Q2 2023 Sealed Air Corporation Earnings Call
Good day, and thank you for standing by.
Welcome to the Q2 2023 sealed air earnings Conference call.
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I would now like to hand, the conference over to your Speaker today, Brian Sullivan Executive Director Investor Relations and assistant Treasurer. Please go ahead.
Thank you and good morning, everyone with me today are Jeff <unk>, our CEO and doesn't see Matt our CFO .
Before we begin our call I would like to note that we've provided a slide presentation with enhanced visuals to illustrate who we are what we do and where we're going.
Please visit <unk> dot com, where today's webcast and presentation can be downloaded from our investors page.
Statements made during this call, stating management's outlook or predictions for future periods.
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.
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.
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'll now turn the call over to Ted Operator, Please turn to slide three.
Yep.
Thank you, Brian and thank you for joining our call today, we will discuss our second quarter results and provide updates on our 2023 outlook in our continuous journey to reinvent see from the best in packaging to World Class Company automating sustainable packaging solutions.
<unk>.
We're introducing a new program called cost takeout to grow as part of our reinvent see two point now to return to growth and take out our cost in this challenging post COVID-19 environment.
After that well open up the call for your questions.
Starting with slide three.
On this chart, we show our adjusted EBITDA performance since 2017 through the lens of nature episodic events.
The chart recaps, where we are today.
Importantly, where we're going and how we're repositioning for future growth.
Like to give you visibility to what we see for 2024 through 2025 and set the stage for a cost take out to grow program.
As we entered 2018, we were faced with major challenges such as the startup war on plastics and remaining stranded costs after the diversity sale.
The Companys operating leverage and earnings power, we're not where we wanted to be and our stock price had been stagnant for the previous three years.
That was the case correction to launch our reinvent see program based on our four PS.
We established to see operating model setting the tone for our transformation to a world class.
The reinvent see growth strategy centered on the pillars of automation digital and sustainability.
Reinvent see we realized annual savings over $300 million margin expansion greater than 270 basis points, and 5% topline growth, including M&A.
In early 2020, Covid shook the world and profoundly impacted the way of life globally.
Hope it brought demand surges in e-commerce, and food retail cause wide supply chain disruptions rapid inflation product shortages and overstocking.
We built reinvent see aiming to become world class based on our four PS.
People.
<unk> products processes and sustainability.
Last quarter, we introduced our new C corporate brand highlighting our transformation into an automation digital and sustainability packaging solutions company.
We are now evolving reinvent see two points to growth and expand the cost takeout and productivity program to $140 million to $160 million of annual savings to be fully realized by the end of 2025.
This cost take out to grow program will redirect resources from crisis problem solving to focus on driving major growth opportunities.
We're transforming see go to market team to an efficient and effective solutions focused organization.
Celebrating automation across our business verticals and launching new product innovations enabled by sustainable materials and digital solutions.
We will increase the operating leverage in earnings power in the business by further optimizing our supply chain footprint and driving digitally enabled SG&A productivity improvements.
It all together with our cost takeout to grow.
Targeting low single digit growth fueling our sea operating engine, which will result in margin expansion in our journey to world class.
Now moving to slide four we'd like to showcase how we're creating high quality growth.
We breakdown our growth by geography market product and might see our online digital platform.
In the second quarter, our digital online transactions grew to 16% of total company sales representing a sequential increase from approximately 10% in Q4 of 2022 and approximately 14% in Q1 of 2023.
This rapid growth reflects the speed of our digital transformation, our ability to adapt to changing needs of our customers, enabling us to serve customers, we are not efficiently reaching to that.
Towards the bottom of the slide you can see the current percent of online transactions for each of our business verticals, our largest penetration is in our automated protective solutions business.
Starting with consumer ready solutions, representing over 50% of total revenue.
These solutions are designed to meet the evolving needs of food processors retailers and brand owners as they seek to respond to shifting consumer preferences and to create an at home experience.
In the second quarter consumer ready solutions declined low single digit in volume, primarily driven by softer demand in our processors and food retail end markets.
The rapid increase in inflation over the past several quarters has impacted discretionary spending resulting in a decelerating market demand.
Consumers are trading down from premium to lower priced proteins.
This dynamic impacted all regions with EMEA up being hit the hardest.
See automation solutions for proteins continued to be a bright spot and grew approximately 40% from strong share gains with major meat processors in the quarter.
Despite the softer global protein market automation grew double digits in all regions with APAC, showing the strongest momentum growing greater than 50%.
Throughout 2023 and into 2024, we expect the retail softness to continue.
The U S cattle cycle will be a headwind for the business, partially offset by tailwind from the Australian hurt cycle, which already positively impacted our business.
Automation will continue to be a secular driver across all of these markets.
The next business vertical fluids, and liquids now representing greater than 10% of company sales in the quarter experienced mid single digit growth before counting local box.
We continued to see the modest foodservice recovery and strong growth in automation.
Bringing medical into this business vertical further capturing synergy between cryo backs materials science and liquid box fitment and attachment technologies.
Our third business vertical is our automated protective solutions, which represents approximately 35% of our business today, focusing on a variety of markets and customers ranging from industrials ecommerce fulfillment.
Weak end market demand and channel Destocking continued to impact volume performance in the quarter.
We're focusing our efforts on turning around this vertical by expanding see automation capabilities and fiber based solutions.
We're increasing engagement and reaching more customers through our <unk> digital platform.
Now representing approximately 35%.
This verticals revenue.
We're actively performing a strategic review of our protected portfolio for further areas to optimize and unlock value.
A small example, we recently announced the closure of our keyboard thermal temperature assurance business.
Transitioning now to slide five we delve into CES growth pillars, namely automation digital and sustainability.
Crucial in addressing our customers most pressing packaging challenges.
During the second quarter, we reached new significant milestones demonstrating our commitment to our customers and delivering incremental value add capabilities to enable profitable growth proceed.
Automation exhibited robust growth for the quarter, increasing by approximately 20%.
Food automation was particularly strong up approximately 40% year over year from continued market share gains at major protein producers.
We anticipate delivering over $525 million up 10% and annual rent revenue this year.
With regards to digital solutions, we achieved several significant milestones as an example of how digital printing is fueling see automation, we introduced a new digital printer unit to print protein bags at our customers' facilities, enabling them to customize their products at the <unk>.
Point of packaging.
Transactions on my C platform surpassed $1 billion annual run rate in the second quarter, demonstrating a robust digital engagement.
Following the successful introduction of our online design studio on boarded customers experienced high speed web to print solutions.
Streamline graphics process and reduced print lead times.
As we move more of the company online we continue to unlock operational efficiencies reach new customers and make it easier to do business with <unk>.
On the sustainability front, we're proud to share that our MFS Ci and sustain Olympics ratings have improved recognizing our ESG progress.
Back in July together with Exxonmobil, Australia, we announced a unique circularity initiative for protein trays.
The collaboration will divert more than 900 tons of plastic waste annually from landfills or incineration.
We take great pride in the industry partnerships, we've created to deliver scalable and sustainable solutions.
Making our world better than we find it.
Turning to slide six.
This is another example of how the combination of best in class <unk> auto pouch equipment in film liquid box dispensing technologies, and prismatic digital connectivity bring value and create customer returns.
On the top right hand side of the slide you see the use of <unk> technology barrier bags filling lemonade within a quick service restaurant environment.
This automated form fill and seal solution enables greater than two times operational efficiency and over 30% waste reduction compared with traditional back of the store lemon slicing and squeezing.
Improved speed of service reduces storage requirements enhances safety, while offering a seamless source of fresh lemonade throughout a given day.
In this example, the operational savings were over $10 million for the customer.
We're introducing a new solution designed not only to bring additional operational savings, but also create new revenue sources for <unk> brand owners.
Pre filled fresh lemonade bag in the box can replace Carryout rigid plastic jugs for quick service restaurants.
This growth opportunities for our customers extend shelf life from hours to days enables in store retail carryout formats, and digital marketing opportunities to enhance consumer experience.
This application will disrupt rigid containers within improved sustainability profile through less and more efficient packaging.
Now I'd like to turn the call over to Dustin to review our financial results Dustin.
Thank you Ted and good morning, everyone.
Now moving to second quarter's results, let's turn to slide seven.
In the quarter on a constant currency basis, net sales were down 1% and adjusted EBITDA of $280 million it was down 5% compared to last year.
Volumes were relatively flat sequentially, excluding M&A and FX, reflecting volume stabilization since the beginning of the year.
Sequentially EBITDA improved about 5% from 267 million in the first quarter of 2023, partially driven by improved sequential volumes and cost reduction.
Adjusted earnings per share in the quarter of 80.
It was down 22% compared to a year ago on a constant currency basis, but increased 8% sequentially from 74 in the first quarter of 2023.
Turning to slide eight local box contributed 5% to top line sales are approximately $75 million was more than offset by organic declines driven by continued market pressures and customer destocking and protective as well as continued weakness in food.
Okay.
Okay.
Second quarter, adjusted EBITDA of $280 million, which included $19 million contribution from local box decreased $13 million or 4% compared to last year margins of 23% down 40 basis points.
<unk> was mainly driven by lower volumes will then protective.
As it relates to adjusted earnings per diluted share in the second quarter of 80 <unk>.
Our adjusted tax rate was 26, 9% compared to 24, 7% in the same period last year.
We did not repurchase any shares in the second quarter.
Our weighted average diluted shares outstanding in the second quarter of 2023 was $144 8 million.
Moving to slide nine.
In the second quarter food net sales of $881 million were up 3% on organic basis, primarily driven by price realization.
Volume was flat year over year with growth in automation in our organic fluids the liquids business.
Set by continued weakness in retail demand.
<unk> was slightly up versus the first quarter.
Food adjusted EBITDA of 191 million in the second quarter was up 16% in constant dollars compared to last year with margins at 21, 7% up 90 basis points, mainly due to the contribution from local box and lower operating costs, partially offset by unfavorable net price realization of $10 million.
Protective second quarter net sales of $500 million were down 18% driven by volume declines in all regions from continued market pressures in industrial electronics and fulfillment markets and continued customer destocking activities.
While we expect destocking activities to moderate headwinds in end market demand are projected to continue in the second half.
Protective adjusted EBITDA of $96 million was down 24% in constant dollars in the second quarter with margins at 19, 2% down 140 basis points due to lower volumes and associated operational leverage.
Partially offset by favorable net price realization of $11 million.
Sequentially productive EBITDA margins improved 300 basis points, primarily driven by favorable net price realization and cost control.
On Slide 10, we review our second quarter net sales by segment and by region.
In constant dollars net sales were down 1% or 12% growth in food, while protective was down 18% by.
By region, we grew APAC by 6% offset by a decline of 2% in Americas and EMEA being flat.
Now, let's turn to free cash flow on slide 11.
For the second quarter free cash flow was a use of cash of $130 million compared to $94 million source of cash in the same period a year ago.
Working capital has improved through our continued efforts to reduce inventory.
However benefits were offset by the previously disclosed deposit the internal revenue service of $175 million.
Excluding the impacts of the Iris deposit free cash flow would have been a source of cash of $45 million.
On slide 12, we outline our purpose driven capital allocation strategy focused on maximizing value for our shareholders.
As anticipated we closed out the second quarter with a net leverage ratio of approximately four one times.
We expect to use free cash flow generation to delever throughout the year and into 2024.
We are working to optimize our portfolio and actively addressing opportunities to unlock value.
Let's turn to slide 13 to review our 2023 outlook.
Our guidance at the beginning of the year anticipated a V shaped recovery in the second half of full year 2023.
Based on continued end market demand weakness compounded by Destocking, we expect an L shaped recovery through 2023, and then into 2024.
Selecting a post COVID-19 lower growth environment.
As a result, we are revising our full year guidance, which includes the following.
We expect net sales being the range of five 4% to $5 6 billion, which at the midpoint is down 3% on a reported basis and down 7% organically.
We now expect local box to contribute approximately $300 million in sales for 2023.
Second half will be similar to the first half of 2023, reflecting volume stabilization throughout the year, despite an uptick in volumes in the fourth quarter.
We expect full year adjusted EBITDA to be in the range of 1.0 75 to 112 5 billion, which assumes adjusted EBITDA margin of approximately 20%.
Full year adjusted EPS is expected to be in the range of $2 75 to.
$2 95.
We expect full year 2023 free cash flow, excluding the previously disclosed tentative tax settlement to be in the range of $325 million to $375 million, which implies a free cash flow conversion of approximately 85% at the midpoint.
Lastly for the third quarter of 2023.
We expect net sales to be in the range of $1 $360 million to $1.380 billion and adjusted EBITDA to be $260 million to $270 million with an earnings per share between <unk> 60.
64 per share.
As Ted mentioned earlier due to the current environment, we launched cost take out to grow as part of reinvent to point out to restore earnings and volume growth in 2024 and beyond.
I look forward to giving you more details and updating you on the progress to the $140 million to $160 million of annual savings target by the end of 2025 and our growth initiatives on subsequent earnings calls.
With that let me now pass the call back to Ted for closing remarks, Ted over to you.
Thanks testing as.
As we look to the remainder of 2023 and into 2024, the combination of reinvent see 2.0 initiatives and new product introductions will help us to low single digit growth.
We continue to be cautious on the global economic outlook and the lingering impact of inflation.
We are confident that our cost takeout to grow program will put us back to the earnings growth path and position us to address significant opportunities in our end markets.
I also wanted to take a moment to recognize our people.
Their hard work and dedication to read lent Leslie drive our company to World class performance.
With that.
I open the call for questions.
Operator.
Thank you.
At this time, we will begin the question and answer session.
As a reminder, please press star one on your telephone and wait pruning to be announced.
To withdraw your question. Please press star one again.
We will be taking one question per person and we will not be taking follow up questions.
Please standby, while we compile the Q&A roster.
Our first question comes from Ghansham Panjabi.
From Baird. Your line is open.
Hi, Good morning. This is Matt Krieger sitting in for Ghansham. Thanks for taking my question and for all the details.
I was hoping that you could provide some added detail on your volume expectations by segment for the second half of 2023 guidance appears to imply a slowdown in food. In addition to the weakness in packaging.
Why would this be the case.
This is the second quarter and what.
What were the volume run rates for each of the businesses during July and if you even want to breakout some of those details by sub segment that would be great.
Hey, Matt This is Dustin speaking.
Great question. So a couple of points, we highlighted to go back to some of the prepared remarks, starting with food. If you think about the second half of the year, what Youre really looking at is a shift in the U S cattle cycle since the beginning of the year starting in Q2 and now going throughout the remaining portion of the year is being partially offset to some degree with what's happening in Australia Hertz.
Michael as well, but not fully so thats whats that market impact is compounding volume in the second half as it relates to food keep in mind Holistically, though if you think about the business from first half to second half in food and protect up Youre looking at general volume stabilization. If you move to protective looking at the second half we talked about we're still seeing.
And market weakness in demand.
And then that's been compounded by obviously destock so the longer the weaker demand in our end markets, if you're logging into destocking cycle, and youre seeing that extend into Q3 as well as the compounding market. So there's those two factors were driving high single digit declines in the second half for protected from a volume perspective.
Okay.
Thank you for your next question.
Yeah.
Our next question comes from Lawrence de Maria from William Blair. Your line is open.
Thanks, Good morning, everybody.
I wanted to ask about the growth opportunities I would like to understand some of the volume declines in terms of market declines versus let's say switching share losses.
Some of the trade down.
You kind of discuss the volume of market declines versus destocking in the second half and what kind of share losses, there potentially are and if we lost any share due to pricing actions. Thank you.
Sure.
Alright, Larry This is Steve Mac I'll start off and then <unk> can chime in so if you look at kind of going back to the prior question as well I will go up by segment Larry. So if you look at food what we're seeing is volume Holistically right think of it as down in the roughly 4% range in the second half of the year you have a little bit of uptick in price slightly because we see this as more of a year over year comp.
And then when you look at market is down about 4% Holistically.
Looking at share lost about a down a point.
And that's being offset to some degree in our other growth areas and I'll, let it go back to that point, because I'll move to protect a quickly when you come back to protective in the second half of the year, we're seeing more pressure on price youre seeing that on the commodity resin side really coming from the first half. So you see the price down about 3% Holistically in the second half with volume down high single digit.
Which about half of it is market.
$25 30 points of Destocking and the rest is going to be share loss offset by some growth now I'll turn it to Ted to talk a little bit about the growth in each area sure and picking up on the share share loss piece. If we look talk to fluid first we've talked about what's happening with the rep. The resins, we feel like we've got that stabilizing.
But we did still have a little carryover for the resin with our customers who you did lose because we didn't have the resin converting those back they've got to get rid of the stock that they have market slowing is slowing that down a bit into the third quarter. We think we should have that hopefully gain back by the end of the year. The other part on the share.
Gain is with the automation driving some of our growth on the food side as we shared pretty strong really have a great backlog, we got some of that pickup we got some other part shortages, we had that we talked about.
In the food business alone up 40% still driving to 10% growth for the year and into next year. Some of the activity on the automation, we are working on new products and right now with our customers being under strain there are reducing their capex or kind of fighting that right now helping them calling in.
What can we do to help them with their productivity issues. We still think automation has opportunities for syn <unk> in the second half and going into strong into next year on the protect aside the share gain but really the pressure. We've been seeing is with the destocking. We are seeing that reduced but still strong in the quarter. We still think we will have more of that.
In the second half.
The fiber of the plastic fiber push is still there we're working on that that will be playing out through the rest of the year. So we do see some stabilization.
In the protector side same thing on the growth with protective we really think going with our e-commerce platform getting better reach getting reaching more customers also with the fiber based solutions coming on board and also the automation as you saw on the prepared remarks, we have some.
Second opportunities moving on the protective side.
Coming in the second half, but right now the <unk>.
First half year's tough second half, you're going to stabilize and building into next year.
Okay next question.
Thank you.
Next question is from George Staphos from Bofa Securities. Your line is open.
Hi, good morning, everybody. Thanks for the details.
My question is.
Two parter, combining the volume outlook with the savings on CTO to grow.
Ultimately.
What should be the cadence on the $140 million to $160 million savings that you spell out on slide three and how pressure tested our the Ted to the volume outlook.
And the reason I ask and this is kind of a second question.
Some of the issues that you cite here in the back half of the year the cattle cycle automation, perhaps not growing as quickly because your customers are holding back Capex. These are factors that were talked about in past quarters and the company's view was there shouldnt be that big of a deal. So are your customers.
Do you feel their need to get closer see need to get closer to its customers to have maybe a better view on the volume outlook and in turn how that will ultimately play into the savings and the cadence there. Thank you so much and good luck in the quarter.
Hi, George Good question, let me lead dust and start with just unpacking some of those numbers and then I will answer the question about how close we are to our customers and why we had that demand shift from first quarter to second quarter.
You Ted and thank you George so to quickly answer that question. So I'll take a step back and talk about reinvent see Ryan just as a reminder, as we are announcing a 140 to 160 million outlook over the next couple of years through 2025, we went back to reinvent see one point out.
The initial kind of commitment was roughly 225, which resulted in over 370 million savings and the point to make there is that as we move throughout the markets, but beyond 'twenty three 'twenty four we're going to continue to focus on taking costs and driving the necessary amount savings to continue to restore earnings power, but going back to the 140 to 162, you can think of.
About the cadence about where there'll be youll see it begin to feather end in Q3, and Q4 were already off and running and the teams are actively engaged and executing as we speak and then whats youre going to see a 60, 70% of that $1 50 at the midpoint appear in 2020.
Four and the remaining portion of 2025 I'll turn it back to you Ted Yes, and then so George to the second part of the question about being close to our customers.
Going through this right now extremely close to our customers right now with the pressure, especially in the food side, where they've seen that demand change.
Here with some of our larger customers are announcing publicly what's going on with their demand reduction for the year. So we are side by side, we're seeing that feeling that our look one quarter later, we have much greater visibility to what we see and Thats, where you see the adjustment in the second half to the second part of your question.
The automation.
Has been part one releasing what we had in the backlog getting that strong growth in the first half we still the pipeline is still strong we have been reducing the bookings the pipeline is still quite strong to get and we have to get those converted but we're fighting with is with their reduction of demand and the <unk>.
Reduction of their heavy intense focus on cost reduction is how can we come in and help them take their cost out through automation and thats. The issue that we're going through right now to build up our backlog for the end of this year and going strong into 2024, we feel pretty good about that on the <unk>.
Automation side that we can hit that we have some work to do but we think the automation is really strong bright spot for us going forward.
Next question.
Thank you.
Our next question comes from Michael Rochman from curious Securities. Your line is open.
Thank you everyone for taking the question.
Ted.
You mentioned last quarter in the prior quarter about your confidence and regaining loss volume for volumes from from last year.
How much additional progress have you made in <unk>.
So just talk about your approach in food excuse me on a go forward basis.
One of your larger competitors recently acquired a food packaging business targeting module or vacuum packaging solutions for protein dairy and intends to increase its food packaging volumes to gain market share and just so I just wanted to find out how youre going to address that increase in competitiveness. Thank you.
So the first part.
How were feeling comfortable.
And building on what I, just said before we are with our customers directly so again feel pretty confident on the automation on what we're doing with their customers in the food space on the resin piece, which is a different subject as we regain but we didn't have that reticent in the past we feel very good with our <unk>.
Customers with our brand with our service that we can get that business back again, we have to get them to deplete the inventory they have with someone else. So feel really good about that one even myself personally being engaged with those customers, let's go get that business.
Second part of your question with what are competitors doing in automation.
Part of our growth in automation being well above the market has been taking share. So we feel really good about that we talked about in the fourth quarter. We had a major conversion with one of our largest customers actually taking that business back that we lost over five years ago, we got that back making game.
And we have some of that equipment in place actually happened on one of the slides of the new equipment that we brought in so we feel very good about that we feel like we have the best products. We feel like we have the best equipment, we have new designs coming in place. So feel really good about we'll always have competition, but.
I feel very good with our cryo that incredible brand with our customers. We have the product. We can go get the business, we have a tremendous sales and service team so feel quite confident giving the team better tools.
I think we're in a good place despite what the competition is doing.
Next question.
Thank you.
Our next question is from Phil <unk> with Jefferies. Your line is open.
Hey, guys doesn't did a great job in talking about the cost element of your restructuring effort. So Ted help us kind of think through perhaps the growth side of things. How long do you think these initiatives will take hold we will see it on the bottom line.
And some of the challenges youre, calling out on volume.
It could linger into 2024, so curious what's your level of confidence in getting back to growth from a topline and earnings perspective, when we look out to 2024.
Great question and.
But I'll have to share because that Dustin did take the cost out and theyre saw already some of the lines, where I've used it.
<unk>.
It's been great, having dustin here, a clean set of eyes.
Use the phrase already for my mom and our new Broome sweeps clean.
What you see there on our cost take out to grow building on the success of reinvent.
We have really good line of sight, what he didn't say is we will continue to under promise and over deliver on those savings. So on the growth element. If you look at the curve on slide three.
That is where we put a tremendous part of our resource is taking care of that Covid period.
We originally called out the Covid crisis, we've gone through so many crises around the world. Our scientists are engineering team our service technicians, taking care of that bump that was out there we redirected resources to take care of business and actually we had to redesign products that we already have.
So to answer your question on my confidence can we bring get us back to growth as we put in the slide committing to low single digit growth. Our internal plans are above that single digit growth. So how do we do that you already talked we talked about inorganic with liquid box five 5% of that growth has come.
In there as we drive our largest are our fastest growing highest margin segment. So feel really good about that how are we doing on automation on the growth going forward feel very good that's got to be north of double digit right now so far this year quite strong going out yes. The.
Digital solutions are just coming into fruition going again that hump that the COVID-19 crisis behind us.
Putting our engineers on our digital solutions, we feel really good about that and then breaking out the fourth area of those new products again designing for this new.
Curve on reinvent to point out we have new trades coming out new fiber based products coming out. We now have to have those realized to beat that low single digit volume growth out there. So again under promise just like on the cost side, we're going to beat that on the gross side I have high confidence, we're going to beat that going forward.
Yeah.
Okay next question.
Thank you.
Our next question comes from Gabe <unk> from Wells Fargo. Your line is open.
Yes, good morning.
Maybe I'll ask the question a little bit differently I'm honing in on slide number three where you talk about CTO to grow.
Enabling you to get low single digit volume growth and then further on the right hand side of the slide you talk about sales growth of 5% to 7%. So I'm assuming implied in there is some gross price as.
As well as acquisition related growth so.
I guess in the near term given that your focus on deleveraging right M&A.
M&A tends to be fairly lumpy lumpy.
Is it safe to say that you're assuming that you'll get back to some sort of contribution.
Net or gross price and that algorithm.
Yes, just.
To clarify on the guidance.
You're calling down I think liquid box to be $50 million lower than revenue, what's driving that and does that come back in 2024 and beyond.
Okay great.
Greg Great question I'll comment first on net price and then the comments you made around the cost take out to grow and you see on this chart on slide three that kind of course correction. So what we're calling right now is the $140 million to $160 million of annual savings through 2025, and if you think about that line that dotted lines. That's what it represents okay and then low.
<unk> digit growth during that period and to your point they call. If you look at capital allocation with a focus in the short term.
Deleveraging right. So that's an organic number when we're calling it out in general we see net price realization somewhat.
Say negative excluding cost takeout to grow right for the next couple of years and we talked about that in terms of the where resin pricing is at today, where end market demand. That's holistically, what's driving that kind of short term view on pricing and idea is that when we get through that occur by the end of 2025 that will enable us to get back on over to the right hand side because our bounds.
It will be much further deleverage.
The pricing environment markets will be in a different place and then we're able to get back onto our <unk> operating model, which you can see on the bottom right hand corner.
Yeah. The second part Dave This is Ted where you mentioned about the liquid box liquid box being right now at a step down from what we talked about before the short issues coming into the quarter into the business. We've had operational issues right now into the quarter, we had some quality issues we feel.
Like we are on top of that we brought the cryo back team in there to fix it we even had some personnel issues in the plants. We've adjusted rates believe we have that fixed and on top of we've also with our customers. They have seen a slowdown in the market. So we've been face to face with our team our <unk>.
Team with the liquid vaccine and we think we have some significant opportunities right now in the short term there those are issues and Thats why we took that number down for the year.
But the last one on the cost synergy, though we're actually our head even though the volumes are down. We are ahead on the cost synergies there in the model and so we get the volumes back up we think we will far exceed the cost synergies on the liquid box going into $2004 25 in 2006 that is definitely part of getting back to the growth.
Algorithm with the growth in liquids in fluids business. So we're still quite confident about that.
Next question.
Thank you.
Our next question comes from Josh Spector with UBS. Your line is open.
Yes. Thanks for taking my question I guess, one thing I wanted to ask about was more on the cost side, specifically margins within protective.
You had a pretty nice step up in <unk>.
<unk> sales sequentially. So just wondering kind of on your expectations for second half I think you've talked about pricing down but price net of cost I guess could that be up and if margins improve do you think you could actually see protective earnings up year over year in the fourth quarter or is that too aggressive.
Great question, Josh and so as we mentioned earlier.
Two points or a couple of different dynamics that I'll call out one is if you think about the second half for the year, we're talking about volume stabilization, having that volume stabilization sequentially coming from the first half well it gives us an opportunity as we think about cost control, which benefited in Q2 and with cost take out to grow benefiting further and what it hasnt really splits Lisa.
But I will say now which is a 140 <unk> hundred 60, obviously with protective in house performed on the first half of the year and really the back half of 'twenty. Two a lot of those cost savings will obviously proportionally be focused on our protective segment Holistically. If you think about the second half and to your point you are going to have margin sitting in the high teens roughly for the think of it as the first.
For Q3 and by the time you get to Q4 on an absolute dollar basis, you should be very similar to wear protective was in Q4 of 2022.
The only thing I'd add on that on the growth side looking at protective is the portfolio. We did highlight in the prepared remarks. The continued portfolio review and actually changing that portfolio. We will we are planning to have margin expansion by the shift in the product mix going into the second.
Half of the year also with the new products coming in and in automation will be driving a different mix in the volume. So we should have again margin expansion in the second half that's what we're planning on.
Next question.
Thank you.
Our next question comes from Erin just wanted <unk>.
RBC capital markets. Your line is open.
Great. Thanks for taking my question.
So if we look at the midpoint of the guidance, it's a $1 1 billion.
For this year and the second implying kind of like a 553.
$3 million number for the second half.
So, yes, youre exiting kind of that $1 $1 billion right.
You will be facing some pretty easy comps next year and protective I think food also as far as the back half.
Maybe it is positioned.
All of it.
Better way is well.
How do you think about growth next year do you envision returning to that key operating model.
Both level of EBITDA, maybe in the in the mid to high upper single digit range.
And what are the risks.
To keep in mind.
That would prevent you from getting to that range. Thanks.
How about if we tag team on the answer because we have the new CFO with readjusting with as the CTO to grow and then I'll add some color on how it gets back to the model.
Absolutely.
So arun.
Again, it really appreciate the question a couple of comments I would make as we think about next year right volume growth is critical if you think about restoring earnings and that's part of the reason we talked about CTO to grow is really both sides of the coin getting back to low single digit volume growth and then restoring earnings if we get back to low single digit volume growth. We believe the cost take out of <unk>.
Program will run earnings growth ahead of overall topline growth at that point it won't get back to quite.
Mid to high single digits for 2024, but anticipating kind of mid single digits relative to 2020 for earnings growth.
I'll go back to your point, what are the kind of pluses and minuses as we think about that one is we're obviously coming off a down year. If you think about next year I made a comment earlier on one of the questions around net price realization and that being slightly negative that to some degree is what's putting pressure on our point of view at this point in time, which could shift as the market develops is putting pressure on what.
We see is that 60% to 70% of the 150 coming into play next year, right and again, what plus that upper plus that down from that point of view really comes in how we perform on volume and how those end markets look and do they shift or change from our point of view today as we progressed over the next six months of the year.
Now I'll turn instead, yes, everyone and just building off of that.
Is going through this depth and as we put the CTO to grow in there and again on the theme to under promise over deliver the cost side.
Again. This is what we have in the plan. Our plan is to beat that on the growth side, we got to get back to growth I shared <unk>.
Exactly what you've looked at in the model with this is implying a low end on the growth going into 'twenty four 'twenty five and 26, we have to turn that engine around to get those growth initiatives and to add.
8% or two on top of what you see here to get it back to the model right now those numbers are below the model for the outlook years, what we have to do internally is to beat that.
We also with the market going behind US, we think that will lift as we've shown.
With reinvent where we did the first time, we leverage very nicely, but we got to leverage off growth.
So it's our crisis going forward, we have a growth crisis and that's we have a whole team going after it and we will leverage quite nicely getting that growth and that's what we're focused on to beat what you see here.
Next question.
Thank you.
Our next question is from Adam Samuelson from Goldman Sachs. Your line is open.
Yes. Thank you good morning, everyone.
Maybe continuing on the discussion and protective and I appreciate that Youre doing some portfolio review.
Is there a <unk>.
Element hero, yes, this shrink to grow in terms of some some parts of the business.
That might be more commoditize that functionally exit those.
Those business lines and trying to replace those with newer higher margin business and is there a time lag, but when that transition happens.
Impacting your shipments in your kind of your confidence in the.
The growth cadence going into next year.
Yes, Adam it's an interesting I have to actually pause and think what you said shrink to grow.
What were part of the review on the portfolio. What we're looking at is does it fit into where we want to go if you noticed we changed the name what was called.
Product care, we went to protective now we're calling it automated protective solutions. So the lens, we're putting on this business does it fit our strategy.
Automation digital and sustainable solutions for our customers.
So what's being pruned dersch shrunk or doesn't fit in if it has a discrete products like we.
We shed reflective business, we just talked about Cabo thermal these are discrete products, great products, but don't fit into that automation lands that we have for this business. So.
Those businesses, if we can't grow them, we're looking to do something else with that the other side of the protective as we strengthen this portfolio continue to get the cost right. So that's that cost to grow we can grow more effectively and efficiently and how we go to market through our digital transformation.
Reaching more customers more effectively and efficiently where in the past we said, we couldnt afford to go to this customer that customer we wanted to get more nimble and go reach with these tremendous product lines, we haven't.
Automate protective solutions portfolio get to the reach of those customers and some of the new products that we have coming in so we think we can grow this business, but we got some work to do.
Next question.
Thank you.
Next question comes from Christopher Parkinson with Mizuho Securities. Your line is open.
Hi, This is John on for Chris can you dig deeper on your current automation strategy appears that your clients have been pretty receptive recently and so if you could provide more detail on your current backlog and how that's been trending versus your initial expectations and then also if you could just touch on digital and Mike how.
How you see that growing in the intermediate term. Thank you.
Okay. Good so the first part of the question on the automation on where we are.
Feel good about that we talked about our bookings if we look into last year, we had some of our product lines in automation on protective and in food.
Actually too high a level because we couldnt ship.
So.
That pipeline, we work the bookings we've worked down that was part of the growth in the first half of the year.
Seeing that up significantly.
Second half of the year, we are working that bookings down but the issue that we're focused on is the is the pipeline turning the pipeline into bookings so as I shared earlier on the call we're balancing that with our market.
The demand reduction where customers are challenged on their capex spending we have to actually work harder we have to show a significant can savings where we can help them in their productivity. So that's the challenge for US right now into the second half and going to next year and also bringing in new <unk>.
Automated solutions new products, so that part we feel feel good about.
The second part of the question. If you could help me just going back through my city held or digital solutions, Yes, we're working on my C and how we make it easier for them to do business with our customers you see that moving fairly quickly again protective is where we have the most conversions and they're our largest distributor.
These are coming online with us and very cooperatively seeing that we can help in the interactions working back and forth. We're talking about not just touchless in our factories, how can we touch list with our operations communicated anything with customer service order entry et cetera, So we see that moving quickly.
We need to get over half the company to really feel that tipping point, but with the second part of my C that were excited about slowly starting to happen can we use our online design studios and help our customers actually design their products online quicker and faster. So we can start bringing in the scalability.
That part is still underway.
With more good things to come.
Okay.
Operator, I think that with time for <unk>, we have time for one more call.
And to wrap it up.
I am showing no further questions at this time, so I would like to turn the conference back to Ted <unk> for closing remarks.
Right I would like to thank everyone for their time today, we are definitely excited about the opportunities ahead for <unk> and we look forward to speaking again in November .
Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
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