Q2 2021 Sealed Air Corp Earnings Call
[music].
Thank you for standing by and welcome to the second quarter 2021 sealed Air earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
To ask a question during the session you will need to press Star then 1 on your telephone.
We ask that you please limit yourself to 1 question.
Also please be advised that today's call is being recorded if you require any additional system starting in June to reach an operator.
Nice to hand, the call over to Lori treatment, Vice President Investor Relations. Please go ahead.
Thank you and good morning, everyone 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 in the section entitled forward looking statements in our earnings release, and slide presentation, which applies to this call. Additionally.
Additionally, our future performance may differ due to a number of factors.
Many of these factors are listed in our most recent annual report on form 10-K, and as revised and updated on our quarterly reports on form 10-Q, and current reports on form 8-K, which you can also find on our website 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 in our earnings release and.
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, we reference throughout the presentation.
I will now turn the call over to Ted Operator, Please turn to slide 3 per.
Yeah.
Thank you Lori.
Welcome to our second quarter earnings call.
We appreciate your interest and see and hope you and your families are staying safe and healthy.
We're working through very exciting and challenging times as we transform sheet, we're accelerating our strategy to take us to world class in everything we do.
As you can see on slide 3 we're in the business to protect to solve critical packaging challenges and to make our world better than we found it.
On today's call I'll recap, our second quarter 2021performance.
Share a strategy for growth in automation digital and sustainability within our global markets Chris.
Chris will review, our financial results and outlook in more detail.
I will then end with closing remarks before opening the call for Q&A.
Let's turn to slide 4 for a review of our second quarter 2021results.
Net sales increased 15% with 9% volume growth led by strength in Americas, and Europe, Middle East and Africa regions.
Adjusted EBITDA increased 1% and margins were under pressure at 19.8 per cent compared to 22, 6% last year.
This year, we experienced higher volumes additional productivity gains and pricing actions against dramatic inflationary cost pressures and supply disruption.
Also relative to last year, we had pandemic induced searches in our central product and minimize expenses due to lockdowns.
On a per share basis earnings of 79 cents were up 3 cents compared to last year, we generated free cash flow of $102 million in the first 6 months of the year, which compared to $129 million in the first half of last year.
We are raising our full year sales and adjusted EPS outlook and reiterating our prior guidance for adjusted EBITDA and free cash flow.
Our C operating engine is delivering.
Sales growth and productivity gains mitigated the adverse imply environment in the second quarter.
This engine coupled with expected price realizations is enabling us to maintain or adjusted EBITDA guidance for the full year and drive continuous improvement going forward.
I want to highlight our sea operating model on slide 5, which clearly defines where we're taking see in the future.
What you should expect us to deliver.
Organic sales target is built up and a historically stable packaging market that grows 1% to 3%.
We've been adding to this begs with their innovations in automation digital and sustainability to take us to an organic sales growth target of 3% to 5%.
Our operating leverage target is over 30%, which drives adjusted EBITDA growth to 5% to 7%.
We're targeting adjusted earnings per share growth of greater than 10% and free cash flow conversion of more than 50 per cent.
Our C operating model delivers significant cash for our disciplined capital allocation.
We are fueling growth opportunities with our investments in innovation and Capex.
Through C ventures' investments, we're utilizing our balance sheet to incubate disruptive technologies and new business models to accelerate our future growth.
We're also returning value to our shareholders through share repurchase and dividends, we approved a new $1 billion share repurchase program and recently increased our dividend by 25 per cent.
Our approach to capital allocation reflects our confidence in our vision strategy and execution of our C operating engine.
Let's turn to slide 6 which highlights our market driven solutions powered by our iconic brands.
We encourage you to visit our website, where you can read about our innovation and customer success stories.
We create measurable value for our customers to automated and sustainable solutions that are designed to maximize food safety minimize waste protect goods and deliver productivity savings.
In the second quarter, we had strong growth across our end markets.
We are leading a dramatic shift to a touchless automated environment for all customers, resulting in more than 30% growth in our C automation portfolio.
We're ahead of our plan to double our equipment business in the next 3 years.
For our food customers are see automation growth as a result of our integrated touchless systems with their high performance Cryo Vac materials.
Looking for auto bag and auto box equipment were up more than 50% in the first half of the year and were vesting more than $30 million in capacity expansion to help meet the strong demand for our equipment solutions.
Our automated solution to address labor shortages productivity and employee safety, we're at the table with their customers providing connectivity from our operations to theirs, which is helping all of us exceed our sustainability commitments.
Restaurants, sporting events conferences and other large public venues are cautiously reopening our solutions with high exposure to foodservice returned to growth for the first time since Q1.2020.
We are seeing growth in our cryo vac barrier bags utilized across all proteins, including cheese, and seafood and crowded pouches for soup sauces beverages and other liquids.
Our industrial markets were up double digits in the Americas, Europe, Middle East and Africa regions compared to last year, when there were pandemic related shutdowns.
We continue to capitalize on global ecommerce growth and increased demands for recyclable materials fiber based solutions and automated packaging that minimizes waste.
And medical pharma and life Sciences, we play a key role in the COVID-19 vaccine distribution benefit from growth in online shipments of medical equipment and pharmaceuticals.
Now turning to slide 7 for an update on see automation.
In the first half of the year equipment systems and service sales were up 26% and accounted for 8% of our net sales.
We're on track to achieve approximately $425 million or 12% growth in 2021 of which more than 250 million will come from equipment and systems are.
Our bookings for automated equipment are strong we're confident in our ability to exceed $500 million by 2025.
When you factor in a 3 X plus solutions multiplier, including growth in parts and service from the installed base and the flow through of materials. This resulted in a $5 billion plus potential growth opportunity over the 10 year solutions lifecycle.
The solutions multiple is why we are so excited about see automation.
Let me now turn to slide 8 and talk about sustainability.
Sustainability in everything we do and fueling our growth.
We're making significant progress on our 2025 sustainability pledge with nearly 50% of our solutions already design per recyclability.
Our innovation strategy is focused on maintaining the high quality standards that our customers are accustomed to in food safety minimizing waste and protecting goods. We are continuously optimizing our high performance materials, and incorporating more recycled and or renewable content to drive circularity.
It makes sustainability more affordable.
We're also collaborating and investing with partners on mechanical and advanced recycling.
As part of C ventures, we recently joined the closed loop circulars plastic fun.
This fund investing scalable recycling technology equipment upgrades and infrastructure solutions to advance the recovery of plastics in the U S and Canada.
You can see a handful of our solutions designed for Recyclability on this slide with many more shared on our website.
Earlier this year, we established a net zero carbon emissions goal across our operations by 2040.
We're taking many actions to reduce our energy consumption, such as investing touchless automation upgrading air compression systems and utilizing led lighting.
We're also investing in renewable energy sources, including solar and wind.
Between 2012, and 2020, our greenhouse gas emissions intensity decreased by a remarkable 50%.
We'll share more details in our upcoming annual sustainability report that will be available on our website in the early fall.
I'll now pass the call to Chris to review our results in more detail, Chris. Thank you Seth and good morning, everyone. Let's start on slide 9 to review our quarterly net sales growth by segment and by region.
In the second quarter net sales totaled $1.3 billion up 15% as reported.
11% in constant dollars food was up 6% in constant dollars versus last year and protective increased 20%.
EMEA and the Americas were both up double digits EMEA are up 16% in the Americas up 13% paper.
APAC was flat versus last year with a modest decline in volumes offset by favorable price.
On slide 10, you see organic sales volume and pricing trends by segment and by region in.
In the second quarter overall volume growth was up 9% on favorable price of 3 per cent.
Let's start with volumes food.
Food volumes were up 4% with the Americas up 7% and EMEA up 2%.
This was offset by a 3% decline in APAC largely related to Australia herd rebuilding.
Protective volumes were up 15% with the Americas up 13% and EMEA up 36%, while APAC had a modest decline.
Q2 price was favorable 3%.
You can see that protected had 5% net favorable pricing and food was 1% due to the timing of pricing actions and Formula pass throughs.
We have implemented several price increases and expect 2021 price realization to be $275 million.
On slide 11, we present, our consolidated sales and adjusted EBITDA walks, having already discussed sales, let me comment on our adjusted EBITDA performance in Q2, we.
We delivered adjusted EBITDA of $263 million up 1% compared to last year and margins of 19, 8%.
Down 280 basis points, reflecting the impact of the current inflationary environment and supply chain disruptions.
We are leveraging our higher volumes at 40% as we experienced a more favorable product mix.
Despite favorable pricing in the quarter, you can see how higher input costs weighed on our EBITDA performance with an unfavorable price cost spread of $36 million.
Operational costs increased approximately $13 million relative to last year.
This increase reflects investments to support growth in <unk>.
<unk> on labor and indirect material costs as well as the normalization of spend in the quarter.
This was partially offset by $13 million in reinvent see productivity benefits.
We expect our price cost spreads have improved sequentially in the third quarter. However, we do not expect to see positive price cost spread until Q4.
Adjusted EPS in Q2 was 79 cents compared to 7 <unk> from Q2.2020.
Our adjusted tax rate was 25, 6%, reflecting a more favorable mix of foreign earnings are.
Our weighted average diluted shares outstanding in the quarter were $153 million, we exited the quarter with 150 million shares outstanding.
Turning to slide 12 here, we provide an update on reinvent see.
We have achieved a $28 million of benefits in the first half of the year and remain on track to realize approximately $65 million in 2021 or.
Our commercial work stream is accelerating innovation and driving new customer wins in core and adjacent markets.
Turning to segment results on slide 13, starting with food and.
In Q2 free.
Net sales of $737 million were up 6% on a constant dollar basis.
<unk> barrier bags, and pouches returned to growth, increasing approximately 10% and accounting for nearly 50% of the segment sales.
This growth reflects the beginning of foodservice recovery relative to last year when protein plants in restaurants sporting events and other large venues were shut down.
Sales in case ready and roll stock retail applications, which accounts for just over 40% of segment sales were down low single digits and supply disruptions impacted our results.
In addition, this is against the backdrop of tough comps given the surge in demand from shutdowns a year ago.
Equipment parts and sales and service sales, which accounts for 8% of the segment.
We're up nearly 40% in the quarter.
We are experiencing increased demand for our automated solutions as our customers around the world invest in their processing plants to upgrade aged equipment and drive productivity.
Adjusted EBITDA in food of $158 million in Q2 declined 6% compared to last year with margins at 21.5 per cent out 360 basis points.
This decline was related to elevated input cost supply disruptions and the timing of pricing actions.
On slide 14, we highlight protective segment results.
In constant dollars net sales increased 20% to $592 million.
Industrial was up approximately 30% relative to last year when automobiles in general manufacturers were forced to temporarily shut down.
Their operations.
Film, It which is largely driven by E. Commerce growth was up approximately 10% on a global basis led by double digit growth in automated equipment.
<unk> solutions paper and temperature assurance.
We leveraged our broad portfolio and global scale to meet increased demand despite ongoing supply issues.
Such as industry related chip shortages out of Asia.
The $30 million investments and capacity that Ted referenced earlier will help us meet increased customer demand for automation equipment.
Yeah.
As a reminder, approximately 55% of our protective sales are derived from industrial end markets and the remaining 45% from fulfillment and ecommerce.
Adjusted EBITDA of $107 million increased 17% from Q2 with margins at 18, 1% down 100 basis points versus last year.
Higher sales and productivity gains help mitigate higher input and supply disruption costs.
Now, let's turn to free cash flow insights slide 15.
In the first half of 2021 we generated $102 million of free cash flow relative to the same period last year higher earnings and lower restructuring payments were offset by higher employee related costs and capex investments to support growth and innovation.
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 profitable growth initiatives.
In addition, we have a healthy acquisition pipeline that aligns with our growth strategy.
On this slide I want to highlight our growth investments, we are focusing our capex on breakthrough processes automation digital and sustainability.
With C ventures, we have invested approximately $40 million in early stage disruptive technologies and business models that are expected to accelerate accelerate our strategy and innovation efforts.
As it relates to returning capital to shareholders. In Q2, we were an active buyer of our stock.
We repurchased $6.1 million shares for $299 million during the first 6 months of 2021 rich.
Reflecting confidence in our vision strategy and execution.
And as Ted noted today, we announced a new $1 billion share repurchase program, continuing our commitment to return value to shareholders.
This new program has new exploration day and replaces the previous authorization.
During the second quarter, we also announced an increase to our quarterly cash dividend of 25 per cent.
Let's turn to slide 17 to review our updated 2021 outlook.
We are raising our net sales guidance, reflecting strong first half sales performance and outlook for the remainder of the year.
For net sales, we estimate 5.4% to $5.5 billion or 10% to 12% as reported growth and 8% to 10% in constant dollars.
Compared to our previously provided $5, 2.5% and 535 billion range.
At the midpoint, the $150 million increase in constant dollar sales largely reflects additional pricing.
We continue to anticipate adjusted EBITDA using a range of $1.1 2 to 1.15 billion on.
On a reported basis adjusted EBITDA is expected to grow 7% to 9%.
Higher sales are expected to help offset increased material and supply disruption costs.
Given the timing of pricing actions, we anticipate a modest sequential improvement in EBITDA in Q3, but the more meaningful improvement in Q4.
We are raising our 2020 outlook for adjusted EPS to $3.45 to $3.60.
And we continue to expect a 45.55 first half second half percentage split.
Our outlook assumes a 153 million average shares outstanding 1 million reduction from our prior guidance given the share repurchases in the first half and then adjusted affect adjusted effective tax rate of approximately 26 per cent.
And lastly, our free cash flow outlook continues to be $520 million to $570 million.
There is no change to our outlook for 2021, capex of approximately $210 million and reinvent see restructuring and associated payments of approximately $40 million.
As you can see on the slide we wanted to provide a few variables as it relates to our 2021guidance range. The low end of our range would assume the magnitude and duration of material inflation and supply chain headwinds persist longer than anticipated and a slower pace of foodservice recovery.
The high end implies market and geographic share gains.
Continued strength in automation industrials e-commerce, and food and over performance of our operating engine.
With that let me now pass the call back to Ted for closing remarks.
Thanks, Chris Bill.
We open up the call for questions I want to emphasize how are see operating engine is delivering results on our journey to world class performance. We are clearly defining where we are taking to see in the future and what you should expect us to deliver with our C operating model.
Differentiate ourselves in the markets, we serve with the broad set of innovative packaging solutions Global service scale entrepreneurship and agility.
Our people are working hard to exceed our customers' expectations.
This is core to who we are.
Our talent is driving our transformation to a world class, we will continue to focus on zero harm and protecting our people as the pandemic continues.
We're reinventing everything we do from how we innovate to how we solve our customers' most critical packaging challenges. Our strategy is working we are creating sustainable long term value for our stakeholders and making our world better than we found it.
With that I'll now open up the call for questions.
Operator.
We would like to begin the Q&A session.
As a reminder to ask a question. Please press Star then 1 if your question has been answered and you'd like to remove yourself from the queue press the pound key.
Our first question comes from Ghansham Panjabi with Baird. Your line is open.
Thanks, Good morning, everybody.
And 1 of your positive variances that you cited on slide 17, you called out share gains in markets and geographies.
I was hoping you could give us a bit more color on that dynamic and then related to that how much of the share gains would you ascribe towards products that align towards your circularity initiatives. Thanks, so much.
Bill.
Thanks, Scott, Jim and for the 2 parts to your question on that.
Actually going to put that in the bands per second and give that to Chris and I'll follow up on the second part of that.
Question, Chris and if you can remind me, but ghansham before we get to your question for everybody in the call I did want to add some clarity to the Q&A and make a brief comment.
Late yesterday, we announced that we received notice.
Cash from the SEC staff that our previously disclosed disclosed investigation has concluded as it relates to sealed air.
And that the FCC does not intend to recommend any enforcement action against the company.
As Im sure everybody can appreciate our comments are limited to the SEC documents that were filed publicly including in our press release and form 10-Q, which we're going to file letter with the SEC.
Throughout this process, though I just want to highlight we fully cooperated with the SEC investigation and we are pleased to put this matter behind us so.
So let's get back to your question Ghansham and Chris If you can handle the first part and share.
Somebody is still there.
Okay. Let's continue on so I think you mentioned interest in terms of page 17 for our.
Overall overall slide if I recall, you said, that's why 17, which provides an update on our outlook on net sales adjusted EBITDA adjusted EPS and free cash flow as we see overall performance.
In terms of the top line very strong growth in the quarter as we mentioned if I was to change. If we were just to kind of reflect what we said in the may timeframe and bridge. It to what we you know in terms of top line growth. We we increased last quarter, we increased the top line by $150 million and we mentioned that 50% of that was going to be price of 50 per cent of that was going to be.
Volume this.
This quarter, we're going up another incremental $150 million, mostly driven by price from a small amount of volume improvement.
What were those strengths before is the is the protective side of our business, especially out of out of that.
EMEA, where we saw extremely strong growth as we commented on it in our prepared remarks, so that gave us confidence coming off first first quarter second quarter first half of the year, leading into the next year to increase our guidance of $150 million and that's how we feel pretty good about the pretty pretty good about the performance and the execution.
The bottom line, we've talked about the price increases multiple price increases that are necessary in light of the significant inflationary environment that we're in multiple price increases throughout the year to make up for that make up for that difference, hoping to close that gap in the second half, but I did want to comment that our third quarter, we do expect a slight <unk>.
<unk> 2 Q like but as I mentioned that fourth quarter is where we'd see the bigger lift 1 formula based pricing other pricing actions kick in in a more meaningful way.
Great.
I'll handle the second part of the question, where Ghansham asked about tell us about the investments in the circularity piece.
The point, if I could just slide 8 so if.
Look at slide 8 we talk about what's going on with sustainability and as we highlighted in our prepared remarks about our investment with closed loop and we're excited about we've made previous investments and you've heard us talk about our C ventures, we're investing in sustained bill using our balance sheet.
To go side by side with some really interesting investments that are out there what we like about closed loop is that lines exactly where were going they focus on sustainability, they're focusing on the carbon footprint and taking.
This.
Taking the process from a linear process, where you make a product and then it ends up into the ocean or landfill, how do you bring circularity to bring that waste back and recycle it whether it's chemical recycling et cetera, but the other part we like about their strategy.
Is that they also connected to earnings growth. So they focus on the circular economy, how do we do that in a way to drive earnings also our investment allows us to see what other interesting incubating technologies that they're looking at so we can see inside and be early.
Investors some pretty exciting technology in this space are recycled recycled.
Products and businesses that are out there. So we're gonna be investing side by side, but it really ties into our strategy of linking sustainability to our carbon neutral goals. But then also that we're in the business to protect and in the business part is how we're connecting it to the earnings Okay.
Next question operator.
And our next question comes from Adam Samuelson with Goldman Sachs. Your line is open.
Yes, thanks, good morning, everyone.
So it's a 2 part question.
First was hoping to get a little bit of color just on volumes, if I look through the balance of the year the volume growth expectations don't seem particularly.
Particularly aggressive and.
Maybe you could help frame by business by region kind of how volumes are tracking.
Relative to pre pandemic 2019 levels, and where you see kind of the opportunities and risks over over the balance of the year and then just to confirm on the pricing side so implies about.
9% pricing year over year in the back half I presume more fourth quarter weighted.
Can you just maybe clarify for us kind of how we should think about the raw material cost trajectory through the second half.
So maybe I'll take the second part first because what we've seen is just coming off the announcement, we made yesterday in terms of the press release overall pricing.
If we go back to the first quarter call, we talked about an incremental headwind on resins and chemicals, primarily this material inflation heading our way of roughly $150 million. What we're seeing now is more like 300 plus million and as a result, we are.
We have implemented multiple price increases are more to come as we communicated the realization of that price increase.
In my prepared remarks talking about just the overall.
It's the second half of that $150 million increase for the full year guidance, mostly driven by price.
Your first part of your question was just overall volumes the strength of protective really.
Comment on in terms of the Americas, and specifically EMEA has been extremely strong some of that being an unfavorable comps completely clearly towards the second half of the year, but as we look at as we look at the second half.
If momentum that's moving into that into that part of the year.
We just see protected continues to be strength strengthened and.
There's no 1 particular area, it's kind of across the board I don't know Ted if you have anything to add as it relates to overall volume for the second half, but it seems to be able to get leading leading the Americas, leading out of EMEA with where Asia Pac ill catch you got in the second half.
Good.
And Adam as you can see how Chris Snyder Tag teaming Chris will tell you make sure we do what we say we're going to do another skews a little bit of the excitement that we will get through this journey.
As we put in the press release.
Went directly to our customers as well about our price increase so it's a it's pretty significant what we've swallowed through the engine right now it's it's going through the engine will we'd like to get through this in the second quarter, but significant input cost, but behind that the engine is working day.
Productivity and the leverage behind that as Chris highlighted we're leveraging at 40%, but that input costs, we've got to get through and we think we'll get through it by the end of the year, we're not going to tell you which quarter because we don't know, but we are aggressively working day model that we showed on slide 5 that we.
Bill happened and that's the guide where we're showing you where we're going in 2022 now and beyond so some of the specifics that were driving it's really using our automation to get that through and help our customers.
I'll just I'll give you a little bit of detail. If you look at slide 7 where we look at our whole portfolio.
I'm sorry go to slide 6.
So if you look at our portfolio a product of what it's going to weaken 30 billion packages. So if you just think about that with our whole portfolio and you took that 30 billion. This $5 billion company take equipment away. So we're talking about the average price for our package is around 16 cents.
Well with this dramatic input costs, that's going to go from 16 to 18, Oh and by the way, we're going to make it sustainable and by the way were going digital so we're getting actually take that probably up from 16 to 20.
And we're being very transparent with the market that's coming so what do we do we got to drive automation. So the automation is where our growth is coming where we can save our customers millions to afford those few cents per packaging. So as we get through this and we swallow this.
Incredible inflationary period, we are spending a huge amount of time with our customers and driving the automation and to hit that sales growth number in our whole portfolio beyond protective and food that we are going to be driving the automation digital and sustainable solutions and you can see.
The numbers that we're excited by going through this double digit up 30% more even the bookings which were tracking and tracing.
Up significantly so we're investing there heavily we're working with our customers. We will swallow this inflationary period the timing of it we don't know exactly but for sure by the end of the year, we think we're going to do quite well and we'd like to end on that model. The model will continue.
To perform going into next year.
Operator next question please.
Our next question comes from George Staphos with Bank of America. Your line is open.
Hi, everyone. Good morning, hope you're doing well thanks for drug sales.
Hey could you kind of took my question there that I had free but I'll try a different.
[noise] approach to it so is the automation, allowing you to also upsell the price per package or is it really more around you need to raise pricing and the productivity that your customers are getting from this is allowing them to absorb.
The increase in pricing and are you finding that it is 1 for 1 and then kind of the related part 2 is you gave us color on.
Your automation sales and the initiatives here in food could you remind us I don't remember hearing it what the automation performance was in.
For protective in the quarter and overall, how that's helping you drive more operating leverage across both businesses. Thank you.
Yeah.
Good question, George and I'm glad I answered part of your question before but going back into your detail on how we're doing this with our customers and this remember the customers are listening to this call with us as well.
So be it I have been very direct and through this even this past quarter and meeting with the Ceos of some of our major customers are literally around the world most of those being virtual so we've been very open that package, our pricing is going up on the materials.
So to your question on the pricing side of it we want to share with them again does package pricing is going to go up a few cents.
But where the real savings for them, it's millions of how do we automate their operations and their issues right now our labor scarcity.
The safety of Covid, how can we get in there and fully bottoming. So take these bill there there are millions of packages and save them money. So you.
We're not talking to them about actually the price increase we're talking about how we can save them money knowing that some of those materials are going to be more expensive at.
At the table with them. We're also learning even more challenges that they're having we're not the only ones that are experiencing higher input cost to our customers. So again, we're going even further into their facilities and actually bringing our ops teams into it with our customers to show them, how we can potentially help them make their facilities.
More productive safer and are driving the level of level of automation. So yes, it's a pricing discussion very direct but it's really how can we save them money. So I'll keep pointing to slide 7 in that this is how we're selling that automation story.
To our customers. The second part of your question I'll start and maybe if Chris wants to add more detail. Your question is is that is the equipment and the automation story coming in the protective side, absolutely, especially with fulfillment centers, we're seeing the automation come into these high volume.
Dominant centers very aggressively what we used to do in the old model as we would get that equipment away, even with you know our iconic bubble wrap we actually can make bubble wrap on demand by the push of a button air.
And do the and create the bubble wrap a variety of the fulfillment center.
But really the growth in protected has been with auto back the acquisition that we've made with auto bag and what Theyre doing with automation has been tremendous for especially in this environment, bringing our auto bag systems into the fulfillment center. So that you can actually load the package more effectively and efficiently.
<unk> and bring those high value materials around the package is where the growth right now through the pandemic is really really strong and we think more to come and we're taking that to our food business as well so to our customers They think industrial.
Is what we do because if you look at food plant they actually call that an industrial operations. So just sharing with you. It covers all of our customers. The short answer on the pricing is we've got to save them more money. So we got to work harder and automation is a great story to be at the table through these challenging times.
Sure Nobody else does and maybe just to add onto the George's comments relative to the volume and what we saw in Q2, we mentioned food up considerably on the equipment side, but protective actually was up also double digits.
And if I gave you at first half numbers, what we've seen is food will be a little bit better than 20 per cent and protective around 30%. So really significant strong strikes that are out of our automation performance.
For the first half of the year and we're continuing to guide greater than $250 million.
As you can see in terms of equipment and services and the net 425 as we talk about we have opportunities to exceed that 425, clearly we want to make sure. It's in our performance and hopefully we'll hear a quarter from now talking about how that expectation for 'twenty..1 is actually that would be greater than that for 25, we've got a good pipeline of opportunities.
Operator next question please.
Our next question comes from Phil <unk> with Jefferies. Your line is open.
Hi, Good morning, Ted Chris Lori This is actually John on for Phil I Hope, you're all doing well.
I wanted to stay on the inflation and price cost I'm, sorry, the price initiatives that you announced yesterday.
Could you could you talk a little bit about what what's different Maguire, you announced price increases in our press release and how it compared to some of the other price increases that you've <unk>.
Put out without a press release earlier in the year and then Chris I just want to confirm I think he said essentially that the price cost spread is now expected to be about a $25 million plus headwind for 2021 from about flat in the guidance last quarter. Thank you.
Okay.
Hi, John I'm going to do the first part and then turn it over to Chris. So why did we do a press release on this.
And it's more than a price.
Announcement, it's actually a problem solution announcement, you know going directly to customers because it's been significant so number 1 price increase is coming it's across the board. It's not just with the non formula formula et cetera, et cetera, So it's everywhere and it's across the world.
<unk>.
The second piece of the announcement was its a solution based announcement. Please let's work with you. So what we can do to help you in this tremendous environment to bring our automation solutions, our full portfolio to you. So we can help you with the situations. So it's directly to that.
Customers. So it's a 2 part so I'll, let Chris handle the second part of that question sure. John So on the second piece of it but you are right. The first quarter call, we talked about trying to drive pricing actions from productivity et cetera.
To mitigate the concern on our EBITDA performance, we feel good about being able to maintain the current range, but the dynamic there is.
Driving incremental volume and driving productivity is going to help offset our view of the full year price cost spread to be net negative you mentioned 25 exactly right. We kind of view. It is 25 to 30 million of negative price cost spread for the full year based on what we know today. So.
As I mentioned, just driving that volume incremental volume growth in terms of bottom line performance and productivity to try to help offset that is how we overcome that to maintain our EBITDA range and we stay committed to that as of as of now through the first half obviously of the year.
Operator next question please.
Our next question comes from Jeff Zekauskas with Jpmorgan. Your line is open.
Thanks very much.
Okay.
Is it the case that as a as a base case next year, you recoup your negative price cost spread.
And secondly in the in the food area.
For the third quarter is it the case that your raw material spreads will get a little bit worse, and Europe protective spreads will get a little bit better leading to you, having a little bit better of a.
Cost spread per.
File in the third quarter.
Yes.
And then Chris that's a good feeling so so Jeff the first part of your question again, I, just keep going back to the slides why we put the model out there to continue that's telling you where we're going so again as we're swallowing this problem going through the engine.
We think to your question in 'twenty 2 yes, we will be through this yes will be had on the pricing, yes will be caught up and that's what the model says that we're going to do we just can't make the call right now because we don't know when this inflationary pressure is going to stop as we'd even talk to you.
At your conference in the past that Hey, maybe it's gonna be start coming down in the second quarter that didn't happen, maybe it's going to come down in the third quarter Bill.
No. So we're just giving you the guidance we think we'll be through this going into 'twenty 'twenty..2 we just can't make the call on when in 2021 being part of that so yes. We will be ahead of the price have our price ahead of the cost into some time in 2021.
And we will be continuing to drive our model into 2022 as we laid out in slide 5 share and then Jeff as you mentioned in terms of being able to recoup that.
Inflationary headwinds leading into the next year, we will have that favorable we expect assuming no additional.
Pressure from an inflationary environment that we're going to we're going to recoup some of that material cost inflation going into next year, given formula based pricing, but specific to your question around the second half of the year, maybe thinking through foods contribution as well as well as protectors contribution or what the what that whole dynamic is between mature.
Cost inflation in price because our price cost spread we see both both segments being under pressure in the third quarter as I mentioned earlier some improvement from from Q2, clearly, but as you look to the fourth quarter Youll see both segments.
Contributing positively from a from a price cost spread for food clearly more more benefit from formula based pricing, but we're also implementing price on the non formula and protective given the pricing actions we've taken.
We'll start to materialize as well so you've got this big lift in Q4, as we see the price benefit of the actions of the price cost spread benefit of the actions we've taken on price.
Operator next question please.
Our next question comes from Anthony Pettinari with Citi. Your line is open.
Good morning.
Just following up on Jeff's question on food can you talk about organic growth expectations for the second half.
And how those are kind of bracket it out between price and volume and then within those volumes is there any way that we should be thinking about.
Case ready volumes in foodservice volumes and how those might trend in the second half given the comps.
Yeah, maybe the only thing to add to that is from for food.
The incremental $150 million in terms of the amaze guidance, you know leading up to today's guidance.
On the food piece of it we don't expect that to be most of the increase is going to be driven by pricing actions, there's gonna be a slight improvement on volumes.
And then protective is going to be continued improvement in volumes as well as price, but I guess I wanted to just be clear that that incremental price per incremental volume that we are profiling in terms of $150 million between the 2 segments will benefit both segments, but it's mostly on price volumes, we don't expect a big change with say maybe to add to that.
Right. So the other anthem Anthony the piece on that what's going on in the markets that we'll see and if you remember year over year the first half.
We're competing with that tough comp of second quarter last year when during when the shutdowns hit the bag business on food was really really strong boy, we leveraged nicely on bags, but behind that we have had foodservice pretty much shut down with restaurants, and that's the pouch business as we go into.
2 our liquids and tomato paste et cetera. So we had those 2 things work. So we see that moving in the second quarter. We just can't tell you the timing on it. So we see the fluids in the pouch business, which is extremely attractive business to us picking up and we will be.
Gaining on that in the second half and again going into next year sell food is really a tale of 2 markets, but it's also the same with the protected where we had the industrial and E. Commerce. So that is shifting in the quarter, but behind all of that I. Just wanted to continually highlight the engine is working.
On driving the productivity on both of those internally, so that's giving us our confidence to drive getting through this driving it through the end of the year and into 2022.
Operator next question please.
Our next question comes from Salvator Tiano with Seaport Research Your line is open.
Yeah, Hi, Chris from Lori Thanks for taking my question.
Just trying to understand a little bit the price calls people have been asking them.
Should we expect in Q4, specifically.
You clarify would you expect $25 million to $30 million negative price goes from a year now.
With Q3 also in the Red and Europe strictly Fireeye. So far so that's gonna be fly, but you shouldnt be at least the medium sales price close in Q3 Q4 is that kind of apparel.
Youre thinking about it and as we do you care about the Q4 is glad EBITDA, which seems to be based on a modest Q3 increase per.
Probably 320 million or something like that based on the full year guidance how much of that do you think you can sustain on a run rate as we move into 2022.
Sure. So thanks for the question. So so you are right and just in terms of how we look at the fourth quarter most of the benefit and price cost spread to our full year still being negative roughly $25 million to $30 million that fourth quarter shows a significant increase and again I'll. Just go back from our comments in terms of the pricing, mostly formula based pricing as well as other pricing actions kind of hit.
In Q.
In Q3, but theyre going to show a big lift in Q4 based on based on our expectation.
Kind of ending the quarter, a little early to tell because of the inflationary environment. Just as we were here at 90 days ago. If you will talking about the.
The full year 'twenty, 1 extremely dynamic environment.
Right now.
Now our projections are our estimates for the full year show a nice improvement in Q4 for purposes of margin without a doubt the sustainability of those margins going into 2022.
We'll have to assess based on the inflationary environment as you know our business ranges from 'twenty to 'twenty 1 per cent to 'twenty 3 'twenty, 4% EBITDA margin just depending on the dynamics in a particular quarter, but we're trying to drive for not only net incremental volume growth from the leverage off of that getting back to our our operating model is to be able to drive.
EBITDA margins.
Approaching 24, 25% overtime given the operating engine in terms of the ability to generate the cash and fuel it back into the business. So, but then maybe an additional comment is south Korea as you can see all albeit broken record, we're trying to make it easy for you easy for investors to see where we're going so I'm going to go back.
Slide 5 so we're going to get through this and as you're working your model as Youre looking what's going through the third quarter and then the fourth quarter. So you can say well on the third quarter. Your leverage is not there and that's why we're explaining it we're giving you the leverage behind what's going on with the engine behind this input costs than it was.
Actually leveraging at 40% even higher than our target did you see of the 30, so going into next year. We think we'll be back at that 30% target probably be ahead of that 30% target in the fourth quarter, but that's a net.
Net net that's where we think and we're pretty confident that we're going to make the operating model work as we get through this so just wanted to keep sharing with you where we have businesses going despite these challenges.
We're going to get through it and actually be a stronger better company on the other side of this copper.
Operator next question please.
Our next question comes from Adam Josephson with Keybanc. Your line is open.
Thanks, a lot good morning, everyone. Yeah, Chris just on your guidance just want to make sure I understand a couple of things. So polyethylene has yet to settle for July. So I'm just wondering what what is your actual polyethylene price expectation not only for July but for the balance of the year and then on the Delta Varian I don't.
You've talked about it but just what is embedded in your guidance in terms of any.
Potential disruptions in Asia or elsewhere from the area. Thank you.
Alright, thanks for the question so so.
So we are we have been and we continue to be in this a very inflationary environment as it relates to to P. So.
Again, not to sound like a broken record, but we're in the face of it we're acting to ever managing through it we're driving product. We're doing everything we can to try to minimize the impact of sealed air to maintain that full year guidance. Our expectation is that we're still in this inflationary environment. We do expect it to continue call it for another month or 2.
But I'll tell you that that's.
It makes us nervous a little bit to even make that statement because because of the dynamic we've seen in the past in the past 3 months, we will react to it accordingly of course in terms of driving productivity and pricing actions as necessary, but we're hopeful that this thing starts to plateau kind of level out and we continue to to kind of move forward, but internally.
But when you think about our risks and opportunities and as we share with we'd like to share with investors. When we put our guidance slide you know.
Kind of the downside as well as the upside to our outlook you can see the downside clearly still has that dramatic material inflation continues to supply disruptions et cetera.
But we'll manage through it but let me focus on the positive the positives are the global reach of our company.
The share gains the opportunity we already talked about the equipment piece of it in terms of what we're what we're doing and how we're driving we hope to exceed that 425 as I mentioned before.
And then between Turner myself, just continuing to reiterate the operating engine.
The backbone that we have in place to drive productivity is there, it's real and it's happening and are and will continue to pursue it.
Regarding the Delta variance.
And the implications that has on our business I kind of view it as every week a new week. Almost every day is a new day as we hear more about it it has us clearly clearly concerned in 1.1 side of the business.
May do better as it relates to the retail food side. If you will we did see some early signs of recovery on the service side, we're hopeful that that foodservice I hope hopefully that continues but you know time time will tell from hotel.
Operator, it looks like we have time for 1 more question. Please.
Okay and our next question comes from Josh Spector with UBS. Your line is open.
Yeah, Hey, guys. Thanks for squeezing my question here, just looking at Asia specifically.
Bit of a step down in <unk> versus <unk> in both segments, you talked about some weakness and you mentioned the herd rebuild they can food, but is there anything else that's changed or resulted in a lack of growth.
Near term and how are you thinking about the second half of 2022 for Asia broadly as a result.
Yeah, Josh good. Good question, obviously, if we didn't talk about it it wasn't is a top number driving our numbers, but the Asia Pacific growth in the quarter was not what we would expect so we do think we have opportunities I don't want to give you the answer.
Timing et cetera, but we think we have some growth opportunities in Asia. There were some issues again, it's the year over year comparable we had a really strong second quarter a year ago.
In the guidance that we have again similar to the previous question that Adam had we do have the philosophy is under promise over deliver so we have our Asia team.
Is being aggressive on how do we drive growth in such a large region.
But right now in our guidance, we have a tepid number out there, but we think we have an opportunity really it's the same issue, though it's what can we do in automation, we're driving some significant wins.
Will materialize some of them you don't see because they're in the bookings and the bookings that good news why we have confidence we can now see those bookings numbers are up that will be realized and so we see some opportunity.
In Asia Pacific, It's a huge opportunity for especially same thing the industrial ecommerce and eat the food business, if youre, if youre reading, what's going on with the African swine fever.
Huge industrial growth opportunity is China is converting from that wet to dry some of those huge pork plants as industrial plants that we're connected with.
Our under construction are being built will they be realized this year now that we see we see lots of opportunity in Asia Pacific as far as our portfolio. When it's only 15% it's not moving the needle, but we're excited about the opportunity to get Asia Pacific more.
Into our numbers for the future. So we got to work to do there. Good question. Thanks, Ted. Thank you all for joining us on today's call. We look forward to speaking with you in the near future stay safe and healthy operator.
This does conclude the program and you may now disconnect everyone have a great day.
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