Q1 2022 Sealed Air Corp Earnings Call
Good day and thank you for standing by welcome to the first quarter 2020 to 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 to ask a question. During the session you will need to press star one on your telephone. Please be advised today's conference may be re.
Accordingly, if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today Luis sluggish. Please go ahead.
Okay.
Thank you and good morning, everyone with me today.
Our CEO and Chris <unk>, our CFO before we begin our call I would like to note that we have provided a slide presentation.
That was it.
So our results and outlook.
Good day.
We don't like it.
As we get through a website with todays webcast and presentations can be downloaded from our website at <unk>.
Debit card.
Statements made during the call management's outlook or predictions for future tenure alcohol up looking statements.
These statements are based only on information that is now available to it.
Again with you to review the information ease of friction entitled forward looking statements.
Our new journey, and slide presentation, which apply to the Gulf.
Additionally, our future performance may be sales due to a number of effects of them. Many.
Many of this backdrop I'm speaking in our most recent annual report on Form 10-K.
As revised and updated on our quarterly report on Form 10-Q, and Q1 report on form 8-K.
Which you can also find on our website Paul on the team.
<unk> web site.
We just good financial materials have been had coffee it conform to U S. GAAP you will find important information on our use of.
These measures and Derek information to you would get in our own journey.
And in the appendix of today's presentation, you will find U S GAAP financial rigor that's correct.
U S. GAAP measures, we reference there was presentation.
We'll now turn the call of retrofit operator.
Turning to slide three.
Thank you Luis and thank all of you for joining our first quarter 2022 earnings call.
Chris and I will discuss our Q1 results and our 2022 outlook I will first recap our quarter performance and then provide a deep dive into our digital transformation.
After that Chris will review in more detail, our financial results and our revised 2022 outlook.
On slide three you can see we delivered strong sales and earnings despite sustained inflationary pressure and the volatility caused by numerous disruptions around the world.
Our C operating engine is performing and.
In the quarter net sales were up 12% to $1 4 billion and adjusted EBITDA was up 22% to $327 million.
Adjusted earnings per share was up $1 12 sets up 43% compared to a year ago free cash flow for Q1 was a use of cash of $19 million as we continued to invest in our operations to support growth and productivity.
On slide four you can see our sea operating model.
As presented last quarter, we aim to achieve 5% to 7% annual sales growth over the next three years, we are targeting to have more than 1% of this growth to be digitally generated by 2025.
We're also targeting to have 50% of our total sales to be generated online by 2025.
We are targeting adjusted EBITDA growth at 7% to 9%.
We've updated our sea operating model for free cash flow conversion to greater than 45% to align with our increased capital expenditures in our operations to approximately 5% of sales.
Finally, we are raising our 2022 sales and earnings guidance and Chris will talk about this in more detail later.
Let's turn to slide five to take a look at our markets where.
We're transitioning to a market and customer centric company, creating value and delivering savings through automation digital and sustainability solutions powering our engine to grow faster than the markets we serve.
While Chris will give you more detail on our geographic performance I will focus on activities in our top markets.
We experienced strong sales performance across most of our markets. We continue to generate increased demand for automation digital and sustainability solutions in.
In Q1 equipment and system sales were flat in constant dollars due to component shortages and sanctions imposed on Russia, mainly impacting our food equipment business.
Despite this I want to highlight that equipment bookings continued to be strong and were up more than 20%. This quarter led by strong demand in auto box.
Auto box bookings more than doubled compared to Q1 last year, while food equipment bookings were up double digits, even in a challenging environment.
We are investing to double our equipment production capacity in the next three years you can find more details on our C automation business on slide 21, and 'twenty two in the appendix.
Turning to slide six we will now take you through a deep dive on our see digital transformation journey.
We start with our vision statement to become a world class digitally driven company automating sustainable packaging solutions.
Our digital operating model will shift our business from an offline to an online operation through E. Commerce will be ramping up our digital sales aggressively generating an additional revenues in excess of $300 million over the next three years.
We're excited to launch our new digital brand prismatic powered by possibility.
Our digital business will include digital packaging design services and direct E Commerce sales.
Let's look at slide seven.
We are transforming seas culture, and DNA, including a new people plus digital organization.
We are building a caring people first digitally driven culture with team's passionate about engineering, a future where packaging plays a powerful part and everyone's daily life.
Beyond nurturing our people, we are investing in new technologies and systems as well as adapting our processes to new ways of delivering our solutions.
We're ushering in a new competitive capabilities, while simplifying our processes to create new value to packaging solutions.
Packaging, it's digital experiential and intelligent.
Packaging solutions that transform data into results.
We're doing this for our customers. So they can engage with C in new and different ways, while enabling them to directly connect with consumers.
We're changing the way we work.
Proactively swarming to connect everyone without functional market or geographic barriers and partnering with our customers.
Moving to slide eight.
Last week, we introduced our new digital packaging brand prismatic.
Packaging made brilliant.
Prismatic will represent our digital packaging solutions from ideation to consumer engagement design services digital printing and smart packaging.
<unk> solutions portfolio allows C to embed digital printing capabilities within our manufacturing operations as well as in our customers' operations driving efficiency personalization directly at each package.
We are bringing together, both the operational and experiential journeys of our customers to create digitally empowered packaging.
Using design and digital printing as an enabler we are innovating. So each package will be able to provide valuable product information sustainability indicators traceability through unique scannable identification markers and so much more.
Our end to end cloud based platform will generate packaged specific digital ids that collect and manage data along the value chain.
Customers can access and leverage those insights through dashboards and analytics.
We are leveraging world class partners like Adobe to build scale and speed in digitizing billions of packages, we produce today and many more in the future.
Ultimately, we are elevating packaging from its current functional and linear state to a digital ecosystem, where it's a billboard for engagement and efficiency.
Our proprietary digital printing technology is a core pillar for this new brand.
The possibilities powered by prisoners are endless.
We're excited by the value this will unleash for our customers.
Yes.
Let me now turn to slide nine.
Here, we highlight our breakthrough digital printing technology as well as our bold moves to rapidly expand our network penetration globally and our E Commerce platform.
We have been mobilizing to develop digital printing technology for unique applications and substrates and our operations around the world.
Alongside our Prisma brand, we are unveiling a first of its kind proprietary 54 inch digital press that will offer a combination of wide web high speed full color water based food grade inks and double sided printing capabilities for fiber based materials as well as film.
<unk> flexible and shrink of all materials. We're also using this technology to integrate printing systems in line with our operations often cutting the footprint down 10 times from what it's replacing.
Prismatic digital printing is bringing speed to our graphic services dramatically, reducing minimum order quantities, providing faster prototyping and now offering serialization that enables tracking and tracing and blockchain capabilities.
We've already invested well over $50 million in digital printing technology and it plans to double that investment with the goal of taking our entire platform to digital.
Now moving to slide 10.
I would like to show how digital printing is a critical enabler of our see sustainable ecosystem as we work to create a circular economy for packaging.
Our goal is to offer the best solutions at the right price and make them sustainable.
To make this scaling possible for the billions of packages. We produce we are leveraging world class partnerships with suppliers and customers.
Our game changing innovations in digital automation and sustainability are designed to help close the loop on the circular economy.
Our C ecosystem connects our internal operations to our customers' operations into consumers at home.
In this loop or C. Touchless automation team is gaining momentum.
We're developing these innovations across our entire network to eliminate waste simplified processes and remove people from harm's way and now with our Prisma digital printing, we can move faster.
Our touchless automation will enable our sea operating engine to produce flawless quality world class productivity and exceed our sustainability goals.
We're investing in bold ideas like Prisma.
<unk> made brilliant that will disrupt the markets, we serve and our own business.
We are building a caring people first culture with talented passionate and diverse team that believes they can make our world better then they find it.
I will now pass the call to Chris to review, our financial results in more detail.
Thank you David and good morning, everyone.
Shown on slide 11 to review, our first quarter net sales growth by segment and by region.
In Q1, net sales were up 12% to $1 4 billion.
In constant dollars net sales were up 15% with 18% growth in food and 10% growth in protected.
By region Americas was up 18% EMEA up 11% and APAC up 4%.
On slide 12, you can see organic sales volume and pricing trends by segment and by region.
In Q1 price was up 16% overall, while volumes were down 1%.
Tier one price was favorable 17% for food and 15% and protected.
Most of the price realized in Q1 was a result of prior actions and Formula pass throughs.
Actions to increase price with care to gain share or in response to ongoing inflationary pressures.
As always we are working directly with our customers to meet their needs and save them money and drive productivity.
Crude volumes were up 2% driven by EMEA up, 7% and APAC up 3%, while Americas was down 1%.
The volumes were down 3% with declines in all regions, mainly driven by normalized demand trends given the strong demand in Q1 'twenty one.
On slide 13, we present, our consolidated sales and adjusted EBITDA loss having.
Having already discussed sales, let me comment on our Q1 adjusted EBITDA performance.
Q1, adjusted EBITDA of $327 million increased $59 million or 22% compared to last year with margins of 23, 1% up 190 basis points.
We achieved positive price realization this quarter.
However, labor and nonmaterial inflation continues to rise at a rapid rate.
Impacting year over year earnings by $24 million compared to $13 million a year ago.
In addition, operating costs of negative $30 million includes incremental investments to support future growth.
Productivity gains totaled $10 million in Q1, and we remain on track to realize approximately $60 million of productivity gains from the completion of reinvent see initiatives and performance of our operating engine in 2022.
Adjusted earnings per diluted share in Q1 was $1 12.
Compared to <unk> 78.
In Q1 'twenty one.
Our adjusted tax rate was 25, 2% compared to 27, 6% in the same period last year.
We were an active buyer of our stock in the quarter with approximately 3 million shares repurchased valued at approximately $200 million.
Our weighted average diluted shares outstanding in Q1, 'twenty, two where $149 5 million compared to $155 4 million in Q1 'twenty one.
At quarter end, we had $696 million remaining under our authorized share repurchase program.
Turning to.
Segment results on slide 14, starting with food.
In Q1 food net sales of $808 million were up 18% in constant dollars.
Price was up 17% year over year with all regions contributing to positive price.
Volume growth was 2%.
Automation sales, which includes equipment systems parts and services accounts for approximately 6% of the segment sales and were up mid single digits in the quarter.
Adjusted EBITDA of $200 million in Q1 increased 28% compared to last year with margins at 24, 8% up 250 basis points.
On the protective side net sales of $610 million increased 12% on an organic basis.
Price was up 15% in the quarter again with all regions contributing to positive price, while volume saw a decline of 3% in the quarter as we faced normalized demand trends.
As a reminder volumes in protective were up 13% in the first quarter last year fueled by the strong growth in fulfillment e-commerce and the rebound of industrial end markets. Following COVID-19 shutdowns in 2020.
As for automation sales in the quarter, which accounts for approximately 8% of the segment sales they were up double digits in the quarter.
Adjusted EBITDA of 127 million increased 16% in Q1 with margins at 29% up 140 basis points.
Now, let's turn to free cash flow on slide 15.
In the first three months of 2022.
Free cash flow was a use of cash of $19 million compared to a source of cash of $36 million in the same period a year ago.
This $55 million swing was largely driven by increased working capital needs capex to support growth and productivity plus the absence of a $24 million federal tax refund in Q1 'twenty one.
On slide 16, we outlined our purpose driven capital allocation strategy focused on creating economic value.
We maintain a strong balance sheet, while driving attractive returns on invested capital and supporting profitable growth initiatives.
We are focusing our capex on touchless automation digital and sustainability.
As Ted noted, we are investing in smart packaging and digital printing and see many opportunities to expand our presence in attractive growth markets and geographies.
Let's turn to slide 17 to review our updated 2022 outlook.
We are raising our net sales and earnings guidance, reflecting our strong Q1 performance and the outlook for the remainder of the year.
For net sales, we now estimate high.
$8 5 billion to $6 5 billion a year over year increase of 6% to 9% as reported.
Impaired to our previously provided five $8 billion to $6 billion range.
Our organic growth forecast is 9% to 12%.
Which assumes approximately 1% in volume and 9% in price at the midpoint.
Full year adjusted EBITDA is now expected to be in the range of one to two to 125 billion.
This compares to our previous guide of one two to $1 two 4 billion.
Adjusted EBITDA is expected to grow 8% to 10% and implies an adjusted EBITDA margin of approximately 21%.
For adjusted EPS, We now expect to be in the range of $4 five to $4 20.
This assumes depreciation and amortization of approximately $250 million.
And an adjusted effective tax rate of approximately 26%.
Net interest expense of approximately $160 million and approximately 149 million shares outstanding.
And lastly, we are reiterating our outlook for free cash flow, which is in the range of $510 million to $550 million.
So in summary, 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 Q1 performance and revised 2022 outlook.
With that let me now pass the call back to <unk> for closing remarks.
Thanks, Chris, Let's turn to slide 18, where we have our purpose statement.
As an ESG centered company our purpose guides everything we do.
This is how we are making our vision a reality.
Our C operating engine is performing and maintain momentum despite considerable disruption and sustained inflation.
I am proud of our team's efforts and perseverance operating in challenging times.
We continued to invest in automation digital and sustainability to deliver savings and productivity to our customers. Please.
Please visit our website to see our full prismatic digital packaging made brilliant launch to find out more about where we're going.
We are creating long term value for our stakeholders and making our world better than we find it.
Continuing with the theme of providing investors deep dives into our growth drivers of automation digital and sustainability next quarter, we plan to provide a deep dive into sustainability.
With that.
I will now open the call for questions.
Operator wed like to begin the Q&A session.
Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone.
If your question has been answered very wish to remove yourself from the queue. Please press the pound key we ask that you limit yourself to one question.
Question comes from the line of George Staphos with Bank of America. Your line is open. Please go ahead.
Thanks, very much hi, everyone. Good morning, thanks for the detail Chris.
I wanted to dig into digital and prismatic and I guess one.
A couple of parts to the question, but just want to reaffirm.
You said that you ultimately want to double your investment in digital to over $100 million, you've already put in $50 million.
<unk> is like 50, 540, and you said you wanted to get to 100% digital if I heard you correctly.
One how when would we expect for you to be at 100%.
And Relatedly, what is proprietary what could be replicated by somebody.
In your whole prismatic value proposition to customers or is it totally proprietary and you have a very large moat around that thank you very much.
Great.
Thanks, George and.
Excited that you opened up with <unk> is the question. So I'll use the slides to trying to give some color a couple of points I. Just wanted to play back that you said a little bit differently, but if you we highlighted on the operating model. We actually are looking for digital to bring an additional 1% growth in 2020.
But actually 50% of our sales we're looking to go online on digital so and by 2025. So back to your specific question. If we look at <unk> and you see one of the press there.
The picture on slide nine.
This is the largest print we've already deployed and a $50 million that we talked about a little bit more than $50 million is just on digital printing investments that we've made since we actually bought the proprietary technology now about three years ago. The other part of our digital investments.
Is beyond just the digital printing so just to clarify those numbers they're put.
Put back looking at the press. This is what's extremely exciting. This is an actual picture of the press. It is right now on your operations.
In our Simpsonville facility, the largest food packaging plant in the World. This press is reducing the footprint of the current printing operation.
Factor of 10.
And what's exciting about this we have smaller versions of this and actually single color that we've already deployed we've deployed some of those in our Illinois facility, we're actually doing mailers and I could talk a little bit about what that's enabled for us which is pretty exciting we could touch asleep turn mailers now with single color.
Renting really by phone calls and have unique printing capabilities per mailer, which is pretty exciting but for the whole footprint. It is going to probably in the next three years changing out our printing to the digital this is the actual biggest one this one we're excited about full 10 color.
<unk> printing also metallic printing and actually we've had customers and looking at this.
Especially the color that's been most requested from the press is actually invisible ink and so that we can work with that track and traceability.
So pretty exciting.
Great question really excited much more coming on digital that we can follow up with but really excited.
Next question please.
Our next question comes from the line of Adam.
Samuelsson with Goldman Sachs. Your line is open. Please go ahead.
Yes, thanks, good morning, everyone.
Good morning.
I was hoping to just maybe taken a little bit on the performance in the quarter and the expectations over.
Over the balance of the year thinking.
Thinking about kind of how positive price cost spread was in the first quarter. It seems like that youre expecting that.
To moderate pretty notably over over the balance of the year, maybe offset a little bit by some.
Year on year volume trends as we go forward could you just help us think about kind of some of the key puts and takes around that.
Second quarter and back half, yes, very good yes. So good question. So maybe just a comment on Q1, just that price realization coming off a favorable price cost spread in Q4 that momentum continued into Q1. So we were pleased with that performance in the first quarter in terms of contribution to our overall results but to.
To your point.
We do see Q1 has been a very strong price cost spread will continue to benefit that going into Q2, the second half of the year.
Really the moderation I think on the material inflation side since we're seeing the material inflation or at least anticipating most of that to be two thirds of which to occur more in the first half of the year.
Then the second half so as we work through literally quarter by quarter, just managing that expectation around price cost spread.
That's how we're that's how we're working through it.
So to your point there will be some moderation in the second half of the year in terms of our guidance implies.
But strong strong performance for Q1.
Out of that so we're in a position to basically look at overall full year guidance and given the strong Q1 performance. We wanted to provide some updated commentary around our full year guidance to reflect some of the favorability in the into the full year.
Yes.
And Adam I had just a shout out to you in the Goldman Sachs Conference.
Be there next week and actually I'm going to bring a meal with me our chief operating officer and talk about some of the cool things we're doing in the industrial space.
As we look at the volumes.
I do want to highlight just something thats really important to us. If you look at slide 13, you will notice that we use the term price realization.
The pricing here and we were very explicit pricing with care to gain share and so this was the first quarter. We actually give you the formula of how we look at price realization internally. This was the first quarter that we actually had a positive price realization, which is tremendous inflationary.
Pressures going beyond resins to pretty much everything so I just want to highlight that.
But beneath that if we look at the volumes just to give you some color of what's going on with our market as Chris highlighted the first quarter on the protective side.
With dealing with comparable last year, there was up significantly so missing that on the volume side. If we take a look at what we had and the constraints with some of the materials and really the constraint on our automation and I'm sure I'll get another question on did we with that.
Sorted we still had a backlog we didn't ship and so we still see the volume coming from the year on the protective side. The biggest drop was actually in our mailers the biggest year over year. When we had the surge from a quarter ago, but where if you looked at slide five.
Introducing a new mail are really excited about will hit on the second half of the year.
Paper bubble wrap mailers.
That is significant we're working with an E. Commerce play we already have a paper mail are out there, but this one is giving that wonderful protective property of bubble wrap and now going paper a proprietary product that we got in place and we're going to bring automation with that right away.
We're targeting to get that end of year. So we can pick up some of that volume in a pretty strong shifted a year.
Other part on the protective side I want to highlight is if we look at all of our markets. If we go back to slide five.
E Commerce still strong year over year, not as strong as it was but industrial up over 18% in one of the portfolios that came back strong in the quarter was our <unk> Pak <unk> going after that industrial space we.
We had 6% growth on <unk> and those of you know who followed us for a while in <unk> very high margins and working with our customers seeing the industrial space come back so on the protective side lots of ups and downs and we still are aggressively caution.
So I'll say on the second half of the year. Despite all of our constraints on the volume side.
I do want to mention on the food side on the volume as well foods driven if we look at our top market in Red meat fresh Red meat was still positive despite the proteins market moving around the world, but our smoked and processed meat was up very strong where.
Where we see in our case ready, but the highest growth on the food side was actually in our liquids, though it's a smaller part of our portfolio. If you remember during the pandemic, we talked about with restaurants shutting down and quick service.
Was up almost 40% in the quarter, so things going up things going down also on the food the seafood side small, 2% that was actually down in the quarter.
A lot of our the shipments from Alaska, Chill, a Norway et cetera on the food side use our high market share 10-K, okay.
Oxygen transmission rate film for those in the industry know it quite well, but that was actually down in the quarter, but were bringing automation into that so in the second half we think thats going to go up very broad portfolio. We feel good about on the second half we got to drive some of that growth and so we're cautiously.
Optimistic that we can drive the volume in the second half of the year.
Okay next question.
And our next question comes from the line of Adam Josephson with Keybanc. Your line is open. Please go ahead.
Turning Chris Good morning, and congrats on a really good quarter.
Chris One question on your volume guidance can you just walk me through the change from three months ago. So I think three months ago, you were expecting about 3% volume growth for the year now youre expecting about one how much of that is the raw material and automation constraints that you mentioned how much is any demand elasticity from these higher prices.
How much is the global industrial economy slowing e-commerce slowing obviously, we saw Amazons report.
On Thursday can you walk us through the buckets and what changed from three months ago.
Sure and really to your point, we did have a slight change on the volume assumption.
As reflected so filling this low single digits kind of in that 2% to 3% as we first came out with full year guidance more than.
1% right now.
I wouldn't say, there's any one thing.
So just kind of went through the portfolio of our end markets. It's a combination of a number of things as we're looking at the supply constraints are clearly impacting us here in the first half how quickly does that.
Resolve itself as we execute.
You may be give us some more momentum on the on the organic side, especially as we think through the automation part.
Our portfolio then you get into the individual end markets the industrial strength as things start to continue to open up clearly the industrial and the automotive side is still somewhat mute.
Muted as we all hear about.
And so no one particular answer to that question I think as we just looked at the full year is 2% to 3% volume growth. We felt more like in this 1% range is how we see it today of course, we will update that each quarter as we as we evolve, but it's a combination of a host of items.
One item for sure.
Thank you Chris operator.
We'll now take the next question.
Thank you and our next question comes from the line of Larry de Maria with William Blair. Your line is open. Please go ahead.
Alright, Thanks, good morning, nice job everybody.
Thanks.
Now for the update on <unk> and the digital transformation you can see the obvious utility new offering can you provide some perspective, how advanced versus competition. This is how much of a differentiator. It is and what kind of ROI do you think it will it will provide and be needed. The market. Obviously, you said, it's all of our footprint et cetera, but can you just give a little bit for the Colorado competitive.
<unk> the ROI.
Yes.
Hi, Larry the.
Our competitive position, we have proprietary technology, we actually bought three years ago.
Digital printing technology that we have I'll describe it in my non technical way, we we have the ability for digital printing printing with actually floating hedge that can go over actually flexible materials and why that's really unique is our material they shrink that.
Change formats.
At high speed and having the ability to print that on multiple different formats multiple different layers and at high speed.
We think we're in a unique position. So we think we are ahead of the competition.
On that.
And so we think we have something that right. Now we're ahead and that's why we have to go faster and Thats why we got invest faster. That's why we actually are partnering you saw the announcement last quarter and Vince investing with Fox pack.
Another digital printing capability. So that we can take this and go go globally very quick our initial phase is with our internal operations, but already dealing with customers as were putting automation into their facilities don't want this digital print printing to be into the automd.
<unk>, we actually put in their packaging plants. So we think we're ahead of the <unk>.
Scalability on the background as I shared we're working with world class suppliers, especially on the software side. So we can scale very very quickly. So we think we're ahead and we.
We are going to be driving it much faster that ramp up number that I gave.
We're measuring that actually daily with our teams internally on what our digital sales are so pretty excited where thats, what that can mean and start affecting our business. This year.
Okay.
Okay next question.
And our next question comes from the line of Ghansham Panjabi with Baird. Your line is open. Please go ahead.
Thanks, Good morning, everybody.
Maybe you could just touch on some of the topical events at this point just in terms of China, Covid and the impact potentially on your industrial business.
Maybe even the food business in Europe , and then going back to prismatic.
Just from a high level standpoint is it designed to be additive to your sales growth is it a productivity boost along the supply chain mixed benefit how would you sort of help us think about the.
Specific impact on sealed air.
Yeah.
Let me go step first ghansham, so I remember that before it and go through some of the issues. So it's actually on the topline as we put out in our model. We think we're going to add additional growth.
With that so we'll see that added to our business and also.
Also our cost side.
We think in the customers we've shown the capability what we can do in printing. If you can visualize our case ready what does digital printing mean, you see labels on top everything even if you look at our meet a slap a big piece of paper label on the meat when you see in the in the store, we're now going to be able to.
To digitally print all that information right there on the markings in your smartphone will be able to tell you everything about the package what's inside all of that material. So the first part of your question is going to drive additional sales, but the second part of your question. There is a huge cost opportunity.
For us and our customers as we digitize the printing capabilities. So it can help us on both how we're putting that into our modeling.
We just put that high level number there, but we think it's going to help us drive our top line and the bottom line.
Other issues I'll take just a deep breath here when you talked about some of the constraints that are out there ghansham as you know quite well the resins piece.
Is still is still out there is still the constraints.
We are anticipating we should be some time on the other side of that curve, but right now the inflation on our resins and materials is still quite strong we use special stuff. So we're feeling that we're still in a rational situation with a lot of our our specialty chemical suppliers.
On the other side of the business, where we see the automation where automation is just a huge growth driver for us we're struggling like as many of the automation companies are we got issues with components with chips in them.
And again that links directly into the Russian conflict, we have some of our leading automation right now in automation.
Russia, Thats actually been stopped.
So that is showing up as another headwind.
We've had headwinds in China with the China Lockdown on Covid I was just talking to our China team. This morning, we have 200 people and our largest facility in China that we're actually providing housing in the plant.
And to keep the operation going to keep them safe and so that locked down.
<unk> now these are all <unk>.
Small percentages of the total, but its where that volume piece right now is hitting us that we think we will get through these challenges on the second half of the year, but who knows more coming but right now we're fighting through each one of those.
We think pretty successfully.
I don't want to underestimate how significant the challenges are.
Yes, maybe to add to Ted's comments, just thinking about just Q1 as we do evaluate given these restrictions we do evaluate what potentially with the lost opportunity for us in the quarter, recognizing we still see the demand, but it is just moving to the right probably 1% to 2% is how we kind of viewed that organic volume.
Item could have been better if these constraints were there so that 1% to 2% is putting put pressure on the quarter in terms of our organic growth and then also going back to an earlier question just thinking about our change in the assumptions going from roughly 3% down to 1% kind of.
Shifting in terms of our ability to execute on that things continue to move to the rates somewhat.
Also wanted to comment that as we think about the earnings for the year the profile.
When we first established guidance for the full year in February was more of this $48 52 and right now as we look at our outlook, we're more than a 50 149.
So we're going to continue to obviously manage that accordingly.
And things could get better and obviously provide some upside so on our page 17, when we give guidance, we do want to provide those negatives potentially in the downside of our guidance as well as the potential positive that will provide the.
Higher end of our range.
Okay next question please.
Our next question comes from the line of Max Mike <unk> with <unk> Securities. Your line is open. Please go ahead.
Thanks, very much hi, Ed Chris Congrats on a very good quarter.
Just two quick questions just want to get your sense about the on demand elasticity and the company's ability to continue to increase prices given the inflationary environment and then just the second part of the question is recognizing that youre material agnostic any thoughts around expanding in fiber based.
I think last quarter and even this quarter you mentioned on the slides that 50% of your material wasn't fiber any desire to expand that.
And if so like why would that be a focus.
Yes. So if you look at that slide let me take the last one Chris can come into some of the volumes. So if you look at our our ecosystem. There we have the 15% fiber based and yes, we use the term that were material agnostic.
If you go to the example that we talked about with mailers before traditionally our mailer had been a.
Film based plastic mailer, the bubble wrap mailers.
As you described earlier, we're moving that to a paper bubble wrap so we see the strong push for fiber based solutions on the food side, we're working quite aggressively with our customers that are asking us can you help us with the trades can you take bring that into a composed to bowl recycled.
Product a fiber based product coming in the food side. So we have some really exciting developments in that area. So the short answer to the question internally, we're looking to take that number up to be over 20% and so youll see that and I mentioned in the pre.
My opening comments about the.
The auto box sales going up auto box is actually our fastest growing on the equipment side, while auto box is pulling through paper cardboard fiber based solutions into our <unk> auto box solution. So that's going to help move that number up so.
Just share with you targeted will we get there by the end of the year don't know, but that number is moving to north of 15% should be at 20, hopefully by the end of the year Chris.
Okay.
Next question.
And our next question comes from the line of Anthony Pettinari with Citigroup. Your line is open. Please go ahead.
Hi, good morning.
Just following up on resin can you talk about underlying assumptions for resin costs and the updated full year guide you basically assume.
<unk> is sort of flat from here on out or do you anticipate further inflation and then just maybe to clarify on your earlier comments do you assume some improved availability of specialty resins, maybe in the second half that are currently scarce or are you just sort of assuming more of the same.
Thanks.
Yes. So good question, so anything I think the.
The underlying assumption around our full year guide the updated guide reflects that we are going to continue and are anticipated to continue roughly an incremental $100 million on the raw material costs given.
Given the change in price or at least anticipate a change in pricing that.
We all see.
Relative to the specialty resins continue to be elevated getting better not only.
Hopefully getting better from a price point of view as well as just the availability side as we mentioned earlier in the commentary, but if you look at the assumptions for the full year guide what we said in February and what we're saying here in may we anticipated material inflation to be roughly $200 million and now we are.
More like $300 million for the full year.
And Anthony just a little bit more color on the pieces with the resins, we do use specialty resins and you under stand that pretty clearly there is some of those resins right now that you just can't get there actually rationed and we our team has done some incredible redesign of our resin in our barrier, especially.
With our.
<unk> brand. So you don't see that volume, but redesigning what we have to meet some of that demand. We think we'll have an opportunity actually in the second half of year to gain share when we see some of that.
Material coming back into the market. So we think that some potentially upside on the second half.
The paper the paper is net well so part of our issue we're seeing the inflationary side on the paper side, especially with energy and in Europe , We've had some significant market share gain with their paper products.
In Europe , but we're seeing that inflationary pressure.
And right now we are working with our teams we see that continuing through the second half of the year. So again, our price realization, we want to keep that positive.
But we see an inflationary pressures it for sure moving through the first half of the year and we're still planning to see it through the entire year.
Okay next question please.
Our next question comes from the line of Christopher Parkinson with Mizuho. Your line is open. Please go ahead.
Hi, Good morning, this is kieran on for Chris.
I was just wondering if briefly you can just walk me through some of the productivity initiatives that you've been working on it seems like youre well on track to achieve that target for 2022, but are there any areas, where you may have been been executing quicker than expected or where youre seeing additional opportunities and it seems like there is even a greater opportunity to hear over time, when we look out past two.
22, and while I understand you probably can't quantify that at this time, just any preliminary thoughts in terms of how you view those trending through the portfolio over the next.
Over the year and then further out thank you.
Yes, it's a great question. If you go to slide 10, where if you look at our ecosystem slide.
What we've been working on internally and right now we've been talking about price realization a lot because just dramatic inflationary pressure.
Pressure, but if we look at the sea operating engine, what's producing underneath that is the productivity of our operations around the world as we are driving to touchless operations. When we talked about automation last quarter I shared that we are going from right now are our network, where we're talking about currently today.
And the term of one hundreds of robots and co bots in our facilities around the world over the next three years, we're going to take that number to the thousands so we're making some significant process.
Productivity is underlying our business and if you look at our performance today, we're looking at what is that productivity, that's driving underneath the engine right now so it's in the inflationary environment, it's about that price realization, but we are seeing the productivity actually doing quite well. So we are actually going.
Faster on that digital printing can even help even more that we can actually simplify our production.
Both internally and bring some of that was production savings to our customer. So your question about the long term absolutely that's where we think our productivity in the outward years is going to continue to increase and drive our margin expansion. Once we get through this really dramatic inflationary pressure.
Next question please.
Our next question comes from the line of Joshua Spector with UBS. Your line is open. Please go ahead.
Hi, Good morning. This is like a spotlight on for Josh.
So I just wanted to go back to your equipment backlog and the order books products.
You've had a pretty big increase in the backlog.
So I just wondered if you could talk a bit more about what gives.
At the edge there. So I think some of the tighter focus companies also have competing kind of box sizing systems. So I was wondering if you could talk a bit about sort of what makes your products different than sort of where your hedges.
Good question, so to help on that for the automation.
Not a deep dive focused but we're keeping the slides in the appendix. So if you go to slide 21, if we want to unpack our equipment and our automation you can see in the quarter.
The equipment was only up 8% year over year.
But behind that the bookings continued to be a double digit so just a huge amount of constraints and as you see on the slide we've got component shortages, we get sanctioned in Russia actually rush is on the food side, where we have quite a bit of success Bolton fresh red meat and cheese automation.
And in Russia, and then we got some FX and also the China Lockdown.
Is affecting some of our equipment business.
What we're doing is we're actually spending right now and we've had this underway of how do we actually double our equipment capacity over the next three years, the other piece that might be a little bit different than some of the other people in the automation space is we're using multiple suppliers to help drive our.
Equipment growth. So we think we have a potential to continue this we want this to be well into high double digits for growth on sale to match our bookings trends. So I'll just go to one slide if you go to the next slide just so you can see what this means here's the example of the solutions multiplier on tour.
For example.
Talked about in the last quarter first of all just on the cheese, one that's done quite well if you look at the cheese.
Our systems right now since we launched this just a couple of years ago on automation on cheese, which is almost a lights out production for us with their customers.
We sold over 20 of these systems and we have over 50 of them in our pipeline that summer stall, but we think we'll get through those in the next 12 months in the pipeline. The average one of those systems is about $500000. So just in the backlog alone we got over $25 million just in the Chi side.
But the solutions multiplier, where we sell that piece of equipment, where we auto load auto pack auto back yet then.
And then the pull through on the materials.
Is $500000 and so at 10 X.
Excuse me a <unk> multiplier if you look at from the equipment to the false solution.
The other piece on the solutions multiplier there we're excited about as an example on the protective side as we talked about the industrials coming back and this is the auto wrap system for tires. So if you look at that piece of equipment is $2 million that pull through is $350000 of materials.
<unk>.
The film RFID tags, and then so that multiplier is three acts over its lifetime over 10 years three X plus.
What does that mean to the customer and this was this is a big one.
Eight times, the packing speed, 50% reduction of their labor.
Also the waste stream, we've converted this from PVC polyvinyl chloride to actually.
Polyethylene and it's now 100% recyclable fully robotic and our customers' operations. So just a tremendous opportunity for us on the automation side and this example is we're using a third party fully branded equipment supplier in Europe . So we can get to market faster.
Okay. Operator, I think we have time for one more question.
Our last question comes from the line of your end this or nothin' with.
RBC capital markets. Your line is open. Please go ahead.
Yes.
Great. Thanks for taking my question.
Yes, I had a question on the pricing strategy. So.
Robust pricing in Q1 with care to preserve share.
So mid teens, and then lost say, 1% of volume, but when you look out into the future.
Yes, it looks like.
You still have this model of pricing off of.
<unk> and formula based pricing within food.
Would it be possible for you to consider more of a value based pricing strategy and I guess would that be more.
Representative of where the company is heading and kind of removing that raw materials side. So that you could preserve some of this price action once raw materials receipt or how should we think about kind of the pricing strategy you guys are thinking about internally.
Actually it's a great question, because it's the pricing strata is a value base.
And I have been personally involved with this with our largest customers around the world.
So it would take very carefully how we described we are disciplined pricing.
To take care of our customers to gain share.
So with our customers and that's where we bring automation and we bring digital land, we bring sustainable sustainability, how we present this to our customers is where it's not how much our materials, our how much our solutions cost. It's how much we can say now even in this highly.
<unk> market right now where our customers can't get people they are.
Heavy tremendous supply constraints and also have inflation like we do.
So our pricing strategy, it's not a pricing strategies to raise price to gain share. So how do we sell it we do it on payback and if you want to see customers that are using our equipment services, you'll see them talk about payback, we're targeting on our automation a three year payback. So it's not how it is.
Expenses our systems, our materials are it's how we can save them money.
And we're focusing on that three year payback, that's actually pulling through the materials. The good news is there is so much waste out there that we think just like we're looking at our own facilities and how we bring touch with some of our large customers, we're actually sending our operations team to help them and how we can help them automate and drive touched.
<unk> operations through their facilities so.
It is the value base.
Selling process.
It's price realization more than go raise price so its price above our cost and this is our first quarter of positive price realization.
We're very careful on how we share this with our customers our strategy is to save them money as we put in our prepared remarks.
Our strategy is that we're going to find a way to help save them money, it's going to pull through our automation our service and our materials.
Great question.
Operator that closes for the call we're right on the hour I do want to thank everybody for.
For the call.
I hope everybody stays safe and we look forward to talking to you again next quarter, and we'll be talking and deep diving sustainability. So operator. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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