Sealed Air Corporation (NYSE:SEE) Q1 2024 Earnings Call Transcript

Sealed Air Corporation (NYSE:SEE) Q1 2024 Earnings Call Transcript May 2, 2024

Sealed Air Corporation beats earnings expectations. Reported EPS is $0.78, expectations were $0.53. Sealed Air Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2024 Sealed Air 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. [Operator Instructions] 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. Please go ahead.

Brian Sullivan: Thank you, and good morning, everyone. With me today are Emile Chammas, Interim Co-CEO and COO; and Dustin Semach, Interim Co-CEO and CFO. Before we begin our call, I would like to note that we have provided a slide presentation to supplement the call. Please visit sealedair.com, where today's webcast and presentation can be downloaded from our Investor Relations page. Statements made during this call stating management's outlook or estimates 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 as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K. We discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and the 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 Emile and Dustin. Operator, please turn to Slide 3. Emile?

Emile Chammas: Thank you, Brian, and thank you for joining our first quarter earnings call. Today, Dustin and I will review SEE's financial performance, provide updates on the markets we serve, discuss relevant trends and highlight the significant progress made on the transformational actions discussed on our previous calls. Lastly, we will conclude with our 2024 outlook before opening the call for questions. We closed the quarter with sales of $1.33 billion and adjusted EBITDA of $278 million, delivering strong results despite the continued challenging market dynamics in the Protective segment. Our first quarter results reflected for the first time since quarter four 2021 year-over-year volume growth across all regions of our Food business, continued volume stabilization in Protective and strong execution related to our CTO2Grow initiatives.

Through the focused efforts of our teams around the world, we delivered positive free cash flow of $78 million in the first quarter compared with a negative $13 million in the same period a year ago. Dustin will provide a more comprehensive overview of our financial performance shortly. Now let us move on to our market and business update. During the first quarter, our Food segment delivered low single-digit volume growth across all regions, primarily driven by our shrink bag business, which benefited from the carryover momentum of enhanced holiday demand and new customer wins from the fourth quarter. In the U.S., beef production was down low single digits year-over-year for the first quarter. For the rest of 2024, U.S. slaughter rates are expected to decline at a more rapid pace in the outlining quarters.

In South America and Australia, cattle cycles are at their peaks, driven by a robust domestic consumption and heightened export activities. Against a flat global proteins market in the first quarter, we drove volume growth, gained share and delivered double-digit growth in automation. Following its successful launch last quarter, our new compostable tray continues to gain traction in the market. Additionally, we are actively engaged in the development and introduction of more sustainable packaging solutions, such as recycle-ready barrier display films, poultry bags and post-consumer-recycled trays to address evolving market needs and support food processors and retailers in meeting their sustainability goals and regulatory requirements. The regulatory landscape concerning plastics continues to evolve rapidly with recent legislative attention being directed towards polyvinylidene chloride or PVdC due to chemical similarity to PVC.

PVdC is used as a very thin barrier layer in multilayer films within our protein shrink bags. Our shrink bag business that contains PVdC is approximately 1/3 of our Food segment. This barrier material plays a vital role in preserving the quality of fresh proteins, extending shelf life, enabling global distribution and minimizing food waste and its environmental impact on greenhouse gas emissions. Currently, there is no alternative to PVdC that matches its performance level. Through close collaboration with our suppliers, customers, industry associations and government agencies, we actively advocate for the essential role packaging plays in mitigating food waste and ensuring safe, affordable food on a global scale. For decades, we've been assisting our customers in adapting to the changing regulatory environment and safeguarding their food supply chains.

We already provide alternative barrier layers to PVdC, such as EVOH among others, particularly for applications with lower performance requirements. As the market leader in shrink bags, we continue to be best positioned to help food processors navigate the evolving regulatory landscape and deliver market-leading solutions that combine world-class material science, equipment and technical services. Transitioning to Protective. Revenue performance in the first quarter was in line with expectations. Industrial portfolios continued to be under pressure across all regions, contributing to a low to mid-single-digit year-over-year volume decline for the segment. As discussed on our last quarter's call, the pricing environment remains pressured as we compete in a low volume, low visibility environment.

In the Americas, volume growth was less than 1% as growth in box rightsizing solutions and recovery in retailer fulfillment sectors were offset by industrial weakness. EMEA experienced continued double-digit volume decline, primarily driven by intensified sustainability pressures across all portfolios and destocking from our APS product line. The electronics sector in Asia is improving from last year. However, uncertainties around China's economic recovery continue to temper short-term regional growth expectations. Consistent with our previous discussions, we still anticipate an L-shaped recovery across the Protective segment. The organizational changes implemented in February, which established dedicated commercial teams for both Food and Protective, are beginning to gain traction.

The renewed focus on our Protective channel and direct customers has created positive momentum internally and has well been received by our customers. Similar to Food, we strive to protect products in transit in a sustainable way. Our strategy entails a dual-pronged approach. First, within our flexibles portfolio, we are continuously increasing the level of recycled content in our product lines. Second, we are in the process of adding more fiber solutions to our portfolio, which will enable us to fully serve our channel partners in all segments within our markets. As an example, we are expanding our paper mailer offerings with various sizes to match the versatility traditionally associated with plastic and hybrid mailers. Moreover, we've developed more resilient paper coilers as a sustainable fishing solution to address demands of protecting high-value heavyweight products.

Additionally, we are introducing fiber alternatives within our APS solutions, enabling substrate-agnostic capabilities for our automation portfolios. This approach ensures that existing equipment installations can accommodate both substrates, providing our customers with enhanced flexibility in their distribution processes. The transformation outlined in previous quarters continues at SEE. We are focused on improving underlying business fundamentals by improving our commercial effectiveness, innovation processes and overall talent. Overall portfolio and footprint optimization continues to progress with three plant closures last year and another four in process in 2024. Throughout the first quarter, we continued to wind down pieces of the portfolio announced last year.

And we continue to evaluate the rest of the portfolio and footprint for further opportunities. As mentioned earlier, we continue to accelerate our cost takeout initiatives. And it is driving improvements to our bottom line. With the actions implemented so far, we have achieved an annual run rate savings of $78 million. Continuing with this momentum, we are confident in our ability to achieve approximately $90 million in year-over-year cost savings in 2024. Finally, we are in the process of pivoting our digital and automation strategies. And we'll have more to share in subsequent calls. Now I'd like to turn it over to Dustin to review our financial results. Dustin?

Dustin Semach: Thank you, Emile, and good morning, everyone. Moving to first quarter results, let's turn to Slide 4. Net sales were $1.3 billion in the quarter, down 1% on a constant currency basis. Adjusted EBITDA in the quarter was $278 million, up 4% compared to last year. Volumes were flat year-over-year for the quarter with growth in the Food segment across all regions offset by declines in Protective, primarily in EMEA. As reported, adjusted earnings per share in the quarter of $0.78 were up 5% compared to a year ago. Our adjusted tax rate was 25.9% compared to 24% in the same period last year. The increase in the tax rate year-over-year was driven by discrete impacts related to our share-based compensation. Our weighted average diluted shares outstanding in the first quarter of 2024 was 145.4 million.

Turning to Slide 5. In Q1, inorganic growth from Liquibox contributed 2% to total company sales or approximately $23 million. As anticipated, we saw lower pricing across both the Food and Protective segments, primarily in the Americas and EMEA regions, following the reduction of resin costs from the post-COVID peak in 2022 to the middle of 2023. Year-over-year volume improved in the Food segment across all regions through carryover momentum from last year's holiday season and new customer wins. Protective volumes were down 4% year-over-year, driven by a rebound in Americas, more than offset by declines primarily in EMEA. First quarter adjusted EBITDA of $278 million, which included $4 million inorganic contribution from Liquibox, increased $11 million or approximately 4% compared to last year with margins of 20.9%, up 110 basis points.

This performance was mainly driven by accelerated savings from our CTO2Grow and productivity efficiencies, partially offset by unfavorable net price realization. Moving to Slide 6. In the first quarter, Food net sales of $868 million were down 1% on an organic basis, primarily due to declines in price, partially offset by positive volumes led by carryover holiday benefits within our Food business, solid equipment performance, cattle cycle tailwinds in Asia Pac and Latin America, along with share gains of our case-ready solutions in the poultry market. Food adjusted EBITDA of $190 million in the first quarter was down 3% with margins at 21.8%, down 100 basis points compared to last year. The decrease in adjusted EBITDA was mainly driven by unfavorable net price realization of $10 million, partially offset by higher volumes.

Protective first quarter net sales of $461 million were down 7% organically, driven by lower pricing in Americas and EMEA and volume declines primarily in EMEA, where both industrial and fulfillment end markets remain soft and sustainability pressures are accelerating. Americas volume rebounded with strong automation solutions offsetting continued industrial weakness. Protective adjusted EBITDA of approximately $90 million was up 11% in the first quarter with margins at 19.4%, up 320 basis points. The increase in adjusted EBITDA was driven by cost control actions, which included CTO2Grow savings, partially offset by unfavorable net price realization of approximately $10 million in lower volumes. On Slide 7, we review our first quarter net sales by region.

On an organic basis, Americas was down 2% primarily due to lower pricing. Volume turned positive year-over-year for both segments for the first time since the end of 2021 with robust equipment placements in both businesses and strong volume within Food. EMEA declined 7% organically on lower pricing, persisting market softness and sustainability challenges in the Protective segment while Food volumes grew mid-single digit. Asia Pac was flat organically as tailwinds from Australian cattle cycle and improving electronic performance were offset by continued weakness in the industrial markets. Now let's turn to free cash flow and leverage on Slide 8. Through the first quarter, we generated strong free cash flow of $78 million compared to $13 million use of cash in the same period a year ago.

The primary driver of this improvement was higher earnings, lower incentive compensation payments and better working capital management, partially offset by higher interest costs. During the first quarter, we further reduced our total debt by $28 million, ending the quarter with a net leverage ratio of 3.9x, flat from the end of 2023. Our total liquidity position was $1.4 billion, including $353 million in cash and the remaining amount in committed and fully undrawn revolver. We continue to focus on driving net debt to adjusted EBITDA to below 3.5x by the end of 2025. Let's turn to Slide 9 to review our 2024 outlook. We are pleased with the strong finish to the first quarter and encouraged by the momentum that is building in parts of the business.

The strength of the first quarter is giving us more confidence in our full year guidance. We continue to operate in a low visibility environment, especially in Protective. And we'll have better visibility into how this momentum translates into the second half during our next call. For now, we are reaffirming our full year 2024 outlook. Looking ahead to the second quarter, we anticipate a slight sequential decline in sales, reflecting the dynamic low visibility environment and subsiding holiday demand from last year. As a result, second quarter net sales, adjusted EBITDA and adjusted earnings per share are expected to be ranging around $1.3 billion, $260 million and $0.64, respectively. Turning to Slide 10. We remain committed to restoring underlying fundamentals by executing in the market, progressing our transformation, delivering CTO2Grow savings and deleveraging the balance sheet.

Lastly, I'd like to close by thanking the global SEE team, who are at the center of our transformation, for their efforts in solving our customers' most critical packaging challenges day in, day out. With that, Emile and I look forward to your questions. Operator, we would like to begin the Q&A session.

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