Sealed Air Corporation (NYSE:SEE) Q1 2023 Earnings Call Transcript May 2, 2023

Sealed Air Corporation misses on earnings expectations. Reported EPS is $0.74 EPS, expectations were $0.77.

Operator: Good day, and thank you for standing by. Welcome to the first quarter of 2023 Sealed Air Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand over the conference to our speaker today, Brian Sullivan.

Brian Sullivan: Thank you, and good morning, everyone. With me today are Ted Doheny, our CEO; Dustin Semach, our CFO; and Susan Yang, our VP of Automation Finance and Treasurer. Before we begin our call, I would like to note that we have 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 are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled Forward-Looking Statements in our earnings release and slide presentation, which applies to this call.

Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K, which you can also find on our Web site or on the SEC Web site. 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 reference throughout the presentation. I will now turn the call over to Ted. Operator, please turn to Slide 3.

Ted?

Ted Doheny: Thank you, Brian, and thank you for joining our call. Today, we’ll discuss our first quarter results, provide an update on Liquibox integration, our new corporate brand and our continuous journey to reinvent SEE. After that, we’ll open up the call for your questions. Starting with Slide 3, I’m excited to share that as part of our Reinvent journey, we are changing our corporate brand to SEE. Our new SEE brand brings clarity to our markets, customers and people of who we are, what we do and where we are going. We are a market-driven, customer-first solutions company. The new logo unites automation, digital and packaging, with the full circle representing SEE’s Net Positive Circular Ecosystem and our purpose to make our world better than we find it.

We enter a new phase in our journey to lead the industry by redefining what packaging does and can do. The new brand positions SEE as a world-class, high-quality growth company solving critical packaging challenges unlike anyone else. Whenever our customers have a packaging [issue] or opportunity, we will be at the table in top of mind. Now moving to Slide 4. We’d like to share how we are creating high quality growth. We break down our growth by geography, market, product and MySEE, our online digital platform. In the first quarter, our digital online sales grew to 14% of total company sales, representing a sequential increase from 5% in Q3 and 10% in Q4 of 2022. This rapid growth reflects the speed of our digital transformation and our ability to adapt to the changing needs of our customers.

You can see our top 13 markets. We continue to reinvent the company from product based to a market-driven, customer-first solutions company. The fastest-growing markets was Fluids and Liquids, which grew double digits in the quarter before counting Liquibox. With Liquibox, this market represents close to 10% of company sales in the quarter. Our Consumer Ready solutions are designed to meet the evolving needs of food processors, retailers and brand owners if they seek to respond to shifting consumer preferences and changing shopping patterns. Through our innovative solutions, we integrate high-performance, sustainable materials, state-of-the-art trays and pouches and advanced automation technologies to deliver versatile packaging formats that can be tailored to a wide range of products.

We leveraged digital packaging capabilities to enhance the overall impact and appeal of our customers’ products. This vertical space represents one of our largest growth markets with more than $10 billion in addressable opportunities. Drawing on our market-leading CRYOVAC material science and SEE automation expertise, we are able to expand our reach deeper into the proteins market, encompassing fresh red meat, smoked and process meats, poultry and seafood. Our capabilities also extend to other food markets, allowing us to offer an unparalleled level of flexibility and customization to our valued customers. We are driving continued innovation and growth in this space with our highly differentiated products and packaging solutions. The next vertical, Fluids and Liquids, now representing 10% of our company sales, is our highest margin, fastest growing product line.

With CRYOVAC and Liquibox technologies converging, we are well positioned to capitalize on new opportunities in areas such as ready-to-drink liquids, consumer packaged goods, sauces and condiments, wine and spirits and many more. We’re disrupting the rigid container market, providing customers with lower cost, higher value and more sustainable solutions. Our goal is to exceed $1 billion in revenue from this vertical by 2027. We are now driving internally to achieve this by 2025. The third growth vertical for us is our Automated Protective Solutions, which represents approximately 35% of our business today, focusing on a variety of markets and customers ranging from industrial to e-commerce fulfillment. I will describe shortly how we are working to broaden and optimize our existing portfolio while expanding market penetration.

Now moving to Slide 5 for visual depiction of a fully automated form fill-and-seal system that is currently being commissioned by one of our large wine customers, targeting the fast-growing $100 million wine and box market. Compared with traditional bottling operations, our automated solution requires less than one tenth of the footprint and half the cost. Our innovative Bag-in-Box solutions reduce waste and preserve the freshness of the product longer than any of the traditional packaging options without affecting its flavor or quality. This automated system combines our high-performance barrier CRYOVAC materials, fitment capabilities and our engineering expertise to bring the full solution into the box. Starting on the left of this slide, we show the critical process steps of the system, including bag forming, fitment attaching, wine filling and bag sealing.

I’d like to highlight the fitment attachment process on the bottom left of the picture. Our engineers have developed a novel high-speed method of attaching the fitment while the bag is being formed, eliminating leakage and oxygen content by avoiding punching a hole. Moving across the slide, you can see an automated box-making operation. The filled bags are placed in the digitally-printed fabricated box in a touchless process. On the upper right corner, we show our end product in a restaurant environment where wine boxes are available for single-serve uses. The single pour of the wine from the bag enables extending the shelf life from hours to weeks, reducing waste and spoilage, which can represent over 30% of our restaurants’ wine cost. This cutting edge system solution, valued at $3 million, provides our customers with less than a three year payback.

This also represents the highest solution multiplier in our portfolio, exceeding 25 times. We are well positioned to drive widespread adoption of the system. By integrating SEE automation, CRYOVAC materials and Liquibox innovations, we are driving powerful synergies. Moving to Slide 6. We outline what we are doing to turn around our Automated Protective Solutions platform with an estimated addressable market of $15 billion. By leveraging SEE automation and our industry-leading materials, we solve our customers’ pressing packaging challenges such as safety, labor and productivity. Our portfolio of brand solutions including BUBBLE WRAP, Instapak, AUTOBAG, Auto Boxing, among others, is the widest in the industry. We’re actively working to broaden our portfolio by bringing our total solution strategy across our platforms, aggressively expanding our fiber based solutions as well as our equipment agnostic systems.

This is opening new opportunities for customer engagement and growth. Our MySEE platform allows us to expand our customer reach into new segments while lowering our sales and service costs and making it easier to do business with us. Our online studios create new ways to interact with our customers, providing digital printing, packaging design and services. On Slide 7, we can see a solution to a major challenge we were asked to fix by Continental and our 3PL partner, UPS. In the last quarter, we generated $2 million in revenue from an Auto Wrap tire packaging system, which addressed the issue of shipping individual tires with conveyable solutions for common carriers. With this innovative tire packaging solution, we were able to eliminate safety concerns for the carrier to achieve a greater than fivefold improvement in throughput, reduced labor by 50% and create an entirely new revenue stream that was previously unattainable.

Each individual tire is marked with an RFID mark, allowing for track and trace. The tires are wrapped in CRYOVAC technology film that is fully recyclable, highly durable and 65% wider than the previous packaging materials. This solution represents an opportunity to capture more than $50 million in the individual tire packaging market. Moving to Slide 8, showing our SEE operating model. Fueled by Reinvent SEE 2.0, together with the Liquibox acquisition, our growth trajectory remains the same despite 2023’s near term recessionary challenges. For this year, we anticipated a very challenging first half. With the first quarter in line with our expectations, we continue to execute our plan to drive profitable growth in the second half of the year on the back of a broad market recovery.

In Q1, we completed the acquisition of Liquibox. Our traditional Fluids and Liquids business was up double digit year-over-year in the first quarter. Liquibox is performing on track with expectations thus far and we expect to realize the cost synergies laid out in our deal thesis. Reinvent SEE 2.0 cost reduction efforts are on track to reduce expenses in line with our $35 million to $45 million target within 12 to 18 months. SEE automation revenue continues to fuel our growth. Automation sales were up 5% in constant dollars for the quarter driven by automated protein solutions. We are on track to deliver more than $525 million sales for the year. In a tough quarter, Fluids and Automation continue to drive growth in a recessionary environment.

Now, I’d like to turn it over to Dustin to review our financial results. But before I do that, I’d like to give him an official welcome and share that we’re really excited to have Dustin on board. Dustin?

Dustin Semach: Thank you, Ted, and good morning, everyone. Today, I will go over a couple of opening remarks before moving to the first quarter results and our outlook for 2023. First, I’m really excited to be joining SEE at a pivotal time during its transformation. I’m impressed by what Ted and the rest of the management team have been able to accomplish over the past few years. I see the market opportunity ahead of us and look forward to leveraging my background in digital to help accelerate our journey to becoming a world-class market-driven automation, digital and sustainable packaging solutions company. Now moving to first quarter results. Let’s turn to Slide 9. In the quarter, on a constant currency basis, net sales were down 2% and adjusted EBITDA of $267 million was down 17% compared to a very strong first quarter last year.

Adjusted earnings per share in the quarter of $0.74 were down 33% compared to a year ago on a constant currency basis. On Slide 10, we review our first quarter net sales by segment and by region. In constant dollars, net sales were down 2%, with 9% growth in Food while Protective was down 17%. By region, we grew EMEA by 4%, offset by declines in Americas of 4% and APAC of 1%. On Slide 11, we summarized the first quarter performance. Liquibox contributed 4% to top line sales or approximately $57 million, but was more than offset by organic declines driven by the recessionary market backdrop and continued destocking in Protective as well as some weakness in food retail end markets. First quarter adjusted EBITDA of $267 million, which included $13 million contribution from Liquibox, decreased [$60 million] or 18% compared to last year with margins of 19.8%, down 330 basis points.

This performance was mainly driven by lower volumes and the resulting unfavorable operating leverage primarily within Protective. As it relates to adjusted earnings per diluted share in the first quarter of $0.74, our adjusted tax rate was 24% compared to 25.2% in the same period last year. We repurchased approximately $80 million or 1.5 million shares in the first quarter. Our weighted average diluted shares outstanding in the first quarter of 2023 was $144.8 million. At quarter end, we had approximately $537 million remaining under our authorized share repurchase program. Turning to quarterly segment results on Slide 12, starting with Food. In the first quarter, Food net sales of $853 million were up 1% on an organic basis which consisted of 4% from price realization offset by volume declines of 2%, primarily from food retail softness, partially offset by strong volumes in Automation, Fluids and Liquids.

Diluted adjusted EBITDA of $195 million in the first quarter was relatively flat in constant dollars compared to last year with margins at 22.8%, down 200 basis points, mainly due to unfavorable year-over-year impact from net price realization, lower volumes and related unfavorable operating leverage. Protective first quarter net sales of $496 million were down 17% in constant dollars, driven by volume declines from recessionary pressures in the industrial fulfillment markets and continued destocking activities from our channel partners. We see these headwinds continuing in the second quarter but expect an inflection point in the second half with more favorable market conditions, easier comparables and recovery from areas such as China as they normalize from recent reopenings from lockdowns.

Protective adjusted EBITDA of $80 million was down 35% in constant dollars in the first quarter [Technical Difficulty] [margins] of 15.2%, down 470 basis points due to lower volumes and associated operational leverage. Now let’s turn to free cash flow on Slide 13. In the first quarter, free cash flow was a use of cash of $13 million compared to $9 million use of cash in the same period a year ago. Slight improvement in free cash flow was driven primarily by improved working capital performance. On Slide 14, we outline our purpose-driven capital allocation strategy focused on maximizing value for our shareholders. As anticipated, we closed out the first quarter with a pro forma net leverage ratio of 3.7 times. We expect to use free cash flow generation to delever throughout the year, estimating approximately 3.5 times or below by the end of 2023 and approximately 3 times by the end of 2024.

Let’s turn to Slide 15 to review our 2023 outlook. We are reiterating our full year guidance, which includes the following. We expect net sales to be in the range of $5.85 billion 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 Liquibox to contribute between approximately $340 million and $360 million in sales for 2023, given 11 months under our ownership. We expect full year adjusted EBITDA to be in the range of $1.25 billion to $1.3 billion, which assumes adjusted EBITDA margins of approximately 21%. Full year adjusted EPS is expected to be in the range of $3.50 to $3.80. Lastly, we expect full year 2023 free cash flow in the range of $475 million to $525 million, which implies a free cash flow conversion of greater than 90%.

This range excludes $175 million tax deposit to IRS in April with respect to a [indiscernible] settlement agreement reached in December of 2022. As we look ahead to the rest of 2023, we expect the second quarter to be a slight improvement from the first [end] quarter impacted by ongoing destocking activities that we expect to ease by the end of the first half. As Ted mentioned earlier, we remain focused on driving growth in the second half, driven by accelerating momentum within our Automation, Fluids and liquids businesses, coupled with a broader market recovery, especially within Protective. With that, let me now pass the call back to Ted for closing remarks. Ted, over to you.

Ted Doheny: Thanks, Dustin. In summary, we had a tough quarter and expect market softness to continue through the first half. We’re staying the course on our strategy, driving automation, digital and sustainable packaging solutions now under SEE, our new corporate brand. For the year, we have a strong growth and cost actions in place to deal with the current recessionary environment. Our Liquibox performance is on track to exceed expectations to drive growth for the business in 2023. With that, I’ll open up the call for questions. Operator, we’d like to begin the Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Adam Samuelson of Goldman Sachs.

Operator: Our next question comes from the line of George Staphos of Bank of America Securities, Incorporated.

Operator: Our next question is from the line of Ghansham Panjabi of Baird.

Operator: Going to our next question. Our question comes from the line of Christopher Parkinson of Mizuho Securities.

Operator: Getting to our next question. Our next question comes from the line of Anthony Pettinari of Citi.

Operator: Our next question comes from the line of Josh Spector of UBS.

Operator: Our next question comes from the line of Angel Castillo of Morgan Stanley.

Operator: One moment for our next question. Next question comes from the line of Jeffrey Zekauskas of JPMorgan.

Operator: Going to our next question. Next question comes from the line of Phil Ng of Jefferies.

Operator: One moment for our next question. Our next question comes from the line of Arun Viswanathan of RBC Capital Markets.

Operator: Getting our next question. Our next question comes from the line of Samuel Ohiomah of William Blair.

Operator: No question in the queue.

Ted Doheny: Okay. Well, thank you then. We’ll bring the call to a close. And I would like to thank everybody, especially our SEE employees for their tireless efforts in really a tough market. And I’d like to also thank our investors for their — our investors for the time today. We’re excited about the opportunities we have ahead and how we will accelerate our growth for the future, and we look forward to speaking again in August. Thank you. Operator?

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.