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#Thank you, <UNK>, and good morning, everyone
On our call today, we will cover our third quarter results, outlook for the year-end, and provide an update on our capital allocation strategy, post the close of the Diversey sale
You will have also the opportunity to hear from Ted <UNK> who will be taking over as CEO from me on January 1, and Bill <UNK>, our acting Chief Financial Officer
But before all and relevant to my retirement, I take this opportunity to let you know that I ran my first marathon in New York last Sunday, thanks to my son, Alexi (02: 47) and my friend, Allen (02: 48)
For those of you who are up to the challenge, you will be rewarded for life
But don't worry I will not turn into Forrest Gump in my retirement
Back to business, you can see that in the third quarter net sales growth accelerated to 6% on an as reported basis and 5% in constant dollars
Adjusted EBITDA margin was 19%
Our performance in the third quarter continued to improve compared to the first half of the year when we delivered 3% constant dollar top line growth and 18% margin and this momentum is continuing into the fourth quarter and we are delivering on our 2017 outlook as a result of our highest sales in our pricing and cost disciplines
In fact, we are executing on our long-term profitable growth strategy that we outlined at the Analyst Day in June 2015. Remember, at that time we set a 3-year sales growth target of 4% to 5% for each of those two divisions
We said that we expected sales growth to accelerate throughout the period of 2016 to 2018 and that these growth would be led by volume, thanks to our market maker innovative strategy
In 2016, we didn't see much movement on the top line and exited the year with an increase of just 1% constant dollar sales growth
However, our growth have been improving each quarter since the fourth quarter of 2016. In the fourth quarter of last year, we started delivering in constant currency 1% sales growth
In the first quarter of this year, in constant dollars, we delivered 3% growth
In the second quarter, we delivered 4% growth, and now in the third quarter, we are reporting 5% constant currency sales growth
And should the temporary and incredibly steep PE resin cost increases of 13%, or $0.10 per pound since August and $0.15 year-to-date, not have surprised all of our industry, those sales gain would have translated into the bottom line already
The good news is that I said temporary cost increases
And also that we have fully implemented our announced Product Care and Food Care price increases on September 1 and October 1 respectively
This is where our confidence comes in as we head into year-end
We are seeing rapid adoption of our game changing solutions
We're seeing healthy end-market demand, particularly in North America and Asia and our now famous operational disciplines are taking hold
On September 6, we closed the Diversey sale
When we announced the transaction in March 2017, we increased our share repurchase program, and we said that we would pay down debt, address stranded costs, and target selective M&A that was aligned with our strategic direction
Through September 30, we repurchased approximately 15.5 million shares valued at $677 million through a combination of open market and accelerated share repurchase programs, including an ASR that is currently ongoing
We paid down $1.1 billion in debt, bringing our total debt balance down to $3.3 billion
We have already made progress on our cost structure and will continue to do so heading into next year
We also closed two acquisitions: a small strategic food packaging company in Brazil, Deltaplam, which closed in August and, then in October, we closed the Fagerdala acquisition, a protective packaging company based in Singapore that significantly expands our presence in Asia
As all of you know on September 9, I announced my retirement effective December 31, 2017. I have really enjoyed my time at Sealed Air, and I'm extremely proud of what we have become, thanks to the vision and determination of our management team and our 14,000 global employees who I want to recognize here
We have built a winning culture, a culture that is obsessed with creating new value for our customers
We take the responsibility of being the industry leader and the market maker by creating new markets with disruptive innovations and instilling discipline throughout the industries we serve
Our long-term profitable growth strategy is well under way, and we continue to gain traction globally as you could see from our sales growth focusing all of our efforts on some very key megatrends
Our journey as a knowledge-based company continues with many exciting opportunities ahead
And I am very confident that under Ted, Bill and the entire leadership team, the organization will continue to thrive and generate significant value for our customers, shareholders and employees
Bill joined Sealed Air in 2013 and has been on this journey alongside our senior leadership team
Ted and I continue to work closely together to ensure a seamless and successful transition
We have been spending time in Charlotte, North Carolina and now also traveling around the world with our senior team to meet with customers and employees
Let me now move back to our third quarter results in more detail, and turning to slide 6 where we highlight our results by region
We experienced constant dollar year-over-year growth across all regions
North America once again was our fastest-growing region at 7%, with sales up 9% in Food Care and up 4% in Product Care
Sales in EMEA, Asia Pacific and Latin America increased in the range of 2% to 3%
I want to highlight that Product Care sales in Asia Pacific were up 15% in the third quarter, led by volume growth
On slide 7, you can see our volume and price mix trends by division and by region
As we anticipated, top line performance was primarily driven by 5% volume growth with positive trends across all regions
Food Care volumes were up 5% with 9% growth in North America and positive trends in both Latin America and EMEA
Product Care volumes were up 6%, driven by our largest regions, North America and EMEA, increasing 4% and 7% respectively
Overall price mix was relatively neutral to our top line results
Keep in mind that our pricing actions in Product Care went into effect as of September 1 and in Food Care for our non-formula customers effective October 1. And now, let's turn to slide 8 and review Food Care results in more detail
Food Care sales were $716 million and adjusted EBITDA was $158 million, or 22% of sales
Sales were up 4% in constant dollars compared to last year due to higher volumes
Our margin compressed year-over-year primarily due to timing of raw material cost factors and higher input costs
It is important to note, however, that sequentially EBITDA margins improved 60 basis points as formulas started to align better with higher input costs, and we continued our focus on expense management
Our performance in North America which accounted for 51% of Food Care sales was driven by the ongoing adoption of our case-ready platform across all protein including seafood and higher equipment sales
We capitalized on end market demand in all protein segments led by an increase in slaughter rates of more than 5% in the beef sector
We expect our business in North America to continue outpacing the market in Q4, although keep in mind, we have tougher year-over-year comparables on volume to come
EMEA, which accounted for 22% of Food Care sales was essentially flat compared with last year
We are continuing to see adoption of our new products in an environment where the protein market is growing modestly, but this was offset by timing of equipment sales
Heading into year-end, we anticipate improving top line trends with growth coming from both equipment and new product sales
APAC accounted for 15% of Food Care with Australia and New Zealand accounting for close to 70% of our sales in this region
Australia and New Zealand declined in the quarter as a result of further deterioration in the dairy market
But an encouraging data point to share is that for the first time in over a year, slaughter rates in Australia were relatively flat with prior year
The beef cycle is now near bottom, and we expect growth to return late 2018. Latin America represented the remaining 12% of sales with Mexico, Brazil and Argentina accounting for approximately 80% of Food Care sales
Constant dollar sales were up 3% led by growth in Argentina and stabilizing trends in Brazil
This was offset by a temporary decline in Mexico where our business was impacted by the earthquake late in the quarter
But heading into year-end, we anticipate improving trends in both Brazil and Mexico, albeit slow, with continued growth in Central America
For the full year 2017, we expect Food Care to increase sales approximately 3.5% in constant dollars
Adjusted EBITDA margin are expected to be approximately 22%
Slide 9 highlights results from our Product Care division
Product Care net sales were $415 million and adjusted EBITDA was $87 million, or 21% of net sales
You can see in the EBITDA bridge that, compared to last year, higher volumes were offset by a negative mix and price/cost spread
Product Care margins improved sequentially by 100 basis points, this improvement was primarily related to higher volumes, yield on our pricing actions and cost management
North America and EMEA accounted for approximately 85% of Product Care sales and were up 4% and 7% respectively
APAC had another strong quarter with 15% growth led by China and Japan
Our advanced product portfolio, including inflatable I-Pack, self wrap and FloWrap, continued to gain significant traction as our e-commerce and fulfillment customers optimized and automated their distribution channels
In Western Europe, I want to highlight that in the third quarter, we benefited from accelerated execution of automated solutions, volume growth of our consumables after record level of equipment installs over the last 12 months and pockets of strength across some of the industrial segments
With the acquisition of Fagerdala, we tripled our manufacturing footprint in China and as you would expect, there are synergies to leverage and meaningful cross-selling opportunities
For the full year of 2017, we expect Product Care to increase sales approximately 6% on a constant-dollar basis which would include $20 million in sales from Fagerdala
Adjusted EBITDA margins are expected to be approximately 20%
And this implies Q4 constant dollar year-over-year growth of approximately 10% and adjusted EBITDA margin of 21%
Let me now turn the call over to Bill to review our overall sales and EBITDA bridges and outlook heading into year-end
So you -first of all, you have seen with all our competitors that everybody in the industry has been surprised by the pace of the cost increase in resin and the number
So, let me remind you, $0.15 since the beginning of the year
That's almost 20%
And $0.10 since August 1.That's about 13%
And here we're talking about PE
I'm not talking about nylon
I'm not talking about other raw materials which went up in a very steep way
So this is in light of us having in Food Care a sizable part of our business which is formula driven
And remember also that in the month of July and before, we were thinking, and not only us everybody was thinking, that because of the capacity addition coming onstream, prices were not going to go up
They were going to come down
So, yes, we did have margin squeeze
I would call it margin compression
And, as I said in my prepared remarks, we are seeing that this is temporary, and that as a result of that, we are going to do what we have done in the last round
When resin prices went down, we are going to recoup the quality of our business
So I'm really not worried
And we are going to start seeing this, in my mind, definitely in 2018 depending on the pace again at which resins are going to be coming down
Thank you
So let me start with the last part of your question
Our September 1 Product Care price increase went through fully
Our October non-formula pricing Food Care price increase went in fully
Why? Because we had PE margins and nylon and so on margin compression, and we also had other type of inflation, including freight
And for those of you who don't know that post-Harvey had consequences on freight cost, availability of trucks, needing to buy resins on the spot market, and all of those kind of things because our priority number one was to delight our customers who were in difficult times for supply themselves, et cetera
And we did not spare any efforts nor any money in making sure that we would have absolutely no disruption
Did that cost money? Absolutely
But what is absolutely important to understand is what I said exactly five years ago in January 2012 when I said we are the market leader
The market leader has a responsibility
And the responsibility for the market leader is to be disciplined and to lead on price
Yes, we do need to be leading on price
We have led on price, which is why we stood extraordinarily firm
Yes, we did hear that some competitors were not as disciplined
That's their problem
In order to keep investing the amount of money we're investing in innovation; in order to bring them, our customers, the revolutionary solutions that we're bringing them, and surprise them by adding value, tremendous new value to them, we need to be able to have the funds and the resources
And, therefore, keep investing at the pace we're investing and, by the way, accelerating to bring those solutions in automation, in new products, et cetera, et cetera
So that is the context
Next to that, you do have – and this is why we are already slightly improving on our margins compared to the first half of the year as a result of having this September 1 price increase in Product Care and such (32: 35)
So do we have competition? Yes, we do have competition
But you have customers who are price-driven customers, which are not the ones we want; and you have customers who are value customers, which is those we want
And we are absolutely committed to continue, thanks to our solutions, to add new additional and much higher value than they could get from a slight price concession
Do we have market skirmishes here and there? Of course, but not very much more than before
Depending on the country, including in the U.S
, we had some competitors who were a little bit desperate in taking business, but this is normal
Thanks, <UNK>
I'll start and Ted will continue
<UNK>, all of the above and our innovation, which means that you saw that we have renewed with constant currency growth in the fourth quarter of 2016. And since then it's been on and on and accelerating
The comparables are going to get a little bit tougher, but it is our innovation which is fueling all of this, the success of the strategy that we have embarked into in Product Care moving to automation
The very successful B+ acquisition of August 2015 continues at a fast pace
The deployment of those automation technologies in Japan, in China, in Europe, and in North America had some tremendous success
And also our automation in Food Care with Cogni Link and CogniPRO (35: 34), and on the other end, our case-ready which is really starting to take hold
So we're very confident that we are exactly on the pace to do and execute on what we said back in June 2015 when we gave the 2016 to 2018 look during our Analyst Day
It is actually amazing to see how what we said at that time is happening
Then back to your question on margin
We have formulas in Food Care and they have been a little bit slower to kick in because they would have kicked in – they were supposed to kick in from the third quarter as resins were coming down and as formulas was coming up, leading to margin expansion
And as resins came up, you see that this phenomenon is slightly delayed
And we have proven to you in the past that in an environment like the one we're going to lead through probably through the end of this year and into early next year, we are going to restore our margins
You had a quick follow-up to Ted on the operational excellence maybe
I can't stack because I don't have the detail of every single
number there
But it is all of the above
We do have a tremendous pull (37: 26) from our innovation
You know that depending on the division, some of those kick in faster than some others
The operation on trade needs to be approved by the retailer
This is done through – and we talked about this
on the cycle of innovation
And in some Product Care, it comes faster
And we're seeing all of those benefits
But there is discipline in this thing
The good thing about Sealed Air is that we say what we do and what we do what we say
And we are a disciplined organization
We are executing on it
And we demand value from our customers because we know we are bringing them tremendous value in the total cost to serve operation that they run
So I'm not going to give you a guidance for 2018. But in 2017 for the rest of the year, we have – in my prepared remarks, I made a comment about that, and we said that we are expecting about 3.5% or 4%
Altogether – what did you say? 4%
<UNK> said 4%
4.5%, <UNK> said
And, actually, what does this mean? It means that the momentum keeps on
It means that we have the North American cycle in full swing
Exports are good and strong
The slaughter rate is good and strong
And we are right now in the middle of the quarter, and there is nothing else to say than that
We're also looking at other protein
And the reason why we are, and it is as successful
And you hear about the beef cattle cycle at 5% slaughter rate increase, but you see our total business being very solid
And you know that our red – our meat, our cattle, beef prices or beef products are only a part of the whole thing, and we are having success with our case-ready solutions all over
And there is a change in the marketplaces, including in North America with our case-ready solutions because the market is changing, because of the need for sustainability, because, for example, California having banned foam trays and those kinds of things
And therefore, you have MAP, modified atmosphere packaging, and you have our Darfresh which is kicking in very nicely
So we're confident
2018, you're going to see that there is – that the comparable there will be easier, but when Ted is going to give you a guidance for the company and by businesses in February, this momentum is there and this is not a commodity business
The momentum is there
Thank you
You will love the Investor Day when it comes and you will get under-the-tent on our ecommerce 3PL solution
Having said that, and let me stay with the present, Ted will talk about the future
But with regards to the present, we had slight negative mix, which is being corrected, I can't say day-after-day but month-after-month as we are introducing our automation solutions and innovations, which are not only automation solutions
There are some very big phone companies who launch new products and they have our solution as the product in which their phones are packed through the Internet
And this is big business
And it is this innovation and it is this need for not only addressing dimensional weight, which is the number one cash costs operation in the cost-to-serve of ecommerce ,number one is dimensional weight, which means freight cost
The number two is labor productivity, is labor
Number three, damage when the items are fragile; number one, it is the cost of packaging
What we do is reducing freight costs, is improving labor productivity, eliminating damage, and we do that with a little, slowest, smallest cost component, which is our packaging cost and the solution, which adds total value to our customers
So, yes, this ecommerce and 3PL business is growing much faster and the margins are improving quarter after quarter as we address our – as we introduce our innovation and our solutions
So that's important to understand because it was an issue in 2016, a little bit in the beginning of 2017, and it is being gradually and nicely corrected
Ted, future of Product Care?
Thank you
I'll just start because I was intimately with Ken Chrisman in the early negotiations
And I will tell you that most companies look at the products and they look at the segment in which the target participates, et cetera
What I did really look at is quality of management
We all know that when you buy a Chinese company in China, you have to do your due diligence extremely tightly because you sometimes never know what you buy
We bought a Singaporean company which has operations and its major operations in China
So, we bought quality, quality, quality
What we also bought is superb management
That is really very important
And on top of that, we bought an extraordinarily efficient fabricator
And (51: 12) has traveled with Ken to see their operation and will make comments
And the short story is that he was very impressed with what we intend to do
And remember, fabrication is not what we do, but we want to be Chinese in China
We are becoming Chinese in China, and this is extremely important
