Q3 2021 Sealed Air Corp Earnings Call
Good day, and thank you for standing by and welcome to the third quarter 2021 sealed Air earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
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Now like to hand, the conference over to your Speaker today, Lloyd Chapman, Vice President of Investor Relations.
Thank you and good morning, everyone with me today are <unk>, our CEO and Chris even 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 found and 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, 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 asthma.
And updated on our quarterly report on Form 10-Q, and current reports on form 8-K, which you can also find on our website at sealed air Dot com or on the SEC's website at SEC Gov.
We also discuss financial measures that do not conform to U S. GAAP.
You will find important information on our use of these measures and their reconciliation to U S. GAAP in our earnings release.
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 three Ted.
Thank you Lori and thank you for joining our third 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 continue to transform C.
As seen on slide three our strategy to become a world class digitally driven company automating sustainable packaging solutions.
On today's call I'll recap, our third quarter 2021 performance I'll share our strategy for growth in automation digital and sustainability within our global core markets.
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 four for a review of our third quarter 2021 results.
Net sales increased 13% in constant dollars with volume growth of 5% and price realization of <unk>, 8%.
Adjusted EBITDA increased 4%.
Our volumes and pricing efforts helped mitigate inflationary pressures and supply disruptions yet our industry, leading margins were still under pressure at 19, 2% compared to 21% last year.
On a per share basis adjusted earnings of 86% were up four cents compared to last year.
We generated free cash flow of $223 million in the first nine months of the year, which compared with $292 million in the first nine months of last year.
Our C operating engine performance.
<unk> touchless automation and sustainable packaging solutions are generating demand growth and delivering productivity savings.
I want to highlight our sea operating model on slide five.
The bonds were taking C and what you should expect us to deliver.
Our innovations and automation digital and sustainability continue to gain momentum and are driving our growth above our traditional packaging markets.
We're targeting adjusted earnings per share growth of greater than 10% and free cash flow conversion of more than 50%.
Our C operating model generates significant cash from our purpose driven approach to capital allocation.
Fuel our growth, we're increasing our capex investments for innovations and touchless automation.
Through seed Ventures' investments, we're using our balance sheet to incubate disruptive technologies and new business models to accelerate our pace of innovation and speed to market.
We continue to return value to our shareholders through share repurchases and dividends.
We further strengthened our capital structure with a $600 million new bond issuance in the third quarter.
Proceed. This is our first secured investment grade bond in the company's history.
The proceeds were used to pay down existing debt.
Let's turn to slide six 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 good and deliver productivity savings.
Sales in our automation portfolio, which includes equipment services and spare parts have increased approximately 20% year to date accounting for 8% of our total sales.
<unk> systems are our fastest growing automated solution.
Year to date sales up more than 25% and bookings up approximately 50%.
For protein equipment spare parts and service sales are up double digits year to date.
Our protein automation pipeline continues to grow across all regions with major food producers committing to our C touchless automation future.
Yeah.
Our automated equipment and service sales had a strong hold true for our high performance sustainable materials.
Our unique approach to automation is strengthened with our digital solutions.
Through our CE, Mark Smart packaging enabled with our patented digital printing.
We're creating touchless digital connectivity from our operations to our customers and to consumers' homes.
This level of connectivity is transformational for our customers. It enables us to be embedded into our customers' operations, where we can drive significant savings to their bottom line.
Our customers are buying into our automation future.
In addition to growth in automation to recovery in foodservice and our innovations in fluids are driving increased demand for high performance sustainable cryo that barrier bags pouches in case ready applications across all regions.
In the quarter, our fastest growing food solutions with our cryo that pouches designed for fluids and liquids with double digit sales growth.
We continue to benefit from the industrial recovery and strength in automation design for E Commerce fulfillment.
We're seeing significant shifts in our fulfillment portfolio towards automation and sustainable solutions and.
In industrial we delivered mid to high single digit volume growth.
Fulfillment, we experienced double digit volume growth in automation paper systems and temperature assurance solutions.
Although we face global supply challenges across our business. Our team is doing a nice job minimizing disruption and delivering on increased demand.
I also want to highlight that we recently launched a new innovative bubble wrap on demand and flavor system designed for industrial and fulfillment customers.
You can see the illustration of this system on the right side of this slide.
Teachers Smart technology that recognizes the type of film it's loaded easily switches between material types, whether its in playable cushioning couches or air pillows.
She is becoming an automation company.
On slide seven you can see how we are making this happen.
For the full year, we expect to exceed our $425 million sales target or over 12% growth in equipment system and service.
We're confident in our ability to exceed our 2025 target of over $750 million, which is more than $500 million will come from equipment and systems.
Over the last 12 months, our bookings are up significantly, even though supply disruptions persist.
Pandemic accelerated demand for automation.
Noted earlier, we're highlighting the success of our auto bag systems portfolio with bookings up approximately 50% year to date and more than 60% since the start of the pandemic.
This accelerated systems demand will drive up to seven times future pull through for materials and services over the equipment lifecycle.
We currently are experiencing a significant increase in all of that material orders and we're investing in innovation and capacity expansions to meet this increased demand.
Our year over year bookings growth in auto box is also notable.
Our touchless automation value proposition resonates with customers as we're generating significant operational savings and taking our strategic partnerships to the next level.
Let me now turn to slide eight and talk about sustainability.
Sustainability is in everything we do it starts with our purpose driven culture and values, how we innovate and invest to generate growth.
Sustainability is core to our responsible sourcing of raw materials, our carbon footprint as well as our efforts to advance circularity packaging materials with our customers and suppliers.
You can see on this slide our environmental goals and our sustainability pledge.
Our long term targets are ambitious and lead the industry towards a better future.
As it relates to climate change, we are doing our part within a vicious pledged to achieve net zero carbon emissions across our operations by 2040.
Continue to take actions in our own facilities to reduce energy consumption with incremental investments and touchless automation and renewable energy sources.
We're making significant progress on our 2025 sustainability pledge with approximately 50% of our solutions already designed for Recyclability, which have reached approximately 20% recycled into a renewable content in those solutions.
We design, our high performance materials with Recyclability in mind to make sustainability more affordable and to create a pathway for a circular economy.
You can see on this slide how touchless automation is transforming our operations, our customers operations and enabling a circular economy.
Innovating and smart packaging, incorporating digital technology, and delivering supply chain efficiency sustainability and brand engagement with our customers.
We are excited to share that in early October republished our global impact report that highlights our ESG priorities and commitments related initiatives, our progress and performance.
We highlight how C is shaping the future of the packaging industry and progressing towards our bold environmental targets I will now pass the call to Chris to review our results in more detail Chris.
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.
In Q3, net sales totaled $1 4 billion up 14% as reported up 13% in constant dollars.
Food was up 12% in constant dollars versus last year and protective increased 13%.
Americas and EMEA were both up double digits with Americas up 14% in EMEA are up 13%.
APAC was up 6% versus last year.
On slide 10, you see organic sales volume and pricing trends by segment and by region.
In Q3 overall volume growth was up 5% with favorable price of 8%.
Let's start with volumes.
Volumes were up 6% with growth across all regions Americas up, 5%, EMEA up 6% and APAC, 7%.
Protective volumes were up 4% led by EMEA with 16% growth followed by APAC up 4% and Americas essentially flat to prior year.
Q3 price was favorable 8% with protective at 10% and food at 7%.
Formula based pass throughs, primarily in food North America are now better aligned with input costs for.
For the full year 2021, we now expect to realize more than $275 million of price given additional pricing announcements since our last call as well as timing of formula based pricing.
As we head into 2022, we will be announcing additional price increases effective December one.
In response to continued inflationary pressures.
This increase will vary based on region and product offering and will average between 5% and 10%.
We are engaging directly with our customers to meet increased demand with automation and alternative solutions that drive productivity savings.
On slide 11, we present, our consolidated sales and adjusted EBITDA walks.
Having already discussed sales, let me comment on our Q3, adjusted EBITDA performance of $271 million, which was up 4% compared to last year.
<unk> of 19, 2%, we're down 180 basis points.
Despite the favorable pricing in the quarter, you can see how the inflationary environment and supply challenges weighed on our results with an unfavorable price cost spread of $18 million.
Operational costs decreased approximately $3 million relative to last year.
With reinvent see productivity gains and a $5 million benefit related to an indirect tax recovery in Brazil.
Our key operating engine is performing with 40% leverage on higher volumes.
In the month of September price cost spreads turned favorable in Q4, we expect this favorable trend to continue.
Adjusted earnings per diluted share in Q3 was 86 compared to 82 in Q3 2020.
Our adjusted tax rate was 24, 9% compared to 26% in Q3 2020.
Prior year tax rate included the benefit of U S. You'll see regulations issued in 2020.
Our weighted average diluted shares outstanding in the quarter were $151 million.
Turning to slide 12 here, we provide an update on reinvent see which is now the foundation of our C operating engine.
We have achieved $43 million of benefits in the first nine months of the year and remain on track to realize approximately $65 million in 2021.
Turning to segment results on slide 13, and starting with food.
In Q3 food net sales of $797 million were up 12% in constant dollars.
I hope that barrier bags, and pouches were up for the second consecutive quarter versus last year and combined accounted for nearly 50% of segment sales.
In case ready enrolls stock applications were also up.
Food service recovers and retail demand remained strong.
So equipment parts and service sales, which accounted for 7% of the segment were up low single digits in the quarter.
As Ted noted, we are experiencing strong demand and protein automation tended to build our pipeline.
Adjusted EBITDA of $169 million in Q3 increased 11% compared to last year with margins at 21, 2% out of 40 basis points.
Higher volumes.
Favorable pricing and productivity gains offset elevated costs.
On slide 14, we highlight protective segment results.
Constant dollars net sales increased 13% to $609 million.
Relative to last year industrial was up more than 15% and fulfillment up approximately 7%.
We face supply chain disruptions throughout the quarter and leveraged our broad portfolio and global footprint to meet customer demands where possible.
As a reminder, approximately 55% of our protect themselves are derived from industrial end markets and.
And the remaining 45% from fulfillment and e-commerce.
Adjusted EBITDA of $103 million decreased five 5% in Q3 with margins at 16, 9% down 350 basis points versus last year.
We incurred transitory headwinds, including non material inflation, and labor challenges, which more than offset higher volumes and pricing actions.
Now, let's turn to free cash flow on slide 15.
And the first nine months of 2021 we generated $223 million of free cash flow.
Relative to the same period last year higher earnings and lower restructuring payments were offset by the impact of higher employee related costs.
Cash tax payments and capex investments to support growth and innovation.
On slide 16, we outline our purpose driven capital allocation strategy focused on creating economic value.
Maintain a strong balance sheet, while driving attractive returns on invested capital and supporting profitable growth initiatives.
As Ted mentioned.
Right.
In Q3, we executed a $600 million five year senior secured bonds at 1.5 to seven 3%.
Proceeds of this offering were used to pay down $425 million senior unsecured notes at 4.8, 75%.
In 2022, and $175 million pre payable term loan debt.
To support our growth initiatives, we are focusing our capex on touchless automation digital and sustainability.
We are expanding our capacity and equipment to align with customer demands and support continued growth.
We are investing in smart packaging and digital printing and see opportunities to expand our presence in attractive growth markets and geographies.
We are managing our product portfolio with discipline to ensure alignment with our growth strategy.
As it relates to returning capital to shareholders, we have repurchased six 6 million shares 329 million year to date September reflecting confidence in our future growth.
At quarter end, we have approximately $970 million remaining under our authorized repurchase program.
Let's turn to slide 17 to review our updated 2021 outlook given our performance year to date through September.
For net sales, we now estimate approximately $5 5 billion or up approximately 12% as reported growth to reflect a favorable demand environment and pricing actions.
This compares to our previous range of five 4% to $5 5 billion.
We expect a favorable currency impact of approximately 1.15%.
Given the current environment, we now anticipate adjusted EBITDA to be in the range of $1. One two to one 4 billion.
On a reported basis adjusted EBITDA is expected to grow six five to eight 5%.
This compares to our previous guidance of one to one 5 billion.
For adjusted EPS, we expect to be in the range of $3.50 to $3 60, a higher end of our previous guidance.
This assumes depreciation and amortization of $230 million and adjusted effective tax rate of approximately 26% at approximately $152 5 million average shares outstanding.
And lastly, our outlook for free cash flow is expected to be in the range of $520 million to $540 million.
There is no change to our outlook for 2021 capex of approximately $210 million.
<unk> restructuring.
Approximately $40 million.
For cash taxes, we anticipate approximately $110 million, which is net of a $24 million tax refund associated with the retroactive application of the revised U S guilty regulations.
As we close out beer and enter 2022.
We're executing on our growth strategy driving productivity and aligning our business with our <unk> operating model.
With that let me now pass the call back for closing remarks.
Thanks, Chris, Let's turn to slide 18, where we have our purpose statement, which is how we will make our vision a reality.
Before we open up the call for questions I wanted to thank our people for their tireless efforts to take care of our business in this difficult environment.
Demonstrating our ability to grow and expand our presence globally, considering the inflationary pressures and global supply disruption is a true reflection of the talent we have let's see.
We are differentiating ourselves in the markets, we serve with a can do get it done culture.
We're reinventing wherever you are taking C and driving our performance to World class.
We're at the table with our customers solving their most critical packaging challenges with automated and sustainable solutions. Our strategy is working and continues to gain momentum.
We are purpose driven to create long term value for our stakeholders and making our world better than we found it.
With that I'll now open the call for questions.
Operator.
Thank you Oh, Sorry reminder, to ask a question simply press star one on your telephone.
We draw the question press the pound or hash key we ask that you. Please limit yourself to one question.
My first question is from George Staphos with Bank of America. Your line is open.
Hi, Thanks, operator, hi, everyone. Good morning, Thanks for all the detail.
I wanted to ask a question on growth framed.
With some of your strategic initiatives Ted so.
Within automation I think as of the second quarter sales were up around 26% year on year year to date, and if I'm remembering correctly, you're up approximately 20%.
As of the nine month period, we recognize there's a lot of good things going on in automation, if I'm remembering the numbers correctly, where you're seeing the deceleration and relatedly within protective.
You called out supply chain.
Headwinds.
Notable that EBIT was down in the quarter, even though you did a really good job relative to <unk> and <unk> on price cost can you quantify what was going on in protective relative to the growth rate. There. Thank you very much.
Good Thanks, George and I'll try to tag team that with Chris I think we picked up three things and maybe we'll talk about 2022, which you've kind of had an M. Prints. There. So if you look at equipment and if I can point to our deck on the equipment slide which is slide.
Seven.
If you unpack, what's going on with equipment year to date as you highlighted we highlighted it's up over 20% in the quarter. There was a little bit of on the actual shipments on the sales. There was some slowdown it was less than it was high single digit, but the slowdown was due to comps from last year.
But also supply disruptions as you're dealing with other equipment companies are out there I don't want to go through all those issues, but they're real and getting the equipment installed et cetera et cetera. So what we're really focusing on by the way we're working with our customers on all of those issues are really focusing on as we really transform this into.
And equipment company is what are the bookings how are the bookings doing the bookings are still very very strong and they're strong across the board. So.
I'm not worried about that we got a lot of issues in place and actually again, we're using the equipment story to handle these situations with our customers because their number one issue is labor shortages. So we are right there with them and solving that so actually when we talk about some of our thoughts on 2000.
22, you'll see why this is what we're quite confident that this momentum will build forward. The second part of the question I might try to get Chris to tag team on that and that is what's going on with the bridge with the protective and food or so George let me just comment around around protective and you kind of highlighted the fact that we.
Had good growth in the quarter, but saw the margin pressure and unfortunately, you're going to hear kind of a consistent theme. Given these are the supply chain disruptions that we faced during the quarter that we continue to manage through good. Good in terms of the growth for those incremental costs are impacting our margins those transitory impacts higher freight costs.
Thinking about the labor challenges et cetera to get that volume out we have experienced some headwinds so although we felt good about the growth.
Conversion, if you will or the margin profile and protective Unfortunately were was negatively impacted.
In the quarter and that's what you see in our results.
Operator next question.
Thank you next question is from Ghansham Panjabi with Baird. Your line is open.
Hi, Good morning, just on your comment Chris about price costs inflicting positively in September I, just wanted to check in to see if it's on both segments or is it just skewed towards one and then you know what protective comparisons get quite a bit more difficult from a volume standpoint, <unk> onwards, obviously, there's considerable supply chain constrains you know auto yeah.
And it just industrial markets in general.
Don't see that playing out and then related to that how does that impact your ability to deliver it's all machines.
Pretty linearly.
Just given all the constraints that Ted said it in terms of shortages et cetera, I'm quite sure yes sure gotcha. Thank you.
So a few questions. So maybe just hit the price cost spread because in my prepared remarks, we talked about at September we.
We did see that favorable terms. So we're finally catching up as it relates to price relative to the input cost increases that we've experienced all.
All year pretty evenly split it's not a huge number.
Kind of calibrate it that way, it's not a huge number we're just glad to see it would be positive and pretty much reflected both in food and protective that momentum. We expect to continue so our guide if you will assume that we're going to get incremental to our sequential improvement from Q3, roughly 40 to potentially $50 million of incremental pricing to be expected.
To be able to achieve the midpoint of our of our guide for full year, and then how that relates back to.
Back to fourth quarter.
And then maybe your specific question relative to protective volumes continued to be strong I mean, I've made my comments earlier in terms of the margin profile. We're doing everything we can to be able to meet that meet that demand.
Heading into Q4.
So so it's great to get that volume granted we bought we'd like to see better margin improvement.
But at the same time, we recognize that this is a temporary kind of transitory type of challenges that we're working through and our supply chain team is doing the best they can to get product to our facilities to be able to satisfy satisfy that demand. So that that kind of answers. Your delivery question in terms of being able to deliver on our customers' needs.
Operator next question please.
Thank you. Our next question is from Anthony Pettinari with Citi. Your line is open.
Hi, This is actually Brian birchmeier sitting in for Anthony.
You guided to $275 million in price increases for this year, which is the same number you gave on the last call. So is the raise to organic growth guidance entirely driven by volume and based on what you've already said publicly how much will prices be up in 2022.
Sure Brian So so you're right I mean made our midpoint last last quarter's call in terms of the top line and then as we move forward in terms of adjusting and tightening that range, specifically around $5 5 billion for the for the full year is driven by is driven by volume so its our expectation of volume, although we're well.
<unk> to be able to achieve better than that $2 75, as I mentioned in prepared remarks that that's hopefully what we'll see we're counting on it in terms of our EBITDA range guidance for <unk>.
For the full year, but we would expect to be.
We're better than that $2 75, so it seems they've done a nice job of working that.
We're literally partnering with our customers to make sure that demand satisfy everyone recognizes the environment. We're in relative to these inflationary pressures and we're working our best with customers to be able to satisfy their demand at the same time as we come in and help help their operations from a productivity point of view.
Yeah, Brian Let me just add on one thing because you were alluding to if you go to our slide five with what's happening in the fourth quarter.
And on price, which has been the big issue for US we've had three quarters, we've been chasing those input costs. So as Chris highlighted in his prepared remarks, we saw a turn in September so that's what's giving us confidence to hit that our fourth quarter and really building into the momentum into 2022.
So if you look at our slide you could see where we're giving you. This is where the model is driving so to unpack that a little bit for you. If you look at our organic sales. That's been strong. This year, we're looking to that momentum continued to be strong and actually exceed that going into next year and then you add price on top of that.
Do you see some strong volumes into 2022, and then the conversion on that on the earnings is going to be with the price now going positive in the quarter, you're going to see a pretty significant change in our profitability in the fourth quarter compared to the first three quarters being ahead on the price you'll see not only our operator.
Leverage on the volume that we've been consistently hitting well over that 30% you're going to see the price coming in as well.
Going into 2022, we're still going to have some supply constraints and we still think we have those inflationary pressures so they're happening it's going to be a little bit different in the resin because we do think that should be starting to flatten, but just to catch up on all of the other inflationary costs, but we still think we're going to be had and we think our EBIT.
Growth percentage is going to outweigh our sales. So we're going to have some margin expansion going into next year, and then that flows with getting over 10% on EPS and our cash generation. So.
We're seeing this momentum in the fourth quarter being led by price taking us into a strong 2022.
Operator next question please.
From Larry de Maria with William Blair. Your line is open.
Hi, Thanks, good morning.
Just changing gears, a little bit Ken you mentioned disruptive technology any examples.
Obviously aside from the automation just around alternative to plastics and commercial wins you may be seeing there and then secondly on Neal.
Reinvent see obviously way ahead of schedule any update there and how should we conceptualize that going forward into next year.
Sure.
And welcome Larry into our stock it smacks, having an equipment Guy Halloween.
So I'll do the first part and talk about some disruptive technologies and I'll, let Chris handle the reinvent see progress. So if we look at our slide eight I believe are cited when we talk about what are we doing in sustainability what are we doing with automation.
So if you look at this picture of what we do.
We have roughly a 1 billion pounds of resin and plus.
Add to 250 million pounds of paper that go in to produce 30 billion packages. So that's the big picture of what we do so to your question on disruptive technology, we're bringing automation into our facilities, we're actually bringing some pretty unique operations.
Creating some touchless systems that enable us needling us to change how we make a product in this example that we have here on the slide this.
This is where we're taking in our food business instead of taking our creating the bag, we fold them up into box, we're now fully automating that and putting it into a high density role. So actually we're finishing making the bag in our customers' operations. So on this one example here this is.
Order that's coming in is we're actually able to now go to a high density rule finish, making the bag and our customers' operations were eliminating in this one example, 87000 boxes a year or.
So traumatic carbon footprint change dramatic environmental change, but also the productivity and it's saving customers' labor, which is significant so very disrupted and then now we're bringing our high mid to high performance materials into the system introducing some of the digital tech.
<unk> actually printing right, there now and our customers facilities versus where we used to print in our plants. So this is orders in process and this is where our future is going to abate and then you could see taking it all the way to the consumer in the home, bringing our digital technology. So that you can see.
Through the package no what material, it's made us know what's going on with the protein inside so pretty.
<unk> added about making this happened and this is this reality is happening as we speak, especially right now in the protein market. So I'll turn to reinvent see crusher soliris.
Kind of adjust your euro reinvent see question given the successful program Youre right pretty much coming up towards the end of of the program in 'twenty, one don't expect meaningful carryover into 'twenty, two but what we're trying to lease profile out.
This is this has really become the foundation of our C. Operating engine meeting every year the productivity.
Generation of the company.
To exceed inflation and is the goal we're going through our planning period right now for 2022, and that's not to say, we won't be too inconsistent with our operating model in terms of how you think about our performance over time so.
So we plan on updating investors in the February timeframe, when we close out 'twenty, one and provide more specific guidance relative to 2022, but I would I would comment there is nothing that we're seeing.
As a major concern kind of heading into 2022, we're working through these transitory costs, we're getting getting the favorability of price as we mentioned you know driving productivity in our operations.
Feeling good about where we are in terms of the turn but there's more there's more work to do so there's a lot going on with our with the operations right now so we're going to present.
But we're gonna finalize their plant coming up and we'll give more color in the February timeframe, and specifically talk to productivity installation relative to 2022.
Your next question please.
Thank you is from.
Chris Parkinson with Mizuho Your line is open.
Hi, good morning, just carrying on for Chris.
I was just wondering if you can provide a little bit more color on kind of the volume trends that you saw in the quarter and protective in food, but specifically by region. It seems like EMEA was particularly strong and if you can just parse that out and talk about what you see into the fourth quarter and maybe a little bit into 'twenty two that would be helpful. Thank you.
Sure. So as you can see in our.
Supplemental slides specifically around.
The growth in protective and food given our segments as well as the regions, but you know really strong strong performance across the board EMEA, specifically that we've highlighted given the volume growth of 10%.
Just just very strong so if we look at it is that that's continuing.
Despite the supply challenge as well as the price increases that were introducing being able to retain that business and look to grow it.
And that's that's kind of obviously the favorability out of industrial of fulfillment and it's been very strong.
There's some tougher comps when you kind of compare quarter over quarter, but the volume we're feeling really good about.
I'll just let me add one thing there is we're looking at the business and you mentioned protective.
A piece that we feel like we're behind is actually we had great gains with our European Middle East and Africa region on the volumes, but we're little bit late on the price. There. So we think that's an opportunity going forward as we look at the protective and that's what you're seeing in the numbers, where we're a little bit.
Hind and we're again anticipating a catch up in the fourth quarter and into 2022.
Operator next question. Please thank you from Josh Spector with UBS. Your line is open.
Yeah.
Yeah, Hey, guys. Thanks for taking my question I guess just to dig into food volume a little bit more if I look at your performance in second quarter and third quarter.
Somewhat consistent on a two year stack when I'm looking at your fourth quarter guide it seems to imply a bit of a slowdown and I don't know if there is something from a reopening or mix that's impacting that or is there something else that I'm missing or if my interpretation is wrong. So any comments there on what youre seeing in <unk> and an early thought perhaps on.
How are you thinking about volume growth there to point to here would be helpful. Thanks.
Yeah, Hi, Josh just real high level, it's we're dealing in the fourth quarter, what you see in the implied guidance is it's relatively flat.
And we still are have the persistent labor challenges et cetera. The opportunity there is where do we see the volume coming in on the foodservice. So we feel that is going to overcome but right now the guide right now it's flat so going now into 2022, that's where we feel.
Confident that we get to see foodservice coming back we see really the automation coming in strong into the food side. So we should have to pick up so for right now in the fourth quarter flat slightly up but we think we have opportunities going into 2022 and getting that not only the volume, but then catching up.
On the price so that's the opportunity we have for food going into 2022.
Operator next question please.
He is from Mark Wilde with bank of Montreal. Your line is open.
Hi, Ted Hi, Chris.
Hey, Mark.
Kevin I wanted to just talk a little bit more about sort of automation and the timing.
We'll throw as you see it I mean, you can you can imagine I guess after Covid last spring and all the issues in the meat packing plants that that these manufacturers are keen to kind of reduce the amount of labor, but in practical terms.
How long does it take them to kind of work this through the budget and the sort of the reengineering of all of these facility. So how long could this sort of reconfiguration that increased automation.
How long could it take for this to play out in your view.
What would be the kind of the cadence thing.
Great Great question, Mark Obviously, you were asking the question with knowledge, Eric because it depends is the big systems are probably a two to three year timing.
What we're excited about we've been working on this for a while so actually in the quarter, we actually were able to secure some longer term major automation wins in the protein space. So those will be building up over the cadence of the next one to two years and we will.
Seat, we will see that now the rest of the portfolio and that's where we gave you a little bit of a detail on the our automation slide where we wanted to unpack auto bag and actually show you what's going on with auto bag as we looked at you know our acquisition of automated packaging systems.
Because we're now looking like an equipment company, we're tracking bookings and we actually gave a signal to the team actually not within the signals of direct command over nine months ago, We're gonna have to double our capacity and this is with auto back. So just unpacking that we do some food and.
With the auto bag as well, so which I'm pleased to see that we're all we are catching up we are behind because the book to bill is higher than we would like our lead times are longer than we'd like but we're seeing that we even went public with our capex announcement, there are over $30 million, we are catching up and again going.
Into 2022, we think this will be able to support that significantly strong growth rate that we have for equipment. So I think we're well on our way to exceed the target to get over that $750 million over the next three years five years four years whatever it is.
So it does you are right with these are long term projects, which actually is excited because we're embedded with our customers. We're working with their layouts, how do we get our equipment in place and actually embedded into the systems. So.
Long long answer simple the big stuff the big systems. The multimillion dollar systems, probably two to three years in planning and execution, but the auto bag systems. Those are matter of less than three months and it should be in weeks and that's what we're working on.
Okay.
Operator next question please.
Do you from Mike Rockville, and with tourists Securities. Your line is open.
Thanks, Good morning, Chris Laurie I appreciate you taking my questions.
Just wanted to follow up on the.
Machinery and automation bookings obviously this is an insurance the law during the call.
Insurance continues to persist and I would argue has gotten worse over the last few months what has been the cadence in your machinery bookings have you seen an acceleration in those sales bookings corresponding to deteriorate deteriorating labor situations.
And then Relatedly you mentioned that machinery sales have been impacted by a shortage of materials.
Provide some.
Some more color around with some of the gating factors are there without worsening during the quarter and what are you seeing regarding that shortage, thus far in <unk>. Thank you.
Okay. Good so again, if we take a look at that slide we talk about the equipment business and the cadence.
Here is using the language is as an ex equipment Guy myself, you can hear us using language like choppy.
And because these are bigger numbers that are coming in and they come in at different times, so as our pipeline grows.
We'll have a smoothing of this but so but in the quarter. Some of the issues that I mentioned already is for getting some of those equipment installs on a sales basis in the quarter. We had some starts and stops. So we think we will have some recovery in that in the fourth quarter, but still very strong.
Bookings, though are up significantly.
So could the bookings even be higher probably that's why we got to add capacity because those lead times are stretching so the to the cadence.
And two where you asked a question about labor.
Labor right now this is the hottest thing out there in the market today can we help our customers with their labor labor shortages and automation is the answer so.
Lots of investment going on in place, we're working with our customers.
<unk> taken care of these supply shortages, but I want to separate one thing that you said just to understand why we're so excited about our equipment strategy equipment as one piece the pull through of the materials is the other aspect of this so not only had weak auto bag specifically we've had.
To invest into the material side of that as well.
So our materials are up because the pull through reactions can be selling materials faster.
The last piece on the equipment is we mentioned equipment plus systems. So these large systems that we're selling not only didn't have the equipment. Some traditional equipment. We've had in the past some new equipment, but also its full systems. So we're putting in robotics, we're putting and conveyance systems, we're putting in.
You know WNS systems with our customers. So the dollar amount is much higher and we're making the margin is on the savings or the full system. So it's much different than we've done in the past.
And we're getting better and better visibility on how we measure this and how we forecast it going forward. Okay. Operator next question. Please.
Phil.
At Jefferies. Your line is open.
Hey, guys Ted Congrats.
Congrats on a good quarter in a choppy environment.
No.
Yeah.
S. In the containerboard manufacturers actually called out strong underlying demand, but their customers have been constrained by supply chain labor. It sounds like you're seeing some of that so just curious as we kind of head into the holiday shopping season. What are your customers are signaling to you, particularly in protective as you kind of lap some of these tougher comps and when we look out to perhaps 2020.
Two how are you thinking about volumes in that mix dynamic evolving next year.
Yeah.
Well I'll take the first part and then critical Q&A regulatory zuko, yeah, so as far as where is that going and obviously you mentioned UBS where type partner with U P. S. So they they have our stuff actually is their innovation centers so as those.
At home purchases continue and going through to the holiday season, We think we will see more.
The equipment for the automation, but that's already planning for 2022, where we're going to see in the next few months is more of what we already have in place coming through with more of our discrete mailers discrete products. So right now it's more on the material issues to getting those taken care of.
On those bottlenecks as far as going into next year, it's going to be our new stuff, it's going to help us with comps. This year can we get those new products out there can we get the automation out there and can we also get some of our geographic issues taken care of we're investing in our geographies around the world.
So Jim to handle that comp for next year, which we still feel pretty good about that Chris talked a little bit about 2022, and we think we can maintain those volumes and.
Incremental volumes on that.
Protecting side as well as the food share maybe before I talk about 2020.
Relative to maybe the third quarter as well as the fourth quarter, given supply disruptions thinking about labor challenges et cetera.
It seems when we assessed it for Q3, we felt we were kind of roughly $20 million of opportunity lost if you will as it relates to these disruptions in Q3 as that same specific question relative to Q4 little bit less but still kind of in this you know call it $15 million range. So were.
Tens of millions of dollars Unfortunately, being not necessarily lost some of its going to move to the right, but it's definitely impacting our performance even though our performance is very good. So we're kind of working through these supply challenges if returns to just 2022.
Just to give some high level thoughts the volume the operating model that we're driving through the 3% to 5% given the favorable dynamic we expect to see on price cost spread.
We would expect to have that organic growth in that 3% to 5% category. But then you add on top of that what we would expect in terms of price being greater than the material inflation or get the price benefit of that so we're more in the 6% to 7% growth as we see it right now for 2022 now going through the planning period. This assumes.
It has a lot of assumptions for material availability working through these transitory items, which were working through but we feel good about the volumes the underlying volumes theyre getting the labor in place getting through these disruptions and continue to execute because where we're where we're focused.
Operator next question. Please. Thank you is from Salvator Tiano with Seaport research.
Yes, hi, thanks for taking my questions. So.
A couple of things Firstly, just building on what you just mentioned about next year organic sales being a little bit higher than normal because of the price cost does. This mean also we should assume that your EBITDA growth should be at the top.
Hope and of the five.
5% to 7% growth rate next year already been above it and also just bringing them cut the location you have $300 million in cash and free cash flow coming through in Q4 based on the food your guidance. What are your thoughts now that we saw you slowed down buybacks with regard to M&A or we start into the box.
Going back to them to purchase services even more.
Sure. So thanks for your questions. So maybe just EBITDA performance for the full year, given our updated guidance for 2021, and then as we think about 2022 early stages really just focus on the EBITDA margin expansion. The fact that we expect to be a favorable on that price cost spread.
Heading into 2022, given the volume growth and we're converting today, we're converting incremental volumes you know close to 40% so having that good momentum.
It makes us feel feel good about it whoever lot of assumptions built into what I, just said and we're working through to make sure. We have a good profile, but I could tell you that internally, how we're driving is to convert that incremental volume of greater than 30% you've heard us say that in the past and margin expansion, maybe a little bit challenging but we're.
We're driving we're roughly a 21% EBITDA margin business is what we're is what we're targeting in terms of our thoughts.
And then you mentioned the second item just relative to the cash generation that we have expected for the full year.
As we kind of commented a small number but we had an incremental share repurchase in the quarter. So the amount of I'll call. It dry powder, we have to deploy in the business and I'll, let I'll, let Ted comment as well because we just put out a press release. This morning since we finalize it on the reflect fixed divestiture, which we expect to get.
The after tax proceeds between $40 million to $50 million for that so so the cash.
Proceeds to use to redeploy into the business will be available to us.
And as we execute on that share repurchases an item as we noted we recently increased the dividend we're very.
Optimistic that the pipeline of opportunities for M&A, we'll be there of course that takes the other side to agree. So we'll work through it but maybe you said some some color on capital.
Capital allocation and the excess cash we'll have yeah.
So just the specifically in the press release, just get hit on are reflected business. So and that's what we were communicating always trying to be transparent. If you go to our capital allocation Slide 16, where again purpose driven and if you look in this section we talk about it.
Vas and acquire if there is an implied word.
Best acquire and divest to accelerate growth. So as we look at our product portfolio. We are continuously analyzing our portfolio where does it match and can we use our portfolio to actually fueled our growth. So.
They reflect fix is a nice business it focuses though on HVAC and construction.
Not something that is connected to our strategy, but at very nice business.
So the buyer is getting a nice business.
And we're going to take those proceeds and continue invest where we're taking the business and driving into our automation digital and sustainability.
Growth plans so the other piece in here as we look at our capital allocation as Chris talked to we're being very opportunistic as we talked about the share repurchase.
I've mentioned before our.
Our stocks hit a new low so we're also communicating with those investors that are coming in.
And this model is generating close to $2 billion of cash over the next three years, so being purpose driven where we put that cash is going to be how do we fueled this growth.
Going forward so.
Good question and one of them just to the employees that are going to reflected we really appreciate what you did into the buyer you got you've got a great business in itself.
It's all part of Optum.
Optimizing our portfolio.
Operator, we have time for one last question. Please.
Excellent and my <unk>.
Last question is from Adam Samuelson with Goldman Sachs. Your line is open.
Oh, yes, thank you and good morning, everyone.
Good morning.
So I was hoping maybe you can touch on this a little bit but as we're thinking about 'twenty. Two you expressed a good luck at the level of confidence on the volume side.
Maybe at a global basis, but can you.
Maybe just think about where.
Things are.
Where are the confidence level is particularly high and maybe some of those end markets that are that are bigger than been more challenged or a bit more of a cautionary.
So on the positive side I would think about ecommerce in the U S. Maybe inversely read me either in Brazil or in Australia.
Industrial production based protective businesses in Europe, I'm, just trying to think about where that's at the high and low end of the spectrum here. Your most in a little bit more watchful eye on the volume outlook.
Okay.
Well I'll do the first part.
Yeah. It's a good question that again, you know as we're looking to grow the business how do we grow it by product how do we grow by geography, and how do we go up by market sell just some quick thoughts and then some.
The secular trends that we're focused on which I'm always going back to this.
First thing is automation and that applies to the whole portfolio because what is being driven is these labor shortages.
As we package our again, our 30 billion packages that we do a year.
We're covering all market just labor challenge is ubiquitous it's everywhere so.
Now going into some of the markets or the geographies that we think we have this year, maybe we were a little behind on we think we have some potential it's a we're pretty bullish on what's going to happen with the turnaround with the European Middle East and Africa had a tough catch up on the costs going up faster than the price we think.
We're going to get there we have some really interesting innovations that are going into the European market, especially on that other challenge of sustainability introducing some.
Paper products into E Commerce, we do very well with our bubble wrap or pillows et cetera, and we're investing in some pretty interesting technology on the paper side for that it's going to show up in the ecommerce being really pulled quickly into the European markets, but that's going to be <unk>.
So we see that's exciting for 2022 growth on the food side, we see our expansion beyond proteins, obviously fresh red meat, where we do really well, but the growth in that 22% part of our portfolio is going to be on the automation and we're really excited.
That we're seeing some of those big automation opportunities actually now going forward some of the equipment at some of those should be hitting in 2022.
So that's that's globally.
All over the world.
Then the other piece is going taking food beyond fresh red meat, you heard us talk about the liquids in fluids being up over 20%.
So, bringing the cryo vacuum pouch to that but as you see in this slide if you look at our market slide youll see going into liquids such as spirits wine, but next to that is a million dollar piece of equipment, it's actually filling those pouches that we're putting into a box and.
Creating a full system those are some exciting markets that we're going after you look at the site pouch system, we have actually packaging food and you would have called out we would not we would have called that our protective business in the past, but that's why we are becoming.
Really market driven with these great products and systems and so we see some <unk>.
Expansion into the parts of the food business, where we didn't play before especially on equipment side, where we may have done the pouches, but now we can do full equipment and again saving our customers significant amounts of money on their productivity and again labor shortages, where they just can't get the labor right now so going into 2000.
'twenty two we think we've got lots of opportunities again, just to close the call the momentum of the fourth quarter building into 2022.
We're excited about the future and I want to thank everybody for the time on the call and operator I think that's it for us today and look forward to when we talk next thank you.
Well you know as you close out the call. Thank you.
Thank you everyone for joining us and for participating and you may now disconnect have a wonderful day.
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