Q2 2022 Sealed Air Corp Earnings Call
The cost.
[music].
Good day and thank you for standing by welcome to the second quarter 2022 sealed Air 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 a press star one on your.
Telephone please be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today, Brian Sullivan. Please go ahead.
You and good morning, everyone with me today.
Chris Stevens our CFO .
Before we begin our call I would like to note that we've provided.
My presentation.
Gotcha.
In addition to our results and outlook.
Right.
Let's see.
Please visit our website.
This webcast presentation can be downloaded.
Yeah.
Dot com.
Statements made during this call, stating magazines outlook or predictions for future periods are forward looking statements.
These statements are based solely on information that is now.
To us.
We encourage you to review the information in the section titled 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.
He reports on Form 10-Q, and current reports on form 8-K, which you can also find on our website or on the SEC's website.
We discuss financial measures that do not conform to U S. GAAP.
You will find important information on our use of these measures and their reconciliation to U S. GAAP in our earnings release.
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, Brian and thank all of you for joining our second quarter 2022 earnings call.
Starting on slide three the graphic is showing where we are taking packaging with automation digital and sustainable solutions.
We start with our purpose.
We are in business to protect.
Solve critical packaging challenges.
And to make our world better than we find it.
This enables our vision to become a world class digitally driven company.
Automating sustainable packaging solutions.
Our purpose and vision and drive value creation for our people customers and shareholders.
On today's call, Chris and I will discuss our Q2 results and 2022 outlook.
Ill first recap our quarterly performance and then provide a deep dive into our see sustainability strategy.
After that Chris.
This will review in more detail, our financial results and our 2022 outlook.
On slide four you can see we delivered strong sales and earnings despite sustained inflationary pressures.
And a challenging global operating environment.
Our C operating engine continues to perform.
In the quarter net sales were up 7% to $1 4 billion and adjusted EBITDA was up 12% to $293 million.
Adjusted earnings per share of $1 <unk>.
Was up 28% compared to a year ago.
Free cash flow through Q2 was a source of cash of $94 million.
We continue to invest in our global operations to drive growth and increase productivity.
On slide five we share our operating model, where we highlight our growth targets driven by automation digital in sustainability, which are fueling our sea operating engine.
We leverage all three into our innovative solutions to create customer value with attractive returns.
Our operating model highlights our growth targets through 2025, as well as our actual performance over the past four years.
We aim to deliver 5% to 7% annual sales growth over the next three years.
We're targeting adjusted EBIT growth at 7% to 9% and adjusted EPS growth of greater than 10%.
We've updated our operating model, our free cash flow conversion.
Find has free cash flow divided by adjusted net earnings to be greater than 90%.
We will continue to accelerate investments.
Expecting capital expenditures of approximately 5% of sales each year.
Let's turn to slide six to take a look at our market driven solutions and how they create value for our customers using automation and digital and sustainability to drive growth faster than the markets we serve.
We experienced solid sales performance across our diversified portfolio.
Despite persistent supply constraints as well as inflationary and macroeconomic headwinds.
Our strongest growth in the quarter with liquids and fluids, which was up over 30% driven by foodservice recovery and our new flexible pouch solutions.
Our auto pouch system, coupled with Prisma digital printing technology is creating an ecosystem that help customers automate food safety streamline inventory management unlocked new capacity and improve product yield.
In consumer retail and fulfillment markets, we experienced a reduction in volume as our customers are quickly throttling back their own inventory levels.
I'd like to highlight the launch of our bubble wrap paper bubble mailer.
See the illustration this product on the right side of the slide.
The product is made with recycled and renewable materials and as curbside recyclable.
While living up to the bubble wrap brand promise.
It is also smaller and lighter than box.
Which reduces shipping costs and dimensional weight.
Our paper bubble wrap mailers will include innovative digital packaging features and we will be expanding globally by early 2023.
We are relentless in designing and delivering solutions that maximize food safety.
<unk> waste protect goods and create productivity savings for our customers.
In Q2 automation sales were up 5% year over year in constant dollars driven by auto box and out of that.
Customers continued to embrace our value proposition of automation.
To address labor scarcity productivity quality and employee safety.
We're on track to achieve approximately $500 million.
On automation revenue for the year.
Food placements in the second half, we will continue to be pressured due to various supply constraints and impacts from economic sanctions imposed on Russia.
Our digital business continues to grow at an accelerated pace.
In Q2, with almost 400 customers come online.
More than doubled online revenues in Q1, and we continue to be on pace to have more than 15% of our global business transacting globally by the end of this year.
Digital packaging is creating customer demand after our launch of Prisma last quarter.
Let's turn to slide seven for an update on see automation.
As we continue to share with our C operating growth model and in our previous earnings calls.
We are looking to double our equipment business in the next three years with increased investments internally and through strategic acquisitions.
As you can see in our updated see automation strategy, we're looking to take see automation to over a $1 billion in the next three years with both organic and inorganic investments.
Our strategy to allocate capital is purpose driven.
And we have a pipeline of potential acquisition opportunities to accelerate our journey to a digitally driven company automating sustainable packaging solutions.
We have our own C proprietary playbook to take acquisitions to successful outcomes.
The playbook has proven its value during the last three years with the Aps acquisition, where we create significant value to our shareholders.
We continue refining it with real world experience and searching for targets with win win value creation power.
There are several potential acquisitions within our space, where M&A can create meaningful synergies and drive our profitable growth.
Turning to slide eight we will now take you through a deep dive on how we see ourselves as a sustainable company.
We are focused and determined to be a world class digitally driven company automating sustainable packaging solutions.
Our approach combines automation digital and sustainability, which positions us to drive efficiency within the operations of our own business and our customers.
We're enabling product identification and traceability from products sourced to the consumer home, reducing resource waste across the value chain accelerating circularity through recovery and recycling and decreasing greenhouse gas emissions and our own operations and at our.
<unk> to mitigate climate change.
We call. This the see net positive circular ecosystem designing developing and deploying automation and digital packaging solutions that have a positive impact on our stakeholders and society.
One of the key components of this circular ecosystem is collaboration.
We lead in engage in partnerships that are reshaping the future of the industry.
By collaborating with organizations such as the alliance to end plastic waste closed loop partners and see venture investments like plastic energy.
We are creating our circular future where packaging never becomes a waste.
Last year, we collaborated with a key resin suppliers topic on a circular demonstration of flexible plastic packaging with a leading U K retailer for cheeks.
We are expanding the use of certified circular materials and our product solutions globally.
Earlier this year, we partnered with Exxonmobil advanced recycling solution about a key collaboration with a major grocery retailer in the U S to drive circularity of flexible plastic packaging used for fresh proteins.
Now, let's turn to slide nine.
Why do we call it net positive.
As you can see the integration of our solutions generate economic environmental and social benefits.
Our solutions create a multiplying effect.
The beneficial impacts far exceed the investments in those solutions.
Our customers benefit from materials efficiency productive.
Packaging processes.
And more effective distribution of their products.
Society benefits from a central packaging that enabled access to safe and fresh food with less waste and spoilage.
Producer benefits from preventing damage to products during transport retailing e-commerce, where storage.
Our ecosystem allows for recovery materials after us driving the circular economy for packaging.
See benefit by getting recyclable and reusable material. So that we can offer the best solution at the right price and make them sustainable.
Our see net positive circular ecosystem will make our world better than we find it.
Moving to slide 10.
Let's talk about some of our sustainable solutions that underpin our net positive circular ecosystem.
Our packaging solutions are designed to meet the current and anticipate the needs of our customers and position them to achieve their sustainability goals.
We are material agnostic and our solutions.
We integrate materials and equipment with advanced technologies to drive customer benefits.
We offer a wide range of fiber plant based and plastic materials solutions that minimize waste reduce resource use and overcome labor challenges.
By enabling circularity, we lessened reliance on Virgin materials for both packaging and equipment.
Expanding advanced recycling capabilities like we have proven through partnerships with Exxon Sabic and plastic energy allow.
Allows essential packaging to be recovered and re used for demanding applications, such as food packaging, while enhancing safety and performance.
We are intensely focused on reducing our own greenhouse gas emissions and working hand in hand to reduce those of our customers, while avoiding emissions associated with wasted or damaged products.
For example, our <unk>.
Ability to extend the quality of life of foods, such as fresh meats from days to weeks, while ensuring package integrity through distribution allows customers and retailers to avoid significant ways.
By eliminating waste our customers reduce their greenhouse gas scope three emissions.
Let me now turn to slide 11.
To effectively design develop and deploy integrated solutions that have a positive circular impact on our stakeholders and society.
Starts with us and how we operate.
Here's some of the metrics, we are using to track our progress on our journey to creating and transforming to see net positive circular ecosystem.
We pledge that by 2025, 100% of our solutions would be designed to be recycled or reused.
<unk>, an average of 50% recycled or renewable content.
We are on track to meet that pledge.
We have an ambitious internal goals to improve our operational efficiency by 2030 in key areas, such as energy water greenhouse gas emissions and landfill diversion of our manufacturing waste.
We're making steady progress against all of these goals.
She is leading our industry to net zero in our Cotwo emissions from our operations by 2040.
For example, we have a picture of our Madera, California manufacturing facility.
We have installed more than 10 acres of solar panels and battery storage.
Panels will provide 99% of the electricity for that facility.
This is the first plant C. It is powered with on site renewable energy.
We are a sustainability company.
I will now pass the call to Chris to review, our financial results in more detail.
Thank you Ted.
Good morning, everyone, let's start on slide 12 to review, our second quarter net sales growth by segment and by region.
In Q2, net sales were up 7% to $1 4 billion.
Constant dollars net sales were up 11% with 13% growth in food and 7% growth in protected.
By region Americas was up 13% EMEA up 7% and APAC up 5%.
On slide 13.
You can see organic sales volume and pricing trends by segment and by region.
In Q2 price was up 16% overall, while volumes were down 5%.
Q2 price was favorable 15%, a food and 17% in protected.
Primarily reflecting price realization both from actions in 2021 and 2022.
As well as Formula pass throughs to help mitigate continued inflationary pressures.
We are working directly with our customers in a disciplined manner the price with care to gain share.
Food volumes were down, 2% with Americas down, 3% and EMEA down, 2%, partially offset with APAC up 1%.
Lower volumes are primarily attributed to continued supply disruptions across all regions. If you exclude these constraints we would've been in line with volumes reported in Q2 last year.
Protective volumes were down 8%.
With declines in all regions, given tougher comps relative to Q2, 'twenty, one COVID-19 related economic recovery.
Vaccine distribution sales leads.
We also experienced lower volumes due to the COVID-19 related lockdowns in China during the quarter.
On slide 14, we present, our consolidated sales and adjusted EBITDA loss.
Okay already discussed sales, let me comment on our Q2 adjusted EBITDA performance.
Q2, adjusted EBITDA of $293 million increased $30 million or 12% compared to last year.
With margins of 27% up 90 basis points.
Strong price realization a favorable mix has limited the market impact of lower volumes and higher operating costs.
Unfavorable operating costs of approximately $58 million were driven by higher non material inflation and the impact of continued supply disruptions.
Productivity gains totaled $7 million in Q2, and we now expect approximately $45 million for the full year.
Down from previous expectations of approximately $60 million due.
Due to continued supply disruptions and labor challenges.
Adjusted earnings per diluted share in Q2 of $1. One compares to <unk> 79 in Q2, 'twenty, one was primarily driven by strong earnings growth.
Our adjusted tax rate was 24, 7% compared to 25, 6% in the same period last year.
We were an active buyer of our stock in the quarter.
With approximately 871000 shares repurchased at a cost of approximately $50 million.
Our weighted average diluted shares outstanding in Q2, 22 was 147 5 million compared to $152 7 million in Q2 'twenty one.
At quarter end, we had $646 million remaining under our authorized share repurchase program.
Turning to segment results on slide 15, starting with food.
In Q2 food net sales of 806 billion were up 13% both in constant dollars and on an organic basis.
Price was up 15% year over year with all regions contributing to favorable price.
Volume was down 2%.
The volume decline in the quarter was primarily driven by supply constraints across all regions and the impact of economic sanctions related to automation sales in Russia.
Automation sales, which include equipment systems parts and service for approximately 7% of the segment sales and were down mid single digits.
Adjusted EBITDA of $168 million in Q2 increased 9% in constant dollars compared to last year with margins at 28% down 70 basis points.
On slide 16 protective net sales of $612 million increased 7% in constant dollars.
Or 9% on an organic basis.
Price was up 17% in the quarter again with all regions contributing to favorable price.
While volume saw a decline of 8% in the quarter.
We see general concerns in the market related to the economic outlook, particularly in retail where customers are adjusting their inventory levels. Additionally, we have a tough comparison from last year.
As a reminder, volumes and protected we're up 15% in the second quarter last year fueled by the strong growth in fulfillment e-commerce and the rebound in industrial end markets. Following COVID-19 shutdowns in 2020.
As for automation sales in the quarter, which accounts for approximately 9% of segment sales.
We're up double digits in the quarter fueled by auto box and auto bag places.
Adjusted EBITDA of $126 million increased 18% in Q2 with margins at 26% up 250 basis points.
Now, let's turn to free cash flow on slide 17.
In the first half of 2022 free cash flow was a source of cash of $94 million compared to $102 million in the same period a year ago.
$8 million difference was mainly driven by higher adjusted EBITDA offset by increased inventory given higher material costs.
Strategic stock built to help mitigate global supply disruptions.
On slide 18, we outline our purpose driven capital allocation strategy.
Focused on maximizing value for our shareholders, we maintain a strong balance sheet, while driving attractive returns on invested capital and supporting profitable growth initiatives.
We continue to focus on strong cash generation and going forward as Tim noted we plan to measure cash conversion on adjusted net earnings basis.
Specifically calculating free cash flow, which we define.
Cash flow from operations less capital expenditures divided by adjusted net earnings.
We are focusing our investment activities, such as Capex innovation and M&A on touchless automation digital and sustainability.
We take a disciplined approach on these activities across segments applications and geographies.
As Ted highlighted.
On the C automation slide seven we are planning to double our equipment business in the next three years through organic and inorganic investments.
Let's turn to slide 19 to review our 2022 outlets.
Despite headwinds from selected end markets, we serve and FX, we are maintaining our full year sales and EBITDA guidance range, given our focus to drive pricing with care to gain share.
Our net sales guidance of $5 85 billion to six 5 billion.
Assumes a 6% to 9% growth on a reported basis.
Organic growth.
Ken.
13%, which assumes flat volume and approximately 11% growth from price at the midpoint.
Full year adjusted EBITDA range.
<unk> at.
One two to $1 $2 5 billion and assumes adjusted EBITDA margin of approximately 21%.
Full year, adjusted EPS of $4 <unk> to.
$4 20.
Assumes depreciation and amortization of approximately $245 million and adjusted effective tax rate of approximately 26%.
Net interest of approximately $165 million and 148 million shares outstanding.
And lastly, we are reiterating our outlook for free cash flow, which is in the range of $510 billion to $550 million.
Summarize we had a strong quarter.
And we continue to work through the challenges we can control.
This is a testament to the <unk> team as we are focused on executing our growth strategy driving productivity generating world class cash flow performance and executing our operating model.
With that let me now pass the call back to Ted for closing remarks.
Thanks, Chris and let's move to slide 20.
Before we open up the call to questions I want to emphasize how our sea operating engine continues to perform.
We are determined to make the world better than we find it by generating net positive results for our people customers shareholders and society.
We are a sustainable company.
With that.
I'll open up the call for questions.
Operator.
Thank you.
A reminder, if you would like to ask a question at this time. Please press star one on your telephone we do ask that you limit yourself to one question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Lawrence de Maria with William Blair. Your line is open. Please go ahead.
Hey, Thanks, good morning, everybody.
Wanted to just dig back into two things here first on the negative 2% food Tech volume comp.
Any more color, what's driving that is that a trend you're concerned about as we look the outlook for some of that protein consumptions, maybe be down into next year. So how concerned are you there and secondly, the automation orders.
They've come back down maybe there was some pent up demand previously, but is there any incremental weakness there or something else. Obviously, you called out supply chain just some more color on that would be helpful. Thank you.
Good morning, Larry It's Chris.
So the first part of that question I had a follow on but on the food side, what the volumes for the quarter. What we saw mainly attributable to kind of the supply disruptions that we've that we've experienced.
Actually if you noted.
My prepared remarks, but just commenting on it.
If you excluded these supply disruptions, we felt we would have been more in line basically flat on the volume side.
Consistent with last year, so heading into the second half of this year continue to work through those supply constraints. Some are easing which is good news.
So when we think about the second half specific food, we expect that low single digit growth to to be there given seasonality et cetera.
But then maybe at discounts.
Hi, Larry good questions for both so if you look at the food as Chris highlighted.
It's our specialty materials that.
As Helen established a couple of percentage points, if we had it.
We would've been on top of the head actually positive growth in the quarter on the volume it.
It's also then connected to the equipment side, which you second part of your question.
So if you unpacked equipment, if we just look at slide seven where we talked about automation. We spent a lot of time on our investment.
It was actually misses in the quarter on the sales side, where we do have a huge backlog on equipment and what we're still struggling with supply constraints to get some of that.
Through to your second part of the question, we're actually see demand increase on automation and specially with Phil I put another slide in the deck.
Actually see demand increase on automation and specially with food.
Put another slide in the deck as we talk about our solutions multiplier I was actually in Japan, the past week focusing on our suppliers.
Two of our major suppliers on equipment are in Japan. So what can we do two of our major suppliers on equipment are in Japan. So what can we do to get the equipment also a major specialty suppliers in Japan, how do we get more materials.
Third part of the trip to Japan with getting into the country of automation and we want to be world class in automation, we got to be in Japan. So we met with major customers and actually on the pork side.
We have a new system in place and it actually matches the graphic that we have there in the appendix, where they have our rotary chamber machine.
We now actually put in.
Our robotics, they're buying a robotics arms. This is in Japan, and so they actually three more systems in place, which was quite exciting so the.
Backlog is up.
We just got it deliberate so part of our second half opportunities automation is still the answer for us to drive our food growth so were.
Actually quite excited about the opportunities and why I'm mentioning Japan.
Two other great highlights for the visit there last week as we had a new leader in place Alessandra just shout out just dynamite with the opportunities we have in that country to lead in <unk>.
With investors, we did a non deal roadshow with Japanese investors.
Quite interested in what we're doing on automation and sustainability.
Good question short answer is the Miss.
Is constraints and that we're looking to that to be potential upside opportunity for the second half, but we've got to get through that backlog and that's why we're enhancing our investment in automation.
Okay. Thank you very very much yes. Thanks.
Thanks.
Next question.
Operator.
And our next question comes from the line of filming with.
Hey, guys. Thanks for taking my question, Ted I guess in a more uneven macro backdrop and just given the mountain.
Inflation I'm just curious.
Have you seen any shift in customer behavior in terms of the uptake of your higher value products focus on automation digital and just the service component and then.
Understand how the growth outlooks in past cycles, just given your pivot into some of these value added automation digital.
End markets do you see your business holding up materially different whether it's food and protective in a potential recession. Thanks a lot.
Yes, Thats a good question and it's a big question out there.
We had a recession, yes or no.
The simple answer for us is definitely.
Definitely CLS.
So what's different with our customers right now through using our automation digital and sustainability two things are happening so as they're in a crunch with hey could their markets be softening.
The situation is still the same they still have significant labor issues and how can we help them on the cost side with automation is that and that is key the digital side, it's quite interesting because with digital is doing for us, it's actually making us more cost effective. So we can actually work with the smaller.
Customer, especially on the protein side, where we do extremely well with the large customers who are in their plants with digital we're actually now being able to give solutions for those smaller markets and smaller customers. So we think on the recession side of the equation.
We can help all so actually quite quite excited for that opportunity. So.
The debate I don't want to debate. The question is the recession coming we definitely feel it with our customers with his tremendous inflationary pressures.
But we think the.
This strategy is going to really open up some growth opportunities for us on.
In a recessionary environment as well.
But have you seen any shift in order patterns from your customers call. It the last few months given.
But your point, saying youre feeling it a little more.
Yes order patterns in the sense of maybe.
Chris If you, yes, I think.
If you kind of think about the supply constraints side of in terms of the delivery, but the order activity.
As we've.
We've talked about just kind of follow on on the automation side continues to be very strong continues to be there.
We've got to work through supply constraints on the order behavior, the shorter cycle business, given given food and protective food again, if you put the supply constraints side. We thought we would have been more on the flat side for food volumes for the quarter and the protected piece of it given the tougher comps quarter over quarter given the vaccine.
Last year et cetera, we're feeling that but we expect flattish to the second half of the year for protective and it gave me a chance to think so thank you Chris.
Let me give you some specific examples so if you look at <unk>.
Slide six.
So what has shifted in the end market, let's let's go to the protective side, we've talked about the paper bubble wrap and that ties in the sustainability side.
During the surge of the.
Covid last year that our Mailer business was quite strong how do we get that out we've seen that soften.
With the e-commerce.
Pulling back and you've seen that the retail market. So the shift is just a significant demand for this paper bubble now Piper bubble Mailer now will that be a fix for the second half is probably just a couple of million, but we believe that's a $100 million opportunity for us over the next three years.
So definitely that that kind of a shift.
So on the food side, we've really seen a shift where especially with we get the issue where are we with the cattle cycle automation has been driving that we've seen a shift from fresh red meat, which has been strong in the first half really the shortage is on the pork. So we see a.
A lot of pork poultry that kind of shift going in the marketplace on the second half of the year.
Right now we still see the demand strong it's going to look a little different so going forward.
Thank you great color guys.
Next question.
Operator, and our next question comes from the line of.
Adam Samuelson with Goldman Sachs. Your line is open. Please go ahead.
Yes, thanks, good morning, everyone.
Good morning, good morning.
I was hoping to maybe.
Some of the comments you made before about ecommerce and just trying to think about protective and.
e-commerce activity, and maybe durable goods purchases by consumers broadly through the pandemic.
Normalized this to some extent that consumer spending is going into other categories that we'll be using less protective packaging.
How do you think about.
Any further kind of headwinds that might be in the business to that you still have to comp through.
And then more.
Slower e-commerce environment, and I guess, along those lines I look at the.
The chart on equipment orders on slide seven for auto box switch. This is I believe LTM orders.
Which is kind of falling pretty precipitously from where from their high. So I'm just trying to think about does.
Does that presents an equipment kind of headwind into next year as you.
As those orders would have converted into shipments.
Good question Adam.
Far as the first part of the question, where do we see shifting on ecommerce. So again I'll use used.
These two slides I'll use slide six to highlight that.
Big surge that we had last year on the protective side within the medical side, we were doing a lot of packaging for Covid a lot of.
That business was very strong that actually is down so we have seen that in the quarter.
Anticipating where that's going to shift, though we have seen industrial and transportation actually pick up.
Taking it to a product line.
And even trying to how do we put this online is our answer to pack, where it's an impact for the last couple of years has been down, especially in the pandemic because it was connected to the industrial and <unk> in the quarter was up in volume and up and in margin. So actually probably in the protective side are most.
Profitable piece of the protected portfolio.
The second part of your question looking at the automation as we're driving automation for the entire portfolio.
Auto box.
We've had it's lumpy and as we're getting more and more as you understand this in the equipment business and those which has been in my career, where you used the term lumpy because you get large orders so a little bit of that was an auto box being very strong anticipate.
Auto box and specialty auto bag being up.
Continuously the auto bag business is just a great indicator on how well we're doing with their automated packaging systems.
In the quarter, even though we have huge supply constraints, because thats, where we are doubling our capex right now significant amount of capex into that business. We just got to get that taken care of our lead times are too long so that's actually hurting.
The bookings so we got to get through that.
But as far as those markets that they serve.
Quite quite strong.
Both sides of the business.
I hope that that answers next question.
Operator.
And our next question comes from the line of Anthony Pettinari with Citi. Your line is open. Please go ahead.
Good morning.
On the on.
The full year outlook understanding you don't give quarterly guidance, but any thoughts.
Thoughts on the kind of the split or the cadence between <unk> and <unk> I think historically, you've seen a little bit of a.
10, 15 step up from 32 to <unk> can you just kind of remind us the comps in the two businesses from <unk> to <unk> and anything that you can.
Say on that cadence.
Sure Anthony as you mentioned, we don't necessarily specifically provide quarterly guidance, but I can tell you that when we look at the most recent outlook for the second half of the year preparing for the call.
I look at Q3 is pretty much being consistent or in line with.
With Q2 performance with the fourth quarter being stronger of the two mainly because of the expected seasonality side of our of our business. So to your point earlier when you comment on the fourth quarter is usually the <unk>.
<unk> quarter, that's that's what we anticipate.
And that's what is assumed in our in our full year guidance.
Okay. Operator next question.
Our next question comes from the line of George Staphos with Bank of America. Your line is open. Please go ahead.
Hi, everyone. Good morning. Thanks.
Thanks for the details can you hear me okay.
Okay.
Wanted to ask a question on on the growth outlook.
In years past.
Field, there had said that one of the <unk>.
Better indicators for the cattle cycle.
<unk> production in the future with driven by near term pasture trends and drought conditions. So what's your view on the cattle cycle, which has been moderating any way over the last couple of years, whether this current condition may lead to weakened.
Production and an outlook for next year Relatedly back to slide seven Ted could you talk to us a little bit about whether the double digit revenue that you saw.
Automation sale.
Protective I believe whether that was there as a way to parse that between volume.
And price if you will.
The book to Bill at about one is accelerating or decelerating from recent trends. Thank you very much and good luck in the quarter.
Thanks, Thanks, George and I'll try to unpack that first let's talk about the cattle cycles.
We're definitely looking at that and it's interesting if we can compare it from the past what we did in the past and applying that on our strategy and where we're going.
Looked at the cattle cycle of what's been happening from <unk> back to 2015, we recently analyzed what's going on in the U S.
Latin America, and Australia looking at our three big markets.
And seeing what's happened with various issues, but.
With it, peaking in 2015 and going down to trough in 2019, we had various issues going on we had.
Yeah.
Droughts, where are they pulling to hurt out early during the COVID-19 et cetera. So when we pulled back from the cattle cycle, we said, what's happening to our business and we saw through peak and trough.
Peak to trough and then where it is coming back to we had steady growth in that was leading then to where you went to what are we doing on automation and then also what are we doing with our underlying products that are set are satisfying the protein market.
Our dominance in fresh red meat.
Is moved.
That's being driven now through automation and what we can do with our new products, taking fresh red meat doing really really well in bags, and we are still doing well and bags, but significant growth for us.
And the roll stock or which we call our case ready what you see in the supermarket with our new products. What we're doing in case ready and you can see that's out there. So from the past we've been able to grow through cycles going forward, where we see the cattle cycle, we actually see in the first half.
Beef was strong.
We were short as Chris highlighted because we had some supply constraints, but we're really seeing the growth right now on the protein side, where it links to automation is on pork and poultry.
That's where we're spending time, where customers are bringing his hand can you help on the automation and those areas, where we're excited because we think we can have some significant share gain.
And then it also ties into the question that I was asked earlier well we have these big solutions for the big customers, but also with digitally enabled US is how can we now take care of those smaller operators with.
Solutions that we can actually be deployed for some of the smaller operators. So.
On the equipment side of the business. When you set when you mentioned the comment do you see the book to Bill going down that's really because of our supply constraints I mean, we could even get more orders, but our lead times are too far out there. That's why we're aggressively working on our capital to get it get the product.
And place investing in our Capex, that's why I was working with our major suppliers on equipment and why we even talk to you about.
Is there an M&A opportunity here that we can satisfy the demand.
We believe that the automation.
He is the right thing so with the cattle cycle moving up and down the real excitement is can we take share get into new proteins.
Offer an automated digital and sustainable solution.
We've got some work to do but we think we can grow pretty aggressively through through the cycle no matter what plays out on the cattle cycle.
Okay.
Next question operator.
And our next question comes from the line of Adam Josephson with Keybanc. Your line is open. Please go ahead.
Thanks, very much having Chris hope, you're well, Chris just on your volume guidance I know you started the year expecting about 3% growth and now you're thinking.
Thinking about flat when I look at the comps the second half comps you were up about.
Four 5% in the second half of last year, So that would flat volume for the year would imply a pretty substantial volume growth in the second half, yes, correct me if I'm wrong. There I think you said you expected about flattish volumes in protective.
In the second half and if I heard that correctly that would mean that food volumes would be up I would think quite substantially. So can you help me understand what's embedded in that full year volume expectation.
Bye.
By segment and <unk>.
And as far as what gives you confidence that you can overcome what seems to be a pretty difficult comp in the second half.
Sure very good so let me let me talk about the protective side for <unk>, we just we faced more challenging comps.
<unk> first half of this year versus first half of last year and as we look to the second half guidance. It is it is more of a flat year over year volume growth.
Call it.
To.
Maybe 1% to 2% low single digits, but for the full year, we expect protected volumes to be down roughly roughly 2% so down low single digits.
Move to the food side the confidence we have on the food is not only in the materials side, but also on the equipment piece of it.
Hoping to work through these supply challenges by constraints, we've talked about so the assumption on the food side for the second half of the year is that low single digit growth both the third and the fourth quarter, which then plays itself out roughly approximately a 2% growth in food volumes.
For the full year, so theres nothing that.
Triggers us from a concern point of view.
On either either segments for the second half we go through the risks and opportunities. We go through the discussions with the team we even kind of point to our performance here in July a little bit slower than we expected out of the start but there is reasons for it and those reasons are always circle back to the supply constraints that we're working through the supply disruptions.
So I'm.
So that's kind of how we're managing through the second half second half of the year.
Operator next question please.
And our next question comes from the line of Andrew <unk> with Morgan Stanley . Your line is open. Please go ahead.
Hi, Thanks for taking my question. So maybe just a quick one just to follow up on your comments there about.
The volume growth in the second half just curious on the supply constraints that you've been having you mentioned a little bit of easing I was wondering if you could tell us maybe what youre seeing that.
Perhaps in terms of the timeline of when that can kind of normalize so that you can have.
And then more visibility into this growth in the second half.
If I could just a little bit more broadly on pricing also how you see that in the second half and how does that kind of continuing and given that price cost has been strong.
A strong contributor to the growth so far so how it trends there how has customer activity et cetera.
Okay I'll go first year implicit back Sir.
Chris to talk about pricing with care.
On the volume side building off of what Chris said, if looking at low single digits in the second half.
And the visibility we have that again, that's where the automation story concerned we've got the backlog, we do have supply constraints, but we had two of them on the food side as we're working on a sustainable solution.
The resins, we have seen I haven't got that question, yet, but we've seen our.
50% of our residents is specialty and that's what's hurting US right now on the supply constraints, that's what where we need to fix so we see that getting better in the second half than the first half so that's a positive.
On the volume side with food because it's very very important the second is the automation we have the backlog we have the orders.
Still have issues, but we have line of sight, how we didn't built yet that so that's what's helping us with the confidence on fluid volumes to get that.
Positive single digit volume growth on the phone so with that I'll turn that to Chris sure. Yes, the price realization side, maybe I'll use as an opportunity to kind of bridge, what our expectation was on the EBITDA side and our first.
After our first quarter first quarter calls just kind of bridge into today and what we're seeing is given the price realization more of a $600 million plus numbers, what we're anticipating to get on the price side of the equation, we just talked about volume volumes in a more <unk>.
Flattish versus a positive 1% I think maybe the 2% growth that we expected.
Last time, however, on the cost side, both material and non material. They both were up versus our prior expectation so from a from.
From the material side, we are more than this $3 50 range $350 million for the full year and then on non material inflation, we expect that to be more of about $110 million were last time, we guided about 100. So we're trying to provide this transparency as we manage through this both on driving productivity actions as well as the price realization helped <unk>.
Offset those costs and that gives us that gave us the confidence to keep the full year to full year guidance, yes, we still have that broader range and we're six months through the year, we'll tighten that after the third quarter.
But right now thats kind of the headline is that we have a little bit softer.
Topline volume offset with much more favorable price and FX clearly as everyone has seen.
Getting a lot of companies with a European based presence.
Seeing higher FX rates in terms of the headwind from that but that those puts and takes allowed us to maintain our full year guidance.
Just want to make the comment on the pricing because we're talking we have our customers listening here. So.
The pricing with care to gain share.
And I'm personally getting involved in many of these.
Especially on the automation side with their major customers that we are totally focused on how we can save them money.
Passionate about how can an automation and help them with their issues help them with.
Labor disruptions sustainability. So it is not how much.
Our solutions cost, it's how much we can save them and I just wanted to share that issue and that's where the language that we want to use is really what is our price realization that we are getting in to be very open with our customers that we are realizing the price over cost. So we.
Still think we have more opportunity, but we have to work hard to get that price, we have to save our customers more money.
And can we also want to do this and taking share in the process. So just want to highlight we are working this one very very hard and we think we have more opportunities still to go on the pricing side, but we have to earn it we will get the price unless we truly show our customers, we can help them save money.
Yeah.
Next question.
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.
Yes, I'm wondering if we can just kind of put it all together can you discuss any productivity initiatives you have ongoing and then when we think about kind of a cost price volume and productivity equation, how do we think about margins trending over the course of the.
The year in the second half thank you.
Sure So what's assumed in our full year.
Full year guidance is maintained at approximately 21% EBITDA margin in my prepared remarks, I talked about how on the productivity side. Some of it driven by just the labor challenges, we're faced with as well as just the inefficiencies given the supply disruptions little bit little bit lower on the <unk>.
Those productivity, we expected roughly $60 million in our previous guide right now, we're expecting roughly $45 million, we continue to work through that.
However, those initiatives are very much built off what we have created over the past several years with the great success of reinvent NRC operating engine is the opportunities that we have to continue to drive productivity are out there. Unfortunately are being a little bit offset this year. Unfortunately, given supply some of the supply constraints and just the inefficiencies.
We've had to work ourselves through.
But again I would just go back to the <unk>.
EBITDA margin profile for the full year is approximately 21% and we're committed to deliver that.
Yeah, and maybe if I can just add to that especially as a shout out to mizuho.
Timed my Japanese visit we had zero hosting us with.
Some Japanese investors and if you look at our operating model because it ties into our productivity productivity. We did in the past productivity that we're sharing in the future. So if you look at slide five on the operating model and this was a question that came from the Japanese are Japanese.
Hopefully near future investors that they looked at this and look at their attention was that consistency of performance, especially on the EPS driving that well north of what we said, we will do a greater than 10% of the 20% CAGR over the last four years and having the courage and the <unk>.
<unk> to drive that in our outlook and of course lot of detailed questions and how are you going to do that so that's where we highlighted our operating leverage targets that we've been talking now for a few years of what our operational excellence mean and holding ourselves to how do we get operating leverage you got a lot of challenge.
She is out there, but if we look at our operating leverage in the first half of the year, we're doing okay.
We have a 37% operating leverage on the business.
So it's north of our target we got issues that are going on with inflation et cetera, et cetera, but the other piece of what are we doing in the future because the questions. We're asking hey, if you have a recession coming.
Again, what we're bringing in digital we've in some of my customer meetings in the quarter I met with two of our largest customers and we talked about what we're doing on digital putting the whole company online how can we be more efficient in working with them can they design their products.
With us digitally remotely and how can we then dividend of our digital printing capability. So that they can actually have unique products and actually at the right.
<unk> costs, so that productivity through all of these challenges.
We're pretty excited that we're going to make it happen.
<unk>.
So with that.
Operator, we are down on the hour.
I wanted to.
If we can close and finish and I do want to thank everybody for being on the call today and as you've heard we're really excited about see as a sustainability company.
S. G is critical to who we are our performance and our success, we really appreciate the.
The interest in <unk>, and we look forward to all of you and speaking with all of you next quarter. So operator.
Thank you and that's the close for our call today.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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