Q3 2019 Earnings Call
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to your speaker today, Ms., Lori Chaitman Vice President of Investor Relations. Please go ahead ma'am.
Thank you and good morning, everyone.
Well, we begin our call today I would like to note that we provide a slide presentation to help guide our discuss.
His presentation can be found on today's webcast can be downloaded from our IR website at sealed air Dotcom.
I would like to remind you the statements made during this call, stating management outlook or predictions 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 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 , and as a revised and updated on our quarterly reports on Form 10-Q , and current reports on form 8-K. If you can also find on our website at sealed air Dotcom running as he sees website as you see knock off.
We also discuss financial measures that do not conform to U.S. cap.
You will find important information on our used to these measures and their reconciliation to U.S. gap in our earnings release.
Included in the appendix of today's presentation, you will find U.S. GAAP financial results at Carpe on some of the non U.S. GAAP measures we referenced throughout the presentation.
With that I'll turn the call over 10, Divini, our president and CEO test.
Thank you Laurie and thank all of you for joining us for a third quarter earnings conference call.
On today's call I'll start out with a quick recap of our third quarter results and discuss how reinvent see strategy is transforming sealed air two world Class company.
This is an exciting journey and we're making great progress.
I'll then discuss the status of the integration of automated packaging systems and how this will accelerate our growth.
I'll conclude with an update on the progress, we're making under sustainability goals and her 2025 pledge.
Jim will expand on a financial results for the quarter and provide more details on our outlook for 2019.
We will end the call with the Q in a recession.
Turning now to a third quarter results on slide three in constant dollars, we delivered 12% adjusted EBITDA growth on 5% higher sales compared to last year.
Our topline performance was largely attributable to higher volumes and food packaging and contribution from our recent acquisitions.
Adjusted EBITDA margin was up 130 basis points to 19.8% and we delivered adjusted earnings per share 64 cents of 5% increase over last year.
Well, we continue to face macroeconomic challenges around the world and within the markets. We serve our reinvent see strategy is driving share gains is significant productivity improvements. This enabled us to deliver strong EBITDA growth in the quarter and position us to reaffirm our 2019 earnings.
In free cash flow commitments made.
More importantly, we're strengthening the structural earnings power of the company.
Slide four reiterate your vision, our strategy and how we're making all of this happen.
Our vision is to transform sealed air from the best in packaging two World Class company servicing the global packaging industry.
Today, we are as a leading innovator in packaging and are making a difference in the industries, we serve with automated equipment service and materials.
At the same time, we're reinventing the business from how we innovate to how we saw.
Our reinvent see work streams are designed to accelerate profitable growth drive operational excellence developed a high performance culture and deliver long term value for our customers shareholders employees in the society, where we live and work.
Let's turn to slide five which illustrates how our team is taking or for piece of reinvent see performance people products processes and sustainability to world class.
We are investing smarter to accelerate the speed to market of our new innovations in food and protective packaging.
We're making advancements in our materials for proteins, including seafood and plant based protein alternatives and fluids.
For protective packaging markets, we're introducing a new reinvented version of our bubble Rep brand in 2020 that contains more than 90% recycled material, while providing the same level of protection and air retention is our original bubble Rep brand.
We continue to invest to strengthen our capabilities in automation sustainability and digital.
We've been making changes across our manufacturing and distribution network to enable us to drive the best products get the right price and make them sustainable we have seen gross margin improvements from a reinvent see work streams and plant productivity network efficiencies and procurement savings.
Throughout our global operations by acting is one sealed air we've been able to realize savings in multiple functions throughout the organization.
This has given us the ability to move and respond faster to the markets, we serve and the adjacent markets we are targeting.
As we head to year end in plan for 2020, we're adding new reinvent workstreams on revenue in service to drive topline improvements.
We're focusing on driving integrated customer solutions with our automated equipment service in materials.
We're expanding the capabilities of our commercial teams by providing them with more resources launching new campaigns to drive market share gains and accelerate commercialization of our newest innovations.
We're enhancing our service leadership by leveraging automated packaging systems technical service excellence and expanding our own best practices globally.
I want to share the integration of automated packaging systems is going very well.
Our sales teams have attended training and collaboration meetings verifying cross selling prospects around the world.
We collaborated at three major trade shows in the us in Europe and held the summit to accelerate innovation projects and growth.
While it's still early we had a handful of cross selling orders in North America, Europe , and Asia in the quarter and are optimistic about our opportunities in 2020.
Now, let's turn to sustainability on slide six which is at the heart of our purpose statement to lead the world better than we founded.
Looking back over the last year sustainability concerns across the packaging industry have increased around the world.
We've made progress on our internal operations and our 2025 sustainability pledge.
These investments have been driven by our focus on operational excellence and by increasing market demand for more sustainable packaging solutions.
Our goal is to deliver the best products at the right price and make them sustainable.
Recently, we published our 2019 sustainability report, where you can learn more about how sealed air is working to move the needle on sustainability and build a more circular economy.
We're proud to report we've exceeded our 2020 sustainability goals. Two years ahead of schedule on resource intensity, which includes greenhouse gas emissions energy and water.
On waste, we've been diverting nearly 80% of our waste from landfills.
More than half of our facilities today are delivering on our 2020 goal of achieving 100% waste diversion.
Employee safety is paramount to us.
Our goal is to achieve zero harm across our global facilities.
Year to date, we're pleased to have reduced our total recordable incident rate by 10% with more than 65% of our facilities achieving zero harm.
On our 2025 sustainability pledge, we're making meaningful progress towards delivering solutions that are recyclable or usable and contain post consumer or post industrial recycled content.
Investments in our portfolio or geared towards our 2025 commitments.
In the third quarter, we had three protective packaging solutions to our list a recyclable offerings.
Our reinvented bubble wrap material in stealth wrap shrink film had been recently certified for store drop off recycling.
The new version of bubble rap is not only made from recycled content, but also has a 40% lower total carbon footprint than our existing products.
Our stealth rep automated packaging system replaces larger heavier secondary boxes and provides improved efficiency by reducing dimensional weight during distribution.
We also received third party certification for Curbside Recyclability for our paper based temp card bio thermal assurance product.
Across the packaging value chain, we are widely recognized as a leader in essential flexible packaging committed to build a circular economy and reducing our customers carbon footprint through innovation and collaboration.
We strongly believe our investments will accelerate our growth trajectory.
Looking ahead, our product roadmap puts us on track to achieve our 2025 objectives.
Ill now pass the call to Jim to review review our results in more detail Jim.
Thank you Ted and good morning, everyone.
On slide seven we'll start with a review of our net sales by region.
In the third quarter sales increased 3% as reported and 5% in constant dollars.
We delivered growth across all regions, which included two months of sales contribution from automated packaging systems.
In constant dollars North America, our largest region, representing 60% of the company sales grew 4% year over year EMEA was up 5%.
In Asia Pacific was up 3%.
South America, where we have US dollar index pricing was up 21%.
Turning to slide eight here, we highlight our volume and price trends by business segment and by region.
In the third quarter overall volume, excluding acquisitions was down 1%.
Food care volume was up 2% with favorable trends across all regions.
This was more than offset by 5% volume decline in product care.
The industrial manufacturing slowdown in ongoing trade disputes hit our product care business. The hardest in North America in Asia Pacific, where we had organic volume declines of 7% and 5% respectively.
In EMEA product care volume was up slightly with growth in automated equipment offsetting economic softness in Europe .
Favorable overall price performance.
It was driven by the US dollar index pricing in South America.
And as we anticipated pricing in North America was down 1%, primarily due to resin based formula pricing in food care.
On slide nine we present, our year over year sales and adjusted EBITDA bridges.
Third quarter and year to date.
Starting with the quarter organic sales, which exclude acquisitions and currency translation.
Were essentially flat year over year.
Automated packaging systems accounted for 48 million of the 62 million of sales from acquisitions.
Adjusted EBITDA of 241 million increased 22 million or 10%.
Compared to last year with margins up 130 basis points to 19.8%.
This increase was largely attributable to our reinvest see initiatives and favorable price cost spread.
In price cost spread we benefited from reinvest see actions that are structurally lowering our direct materials and transportation costs.
And increasing value capture.
We also benefited from market driven lower input costs relative to last year.
Higher operating costs were largely due to labor and indirect material and services inflation.
Increased incentive compensation.
And incremental investments in the business.
Partially offset by reinvent see benefits from network optimization.
Manufacturing supply chain process improvements procurement savings and other organizational efficiencies.
We also realized 21 million of savings from restructuring actions.
Operational EBITDA from the addition of automated packaging systems for two months in the quarter was offset by a 7 million dollar noncash purchase accounting inventory charge.
And currency translation was also 4 million unfavorable to adjusted EBITDA.
Adjusted EPS in the third quarter was 64 cents on average diluted shares outstanding of 155 million.
This compares to 61 cents in the third quarter of 2018.
Automated packaging systems was four cents dilutive on adjusted EPS in the current quarter and included seven cents of noncash purchase accounting items.
The adjusted tax rate in the quarter was 28.5% compared to 27.8% in the third quarter 2018.
Year to date, the adjusted tax rate was 25.5% and for the full year, we continue to expect the rate to be approximately 26%.
Turning your attention to our year to date EBITDA Bridge you can see we have realized approximately 123 million of reinvest see benefits with 47 million coming from restructuring.
Reinvent see has exceeded our expectations and we are now on track to achieve approximately 150 million in total benefits for the year with approximately 65 million coming from restructuring savings.
This is a $15 million increase in our full year outlook for reinvest see benefits, which has positioned the company to reaffirmed its adjusted EBITDA adjusted EPS and free cash flow guidance, despite lower projected sales.
Turning to our results by segment on Slide 10, we present third quarter and year to date results for food care.
For the quarter food care net sales of 730 million were up 2% organically.
And up 3% in constant dollars.
Adjusted EBITDA increased 10% to 160 million with margins, improving 190 basis points to 21.9%.
Global protein markets were up about 1% in the third quarter compared to our food care volume, which was up 2%.
By region, our volume was up 3% and both South America in Asia Pacific.
2% in North America.
And up 1% and E M here.
Overall, our volume of materials was up 3%, which was partially offset by a decline in north American equipment sales due to a tough year over year comparison.
Our topline performance was driven by local protein consumption.
Strong exports and continued adoption of sustainable solutions.
Increased consumer demand for fresh protein continues to drive penetration of our case ready platform across all proteins.
The export market for beef poultry and pork continues to strengthen particularly North American South America, largely due to the impact the African swine fever is having on pork production in China and surrounding countries.
In sustainability, we are gaining share globally with our solutions that contain recycled materials and offer post consumer recyclability.
It is also worth noting that we are seeing incremental growth opportunities in adjacent markets, including fluids seafood and alternative proteins.
For the full year 2019 global protein production is projected to be up one of the half percent.
Our food care team has been outperforming the market and we expect this trend to continue going forward.
However, due to the timing of certain new equipment deliveries in a weaker macro environment in Europe . We are revising our full year 2019 constant dollar sales outlook for food care to 3.5% versus 4%.
On slide 11, we highlight results from our product care segment.
In the third quarter product care net sales of 489 million were up 8% in constant dollars.
Excluding automated packaging systems acquisition product care net sales were down 5% due to volume declines on a centrally flat pricing trends.
The volume declined in the quarter was primarily with our specialty industrial applications and traditional packaging solutions.
Adjusted EBITDA of $84 million or 17.2% of sales was up 10% and margins expanded 60 basis points.
Restructuring savings favorable price cost spread and other benefits from reinvent see were partially offset by lower volumes higher operating costs and inventory purchase accounting charge associated with the automated packaging systems acquisition.
In product care, we continue to work on our portfolio to focus on automation and sustainability.
Value added solutions, which include automated equipment Inflatables paper systems core view and temperature assurance were up 6% on an organic basis in the third quarter.
When you include the contribution from automated packaging systems.
This segment of our business now accounts for roughly one third of product care.
Our traditional packaging solutions, which includes but we'll wrap standardized mailers shrink film and voice, Phil were down 7% or organically and still account for one third of our product care sales.
This part of the segment has been adversely impacted by the market shifting to automation and sustainable solutions and the global industrial manufacturing slowdown.
As Ted noted, we are bringing more recyclability to this portfolio with the new version of bubble Rep in 2020, and recently a recyclable cushion mailer.
Our specialty industrial applications, which include the Instapak platform and integrated fat fabrication solutions.
Account for the remaining third of our product care sales and this part of product care was down 7% organically due to lower global industrial demand and the ongoing trade dispute with China.
While the market cycle has been challenging we are working with customers to upgrade their packaging to be parcel ready, which brings more efficiency and less waste to the distribution channel.
For the full year, we now estimate product care constant dollar sales growth to be 6% compared to our previous guidance of 7%.
Organic sales are now expected to be down approximately 4%.
Impaired to our previous forecast of down 3%.
It is important to note that while our topline outlook has come down throughout the year and more favorable sales mix combined with reinvest the benefits have resulted in higher margins and product care.
Now, let's turn to year to date free cash flow on slide 12.
In the nine months ended September Thirtyth, we generated 110 million or free cash flow compared to 35 million in the same period in 2018.
The year over year improvement was driven by higher adjusted EBITDA and lower cash tax payments, partially offset by increased investment in capex and our reinvest see programs.
Net debt at the end of the third quarter totaled 3.7 billion.
Net debt to LTM adjusted EBITDA on a pro forma basis for the automated packaging systems acquisition was 3.8 times.
As we previously communicated we expect pro forma net leverage to be approximately 3.7 times by the end of 2019, driven by cash generation and continued growth in adjusted EBITDA in the fourth quarter.
Turning to our updated outlook on slide 13.
We now anticipate netsols to be approximately 4.8 billion or about 1.41, 0.5% growth for the year as reported.
On a constant dollar basis net sales are expected to increase approximately 4.5%.
Food care growth of 3.5% includes just over 10 million from the smaller strategic acquisitions completed in the second quarter.
Product care growth of 6% includes 180 million from acquisitions of which approximately 120 million is expected to come from automated packaging systems for the five months ending December 31 2019.
We are reaffirming our adjusted EBITDA for the full year in the range of 950 that 960 million.
This outlook includes 10 to 12 million of adjusted EBITDA from automated packaging systems, which is inclusive of the 7 million noncash inventory purchase accounting charge.
It also includes unfavorable currency translation for the year of 30 million, which is up about 5 million from our previous guidance.
We continue to expect adjusted EBITDA or adjusted EPS excuse me to be in the range up to 70 to 80.
Our guidance assumes approximately seven cents of dilution from automated packaging systems.
Our outlook for adjusted EPS is based on roughly 155 million shares outstanding and does not assume additional share repurchases for the remainder of the year.
We are reaffirming our forecast for free cash flow of 180 million.
Our capex for the full year is on track for 210 million, which includes 10 million for automated packaging systems.
We continue to expect to reinvest see restructuring and associated payments.
To be about 115 million in 2019.
Let me now pass the call back to Ted for closing remarks.
Thank you Jim.
We will continue to push forward on our journey to World class and aggressively go after opportunities with reinvent C.
Reinvent see is about accelerating profitable growth and increasing earnings power.
As illustrated on Slide 14, you can see how we're reinventing our powerful brands and operating as one company.
Our four piece of reinvent C are increasing efficiency and an unleashing growth.
We're excited for what's ahead and we'll continue to focus on what's in our control to drive our success and create value for our shareholders.
With that I'll now now open the call for questions.
Thank you as a reminder to ask a question you would need to press star one on your telephone.
To withdraw your question press the pound key.
And our first question comes from Tyler Langton with JP Morgan Your line is open.
Good morning, Thanks for taking my question just on the the reinvent are still there I guess sort of the the savings is going to steadily moved up throughout the year.
Thanks, it's in terms of offsets.
EBITDA sort of not moving up as much as it.
You know product care volumes FX higher operating expenses, when if you could provide any sort of call or what have been sort of.
The biggest assets.
Sort of versus your estimates.
Well when we started the year. This is Jim when we started the year, we certainly had a greater expectations for volumes across the business.
And.
You know, where we're at right now with increasing the benefits from this program we're able to.
The drive EBITDA adjusted EBITDA to a higher level than what we started the year and have seen an awful lot of margin improvement.
I think at the most basic level, what's going on with reinvent has more than offset volume declines for the year and the currency translation drag on the business.
Operator next question.
Our next question is George Staphos with Bank of America. Your line is open.
Hi, everyone. Good morning.
Thanks for all the details as always I guess my my first question and then obviously, we'll turn it over there can you give a bit more color in terms of the volume decline in product care.
In the third quarter is down 5% considering that last year, whether they are relatively challenging quarters and easy comparison for product care and as you move into the fourth quarter, the comps get a bit tougher.
Can you give us some additional color in terms of how the volumes are progressing year on year and product care, especially in the categories as you laid them out. Thank you.
Thanks, George This is Ted at looking at product care, and if we unpack what's going on and if we compare to year over year. The third quarter as you highlighted last year, we saw a drop.
In the third quarter last year, we had a issue with an automated piece of our portfolio that was going away that still leaking away in the business and probably will wont be out until the end of next year, but if you look at the portfolio is Jim highlight not highlighting our prepared remarks.
Double digit and we've had margin expansion in that piece. So we're looking at that whole portfolio unpacking. It focus we keep talking about the automated equipment.
That actually is up also double digit we're working with the portfolio, though to get that connected to materials in some cases, it's not connected to our materials and we're working very aggressively to get that connected.
And then looking at globally, we have saw some positives our European team has actually had flat to growth in but with some of the new products. They are seeing that sustainability push much tougher than anywhere in the world and we've seen our new Mailer come online quickly it's pretty impressed have.
Quickly they brought that new product to market more to come in this quarter and in 2020. So we're aggressively going after the product care portfolio, we have things that are growing.
It's got hit by the market, we don't want to be at excuse, but we've got to address that we've got to move the portfolio quicker and we got to get the new products to market fast and Thats were working on.
Operator next question.
Our question comes from a room Viswanathan with RBC capital markets. Your line is open.
Great. Thanks, good morning.
I just wanted to ask a little bit of a higher level strategy question. You know a couple of years ago, the company's sold diversity.
And the path forward looks like a differing the stranded cost on that continuing to kind of in Winston here in your food care product care business.
When you look back a you know and that sale you know Unfortunately, it was dilutive to earnings and we were at a three dollar basically went down to about a 250 base. So.
It seems like you're you're digging yourself out of that whole, but just wanted to get your own perspective on kind of where you stand in the transformation and if you could just high and how much of your product base that you would consider specialty or potentially non commoditized at this point that'd be helpful. Thanks.
Okay.
Well I appreciate your summer and if we look at the strategy of the separation of diversity only comment I'll make on that from the past it really didn't feel like it was a similar business to us and one of this things with our strategy on reinvent is how do we act as one company.
And focused on our purpose statement that were in the business to protect focusing on our customers most challenging packaging issues and making the world better we found that so if we looked at the portfolio of food care and product care. We're actually acting is one we actually have many many mark.
Good verticals beneath that and that's where our focus has been our strategy and then on the operational side of that focusing on automated equipment that is in both businesses. That's been part of the growth of our food care and more to calm and the same thing with the automated equipment on product care. So we see that synergy there.
The acquisition of Ats was how do we go faster into that space.
The other piece is we're focusing on things that even with our sustainability focusing on things that are so if you get plastics world of essential versus non essential. So we see that those two are two portfolios having the same issue there even in the packaging of food care. We're looking it can we bring our protect.
Packaging solutions with product care can we bring some of that material expertise that we have together. So strategically we see a lot of similarities the adjacent markets. We're seeing quite clearly with we've talked about some of our growth in temperature assurance with Ats.
Close to 20% of their business was in food and we've learned a lot of things of how they do high speed loading of bags, great synergies that we see already with our food care business. So the strategy is to focus on packaging focus on the critical packaging focus on.
Having the best materials, having multiple materials when are sustainable world. If its paper if its plastic or if it say a protective material that no. One else has that's what we're focused on and then also the strategy is on the operation side, let's be more efficient on how we go to market and so that's the backbone behind reinvent.
He is well so I think we're making good progress and.
I think more good things to come.
Operator next question.
Neel Kumar with Morgan Stanley Your line open.
Great. Thanks for taking my question.
So I wonder if that's a million dollars in remains see benefits you're now expecting for the full year implies about $27 million fourth quarter, given you've done $123 million year to date.
It seems that it's been about $50 million and benefits to the last two quarters. So I was just wondering if there's any reason why this was slow down in the fourth quarter or perhaps and maybe incorporating some conservatism.
Yeah. This is Jim I think we like to see it coming through we've got a very strong pipeline.
And we've been really accelerating that hi.
Given the volume challenges that we have so you're right that math is exactly right.
And hopefully we beat it.
But you know I would say that we pushed up as a lot of that early in the year and in some of that will carry into the fourth quarter in a new restructuring actions will be launch.
In the fourth quarter that will then.
Help us as we lean into 2020, we still think we have a lot.
Of opportunity you know broadly on productivity and efficiency.
Across our business that will position us well for next year, but yeah, we like to we'd like to under promise and over deliver when it comes to those kinds of things, but the team is working really hard we talked last quarter about the governance structure and the culture change that this is driving within the company to reach.
Really from idea generation, two accountability, making that that fall through so.
No I don't think we want to put too much more in the fourth quarter than what we have but I think we feel confident that enough that we were able to raise the forecast offset volume decline that we.
Having the business Yeah, Neil just this is Ted on the.
Is Jim's point I'll tag team on the under promise over deliver and also to touch on the cultural piece there.
Me being the optimist, you're seeing right.
Really some good things that happening we had the whole management team in Europe , and looking at the change in listening and watching and walking the shop floor seem to this reinvent.
Being lectured by where the opportunities are seeing the plants work together. So the productivity I think we've just words were on a journey and I think many many more good things to calm the tough market is out there. We just have to fight through and go faster, but I think theres more opportunity come that.
May not be sitting in our numbers in the fourth quarter and beyond but.
I'm pretty positive we got a lot of legs here.
Operator next question please.
Anthony Pettinari with Citi. Your line is open.
Hi, This is actually Brian Bird my are sitting in for Anthony you guys include the post consumer and bio based wasn't products in the value added portion of product care and can you provide some color on the grocery understandable products in Threeq you or your today.
Yeah, I think if I understand your question, yes, if it's the post the recycled content and post consumer is in the product care numbers I'm not sure if I understand if he had more detail on them.
What was the second part of his question broke out the growth rate of the sustainable products that you highlighted throughout the year in your slides. If you can just about any color on how those products are solid year to date.
Yeah. The years the year to date for that value added segment of business is up high single digits year on year in the third quarter, we talked about being up about 6%. So it's down from what the year to date, if we saw that will be filtration.
In that segment of the business in the third quarter, but overall year to date, you know I would say high single digits.
And again, you know piece of this business I mean is and whether that cycle.
Certainly this business part of the business either even though were its value added is being impacted by you know very difficult.
Global manufacturing environment.
Yeah, Hi.
We had a follow up question huh.
I'm sorry.
Okay right.
Operator lets go next question, Brian If you have a follow up you come back again.
Our next question comes from Rosemarie Morbelli with GE Research. Your line is open [laughter]. Thank you good morning, everyone.
I was wondering she meet you could talk about the free cash flow expectations.
2020, if I look at the 115 million of restructuring plus the nobody pack settlement of 59 million.
These here should we anticipate free cash flow just those two eye to eye tends to increase by 174 million next year or are they asked some residuals.
Well, that's a that's a loaded question because Ah you know what are the key drivers are free cash flow is a adjusted EBITDA and we've been able to demonstrate we can grow adjusted EBITDA, even in a flat organic environment. So our hope would be even leading into 20 with the trajectory coming out of the back half of nine.
18 that we're going to have some even though the improvements so I think that will be a positive.
Cash flow year over year.
You're right about the Nova packs that won't repeat let's call that 60 million in total.
That's not side or reinvent, which is driving a substantial benefits for the company. We're saying the investment was 115 million. This year that will repeat not at that level next year, but you know think about that being 100 million there.
Remember this program on a cash basis cash on cash was about a three year payback.
So we said when we launch this program that we expected 250 million of benefits over three years with about the equivalent amount little less maybe on the cash side. So.
We'll have some more cash outflow next year on reinvest, but hopefully will likely to this year, we're positioned well to the over deliver on the total benefits for the program.
And and then Capex you know Capex, we did bump a bit for if yes, I think think about about 4% of sales.
For Capex is a good number and it gives us.
So some good projects to continue to drive the inflation fighting.
Activity that we're going to see here I mean, you're out of business.
Thank you Rosemary operator next question please.
Adam Josephson Joseph Sun with Keybanc capital markets. Your line is open.
Thanks, Good morning, everyone.
Yeah, Jim one more cash flow question, if I go through the the bridge. The all the items you laid out I think the implied working capital drag for this year is about 70 million correct me if I'm wrong, there have been perhaps or something else in that 70 million. Besides the working capital can you talk about what that missing piece is this how many million and if it's.
All working capital what exactly is going on there and to the extent you're expecting a working capital drag. This year do you expect another one next year do you expect the working capital that to flat line next year.
Yeah, I think the if you look at the underlying metrics with working capital and the key.
Working capital items, as you know or a our if you look at the D. So of the business as we sit here at the end of the third quarter.
You know were like a call it just over 38 days.
And last year, we were at 39, so we're actually seeing some year over year improvement in that metric, excluding a P.S.A.P. US you know as a business probably has about a day higher dsos. So that they P.S. inclusion for the full year, we'll put a little bit.
Have a challenge into the metric, but overall, that's looking really good and so I would expect you know that to be moving with that kind of Ah.
You know a 30 high thirtys of D.S., so and that will that will change was sales.
A p. probably is where we see the youth the biggest year over year changed from a cash perspective. The company accomplished a lot of really good things in terms of terms extension in 2018 that didn't repeat.
In 2019, so if you kind of look at the cash flows from that and 18 versus 19 would they be it's.
It's it's a <unk> the cash outflows are up.
If you look at the underlying metric with a Pete let's call. It 87 days.
A year ago, and we're sitting at about 79 days. So we've lost a little bit on the DPL metric and I would say some of that is related to trade off that we're making in terms of.
As we deal with our suppliers, we talked a lot of but lot of benefits coming from <unk> things with procurements and that sort of thing so theres a little bit of a trade off we're making on D. PEO.
To drive some of that supplier related benefits that were seen in the business I mean, what if you look at the absolute level of the DPL at 79 days as we sit here today, that's that's a pretty good.
Number that you know we can stack up against most most companies and say that you know that's that's a good accomplishment and then finally inventory you know we're up about a day year on year. So were about 67 days as we sit here today.
Certainly some of the volume declines that we've experienced on the topline were adjusting the manufacturing to be in line with that and to drive structural inventory reduction, we're falling a little bit behind there, but we've got a lot of people that are focused on improving as we go forward and then really with some of this capex that we're going to.
Unleash on the business you know the incremental capex above the maintenance level I think over time will drive really good improvements in the process flow within manufacturing that structurally take out inventory, but that will take us the time I think.
As we think about next year, hopefully, that's an opportunity with what where we're at this year, but hopefully I can see a good thats. The number you quoted is directionally correct in terms of the the outflow associated with our working capital it maybe a little bit higher than that but you're in the ballpark.
Operator next question please.
Mark Wilde with bank of Montreal Your line is open.
Hi, Good morning, Ted Good morning, Jim.
<unk>.
So I wonder.
Feel there's has a lot of restructuring programs over the years and we're working on you know some some pretty healthy numbers here with reinvent see I wondered if you could help us from just a big picture standpoint, how much of that you think you can really hold onto and how much of that cost take out. It's just the price of kind of staying in the game every.
A year of kind of running even with your competition, who is also working on reducing costs.
Yes. Good question Mark. It's we're looking part of this reinvent T. I get asked a question even internally when is it over.
I believe this is an ongoing journey. So we're looking very carefully for structural change you know saving use those words were looking for structural change at the business. Some of our investments will come back but to the strategy that we're working on is how do we drive it.
Productivity engine.
That is sustainable year over year were benchmarking, all or processes and you know we're looking at our cost structure on in the marketplace is expecting that we have a productivity improvement year over year is I think I shared and when the previous calls we looked over the last five years and we saw.
The cost go up over five years and year over year in how do we pulled build a structure that we're continuously bringing productivity.
Also productivity into the organizational structure. So we're changing the structure, we're looking at the layers and looking how we're a fix a affected inefficient so that cost doesn't come back where the cost is coming back as Jimmy than highlighted on the Capex is where we're investing into automation where were they.
Testing into new tools investing into digital investing into E. Commerce. So that we can compete in this marketplace more effectively and efficiently. So we're not considered a serial restructurers say it that's what people are saying no. This is a fundamental transformation.
Changing of the business for how we do business in the future. It's on a journey, we're making good progress we got more to come more to come even after 20 2021 2022, and that's the culture change that that we're driving [noise].
If I could just just to add onto that a bit.
In the new got kind of looking at the swing when I came in you know I heard an awful lot about reinvent see all the way down the organization.
And certainly you know people understand this program, but I would say that tucked into reinvent C are the normal productivity type of continuous improvement actions that any company would take to fight inflation and our inflation will run about 50 million.
Collars a year. So 50 of that 150, the Ted talked about is really inflation fighting continuous improvement I wouldn't I wouldn't classify the structural but a lot of that the other stuff yes.
So that just would be a little bit more perspective, maybe as a new person coming in that could be helpful. Thanks.
Operator next question please.
Yes, Salvatore Tiano with vertical research your line is open.
Hi, Good morning said and Jim.
So I wanted to clarify a little bit about how you see product care developing the next few years and firstly, if you can play a little bit when do you provided the breakdown between the three back if I guess utilities industrial Linda value add you mentioned, it's roughly one third each piece of pro forma for eight bps or is it with a two month contribution and how do.
Do you see these developing the next couple of years given more secular headwinds in some parts of the business on the secular tailwinds to find out segment and as unless one can you, let us know a little bit about kind of the margin differential between the three buckets. There. So we got a little bit understand how margin should progress all else being equal.
As a segment the transforms.
Well, let me take a few pieces of that.
Question on the island said take the rough.
I'll start with the last question because I remember its margin differential so the highest margin business would be the specialty instapak integrating phone piece of it and evaluate category and those are very nice margins lower would be the I'll, what we call the traditional packaging.
Systems.
And that's where we're seeing probably the most structural loss in the business I mean that business is being impacted by the manufacturing.
Environment that we're in but what probably some of it is shifting into the value added component, where we're seeing that nice growth.
The first part of your question was that as I broke that segment down in the results for the quarter I was using only or organic volumes. So 80 US was not included in the growth rates that I quoted there however, what I split the business between for third and a third.
Our simply I did pro forma yes, and apss will be in that value added part because really it's driving the automation and the sustainability as they call me company six in this area that might want to comment on the how this is going to develop a going forward right itself I follow.
Beginning part of the question if we look at the portfolio.
If we look at again, what is our automated equipment and let's just explain that that's where we're loading a package whether its loading a bag.
That's where we see the portfolio actually doing quite well that business is growing double digit, but it's a slow it's a small percentage what we'd like about that business and on driving the strategy, that's where the stickiness is putting those assets in helping our customers tried the automation.
Hey, P.S. does actually a much higher rate of that then our current product care portfolio.
Dan its matching the materials to that so higher speed.
Higher packaging no again looking at a P.S. they had a different materials structures they have a high.
Recycled content et cetera, so, but also looking at the whole company. We can help a P.S. with some of our operational improvements and we've had already had or operations teams working together and seeing some of those efficiencies. We drive this portfolio to have the automate equipment, we really like that.
But then also would have that materials that are dedicated that equipment.
So we see some opportunities so the portfolio is shifting.
And where we don't have the right margins and we've talked about mailers before mailers is a business that has been on the decline force, but as I shared with in Europe , as we reinvent that naylor with the sustainable product, we brought our operations teams and to get the price right and that's why.
We're carefully using that strategy best product right price and make it sustainable we seen them pretty quickly stop that drop in a tough market in Europe , and we think we can do more of that on the mailer side in the U.S. market in the Asia Pacific market. So we're.
Tacking the portfolio Ats is I think can help us go faster and Oh, we so we think we can grow it didn't grow it profitably and that's we're working on its going to take some time right now we're doing it without market help but actually that's helping US go faster. So we feel good about that.
Operator next question please.
We have a question from gave.
Hi, today with Wells Fargo Securities. Your line is open.
And Jim Mora, Good morning type Ted if I go to slide nine.
And I look at the.
EBIT the bridge, specifically operating costs with a little aspects.
It does that imply that it there's $81 million of incremental operating cost because you've saved 52 plus 29.
Is that I guess help me because at the right way to think about it and if it is it sort of implies $100 million non material related inflation within the business versus what.
I used to think was around 30 to 35, so and I guess, maybe compare contrast that with the comments you made about making incremental investments in commercial and technical support.
Yes, let me let me jump in there this is Jim and.
Matthew did there is absolutely spot on so let's focus on that.
$80 million, if you'd gross up the operating cost bucket on the year to date British company, you get there an $80 million number.
We talked about inflation being 50 million for the year through nine months think about and number being about 37 million.
We also have let's call it about 8 million.
Increase associated with volume variance as we work to.
Bring our inventories down and more in line with the end market demand, we are seeing some uncovered fixed cost that.
You know that are that are flowing through that bucket.
We talk about in some compensation the company is driving very strong margin.
Then leverage metrics, which are key components of the variable compensation plan for the company and that is driving some year over year increases in that.
With which you know again are variable they come in this year and then we reset for next year.
And then probably the as well as the last big buckets. There is what I'll call investments you don't think about 15 million.
On a year to date basis, and maybe twentyish million per year and these are selected investments the company's making to try to drive.
ROI see for the future. So these are longer term investments are flowing through the you know where we hope to get good returns are always see goal is 15% or above and so this is the pocket of money that we're selectively used as a driver that and so I said 15 million in your today, a big chunk of that to hit on earlier.
This digital in E. Commerce, so we're wanting to put that capability and more broadly than the company than we have today.
And then we have some other investments are going on there, but so your numbers are right and this gets back to what I said to the prior question, which is when that is the ban or we use for all of our improvement structural and inflation fighting.
And that 50 million of inflation for the year, we've got to get that you're in and your route.
At least until we you know maybe Randall bigger forever, but we kind of feed it up as a three year type of thing well folded in there, but beyond that we're going to have things are going to drive that productivity improvement to at least offset inflation and hopefully more.
Operator, we have time for one more question. Please.
Daniel Rizzo with Jefferies. Your line is open.
Hi.
You mentioned that both poultry in beef demand was fairly strong quarter I was wondering how the trade wars affecting that how you see playing out going forward.
Yeah, the what's interesting that the biggest concern I think we shared with you last quarter was what was going on with pork. So if we look at our protein market the pork actually issue in the quarter.
We said for the year with might be a 3 million dollar headwind actually we're fighting through that its a huge issue in China right now.
We were in Brazil, and we're in Europe , and we're seeing what's happening in the market. So we don't think we think we can fight through that headwind and actually maintain the the growth in the protein market, specifically cover that that will be covering China through Latin American Brazil.
Mainly in the U.S., we've also seen some benefits because the customers working with us to aggressively how can we shipped pork quicker from the U.S. and from Brazil. The good news it's there.
It was going frozen but for them to go quick were frozen, we don't really ness always get that bags, but since they want to go quick and they want to have high level of protection.
That looks like that's an upside opportunity for us going forward.
We also think in.
Which meant we also think on.
The beside we do have challenges coming in a with Australia right now.
With the droughts in the heard that be an issue.
But the U.S. right now so far is is looking the will maintain it and plus we're developing new products going beyond the beef the poultry the cheese markets with our liquid so we think on the food care side.
We have opportunities going into the ended the year into next year the fight.
You opened to comment with what's going on with the trade wars et cetera.
So those are challenges ahead, but we think those will actually turn opportunities for us in the long term and a long term isn't the next six months.
Thank you and thank everyone for joining our call today operator.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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