss financial measures that do not conform to US GAAP. You will find important information on our use of these measures and their reconciliation to US GAAP in our earnings release. Included in the appendix of our today's presentation, you will find US GAAP financial results that correspond to the non-US GAAP measures re-referenced throughout the presentation. I will now turn the call over to Ted. Operator, please turn to slide three. Ted?

Thank you, Lori, and thank all of you for joining our fourth quarter and year-end earnings call. Chris and I will discuss our Q4 and year-end results, our 2022 outlook, and we'll be introducing a deep dive into our C automation three-year plan. On slide three, you can see our visions. to become a world-class digitally driven company automating sustainable packaging solutions. And we'll show you how we're getting it done. Now let's turn to slide four. In 2021, we delivered strong sales and earnings, overcoming dramatic inflationary supply and COVID challenges. Our results are a testament to our culture, people, and powerful sea operating engine. We're building a world-class, digitally-empowered company, acting like a startup to disrupt the markets we serve, our industry, and ourselves. These are exciting times for us. We're taking bold steps, investing in our people, operations, and customers to create significant value for our stakeholders. You can see how our C operating engine performed in the fourth quarter. Net sales were up 14% to $1.5 billion, and adjusted EBITDA was up 18% to $330 million. For the full year, we generated free cash flow of $497 million. As part of our strategic portfolio realignment, we successfully completed the divestiture of reflectors, a maker of insulated materials for the construction market, and generated additional after-tax proceeds of $65 million. On slide five, we're raising our C operating model growth goals for sales and adjusted EBITDA by 200 basis points. Our higher above-market growth goals are led by our confidence in our strategy, disruptive innovations and investments, and our execution across markets and geographies. Through M&A and C Ventures, we're looking to expand into attractive markets, technologies, and disruptive business models to accelerate our speed to market. Under Cventures, we recently completed the acquisition of Foxpac, a pioneer in digital printing. Let's turn to slide six, where you can see our transition from a materials-driven business to a market and customer-centric company focusing on automation, digital, and sustainability, powering our growth. While Chris will give you more detail on our geographic performance, I'll focus on activities in our top markets. In proteins and fluids, we experienced strong growth in automation with equipment, parts, and services up double digits in the fourth quarter and the year. In 2021, our e-commerce fulfillment portfolio shifted towards automation and sustainable solutions. Sales for Auto Bag, which is illustrated on this slide, and Auto Box were up double digits in the quarter and the year, reflecting the increased demands for automated solutions from e-commerce and logistics. You can see an example of our Auto Wrap solution on this slide as well. With Continental Tires and our partnership with UPS, we're enabling a fully automated tire packaging and sorting solution that creates an enhanced customer experience. This is creating significant savings for Continental Tires and new business for UPS. Turning to slide seven, we'll take you through a deep dive on C automation. Our plan is to more than double our automation business to over $1 billion by 2025. Our solutions model starts by identifying savings for our customers and converting those savings into solutions with a faster than three-year payback. Our solutions multiplier, as materials and service flow through the installed base, is key to our growth. We are digitally connecting more than 100,000 installed assets. Our C automation solutions resonate with our customers as we address their needs to reduce labor dependency, build more resilient operations, increase productivity, reduce costs, and deliver flawless quality. C automation solutions drive margin expansion for C as compelling customer savings and operational improvements allow for the best solutions at the right price, and we are making them sustainable. We're investing to double our equipment production and service capacity over the next three years to match our ambitions. We recognize we have to go faster, and we are relentless in this pursuit. The chart to the left shows how customer savings are behind our growth in automation. The chart to the right illustrates our bookings trends of our fastest growing automation platforms, giving you transparency into the strength of our business. Solving customer challenges and driving tangible savings are the central pillars of our sustainable competitive advantage, creating an inimitable ecosystem. On slide 8, we are showcasing our C automation solutions. This is an example of a $7 million automated protein system with less than a three-year payback, providing a step-change improvement for our customers' operations. We start with the most labor-intensive processes in meat packing facilities. C-AutoLoad automates the process of loading the meat in the bag. We're integrating cobots, robots, and other automated systems to increase line speed while producing flawless quality with AutoVac and AutoPak. We continue to innovate in high-performance cryovac materials, making them more sustainable, recyclable, and effective. Our state-of-the-art vision systems for quality control can see what humans cannot, and our artificial intelligence and machine learning continuously makes the process smarter. We use our CMARC to validate and certify quality. Our advancements in digital printing will enable customers to improve their operations and, at the same time, digitally connect with their consumers. A key point of differentiation for C is how we leverage our internal touchless automation capabilities and our OpEx teams to improve customer operations. Our industry-leading experts are working with customers and their facilities to simplify the process, eliminate waste, remove people from harm's way, and then automate, putting in practice the principle of you get what you measure. Let's talk about what automation means for growth. On slide nine, we use the waves of the C mark to illustrate the value of the solutions multiplier. We are changing from our past of being a materials first to leading with an automation first solutions model. We start with the value of the initial equipment order equaling 1x. We continue with parts and services being 2x over the equipment lifecycle. And the automation and integration opportunities represent three acts. As our high performance materials, such as paper and films, along with digital graphics flow through the system, it takes us well over 10 times the value of the original equipment order. Let me now turn to slide 10. Our strategies to make sustainability an integral part of our business. We continue to make significant progress on our 2025 sustainability pledge with approximately 50% of our solutions already designed for recyclability, and we reached approximately 20% recycled and or renewable content in those solutions. Approximately 15% of our solutions are fiber-based. We design our high-performance materials with recyclability in mind to make sustainability more affordable and to create a pathway for circularity. It starts with our touchless operations, where we actively measure every touch point from pellet to bag and aggressively work to simplify the process, eliminate waste, and millions of touches. We're investing in automation and robotics to make it happen. We're linking our own automation to our customers' operations and leveraging the same productivity processes we use internally. Our digital initiative is critical to our sustainability and automation efforts. Next quarter, we plan to feature in detail how our proprietary digital printing technology and C-Mark connect consumers and customers to build brands and close the loop on the circular economy. I'll now pass the call to Chris to review our results in more detail.

Thank you, Ted, and good morning, everyone. Let's start on slide 11 to review our quarterly and year-end net sales growth by segment and by region. In Q4, net sales were up 14% to $1.5 billion. In constant dollars, net sales were up 15%, with 17% growth in food and 13% growth in protective. The Americas and EMEA were both up double digits, with Americas up 19% and EMEA up 13%, while APAC was up 4% versus last year. In 2021, net sales were up 13% to 5.5 billion. In constant dollars, net sales were up 11% with 9% growth in food and 15% in protective. Growth was led by the Americas and EMEA, which were up 13% and 12% respectively, with APAC up 6% versus last year. On slide 12, you can see organic sales volume and pricing trends by segment and by region. In Q4, overall volume growth was up 4% with favorable price of 12%. In 2021, volume growth and favorable price were both 6%. Let's start with volume trends and focus on Q4 performance in 2021 trends. In the quarter, food volumes were up 6%. with growth across all regions. Americas up 5%, EMEA up 10%, and APAC up 6%. Protective volumes were up 1%, led by EMEA with 7% growth, Latin Americas, and APAC declined 4%. We experienced accelerating volume in food in the second half, with higher sales in automation and growth in materials as food service continued to recover and retail demand remained strong. Protective volume surged in the first half of 2021 on the heels of 2020 industrial shutdowns and growth and fulfillment around the world, particularly in EMEA. We faced tougher comps in the second half of 2021. However, fulfillment automation sales were up and industrial demand was favorable. Starting in Q2 2021, in response to inflationary pressures, we accelerated pricing actions. Q4 price was favorable 12% with protective at 13% and food at 11%. For the full year 2021, we realized nearly $300 million in price, of which more than half was realized in Q4 as a result of timing of pricing actions and formula pass-throughs. Given ongoing inflationary environment, we will be announcing additional price increases with care. These increases will vary based on region and product offering and will average between 5% and 10%. We will work directly with our customers to meet increased demand and help them drive productivity and operational savings. On slide 13, we present our consolidated sales and adjusted EBITDA walks. Having already discussed sales, let me comment on our Q4 and full-year adjusted EBITDA performance. Q4 adjusted EBITDA of $330 million, up 18% compared to last year, with margins of 21.5%, up 70 basis points. Full-year adjusted EBITDA of $1.132 billion, was up 8% compared to 2020, with margins of 20.4%, down 100 basis points. Higher volume contributed $23 million to Q4 adjusted EBITDA, Full-year volume contributed $109 million to adjusted EBITDA. For the first time since Q3 2020, price-cost spread was favorable in the quarter, contributing $36 million to earnings. In 2021, price-cost spread was unfavorable $37 million. Reinvent C benefits totaled $21 million in Q4 and $64 million in 2021. Operating costs include labor and other non-raw material cost inflation of about $20 million in Q4, which compares to $13 million in the same period a year ago, and $69 million for the full year, which is up from $52 million in 2020. Adjusted earnings for diluted share in Q4 was $1.12 compared to 89 cents in Q4 2020. In 2021, we delivered adjusted EPS of $3.55 compared to $3.19 in 2020, an increase of 11%. Our adjusted tax rate was 26% compared to 24.5% in 2020. Our weighted average diluted shares outstanding in 2021 were 152 million compared to 156 million given we were an active buyer of our stock throughout the year, purchasing 7.9 million shares $403 million, or approximately $51 per share. At year-end 2021, we had $896 million remaining under our authorized repurchase program. Turning to slide 14, here we provide an update on re-invent C. We achieved $64 million of benefits in 2021, bringing the cumulative benefits of our re-invent C program to $354 million. Cash payments associated with reInvent-C were $28 million in 2021 and $193 million since the start of the program. To complete this program, we anticipate $20 to $25 million in cash payments in 2022, half of which is carryover from 2021. We anticipate $60 million of productivity gains in 2022, of which approximately one-third is coming from reInvent-C initiatives. The remaining two-thirds is our C operating engine. which is designed to drive continuous productivity improvements. With that said, inflationary pressures coupled with costs associated with supply disruptions are expected to continue. The combination of volume growth, pricing, and sea operating engine productivity gains are expected to mitigate these headwinds in 2022. Turning to segment results on slide 15, starting with food, my comments will focus on our Q4 results. In Q4, food net sales of $877 million were up 17% in constant dollars. Volume growth of 6% was led by double-digit growth in automation and strong growth in materials. Adjusted EBITDA of $204 million in Q4 increased 20% compared to last year with margins at 23.3%, up 90 basis points. Higher volumes, pricing, and productivity gains offset elevated costs. On slide 16, we highlight protective segment results. Net sales increased 14% on an organic basis to $655 million. Volume in the quarter was up 1% as we faced tougher comps and managed through supply disruptions. Adjusted EBITDA of $126 million increased 10% in Q4, with margins at 19.3%, down 40 basis points versus last year. Now let's turn to free cash flow on slide 17. In 2021, we generated $497 million of free cash flow. Relative to the same period last year, higher earnings and lower restructuring and interest payments were offset by working capital needs and incremental CapEx investments to support strong growth. On slide 18, we outline our purpose-driven capital allocation strategy focused on creating economic value. We maintain a strong balance sheet while driving attractive returns on invested capital and supporting profitable growth initiatives. We are focusing our CapEx on touchless automation, digital, and sustainability. We are expanding our capacity and equipment to align with customer demand and support continued growth. We are investing in smart packaging and digital printing and see opportunities to expand our presence in attractive growth markets and geographies. We are managing our portfolio with the discipline to ensure alignment with our growth strategy. Let's turn to slide 19 to review our 2022 outlook. For net sales, we estimate $5.8 to $6 billion, an increase of 5% to 8%. Our organic growth forecast is 7% to 11%, of which at the midpoint assumes approximately 3% in volume and approximately 6% in price. We anticipate adjusted EBITDA to be in the range of $1.2 to $1.24 billion. Adjusted EBITDA is expected to grow 6% to 10% and implies an EBITDA margin of approximately 21%. For adjusted EPS, we expect to be in the range of $3.95 to $4.15. This assumes depreciation and amortization of approximately $245 million. an adjusted effective tax rate of approximately 26%, net interest expense of approximately $155 million, and approximately 150 million shares outstanding. And lastly, our outlook for free cash flow is expected to be in the range of $510 to $550 million. We are increasing CapEx to $240 to $260 million to increase capacity to support growth initiatives. For cash tax payments, we anticipate to pay 205 to 215 million in 2022, reflecting expected earnings growth, 17 million tax payments on the gain from sale of Reflectix, and approximately 30 million impact related to the R&D provision requiring R&D expenses to be deducted over five years versus the prior immediate expensing allowance. Additionally, as previously disclosed, Our 2021 cash tax payments were reduced by approximately $24 million refund associated with the retroactive application of the revised U.S. GILTI regulations. We are executing on our growth strategy, driving productivity and cash generation and aligning our business around the C operating model. This is reflected in our 2022 outlook for sales, earnings, and cash flow to fuel our engine and drive accelerated growth beyond 2022 we are increasing our CapEx and R&D investments for innovation and automation. We have a strong balance sheet, and we will continue to focus on generating attractive returns on invested capital. With that, let me now pass the call back to Ted for closing remarks. Ted?

Thanks, Chris. Let's turn to slide 20, where we have our purpose statement. This is how we're making our vision a reality. Our C operating engine is performing and gaining momentum. We'll continue to invest in our four Ps of reInvent C. Next quarter, we'll provide a deep dive on digital. We're creating long-term value for our stakeholders and making our world better than we find it. With that, I'll now open up the call for questions. Operator, we'd like to begin the Q&A session.

If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. Again, that is star, then one to join the Q&A queue. Our first question comes from Anthony Pettinari with Citi.

Hi, this is actually Brian Bergmeier sitting in for Anthony. Can you provide some detail on the cost assumptions included in your 2022 guidance, such as resin, freight, and wage inflation? And do you expect to be price cost positive again in one Q and throughout 2022?

Sure, Brian. This is Chris. Thanks for your question. So my opening remarks, we talked about just the inflationary pressures that we're seeing. I think just to comment in terms of the positive, be able to now be favorable on our price cost spread heading into the year. We expect that to continue clearly through the first half of the year. But the inflationary pressures beyond just material from what we're seeing on the non-material side is causing us to When you bring it up a level, that cost side, the material side, is roughly $200 million in our guidance, is the assumption. And on the inflationary, being all non-material related items, everything else, if you will, is about $100 million. So we've got $300 million that we're managing through, at least that we expect to see this year. And again, I'll just comment that we feel good about the price-cost spread turning positive. We expect that to continue. But we're managing not only our pricing, but also the productivity actions across the organization to be able to deliver on our commitments. Okay. Next question.

Our next question comes from Larry DeMaria with William Blair.

Hey, thanks. Good morning, everybody. Ted, hey, guys. As it relates to automation, obviously we're seeing trends clearly accelerating increasingly. across all automation on the food side, especially. Can you talk about your visibility backlog and how much your solutions, being more toward the end of the line, are being prioritized versus other automation and, let's say, secondary processing because the labor challenge is there? So, in other words, where are you in the order and what kind of visibility and backlog are you thinking about?

Okay, good. Hi, Larry, and it's great having an expert on automation asking me the questions. So... I'll break it up in two parts. So what's in our backlog? If you look at slide seven, we kind of gave you that picture. And especially as an automation company talks about their business, they talk about backlogs so you can kind of see what's out there. The backlog's up pretty significant, much higher than sales. So to your question, we're seeing that much higher. The second part of your question, how does that compare to the other part of the process? I'm sure I'll get the question, but we put the full detailed process of what we're going after on another slide. But for where we are, if you went and looked at a meat plant or a protein plant, you would see lots of automation upfront in the processing. But when you get to the actual packaging of actually putting the meat into a package, you see lots of people. You even see it on the news when you've had some of the COVID scares with some of our large customers. That's where the labor intensity is. So where we fit in the automation is right now we're actually a key part for our customers to help them right now with availability of labor, they can't get it, driving some efficiency. So The direct answer, we're probably first in line in the spot that they're spending money on to get that automation and to break some bottlenecks. This is the most labor-intensive piece of a food packaging plan. I hope that helps with the description there. Next question.

Our next question comes from Angel Castillo with Morgan Stanley.

Hi, good morning, and thanks for taking my question. Just was wondering if you could give us a little bit more color as to the EBITDA guide, the low end and the high end. You noted volume of 3% and price of 6% kind of at the midpoint. But how should we think about kind of the two bookends, you know, and what kind of assumptions are embedded in that? If you could just add that. Thank you.

Sure. Good question. So maybe just a few items. I definitely want to highlight the fact that we've got some Headwinds on the FX side just consider where the currencies currently are. So FX impact on our adjusted EBITDA is roughly 2%. Small item, but we talked about the divestiture reflectics that occurred this past year. So that's a little bit in terms of the contribution that it made, which is pretty much consistent with the company. But the other notable item to highlight is that the investments that we plan to make and are making in our business, mainly driven on capacity needs as well as on the expense side, thinking through the R&D piece, the innovation as we move forward, we're increasing those investments heading into 2022. And if I put a number on around, it's roughly $40 to $45 million incremental is what we expect to spend in 2022 versus 2021. So all of that is not flowing through the bottom line given that volume and price assumptions heading into 2022. So that's a conscious investment back in ourselves for future returns that we're not necessarily going to see in 2022. And then you look at our ability to generate returns on those investments, industry-leading ROI ending the year at roughly 16%. So we're very much driven on longer-term investments that we're making and not going to make that short-term you know, pause, if you will, to let all that drop to the bottom line. So in our guide, roughly, like I mentioned before, is 40 to 45 million of incremental investments we're making in ourselves consistent with our strategy of where we're going.

And just a little bit of color as we looked at those bookends and what's going on in business, and tying to Larry's question, really, is automation driving. So if you look at the high end, what we really looked at very carefully, though, even though the bookings are up significantly, we still have operational issues that we got to deal with in the market. Everybody knows what's going on with the supply chain and the disruptions. So as we knock out some of those bottlenecks, that's what we were looking at. Could we push that up even higher? So let's go make that happen. But we definitely see there's some opportunity. Again, to Chris's point, to make some of that stuff happen, we are investing heavily in the automation, digital, and sustainability. And so we're investing to make that happen. So we do think knocking out some of those bottlenecks, knocking through these issues, and by the way, this is our third year of the same thing, supply chain, COVID, inflation. So we think the engine can power through that right now, but right now the guidance there we think is doable, and that's what... That's what we're going after to get it done. Next question, please.

Our next question comes from Phil Ng with Jefferies. Good morning, Ted, Chris.

This is John on for Phil. I hope you're doing well.

I wanted to start off with – There must be something exciting going on that we're getting to. Good to have you back.

Nothing more exciting. For the protective volumes, coming through 2021, protective, obviously, growth accelerated on the tougher comps and the pandemic restrictions easing. Can you give us your thoughts on how protective will do through 2022 in terms of volumes and where you're seeing strength with some of the COVID restrictions easing up?

Sure. And our guidance kind of implies that You know, the organic side, roughly 3%, as well as price, approximately 6%. And if you break that down between food and protective as it relates to the organic piece of it, roughly 3%, we can be a little bit higher on the food, kind of thinking 3% to 4% on the protective, a little bit lower, 2% to 3%. And from a geography point of view, it is certain areas that we would expect to come back, you You know, this low single-digit growth that we're anticipating in our guide is kind of what we're looking at. Hopefully, as things do open up faster, you know, things kind of settle, you know, the markets are a little bit more favorable than we view it. But right now, that caution is there, to your point, specifically on the protective side. But, Ted, I don't know if there's anything else to add.

Yeah, a little color focusing on protectives. If you look at slide six, John, we're trying to give you a picture to tell what the story is going on here. Again, we're moving to be market-driven from our products. So the markets in 21, we had some, Chris, you've been using this language, we had some surge with what was going on in the e-commerce space and actually the COVID-related stuff. We shifted that portfolio really fast. And so we're anticipating that shift in different areas. So one of the areas in 21 that didn't grow as fast for us was actually our mailer business. We're changing that out, driving automation. So that opportunity was actually down last year, we think is an upside potential. And that was driving that lower number there in the fourth quarter was the mailer business, which we think that is an upside opportunity this year on protective, again, driving automation. Also, if you look at the slide, we're bringing out the example of taking automation into this industry. This is a whole new market for us. That's a $2 million piece of equipment there with the tires, wrapping that with the auto-wrap system. That's simple. So we're taking automation that's taking the protective business to new areas, and we think we can move that pretty quickly. As the markets continue to move, pretty significantly. So we feel that we'll recover that and protect it. We don't see as an issue for us in growth in 2022. Okay. Next question, please.

Our next question comes from Gancham Punjabi with Baird.

Hey, guys. Good morning. On your automation ambitions of, you know, one plus billion by 2025.

Gancham, I'm excited that you made our call.

This was the excitement for the week. This was the excitement. I guess going back to one of the slides where you had the automation ambitions of one plus billion by 2025, inclusive acquisitions. Just curious, how are you resourcing internally the position for that organic growth relative to the baseline for 2022? And I guess the question is, are they existing solutions that you're expanding with current and new customers, or are they incremental technologies that which will require some level of outside expertise to complement what you already have. And then second question related to that, on your comment to double equipment production capacity over the next three years, is that investment weighted towards one segment in particular, or is it commensurate with the sales split? Thanks.

Okay, let me try to go last first, Gansham, and Chris will try to make sure I get to it. So let's go to the last on the investment. Where we've been transparent, we shared earlier in the middle of last year, we actually increased the capacity to CapEx on APS, and we went public that on a price increase because we saw the volumes, and that we were going to double that on APS to get the capacity up in three years. We actually had a schedule on that that's working. So the same thing there. The team's been working a little bit of your timing question, We've been working on that. We're just being declarative there that that's part of that CapEx. We're actually doubling internal CapEx so that we can make that automation happen. The other piece, I'm going backwards on your question. Go to slide 10. This is our bathtub or the circular world that we're living in here. This is a mixture of the technology. If you look at the left piece there, those are actual pictures of our operation. where we're bringing automation in, where I talked about co-bots and robots and automated processes. By the way, a co-bot, get asked that question a lot, a co-bot is a robot working actually with a human. So today, just a rough number, we have hundreds of these in our operations. We're going to take that to thousands in the next five years. We're going to be reducing the touch points of our facilities by over 50%, which, by the way, is millions. And behind all that is driving that 30% productivity that we've been talking to you about in our journey. So the technology behind this is digital. And digital has many forms, and we'll talk about that more when we do the deep dive on digital next quarter. Now, bracing that into the second piece of the slide is now bringing the technology into our customers' operations. So the same technology, so some of it is technology, but some of it's process. And that's eliminating obstacles, streamlining processes, some of it's ESG, et cetera. So part of that technology is actually process-based where some of these large savings are coming from, but it's driving different material. The other piece on the automation for us is our install base. And again, turning that model upside down, being automation first, it's getting connected to over 100,000 pieces of equipment that we have. Again, bringing digital, how do we get connected to those really, really fast? The third element of the growth behind there is working actually with our network. Not only what we make, but our partners, and that's how we're going to get this number up even faster. Working with all those interconnected, that's how we're going to make those growth numbers actually beat those growth numbers that we've talked to you about. Did I miss one of his questions? No, that's good. Okay. Next question, please.

Our next question comes from Josh Spector with UBS.

Yeah. Hey, guys. Thanks for taking my question. Just curious if you could update us on where you are. Good morning. In terms of equipment profitability, If you can give us some context of maybe where you were a couple of years ago versus what you're thinking 2022 looks like. Also thinking about in the context of the higher investment that you guys are highlighting, do you need to scale further, get to your 2025 goals for that to become meaningfully more profitable? Or are you seeing incremental improvement there already that's flowing through to your EBITDA?

I'll let Ted go ahead and answer that. I wanted to jump in only because we don't disclose EBITDA margins at that level, but the good news is that we clearly are focused on profitability in the equipment side, so we are getting some improvements, clearly. It's happening. It's a part of our overall adjusted EBITDA margin, but I'll let Ted answer strategically.

Josh, great question, and Chris was jumping in to make sure that this Their question is exactly where, why this is so exciting, not just as a growth, but actually the profitability. But before we talk about us, again, I just want to be repetitive. It's about our customers. It's about creating the demand. And so in the slide, if you look at slide seven, we put something out there in the gray. We put the bar that's driving this is our customer savings. We are focused as a solutions provider, as an automation company, focused on how we can save our customers the most money, and we're sizing, pricing our solutions on the customers getting that three-year payback. Well, why is that so important? Because then it drives to, if you look at the fourth bullet on the slide, we're accelerating innovation while improving EBITDA margins. So yes, we have a few hundred basis points improvement coming through on the equipment side for many different reasons. But the number one reason is removing the conversation from how much does it cost to how much does it save? And the savings are significant. But yes, there is significant margin improvement on our equipment offerings of today driving to where we're going. So as you're thinking about modeling and where it goes, that's where we look at our whole business to say that we have that leverage out there all through our journey of reinventing the company. We're driving greater than 30% operating leverage. So this growth is going to fit in that target, and we're going to have margin expansion as we do this. The third element of this that is so important, why we use the word inimitable, if you can go to the solution slide, on slide nine so slide nine is there so we're going to put equipment which is our core turning the model upside down so this is going to be profitable part of our business not a subsidy the second part is we're going to be driving service element here significantly more profitable than the equipment but in a customer's eyes the service is what differentiates us. We've had our service technicians embedded into our customers' operations. We're going to do more of that. Then the integration of the other technology that we talked about. Well, how do you pay for that? Savings. And then we get to the really cool part of our model is we're pulling through the cryovac materials, the bubble wrap materials, that inimitable solution where we're wrapping these really special packages with our materials, and that's what's driving the solutions multiplier. So great question. It's behind this whole model. Not are we going to grow the business faster. We're going to do it more profitably. Next question, please.

Our next question comes from Arun Viswanathan with RBC Capital.

Great. Thanks for taking my question. You know, we've seen quite a few declines in resident prices in the last couple of months, although the tide seems to be switching a little bit in the last couple of weeks. And then we also have increased feedstock costs on the energy side. I guess when you think about all of that, maybe you can just help us understand how the formula pricing will be affected. And, you know, is there any unusual impact on your European operations? Thanks.

Yeah, thanks for your question. So, yeah, I guess, you know, the volatility continues. I think, you know, we're on top of it relative to the pricing actions we talked about for the past, you know, three quarters now. But what we're seeing is, you're right, there's certain improvements in some of that resin pricing. But we We get, you know, we have specialty resins. So it's not just on one, it's many. So you're talking about other resins that are increasing as well as chemicals. So we look at all of the raw material and just get a good sense of what we're anticipating for this year, heading into it and making sure our pricing is as close as possible to that. Your point on formula-based pricing is that we're in the middle of that. We would expect that to continue somewhat. It takes about six months for that to kick in, and the same effect has when it does come down. We'll get the benefits over a six-month period. So we consider this year in our guide to be favorable as it relates to price-cost spread. I think I commented on that earlier. And then maybe the other point I did want to make, just thinking about the year, is we're roughly looking, just like we entered last year, roughly 45%, 55%. This year we're entering into kind of this 48-52. I just wanted to add some color in terms of our guidance between that first half and second half. So, you know, bottom line, formula-based pricing is intact. We don't expect an immediate change any time in the near future as it relates to that, even if there's improvement in that resin pricing. And, again, we buy multiple different grades of that and specialty type of resins that are embedded in our formulas. But maybe some other comments.

Yeah, I'll just add a little bit of color because obviously now four years with the business, the questions I've tried to guide that we're much more than a resin converter business. But let's understand what's going on because this is a major source of our business. So as Chris said, the resin markets, you know, with inflation, resins hit us really hard. So it took us to the end of the year to get ahead of that on the price-cost mix. But we still see pressure on that in the first half of the year, especially on the commodity-type resins. We think we'll go up in the first half, or actually down in the first half, and maybe down for the whole year. So underneath that, though, the specialty resins, and that's what we do the magic with, especially our Cryovac material, we see that still going up year over year. So we have that balance going in where we have the commodities going down a little bit. We see that flattening, which is good. The specialty of those are still going up. But we also want to take it a little bit beyond just the resins. We're also into paper. So the paper, especially in Europe, as we're moving our portfolio to be material agnostic, we're seeing that there's a significant inflation on the paper. Again, because paper, very simply, it's wood plus energy. The energy costs, as we all know around the world, are driving. So with paper, now with resin, the solution is still the same. How do we drive automation? And how do we drive automation to power through this with our customers? As Chris said, that we have disciplined pricing actions still in place with care, working with our customers to handle it. And one last comment, it's beyond resins, it's everything on this inflation, freight, all the materials, labor, et cetera, et cetera. So we really, really, the inflation issue is not over for us, but we can handle it and we're attacking it and we have to do it with care on pricing with our customers. Next question, please.

Our next question comes from Adam Josephson with KeyBank.

Good morning, everyone. Hope you're well. Chris, on free cash flow, your conversion last year was 44%. It seems like you're expecting something similar, maybe a touch lower in 22. Your target long-term is 50% plus. And I know last year working capital was a bit of a drag and This year, CapEx is going to be elevated. Cash taxes will be elevated for a couple of reasons. So can you help me think about beyond 22? Perhaps you're expecting CapEx to normalize, cash taxes to normalize. What gets you back to that algorithm post-22?

Yeah, good question, Adam. So I'd start with just overall improvement in the performance of the business, meaning the earnings power based on these investments, given the return profile of what we're able to generate, it first starts there. Yes, we're around a 21% EBITDA margin business, clearly got aspirations to drive it to a mid-20% over time. So I'd start with just the earnings power of what we're able to do, getting the return on those investments as we make them. As we comment internally, we don't starve capital. If the CapEx need is there, the return on investment makes a lot of sense, we're going to do that. We have elevated CapEx going into this year. And I'd couple that also with the investments back in the business, as I commented earlier, mainly around the R&D space. So then you get to working capital, the large next lever. And the efficiencies, and you can see our DSO, BPO, DOH, et cetera. I mean, really, really strong performance in working capital as it relates to those metrics. However, I would comment that if inventory is available, we're going to get it, and that's especially in this environment. So, working through these supply challenges, I would say we're taking on, in certain elements, we're taking on more inventory to feed that future demand, which is good. But once things open up, stabilize, we expect to be able to get inventory down over, you know, not considerably, but we expect to get more velocity, if you will, in terms of getting that inventory down. And then you get into the other part of the area is just the income tax payments. And I made those tax payment comments on my prepared remarks specifically because we're seeing a roughly $100 million increase year over year. And I kind of explained in my prepared remarks what, you know, what they were. We'll see how that takes shape. Of course, we're always looking for opportunities to take advantage of, I'll call it tax incentives, if you will. We're a global company. Are there opportunities that we can get benefits in the countries we operate based on the investments we make? So we're going to continue to look at cash taxes in terms of being able to get that down. So maybe just a summary. I look at it as the earnings power. The earnings power of our business is looking at what we're driving for in terms of that improvement to greater than 50%.

And Adam, the only thing to add to what Chris said, good summary there, especially Chris, congratulations, now been here a year. But as we've been driving, we took that number up when we first looked at the engine over history. We took it, you know, we looked at 30, 40, into 50. And so as we're the engines revving, as we're going forward, what came in, as Chris described, with the working capital, those volumes are going up. So The volumes, when they spike up, will there be a consumption of the cash? But to the model, we looked at it and we said, with those volumes going up, let's go sustain those volumes. And the second key there is to drive earnings even higher, to producing more cash, and that's part of the engine. So those are the two areas there that we feel confident that that's the model and that's where we're going to take the business and are pretty confident we're going to get there. So next question, please.

Our next question comes from Anoja Shaw with BMO Capital Markets.

Hi, good morning. I know you said you're going to talk more about digital printing next quarter, but you mentioned the Fox Pack acquisition, and I was wondering, do you envision more M&A in digital printing, or will it be more of an internally built focus?

Yes. I'll let you go at that. Yeah, no, it's a good question. So if you look at slide 10 and you see the digital printing on both sides, it's a good question. We actually started our digital journey in this part of C Ventures we've had that we've invested some what we think is game-changing technology. So I don't want to put a little bit of a buzz out there for next quarter, but that technology that we've invested in is exceeding expectations. So it's right now, it's mostly in the operations. It's enabling us to get some significant productivity. We're now putting some of the technology out with our customers, actually putting the digital printing in our automation packages. And what Foxpac is really is a pioneer in that space is helped us with its European footprint. How do we get to more places faster? especially their expertise on the presentation and the speed to market that they produce the outcomes, really impressive. So as Chris said, the answer is yes. We're investing internally because now we have our own internal capability, but we are looking at other opportunities on the M&A space to move that faster because the secret to the future, it is digital. and we've got to be digitally connected in everything we do and more coming. We might necessarily have to buy it all because we have some pretty impressive digital partners that are working with us behind the scenes, and we will share some of that with you again in the next quarter when we do the deep dive on digital. Great question, and it's what we're excited about. Last question, please, operator. Last question.

Our last question comes from Adam Samuelson with Goldman Sachs.

Yes, thank you. Good morning, everyone. I was hoping to maybe dig into this point on the automation solutions multiplier, and I'm looking at the materials and hearing kind of the framing properly. This is the first time you've talked about up to a 10x multiplier on some solutions offerings, which is considerably higher than what you'd framed it previously, and I'm maybe just trying to get a sense of what proportion of the equipment business might be reaching kind of that kind of threshold. And if that's a big driver of the more optimistic longer-term growth outlook for the company where the equipment growth outlook itself doesn't seem to have changed dramatically.

Yeah. Hi, Adam. Yes. So the answer is yes. It's there. We're turning, if you go back to slide, before we go to slide nine, just to give you a framework. So if you look at slide 10, and slide 10 is, you know, a model of the circular of where we're taking this. I call this our bathtub. We're turning an aircraft carrier in a bathtub, and you can see we're recharging it, rewiring it, repowering it. So then if you go to the next slide on the solutions multiplier, we did talk about this and with our acquisition of APS. And being an ex-equipment person and those, even the new sell-side analysts that we're talking to that are automation-based, they get this solution multiplier very well because this is what an automation company does. So you have the equipment. You don't give the equipment away. You charge for the equipment. You connect it with service. And then you bring what we're different than an equipment company, and that's why we use the word inimitable, is that we not only do the equipment, we do the materials. That's the special part of this model. So linking that together with, I shared with you, we have well over 100,000 pieces of equipment. We've got to get that connected, get that moving fairly quickly. But so, yes, that multiplier is big. So if you look at one specific example to show you how do you get to 10x, because your comment was very appropriate if you looked at our model, we used greater than 3x. This slide is showing you if we really do and get connected to the equipment, the service, and the materials, like that visual example of a bag and a box for one. So how does that solution multiplier work? Well, that piece of equipment, doing an auto pouch system, it's anywhere from $750,000. Then you do the service and you can use all those multiples all the way to the materials where you have a pouch, you have a fitting, you have a box. And we actually do digital printing and we have a very customized box for our customers and The multiplier on what that means is well over 10x. But that, to your point, that's not the whole portfolio moving overnight. That shows you where we're taking it, product by product, every piece, even to the example down below, which is a mailer. Mailers in the past, we did millions of mailers, but we did it by discrete inputs. Now we're going to actually be automating and even putting some of that automation system and digital printing, which we're already bringing to mailers, that we can bring that solutions multiplier. The mailer multiplier is much lower. Right now it's below three. So if you look at that whole portfolio, but if you look at the meat one above, really exciting, where we bag beef. multiple times before it ever leaves the customer's facility. And then on the right side, you see the roll stock. So the multiplier of that film doing all the automation is significant. But that piece, that system, as I shared in the example, was $7 million. So be careful on your modeling. It's not everything all at once, but that's where we're taking the business to answer your question and Are those growth volumes you see on equipment real? Yes. Is it going to tie to pushing the volume growth of us going higher in the future? Yes. And that's why we gave you the guide of how we're moving our growth in the future on our model. So with that, we're out of time. I want to thank everybody for the call. Really excited for the next quarter's call, as you can tell, on digital. But I hope everybody stays safe and healthy. And operator, that's it for us today. Thank you.

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