Q4 2021 Sealed Air Corp Earnings Call

February 17, 2022

Good day, and thank you for standing by welcome to the sealed air fourth quarter and full year 2021 earnings conference call.

At this time all participant lines are in listen only mode.

After the presentation, there will be a question and answer session.

To ask a question. During this session you will need to press Star then one on your telephone keypad.

Please be advised today's conference maybe recorded.

If you require operator assistance during the call. Please press Star then zero.

I would now like to hand, the conference over to Lori, Jason Vice President of Investor Relations.

Thank you and good morning, everyone with me today are <unk>, <unk>, our CEO and Chris Stevens our CFO .

Before we begin our call I would like to note that we have provided a slide presentation to help guide our discussion.

In addition to our result and outlook head will go through a deep dive on see automation.

Please visit our website, where today's webcast and presentation can be downloaded from our IR website at <unk> Dot com.

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 as revised 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 or on the SEC website.

We discuss financial measures that did 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.

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 three.

Thank you Lori and thank all of you for joining our fourth quarter and year end earnings call Chris.

Chris and I will discuss our Q4 and year end results.

Our 2022 outlook and we will be introducing a deep dive into our CE automation three year plan.

On slide three you can see our vision.

To become a world class digitally driven company automating sustainable packaging solutions.

And we'll show you how we're getting it done.

Now, let's turn to slide four.

In 2021, we delivered strong sales and earnings overcoming dramatic inflationary supply and Covid challenges.

Our results are a testament to our culture people and powerful fee operating engine.

We're building a world class digitally empowered company acting like a startup to disrupt the markets, we serve our industry and ourselves.

These are exciting times for us.

Taking all steps investing in our people operations and customers to create significant value for our stakeholders.

You can see how our sea operating engine performed in the fourth quarter net.

Net sales were up 14% to $1 5 billion and adjusted EBITDA was up 18% to $330 million.

For the full year, we generated free cash flow of $497 million as part of our strategic portfolio realignment. We successfully completed the divestiture are reflected.

Acre insulated materials for the construction market and generated additional after tax proceeds of $65 million.

On slide five we are raising our operating model growth goals for sales and adjusted EBITDA by 200 basis points.

Our higher above market growth goals are led by our confidence in our strategy disruptive innovations and investments.

Our execution across markets and geographies.

Through M&A and <unk> ventures, we're looking to expand into attractive markets technologies and disruptive business models to accelerate our speed to market.

Undersea ventures, we recently completed the acquisition of Fox Pak <unk>.

A pioneer in digital printing.

Let's turn to slide six where you can see our transition from a materials driven business to a market and customer centric company, focusing on automation and digital and sustainability.

Powering our growth.

While Chris will give you more detail on our geographic performance.

Focus on activities in our top markets.

In proteins in fluids, we experienced strong growth in automation with equipment parts and services up double digits in the fourth quarter and the year in.

In 2021, our e-commerce fulfillment portfolio shifted towards automation and sustainable solutions.

Sales for auto bag, which is illustrated on this slide and auto box were up double digits in the quarter and the year.

<unk> the increased demands for automated solutions from E Commerce and logistics.

You can see an example of our auto wrap solution on this slide as well with continental tires, and our partnership with UBS, we're enabling a fully automated tire packaging and sorting solution that creates an enhanced customer experience.

This is creating significant savings for continental tires, and new business for UBS.

Turning to slide seven we will take you through a deep dive on see automation.

Our plan is to more than double our automation business to over $1 billion by 2025.

Our solutions model starts identifying savings for our customers and converting those savings into solutions with a faster than three year payback.

Our solutions multiplier as materials and service flow through the installed base is key to our growth.

We're digitally connecting more than 100000 installed assets.

Our C automation solutions resonate with our customers as we address their needs to reduce labor dependency build more resilient operations increase productivity reduce cost and deliver flawless quality.

See automation solutions drive margin expansion for seed.

Palling customer savings and operational improvements allow for the best solutions at the right price and we are making them sustainable.

We're investing to double our equipment production and service capacity over the next three years to match our ambition.

We recognize we have to go faster and we are relentless in this pursuit.

The chart to the left shows how customer savings are behind our growth in automation.

The chart to the right illustrates our bookings trends are our fastest growing automation platforms, giving you transparency into the.

The strength of our business.

Solving customer challenges and driving tangible savings are the central pillars of our sustainable competitive advantage, creating an inimitable ecosystem.

On slide eight we are sure.

<unk> R C automation solutions.

This is an example of a $7 million automated protein system with less than a three year payback.

Providing a step change improvement for our customers operations.

We start with the most labor intensive processes can be packing facilities.

See auto load automates the process of loading the meat in the back.

We're integrating co bots robots and other automated systems to increase line speed.

While producing flawless quality with auto back and auto pack.

We continue to innovate and high performance cryo vac materials, making them more sustainable recyclable and effective.

Our state of the art vision systems for quality control can see what humans cannot.

Artificial intelligence and machine learning continuously makes the process smarter we.

We use our CE mark to validate and certify quality.

Our advancements in digital printing will enable customers to improve their operations and at the same time.

Digitally connect with their consumers.

A key point of differentiation for C is how we leverage our internal touchless automation capabilities and our opex teams to improve customer operations.

Our industry, leading experts are working with customers and their facilities to simplify the process eliminate waste remove people from harm's way and then automate.

Putting in practice the principle of you get what you measure.

Let's talk about what automation means for growth.

On slide nine we use the waves of the sea marked illustrate the value solutions multiplier.

We are changing from a path to being a materials first to leading with an automation first solutions model.

We start with the value of the initial equipment order equally onex, we continue with parts and services being two X over the equipment lifecycle and the automation and integration opportunities represent three X.

As our high performance materials, such as paper and films along with digital graphics flow through the system. It takes us well over 10 times the value of the original equipment order.

Let me now turn to slide 10.

Our strategy is to make sustainability.

Part of our business.

We continue to make significant progress on our 2025 sustainability pledge with approximately 50% of our solutions already designed for Recyclability and we reached approximately 20% recycled <unk> renewable content in those solutions.

Approximately 15% of our solutions for fiber base.

We design, our high performance materials, with Recyclability and mine to make sustainability more affordable and to create a pathway for circularity.

It starts with our touchless operations, where we actively measure every touch point from pellet to bag and aggressively work to simplify the process eliminate waste and millions of touches.

We're investing in automation and robotics to make it happen.

We're linking our own automation to our customers' operations and leveraging the same productivity processes, we use internally.

Our digital initiatives is critical to our sustainability and automation efforts next quarter, we plan to feature in detail, how our proprietary digital printing technology.

<unk>, Mark connect consumers and customers to build brands and close the loop on the circular economy.

I'll now pass the call to Chris to review our results in more detail.

Thank you Ted and good morning, everyone. Let's start on slide 11 to review, our quarterly and year end net sales growth.

And by region.

In Q4, net sales were up 14% to $1 5 billion in constant dollars net sales were up 15% with 17% growth in food and 13% growth in protected <unk>.

The Americas and EMEA were both up double digits with Americas up, 19% and EMEA up 13%.

Pat was up 4% versus last year.

In 2021, net sales were up 13% to five 5 billion in cash.

Dollars.

Net sales were up 11% with 9% growth in food and 15% and protected.

Growth was led by the Americas and EMEA.

Each were up 13% and 12% respectively.

With APAC up 6% versus last year.

On slide 12, you.

You can see organic sales volume and pricing trends.

Segment and by region.

In Q4 overall volume growth was up 4% with favorable price of 12%.

In 2021 volume growth and favorable price were both 6%.

Let's start with volume trends and focus on Q4 performance in 2021 trends in.

In the quarter food volumes were up 6% with growth across all regions.

<unk> was up 5% EMEA up 10% and APAC up 6%.

Protective volumes were up 1% led by EMEA with 7% growth Latin Americas, and APAC declined 4%.

We experienced accelerating volume in food in the second half.

Higher sales in automation and growth in materials.

Foodservice continues to recover and retail demand remained strong.

Protect the volume surged in the first half of 2021 on the heels of 2020 industrial shutdowns.

And growth in fulfillment around the world, particularly in EMEA.

We face tougher comps in the second half of 2021.

However, fulfillment automation sales were up in industrial demand was favorable.

Starting in Q2 2021 in response to inflationary pressures.

We accelerated pricing actions Q.

Q4 prices favorable 12%.

Protective at 13% and food at 11%.

For the full year 2021, we realized nearly $300 million in price.

Of which more than half was realized in Q4.

As a result of timing of pricing actions and Formula pass throughs.

Given ongoing inflationary environment, we will be announcing additional price increases with care.

These increases will vary based on region and product offering.

It will average between five and 10%.

We will work directly with our customers to meet increased demand.

Help them drive productivity and operational savings.

On slide 13, we present, our consolidated sales and adjusted EBITDA walks.

<unk> already discussed sales, let me comment on our Q4 and full year adjusted EBITDA performance.

Q4, adjusted EBITDA of $330 million up 18% compared to last year with margins of 21, 5% up 70 basis points.

Full year adjusted EBITDA of $1 32 billion was up 8% compared to 2020 with margins of 24% to one.

100 basis points.

Higher volume contributed $23 million Q4 adjusted EBITDA.

Full year volume contributed $109 million to adjusted EBITDA.

For the first time since Q3, 2020 price cost spread was favorable in the quarter.

Contributing $36 million in earnings.

In 2021 price cost spread was unfavorable $37 million.

Reinvent see benefits totaled $21 million in Q4 and $64 million in 2021.

Operating costs include labor and other non raw material cost inflation of about $20 million in Q4, which compares to $13 million in the same period a year ago.

$69 million for the full year, which is up from $52 million in 2020.

Adjusted earnings per diluted share in Q4 was $1 12 compared to 89 in Q4 2020.

In 2021, we delivered adjusted EPS of $3 55.

Compared to $3 19, and 2020, an increase of 11%.

Our adjusted tax rate was 26% compared to 24, 5% in 2020.

Weighted average diluted shares outstanding in 2021 were $152 million compared to $156 million. Given we were an active buyer of our stock throughout the year purchasing seven 9 million shares.

$403 million or approximately $51 per share.

At year end 2021, we had $896 million remaining under our authorized repurchase program.

Turning to slide 14 here, we provide an update on reinvent see we achieved $64 million of benefits in 2021, bringing the cumulative benefits of our reinvent see program to $354 million.

Cash payments associated with reinvent see were $28 million in 2021 and $193 million since the start of the program.

To complete this program, we anticipate $20 to $25 million in cash payments in 2022.

Half of which was carryover from 2021.

We anticipate $60 million of productivity gains in 2022.

Which approximately one third is coming from reinvent see initiatives.

Remaining two thirds is our C operating engine, which is designed to drive continuous productivity improvements.

With that said inflationary pressures coupled with cost associated with supply disruptions are expected to continue.

The combination of volume growth pricing and see operating engine productivity gains are expected to mitigate these headwinds in 2022.

Turning to segment results on slide 15, starting with food.

Comments will focus on our Q4 results.

In Q4 food net sales of $877 million were up 17% in constant dollars.

Volume growth of 6% with.

It was led by double digit growth in automation and strong growth in materials.

Adjusted EBITDA of $204 million in Q4 increased 20% compared to last year with margins at 23, 3% up 90 basis points.

Volumes pricing and productivity gains offset elevated costs.

On slide 16, we highlight protective segment results.

Net sales increased 14% on an organic basis to $655 million.

Volume in the quarter was up 1% as we face tougher comps and manage through supply disruptions.

Adjusted EBITDA of $126 million increased 10% in Q4 with margins at 19, 3% down 40 basis points versus last year.

Now, let's turn to free cash flow on slide 17.

In 2021, we generated $497 million of free cash flow relative.

Relative to the same period last year higher earnings and lower restructuring and interest payments were offset by working capital needs.

An incremental capex investments to support strong growth.

On slide 18, 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.

We are focusing our capex on types of automation digital and sustainability.

We are expanding our capacity and equipment to align with customer demand and support continued growth.

We are investing in smart packaging and digital printing and <unk>.

See opportunities to expand our presence in attractive growth markets and geographies.

We are managing our portfolio with the discipline to ensure alignment with our growth strategy.

Turn to slide 19 to review our 2022 outlook.

For net sales, we estimate five $8 billion to $6 billion, an increase of 5% to 8%.

Our organic growth forecast of 7% to 11% of which at the midpoint assumes approximately 3% in volume and approximately 6% and price.

We anticipate adjusted EBITDA to be in the range of one two to $1 billion to $4 billion.

Adjusted EBITDA is expected to grow 6% to 10% and implies an EBITDA margin of approximately 21%.

For adjusted EPS, we expect to be in the range of $3 95 to $4 15.

This assumes depreciation and amortization of approximately $245 million and adjusted effective tax rate of approximately 26%.

Net interest expense of approximately $155 million and approximately 150 million shares outstanding.

And lastly, our outlook for free cash flow is expected to be in the range of $510 million to $550 million.

We are increasing capex to $240 million to $260 million to.

To increase capacity to support growth initiatives.

For cash tax payments, we anticipate to pay $205 million to $215 million in 2022, reflecting expected earnings growth 17 million tax payments on the gain from sale of reflected an approximately $30 million impact related to the R&D provision requiring R&D expenses to be deducted.

Over five years versus the prior immediate expensing allowance.

Additionally, as previously disclosed.

Our 2021 cash tax payments were reduced by approximately $24 million refund associated with the retroactive application of the revised U S guilty regulations.

We are executing on our growth strategy, driving productivity and cash generation and aligning our business around the <unk> operating model.

This is reflected in our 2022 outlook for sales earnings and cash flow.

Fuel our engine and drive accelerated growth beyond 2022, we are increasing our capex and R&D investments for innovation and automation.

We have a strong balance sheet and we will continue to focus on generating attractive returns on invested capital.

With that let me now pass the call back for closing remarks.

Thanks, Chris Let's turn to slide 20, where we have our purpose statement. This is how we're making our vision a reality.

Our C operating engine is performing and gaining momentum we will continue to invest in our four piece of reinvent see.

Next quarter, we'll provide a deep dive on digital.

We're creating long term value for our stakeholders and making our world better than we find it with that.

I'll now open up the call for questions operator.

We'd like to begin the Q&A session.

If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.

Again that is star then one joined the Q&A queue.

Our first question comes from Anthony Pettinari with Citi.

Hi, This is actually Brian birchmeier sitting in for Anthony.

Can you provide some detail the cost assumptions included in your 2022 guidance, such as freight and wage inflation and do you expect to be price cost positive again in <unk> and throughout 2022.

Sure Brian This is Chris Thanks for your question.

So my opening remarks, we talked about just the inflationary pressures that we're seeing I think just to comment in terms of the positive be able us to now be favorable on our price cost spread heading into the year. We expect that to continue clearly through the first half of the year, but the inflationary pressures beyond just material and what we're seeing on the non materials side is causing us to.

Take action relative to price, but when you when you bring it up a level that cost side and the material side is roughly $200 million in our guidance is the assumption.

And on the inflationary being all non material related items everything else. If you will is about a $100 million. So we've got $300 million that were managing through at least that we expect to see this year.

I will just comment that we feel.

Good about the price cost spread turning positive we expect that to continue.

But we are managing not only on pricing, but also the productivity actions across across the organization to be able to deliver on our commitments.

Okay.

Question.

Our next question comes from Larry de Maria with William Blair.

Hey, Thanks, good morning, everybody.

Hey, guys.

Automation, obviously, we're seeing trends clearly accelerating.

For cross all of automation on the food side, especially can you talk about your visibility backlog and how much your solutions gain more towards the end of the line would be prioritized versus other automation in with a secondary processing because of labor challenges are so in other words, where are you in your order and what kind of visibility backlog or are you thinking about.

Okay, Good hi, Larry.

It's great having an expert on automation asking me the question so.

I'll break it up in two parts. So what's in our backlog. If you look at slide seven and we kind of gave you that picture.

Specialty is an automation company talks about their business. They talk about backlog. So you can kind of see what's out there in the backlog.

Pretty significant much higher than sales so to your question, we're seeing that.

Much higher the second part of your question, how does that compare to the other part of the process.

I'm sure I'll get the question, but we put the full detailed process of what we're going after on another slide.

But for where we are if you went and looked at B plant.

And or protein plant.

You would see lots of automation upfront in the processing, but when you get to the actual packaging of actually putting the meat into a package you see lots of people <unk> seen on the news we have had some of the COVID-19 scares, but some of our large customers, that's where the labor intensity is so.

Where we fit in the automation is right now we're actually a key part for our customers to help them right now with availability labor they can't get it driving some efficiency so.

The direct answer we're probably first in line in the spot that they are spending money on to get that automation and to break. Some bottlenecks. This is the most labor intensive piece of food packaging plant.

Okay that helps with the description there.

Next question.

Our next question comes from Angel Castillo with Morgan Stanley .

Hi, Good morning. Thanks for taking my question just I was wondering if you could give us a little bit more color as to the EBITDA guide the low end and the high end.

Volume of 3% and 6% kind of at the midpoint, but how should we think about kind of the two bookends on what kind of assumptions are embedded in that.

Thank you sure.

Good question so.

Just a few items I wanted to first I want to highlight the fact that we've got some headwinds on the FX side, just considering where the currencies. Currently are so FX impact on our adjusted EBITDA, roughly roughly 2% small item, but we did we talked about the divestiture reflects.

That occurred this past year, so thats a little bit.

In terms of the contribution that it made which is pretty much consistent with the company, but the other notable item to highlight is that the investments that we plan to make and are making in our business, mainly driven on capacity needs as well as on the expense side thinking through thinking through the R&D piece of innovation as we move forward.

We're increasing those investments heading into 2022, and if I put a number on around it's a roughly 40% to $45 million incremental is what we expect to spend in 'twenty two versus 21. So the so all of that is not flowing through the bottom line given that volume and price assumptions heading into 2022, So that's a conscious.

Investment backing ourselves for future for future returns that were not necessary going to see in 2022, and then if you look at our ability to generate returns on those investments industry, leading ROI ending the year up to 16%. So we are very much driven on longer term investments that we're making.

I'm not going to make this short term pause if you will to let all of that dropped to the bottom line. So so in our guide roughly like I mentioned before is $40 million to $45 million of incremental investments, we're making and ourselves consistent with our strategy of where we're going.

And just a little bit color as we looked at those bookends of whats going on business and tying to Larry's question really is automation driving so if you look at the high end, what we really looked at very carefully, though even though the bookings are up significantly we still have operational issues that we.

Got to deal with in the market everybody knows what's going on with the supply chain and the disruption. So as we knock out some of those bottlenecks. That's what we're looking at could we push that up even higher so let's let's go make that happen, but we definitely see there's some opportunity again to chris's point to make some of that stuff.

Happen, we are investing heavily in the automation digital and sustainability.

And so we're investing to make that happen. So we do think knocking out some of those bottlenecks knocking through these issues and by the way since our third year of the same things supply chain Covid.

Inflation. So we think the engine can power through that right now and but right now the guidance. There we think is.

Is doable and Thats what.

That's we're going after and get it done.

Okay next question please.

Our next question comes from Phil <unk> with Jefferies.

Good morning, Chris This is John on for Phil Hope Youre doing well.

I wanted to start off with.

Nothing exciting going on and we're getting that.

Yeah.

Okay.

Nothing more exciting.

And for the protective volumes coming through 2021 protective obviously growth accelerated on the tougher comps in the pandemic restrictions easing.

Can you give us your thoughts on how protective we'll do it through 2022 in terms of volumes and where youre seeing strength with some of the COVID-19 restrictions easing up.

Sure.

Guidance kind of implies that.

The organic side, roughly 3% as well as price approximately 6% and if you break that down between food and protective as it relates to the organic piece of it roughly 3%.

It can be a little bit higher on the food kind of thinking 3% to 4% on the protective little bit lower two to three and from a geography point of view. It is certain areas that we would expect to come back better than others, but this low single digit growth that we're anticipating in our guidance kind of what we're looking at hopefully as.

Things do open up faster things kind of settled the markets are a little bit more favorable than we view it but but right now that caution is there to your point specifically on the protected protective side, but said, though if there's anything else to add.

A little color focusing on protected.

You look at slide six John we're trying to give you a picture to tell its story is going on here again, we are moving to be market driven from our products. So the markets in 'twenty one.

<unk> had some Chris you've been used as language, we had some surge with what was going on in the e-commerce space and actually the COVID-19 related to stuff, we shifted that portfolio really fast and so we're anticipating that shift in different areas. So one of the areas in 'twenty one did.

Grow as fast for US was actually our mailer business, we're changing that out driving automation, so that opportunity, which actually down last year. We think has an upside potential and that was driving that lower number there in the fourth quarter was the mailer business, which we think that as an upside opportunity.

This year on protected again driving automation.

Also if you look at the slide we are bringing out. The example, taking automation into this industry. This is a whole new market for us that's a $2 million piece of equipment, there with the tires wrapping that.

But the auto rack system that simple.

So we're taking automation, that's taking the protective business to new areas and we think we can move that pretty quickly.

As the markets continue to move pretty pretty significantly. So we feel that we will recover that and protective we don't see as an issue for us in growth in 2022.

Okay next question please.

Our next question comes from Ghansham Panjabi with Baird.

Hey, guys good morning.

On your automation ambitions of oneplus highly on March 20, <unk> you made a call. This is Chris was the excitement for the week this was excitement.

Yeah.

I guess going back to one of them.

The slides, where you had the automation ambitions of one plus billion by 2025 inclusive of acquisitions.

Just curious how are you resourcing internally to position for that organic growth relative to the baseline for 2022.

And I guess the question is are the existing solutions that you're expanding with current and new customers or are they incremental technologies.

Quite some level of outside expertise to complement what you already have and then second question related to that on your comment to double equipment production capacity over the next three years is that investment weighted towards one segment in particular or is that commensurate with the sales split.

Okay. Let me try to go last first Ghansham and Chris will try to make sure I get to it so let's go to the last on the investment.

<unk> been transparent that we shared earlier in the middle of last year, we actually.

Increase the capacity to Capex on Aps and we went public that on a price increase because we saw the volumes and that we're going to double that on Aps to get the capacity up in three years. We're actually ahead of schedule on that that's working so the same thing there. The team has been working a little bit of your timing.

Question, we've been working on that we're just being declared a there that that's part of that Capex, we're actually doubling.

Internal capex, so that we can make that automation happened.

The other piece I'm going backwards on your question. If you go to slide 10.

This is our bathtub or the circular world that we're living in here. This is a mixture of the technology. If you look at the left piece there.

Our actual pictures of our operations, where we're bringing automation and where I talked about co bots and robots and automated processes by the way a cold I get asked that question a lot of cobalt is a robot working actually with the human cell.

Today, just rough number we have hundreds of these in our operations, we're going to take that 2000 and the next five years, we're going to be reducing the touch points of our facilities by over 50%, which by the way it's millions and.

Behind all of that is driving that 30% productivity that we've been talking to you about in our journey. So the technology behind this is digital.

And digital has many forms and we will talk about that more when we do the deep dive on digital next quarter now bracing that into the second piece of the slide is now, bringing the technology into our customers' operations. So the same technologies. So some of it.

Is technology, but some of its process and thats eliminating obstacles.

Streamlining processes some of its ESG et cetera. So part of that technology is access process pace, where some of these these large savings are coming from but it's driving different material.

Other piece on the automation for US is our installed base and again, turning not model upside down being automation first it's getting connected to over 100000 pieces of equipment that we have again, bringing digital how do we get connected to those really.

Really fast.

Third element of the growth behind there is working actually with our network not only what we make but our partners and that's how we're going to get this number up even faster so working with all of those interconnected that's how we're going to make those growth numbers actually beat those growth numbers that we've talked to you about.

Yes.

Did I Miss one of those questions.

Next question please.

Yes.

Our next question comes from Josh Spector with UBS.

Yeah, Hey, guys. Thanks for taking my question.

Just curious if you could update us on where you are good morning in terms of equipment profitability. If you can give us some context of maybe where you were a couple of years ago versus what Youre thinking 2022 looks like also thinking about in the context of the higher investment that you guys are highlighting do you need to scale further to get to your 2025 goals.

Got to become meaningfully more profitable or are you seeing incrementally incremental improvement there already that's flowing through to your EBITDA.

Yes, I'll, let <unk> go ahead.

I wanted to jump it only because we don't disclose EBITDA margins at that level, but the good news is that we clearly are focused on profitability and the equipment side. So we are getting some some improvements clearly that's happening apartments that are part of our overall adjusted EBITDA margin, but I'll, let Pat answer strategically.

Josh Great question, and Chris was jumping in to make sure.

This is exactly your question exactly.

Why this is so exciting not just as a growth but actually.

The profitability, but before we talk about US again, I just want to be repetitive, it's about our customers, it's about creating the demand and so in this slide if you look at slide seven we put something out there in the gray we put the bar that's driving this is our customer savings.

We're focused as a solutions provider as an automation company focused on how we can save our customers the most money and we're sizing pricing.

Our solutions.

The customers getting that three year payback.

Why is that so important because then it drives too if you look at the fourth bullet on this slide we're accelerating innovation, while improving EBITDA margin.

Yes, we have a few hundred basis points improvements coming through on the equipment side for many different reasons, but the number one reason is removing the conversation from how much does it cost to how much does it say in the savings are significant but yes. There is.

<unk> margin improvement on our equipment offerings are today driving to where we're going.

So as you're thinking about modeling and where it goes that's where we look at our whole business to say that we have that leverage out there all through our journey reinventing the company, we are driving greater than 30% operating leverage. So this growth is going to fit in that targets and we're going to have margin expansion.

As we do this.

Third element of this that is so important and why we use the word inevitable. If you can go to the solutions slide on slide nine.

So slide nine is there so we're going to put equipment, which is our core turning the model upside down. So this is going to be profitable part of our business not a subsidy.

The second part is we're going to be driving service element here significantly more.

More profitable than equipment in our customers' eyes to service is what differentiates us we've had our service technicians embedded into our customers' operations, we're going to do more of that than the integration of the other technology that we talked about what how do you pay for that savings and then we get.

Two the really cool part of our model is we're pulling through that.

Our cryo vac materials, the bubble wrap materials that inimitable solution. We're wrapping these really special packages with our materials and Thats whats driving the solutions multiplier. So great question, it's behind this whole <unk>.

Model not are we going to grow the business faster, we're going to do it more profitably.

Next question please.

Our next question comes from Arun Viswanathan with RBC capital.

Great. Thanks for taking my question.

We've seen quite a few declines in resin prices in the last couple of months, although tight seem to be switching a little bit in the last couple of weeks.

And then we also have increased feedstock costs on the on that.

Energy side.

When you think about all of that maybe you can just help us understand how the formula pricing.

We will be affected.

Is there any unusual impact on your European operations.

Yes. Thanks for your question so.

Yes, I guess the volatility continues I think we are on top of it relative to the pricing actions, we've talked about for the past three quarters now.

But what we're seeing is youre right theres certain theres certain improvements in some of that resin pricing, but we get.

Specialty resins. So it's not just it's not just on one it's many.

Talking about the other resins that are increasing as well as chemicals. So we look at all of the raw material and just get a good sense of what we're anticipating for this year heading into it and making sure our pricing is as close as possible to that your point on Formula based pricing is that we're in the middle of that we would expect that to continue somewhat.

It takes about six months for that to kick in in the same effect has when it does come down we'll get the benefits over a six month period. So we consider this year in our guide.

To be favorable as it relates to price cost spread I think I'd comment on that earlier and then maybe the other.

The other point I did want to make just thinking about the year is roughly looking just like we entered last year roughly $45 55. This year, we're entering into kind of the <unk> 48, 52, I just wanted to add some color in terms of our guidance between the first half.

And second half so.

Bottomline Formula based pricing is intact, we don't expect an immediate changed anytime in the near future as it relates to that even if there is improvement in that resin pricing and again, we buy multiple different grades of that specialty type of resins that are embedded in our formulas.

But maybe some other comment yes, I'll just add a little bit of color because obviously now four years with the business.

The questions I tried to guide that.

We're much more than a resin converter business, so, but let's understand what's going on because it is a major source of our business. So as Chris said the resin markets.

With inflation resins hit us really hard.

It took us to the end of the year to get ahead of that on the price cost mix, but we still see pressure on that in the first half of the year, especially on the commodity type resins. We think will go up in the first half but.

Are actually down in the first half.

And may be down for the whole year.

That's great.

Underneath that though the specialty resins and that's what we do the magic with especially our <unk> material, we see that's still going up year over year. So we have that balance going in where we have the commodities going down a little bit we see that flattening which is good.

The specialty those are still going up but.

But we also wanted to take it a little bit beyond just the resins were also into paper.

So the paper, especially in Europe as were moving our portfolio to be material agnostic, we're seeing that there is significant inflation on the paper.

Again, because paper very simply it's where wood plus energy the energy costs as we all know around the world are driving so with paper now with resin. This solution is still the same.

How do we drive automation and how do we drive automation to power through this with our customers as Chris said that we have disciplined pricing actions still in place with care working with our customers to handle it and one last comment.

Beyond resins beyond.

Everything on this inflation.

<unk>.

All the materials labor.

Et cetera et cetera, So we really really inflation issue is not over for us, but we can handle it and we're attacking it and we have to do it with care on pricing with our customers next question. Please.

Our next question comes from Adam Josephson with Keybanc.

Good morning, everyone hope you're well.

Chris on on free cash flow conversion last year was 44%. It seems like you are expecting something similar maybe a touch lower in 'twenty two.

Your target long term is 50% plus and I know last year working capital was a bit of a drag in this year capex is going to be elevated cash taxes will be elevated for a couple of reasons. So can you help me think about.

Beyond 'twenty, two perhaps youre expecting capex to normalize cash.

Taxes to normalize like what what gets you back to that algorithm.

<unk> 22.

Yes, good question.

I'd start with just.

Overall improvement in the performance of the business, meaning meaning the earnings power based on these investments given the return profile of what we're able to generate its first starts there yes, we're around 21% EBITDA margin business clearly got aspirations to drive it to a mid 20% over over time, So I would start with just the earning.

The power of what we're able to do getting the return on those investments as we make them as we comment internally, we don't starve capital if the Capex need is there and the return on investment makes a lot of sense, we're going to do that we have elevated capex going into this year and a couple that also with the investments back in the business as I commented earlier, mainly around the R&D.

D space. So then you get some working capital a large.

Next lever.

And the efficiencies you can see our DSO CPO DLH et cetera, I mean really really strong performance in working capital as it relates to those metrics. However, I would comment that if inventory is available we're going to get it and that's especially in this environment. So working through these supply challenges I would say, we're taking on and certain <unk>.

<unk> for taking on more inventory to feed that future future demand, which is good but once things open up stabilize we expect to be able to get inventory down over and thats considerably, but we expect to get more <unk>.

Velocity, if you will in terms of getting that inventory down and then you get into the.

The other part of the area just the income tax payments and I made I made those tax payments comments on the my prepared remarks, specifically, because we're seeing a roughly $100 million increase year over year and I kind of explained in my prepared remarks with what they were we will see how that takes shape of course, we're always looking for opportunities to take advantage of.

I'll call. It tax incentives if you will we're a global company are there opportunities that we can get.

Benefits in the countries, we operate based on the investments we make so we're going to continue to look at.

Cash taxes in terms of being able to get that debt down.

Maybe just some I just I look at the earnings power the earnings power of our business is looking what we're driving for in terms of that improvement to greater than 50%.

And Adam the only thing to add to what Chris said I'm good.

Good summary, there, especially Chris Congratulations now been here a year from that as we've been driving we took that number up we first looked at the engine over.

History, we took it we looked at 30 40, and 50 and so as were the engines revving as we're going forward what came in as Chris described with the working capital those volumes are going up so the volumes when they spike up will there be a consumption of the cat, but to the model we have.

Looked at it and we said with those volumes going up lets go sustain those volumes and the real the second key there is to drive earnings even higher to producing more cash and thats part of the engine. So those are the two areas. There that we feel confident that that's the model and that's where we're going to take the business.

We're pretty confident we're going to get there.

Next question please.

Our next question comes from I noticed Shah with BMO capital markets.

Hi, good morning.

I know you said youre going to talk more about this.

More about digital printing next quarter, but you mentioned the Fox acquisition and I was wondering do you envision more M&A in digital printing or whether it would be more of an internally built focused.

Yes.

Well. Thanks again, yes. It's good question. So if you look at slide.

10, and you see the digital printing on both sides be it.

It's a good question, we actually started our.

Our digital journey.

And as part of C ventures, we've had that we've invested some what we think is game changing technology. So I don't want to.

But a little bit of a buzz out there for next quarter, but that technology that we've invested in is exceeding expectations.

It's right now it's mostly in the operations, enabling us to get some significant productivity.

We're now putting some of the technology out with our customers actually putting the digital printing and our automation packages.

And what Fox pack is really as a pioneer in that space has helped us with its European footprint, how do we get to more places faster, especially their expertise on the presentation and the speed to market that they produce.

The outcomes really impressive.

So as Chris said the answer is yes.

We're investing internally because now we have our own internal capability.

We are looking at other opportunities on the M&A space to move that faster because.

The secret to the future. It is digital and we got to be digitally connected in everything we do and more coming we might necessarily have to buy it all because we have some pretty impressive digital partners that are working with us behind the scenes and we will share some of that with you again in the next.

Quarter, when we did the deep dive on digital great question.

We're excited about.

Last question. Please operator last question.

Our last question comes from Adam Samuelson with Goldman Sachs.

Yes. Thank you good morning, everyone.

Good morning, I was hoping to maybe dig into that point on the <unk>.

Automation solutions multiplier in.

I'm looking at the materials and hearing kind of framing properly. This is the first time, you've talked about that up.

Hep to attack multiplier on long term solutions offerings, which is considerably higher than.

But you had framed it previously and then maybe just trying to get a sense of.

What proportion.

<unk> business.

Might be.

Reaching kind of that kind of threshold and.

If thats a big driver of the <unk>.

More optimistic longer term growth outlook for the company where the.

The equipment growth outlook itself.

Seem to change dramatically.

Yeah, Hi, Adam Yes, so the answer is yes.

There, it's we're turning a few.

Go back to slide before we go to slide nine just to give you a framework. So if you look at slide 10.

And slide 10 is our model of the circular where we're taking this.

I call this our bathtub.

We're turning an aircraft carrier in a bathtub and you could see we're recharging it rewiring Repowering. So then if you go to the next slide on the solutions multiplier.

Did talk about this and with our acquisition of Aps.

And being an ex equipment person in those even the new sell side analysts that we're talking to their automation based they get this solution multiplier.

Very well because this is what an automation company guts.

You have the equipment.

You don't give the equipment away you charged the equipment you're connected with service and then you bring what were different than an equipment company and Thats why we use the word incremental Paul is that we not only do the equipment, we did the materials.

The special part of this model.

Linking that together with I shared with you we are well over 100000 pieces of equipment, we got to get that connected get that moving fairly quickly, but so yes that multiplier as big So if you look at one specific example to show you how you get to 10.

Next because your comment was very appropriate if you looked at our model we used greater than three X. This slide is showing you. If we really do it get connected to the equipment service and materials like that visual example.

A bag in a box for one.

So how does that solution multiplier work well that piece of equipment.

Doing an auto pouch system anywhere from $750000 and you do the service and you can use all those multiples all the way to the materials, where you have a pouch you have a fitting you have a box.

And we actually do digital printing and we have a very customized box for our customers.

And the multiplier on what that needs is well over 10 X.

And so but that to your point, that's not the whole portfolio moving overnight that show you, where we're taking it product by product every piece even to the example down below which is a mailer.

In the past, we did millions of mail mailers, but we did it by discrete inputs now we're going to actually be automating, even putting some of that automation system and digital printing, which we're already bringing to mailers that we can bring that solutions multiplier the mailer multiplier.

Is much lower right now it's in below three but so if you look at that whole portfolio, but if you look at the meet one above really exciting where we bag.

Beef multiple times before ever leaves the customer's facility and then on the right side you see the roll stock. So the multiplier of that film doing all the automation is significant but that piece that system as I shared the example, with <unk> 7 million.

So.

Be careful on your modeling, it's not everything all at once but Thats where were taking the business to answer. Your question are those growth volumes you see on equipment real yes is it can it's high to pushing the volume growth of us going higher in the future, Yes, and Thats why we gave you the guide of how were move.

Our growth in the future on our model so with that we're out of time I want to thank everybody for the call really excited for the next quarters call. As you can tell on digital but hope everybody stays safe and healthy and operator thats. It for US today. Thank you.

Okay.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Good day and thank you for standing by welcome to the field are fourth quarter and full year 2021 earnings conference call.

At this time all participant lines are in listen only mode.

After the presentation, there will be a question and answer session.

To ask a question during the session you will need to press Star then one on your telephone keypad.

Please be advised today's conference maybe recorded.

If you require operator assistance during the call. Please press Star then zero.

I'd now like to hand, the conference over to Lori shaping Vice President of Investor Relations.

Thank you and good morning, everyone with me today are Tabitha Heaney, our CEO and Chris Stevens our CFO .

Before we begin our call I'd like to know that we have provided a slide presentation to help guide our discussion.

In addition to our result and outlook Ted will go through a deep dive on see automation.

Please visit our website, where today's webcast and presentation can be downloaded from our IR website at seal their dot com.

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 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 website.

We discuss financial measures that did 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.

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 three Ted.

Thank you Lori and thank all of you for joining our fourth quarter and year end earnings call Chris.

Christian I will discuss our Q4 and year end results.

Our 2022 outlook and we will be introducing a deep dive into our XI automation three year plan.

On slide three you can see our vision.

To become a world class digitally driven company automating sustainable packaging solutions.

And we'll show you how we're getting it done.

Now, let's turn to slide four.

In 2021, we delivered strong sales and earnings overcoming dramatic inflationary supply and Covid challenges.

Our results are a testament to our culture people and powerful see operating engine.

We're building a world class digitally empowered company acting like a startup to disrupt the markets, we serve our industry and ourselves.

These are exciting times for us.

Taking all steps investing in our people operations and customers to create significant value for our stakeholders.

You can see how our sea operating engine performed in the fourth quarter net.

Net sales were up 14% to $1 5 billion and adjusted EBITDA was up 18% to $330 million.

For the full year, we generated free cash flow of $497 million as part of our strategic portfolio realignment, we successfully completed the divestiture of reflects.

Acre insulated materials for the construction market and generated additional after tax proceeds of $65 million.

On slide five we're raising our operating model growth goals for sales and adjusted EBITDA by 200 basis points.

Our higher above market growth goals are led by our confidence in our strategy disruptive innovations and investments.

Our execution across markets and geographies.

Through M&A and see ventures, we're looking to expand into attractive markets technologies and disruptive business models to accelerate our speed to market.

Undersea ventures, we recently completed the acquisition of Fox Pak <unk>.

A pioneer in digital printing.

Let's turn to slide six where you can see our transition from a materials driven business to a market and customer centric company, focusing on automation and digital and sustainability.

Powering our growth.

Well, Chris will give you more detail on our geographic performance.

Focus on activities in our top markets.

And proteins in fluids, we experienced strong growth in automation with equipment parts and services up double digits in the fourth quarter and the year in.