Sealed Air Corp (SEE) — Q4 2017 Earnings Call Transcript

Thank you, Sabrina. 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, stating management's outlook or predictions for the future period, are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled 'Forward-Looking Statements' in our earnings release and slide presentation which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent Annual Report on Form 10-K and as revised and updated on our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which you can also find on our website at sealedair.com or at the SEC's website at sec.gov. We will 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 our earnings release. Included in today’s presentation on slide three, you will find U.S. GAAP financial results that correspond to some of the non-U.S. GAAP measures we referenced throughout the presentation. Now, I'll turn the call over to Ted Doheny, our President and CEO. Ted?

Thanks, Lori. I want to thank all of you for your interest in Sealed Air and welcome to our 2017 fourth quarter and year-end conference call. I’ll begin the call with a few brief comments and then ask Bill to expand upon our press release and provide additional background on our financial results for the quarter and the year. I’ll then provide you with our strategy and outlook for 2018 with a discussion around end market growth and how we plan to further leverage our innovations. I’ll also discuss actions we are taking to improve operational productivity across the globe. After our prepared remarks, we’ll conduct a question-and-answer session. To recap 2017 results, let’s start with what went well. Our sales accelerated into year-end, resulting in a 9% constant dollar growth in the fourth quarter and 5% for the full year. Throughout the year, we capitalized on strong end market trends within the protein and e-commerce sectors. We reported adjusted EBITDA and EPS of $833 million and $1.81 per share, respectively, slightly higher than guidance we provided on our last conference call. Free cash flow was above our expectations at $420 million due to working capital management. We executed on our share repurchase program returning $1.3 billion of capital since January 2017 through the use of open market and accelerated share repurchase programs. We have more than $860 million currently remaining under our authorized share repurchase program. What we would like to improve is our operating leverage, meaning how our year-over-year sales growth translates into earnings growth. In 2017, our operating leverage or our profit-to-growth ratio was only 10%. We expect this ratio to double in 2018 with planned cost reductions and higher sales of our market-leading solutions offsetting the expected rise of our input costs. Today, we are the premier specialty packaging company in the world. I’m excited to see the potential that we have within Sealed Air and our ability to take our performance to the next level. I’ve been working closely with our leadership team to accelerate our strategy. We’ll focus on growth from new innovations, drive operational excellence, recognize and promote talent, and target strategic M&A, all of which will produce higher returns on invested capital and maximize free cash flow, taking us to world-class performance. Let me now pass the call to Bill to provide more detail on our fourth quarter and year-end results. Bill?

Thank you, Ted. Turning to slide five, let’s start with the review of our net sales by region. In the fourth quarter, we delivered $1.2 billion in net sales, an increase of 11% on our reported basis and 9% on a constant basis. All regions delivered constant dollar sales growth. Asia Pacific was our fastest-growing region at 17% growth, which includes sales from our recent Fagerdala acquisition in the integrated fabrication solutions space. Sales in North America were up 10% with Food Care delivering 10% and Product Care delivering 9%. Latin America was up 6% led by a strong rebound in the fresh meat markets coupled with new customer wins in Brazil. Europe, the Middle East, and Africa increased 5% with positive trends in France, the U.K., and Italy. Slide six illustrates net sales by region for the full year. North America was our fastest-growing region followed by Asia Pacific. We are pleased to report that sales improved in EMEA and Latin America in the second half of the year, resulting in favorable sales trends in both regions. Turning to slide seven, let me walk you through our fourth quarter net sales and adjusted EBITDA on a year-over-year basis. We delivered $1.2 billion in net sales. Volume contributed $55 million, the price mix was $23 million favorable, and we reported $24 million in incremental sales from our Fagerdala acquisition. Currency translation was favorable by $25 million. Adjusted EBITDA was $238 million or 19.4% of net sales. Volume growth contributed $21 million, and mix and price/cost spread was $2 million favorable. The fourth quarter represents the first time in 2017 that we reported a positive mix and price/cost spread. Restructuring savings were $4 million. Operating costs including acquisitions increased by $10 million. Currency was favorable by $5 million. Adjusted earnings per share was $0.58 on an average diluted shares outstanding of $176 million. Our adjusted tax rate was 34% in the fourth quarter. On slide eight, we illustrate the same bridge for the full year. Our top-line growth in 2017 was primarily driven by strong volume. Adjusted EBITDA performance was attributable to volume growth partially offset by higher raw material costs, stranded cost related to the divestiture of the Diversey business, and salary and wage inflation. Adjusted earnings per share were $1.81 on an average diluted shares outstanding of $189 million. We exited the year with 168 million shares outstanding. Our adjusted tax rate for the full year 2017 was 30%, which is in line with our forecast. Turning to slide nine, we highlight the impact of the U.S. tax reform. In the fourth quarter, we reported a $36 million tax expense due to the revaluation of our net deferred tax assets from 35% to 21%. The actual impact of the transition tax is still being evaluated and we will record this in the first quarter of 2018. For 2018, we estimate that our effective income tax rate will be approximately 29%. The benefit of the U.S. corporate rate reduction is largely offset for us by the base broadening provisions. Going forward, we will absolutely continue to evaluate opportunities to optimize our tax posture. Let’s turn to our free cash flow for the full year on slide 10. 2017 free cash flow on a consolidated basis was a source of cash of $421 million. This compares to the guidance we provided on our last earnings call of approximately $400 million. The upside in consolidated free cash flow was driven by great working capital management. CapEx was $184 million, which includes $23 million related to other CapEx restructuring activities. In those payments, net of interest income, were $186 million, and cash tax payments were $152 million. Let me now pass the call back to Ted for more details on our revisions as well as our outlook.

Thank you, Bill. Turning to slide 11, which highlights volume and price mix trends by division and by region. On a global basis, volume trends were up 4% to 5% throughout the year. This compares to volume trends of 1% to 2% throughout 2016. In the fourth quarter of 2017, we delivered favorable price mix which helped offset higher material costs. Our pricing actions in Product Care went into effect on September 1 and in Food Care for non-formula customers effective October 1. As we move forward, we’ll continue to take price actions on rising input costs. We recognize that the success of our value capture pricing strategy is dependent on our ability to save our customers money and solve their most critical packaging challenges through highly differentiated products, services, and solutions. We’ll do just that—save money and solve problems. Let’s turn to slide 12 and review Food Care results. For the full year of 2017, Food Care delivered $2.8 billion in net sales or 4% constant dollar sales growth. Adjusted EBITDA was $608 million or 21.6% of net sales. On the top line, our business benefited from the continued adoption of our market-leading portfolio and the growing protein market, particularly in North America. However, the timing of formula pricing and rapidly increasing raw material cost put some pressure on our margins throughout the year. As we look forward, I want to highlight the trends driving our profitable growth strategy in 2018. First, our case-ready platform—including both materials and systems—accounted for nearly 20% of our Food Care sales in 2017 and delivered high single-digit growth. We expect this level of growth to continue as we further penetrate global markets and introduce new sustainable solutions for the seafood and convenient segments. Second, in high growth geographies, such as Brazil, Russia, China, and Southeast Asia, we are well-positioned to serve the increased demand for packaged protein and drive the adoption of applications that extend shelf life and reduce shrink. And third, we expect continued growth in North America, yet at a more moderated rate as compared to 2017. For the full year of 2018, we expect Food Care sales to increase by 3% in constant dollars and adjusted EBITDA margins to be relatively in line with 2017. Similar to last year, we expect Q1 2018 to be a low point for EBITDA, primarily due to the timing of our contract pass-through and higher input costs. Moving to slide 13 where we highlight results from our Product Care division. For the full year 2017, Product Care delivered $1.6 billion in net sales for an 8% constant dollar growth. Adjusted EBITDA was $332 million or 20.2% of sales. We will continue to work our portfolio towards a higher mix of solutions and services that eliminate waste. These solutions include our growing portfolio of inflatables, our automated systems such as I-Pack, StealthWrap, and our unique Korrvu platform. Inflatables, automated systems in Korrvu increased in excess of 15% and accounted for approximately 20% of our total sales in 2017. Another highlight in 2017 is the positive trend we are seeing in the Instapak business. Our business-to-business customers are under increasing pressure to modify their packaging for the small parcel e-commerce fulfillment network, a trend called ship-in-own-container or SIOC. This aligns well with our pallet-to-parcel strategy. Sales of Instapak were up in the mid-single digits, and we expect this to continue into 2018. With the addition of Fagerdala in the fourth quarter, we are now a leading provider of packaging solutions serving the electronics market. We keep finding additional synergies from these acquisitions where we can leverage a broad solutions portfolio and global reach. For the full year 2018, we anticipate year-over-year constant dollar sales to increase approximately 7%. We are seeing profitable growth from our recent acquisition of Fagerdala and expect it to contribute $95 million in Product Care sales. Even with the integration costs associated with the Fagerdala acquisition and resilient raw material environment, we expect Product Care margins to be close to 20% level in 2018. Turning to our Total Company 2018 outlook on slide 14, net sales are expected to be in the range of $4.75 billion to $4.8 billion with constant dollar growth of approximately 4.5%. Adjusted EBITDA is expected to be in a range of $890 million to $910 million, implying an EBITDA margin of 19%. I would like to highlight that we are taking actions to realign our corporate function. In 2018, we expect corporate cost to be below $100 million compared to the $107 million in 2017. Adjusted earnings per share is expected to be in a range of $2.35 to $2.45. This forecast assumes no additional share repurchases in 2018. We forecast free cash flow from continuing operations to be approximately $400 million, net of capital expenditures of $160 million. Our free cash flow forecast also includes a $45 million payment in lieu of certain royalty payments for patents to an outside engineering firm. Just before year-end, we entered into an agreement to pay $50 million of which $5 million was paid in 2017 and the remaining was paid in late January. By taking design ownership in-house or expediting our organizational productivity initiatives. Keep in mind that the cash flow of $421 million we recorded in 2017 is on a consolidated basis. If you exclude the cash generated from Diversey in 2017, our free cash flow outlook in 2018 reflects a year-over-year decrease. To wrap up this call, I’d like to provide a brief discussion on our strategic directions which you can see at a high level on slide 15. First, we will focus on increasing sales from highly differentiated, innovative, sustainable, and profitable solutions that are in high demand in the market. We’ll target incremental, profitable growth opportunities in adjacent markets and expand our presence in high-growth geographies. In the end, to reiterate what I said on our last earnings call regarding M&A, we are looking for technology, equipment, and automation opportunities that enhance our business and are accretive to earnings. Second, we’ll optimize our cost structure by doing more with less and by investing in working smarter. This goes beyond our efforts to eliminate stranded costs related to the Diversey sale. We’re creating a one Sealed Air culture that will drive productivity gains and eliminate redundancy. For instance, in January, we had expanded the responsibility of some of the most talented leaders to tackle our biggest challenges. Karl Deily, in addition to his role as President of our Food Care business, is now also leading our innovations team for all of Sealed Air. We moved sustainability under innovation to accelerate our efforts as sustainability is critical to our customers’ success. Ken Chrisman, President of our Product Care division, is now also leading commercial action to strengthen the partnership with our Global Sales team to simplify our processes, lower our cost structure, and offer exceptional customer service globally. And Mark Hammer, our CIO and Chief Digital Officer, is taking on additional responsibility to lead our customer service team. This is in addition to the exciting digital work that Mark is already leading with his team on our smartly connected products and enabling our automated solutions. With Mark leading customer service, we’ll invest in tools and technologies that better connect our team with our internal and external systems so that we get the right product in the right place at the right time. Third, we’ll maximize our operating leverage with the successful implementation of the Sealed Air operating excellence culture. We already had big systems in place, but we clearly had opportunities for improvement. For instance, we are upgrading assets to the latest technologies and investing in breakthrough production processes. We’ll continue our efforts on SKU rationalization, simplify our supply chain, and improve quality. Our operational discipline will apply not only internally but also externally with our customers and in future acquisitions to quickly capture synergies. And lastly, we’ll continue to develop sustainable solutions that leave our world, environment, and communities better than we found them. We are always finding new ways to reduce our resource intensity and waste for ourselves and our customers. Addressing food waste, product damage, and our environment are all priorities for us. By moving sustainability under innovation, it will be at the core of what we do and how we operate. Accelerating our efforts in sustainability will not only make us more profitable, it’s the right thing to do. We are committed to creating value for our customers, shareholders, and the communities where we live and work. Before I open up the call for your questions, I would like to ask that you please mark your calendars for Thursday, May 3, for our first quarter 2018 earnings call.

Hey guys, good morning.

Good morning.

So first off, you’ve seen a very nice acceleration in Food volumes during the back half of 2017 at up 5%, pricing is also starting to flow through in that segment. I know you have tougher comps, but were you expecting a particular region to see a moderation in volumes in 2018? I guess in front to reconcile a momentum you saw in the back half of 2017 versus your 3% core sales guidance for that segment for 2018?

This is Ted. Hi Ghansham, what we are looking at is basically continuing the volume of the fourth quarter, but if we break it up by region, we expect continued strength in North America, but that will be tempered year-over-year as we highlighted. We do think there’s some opportunity in Europe, moving that up basically due to our equipment. Latin America saw a pickup; we had some strong equipment sales, but we do think the pickup year-over-year will probably be tempered from what we saw in the fourth quarter.

Got it. And just as a follow up question, on your EBITDA waterfall slide for fiscal year 2017 and the $49 million in unfavorable price cost, Ted, how should we sort of think about the recovery timeline associated with that? Thanks so much.

So the EBITDA on the bridge?

Hmm.

Well, first of all, as you’ve highlighted the pricing issue that we were chasing all of 2017, we saw some catch up in the fourth quarter, but we are still behind on catching up with a price cost mix. We think in the first quarter we still have residuals that could be working against us. We don’t think we’ll probably get ahead of that until maybe the second half of the year, so it looks like continued discipline on pricing should help us stay ahead of it. Bill, if you want to add anything more on this?

No, I think we are very happy about the fourth quarter of 2017; we saw a very positive price cost spread. I mean, we did not have that luxury in the earlier part of 2017, and we are very excited to have this go positive, and we think this is good momentum moving forward into 2018, although as we indicated, our adjusted EBITDA as a percentage of sales is flat in total Food Care from 2017 to 2018.

Operator, next question please. Thanks, Ghansham.

Thanks. Good morning. Just a follow up on that real quick, on the increased raw material pricing. I know it’s early in your tenure with the company, but anything that you see so far around the ability for Sealed Air to maybe move more towards automatic pass-through of resins on a go forward basis? Are you comfortable with where the company stands today from a pricing perspective?

Yes, good question. As being a price zealot in my past and building off of the good work that Jerome has done, if you look at that, what I’ve been looking at is understanding how the formula pricing works with our Food Care business. And I think it works out well. The danger with that is the shock that hit looking at what happened with Harvey is how quickly we can recover. So I don’t like the fact that we can’t catch up to that quickly; it does catch up over time in a lead-lag situation. On the Product Care side, though, when we are connected to our customers, we should be able to respond more quickly and effectively on price. I think if we analyze last year on the pricing, I think we could have gotten ahead of that sooner and quicker, and the team recognized and understood that. I think we’re on top of that pricing building into 2018. I think the real issue we want to accelerate; I see it in the business and it’s exciting, and you hear us talk about value capture is what we are doing in the marketplace. It’s really saving our customers a significant amount of money with some of these new solutions, and then really how do we share that savings? So I think we have some opportunity on value capture going forward. I think the discipline in the business is there. Shocks hurt us, so we got to find a way to get ahead of that quicker, but I think on the pricing side, there are some good things there. The opportunity, as we drive more solutions and especially as we bring equipment into a larger part of our portfolio as our customers drive for automation, I think we have some pricing or value capture opportunity moving forward.

Okay. And you mentioned the follow-up to that. You mentioned that you expected some drag from rising raw material prices in the first half of 2018. And Bill, I think you mentioned a 20% EBITDA margin in product care. Where should we – are we going to see that more – the rising raw material lingering more in food care or more in product care as we move through 2018? Thanks.

I’ll go first and let’s see if Bill wants to add some color to that. As we mentioned, we see that raw materials going up, and as we look at the fourth quarter we saw more pressure for lots of reasons, oil, etc., putting pressure on the raw material environment. So we think it’s still going to be a resilient environment that we’re going to have to manage through probably the whole first half of the year. So if we do see improvement, it’ll be in the second half but not in the first half. Our guidance is based on the resin environment being flat—slightly up for the full year—and so if we see a benefit we don’t foresee it in our guidance until a little bit, potentially, in the second half of the year.

I think the original assumptions that a lot of folks have relative to 2018 would have been that we would have seen some quicker decreases in resin prices in 2018 because of Harvey and the other factors that Ted has indicated we haven’t enjoyed that decrease, and we’re actually planning on an increase in the resin cost as we go year-over-year moving forward. But it is something that we watch, and we’re in constant communication with our supply chain team to assess the current impact of any changes in resin prices on our total P&L, given our understanding of what percentage of our customers in Food Care versus Product Care are on formula pricing versus those that are not on formula prices.

Operator, next question please.

Hi, everyone. Good morning. Thanks for all the detail and congratulations on the year and good luck going forward, Bill and Ted. I guess the first question I had just piggybacking on the last couple of questions from Scott and Ghansham on Food. So, on the one hand, your price increases in Food and non-contract came a little bit later than Product Care, and that might be one of the reasons that you had less price cost mix positive, it was a negative in the last quarter versus positive in Product Care. Question one, are you out with any additional non-formula price increase in Food or for that matter in Product Care? And should we assume for the time being that price mix cost for Food Care is at least as negative, if not worse for the first half, and then I had a question on operational excellence?

So the answer is yes, we were out there with price increases, but as you know, George, we got the lead-lag there seeing the effect of that. So, we’re out there with the price increase where the formulas will have to wait. Where we don’t have formulas, yes, we’re out there with the price.

And we should assume at least a similar negative if not worse in price cost mix for Food for the first half as what you saw in the fourth quarter?

I would say, slowly seeing that recover through the year and we’re just not anticipating the gain till the second half.

Operator, next question please.

Thank you, and good morning. I just wanted to come back to costs. Could you share where you are on addressing these stranded costs? Also, if you want to progress through a bit about your thoughts about equipment installations and how that can drive your growth going forward, if that's going to be an incremental focus to drive that stronger growth and in particular that profit-to-growth doubling that I just discussed in 2018?

So, I’ll address the stranded cost piece, and what we had said during last quarter’s earnings call is that we have $20 million of unallocated cost that we were going to address throughout 2018 and if those unallocated costs would be offset by transition services revenue that we were getting beginning September 6th associated with the Diversey separation. As we look at our fourth quarter results, we saw just this occur that that transition services revenue was able to offset those costs. We also pick that momentum in terms of addressing our stranded costs. We’re going to continue to have that transition services agreement revenue for 12 to 18 months after the close of the Diversey Care transaction, but we’ve definitely picked up momentum in addressing stranded costs. You’ll see that relative to our performance in the corporate bucket in the fourth quarter of 2017 being at $107 million versus what we had originally estimated at $115 million. And we also appear to have increased momentum in the reduction of those stranded costs going forward, and we’re highly motivated to make the decisions necessary to get our stranded costs under control and to be a new Sealed Air in terms of the corporate cost structure that Ted indicates.

And if I can piggyback on that with the corporate costs and you mentioned PG ratios and equipment. To segue those two together, first of all, on the corporate cost, we will be returning that stranded cost into our goal of driving organizational productivity. How do we do more with less by investing and working smarter? We will hit and exceed that stranded cost target. And your question regarding equipment sales and PG ratio; we’re using the PG ratios as a guide to the team. So as we get growth, we’re looking to qualify growth; good growth for us means that we’re looking for profitable growth and drive that through our business, not just straight growth. So equipment sales make up less than 10% of our business in equipment sales, but so what do we do? We solve problems. If you look at both markets, it’s quite interesting; if you look at Food Care and Product Care, what they do is solve problems. Now Food Care maybe extends the way that shelf life of the product, but it was quite interesting—I got in and visited two customers that I was at the Food Show with Karl just last week, and I got to see chickens being loaded and set up and ready to go into our exclusive bag, but I saw automation on the front side. There are a lot of people around actually having to adjust it, getting it ready for the automation where we seal it and protect it and use some of our exclusive processes. I was listening to customers as they watched this process and I heard just incredible data going out. One of our largest customers shared—I couldn’t believe the number, but they have 42% absenteeism. So the more we can work on automation with our equipment to help solve that problem, a significant opportunity. So when we’re looking at capturing the savings, we’re going to slow down a little bit and say, hey, we have a lot of things to sell you. We’re going to say what can we save you? That huge amount of waste and automation is a big deal, taking people out of harm's way, but another aspect is that they just don’t have the workforce right now to tackle manufacturing all over the world, getting the talent to do this, and also taking them out of harm's way is a big element of waste. So, how do we then bring that to profitable growth equipment? Now when we bring those solutions, how do we share those savings and bring our exclusive solution to the customer? I think we can drive some significant margin opportunity moving forward.

Operator, next question please.

Hey, good morning. I wanted to go back to the two bridges of the segments. It’s a pretty significant headway in each segment from operating costs. Is that a reallocation of some of the unallocated costs back to the segment or some explanation of what's going on there and what the outlook is for that line in 2018?

Thank you very much for the question. And we’ve included our stranded costs and any sort of corporate costs not in our Food Care or Product Care results, but your question relates to the Food Care and Product Care operating expense item on the bridge. The strong driver of that negative item when you compare Q4 of 2016 compared to Q4 of 2017 is basically incentive compensation and other compensation-related costs. Remember that we’re comparing what our compensation expense would be in the fourth quarter of 2017 with the same period a year ago. The other point I would make is that Ted and I have certainly positioned ourselves well for our 2018 performance as we will look at expediting certain actions, and those have already occurred in the fourth quarter of 2017.

Okay. Thank you for that. And thank you for all the detail on the operational excellence program, but is that going to require any capital spending, and if so how much?

Well, how about we talk about yes in certain places, but part of our CapEx spending that we have—we will need some operational excellence if we have a new process in place to improve our facility. There will definitely be some CapEx associated with that. We’re guiding to $160 million of CapEx. We believe that’s enough to accomplish it. We can use about operational excellence as some of its process change and won’t be as capital intensive. Basically, this is internally and externally, eliminating the waste, simplifying the process, and then automating. But before we do the automation, we got to do those first steps, and there’s a lot of money to be saved there. So, but yes, we are looking at some interesting capital to solve some problems. Can we solve some of the tough problems like even on the resin with our large extrusion lines to be more effective and efficient? So we’re looking at that; can we even work with our innovation team and different resins that we are actually producing for our products? Again, as we’re driven to be a more sustainable organization, can we invest in capital that could change the resins that we use and drive a higher sustainable business for us and for our customer? So there’ll be capital we can deploy in that area as well.

Thank you, operator, next question please.

Ted, I want to come back to that profit-to-growth ratio you mentioned earlier. I think you said it was at 10% last year. You hope to double it to 20%, I’m assuming you're talking about sort of incremental margins there on the business. The current margins are in each segment already a little bit above 20%, so it’s sort of consistent with the guidance you’ve got for segment margins that may be down a little bit, but just wondering where you think that that number can go to over time, recognizing that you probably have some resin headwinds in 2018 and all these operational improvements won’t really be kicking in yet? Is there a number or a target that you sort of have in mind for where you can get that to over time and how quickly do you think we can get there?

That's a great question. We expect to be able to double our profit-to-growth target incrementally, with a long-term goal of achieving 25%. Essentially, we want 25% of the additional volume we generate to contribute to our bottom line. Achieving this will take some time, but we believe we can double it in the first year. We're going to focus on managing costs effectively, as highlighted by Bill. It's important to communicate this not just for our investors but also for our team. We are already making changes to our internal metrics and incentive systems to ensure alignment with our goal of achieving that 25% with the incremental business. In response to the second part of your question, we're currently at a 20% business level, and although we aim for 25%, we consistently benchmark against our peers to understand what world-class looks like. While we believe we excel in packaging and don't dispute that, we do ask ourselves if we are truly world-class. Over time, we may aim to exceed that 25% target, but for now, our focus is on bringing the business to where it needs to be. We plan to commit to this growth and aim for a 20% achievement in the first year while doubling our previous metrics, and we have a clear path to ensure this happens. Our internal focus remains firmly set on the 25% target.

Operator, next question please. Sorry about that.

Sorry. Just at the—the EPS guide not including any more share repurchases. Just wondering if there’s any change in the strategy there to pivot towards M&A or is that just conservatism?

Yes. But it’s part of our capital allocation. As we look at share repurchase if we just want to be very transparent, we want to have the option to pivot off that if we see a better opportunity, a better return for the company, both for the first question or the questions that were asked about operational excellence. If we see capital we can deploy internally more valuable than buying our shares back, then yes, if we see an M&A opportunity that is more valuable than buying our own shares, then the answer is yes. The other metric that would really drive and being trying to inculcate into the whole organization is return on invested capital. So we’re looking at all of our internal investments, whether its CapEx, new products, new innovations, looking even for share repurchase, and we’re going to be focused on the PG ratio and checking out what’s coming in on the sales line and looking at return on invested capital. So we’re talking to you in the same language as we’re talking internally in the same language, and that’s what we’re designing to. So yes, we have the ability to pivot on that share repurchase.

Operator, next question please.

Good morning, thank you. Just had a question, I guess the clarification on the growth outlook in 2018 for Product Care. I think in the slides you mentioned constant dollar growth of 7%. I think the acquisition I think that would contribute $95 million, which seems to be 5% to 6% or that 7%. I’m just trying to get a sense of your thought on organic volume growth for Product Care in 2018?

If you pull the—and by the way, just highlighting the $95 million, we think we reported $24 million last year. So it’s not incremental; it could be at $95 a year. So we’re looking at Fagerdala to do that. So underneath that, with Product Care, we think we’ll still have reasonable volume in that less than 5% organically if you pull out Fagerdala and net 3% range just in guidance. So there’s an opportunity there, but we see year-over-year decent growth for the market. We’re going to have to create it, but we’re looking for profitable growth, and that’s the goal we’re guiding team as well, bringing profitable growth and let’s get that 3% on top of the acquisitions that we made for the Fagerdala.

Okay. That's helpful. And then Bill, I guess the operating costs were kind of I think in total like a $10 million headwind in 4Q. And I know you talk about it before, but I guess in 2018, mean that something where kind of given asset which you’re taking and now the total really shouldn’t be a drag in 2018 or should we expect some of the drag in the first quarter or two?

No. We think that the year-over-year comparison that we’re seeing in Q4 of 2017 compared to Q4 of 2016 is the most significant negative comparison we’re going to have. We don’t feel like we’ll have those negative comps going forward relative to our operating expenses, and I have—you also indicate that we’re going to continue to focus on having the right amount of cost for the new Sealed Air, continue to reduce our stranded costs as we go forward, and also to be totally dedicated to as Ted indicates the profitable growth ratio and that concept. And I will say that that mindset has already changed behaviors here at Sealed Air; I mean we had an executive committee meeting last week, and a large portion of that meeting was spent with the executive leaders speaking about what our specific actions in the first quarter and the second quarter are going to be and the impact on the PG ratio. So it does change behavior and it does translate to the P&L, and we are very optimistic in terms of that comp going forward in 2018.

Thank you. Operator, next question please.

Good morning. Ted, in your comments on M&A, I think you indicated technology and automation were areas of focus. Is it fair to say that might lend itself to kind of smaller bolt-on acquisitions that are kind of maybe more consistent with what Sealed Air has done recently? And then just some of your public peers have done large acquisitions and have argued that boosting their purchases, their resin purchase scale is a competitive advantage—not sure if you subscribe to that, but just wondering if you could give more color on M&A?

No. I think it's a good question. I’ll just build off the guidance that was out there from Jerome even back in 2015 looking at that we were in that $400 million look, so building off of that size. The danger for just seeing you buying a company because you can make a cost synergy to me doesn’t sound strategic because that’s one year-over-year, we can have tremendous—I think that’s an adder if we find a strategic acquisition that fits in our space and we could leverage our supply chain excellence there. Yes. But buying it just because we see a resin advantage, we really are probably looking more is there a strategic advantage that we can have some technology, some competitive advantage to win in the marketplace. That said, the size we are looking at in our space is something is an opportunity for us about $400 million that fits into our businesses can drive our Food Care business, can drive Product Care business and has a differentiating technology, and definitely that would be something that would be interesting to us. I think bringing our operation of excellence capability to those within just would be an exciting synergy that we could make that accretive quicker. So we’re looking at it. Yes, we think there are some purchasing power on resin if we were bigger, but our first look is, is it a strategic fit for us? And that’s what we would be excited to go after.

Okay. That’s helpful. I’ll turn it over.

Thanks, Operator?

Great. Thanks. Good morning. Just wanted to get your thoughts on your confidence level on the volume outlook. You face some tough comps in North America food and Europe food as well. And Brazil, New Zealand, Australia there have been some fits and starts there. Maybe there's some stabilization, but what your confidence that you will see some nice organic growth in food care?

We put that into our guidance. We did—the North America has been strong; North America has been the leading part of Food Care. We had that tempered growth rate into our guidance on North America. We don’t see that continuing at that rate, but last year's problem is this year's opportunity. So could we get some correction in Latin America and could we get some correction in Europe? So to the guidance just roughly, we see tempered volume for us and tempered on the acceleration of the volume of the fourth quarter and guidance, but we still think we’ll have nice growth from the product lines and specifically food care going into 2018.

And just follow-up on price. What’s your customers' level of acceptance on price increases? Are you getting pushback? We’re hearing price input cost pressure throughout the chain, so how willing are your customers to accept that price and has it improved since resin hasn’t gone down as much as you thought? Thanks.

Okay. Well, I’m a couple months expert in the new industry, but I think since our customers are probably listening to the call right now I don’t think customers are really excited about raising prices. Matter of fact, I’ve already had experiences with customers directly now. So that’s partly why we have to really move, and the business does a great job on the value capture. Can we save them more money that simply then is not an issue of price to go past that? Now, as we mentioned, that we’re pricing that our costs are going up so we will raise prices. So how I would serve it for the customers living is that we will be let down and want to be at the table. What might be a little bit different going forward is we are going to ask them other questions because they are going to say for your bag to load our turkey, what’s the price per bag? We might say, is there something else in your facility that we can help and save you money? They might be asking us on our Product Care as they would be packaging a product, we might say, what are you repackaging? Can we take some of that cost out and crawl into it? So we’ll be getting prices in a little different area. But the direct question with our customers raising prices in this environment, of course, it’s very difficult. We’ll do it on rising costs, but we are going to be much more aggressive and creative on helping them to save money, and we think we have opportunities to increase our margins in that value capture strategy, and that’s what we are going to be going after.

Operator, we have time for one last question please.

Thank you. Good morning. Just one follow-up on acquisitions. I mean, are there any regions in the world that’s most attractive to you, like where would you be reinvesting?

Good question. We are looking at the regions where we do business. The part of the Fagerdala acquisition that really helped us is giving us some presence in the Asia market, and that’s because it’s to help with our cost structure, having presence there, that would be attractive to us. But again, we want to be next to our customers. We want to be in adjacencies that we have some new technology that would help us get into markets. What would the example be? We are pretty strong in the fresh meat market. We are exploring getting into more of the seafood market. Those are some adjacencies that make sense. We had some pretty interesting technology in rigid containers. Can we get more into that space? We are looking for adjacencies where we have an opportunity that if we can’t make it fast enough, maybe there might be a player or a technology in those attractive spaces that we can buy our way in quicker. But the guiding rod we are using is staying really connected to our technologists, and we’re looking at all of our product development—can we accelerate that internally, or is there a way to accelerate that faster with an M&A opportunity?

And one quick clarification on the share buybacks. Is there a timeframe that you want to complete what’s left, or is it like open-ended?

No, we typically don’t disclose that. As we indicated, the guidance assumed the $159 million shares repurchasing. We will continue to be active in the market throughout 2018 with our typical methodology of accelerated share repurchase and open market repurchases. But we haven’t indicated a specific timeline at this stage.

Okay, thank you.