Sealed Air Corp (SEE) — Q2 2016 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 discussion. This presentation can be found on today’s webcast and can be downloaded from our investor relations 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 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 reconciliations to U.S. GAAP in the financial tables included in our earnings release. Included in today’s presentation on Slide 3, you will find U.S. GAAP financial results that complement some of the non-U.S. GAAP measures used throughout the presentation. Now, I will turn the call over to Jerome Peribere, our President and CEO. Jerome?

Thank you, Lori and good morning everyone. I am sure that you have had the time to review our second quarter earnings results, and I will keep my comments brief before passing the call on to Carol Lowe, our CFO; and Dr. Ilham Kadri, President of our Diversey Care division, to provide a more detailed review of our second quarter performance and full-year outlook. Our second quarter results were in line with our expectations in each of our three divisions. We knew from the onset of the year that our growth in the first half would be muted. Food Care, Diversey Care, and Product Care capitalized on growth opportunities in targeted countries and end markets, which offset other areas challenged by economic uncertainties, political unrest, and a weak industrial environment. Overall, I am pleased with our adjusted EBITDA results of $306 million or 17.7% of net sales, which includes about $7 million of reimbursement related to environmental expenses on a slight increase in organic net sales. Excluding this reimbursement, we had a very solid adjusted EBITDA margin performance of over 17% of sales. Product Care delivered over 21% margin, Food Care over 20%, and for the first time, Diversey Care delivered a 15% margin, excluding the environmental reimbursements. As we look to the second half, and as previously communicated, we expect stronger performance primarily driven by volume acceleration. In Food Care, the operation rate continues to penetrate the market in Europe, and we are in successful trials with two large retailers in North America. Diversey Care is enjoying new customer wins across its portfolio, and our robotics startup, Intellibot, delivered record sales in May and June. In Product Care, our innovation pipeline and customer inflows are building as we prepare for a seasonally strong year-end. This momentum, coupled with an improved protein market and accelerated growth in e-commerce and fulfillment, gives us confidence in our second-half growth trajectory. For the full year, our outlook is within the range of our previously provided guidance. Currency headwinds are not as high as we anticipated, but this benefit is being offset by our assumptions on resin costs and related impact on Food Care’s formula pricing. Additionally, we anticipate the recent geopolitical events in Europe and the Middle East to have an impact on our business in the coming months. Overall, our strategy is clearly working. Our market differentiation of revolutionary innovation is gaining significant traction in each of our divisions. In Food Care, customer interest continues to increase for our next generation target technology, Optidur. Diversey Care’s disruptive and innovative technology, including the Internet of Things platform and digitally enabled solutions, are increasing our sales opportunities in a meaningful way. In May, we received a top innovation award at the ISSA/Interclean Trade Show in Amsterdam. And Product Care has reshaped its entire portfolio and go-to-market strategy with dimensional ways, fulfillment velocity, and consumer experience solutions. I strongly encourage all of you to attend two upcoming tradeshows: the ISSA/Interclean in late October and Pack Expo in early November, both of which are being held in Chicago. At Pack Expo, Product Care will showcase more commercialized innovation than ever in the history of Sealed Air. So with that said, let me now pass the call on to Carol and Ilham to get into more details by division and our outlook, and then we will answer any questions that you may have. Carol?

Thank you, Jerome. On Slide 5 of our presentation, you can see our performance by region for the second quarter. Let me start with EMEA, where we had 2.5% organic growth and positive sales across our three divisions. Food Care sales increased by 3%, Diversey Care increased by 1%, and Product Care increased by 5%. On a by-country basis, EMEA was led by double-digit growth in Russia and high single-digit growth in Spain and Holland. We also experienced positive sales in Germany and Sweden. Asia-Pacific was up 1% in constant dollars. India was up 12% led by double-digit growth in Diversey Care and Product Care. In China, Diversey Care delivered high single-digit growth and Product Care’s business returned to growth in the quarter. Our largest markets in Asia-Pacific are Australia and New Zealand, and combined, they account for 6% of our total net sales and just over 10% of Food Care sales. In Food Care, sales in Australia and New Zealand were essentially flat compared to last year. In Australia, adoption of our advanced product portfolio and new customer wins are helping to offset the double-digit declines in slaughter rate and the export of live animals. In New Zealand, our business continues to be impacted by the ongoing weakness in the global dairy market. Latin America was hit the hardest by currency devaluations and socio-political instability. On a reported basis, Latin America was down 11%, which translates into constant dollar growth of 8%. Despite the current environment in Latin America, Food Care experienced positive sales growth in Brazil and Mexico on an as-reported basis. This translates into nearly 20% growth in both countries on a constant dollar basis. Brazil and Mexico each accounted for approximately 4% of Food Care sales. Let’s move to Slide 6 and look at trends in North America. Overall, North America sales were down 2% on an organic basis due to an unfavorable price mix of 3% partially offset by 1% volume growth. Food Care delivered healthy volume growth of 3%. This was more than offset by unfavorable formula pass-throughs. Diversey Care’s North America business returned to growth in the second quarter with positive price mix and volume trends. Product Care’s volume and product mix were negatively impacted by the ongoing weakness in the industrial market, particularly in manufacturing and electronics. Volume was also impacted by our rationalization efforts. Excluding rationalization, volume would have been positive in the quarter. Turning to Slide 7, let me walk you through our net sales and adjusted EBITDA performance on a year-over-year basis. Starting with the net sales, you can see that we delivered $1.7 billion. Volume contributed $9 million to top line growth, and favorable price mix contributed $7 million. Unfavorable currency translation was $59 million, and the impact from divestitures was $15 million. On Slide 8, you can see that our adjusted EBITDA was $306 million or 17.7% of net sales. Mix and price cost spread was $9 million favorable, and positive volume contributed $4 million. We had $9 million in restructuring savings. Operating expenses of $12 million are net of the $7 million environmental reimbursement Jerome mentioned in his comments earlier. Salary and wage inflation of $17 million, currency was negative $9 million, and divestitures were $3 million. Adjusted earnings per share was $0.65 in the second quarter. Our adjusted tax rate in the quarter was 29%. For the full year, we continue to expect our tax rate to be approximately 24%. Let me now turn the call over to Ilham to go through our results by division. Ilham?

Thank you, Carol. Slide 9 highlights the results of our Diversey Care division. Diversey Care net sales on a constant dollar basis were at 2.4% in the second quarter. We had positive sales growth in constant dollars in all regions. Asia Pacific was our fastest growing region with 7% constant dollar sales growth. In North America and Europe, constant dollar sales were at 3% and 2.4%, respectively. If you look at our adjusted EBITDA excluding the environmental reimbursement, we delivered $80 million or 15% of net sales. Volume, pricing, and cost management all contributed to our strong EBITDA performance. It’s worth noting that in the last 2.5 years, with the exception of one quarter, we delivered positive constant dollar sales and adjusted EBITDA growth every quarter. I am particularly proud of the performance in North America and Europe over this time period. Remember that when we reorganized this business back in 2013, both Europe and North America had many years of declining sales and deteriorating margins, whereas Middle East, Africa, and Latin America increased sales on a constant dollar basis this quarter. We are seeing a slowdown in our business due to political unrest in the Middle East and economic weakness in Argentina. Middle East, Africa, and Latin America combined represent 15% of our sales. Looking ahead, we are confident the momentum in North America, Europe, and Asia Pacific will continue. We are rolling out new customers and adding to our list of strategic wins across all sectors, including facility management, retail, and healthcare sectors. Customer feedback on our robotics and Internet of Things platform has been extremely positive, and as a result, we are accelerating our go-to-market strategy. For the full year, we expect constant dollar adjusted EBITDA growth and margin expansion. The third quarter will experience a decline versus quarter two as we step up our implementation of new sites related to recent customer wins and the significant slowdown in hospitality in Middle East, Africa. We expect our fourth-quarter adjusted EBITDA to be stronger given the timing of the new customer rollouts and product and regional mix heading into year end. Let’s now turn to Slide 10 and review Food Care results.

Food Care sales increased by 1% on an organic basis driven by a combination of higher volume and favorable price mix. By region, Latin America was up 11% and EMEA increased by 3%. Asia Pacific was essentially unchanged and North America declined by 3%. Adjusted EBITDA was $163 million or 20.3% of net sales. Positive volume in North America and EMEA is largely a result of our case-ready platform, including Darfresh on Tray. Also, our next-generation barrier technology, Optidur, is gaining traction with successful trials in North America, Asia Pacific, and Europe. In Hygiene, we continued to improve both sales trends and profitability. We are also investing in new solutions, including our recent acquisition of Finland-based TTS-Ciptec, a leading cleaning place systems optimization company. This acquisition complements our expertise in remote monitoring and data analytics and enhances our knowledge-based service offering. In the second half of the year, Food Care organic sales growth is expected to accelerate, primarily driven by an increase in sales volume in North America and Europe. Both regions will benefit from higher protein production levels as well as continued adoption of advanced products. We also believe our packaging business in Brazil is beginning to stabilize with 4% volume growth in the second quarter. These positive trends will be partially offset by declines in Australia and New Zealand and North America formula pricing. On the bottom line, we continue to expect sequential growth in absolute dollars in the third and fourth quarters, resulting in full-year organic EBITDA growth and margin expansion. As Jerome noted, Food Care EBITDA will be negatively impacted by our assumption of raw material costs heading into year end. Let’s turn to Product Care results on Slide 11.

Product Care’s net sales in constant dollars were down 1.5% due to a 4% decline in North America, partially offset by mid-single-digit growth in EMEA. We continued to experience strong growth in e-commerce and fulfillment in the first half of the year on a global basis. In North America, this was more than offset by ongoing weakness in the industrial sector. Also, keep in mind that we divested $15 million of annualized sales in North America in January and another $12 million of annualized sales in Europe in May. Excluding these divestiture figures, global volume trends would have been stronger and we would have delivered a slight uptick in North America. In the second half of the year and more so in the fourth quarter than the third quarter, we expect our constant dollar growth rate to accelerate. Demand continues to increase for our Inflatable Bubble, Korrvu, Sealed Air B+ and FloWrap equipment platform. This level of demand is translating into strong double-digit growth in equipment sales and installments. For the full year 2016, top line growth coupled with our focus on pricing and cost discipline will drive constant dollar EBITDA growth and margin expansion. Now, let me pass the call back to Carol to review our free cash flow and our outlook for 2016. Carol?

Thank you, Ilham. Turning to Slide 12, free cash flow was a source of cash of $68 million in the first half of the year. CapEx increased to $114 million compared to $58 million during the same period a year ago, of which $40 million was related to our Charlotte campus. Working capital and other assets and liabilities were a use of cash of $165 million. Operating working capital as a percent of net sales based on a 13-month average is relatively the same since year-end at 14.3%. As compared to June 30 last year, we improved 130 basis points. Now turning to outlook on Slide 13, net sales are expected to be approximately $6.85 billion. The impact from the Food Care divestitures on 2016 net sales is $102 million, of which $82 million impacted the first half of the year. Currency is expected to have an unfavorable impact on sales of approximately $275 million. Our outlook for adjusted EBITDA is now at $1.17 billion to $1.18 billion. The impact from the Food Care divestitures on 2016 EBITDA is $21 million, of which $17 million impacted the first half of the year. Currency is expected to have an unfavorable impact on EBITDA of approximately $45 million. As Jerome mentioned earlier, we are expecting accelerated EBITDA growth in the second half of the year and anticipate that the fourth quarter will be our strongest quarter of the year. Strength in the fourth quarter will be driven by higher Food Care volumes, our customer rollout schedule in Diversey Care, and seasonal strength in Product Care. Our medical and corporate expenses are expected to be a net expense of $90 million for the full year 2016. Our interest expense for 2016 is estimated at $225 million. Depreciation and amortization is forecast to be approximately $280 million. Adjusted earnings per share is expected to be at the high end of our previously provided range of $2.52 to $2.60. We are maintaining our free cash flow target of approximately $550 million. CapEx is expected to be $275 million, which includes approximately $125 million related to the investment we are making in our Charlotte campus and other capital restructuring activities. Excluding these items, maintenance and growth CapEx combined is estimated to be approximately $150 million. For the full year, we continue to expect working capital and other assets and liabilities to be a source of cash of approximately $100 million. Cash restructuring payments are estimated to be $110 million, and we expect to realize restructuring savings of approximately $30 million. Cash interest payments are expected to be $220 million, and cash tax payments are estimated at $125 million. As we head into year-end, we will focus on what we can control and look for opportunities that will help mitigate the potential impact of the macro environment. We will continue investing to support our future growth opportunities. Our focus on execution and delivering profitable growth is embedded in our winning culture. Before I open the call to questions, I would like to remind you our third quarter earnings call is tentatively scheduled for Thursday, October 27. We have invited Ken Chrisman, President of Product Care, to join Jerome and I on that call. With that, operator, can you please open up the call for questions?

Thanks. Good morning.

Good morning.

Hey, Jerome, Carol, Ilham.

I just wanted to look at the EBITDA guidance. So, it comes down to $1.17 billion to $1.18 billion, looks like down $10 million, and yet currency is better. You had a better-than-expected first half and you are talking about accelerating EBITDA growth in the second half. What is it that’s maybe below expectations for the full year now that’s caused that reduction in the EBITDA guidance?

So, let me first say that we are really counting on the acceleration that I talked about back in February. I said from the very beginning that the first half was going to be re-reviewed and that we were going to see business acceleration. What I also said was that this was going to grow mostly with volume. What I didn’t think would happen was the assumptions we had on resin prices, which have been lower than what we thought. That is having an impact on our formula pricing. You know how important they are. We were thinking at the time that those formula pricing in Food Care in North America were mostly going to be in the first half and not in the second half. Well, because of what resin prices are and we anticipate they are going to be, we are going to have negative formula pricing in the second half, and that’s basically how we are seeing the situation today. Having said that, our global price mix in Food Care and price mix versus cost price will be positive for the full year, but not as positive as we had originally forecasted. So, that’s basically the slight difference. This is impacting sales growth because of the net sales resulting from the lower resin prices. But what we are doing here is narrowing the range that we are providing, and that’s mostly what we are doing here. And keep in mind that pricing drops straight to the bottom line. So, that’s great. The important thing to remember here is the volume trend. And the volume trend is really as per what we were expecting. And why are we seeing good volume trends? It is very clearly the impact of our innovation is kicking in.

Operator, next question please.

Hi, everyone. Good morning. Thanks for the details and discussion. I guess I wanted to ask a two-part question. One, just tying a bow on Scott’s question, and then I had a question on volumes relative to case-ready and the new products. So, with EBITDA coming down, your relative to your prior guidance, and we understand the reasons why, your EPS guidance is towards the higher end of the range. Is there some sort of non-cash driver of that or what reconciles that? And then on Optidur, what’s the risk of cannibalization around existing sales? And with Darfresh on Tray, what’s so positive about that now versus prior case-ready offerings? Thank you, guys.

Okay. So I will answer the third question. The EPS is going to go to Carol. Let me just talk about Optidur and Darfresh on Tray. Optidur, when it is fully launched, which means as it ramps up, we have cannibalization effects, but it will also have strong margin improvements effect, but this is going to be, call it a full year program. We had several generations of Optidur product. And the first one right here that we are introducing for obvious reasons is mostly new business. And this is at this point in time in Europe we have run trials, and implants in North America were extraordinarily successful, highly compelling products. Therefore, overall, in time, it’s going to be a quarter of sales cannibalization but dramatically improved margin expansion for all kinds of reasons that we have already talked about. Regarding Darfresh on Tray, the value selling proposition is strong on several fronts. Number one, you have vacuum skin packaging, which is improving shelf life and has value for the retailer. It also has value for the producer because of the shipping time, etcetera, and it has value for the consumer, because they can keep the product freezer-ready and keep it stored in their fridge. Production runs extremely fast as well, and also eliminates human waste on the top lid due to the machine's operation versus about 20% to 40% waste on the lid. On the EPS, Carol, any comments?

Yes. George, with EPS, one of the changes is the slight decrease in depreciation and amortization of about $5 million. Also, our share count as we are exiting Q2 was at approximately 197 million shares outstanding. We are seeing benefits from share repurchases going into the weighted average calculation for the first quarter where we spent about $32 million to buy almost 700,000 shares back in Q2. We spent approximately $20 million to buy an additional 435 shares back. So year-to-date, we are at 1.13 million shares with the spend of $52 million. I will remind everyone we still have $832 million available under our July 2015 Board authorization. And managing within our targeted leverage range of 3.5x to 4x, we would expect to return value to shareholders as we consistently messaged moving forward throughout the year, again maintaining within our leverage.

Operator, next question please.

Yes. Good morning guys. I guess sticking on the growth question, can you just give us your view on second half end market growth for your three segments across the various regions, obviously it’s a very complicated backdrop. And then also, how much in total do you think your new growth initiatives will add to that growth rate? Thanks so much.

Okay. I can detail you the growth initiatives right away. But as I said, starting with Food Care, our growth is led by innovation. We are in trials with Darfresh on Tray with two large retailers. Things are going extremely well. It takes time to see full adoption due to required investments. If you go back to our Investor Day of exactly a year ago, it’s all happening and better. When you look at Product Care, and I would let Ilham comment on Diversey Care, you absolutely need to come to Pack Expo this autumn as I mentioned in my prepared remarks. You will see the booth with the highest innovation, and that is driving our growth. Our e-commerce business is growing extremely well. The industrial GDP is not good, however. If you look at the CAS index, which tracks truck and rail freight, it is at the lowest since 2010 right now. You can’t pretend that the industrial economy is doing really well because it isn’t. But when you look at e-commerce and how we are performing in this environment, we are clearly partnering with our customers in hopes of growth. We have multiplied by 2.5 the installs of our small equipment in North America. We have seen a similar increase of 15% in EMEA and almost 30% in Asia. This signals the consumer is going to come during the year. Ilham, some comments on Diversey Care?

Yes. Ghansham, on Diversey Care, I think you have seen the numbers. I am extremely proud of the hard work done by the Diversey Care team and all the important fractions we delivered to report EBITDA. I will give you some colors on regional performance; Europe was extremely strong, showing continued momentum since we started transforming this business back in 2013. This was nice growth to raise both markets in South Europe and in Germany. We are winning customers like in the UK, where we are rolling out and should start picking up by the end of the year. In North America, North America returns to growth as we noted in quarter two, thanks to our healthcare business performing extremely well with our unique sustainability technologies there, and we are rolling out large customers in facility management. We are implementing help at 50,000 sites ahead of schedule. Last but not least, in APAC, we have good momentum as well. We are growing above the industries we serve at 4% for 2016. Diversey Care is gaining momentum from volume levels. As we noted earlier, China is growing high single-digits and India mid double-digits, just to highlight a few leading and strategic economies for our Sealed Air economy.

What might affect Diversey Care in the second half are factors that you and I read in the newspapers, which means that in Diversey Care, for example, you have tourism which is strongly impacted in Europe. Hotel chains have published some results, and you can see that tourism is down in France, Belgium, Morocco, and Turkey. In Egypt, hotel capacity utilization is at 55% and 50% in Turkey. So, we have to be realistic about the situation, which will impact Diversey Care in the third quarter but should improve in the fourth due to customer wins that require resources which are currently being deployed. Overall, the impact on net sales growth stems from pricing and resin formula pricing, which is influencing dollar sales growth, but not the momentum of our businesses.

Operator, next question please.

Alright. Thank you. Could you just discuss your outlook on the resin price environment and I guess maybe some of the actions that you take to mitigate volatility that you see there?

Okay. I am not going into details so as not to signal too much to our competition on our actions, but rest assured that we do what it takes to stay very competitive. Regarding the resin, I mentioned earlier that we anticipated some weakness and overall it has not been that weak, with price increases seen in March and April. We had anticipated that these would not hold for a long time, but they are, in fact, helping the producers significantly. In the second half, we are going to see a negative impact that will outweigh the positive contribution from better currency movements anticipated. We will have negative formula pricing as a result. It’s challenging to predict the resin prices. We wouldn’t wish they were at the beginning of the year where they currently are. Capacity will come in next year, and ease our challenges as we enter hurricane season which can alter these factors significantly.

Operator, next question please.

Hi guys. Should we expect the product rationalization on Product Care largely behind you at this point and will that help firm up demand despite some of the weakness you are calling in the industry economy and stabilize or kind firm up price in the back half? I would have thought given some of the mix improvements you are doing on e-commerce that would have helped down pricing? Thanks.

Hi, Phil, good questions. Some comments on the economy: our industrial parts are today moving forward compared to the e-commerce parts. The e-commerce and 3PL sectors are expanding rapidly but remain at approximately 30%. This is where our growth is focused. We anticipate taking full advantage of our equipment and consumables in that market sector. We have completely reinvented this division and it is growing exceedingly well. I told you earlier this year that you would be surprised by our innovation momentum and customer uptake in the second half, and we are here to confirm that all is going according to plan. On rationalization, I noted in January that we have divested from a historic line in the U.S., which represented $15 million in sales. I stated we would be closing down a plant and product line in France, which was about $12 million. To your question, yes, we believe that this process is largely over. Keep in mind that we need to look at the impact of Brexit as it relates to our translation costs. We have a strong business in Product Care, Food Care, and Diversey Care in the UK. What we are doing is implementing a 6% to 8% price increase effective September 1 to capture the transaction costs from the UK pound. We communicated this clearly to our customers, and we are moving on. Surprisingly, it has been easier to get through than anticipated, as everyone understands these market dynamics.

Yes. It’s important to highlight that we saw a continued strong improvement in margins in the second quarter with an improvement of 40 basis points year-over-year on our adjusted EBITDA and for the full half, a 60 basis point improvement. Despite the challenges in the industrial market that Jerome has highlighted, that’s just very strong performance by the team.

Operator, next question please.

Thanks. Good morning. Jerome or Carol, just one clarification on organic sales growth; I think last quarter you stopped disclosing a growth target and there was some weakness in Brazil and Venezuela that you called out. Now, I think Jerome you are saying that the impact of lower resin prices is having a profound impact on your organic net sales, dollar sales. You are also talking about global economic weakness as evident in industrial conditions, tourism, etc. So, I’m just trying to understand exactly what the puts and takes are in terms of your organic sales forecast now compared to where it was six months ago. It would really be helpful. Thank you.

Yes, good question. So, what did I say at the beginning of the year, I mentioned about 2.5%. What you are seeing is that it’s going to be slightly less than 3%. This is not due to volume; it is due to resin prices and some weakness in sectors like hospitality. Positives and negatives arise every single day. If resin prices increased by 10% more, you would see our sales growth suddenly increase beyond the initial estimate of 3.5%. The lag in these shifts due to pricing makes it complicated. The fundamentally important thing to emphasize is the volume trends are as we expected, and our innovation strategy is successfully fostering this momentum.

Operator, next question please.

Good morning. I guess I want to kind of follow-up here, because I am still a little bit confused on a couple of topics. Look I think coming into the year you anticipated a pointer, I think it was 3% plus growth with 2% of it being organic and one being priced. Now, as material costs are falling, I am a bit perplexed about the prior expectations you had whereby it seemed you could maintain those margins. It sounds now like maybe Jerome what you are saying is that while you are still poised to gain volume in the back half of the year to make up that piece, the revenue growth might not be there because some of the mechanisms are lowering price. Is there something perhaps different in the competitive landscape today that’s not enabling you to – or that’s cutting price perhaps more than just what the formulas are moving that’s impeding your ability to kind of work on the net price side? What’s changed perhaps from a quarter or so ago to today or this has progressed?

Okay, Chris, I don’t know how to say this differently. I told you nothing has changed. I stated that we had 3% growth in Food Care in North America in the second quarter—not bad. We had, in the second quarter, 3% growth. In Latin America, if you exclude Venezuela, we would have had volume growth. Things are stabilizing. We are very satisfied with performance in Brazil. The way our local management has turned things around is key. We are doing well in EMEA thanks to Food Care and we have similar scenarios in Product Care and Diversey Care. What I am telling you here is that we have given you a guidance of about 6850 for the total year in total sales. We did benefit from currency on one side. What I have just discussed with you relates to the net selling price, which is impacted by resin costs and formula pricing. You referred to competition? Look at our competition and compare how we are expanding volumes with their growth. Product Care is thriving. Food Care is thriving. We had a record year in Diversey Care at the same time.

Operator, next question please.

Yes, good morning. Jerome, could you give us a quick view of how the beef business is looking for you guys in Food Care around the world and how things may have changed since the last call?

Okay. So, let me start with the good news: the Australian beef cycle is stabilizing. It’s only down 0.5%, which is actually better than we had originally anticipated. Remember that last year it was experiencing rapid growth with a 10% increase in slaughter rates, which was unsustainable. It then lowered over the fourth quarter and first quarter. Now, it seems that the markets are stabilizing. You have the volumes in North America increasing, and while there might be a slight pause in the third quarter due to a strong second quarter harvest, overall, we expect to see a rise of over 3.5%. So this trend is moving positively. Regarding Russia, it's developing its herd positively, and just to let you know, our business down there is doing exceptionally well. Russia is up by 15%, Spain is up by 8%, and meat exports from Brazil are seeing improvements. Overall, I would say our expectations are being met. I can assure you that we have a high market share in that business and we continue to grow with our bag's business, Darfresh on Tray, and OptiDure.

Operator, I think we have time for one or two more questions please.

Good morning Jerome. Good morning Carol. Just to follow on Chip’s question there, Jerome, is it possible for you to give us some sense of the size of your North American beef business versus the size of your beef business in all of those offshore markets?

No, we don’t publish that information. However, we have provided indications regarding the overall market impact. Globally, our fresh red meat market constitutes about 30% of our total sale, and that’s as much as we can share. But I have previously given indications in earlier earnings calls about how to size this type of business.

Operator, I think we have one final question please.

Thanks for squeezing me in. Jerome, I just wanted to ask you about dimensional pricing for a minute, just curious how the customer adoption on that has gone so far. I know you signed some strategic partnerships during the quarter, and I am wondering if you could expand upon what those will allow you to do that you couldn’t do on your own. When do you think we will start to see this kind of move the needle on the volume or price numbers for the Product Care segment? Thanks.

So, as I mentioned, weight and pricing are significant growth factors for our business. Thanks to our B+ and FloWrap technologies, etcetera, our new Korrvu innovation provides substantial sales. You will see these positive changes in the third and especially in the fourth quarters, as Q4 is an e-commerce quarter. All cards are set for a stellar quarter. I am very pleased with the transformation of that division. I have made it clear that we are revolutionizing this entire sector. Our customers are responding positively not only to the dimensional pricing but also to the realization that the packaging look matters significantly in presentation through e-commerce packaging. We are conducting various studies and will publish the results at Pack Expo, which will illustrate that the retailer or e-commerce company image is deeply influenced by proper packaging.

Operator, I believe there is one question in the follow-up queue. It looks like George Staphos is trying to ask a follow-up question. If you see him in the queue, can you please open his lines?

Okay. Thank you very much for everybody joining us today. If you have any follow-up questions, please reach out to myself and I will be happy to follow up. Thank you.

Thank you.