Q1 2021 Sealed Air Corp Earnings Call
[music].
Ladies and gentlemen, and thank you for standing by and welcome to the first quarter 2021 sealed air earnings Conference call. At this time all participant lines are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. The one day session you will need to press Star then one on your Telus.
Phone, we ask that you please limit yourself to one question at that time.
Please be advised that today's conference is being recorded if you acquire any further assistance. Please press Star then zero I would now like to hand, the conference over to your host Lori <unk>, Vice President of Investor Relations.
Okay.
Thank you and good morning, everyone.
Hope you and your family are healthy and staying safe.
With me today are Ted Doheny, our CEO and Chris Stevens our CFO.
Before we begin our call today I would like to note that we have provided a slide presentation 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 would 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 information that is now available to us.
We encourage you to review the information and the 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 lifted and our most recent annual report on form 10-K, and as revised and updated on our quarterly reports on form 10-Q, and current reports on form 8-K, which you can also find on our website at feel their dot com or on the SEC's website and S E T.
Gov.
And also discuss financial measures that do not conform to U S. GAAP and you will.
I'll 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 the non U S GAAP measure.
And we referenced throughout the presentation.
I will now turn the call over to Pat.
Operator, please turn to the next slide 10.
Thank you Lori and thank all of you for joining our first quarter earnings call.
We had a solid start to the year, despite the ongoing pandemic and winter storm Yuri impacting the global supply chain.
Our team has been doing a great job leveraging our supply network to ensure business continuity.
And you can see on slide three our purpose, we are and the business to protect to solve critical packaging challenges and to make our world better than we found and our purpose is clear and continues to guide us.
On today's call I'll recap, our first quarter 2021 performance.
I'll share how we are managing through the current environment, how our global markets are evolving and the growth opportunities. We see ahead.
We're leading the way with automation and digital and sustainability.
Chris will review, our financial results and outlook in more detail.
I will end with closing remarks before opening the call for Q&A.
Let's turn to slide for for a review of our first quarter 2021 results.
Net sales increased 8% with strength and ecommerce automated equipment food retail and industrials.
Adjusted EBITDA increased 6% volume growth and reinvent see productivity improvements more than offset material inflation and supply disruption costs.
EBITDA margins were 21, 2%.
Modest decline compared to last year.
Our operating leverage of 16% was impacted by the inflationary environment and timing of our price actions and Formula pass throughs.
Near term pressure is expected to continue through the second quarter.
Adjusted earnings per share was <unk> 78.
Up 7% we.
We generated free cash flow of $36 million, which compares to the use of cash of $8 million and the first quarter last year.
We are raising our 2021 outlook across all key metrics to reflect our first quarter results topline momentum and operating leverage improvement and the second half.
Looking beyond 2021 on slide five we wanted to reiterate the objectives of our C operating model.
Automation and digital and sustainability is expected to drive above market growth.
Our organic sales target is 3% to 5% for approximately 200 basis points above our addressable market growth.
We service stable market that historically has grown 1% to 3% a year with innovation and sustainability, we expect to accelerate growth on our base business to 2% to 4% and add another 100 basis points of growth with automation.
Our operating leverage target is over 30%.
Which translates into adjusted EBIT growth of 5% to 7% per year.
And with our capital allocation strategy in place, we're targeting adjusted earnings per share growth of greater than 10% and free cash flow conversion and greater than 50%.
Let's turn to slide six our movie real slide, which pictorially shows some of our new solutions powered by our iconic brands and.
You can see a playbook and on this slide which is to encourage you to visit our website, where you will find exciting success stories.
Our automated and sustainable packaging solutions, and maximize food safety protect goods minimize waste and deliver savings to our customers through increased productivity.
And the first quarter, we had strong growth across our protected and markets.
Led by E Commerce, retail and consumer goods logistics medical and life Sciences, and the recovery and industrials.
We're leading a dramatic shift to a touchless automated environment and fulfillment centers, resulting in double digit growth and our automated solutions portfolio further enabled by our Aps acquisition.
And consumer goods and logistics, we're capitalizing on global ecommerce growth.
And medical and life Sciences were playing a key role and the global COVID-19 vaccine distribution and benefiting from growth and online shipment of medical equipment and pharmaceuticals.
Our industrial markets, including General manufacturing electronics, and transportation has gained momentum since year end, particularly in Asia Pacific and Europe, where we have a high exposure to electronics and automotive end markets.
And the Americas, we experienced favorable trend despite the winter storm supply disruptions.
There continues to be an imbalance across the food industry with strong demand and the retail channel offset by softness and foodservice.
We were encouraged by our performance given the end market environment and the tough year over year comparable particularly in North America.
We saw strong growth and our automated equipment and favorable trends and retail applications across all proteins, including cheese and seafood.
Going forward, we expect foodservice to recover at restaurants sporting events conferences and other large public venues reopen.
On a global basis, our meat packing customers are investing in automation and material that improve productivity enhance employee safety and address their sustainability goals.
We are at the table staying connected online with our customers demonstrating our new automated touchless and sustainable solutions.
And Europe, we're gaining momentum with our industry, leading cryo that barrier bags optimized for recyclability.
We're experiencing and increase in demand from quick service restaurants, they're investing and new cryo ex auto power solutions for soups sauces, and condiments wine and spirits.
Our high performance sustainable materials are integrated with automated equipment and services disrupting the rigid container market.
Now turning to slide seven for an update on see automation Touchless solutions.
Equipment systems, and services sales were up 18% and the quarter and accounted for 8% of our net sales.
We are on track to achieve approximately $425 million for 12% growth in 2020, one of which more than $250 million will come from equipment and systems.
Our sales pipeline for automated equipment is strong and we are confident and our organic target of over $500 million by 2025.
When you factor in a three ex plus solutions multiplier, including growth and parts and service from the installed base and the flow through of materials. This result, and a $5 billion plus potential growth opportunity over the 10 year solution lifecycle.
We're working closely with our customers to prioritize projects to create less and a three year payback.
We're creating tremendous value for our customers and are excited to lead the way to a more touchless digital environment.
Now, let me turn to slide eight and share how we're leading through this pandemic.
We are investing and our own e-commerce platform to drive our transformation to a digitally driven world class company are smart and intelligent packaging value proposition is enabled by our proprietary digital printing technology. This is enabling unique designs on high speed package.
<unk> systems, and multiple colors food grade, Inc, and even invisible links that with our unique see marks will enable blockchain tracking billions of packages.
Our vision is to digitally connect sustainable packages inside our facilities to our customers and to consumers' homes through E Commerce.
I will now pass the call to Chris to review, our results and more detail Chris. Thank.
Thank you Ted and good morning, everyone, let's start on slide nine to review our quarterly net sales growth by segment and by region and the first quarter net sales totaled $1 3 billion up 8% as reported up 6% and constant dollars.
<unk> was flat in constant dollars versus last year on a tough comp and protective accelerated 14%.
Our fastest growing region with Asia Pacific, which delivered 12% constant dollar growth.
EMEA increased 7%, which is the highest organic growth rate for the region and the last for years and our largest region and the Americas was up 4%.
On Slide 10, you see organic net sales volume and pricing trends by segment and by region.
And the first quarter overall volume growth was up 5%.
Volumes and food were flat with favorable trends and Asia Pacific and EMEA, offsetting a 2% decline and the Americas.
Protective volumes were up 13% with double digit volume growth and all regions.
As Ted indicated on a global basis strength and E Congress automation, and food retail and improving trends and industrials more than offset softness in foodservice.
Q1 price was favorable and 1% mainly due to U S dollar based index pricing and Latin America.
Most of the pricing actions and corresponding to the current raw material and supply chain environment environment are taking hold and the second quarter and Formula pass throughs, largely and food and North America are just beginning to turn.
On slide 11, we present, our consolidated sales and adjusted EBITDA walks for the first quarter.
Having discussed sales results, let me comment on our adjusted EBITDA performance.
We delivered adjusted EBITDA of $268 million up 6% compared to last year and margins of 21, 2% down 40 basis points.
You can see on our EBITDA walk that higher volume and operational benefits offset higher input costs.
Adjusted EPS and Q1 was 78.
Compared to 73, and Q1 and 2020.
And adjusted tax rate was 27, 6% essentially in line with last year's adjusted rate and the same period.
Our weighted average diluted shares outstanding and the quarter were $155 million.
Turning to slide 12.
Here, we provide and update on reinvent see and 2020. One we remain on track to realize approximately $65 million of reinvent see benefits with roughly 50% flow through from actions taken in 2020.
Our commercial work stream is accelerating innovation and driving new customer wins and core and adjacent markets.
As Ted noted, we are seeing strong growth and our equipment order pipeline and both food and protected.
Turning to segment results on slide 13.
Starting with food and Q1 food net sales of $702 million were flat on a constant dollar basis similar to the year over year trends, we experienced in the fourth quarter Cryo Vac materials were down slightly due to low single digit declines and barrier bags and pouches, which combined represents nearly 50 per.
For scent of segment sales and have the highest exposure to foodservice.
This was offset by modest growth and case ready and roll stock retail applications, which represents just over 40 per cent of the segment and equipment parts and service sales, which accounts for approximately 7% of the segment.
We're up approximately 10% and the quarter.
Our customers and around the world are investing and their processing plant upgrade aged assets and drive productivity.
We are also seeing equipment opportunities and Asia, and eastern Europe, where emerging countries are focusing on domestic production of multiple types of proteins.
Adjusted EBITDA and food and 157 million and Q1 was essentially flat compared to last year with margins at 22, 3% down 30 basis points, given higher input costs and timing of pricing.
On slide 14, we highlight protective segment results.
In constant dollars net sales increased 14% and $565 million.
Fulfillment, which is largely driven by E. Commerce growth was up approximately 20% on a global basis with similar growth trends across all regions.
Industrial was up high single digits, driven by end market strength, and general manufacturing electronics and automotive.
We leveraged our broad portfolio and global scale to meet increasing demand despite supply disruptions.
And I also want to highlight approximately 55% of our protective sales are derived from industrial end markets and the remaining 45% from for summit and ecommerce.
Adjusted EBITDA of $110 million increased $17 million or 18% and Q1 with margins at 19, 5% up 30 basis points.
Now, let's turn to free cash flow on slide 15.
And the first three months of 2020, one we generated $36 million of free cash flow compared to a use of cash of $8 million and the same period a year ago.
Largely driven by higher adjusted EBITDA.
Lower restructuring payments and the $24 million tax refund, we received in the quarter associated with the retroactive application of the revised U S guilty regulations.
On slide 16, we outline our capital allocation strategy.
We will maintain a strong balance sheet, while driving attractive returns on invested capital and supporting our profitable growth initiatives.
On this slide I want to highlight our organic growth investments.
We are focusing our capex on breakthrough processes automation and digital and sustainability.
With <unk> ventures, we are investing and early stage disruptive technologies and business models that are expected to accelerate our strategy and innovation efforts across sealed air.
As it relates to returning capital to shareholders and Q1, we were an active buyer of our stock, we repurchased 4 million shares for $177 million, reflecting confidence and our vision strategy and execution.
We have approximately 500 million for additional share buyback remaining under current board authorization.
And you can see and the takeaway, we updated our financial policy and leverage ratio objective to be three five times or below from previously communicated three and a half four times.
Let's turn to slide 17 to review our updated 2021 outlook.
We are raising our guidance across all key metrics, reflecting strong Q1 performance and.
And outlook for the remainder of the year.
For net sales, we now estimate five to $5 535 billion or.
For 7% to 9% as reported growth.
And 6% to 8% in constant dollars.
This compares to our previous guidance of $5 one for $5 2 billion for constant dollar growth of two and a half to four and 5%.
The higher sales guidance reflects increased volume growth and protective and additional price and both segments given the current supply chain environment.
And food, we now expect constant dollar growth of 4% to 6% as compared to previous guidance of 2% to 4%.
And then protective we now expect constant dollar growth.
8% to 10%, which compares to previous guidance of 3% to 5%.
On a reported basis adjusted EBITDA is now expected to grow 7% to 9%.
We anticipate adjusted EBITDA to be and the range of $1. One to 211 5 billion a $20 million increase at the midpoint from our previously provided guidance.
Higher sales from volume and price are expected to offset increased material and supply disruption costs.
In terms of currency, we now expect favorable FX translation on 2020, one sales and adjusted EBITDA of approximately one five per cent.
We are raising our 2021 and outlook for adjusted EPS to $3 40 to $3 55.
And we continue to expect approximately 45 55 first half second half percentage split.
Our outlook now assumes approximately 154 million average shares outstanding of.
A 3 million share reduction from our prior guidance, reflecting our share repurchases in the first quarter.
We continue to estimate and adjusted tax rate of 26% to 27%.
And lastly, our revised free cash flow outlook of $520 million to $570 million reflects the higher range for adjusted EBITDA.
There is no change to our outlook for 2020, one capex of approximately $210 million and.
And reinvent see restructuring and associated payments of approximately $40 million.
As you can see on this slide we wanted to provide a few variables as it relates to our 2021 guidance range.
The low end of our range would suggest a slower recovery and foodservice and supply chain headwinds persisting longer than anticipated.
Hi, and implies continued strength and equipment e-commerce and food retail along with an acceleration of the industrial rebound and over performance of our C operating interest in.
With that let me now pass the call back and said for closing remarks.
Thanks, Chris before we open up the call for questions I want to emphasize how are one see operating engine is driving sustainable earnings power and.
We're capitalizing on growth opportunities in front of us and investing and our future.
Our broad and innovative portfolio global scale, and agility truly differentiates us and the markets we serve.
Our focus on automation and digital and sustainability is accelerating our growth and our core business and enabling us to expand into new and adjacent markets.
We're making significant progress on our plastics pledge with nearly 50% of our solutions designed for Recyclability.
Our C operating excellence processes are driving productivity improvements flawless quality and enhancing customer experiences.
We're on a journey of transforming sealed air to a world class sustainable company Automating global packaging.
We're reinventing everything we do from how we innovate to solve our customers' most critical packaging challenges.
Our strategy is working and.
Our team is delivering and we are focused on creating sustainable long term value for our stakeholders and making our world.
Other than we found it.
With that I'll now open up the call for questions.
Operator.
I'd like to begin the Q&A session.
Thank you.
As a reminder to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key we ask that you limit yourself to one question. Please.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Josh Spector with UBS. Your line is now open.
Yeah, Hey, guys. Thanks for taking my questions and congrats for the strong quarter here.
Thanks, Justin.
And your protective organic results they came in and much stronger than we expected and my guess is stronger than you expected. So I guess, what surprised you positively and the quarter that you didn't expect a couple of months ago and looking at your full year guide for protective you basically doubled your guidance can you give us some context of how much of that increase is better.
Volumes versus higher pricing.
Hey, Josh.
And part of it and Chris is here and want to go through the bridge, if we need to.
As far as what surprised us I actually have to say, our European team and what's going on and ecommerce.
Exceeded expectation and <unk>.
Extremely strong e-commerce. It just continues to go as we know and the pandemic everybody is using e-commerce and your packages, you're showing up at home and we continued to do quite well.
So we saw with the medical pick up there with the vaccine what we're doing on packaging and some really interesting solutions pick up that was stronger than anticipated on the and.
Industrial side and.
And we saw the industrial pickup in Europe, we saw a pickup and Asia, it's still flat.
Flat to slightly down and the U S. So we didn't see the industrial pickup so that might tie into the second part of your question on the second half year, and then the real issue and protective was automation.
Really exciting the penetration with Aps and what that day at our bookings are up significantly.
And with our equipment and.
S, which is and the protective side, so quite strong and into the second part of your question, we see that continuing for the second half of the year.
Got some challenges there as you asked about pricing we saw the pricing going up while we saw our costs going up and the fourth quarter, we had price increase and we've already done three so what.
What happened and the first quarter with Jerry and the supply chain with our input costs going up definitely surprised us by kept going up so.
We didn't get totally on top of all of the price on that but we think we have opportunity to catch up the <unk>.
Second quarter, though still going to be tough on the resin side, but net net are quite pleased with how the protected this working and are actually quite excited we think we even have more opportunities and the second half, especially with industrial coming back.
And the second half of the year, we think.
We see some strong growth continuing very good day adjusted to kind of elaborate on your on the.
Full year comment.
And we looked at the midpoint.
And what we communicated in February versus what we're communicating and they pick up at that point $150 million.
As you noted given the topline and protected and Q1 and are confident that set was commenting in terms of our full year that that increase on the volume side is all driven and protect the other half of that increase of $150 million reflects the pricing actions that have basically been already in place and some of that spot pricing and terms.
What happened real time.
Good portion of that coming through our formula based pricing, which we're starting to see the beginning of that being in the early part of the second quarter.
And here in April going into May So we're going to start seeing the benefits of that term. However, just specific to the second quarter. One other things that we wanted to highlight as we did last time was given the EPS range between first half and second half given that material dynamic and that's that we're still on track, even though we had a good big and feel very good about the first quarter and turns of our.
Our performance and we're raising our full year guidance. That's 45 55 split between first half and second half is what we still insist.
Okay.
Thanks for your question.
Operator next question.
Thank you. Our next question comes from the line of George Staphos with Bank of America. Your line is now open.
Hi, everyone. Good morning, Thanks for all the details Mike.
My question is going to be on sort of general concept of flow through and leverage.
So Ted you had talked a lot about all the things we're doing on the food side of the business and how the customer is excited about the automation solutions that you're bringing yet.
Yet, we're not yet seeing the volume growth and that segment. When do you think we'll see the food volumes turned positively for sealed air over the course of 2021 and why haven't we been thing and so far and then you know for both you and Chris If we look at slide 17, and and we talk about the <unk>.
Revenue guide increase which was $150 million.
There's only about a $20 million improvement and EBITDA, which is a low relative incremental margin why wouldnt, we see and incremental margin pickup on the $150 million, that's more commensurate with the 30% plus that you typically target, especially since you said that the revenue growth is coming from protective.
Where margins have been surprising on the upside and pricing, which is pure margin. Thank you guys.
Thanks, George and well see if we can unpack that was very clever.
It was I think a bunch and there, but I'll try and unpack piece and Chris you can work first of all let's talk about what we're seeing in food and and appeal, let's stay on slide 17, where you asked.
And we looked at the first quarter, what's going on with food and we're still and this pandemic environment, where the foodservice is down year over year as we're still in the stay at home environment with restaurants et cetera, and down and also the quick service, we're seeing a pick up there, but that's still down one day.
That does to the portfolio on to leverage our largest product lines and two of them and actually most profitable.
Bags and pouches that are affected so actually in the quarter the bags and pouches were actually slightly down and so its actually has a deleveraging effect.
So to your question and then on the second half of the business and we see this recovery coming back we would expect that with leverage quite nicely into that 30% leverage as we look for that growth.
Top line question that you asked when we increased our guidance you're exactly right. We actually if you take the B, that's a 13% leverage on the res. So we got to get through the second quarter, we got input costs going up substantially and we're trying to manage on the price and as you know on the food we have that lag.
Going back with.
Our formula prices, so really Q2, and it's going to be see can we get that catch up where you will see that nice leverage coming through right now and the Guy we don't have the leverage returning until the second second half of the year on the food side.
And then maybe just go and add to that just for protective Q1 in terms of the growth that contribution margin on the incremental volume, we're seeing a nice flow through 30%. It's really the dynamic of the material headwind that are that is impacting the overall PG ratio as we referred to it in terms of the contribution.
Bottom line relative to the top line and then as I mentioned before in terms of that full year full year guidance of up $150 million.
On the mid point of sales have been by volume has being.
On the price side that price side is good because it's gonna, it's offsetting and material headwinds. So we're hoping to get that.
Price cost spread near zero by the end of the air that's what our guidance reflects.
And so that's how we're looking at and.
And at the full year, the dynamic between us, having our lowest quarter and kind of in Q2, given the material headwinds and pricing starting to kick in.
And that's what the that's what kind of drives our 45 55 in terms of giving some color on first half second half.
Okay. Operator next question.
Our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.
Oh, yes, thank you and good morning, everyone.
Good morning.
So I was hoping.
Maybe a two part question one.
Obviously, a lot of channel and regional noise on a year over year basis. As we go kind of March onwards, given your and markets and some other disruptions that happened and some of your key customers last year. So I was hoping just on a volume basis across food protective and the major geographies you could kind of help us think about volumes relative to chip.
19 levels as we think about kind of how the company exits.
COVID-19 and and the second part of the question.
And is around the equipment kind of side and just maybe talk about your kind of sales pipeline and funnel just as you kind of are working on automation projects with customers and kind of the confidence level on the on the 250 million.
And our equipment sales this year, which would seem to imply a pretty meaningful acceleration and growth over the next three quarters.
Okay, how about let me jump on my favorite subject.
And the first and then Chris could help going through some of your volume questions here and get some color there.
Good question for Adam on the on the automation is definitely something we're quite excited about chip.
If you look at slide seven we're trying to lay out.
Where we're taking automation is what we're calling touchless. So as you highlighted we have 250 there we've.
Pretty confident that we're on track with that if you unpack the equipment, just and the equipment piece.
And in the first quarter, that's almost up 30% on equipment sales and just looking at Aps, which is the big driver of equipment or Aps bookings are up 60%.
So we're seeing a very healthy pipeline and we're seeing that.
Through both food and protective so that we feel quite confident and to get to that 500. Just you. Obviously see we're expecting to double that business. So we think we're on track with that and the growth rates and we see that to continue through the second quarter and and the second half of the year I also Wanna.
A highlight that's really connected to the automation is that large fleet, we actually have and.
It's an incredible number over 100000 pieces of equipment out there and our fleet and as we're really changing the strategy to be and equipment company.
We focus on.
And the automation. It's also taking care of that fleet. So that other part is that parts and services out there and staying connected to that installed base.
We think we have some more upside on that on that potential so automation and where the final piece of your question.
And does this mean to our customers. This is what the pandemic is really driving and this touchless system that we're talking about how do we make a meat packing plants safer how do we take people out of harm's way, how do we bring a much higher level of automation and security to the process.
Had one of our largest meat packing customers with us and Simpsonville, just last week, where we're actually showing our automated systems and the largest meat packing plant.
Packaging plant and the world of how we're going to extend our touchless system into their plans. So really excited about the opportunity, we have and equipment to keep that going and growing and I'm very confident we're going to exceed the expectations for this chart, great and then Adam Let me provide some color on your first part of question and just.
Talking about just the other regional regionally like no other way so I'll start off with food and food as we mentioned on a constant dollar basis was flat and Americas was actually down 1% and EMEA, we saw modest growth of 1% and Asia Pac at 5%, but big story for us for the quarters are protected from double.
Visit growth across all regions and all.
Protective segment or for the.
Total company being up 14%. So we see that we see that continuing and again that gets back to our kind of full year guide that volume increase and part of our $150 million of our midpoint increase have been volume has being price and volume is really driven by what's going on and protected.
Okay great.
Great. Thanks, Chris next question operator.
Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Your line is now open.
Yeah.
Hi, Good morning, everyone. This is actually back krieger sitting in for Ghansham. How are you all doing today.
Good how are you.
Yeah.
Great great. Thank you.
I guess I, just wanted to dive a little bit and on the cost basket.
And I was hoping that you could provide some added detail about what your assumptions are for your key raw material for.
Paid labor and and other cost inflation and buckets for the remainder of the year, including whether or not you're assuming any sort of reversal across any of these inflationary drivers during the second half and in addition to that any any kind of detail on quarterly cadence is helpful as well.
Sure so clearly.
You know pretty volatile environment, just thinking and material inflation, starting in the fourth quarter of last year and really continuing through through April or hope, we're hopeful that we've seen a little bit of steadiness in terms of how we're currently thinking about it.
Our full year guidance assumes and things start to start to level off and we entered the year and.
For the year and anticipating raw materials being up roughly 5%. Our latest is now we're thinking it's gonna be and the <unk>.
10 per cent category, although we all read about increases 2030 40 per se, it's significantly a lot of what we buy especially red resins, which has not had a dramatic of an increase although we are seeing afraid as the other items that we.
We experienced in the quarter were doing everything we can to satisfy customer demand. So air freight. Unfortunately has been driving not only getting product to us for getting product or customer mostly on the input side, where we've incurred incremental roughly three to 4 million of incremental cost.
And to make sure we can satisfy the demand on the on whatever that is coming towards towards our way, but again going back for the full year, we're assuming it starts to level off we've reflected that and our and our updated guidance for the for the full year.
Okay. Thanks.
Operator next question.
Our next question comes from the line of Jeff Zekauskas with Jpmorgan. Your line is now open.
Thanks, very much is the price cost penalty and the second quarter going to be the same as in the first or worse or better.
And in your equipment sales to the protective market, which are growing very very quickly.
And you're growing.
Faster than the market for.
And for equipment and if you are why are you growing faster what is it that customers like about your machines for.
Other People's machines.
Okay.
Well I'll, let Chris do the better and worse and then I'll talk about what I think is the why we're growing faster and for the market sure. So Jeff we do expect the challenges to be be there and the second quarter kind of peaking in terms of the price increases that we've been again reading about Eric about the impact on on us, particularly light.
And about 30 to 45 day. So we're starting to feel we had been actually bill that the brunt of it which is coming into our into the second quarter. So we actually expect our price cost spreads and be a little bit worse, and the second quarter than than the first.
However, as we think about first half second half, we expect that to rebound as we have.
Full fledged pricing and place a formula based pricing as well as other price increases that we've that we have announced and are starting to kick in and we expect that to turn and the second half for the year and again that really just drive that's what we're trying to provide as this color as how we're going into this year that gave US 45, 55 first half second half split on EPS.
And just trying to provide investors a kind of a good view of how we're managing through it and.
And I would suggest that our ability to manage through Q1 to deliver these kind of results. We know it's coming and it is coming and we've been planning, Florida in terms of what the impact is on Q2 internally, we're managing and measuring our ability from a price point of view the stickiness of that price and the markets, we serve as well as with the customer.
Impact so just staying very close to and I can tell you. It's top of mind for us as a company across the entire company just talking about how to manage this dynamic duo and the best weekends and to leverage our really supply chain global supply chain network, and and being able to satisfy demand as we move forward.
And then and I'll handle the second part of the growth, but Jeff now and you can't answer me. So I can speak to you without you answering but you didn't predict it at your conference.
Cost with peak April 1st So I now know that that was your prediction or maybe a predilection. So we see it going past April 1st from the cost side, but.
But on the growth on <unk>.
And on protected and what we're excited about it.
And is just.
Highlights just a couple of things one is our presence and where we are and how quickly we've been adapting the portfolio.
And we're growing our paper products at double digits, and we've introduced new paper products that are going and doing quite well our equipment business. We already highlighted equipment business is up almost 30% just the equipment and that's across the board food and protected we're also.
Seeing as we shifted as I highlighted at the different markets and and the movement with the E. Commerce, we're really being quite aggressive and getting the right product right product at the right price and then I also going to bring and sustainability. We are definitely seeing the sustainable issue coming forward with do you want paper do you want plastics.
Either one how do we make that sustainable so we're seeing some good opportunities and the last one and I.
I think we even have more opportunity on the second half on the protective side with the return of the industrial market. We did not see that is strong and the U S. We saw stronger in Europe.
We think we still have some upside opportunity and that also ties into keeping net leverage going because that's where we leverage both of them and food getting to bags back and getting that into pack volume back little leverage quite nicely to get us back over that.
Our leverage targets at the back end of the year.
Okay. Operator next question.
Our next question comes from the line of and I was just shocked with BMO capital markets. Your line is now open hi.
Hi, good morning, and I wanted to come back to this the automation and equipment and your strategic focus around that and clearly a P. S was a very successful acquisition are you open for more M&A here are there even attractive targets and this market or is it more of a and internal growth type of focus.
Yeah. That's a day if you go to our capital allocation slide on 16, and so you could see just did before we did the acquisition.
And of Aps, we start communicating what we're thinking about we're working so.
We do have internal focus on organic on the equipment, we have a pretty strong portfolio of equipment that were strengthening working on and we're also looking at and where we have gaps in our portfolio.
We do think we have some opportunities there where we are looking at very closely on how we can drive automation and so.
Our capital allocation as we're looking at that area. So how do we keep that really strong growth going that $500 million targeted don't want equipment. That's all internal so we think there's even additional opportunity to grow our equipment business above and beyond that 500 million target for 2025.
Which will require M&A.
Okay.
Okay. Operator next question.
Our next question comes from the line of Arun Viswanathan with RBC capital. Your line is now open.
Yeah.
Hi, Thanks for taking my question.
I'm just curious as you.
Think about resin costs inflation and pricing I know that there's a formula based pricing and and and and food and when do you think about protective Ah.
Can you can you just discuss the environment there for pricing opportunities is it fairly competitive or you know given our strength and volumes is it all of it are more constructive as far as pricing goes.
Okay.
Well first of all we've been putting pricing out and protected sense.
Last year. So we do believe we are a leader so not cavalier on the pricing we are working very carefully with the customers and we think this is a great opportunity actually when we go and talk just don't send an email, but we're working.
On the aggressive price increases we've already gone for three so.
So have we been out there and as much as the the resins had gone as fast no. We think we have an opportunity to get that to turn and hopefully by end of the second quarter, but as far as the opportunity. We're not looking to lose share actually gained share in this marketplace, so being the leader and the market and then.
What we're challenging our team went to go get the price and.
And not to lose share by bringing in our larger portfolio, bringing in automation, bringing and sustainability, but it's a very very tough environment on the input costs.
Right now and I don't know for Christopher <unk>.
Yeah.
And operator next question.
Our next question comes from the line of failing with Jefferies. Your line is now open.
Hey, David Hi, Chris This is John Dunigan sitting in for Phil.
And I wanted to touch on the leverage.
Took down to less than three five times is is that a factor.
And better operating leverage from your reinvent sealed air and.
Initiatives that are clearly driving results or should we read into that that the M&A pipeline might be not as robust at least for the foreseeable feature and.
And when do you think you can get below that three and half time target and is that is that by the end of this year.
So let.
Let me pick that one and I think just from a just thinking through the leverage ratio and then ending year and last year at 3.1. We ended this quarter at three point too.
Looking forward just getting to your point in terms of our ability to operate and execute in this environment.
Recognizing we are a good cash generator and our cash flow generation being able to over time reduce that debt, but at the same time and not lose sight of the investments, we want to make which first and foremost invest and ourselves in terms of where the organic growth opportunities are and.
So all we were an active buyer of our stock and the first quarter average share prices dropped at $44 per share. We felt it was clearly a good opportunistic time to get back and the market given how we ended the year on the cash flow or the equation, but we don't want to we definitely don't want to lose sight of the fact that we've got a pipeline of opportunities.
On the M&A front earlier comment was made in terms of success for the E. P. S acquisition, which absolutely has been.
So the pipeline is there we will continue to look at and just where we are for for availability and market environment. We're in for deploying capital on every day as we continue to grow would we maybe go above that leverage ratio potentially.
But we want to work that backed out for three and a half or less over I would call. It a reasonable period of time for call. It 12 to 18 months.
And and that's why we felt it was appropriate given the cash generation and all the benefits of reinvent see and the progress being made over the past two or three years, we don't need to necessarily stay in this three and a half to four times, we can stay below three and a half.
And continue to have a lot of availability to reinvest and ourselves as well as look at opportunities for M&A and.
The only thing to add Chris that was a great answer there for chart because if you look at the cash generation. If you go to slide five of the model because there's the second part of your question. This engine is delivering strong earnings power and we're putting that out there and showing that and if so just doing the math on that to 2020 for that's close.
This engine generating $2 billion of cash.
So we think we can be very prudent and but it's not a message at all that we don't see a pretty strong robust pipeline to continue to fuel this business.
So operator next question.
Thank you. Our last question comes from the line of Anthony Pettinari with Citi. Your line is now open.
Hi, This is actually Brian bird and I are sitting in for Anthony.
Do you anticipate any impact protective packaging from the chip shortage.
Sibley impacting automotive or electronics demand <unk> for the second half.
No. It's a good question, we are definitely seeing that impact of our customers, especially and in the.
Motive industry.
We are seeing some pieces and the electronics, but actually electronics has been quite strong for us. So we're not seeing that the chip shortage a day.
Directly as much as others for.
For the packaging.
Yeah.
Operator was that it onto question so with.
And with everyone I want to thank everyone for your time really appreciate the interest and sealed air and we look forward to talking to all of you and the near future. Thank you very much operator.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
[music].
[music].
[music].