Sealed Air Corporation

Good day and thank you for standing by. Welcome to the Q2 2023 Sealed Error Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one, one again. Please be advised that we will be taking one question per person and we will not be taking follow-up questions. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Sullivan, Executive Director, Investor Relations and Assistant Treasurer. Please go ahead.

Thank you and good morning, everyone. With me today are Ted Dehaney, our CEO, and Dustin Simak, our CFO. Before we begin our call, I would like to note that we've provided a slide presentation with enhanced visuals to illustrate who we are, what we do, and where we're going. 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 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 and 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 and as revised and updated on our quarterly reports on Form 10Q and current reports on Form 8K, which you can also find on our website or on the SEC's website. We discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. Included in the appendix of today's presentation you will find U.S. GAAP financial results that correspond to the non-U.S. GAAP measures we referenced throughout the presentation. I'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 we will discuss our second quarter results and provide updates on our 2023 outlook and our continuous journey to reinvent C from the best in packaging to a world-class company automating sustainable packaging solutions. We're introducing a new program called Cost Takeout to Grow as part of our Reinvent C 2.0 to return to growth and take out our cost in this challenging post-COVID environment. After that, we'll open up the call for your questions. Starting with slide three. On this chart, we show our adjusted EBITDA performance since 2017 through the lens of major episodic events. The chart recaps where we are today, but most importantly, where we are going and how we're repositioning for future growth. We'd like to give you visibility to what we see for 2024 through 2025 and set the stage for a cost takeout to grow program. As we entered 2018, we were faced with major challenges, such as the start of war on plastics and remaining stranded costs after the diversity sale. The company's operating leverage and earnings power were not where we wanted to be, and our stock price had been stagnant for the previous three years. That was the case for Action to launch a re-invent seed program based on our four P's. We established the C operating model, setting the tone for our transformation to world-class. The reInvent-C growth strategy centered on the pillars of automation, digital, and sustainability. Through reInvent-C, we realized annual savings over $300 million, margin expansion greater than 270 basis points, and 5% top-line growth, including M&A. In early 2020, COVID shook the world and profoundly impacted the way of life globally. COVID brought demand surges in e-commerce and food retail, caused wide supply chain disruptions, rapid inflation, product shortages, and overstocking. We built Reinvent C, aiming to become world-class based on our four P's, people, performance, products, processes, and sustainability. Last quarter, we introduced our new C Corporate brand, highlighting our transformation into an automation, digital, and sustainability packaging solutions company. We are now evolving reInvent C 2.0 to growth and expand the cost takeout and productivity program to $140 to $160 million of annual savings to be fully realized by the end of 2025. This Cost Takeout to Grow program will redirect SEA resources from crisis problem solving to focus on driving major growth opportunities. We're transforming C go-to-market team to an efficient and effective solutions-focused organization, accelerating automation across our business verticals and launching new product innovations enabled by sustainable materials and digital solutions. We will increase the operating leverage and earnings power in the business by further optimizing our supply chain footprint and driving digitally-enabled SG&A productivity improvements. Bringing it all together, with our cost takeout to grow, we are targeting low single-digit growth, fueling our sea operating engine, which will result in margin expansion and our journey to world class. Now moving to slide four, we'd like to showcase how we are creating high-quality growth. We break down our growth by geography, market, product, and MySee, our online digital platform. In the second quarter, our digital online transactions grew to 16% of total company sales, representing a sequential increase from approximately 10% in Q4 of 2022 and approximately 14% in Q1 of 2023. This rapid growth reflects the speed of our digital transformation, our ability to adapt to changing needs of our customers, enabling us to serve customers we are not efficiently reaching today. Towards the bottom of the slide, you can see the current percent of online transactions for each of our business verticals. Our largest penetration is in our automated protective solutions business. starting with consumer-ready solutions, representing over 50% of total revenue. These solutions are designed to meet the evolving needs of food processors, retailers, and brand owners as they seek to respond to shifting consumer preferences and to create an at-home experience. In the second quarter, consumer-ready solutions declined low single-digit and volume, primarily driven by softer demand in our processors in food, retail, and markets. The rapid increase in inflation over the past several quarters has impacted discretionary spending, resulting in decelerating market demand. Consumers are trading down from premium to lower-priced proteins. This dynamic impacted all regions, with EMEA being hit the hardest. C automation solutions for proteins continue to be a bright spot and grew approximately 40% from strong share gains with major meat processors in the quarter. Despite the softer global protein market, automation grew double digits in all regions, with APEX showing the strongest momentum, growing greater than 50%. Throughout 2023 and into 2024, we expect the retail softness to continue. The U.S. cattle cycle will be a headwind for the business, partially offset by tailwinds from the Australian herd cycle, which already positively impacted our business. Automation will continue to be a secular driver across all these markets. The next business vertical, fluids and liquids, now representing greater than 10% of company sales in the quarter, experienced mid-single-digit growth. before counting LiquiBox. We continue to see the modest food service recovery and strong growth in automation. We're bringing medical into this business vertical, further capturing the synergy between Cryovax material science and LiquiBox fitment and attachment technologies. Our third business vertical is our automated protective solutions, which represents a approximately 35% of our business today, focusing on a variety of markets and customers, ranging from industrials to e-commerce fulfillment. Weak end market demand and channel destocking continue to impact volume performance in the quarter. We're focusing our efforts on turning around this vertical by expanding C automation capabilities and fiber-based solutions. We're increasing engagement and reaching more customers through our MySeat digital platform, now representing approximately 35% of this vertical's revenue. We're actively performing a strategic review of our protected portfolio for further areas to optimize and unlock value. As a small example, we recently announced the closure of our Kivo thermal temperature assurance business. Transitioning now to slide five, we delve into C's growth pillars, namely automation, digital, and sustainability, all crucial in addressing our customers' most pressing packaging challenges. During the second quarter, we reached new significant milestones, demonstrating our commitment to our customers in delivering incremental value-add capabilities to enable profitable growth for C. Automation exhibited robust growth for the quarter, increasing by approximately 20%. Food automation was particularly strong, up approximately 40% year-over-year from continued market share gains at major protein producers. We anticipate delivering over $525 million, up 10%, in annual rent revenue this year. With regards to digital solutions, we achieved several significant milestones. As an example of how digital printing is fueling C automation, we introduced a new Prismic digital printer unit to print protein bags at our customers' facilities, enabling them to customize their products at the point of packaging. Transactions on myC platform surpassed a billion dollars annual run rate in the second quarter, demonstrating robust digital engagement. Following the successful introduction of our online design studio, onboarded customers experienced high speed web-to-print solutions, streamlined graphics process, and reduced print lead times. As we move more of the company online, we continue to unlock operational efficiencies, reach new customers, and make it easier to do business with C. On the sustainability front, We're proud to share that our MSCI and Sustainalytics ratings have improved, recognizing our ESG progress. Back in July, together with ExxonMobil Australia, we announced a unique circularity initiative for protein trays. The collaboration will avert more than 900 tons of plastic waste annually from landfills or incinerations. We take great pride in the industry partnerships we've created to deliver scalable and sustainable solutions, making our world better than we find it. Turning to slide six, this is another example of how the combination of best-in-class Cryovac auto pouch equipment and film, LiquiBox dispensing technologies, and Prismic digital connectivity bring value and create customer returns. On the top right hand side of the slide, you see the use of Cryovac technology barrier bags filling lemonade within a quick service restaurant environment. This automated form fill and seal solution enables greater than two times operational efficiency and over 30% waste reduction compared with traditional back of the store lemon slicing and squeezing. Improved speed of service reduces storage requirements, enhances safety while offering a seamless source of fresh lemonade throughout a given day. In this example, the operational savings were over $10 million for the customer. We're introducing a new solution designed not only to bring additional operational savings, but also create new revenue sources for QSR brand owners. A pre-filled fresh lemonade bag in the box can replace carryout rigid plastic jugs for quick service restaurants. This growth opportunity for our customers extends shelf life from hours to days, enables in-store retail carryout formats, and digital marketing opportunities to enhance consumer experience. This application will disrupt rigid containers with an improved sustainability profile through less and more efficient packaging. Now I'd like to turn the call over to Dustin to review our financial results. Dustin? Thank you, Ted, and good morning, everyone.

Now moving to second quarter's results, let's turn to slide seven. In the quarter, on a constant currency basis, net sales were down 1%, and adjusted EBITDA of $280 million was down 5% compared to last year. Volumes were relatively flat sequentially, excluding M&A and FX, reflecting volume stabilization since the beginning of the year. Sequentially, EBITDA improved about 5% from $267 million in the first quarter of 2023, partially driven by improved sequential volumes and cost reduction. Adjusted earnings per share in the quarter of $0.80 was down 22% compared to a year ago on a constant currency basis, but increased 8% sequentially from $0.74 in the first quarter of 2023. Turning to slide A. Licklebox contributed 5% to top-line sales, or approximately $75 million, but was more than offset by organic declines driven by continued market pressures and customer destocking in protective, as well as continued weakness in food retail markets. Second quarter adjusted EBITDA of $280 million, which included a $19 million contribution from Licklebox, decreased $13 million, or 4% compared to last year, with margins of 20.3%, down 40 basis points. This performance was mainly driven by lower volumes within protective. As it relates to adjusted earnings per diluted share in the second quarter of 80 cents, our adjusted tax rate was 26.9% compared to 24.7% in the same period last year. We did not repurchase any shares in the second quarter. Our weighted average diluted shares outstanding in the second quarter of 2023 was 144.8 million. Moving to slide 9. In the second quarter, food net sales of $881 million were up 3% on an organic basis, primarily driven by price realization. Volume was flat year-over-year with growth in automation and our organic fluids and liquids business upset by continued weakness in retail demand. Volume was slightly up versus the first quarter. Food adjusted EBITDA of $191 million in the second quarter was up 16% in constant dollars compared to last year. with margins at 21.7%, up 90 basis points mainly due to the contribution from liquid box and lower operating costs, partially offset by unfavorable net price realization of $10 million. Protective second quarter net sales of $500 million were down 18%, driven by volume declines in all regions from continued market pressures in industrial, electronics, and fulfillment markets and continued customer destocking activities. While we expect these stocking activities to moderate, headwinds and in-market demand are projected to continue in the second half. Protective adjusted EBITDA of $96 million was down 24% in constant dollars in the second quarter, with margins at 19.2%, down 140 basis points due to lower volumes and associated operational leverage, partially offset by favorable net price realization of $11 million. Sequentially, protective EBITDA margins improved 300 basis points, primarily driven by favorable net price realization and cost control. On slide 10, we review our second quarter net sales by segment and by region. In constant dollars, net sales were down 1%, with 12% growth in food, while protective was down 18%. By region, we grew APAC by 6%, offset by a decline of 2% in Americas and EMEA being flat. Now let's turn to free cash flow on slide 11. Through the second quarter, free cash flow was a use of cash of $130 million compared to $94 million source of cash in the same period a year ago. Working capital has improved through our continued efforts to reduce inventory. However, benefits were offset by the previously disclosed deposit to the Internal Revenue Service of $175 million. Excluding the impacts of the IRS deposit, free cash flow would have been a source of cash of $45 million. On slide 12, we outline our purpose-driven capital allocation strategy, focused on maximizing value for our shareholders. As anticipated, we close out the second quarter with a net leverage ratio of approximately 4.1 times. We expect to use free cash flow generation to deliver throughout the year and into 2024. We are working to optimize our portfolio and actively addressing opportunities to unlock value. Let's turn to slide 13 to review our 2023 outlook. Our guidance at the beginning of the year anticipated a V-shaped recovery in the second half of full year 2023. Based on continued in-market demand weakness compounded by the stocking, we expect an L-shaped recovery through 2023 and into 2024, reflecting a post-COVID lower growth environment. As a result, we are revising our full year guidance, which includes the following. We expect net sales to be in the range of $5.4 to $5.6 billion, which at the midpoint is down 3% on a reported basis and down 7% organically. We now expect LocalBox to contribute approximately $300 million in sales for 2023. The second half will be similar to the first half of 2023, reflecting volume stabilization throughout the year. The slight uptick is in volumes in the fourth quarter. We expect full-year adjusted EBITDA to be in the range of $1.075 to $1.125 billion. which assumes adjusted EBITDA margin of approximately 20%. Full-year adjusted EPS is expected to be in the range of $2.75 to $2.95. We expect full-year 2023 free cash flow, excluding the previously disclosed tentative tax settlement, to be in the range of $325 to $375 million, which implies a free cash flow conversion of approximately 85% at the midpoint. Lastly, for the third quarter of 2023, we expect net sales to be in the range of $1,360,000,000 to $1,380,000,000 and adjusted EBITDA to be $260,000,000 to $270,000,000 with earnings per share between $0.60 and $0.64 per share. As Ted mentioned earlier, due to the current environment, we launched Cost Takeout to Grow as part of reInvent 2.0 to restore earnings and volume growth in 2024 and beyond. I look forward to giving you more details and updating you on the progress to the $140 to $160 million of annual savings targeted by the end of 2025 and our growth initiatives on subsequent earnings calls. With that, let me now pass the call back to Ted for closing remarks. Ted, over to you.

Thanks, Dustin. As we look to the remainder of 2023 and into 2024, the combination of Reinvent C 2.0 initiatives and new product introductions will help us revert to low single-digit growth. We continue to be cautious on the global economic outlook and lingering impact of inflation. We are confident that our Cost Takeout to Grow program will put us back to the earnings growth path and position us to address significant opportunities in our end markets. I also want to take a moment to recognize our people, their hard work and dedication to relentlessly drive our company to world-class performance. With that, I open the call for questions. Operator?

Thank you. At this time, we will begin the question and answer session. As a reminder, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. We will be taking one question per person. and we will not be taking follow-up questions.

Please stand by while we compile the Q&A roster. Our first question comes from Gansham Punjabi from Baird.

Your line is open.

Hi, good morning. This is Matt Krieger sitting in for Gansham. Thanks for taking my question and for all the details. I was hoping that you could provide some added detail on your volume expectations by segment for the second half of 2023. Guidance appears to imply a slowdown in food in addition to the weakness in packaging. Why would this be the case versus the second quarter? And what were the volume run rates for each of the businesses during July? And if you even want to break out some of those details by sub-segment, that would be great.

Hey Matt, this is Dustin speaking and great question. So a couple points we highlighted to go back to some of the prepared remarks starting with food. If you think about the second half of the year, what you're really looking at is a shift in the US cattle cycle since the beginning of the year, starting in Q2 and now going throughout the remaining portion of the year is being partially offset to some degree with what's happening in Australian herd cycle as well, but not fully. And so that's what that market impact is compounding volume in the second half as it relates to food. Keep in mind, holistically, though, if you think about the business from first half to second half, in food and protective, you're looking at general volume stabilization. If you move to protective, looking at the second half, you know, we talked about, you know, we're still seeing, you know, in-market weakness and demand, and then that's being compounded by, obviously, destocking. So, the longer, the weaker the demand in our in-markets, it's elongating the destocking cycle. You're seeing that extend into Q3. as well as the compounding market. So those two factors were driving high single-digit declines in the second half for protective from a volume perspective.

Okay. Thank you for your question. Next question. Yeah.

Our next question comes from Laurence DeMaria from William Blair. Your line is open.

Thanks. Good morning, everybody. As much as I want to ask about some of the growth opportunities, I would like to understand some of the volume declines in terms of market declines versus, let's say, switching, share losses, and some of the trade downs. So can you kind of discuss the volume of market declines versus destocking in the second half and what kind of share losses there potentially are? And have we lost any share due to pricing actions? Thank you. Sure.

All right, Larry, this is Dustin Siamak. I'll start off and then Ted can chime in. So if you look at kind of going back to the prior question as well, I'll go up by segment, Larry. So if you look at food, what we're seeing is volume holistically, right? Think of it as down in the roughly 4% range in the second half of the year. You have a little bit of uptick in price slightly because we see this more of a year-over-year comp. And then when you look at market, it's down about 4% holistically. We're looking at share loss about down a point. And that's being offset to some degree in our other growth areas. And I'll let Ted come back to that point because I'll move to protective quickly. When you come back to protective in the second half of the year, we're seeing more pressure on price. You're seeing that on the commodity residence side really coming from the first half. So you see price down about 3% holistically in the second half with volume down high single digit, of which about half of it is market. The other 25, 30 points is destocking. And the rest is going to be share loss offset by some growth.

And I'll turn it to Ted to talk a little bit about the growth in each area. Sure, and picking up on the share loss piece, if we talk to food first, we've talked about what's happening with the resins. We feel like we've got that stabilizing, but we did still have a little carryover for the resin. With our customers who did lose because we didn't have the resin, converting those back, they've got to get rid of the stock that they have. Market slowing is slowing that down a bit into the third quarter. We think we should have that hopefully gained back by the end of the year. The other part on the share gain is with the automation driving some of our growth. On the food side, as we shared, pretty strong, really have a great backlog. We got some of that pickup. We got some of the part shortages we had that we talked about in the food business alone, up 40%. Still driving to 10% growth for the year and into next year. Some of the activity on the automation, we're working on new products. And right now with our customers, being under strain, they're reducing their CapEx. We're kind of fighting that right now, helping them, crawling in. What can we do to help them with their productivity issues? We still think automation has opportunities for us on food in the second half and going in strong into next year. On the protective side, the share gain really is the pressure we've been seeing is with the destocking. We're seeing that reduced, but still strong in the quarter. We still think we'll have more of that in the second half, but that The fiber, the plastic fiber push is still there. We're working on that. That will be playing out through the rest of the year. So we do see some stabilization in the protective side. Same thing on the growth with protective. We really think going with our e-commerce platform, getting better reach, reaching more customers. Also, with the fiber-based solutions coming on board, And also the automations you saw on the prepared remarks, we have some significant opportunities moving on the protective side coming in the second half. But right now, the first half of the year is tough. Second half, you're going to stabilize in building into next year. Okay. Next question.

Thank you. Our next question is from George Stappas from B of A Securities. Your line is open.

Hi. Good morning, everybody. Thanks for the details. My question is a two-parter combining the volume outlook with the savings on CTO to grow. Ultimately, what should be the cadence on the $140 million to $160 million savings that you spell out on slide three? And how pressure tested are they, Ted, to the volume outlook And the reason I ask, and this is kind of the second question, some of the issues that you cite here in the back half of the year, the cattle cycle, automation perhaps not growing as quickly because your customers are holding back CapEx. These are factors that were talked about in past quarters, and the company's view was they shouldn't be that big of a deal. So are your customers, does Sealed Air need to get closer to its customers to have maybe a better view on the volume outlook, and in turn, how that will ultimately play into the savings and the cadence there. Thank you so much, and good luck in the quarter.

Hi, George. Good question. Let me let Dustin start with just unpacking some of those numbers, and then I will answer the question about how close we are to our customers and why we had that demand shift from first quarter to second quarter. Thank you, Ted.

And thank you, George. So to quickly answer that question, I just want to take a step back and talk about re-invent C, right? And just as a reminder, as we're announcing the $140 to $160 million outlook over the next couple of years through 2025, we went back to re-invent C, you know, 1.0. You know, the initial kind of commitment was roughly $225, which resulted in over $370 million savings. And the point to make there is that as we move throughout the markets beyond 23 into 24, we're going to continue to focus on taking out the amount of costs and driving the necessary amount of savings to continue to restore earnings power. But going back to the 140 to 160s, if you think about the cadence, you'll see it begin to feather in in Q3 and Q4. We're already off and running. The teams are actively engaged and executing as we speak. And then what you're going to see is 60%, 70% of that 150 at the midpoint appear in 2024 and the remaining portion in 2025.

I'll turn it back to you, Ted. Yeah, and then so George to the second part of the question about being close to our customers going through this right now, extremely close to our customers right now with the pressure, especially in the food side where they've seen the demand change. Here, some of our larger customers are announcing publicly what's going on with their demand reduction for the year. So we are side by side. We're seeing that, feeling that. Our look one quarter later, we have much greater visibility to what we see, and that's where you see the adjustment in the second half. To the second part of your question, the automation has been part, one, releasing what we had in the backlog, getting that strong growth in the first half. The pipeline is still strong. We've been reducing the bookings. The pipeline is still quite strong to get, and we have to get those converted. What we're fighting with is with their reduction in demand and the reduction of their heavy, intense focus on cost reduction, is how can we come in and help them take their costs out through automation, and that's the issue that we're going through right now to build up our backlog for the end of this year and going strong into 2024. We feel pretty good about that on the automation side that we can hit. We have some work to do, but we think the automation is a really strong, bright spot for us going forward. Next question.

Thank you. Our next question comes from Michael Roxland from Truist Securities. Your line is open.

Thank you, everyone, for taking my question. Ted, in food, you mentioned last quarter and the prior quarter about your confidence in regaining lost food volumes from last year. How much additional progress have you made in 2Q? And can you also talk about your approach in food, excuse me, on a go-forward basis, One of your larger competitors recently acquired a food packaging business targeting modular vacuum packaging solutions for protein, dairy, and it tends to increase its food packaging volumes to gain market share. So I just want to find out how you're going to address that increase in competitiveness.

Thank you. So the first part, how we're feeling comfortable building on what I just said before, we are with our customers directly, so again, feel pretty confident on the automation on what we're doing with our customers in the food space. On the resin piece, which is a different subject, as we regain where we didn't have that resin in the past, we feel very good with our customers, with our brand, with our service, that we can get that business back. Again, we have to get them to deplete the inventory they have with someone else. So, feel really good about that one, even myself personally being engaged with those customers, let's go get that business. The second part of your question with what are competitors doing in automation, part of our growth in automation being well above the market has been taking share. So if we feel really good about that, we talked about in the fourth quarter, we had a major conversion with one of our largest customers actually taking that business back that we lost over five years ago. We got that back, making gains. We have some of that equipment in place, actually have it on one of the slides of the new equipment that we brought in. So we feel very good about that. We feel like we have the best products. We feel like we have the best equipment. We have new designs coming in place, so feel really good about that. We'll always have competition, but I feel very good with our Cryovac incredible brand with our customers. We have the product. We can go get the business. We have a tremendous sales and service team, so feel quite confident giving the team better tools. I think we're in a good place despite what the competition is doing. Next question.

Thank you. Our next question is from Phil Engie with Jefferies. Your line is open.

Hey guys, Dustin did a great job in talking about the cost element of your restructuring effort. So Ted, help us think through perhaps the growth side of things. How long do you think these initiatives will take hold? We'll see it on the bottom line. And some of the challenges you're calling out on volume seem like it could linger into 2024. So curious, what's your level of confidence in getting back to growth from a top-lining earnings perspective when we look out to 2024? Great question.

but I'll have to share because Dustin did take the cost out, and there I saw already some of the lines where I've used it. It's been great having Dustin here, a clean set of eyes, and I've used the phrase already from my mom, a new broom sweeps clean. So what you see there on our cost takeout, building on the success of reInvent, We have really good line of sight. What he didn't say is we will continue to under-promise and over-deliver on those savings. So on the growth element, if you look at the curve on slide three, that is where we put a tremendous part of our resources taking care of that COVID period. We originally called that the COVID crisis. We've gone through so many crises around the world. Our scientists, our engineering team, our service technicians taking care of that bump that was out there, we redirected resources to take care of business. And actually, we had to redesign products that we already had. So to answer your question on my confidence, can we get us back to growth? As we put in the slide, committing to low single-digit growth, our internal plans are above that single-digit growth. So how do we do that? We talked about inorganic with LiquiBox. Five and a half percent of the growth is coming in there as we drive our largest, our fastest growing, highest margin segment. So feel really good about that. How are we doing on automation? On the growth going forward? Feel very good. That's got to be north of double digit right now so far this year. Quite strong. Going out? Yes. The digital solutions are just coming into fruition. Going again, that hump, that the COVID crisis behind us, putting our engineers on our digital solutions, feel really good about that. And then breaking out the fourth area of those new products. Again, designing for this new curve on reInvent 2.0, we have new trays coming out, new fiber-based products coming out. We now have to have those realized to beat that low single-digit volume growth out there. So, again, under promise, just like on the cost side, we're going to beat that. On the growth side, I have high confidence we're going to beat that going forward. Okay, next question.

Thank you. Our next question comes from Gabe Hosdy from Wells Fargo. Your line is open.

Hi, Dustin. Good morning. Maybe I'll ask the question a little bit differently. I'm honing in on slide number three where you talk about CTO to grow. enabling you to get low single-digit volume growth. And then further on the right-hand side of the slide, you talk about sales growth of 5% to 7%. So I'm assuming implied in there is some gross price as well as acquisition-related growth. So I guess in the near term, given that you're focused on deleveraging, M&A tends to be fairly lumpy. Is it safe to say that you're assuming that you'll get back to some sort of contribution-based from net or gross price in that algorithm. And I guess just to clarify in the guidance, you're calling down, I think, liquid box to be 50 million lower in revenue. What's driving that and does that come back in 2024 and beyond?

Okay, so great question. Comment first on net price and then the comments you made around, you know, cost they got to grow and you see on this chart on slide three, that kind of course correction. So what we're calling right now is $140 to $160 million of annual savings through 2025. And if you think about that line, that dotted line, that's what it represents, okay? And then low single-digit growth during that period. And to your point, if you look at capital allocation, we are focused in the short-term on deleveraging, right? So that's an organic number when we're calling it out. In general, we see net price realization somewhat, you know, I would say negative, excluding cost takeout to grow, right, for the next couple of years. And we talked about that in terms of, you know, where resident pricing is at today, where in-market demand that holistically was driving that kind of short-term view on pricing. And the idea is that when we get through that curve at the end of 2025, that will enable us to get back on over to the right-hand side because our balance sheet would be much further to leverage today. You know, pricing environment, markets will be in a different place, and then we'll be able to get back onto our C operating model, which you see on the bottom right-hand corner.

Yeah, the second part, Dave, this is Ted, where you mentioned about the liquid box. Liquid box being right now at a step down from what we talked about before. The short issues coming in a quarter into the business, we've had operational issues. right now into the quarter we've had some quality issues we feel like we're on top of that we brought the cryovac team in there to fix it we've even had some personnel issues in the plants we've adjusted rates believe we have that fixed and on top of we've also with our customers they've seen the slowdown in the market so we've been face to face with our team our cryovac team with the liquidbox team and we think we have some significant opportunities right now in the short term there those are issues and that's why we took that number down for the year but the last one on the cost energy though we're actually our head even though the volumes are down we are ahead on the cost synergies there in the model and so we get the volumes back up we think we'll far exceed the cost synergies on the liquid box going into 24 25 and 26 that is definitely part of getting back to the growth algorithm with the growth in liquids and fluids business, so we're still quite confident about that. Next question.

Thank you. Our next question comes from Josh Spector with UBS. Your line is open.

Yeah, thanks for taking my question. I guess one thing I wanted to ask about was more on the cost side of specifically margins within protective. You had a pretty nice step up in 2Q on flat sales sequentially. So just wondering kind of on your expectations for second half, I think you talked about pricing down, but price net of cost, I guess, could that be up? And if margins improve, do you think you could actually see protective earnings up year over year in the fourth quarter, or is that too aggressive?

Great question, Josh. And so, as we mentioned earlier, two points or a couple of different dynamics that I'll call out. One is if you think about the second half of the year, we're talking about volume stabilization. Having that volume stabilization sequentially coming from the first half really gives us an opportunity as we think about cost control, which benefited in Q2 and with cost takeout to grow benefiting further And what I haven't really explicitly said, but I will say now, which is 140 to 160, obviously with protective and how it's performed on the first half of the year and really the back half of 22, a lot of those cost savings will obviously proportionally be focused on our protective segment holistically. If you think about the second half and to your point, you are going to have margins sitting in the high teens roughly for the, you know, think of it as the first for Q3. And by the time you get to Q4 on an absolute dollar basis, you should be very similar to where protective was in Q4 of 2022.

The only thing to add on that on the growth side of looking at the protective is the portfolio. We did highlight in the prepared remarks the continued portfolio review and actually changing that portfolio. We will, we are planning to have margin expansion by the shift in the product mix going into the second half of the year. Also, with the new products coming in and in automation, we'll be driving a different mix in the volume, so we should have, again, margin expansion in the second half. That's what we're planning on. Next question.

Thank you. Our next question comes from Aaron Viswanathan, RBC Capital Markets. Your line is open.

Great. Thanks for taking my question. So if we look at the midpoint of the guidance at, say, $1.1 billion for this year and the second implying kind of like a $553 million number for the second half. So, yeah, you're exiting at kind of that $1.1 billion rate. you will be facing some pretty easy comps next year in protective. I think food also, as far as the back half, maybe is positioned in a little bit better way as well. How do you think about growth next year? Do you envision returning to that sea operating model growth level of EBITDA, maybe in the mid to high upper single digit range? And what are the risks to to keep in mind that would prevent you from getting to that range. Thanks.

How about if we tag team on the answer because we have the new CFO with readjusting with the CTO to grow, and then I'll add some color on how it gets back to the model. Absolutely.

So, Arun, again, I really appreciate the question. A couple comments I would make. You know, as we think about next year, right, volume growth is critical. If you think about restoring earnings, and that's part of the reason we talk about CTO to grow is really both sides of the coin, getting back to low single-digit volume growth and then restoring earnings. If we get back to low single-digit volume growth, we believe the Cost to Got to Grow program will run earnings growth ahead of overall top-line growth. At that point, it won't get back to quite, you know, I would say mid to high single digits for 2024, but anticipating kind of mid single digit-ish relative to 2020 for earnings growth. So going back to your point, what are the kind of pluses and minuses as we think about that? One is we're obviously coming off a down year. If you think about next year, I made a comment earlier in one of the questions around net price realization and that being slightly negative. That to some degree is what's putting pressure on on our point of view at this point in time, which could shift as the market develops, is putting pressure on what we see is that 60%, 70% of the 150 coming into play next year, right? And again, what plus that up or plus that down from that point of view really comes in how you perform on volume and how those end markets look and do they shift or change from our point of view today as we progress throughout the next six months of the year. I'll turn to Ted.

Yeah, Arun, and just building off of that is going through this dip and as we put the CTO to grow in there. And again, on the theme, the under-promise, over-deliver. The cost side, again, this is what we have in the plan. Our plan is to beat that. On the growth side, we've got to get back to growth. I shared exactly what you looked at in the model with this is implying a low end on the growth going into 24, 25, and 26. We have to turn that engine around to get those growth initiatives and to add a percent or two on top of what you see here to get it back to the model. Right now, those numbers are below the model for the outlook years. What we have to do internally is to beat that. We also, with the market going behind us, we think that will lift. As we've shown with reInvent, what we did the first time, we leveraged very nicely, but we've got to leverage off growth. It's our crisis going forward. We have a growth crisis and that's we have the whole team going after it and we will leverage quite nicely getting that growth and that's what we're focused on to beat what you see here. Next question.

Thank you. Our next question is from Adam Samuelson from Goldman Sachs. Your line is open.

Yes, thank you. Good morning everyone. Continuing on the discussion in protective and appreciate that you're doing some portfolio review. Is there an element here of you have the strength to grow in terms of some parts of the business that might be more commoditized, that you have to functionally exit those business lines and try to replace those with newer, higher margin of business? And is there a time lag when that transition happens that might be impacting your shipments and kind of your confidence in the growth cadence going into next year?

Yeah, Adam, it's an interesting, I have to actually pause and think what you said, shrink to grow. What we're, part of the review on the portfolio, what we're looking at is does it fit into where we want to go? If you notice, we changed the name, what was called product care. We went to protective care. now we're calling it automated protective solutions so the lens we're putting on this business does it fit our strategy of automation digital and sustainable solutions for our customers so what's being pruned or shrunk or doesn't fit in if it has a discrete products like we we shed the reflective business we just talked about kibo thermal these are discrete products great products, but don't fit into that automation lens that we have for this business. So those businesses, if we can't grow them, we're looking to do something else with them. The other side of the protective, as we strengthen this portfolio, continue to get the cost right, so that's that cost to grow, we can grow more effectively and efficiently. And how we go to market through our digital transformation reaching more customers more effectively and efficiently, where in the past we said we couldn't afford to go to this customer or that customer. We want to get more nimble and go reach with these tremendous product lines we have in the automated protective solutions portfolio, get to the reach of those customers and some of the new products that we have coming in. So we think we can grow this business, but we've got some work to do. Next question.

Thank you. Our next question comes from Christopher Parkinson with Mizuho Securities. The line is open.

Hi, this is John on for Chris. Can you dig deeper on your current automation strategy? It appears that your clients have been pretty receptive recently, and so if you could provide more detail on your current backlog and how that's been trending versus your initial expectations, and then also if you could just touch on digital and MySee and how you see that growing in the intermediate term. Thank you.

Okay. Good. So the first part of the question on the automation, on where we are, feel good about that. We talked about our bookings. If we look into last year, we had some of our product lines in automation on protective and in food at actually too high of level because we couldn't ship. So that pipeline, the bookings we've worked down, that was part of the growth in the first half of the year, seeing that up significantly. The second half of the year, we're working that bookings down, but the issue that we're focused on is the pipeline, turning the pipeline into bookings. So as I shared earlier on the call, we're balancing that with a market, the demand reduction, where customers are challenged on their CapEx spending. We have to actually work harder. We have to show a significant savings where we can help them in their productivity and So that's the challenge for us right now into the second half and going the next year. And also bringing in new automated solutions, new products. So that part we feel good about. The second part of the question, if you can help me, Justin. Go back through MyC. Oh, our digital solution. Yes, as we're working on MyC and how we make it easier to do business with our customers, you see that moving fairly quickly. Again, protective is where we have the most conversions. And our largest distributors are coming online with us and very cooperatively, seeing that we can help in the interactions, working back and forth. We're talking about not just touchless in our factories. How can we be touchless with our operations, communicating with customer service, order entry, et cetera? So we see that moving quickly. We need to get over half the company to really feel that tipping point. With the second part of MySee that we're excited about slowly starting to happen, can we use our online design studios and help our customers actually design their products online quicker and faster so we can start bringing in the scalability? That part is still underway with more good things to come. Operator, I think we have time for one more call.

And to wrap it up, I am showing no further questions at this time, so I would like to turn the conference back to Ted Doheny for closing remarks.

Great. I would like to thank everyone for their time today. We are definitely excited about the opportunities ahead for SEA, and we look forward to speaking again in November. Thank you very much.

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