Sealed Air Corp (SEE) — Q4 2015 Earnings Call Transcript

Thank you and good morning, everyone. Before we begin our call today, I would 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 would like to remind you that statements made during this call regarding management's outlook or predictions for the future 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, 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, which you can also find on our website at sealedair.com. We also discuss financial measures that do not conform to U.S. GAAP. You may find important information on our use of these measures and their reconciliation to U.S. GAAP in the financial tables that we have included in our earnings release. Please note that we will end the call by 11:00 AM today. Now, I'll turn the call over to Jerome Peribere, our President and CEO. Jerome?

Well, thank you, Lori, and good morning, everyone. I am proud to report on behalf of all Sealed Air employees that for the third consecutive year we executed on our commitments and delivered financial and operational improvements. We stayed focused on our objectives and our three divisions and functions performed extremely well. For the full year 2015, we delivered 3% organic sales growth with favorable price mix in every division and in every region. Adjusted EBITDA margins expanded by 230 basis points. Our productivity metric, which is the ratio between our operating expenses to our gross profit, improved from 65% in 2014 to 60% in 2015. Furthermore, our operational results excluding FX and the impact of 2015 divestitures show that our net sales increased by $217 million and our EBITDA increased by $212 million. That is impressive and something to be proud of. Our free cash flow in 2015 was $595 million, which excluded $184 million in CapEx and $98 million in restructuring. We returned $802 million to shareholders through share repurchases and still have $884 million remaining under our current authorization. Our Get Fit and Change the Game strategy is well underway, and you can see the financial benefits from Get Fit programs over the last few years, which include tight control and strategic alignments, pricing discipline, targeted R&D investments, and working capital management, and there is still a lot to be done. For example, in Supply Chain, our Get Fit efforts are changing and simplifying how we operate to deliver improvements in cost of goods sold, cash management, and service. Over the last 24 months, we have consolidated 9% of our total facilities, with another planned incremental reduction of 5% over the next 12 to 18 months. We have reduced our total active SKUs by 30% since 2013, and we will continue to optimize SKUs. In the past two years, we have been able to cut our cash conversion cycle by a third, largely through better management of payables and receivables. We have clear targets and will continue making progress in 2016 and beyond with a more concerted effort on inventory management. Our ongoing commitment to continuous improvement will ensure that we consistently realize operational efficiency. This is the power of being focused. And believe me, our Get Fit program has many more good days ahead. At our Analyst Day back in June 2015, we provided a detailed investment plan for Change the Game. Our early successes validate the long-term potential of these growth opportunities. In Food Care, for example, demand for Darfresh on Tray in Europe has exceeded our expectations, and our rollout in North America is off to a very solid start. Our recently introduced barrier technology, OptiDure, is also seeing similar market acceptance in Europe, and there is already meaningful interest globally. In Diversey Care, the acquisition of Intellibot has given us first-mover advantage in the robotics flow care equipment market. We are also delivering on our commitment to bringing sustainable solutions to the hygiene industry with our 100% biodegradable plant-based SURE solutions, and there are more solutions like this under development. And in Product Care, our automated solutions including B+ and FloWrap are gaining traction and positioning us as our customers' trusted consumable and equipment partner. We will execute in 2016 with the same mindset as in 2015. We will deliver profitable growth and maximize free cash flow by focusing on execution and operational excellence. We will stay disciplined in our value-added selling approach and continue investing in next-generation, disruptive technologies. And before I dive into our results, I want to highlight something that I am very passionate about: sustainability being at the service of financial performance. Companies with sustainability as a priority are long-term financial winners in tomorrow's world. At Sealed Air, sustainability is at the core of what we do, how we innovate, and how we invest. Following the COP 21 agreement in mid-December in Paris, we joined a group of companies committed to disclose the total financial impact and the environmental benefits of all new product introductions to our customers. We were recognized by CDP for our sustainability efforts for the second consecutive year and awarded a position in CDP's climate indices, placing us in the top 10% of global S&P companies. In the fourth quarter, we delivered net sales of $1.75 billion, which were up 2% on an organic basis, which excludes currency and the Food Care divestitures in North America and Europe. In EMEA, we delivered 3% organic growth in the quarter with favorable trends in some of our largest Western European countries and continued growth in Russia and Turkey. North America saw organic sales relatively flat, with 5% growth in Diversey Care and slight food care increases offsetting declines in Product Care. Asia Pacific was also flat compared to the previous year, although we did see 2% to 3% constant dollar growth in Australia and New Zealand. Latin America was hit hardest with currency devaluation, declining 18% on an as-reported basis yet increasing 7% in constant dollars due to increased demand in the Food Care business. Through the full year, we delivered $7 billion in net sales, achieving 3% organic growth across every region. We had favorable price mix in every region throughout the year, except in North America during the fourth quarter. Food Care sales increased 3% on an organic basis in the fourth quarter, driven by favorable price mix and higher volumes, with growth in EMEA, North America, and Latin America. Our hygiene business gained traction with our direct food contact chemical solution designed to improve food safety and extend shelf life. Before I highlight our full-year results and outlook for Food Care, let me briefly provide you an update on what we are observing in the North American beef market, which was down 5% in the fourth quarter and for the full year 2015. Industry data suggest we are at the bottom in North America, and evidence shows the market is on track to improve in the second half of 2016. So, looking forward, we are well-positioned to outperform the capital market in North America as production increases and we continue to penetrate existing and new customers with our advanced portfolio across all proteins and adjacent markets. For the full year, Food Care net sales declined 11% as reported, but increased 4% on an organic basis with adjusted EBITDA margins expanding 280 basis points.

Thank you, Jerome. Turning to slides 10 and 11; let me walk you through our net sales bridge and adjusted EBITDA performance for the quarter and the year. We delivered $1.75 billion in sales in the fourth quarter and $7 billion for the year. On an organic basis, sales increased approximately 2% in the quarter and 3% for the full year. Sales growth was attributed to favorable price mix, which was 1.6% or $32 million in the quarter and 2.3% or $176 million for the full year. Volume was essentially unchanged in both periods. Unfavorable currency translation was $190 million in the quarter and $764 million for the full year. In 2015, approximately 18% of our total sales were exposed to the euro. In the quarter and for the full year, divestitures impacted net sales by $64 million and $172 million respectively. Moving on to adjusted EBITDA, during the quarter we achieved $282 million or 16.1% of net sales, unchanged on an as-reported basis compared to Q4 2014. Unfavorable currency translation impacted us by $30 million. On an organic basis, adjusted EBITDA increased by 15% due to favorable mix and financial management. For the full year, adjusted EBITDA increased 5% year-over-year to $1.17 billion or 16.7% of net sales. Adjusted earnings per share was $0.76 in the fourth quarter and $2.59 for the full year 2015. Currency negatively impacted adjusted EPS by $0.11 for the quarter and $0.38 for the year. Free cash flow was a source of $595 million in 2015, excluding the tax refund associated with the settlement agreement. We are making meaningful progress toward achieving our operating working capital target of 15% of net sales based on a 13-month average. Moving forward, we expect net sales to be approximately $6.8 billion in 2016, a 3.5% increase on an organic basis, while unfavorable currency is expected to be $400 million.

Thanks. Good morning.

Good morning, Scott.

Good morning, Scott.

Just first question around Latin America, because I think in the quarter, if I looked at the slides correctly, it was up 10% organically in the quarter. Can you talk a little bit about that? Are you seeing anything in the economic environment that makes you concerned that that growth rate is not sustainable?

Well, Latin America has been a difficult continent throughout 2015, especially as devaluations in the second half have increased. Everybody knows the situation in Brazil, and we have dramatically suffered in our positions in Venezuela, but that's the reality. That being said, we have some very strong bright spots, especially in Argentina, where we've been growing significantly in local currency and in dollars in 2015. While the overall environment is challenging, our Food Care business has outperformed the market despite volume declines. Our new product introductions in Argentina, Mexico, and Brazil have generated strong interest.

Operator, next question please.

Hey, guys. Good morning, and first off, congrats on the strong finish to 2015.

Thank you.

Thank you, Ghansham. Good morning.

Yeah. I guess my question relates to the 2016 organic growth rate of 3.5%, which is clearly an acceleration over the second half of 2015 run rate, even with the macro presumably more challenging. I guess what gives you more confidence on that type of outlook? And how does that break out between volume and price mix? Thanks.

It's interesting that everyone seems rattled by the economies. The financial markets are quite volatile—week to week, oil, China, and banks are all fluctuating. However, I am not as negative. We had growth of 2.8% in 2015, and we aim for 3.5% plus. I am very pleased with our new products. Our Food Care business will benefit in the second half of the year from the cattle situation we discussed at our Investor Day. Our new products, like Darfresh on Tray and OptiDure, are ahead of schedule, and we're seeing strong progress in Diversey Care. Overall, I’m confident that between 2.8% and 3.5%, given our current situation, is realistic.

Just to clarify your question regarding volume versus price mix: our growth is more than half driven by volume.

Operator, next question please.

Hi, everyone. Good morning. Congratulations on the year and thanks for all the details. I had a point of clarification question, and then I wanted to touch on organic volumes for the year. So Carol, I just want to make sure I heard you right. You are forecasting the EBITDA for the quarter coming in at $245 million, with food being down somewhat? And I guess by implication, the other segments being up? And then just comparatively, what was the prior year if I strip out divestitures and the like?

So, George, on the $245 million for Q1 EBITDA forecast, that is correct and is driven mainly by the decline in Food Care, implying the other two segments would be up. Regarding divestitures, last year, we recorded a North America and European trade divestiture of $67 million, negatively impacting adjusted EBITDA by roughly $14 million. Thus, we are positioned for some strong performance in 2016.

Operator, next question please.

Thanks. Good morning, everyone. Carol, just on the FX assumptions, can you help us with what currency rates you are assuming for the full year? And how much different your sales and EBITDA guidance would be if you were taking today's rates as opposed to perhaps year-end rates?

With respect to our assumptions, for the euro, we used $1.05. We recognize that it's less than today's rate due to volatility, but we feel it's a prudent exchange rate for our forecasts. Approximately 18% of revenues were based in euros for 2015. For the Russian ruble, we used $80.5; Brazilian real, $4.33; Australian dollar, $1.44; the Great British pound, $1.45; and the Canadian dollar, $1.30.

Operator, next question please.

Good morning. On free cash flow, moving beyond the CapEx bump in 2016, is that $200 million CapEx guidance for 2017 that you provided at the Analyst Day still intact? Is there anything like divestitures or an upside from Change the Game that might affect that $200 million range?

So, you're spot on, Anthony. We have significant progress compared to our forecast from last year. Outside of currency, we're ahead of expectations, aiming for organic growth of 4% to 5%. For 2016, we expect EBITDA growth and a continued strong focus on innovation.

Yes, indeed, we continue to feel confident about maintaining our CapEx guidance around $200 million as a baseline moving forward.

Operator, next question please.

Yes, and good morning. My question is about the free cash flow guidance. I was curious about the tax situation. You mentioned a tax rate of 24%. How much of this will be cash taxes, and do you think there will be carryover tax benefits that could reduce this cash tax rate?

Actually, Chip, as we mentioned on Analyst Day, our cash taxes are expected to rise as we move forward since we've utilized many benefits, estimating $125 million moving to $180 million by 2018.

Operator, next question please.

Good morning. This is Gabe Hajde, actually, sitting in for Chris. I wanted to touch on the raw material environment. What are your expectations heading into the year, and is there any benefit in the price-cost spread baked into your guidance?

We have accounted for weak polyethylene and olefins prices in our forecast. Thus far, they are developing as anticipated. I’m optimistic as we continue to see positive momentum with customers interested in improving their operations and reducing waste.

Operator, next question please.

Good morning, Carol. Good morning, Jerome. I wondered if you could talk about uses of cash in 2016. The stock is cheaper than average prices last year. Do you have any thoughts on the current market for acquisitions?

We maintain a cautious approach toward acquisitions, focusing on bolt-on solutions or technology expansions rather than large acquisitions. Our focus remains on organic growth.

To add on that, we will pursue both small and targeted tech acquisition opportunities but remain focused on our ongoing operational improvements and innovation ramp-up. We’ll evaluate larger acquisitions when appropriate.

Operator, next question please.

Hey. Good morning, guys. The industrial economy is obviously quite weak. Can you parse out the opportunities driving growth in Product Care, like e-commerce or dim weight, and how trends are shaping up for the broader market?

Regarding Product Care, while industrial markets have shown some softness, we continue to see double-digit growth in e-commerce. We're addressing customer needs in this area through our solutions aimed at reducing damage and improving efficiency, which rounds out a valuable offering.

Operator, we have time for one more question please.

Thank you. Good morning, everyone, and congratulations. Jerome, I was wondering if you could give us a little insight on Food Care's growth expectations in North America versus Australia. Have those growth rates compensated for one another?

Overall, the dynamics in both regions vary considerably but we expect North American growth to be strong. Australia is transitioning, and while previous growth rates are softening, we believe the Food Care North America upside in the second half will outperform Australia.

Operator, that's all we have time for this morning. Thank you, everyone for joining. Operator, I pass the call back to you.