Q2 2019 Earnings Call
Thank you for calling the conferencing Center a conference operator will be with you momentarily.
Thank you for your patience.
You stay on the line for the next available operator.
[noise].
[laughter].
Thank you for your patience.
Please stay on the line for the next available operator.
[noise].
Calling conference I'd number please.
For 99978.
Thank you and they have the spelling or for isn't last name. Please.
Yes, Kevin Love Flom, K E V I and.
L.A.S.L.A.M. and E.
Thank you and your comfort in it bleeds.
Era A.I.E.R.A.
Right. Thank you.
Oh Tschuggen officer.
[noise].
Just a few minutes on a topic, that's top of mind with our people and our customers sustainability highlighted on slide six.
We believe that our sustainable offerings differentiate sealed air in the markets. We serve today will be a key differentiator going forward.
At sealed air we produce materials that are designed to protect and preserve whether its food safety food waste or product protection, our solutions minimum mineralized waste and prevent damage.
There's still a tremendous amount of work to be done around the world to create a circular economy, given what we do and who we are in packaging, we have the responsibility to lead the way in our industry and achieve our mission to leave our world better than we found it.
We are addressing sustainability head on with our innovations, we're working with several suppliers partners and peers on the most environmentally efficient way to manufacture recover and recycle essential packaging materials.
I want to share a few examples of how we're leading the industry towards a circular economy.
We are advancing the use of our food care scrap as raw material for product care. For example production of a new bubble wrap formulation that runs on existing commercial equipment contained greater than 90% post industrial recycled material. This is enabling us to create green bubble wrap in 2020.
We've commercialized post consumer recycle application and offer solutions to contain recycle materials such solutions include our darfresh or vacuum skin packaging modified atmosphere packaging and conventional overlap.
These solutions are meeting increased customer demand, particularly in Europe for more sustainable packaging.
We're investing in multiple plant based materials as well as manufacturers have added manufacturing capacity through a partnership with Corey that is on track for production in 2020.
Our scientists have demonstrated that many of our multiple layer materials can be converted to petrochemical feedstocks for synthesis and new plastics discussions are underway with key suppliers to partner on accelerating commercial development of chemical recycling technology.
It's also important to highlight that we're expanding our engagement with the alliance to end plastic waste.
I had the opportunity to see first hand, the plastics waste challenge is part of a research expedition off the coast of Bermuda in June .
I physically pick trash out of the ocean thats being dumped and mismanaged by multiple sources in July we had our first Alliance Board meeting and together with 20 CEO members. We approved 12, new projects to combat sources of ocean waste as well as a communication strategy to promote the work that's now underway.
We have a lot of work to do but we will lead in fixing this problem.
I'll now pass the call to Jim to review our results in more detail Jim.
Thank you Ted on slide seven we'll start with a review of our net sales by region.
In the second quarter sales increased 1% as reported and 4% in constant dollars.
North America, our largest region, representing 59% of the company's sales grew 4% year over year in constant dollars.
South America, our smallest region, where we have US dollar index pricing was up 30%.
Asia Pacific was up 1% due to the contribution from our Austin foam acquisition, while sales and an EMA were essentially unchanged.
Slide eight highlights our regional performance in the first half of the year.
Our first half performance in constant dollars is very similar to the second quarter.
One thing to note is that going forward with automated packaging systems integrated into go into our financials North America will account for roughly 65% of our net sales.
Turning to slide nine here, we highlight our volume and price trends by business segment and by region.
In the second quarter overall volumes turned modestly positive despite continuing macro headwinds across our business.
Improving volume trends in North and South America were partially offset by volume declines in Asia Pacific and EM EA.
Favorable price of 1% was driven by the US dollar index pricing in South America.
Price in North America was slightly unfavorable due to timing of our formula pass throughs in food care.
On slide 10, we present, our year over year sales and adjusted EBITDA bridges for the second quarter.
Excluding currency translation and acquisitions organic sales were up $17 million.
Our 1.5% year over year.
Adjusted EBITDA of $237 million increased $19 million or 9% with margins up 160 basis points to 20.4%.
This earnings increase was largely attributable to our reinvent see initiatives.
And price cost spread we benefited from reinvent actions around direct materials freight optimization and value capture.
We also benefited from lower input costs.
Higher operating costs were largely due to labor inflation increased non material manufacturing costs, and some incremental spending to support future growth.
Which was partially offset by reinvent see productivity enhancements.
These productivity enhancements include network optimization.
Manufacturing process changes that are improving yields and utilization rates and ongoing efficiencies, resulting from our one sealed air operating model.
We also realized $70 million in savings from restructuring actions.
Acquisitions contributed $30 million of sales in the quarter was $29 million related to Austin phone.
Adjusted EBITDA from acquisitions was only $1 million.
Austin Foams top and bottom line performance has been negatively impacted by the slowdown in the global industrial production.
And the trade dispute with China.
We are moving quickly to integrate Austin phone into our broader fabrication solutions business and shifting manufacturing to lower cost regions to drive improved profitability.
Currency in the quarter was 7 million unfavorable to adjusted EBITDA.
Adjusted EPS in the second quarter was 80 cents.
On average diluted shares outstanding of $155 million.
This compares to 64 cents in the second quarter of 2018.
Roughly 11 cents of the 16 said year over year adjusted EPS improvement was from higher pre tax income.
With the remaining five cents approximately evenly split between a lower tax rate and a lower share count from the share repurchase program.
The adjusted tax rate in the quarter was 19.4% compared to 22.6% in the second quarter 2018.
This year over year improvement was primarily due to a release of a valuation allowance in South America that was triggered in the quarter by improved profitability in the region from reinvest see initiatives.
On slide 11, we present, our sales and EBITDA bridges for the first half of the year.
As illustrated on this slide year to date, we have realized approximately 75 million of reinvent see benefits with 29 million coming from restructuring actions.
In the back half of the year, we expect another roughly $60 million of reinvest see benefits.
Of which about $40 million will come from restructuring savings. However.
Keep in mind, our formula pricing in food care is expected to be more aligned with raw material cost. So we are assuming less contribution from price cost spread in the third and fourth quarters.
Turning to our results by segment on Slide 12, we present second quarter results for food care.
Food care net sales of 711 million were up 4% in constant dollars.
Primarily driven by higher volumes of 2.4% and favorable price of 1.3%.
Adjusted EBITDA increased 15% to $156 million.
And margins improved 290 basis points to 21.9% of sales.
North American South America, food care volumes were up 4% and 7% respectively.
Strength in North America was due to strong exports increased consumer demand for fresh packed proteins.
And continued adoption of our case ready and fluids platforms.
South America performance was driven by 15% volume growth in Brazil, where we benefited from higher equipment sales, a stronger export market and share gains.
In EMEA, our volume was up 1%, despite a softening economic environment and lower protein production.
We experienced increased demand for our sustainable solutions that contain recycled materials and offer post consumer recyclability.
Volumes in Asia Pacific were down 2%.
This is the only region in our food care segment with a declining volume trend and was primarily related to timing of equipment sales in Australia.
We continue to expect food care to outperform global protein markets.
Global protein production is expected to be up slightly in 2019.
Which compares to our food care constant dollar sales growth sales growth outlook of 4%.
As previously mentioned increased consumer demand for fresh proteins is driving adoption of our case ready platform across all proteins.
And we expect the export market to remain strong in both North America, and South America, largely driven by the protein shortage in China.
On slide 13, we highlight results from our product care segment.
In the second quarter product care net sales of 450 million were up 4% in constant dollars.
Excluding the Austin bone acquisition product care net sales were down 2% driven by volume declines of 3%.
Partially offset by favorable price of less than 1%.
The volume decline in the quarter was driven by industrial weakness in Europe , and Asia, and lower sales of traditional bubble wrap mailers and voice Phil.
Adjusted EBITDA of $84 million or 18.7% of sales was up 7% and margins expanded 90 basis points.
Restructuring savings favorable price cost spread and other benefits from reinvent see were partially offset by lower volumes and higher operating costs, including labor and indirect material inflation.
In product care, we are evolving our go to market strategy to better align with changing end market dynamics. We expect continued growth in our value added solutions portfolio.
Which currently represents about 20% of the segment and includes inflatable bubble wrap automation paper systems and temperature assurance.
In the second quarter. This part of the business was up approximately 10% and going forward will include the Ts business.
We continue to target pocket pockets of strength in the industrial market, where our b to b customers are looking to modify their packaging and ensure their products or parcel ready versus pallet ready.
Industrial applications account for approximately 40% of our product care sales.
It is worth noting that our industrial applications in North America were flat year over year in the quarter. This compares to a decline of roughly 5% in the first quarter.
And we saw the specifically in our Instapak business following strong equipment installations in March.
For the remainder of the year, we expect product care organic volumes to be challenged by the decelerating global industrial market and the ongoing trade dispute with China.
With that said we are excited to bring hps into sealed air and believe they are complementary and differentiated portfolio will add significant value to our customers seeking sustainable solutions that provide automation and labor savings.
As Ted mentioned EPS has a strong record of topline growth.
But the results to date in 2019 reflects some of the macro challenges facing sealed air.
As of the last 12 months ending June Thirtyth ETF sales were approximately 292 million and adjusted EBITDA was approximately $41 million.
So modest gains so far this year versus 2018 results. However, we remain encouraged by the go forward opportunities to leverage the dedicated people technologies and capabilities across both organizations to better serve our customers and drive significant efficiencies over time.
Let's turn.
So you are year to date free cash flow on slide 14.
In the first half of the year, we generated $75 million of free cash flow compared to a use of $37 million in the same period in 2018.
The $112 million year over year improvement was driven by higher adjusted EBITDA and lower cash tax payments.
Partially offset by increased Capex spending.
And reinvent C program, a best investments.
Additionally, one time cash outflows related to Diversey and the buyout of a royalty license agreement with an outside engineering firm impacted 2018.
During the second quarter. The company also invested $23 million in two small acquisitions in the food care segment.
One of the acquisitions added at geographic footprint in the Philippines.
And the other added unique digital printing technologies and capabilities.
Net debt at the end of the second quarter totaled 3.4 billion net debt to LTM adjusted EBITDA was 3.7 times.
On a pro forma basis, including the Hps acquisition net debt to LTM adjusted EBITDA was fourx.
Which is at the high end of our targeted net leverage range.
We do expect net leverage by year end 2019 to drop to approximately 3.8 times with our cash generation and continued growth in adjusted EBITDA in the back half of the year.
Now turning to our updated 2019 outlook on slide 15.
We now anticipate net sales to be approximately 4.85 billion.
Or about 2% growth for the year as reported.
On a constant dollar basis net sales are expected to increase approximately 5%.
Food care is on track to deliver 4% constant dollar growth.
Of which about $10 million will come from the previously mentioned small second quarter acquisitions.
Product care is now expected to deliver 7% constant dollar growth, which includes a $180 million from acquisitions.
EPS is expected to contribute approximately $120 million over the next five months and the remaining 60 million is from Austin phone.
For product care organic sales growth, we have revised our forecast to be down approximately 3% compared to our previous expectation of up 1.5%.
This revision is largely due to the slowdown we have been experienced experiencing in the industrial sector, particularly in North America and China.
Adjusted EBITDA for the full year is now expected to be approximately $950 million to $960 million as compared to our previous guidance of $925 million to $945 million.
Our revised outlook includes $10 million to $12 million from Ats.
But keep in mind that 10 to 12 million includes a onetime inventory purchase accounting charge, which we are currently estimating that $6 million.
Adjusted EPS is now expected to be in the range of $2 and 75 to $2.80.
This compares to our previous provided range of 265 to $2.75.
Our guidance assumes approximately seven cents.
Of dilution from Hps.
Which includes nine cents of non cash purchase accounting intangible amortization and the onetime inventory step up charge.
The outlook for adjusted EPS is based on a roughly a 155 million shares outstanding and does not assume share repurchases for the remainder of the year.
For the full year 2019, we continued to anticipate an approximate 26% adjusted tax rate.
We are reducing our forecast for free cash flow to $180 million from 250 million to reflect the $59 million Snowpack settlement.
And the first installment payment of $20 million for the closed Ats deferred incentive compensation plan.
Our revised Capex for the full year is 210 million, which includes $10 million for hps.
We are now forecasting cash tax payments to be approximately $115 million, which compares to our previous forecast of $130 million.
The $15 million reduction is primarily a result of estimated tax benefits from the Nova tax settlement and the Hps acquisition.
Partially offset by tax payments.
On higher earnings.
We expect to continue.
To spend $115 million on reinvent see associated payments in 2019.
For the full year net interest payments are expected to be $190 million.
To fund the Hps acquisition, we secured a new three year term loan a tranche to our existing credit facility.
Strong lender demand for funded assets helped us lower the credit spread for this loan by 37.5 basis points versus the pricing of the existing loans in that facility.
Additional interest expense for five months from this term loan add on of 7 million are expected to be offset by savings from increased cash flows in the first half of the year and a lower than previously anticipated interest rate environment.
Let me now pass the call back to Ted for closing remarks, and then we'll open up for question and answers.
Ted.
Thank you Jim.
We look forward to updating you on our continued progress throughout the year.
Reinvent C is about accelerating profitable growth and increasing earnings power is illustrated on this slide you can see how we're reinventing our powerful brands and acting as one company.
We're communicating or four piece of reinvent see performance people products processes and sustainability and how they are increasing efficiency unleashing growth in creating value for our shareholders. We're excited for what's ahead and we will continue to focus on what's in our control to drive our success.
With that.
I will now open up the call for questions.
Ladies and gentlemen at this time if you have a question. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press. The pound key also we ask that you. Please limit yourselves to one question.
Our first question comes from Ghansham Panjabi with Baird. Please proceed.
Thank you and Jim welcome to the call.
Thank you I guess looking yes. Thank you looking back at the second quarter.
Relative to your initial plan I guess first on what surprised to the upside.
You know in context of a more benign raw material backdrop, maybe the cadence of cost savings mix et cetera.
Just some more color in terms of what drove the upside specific to Twoq and then related to that.
Food care volumes rebounded nicely in the second quarter relative to the first quarter, how should we think about segment volumes for the back half of this year and if you can break that down by sub region that would be helpful.
I know Jim give some comments on core sales, but wanted to focus specifically on volumes. Thanks, so much.
Okay.
Ill give a high level and let Jim give you some of the bridge to go that detail.
I want to say, what surprised us, but our confidence in the quarter. If we look at from a how the.
The business performed we are definitely as we highlight in our prepared remarks that our reinvent see savings are coming through we have a high level of confidence our initiatives that we have in place the cost actions, we're going after as well as the growth opportunities.
We have good line of sight clarity, we saw that hit the bottom line.
The other part on the markets. The we definitely know the markets have been choppy, we obviously looking at the competitors, what's going on there what surprised us actually on the upside is in the industrial space, we're seeing where some of our new products yet that is good but we still have the challenge in the headwind. So the quick summary is the best benefit in the quarter was our reinvent savings I'll, let Jim go through some of the details that you asked on the bridges.
Well I think looking at the original guidance, we clearly had contemplated more volume growth on product care, we didn't we didn't see it.
Fortunately, we did have this reinvent see engine going hard for the full year I think when the company came into the year. They were expecting about 70 million of savings and you'll note from the slide that we delivered $75 million. So we were more than able to offset that volume decline primarily in product care from the reinvent savings as we sit here today as you know we're looking at $135 million.
For the full year from reinvestment.
Another 60 in total in the back half of the year with 40 of that be in restructuring.
So that's that's really the story is the the reinvestment is delivering outstanding results.
In terms of the kind of.
Profile first half second half I mean, we are expecting.
In the back half of the year.
On a consolidated basis, let's call it roughly 1.5% organic.
4% organic would be kind of where we're at with food care, So really no surprise there.
In product care, we would be seeing more like a negative three organic in the back half of the year.
But again over delivering on on the reinvent benefits.
Yeah, Ghansham just one other thing on.
Looking at the food care, if we look at our business and as we shared with you and others that we're really trying to act as one company. So you'll see us talking more as one company, but specifically on food care.
You will see those at 4% that we see in the growth in the second in the first half we're seeing we're planning on that and we're driving that to continue through the second half of the year. So.
That that is a good news in that business and despite all the issues that we're facing that's very important to driving our profitability for the business.
Operator next question please.
And our next question comes from George Staphos of Bank of America. Please proceed.
Hi, This is Molly bomb sitting in for George I just wanted to.
Ask kind of a high level question on product care, so with Amazon shipping container initiatives and other moves were seeing to optimize box size in E. Commerce is that initially a net negative for product care and if so how long before you can get some more benefit from very machinery from your automated packaging lines. Thank you.
Yeah, Hi, Molly.
And I hope George is doing better.
The.
If we look at the product carriers, you highlighted that that work is in process, so with whats happening and e-commerce in that shift in our business in our portfolio we are seeing.
The traditional business we.
We are still doing well with our bubble wrap on demand our core reuse solutions et cetera.
But as it did go to a pack and so its container they're looking for less stuff in the package and also driving automation. So that the issue is can we drive an automated solution. That's actually loading the package automatically so that transition will take over time and will take time, but west. What we're excited were atheists comes in with their auto bag, even better at Connick brand that's exactly what it does rather than a person loading one bag at a time they have their side pouch system fit loads multiple units and increases what one person can do six for a minute and loading a package to 12 to even higher levels. So we're seeing that change happen over time, what it means to our portfolio. We have some internal product development working in that space. We have some sustainable solutions that we think are quite interesting and we also have some lower cost and carbon footprint solutions because that's.
The mailers come in as well by taking the box out of the process. So the transitions in place it is showing up our business.
And what we've lost in the product care business, but we've we're pretty confident that overtime and hopefully sooner rather than later, we'll get some of that business back and more.
Operator next question please.
Our next question comes from Mark Wilde with Bank of Montreal. Please proceed.
Good morning, Ted Gymboree.
Good morning, Mark I wondered.
Ted if you can give us a little more color on a sunny I guess I'm, particularly focused on sort of the margin profile in that business because.
It looks like it's on an LTM basis, it's about a 14% EBITDA margin. So it's lower than the the existing margins that you have in product care I'm also kind of curious about.
What the margin progression has been over the last four or five years, and how stable margins tend to be across the cycle.
Okay.
Good question, we try to put the slide out there mark to kind of help and if we actually refer to the slide is I'll try to lay that out.
Well first of all we were interested in this business and we've been signaling and since I've been with the company as well as how important automation is going to look at their percent of equipment service parts and materials.
So first of all if you look at their equipment, they are 16% equipment and 70% materials. If you look at what we call the solutions multiplier and they actually use that language.
Their materials is a nine next to each piece of equipment.
Also with their equipment and by the way I describe it is to get to that 15% profitability, that's higher much higher level of equipment percentage.
Let there have dedicated materials to their equipment and their service and they are embedded in with the customer and their 60, roughly 60% a direct business. So yes. There overall profitability is lower than where we are with the our business, but what they do for that full system with a high level of equipment, that's quite interesting for us we've been looking at them for well over a year and actually I, probably need to give a shout out to the Ats employees listening welcome to seal there.
We had the first day of operations there yesterday My management team was there I was there via video up either personally, but I want to make sure I say hello to the team.
So we were able to now see actually day, one behind the curtain of how they do what they do from analyzing from the outside so I think that's where we're excited about the opportunity what they are doing with equipment and then also on their profitability looking at the materials. So that's something that we know very very well and so looking at those materials looking at what they have on their sustainability side, we saw a very high sustainability content on their pillows or if you look at that other piece of equipment. They have a patented easy care very interesting innovation on the air pillows. So looking at the business, we see products, we like the the customer overlap is less than 10% that's very exciting for us as we look at our complimentary products and then the third piece is there is their presence in food, which is roughly about 15% so and the profitability side, we see opera.
Communities to move that 15% north of 20.
On this the pieces they have we actually see opportunities that they may be able to help our larger organization to be more profitable and successful in the market as well.
Operator next question please.
Our next question comes from Brian Maguire with Goldman Sachs. Please proceed.
Hi, Good morning, everyone and welcome Ed My welcome Jim.
Just a question on the volumes in food care is nice to see the growth rate bounce back in Twoq I think last call you talked about one QC and some negative impact from Brexit and.
Just wondering if you experienced maybe some restocking benefit.
In the quarter, if you could comment on any impact from that and just the outlook for the second half of the year.
Seems pretty positive on food care does look like we're increasingly drifting towards I know deal Brexit just wondering if you think that we could see sort of a repeat of though the one Q weakness in that in the eventuality that we did have something like that and then just wondering also your comments on the the protein deficit in China.
Are you baking in any expectations of benefits from.
From that in your guidance and how if any do you think.
Yes, tariffs could factor into the ability specifically from the U.S. to kind of export into China. Thanks.
Okay, I hope I get all those.
Questions Baca, Jim help me out I'll pick a couple and if you want to jump into a couple of those as well.
First of all looking at and when we give you information about what's going on the Mark and I'll just share even how we manage internally we don't want to use.
Some of those things like Brexit is an excuse.
Because we have to overcome that and we have to deal with that so there are issues, what we're seeing with even the trade issues around the world. So looking at Europe in general.
We are that's an issue that we have a heavy focus on what we can do and get that growth.
What we are seeing that change is on the sustainability side.
The this war on plastics and is really really everywhere and that's why even and moved it upfront as our first slide in the presentation, especially strong in Europe , so with our food care business.
It that what Brexit means is where the meat is being processed in the UK, you know back and forth into Europe , but the food will get to the right place is having the right package at the right price and making it sustainable so we've seen some actual gains and we need more and our sustainable food care packaging that we're using more recycled content. So we have seen gains in that different from quarter to quarter, we have seen in the North America.
Still strong and actually South Americas, you saw very strong.
I've actually was in Brazil twice in the last month meeting with our top customers.
Actually our largest customers actually headquartered in Brazil.
And so they're using this shift in what's going on with this economic activity and the other thing that's being highlighted is the African swine fever, how are those protein markets going to shift to enable to get the fresh meat into China. So we actually see that North America fairly strong South America very strong. The good news is we have a very strong presence there.
So I'll take a pause Jim if I might have missed a couple of other questions that he had if you want to add some color yeah, I guess in terms of food care as I look at the business over the last month. The first half of the year, we had organic growth, let's call. It that you know just above 3.5%.
But a fair amount of that was coming from pricing.
As we look to the back half of the year lets call it at the midpoint.
Of our new guide, we'd be looking for a similar level of organic growth in total but more on volume as these formula.
Pricing pass throughs kick in in the back half of the year with food.
In terms of the overall effect.
The pro tens of protein deficiency in China that was asked.
We looked at that you know over the last few weeks and right now it doesn't feel like we're we're being hurt and there's probably a little bit of an argument that maybe were being benefited because of the strong exports that were seeing out of North America and Brazil.
But you know clearly with new tariffs that might come through as we go back and forth between China, you know to the extent something were to effect that we have ability to supply and other world areas.
But that could be somewhat of a risk right and probably not fair Jim being the one month expert here on that good job. The other piece that we're hearing the bottom line is we have to quantify it and that's where Jim has done a great job already so what's the problem worth what do we need to go fix we've assessed internally the African swine fever, even though we think it will be a benefit I asked directly our customers. They believe it will be a benefit to us because we're positioned where the proteins will shift.
And even proteins that are going to be part of our future like seafood. The the number we put on it is roughly $3 million that we're going to have to go make up and the reason for that is some of that short term, it's going be shipping frozen carcasses into China, we don't get the same concentration as when it goes fresh our connections to fresh we are seeing the pickup though in Australia. We saw the equipment pickup in Australia. So we're feeling that but overall, what we've got an issue we're going after 3 million Thats can hit and that we're going to go cover that.
Operator next.
Okay. Our next question is from Adam Josephson with Keybanc. Please proceed.
Ted Jim Laura Good morning, and thanks for taking my questions I appreciate it just a two parter on hps.
Ted you mentioned, it's dilutive by seven cents, if you add back the inventory step up its call. It neutral so I guess, what about that in your mind should be kind of exciting to shareholders that you're doing a neutral deal and I know by the end of 21, you're guiding to annualized synergies in 15, but I would say that that's fairways out from here and then just also on EPS the $60 million of the 510 purchase price that that's going to Hps is European employees, who answers just just an accounting question why is that not why is that flowing through operating cash flow as opposed to being classified as part of the purchase price in us going through cash from investing thank you.
Well, let I'll, let Jim go through the accounting piece and then I'll share with you again, why we think it's a good for investors.
Okay sure so on the $60 million deferred incentive compensation, obviously, it's not great that we have 60 million post closing running through our cash from operations and that this is really a legacy and and.
However, we looked at the accounting closely and the reason for it going through operations is that the payments.
Coming out of that plan are going to be going to current employees.
And so the accounting rules are pretty.
Pretty straightforward there if you if you have money going to that's benefiting if you will the current employee base it goes through operations.
So we'll have to just remind everyone.
The next few years, we're going to have about $20 million of year, that's really related to the purchase price.
It's just unfortunately, we're not going to be able to overcome that from an accounting perspective.
Good.
And then Adam to your point of shareholders and the value here I don't want to say trust has been very similar to reinvent C.
Very challenging, but we see that opportunity just like reinvent C and by the way, we're going to be applying day, one reinvent see work streams to hps, but really the whole.
Focus on what they do and what we do looking what they do and equipment and equipment is an accelerator that solutions multiplier that I shared with where they are for every dollar for equipment sales ticket nine ex the materials that is extremely compelling if we can bring that to our business I'm very very compelling their way they are entrenched with their customers because of the equipment. The stickiness. There is very very impressive on what they do and take care of those markets and how they serve and that's why they're leaving automation because that's what our customers are asking our customers are having a very difficult time with getting the right people in the right place and driving automation. They are a leader in that so we're quite we're quite excited what thats going again this is a market growth opportunity.
The performance, we're very comfortable we can work together to improve that inform performance as part of our re and see reinvent C and get them to our profitability. The numbers. We gave you out there do reflect they've seen a slowdown in the market that we've had in the year over year, we're being very clear and very transparent, but the previous years that we've looked at the last three years in the same space, where our product care is primarily they do have 20% food they've been growing at a significantly higher rate than we are so we're excited that they have the market cap and the market potential to complimentary elements of what they do and we were excited that we can make this very good.
Okay. One other accounting related question. So we did say.
Seven cents dilution.
That's based on our best estimate right now of purchase accounting and as everybody knows we're going to have to go through a full fair value analysis, and and that could change a little bit as we as weak.
Finish out the year.
But keep in mind I want to remind you that that seven cents does include the inventory step up.
And the charge and that's about what two and a half three cents of that seven cents.
And then in addition, a couple other things I would say is that if you just look at it on a cash basis, it's accretive right away. So if you exclude the non cash purchase accounting.
It's accretive right away and then next year, even with a pretty heavy.
Chunk of purchase accounting amortization flowing through we look at that business being roughly neutral on an adjusted EPS basis.
And internally.
Well they are internal number for year, one is higher than.
To make it agree.
Okay. Operator next question please.
Our next question comes from gave Haas with Wells Fargo Securities. Please proceed.
Good morning.
Had a question around some of this.
Alternative protein sources that were hearing about and I was curious if you've done some more.
Presumably the answer is yes, but talk about some of the barrier properties that might be required for the food packaging around.
But no plant based protein burners and stuff like that.
And whether or not you see it as a as a long term opportunity.
For that business.
Yeah the.
It's actually quite interesting.
From where the world is going with fresh meat, we are seeing the first the first answer. Your question. We are connected we are doing to packaging that business and they do need the same things to keep it fresh and protected and they need the barrier protection with what we do with our cryo vac material does apply to that and so we are connected.
We're also seeing investors in staying close to our customers in the QSR World. We're finding that it's actually helping the meat business I'm looking at the QSR is where they go into restaurants and now they have an alternative give me a protein that's from that's doubles or the beacons. The whole family is going out to eat so right now we're actually seeing the and projecting from all of our customers are protecting this will help drive the protein market, where we're very strong in so first answer. The question, yes were connected to this with packaging they need the cryo backed technology, which is exciting for us into right now it looks like it's actually going to help the the protein market growth.
Operator next question please.
Our next question comes from Chip Dillon with vertical research partners. Please proceed.
Hi, guys will be somewhat turkana filling in for chip and Jim welcome.
So first a little bit the to go back to E Commerce Amazon.
I know you said overall Youre, where youre working also this acquisition to address some of these issues about just a little bit in the short term. The next few quarters couple of years. How are you seeing demand for traditional ecommerce products you are selling like your mailers to the vote field.
In terms of.
You need to volumes and how should that you know how would that translate to why the growth rate could that translate for your product care segment.
For 20 million of 2020 .
Well right now we're working aggressively on new designs new products just on the mailers itself again sustainable designs is I shared that part of the Green bubble wrath of 2020. That's also connected to our mailers on the automated solution side, that's something we're going to look very quickly at apss to see today have an automated solution that can help accelerate the gap in our portfolio that we lost out to that segment and so we think we have some upside opportunity there.
We also need to get more efficient driving into our operations and what we're doing in that that part of business. We think we have some operational efficiencies that we can be more efficient to be and be more competitive in that business.
We think it's some upside opportunity the year over year, that's part of the tough fix that we got to fix in the food care are the product care business.
Operator next question please.
Next question comes from Neel Kumar with Morgan Stanley . Please proceed.
Thanks, just a question on product care.
So you're talking about their value added solutions being up about 10% in the quarter and I was wondering if you think this level of growth is sustainable and how large tenders get as a total percentage of your portfolio from the 20% currently.
I'm, probably not be able to give you the exact percentage on that but thats, where our focus is.
The value added word we're using its really to drive US also to think not just talking about the price to get the product to get the price, we're really focusing with our customers what can we eliminate in their process. What can we eliminated the package and even what new material to drive that so this is a part of our growth we talk to this one well so I think the continuation of the growth what percentage of our portfolio don't have a direct answer for that but this is our focus and this will grow.
Operator, I think we have time for two more questions.
No problem. Our next question comes from a room Viswanathan with RBC capital markets. Please proceed.
Great. Thanks, Tim Thanks for taking my question good morning.
I just had a question about the growth rates that you're achieving so if you think about the legacy guidance.
And then on 35 range. It looks like you know you had previously guided to about 4% to 6% EBITDA growth I guess is that kind of you know would be in your range of long term expectations. So if we look out into two fiscal 2020.
You're gonna be maybe starting from from that base add in a P.S. and then add in a maybe a third of the synergies and then you maybe put mid single digit growth on your legacy growth, we get something in the mid one billions for EBITDA.
Is that is that the right way to think about the earnings power of the new C. or is there more to that from reinvent or recovery in volume or price or anything like that thanks.
Well run and that was a nice way to try to get us to tell you what our future guidance is clean debate, but let me let me let me come back to this strategy and we're trying to make it easy for you to understand where we're going in so if we look at the metrics that were guiding to we're guiding to say, we're going to beat the market.
We are adjusting this year because the market has gotten choppy and so we've seen the volume get tamped down, but we want to beat the market. How you can get to what the EBITDA looks like is that we are passionate we're managing we're controlling what that leverage is going to be and so that's why we gave you that 40% look so you can look at that growth then put the 40%. That's what we're driving to that is we're talking about that's what we're paying our people on and that's what we do in our control that were going to make happen.
Operator, we'll take our last question please.
Okay and our last question comes from Tyler Langton with JP Morgan. Please proceed.
Yeah, good morning to the Murray.
Just had a question on reinvent see I guess, it you're saying the 135 million of benefits this year versus during this less than the $70 million can you just talk a little bit about what's driving that better than expected performance are you achieving savings were quickly noise or I guess potentially some upside attending the like the 250 million of total savings that you expect it over that.
Three years.
Okay.
I'll go just give you a quick again, reminding what's going well and then if Jim wants to add some detail that.
Remember the reinvent C. and I said over and over again, it's about we're reinventing the company everything from how we innovate Sol we're going after the complete process and we have those we're now up to nine work streams and we given we've given the top down target, but we also have a bottoms up that I must say, it's been pretty exciting for me traveling the world. We had the board in here last week to actually see our largest facility and simpsonville. So we're feeding up these initiatives that are actually track, we're tracking and have very good accountability for to your specific question of the buckets that are moving as we shared where we saw some inefficiencies when we did the diagnostic now a year ago and we're seeing that hit the bottom line. We talked about this was three divisions now two divisions or was two divisions now going to one the acting as one company. So we see that initiative you see it on the SGS.
A line of what we are driving and how do we de layer the organization and that part is measured and managed and we have that track and trace we see it happening on the operational side, we're seeing some of the yield and productivity come through.
We've got teams they are looking at risk their facilities on what we're doing how we're doing our extrusion how were the productivity wears idle time the metrics. If you go to wander facilities now you don't have to read a report you see the visual aboard so.
It's I'm not talking about real exciting stuff, but that stuff, it's being measured it's being managed and it's flowing through the bottom line.
In our confidence that tractability and trace ability.
I feel really really good about that.
The productivity, we've seen some coming through in our direct material now I know the questions always come up of what's going on with resin. So we're breaking that into high level detail of the different types of resins, we buy the S.K. use and were going bit by bit part number by part number and looking at where what makes sense what doesn't make sense put the project on it and we're seeing that tracking and.
Very well, Jim I don't know if you want to add one no I would just say you know what in my first thing is coming to the company was kinda eye opening that.
You know I've been through these kind of processes before and sometimes.
No. There is a lot of consultants speak and that sort of thing and its little bit of puffy.
But I have to say after being here for a month I'm very impressed.
With how this.
Reinvent is being done this transformation is being re done I mean, it's being done it's it's really.
Very detailed.
I think what 2000 specific initiatives throughout the company that are being on track.
Just just all kinds of great work going on here and I think we're not leaving any stone unturned. So yes, we are delivering a lot more than what I think the company thought when it got into this company was prudent when it announced what it thought it could achieve coming into the year, we're seeing those come through really strong beat in the full year in the first half and being able to commit now that $60 million in the back half of the year to really help us offset some of these.
Volume related challenges in product care is really great and we do see good opportunities as we turn the calendar in the next year.
So up yeah, I'm I'm very impressed with what I see and.
Obviously, we'll continue to stay close to the team's done a great job.
Great. Thank you Jim.
We appreciate everyone's time. This morning, Thank you for joining our call and we look forward to see you soon operator.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program you may now disconnect everyone have a great day.