SEALED AIR CORP/DE Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Leadership Changes: Patrick Kivits joined as CEO, Dustin Semach promoted to President and CFO. The team is finalizing the management team and accelerating commercial transformation.
• Segment Performance: Food showed strong momentum with mid-single-digit volume growth; Protective faced continued weakness. Positive cash flow of $207 million generated in Q2 YTD.
• Sustainability: Sealed Air Australia won a GOLD Sustainability Award for sustainable innovations in Food packaging.
• Transformation: Focus on finalizing management team, accelerating commercial transformation, and cost optimization in Protective with over $100 million annual savings run rate achieved.

Segment Performance

• Food Segment: Net sales were $894 million in the second quarter, up 2% organically. Volume growth was driven by strength in end market demand and share gains in case-ready solutions. Adjusted EBITDA was $205 million, up 7%, with margins at 22.9%.
• Protective Segment: Net sales were $451 million, down 9% organically, driven by lower pricing and volume declines across regions. Adjusted EBITDA was approximately $82 million, down 15%, with margins at 18.1%.

Guidance

• Protective volumes expected to remain weak into 2025 due to end market weakness. Food has momentum but Protective challenges continue.
• Free cash flow strong in first half, with expectation to close the year strong. On track to delever the balance sheet to net debt to adjusted EBITDA below 3.5 times by end of 2025.
• Adjusted EPS outlook maintained, with focus on minimizing interest expense and continuing free cash flow generation.

Risks

• Sustainability pressures on void-fill product lines in Protective segment.
• Continued market softness in Protective, with volumes not expected to inflect in 2024 and persisting into 2025.
• Cyclical vs secular challenges in Protective, including dematerialization trends and commercial execution challenges.

Question and Answer

Q: As it relates to what's going to be different at Sealed Air under your leadership versus all the strategic isolations over the past decade and maybe you could also touch on your management style.

A: Patrick Kivits discussed completing the senior leadership team, focusing on commercial challenges, transparency, empowering decisions, and listening to customer voice.

Q: Our next question comes from the line of Adam Samuelson of Goldman Sachs. Your line is now open. Yes, thank you. Good morning, everyone, and Patrick, welcome. So my question is really around the outlook for the second half and the pieces of guidance haven't changed. It seems like the underlying mix of business has. So I'd love to just hear a bit more about the updated volume expectations for both Food and Protective and how those have shifted relative to three or six months ago.

A: Patrick Kivits and Dustin Semach discussed Food showing strong growth but cattle cycle slowing, Protective facing challenges with portfolio review and sustainability headwinds.

Q: Our next question comes from the line of George Staphos of Bank of America Securities. Your line is now open. Thanks. Hi, everyone. Good morning. Henry, Patrick, Dustin, Brian, nice to speak with you all again. Thanks for all the details. I guess my question will be kind of a hybrid of the ones that have already been asked. So I guess when you think about CTO2Grow, part of it, effort was to drive the resources to reinvest in the areas that you wanted to grow and with Protective not yet getting that inflection point, is it causing you to maybe rethink the effectiveness of CTO2Grow or what you need to do differently within that effort? And relatedly, why are we not seeing the traction yet in Protective that you had expected? Related point, Patrick, what from your experiences at WestRock with MPS within consumer, do you think will be helpful in ultimately turning around Protective and along with Dustin and the team making Sealed Air a much more predictable return accreting company?

A: Patrick Kivits discussed recalibration of sales force and focus on sales effectiveness, with Dustin Semach mentioning CTO2Grow is in early stages with investment in commercial areas and portfolio gaps in Protective.

Q: Our next question comes from the line of Josh Spector of UBS. Your line is now open. Yeah, hi, good morning. I had a question on free cash flow. Just, I mean, as you noted, your first half performance was really strong. You didn't change your guidance range and if I look at the last few years, on average, you've done about $300 million to $400 million of free cash flow in the second half. So I think if I add that to the $200 million you'd be meaningfully above your guidance range. So are we missing something that we need to consider in the bridge or would you just characterize it as conservative?

A: Dustin Semach characterized it as conservatism, noting the first half was strong but guidance remains conservative with focus on second half strength.

Q: Our next question comes from the line of Arun Viswanathan of RBC Capital Markets. Your line is now open. Great. Thanks for taking my question. Congrats, Patrick, on the new role and, Emile and Dustin, congrats on the progress you guys have made as well. So, I guess, my question is just thinking about where you guys are right now. Looks like you've been outperforming in Food, Protective continues to lag. When you look into the back half of this year and then into next year, you guys were able to provide some fairly straightforward buckets of EBITDA growth. I don't know if you could maybe update those for us at this point. Is price still kind of a net $90 million headwind? What are you guys thinking about volumes and how that impacts EBITDA as well as incentive comp and maybe anything else on CTO2Grow? Is that $90 million target potentially, does it have some upside now given some of the gains you've had? Or was it pull forward really mainly?

A: Dustin Semach discussed net price realization, volume impact on EBITDA, and CTO2Grow target being on track with some pricing benefits in Protective.

Q: Our next question comes from the line of Michael Roxland of Truist Securities. Your line is now open. Thanks, Henry, Patrick, Dustin and the IR team for taking my questions. And Patrick, congrats on the role and I look forward to working with you. My question is on food automation sales. You mentioned that last quarter it grew double digits, seems to have slowed now again in 2Q. Would love to get any additional color you have on what's happening in food automation and then Patrick, you mentioned being active actively involved in strategic efforts concerning Protected. Can you provide more color on what some of those efforts are?

A: Patrick Kivits and Dustin Semach discussed food automation slowdown due to capital constraints, but outlook for pent-up demand, and Protective strategic efforts on void fill and paper mailers portfolio review.

Q: Our next question comes from the line of Anthony Pettinari of Citi. Your line is now open. Bryan Burgmeier: Hi. This is actually Bryan Burgmeier on for Anthony. Thank you for taking the question. Maybe just following up on Arun's question on net price. So your full year outlook, I guess, improved a little bit from minus $80 million to minus $70 million. What drove that improvement? Are you seeing lower costs? Is it about receiving better value for your products? And then is it possible to say, if net price headwinds are accelerating, slowing into year end, any kind of color you can put on sort of how those negotiations are going with customers right now?

A: Patrick Kivits and Dustin Semach discussed most material deflationary effects behind us, net price improvement in Protective, and ongoing negotiations with customers.

Q: Our next question comes from the line of Christopher Parkinson of Wolfe Research. Your line is now open. Unidentified Analyst: Hi, good morning, everyone. This is actually Andrew on for Chris. Main question is, can you talk about the liquids franchise, the performance of Liquibox and that integration? And then kind of going off of that, what you're seeing from the foodservice business and fast food restaurants, QSRs and the like?

A: Patrick Kivits and Dustin Semach discussed Liquibox portfolio as growing market with focus on portfolio management and market execution, foodservice business performance.

Q: Our next question comes from the line of Philip Ng of Jefferies. Your line is now open. Hey, guys. Patrick, welcome. Looking forward to working with you. I think in Henry's prepared remarks and your commentary, you want to take a different commercial approach and reaccelerate volumes, right? So I guess how are you guys going to tackle that differently? Is it innovation, KPIs on the sales force? Just give us a little more perspective on that? And then just given your background in paper packaging, certainly Protective had seen share loss accelerate. How do you plan to go after this market? What are some of the things that you want to do to kind of accelerate growth? And do you think you have the right to win on the paper side of things for Protective packaging?

A: Patrick Kivits discussed refocusing commercial efforts, accountability in product segments, and focus on fiber areas like void filling and paper mailers in Protective.

Q: Our next question comes from the line of Edlain Rodriguez of Mizuho. Your line is now open. Thank you and good morning everyone and welcome Patrick. A quick one on Protective. When you look at all the issues going on in there, the challenges, like how much of it you think is secular in nature and how much of it is just like cyclical and then so you can gain that volume back? And also at the end of the day, looking at the portfolio as a whole, how core is Protective to Sealed Air, in the sense that not a lot of synergies with food care, a lot of challenges in Protective, yes, like how core is Protective?

A: Patrick Kivits discussed secular vs cyclical challenges in Protective, including dematerialization trends and commercial execution, and importance of reviewing Protective portfolio for core relevance.

Q: Our next question comes from the line of Matt Roberts of Raymond James. Your line is now open. Hey, good morning everybody, and Patrick, I'll echo the others and say welcome and congratulations on the role. I'd like to ask about protective volume and price. I know you noted the pressures are expected to continue in 2025 or into that year. When should we expect that to inflect a positive? And should we expect volume growth in 2025 partially as a function of math? And on the price side of that business, while still seeing pressures, it also seems like it didn't really worsen in 2Q on a sequential basis and getting easier comps here in second half. So should we expect sequential improvements or something changed there, whether it be incremental competitive pressures or the resin timing and investment? I think you might have hit on that resin timing earlier, so my apologies if I missed it.

A: Dustin Semach discussed no positive volume inflection expected in 2025, focus on commercial execution and sustainability gaps, and easing of price cost mix with resin pricing normalizing.

Q: Our next question comes from the line of George Staphos of Bank of America Securities. Your line is now open. Hi, thanks for taking the follow on. So I was hoping we could get a bit more color on where the share gains are coming within Case Ready recognizing some of this is competitive and to the extent that you've been able to study it, Dustin and Patrick, Case it's a bit ironic, right? Case Rady was a business that CRYOVAC invented and now to some degree you're on par at parity with others. So where did the share loss, if you agree with that premise, come from? And then total aside, different question, when do you think you'll be in a position to have an Analyst Day or an event where we get the longer term bigger picture for Sealed Air? It's been I think since 2015 that we've not had an Analyst Day, and do you have any sort of initial goals gentlemen in terms of what the longer term EBITDA cash flow stock price might look like for Sealed Air for investors who are in the stock right now?

A: Dustin Semach discussed share gains in Food from case-ready solutions, strength bags, and EMEA wins, and mentioned Analyst Day is early days with focus on current challenges and opportunities.