Sealed Air Corporation (NYSE:SEE) Q3 2023 Earnings Call Transcript
Sealed Air Corporation (NYSE:SEE) Q3 2023 Earnings Call Transcript November 2, 2023
Sealed Air Corporation beats earnings expectations. Reported EPS is $0.77, expectations were $0.63.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2023 Sealed Air Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand our conference over to your -- our first speaker today, Brian Sullivan, Investor Relations. Please go ahead.
Brian Sullivan: Thank you, and good morning, everyone. With me today are Emile Chammas, Interim Co-CEO and COO; as well as Dustin Semach, Interim Co-CEO and CFO. Before we begin, I would like to note that we have provided a slide presentation to supplement the call. Please visit sealedair.com where today's webcast and presentation can be downloaded from our Investor Relations page. Statements made during this call stating management's outlook or estimates 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 or on the SEC's website. We discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and the reconciliations to U.S. GAAP in our earnings release. Included in the appendix of today's presentation, you will find U.S. GAAP financial results that correspond to the non-U.S. GAAP measures we reference throughout the presentation. I will now turn the call over to Emile and Dustin. Operator, please turn to Slide 3.
Emile?
Emile Chammas: Thank you, Brian, and thank you for joining our call. Today, I will discuss SEE's leadership transition, provide an update on the markets we serve, trends we are seeing and how we operate in this dynamic environment. Dustin will take you through our third quarter results, provide updates on our 2023 outcome [ph] and talk about our progress and plans around capital allocation. After that, we will open the call for your questions. Moving to Slide 3. As previously announced, Dustin and myself are Interim Co-CEOs in addition to our [technical difficulty] roles. Before we move to the market and business update, I would like to talk through how our Co-CEO operating model will work. First, we expect this model to accelerate the turnaround of our results and improve overall execution.
Together, we will evolve SEE strategy, connect that strategy to the overall business and deliver results. I am focused on driving our innovation, supply chain and commercial teams, specifically bringing these teams closer to improve our market intelligence, time to innovate, cost to deliver and commercial execution. Dustin will be more focused on driving our Cost Take-Out to Grow program, optimizing our portfolio and strengthening our balance sheet. While automation, digital and sustainability continue to be key enablers of long-term growth, we are shifting our focus to address the current market dynamics. As a result, we are reevaluating our solutions portfolio and go-to-market strategies with an intense focus on meeting our customers' evolving packaging needs in our core to protective markets.
Now turning to the market and business update. Our end markets remain challenged and visibility limited. We are facing multiple headwinds, including soft retail demand and consumer trade downs in the food markets, compounded by a global capital cycle that is net down due to the U.S. Europe remains firmly in the recession, and the recovery across Asia has been slower than we initially expected earlier in the year. On the Protective side, industrial output remains flat to down. Economic uncertainty is increasing, driving customers to put inventory below historical levels and reduced capital spending. Destocking is moderating in North America, but continues with EMEA and APAC. Pricing pressures have increased as consumers and customers react to inflation.
Despite these headwinds since the beginning of the year, our Protective packaging business delivered largely flat sequential performance. And our CRYOVAC, Fluids and Liquids and Automation businesses have performed very well. In this economic environment where our existing customers are challenged to grow and are focused on acquiring new customers and taking share in the marketplace. We are actioning this by first investing in and redeploying resources towards lead generation, marketing and new sales roles that are closer to the markets our customers operate in. Second, improving the competitive positioning of certain solutions within both Food and Protective by rationalizing the cost to serve across our portfolio. Third, financing our innovation efforts between long-term, higher risk reward and shorter term projects that address our customers' more immediate needs.
Lastly, continuing to lead with Automation, which provides our customers with a single point of contact for both materials and equipment. These solutions solve their most critical packaging challenges and drive longer term sustainable efficiencies within their operations. On Cost Take-Out to Grow, we have actioned approximately $40 million in annualized run rate savings, approximately 25% of our $140 million to $160 million program. As of September year-to-date, we have exited over 600 positions related to both reductions in volume with our network and workforce optimization. On portfolio optimization, we completed the previously announced closure of Kevothermal temperature assurance business in quarter 3. Separately, we decided to exit our plant based roll-stock business.
This was a sustainable offering within our consumer-ready vertical that was displaced by more competitive solutions in the market. Moving forward, we will continue to bring new sustainable solutions while maintaining an enhanced emphasis on market competitiveness. While we are in good progress on Cost Take-Out to Grow and portfolio optimization, we need to accelerate to get ahead of future market impacts. Before I turn it over to Dustin, I wanted to say that I'm excited to [indiscernible] SEE with him. While he has only been here for a short period, he has quickly come up to speed on the business, pushed us to challenge every aspect of how we operate and became a trusted business partner. Together, we are looking through the entire company for opportunities to grow in a cost-effective way, drive further efficiencies and ensure we are world-class in everything that we do.
This is an ongoing process, and we will keep you updated as key decisions are made. Now I'd like to turn it over to Dustin to review our financial results. Dustin?
Dustin Semach: Thank you, Emile, and good morning, everyone. I would like to start by saying it's a privilege to co-lead SEE with Emile. Emile has been with SEE for 13 years and has done a tremendous job transforming our supply chain. He's a proven leader, who is well respected within the industry and across all of SEE. I can't wait to see his impact across our commercial and innovation efforts, and I'm really excited about all that we can accomplish together. Now moving to third quarter results. Let's turn to Slide 4. In the quarter, net sales were $1.38 billion, flat on a constant currency basis, and adjusted EBITDA was $285 million, down 6%, excluding currency compared to last year. Volumes have improved sequentially, excluding M&A and FX, since the beginning of the year.
Sequentially, adjusted EBITDA improved about 2% from $280 million in the second quarter, mainly driven by improved volumes and better net operating costs. Adjusted earnings per share in the quarter of $0.77, were down 27% compared to a year ago on a constant currency basis, primarily driven by lower adjusted EBITDA and higher interest expense. Turning to Slide 5. Liquibox contributed 6% to total company sales or approximately $82 million, but was offset by organic declines driven by continued market pressures and customer destocking in Protective as well as continued weakness in food retail end markets. Third quarter adjusted EBITDA of $285 million, which included $17 million contribution from Liquibox, decreased $8 million or 3% compared to last year with margins of 20.6%, down 30 basis points.
This performance was mainly driven by lower volumes within Protective. As it relates to adjusted earnings per diluted share in the third quarter of $0.77, our adjusted tax rate was 25.7% compared to 25.6% in the same period last year. We did not repurchase any shares in the third quarter. Our weighted average diluted shares outstanding in the third quarter of 2023 was 144.9 million. Moving to Slide 6. In the third quarter, Food net sales of $893 million, were flat on an organic basis with price favorability offsetting organic volume decline. Volume decreased year-over-year by approximately 1%, driven by continued weakness in retail demand, partially offset by growth in our Food automation solutions. Food adjusted EBITDA of $194 million in the third quarter was up 7% in constant dollars compared to last year, with margins at 21.7%, down 60 basis points.
The increase in adjusted EBITDA was mainly due to contributions from Liquibox, partially offset by lower volume and unfavorable net price realization of $5 million. Protective third quarter net sales of $488 million, were down 15% organically, driven by volume declines in all regions with continued market pressures in industrial, fulfillment markets and continued customer destocking activities within our APS business. Protective adjusted EBITDA of $95 million, was down 15% in constant dollars in the third quarter, with the margins at 19.5%, up 30 basis points. The decrease in adjusted EBITDA was driven by lower volume, partially offset by favorable net price realization of $2 million in cost control activities. Protective adjusted EBITDA margin improved 30 basis points compared to the second quarter, primarily driven by favorable cost control.
On Slide 7, we review our third quarter net sales by segment and by region. In [technical difficulty] net sales were flat with 10% growth in Food, our Protective was down 15%. By region, we grew EMEA by 1%, offset by a decline of 1% in Americas and with Asia Pac flat. Now let's turn to free cash flow and leverage on Slide 8. Through the third quarter, excluding the impact of the IRS to positive $175 million, free cash flow was a source of cash of $183 million compared to $137 million source of cash in the same period a year ago, representing an increase of 33% year-over-year. The primary driver of this improvement was significant inventory reduction, partially offset by lower earnings and higher interest costs. Since the peak of Q2, we have reduced total debt by approximately $100 million, exiting Q3 with a net leverage ratio of approximately 4.1x.
Our total liquidity position of $1.2 billion, including $281 million in cash and the remaining amount in our committed undrawn revolver. For capital allocation, we remain laser focused on debt reduction, targeting to drive below 3.5x net debt to adjusted EBITDA over the next 2 years. We also plan to refinance our December 2024 notes over the coming months. Let's turn to Slide 9 to review our 2023 outlook. Our full year 2023 guidance, which we reaffirmed last week, remains unchanged. Q3 top line performance was right in line with our expectations, and adjusted EBITDA has exceeded original expectations due to better pricing and cost control activities. However, going into Q4, we have greater-than-expected FX headwinds and now target sales to be slightly below the midpoint of our full year range, driven by approximately $30 million impact from FX, with volume projections still in line with original estimates.
We continue to expect adjusted EBITDA and free cash flow to be in line with the midpoint in respective guidance ranges. Adjusted EPS will be at the higher end of the range, driven by lower depreciation and amortization expense, reflecting improved discipline around capital deployment. Reaffirming our current guidance ranges, despite exceeding expectations in Q3, reflects the limited visibility environment we continue to operate in. The outcome of our fourth quarter will depend on the strength of our seasonal tailwinds related to the holiday cycle in both Food and Protective. We continue to expect an L-shape recovery through 2023 and into 2024, reflecting an increasingly uncertain macroeconomic environment driven by lingering destocking, weakening consumer demand and a higher for longer rate environment.
At this point in time, for fiscal year 2024, we are targeting flattish revenue growth, low single-digit volume growth offset by negative pricing. We expect the acceleration of our cost reduction and operational excellence initiatives to continue to position us to deliver adjusted EBITDA growth next year. While a transition in leadership can raise questions about disruption, let me be clear. Emile and I have the full Board support to take any necessary action to navigate the current market and maximize value for our shareholders, and that's exactly what we intend to do. Lastly, I'd like to close by thanking the 17,000 plus SEE team for their commitment to each other and for solving our customers' most critical packaging challenges day in and day out.
With that, Emile and I look forward to your questions. Operator, we would like to begin the Q&A session.
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