Sealed Air Corp (SEE) — Q2 2017 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 and Current Reports on Form 8-K, which you can also find on our website at sealedair.com or at the SEC's website at sec.gov. 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 that we have 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'll turn the call over to Jerome Peribere, our President and CEO. Jerome?

Thank you, Lori, and good morning, everyone. We will cover our second quarter and first half results, key drivers for the second half, and how we are executing on our strategy. We will also provide an update on our sale of Diversey to Bain, use of proceeds, and our share buyback program. As we review our quarterly results and near-term business trends, you will see that our long-term profitable growth strategy is coming to fruition, presently led by volume growth. You are now seeing renewed top-line growth as a result of our Change the Game execution. In Product Care, our stated strategy to disproportionally grow our e-Commerce and 3PL business and progressively transform it to automated fulfillment solutions will over time give us equivalent margins to our industrial business. In Food Care, we are benefiting from our focused efforts to deliver unique, differentiated, case-ready applications that align with protein processes' productivity imperatives, and retailers' and consumers' demand for longer shelf life and waste reduction. Our execution on our growth initiatives will continue to gain momentum. We are making the right investments and taking the correct actions to drive additional and sustainable EBITDA growth. During our Analyst Day scheduled for the week of December 4, we will provide an update on our strategy and 2018 outlook and longer-term financial objectives. In reviewing our second quarter for continuing operations, sales of $1.1 billion were up 4% in constant dollars after delivering a 3% increase in the first quarter. Food Care sales were up 3% and Product Care sales were up 6%. The acceleration in both divisions was led by outstanding results in North America with growth of 9% in constant dollars on the heels of 6% growth in Q1. This is the highest level of growth we have delivered in North America since 2010. Adjusted EBITDA of $196 million increased from $182 million in the first quarter. Our divisions performed in line with our expectations, particularly in light of higher raw material costs and increased freight surcharges. In Product Care, we faced increased costs of olefins, nylon, MDI, and paper, and the price increases that we announced in the spring did not produce the yields that we were expecting; therefore, we announced a second price increase effective September 1. Also, we have a temporary unfavorable mix impact in Product Care due to higher sales of utility products to our e-Commerce and fulfillment operations. With that said, I cannot be more pleased with the execution of our automated solutions portfolio and the value it is bringing to our customers. Sales already increased more than 10% in the first half and the pipeline continues to expand globally. In Food Care, we continue to see increased market penetration for our proprietary case-ready solutions and we are capitalizing on the North American beef cycle. To be fully transparent, we have been surprised by the magnitude of the impact on our business from the beef inspection scandal in Brazil. And as you all know, we have been faced with higher resin costs, which takes time to recover given our formula of pricing. We just started to see a turnaround in formulas late in the second quarter. But for 2017, we are committed to achieving our financial objectives and expect sequential EBITDA growth in both divisions in Q3 and Q4. Our second-half results will benefit from a combination of higher sales of our differentiated solutions, as well as our price and cost actions. With regards to our Diversey sale, our sales to Diversey to Bain is on track to close, and we are committed to a successful separation. When we announced the sale in late March, we also increased our share buyback program to address the dilution of the transaction. Following our May 9 earnings call and through August 1, we repurchased 6.5 million shares for $285 million using a combination of open market repurchases and an accelerated share repurchase program. We have approximately $1.9 billion remaining under our existing program, and once the transaction closes, we will have more flexibility with share repurchases, targeted M&A opportunities and as previously discussed, we also plan to pay down our debts. Let me now turn to slide 5 and briefly review our regional performance for Sealed Air for the second quarter. North America accounted for 55% of our net sales and, as I noted, delivered impressive growth of 9% in constant dollars. Europe, Middle East, Africa, which accounted for 22% of our total net sales, Food Care sales in EMEA declined 1% year-over-year, as positive sales trends in France, Italy, and Spain were offset by weakness in the UK, Russia, and Germany. Product Care was down 2%, primarily related to rationalization efforts in France and the softness in the industrial sector in the UK. Excluding these rationalization efforts, Product Care sales in EMEA would have been down less than 1%, and this is, by the way, the last quarter that we will report a year-over-year impact from rationalization. Asia Pacific represented 14% of net sales. In Food Care, APAC sales declined 7% due to the Australian beef market down cycle, which was partially offset by an increase of 11% in New Zealand and 6% in China. Product Care delivered double-digit growth in APAC, led by 15% growth in Japan and 11% in China. In Latin America, which accounted for 9% of net sales, we declined 4% in constant dollars; Food Care was badly hit by Brazil, and to a lesser extent, the economic weakness in Argentina. On the contrary, Mexico was our fastest-growing country in LatAm with 9% growth. Turning to slide 6, which highlights volume and price/mix trends by division and region. You can see from this slide that on a global basis, volume trends were up 4% in the second quarter, led by 9% volume growth in North America. Price/mix was essentially neutral to our overall sales performance. In Food Care, I want to highlight that for the first time since the third quarter of 2015, North America delivered a favorable price/mix due to the continued adoption of our case-ready platform and the timing of raw material cost pass-through. And in Product Care, unfavorable price/mix in North America was partially offset by the positive impact of our rationalization on product mix in EMEA. Now let's turn to slide 7 and review Food Care results in more detail. Food Care delivered $680 million in net sales in the second quarter and adjusted EBITDA of $146 million or 21.5% of net sales. As illustrated in the EBITDA bridge provided on this slide, higher volumes and cost management were offset by a negative price/mix and price/cost spread. Strength in North America was driven by improved protein production in all market segments led by the beef sector with a 5% increase in slaughter rate and the adoption of case-ready applications across all proteins. Looking ahead to Q3 and Q4, we expect North America to be our fastest-growing region, yet at a slightly more moderated pace. Keep in mind that our second half is facing tougher comps as cattle production started to increase in the second half of last year. Therefore, the industry is forecasting production to be at a more measured rate of 3% to 4%. EMEA, which accounted for 22% of Food Care sales was essentially flat compared with last year as it follows a tough first quarter. Food Care equipment sales returned to growth one quarter earlier than anticipated and I would add that the pipeline for both materials and equipment is nicely improving. Market penetration for our case-ready solutions, including our Darfresh platform, ready meals, and ovenables, continues to increase. This is the primary driver for higher equipment sales and our anticipated improved performance in EMEA in the second half. APAC accounts for 14% of Food Care with Australia and New Zealand accounting for close to 70% of our sales in this region. Beef production in Australia was down approximately 12% in the second quarter as cattle farmers continue to rebuild their herds. We have easier comps heading into the second half; however, we are not anticipating growth in this region until late 2018. Latin America represents the remaining 12% of sales, with Mexico, Brazil, and Argentina accounting for approximately 75% of Food Care sales. Our business in Mexico increased 9% in constant dollars, as we continue to penetrate the market with our advanced solutions. Despite the current events in Brazil and the economic situation in Argentina, we continue to view LatAm as a region with significant growth potential, and as such, we recently closed the acquisition of Deltaplam, which is a $25 million net sales Brazilian manufacturer of flexible packaging. Deltaplam utilizes superior extrusion technology to create recyclable, high-value solutions, and this acquisition strengthens our position in Latin America, expands our portfolio of consumer unit packaged solutions, and extends our reach into several new market segments. For the full year of 2017, we expect Food Care to increase sales 3% in constant dollars led by North America and improving trends in EMEA. We expect sequential growth in EBITDA in Q3 and Q4, largely due to the timing of our raw material cost pass-through. Slide 8 highlights results for our Product Care division. Product Care net sales were $391 million, and adjusted EBITDA was $77 million or 19.7% of net sales. Similar to Food Care, you can see in the EBITDA bridge that higher volumes and cost management were offset by a negative mix and price-cost spread. North America and EMEA account for approximately 85% of Product Care sales. E-Commerce and fulfillment are our fastest-growing sectors in both of these regions, and we are starting to see a rebound in some areas of the industrial segments. Sales in APAC were up 10% in constant dollars led by Japan and China, where we are experiencing increased demand for our differentiated solutions portfolio, including Fill-Air inflatable and automated equipment. We are increasing our market presence in this region and have expanded our local manufacturing capabilities to support that growth. For the full year 2017, we continue to anticipate top-line sales growth in the range of 3% to 4%. We expect sequential EBITDA improvement in Q3 and Q4 as a result of cost management coupled with pricing actions. As compared to last year, our third quarter is expected to be flat to down with year-on-year growth returning in the fourth quarter. For the full year 2017, we expect adjusted EBITDA in Product Care to be essentially in line with 2016 as a result of segment mix and the timing of recovery of raw material costs. Let me now pass the call to Carol to review our net sales and adjusted EBITDA, free cash flow, and our outlook for 2017. Carol?

Thank you, Jerome. Let's turn to slides 9 and 10 which provide the sales and EBITDA bridges for Q2 and the first half of 2017. Jerome has provided comments on our sales trends in the quarter and first half of the year, so my comments will focus on the bottom of slide 9, which highlights our second quarter adjusted EBITDA from continuing operations on a year-over-year basis. Adjusted EBITDA was $196 million. Volume contributed $19 million in Q2, which was offset by unfavorable mix and price/cost spread of $20 million. Operating expenses decreased $5 million, and restructuring savings were $2 million. Currency had an unfavorable impact on adjusted EBITDA of $2 million. Unallocated costs were $3 million in the second quarter of 2017, compared to $4 million in the second quarter of 2016. Adjusted earnings per share from continuing operations were $0.35 in the second quarter compared to $0.37 in Q2 2016. Our adjusted tax rate for continuing operations in Q2 2017 was 39% compared to 32% in Q2 2016. The adjusted tax rate in the second quarter of 2017 was impacted by our mix of earnings in higher tax jurisdictions. On slide 10, we present our first-half sales and EBITDA bridges. Higher volumes in the first half of the year were essentially offset by unfavorable mix and price/cost spread. On slide 11, free cash flow is presented on a consolidated basis, which includes results from continuing and discontinued operations. For the six months ended June 30, consolidated free cash flow, excluding payments related to the sale of Diversey, was a source of cash of $93 million. CapEx was $93 million. Cash interest payments were $105 million, and restructuring costs were $33 million. Aligned with our typical free cash flow seasonality, working capital and other assets and liabilities were a use of cash of $110 million. Payments related to the sale of Diversey were $45 million, of which $33 million relates to a cash tax payment that secured certain benefits, enabling us to divest Diversey in a tax-efficient manner. This cash tax payment was included in our growth to net proceeds calculation, which we estimated cash tax payments in the range of $250 million to $275 million. Turning to our outlook on slide 12, we are on track to achieve approximately $4.3 billion in net sales or more than 3% constant dollar growth. This forecast assumes increases of 3% in Food Care and 3% to 4% in Product Care. We expect our top-line performance to be driven largely by volume in both divisions. 2017 adjusted EBITDA from continuing operations is expected to be in the range of $825 million to $835 million compared with our previous guidance of approximately $825 million. Corporate expenses are now expected to be $125 million, which includes $20 million of unallocated costs related to discontinued operations. As a reminder, these unallocated costs consist of functional support and related expenses previously allocated to Diversey Care and hygiene solutions that do not qualify for discontinued operations. Our net interest expense for 2017 is estimated at $190 million with the assumption that we pay down $1.1 billion of debt in 2017. Depreciation and amortization is forecast to be $160 million. We continue to expect our adjusted tax rate to be 28% for the full-year 2017. Adjusted earnings per share is expected to be in the range of $1.75 to $1.80 compared to our previous guidance of approximately $1.70. Our adjusted earnings per share outlook is based on 193 million shares, which reflects the weighted average full-year effect of share repurchases through August 1. Currency is not expected to have a material impact on net sales, adjusted EBITDA, or adjusted earnings per share for the full-year 2017. Our major currency exposures include the euro, which was approximately 13% of net sales in Q2; Australian dollar, 5%; and the Mexican peso, British pound, Canadian dollar, and Brazilian real were each approximately 3% of net sales. Turning to slide 13, we will review our outlook for free cash flow. Our forecast for free cash flow in 2017 is approximately $400 million. This forecast excludes cash payments related to the sale of Diversey. To calculate our free cash flow outlook, we started with an estimated consolidated adjusted EBITDA of approximately $1 billion, which includes our full-year 2017 outlook from continuing operations plus $215 million from the first eight months of discontinued operations, assuming a September close. We anticipate cash interest payments to be $200 million and cash tax payments to be $160 million. Restructuring cash costs, excluding efforts dedicated to reducing unallocated and stranded costs, are estimated to be $50 million. Capital expenditures are forecast to be $175 million, of which $165 million represents Sealed Air continuing operations. Restructuring-related CapEx is expected at $25 million in 2017, and it is included in the $175 million total CapEx estimate. Working capital and other assets and liabilities are expected to be a use of cash of approximately $65 million. As you know, a large portion of our free cash flow is typically generated in the second half of the year with the fourth quarter being our strongest quarter for cash generation. This concludes our prepared remarks. Before I open the call to questions, I would like to note that our third quarter 2017 earnings call is tentatively scheduled for Wednesday, November 8. With that, Operator, can you please open the call for questions?

Hi. Good morning. This is actually Mehul Dalia sitting in for Ghansham. How are you all doing?

Good. How are you, Mehul?

Great. Why do you think the previous price increase didn't yield the amount it should have, and I guess what gives you confidence on your September 1 price increase that you've recently implemented?

Very good question. You can say competitive forces, etc. I think that the more important thing was the importance of the price increases. We tend to talk about polyethylene, which year-to-date went up 7%. We are not as open on the price increases on nylon, which were very hefty between the fourth quarter last year and now. About MDI for our polyurethane foams, which has doubled in China, for example, in the period of 12 months, and paper and corrugated OCC went up 79% since July of last year. So that was very hefty. We tried to pass important price increases, and some of that got passed but not enough. So, this is not very different from what happens from time to time. We had that three years ago where we had to go back with this. We're going back and we are just going to execute that on September 1.

Thank you, Jerome. Operator, next question, please.

Thanks, everyone. I hope you can hear me well.

Yes, George. Good morning.

Good morning. Congratulations on the progress. I just wanted to piggyback on the question of pricing and margin conversion. So, Jerome, is it fair to say that in your view the pricing efforts, maybe not being where you had expected them to be, was more a function of – in terms of their conversion to margin, the pace of the increase in input costs, or in fact was it more competitive activity? And as you looked overall at the quarter, you had very strong volume growth in North America, congratulations on that. We would have expected more conversion in margin. What were the keys in terms of margin conversion relative to volume? Was it really the pace of inputs? Was it competition? What would you single out? Thank you very much and good luck in the quarter.

Thank you, George. All in all, actually, I'm really happy with what's going on. We had a strategy, which is about differentiating ourselves from competition and introducing our Change the Game strategy. This is clearly ongoing because, actually, it shows in our product mix. New products don't necessarily have the margins that we'll have when they reach bigger volumes. New products introduction can be somewhat costly. At the same time, you're seeing this volume growth and these trends which are very different from what you have seen in the industry. The evolution of our portfolio is ongoing and that we are passing our cost increases, and this is something that we know how to do. When we're not 100% successful, we just come back later on. It's not so much about pricing of competition; it is about the execution on our strategy and some tactical things. If we don't get it right immediately, we just come back. The reality is that in Food Care, our case-ready applications are ongoing everywhere. This is not a North American phenomenon, and we're seeing this through our equipment sales. Our equipment sales are strong and our order book is very strong. This is going to happen later this year and continue next year. Our customers are investing in new types of equipment. It can be Darfresh on Tray or Darfresh VSP technology, but this is a very strong trend. In Product Care, we are going through a tremendous evolution of our portfolio and segments. E-Commerce and 3PL are growing, and we are seeing equipment introduction again all over the world. We're placing equipment in Japan, and we're seeing tremendous growth in China and North America. The orders book in Europe is also very strong, which is a fundamental trend in our portfolio. Short term, the numbers I gave you, 79% increase in the last 12 months on paper. MDI, 30% up in Europe, double in China versus the same time last year. We are facing short-term headwinds, but we know how to deal with that. We have proven to you over the past few years that we can manage and pass our cost increases.

George, is there a follow-up?

No. We got two parts there. I appreciate it.

Okay. Great. Thanks. Operator, next question please.

Thank you very much. Good morning to all.

Good morning.

A quick one on Product Care. I mean, you've talked in the past, and I think you mentioned that today, shorter-term like lower margins in e-Commerce and 3PL versus the segment margin. How quickly do you believe you can close that gap?

The pace is going to depend on our placement of new equipment and our reducing manufacturing cost of that equipment as we produce – as we go to mass production. There is a trend in e-Commerce and this trend is that corrugated cardboard prices are going up dramatically. As a result of that, you are going to see more pouchers, which are enabling reduced dimensions and weight costs for shipping and lower costs of packaging. We have two very strong offerings here. For boxes, our I-Pack and e-Cube product line improve dimensional weight costing. Our StealthWrap and FloWrap equipment and the generations to come, which we are going to present at Pack Expo later in the year, are tremendous substitutes for boxes. We have huge momentum in e-Commerce 3PL, and this is accelerating our sales growth in Product Care. Yes, we are having slightly lower margins due to cost increases. But, as I said, we're dealing with those. How quickly? We're going to show you during our Investor Day the week of December 4; we're going to show you our three-year targets and plans, and you will see that what I said earlier in my prepared remarks regarding margin in that segment, we intend to recoup and have similar margins to the rest of the portfolio over the next three years.

Operator, next question, please?

Hey, good morning.

Good morning.

Just following up on the previous question. The $20 million EBITDA hit you saw in the quarter from mix and price/cost spread, is it possible to say roughly what portion of that was mix shift and what portion is price/cost that, I guess, at some point, you might get recovered?

So, we don't break out between mix and price/cost spread. It's a combination of both, Anthony. But, we do expect, as Jerome highlighted, to see improvement sequentially in our EBITDA growth as we move through the balance of the year. We started to see the turn from the formula pricing for Food Care at the end of the second quarter and will expect to have positive trends from that, obviously depending on how resins play out for the second half of the year, and the price increases being implemented for the Product Care division will also favorably impact our improvement sequentially in our EBITDA margins as well as our overall EBITDA growth.

We are in a specialty business. You don't shovel your price increase onto your customers. You collaboratively work to introduce those solutions and at the same time, you have to pass your costs. We understand that, and it's just a question of time. It would have been faster if those cost increases had not been so significant. So, have we absorbed a little bit of those? Yes, we have. But our customers know that we are passing them. This is why we have announced our September 1 price increase in North America and Europe. This is ongoing. In the end, we have a lot of momentum with our customers because they know that in both divisions, we are the innovator, which allows us to work collaboratively and positively with them.

Anthony, do you have a follow-up question?

No. That's helpful. I'll turn it over.

Okay. Great. Thank you. Operator, next question please?

Great. Thanks. Thanks for all the detail. Congrats on the progress here, especially on the volume side. Just trying to understand the guidance for the rest of 2017. So, you increased the EBITDA range to $825 million to $835 million from $825 million, but you also lowered the FX headwind to zero from $5 million. You had other lower costs as well in Q2. I'm just trying to understand, is the guidance bump from the lower FX headwind and lower stranded costs? Or are you actually more confident in the Food Care and Product Care segments?

So, what you're seeing is that there are a few bubbles in the air right now. The FX is more favorable than anticipated at the beginning of the year. Where is it going to be three or four months from now, I don't know. Just look at the euro. In January, the euro was at $1.03. It is at $1.18 today. Nobody anticipated this in January. I'm not going to predict, but at this point, there is a positive bubble in the air related to currency and that's one thing that is positive. On the negative side, we're a little bit concerned with polyethylene prices. We anticipated that they would start to come down in September. Right now, we have some producers who are already talking about price increases on the heels of a possible hurricane. This is not an ideal situation, but there is some momentum there. Some producers who announced price increases for July did not follow through. They've been pushed to August. And then, we have some more announcements for September. This is causing uncertainty. We're concerned that we may not have what we were expecting in terms of raw materials on polyethylene for September to December. This is why we're seeing the revision. Overall, we're very determined to get our price increase through and we might suffer a little bit from volume in some more commoditized segments. These are short-term tailwinds or headwinds. We believe that our fourth quarter is going to be strong and the most important thing is to see that this Change the Game, which was in doubt in 2016, is definitely coming. This is why we have growth momentum right now, which we didn't have in 2016 and which generally the industry doesn't have.

Operator, next question. Go ahead, Arun. Sorry about that. Go ahead. Operator, can you open up back the line or we'll bring him back after? Do you want to go to the next question?

Hi. Thanks. Good morning, everyone.

Good morning, Adam.

Jerome, two questions. First is just aside from paying down debt and buying back shares to offset the dilution once the deal closes, what is your overarching strategic plan for the new company? Do you eventually plan to grow by acquisition, or what exactly do you have in mind? Obviously, EBITDA over the last eight quarters or so has been kind of flat to down. It's just been hard to generate organic EBITDA growth. So, what do you have in mind longer term post the deal closing?

So, we did not have growth in 2016, sales growth, and therefore EBITDA. We are in transition, and we said that several years ago. There was a Get Fit and a Change the Game phase. It is very important to understand who we are. We're not a simple packaging company. We are solutions driven, and our margins will expand as we expand the value of our solutions to our customers. That is very clear, and there is a fundamental mega trend in the way we're collaborating with our customers. They respond; we are the major player in the sectors of protein and in the sector of protective packaging through our solutions. That is where we're going. We are not going to only buy back shares and pay down debt. We're starting to look at some potential acquisition targets. Multiples are very high; acquisitions traditionally do not return shareholder value, or most do not, and when you look at the multiples right now, you have to be careful. This Deltaplam acquisition is a good example of a small acquisition in a country where we see potential. It was the right time, at the right price with the right equipment and technology. They have great equipment that will be a nice addition. We are looking at some others. At the same time, we've been very busy with the separation of Diversey. Therefore, we're not going to rush into things immediately. We are working diligently on the next steps. But yes, we will make acquisitions over time.

Thanks, Jerome. And just one follow-up. You talked about acquisition multiples being quite high. I know you’re buying back your stock just to offset dilution. But you guys are at call it 12 times, 13 times EBITDA once you get the proceeds. I mean, do you think your stock is undervalued here? And if so, can you explain why you think that?

Well, you're not going to take me there. Do I personally think our stock is undervalued? Well, looking at the Investor Day as it is coming in our numbers, you will judge in December whether you think our stock is overvalued or undervalued. I have my own opinion on those kinds of things. We are determined to become a value-add company to our customers with new solutions. We happen to invoice for packaging, but our number one asset is to add value to our customers because of longer shelf life, because of the differentiated equipment that we're bringing and the e-Commerce and industrial sectors, the dim weight cost increases are important. As e-Commerce is growing rapidly, you see the absolute need to optimize e-Commerce packaging, and we are in a strong position to do that. We are specialty in specialty. This is how you will see us over time.

Operator, next question please.

Yeah. Good morning, thank you. Could you just talk a little about the type of volumes that you are seeing on the industrial side of Product Care? I mean, are you seeing growth there or is it really mostly from the e-Commerce and fulfillment?

We're seeing growth in the industrial sector. I'm not going to tell you that we're seeing huge growth, but it has bottomed last year. In the second quarter, we are seeing where there is some growth, we'd call that in the range of 2%, 2.5%, which is quite good. It's not everywhere; it is country by country, but we're seeing industrial growth in China, in some West European countries, and a little in the U.S. We're seeing industrial growth; we're not seeing it in the UK. You can read the GDP and see what's going on, but we're doing quite well there.

Tyler, do you have a follow-up?

Yeah. I guess, Carol, just on the corporate expense. I think the previous targets were to get rid of the $40 million of stranded costs, eliminate 50% in two years. And then, on the unallocated, it was to eliminate by 2018. Has anything materially changed with those targets?

No. We're still on track for that. The $20 million unallocated that was revised down from $25 million should not have any negative impact on 2018. We're already starting activities to address the unallocated as well as stranded costs. We're confident that we'll be able to stay on plan, if not outperform what's been previously communicated.

Great. Thanks.

Operator, next question please.

Hi. Good morning.

Good morning.

I just wanted to go back to Brazil. Did we actually get the volume decline or can you just give us a little more flavor on what happened in the quarter in Brazil? And then, secondly, I think you were embedding some recovery in the second half for Brazil; is that still the case? And if so, some idea of how much?

In Brazil, you could see that charcoal consumption went down 11% in the second quarter, and that local meat consumption is down about 20% in the second quarter as a result of the inspection scandal saga and related items in the production of fresh red meat. This has been much bigger than anyone could anticipate. The exports have been impacted also. Our view is that this is temporary. We're seeing it stabilizing. Equipment is being sold and placed by red meat producers. I was in Brazil three weeks ago talking to all of those customers and they believe that the slowed rates are going to start to increase sometime in the third quarter and into the fourth quarter. This is not a long-term trend, but specific to Brazil given the scandals. You see Argentina's consumption going up by 2%, which is very little, while exports are increasing by 38%, but Argentina is not a big meat exporter anymore. Our business in Mexico is growing very nicely; I was there last week and I can assure you that the trends are very positive. We're also seeing nice trends in Chile for fish production where we participate nicely. Total Latin America is negative from Brazil's weight, but we believe this is temporary.

Operator, next question please?

Hi. Good morning. Just had two questions. One following up on the last one. Just wondering if you could parse out if any of the strength in the non-Brazil Food Care business you think might have been benefiting from some of the reduced exports out of Brazil? Is some of that had to come from other regions? And then, as a second question, Jerome, just wondering if you could comment on the e-Commerce margins, which have been weak for a couple of quarters and I think a couple of people were alluding to it, but just wondering how you see the margins on some of the new product offerings? Can they be in that 20% plus range that you've been in in the past once they start to get a little more scale and maturity? Thanks.

Starting with the exports, yes, the U.S. is dramatically benefiting from beef exports. You saw what happened in the first quarter. If I remember correctly, April exports were over 30% growth out of the U.S. Brazil's export reduction has been beneficial to us. The prices of U.S. beef are very high, but these did not affect exports, and exports have been freshened and frozen. Cooked beef for the month of June was almost 12% higher than a year ago, which is very strong. This is positive for us because all of that is packed with our bags, and we are happy to see this happening. Regarding e-Commerce, yes, we have a product mix that is very nice, but we are experiencing a negative segment mix right now. The growth is not at the level we anticipate. What you need to understand is that we're building new businesses with our customers, and selling equipment takes time; it's a capital spend for them. Our customers are dealing with raw material price increases and we are working through this. The equipment sales in Product Care year-to-date are up 10% compared to last year. We are seeing nice momentum there and will see continued acceleration, so we expect to improve margins over time once these new products reach scale.

Operator, we have time for one more question please.

Hey, good morning. Thanks for taking my question. I think it would be helpful to better understand your intended pace of share repurchases versus other uses of capital. Following the completion of the Diversey Care divestiture, should we expect to see a larger purchase in September? Are there any limitations on repurchasing shares in 2017 aside from the size of your share repurchase program? And I think you touched on this, but how do you think about the trade-offs of mitigating near-term dilution through share repurchases versus creating shareholder value through other uses of capital? Thank you.

Jason, I'll start, and then Jerome may want to address the last part of your question. But there's nothing restricting us from being very active in the market following the close of the Diversey transaction. We have previously communicated that it is our intent to address the dilution. It will take some time; it won't all be done by the end of 2017 and addressing that dilution includes not only the share buyback but also improvement in our EBITDA going forward. We do plan to be active in the market and will continue to use a combination of tools such as OMR and ASR as we move forward. We've modeled the share price based on our strategic plans and working with the board, we've set levels of that share price that we feel represent fair value for the buyback.

I made comments earlier about our discipline. In the coming years, we will grow through acquisitions as well. We're not rushing into it; we're ensuring it adds shareholder value. This management team's fundamental approach is pursuing innovation and executing our announced strategy. You will see during Investor Day in early December how disciplined we are, and the importance of this innovation. This will be complemented by regional bolt-ons in strategic locations where we believe we can add tremendous value by deploying our technology. Over time, you will see us reinforce both divisions and stay focused on becoming the specialty leader that we are becoming as a result of our Change the Game initiative.

Operator, that concludes our call.