Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for stealing bundling and welcome to the first quarter 2020 sealed Air earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation there will be.
A question and answer session to ask a question. During this session you'll need to press star one on your telephone as a reminder, today's program may be recorded and now I'd like to introduce your host for todays program like Kevin Vice President of Investor Relations. Please go ahead.
Thank you and good morning, everyone I Hope you and your family are healthy and saying thank.
Before we begin our call today I'd like to note that we have provided a slide presentation to help guide our discussion.
This presentation can be found on today's webcast can be downloaded from our IR website at steal their dotcom.
I'd like to remind you that statements made during this call, stating Andrew 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 report on form 8-K, which you can also buying on our web site at sealed air dotcom or on the FCC website at Sep back up.
We also discuss financial measures that do not conform to U.S. gap you will find important information on our use of these measures and a 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 that correspond to some of the non U.S. GAAP measures you reference throughout the presentation with that I'll turn the call over to Ted Divini, our president and CEO Ken.
Thank you Laurie.
And thank all of you for joining our first quarter 2020 earnings call.
I want to begin by saying that I hope you and your families for spring healthy and say during these unprecedented times.
I believe how we overcome adversity defines us and.
Like challenges, we face before we will manage through this pandemic learn from the experience and come out of this stronger on the other side and even more resilient.
Many of our customers are responsible for supplying food consumer staples medical equipment supplies pharmaceuticals, and other necessary gets most governments and authorities had designated these industries, including our global packaging operations is critical.
And essential.
I want to see a special thank you to our dedicated people working hard in our operations and those working remotely.
I also want to thank those in our supplier in customer organizations, It's a testament to our business and our relationships that we are at the table with our customers and suppliers to ensure goods are delivered in a timely and safe manner to consumers around the world.
On today's call I'll recap, our first quarter results and our experiences sense the outbreak.
I will share how we're navigating this crisis and leveraging our four piece of reinvent C.
Discuss how we see our company and markets emerging and how will lead in this new normal.
Jimmy We review our financial results in more detail.
We'll end the call with Q1 day.
We invited Carl dialing our chief commercial officer to join Us during the Q anyway.
Let's turn to slide three for recap of our first quarter.
We delivered 6% net sales growth, 17% adjusted EBITDA growth in 24% adjusted EPS growth.
Adjusted EBITDA margins expanded 220 basis points to 21.6%.
Our first quarter results reflected critical nature of our product portfolio and the agility of our people to respond to this unprecedented environment.
Our results also reflect the continued execution of our strategy and demonstrate how reinvent see it's improving operating leverage on higher sales.
We're suspending our full year 2020 guidance due to the demand swings and the uncertainty on how long the current situation will last.
Again, we are at the table with our customers and suppliers managing the demand volatility, which is changing daily to ensure our supply is uninterrupted.
I'm confident we'll continue to execute at a high level, regardless of the market volatility.
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On slide four our purpose statement to solve critical packaging challenges into leave our world better than we found it.
Is driving us now more than ever during the crisis.
We introduced our four piece of reinvent see performance people products processes and sustainability over a year ago and have been using them as a guide to ensure employee safety business continuity and make our business stronger.
I am impressed power teams around the world have taken our performance to the next level.
Our people have done a tremendous job responding to customers and our communities to deliver the best service possible.
By operating as one sealed air culture, we're maximizing productivity across our business segments regions and function.
Enabling fast coordinated decision making.
Our product strategy is resonating with our customers in this time of crisis.
Delivering the best products at the right price in making them sustainable.
Practicing social distancing and implementing automation to do more with less by investing in working smarter has become even more important to both our operations and our customers.
We're accelerating our innovations to support a more touchless digital world.
Our one sealed air operational excellence process starts with zero harm.
Are creating new ways to keep people out of harm's way and our own facilities and for our customers we are driving value.
By eliminating waste simplifying and then automated.
Sustainability is still top of mind and everything we do.
Our core competencies in food safety automation and protecting goods with innovative sustainable solutions will be even more critical and a key driver to our profitable growth.
Let me now turn to slide five give you more details about the actions we've taken.
We expect our transformation to accelerate into the recovery.
And how we're leading to a new normal.
To protect our employees, we've enhanced cleaning procedures at all sites.
We're performing employee temperature checks upon entrance and requiring personal protective equipment for location dependent essential workers.
Weve implemented social distancing measures within these operating sites and our non location dependent employees continue to work remotely.
We have implemented visitor access restrictions and suspended non essential travel.
We're also finding new virtual ways to stay connected to each other and our customers.
We have created flexibility with our teams in our supply chain and product portfolio to support rapidly changing circumstances in our end markets.
I joined numerous calls with our crisis management teams regional sales customers suppliers and industry leaders.
Our service levels have remained strong our teams are well organized and we have adapted quickly despite the difficult environment.
As the global economy slowly reopened the actions, we're taking today will accelerate our transformation into the recovery phase.
We have prioritized, our innovation pipeline, while strengthening our partnerships with customers and suppliers.
On this slide we're showing a few examples of our product offerings that we have quickly adapted to support customer demand swings.
We will be stronger post crisis, we are adopting more flexible workplace practices. We are taking advantage of our digital tools to stay connected with our colleagues supply chain partners and customers.
We remain committed to our 2025 sustainability pledge and are on track, achieving 100% recyclable already usable materials with 50% average recycled content.
Let's now turn to slide six which summarizes the early impact on cobot 19, and our one sealed air end markets.
Approximately 65% of our sales are derived from packaging fresh and frozen proteins as well as other food fluids and goods for the medical and life Sciences industries.
In March coinciding with the implementation of stay at home or Lockdown orders, the food industry experienced a dramatic shift to retail.
And a dramatic slowdown in foodservice.
For sealed air the shift, resulting in a surge in demand for our retailed applications, including case ready shrink bags and prepackaged meals and snacks designed for home consumption.
In mid April throughout North America, some of our food customers face Koeppen, 19 outbreaks and their meat processing plant and have been forced to temporarily shut down production.
We've not seen any significant closures outside of North America and demand for retail protein packaging has remained strong on a global basis.
The situation in North America is very fluid and we're working closely with our customers to support their needs.
Within our medical and life Sciences portfolio, which is approximately 4% of our net sales were seeing new business and our protective packaging solutions for medical supplies pharmaceuticals, and personal protective equipment, such as monitoring systems ventilators mask encoded 19.
Test kits.
The remaining 35% of our sales serve consumer and industrial segments.
Many of these end markets, including general manufacturing transportation and non essential goods are suffering from government in four shutdowns and a significant reduction in discretionary spending.
Partially offsetting these declines or increases in demand for goods that support to stay at home environment and our ships through E commerce as retail channels have rapidly shifted away from brick and mortar stores.
Across our global business, we estimate that approximately 75% of our end markets are experiencing increased demand for food medical supplies in consumer staples.
The remaining 25% are facing slowdowns or have been forced to temporarily suspend production.
Recognizing where immersed in an extremely unpredictable environment, our experiences with tell us that we will return to a more balanced supply and demand in due time.
Longer term, we expect the learnings from the pandemic will drive secular global demand increases for automation and packaged proteins.
Producers will invest in more automation for efficiency and safety and consumers around the world will demand packaging formats that maximize food safety minimize food waste and our sustainable.
For now our top priorities are the safety of our people managing the business continuity for our customers and making our business stronger for the future.
I'll now pass the call the gym to review our results in more detail Jim.
Thank you Ted.
Let's turn to slide seven for review of our net sales by region.
In the first quarter sales were 1.2 billion, an increase of 6% as reported and 8% in constant dollars.
In constant dollars North America, our largest region, representing 61% of the company sales grew 10% year over year.
And he was up 7% in Asia Pacific was down 1%.
South America, where we have US dollar index pricing was up 24% of which 7% was volume growth.
Turning to slide eight here, we highlight our organic sales volume and pricing trends by segment in region.
In the first quarter volume, excluding acquisitions rebounded to 2% growth driven by 5% growth in food care.
Partially offset by a 2% decline in product care.
Due to increased demand in protein packaging for retail markets.
Food care experienced volume growth across all regions, except for Asia Pacific.
Which declined 3% in the quarter largely due to depressed dairy market conditions and heard rebuilding in Australia and New Zealand.
Product care volumes declined across all regions. However, the business performed better than we anticipated that declines and industrial markets were partially offset by an increase in ecommerce demand for consumer staples and medical supplies.
Overall volume growth in the quarter was partially offset by a decline in net selling prices.
Lower resin based formula pricing, mostly in North America food care, what's the primary contributor of the price decline.
Partially offset by US dollar index pricing.
Mainly in South America.
On slide nine we present, our year over year consolidated sales and adjusted EBITDA Bridge as for the first quarter.
Organic sales in the quarter were up 1.5%.
Acquisitions contributed 75 million of which 69 million was from automated packaging systems.
Currency translation negatively impacted sales in the quarter by 30 million or about 3%, mostly due to year over year declines and the Argentinian peso Brazilian real the euro and the Australian dollar.
Based on where exchange rates are today, the negative translation impact on sales for the year versus 2019 would be approximately 140 million.
Adjusted EBITDA of 253 million increased 37 million or 17% compared to last year with marching up 220 basis points to 21.6%.
Reinvent see benefits totaled 30 million in the quarter.
25 million in operating costs inclusive of 14 million of restructuring savings and 5 million in price cost spread.
Adjusted EBITDA also benefited from higher volumes and contribution from automated packaging systems.
Currency translation was 7 million unfavorable to adjusted EBITDA in the first quarter.
Operating cost in the quarter included over 2 million of incremental spending related to co bid 19, but these expenses were partially offset by lower employee travel activity.
Adjusted EPS in the first quarter was 73 cents compared to 59 cents in the first quarter of 2019, primarily due to higher adjusted EBITDA.
Partially offset by increased depreciation and amortization expense.
About two thirds of the DNA increase was from the automated packaging systems acquisition.
The adjusted tax rate in the first quarter was 27.9% as compared to 29.5% last year.
Turning to slide 10.
Here, we provide an update on our re event see transformation, which continues to progress in earnest in is driving significant structural operating leverage in the business as evidenced by the greater than 60% profit to growth ratio in the quarter.
We have added a new work stream to reinvent see in our commercial organization to accelerate innovation and growth in core in adjacent markets.
The new capabilities and processes that underlie the success of reinvent on our cost structure will help us reinvigorate and drive targeted topline growth in the business.
In 2020, we're on track to realise 110 billion of incremental benefits to adjusted EBITDA compared to last year.
Of which roughly half is related to actions taken in 2019 and the other half is coming from new actions.
We are prudently accelerating 2020, reinvent actions where possible.
And have been successful to date, given our operations have been largely intact.
Despite challenges with the virus.
Cash restructuring payments associated with reinvent see were $26 million in the first quarter.
We continue to estimate approximately 100 million and cash payments for the year.
Turning to segment results on slide 11.
Starting with food care.
In the first quarter food care net sales of 690 million were up 10 million or 2%.
In constant dollars sales were up $35 million or 5%, primarily driven by higher volumes.
Adjusted EBITDA and food care increased 13 million or 9% to 156 million with margin improving 160 basis points to 22.6%.
This performance was primarily driven by higher volumes and reinvent see actions.
Our food care business benefited from the shift in retail demand for cryo back packaged proteins.
Shrink bags roll stock in case ready applications, which account for more than 80% of food care sales were up 4% to 5% in the first quarter.
Sales in fluids, which accounted for 6% of food care in the first quarter were essentially flat compared to last year.
Over the next few quarters, our fluids portfolio, which consist of innovative vertical pouch packaging for condiments, soups and sauces will be negatively impacted by the slowdown in the food service industry.
Equipment sales, which also accounted for 6% of food care increased mid teens percent in the first quarter. However, since mid March plants around the world have instituted visitor restriction policies, which has led to a shutdown of of this delay.
Patients.
Well some of our North American food customer.
Temporarily suspending production our orders have moderated since peak levels in March.
Our customers are doing everything they can to reopen their facilities as soon as possible and we are there to support though.
On slide 12, we highlight results from our product care segment.
In the first quarter product care net sales of 484 million were up 51 million or 12% as reported.
Organic sales were down 3%.
Adjusted EBITDA of 93 million increased 18 million or 24%, including a 13 million contribution from automated packaging systems.
Product care as adjusted EBITDA margin of 19.2% expanded 190 basis points year over year.
Reinvest seat benefits and lower input costs more than offset the negative impact from the organic sales decline.
Product years value added solutions portfolio, which represents about a third of the segment sales and has the most exposure to E commerce distribution, the central and not essential consumer goods delivered 10% organic volume growth in the quarter.
The performance across value added solutions was largely driven by increased demands on E. Commerce fulfillment centers to automate packaging processes increased the speed to pack and optimize the cube size for efficient shipping.
These solutions are designed to handle the high level of cushioning required to ship critical goods.
As a reminder, automated packaging systems is included in value added solutions, along with bubble wrap on demand.
Eight per systems core view temperature controlled packaging.
And automated equipment, such as our AIPAC and self reps systems.
The remaining two thirds of product care consist of industrial applications and traditional packaging.
In the first quarter volume declined 7% in industrial and 3% and traditional.
We expect industrial applications to be hit the hardest through the endemic.
Demand trends in North America in January and February began to stabilize however March sales dropped in the high single digit percent area as many of our customers and distributors were forced to temporarily shut down.
Traditional packaging performed better than we anticipated in the first quarter.
We experienced low single digit growth in Mailer volume as a result of the surge in ecommerce distribution.
But this was more than offset by declines and traditional bubble rap.
Phil applications and shrink though.
Based on what we experienced in April and given the level of exposure, we have to industrials, we think product care volume in total could declined 15% to 20% in the second quarter with improvement in the second half of the year as the economy Reopens industrial manufacturing reserve.
And we continue to help our customers automate their packaging processes.
Now, let's turn to free cash flow on slide 13.
First quarter cash generation is typically lower as a result of seasonality of sales and working capital and timing of certain annual payments in particular incentive compensation and customer volume rebates.
Despite higher adjusted EBITDA in the first quarter of 2020 free cash flow declined 24 million year over year, primarily due to higher incentive compensation payments based on improved 2019 performance.
And a higher quarter end accounts receivable balance from significantly increase sales in the back half of March related to cope with 19 demand across many of our end markets.
We expect trade working capital overall to be a source of cash in the back half of the year.
From normal seasonality and proactive management of underlying working capital metrics.
Additionally, we are reducing our capex target for the year from 200 million to 175 million in light of current economic conditions.
This level of spending will bolster near term cash generation, but will also allow key strategic growth investments to advance without delay.
Overall, we remain confident in our ability to generate free cash flow in these on certain times.
And plan on maintaining our dividend at current levels.
As initially disclosed in the third quarter of 2019 diverse say submitted a claim that sealed air owed it approximately 50 million pursuant to a clawback agreement that we entered into a connection with sealed air sale of the diversified business in 2007.
Team.
Under this Clawback agreement sealed air was contingently obligated to return to diverse say a portion of the purchase price. We received in the sale if diversity failed to achieve specified financial metrics. Following a successful renewal of certain commercial contract.
Post closing.
As noted in our form 10-Q filed this morning.
We have resolve this matter with diverse today and will not be required to make any payment under the clawback agreement.
Accordingly, we have recorded an eight cents per share gain in the quarter from discontinued operations.
Slide 14 highlights our leverage liquidity and debt maturity profile.
We ended the quarter with pro forma net debt to trailing 12 month adjusted EBITDA of 3.5.
Which is down from 3.6 at the end of 2019.
We will continue to take a disciplined approach to capital allocation to maintain a healthy balance sheet.
And based on what we now see expect further leverage reduction by the end of the year.
As of the end of March we had over 1.2 billion of liquidity from a combination of cash on hand, and undrawn committed revolving credit facilities.
We have a leverage covenant in our credit facility with a maximum ratio a five through the third quarter of 2020, reducing back to 4.5 at the end of 2020.
The increase in the Covenant maximum two five was triggered in the fourth quarter of 2019 with the automated packaging systems acquisition.
The covenant calculation as of the first quarter is estimated to be 3.2, which is lower than our reported pro forma net debt to adjusted EBITDA ratio due to certain allowed EBITDA adjustments in the credit agreement.
So we have significant cushion with our financial covenant and do not expect any issues accessing the liquidity under the credit facility.
Additionally, we do not have any debt maturities until August 2022, which gives us good financial flexibility to operate and support the business.
Ill now turn the call back over to Ted.
Thanks, Jim.
We are confident that our ability to maximize food safety minimize food waste and protect goods that are shipped around the world will continue to create significant value for our customers.
Our capabilities in automation and digital technologies will emerge as a differentiator and enable us to become an even more critical partner to our customers than we already are today.
Im confident that are for PS at reinvent C and our strategy to deliver the best product at the right price and make them sustainable will deliver exceptional long term results.
Before we open up the call to questions I want to thank our employees for their dedication and commitment to business continuity their efforts have been remarkable and it could not be more proud to lead sealed air during this unprecedented and unforgettable period in our history.
Together, we will emerge from this crisis, a better stronger company.
With that I'll now open up the call for questions.
Jonathan we'd like to begin to queuing day.
So new babies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the Q. Please press the pound key we ask that you. Please limit yourself to one question. Each you may get back into queue. As time allows our first question comes the line of George Staphos from Bank of America.
Your question please.
Hi, everyone. Good morning.
Thanks for the details of the thanks, Ladies gentlemen, uncoated my question is around volume and its relation to reinvent.
And and you know kind of a two part so.
Ted can you go through a bit more detail in terms of how you are seeing the product care of.
Gross dropped to a 15% to 20% decline given the still it sounded like very good benefit you're getting from E commerce, which would be a partial offset and related how volume dependent reinvent savings or I would expect at some point those numbers, maybe get hard to hit.
Keep seems kind of revenue or volume drop, but please add color where you would thank you.
Okay. Thanks George.
Actually would probably be helpful. George if I'd point to your question. If we look at slide six and then slide five what we're trying to answer that question and if we break up reinvent C.
So if you look at the volume is focusing on product care, where is in Jim had in prepared remarks, we're looking in the quarter. We think we could have a 15% to 20% reduction.
If you look at those three sectors. If you look at what's happening on the food side industrial side, and then E commerce.
In the quarter. This is Q1, but if we look at Q2, we are seeing as you highlighted the E commerce business pick up significantly we saw some gain with their mailer business, we definitely saw some gain with Ats with our automated systems.
The other side also in the protective side some of the protective is in that food medical and life Sciences. If you look at slide five you'll see something quite interesting in the crisis going through Q1 now going into Q2, we are actually doing some of the packaging bolt on the mass is.
Everybody's reading the economy is going to need 300 million mask just in the U.S. alone.
We're into that we're bringing actually our EPS, our auto bag systems connected to that and also you see the another example, there and our product care with our core view package for ventilators. So that's going to flow through from Q1 to Q2.
Now to the downside of that 15% to 20%.
What really is hit is the industrial piece and if we look at our product care. That's in that Instapak, where the industrial economy has been shut down and we're feeling that and that's in that 22% of the slide. So we that will recover we just don't know when.
Is the businesses come back, but we think the portfolio. What we were impressed with the quarter is how quickly we're moving our portfolio in this crisis to those growth areas and being prepared when that industrial economy comes back.
Thank you our next question.
Thank you. Our next question comes on line of Ducham Punjabi from Baird. Your question. Please [noise].
Hey, guys. Good morning, hope everybody is doing well.
Yes, Hi, Ghansham.
Good morning, I guess as a follow up to George's question, but you know just gives a sense as to April volumes specific to that 70, 525 splitter, you called out in the bottom flights.
And then a question on North American food, specifically I mean, obviously, there's a lot going on with Dupont shutdown, calling of animals in some cases.
Then you have a big shift towards retail versus foodservice and I think Tyson yesterday mentioned no call it a 40% increase than retail.
Some cases, how do you think all these dynamics that though for North American food. Both in Twoq, you and then also as the year unfolds.
Okay.
[noise] Ghansham on X should we have Carl here, So I'll, let Karl take a piece of it but if we if we look at the volumes just what's flowing in through the second quarter on the food side, we're definitely seeing going into April this rapid spike that we saw in the first quarter, we're definitely seeing a.
Overall, we're seeing that tempered so we're seeing that business slightly down, but then to your specific question of what's going on with the food industry. We got Carl here and if Carl if you want to tackle that one absolutely. Thank you and gone from I think.
If you reference back to slide six and a b net positive, especially in the proteins. We saw a definite global trend of a sequential improvement in our business with the transition from food service to a retail again around the globe and.
Thats held up very well even in Europe as recently as last week retail sales were still up in the mid teens, a year over year, which was accretive to our business what changed and if you listen to Tysons call yesterday, It's obviously highlighted there was the.
Significant disruption in the North American food market and that has been obviously going away on the industry going in to the second quarter. It was also a significant uptick in the first quarter as that shift occurred it was.
Very favorable impact to us not only just on the increase of production, but our ability to be nimble and a very.
Fluid and how our customers pivoted from one market to the other we were able to accommodate.
Areas, where other competitors may have not been able to supply.
We were also able to provide products and.
Increased level of volumes, you mentioned, 40%, we actually had some products that were up over 90% and we were able to respond due to our global network and our breadth to portfolio. So we provided that opportunity I think we had extremely good customer intimacy daily costs.
First stations to drive.
What was obviously very unchartered waters, just as that was extremely favorable there in the down cycle with you know the employee situation there working through but again were connected at the hip and we're working through the significant swings in volume and and and.
Also the conversation is definitely change to what's life going to look like post covidien like team and we're working very closely with them on automated solutions, how can we drive additional versatility and.
Flexibility into their operations and a less labor intense manner. So you know obviously very good of first quarter second quarter less heart less easy to predict but we believe the future will be a net positive good and ghansham to the.
Last part of your question referencing the Tyson call. It we can point to slide five where we look at our portfolio is it's Karl describe what we're doing through the crisis and accelerating they did talk about automation and they were followed up on the automation question and we've talked to you about what that means.
This is a part though in our numbers the equipment business.
Yes, it's tough to get the equipment installed because of the situation with the crisis, but this is where the conversation is moving into the automation. We have two of our pictures there showing that if you look at on television you see these plants, where these people are so close to each other what our automation.
As allowing we're working with these customers how do we automatically pack in the bags and keep people out of Harm's way. The other thing they mentioned on their call is the automation being able to look at the foreign optioned object detection, we have the ability and we're working with the customers to actually see inside.
To help identify is it a bone in the bag is it the marveling and learning with our equipment. So we have some significant opportunities post crisis to help on the automation and make the business better together and we're at the table and that's an exciting part of the future.
Okay. Operator next question.
Certainly our next question comes from the line of Anthony Pettinari from Citi. Your question. Please.
Hi, This is actually Brian burglars sitting in for Anthony.
Just in terms of the volume declines in product care into Q, how should we think about decremental margins just given the restructuring you've been doing and the ongoing changes to mix.
Okay I'll take a shot at that maybe tag team that with GM. If we look at the Decrementals that we look at the business as we've been talking to you on Incrementals that we're designing to this 40% upside when we have a downside we're thinking right now it should probably be.
Detrimental in that 40% everything being the same.
Right now the with the shift in portfolio, we're not seeing that even as you saw with we have so many cost actions going in place.
Right now I don't know if you want to give more detail on that Jim but.
Designing decremental, we would think 40% we're actually beating that in the first quarter I think we should because of reinvent in some of the cost actions that we have working.
We should be able to beat that detrimental, but that's what the design would say with losing the volume you should lose 40% on the downside yeah that 40% would be kind of the direct margin loss that you would have but of course, we're going to review the responding to that volume decline with cost reductions that are.
Above and beyond the reinvent structural program that we have going on.
So I do agree to the decremental will be below that 40% level.
I feel like we're going to do what we need to do to respond to these volumes and the organization is very agile that way and I think our first quarter results reflect that on the upside I think we'll see a little bit of the challenge and.
Product care in the second quarter on the downside I think we're prepared to respond to that in the right way.
If I could come back while we're talking about this because georgia to asked about reinvent.
And how we see reinvent progressing across the year as we indicated we are confident in our ability to drive the 110 million.
Brian bent benefits incrementally in 20 versus 19, we got 30 in the first quarter.
Probably a level comparable to that in the second quarter.
And.
As I said, we're doing what we can to prudently accelerate.
Keep in mind that 50% of that benefit is coming from actions. We took in 19. So those are fully done and the remainder is coming from 2020 actions and it is somewhat dependent on the volume profile in our factories.
To George's comment we have been fortunate that we have been running our facilities fairly well through the situation. We've had some shutdowns, but got back pretty quickly. So I think even with the decline that we see in product care in the second quarter I do think that we'll be able to continue to drive forward.
With the structural improvement in the business.
Thanks, Jim Jonathan next question. Please.
Certainly our next question comes from line of Neel Kumar from Morgan Stanley. Your question. Please.
Great. Thanks for taking my question.
In terms of comparing North American protein production to your food care volumes.
Great quarterly correlation historically I know, we don't believe it plays a role but is there any type of a lag or any other please keep in mind continually ship it in detail and what is then we will allow you to continue to outperform underline protein.
[noise] Neil came in a little bit rough Karl did you get.
If I'm responding to your question correctly.
From what we heard you were little broken up is that our volumes do tend to be a very in line with up market performance, there's not a real delay in the protein market North America, we have very integrated supply chain dynamics with our cut.
Customers and are a key part of their order fulfillment. So we do tend to track without a lag. We also tend to perform above the market. So sometimes when you have a significant swing in the market. The way it was from food service to retail.
There's a positive.
Shift in our business as well so is the market dynamics are there, especially as you know you go from food service, which may be a larger packages to.
Retail case ready packaging.
That shift as a net positive so we got to accretion of our performance while that's occurring what we also seeing during this you know over time says a change in product format for our customers that go into larger packages at retail fewer cut selection.
So there's a lot of dynamics in there that kind of would change any typical model of exactly what we should see a producers actually you know went through herculean efforts to try to me retail demand during the March timeframe.
Now obviously there they have other issues that they are they're dealing with but.
No I think our performance mirrors, the industry pretty well a you know there were other things are you know there were some share gains and some things of that nature that we were able to pick up with our global footprint and dealing with the global market.
Good Thanks Carl.
Jonathan next question.
Certainly our next question comes in the line of Mark Brian from Bank of Montreal. Your question. Please.
Morning, Ted burning Jim.
Good morning, Mark.
Ted is it possible get a sense of what kind of underlying growth of seeing in the us business and whether that's just it has been slowed at all just in the near term.
From the difficulty of getting technicians and plans to do installations things like that.
Good question Mark.
And if I could point again to slide five on the answer there, whereas you see a P.S. coming in.
So if we look at Ats growth, you know Ats, 50% of EPS growth.
Is on that 22% bucket on back to slide six sell I'll go back and forth little bit. So if you look at Ats profile, that's where they have half their business at that 22% where their growth profile is showing up they do a lot of work in the ready meals into food fresh produce.
News.
Pet carried have you seen we have that on there that's where we've seen some growth and then if you flip to slide back to slide five this is where the Apss is where we got the mass business. That's coming in Apss is also helping us with the automation on E commerce. So.
So the net answer to your question through the crisis their businesses actually been slightly down to flat compared to year over year going into our equipment side of the business, though is really strong and that's where with the auto bag the site pouch system and that's feeding.
In that and that transition. So we're actually excited about that and then talking about the financials. Jim showed the bridge and you saw very clearly where Ats performance showed up that we moved the margins pretty quickly from where we purchased state as to where they are today.
If you could do the math on that you'll see that's moving all the way up to an 18% margin from 14. So the growth is coming the efficiencies are there you see the reinvent coming into helping hps and as a shout out to our apss.
Folks listening to the call really excited to have them onboard they are definitely helping us become a better stronger company through the crisis and beyond.
So Jonathan next question.
Thank you. Our next question comes from the line of a room Vista, None from RBC. Your question. Please.
[noise] lives on the thanks for taking my question.
Guys are all well I guess I'm just curious them yet you you address the decremental margin question I'm in the near term I guess I'm just kind of curious when you look at food care.
As well looking out a couple of years do you still think.
Got 40% to 45% decremental margin is achievable or sorry incremental margin is achievable and then as as a follow up I guess, maybe could you address where we are in kind of the protein a cycle in North America, and maybe in other geographies as well thanks.
Yes. Good question I'll do the first part and Carl if you can handle the second so if we if you look at our incremental margins and you see really the power of changing structurally width and reinvest and if you look at our performance in the quarter and if you're looking at food specifically to your question.
We had gains in the quarter, we had some pricing issue that question will probably come up with going on with resin. So we we did have a resin benefit of roughly 8 million, but we also had a pricing issue as you're well aware with food. We have we give that price back in the marketplace. So that was a lot.
So net on that you can see the power of reinvent structurally helping that business underneath but also what you really see is the leverage of the different structural cost on incremental volume and that's where we're designing the engine so those incremental margins.
And as we've described that 40% feels real in we sought with the growth in the quarter. The 60% growth is for other issues that are going on quarter, which is very very strong with that high volume coming through so short answer your question incremental margin on or food.
Business getting to structural cost right.
Yes, very confident going forward that that's that that will happen and Carl if you want it yeah.
Let me take a quick well around the world and touch on that obviously with the disarray currently in the North American protein barcode.
The positives or is that there is significant demand and demand has held up.
Consumption continues to increase and there's long term positives for demand in North America as well as demand in the export markets. So.
Obviously, there are issues in the market dynamics right now, but we assume a stable to slightly increasing animal availability in the North American market, Obviously, Latin America has a large heard and they're typically very inefficient. They have great opportunity to continue to grow as they can to.
When you too at the blocks and improve their market efficiency, there well poised to help feed the world and saw and give to the and contribute to the export market growth there installing equipment and we believe that though we'll continue to penetrate that market and it will be.
Accretive.
Long term Australia's you are well aware is rebuilding their heard there obviously dividing their heard between domestic supply and going after value added opportunities globally, and so that will be stable to down slightly and then.
Asia continues to evolve and to evolve through a more modern I think the positive you'll see us the Cove at night team posts pandemic is a more moderate and.
Market in Asia, with more pretty packaged products more retail and more E Commerce channel developing.
Thanks, Carl it's great having Carl on the call for the handling to hurt. Thank you. Jonathan next question. Please.
Thank you. Our next question comes from the line of Rosemarie Morbelli from Gabelli Research. Your question. Please.
Thank you good morning, everyone.
And I was wondering if you could.
Thoughts on the this twins so the trend of the recovery in China since they leave open to own facilities and then if you could give us some details.
In terms of the adjustments markets Youre targeting.
The upside to what the might market the adjacent markets you're targeting okay. It. Good question. The so if we look at it China and what's going on in China is going back to our call in February 11th when we first talked about the Corona virus we saw.
China hitting first so we got to see those dynamics.
Very quickly how China.
Took care the issue we saw our operations we have eight facilities. There we worked quickly and made those safe and still supported not only the local market, but the end end market.
We're also seeing with China that they're changing their market and that is happening as we speak going to the wet the wet market is changing if you just visualize meat hanging in markets. There unprotected, it's creating a need for what we do real.
Okay, well is protective packaging and fresh me, we're also seeing the frozen side coming in to China as well so net net on the markets. We think this.
Disruption is a onetime event, we think long term China's going to be stronger for us. We're positioned again, we're at the table, especially with the major meat producers that are looking to go after the China market.
We're with them, bringing automation and other opportunities so China is and.
We think net net that say a good positive going forward.
Government is definitely looking at what markets to transition will be slow it won't be overnight, but their target is by 2025 have less than 30% of their protein production through small local farmers and the more modernized mi industry. So the long term net positive as good more.
Short term.
All indications are in the market. There has been increased volume of me through alternate shifting channels online sales a may have been.
Sky Rocketing in China, we have benefited from that with our case ready options. We have a strong booking forward booking of systems to a further that we've also seen a significant trend towards away from what markets by especially middle and upper end.
Come a Chinese two.
More modern retail and interestingly enough the Australian meet Board did a survey.
Yeah, and post cobot 19, they're looking for larger volumes to consumers.
More packaged product and more chilled products.
The more often at home so a lot of positive upward dynamics and that market.
Great. Thanks, Carl Yeah, Jonathan I think we got time for one more question.
[noise] certainly than our final question for today comes from the line of Brian Maguire from Goldman Sachs. Your question. Please.
Thanks for fitting man hope everyone's doing well.
It's one of the follow up on a couple of.
Questions that have already kind of from one.
We've talked about Tyson or maybe more on this call them, we have in a long time that I can remember.
And I think they sort of talked about roughly 40% of their volume go into food service applications.
And I know you gave some color on that a breakout for you guys I wonder if he could more specifically kind of just talking about your own Nixon exposure.
To foodservice and then just thinking about the guidance you gave explicit guidance and product care for food care. Yeah. I think you said, 6% of the business is negatively impacted from a machine installations. Another six from liquid that seems like it's sort of foodservice related so are we.
Kind of thinking mid two to volumes could be temporarily down mid single digits in into care as we deal with some of the manufacturing plants being down in.
Some of the locked down impacts thanks.
Yes, Brian you did a nice job there with with US not trying to give you got.
Your your math is pretty good and were and the reason we're not trying to be at cheeky on the guidance. We just don't know and it is it's dramatic week to week, we side ramp up the last two weeks.
Of March where incredible, but then we've seen this there's choppiness go the other way our portfolio is shifting dramatically bolt on the product care side in the food care side that we've talked about so.
Without giving guidance I think your math is kind of where we're seeing it but that will change next week.
Let the message, we're giving to the market is that we will outperform the market we are moving our portfolio really fast.
The high volume roll stock, what we're doing that the penetration of that just in a matter of weeks has been dramatic. So we're going to shift we're not going to give up that the market is doing some interesting things were going to grow our portfolio in move but the short answer your math.
Path is pretty good on what we're thinking so on on the food care side, but if you wanted to give more detail on foodservice versus retail I think we talked about it but Carl if you want to add any owning that thing I would add as I think are some fundamental pivots into market places they react to this dynamic thing you've seen service cases and.
Europe basically shut down I don't think retailers will bring those back because it's a cost advantage, so that increasing penetration and packaging those products will live on I think you've seen a significant shift and surface seafood cases, a question earlier on adjacent markets I think we'll see a net.
Was that of as you see a shift in pivot prepackaged sea food.
So as foodservice comes back I see as a net multiplier, we'll get some of that business back that is very specific to food service that will come back and some of the positive benefits that we've seen into shift to a retail will will live well have legs. So and then when a quick.
Returns I think that will be up an additional multiplier is to go more automation more touch was and and we can you know equipment back to where it needs to be.
Got it all net positives right, thanks, Kyle and I X. I want to give a shout out to all our sell side analysts were very fortunate a very thoughtful questions and we really appreciate a just like good tough customers make us better good analysts make us better. So really appreciate very thoughtful and I also wanted to share each.
One of you asked that were safe and I just want to make sure it everyone safe in this environment and a feel really good about our company and what we're doing to make this world to better place in we're letting this crisis help show how we can make that happen so with that I want to thank everyone again for the call.
We look forward speaking with you in the near future in stay safe and Jonathan that's it. Thank you for your help on the call.
Thank you and thank you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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