SEE
#Good morning, everyone
As you can see from our results, free cash flow and earnings per share performance were the highlights for the quarter and the year
We generated $631 million in free cash flow in 2016, and this was net of $276 million in CapEx and $66 million in restructuring
The significant upside relative to our guidance was primarily driven by our continuous strong focus on working capital
We also delivered $0.76 in adjusted EPS in the fourth quarter and $2.66 per share in 2016 after repurchasing only 5 million shares in the first nine months of the year
In the fourth quarter, both Food Care and Diversey Care delivered organic sales growth of approximately 3% and adjusted EPS growth of 16%
In Food Care, protein packaging volumes in North America increased more than 6%
Our hygiene business increased by 5% in constant dollars and we delivered favorable price mix on a global basis
Diversey Care's growth was primarily driven by favorable price mix of over 2% and volume increases of 7% and 3% in Asia-Pacific and North America, respectively
Where we felt short in the quarter was our top-line constant dollar growth in Product Care, which weighed on our adjusted EBITDA performance
We knew December would be a critical month for us with most of our global growth depending on our e-Commerce business, and we were happy with our e-Commerce volume growth of 15% in the quarter, but this was offset by weakness in global industrial GDP and our product rationalization efforts
And despite the shortfall in sales, adjusted EBITDA margins increased 80 basis points over the last year to 22.3%
So as I'm sure you all know, I am not happy with our overall organic growth of 1.3% in 2016. We underestimated the impact of the economic and geopolitical environment in Latin America and the Middle East, the depth of the downcycle in the Australian beef market and the weakness in the industrial world
But at the same time, I'm very pleased with the agility of our organization, its ability to deliver bottom line results and properly prioritize
I'm also extremely pleased with the innovation pipelines and the number of new disruptive products that we are gradually introducing and launching across the three divisions
Our total net sales outlook for 2017 of 2.5% constant dollar growth reflects approximately 3% of growth for Food Care and Product Care, and 1% for Diversey Care, which accounts for the short-term impact of the expiration of the brand licensing agreement with SC Johnson
Internally, the actions that we're taking to drive growth in 2017 are purposeful
We will leverage our strong global presence in Food Care and continue growing at a faster pace than the protein packaging markets
We will capitalize on the e-Commerce opportunity with our disruptive technologies
And the underlying constant dollar sales growth for Diversey Care, excluding SCJ, is expected to be at an all-time high in 2017 and our plans to rebuild our consumer brands business is very well underway
We recognize that 2017 will prove to be a critical year for Sealed Air, particularly, as we proceed with our plans for the separation of New Diversey
As you know, we disclosed back in October that we are pursuing a tax-free spin-off
And today, we announced that we are also exploring all the strategic alternatives including the potential sale of New Diversey, and we're confident that the separation is the appropriate next step in our company's transformation, and will enable us to unlock meaningful value for customers and shareholders
At this point, we are very limited on what we can share about the separation process, and thank you in advance for respecting our need to significantly limit our comments
So now let me turn back on the full quarter and year-end performance
On slide 5 and 6 of our presentation, you can see our performance by region for the fourth quarter and the full year
In Q4, organic sales growth was 2% with positive trends across all regions
Organic growth in North America was driven by an increase of approximately 4% in volume
Constant dollar growth in Latin America was a result of our pricing efforts to offset currency devaluations
And in EMEA, positive trends in Food Care and Diversey Care were partially offset by declines in Product Care
And performance in Asia was very strong in Diversey Care at 7% constant dollar growth, but the total company's results were impacted by a 10% decline in Australia due to the beef market downcycle
Australia accounted for approximately 7% of Food Care net sales in the fourth quarter
And for the full year 2016, net sales increased 1.3% as compared to 2015 on an organic basis
Constant dollar growth in Latin America was 9% and organic growth in EMEA was 2%
North America and Asia Pacific were essentially unchanged as compared to last year
Turning to slide 7, which highlights volume and price mix trends by division and by region
You can see that from this slide that on a global basis, volume trends were flat to up 2% throughout the year
Let me highlight that our volume in North America has accelerated throughout the year, with 4.2% growth in the fourth quarter on the heel of 3.8% in the third quarter
We delivered favorable price mix in each quarter throughout 2016 as a result of positive trends in Food Care and Diversey Care
Now, let me to turn to slight 8 and review Food Care results
Positive volume trends in North America and EMEA, favorable price mix, and disciplined cost management were key contributors to our fourth quarter organic sales growth of 3%, and adjusted EBITDA margin of 21%, an increase of 250 basis points over last year
We're seeing the benefit of higher beef volume and market share gains through the continued global adoption of our new products
Similar to the third quarter, these positive trends were offset by volume declines in Australia and Latin America
For the full year 2016, Food Care delivered $3.2 billion in net sales or 2% organic sales growth
Packaging solutions were $2.6 billion, and hygiene solutions were $600 million
In adjusted EBITDA, Food Care reported $661 million or 20.5% of net sales
Packaging solutions delivered adjusted EBITDA of $593 million or 22.7% of net sales and hygiene delivered the remaining $68 million of EBITDA or 11.3% of net sales
I'd like to highlight that the hygiene business has improved its margins by over 400 basis points on an as-reported basis since 2013 and has a very bright future as part of New Diversey by providing market-leading solutions and technology advancements enhanced by acquisitions of Dry Lube and Ciptec
For the full 2017, Food Care sales are forecasted to increase approximately 3% in constant dollars
Our core business is expected to continue growing faster than the market with more contribution from our Change the Game initiatives, particularly OptiDure and Darfresh
Latin America is starting to stabilize and Australia will continue to be impacted by declines in the beef market, also to a lesser degree as compared to 2016. Adjusted EBITDA is expected to increase at a faster pace than sales and similar to 2016, we expect the Q1 to be our low point for sales and EBITDA
Turning to Diversey Care's results on slide 9, you can see that net sales were up 3% in constant dollars in the fourth quarter and up 2% for the full year
Adjusted EBITDA margins of 13% increased 180 basis points in the quarter and for the full year, margins increased 120 basis points to 12.8%
Sales growth in the quarter and throughout the year was driven by increased sales from existing and new customers in North America, Europe and Asia-Pacific
In Western Europe, most of our largest countries experienced positive constant sales growth
And in Asia-Pacific, growth was led by strength in China, India and Southeast Asia
Towards the Middle East and parts of Europe, the hospitality sectors struggled in the second half, as a result of declines in tourism and occupancy rates, due to terrorist attacks
In 2017, Diversey sales are expected to increase approximately 1% on a constant dollar basis, with adjusted EBITDA margins in line with 2016 results
And as I noted earlier, our plans are well underway to mitigate the impact of SCJ; and sales from the core business, excluding SCJ, is growing on an accelerated pace
This growth is a direct result of the investments that we have made in our product portfolio, go-to-market strategy and sales organization
Slide 10 highlights the results from our Product Care division
In the fourth quarter and full year, Product Care net sales on a constant dollar basis were essentially unchanged as compared with 2015. Adjusted EBITDA margins increased 80 basis points to 22.3% in the quarter and 90 basis points to 21.8% in 2016. In the fourth quarter, Product Care delivered strong volume trends in North America, which were partially offset by declines in Europe
Adjusting for product rationalization, North America volumes were up approximately 5%, driven by strength in our e-Commerce segment
And similar to the third quarter, our performance in Europe was negatively impacted by the industrial environment
And in the latter half of 2016, we have been introducing an unprecedented number of new technologies and solutions, and as a result, we are experiencing significant interest from our customers, which mainly you saw firsthand at Pack Expo – many of you saw at Pack Expo in early November
Sales for these products including I-Pack, FloWrap, StealthWrap, Inflatable, Bubble and also mailers are expected to ramp up in 2017 and contribute to both our top and bottom line growth
We will continue to invest heavily in the business to support new product launches and global growth opportunities
But for our industrial based business, we are planning for sales to be relatively in line with 2016. And also keep in mind that our rationalization efforts are behind us, so that you will not see a true apples-to-apples constant dollar sales growth rate until the second half of 2017. For the full year 2017, we anticipate year-over-year constant dollar sales to increase approximately 3%, and similar to Food Care, adjusted EBITDA is expected to increase at a faster pace than sales
And now, let me pass the call to <UNK> to review our net sales and adjusted EBITDA, free cash flow and more details on our outlook for 2017. <UNK>?
Good morning, <UNK>
So, good question
And no, I don't think that is going to be – the growth is going to be 50-50. I think that the growth is going to – actually the way we're seeing the growth is definitely more towards volume growth than price mix
That's mainly how we see it happen
We are dealing with the resin price which is flattish, it's coming up in the first quarter and so – but we believe that those are going to come down during the year
So, it really is volume growth that we're looking at
Good question again
And no, I am not happy
I am not happy with the growth that we had, and I am disappointed
Why? Because we didn't have a very strong – we didn't have much growth in the first half, a little bit in the third quarter, it's improving somewhat in the fourth quarter, but it is not at the levels that I was expecting, and yes, indeed we have been surprised by a few things
Number one is the global GDP, you go to Bloomberg on February 2016 and you see that global GDP was forecasted at 2.4%, and it ended up – global ended up at 1.9% with the U.S
at 2.4% also, which ended up also at 1.9%, and Europe, which was forecasted at 1.9% and it is at 1.6%
And for 2017, the trend seems to be the same
Last year 2017 was seen to have a global GDP forecast, for 2017, a year ago, at 2.6%, and today's projection is 2.3%
So, we can't ignore those kind of things and what has disappointed me is the lack of industrial GDP growth
In a world economy, which had 1.9% global GDP growth, this is probably one of the worst years that we have experienced in many years actually
And it's always next year which is supposed to be better, but you know what? We're not counting on it
And in our forecast at this point in time, we are considering that the industrial world is not going to be better, and if it comes as a good surprise, well be it, we'd love that
Back in June of 2015, during Analyst Day, almost two years ago now, or 18 months ago, we were seeing a macro world which was going to be better
The reality is that in 2016, LatAm has been much worse than we thought it was going to be
And again, industrial market has been much softer
So that's how we plan
What am I happy with? Very frankly, we have invested a lot of money in new products and in R&D and marketing, to position new products
At Pack Expo late October, we have shown and we have announced quite a few innovations, which are disruptive and are going to make an impact
But what you had seen at that time, for several of those equipments, our products which – it was the first production, so we launched at that time and now in 2017 we have to ramp up those things
The thing that we all need to understand is that we're doing very different things that we were doing a few years ago
A few years ago, we were launching just simple products
Today, we're launching solutions, we're launching equipment, razor/razor blade, those are higher margin products, but the issue of this is that it takes a little bit of – the sales cycle is a little bit longer
When you work with meat processors and retail chains, in Europe, in North America, to establish Darfresh on Tray are those kinds of extraordinary solutions, which have a very, very clear mega trend, it just takes time, and we have talked about that
We have talked that with some of those retailers, the cycle between the first time we talk about that – about such a product or a solution and the production or the goal that's produced after ordering the equipment, this is two years
And it's the same on Product Care
One thing was to sell a little inflatable machine, and another thing is to do operational excellence with our e-commerce partners and improve all the organization and show them how much value they can create out of StealthWrap, FloWrap and I-Pack, and those kind of things
So I'm disappointed with the overall world economy support
I'm extraordinarily excited, which is why during the year 2016, we have invested so much money in R&D and in marketing to position those new solutions, because I really believe that this is disruptive, and our expected growth is probably delayed just – has probably been delayed by a few quarters, but I'll conclude, because this is very key, that we've seen an acceleration of the volume growth in Sealed Air in the fourth quarter
We had the highest volume growth in Food Care of each – of all the quarters in 20 – in the fourth quarter, same for Diversey
And almost the same, we had a very strong third quarter in Product Care, but same – almost the same in Product Care
So it's absolutely not doom and gloom, but we have to be realistic, and 2017 is going to be mostly about volume
And talking about Diversey, let me remind you what I said earlier, it is going to be our fastest growth business, fastest growth year, if you exclude the short-term impact of the SCJ
And we told you why this agreement did not get renewed is that it was not fitting either company
We wanted access to wider markets, to consumer markets, to all kind of, do-it-yourself type of market, and SCJ didn't want that
And therefore, we agreed to disagree
Yes, it does have a short-term impact, but this was really the right thing to do for the company
We have lots of great plans in place, and you're going to see outside of this SCJ business, we're going to have the highest growth that we ever had in Diversey here
Good morning, <UNK>
Well, the way you should think about this is that we're going to be counting properly and that we're going to do what is the best for our shareholders
And, I'm not announcing a sale, well, I am saying that we are pursuing to do it right here
So the market is choppy, you've seen that, that there's been increases in September, which were given back two months later
You see that the $0.05 in February is going through
We'll have to see whether the $0.06 (34:56) is going through, you'll have ethylene prices which are high, you have turnarounds, which are fabulously orchestrated
And at the very same time, you'll have some high capacity, or lots of capacity which is coming later in the year
So our view on the full year is that our – that prices are going to be flattish, and formula prices have a little bit of lag, is this going to impact the first half? A little bit with those price increases announced, yes, but for the whole year, we are counting on flat sales, which is why, by the way, we are not going to – we are not having a lot of price in our growth forecast, we have price mix, but we don't have very much of that
What you have to know is that we're very diligent
We have announced the pricing increase effective March 1 in our Product Care business, we're looking at systematic price product line by line, it's not going to apply across the board, because it's going to apply to polyethylene based products and we don't have only polyethylene based products in Product Care
We're looking at similar things where we don't have formulas in other – in other divisions, and by definition, we're not in the business of absorbing those cost increases
Good morning
So, well, we have never given and we're not going to be giving the specific detail on this contract, but I have – I have said that we are expecting 1% sales growth and flattish EBITDA in 2017 out of Diversey Care as a result of this
Given that we are having under non-Diversey Care – non-SC Johnson business we're having higher growth than what we had in total in 2017 – in 2016.
So what you're having here is in 2017, we have included basically $50 million of negative, and it's $40 million from currency, and it is $10 million – actually it's more, it's $13 million on the interest income
So you have $53 million right there
And then next to that, you'll have a very transparent explanation of a flat Diversey Care in terms of EBITDA for the simple reason in constant currency – flat EBITDA, for the simple reason that we have a temporary situation with these consumer goods contracts
And this compares to a double-digit EBITDA growth in constant currency every single year in the last four years in Diversey Care
So that's what's going on
And should currency be better than the $40 million impact? We're going to be obviously happy about this
It is pretty choppy, remember, the euro was at $1.03 four weeks ago, three-and-a-half weeks, it is at $1.07, and those kind of things
You have quite a few movements of currency at this point in time
But you have $53 million of negatives right away as I just compared those two things on interest income, and currency
If you just give a little bit of more color to the question, specific question? Mix, what kind of mix are you referring to?
So, we're not giving those kind of details of price mix for existing products or new product, et cetera
Generally speaking, what you have to consider is that our solution based offering is having higher margins because as we are creating, with some of our solutions, extraordinary value for our customers, we are in a mode of sharing those
And we have glowing examples of those and when you take products like OptiDure where you have less flickers at the production level, where you have more additional sales because of the shine of the product and tightness in the vacuum
When you have Darfresh on Tray, which reduces dramatically the shrink at the retailer level, and it improves the shelf life and therefore, the supply chain
When you have products like FloWrap and StealthWrap, whose number one benefit are – and I-Pack, number one benefit are to reduce the shipping costs, because they generate less Cube, which is by the way in e-commerce, the number one cost
When you take the whole packaging operation, the number one cost is freight, is shipping cost
So when you can improve all of those kind of things, you are in a position to obviously enjoy better margins if you can demonstrate those value
So that's how we're going
But having said that, we're not giving details on the margins of existing products versus the new products, although during our Investor Day in September, we'll be able to give an update of how we're progressing and with our Change the Game offering
Good morning, <UNK>
Yes, you're correct that the volume growth in Product Care total year has been 1.4% in 2016 versus 1% in Food Care
It's not like this in the fourth quarter because it was Food Care, which had the highest growth
Having said that, the price/mix has also been different, and the price/mix has been more unfavorable every single quarter during 2016. And this is because we don't have price formula
So depending on the mix and also depending on the type of products or resin prices, we have to adapt our pricing in a very different way because those are very different businesses with our customers there
Okay
So what Product Care has clearly suffered from is from the mix between industrial and e-commerce and 3PL
Let me address the second part of your question first, which is the Index
Yes, in general speaking, we can see some ratios, which are hanging in there
The reality is that we have the bulk of our business, about 85% of our business, is in North America and is in Europe
And when you look at those two parts of the world and when you talk with our customers, and very frankly on the industrial part, their exports and their business is suffering, and it's just sluggish
When you have the U.S
with a GDP of 1.9%, all driven by consumers, you can call this an industrial GDP boom or these kind of things
And as I said, the bulk of our Product Care business is in North America and in Europe
So that's the way it is
Unfortunately, we have a large part of our Product Care business in there
Fortunately, we're growing very fast in the 3PL and e-commerce business, and the solutions that we have are absolutely second to none, disruptive, and revolutionary
Thus every time we are engaged with new customers, we are going through a whole process of new value being created and working on how we can go and get the kind of things done
And now addressing your first question, which was related to the margins of e-commerce versus industrial
Yes, indeed with our current portfolio, they are slightly lower
But with the solutions that we have shown at Pack Expo, they are going to be definitely improving and not lagging our industrial business
It seems that your question started with Food Care and so
So in Food Care, we're seeing continually strong growth out of North America
We had negative volume in Latin America, actually very negative in Brazil, positive in some other parts of Latin America, but for a total being negative
We believe that this is going to be stabilized
When we look at the herd and type of the cattle cycle, we are seeing that, specifically in Brazil, we're seeing that it has hit the trough in 2016. We believe that the first half of the year is going to be somewhat flattish, and that it is going to start to improve in the second half of 2017. When you look at Australia, 2017 is going to be lower than 2016. Again, we are following very closely their herd size
The herd size is being rebuilt in 2017. It has dramatically come down in 2016 for all the reasons that we talked about
And when you think about the herds in 2014, it was 29 million head, and in 2016 it was about 26.2 million
And this has been a huge reduction and the slaughter rate has dramatically decreased
We believe that it is going to continue in 2017 at lower a pace but it's going to continue, and definitely as the herd is being rebuilt from 2016 in 2017 and onwards, towards 2021, we believe that the business in Australia, the slaughter rate is going to increase, and as you know, it's a positive from 2018. So what we see is that from 2018, we're going to have the three big parts of the world which are exporting, et cetera, which are Latin America, Australia, and North America be on an up cycle, and that's going to be definitely very positive of that
To be noted also is that the exports out of Brazil are improving, but you have to remember that about 88% of the Brazilian beef exports are frozen and 12% are fresh
The good news is that fresh is expanding with the approval to export to the U.S
and will open to Asian markets as well
So on Product Care, we think we have a huge momentum on 3PL and e-commerce
We're going to be showing more of the partnership agreements that we have in the second quarter with very important ones
And so we're doing great things
It is going great and we are going to be showing, we believe, nice growth in the 3PL, e-commerce in North America
The European business has been negative in the fourth quarter
Disappointing, definitely led by our industrial business in Europe
The whole question is how do we mitigate with e-commerce and 3PL the flattish trends in industrial
And our view is that we shouldn't count on industrial increase in 2017, and preserve our position there at the very same time, continue to aggressively grow the businesses which have momentum and in which we're very disruptive
