U.S. markets closed

Edited Transcript of SEE earnings conference call or presentation 5-May-20 2:00pm GMT

Q1 2020 Sealed Air Corp Earnings Call

ELMWOOD PARK Jun 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Sealed Air Corp earnings conference call or presentation Tuesday, May 5, 2020 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Edward L. Doheny

Sealed Air Corporation - CEO, President & Director

* James M. Sullivan

Sealed Air Corporation - Senior VP & CFO

* Karl R. Deily

Sealed Air Corporation - Senior VP & Chief Commercial Officer

* Lori C. Chaitman

Sealed Air Corporation - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Arun Shankar Viswanathan

RBC Capital Markets, Research Division - Senior Equity Analyst

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Bryan Nicholas Burgmeier

Citigroup Inc, Research Division - Associate

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Neel Kumar

Morgan Stanley, Research Division - Equity Analyst

* Rosemarie Jeanne Morbelli

G. Research, LLC - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the First quarter 2020 Sealed Air Earnings Conference Call. (Operator Instructions) As a reminder, today's program may be recorded.

And now I'd like to introduce your host for today's program, Lori Chaitman, Vice President of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Lori C. Chaitman, Sealed Air Corporation - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, and good morning, everyone. I hope you and your family are healthy and staying safe.

Before we begin our call today, I'd like to note that we have provided a slide presentation to help guide our discussion. This presentation can be found on today's webcast and can be downloaded from our IR website at sealedair.com.

I'd like to remind you that statements made during this call stating management's outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled Forward-looking Statements in our earnings release and slide presentation, which applies to this call.

Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K, which you can also find on our website at sealedair.com or on the SEC's website at sec.gov.

We also 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 some of the non-U.S. GAAP measures we reference throughout the presentation.

With that, I'll turn the call over to Ted Doheny, our President and CEO. Ted?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Lori, and thank all of you for joining our first quarter 2020 earnings call. I want to begin by saying that I hope you and your families are staying healthy and safe during these unprecedented times. I believe how we overcome adversity defines us, and like challenges we have faced before, we will manage through this pandemic, learn from the experience and come out of this stronger on the other side and even more resilient.

Many of our customers are responsible for supplying food, consumer staples, medical equipment and supplies, pharmaceuticals and other necessary goods. Most governments and authorities have designated these industries, including our global packaging operations as critical and essential. I want to say a special thank you to our dedicated people working hard in our operations and those working remotely. I also want to thank those in our supplier and customer organizations. It's a testament to our business and our relationships that we are at the table with our customers and suppliers to ensure goods are delivered in a timely and safe manner to consumers around the world.

On today's call, I'll recap our first quarter results and our experiences since they operate. I'll share how we're navigating this crisis and leveraging our 4P'S of Reinvent SEE. I'll discuss how we see our company and markets emerging and how we'll lead in this new normal. Jim will review our financial results in more detail, and we'll end the call with Q&A. We invited Karl Deily, our Chief Commercial Officer, to join us during the Q&A.

Let's turn to Slide 3 for a recap of our first quarter. We delivered 6% net sales growth, 17% adjusted EBITDA growth and 24% adjusted EPS growth. Adjusted EBITDA margins expanded 220 basis points to 21.6%. Our first quarter results reflect the critical nature of our product portfolio and the agility of our people to respond to this unprecedented environment. Our results also reflect the continued execution of our strategy and demonstrate how Reinvent SEE is improving operating leverage on higher sales.

We're suspending our full year 2020 guidance due to the demand swings and the uncertainty on how long the current situation will last. Again, we are at the table with our customers and suppliers, managing the demand volatility, which is changing daily to ensure our supply is uninterrupted. I'm confident we'll continue to execute at a high level regardless of the market volatility.

On Slide 4, our purpose statement to solve critical packaging challenges and to leave our world better than we found it is driving us now more than ever during the crisis. We introduced our 4P'S of Reinvent SEE, performance, people, products, processes and sustainability over a year ago and have been using them as a guide to ensure employee safety, business continuity and make our business stronger. I'm impressed how our teams around the world have taken our performance to the next level.

Our people have done a tremendous job responding to customers and our communities to deliver the best service possible.

By operating as One Sealed Air culture, we're maximizing productivity across our business segments, regions and functions, enabling fast, coordinated decision-making. Our product strategy is resonating with our customers in this time of crisis, delivering the best products at the right price and making them sustainable. Practicing social distancing and implementing automation to do more with less by investing and working smarter has become even more important to both our operations and our customers. We're accelerating our innovations to support a more touchless digital world.

Our One Sealed Air operational excellence process starts with 0 harm. By creating new ways to keep people out of harm's way in our own facilities and for our customers, we are driving value by eliminating waste, simplifying and then automating.

Sustainability is still top of mind in everything we do. Our core competencies in food safety, automation and protecting goods with innovative, sustainable solutions will be even more critical and a key driver to our profitable growth.

Let me now turn to Slide 5 and give you more details about the actions we have taken, how we expect our transformation to accelerate into the recovery and how we are leading to a new normal. To protect our employees, we've enhanced cleaning procedures at all sites. We're performing employee temperature checks upon entrance and requiring personal protective equipment for location-dependent essential workers. We've implemented social distancing measures within these operating sites and our non-location-dependent employees continue to work remotely.

We've implemented visitor access restrictions and suspended nonessential travel. We're also finding new virtual ways to stay connected to each other and our customers. We have created flexibility with our teams in our supply chain and product portfolio to support rapidly changing circumstances in our end markets. I've joined numerous calls with our crisis management teams, regional sales, customers, suppliers and industry leaders. Our service levels have remained strong. Our teams are well organized, and we have adapted quickly despite the difficult environment.

As the global economy slowly reopen, the actions we are taking today will accelerate our transformation into the recovery phase. We have prioritized our innovation pipeline while strengthening our partnerships with customers and suppliers.

On this slide, we're showing a few examples of our product offerings that we've quickly adapted to support customer demand swings. We will be stronger post crisis. We are adopting more flexible workplace practices. We are taking advantage of our digital tools to stay connected with our colleagues, supply chain partners and customers. We remain committed to our 2025 Sustainability Pledge and are on track achieving 100% recyclable or reusable materials with 50% average recycled content.

Let's now turn to Slide 6, which summarizes the early impact of COVID-19 in our One Sealed Air end markets. Approximately 65% of our sales are derived from packaging fresh and frozen proteins as well as other food, fluids and goods for the medical and life sciences industries. In March, coinciding with the implementation of stay-at-home or lockdown orders, the food industry experienced a dramatic shift to retail and a dramatic slowdown in foodservice. For Sealed Air, this shift resulted in a surge in demand for our retailed applications, including case ready, shrink bags and prepackaged meals and snacks designed for home consumption.

In mid-April, throughout North America, some of our food customers faced COVID-19 outbreaks in their meat processing plants and have been forced to temporarily shut down production. We've not seen any significant closures outside of North America and demand for retail protein packaging has remained strong on a global basis. The situation in North America is very fluid and we're working closely with our customers to support their needs.

Within our medical and life sciences portfolio, which is approximately 4% of our net sales, we're seeing new business in our protective packaging solutions for medical supplies, pharmaceuticals and personal protective equipment, such as monitoring systems, ventilators, mask and COVID-19 test kits. The remaining 35% of our sales serve consumer and industrial segments. Many of these end markets, including general manufacturing, transportation and nonessential goods are suffering from government-enforced shutdowns and a significant reduction in discretionary spending.

Partially offsetting these declines are increases in demand for goods that support the stay-at-home environment and are shipped through e-commerce as retail channels have rapidly shifted away from brick-and-mortar stores. Across our global business, we estimate that approximately 75% of our end markets are experiencing increased demand for food, medical supplies and consumer staples. The remaining 25% are facing slowdowns or have been forced to temporarily suspend production. Recognizing we are immersed in an extremely unpredictable environment, our experiences would tell us that we will return to a more balanced supply and demand in due time.

Longer term, we expect the learnings from the pandemic will drive secular global demand increases for automation and packaged proteins. Producers will invest in more automation for efficiency and safety, and consumers around the world will demand packaging formats that maximize food safety, minimize food waste and are sustainable. For now, our top priorities are the safety of our people, managing the business continuity for our customers and making our business stronger for the future.

I'll now pass the call to Jim to review our results in more detail. Jim?

--------------------------------------------------------------------------------

James M. Sullivan, Sealed Air Corporation - Senior VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Ted. Let's turn to Slide 7 for a review of our net sales by region. In the first quarter, sales were $1.2 billion, an increase of 6% as reported and 8% in constant dollars. In constant dollars, North America, our largest region, representing 61% of the company's sales grew 10% year-over-year. EMEA was up 7% and Asia Pacific was down 1%. South America, where we have U.S. dollar index pricing, was up 24%, of which 7% was volume growth.

Turning to Slide 8. Here, we highlight our organic sales volume and pricing trends by segment and region. In the first quarter, volume, excluding acquisitions, rebounded to 2% growth, driven by 5% growth in Food Care partially offset by a 2% decline in Product Care. Due to increased demand in protein packaging for retail markets, Food Care experienced volume growth across all regions, except for Asia Pacific, which declined 3% in the quarter, largely due to depressed dairy market conditions and herd rebuilding in Australia and New Zealand.

Product Care volumes declined across all regions. However, the business performed better than we anticipated as declines in industrial markets were partially offset by an increase in e-commerce demand for consumer staples and medical supplies. Overall volume growth in the quarter was partially offset by a decline in net selling prices. Lower resin-based formula pricing, mostly in North America food care was the primary contributor of the price decline, partially offset by U.S. dollar index pricing, mainly in South America.

On Slide 9, we present our year-over-year consolidated sales and adjusted EBITDA bridges for the first quarter. Organic sales in the quarter were up 1.5%. Acquisitions contributed $75 million, of which $69 million was from Automated Packaging Systems. Currency translation negatively impacted sales in the quarter by $30 million or about 3%, mostly due to year-over-year declines in the Argentinian peso, Brazilian real, the euro and the Australian dollar. Based on where exchange rates are today, the negative translation impact on sales for the year versus 2019 would be approximately $140 million.

Adjusted EBITDA of $253 million increased $37 million or 17% compared to last year, with margin up 220 basis points to 21.6%. Reinvent SEE benefits totaled $30 million in the quarter, $25 million in operating costs, inclusive of $14 million of restructuring savings and $5 million in price/cost spread. Adjusted EBITDA also benefited from higher volumes and contribution from Automated Packaging Systems. Currency translation was $7 million unfavorable to adjusted EBITDA in the first quarter.

Operating costs in the quarter included over $2 million of incremental spending related to COVID-19, but these expenses were partially offset by lower employee travel activity. Adjusted EPS in the first quarter was $0.73 compared to $0.59 in the first quarter of 2019, primarily due to higher adjusted EBITDA, partially offset by increased depreciation and amortization expense. About 2/3 of the D&A increase was from the Automated Packaging Systems acquisition. The adjusted tax rate in the first quarter was 27.9%, as compared to 29.5% last year.

Turning to Slide 10. Here, we provide an update on our Reinvent SEE transformation, which continues to progress in earnest, and is driving significant structural operating leverage in the business as evidenced by the greater than 60% profit to growth ratio in the quarter. We have added a new work stream to Reinvent SEE in our commercial organization to accelerate innovation and growth in core and adjacent markets. The new capabilities and processes that underlie the success of Reinvent on our cost structure will help us reinvigorate and drive targeted top line growth in the business.

In 2020, we are on track to realize $110 million of incremental benefits to adjusted EBITDA compared to last year, of which roughly half is related to actions taken in 2019, and the other half is coming from new actions. We are prudently accelerating 2020 Reinvent actions where possible and have been successful to date, given our operations have been largely intact despite challenges with the virus.

Cash restructuring payments associated with Reinvent SEE were $26 million in the first quarter. We continue to estimate approximately $100 million in cash payments for the year.

Turning to segment results on Slide 11. Starting with Food Care. In the first quarter, Food Care net sales of $690 million were up $10 million or 2%. In constant dollars, sales were up $35 million or 5%, primarily driven by higher volumes. Adjusted EBITDA in Food Care increased $13 million or 9% to $156 million with margin improving 160 basis points to 22.6%. This performance was primarily driven by higher volumes and Reinvent SEE actions.

Our Food Care business benefited from the shift in retail demand for Cryovac packaged proteins. Shrink bags, rollstock and case-ready applications, which account for more than 80% of Food Care sales were up 4% to 5% in the first quarter. Sales in fluids, which accounted for 6% of Food Care in the first quarter, were essentially flat compared to last year. Over the next few quarters, our fluids portfolio, which consists of innovative vertical pouch packaging for condiments, soups and sauces will be negatively impacted by the slowdown in the foodservice industry. Equipment sales, which also accounted for 6% of Food Care, increased mid-teens percent in the first quarter. However, since mid-March, plants around the world have instituted visitor restriction policies, which has led to a shutdown of installations.

With some of our North American food customer temporarily suspending production, our orders have moderated since peak levels in March. Our customers are doing everything they can to reopen their facilities as soon as possible, and we are there to support them.

On Slide 12, we highlight results from our Product Care segment. In the first quarter, Product Care net sales of $484 million were up $51 million or 12% as reported. Organic sales were down 3%. Adjusted EBITDA of $93 million increased $18 million or 24%, including a $13 million contribution from Automated Packaging Systems. Product Care's adjusted EBITDA margin of 19.2% expanded 190 basis points year-over-year. Reinvent SEE benefits and low input costs more than offset the negative impact from the organic sales decline.

Product Care's value-added solutions portfolio, which represents about 1/3 of the segment sales and has the most exposure to e-commerce distribution of essential and nonessential consumer goods delivered 10% organic volume growth in the quarter. The performance across value-added solutions was largely driven by increased demands on e-commerce fulfillment centers to automate packaging processes, increase the speed to pack and optimize the cube size for efficient shipping. These solutions are designed to handle the high level of cushioning required to ship critical goods.

As a reminder, Automated Packaging Systems is included in value-added solutions, along with Bubble Wrap on-demand, paper systems, Korrvu, temperature-controlled packaging and automated equipment, such as our IPAC and StealthWrap systems. The remaining 2/3 of Product Care consist of industrial applications and traditional packaging. In the first quarter, volume declined 7% in industrials and 3% in traditional. We expect industrial applications to be hit the hardest through the pandemic. Demand trends in North America in January and February began to stabilize. However, March sales dropped in the high single-digit percent area as many of our customers and distributors were forced to temporarily shut down.

Traditional packaging performed better than we anticipated in the first quarter. We experienced low single-digit growth in mailer volume as a result of the surge in e-commerce distribution, but this was more than offset by declines in traditional bubble wrap, void fill applications and shrink film. Based on what we experienced in April, and given the level of exposure we have to industrials, we think Product Care volume in total could decline 15% to 20% in the second quarter, with improvement in the second half of the year as the economy reopens, industrial manufacturing resumes and we continue to help our customers automate their packaging processes.

Now let's turn to free cash flow on Slide 13. First quarter cash generation is typically lower as a result of seasonality of sales and working capital and timing of certain annual payments, in particular, incentive compensation and customer volume rebates. Despite higher adjusted EBITDA in the first quarter of 2020, free cash flow declined $24 million year-over-year, primarily due to higher incentive compensation payments based on improved 2019 performance and a higher quarter end accounts receivable balance from significantly increased sales in the back half of March related to COVID-19 demand across many of our end markets.

We expect trade working capital overall to be a source of cash in the back half of the year from normal seasonality and proactive management of underlying working capital metrics. Additionally, we are reducing our CapEx target for the year from $200 million to $175 million in light of current economic conditions. This level of spending will bolster near-term cash generation but will also allow key strategic growth investments to advance without delay. Overall, we remain confident in our ability to generate free cash flow in these uncertain times and plan on maintaining our dividend at current levels.

As initially disclosed in the third quarter of 2019, Diversey submitted a claim that Sealed Air owe it approximately $50 million pursuant to a clawback agreement that we entered into in connection with Sealed Air's sale of the Diversey business in 2017. Under this clawback agreement, Sealed Air was contingently obligated to return to Diversey a portion of the purchase price we received in the sale if Diversey failed to achieve specified financial metrics following a successful renewal of certain commercial contracts post closing. As noted in our Form 10-Q filed this morning, we have resolved this matter with Diversey, and will not be required to make any payment under the clawback agreement. Accordingly, we have recorded an $0.08 per share gain in the quarter from discontinued operations.

Slide 14 highlights our leverage, liquidity and debt maturity profile. We ended the quarter with pro forma net debt to trailing 12-month adjusted EBITDA of 3.5x, which is down from 3.6x at the end of 2019. We will continue to take a disciplined approach to capital allocation to maintain a healthy balance sheet and based on what we now see, expect further leverage reduction by the end of the year.

As of the end of March, we had over $1.2 billion of liquidity from a combination of cash on hand and undrawn committed revolving credit facilities. We have a leverage covenant in our credit facility with a maximum ratio of 5x through the third quarter of 2020, reducing back to 4.5x at the end of 2020. The increase in the covenant maximum to 5x was triggered in the fourth quarter of 2019 with the Automated Packaging Systems acquisition.

The covenant calculation as of the first quarter is estimated to be 3.2x which is lower than our reported pro forma net debt to adjusted EBITDA ratio due to certain allowed EBITDA adjustments in the credit agreement. So we have significant cushion with our financial covenants and do not expect any issues accessing the liquidity under the credit facility. Additionally, we do not have any debt maturities until August 2022, which gives us good financial flexibility to operate and support the business.

I will now turn the call back over to Ted. Ted?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [5]

--------------------------------------------------------------------------------

Thanks, Jim. We are confident that our ability to maximize food safety, minimize food waste and protect goods that are shipped around the world will continue to create significant value for our customers. Our capabilities in automation and digital technologies will emerge as a differentiator and enable us to become an even more critical partner to our customers than we already are today. I'm confident that our 4P'S of Reinvent SEE and our strategy to deliver the best product at the right price and make them sustainable will deliver exceptional long-term results.

Before we open up the call to questions, I want to thank our employees for their dedication and commitment to business continuity. Their efforts have been remarkable, and I could not be more proud to lead Sealed Air during this unprecedented and unforgettable period in our history. Together, we will emerge from this crisis a better, stronger company.

With that, I'll now open up the call for questions. Jonathan, we'd like to begin the Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of George Staphos from Bank of America.

--------------------------------------------------------------------------------

George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [2]

--------------------------------------------------------------------------------

Thanks for the details, and thanks for what you're doing on COVID. My question is around volume and its relation to Reinvent and kind of a 2 part. So Ted, can you go through a bit more detail in terms of how you're seeing the Product Care growth drop to a 15% to 20% decline given the -- still, it sounded like very good benefit you're getting from e-commerce, which would be a partial offset and related how volume-dependent Reinvent savings are? I would expect at some point, those numbers maybe get hard to hit if you keep seeing this kind of revenue or volume drop, but please add color where you would?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [3]

--------------------------------------------------------------------------------

Okay. Thanks, George. Actually, it would probably be helpful, George, if I point to your question if we look at Slide 6 and then Slide 5, where we're trying to answer that question, and if we break up Reinvent SEE. So if you look at the volume, focusing on Product Care, where as -- and Jim had in the prepared remarks, we're looking in the quarter, we think we could have a 15% to 20% reduction. If you look at those 3 sectors, if you look at what's happening on the food side, industrial side and then the e-commerce, in the quarter, this is Q1. But if we look at Q2, we are seeing, as you highlighted, the e-commerce business pick up significantly. We saw some gain with our mailer business. We definitely saw some gain with APS, with our automated systems. The other side -- also in the protective side, some of the protective is in that food, medical and life sciences.

If you look at Slide 5, you'll see something quite interesting in the crisis going through Q1 now going into Q2, we were actually doing some of the packaging, both on the mask is -- everybody is reading, the economy is going to need 300 million masks just in the U.S. alone. We're into that. We're bringing actually our APS, our Autobag systems connected to that. And also you see the another example there in our Product Care with our Korrvu package for ventilators. So that's going to flow-through from Q1 to Q2.

Now to the downside of that 15% to 20%, what really has hit is the industrial piece. And if we look at our Product Care, that's in that Instapak, where the industrial economy has been shut down, and we're feeling that, and that's in that 22% of the slide. So we -- that will recover. We just don't know when, as the businesses come back, but we think the portfolio, what we were impressed with the quarter is how quickly we're moving our portfolio in this crisis to those growth areas, and being prepared when that industrial economy comes back.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Our next question comes from the line of Ghansham Panjabi from Baird.

--------------------------------------------------------------------------------

Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [5]

--------------------------------------------------------------------------------

Hope everybody is doing well. I guess as a follow-up to George's question, Ted, just give us a sense as to April volume specific to that 75-25 split you called out in the bottom of Slide 6. And then a question on North American food specifically. I mean, obviously, there's a lot going on with new plant shutdowns, calling up animals in some cases. And then you have a big shift towards retail versus food service. And I think Tyson yesterday mentioned, call it, a 40% increase in retail foodservice in some cases. How do you think all these dynamics nets out for North American food both in 2Q? And then also as the year unfolds?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [6]

--------------------------------------------------------------------------------

Okay. Ghansham, actually, we have Karl here, so I'm going to let Karl take a piece of it. But if we look at the volumes, just what's flowing in through the second quarter on the food side, we're definitely seeing, going into April, this rapid spike that we saw in the first quarter, we're definitely seeing in April, we're seeing that tempered. So we're seeing that business slightly down. But then to your specific question of what's going on with the food industry, we've got Karl here. And if Karl, if you want to tackle that one?

--------------------------------------------------------------------------------

Karl R. Deily, Sealed Air Corporation - Senior VP & Chief Commercial Officer [7]

--------------------------------------------------------------------------------

Absolutely. Thank you. And Ghansham, I think if you reference back to Slide 6 and the net positive, especially in the proteins. We saw a definite global trend of a sequential improvement in our business with the transition from food service to retail, again, around the globe. And that's held up very well. Even in Europe as recently as last week, retail sales were still up in the mid-teens year-over-year, which was accretive to our business. What changed? And if you listen to Tyson's call yesterday, it's obviously highlighted there was a significant disruption in the North American food market. And that has been obviously gone away on the industry going into the second quarter. There was also a significant uptick in the first quarter as that shift occurred, was a very favorable impact to us, not only just on the increase of production, but our ability to be nimble and very fluid in how our customers pivoted from 1 market to the other, we were able to accommodate areas where other competitors may have not been able to supply.

We were also able to provide products and increased level of volumes. You mentioned 40%. We actually had some products that were up over 90%, and we were able to respond due to our global network and our breadth of portfolio. So we provided that opportunity. I think we had extremely good customer intimacy, daily conversations to drive what was obviously very unchartered waters. Just as that was extremely favorable, they're in a down cycle with the employee situation they're working through but again, we're connected at the hip, and we're working through the significant swings in volume.

And also the conversation has definitely changed to what's life going to look like post-COVID-19. And we're working very closely with them on automated solutions, how can we drive additional versatility and flexibility into their operations in a less labor-intense manner. So obviously, very good first quarter. Second quarter, less hard -- less easy to predict, but we believe the future will be a net positive.

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [8]

--------------------------------------------------------------------------------

Good. And Ghansham, to the last part of your question, referencing the Tyson call, if we can point to Slide 5 where we look at our portfolio, as Karl described what we're doing through the crisis and accelerating. They did talk about automation, and they were followed up on the automation question, and we've talked to you about what that means. This is a part, though, in the numbers, the equipment business is -- it's tough to get the equipment installed because of the situation with the crisis, but this is where the conversation is moving into the automation. We have 2 of our pictures there showing that if you look at on television, you see these plants where these people are so close to each other. What our automation is allowing and we're working with these customers, how do we automatically pack in the bags and keep people out of harm's way. The other thing they mentioned on their call is the automation being able to look at the foreign object detection. We have the ability, and we're working with the customers to actually see inside to help identify, is it a bone in the bag? Is it the marbling? In learning with our equipment, so we have some significant opportunities post-crisis to help on the automation and make the business better together. And we're at the table, and that's an exciting part of the future.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question comes from the line of Anthony Pettinari from Citi.

--------------------------------------------------------------------------------

Bryan Nicholas Burgmeier, Citigroup Inc, Research Division - Associate [10]

--------------------------------------------------------------------------------

This is actually Bryan Burgmeier sitting in for Anthony. Just in terms of the volume declines in Product Care in 2Q, how should we think about decremental margins, just given the restructuring you've been doing and the ongoing changes to mix?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [11]

--------------------------------------------------------------------------------

Okay. I'll take a shot at that and maybe tag team that with Jim. If we look at the decrementals, that we look at the business, as we've been talking to you on incrementals that we're designing to this 40% upside. When we have a downside, we're thinking right now, it should probably be decremental in that 40%, everything being the same. Right now, though, with the shift in portfolio, we're not seeing that. Even as you saw with -- we have so many cost actions going in place, right now, I don't know if you want to give more detail on that, Jim. But designing decremental, we would think 40%, we're actually beating that in the first quarter. I think we should because of Reinvent and some of the cost actions that we have working, we should be able to beat that decremental. But that's what the design would say with losing the volume, you should lose 40% on the downside.

--------------------------------------------------------------------------------

James M. Sullivan, Sealed Air Corporation - Senior VP & CFO [12]

--------------------------------------------------------------------------------

Yes. That 40% would be kind of the direct margin loss that you would have. But of course, we're going to be responding to that volume decline with cost reductions that are above and beyond the Reinvent structural program that we have going on. So I do agree that the decremental will be below that 40% level. I feel like we're going to do what we need to do to respond to these volumes, and the organization is very agile that way. I think our first quarter results reflect that on the upside. I think we'll see a little bit of the challenge in Product Care in the second quarter on the downside. And I think we're prepared to respond to that in the right way.

If I could come back while we're talking about this because George had asked about Reinvent and how we see Reinvent progressing across the year. As we indicated, we are confident in our ability to drive the $110 million of Reinvent benefits incrementally in '20 versus '19. We got 30 in the first quarter, probably a level comparable to that in the second quarter. And as I said, we're doing what we can to prudently accelerate. Keep in mind that 50% of that benefit is coming from actions we took in '19. So those are fully done, and the remainder is coming from 2020 actions.

And it is somewhat dependent on the volume profile in our factories. To George's comment. We have been fortunate that we have been running our facilities fairly well through this situation. We had some shutdowns, but got back pretty quickly. So I think even with the decline that we see in product here in the second quarter, I do think that we'll be able to continue to drive forward with the structural improvement in the business.

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [13]

--------------------------------------------------------------------------------

Thanks, Jim.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question comes from the line of Neel Kumar from Morgan Stanley.

--------------------------------------------------------------------------------

Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [15]

--------------------------------------------------------------------------------

Great. In terms of comparing North American protein production to your Food Care volumes, we haven't seen a great quarterly correlation historically. I know regional exposure plays a role, but is there any type of a lag or any other things you should keep in mind when comparing our relationship between the 2? And what certainly will allow you to kind of continue to outperform underlying protein volumes?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [16]

--------------------------------------------------------------------------------

Neel, it came in a little bit rough. Karl, did you get?

--------------------------------------------------------------------------------

Karl R. Deily, Sealed Air Corporation - Senior VP & Chief Commercial Officer [17]

--------------------------------------------------------------------------------

If I'm responding to your question correctly, from what we heard, you were a little broken up, is that our volumes do tend to be very in line with market performance. There's not a real delay in the protein market in North America. We have very integrated supply chain dynamics with our customers and are a key part of their order fulfillment. So we do tend to track without a lag. We also tend to perform above the market. So sometimes, when you have a significant swing in the market the way it was, from foodservice to retail, there's a positive shift in our business as well. So the market dynamics are there, especially as you go from food service, which may be larger packages to retail case-ready packaging, that shift is a net positive. So we get an accretion of our performance while that's occurring.

What we've also seen during this times is a change in product formats for our customers. They've gone to larger packages at retail, fewer cut selections. So there's a lot of dynamics in there that kind of would change any typical model of exactly what we should see. Producers actually went through herculean efforts to try to meet retail demand during the March time frame. Now obviously, they have other issues that they're dealing with. But no, I think our performance mirrors the industry pretty well. There were other things -- there were some share gains and some things of that nature that we were able to pick up with our global footprint and dealing with the global market.

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [18]

--------------------------------------------------------------------------------

Good. Thanks, Karl.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from the line of Mark Wilde from Bank of Montreal.

--------------------------------------------------------------------------------

Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [20]

--------------------------------------------------------------------------------

Ted, is it possible to get a sense of what kind of underlying growth you're seeing in the APS business? And whether that's just -- has been slowed at all just in the near term from the difficulty of getting technicians in plants to do installations, things like that?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [21]

--------------------------------------------------------------------------------

Good question, Mark. And if I could point again to Slide 5 on the answer there, whereas you see APS coming in. So if we look at APS growth, APS, 50% of APS growth is on that 22% bucket on -- back to Slide 6. So I'll go back and forth a little bit. So if you look at APS profile, that's where they have half their business at that 22%. Where the growth profile is showing up, they do a lot of work in the ready meals, in the food, fresh produce, pet care, you've seen -- we have that on there, that's where we've seen some growth. And then if you flip to slide -- back to Slide 5, this is where the APS is where we got the mask business that's coming in. APS is also helping us with the automation on the e-commerce. So the net answer to your question, through the crisis their business has actually been slightly down to flat compared to year-over-year.

Going into equipment side of the business, though, is really strong. And that's where with the Autobag, the side pouch system, and that's feeding in that transition, so we're actually excited about that.

And then talking about the financials, Jim showed the bridge and you saw very clearly where APS performance showed up, that we've moved the margins pretty quickly from where we purchased APS to where they are today. If you could do the math on that, you'll see that's moving all the way up to an 18% margin from 14%. So the growth is coming, the efficiencies are there. You see the Reinvent coming in to helping APS. And as a shout-out to our APS folks listening to the call, really excited to have them on board. They are definitely helping us become a better, stronger company through the crisis and beyond.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from the line of Arun Viswanathan from RBC.

--------------------------------------------------------------------------------

Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Senior Equity Analyst [23]

--------------------------------------------------------------------------------

I guess I was just curious, you addressed the decremental margin question in the near term, I guess. I'm just kind of curious, when you look at Food Care, as well, looking out a couple of years, do you still think that 40% to 45% decremental margin is achievable -- or sorry, incremental margin is achievable? And then as a follow-up, I guess, maybe could you address where we are in kind of the protein cycle in North America and maybe in other geographies as well?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [24]

--------------------------------------------------------------------------------

Yes. Good question. I'll do the first part, and Karl, if you can, handle the second. So if we look at our incremental margins, and you see really the power of changing structurally with the Reinvent. I mean if you look at our performance in the quarter and if you're looking at food specifically to your question, we had gains in the quarter. We had some pricing issue. The question will probably come up what's going on with resin. So we did have a resin benefit of roughly $8 million. But we also had a pricing issue. As you're well aware with food, we have -- we give that price back in the marketplace, so that was a wash.

So net on that, you can see the power of Reinvent structurally helping that business underneath, but also what you really see is the leverage of a different structural cost on incremental volume. And that's where we're designing the engine, so those incremental margins. And as we've described, that 40% feels real, and we saw it with the growth in the quarter. The 60% growth is for other issues that are going on in the quarter, which is very, very strong with that high-volume coming through. So short answer to your question, incremental margin on our food business, getting the structural cost, right? Yes, very confident going forward that, that will happen. And Karl, if you want to...

--------------------------------------------------------------------------------

Karl R. Deily, Sealed Air Corporation - Senior VP & Chief Commercial Officer [25]

--------------------------------------------------------------------------------

Yes. I'll just -- let me just take a quick walk around the world and touch on that. Obviously, with the disarray currently in the North American protein market, the positives are that there's significant demand and demand has held up, consumption continues to increase, and there's long-term positives for demand in North America as well as demand in the export markets. So obviously, there are issues in the market dynamics right now, but we assume a stable to slightly increasing animal availability in the North American market.

Obviously, Latin America has a large herd, and they're typically very inefficient. They have great opportunity to continue to grow as they continue to add feed lots and improve their market efficiency. They're well poised to help feed the world and give to the -- and contribute to the export market growth. They're installing equipment. And we believe that they'll -- we'll continue to penetrate that market, and it'll be accretive long term.

Australia, as you're well aware, is rebuilding their herd. They're obviously dividing their herd between domestic supply and going after value-added opportunities globally, and so that will be stable to down slightly. And Asia continues to evolve and to evolve to a more modern. I think the positive, you'll see the COVID-19 post-pandemic is a more modern market in Asia with more prepackaged product and more retail and more e-commerce channels developing.

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [26]

--------------------------------------------------------------------------------

Thanks, Karl. It's great having Karl on the call for handling the herd.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Our next question comes from the line of Rosemarie Morbelli from Gabelli Research.

--------------------------------------------------------------------------------

Rosemarie Jeanne Morbelli, G. Research, LLC - Research Analyst [28]

--------------------------------------------------------------------------------

Ted, I was wondering if you could talk on the strength or the trend of the recovery in China since they reopened all facilities. And then if you could give us some details in terms of the adjacent markets you are targeting.

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [29]

--------------------------------------------------------------------------------

I'm sorry, the wet -- the wet market?

--------------------------------------------------------------------------------

Rosemarie Jeanne Morbelli, G. Research, LLC - Research Analyst [30]

--------------------------------------------------------------------------------

The adjacent markets you are targeting?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [31]

--------------------------------------------------------------------------------

Okay. Good question. So if we look at China and what's going on in China is, going back to our call in February 11, when we first talked about the coronavirus, we saw China hitting first. So we got to see those dynamics very quickly, how China took care of the issue. We saw our operations. We have 8 facilities there. We worked quickly and made those safe and still supported not only the local market, but the end market.

We're also seeing with China that they're changing their market, and that is happening as we speak, going to the wet -- the wet market is changing. If you just visualize meat hanging in markets, they're unprotected, it's creating a need for what we do really well is protected packaging and fresh meat. We're also seeing the frozen side coming into China as well. So net-net, on the markets, we think this disruption is a onetime event. We think long term, China is going to be stronger for us. We're positioned. Again, we're at the table, especially with the major meat producers that are looking to go after the China market. We're with them bringing automation and other opportunities. So China isn't -- we think net-net, that's a good positive going forward. Karl, you want to add?

--------------------------------------------------------------------------------

Karl R. Deily, Sealed Air Corporation - Senior VP & Chief Commercial Officer [32]

--------------------------------------------------------------------------------

Chinese government is definitely looking at wet markets, the transition will be slow. It won't be overnight, but their target is by 2025 to have less than 30% of their protein production through small local farmers and a more modernized meat industry. So the long-term net positive is good. More short term, all indications are in the market. There has been increased volume of meat through alternate shipping channels. Online sales and meat have been skyrocketing in China. We have benefited from that with our case-ready options. We have a strong booking, forward booking of systems to further that. We've also seen a significant trend towards away from wet markets by especially middle and upper-income Chinese to more modern retail. And interestingly enough, the Australian Meat Board did a survey and post COVID-19, they're looking for larger volumes to consumers. More packaged product and more chilled product, eaten more often at home. So a lot of positive upward dynamics in that market.

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [33]

--------------------------------------------------------------------------------

Great. Thanks, Karl.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Then our final question for today comes from the line of Brian Maguire from Goldman Sachs.

--------------------------------------------------------------------------------

Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [35]

--------------------------------------------------------------------------------

Hope everyone is doing well. Just wanted to follow-up on a couple of questions that have already kind of come up. One, I think we've talked about Tyson maybe more on this call than we have in a long time that I can remember. And I think they've sort of talked about roughly 40% of their volume going to foodservice applications. I know you gave some color on that breakout for you guys. But wonder if you can more specifically kind of just talk about your own mix and exposure to foodservice. And then just thinking about the guidance, you gave explicit guidance on Product Care, for Food care. Yes, I think that 6% of the business is negatively impacted from machine installations, another 6% from liquid, that seems like it's sort of foodservice related. So are we kind of thinking that 2Q volumes could be temporarily down mid-single digits in Food Care as we deal with some of the manufacturing plants being down and some of the lockdown impacts?

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [36]

--------------------------------------------------------------------------------

Yes. Brian, you did a nice job there with us not trying to give you guidance. Your math is pretty good, and we're -- and the reason we're not trying to be cheeky on the guidance, we just don't know. And it is -- it's dramatic. Week to week, we saw it ramp up. The last 2 weeks of March were incredible. But then we've seen this choppiness go the other way. Our portfolio is shifting dramatically, both on the Product Care side and the Food Care side that we talked about.

So without giving a guidance, I think your math is kind of where we're seeing it. But that will change next week. What the message we're giving to the market is that we will outperform the market. We are moving our portfolio really fast. The high-volume rollstock, what we're doing, that -- the penetration of that just in matter of weeks has been dramatic. So we're going to shift. We're not going to give up, that the market is doing some interesting things. We're going to grow our portfolio and move. But the short answer, your math is pretty good on what we're thinking, so -- on the Food Care side. But if you want to give more detail on foodservice versus retail, I think we talked about it. But Karl, if you want to add any?

--------------------------------------------------------------------------------

Karl R. Deily, Sealed Air Corporation - Senior VP & Chief Commercial Officer [37]

--------------------------------------------------------------------------------

The thing I would add is I think there's some fundamental pivots in the marketplace as they react to this dynamic thing. You've seen service cases in Europe basically shut down. I don't think retailers will bring those back because it's a cost advantage. So that increase in penetration and packaging those products will live on. I think you've seen a significant shift in service seafood cases. A question earlier on adjacent markets. I think we'll see a net positive as you see a shift and pivot to prepackaged seafood. So as food service comes back, I see it as a net multiplier. We'll get some of that business back that is very specific to food service that will come back and some of the positive benefits that we've seen and the shift to retail will live, have legs. So -- and then when equipment returns, I think that will be an additional multiplier to go to more automation, more touchless, and we can get equipment back to where it needs to be. I think that will be all net positives.

--------------------------------------------------------------------------------

Edward L. Doheny, Sealed Air Corporation - CEO, President & Director [38]

--------------------------------------------------------------------------------

Great. Thanks, Karl. And actually, I want to give a shout-out to all our sell-side analysts. We're very fortunate, very thoughtful questions. We really appreciate. Just like good, tough customers make us better, good analysts make us better. So really appreciate, very thoughtful. And I also want to share each one of you asked that we're safe, and I just want to make sure that everyone is safe in this environment. And feel really good about our company and what we're doing to make this world a better place, and we're letting this crisis help show how we can make that happen.

So with that, I want to thank everyone, again, for the call, and we look forward to speaking with you in the near future and stay safe. And Jonathan, that's it. Thank you for your help on the call.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Thank you, and thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.