SEE
#Thank you, <UNK>, and good morning, everyone
We have a lot to cover on our call this morning
And during our prepared remarks, we will cover the announced sale of Diversey, and the use of proceeds and how we will address stranded and unallocated costs
We will review in detail our first quarter results and outlook for continuing operations
We will also highlight Diversey results and after our prepared remarks, we'll open up the call for your questions
So, let's get started
On March 27, we announced a definitive agreement to sell Diversey, our Diversey Care division and our related hygiene business to Bain Capital Private Equity for $3.2 billion
The transaction is expected to close early September with net proceeds of approximately $2.5 billion
This transaction marks a significant milestone for both Sealed Air and Diversey, and we are committed to a timely and successful separation
For Sealed Air, this transaction will give us an even greater focus on executing our profitable growth story and investing in our core business
The increased financial flexibility will enable us to return cash to shareholders through share repurchases and dividends, while at the same time, target value-added acquisitions
To address the dilutive impact of this transaction, we increased our share repurchase program by an additional $1.5 billion, expanding our total authorization for future repurchases to approximately $2.2 billion
We will continue our quarterly cash dividend of $0.16 per share and we will pay down approximately $1.1 billion of debt and maintain our credit profile
In reviewing our first quarter performance for continuing operations, you will see that we had a very solid start of the year
Sales were a $1 billion, an increase of 3% constant dollar growth
Food Care sales of $656 million, had constant dollar growth of 2% and Product Care sales of $377 million, had constant dollar growth of 4%, excluding 50 basis points of rationalization efforts in Europe
We are very pleased to see the execution in North America with constant dollar sales growth of 6% and both Food Care and Product Care contributed to this performance with sales growth of 7% and 3% respectively
We are also pleased with our EBITDA performance for both Food Care and Product Care
Combined, those two divisions delivered adjusted EBITDA of $216 million or 21% of sales, offset by $34 million in corporate expenses
This resulted in adjusted EBITDA from continuing operations of $182 million, or 18% of sales
And <UNK> will provide more details later on the call on corporate expenses, which includes stranded and unallocated costs associated with the sale of Diversey
Diversey, which was recorded in discontinued operations in the first quarter, delivered $582 million in sales, an increase of 2% in constant dollars
And if we did not have discontinued operations accounting, adjusted EBITDA would have been $53 million as compared with $48 million in adjusted EBITDA in the first quarter of last year
Our comments throughout the rest of this call will be focused on results from continuing operations
So let me now turn to slide 5. Our regional performance for Sealed Air
North America accounted for 55% of our net sales, and as I just noted, increased 6% in constant dollars
Latin America, which accounted for 9% of net sales, had constant dollars growth of 5.5%
Mexico, by the way, increased 17% and Brazil was up 5%, which was partially offset by 4% decline in Argentina
On a combined basis, Mexico, Brazil and Argentina accounted for 8% of total company's net sales
Asia-Pacific represented 15% of net sales and was flat year-over-year with 10% growth in New Zealand and 9% growth in China
Growth in New Zealand and China was offset by the 12% decline in Australia, due to the beef market downcycle
Australia, New Zealand and China combined accounted for 10% of our total company net sales
EMEA, which accounted for the remaining 21% of the total company net sales, was the only region that declined in the quarter, and the 3.5% decline in constant currency was primarily due to timing of Food Care equipment sales, rationalization efforts in Product Care that were completed in May of last year, and a decline in net sales in Russia related to currency because our pricing is indexed to the euro
On an as-reported basis, Russia was slightly up versus last year
Now turning to slide 6, which highlights volume and price/mix trends by division and region
You can see from this slide that on a global basis, volume trends were up 4% in the first quarter
We delivered over 7% volume growth in North America with 9% volume growth in Food Care and 6% growth in Product Care
I wanted to note that Sealed Air has not delivered volume growth like this since the recovery in 2010 after the great global recession
Volume growth in North America was partially offset by unfavorable price/mix of 1.7%
In Food Care, unfavorable pricing was due to timing of raw material cost pass-through, which we expect to turn in the second half of the year
And in Product Care, unfavorable mix was impacted by continued growth in e-Commerce and fulfillment
We announced price increases that began in early Q2, which should help top-line going forward
I also want to note that we experienced positive volume trend in Latin America, led by 2% volume growth in Food Care packaging
This is the first time since the first quarter of 2014 that volume contributed to sales growth in this region
Despite improvement in Q1, the consequences of the selective ban on the Brazilin beef exports is expected to slow down the recovery in this local market and negatively impact our volume in Q2 and Q3. But Latin America continues to be a significant growth opportunity for us
And we expect trends to improve as we head into 2018. Turning now to slide 7, and review Food Care results in more details
Food Care delivered $656 million in net sales in the first quarter, an increase of approximately 2% on a constant dollar basis
Adjusted EBITDA of $142 million or margins of 21.6% was impacted by higher input cost
Adjusted EBITDA in Q1 2016 was $139 million
The strength we delivered in North America was not only driven by the increased cattle production in the region, but also growth in fresh pork, smoked and processed meats, and cheeses
North America accounted for 51% of Food Care sales in the first quarter
Latin America, which accounted for 13% of Food Care sales delivered positive volume trends for the first time in several quarters, resulting in 5% constant dollar growth
Growth in North America and Latin America was partially offset by continued weakness in Australia as I talked about, and declines in Europe due to timing of equipment sales and Forex in Russia
First half sales was a strong year for – first half of 2016 was a strong year for equipment in Europe, resulting in a tough year-on-year comparable in Q1. As we head into the second half, we expect equipment sales to return to growth and the EMEA region accounted for 20% of Food Care net sales, with Asia-Pacific accounting for the remaining 16% of sales
For the full-year 2017, we continue to expect Food Care to deliver 3% constant sales growth with continued strength in North America, improving trends in EMEA, and a more favorable global price/mix as the year progresses, due to the timing of raw materials cost pass-through in North America
Slide 8 highlights results from our Product Care division
Product Care net sales of $377 million increased 4% in constant dollars, excluding 50 basis points of rationalization in Europe, which happened in end of May of last year
Adjusted EBITDA was $74 million or 19.7% of sales
Performance accelerated through the quarter with all regions delivering positive constant dollar sales and volume growth
North America, which accounted for 62% of Product Care's net sales, increased 3% with strong growth in e-Commerce and fulfillment
EMEA accounted for 23% of sales, and increased slightly, driven by high single-digit growth in Germany, offset by flat sales in the UK and declines in France, largely related to the rationalization I've referred to
Asia-Pacific and Latin America combined accounted for the remaining 15% of sales and were up nearly 10% led by strength in China, Japan and Mexico
We continue to grow alongside the rapidly expanding e-Commerce and fulfillment market, and see good areas of stabilization within the industrial sectors
Our new products including B+, FloWrap, StealthWrap, Inflatable Bubble and Automated Mailers are also gaining momentum, across all of our end markets as our customers focus on addressing dimensional weight pricing
We expect our automated fulfillment solutions to continue ramping throughout the year and further contribute to our performance
It is worth highlighting that last week we announced with UPS, the opening of a Packaging Innovation Center in <UNK>ville, Kentucky, on the UPS largest Supply Chain Solutions site
We were honored to be selected as UPS partner to help address their customers' packaging and shipping challenges
And this clearly demonstrates the power of our innovative solutions and the ability for UPS and Sealed Air to collaboratively work together to add value to customers around the world
For the full 2017, we expect the momentum we experienced in the first quarter to continue throughout the rest of the year, resulting in constant dollar sales growth in the range of 3% to 4%
Growth within our e-Commerce and fulfillment segment is far surpassing industrial growth
And now let me pass the call to <UNK> to review our net sales and adjusted EBITDA, free cash flow, and our outlook for the full year
<UNK>?
Good morning
So there is something that you need to understand is the SEC rules with regards to unallocated costs before closing
And unless a given unallocated cost is very precisely put into a division, call it computers and cell phones, there is a cost for computers and cell phone for example which is very clearly set into the Diversey operation
But if it is a cost which is allocated as a percentage of sales or things like this, before closing, all of those costs move to Sealed Air to new Sealed Air, and that is probably part of this explanation and we have talked about $25 million of those costs, which in fact are moved to – into our accounting, since they're new to their accounting, and you're going to have – you're going to see those after closing being offset by GSAs (31:48)
So that's a very good question
We don't have a margin issue as you said, with Product Care because actually we're really very happy with the restoration of margin in that division that we have carried throughout the years
But what you have seen is that we have actually – what we have not seen, but what we have had is somewhat flat pricing, but a negative price/mix and you have seen that for the year we said that we're going to have 3% to 4% constant dollar sales growth
The reality in the gross profit line is that we're seeing a slight degradation in the first quarter and it's going to be impacting also the second quarter because we have had hefty resin price increases, which we have not been able to immediately offset with our own price increases, which we have started
So we already are seeing some price increase – slight price increase in the first quarter which is going to continue in the second quarter but that's one part
One part is the slight margin compression that all of our competitors have had in food packaging and in product packaging and things like this because of the speed and how hefty those resin cost increases have been
The second thing is the mix
And in Product Care, we are growing as we already told you in the previous quarters, much faster in e-Commerce and fulfillment than in our industrial packaging
By the way, our industrial packaging is doing much better than it has done
We are seeing some lift, we're seeing some restoration of volume which is very pleasant to see in an industrial GDP, which is still not very good, but we're seeing this
But what is important to understand is that yes we do have some lower value-added products temporarily in e-Commerce, but we also have and you need to remember that, have launched an equipment line
Two years ago, we didn't have any equipment product
We have at Pack Expo last October shown our new line of equipments and those are starting to ramp up
You can imagine that when your production starts to ramp up, you have lower margins because you'll have to absorb volume variances in your plants and we are by far not at the margins we need to be in our equipment
But this is the nature of the beast
You ramp up your equipment and when those are going to start kicking with sizeable volume and we're doing – we have a lot of momentum in that sector
We are going to improve our margin
This is why and I'm concluding with this, this is why I said that short-term our margins in e-Commerce 3PL are lower than our total margin, but this is not going to be the case over time
Hi <UNK>
So, yeah
in regards to our cost increases, once again, remember the cost increases, that was $0.05 in February, it was $0.03 in March, the $0.03 of April in resins has been moved to May, and we'll see if it goes through et cetera
So, yes we have been negatively impacted on the gross profit line on both divisions; one because of formula pass through, the other one because of negotiations and it is going to impact also Product Care and also Food Care in the second quarter before we see a restoration
But what you have to be sensitive also with regards to the currency, and yes indeed, the currency impact is less, but remember who it affects most
It is the Diversey side because they have a higher exposure to non-U.S
dollar than the rest of new Sealed Air
Having said that, no, we don't see a deterioration of our forecast when you compare apples-with-apples
We expect continued gross profit squeeze in the second quarter because of the reasons that I talked to you about
On the second comment, which is also a very good question, remember what I said several years ago, there is a catch-up to do
So, therefore, the margin increase is going to slow except for the new products and you remember that in Food Care and in Product Care, we have been moving with innovation which is – which are really doing well
We are going to update you all during our Analyst Day next autumn about this
And as a result of that we believe that we are going to be able to continue to have margin expansion
The solutions that we are bringing, adding new value to customers have a very quick and very strong payback for our customers
So, we're really pleased with our innovation
Hi, <UNK>
So, our forecast is our forecast
What we have seen, as I said before, is margins squeezed in the Product Care
We used to see the sales growth move into the EBITDA and more and we are not seeing this in Product Care for the reasons I have talked about
And therefore for the full year, we're not seeing and we're not expecting to have product care have the sales growth dropped to the bottom line and more
And the reasons once again are hefty and quick resin increases and the product mix with regards to our equipment in our lower value-add products into the e-Commerce
So that's one
The second one is that we are – in Food Care, we're seeing growth and we're satisfied with what's going on in there, and we're not seeing the major EBITDA contraction or lower growth than you were expecting
Once again, remember what I said before, the ATC (43:59) accounting principles oblige us to take all of those non-directly attributable allocated costs that we have before closing into Diversey
They have to come to new Sealed Air that is having an impact
So now you don't tighten because those pass-throughs because those are contracts and therefore you respect the contracts
But what goes around comes around and as a result this at the point in time, we're going to start to benefit from those and we believe that this is going to be towards the end of the year and definitely into next year
With regards to Product Care, those are negotiations because we don't have basically formulas and that has affected some gross profits in the first quarter because of the speed of those $0.05 and $0.03 and potentially some more to come
We have announced price increases on – and we have executed on price increases based on resins
We also had some benzene and MDI, very hefty price cost increases, and we have already started to implement price increases on our – Instapak product line which is important
So, yes, M&A can be part of the game
I've been very public saying that we have been doing technology bolt-ons in the past and we're going to continue looking at bolt-on operations
So therefore there is no huge M&A being discussed or being looked at at this point in time
We believe that we can do a regional bolt-on to reinforce our Product Care and our Food Care divisions
Having said that, you have observed I hope the dramatic shift in our volume growth
And that helps me to come back and say and remind all of what I said last year
Last year, I said that we were expecting to have a total growth of about 3%, which we did not deliver, but I was expecting this to be – the growth of last year to be ramping up towards the end of the year
So, when you step back what are you seeing? You're seeing that basically I was wrong by one to two quarters maximum, and I do confirm that I am expecting to see the volume growth and the total growth to firm up because we said 3% to 4% this year, and when you look at specifically to the volume, we have had this past quarter, about the double growth that we have had for a long time because our volume growth in New Sealed Air has been of about 0.8% to 0.7% in the first three quarters of last year, and about 2% in the fourth quarter, so what you're seeing that this growth has picked up
So, Q4 volume growth for New Sealed Air was 2%
Q1 volume growth for the first quarter was 3.8% and I do confirm that this is a very good and positive trend, which is making me very confident that our strategy was and is the right one, innovation and segmentation is the name of the game
And next to that we're going to see how it develops into 2018, but altogether we believe that this 3% to 4% growth in 2017 is going to be coming, which is the major change compared to the past
Not more frustrating than for us by the way, but this is a transition time
It is a difficult time in 2017. We have done what we felt was necessary to be done for the future of Sealed Air
This Diversey has earned the right to fly from its own wings with Bain Capital right now, and I think this is good for Sealed Air and that this is good for Diversey
And on the Product Care, having the sales growth not dropping to the bottom line, fully agree with you, we believe that this is transitional also, but it's going to be there in 2017.
I'm a very strong believer that you do not buy your way into markets with price, and I have proven that over the past few years
What is making us win in the marketplace is our innovation, it is not only on red fresh meat, it is also on cheese, it is also on processed foods, we have customers who are converting to Grip & Tear solutions, we are making progress with OptiDure as we were expecting, we're making progress with our DOT as we were expecting
So I would say all good and this is what enables us to have the volume moves that we're having
Mostly what we're seeing is, price in the first quarter mostly North America because of the formula pricing
It's mostly a timing point situation
