Q2 2020 Sealed Air Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 sealed Air earnings Conference call.
At this time, all participants on the listen only mode.
After the speakers presentation, there will be a question answer session and we ask that you limit yourself to one question.
That's the question you'll need to press Star then one that your telephone.
Please be advised that this call is being recorded.
Hi, This mill system nuclear star than he wrote return operator.
I'd like to hand, the call over to worry Chaitman Vice President Investor Relations. Please go ahead.
Thank you and good morning, everyone I Hope you and your family are healthy and thing thing.
Before we begin our call today I would like to know that we provide a slide presentation help guide our discussion.
Please visit our newly reinvented website, where today's webcast and presentation can be downloaded from our IR web site at feel there dotcom.
I would like to remind you that statements made during this call fading managements outlook or predictions for future periods are forward looking statements.
These statements are based solely on information that is now available to us.
Coverage you to review the information in a section entitled forward looking statements and our earnings release and slide presentation, which apply for 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 revised and updated on our quarterly reports on form 10-Q, encouraging reports on form 8-K, which you can also find on our website at the older dotcom or on the Fccs web site at FCC that Scott.
We also discuss financial measures that did not conform to U.S. gap you will find important information on our use of these measures and have reconciliation to U.S. gap in our earnings release.
Including in the appendix of todays presentation, you'll find U.S. GAAP financial result, they correspond to the non U.S. GAAP measures we referenced throughout the presentation.
Before I turn the call. It was a pet I wanted to let everyone know we filed our second quarter 10-Q. This morning.
It is our policy the company does not comment on pending litigation, we wanted to know that the U.S. Attorney's office has advised us that they have completed their investigation and will not be taking any action on the previously disclosed matter.
Ill now turn the call over to Ted Doheny, our president and CEO Pat.
Thank you Laurie.
Thanks for joining our second quarter 2020.
I hope you and your family's you're staying healthy insane.
Yes.
I want to reiterate what I said last quarter.
How are we overcoming adversity defined.
Yeah.
Challenge, we face before we're managing pinned down it learning from experience and becoming a stronger and better company.
On today's call I will recap or second quarter results.
This year, how we're navigating this crisis Ukrainian growth in an uncertain didn't mark.
Oh sure how we continue to use the form piece of reinvent. She did driver company transformation from how we innovate to how we saw our customers most critical packaging challenges.
I'll discuss how we see your company in markets evolve and how we are emerging from this crisis a stronger company.
Jim will review our financial results in more detail and we will end the call with Humana.
Let's turn to slide three for a recap of her second quarter results compared to last year.
We increased adjusted EBITDA by 10% and expanded margin 220 basis points on constant dollar sales growth of 3%.
Adjusted earnings per share was 76 cents compared 80 cents in the second quarter 2090.
The four cents year over year decline was due to higher taxes.
The increase in adjusted EBITDA resulted in an over $50 million a free cash flow growth in the first half year versus the same period a year ago.
Our operating leverage clearly demonstrates our progress towards world class.
Despite diversity, we are driving or reinvent see transformation faster.
Execution, so far in 2020 and increased clarity of customer demand are essential packaging solutions gives us confidence to reissue guidance for the full year.
On slide four the combination of our four piece of reinvent C and purpose statement to protect to solve critical packaging challenges into LIVAR world better than we found it has not only been our guide for company transformation. It has helped to successfully navigate through the challenges of the pandemic.
Our strategy to deliver the best products and systems at the right price and making them sustainable is working.
We're expanding our solutions with our customers by aggressively focusing on savings and faster paybacks for equipment services and materials.
Our broad and innovative portfolio global scale and organizational agility has enabled us to respond to dramatic changes across our end markets and geographies.
As a market moves to a touch environment, we're increasing investments in our automation and equipment portfolio.
Our portfolio automated packaging systems addresses customer needs and brings new innovative solutions to the market.
We're doing the same across our own manufacturing network to improve yields productivity and our operating leverage.
Sustainability is in everything we do fueling our growth and in this pandemic still top of mind.
We continue to invest to meet our 2025 sustainability pledged and drive a circular economy for plastics.
We are executing on the strategy to collaboration with industry pioneers research and development advanced technologies and implementation of new solutions.
I'm excited to share that we recently made a two and a half million dollar equity investment in plastic energy Global in addition, sealed air and plastic energy Formalizing agreement on joint R&D further the recyclability of plastic wix.
Plastic energy is an industry leading company in advanced recycling technology. The company's technology enables the conversion of plastic waste into new raw materials that can be used in the production of recycled resins, which is an important step to achieve our 2025 sustainability pledge.
In a circular economy in plastics.
This collaboration will help divert plastic waste from landfill and create a new recycling stream for plastics that have not traditionally been recyclable.
Our one see operational excellence processes are driving Wallace quality productivity in yield improvements as well as customer service enhancements.
You can see the structural changes to reinvent see reflected in our first half operating leverage.
Our performance continues to improve as we are progressing towards world class.
We are keeping people out of harm's way and investing in our people, while strengthening our business through the crisis.
By operating as one see culture, we're maximizing productivity across regions business and and functions, enabling faster coordinated decision making.
As Larry mentioned, we recently launched their new website.
Please look at our reinvented digital customer experience that showcases our resources with a greater focus on how our solutions approach integrates our equipment system service immaterial offerings to help our customers improve productivity and keep their people safe.
Concluding with our purpose to leave our world better than we founded we're embedding our purpose into our structure and culture aiming for leadership SG.
We're listening to our stakeholders and working to be world class by raising the bar in inclusion diversity and eliminating unconscious biased with our teams around the world.
Let me now turn to slide five and give you an update on our leadership actions.
We are accelerating our transformation to be a stronger and better company post crisis.
We are fully committed to zero harm for employees, our operations and our customers.
We continue to practice, social distancing and kept our enhanced cleaning procedures in personal protective equipment requirements at all sites in place.
Close to 70% of our locations globally have operated with zero harm this year and no recordable injury or first aid incidents.
We are expanding our digital capabilities and wherever possible conducting virtual meetings with colleagues suppliers and customers with non location dependent employees working remotely.
We recognize our new normal will be here for the foreseeable future that are finding ways to improve productivity across our geographies supply chain and product portfolio.
We're connecting virtually more than ever.
We're still in the early transition phase of economy slowly reopening.
We're evolving towards a seamless digital customer journey.
We have prioritized, our innovation pipeline to increase speed to market, adding more online capabilities for our customers and prospects to work with us digitally with smart technologies.
On this slide were illustrating a few examples of our solutions portfolio that we provided to support customer demand swings and a touch list digital world.
The new sealed air Dot com lays out our digital transformation underpinned by our power brands that not only get us to the table with their customers, but enables us to engage online.
We will continue investing in our online capabilities and believe it will be a growth engine for us in the future.
We also believe will drive further productivity improvement.
Let's turn to slide six which summarizes the impacts of the pandemic on our one see end markets.
In the first half the year approximately 64% of our sales were derived from packaging fresh and frozen proteins as well as other foods fluids and goods for the medical life Sciences, and pet care industries.
With stay at home or Lockdown advisory still in place there continues to be an imbalance across the food industry with higher demands in the retail channel, including E food and eat grocery.
Offset by continued weak demand in foodservice and restaurants.
For sealed air this imbalances increased demand for our retail solutions, including case ready Pete pre packaged meats and snacks as well as growth in pet care products.
In mid April throughout North America, some of our food processing customers faced cobot 19 outbreaks in their meat processing plants and were forced to significantly reduce production or temporarily shut down.
We were pleased that some of these customers were able to reopen their plans at over 85% production levels. The latter part of the second quarter.
On a global basis, we're working closely with our customers to provide automated packaging systems that help address ongoing labor shortages productivity improvements, while keeping people out of harm's way.
Within our medical and life Sciences portfolio, which is approximately 4% of our sales demand remains strong for medical supplies pharmaceuticals, and personal protective equipment, such as monitoring systems face coverings, and cobot 19 test kits.
We quickly shifted our portfolio to address new markets and provide new customers with solutions, including automated equipment service and materials they need to successfully navigate the crisis.
The remaining 36% of our sales serve industrial and consumer segments General manufacturing transportation and non essential goods continued to suffer from government mandated shutdowns and a reduction in discretionary spending.
Partially offsetting these declines or increases in demands for good shift through E commerce that support a stay at home environment.
Online purchasing continues to surge is social distancing requirements remain in effect.
We've seen a strong increase in demand for our mailers as many E commerce customers look to eliminate boxes to reduce waste reduce carbon footprint and optimize their packaging process.
Across our global business, we estimate that over 75% of our end markets are experiencing increased demand for food medical supplies and consumer goods.
As we head into year end early learnings from the pandemic are driving secular global demand increases for automation and safely packaged proteins.
On slide seven you can see our diverse end market exposure across the top and we are displaying imagery to highlight how our broad and innovative platforms alongside our powerful brands.
The landscape for packaging is changing with our markets quickly evolving with E commerce automation sustainability and digital technologies, and we're leveraging our power brands to be at the table and online with their customers to solve their critical packaging challenges.
We're also responding to the increase in demand for automation by expanding our portfolio of automated systems.
This is creating an increase in equipment opportunities with additional services materials to comp.
We continue to lead the way in packaging innovation, our core competencies sustainability food safety, minimizing waste and protecting goods or more critical than ever.
And this crisis. These core competencies combined with our investments in automation and digital are becoming key differentiators within the markets. We serve in opening doors into adjacent markets.
Ill now pass the call Jim to review our results in more detail.
Jim.
Thank you Ted let's turn to slide eight for a review of our net sales by region.
In the second quarter net sales totaled 1.15 billion down, 1% as reported and up 3% in constant dollars.
In constant dollars North America, our largest region, representing 60 per cent of our sales increased 2% year over year.
Asia Pacific was up 4% and EA was essentially flat.
South America was up 18% due to us dollar index pricing.
On slide nine here, you see more detail on the organic sales volume and pricing trends.
Segment in region.
In the second quarter volumes, excluding acquisitions declined 4% with a 2% decline in food and an 8% decline in protective.
You may recall, when we reported first quarter results early may with many of our North American food processing customers experiencing labor challenges with the virus and industrial customers being mandated to shutdown, we anticipated a mid single digit organic volume decline in food.
And a 15% to 20% organic volume decline in protective in the second quarter on a year over year basis.
While our volumes were down in both segments year over year. The decline was not as severe as we originally thought it could be.
North America, and EMEA volumes were down, 6% and 5% respectively.
Boost volumes in North America were down 4%, while EMEA was up slightly.
Continued strong demand trends for food retail solutions.
Partially offset declines in food service and the impact from meat processing plant closures in North America.
Protective volumes in North American.
Hey were down, 10% and 14% respectively.
The industrial related volume declines in these regions. We're also not as severe as we thought they could be and ecommerce activity remains strong despite higher unemployment levels.
Asia Pacific was our best performing region in the quarter with volume growth of 3%.
Protected vote was up 6% and food was up 2% in this region due to an increased demand for E commerce retail package proteins and higher exports of fresh red meat out of Australia, New Zealand.
In South America volumes declined 1%.
With food up 1% and protective down 21%, albeit off a small base.
Protein exports remain strong while local demand in the region has weakened.
Net selling prices overall were modestly favorable in the quarter due to US dollar index pricing in South America.
On slide 10, we present, our year over year consolidated sales and adjusted EBITDA bridges for the second quarter and the first half of the year.
Organic sales in the quarter decline just under 4%.
Acquisitions contributed 73 million or 6%, which essentially all came from automated packaging systems.
Currency translation negatively impacted sales in the quarter by 42 million or about 4%, mostly due to year over year declines in the Argentinian peso.
Brazilian real Euro and Australian dollar.
Adjusted EBITDA of 260 million increased 23 million or 10% compared to last year with marching up 220 basis points to 22.6%.
Reinvest see benefits totaled 38 million in the quarter 34 million and operating cost savings and 4 million price cost spread improvements.
Operating cost in the quarter included approximately 9 million of incremental spending related to Kobin 19.
But these expenses were mostly offset by lower employee travel activity.
Adjusted EBITDA also benefited from a 14 million contribution from the automated acquisition and 7 million of market driven lower input costs, which helped offset the adjusted EBITDA drag from lower sales volumes and currency translation.
Adjusted EPS in the second quarter was 76 cents compared to 80 cents in the second quarter of 2019 due to higher taxes more than offsetting the increase in pre tax earnings.
The adjusted tax rate was 27.5% in the second quarter of 2020 compared to 19.4% in the second quarter of 2019.
Last year's lower tax rate was primarily due to the release of a valuation allowance in the quarter related to reinvest see driven profitability improvements in South America.
So higher taxes this year negatively impacted our adjusted earnings per share on the quarter by nine cents.
Turning to slide 11.
Here, we provide an update on reinvest C.
Which continues to progress and earn us. Despite the pandemic is driving significant structural operating leverage in the business.
Our reinvest commercial growth work stream is progressing well despite challenging macro conditions.
We are accelerating innovations and executing on targeted growth areas, which is helping to alleviate endemic driven weakness in some end markets.
We believe the commercial strategies.
Capabilities and governance processes develop from this new reinvent work stream will help us drive future sustainable revenue growth in the markets we serve.
In 2020, reinvent see is on track to realize at least 110 million of year over year productivity benefits to adjusted EBITDA.
We are continuing to prudently accelerate improvement actions, where possible and have been successful to date since our operations have largely.
When intact, despite ongoing challenges with the virus.
Cash restructuring payments associated with reinvest the were 44 million in the first half of the year and are expected to be about 100 million for the year.
Turning to segment results on slide 12, starting with food.
The second quarter foods sales of $673 million declined 5%.
In constant dollar sales were essentially flat.
Adjusted EBITDA in food increased over 13 million or 9% to 169 million with margin improving 320 basis points to 25.1%.
This performance was primarily driven by reinvest see actions and favorable price cost spreads.
We are seeing increased demand globally for our prior back retail packaging, which ensures food safety and expense shelf life.
We are also growing our sales pipeline for automated equipment solutions and are starting to see installations and scheduled again as customers utilize our near new virtual capabilities to address labor productivity challenges and enhance employee safety protocols.
With most of our North America customers now operating at close to normal production levels and global retail demand for packaged proteins remaining study, we expect food volumes to improve sequentially in the third and fourth quarters and reached levels on par with last.
Last year in the back half of 2020.
On slide 13, we highlight results from our protective segment.
In the second quarter protective sales of 478 million were up 28 million or 6% as reported.
Organic sales were down 9% with volume's down 8%.
Adjusted EBITDA of 92 million increased 8 million or 9% and the margin expanded 40 basis points year over year to 19.1%.
Reinvest see benefits contribution from the automated acquisition and lower input costs more than offset the negative impact from the organic sales decline.
It is worth noting with targeted cost synergies implemented a year ahead of schedule. The adjusted EBITDA margin for the automated business is now over 19%.
On par with the segment average and approximately 500 basis points higher than when the act acquisition was completed in August 2019.
The protective organic volume decline of 8% in the second quarter was driven by a 20% decline in our specialty industrial portfolio, which includes instapak in specialty phones.
This decline was to a large extent driven by Copel 19 customer plant shutdowns throughout North America in Europe.
The remainder of the protective product portfolio on an organic volume basis was essentially flat with growth and bubble wrap on demand.
Or view retention packaging and mailers offset by declines in traditional voice fill applications and shrink film.
With strength in E commerce and automation continuing in the second half.
And then industrial slowly reopening.
We expect organic sales volume in protective to improve sequentially in the third and fourth quarter, but still be down year over year in the back half of 2020 in the mid single digit percentage area.
Now, let's turn to free cash flow on slide 14.
In the first half of the year, we generated 129 million of free cash flow compared to 75 million in the same period in 2019.
The $54 million year over year improvement was largely driven by higher adjusted EBITDA, partially offset by increased trade working capital investment.
Trade working capital was a cash use of 100 million in the first six months of 2020.
Which is typical seasonality for the company, but the magnitude of the increase was higher this year due mostly to a purposeful inventory built for Covance 19 contingency planning and this was partially offset by increased customer advanced payments from new equipment orders.
Yes.
Overall with strong first half results improved demand visibility and significant trade working capital monetization in the back half of the year, we're raising our full year free cash flow guidance to a range of 350 to 375 million.
Mhm.
We expect free cash flow to adjusted EBITDA to increased from 33% in 2019 to around 36% in 2020.
We are very well positioned to achieve our target free cash flow conversion ratio of greater than 40% in 2021 with the strong earnings progression of the business and as the restructuring investment on the reinvest see transformation winds down over the next.
Year.
Slide 15 highlights our leverage liquidity and debt maturity profile.
We ended the quarter with pro forma net leverage at three point Fourx, which is down from 3.6 assets at the end of 2019.
Our priority is to continue to de lever and we do expect our net leverage to come down further by the end of 2020.
As a reminder, the leverage covenant in our credit facility has a maximum ratio of four point fivex.
At year end 2020 in the covenant calculation at the end of the second quarter was 2.9 next which is lower than our reported pro forma net leverage ratio due to certain allowed favorable EBITDA adjustments in the credit agreement.
So with significant cushion against our financial Covenant.
Over 1.3 billion of liquidity and no debt maturities until August 2022.
We have good financial flexibility.
On slide 16, we outlined our capital allocation strategy.
We will continue to take a disciplined approach to strengthen our balance sheet, while driving attractive returns on invested capital.
We are investing in attractive markets and disruptive products and technologies and approximately 45% of our organic capex. This focused on growth, including breakthrough production processes innovation and automation.
Maintenance and cost productivity projects comprised the remaining 40% and 15% of our organic capex respectively.
Regarding shareholder returns for the time being we're maintaining our dividend at current levels.
And in the context of delivering on our overall de leveraging objective over the next several quarters, we do expect some opportunistic share repurchase activity.
Turning to our 2020 outlook on slide 17.
We anticipate consolidated net sales to be approximately flat to down 1% as reported or 4.7 to five to 4.775 billion.
On a constant dollar basis net sales are expected to increase 1% to 2% with food up approximately 1% and protective up approximately 3%.
Acquisitions are expected to contribute over 170 million in sales for the year of which approximately 165 million. This from the automated acquisition.
We expect a negative impact from currency translation on sales of approximately a $120 million for the year versus 2019.
You may recall, when we provided full year guidance back in February currency translation headwinds on the topline rest committed to be 40 million.
We are reinstating our guidance from February for adjusted EBITDA and adjusted EPS.
For adjusted EBITDA, we expect to be in the range of a billion 10 to 1 billion 30, which at the midpoint would equate to an adjusted EBITDA margin of approximately 21.5%.
The negative currency translation impact on 2020, adjusted EBITDA is now estimated to be approximately 25 million.
In February unfavorable currency translation was expected to be only an 8 million dollar drag on adjusted EBITDA.
We expect adjusted EPS to be in the range of $2.85 to $2 a 95 cents.
Our outlook for adjusted EPS is based on approximately 156 million shares.
And does not assume share repurchases.
The adjusted tax rate in 2020 is expected to be approximately 27%.
As previously mentioned, we're raising our free cash flow guidance from approximately 350 million.
To a range of 350 million to 375 million.
With Capex in the range of 175 to 190 million and reinvest see payments of approximately 100 million.
I'll pass the call back to Ted now for closing remarks.
Thanks, Jim.
We opened up the call for questions I want to reiterate our vision our strategy and how are you see reinvent C to make this hap.
Our vision is to transform sealed air from the best in packaging two World Class company servicing global packaging.
I'm proud of how are people have embraced reinvent SEC, we've executed well in the delivered solid first half results considering a very challenging environment.
Our reinvent see transformation is well underway from how we innovate to how we solve our customers' toughest challenges with the power of one SEC.
I'm confident that are for piece of reinvent C and our strategy to deliver the best products and systems at the right price and make them sustainable will drive profitable growth through this crisis and beyond.
I want to once again, thank all of our employees, especially our location dependent employees in our plans innovation centers and field operations for their dedication and commitment to business continuity.
People have been doing an incredible job through the crisis.
Together, we will emerge from this crisis, a better stronger company with that I'll now open up the call for questions.
Operator faster, we'd like to tell you remind me sessions.
Yes. Good question you need to press Star then one telephone Costar. Your question press the pound cake. Please limit yourself to one question.
Our first question kind of settled on term Punjabi of Baird. Your line is open.
Hi, guys, good morning, and congrats on to Q.
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Just in terms of the second quarter, what would you be able to give us more color in terms of how volumes kind of shook out by month for the each of the segments and then also into July there were certainly disruptions during the quarter et cetera, and then also specific to the 22.6% EBITDA margin that you recorded for Twoq. Two there was also a lot going out with price cost being favorable Reinvents C.
I would assume some of the temporary cost savings.
So just based on that how should we kind of think about margin progression for the back half of the year given that plastic resin is inflecting and I would assume that some of those temporary cost savings will start to come back. Thanks.
Good Thanks, Ghansham will break that up and I'll take team that with Jim I'll first give you a little bit of color that you asked in the second quarter and Jim you can how may make sure we get to second third and fourth question.
On what happened in the second quarter is quite interesting it was dramatic actually in a quarter.
Starting off in the quarter. We saw that serves the continued from the first quarter, especially in the meat business and growing very very strong than mid quarter into April we saw that changing dramatically with the shutdowns at the packaging plants. So we saw a surge.
Then it slowed in what we saw the shift going from food retail to food retail from foodservice with the shutdowns of restaurants, what was going on meet packaging.
We side pick back up at the ended the quarter into June so with the meat business, we saw that swinging pretty widely in the quarter, but still on the food service side, we see that's low in the business on the protective side, we saw the pick the industrial side.
Really go way down with and you've seen that within what's going on with automotive aerospace.
The government shutdowns of businesses that we talked about their prepared remarks, we saw the pickup on ecommerce really shifting.
And are probably the biggest line up is on our mailers.
Huge shift on ecommerce, we're seeing the mailers up well over double digit, we're saying that that globally, we saw that progress and actually pick up through the quarter. The industrial still was down through the quarter, we did see a little bit of strengthening as we're starting to get markets open up opening up.
In the month of June, but still industrial is down significantly so both sides of the business, we had strong up and strong down and that's why we went if you look at slide six where we gave you a lot of detail of what's up and whats down that little piece of an industrial we're still seeing that going to say.
Second half to be slow, we're still concerned with what's going on with the Covidien situation.
We're seeing industries open and then slow so we're watching that so going into the second half were still cautious of what's going on at the markets shifting the portfolio, though that's the part feel really good about how quickly we've been able to move our product portfolio to attack those markets.
The strong again being the E commerce and the food retail side of the business I'll take a pause on that Jim If you want to talk about the margin question.
Sure Ghansham the margin assumption.
If you look at our full year guidance at the midpoint, we do see margins coming down a.
A little less than 100 basis points in the back half of the year, but importantly year over year, we still see margin improvement.
The reason for the back half of the year modest margin compression is really three things. It's one we are seeing resin inflation in the back half of the year and while we do have formulas that help us recover some of that in particular in North America, those formulas will kick in.
A couple of quarters download down the road. So there is a little bit of.
Roughly half of that compression second half versus first half is coming from higher input costs, which again, we think is transitory until we get new pricing.
Secondly, as you can imagine when we entered the second quarter, we were on pretty full lock down in terms of discretionary spending we did a great job.
We mentioned in our.
Comments that corporate expenses were running at about $9 million, but that was offset by lower travel and entertainment as we look to the back half of the year and we position ourselves for growth there are some spending.
Increases that were going to see that will help position us for that trajectory on growth into 21, and we want to do that even though that spending will necessarily benefit us in the second half it will position us to do what we need to do and 21 and then finally, we talked about and our cash flow common.
Terry that we had some contingency.
Built in inventory for co bid, while we've been very successful keeping our sites opened from time to time, depending on the jurisdiction, we'll get inquiries that would suggest maybe that shutdowns could occur in when we see that kind of activity, we want to get in front of it we want to make sure.
We can satisfy customer requirements and make sure we have plenty of safety stock on these new S.K. use that are driving the business. So we did a little bit of that in the second quarter. Good news is thats going to come back to us and we'll monetize that in the back half of the year, but when you ran a little bit higher on inventory you do get a little bit of up fixed costs.
Cost absorption benefit that will be somewhat of a drag on the back half of the year. So those those kind of our the explanation on the margin progression on your reinvent question, we feel really good about reinvent heavy to end of year, we thought 110 million.
We delivered on that the first half significant benefits 68 million. So our guidance would indicate 42 in the back half of the year.
We'll see how that goes we're driving a car we want to position ourselves too.
The feed inflation in future years, we've got a very robust pipeline of ideas that are going to continue to drive forward. So we're not going to let up on that.
We were purposeful in the commentary around at least $110 million I hope, we beat it and I think we're well positioned to do that.
And just finally geismar two the the third part of your question on the outlaw outlook. The only thing we didn't talk about was what we're seeing actually in the automation space, which is being driven in the equipment.
In the second half we saw a new as Jim mentioned, we saw advance payments going up for equipment, but we saw actually the sales impact of our equipment in the second quarter down year over year across the portfolio, we're still working with our customers in this cobot environment getting people and getting.
Technicians in place to take advantage of that equipment business that we do see strong and actually in our outlook. So that's the part we're cautious can we get into those facilities get the equipment not only the orders that we already have but we're anticipating even further movement.
In the automation for us in the second half so thats apart, we're working closely with our customers in making that an opportunity for the second half. So operator, we can get the next question. Please.
Our next question comes from Anthony Pettinari of Citi. Your line is open.
Good morning.
Ted polling upon the automation question I think is it possible to say how much.
The opportunity it from a volume perspective in the second half of the year from food care automation or if you can give a sense for sort of addressable market size or what that opportunity of mid may look like next year or beyond and then when you talk about the delays in terms of getting on site at the customers given cobot restrictions is that's something that's getting resolve.
Within a matter of weeks or a matter of months or if you could just give us some kind of color in terms of.
On a lag time, you're seeing in terms of getting on customer sites.
Sure.
Anthony I'd like to answer it for the whole portfolio not just because we're seeing the automation derive significant opportunities with and protective side specially on filming so framing it up we've talked about equipment before it's less than 4% of our business today.
Our plans are to significantly grow that so what we saw in actual is second quarter, even the first half we actually saw our equipment business down year over year due to the installations. So it down a couple of percent because we couldn't get that actually installed and.
Got it in place. So if we look at the food business and then I'll talk about ecommerce of how do we get that in we have some major installs going in actually in Russia right now a large part of our automation plans in place. So we're having to work with the customers, where we can get our people in place also.
For.
There are people to get the equipment and these are pretty large systems that we're putting in so we think we should be able to get that into the quarter into the said second half to your question on the automation side on E. Commerce. We've had some significant success is actually in the second quarter. Good.
In the orders for some.
Hi speed automation.
Ended ecommerce to basically taking our packaging and putting high speed systems in place that we could package.
And get that so we've got a couple of those actually install.
Getting those up and running so the pull through on the materials and we see that impact probably will field see that the second half we have more scheduled relative to the business I would like to say that couple of percent were down in the first half I think I'd like to see a couple percent up in the second half, but right now that's what we have.
And our guidance is to keep it flat because we have to fight through actually getting people in the installations to make that happen.
Pat.
Next question operator.
Our next question comes from Phil Inc.
Jefferies. Your line is open.
Hey, Ted Kim Laurie its actually done done again on for sale glad to hear you guys are all safe and well and congrats on the strong quarter.
I wanted to ask the Capex started the year at 200 million and it came down to 175 that you're protecting the growth capex side of that and now its backup to when 75 to 190.
Can discuss some of the moving pieces that you.
I had in the guidance, thus far and then talk about where you're seeing some of these continued opportunities for growth projects is is it more on new innovative products or.
Coming through in some of these.
Internal automated equipment that you're putting in place at the fill their facility.
Yes.
The first Jim can tag team, if I Miss something here I'll talk about what we're spending our money on and whats coming through for the investments originally when we looked at what was going on crisis, We said Hey, we lids. We're looking at liquidity, we said hey, let's see what we can do and to manage that capex going through.
The quarter in watching whats happening with the business on the on Capex for growth as we highlighted in our capital allocation slide we're actually seeing with the volumes moving up significantly releasing capital.
An example on that would be on the Mailer business seeing the mailer business up well into the double digit.
Volumes just in the quarter, we've had capacity that we can move quickly on that investments we have a new recycled.
Content Mailer.
Actually it was first led by Europe at that actually the volumes to us So releasing capital. That's an example for that let it let it go in the quarter the major capital, which would be large extrusion centers. We also had capital for that we're releasing and one of the product lines and our food side is our high volume role.
Stop seeing that business shift very quickly in the quarter, because that's showing up in the retail releasing some of that capital that's going to take some time, but we're responding to that market, where we think not only do we gained share in the crisis, we're going hold it get even more efficient and let that drive forward.
So those are some of that examples so we're giving the guidance that hey, we thought we're going to bring that down no. We actually see capital opportunities that we can get growth from that the second part of your question was the internal.
Opt internal automation, we are seeing some great benefit in some of the automation that were put in to our major facilities.
Such as our largest food packaging plant in the world, which is in Simpsonville, we're seeing some great success and our prototypes of the automation. So we're releasing that capital and actually looking for that to go faster. So just some examples both internally to drive automation, but also externally to some of the mark.
Shifting in our portfolio see if we could make that happen this year.
Ted I just have met maybe would say a couple of things further to that is.
We really weren't.
At all reducing growth, we really feel strong commitment to drive growth, we think theres great opportunities.
To do that within our factories and also with the with the customers through equipment and that sort of thing about the hurdle rate is very high we're very disciplined about that rate. If you look at the 45% on growth it's higher than the store.
Allocation for the company. So we're disciplined on how we're going to do this but we really don't want to slow down the growth with a great projects. We do have some constraints within our facilities some suppliers.
I don't necessarily want to come into our facilities.
In a kobin environment. So we have to work through all of that but.
We feel pretty good about where our cash is and where it's going to be in the back half of the year and it's important for us to position the company for a strong future.
Actually just one follow up on to the Jim's point, which was good there on the growth to maintenance.
I think I've mentioned that part of reinvent probably a few quarters ago that we have shifted that priority. We flipped it firms 60 42.
Driving a higher percentage on the growth that we had the past so.
We continue to work on that.
Next question please.
Our next question comes from Neel Kumar of Morgan Stanley. Your line is open.
Hi, good morning, Thanks for taking my question.
So your EBITDA guidance implies second half EBITDA of 507 million versus 513 million in first half the year on the seasonal perspective in past years, it looks as they generally at stronger performance in the back half.
You mentioned from higher input costs, you're expecting in second half as any weakening place and it's a lag for SAP levels or there's some conservatism in applied to that.
Well certainly in this environment you want to be prudent and we think we are but we did talk earlier about why the margin in the back half of the year at the midpoint of our guidance is coming down a bit and you hit the nail and ahead in terms of the inflation in the recovery on that with our Formula is this a bit delayed.
In addition, as I mentioned, we do have some growth related spending that we're going to BCD, none in the back half of the year to drive the 21 profile. So nothing we're concerned about again year over year. There is still margin improvement in the back half of the year.
And.
We do think Theres still beyond where we sit today structural margin improvement opportunities into the future.
Next question.
Our next question comes from Adam Josephson of Keybanc. Your line is open.
Thanks, Good morning, everyone and congrats on a really good quarter.
Jim One more question about the margin issue can you just talk about what led to the 70 basis point or excuse me 80 basis point increase in your full year margin expectation how much of that was temporary.
Cost reductions versus something more permanent and you are based on your full year margin guidance. You will have achieved about 300 basis points of margin expansion just in the past.
Two years and it would be among the highest margins the company's hover around what is their natural limit in your mind to the rate of margin expansion and what are those additional levers that you're thinking about beyond this year, such that I guess, you're thinking the margins will expand further from a 2100% range. Thank.
You are very much.
Okay. Let me, let me take a crack at that I do think that.
The margin expansion opportunity is there the balance that we're focused on is making sure that we're taking the cash in the.
The earnings associated with that improvement and reinvesting in the business to create kind of continual differentiated positions in our materials and equipment et cetera. So.
We want to play long ball here, we're not interested and trying to just hit a quarter or a year. We're doing what we believe our very structural sustainable improvements in our factories with reinvent were taken those same disciplines that we I think executed on very well today.
And applying them to our commercial organization, we talked a bit about that so yes, I think there's great opportunity, but we're going to have to balance as we go forward reinvesting in the business and driving those differentiated positions for the long term in terms of this year.
Clearly, we have some discretionary cost benefits that were.
Helping in the in the coven environment, we talked about lower travel and entertainment.
When you add people sheltered in place and working remotely as many of our offices are just the overall spend levels come down.
That's partially or mostly really offset by what we think over the long term is going to fall away with co bid.
Expenses, so in the first half while we did have those those savings.
Large extent, we put that back in for coated in the back half of the year as I said, we're releasing some of that discretionary spending to drive growth into the future.
Yes, and Adam.
I have to jump in I know you address that Jim, but you talked about where we're going on our margins.
The operating performance of the business and I have to go back to our strategy Division of Reinventing. The company. We think the opportunity here is where we're just we're just beginning our journey on what's out there the cobot crisis as we've highlighted is actually accelerating where we think we can take.
And that lots of things happen in the quarter, you see the portfolio shifting extremely fast to the market.
Where youre seeing is the power. This engine on the leverage now the leverage Doesnt show up on growth because we had certain things way up, but we had things down but you're seeing the power of this engine on driving the leverage on growth and Thats what were going after so.
More things to come we got to drive the growth, but as far as division is we want to be world class operating leverage.
Serving the packaging industry so.
I appreciate your comments that you see good things.
I am just sharing for all of those listening.
We havent gotten to where we want to go but I appreciate the questions and the timing and I think operator, we have chance for just one more call.
Hi last question comes from Brian Maguire of Goldman Sachs. Your line is open.
Yes, thanks for squeezing man and congrats on a great quarter.
Just a question on.
Capital reallocation.
I would comment on the overall M&A environment, you're seeing if theres any.
There's a lot of different.
Different parts of the company that seemed like they could benefit from things like Hps has benefited you in the last year.
Is that a priority and with things settling down a little bit more in the macro are you starting to reengage with those folks and then sort of related to that the plastic surgery Global announcement, you think there'll be more investments.
Needed to try and improve the recycling infrastructure.
As you kind of work with your customers and partner with them to try and improve.
Yeah, Recyclability of your products and reduce plastic waste. Thanks.
And Brian you always I'd like to where you always asked the questions with the answers in your questions. So it did again the only thing is it's not a reallocation strategy in the crisis, we're driving our strategy. So thats, where we put the sheet in the earnings deck. This is a normal slow.
Why is that in Jim talked to that we normally don't have an earnings we use that investor presentations, but we want to be very clear what we're thinking about what we're looking at.
But what's the exciting part is we see a lot of opportunities in the world that we're living in right now.
Vesting in the business investing in our technology investing in the innovation as you highlighted we signed this pledge to.
The plastics pledge, so part of us investing in plastic energy and the shout out to the alliance to end plastic waste, which I'm a member of that's how we found plastic energy.
We are committed to solve this issue and we're going to invest there into that.
Organization to help us close out that circularity, but the investments that we've been made that really turned very quick is our internal investments on recycled content a bubble wrap product is now over 60% from recycled content, we have our Dar fresh on trade. The trays are now up to.
94% recycled content and those are active investments that we have in place.
That we're going to attack that problem and fix it and actually turned to sustainability subject into a growth engine for US last thing I want to talk about is even talked about mailers being up mailers are helping drive sustainability on carbon footprint.
Significant savings and E commerce from can converting from boxes to mailers and as part of that we're also seeing that come into food business that famous question. The paper versus plastic paper is not a good thing for food processing plant. So we're working to have a plastic surgery.
Lucian, but they have a sustainable recycled solution in food so to your M&A part of that question. We're always looking to see what the opportunities are being as Jimmy even said on the share repurchase we want to be opportunistic and if we can't develop it fast enough, we're going to go and get.
At health. So we can go faster to drive our strategy so with that I want to thank everybody appreciate the comments on the quarter.
I think was solid we got more bit things to calm and with that look forward to seeing everybody.
Our seeing everybody virtually next quarter. Thank you operator, that's it for today.
You're welcome 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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