Sealed Air Corporation

Good day, and thank you for standing by. Welcome to the fourth quarter and full year 2022 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 need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. please limit yourself to one question and queue up for any additional follow-ups. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, Brian Sullivan. Please go ahead.

Thank you, and good morning, everyone. With me today are Ted Dehaney, our CEO, Emil Shamas, our COO, and Chris Stevens, our CFO. Before we begin our call, I would like to note that we have provided a slide presentation to help guide our discussion. Please visit sealedair.com where today's webcast and presentation can be downloaded from our investors page. Statements made during this call stating management's outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled forward-looking statements in our earnings release and slide presentation which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed on 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 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 US GAAP financial results that correspond to the non-US GAAP measures we referenced throughout the presentation. I'll now turn the call over to Ted. Operator, please turn to slide three. Ted?

Thank you, Brian, and thank you for joining our call today. Today we'll discuss our Q4 and year-end results, our 2023 outlook, re-invent C2.0, and our acquisition of LiquiVox. After that, we'll open up the call for your questions. Starting on slide three, the graphic is showing where we're taking packaging with automation, digital, and sustainability solutions. We start with our purpose. We are in the business to protect, to solve critical packaging challenges, and to make our world better than we find it. This enables our vision to become a world-class company partnering with our customers on automation, digital, and sustainability packaging solutions. Moving to slide four, we're excited to announce that on February 1st, earlier than originally anticipated, we completed our acquisition of LiquiBox, a global leader in sustainable packaging for the fluids and liquids industry, and a pioneer innovator of bag-in-box solutions. Fluids and liquids is our fastest growing and highest margin product line within our Cryovac portfolio. It is a fast growing attractive market for us as flexible packaging is disrupting the rigid container market. LiquiBox brings to see new competitive capabilities and is highly synergistic with our existing business. The combined LiquiBox and Cryovac business in 2023 is expected to exceed $600 million, representing more than 10% of our portfolio. Our plan is to turn the fluids and liquids business into a $1 billion vertical by 2025 with an operating leverage of over 40%. LiquiBox will enable us to open significant new opportunities for growth in areas like ready-to-drink liquids, wine and spirits, consumer packaged goods, quick service restaurants, and other attractive spaces as the best suitable and cost-effective alternative to rigid containers. The combined business will leverage upon cryovac technology for freshness and shelf life extension, broad market access, and global footprint. To the question of why now, we've been investing in this attractive space for quite some time. Our team identified LiquiBox as a prime target in our M&A pipeline and the most coveted asset in the fluids and liquids space. As the window of opportunity was getting closer, we preempted a potential auction process. We quickly closed the transaction within three months, two months earlier than originally anticipated. I've appointed Emil Chamas to lead the fluids and liquids vertical. deploying our proprietary integration playbook, delivering on our target revenue ambitions of greater than a billion dollars, and achieving cost synergies of approximately $30 million before year three. Under Emil's leadership, SEAS and Liquibox cross-functional teams are highly energized to implement the plans they've been jointly developing. Let's turn to slide five, which highlights how we're moving to be a market-driven, customer-first company fueled by our iconic brands. Our solutions focus on automation, digital, and sustainability, create value for our customers by improving their productivity, sustainability, and enhancing their competitive advantages while allowing C to deliver growth faster than the markets we serve. Our digital online sales have now ramped up to 10% of our total sales in Q4, doubling that from Q3. This digital transformation will be a driving force behind the evolution of our go-to-market strategy and source of new innovation, while enabling us to reach more customers effectively and efficiently. Our online sales platform, MySee, empowers us to reach new customers and new geographies for our highly profitable bubble wrap inflatable solutions. In the quarter, we converted two of our largest distributors to online partners to make this happen. Our CryoVac's fluids and liquids business grew over 20% in 2022. Now, with the addition of LiquiBox, we expect this new vertical to be over 10% of our portfolio with a 40% operating leverage. In fresh proteins, we saw retail markets going down in Q4, driven by declining customer spending. Consumers are trading down from premium proteins and customers are working through excess inventory. Leading with C automation, we were able to win with major customer conversions. Fulfillment, industrial, and especially electronic markets were significantly down in Q4. Destocking amplified this trend. The outlook for these markets is to stay challenged in the first half with a rebound in the second half of 2023. We plan gains from new innovations in automation that were constrained over the past 24 months. Following our investments to double capacity, including our new developments in fiber-based solutions, we're well positioned for growth in the second half of 2023. We're excited about the recent launch of our new line of paper bubble wrap mailers and high recycled content bubble wrap fill air solutions. Moving to slide six, following the success of reInvent-C, we now advance to the next phase of our transformation with reInvent-C 2.0, moving from the best in packaging to a digitally driven, world-class automated solutions company. Starting in 2018, reInvent-C built and solidified the foundation for the next phase of C's journey through development of the C operating model and our growth platforms including leading with automation, digital, and sustainability. Reflecting on the last five years, we've met or exceeded our operating model targets. Sales growth has compounded at 5% versus our 5% to 7% target. Adjusted EBITDA has been 8% versus our targeted range of 7% to 9%. Adjusted EPS growth has compounded at 18% versus our goal of over 10%. and we've averaged 89% free cash flow conversion over the last three years. 2022 was challenged on free cash flow with the building of working capital as we fought through supply constraints and volume headwinds. reInvent C2.0 focuses on high quality, profitable growth, and improved productivity. The LiquiBox transaction accelerates our growth platforms, highlighting our transformation from product to customer-first solutions approach. Our digital transformation will empower us to attack new areas of opportunity and will drive profitability through accelerating the use of automation in our own operations. By moving the business online, we'll focus efforts to grow faster than the markets we serve through a simplified, more digitized organization, reducing our cost structure by $35 to $45 million over the next 12 to 18 months. Let's now discuss how reInvent C2.0 will fuel our C operating engine. Turning to slide 7, we've updated the C operating model out to 2027 with reInvent C2.0 targets. On the left side of the slide, we outline the C operating model growth assumptions. In 2023, we expect a flat growth performance despite a 3% market decline. The downturn in the first half will be recovered by a strong second half. Liquibox will add 6% profitable growth to the total C for the full year. We are confident our C operating engine will convert sales at more than 30% operating leverage, resulting in continued margin expansion. The combination of the C operating engine, our high-performance culture, digital transformation, creative acquisitions, and strong free cash flow generation will deliver world-class growth and returns in the next five years. Let's turn to slide eight to discuss Q4 and full-year results. In the quarter, on a constant currency basis, net sales were down 4%, and adjusted EBITDA was down 7%. Despite the tough environment, we maintained adjusted EBITDA margins above 21%. On a full year basis, inconstant currency net sales were up 6% and adjusted EBITDA was up 10%. Our margin expanded by 110 basis points, setting a new record in earnings per C. Adjusted earnings per share in the quarter of 99 cents were down 7% compared to a year ago and up 20% for the full year of 2022 on a constant currency basis. Free cash flow through Q4, though disappointing, was a source of cash of $376 million. We continue to invest in our people and our business as we accelerate our journey to world class. Moving to slide nine, we updated our C automation growth plan. full-year 2022 automation sales were up $475 million, up 10% in constant dollars. In Q4, we had a record quarter with equipment sales of 24% year-over-year, driven by food equipment, which was up 30%. We continue to work with our customers to deploy automation solutions that create savings and fast returns by addressing labor shortages, inflation, safety, and productivity. Our bookings continue to outpace revenue for 2022, and though supply shortages linger, we expect to deliver double-digit growth in 2023 to achieve revenues greater than $525 million. We're aggressively expanding our C automation solutions portfolio and driving faster growth by integrating equipment and technology like robotics, vision systems, digital printing, from our network of strategic suppliers. In 2023, we're expanding our C automation solution and auto bagging, filling, and boxing with their respective fiber-based materials. Now I'll turn it over to Chris, who will review our financial results in more detail.

Thank you, Ted, and good morning, everyone. Let's start on slide 10 to review our fourth quarter net sales of $1.4 billion by segment and by region. In constant dollars, net sales were down 4%, with 4% growth in food, while effective was down 15%. By region, we grew EMEA by 5%, offset by declines in Americas of 7%, and APAC of 3%. In constant dollars, full-year net sales were up 6%, to $5.6 billion. Food was up 11%, while protective was essentially flat. By region, we were up 6% in Americas, up 7% in EMEA, and up 2% in APAC. On slide 11, we summarize our Q4 and full year 22 performance. Primarily driven by inventory destocking and lower demand in our protective end markets and FX headwinds, we had a challenging fourth quarter with sales down 8% as reported versus Q4 21. However, for the full year, we delivered reported sales growth 2%. Q4 adjusted EBITDA of 297 million decreased 33 million or 10% compared to last year with margins of 21.1% down 40 basis points. For the full year, adjusted EBITDA grew 7% to $1.21 billion with margin expansion of 110 basis points to 21.5%. This performance was driven by positive net price realization, which we define as year-over-year price realization, less inflation on direct material, freight, non-material, and labor costs, as well as productivity gains, which more than offset lower volumes higher operating costs, and unfavorable FX impacts. As it relates to adjusted earnings per diluted share in Q4 of 99 cents, our adjusted tax rate was 26.1% compared to 26.2% in the same period last year. On a full year basis, our adjusted earnings per diluted share was $4.10 with an adjusted tax rate of 25.4% compared to 26.1% in 2021. we had no share repurchase activity in q4 but repurchased approximately 280 million or 4.5 million shares in 2022. our weighted average diluted shares outstanding in q4 22 was 146.1 million and 147.1 million for the full year at year end we had 616 remaining under our authorized share repurchase program. Turning to quarterly segment results on slide 12, starting with food. In Q4, food net sales of $874 million were up 4% on an organic basis, which consisted of 7% price realization to help offset inflationary pressures across all cost categories and volume declines of 3%. Food-adjusted EBITDA of $202 million in Q4 increased 2% in constant dollars compared to last year, with margins at 23.1%, down 20 basis points. Protective Q4 net sales of $532 million were down 14% organically, with price realization of 6% being offset by volume declines. We expect market contractions and a negative economic outlook to continue to put pressure across our protective fulfillment in industrial end markets in the first half of 2023. Protective adjusted EBITDA, 102 million, was down 15% in constant dollars in Q4, with margins at 19.2%, only down 10 basis points despite the end market weakness and customer destocking activity. Looking at slide 13, we could see full-year segment results starting with food. Food net sales of $3.3 billion were up 11% on an organic basis, which consisted of 13% price realization to help offset inflationary pressures and volume declines of 2% overall. For the year, adjusted EBITDA of $755 million was up 13% in constant dollars with margins of 22.8%, up 70 basis points. Food automation sales for the year, which include equipment, systems, parts, and services, account for approximately 8% of segment sales, were up high single digits. Protective net sales of $2.3 billion were up 1% organically, with price realization of 12% being offset by volume declines of 11% in the year. Adjusted EBITDA of $466 million was up 9%, organically with margins of 20% up 160 basis points. As for protective automation sales in the year, which account for approximately 9% of the segment sales, they were up double digits, fueled by our auto boxing solution. Now let's turn to free cash flow on slide 14. Full year free cash flow of $376 million compared to $497 million in the same period of year ago. The $120 million decline was mainly driven by increased inventory, reductions of accounts payable, and higher cash taxes, which were partially offset by favorable adjusted EBITDA. With regards to the reduction in accounts payable, we expect this non-structural use of cash in 2022 to benefit 2023 as we monetize working capital to drive growth and de-lever. On slide 15, we outline our purpose-driven allocation strategy focused on maximizing value for our shareholders. We maintain a strong balance sheet while driving attractive returns on invested capital and supporting profitable growth initiatives. We capitalize on the strength of our balance sheet by engaging our bank group in Q4 and accessing the bond markets last month to successfully finance the liquid box acquisition. We expect to deliver throughout the year, estimating 3.5 times or below by the end of 2023. Let's turn to slide 16 to review our 2023 outlook. We expect net sales to be in the range of $5.85 to $6.1 billion, which at the midpoint assumes mid-single-digit growth on a reported basis and low single-digit growth organically. We expect liquid bonds to contribute between $340 million to $360 million in sales in 2023, given 11 months under our ownership. We expect full-year adjusted EBITDA to be in the range of $1.25 to $1.3 billion, which assumes adjusted EBITDA margin of approximately 21%. Full-year adjusted EPS is expected to be in the range of $3.50 to $3.80, assuming depreciation amortization at the midpoint of approximately $275 million, an adjusted effective tax rate between 26% and 27%, net interest expense of approximately $275 million at the midpoint, and approximately 146 million average shares outstanding. The lower 2023 adjusted EPS is largely driven by non-operating items such as higher pension expense of $0.08, and higher base business interest expense of 27 cents. And lastly, we expect 2023 free cash flow in the range of $475 to $525 million, which implies a free cash flow conversion of greater than 90%. As noted in our earnings release, we have reached a tentative agreement to settle the legacy IRS tax matter related to the Cryovac acquisition from W.R. Grace. Our 2023 free cash flow range excludes any potential cash settlement as a tentative agreement, is subject to further review and approval. As it relates to reInvent 2.0, we plan to include both the costs and the benefits in our adjusted results as we accelerate our digital transformation to drive higher levels of productivity and operating efficiency. As we've highlighted before in our C operating model on slide seven, our digital transformation will be driving 1% growth over time by broadening our sales reach, making it easier to do business with us and delivering 30 basis point operational efficiency gains. So as we look ahead to 2023, we anticipate continued softness in the first half. We will remain disciplined to drive the necessary actions to preserve our margins and generate strong free cash flow. With a successful integration of LiquiBox and the strong value creation we expect this acquisition to have with our Cryovac brand, at the midpoint of our 2023 sales guidance, we expect to be in line with our C operating model sales target of 5% to 7%. With that, let me now pass the call back to Ted for some closing remarks.

Thanks, Chris. Before we open up the call for questions, I wanted to share some insights from my travels around the world as we've increased our face-to-face meetings in the post-COVID environment. I've been able to meet with our employees, our largest customers, and see some of our latest automation solutions in action. It was great to see the progress in our own facilities around the world. Our investments in touchless automation eliminate millions of touches, while providing higher quality materials and removing people from harm's way. It's also been uplifting for me to see how embedded we are with our customers and hear firsthand how we help them through incredible challenges in their facilities. It was exciting to see our latest automation solutions in action and hear from our customers how much they value our partnership. Our automation, digital, and sustainability focus is driving value with our customers and our internal operations. Finally, I'm really energized by the cultural fit and working relationship with the LiquiBox team as we jointly uncover more opportunities. With that, I'll open up the call for questions. Operator, Victor, we'd like to open up now for the Q&A session.

Sure. As a reminder, to ask a question, please press star 11 on your telephone. and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please limit yourself to one question and queue up again for any follow-ups. Please stand by while we compile the Q&A roster.

Our first question will come from the line of Arun Viswanathan from RBC Capital Markets.

Your line is open. Arun Viswanathan, RBC Capital Markets. Great.

Thank you for my question. Good morning. I guess I just wanted to understand your thinking on growth this year. So it sounds like, you know, there is some challenges on the volume front. You know, you noted a challenging macroeconomic background. How do you see volumes evolving, I guess, both in protective and food as you go through the year? You know, you will face some easier comps, I guess, in the back half. But yeah, maybe we can just start with that. Thanks.

Thanks, Sarun. I'll open up with that. And so as we shared in our opening comments, we're seeing the first half of the year still be challenged on the volumes in both business, starting with the protective side. We've definitely seen, as you've been seeing in the major markets, especially in things like electronics and e-commerce. So we're still feeling pressure. We're still going to feel the destocking in the first half of the year. into the first quarter. On the second half of the year, we see a rebound. We still think in our guidance we have our protective still down a couple of percent in our guidance, but we definitely think we should have a strong rebound in the second half of the year. Especially with some of our new products coming in place, we think we can power through that. As we talked about with reInvent-C and moving further on digital with their distribution, Again, I think we have some upside potential. On the food side, as we see that shifting with the volumes still under pressure, also having us destocking, the same story. The first half would be challenged, but we do think we have some significant opportunity for growth on the second half, and we're actually guiding to see the food volumes up a couple of percent. On the food side, as well as the protective, we really see the automation kicking in. It's still really tough out there for our customers with getting labor, inflation, et cetera. So we see some of that pickup coming in. We did this. We highlighted we had strong automation in the fourth quarter. So we see that continuing into the second half of the year. Okay, next question.

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

Hi, everyone. Good morning. Thanks for the details and congratulations on the progress through 2022. My question is on Liquidbox. can you talk to the amount of synergies you're building into the EBITDA contribution you expect from the business this year? And relatedly, you know, bag and box, you know, you see competition across several key characteristics of the package. Where would you say, whether it's the carton, the valve, the material you're seeing competitors catch up to, liquid box, or where are you seeing yourselves putting distance between yourselves and your peers in that market. Thanks, guys. Good luck in the quarter.

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

Thanks, George, for the question. I guess just to remind ourselves, we're only day eight since we closed the acquisition. But let me address the question in a couple of different ways. First of all, there is obviously the competitive set of liquid box. But really, the piece around that is that $7 billion of addressable market and how we convert rigid to liquids. But within the liquid box, capabilities and strengths. It's really around the fitments, the lightweight and down gauging even of existing solutions. And it's all about the sustainability piece. LiquidPure is a unique product in the market that allows for the full recyclability. And as the teams have met over the last couple of weeks, you know, pre-close only to certain extent what we could share, but since eight days ago, we now can fully work together. the teams are just incredibly excited in terms of the opportunities bringing that liquid box expertise into the market and coupling that with sealed airs capabilities around extrusion around sourcing and footprints so we see tremendous opportunities in terms of the short-term ones leveraging the footprint of sealed air around markets where liquid box is not present today customer relationships on both sides to advance the fluids segment as well as in terms of how we drive the synergy since he asked about the synergies on synergy side you know we're unpacking the entire piece obviously the market piece that I've just talked about but also internally how do we collectively buy better obviously still there you know as you know George we buy more than a billion pounds of resins versus the smaller size of the liquid box. Around the film expertise, this is what the cryovac extrusion, the film structure piece of it. And then three really, you know, that company, the small company, they've done a tremendous job with the resources they had, but now bringing in a much larger company, how we can even accelerate the path they were on in terms of the touchless automation within their plants. And then bringing them into our digital capabilities in terms of how we go to market using MySee as well as digital printing. So again, day eight, but many great opportunities that we hope to update you in the upcoming quarterly calls.

Good. Thanks, Emil. Next question.

One moment.

One moment.

Our next question comes from the line of Gansham Punjabi from RW Baird. Your line is open.

Thanks. Good morning, everybody. I guess first off, back to the 2023 question. You know, how should we think about the weighting between the first half and second half on EBITDA and EPS? Excuse me. And then on your 2027 financial targets, which is obviously very helpful to kind of keep focused on the algorithm, how do you think the weighting changes between food and protective from a portfolio standpoint? And I guess I'm just asking because you have so many internal initiatives outlined and acquisitions, et cetera. Will the portfolio become more effectively recession resistant than what we have currently?

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

But, Ted, maybe some additional thoughts. Yeah, Gansham, on the second part of the question is we're moving the portfolio as you look at 2027. So you see the shift and we're very consciously talking about cryovac and that our food business and moving that portfolio, moving it from where it was 45, 55 to now over 60%. The fluids portfolio, if you look at it being over 10%, it's actually another percent because part of the fluids is into our medical space. So you can see it's becoming a very strong part of our portfolio going forward and shifting that strong growth to the food side of the business in our portfolio. But the other side of our portfolio to highlight that's in the re-invent C as we drive to digital and de-automation is really looking at our portfolio to be a full automation portfolio. So what does that mean? Were we leading with equipment where we can automate our customer's facility and have that pull through materials? One of our fastest growing product lines has been in the fiber-based solutions, both food and the protective, and bringing automation into that space. And as Emil was talking about with LiquiBox, right now they do very well, and we do very well with bags, and now we have fittings. But the box part is a significant opportunity as we bring some of our auto-boxing, digital technology and to pull that material through. So the portfolio is shifting in two ways, shifting to be a stronger portion of our portfolio to that very stable, high profitable business as we're adding fluids, but also as we continue to shift the portfolio to a full solutions model with that automation and pull through on materials. we think exciting for where the portfolio shifts. One other piece, just to highlight it, I highlighted in my prepared remarks, is looking at the liquids and fluids portfolio is now going to be leveraging at a 40%, where the operating engine, despite all of our issues, the engine has been performing and operating at a really strong leverage. over and now putting a part of our portfolio that's actually going to be more profitable than the existing base. So that 40% leverage is really going to be driving earnings over the next five years. Okay. Next question.

Thank you. One moment for our next question. Our next question comes from Phil Ng from Jefferies. Your line is open.

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

Yes, so just so it's fresh, we're getting ahead on those supply chain issues on the equipment side, so I think we're in a good shape. I think we can grow that business, and you'll see that strong growth coming back and expecting more. The first part of the question, remind me, Chris. So just thinking through the food, remember we talked about the... Okay, the share gain. Yeah, share gain. The share gain on food. Yeah, definitely, we see that in our guidance. Part of the food, you know, we have it at 2% for full-year growth on food, and part of that is the share gain. But on the second half, we see some of that market coming back. We now have that specialty resin that we highlighted before. We definitely – we're in a really good position with our food business. I mean, our cryovac materials and automation – is the preference in the marketplace and as we're driving that now having the material we think we can get that share back and that's in part of our guidance but it's against a tough first half outlook so short answer is yes we expect that share gain back both on materials and we expect more share gain on the automation and ted have you won that share already at this point Well, partly we identified that in the fourth quarter. With the equipment coming in, that's identifying that that's coming. So part of that strong fourth quarter gain on the equipment, the answer is yes. More to come, though.

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

On the protective side, just if you're asking, you was focused on the food, but we also think same thing as we get through the destocking. And again, just really highlighting is we move our, especially we're on the protective side where we have a distribution, moving those distributors to online partners as we go further digital with MySea. we definitely think it's going to expand our reach and our capability when we get through some of this destocking on the protective side. So we think we have some shared opportunities there as well. Okay, next question.

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

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

Sure, Anthony. As you know, we don't necessarily give quarterly guides, but we like to give – you guys as well as investors, just a feel for the first half and second half. But we definitely, from a sequential point of view, expect earnings per share in Q1 to be down, you know, going into, you know, going into the year. So you kind of, from a modeling point of view, think of it as 46, 47% first half. And then as you may split it, we would expect Q1 to be a softer quarter, given what is going on, mostly on the protected side. Coming off some pretty strong growth on automation in Q1, Don't necessarily expect to see that same level of growth in Q4 event in terms of Q1. So anyway, some headwinds face us in Q1 that is reflected in our view of that first half and second half. Operator, next question.

One moment for our next question. Our next question comes from Angel Castillo from Morgan Stanley. Your line is open.

Hi, good morning. Thanks for taking my question. I was just hoping we could unpack a little bit more of the kind of 2023 growth. You talked about volumes, but I guess if I look at the organic growth that was outlined of maybe minus one to plus three, kind of implies flattish to modestly up. And then I think the liquid box contribution, if we just look at the EBITDA margin that that business has, implies that the EBITDA four-year guide, based on those two factors, would be kind of put you at the high end of the guide just with that starting point. So just curious, should we kind of view that as conservatism or is there any other kind of factors that, you know, as we think about maybe a more base business kind of flattish and contribution from Equibox that maybe are offsetting some of it, whether it's, you know, anything on the cost side or kind of costs of ramping up that business or integrating it?

Sure. Okay. Thanks for the question, Angel. So to your point, let me unpack it. So we talk about overall food being up in 23, low single digits. From a volume perspective, as well as a price, as we continue to benefit from some price actions that we took in 2022 that will continue to benefit us in 23, that's on the food side. FX is, for both segments, providing some level of headwind when you think about it on a reported basis. But when you get to protective, protective is where the pinch point is. I mean, we saw it in the second half of last year. We continue that outlook to be negative for us, unfortunately, in the first half of this year. So roughly down low single-digit growth. We don't expect much in the way of price activity in the first half, given where we are recovering. the inflationary pressures that we've seen, and that will continue to evolve as we execute in 2023. So hopefully that provides a little bit of color. And then the automation piece of it, just to overlay and recognize automation for both food as well as protective is less than 10% of each segment's sales. But that overall growth algorithm, growing that business double digits is what we expect that we shared on slide something, slide nine, in our earnings supplement.

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

that's what we're focused on okay next question one moment for next question our next question comes line of Adam Josephson from KeyBank your line is open hey Chris good morning thanks very much for taking my question in terms of guidance just a two-prong question one is obviously there are cost levers you can pull and you're able to achieve your EBITDA guidance. Volume and free cash flow, obviously, last year were a lot harder for you. How much confidence would you say you have in the various components of your guidance, just given your experience last year, specifically with volume and free cash flow? And just, Chris, can you tell me what your pro forma leverage is now, as well as what exactly your working capital expectations are for the year? Thank you very much.

Yeah, so good. So let me just answer the second half of your question, and we'll come back to the overall guidance. But for purposes of, you know, we anticipate right now Q1 to end the leverage ratio roughly three and a half times, 3.5 times, and hope to continue to kind of work that down, recognizing our working capital improvements in terms of the normalization that we talked about. getting inventory reduced, selling through that inventory, collecting those receivables, we would see that working capital cash generation come through. Using that excess cash to pay down debt would be priority one. So the overall guidance, as you see on slide 16, when we provide our full year view, we've got outlook ranges that we'd like to provide. to give you guys as well as investors a sense of what we're seeing on the potential downside of our guide versus the upside range. And I'll let you kind of read through them yourself. But specific to your question on sales, pretty confident that we recognize the first half, second half discussion we discussed. If I break it down on a regional basis, one region I wanted to highlight for us is APAC, recognizing China opening up again. And Ted recently being over in Asia, just listening to our team over in APAC, is that although it is somewhat muted initially, we're not too bullish in terms of how quickly that's going to come back, but we would expect second-half improvement out of our business in China to help give us some confidence in terms of that top-line sales. Food will continue to be resilient regardless of what happens in terms of the consumer behavior and in terms of what they choose to buy since we play in most, if not all, of the proteins. You get to the protective side. We're hopeful that it's a first half type of situation, every quarter getting better and better in terms of our protective end markets. But that's a little bit on the cautious side, and we talk about the destocking potentially persisting. And then the other element of our four metrics that we provide, you mentioned free cash flow. I'd say the confidence is pretty high. We saw the reduction in inventory start to occur second half of the year, getting more meaningful in the fourth quarter. That will continue in the first half of the year, and we would expect that that cash generation would show a better profile than what we've seen in 2020, too. So that's what gives us confidence. I also want to highlight that we're very conscious to make sure when we think about the cost actions and when we think about the investment actions, we do not want to starve areas that's going to help our future growth. So CapEx, as an example, you can see we expect to spend more next year than we did in the prior year. We think about innovation and the things that we're doing with reformulation, be able to meet the markets and meet our sustainability goals, et cetera, et cetera. we are not holding back on the investments in our business to try where we're going.

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

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

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

Yeah, so let me answer maybe the second half of your question. I'll let Ted comment around the digital piece of it because that's very much a big portion of what we're identifying as opportunities for re-invent C2.0. So on the restructuring side, what we've profiled out on page 16 is that restructuring mainly consists of the continuation of reInvent, the program from several years ago, kind of concluding on that particular transaction, as well as some of the restructuring we've identified on the integration given the M&A deal. What we're specifically identifying, to your point, is that reInvent C2.0 costs as well as the cash profile as we continue to execute that over the next 12 to 18 months. You can see what we've targeted for overall structural changes and benefits. It is currently not reflected in our guidance. At the same time, we view it as potential upside as we continue to manage costs in terms of what is in our control and how we're looking to change the structural dynamic of our company to provide for margin expansion. On future calls, we'll continue to update yourselves as well as investors on how we're executing that particular program.

And on the digital side, if you look at slide seven, and as you highlight on 2.0, we're highlighting where digital's hitting. And on the sales side, incremental sales, and there's a few things that we would identify as a digital sale. The one that is very clear is when we start bringing our digital printing and actually put digital printing connected to our equipment and adding digital incremental sales to our automation. Digital also shows up as we work with our packaging and be able to actually put digital coding on our packaging, letting our customers be able to mark The products, as we've talked before about track and trace, as we get our digital printing deployed around the world. But also the digital is our access to market, that going with MySee, we think we can actually increase our capability. And then the last piece is on the digital printing, especially as we've talked about even with our fiber-based products, that actually doing the printing with corrugated fiberboard, pulling it in, to some of our other solutions. So we think we have some growth opportunities there. So that's that 1% incremental to what we're already doing in the model. But the second part is also in there that we're putting digital into the savings as we're driving our operating engine. As we're creating our digital platform on MySee, working more effectively and efficiently, some of our largest customers want to interact with us digitally, just like they've done in the COVID whether it's designing a product online, using our design studios, being fully touchless from designing the product and actually sending those digital signals to our factories, extreme, significant savings to our customers. So it's part of that engine of how we're going to convert those additional sales to a more efficient and effective operation. And it's also connected to the The touchless piece that, you know, Meal's team is just really doing some exciting stuff with our factories as we're driving touchless automation. And the digital is a big piece of making all that happen. Okay. Operator, I think we have chance or time for one more question.

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

Okay. Thank you. Good morning. First, the clarification and then a question. The 275 DNA versus run rate seems like a big jump. Can you just clarify what's in there and why the jump? Then secondly, you know, you highlighted 18% EPS growth, Kager, over the prior five years. You just did an acquisition, invested heavily in digital, driving automation, but you're only committing to over 10% growth. But it seems like the setup for the next five years is arguably better than it was the prior five years. So can you just talk to that and you know, why it shouldn't be better than, you know, over 10%.

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

Yeah. Okay. So I'll take the second part, Larry. If we look at our operating model slide, so exactly as you said, if you look at that backward slope of the last five years at 18%, and then you see the challenge we have in 2023 on EPS, as Chris has highlighted in the bridge, specifically the biggest one being the interest rates. And again, how do we pay down that debt as fast as possible? So if you look at the slope of that curve from where it is in 23 to 27, it's actually the 15% growth rate. But the target that we had out there is greater than 10%. Let's continue to go beat what we say we're going to do. It actually, the slope of that curve is higher than 10%, but we're also recognizing we took the dip in 2023 to get there. We think the model, to your point, especially as we're adding higher margin, as we continue to have margin expansion, we think beating that 10% EPS growth into 2027 is more than possible. Okay. I want to thank everyone for that ends our call for today. We are and hope you feel the excitement. We're really excited about the opportunities that LiquiBox brings to us and how it's going to accelerate our growth for the future. And we look forward to speaking with all of you in May. Thank everybody for your time.