Q3 2022 Sealed Air Corp Earnings Call
Thank you for standing by and welcome to the Q3 2022 sealed Air earnings Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one one on your Touchtone telephone.
As a reminder, today's conference call is being recorded.
I will now turn the conference or to your host Mr. Brian Sullivan Executive Director Investor Relations and assistant Treasurer, Sir you may begin.
Thank you and good morning, everyone.
With me today are attempting any our CEO , Chris Stevens our CFO .
Our Geo pumpkin, our chief growth and strategy Officer, and Susan Yang our automation finance leader and Treasurer.
Before we begin our call I would like to note that we have provided a slide presentation to help guide our discussion.
Please visit our website, where today's webcast and presentation can be downloaded from our IR website at sealed air Dot com.
Statements made during this call, stating management's outlook or predictions for future periods are forward looking statements.
These statements are based solely on information that is now available to us.
We encourage you to review the information in the section entitled forward looking statements in our earnings release, and slide presentation, which applies to this call.
Additionally, our future performance may differ due to a number of factors.
Many of these factors are listed in our most recent annual report on Form 10-K.
And as revised and updated on our quarterly reports on Form 10-Q, and current reports on form 8-K.
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.
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.
Before we start the call I would like to highlight our press release on our exciting new acquisition of liquid box along with a separate press release for our Q3 earnings.
For today's call will include a summary of the local box transaction and will have an extended call.
I will now turn the call over to Ted Operator, Please turn to slide three.
<unk>.
Thank you, Brian and thank you for joining our third quarter 2022 earnings call.
Starting on slide three the graphic is showing where we are taking packaging with automation digital and sustainable solutions we.
We start with our purpose we are in business to protect to 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 laid solid foundations to drive value creation for our people customers and shareholders.
Moving to slide four.
Today, we announced that we've entered into a definitive agreement to acquire liquid box a global leader in sustainable packaging for the fluids and liquids industry and the pioneer innovator of bag in box solutions.
We're truly excited about this transaction.
This highly strategic acquisition resonates deeply in the core of our transformation journey to provide market driven solutions.
Fluids and liquids had been the fastest growing and most profitable area for cryo back growing more than 30% year to date.
We're going to combine liquid box development innovation, and converting capabilities, Fitments and dispatchers technology and strengthen it with <unk> broad portfolio of performance films global operations and barrier bags technology to partner with customers and create safe.
<unk> innovative world class solutions.
During our call today, Chris and I will discuss the details of the transaction.
Afterwards, we will discuss our Q3 results and our updated 2022 outlook and initial thoughts for 2023.
On slide five we illustrate liquid box business its pioneering bag in box technology and broad solutions portfolio.
Liquid box is a leader in the fast growing fluids and liquid space partnering with diverse customer base by providing a full range of integrated solutions and systems.
Its track record of innovation and sustainability has supported strong revenue and earnings growth, while solidifying long term loyal customers.
Liquid box brings us valuable new capabilities with its expertise and fitments and dispensers portfolio.
Highly complementary to see automation, and cryo vacs fluids and liquids business.
On slide six we outline how this highly strategic acquisition fits into our vision of becoming a world class digitally driven company automating sustainable packaging solutions.
This combination brings together two leading innovators in sustainable packaging disrupting rigid containers for the global fluids and liquids industry.
Liquid box expected 2022 full year revenue was $362 million.
Adjusted EBITDA at $85 million.
Representing a margin of 23, 5%.
Secular trends in the fluids in liquid space like e-commerce, and sustainability provide compelling new growth opportunities.
Liquid box increases our exposure to attractive end markets like consumer packaging goods wine and spirits quick service restaurants, and enables us to create a new platform when combined with cryo back.
With the acquisition see advances its commitment to sustainability and circularity.
Including key growth drivers with disruptive technologies like liquid box, new innovation branded liquid Pierre.
This is the first recycle ready bag in box format.
Liquid biopsy solutions and technologies are well aligned with six net positive circular ecosystem strategy.
Moving to slide seven with complementary operations and technologies Cryo, that's food packaging enters a new competitive arena, while creating an economic value through strong cost and growth synergies.
<unk> and liquid box combined solutions will comprise automated selling equipment.
Best in class bag in box and highly engineered fitments in dispensers.
This will enable profitable growth in the fast growing categories, such as foodservice fluids and consumer goods.
Liquid boxes ecommerce ready solutions will benefit from six integrated approach to digital and the advancement of prismatic digital packaging and printing solutions.
By expanding our fluids and liquids capabilities, we're broadening the scope of <unk> solutions, and making it more resilient to grow in a recessionary environment.
Quick service restaurant customers will benefit from reduced waste and productivity benefits do cryo back and liquid boxes automation and high performance barrier bags solutions.
When adding liquid box blue chip customer base to <unk> global footprint, we will unlock geographic and cross selling synergies to address a potential $7 billion in revenue opportunities.
Now Chris will walk through the attractive financial case.
Great. Thanks Ted.
Turning to slide eight we outline the transaction details.
The purchase price for liquid box is $1, one 5 billion on a cash free debt free basis, representing an estimated enterprise value over 2022, adjusted EBITDA multiple of $13 five times and.
A multiple of 10 times after including only cost synergies.
We plan to execute cost synergies of at least $30 million on an annual run rate basis to be fully realized within three years.
Given by our cryo that footprint.
Joining resin purchases and see operational excellence.
At closing, we anticipate pro forma net leverage to be about three five times and expect to utilize our strong cash flow generation to quickly Delever post closing within 12 to 18 months.
Subject to the receipt of applicable regulatory approvals reviews, and other customary closing conditions, we expect closing to occur in the first quarter of 2023.
We do not anticipate any changes to our corporate family ratings.
While we acknowledge the challenging economic environment, we believe the opportunity presented to seize this transaction is unique and worth pursuing given the prospects of value creation outlined.
Moving to slide nine.
Similar to our automated packaging systems transaction.
Where we've reduced our purchase multiple by six times the adjusted EBITDA in three years, we plan to reduce the purchase multiple of the liquid box acquisition by at least five times over a similar period.
The significant growth synergies are likely going to bring this multiple down even further over time.
This transaction checks all internal financial hurdles that we use to evaluate any investment.
We expect the transactions to be immediately accretive to earnings per share on an operational basis, excluding impacts of purchase accounting.
The local box acquisition brings a strong strategic business into the <unk> portfolio.
When combined with C. It creates significant top and bottom line synergies, helping raise sees valuation.
We expect the acquisition to create potential of over $1 billion in net incremental enterprise value by 2027.
We are deploying our proprietary M&A playbook developed and enhanced through several transactions in recent years, including the successful Aps acquisition and integration.
We are planning a seamless integration processing welcoming the liquid box team, while driving the sea operating engine to create significant economic value for our shareholders.
Thanks, Chris.
Now turning to slide 10.
<unk> operating model highlights our sales earnings and cash profile for what we have done and where we're going.
The model shows our specific financial targets built on our internal principle, you get what you measure.
Subject to receipt of regulatory approvals in the first quarter of 2023 liquid box will be contributing 4% plus sales growth next year at a greater than 30% operating leverage.
Chris will provide more color regarding 2023 later in the call.
Let's turn to slide 11.
Which highlights how we are moving to be a market driven company fueled by our iconic brands.
Our solutions create value for our customers focusing on automation and digital and sustainability, which will deliver growth faster than the markets we serve.
We would like to highlight a change this quarter they were leading with digital.
Digital online sales are embedded in our three regions and will help streamline order processing, improving costs and creating growth by reaching new markets and customers.
Our online sales now represent almost 5% for the quarter.
Digital sales more than doubled versus Q2, and we are making this happen by bringing online some of our largest customers and distributors.
Despite numerous headwinds we continue to perform and serve our customers across our diversified portfolio.
We experienced very strong growth again in fluids and liquids this quarter.
In fulfillment and industrial markets, we experienced reductions in volume as Destocking efforts continued all along the value chain.
Our diversified geographic footprint and portfolio allows us to adapt to changes in market conditions.
At a global level, we have demonstrated our ability to grow through varying cycles.
In food, we expect our business to be resilient to market conditions, our largest market fresh red meat, which was up.
Makes up 22% of our sales is expected to be stable.
Softening of the cattle cycle in North America is expected to be balanced with the improvements in the cattle cycle in Australia, and the continued drive of automation globally.
As we enter the fourth quarter normalization of supply chain shortages will represent an opportunity to regain share in a roll stock case ready business and drive automation growth further.
Our strategy is to create growth regardless of the headwinds by innovating with new products and expanding into new end markets and geographies as demonstrated with liquid box through strategic M&A.
I'd like to highlight that with liquid box the pro forma impact between the two segments of food and protective would move to 60% food with fluids and liquid becoming roughly 10% of the portfolio.
Now, let's turn to slide 12 to discuss Q3 results.
We delivered strong earnings in the quarter exceeding our operating model. Despite the impact of recessionary pressures on top line and a challenging global operating environment.
<unk> operating engine continues to perform in the quarter on a constant currency basis net sales were up 5% and adjusted EBITDA was up 12% adjusted.
Adjusted earnings per share of <unk> 98.
Was up 14% compared to a year ago and up 19% on constant currency.
Free cash flow through Q1 was a source of cash of $137 million.
We continue to invest in our people and our business as we accelerate our journey to world class.
Now Chris will review, our financial results in more detail Chris.
Chris I'll start on slide 13 to review, our third quarter net sales of $1 $4 billion by segment and by region.
In constant dollars net sales were up 5% with 9% growth in food, while protective was down 2%.
By region, all through EMEA up, 7% APAC up 5% the Americas up 4%.
On slide 14, I'd like to highlight a strong improvement in profitability with Q3, adjusted EBITDA of $293 million increased $22 million or 8% compared to last year with margins of 29% up 170 basis points.
This performance was driven by positive net price realization, which we define as year over year price realization less inflation on direct material non material and labor costs, as well as productivity gains, which more than offset lower volumes and FX impacts in the quarter.
Productivity gains of $6 million in Q3.
We had that was total <unk> 6 million in the quarter and we now expect approximately $30 million for the full year down from previous expectations of approximately $45 million due to supply disruptions labor challenges and lower volumes.
As it relates to adjusted net earnings in Q3, our adjusted tax rate was 25, 6% compared to 24, 9% in the same period last year.
In the quarter, we were an active buyer of our stock.
With approximately 114000 shares repurchased at a cost of approximately $30 million.
Our weighted average diluted shares outstanding in Q3 dollars 22 was $146 6 million compared to $151 4 million in Q3 dollars 21.
At quarter end, we had $616 million remaining under our authorized share repurchase program.
Turning to segment results on slide 15, starting with food.
In Q3 food net sales of $830 million were up 9% on an organic basis, which consisted of 13% price realizations to help offset inflationary pressures across all cost categories and volume declines of 4%.
I am declines of 5% in Americas, 2% in EMEA were partially offset by 3% volume growth and APAC led by strong demand for our automated solutions and share gains in that region.
In Americas and EMEA, the volume decline was primarily attributable to.
Two customers seeking to dual source, our case ready roll stock products as a result of supply constraints, we experienced in late 2021 in early 2022.
We estimate this impact represents a sales decline of approximately 3% compared to prior year.
So excluding this 3% our food business was slightly better than the low single digit overall food retail market decline.
Our team has worked tirelessly to navigate through the shortages obtain additional supply and reformulate where necessary to meet customer needs.
Thanks to the efforts of our teams we are working through the sales cycle and now have the product in inventory to get this business back.
Food automation sales, which include equipment systems parts and services accounted for approximately 7% of segment sales.
And we're up mid single digits.
<unk> adjusted EBITDA of 185 million in Q3 increased 14% in constant dollars compared to last year with margins at 22, 3% up 110 basis points.
Protective net sales of $571 million were flat organically.
With positive price realization being offset by 12% volume declines in the quarter.
Market contractions in the negative economic outlook Hagen and will continue to put pressure across fulfillment and industrial end markets.
As for protective automation sales in the quarter, which account for approximately 9% of the segment sales. They were up mid single digits fueled by auto box placements.
Despite end market weakness in the quarter protective adjusted EBITDA of $109 million increased 12% in constant dollars in Q3 with margins at 19, 2% up 230 basis points.
Now, let's turn to free cash flow on slide 16.
September year to date free cash flow was $137 million compared to $223 million in the same period a year ago.
The $86 million decline was mainly driven by higher use of cash for inventory as compared to 2021, given raw material cost inflation and stock builds to mitigate potential future supply disruptions we.
We are expecting inventory levels to normalize over time, as we win by gaining share and growing our business globally.
On slide 17, we outlined 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.
Portfolio growth initiatives.
We have highlighted fluids and liquids on a slide in the past as an attractive opportunity.
We are now actioning with the Liberal box transactions.
Let's turn to slide 18 to review, our updated 2022 outlook and our initial thoughts for 2023.
We now expect our 2022 net sales to be $5 65 to $5 75 billion down from $5 85 to $6 5 billion previously.
At the midpoint this assumes a 3% growth on a reported basis and.
Organic growth of 8% driven by 13% growth from positive price realization, partially offset by 5% volume decline.
Full year adjusted EBITDA is now expected to be $1 21, sorry, one to one to 123 billion down from one to $2 billion to $125 billion and assumes adjusted EBITDA margin of approximately 21% in line with prior estimates by the top line.
Pressures.
Full year adjusted EPS.
$4 10 at the midpoint.
<unk> depreciation and amortization of approximately $245 million and adjusted effective tax rate of approximately 25, 5% net interest expense of approximately $165 million and 147 million shares outstanding.
And lastly, we now expect full year free cash flow in the range of $460 to $500 million down from $510 million to $550 million.
This represents a cash conversion range between 77% and 82%.
As we look ahead to 2023 with the anticipated addition of <unk>.
Box transaction.
And we expect to be in line with our operating model. Despite headwinds we faced in several of the end markets we serve.
So to summarize we had a solid quarter from a from a profitability perspective, working through the challenges and opportunities in our control.
This is a testament to the team as we are focused on executing our growth strategy driving productivity.
Generating and generating world class cash performance.
In executing our <unk> operating model as we go.
With that let me pass the call back to Ted for some closing remarks.
Thanks, Chris and let's move to slide 19.
Before we open up the call to questions I would like to highlight our 2021 Global impact report was published last week and it can be found on <unk> Dot com.
I'm very excited about the report because we've expanded the breadth and quality of our disclosures by referencing global standards and frameworks and illustrated this with powerful examples of how our people are leading the way in sustainability.
These are exciting times for <unk>.
The liquid acquisition is highly comparable and complementary to the sea operating model.
Together, we are determined to drive value for our people customers shareholders and society.
As is customary we plan to provide our full 2023 financial outlook. During our Q4 call in February next year with that I will open up the call for questions operator, we'd like to begin the Q&A session.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your Touchtone telephone against the ask a question. Please press star one one we ask that you. Please limit yourself to one question. Thank you.
One moment please for our first question.
Our first question comes from George Staphos with Bank of America. Your line is open.
Hi, everyone. Good morning, thanks for the detail.
My question is going to be on the longer term outlook and how liquid box <unk> and <unk>.
Chris and thanks for taking my question so liquid box.
It's been around for a number of years, obviously you have a box you have.
Flexible back within the box and you have fitments, which would from an outward look or.
From outside I should say.
Look like maybe not the most sustainable package tell me how you see this fitting into the sustainability story, telling me about lyft for pure and how that's leveraging the growth and then relatedly as we look at the automation.
Chart that you have later in your deck it looks like you've taken those expectations down this year.
Whats going on there how does that affect the longer term outlook on automation. Thank you guys.
Thanks, George and I will try to see if we can go through those break that up into three parts of the question. So the first part let's talk about liquid box and what it is and how that ties into your question about sustainability and how that fits in so if you look at slide six.
Look at the picture of what we have with trial that we have you are familiar with our flex prep.
We lead in tomato paste and we do.
Condiments et cetera, especially into QR space, which is rapidly growing so if you look at the the liquid box what do they do they put bag in a box in one of their leading.
Products is actually <unk> as well with the bag, putting that in for sheer ups et cetera. So the sustainability side of a bag in a box is first of all the productivity of putting a flexible package versus a rigid container much lighter and.
Actually the sustainability side versus on seal to significantly better actually on the cotwo footprint side. So.
So if we look at the business side. If you look so you have a bag you have a box and you have a fitting.
So we do on the bags on the fluid side to do roughly a billion five bags.
Less than $10 billion Fitments, we actually get the fluid get the liquid out of the bag.
Liquid box.
Inverted they do hundreds of millions of bags, but they do over $1 billion fitness their secret sauce is those fitments on how you actually dispense the liquid from the box.
And the industrial application. They actually have quick disconnect to that so the liquid pure product on the sustainability, which was the second part of your question is replacing in this business right now Theres a lot of Metallize containers on the bag so they actually for the barrier.
<unk>.
Use metal, which is not something that's good for the Recyclability. So the liquid product is has no metal, but thats. This very.
Very similar to what we do with cryo back. So we also have a highly recycled content bags, so trying to connect the dots there.
So I'll link the equipment question together here, which is really what's exciting about this for both businesses as we mentioned the fluids business is growing it's our fastest growing business in our portfolio.
Is that how we do that is we have the equipment that actually fills those pouches and then we do.
Apologies for that so we form filling seal liquids liquid box.
The same equipment, they're real technology is how do you attach that fitbit, but they do have selling equipment. They are filling equipment is less than 3% of their portfolio are filling equipment is around five to eight so we see that as a significant growth potential for us.
So flipping it.
Hope that was clear enough.
Go to slide 30.
If you look at the equipment, which we put in the appendix. This time, because we had so much information.
Our enthusiasm for automation is still there just in the quarter right now and we still think this is our highest growth and by the way. This is the major pull we're getting from our customers due to labor shortages et cetera. So in the quarter. You did highlight we have we've had still can supply.
<unk> out there and it's really on the electronics piece.
Backlog is still strong we had we were hoping to break half a billion. This year right now were forecasting it looks like it's at $4 75.
So to your long term question.
<unk> our enthusiasm in the automation is even higher, especially with the fresh red meat, our largest market. The automation is the fastest growing piece of that business and actually put a quote. This is a direct quote at the bottom.
From one of our largest customers actually converted customer coming back to cryo back and the quote is pretty.
Powerful we're moving the business to you because of where you are taking the business and what this will mean for US automation is the key for packaging right now.
So.
Very excited about the potentials and the investments that we're making in our automation to drive growth further and it does.
Big Big play on the liquid space as well.
Okay.
Next question. Thank you.
Our next question comes from Ghansham Panjabi.
R. W. Baird. Your line is open.
Hey, guys. Good morning, congrats on the transaction.
I guess first off on the 23% plus EBITDA margins for local box based on the numbers you shared with US how has that progressed over time, especially during periods of.
No economic incremental economic weakness.
I know, it's a relatively small asset and then just given that it increases the proportionate EBITDA percentage for food to over 60%.
As the acquisition part of an initiative to sort of lower portfolio cyclicality or is it just more opportunistic just like Aps was thank you.
Good question Ghansham, if we can go to slide nine.
And slide nine is this is really why we're so excited about Mike oksenberg to churn and it ties to your question.
So if you look at.
Where this fits into our model, we're acquiring a business that's.
Right now into our portfolio last year was 3%. This year, it's 5%, it's been growing very profitable much more profitable than the portfolio and actually the most part.
Possible piece of our trial back so with that said, we're putting a 23% operating profit business.
$362 million into that pro forma that's what you see and now thats, making that 10% subsea.
So the second part of your question was the growth profile, where it is and where it was at.
The growth last year was north.
Nor is the double digit the profiles has been in that greater than roughly 7% historically and then the third part of your question was the market that it serves its large one of the large markets is the quick service restaurants.
So we're seeing the bag in the box is a real productivity environmental play. So we see it serving markets that are very.
Sensitive to a recessionary environment, just like we saw our liquid business.
During COVID-19 when the <unk> shut down we felt that.
When Covid is coming back and now you see those long lines at many of these <unk> were there behind the scenes and so as liquid box on what they can do on the productivity on those beverages. So we think this is a really strong growth for us right now in the <unk>.
Tough recessionary markets, but even higher growth going forward and as you look is are but we're looking at the business all the way out to 2027, taking this segment to be over $1 billion into the portfolio. So quite excited about the target.
And I have you just mentioned again, so it's really really important that this is an opportunistic right now we recognize the markets are tough we recognize.
Financial markets are tough.
But we looked at the payback and where this fit in right now, having this available and compared it to Aps.
We said that we'd get debt paydown debt reduction of six and we said we would get that leverage down in three years, and we actually did it year and a half.
Our plan is to beat those targets you see right there on liquid box and <unk>.
Very excited about what this means for not only the short term, but the long term growth of the business, especially in our food and cryo that.
Okay.
Thank you.
Our next question comes from the line of Lawrence de Maria of William Blair. Your line is open.
Thank you good morning, congratulations everybody.
So first you made some comments about 2023 and the fee operating model, which obviously implies 10% EPS growth basically a bit stretchy going into recession, and a softer exit run rate aside from the easier comps from this year. So what gives you confidence that hit those kinds of numbers, 10% EPS incremental et cetera.
What are you doing together people on the call the confidence and secondly.
Obviously this puts it at number one or number two in the bag in box technology.
Big asset already went earlier this year, but you didn't execute on why does this fit better or what does this give you that maybe surely get into what is this in other words fit in with feel they're better than the previous acquisition.
Okay. Thanks.
Thanks, Larry and Chris I'll jump in and help me.
Forget to cope with your second question.
So if you go to slide 18, and we tried to lay this out.
Larry which I appreciate you asking referencing to the model as I've mentioned before we introduced the operating model.
It's really important to show what we did and show where were going in as I mentioned in my prepared remarks, you get what you measure.
So the operating model states what we.
What we plan to do and compare it to what we did on sales and earnings and how we turn that into cash.
If we look at 2023 to answer your question in the model.
Say that we want to beat the markets we serve.
So our model says that hey, we're in a very stable environment the markets. The GDP of 1% to 3% is what we should be beating.
We're going into next year as you highlighted there's a lot of challenge on what GDP, what the global markets are going to be so in our model. We actually said that actually next year. It could go down minus 2% to 1%. So we put that in our model.
We already have we know we have the 4% acquisition.
Liquid box in place so we see that will be a positive to.
So against that we also do believe that with our innovations coming.
With some of the sustainability solutions, we think we can get that 1% to 2% growth into next year. We also think we can get share gain.
As Chris highlighted in his remarks.
Part of it, especially the food business.
With these shortages, especially on that specialty resin that causes business as Chris highlighted 3%. We now have that material we have it in place and we can go get we're going to go get that business back.
Also just highlighting the food segment, we think is resilient through the cycles. So flat how do we great create growth even beyond what we just talked about in the acquisition, we think we could create growth, especially with our automation play.
And then how do we drive all of that to earnings.
You've done for five years now for almost five are operating engine drives a greater than 30% leverage we've proven that we can get a price realization. We've proven that we can get more the negative just highlight again industrial and fulfillment market pressures are we will see them in the third quarter was.
See it in the fourth quarter, and we think for sure we will see it in the first half of 2023, but when that turns will be a more efficient company with better products to serve it.
So with that said, we think the model we can drive the model and what we did in the past we think for 'twenty three we can make that happen.
Okay.
Did I get the second part of the question yes.
Yes pretty much I would just add maybe this has ambitions to kind of talk about the value creation within within this portfolio. We identified the cost synergies kind of within our control very specific to what we've been able to do building off the Aps expense as we mentioned in our prepared remarks as well as in the Q&A, but the opportunity for us to just grew.
So on a global scale, given the crowd back footprint and capability and the opportunities for the end market, where as we see it move to bag in box is tremendous and that's what we're really excited so on slide nine we lay out our financial profile why don't you go back now remember he asked me how does this compare to other <unk>.
And box opportunities without mentioning names.
So if we look at this what we're excited about this business versus other technologies. If you look at that fitment.
And again doing well over a billion fitments there just like crowd at the crowd that secret sauce is how do you put these layer materials together to protect the product like no other.
So that is the cryo bags secret sauce, the barrier protection that we have from fresh red meat to fluids or wherever we put it.
Now as we're penetrating the wind market. We can we can protect wine in a bag as well as above well. If you think about the bottle of wine. That's now going back in the box, that's where the markets are going so if you pull a cork off a bottle of wine.
The wind starts.
Getting that how long do you have.
If you have a fitting and you have it you turned the fitting and you get one glass at a time, many restaurants waste significant amount of their wine because they throw those bottles away.
Also with our <unk> technology and also the liquid pure technology.
We can protect as well as the bottle how do you know if the wind is good you smell the corp.
That's not good enough in the markets that we serve are barrier protection protects that now with the fitting offer a really unique advantage to the market. So to compare to other players are out there barrier protection crowd at the leader in the World Fitments liquid box.
The leader in that putting that solution model together, we're excited for what we can meet what this could mean for our customers and our business going forward.
Thanks question. Our next question comes from the line of Adam Samuelson of Goldman Sachs. Your line is open.
Hi, yes, thank you and good morning, everyone.
So I guess, maybe digging into some of the end market considerations in the short term.
And then you talked about the economic pressures certainly impacting the protective segment can you talk about maybe customer inventories as you see them in channel inventories as you see them.
How much is potential destocking impacting.
Your outlook in the <unk>.
In fact for the third quarter and into the into the fourth quarter.
And then just a clarification question you talked about a view that youre red meat business can be pretty stable moving.
Moving forward despite the contraction in U S cattle.
Can you maybe just frame exactly the U S red meat.
Beef part how much is of the total 22% that's red meat, how much is actually U S beef versus international B versus pork and I think just helps dimensionalize kind of that part of the business relative to the observable to clients, we see in the cattle herd.
If I can take that exact question first forget that.
North America.
Is roughly.
Susan.
Susan can answer for them.
Okay.
The answer to that.
You see on the slide on the market.
Market activity, we talked about 22%.
Total company.
Chris Let me ask you've made up of both beef.
And also the split.
It is roughly 50 545 and that certainly is a fairly large part D.
Thank you Sir.
Really look at the U S cattle cycle.
It's really impacting about.
A little less.
Total company revenue.
Thanks Stuart.
5% down.
A company that will be lessened.
5%.
And also on the other side with all the different protein.
I think for next year.
Australian capital cycle.
And also the.
Okay.
Go ahead.
Great.
We are doing.
Doing this year.
In the protein market.
<unk> dilutions.
Also.
Yes.
Betsy.
Offsetting the positives.
The factors.
Alleviate.
Okay.
Good did you put a number on that building.
Okay.
Well Adam.
Actually being exposed here lives that you see one of my management principles.
I'd like to surround myself with people smarter than me so im actually very excited to have Susan with us on the call.
The other part that you had there you talked about the Destocking, which is real and it's showing up more in the.
Protective side of the business. So your direct question was are we seeing it third quarter fourth quarter and then when it goes into there is no question that Destocking is out there as we've seen it with our inventory and you can look at what our customers inventories are et cetera. So there is a destocking play how long will that take to work out.
No we definitely think probably part of the fourth quarter Youre seeing that implied guidance.
But that too will change I would like to highlight though as I keep mentioning digital digital digital.
We're putting our customers and distributors online, we're getting just such better visibility and so part of that inventory, we do not want distributors to have we want to take care of that for them, we want our distributors and our sales teams to be totally servicing our customers and so we think.
We have an opportunity to get better that going into next year, but the direct answer. The question. The Destocking has ended the fourth quarter, probably in the first half of next year, but as Chris highlighted we had the inventory and we have the preferred products.
Highlighted specifically on food, so we're actually using that inventory right now to be very aggressive out there and we want the business we have the inventory.
And we have the marching orders to go get it.
Next question.
Thank you. Our next question comes from John Donigan of Jefferies. Your line is open.
Hey, good morning, Ted Good morning, Chris.
I just wanted to touch on the Capex.
It pulled down a little bit.
In the updated guide is that more driven by.
Maybe pulling back a little bit on the growth opportunities as you know have liquid box coming into the operations or is it just getting pushed out to the right.
<unk> disruptions.
It's the second.
We actually see any investments in which the Capex, obviously competes with the <unk>.
Our capital allocation, we have some really significant productivity.
Productivity opportunities on Capex and it's just.
Getting it done with the other supply constraints that are out there.
And that that part of the business, but yes.
Sure I would just add that's all related to just think through timing, we were guiding roughly $250 million for the full year as we kind of closed out the third quarter is taking a look at what we could execute on here in the fourth quarter working with the equipment suppliers. If you will on the Capex needs. It was it's been reduced it doesn't change our priority we definitely.
We're not starving our capital needs from a business point of view, we talk about.
Traditionally being roughly 4% of sales actually moving more towards 5% of sales as we move forward given the opportunities around our strategic direction around automation digital sustainability. So there was nothing more than timing it doesn't reflect anything different than that.
Okay next question.
Our next question comes from the line of Angel.
Angel Castillo of Morgan Stanley Your line is open.
Alright, Thanks for taking my question.
Just a two part first I guess on liquid box I was wondering if you could give us a little bit more color on what the Capex DNA.
D&A and interest expense that will come along with that deal and then separately there's.
A lot of opportunity for growth here, both from a regional and end market penetration.
You indicated can you talk a little bit about the timeline of achieving maybe some of these revenue synergies.
How should we think about in terms of Capex and cost.
Rob on that question.
<unk>.
What that might be in the coming years as you think about taking advantage of those opportunities and what investments you might need to make.
Great.
Actually I'll, let Sergio answer that surgeon, who has led this process. He is going to have seen all of those targets.
Jamie you want to take that so.
In terms of.
Thanks <unk>.
<unk> is going to be.
Stay with 3% total revenues.
We built into our model looking forward.
On for a moment.
There are certain synergies.
It may require capex to execute their growth and those are also factored into the more of them.
You can see all of those vessels within the seat.
Capex prediction when it comes to realization of the growth synergies.
We have a model.
How do we integrate to execute desktop disclose who would we have geographic opportunities in cross selling opportunities on the same that we've done with automated packaging systems with these three with those targets.
Total sales for listening to us.
Ed.
We know that <unk> been introducing base with customers with those can be realized.
Seamlessly.
The other part which is the cost synergies I think that Stuart mentioned before.
We are planning within three years Sandoz on slide two within the three years in the case with <unk> as we executed 319 months.
We see here a lot of opportunity to accelerate but in principle user count.
It's going to be.
Execute their industries.
Or less.
Okay.
Sure Jim next question.
Thank you. Our next question comes from the line of Anthony Pettinari. Your line is open.
Good morning.
I was wondering if it's possible to talk about.
Kind of the volumes that are implied in the <unk> guide.
In food and protective and maybe how that tied into kind of the trends you saw in October .
Sure. So let me take that one Anthony so on fourth quarter as we've just profile out quarter over quarter performance.
Focus on the positive in terms of the net price realization, we expect to see the benefit.
In Q4, recognizing we started to go.
Positive on net price realizations fourth quarter last year, so that's going to start to diminish, but we do expect that favorability to continue into the first half of next year and then you get to the overall volume side of the equation.
We still anticipate protective is going to be under pressure kind of that mid teens down mid teens. If you will in Q4, we're doing several things to see if we can work that and improve that number but right now we're conservatively kind of forecasting that and then food relatively stable maybe up low single digits.
Work through the inventory challenges, we mentioned before at least the supply challenges and looking to win back that business in the case ready roll stock.
That's the implied assumptions around that so for total C. We would ask bill expect our volumes to be down mid single digits, you get favorable net price realization and Thats whats reflected in our updated full year guidance and then we wanted to provide just like we've committed to doing it on the last quarter call give some color to our investors.
As it relates to 2023, we've commented on liquid box and then you get into what we anticipate to see in 'twenty three so kind of we're able to cover that as well.
Operator next question.
Thank you. Our next question comes from Christopher Parkinson Mizuho Group. Your line is open.
Great. Thank you just a quick corollary of our incentive protective could you just quickly parse out what you're seeing from the various geographies and protective it seems like Europe still difficult broadly from a macro perspective Asia is sluggish now, but perhaps could be a little bit better sequential basis in the U S. We're getting mixed signals, but more negative as of late.
If you can just hit your own opinions on what you're hearing from your customer base that would be incredibly helpful. Thank you.
Yes sure. This is specific to the protective side and I'll talk specifically around the fourth quarter and maybe just break it down by region. So <unk>.
APAC clearly is feeling the effects of just overall reductions in PC PC shipments youre hearing the noise in the news just around the electronics side being significantly down coming out of Asia, we're feeling the effects of that without a doubt.
I also want to comment as it relates to China.
On the protective side, just thinking zero Covid policy is also impacting our business when you get to EMEA. The E Commerce space is down 20%.
And we're feeling it in Americas to your point.
Down, but not not as bad as what we've seen or what we're hearing out of our businesses on the APAC and EMEA side, but overall, the protective and markets. The industrial fulfillment is clearly under pressure and that's what we see here in the fourth anticipating that in the fourth quarter.
Yes, the only other color to add to that is what we're driving against is what we're doing on automation. We think we have some opportunities, especially on the protective side, we talk a lot about the food, but we think of an opportunity also what's interesting on the Asia Pacific where we did have.
<unk> and actually growth different is we are seeing penetration as the world because of as Chris highlighted that the China condition, we're seeing the markets outside of China, growing and where they're locally with now Philippines, Vietnam, Thailand. These are small numbers and.
Our second largest region.
Australia and.
And we're seeing that.
Those are bright spots as we drive through.
The protective side okay.
Okay next question.
Thank you. Our next question comes from the line of Adam Josephson of key your line is open.
Good morning. Thanks, everyone. Just two part question on liquid box, Ted and Chris So I think Ghansham asked what the historical <unk>.
Margin profile has been compared to the.
Slide 23, 5% margin just shared forgive me I didn't.
Catch your answers so any help you could give me on what margins for this business have been historically and just Relatedly could you just talk about the recent history of this business what Olympus did with that I know Luca boxes for us to divest assets.
In order to proceed with its acquisition of DS Smith's plastics business in 2020.
Any difficulties you anticipate what's getting justice department approval et cetera would be helpful. Thank you.
Good question, Adam I think also we got surge you on the call Harrisons led this process.
Just the high level piece before surgery will give you some of the details what we liked was their historical growth and their historical profitability. We looked at what they did in a tough market, where you can test the business and what they do with price and how they did that so we looked at that very carefully.
So we as a question that Larry asked earlier, we've been looking at this space for years now so.
We know others in this space and how they performed in their profitability, having a higher than average profitability, we're sending message to us is the quality of the business behind it.
Also having our friends at Olympus.
That equity running business. So we do have experience with family owned business private equity run business and of course public business.
We did looked carefully at what Olympic stent with the business.
As carefully as we are now.
Had a deal, but we like that part of the business how they performed what their profitability wise and how they executed in this market again when market is what we were extremely attractive to us.
Extracted two so I'll turn it over to <unk> to give you more details to your question absolutely true legally will discuss being steady.
<unk> increased trajectory, we look back but.
Starting in 2014 and refunding.
23%.
A number of drivers to that 22%.
Yes.
What came with pricing, but also the efficiencies drove into their converting process I may highlight that in 2010, CFO Lombardy, we choose the best technology for their budget Bulks converting.
Terry and also out of the DSP that precision once weekly.
Different regulatory stuff.
Started to put that.
We're extremely roofing the integration on extracting synergies of that they've been very effective at consolidating the manufacturing assets and now they have a modernized locations whether they are very very productive so really steady trajectory since 2014 that we look at.
Double digit growth in.
EBITDA line.
Sure.
I would also highlight that the ability to innovate like for example to recoup your is there every months because not only reducing debt, let me Nathan metallic trim dennise.
Much better sustainable products in terms of Recyclability. It also improved its margin profile. So as you replace a very large part of the portfolio from the metallurgy.
Suzanne.
Ped.
On its face different films, you improve the margin profile looking forward.
In terms of like I said, I think that the integration has been a very good job on.
Last highlight is that we are fighting the flexible spun.
The acquisition comes with <unk>.
Part of the estimate is retained by <unk>.
So do you have maybe just a little bit more color because the question a couple of times on how significant the fitments are adding to this full solution.
Their technology is separating from others in the market with as you mentioned Maverick I think the Fitments.
All important we all talk about bags because of our crowd back world. The fitness is something that they really have some innovation.
It would be people, who will discuss our broad portfolio.
On a lot of intellectual property around treatments on the spin.
So you combine that treatments with the top bonds.
The buzz like beautiful ones for wine.
That gives them a lot of.
Scope to do many things into boxes.
That will connect into there so the phone trends that you saw.
Some of the ones that will be spent in theory from the ones that we'll do in the wine from the ones that for example.
Moved into we are ready to.
B ship in own container and compatible with Goldman's those kind of things are tailwind such <unk>, replacing on disrupting rigid containers and ramping.
<unk> savings.
Lastly, both of those 90% I mean.
The sustainability benefits would you can do with other doses.
<unk> technologies other to Dubai is a very significant contributors we have sustainability slide in the deck and we'll probably I'm sure there'll be more follow up questions Youll see the sustainability of bag in the box is a significant conversion driver of the rigid containers.
So we have a slide highlighting that but I'm sure. We can follow up later on with the questions next question operator. Thank you our next.
Question comes from the line of Jeffrey Zekauskas of Jpmorgan. Your line is open.
Thanks very much.
Just a few small questions.
Why is the free cash flow of $50 million lower for this year in that year.
EBITDA changes are pretty small.
What's your cost of debt with liquid box and have you fixed it.
Or this will be.
Floating rate debt will depend on the LIBOR.
And lastly can.
Can you talk about the geographic distribution of liquid boxes revenues.
Whats their market share.
<unk>.
Liquids.
Alright, Jeff So let me so multiple questions in there let's go one at a time.
So free cash flow the main driver.
Driver in terms of our change in our outlook is on the working capital side.
As we mentioned before.
The inventory levels that we have faced.
Based on not only the raw material inflation thats reflected in our numbers, but also the pre buys to make sure. We had the inventory in place coupled that with some headwinds that we've experienced on the protective side given the volumes you are in the circulation, where we are looking to adjust our free cash flow.
Not so much because of EBITDA, but because of the working capital.
Performance.
In the business as it relates to the transaction itself I'll ask us Susan obviously, leaving up on the treasury side thinking through the financing for this deal thinking about the debt as well as the cash on hand to be used.
Yes. Thanks.
For the position here in the purchase price is 141 $5 billion, we have secured a $1 billion.
Great.
And the rest of it will be coming from cash on hand.
Now, we're going to be working toward a takeout option with a combination of bank loans and high yield bond debt.
Mixture of both floating and fixed rate at this point our estimate is the average interest rate is around about 6%.
We'll see we'll be working with our banking group.
To execute.
Got it and then last question, Jeff you just talked about the just the geographical sales footprint for liquid box roughly 76% of their sales is what we would consider the Americas in terms of just kind of equivalent to just kind of comparing them to how we regionally split our business 13% on EMEA.
And 11 of the remaining balance of 11% in APAC. So very much a good a nice overlap as it relates to our overall global positioning and again it gets back into the our global footprint with cryo with cryo back is the opportunity for us.
Work those cost synergies on a quick basis, which is reflected in our financials, but the opportunity the upside opportunities are.
Those sales synergies, which were reflecting as an opportunity not reflected in the financials to justify the steel.
Much excited about both topline and bottom line improvement.
Okay next question.
Thank you. Our next question comes from the line of Joshua Spector.
Your line is open.
Okay.
Mr. <unk> your line is open.
Sorry, you cut out for a second there I didn't hear you. So thanks.
Thanks for taking my questions squeezing this and I just wanted to follow up on the food or volume impact. So the 3% loss due to dual sourcing is that typical that you would win that back that quickly that's not a longer term decision by that customer in terms of how they source supply and as you've talked about regaining share multiple times through the call. How do you do that.
Protect your profitability.
Assuming competitors also have more supply available as well thanks.
Well in the food business.
With a specialty barrier and the problem was the markets were actually rationing supply.
So we didn't lose it because one product was better we just didn't have the product. So that's that was the tough situation. There so as far as the second part of the question can we get it back.
We feel pretty confident in the food business.
We.
Yeah.
We would be first choice and so as far as the pricing of doing that that also ties in very very well with our automation right now and again the strategy to have the best product, which we believe we have at the right price when we got to get the product.
Rice to make that right and then also the sustainability piece part of the challenge that we had when we launched that product source.
Our engineers redesigned.
Down gauged redesigned deter.
Materials. So they did that in an amazing amount of time, because we were literally without product. So we think getting that share back.
At a time as I put the quote and the slide on the automation slide.
We already have the customers coming back.
The food business for us is very sticky it's hard to change.
So you don't want to lose it but losing it because we didn't have a product that part we feel we can get that back and we're going to be going after that aggressively now in the fourth quarter and into 2023.
Thank you next question.
Our next question Scott.
Mike racks line of tuition your line is open.
Thanks, very much I appreciate you squeezing me in here.
Just hoping to get a little bit more color around the e-commerce moderation and maybe any impact on your mental or especially about <unk>, which is your most profitable piece in particular.
Protected portfolio I think Todd you mentioned that youre going to continue aggressively addressing.
The decline there, but I wonder if you could just provide some initial color as to what specific things youre doing to address the weakness in e-commerce, especially with your forecast of volumes being down mid teens in <unk>.
Okay, well, let me just make sure that the mailers arent the largest piece of protective on E. Commerce, if we look at our protective business actually earnings package.
Largest most profitable piece that one was hit with an industrial the industrial right now, but as far as the E Commerce piece.
And so if you look at slide 11 date, the mailers piece going plastic versus paper that's a.
To sustainability play there so part of our mailer downturn and ecommerce, whereas the market wanting to have a paper.
But we have been in development is our paper bubble, we have introduced that.
The reason to your question, we have confidence we are already up to $1 million were looking to take that $10 million in the next 12 months and we want to recapture over 100 million mailers.
Why is that important that competes with.
The plastic bubble mailers that we have as well right now, though the paper is actually 30% caught more costly as you'd go sustainable so we're bringing automation and again, how do we do that in an automated fashion to put it.
The warehouses et cetera. So we think we can get that business back it does with e-commerce going down so its a double hit.
We actually think when we get through this.
Hopefully short term on the ecommerce side, we will have a new product in place to gain some share.
Okay. Next question. Thank you. Our next question comes from the line of Ron. This one is of RBC your.
Your line is open.
Great. Thanks for taking my question.
Wanted to go to slide 18, and ask a couple of questions about the image you have for the <unk> operating model.
It looks like.
You have guidance this year, obviously of $1 2 billion on EBITDA for the midpoint.
And then it looks like Youre, highlighting a bar that's maybe around one five for 2025, so just wanted to understand that.
That trajectory it looks like what would it imply as maybe some contribution from liquid box, maybe three quarters next year, plus maybe $15 million of synergies and then.
2024, you would get the rest 50 million synergies and said, maybe 7% to 7% to 9% EBITDA growth, which would put you at one four and then another 7% and 25 will get you to that one five is that the right way to think about it and and if so is.
Is it the right assumption that essentially most of the growth in 'twenty three is for me the acquisition. Thanks.
Very well cetera.
Yes.
That answer that I mean, thats very much driving what we do and again. This is over time, just thinking through the operating model with the levers we're going to pull on organic growth.
Clearly going into next year the opportunity for us is to add local box into the portfolio is helping us to get back into that into that sales range as we mentioned that 5% to 7%, but EBITDA. The earnings profile over time every year. It can be some variations of good to the back of that but over time that average to be 7% to 9%.
You can see the elements of what we are.
Driving on from an operating engine point of view in terms of executing to fit within our model, but maybe to add some color yes.
So you stated again, so behind the model and I apologize on Slide 18, you have to look at the shrunk down model, but we havent earlier in the presentation you could say it so again just within the model and that's a work.
Running the business too as we say again the markets. We are designing to should be stable, we are very diversified market, 1% to 3%.
In the short term.
<unk> said that we think 2020 to the end of 2022 and going to 'twenty three we actually have markets under pressure so that one to three.
Could be negative two to plus one so that's what we're having to work against and exactly as you said the M&A coming in at 4% our model says two to four.
We didn't have any acquisitions of size over the last two years, we actually had divestitures. So as you can see the model down below with the of how we performed over the last four years and see projecting that going forward, but I do want to highlight is we continue to talk about the innovations coming through in automation and digital and the <unk>.
Gain et cetera.
Our how we see that curve going as you highlighted all the way to 2025. So we're telling you where we're going and again I want to highlight we believe you get what you measure and Thats were designing to Chris's comment where you mentioned on the earnings we expect margin expansion and so we're showing you how we're doing that.
That operating leverage of greater than 30%.
And a lot of time on the call talking about our fluids and liquids that business is north of the average of 30%.
That business has been leveraging closer to 40%.
So when we put that operating engine that's for the whole portfolio, but certain parts of the portfolio are actually moving at a higher rate than.
The other part of the margin expansion is price realization through this tremendous.
Inflationary period that is what's been giving the lift and margin expansion for us so going forward. The same the same issue.
We want to make sure that we again have the best products at the right price and we're going to make them sustainable the only two other things to highlight is on the top side, where we're going on digital.
And what digital does for us on growth and then also as we get more efficient on our operating leverage and showing up and why we're going to have margin expansion. So your numbers were right that follows the model.
Okay.
One more question operator.
Thank you. Our final question comes from the line of Gabe <unk> of Wells Fargo. Your line is open.
Good morning, Chris.
Just one quick one I guess on M&A.
Liquid box does this take you out of the market for other transactions or.
Can you feel like there is still more opportunity out there or assets come into the market that you guys would be looking at thanks.
Yes, if you go to our capital allocation will show you what we've been looking at and what we're quite interested in.
We are very.
Serious about is our capital allocation, where the leverage ratios are and Susan highlighted that were three five and we want to take that down very fast. The model is generating as you heard in the last question. If you plug that into cash over the next two to three years, the model will be generating well over $2 billion of cash.
So where do we put that right now short term is going to be paying down debt.
Getting that leverage ratio.
Down, but as far as what else are we looking for are we out of the market.
We're looking we've looked at well over 100 different deals over the last four years, we've done 14 and.
And some of those have been divestitures, as well, which Aps being the largest until now we have a local box. So we are looking but we want to be fiscally prudent financially prudent and watching that very carefully. So we think the cash generation of the business will have us in the market for those other things that we identified.
That we think will make the business significantly stronger going forward.
So with that.
I want to thank everyone for their time today on the call.
Excited about the opportunities of liquid box I hope you felt that in the call and how we think it can accelerate our growth for the future.
Sorry.
In February thank you.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating and have a great day you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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