Q4 2020 Sealed Air Corp Earnings Call
I am all participant lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session. You want to ask a question. During the session you will need to press star one on your telephone. Please be advised the of today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker of today.
Lori Chipman.
Thank you. Please go ahead ma'am.
Thank you and good morning, everyone I Hope you and your family are healthy and staying safe before we begin our call today I'd like to note that we have provided of bodies and station to help guide our discussion.
Please visit our website, where today's webcast and presentation can be downloaded from our IR website at sealed air Dot com.
I'd like to remind you that statements made during this call, stating management's outlook or predictions for future periods are forward looking statements.
These statements are based solely on the information that is now available to us.
We encourage you to review the information in the section entitled forward looking statements and 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 lifted and our most recent annual report on form 10-K, and as revised and updated on quarterly reports on form 10-Q, and current reports on form 8-K, which you can also find on our website at sealed air Dot com or on the SEC's website at SEC Gov.
We also discuss financial measures that do not conform to U S. GAAP you will find important information on our use of these measures and their reconciliation to U S. GAAP and our earnings release included in the Appendix of today's presentation, you will find U S. GAAP financial results that correspond to the non U S GAAP measures.
Reference throughout the presentation.
I will now turn the call over to Ted Doheny, our president and CEO Ted.
Lori.
And thank all of you for joining our fourth quarter and year end 2020 earnings call I Hope you and your families are staying healthy and safe.
I want to welcome Chris Stevens to his first sealed Air Conference call.
We're excited to have you on our team.
Throughout 2020, the pandemic presented new challenges for all of us around the world. Our purpose, which you can see here on slide three is guiding us and depend on it and it becomes even more clear.
We are and the business to protect the solve critical packaging challenges and to leave our world better than we found it.
Our employees delivered and are proud of our team's tremendous commitment to our customers and our business throughout the pandemic.
On today's call a recap of our performance in 2020.
Sure of how we're accelerating growth and an uncertain environment and the exciting opportunities. We see ahead of <unk>.
Global markets are evolving and we're leading the way with automation and digital and sustainability.
Jim will review, our financial results in more detail and Chris will provide our 2021 outlook of.
I'll close the call and we'll end with Q&A.
Let's turn to slide four for a recap of our 2020 results.
Our strong sales performance and the fourth quarter, coupled with continued execution of reinvent see allowed us to exceed our 2020 commitments.
And 2020, we delivered adjusted EBITDA growth of 9% on 2% sales growth, resulting in 130 basis points of margin expansion and and operating leverage of 77%.
Adjusted earnings per share was $3 19.
And we generated strong free cash flow of $556 million, which is 73% above last year.
Automation and digital and sustainability are driving growth in 'twenty and 'twenty, one and beyond.
This is being fueled by our reinvent see business transformation.
We want to point out on slide four that we're sharing with you. The long term direction that were taking our business and the performance we expect to deliver.
As we shared before we're serving of stable market. The grows at one 3% of year, we're looking to accelerate this growth to 2% to 4% on the base business and another 100 basis points with automation.
With our reinvent see operating system on 3% to 5% organic sales growth, we expect to deliver over 30% operating leverage and create world class returns.
Let's turn to slide five are moving real slide, which pictorially shows some new solutions powered by our iconic brands.
You can see of play button on the slide which is to encourage you to visit our website, where you will find the current new stories with more to come.
The 2020, approximately 63% of our sales were derived from packaging protein and other foods liquids and fluid medical and life Sciences.
Since March 2020, there has been an imbalance of across the food industry. The strong demand and the retail channel offset by continued softness and foodservice from the stay at home pandemic environment.
Food processors are working hard to meet increased retail demand, but there are still challenged with labor shortages.
Our customers are focused on safety productivity and labor shortages and we are responding with automated solutions to solve those challenges.
This has resulted in another strong quarter and food packaging equipment and volume growth and our retail formats.
And the fourth quarter growth and retail formats and equipment was largely offset by continued declines and products with high exposure to foodservice.
We expect this market segment to recover later this year and believe we are well positioned to take advantage of that recovery with new sustainable innovations for example from proteins, we've optimized the materials and process for our cryo vac barrier bags to make them recyclable, while maintaining our industry.
Leading standards for food preservation and food safety.
For liquids and fluids.
Automated solutions that disrupt rigid containers and expand our bag in box offerings pursues sauces condiments and beverages.
The combination of our automated equipment service barrier bags, and pouches and packaging process extend shelf life minimizes material ways and lowers total cost of ownership.
Approximately 37% of our sales serve E commerce, retail logistics and electronics and industrials.
Sales to E commerce retail and logistics were up double digits and the second half of 2020 Automd.
Automation equipment, including the portfolio acquired from automated packaging systems mailers bubble wrap and playable and our new paper based solutions were our fastest growing portfolios and 2020.
And Q4, we also experienced increased demand for our temperature assurance packaging solution that ensures the safe and secure distribution of COVID-19 vaccines.
And 2021, we expect continued growth from our E commerce and fulfillment solutions, particularly the offerings designed to automate the packaging process minimize waste and increased throughput.
And was encouraging to see and the fourth quarter, our sales to the industrial sector were up modestly largely due to strength and consumer electronics and a rebound and automotive.
Now turning to slide six for an update on our C. Automated solution strategy, which is driving growth for the next phase of our reinvent see business transformation.
You can see on this chart, we expect equipment sales to grow more than 15% and 2021 to over $250 million or.
Our pipeline for automated equipment continues to strengthen and we are confident in our organic target of over $500 million by 2025 when.
When you factor in a three X plus solutions multiplier, including growth and parts and service from the installed base and the flow through of material. This result, and a $5 billion plus potential opportunity over the 10 year equipment lifecycle.
As I mentioned before we are solving our customers' most critical needs for safety productivity and labor scarcity with our touchless automated solutions.
We are prioritizing these projects to those that create less and the three year payback for our customers.
With the C automation, we're taking and integrated solutions approach by eliminating waste simplifying the process removing people from harm's way and automated.
Our customers are recognizing the tremendous value, we are creating by integrating our full system.
Brought new solutions to the market and we'll continue to do that for our customers and our own operations as we lead the way to a more touchless digital environment.
Let me now turn to slide seven and share how we are successfully navigating through this pandemic are low.
Local regional and corporate crisis management teams remain active and business continuity plans are still in effect.
We've been proactive with the zero harm mentality and thanks to the dedication of our people we've had minimal disruption to our operations.
We are investing and digital capabilities and finding new ways to do business online on.
Investments and smart packaging and digital printing are unlocking new growth opportunities by enabling our customers to increase their brand equity enhanced consumer experiences and create significant supply chain efficiencies.
I'll now pass the call to Jim to review, our results and more detail.
Thank you Ted let's turn to slide eight for a review of our year over year and net sales growth by region and.
And the fourth quarter net sales totaled $1 3 billion.
Up 3% of as reported and 3% and constant dollars and constant dollars North America, our largest region, representing 58% of our sales increased 3%.
South America was up 13% largely due to U S dollar index pricing and volume growth of 4%.
Constant dollar sales and Asia Pacific were up 4% and <unk> was up 1%.
On slide nine you can see our full year 2020 results.
Net sales totaled $4 9 billion up 2% as reported and 4% and constant dollars.
Similar to the quarterly results, we delivered constant dollar sales growth across all regions and exceeded our most recent outlook by approximately 50 million and most of which was driven by volume growth and protective.
Starting in the first quarter of 2021 for reporting purposes, we will be consolidating North America, and South America into one region. The Americas. This will align with our new one sealed air regional structure and organizational changes that went into effect and January.
Sure.
On slide 10 here, you see our organic sales volume and pricing trends by segment and region.
And the fourth quarter overall volume increased 3%.
Protective volume accelerated into year and delivering 7% growth.
Up from 4% growth last quarter.
As expected, we also saw modest volume growth and food after a couple of quarters of low single digit percentage declines.
By region volumes in North America, South America, and APAC were up 4%.
<unk> volumes were up across all regions due to the E commerce and fulfillment strength.
And growth and our industrial portfolios and.
And North America and APAC.
Fluids delivered volume growth of North America, and South America, due to the strength and retail formats and equipment.
This volume growth and food was offset by declines in the EMEA, and APAC, where foodservice softness and COVID-19 related restrictions outweighed solid retail demand.
On slide 11, we present, our year over year consolidated sales and adjusted EBITDA bridges for the fourth quarter and full year.
As mentioned sales in the quarter were up 3% with volume contributing $42 million to the top on it.
For the full year sales were up 2%, including $22 million and volume growth and of 172 million and contribution from acquisitions of which of $166 million was from automated packaging systems.
Closed in August 2019.
Currency translation negatively impacted 2020 sales by $82 million or about 2%, mostly due to year over year declines and Latin American currencies and the euro.
Fourth quarter, adjusted EBITDA of $279 million increased $8 million or 3% compared to last year with March and down 10 basis points to 28% for.
For the full year adjusted EBITDA of 1.151 billion increased $86 million or 9% compared to 2019 with margin increasing 130 basis points to 21, 4%.
Higher volume contributed $12 million to adjusted EBITDA in the fourth quarter for the year volume had a negative $14 million impact on adjusted EBITDA due to unfavorable product mix and both reporting segments.
Reinvent see benefits totaled 17 million and the quarter and 118 million of 2020, which had a positive impact on price cost spread and operating cost throughout the year.
And the quarter as anticipated price cost spread was $7 million unfavorable due to higher input cost.
For the full year price cost spread contributed $28 million to adjusted EBITDA half of this favorability was driven by reinvent see actions.
Operating costs included labor and other non raw material cost inflation of about 13 million and the quarter and $53 million for the full year.
We incurred $3 million of year over year incremental spending related to COVID-19, and the fourth quarter and $16 million for the year.
These impacts were mostly offset by lower travel spending with the remote work environment.
In addition, reinvent see productivity benefits totaled $15 million and the quarter and $104 million for the year.
Adjusted EPS and the fourth quarter was 89 cents this compared to 78 cents and the fourth quarter of 2019.
For the full year adjusted EPS was $3 19 sets.
And increase of 13% over 2019.
The adjusted tax rate in 2020 was 24 and 5% down from 26% and 2019.
This year's lower tax rate was favorably impacted by the new U S guilty regulations, which were issued and the third quarter.
Turning to slide 12 here, we provide and update on reinvent see which continues to progress and is driving structural operating leverage and the business.
Our reinvent commercial work stream is robust and providing a solid platform for driving revenue growth growth and the markets we serve.
As Ted mentioned, we are seeing strong growth of our automated equipment order pipeline and look forward to capturing those opportunities and 2021.
And 2020 as mentioned, we realize the $118 million of year over year overall, reinvent see benefits to adjusted EBITDA and 2021, we now expect $65 million of additional benefits with roughly 50% flow through from actions taken and <unk>.
2020.
Reinvent see benefits realized since late 2018 from the transformation was launched are now expected to be approximately $355 million.
<unk> 5 million higher than originally targeted.
Cash restructuring payments associated with reinvent see were 74.002 million 20, with an estimated 40 million remaining in 2021 as reinvent see transitions from a restructuring phase two of the company's continuous improvement business operating system.
The total cash cost of reinvent see is now expected to be approximately 205 billion.
10 million of less than what we originally expected.
Turning to segment results on slide 13, starting with food and the fourth quarter food net sales increased modestly on a constant dollar basis to $757 million.
Net sales for the year were up 1% and constant dollars to just over $2 8 billion.
This performance was in line with our guidance.
The equipment parts and service sales, which currently represent about 8% of the foods segment were up 11% and the quarter and 8% from the year.
Across the globe, our meat processing customers are upgrading aged assets to improve efficiency and enhanced employee safety and reduced labor dependency and their plants, we are seeing meaningful capacity expansions to support market growth.
Early and South America for exports and in Asia, and Eastern Europe, where countries are increasing domestic production of multiple types of proteins.
Cryo back materials, which comprised the remainder of the foods segment sales were down approximately 1% on the quarter.
The trend was still below prior year levels, and improved 200 basis points from the third quarter.
Growth in retail applications, which accounted for just over 40% of food sales from the fourth quarter was largely offset by continued declines of barrier bags and couches.
Adjusted EBITDA and food of $170 million on the quarter was essentially flat compared to last year.
For the full year adjusted EBITDA increased $18 million to 648 million with margins of 120 110 basis points to 22, 9%.
Our full year performance was attributable to reinvest see productivity benefits and favorable price cost spread this was partially offset by unfavorable product mix and currency translation.
On slide 14, we highlight results from our protective segment income.
In constant dollars protective net sales increased 7%, the $584 million and the quarter and 9% to $2 1 billion for the full year. This performance exceeded the guidance, we provided on our third quarter earnings call.
And the fourth quarter volume trends in both North America, and APAC accelerated to 8% and 11% respectively.
E M EMEA volume turned positive for the first time in 2020, delivering 2% growth the.
The segment's growth was largely driven by double digit increases and E commerce and fulfillment.
It was also encouraging to see favorable volume trends and industrials and both North America and APAC.
Keep in mind, approximately 55% of our protective sales are derived from industrial end markets and the remaining 45% is coming from E commerce and fulfillment.
Adjusted EBITDA of $115 million increased $8 million or 8% and the quarter for.
For the full year adjusted EBITDA of $408 million was up 58 million or 17%.
And 2020 margin was up 130 basis points to 19, 6%.
Protective <unk> full year performance was attributable to reinvent see benefits and contribution from the automated packaging systems acquisition.
Really offset by unfavorable product mix.
Now, let's turn to free cash flow on slide 15, and.
In 2020, we generated $556 million of free cash flow compared to 321.002 million 19 and of our previously provided guidance of approximately $450 million.
The significant year over year improvement was mainly driven by higher adjusted EBITDA the.
The impact of the Novo tax settlement last year.
Lower reinvent see restructuring and the associated payments and lower capex due to pandemic related project delays.
Trade working capital was the source of cash of 14 million of 2020 relatively consistent with 2019, our trade working capital which includes the advanced payments.
The conversion cycle for the us was better than anticipated and improved approximately two days compared to 2019 the.
This was largely attributable to an improvement in the day sales outstanding.
Our adjusted EBITDA to free cash flow for the year was very strong at 53%.
Slide 16 highlights our net leverage liquidity and debt maturity profile and we ended the year with leverage at three onex on a net debt to adjusted EBITDA basis.
This is down from three six X at the end of 2019.
With the strong balance sheet $1 7 billion of liquidity and no debt maturities until August 2022, we have good financial flexibility to support growth of the business.
On slide 17, we outlined our capital allocation strategy, we ended 2020 with and ROI fee of approximately 15%, which is top quartile and the packaging industry and well above our weighted average cost of capital.
We will continue to take a disciplined approach to maintain a strong balance sheet, while driving continued attractive returns on invested capital.
We are investing and capacity to support growth initiatives, and we are accelerating innovation with disruptive products and technologies.
Approximately 40% of our organic Capex is currently focused on growth, including breakthrough production processes automation and digital.
The adventures includes selected of minority investments and early stage technologies focused on automation and digital and sustainability.
These investments will help accelerate our strategy and will complement our internal innovation efforts cross sealed air for example, and the fourth quarter, we increased our investment to $8 million and plastic energy and the.
The industry, leading startup company with advanced recycling technology, and and early 2018, we invest with a similar amount and farm of tax a leading E commerce enablement platform we.
We recorded a $15 million gain on this investment and the fourth quarter. This gain was treated as a special item and excluded from adjusted EBITDA and the quarter.
Regarding shareholder returns and we take cash dividends in 2020 of 100 million, which represented the dividend payout ratio of 20%.
And starting on the third quarter, we re initiated share repurchases with 821000 shares acquired and the second half of 2020 at a cost of $33 million.
Let me now turn the call over to Chris to provide our outlook for 2020 welcome Chris It's great to have you on board.
It's the next.
Operating time to join the sealed air team and I'm happy to be here.
Since joining in early January I've spent a great deal of time, working with Ted and the team executing my 100 day of game plan focused on people process and results.
I have met virtually with many of our leaders and teams around the world and had the opportunity to tour of few of our facilities and the Safeway.
There's more to learn and many more people to meet and places the visit but in my short time, you can see the passion and commitment by the sealed air team to drive success and continue to execute to exceed customer expectations.
So, let's turn to slide 18 to review our 2021 outlook.
We anticipate net sales to increase four and five to six 5% as reported or five 1% of $5 2 billion.
On a constant dollar basis net sales are expected to increase two and a half of four 5%.
Driven by favorable volume and price and both food and protected.
We expect foods and delivered through the 4% constant dollar growth and protected the delivered 3% to 5%.
Automation equipment and sustainable solutions are expected to drive growth and food and protective and 2021.
And food, we expect the retail channel and protein exports remained strong. We also expect the foodservice industry the recover as we progress through the year.
And protected and we expect continued growth in E commerce and fulfillment and.
And the industrial end markets the gradually improve.
We expect favorable currency translation, and 2021 sales and adjusted EBITDA of approximately 2%, mainly due to the euro and the Australia and New Zealand dollars.
Adjusted EBITDA is expected to be one one to one and one 3 billion at the midpoint of this would imply a modest increase and adjusted EBITDA margin compared to 2020.
Margins are being impacted by higher input costs and continued COVID-19 related expenses.
To help alleviate higher raw material and freight costs, we initiated market price increases and Q4 with more actions going into effect this quarter.
Also keep in mind that our formulas and food North America are typically on a six month lag and are expected to turn favorable mid year.
We expect adjusted EPS to be $3.25 of $3 40.
Given the current impact of higher material costs, and the timing of pricing actions and ease.
Driven by Formula and we expect 2021, adjusted EPS split of approximately 45% first half, 55% second half versus what we realized in 2020, which was the split of 47, 47% of first half of 53% second half.
Our outlook assumes approximately 157 million average shares outstanding and an adjusted tax rate of 26% to 27%.
The higher adjusted tax rate is primarily due to the absence of evaluation reserve release that benefited the rate and 2020.
For free cash flow, we expect to generate 500 of $550 million.
This is net of capital expenditures of approximately $210 million or 4% of sales and reinvent see restructuring and associated payments of approximately $40 million.
The year over year anticipated decline and free cash flow is largely attributable to higher trade working capital from sales growth and higher employee bonus payments and 2021, given the strong performance and 2020.
Let me now pass the call it the pet for closing remarks.
Thanks, Chris before we open up the call for questions turning to slide 19, I want to reiterate our four PS of reinvent see.
We start with the purpose statement, we're in the business to protect the solve critical packaging challenges and to leave our world and then we found it.
Our performance continues to improve we are keeping people out of harm's way, while strengthening our business, we're enabling fast decision, making by operating under a one C culture.
Our strategy to deliver the best solutions at the right price and make them sustainable is working.
Rod and innovative product portfolio global scale, and agility has enabled us to address the evolving customer needs across our diverse end markets and geographies.
Our <unk> operational excellence processes, our focus on flawless quality world class productivity and yield improvement as well as customer service enhancements that are creating customer references.
And then C is our operating engine that is driving profitable growth.
Sustainability and ESG, our strategic imperatives and <unk>.
And our purpose and fueling our growth.
The most recent sustainability report, which you can find on our website includes progress on environmental and social initiatives, including climate, and our 2025 sustainability pledge and diversity equity and inclusion.
We exceeded nearly every one of our 2020 sustainability goals and we'll be releasing our new 2025 and beyond gold shortly.
We delivered exceptional results and a very challenging and unpredictable environment I want to thank all of our employees and our plans and our innovation centers out and the field and working remotely for their dedication and commitment to business continuity.
We recently shared the Jim Sullivan is planning to retire at the end of March 2021.
Jim joined our team and a critical time and provided tremendous leadership throughout his tenure.
He has contributed and incredible amount of value and I'm personally so appreciative for Jim support and leadership.
And I along with his colleagues here at sealed air and want to thank Jim for his contributions.
With that I'll now open up the call for questions.
Operator, we'd like to begin the Q&A.
As a reminder to ask the question no need the press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Ghansham Panjabi from Baird. Your line is now open.
Hey, guys. Good morning, Jim you will be missed and Chris Congrats on your new role.
Thank you and kind of.
Yeah, I guess first off maybe on the food segment.
And the grocery channel has been elevated through the course of the pandemic on you know there are some theories out there.
And the consumption of packaged food will just be at a higher volume baseline relative to pre COVID-19 levels. I guess the question is is there an opportunity here for sealed air to better balance.
That'll exposure against that backdrop versus the current weighting towards fresher food and if so how will your automation platform play into that dynamic.
Sure Hi, Ghansham.
Good morning.
And if we look at where we are with food and just to recap.
The basically the foodservice side that is getting hit with us and reproduces the bags and tying into the restaurants, because we all know what's happening there, but on the retail format, that's changing dramatically and.
And so what we're seeing as we look at if you looked at our moving real slide on slide five we see that shift we have E commerce actually on the right side, where we talk about protective but that's the shift that we see happening very very quickly and the retail formats to your question. If you go to a grocery store we all.
And you see people packing next to you and those Packers were already working with customers and some of the startups.
And on where E. Groceries is going so what is that doing to the packaging format to your question, bringing our Dar of fresh line dark fish entree, how do we actually package that that's now by of pick and pack, but actually that's going to be going into komatsu and robot. So we actually see that format.
Moving quite aggressively.
So we see the market is still moving on the sustainability, the secular trends of automation and fresh food and food safety and even drive harder as we go into those formats and the grocery stores and so our <unk> leading barrier bag right now we're working on new barrier materials.
And then not only of lighter in weight, we're looking with Recyclability with our investment with plastic energy. They want the PBGC out. So we are actually new designs already coming in that we're going to use chlorine free material because of the chemical recycling plants don't want that we had an announcement.
And then with plastic energy and Tesco and so we're leading the way and that so these new formats.
And we think we're well positioned for in the fourth quarter and going next year, we're dealing with still the pandemic. So that shift is happening as we speak but we definitely think theres an opportunity. The other part of our protein side as we talk about that bag and the box and pouches, we are definitely see that.
Slowed with the <unk>, but we are that's where we're seeing a lot of opportunity to actually go into the liquids and fluids business. So actually excited we think we have a lot of opportunity we got to get through some of these headwinds with our markets and the pandemic, but we think we're well positioned and the food side of our business.
For that new format.
Just seeing in the Wall Street Journal today, it's heartening, saying.
Saying that they think this pandemic will be with us forever. So once again, we're planning for the worst hoping for the best but we think our portfolio is well positioned to take advantage of that new normal that's coming in 2021 and beyond.
Thank you operator.
Thank you. Our next question comes from the line of Jeff Zekauskas from Jpmorgan. Your line is now open.
Thanks very much.
And I was puzzled about your EBITDA guidance and that your EBITDA and 2020 was 10 50.
And you thought that you would get 65 million and.
And benefits from your cost synergy program.
Which would get you to 11 15.
Which is the midpoint of your guidance for 2021.
So is the meaning of the guidance that there's no real benefit from the growth and sales from 'twenty, one or why isn't the guidance higher.
And Jeff This is Jim Sullivan, and let me, let me clarify I know you're new to the name Eric.
Talk about reinvent benefits.
We're talking about those productivity actions that we're driving within our factories and we talked and the call about how we delivered $118 million last year and this year, we're coming down to $65 million. Our plan is to continue to drive those benefits at a level higher than our inflation. If you look at our wage and.
And across the enterprise, it's roughly $50 million. So what you are seeing that kind of offsets part of those reinvent benefits is that so the flow through if you look at the benefits and the inflation, it's about 15 million and not the full 65 billion.
Now, having said that I've been around now sealed air for a year and a half and I continue to be very encouraged by the continuous prudent culture. The high performance culture that we have here and what sealed air and <unk>.
We bought after the three year restructuring transition that we would just kind of be on par it would be and inflation fighter not add value. If you will above inflation I think that we're well positioned and the pipeline for reinvent is very strong.
And $65 million next year, hopefully, we beat that we've got the 50% of that is flow through from actions we've already taken in 2020.
So.
Well positioned to deliver that and will continue to drive actions that will allow us to add more to it and in 2022 and beyond.
Hopefully that helps clarify a little bit of the math.
Yeah.
Okay.
Thank you next question on sorry about that.
Thank you and our next question comes from the line of George Staphos from Bank of America. Your line is now open.
Hi, everyone. Good morning, Thanks for all of the details Chris and Jim Congratulations.
And congratulations on the progress.
I guess my question.
Is around volume growth and translating that into your operating leverage target and return on capital. If you could give you a sort of target. There. So you know Ted if you could talk about some of the key platforms that youre working on Dr. Fresh on tray youre mentioning to Ghansham some of the sustainability driven product what would you say.
Say, you're expecting in terms of growth for those products in 2021, and how does the growth and these products and E commerce.
Factor into your operating leverage target, which is now 30% plus I think a couple of years ago last time, you talked about it was more like a 40%.
And in turn.
We like the the return on capital discussion that you have on the deck and how you calculated and what kind of target. If you have 30% plus in terms of ROIC and in terms of margin what kind of ROIC targets and we expect over the next day or two to three years to four years. Thank you.
Yeah. Thanks, George lot in that question, the very thoughtful sell and try to unpack it and actually build off of Jeff's question. The Jim went through the financials because it ties into the operating model that we talked about on slide four.
So what we're going into and we're looking at very current state of what happened and the fourth quarter, the operating leverage and the fourth quarter was actually below the target of where we've been driving less and 20% operating leverage but for the year, 77%, so well, what's going on with our portfolio.
And this tumultuous market we've had huge spikes, but then we've also had parts of the portfolio go down and so now if we look at operating leverage and take a look at our top three product lines and so if we look at food, what's going on with bags and what's going on with bags is affected by all of those restaurants.
Being shut down bags are flat to down our highest margin product. So theres actually a deleverage on the portfolio Theres, a lots of things sort of going live and great progress with Dod fresh on track great progress with some of the sustainable product, but if you look at net net in the fourth quarter and then.
We had some rising input costs did we get ahead on the pricing that we talked about so if you look at that and the quarter. Then you play that through to 2021, you say huh.
The leverage and the midpoint is below that 30% and instead of 25, because we got to get through this first half and what we know and the pandemic. So we look on the protective side.
Wow, you know how many I've been here three years now and seeing that growth can you grow that protected yes. We can yes, we will well we're dealing with our largest product line and that portfolio. It's dependent on the industrial rebound with our instead of pack so deleveraging really heavy so.
And we have all of these ops.
And with that major down on both sides of the business is delevering.
So is it where we wanted to be for the year, 70%, 7%. That's good. So what we wanted to give you was where we're taking the business and where this engine is gone. So we left out of three year plan and that's what we're going to do we're going to put it with very stable markets, though even and pandemic. Some go away.
And some go down so net net we think we can beat that stable market that we serve we think with their innovations and sustainability and we can take that to two to four and.
And the excitement is where we're taking automation the take that to three to five well then to the second part of your question you asked about leverage and Hey, Ted When you came in and you did your assessment of this business Hey, you thought you could leverage at 40% well, we did pretty well we actually if you look at our last three at your.
Average, we leverage way over that 40 to 50, but we also had restructuring and that number. So we're now building off the base of almost 260 basis points higher than we started and there is of greater sign next to the 30%, but that's where we think the model is gone.
And then to your last part of your question was on ROIC.
We shared with you day, one when we got here, we're going to change the guardrails on this business, we are going to measure of leverage and.
I believe it and this is part of the mantra you get what you measure so we put operating leverage and there is all the way through but we also put in ROIC seek day, one all of our.
Investments and capital we look at return on investment and you can now see you get what you measure through this tumultuous market. Our Aro of set ROIC has moved up.
But the George the last part of your question, but where you can take your ROIC.
Our investors know that we're way over our cost of capital wants to put assets on this engine and generate value and that's where we mentioned in there. That's what we're driving this high powered value creation engine is going to be driving these assets that we put on place.
Far above our cost of capital, but it's not about taking that the 15 to 17 and it's driving growth on this engine and that's where we're taking it and so again why on slide three we feel confident the.
Engineers in place, it's moving despite the tumultuous markets that we face we feel confident and we wanted and our investors to know this is where we're going and we're quite confident we're going to get there. Despite the market that we're dealing with really hard and the first half of 2021.
Our next question sorry, operator.
Thank you. Our next question comes from the line of Anthony Pettinari from Citi. Your line is now open.
Good morning.
You talked about the price initiatives, you are taking to recover higher resin costs and I'm. Just wondering if your guidance assumes resin basically remaining at current levels or maybe some relief for incremental inflation over the course of the year and then with other cost categories, maybe things like free corrugated we've seen some sharp inflation.
Can you talk a little bit about the inflation that you're seeing in non res and raws is that and issue and are there any sort of initiatives or.
Actions that you're taking there.
Sure. Thanks, Anthony will I'll give you the of you and then Jim can maybe give you more detail if you'd like the basically youre exactly right its more than just restaurant and we've.
Since I've been here, we've been talking about resin and our team does an excellent job and part of our reinvent is to really focus with multiple different suppliers on the resin and then we have specialty revenues resin. So how can we beat the market and we think we will do that but what has happened with resins and there's no secret.
It has gone up significantly with what the.
The chemical industry is doing so we've been ahead of that on the price, especially with the protective we went out with price and the fourth fourth quarter.
But the second part of your quest the way and also the formulas are coming we have that six month lag there, but we believe we're ahead of it we are the leader and the market. We can lead with price, we don't talk to our customers about price, we are actually embedded with our customers and actually bringing automation and on how we can solve.
This problem and together so I just want to highlight that but the second part of your question you're exactly right. We're seeing it beyond it's the freight costs that have gone up significantly and the other input costs. So we're managing that and and we're using price to stay ahead of it.
But the issue that we have to really work with our customers is look it may be different product portfolio and look at automation, but the other piece that we're not giving up with this rising input cost is the sustainability side. So we are also continuously looking at our material change on <unk>.
Cycled content is it more challenging absolutely, but believe on the price side, we're going to lead and we're going to get our cost right and we're going to be driving automation and by the way automation internally as well as externally. We think we're gonna be ahead and get through this it's tough though right.
Now fourth quarter first half of 'twenty and 'twenty, one you're exactly right.
A tough market on there on input costs.
And on Jimmy if you wouldn't add anything to that or no that was good I mean I think the other question piece of the question was what are we expecting in terms of the back half of the year. The current environment or are we expecting relief as everyone knows the cost curve on inputs across 2020 and was increasing across the year.
So as we plan the business, we're certainly planning for the.
The materials the resins to be at a high level that they are now and we're initiating the price actions that Ted talked about we're very comfortable even in this environment, we can manage the spread of the price cost spread very well.
Over the course of our range of guidance certainly on the low and you could see the.
Input cost exceeding our ability to price and a big part of that is timing you know how is the timing of the raw materials coming in and how quickly can we get the price and place many of our pricing much of our pricing of the north Americas Formula based on the food side. So we won't get that right of way, but certainly we have mechanisms.
And to deal with it and then the final piece of the question was on other raw materials, So think about resin polyethylene and ethylene representing about 50% of our overall resin buy and resins and total or about half of our total input cost. The other half is only inflating and low single digits.
The takeaway I think Tennessee, what you said, we're managing both the input side and the price side very well alright, I was waiting for Jim to say he's going to take care of the hard part Chris is the easy part of that capacity.
Operator next question.
Thank you. Our next question comes from the line of filming from Jefferies. Your line is now open.
Hey, digging into that price cost question, a little bit of all of our first of all thanks year for all of the help really appreciate it and looking forward to working with you Chris.
But just digging in the little bit of award.
Digging a little more and to that question Anthony asked about resin and it seems like you're managing it pretty well any handholding you can provide in terms of price cost. The next few quarters you know how.
And how material it would be relative to let's say fourth quarter.
How are you tackling this headwind between like price versus cost and just lastly have you seen some of your competitors take a similar approach on pricing. Thanks a lot.
So the last question first yes, I think the whole industry is looking at price and doing what it can to recover materials. As you noted. So we did have negative price cost spread and the fourth quarter year over year was about $7 million.
And we would expect that the first half of the year will continue to be a little bit challenged that way, which is why when Chris talked about the the adjusted EPS guidance for the full year of he said kind of expect.
The 45% coming and the first half of the year and 55% and the back half of the year. You know, we're thinking about that cadence of price cost spread being a little bit more challenge and the first half and as we get pricing into the business.
Right now volumes are very robust, we feel good about our ability to get price.
We're not doing anything that anyone else is doing and as Ted said, we're focused on doing what we can differentiate ourselves and really the more value sellers than just pass through.
Resin and then the only other thing I would say is we continue to drive reinvent and above our inflation.
Got $15 million spread as we talked about earlier, we're going to continue to drive that and I think there's some upside there that will help us mitigate some of the raw material pressures that we see.
Yeah, and Phil just I, just want to add one thing because I want to make sure of this we've spent a lot of time with changing the model.
And how we handle price with customers and so we are we are going to rapidly with our customers. We are not sending price increases over the transom. We're there with them. How can we work together I was personally and one of our fastest one of our largest customers on the protective side just <unk>.
Last week and the conversation they're seeing it.
You know what can we do together to handle this I just wanted to make sure because our customers of listening right. Now we are going to handle this together with them and if we even have to move the portfolio. So I do think we're very different than our competitors. We have a very unique portfolio that we can.
Respond and a much better way on this pricing situation with resins and we've ever done before and I really think we're going to come out on the other side well ahead of the competition.
The next question operator.
Thank you. Our next question comes from the line of Adam Josephson from Keybanc. Your line is now open.
Thanks, Good morning, everyone and congrats on a really good end of the year.
Question on just the the organizational shift seemingly from from reinvent see too.
Looking for significant organic sales growth and the 'twenty two 'twenty for a period and the last two years, obviously, you've saved about $300 million of costs during which time your organic sales have been flat and I know theres been a pandemic and a weak global economy, even before the pandemic, but nonetheless, you had flat organic sales while you're.
Saving of significant amount on costs via reinvent see so I think you're tired of of major organizational shift in terms of focusing on cost reductions to focusing on topline and I'm. Just wondering how difficult do you think that transition may be the pull off or the.
Perhaps not much at all but would love to hear your thoughts about how you accelerate sales growth so dramatically and we.
You will there be any more restructuring required over that period. Thank you.
Well, it's good and I've wanted to listen carefully to your question.
No.
My answer to that would be we're reinventing on how we grow the business.
So the restructuring side on the cost you are exactly right, but David.
The portfolio of change.
A part of this difference that where we're going we're moving from being a product driven business to be of market driven business. So 'twenty 'twenty was a pivotal year for us that portfolio shifted dramatically.
So we're pointing that portfolio to the secular trends and the industry and we.
And we believe are going to be there post pandemic, what does that mean automation and.
How do you put more stuff and a package more effectively and efficiently safely securely that.
That is what we're focused on so we think that can drive our portfolio of crossed food product across the region significantly and that's what we're focused on but we have to do it more efficiently. So we've invested part of our investment has been in innovation and are ours.
And as Jim even mentioned, we're given visibility what we're doing with <unk> ventures, if we can't develop it fast enough. When you have that innovation right on top of the team and we're going to move we're going to move this portfolio faster to innovate faster to satisfy those secular trends.
And that's what the exciting part of the packaging business. It's a stable market. It's up it's up to us to move the organization could you use the word organization a lot to move this organization to where the growth is and.
And I'm I think 'twenty and 'twenty was a pivotal year to show us that we can do it it takes time and by the way on dealing with our scientists and all the time and getting FDA approval on our products are unique we're testing. If you came to our innovation center, we're testing things, but we're doing it now virtual.
But we've got and move faster. So the innovation is one of the key that I believe is that next phase that's happening in 2020, but we got to drive it even faster to support that 3% to 5% growth that we're going after I definitely believe we're going to get and the final piece that I would.
Bill mentioned, it's gotta be sustainable so some of the churn and that's the term we use internally why aren't you seeing some of the growth for the innovations and this is where our team says it on too tough on them is because of the churn is we're now actually bringing sustainable solutions like bubble wrap on demand the <unk>.
The ramp if you looked at our facilities to dramatic shift on that is now we have bubble wrap.
And our portfolio with 90% recycled content we.
We did that and less than a year.
So that's part of our bubble wrap portfolio, but it's fully redesign with recycled content. So.
I'm quite excited about that 3% to 5% growth.
We can make and the leverage it.
And over 30%. So operator, we have time for one more question.
Thank you. Our next question comes from the line of Neel Kumar from Morgan Stanley. Your line is now open.
Great. Thank you.
And the protected E Commerce has been a clear driver of segment performance and the past two quarters how.
How are you thinking about the end market exposure of protective longer term.
That 55% segment exposure and industrial versus 45% from ecommerce and Kelvin.
And mix going forward or do you see opportunity.
The increase becomes exposure for there.
Yes.
Hi, Neil and by the way the <unk> have to recognize you our win.
When I did my.
Fireside chat with you. It's your Laguna Conference you asked me about changing CFO is on the spot and I shared with you with Jim a friend and Natus and friend and David So I'd like used as an opportunity to thank Jim again.
When you put me on the spot there on your contracts. So if we look at that portfolio and protected the ecommerce we talked about I just want to say it again E commerce is affecting food too, but for right now and let's go to your questions. So the industrial piece as you you highlighted the 55% that's net negative deleverage that we've had we had.
Slight growth and the fourth.
The fourth quarter, which is good and used. The example on here if we look at our movie real slot, what's going on with industrial we saw automotive we have seen automotive turn.
And we haven't seen it turned to the same levels, but we did see positive. So here's an example of what is automation mean and this is actually a tire solution. So what are we going to do we're going to go package tires, we're gonna be working with the customers, which by the way they get huge penalties because of those tires roll off.
E Commerce conveyor systems. So we've designed a shrink tunnel and we're going to put the tires in the shrink tunnel by the way that's a few hundred thousand dollars, but where we're going to be even more of them going to put the full system in for a couple of million dollars. So we're going to wrap those tires by the way, they're going to have paper and plastic so they don't.
Roll off we're gonna shrinking and we're going to wrap and so they want they don't want to have anybody and know what's inside and.
So the materials, they're going to flow through that we're going to be at two eggs the cost of the system.
So that's a solution that we're bringing right now as we speak into that industrial and automotive segment. So we see that picking back up and boy does that leverage nicely just like our bags business. That's the industrial side of our business Leverages quite nicely. So that's the.
Link of industrial with ecommerce et cetera, so the industrial piece.
The is beyond that we've also seen a pickup on the electronics that's in the industrial side and also on the protective you see that we're kind of emerging on the market as we do.
With our auto bag system, we're actually using the auto bag system now the package food.
So it's in our protective versus food portfolio, but again I'm talking about where that automation is coming in and.
And by the way on the top of the slide it's personal we have pet care up there for all of you staying at home that is an area that really had to pick up and the business with pet care pet food pet accessories, and that's going we're packaging that stuff that you are getting at home right now, but that's going to our side pouch and auto bag.
System, So just giving you a little color and flavor, we're going after that industrial piece, it's coming back, but right now and 2020. It was it was a weight on it was a weight on 'twenty and 'twenty and opportunity in 2021.
So with that operator that the close for our call today and want to thank everyone and I hope, everyone stays safe and healthy and.
Thanks again, Jim.
I know you'll be watching and Chris really excited to have you on board. So thanks, everyone and we'll see you next quarter take care.
Ladies and gentlemen, this concludes today's conference call and thank you for participating you may now disconnect.
Yeah.
[music].
[music].
[music].
[music].