Sealed Air Corp (SEE) — Q2 2019 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 future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled forward-looking statements in our earnings release and slide presentation, which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K, which you can also find on our website at sealedair.com or on the SEC's website at sec.gov. We also discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. Included in the appendix of today's presentation, you will find U.S. GAAP financial results that correspond to some of the non-U.S. GAAP measures we reference throughout the presentation. Before we begin, I would like to note that this morning, as you may have seen, we filed our second quarter Form 10-Q which included some updated language around legal proceedings and risk factors related to the ongoing investigations by the SEC and the U.S. Department of Justice. As I'm sure you can appreciate, we are not able to comment beyond what's disclosed in the Form 10-Q and we will not take questions regarding these matters. We take financial reporting controls and compliance very seriously and are fully cooperating with the regulatory authorities. With that, I'll turn the call over to Ted Doheny, our President and CEO. Ted?

Thank you, Lori. Thank you for joining us for our second quarter’s earnings conference call. On today's call, I'm going to start with a recap of our second quarter results and the continued success of our Reinvent SEE strategy. I'll discuss the exciting acquisition of Automated Packaging Systems, or APS, which we closed yesterday, and how this will be a key platform for us to accelerate our growth. Then I'll provide an update on our sustainability. Jim will expand on our financial results for the quarter and provide an update on our outlook for 2019. We will then open the call for your questions. Now turn to our second quarter results on slide three. We had solid performance in the quarter in the first half of the year, demonstrating strong execution on our Reinvent SEE transformation. In constant dollars, we delivered 12% adjusted EBITDA growth on 4% higher sales compared to last year. Our top line performance was largely attributable to higher volumes in North America and South America and contribution from our recent acquisitions. Adjusted EBITDA margin was up 160 basis points to 20.4%. We also delivered adjusted earnings per share of $0.80, a 25% increase over last year; we remain focused on profitable growth and our results in the quarter reflect the high level of commitment and achievement by our entire global team at Sealed Air. As I mentioned, we completed the APS acquisition, which was valued at $510 million on a cash and debt-free basis. Keep in mind, cash paid at closing was closer to $450 million, as about $60 million of the purchase price includes the assumption of a legacy deferred compensation plan for certain APS employees, which will be paid out over the next three years. After considering synergies and tax benefits, the acquisition has an estimated enterprise value to 2018 adjusted EBITDA multiple of eight times. Both Jim and I will provide more detail on APS in our discussion today. Our business continues to face some macro headwinds and a globally choppy environment. Despite these headwinds, our one Sealed Air culture is driving share gains with new products; we're focusing on incremental growth opportunities by market, by product, and by geography. The progress we're making with Reinvent SEE, coupled with our efforts to overcome macro headwinds, is enabling us to raise our adjusted EBITDA and adjusted EPS guidance and strengthen our future earnings power. Turning to slide four, our journey to reinvent the company is gaining traction and impacting our results. Acting as one Sealed Air is enabling us to move more rapidly around the world and grow faster than the markets we serve. With our Sealed Air operational excellence, we're reinventing the entire process from how we innovate to how we sell. We're accelerating our speed to market on new innovations through our own resources and through acquisitions. We're developing highly differentiated innovations with the goal of producing the best products at the right price and making them sustainable. Our global go-to-market strategies are evolving to a more centralized and targeted approach to drive product cost efficiency. We're optimizing our network with selective asset upgrades and more automation. There are still significant opportunities to be delivered with our Reinvent SEE transformation; more than half of the total projected benefits are in progress or still being planned. Overall, we're very confident our global initiatives will deliver annualized benefits of greater than $250 million by the end of 2021, which will drive our 40% plus operating leverage target. Let's now turn to slide five and review our acquisition of Automated Packaging Systems in more detail. Known for its iconic Autobag brand, APS is a market leader that provides us with unique and innovative solutions, complete with automated equipment, advanced materials, best-in-class engineering, and field service. APS aligns with Reinvent SEE and our goal of doubling the rate of our innovation. APS is highly complementary to our protective packaging solutions for e-commerce and fulfillment operations and offers us adjacent opportunities in the food packaging sector including food, produce, snack foods, and portion-controlled meals. In 2018, APS generated $290 million in sales and $40 million in adjusted EBITDA. The value creation of this acquisition is very compelling. We believe there are meaningful opportunities to leverage our global reach and customer base with their unique automation solutions. We expect to generate annual run-rate productivity synergies of approximately $15 million by the end of 2021. These synergies will come from a larger combined company. We'll apply the same Reinvent SEE work streams to APS. This transaction includes expected tax benefits with a net present value of approximately $70 million. Before I pass the call to Jim, I'd like to spend a few minutes on a topic that's top of mind with our people and our customers: sustainability, highlighted on Slide 6. We believe that our sustainable offerings differentiate Sealed Air in the markets we serve today and will be a key differentiator going forward. At Sealed Air, we produce materials that are designed to protect and preserve, whether it's food safety, food waste, or product protection; our solutions minimize waste and prevent damage. There's still a tremendous amount of work to be done around the world to create a circular economy. Given what we do and who we are in packaging, we have the responsibility to lead the way in our industry and achieve our mission to leave our world better than we found it. We're addressing sustainability head-on with our innovations. We're working with several suppliers, partners, and peers on the most environmentally efficient way to manufacture, recover, and recycle essential packaging materials. I want to share a few examples of how we're leading the industry towards a circular economy. We're advancing the use of our Food Care scraps as raw materials for product care. For example, the production of a new Bubble Wrap formulation that runs on existing commercial equipment contains greater than 90% post-industrial recycled material. This is enabling us to create green Bubble Wrap in 2020. We've commercialized post-consumer recycled applications and offer solutions that contain recycled materials. Such solutions include our Darfresh or vacuum skin packaging, modified atmospheric packaging, and conventional overlap. These solutions are meeting increased customer demand, particularly in Europe, for more sustainable packaging. We're investing in multiple plant-based materials as well as manufacturing; they've added manufacturing capacity through a partnership with [indiscernible] that is on track for production in 2020. Our scientists have demonstrated that many of our multiple layer materials can be converted to petrochemical feedstocks for synthesis in new plastics. Discussions are underway with key suppliers to partner on accelerating the commercial development of chemical recycling technology. It's also important to highlight that we're expanding our engagement with the Alliance to End Plastic Waste. I had the opportunity to see firsthand the plastics waste challenge as part of a research expedition off the Coast of Bermuda in June. I physically picked trash out of the ocean that’s being dumped and mismanaged by multiple sources. In July, we had our first Alliance board meeting, and together with 20 CEO members, we approved 12 new projects to combat sources of ocean waste, as well as a communication strategy to promote the work that's now underway. We have a lot of work to do, but we will lead in fixing this problem. I'll now pass the call to Jim to review our results in more detail.

Thank you, Ted. On Slide 7, we'll start with the review of our net sales by region. In the second quarter, sales increased 1% as reported, and 4% in constant dollars. North America, our largest region representing 59% of the company's sales, grew 4% year-over-year in constant dollars. South America, our smallest region where we have U.S. Dollar Index pricing, was up 30%. Asia Pacific was up 1% due to the contribution from our Austin Foam acquisition, while sales in EMEA were essentially unchanged. Slide 8 highlights our regional performance in the first half of the year. Our first half performance in constant dollars is very similar to the second quarter. One thing to note is that going forward with Automated Packaging Systems integrated into our financials, North America will count for roughly 65% of our net sales. Turning to Slide 9. Here we highlight our volume and price trends by business segment and by region. In the second quarter, overall volumes turned modestly positive despite continuing macro headwinds across our business. Improving volume trends in North and South America were partially offset by volume declines in Asia Pacific and EMEA. Favorable pricing of 1% was driven by the U.S. dollar index pricing in South America. Price in North America was slightly unfavorable due to timing or formula path through in Food Care. On slide 10, we present our year-over-year sales and adjusted EBITDA bridges for the second quarter. Excluding currency translation and acquisitions, organic sales were up $17 million, or 1.5% year-over-year. Adjusted EBITDA of $237 million increased by $19 million or 9%, with margins up 160 basis points to 20.4%. This earnings increase was largely attributable to our Reinvent SEE initiatives. In price-cost spread, we benefited from Reinvent actions around direct materials, rate optimization, and value capture. We also benefited from lower input costs. Higher operating costs were largely due to labor inflation, increased non-material manufacturing costs, and some incremental spending to support future growth, which were partially offset by Reinvent SEE productivity enhancements. These productivity enhancements include network optimization, manufacturing process changes that are improving yields and utilization rates, and ongoing efficiencies resulting from our one Sealed Air operating model. We also realized $17 million in savings from restructuring actions. Acquisitions contributed $30 million of sales in the quarter, with $29 million related to Austin Foam. Adjusted EBITDA from acquisitions was only $1 million. Austin Foam's top and bottom-line performance has been negatively impacted by the slowdown in global industrial production and the trade dispute with China. We are moving quickly to integrate Austin Foam into our broader fabrication solutions business and shifting manufacturing to lower-cost regions to drive improved profitability. Currency in the quarter was $7 million unfavorable to adjusted EBITDA. Adjusted EPS in the second quarter was $0.80 on average diluted shares outstanding of $155 million. This compares to $0.64 in the second quarter of 2018. Roughly $0.11 of the $0.16 year-over-year adjusted EPS improvement was higher pre-tax income, with the remaining $0.05 approximately evenly split between a lower tax rate and a lower share count from the share repurchase program. The adjusted tax rate in the quarter was 19.4% compared to 22.6% in the second quarter of 2018. This year-over-year improvement was primarily due to the release of a valuation allowance in South America that was triggered in the quarter by improved profitability in the region from Reinvent SEE initiatives. On slide 11, we present our sales and EBITDA bridges for the first half of the year. As illustrated on this slide, year-to-date, we have realized approximately $75 million of Reinvent SEE benefits, with $29 million coming from restructuring actions. In the back half of the year, we expect another roughly $60 million of Reinvent SEE benefits, of which about $40 million will come from restructuring savings. However, keep in mind our formula pricing in Food Care is expected to be more aligned with raw material costs, so we are assuming left contribution from price-cost spread in the third and fourth quarters. Turning to our results by segment on slide 12, we present second quarter results for Food Care. Food Care net sales of $711 million were up 4% in constant dollars, primarily driven by higher volumes of 2.4% and favorable pricing of 1.3%. Adjusted EBITDA increased 15% to $156 million, and margins improved 290 basis points to 21.9% of sales. North America and South America Food Care volumes were up 4% and 7%, respectively; strength in North America was due to strong exports, increased consumer demand for fresh packed proteins, and continued adoption of our case-ready and fluids platforms. South America performance was driven by 15% volume growth in Brazil, where we benefited from higher equipment sales, a stronger export market, and share gains. In EMEA, our volume was up 1% despite a softening economic environment and lower protein production. We experienced increased demand for our sustainable solutions that contain recycled materials and offer post-consumer recyclability. Volumes in Asia Pacific were down 2%, this is the only region in our food care segment with a decline in volume trends, and was primarily related to the timing of equipment sales in Australia. We continue to expect food care to outperform global protein markets. Global protein production is expected to be up slightly in 2019, which compares to our food care constant dollars sales growth outlook of 4%. As previously mentioned, increased consumer demand for fresh proteins is driving adoption of our case-ready platform across all proteins, and we expect the export markets to remain strong in both North America and South America, largely driven by the protein shortage in China. On Slide 13, we highlight results from a product care segment. In the second quarter, product care net sales of $450 million were up 4% in constant dollars. Excluding the Austin Foam acquisition, product care net sales were down 2%, driven by volume declines of 3% partially offset by favorable pricing of less than 1%. The volume decline in the quarter was driven by industrial weakness in Europe and Asia, and lower sales of traditional bubble wrap, mailers, and void fill. Adjusted EBITDA of $84 million, or 18.7% of sales, was up 7%, and margins expanded 90 basis points. Restructuring savings, favorable price-cost spread, and other benefits from Reinvent SEE were partially offset by lower volumes and higher operating costs, including labor and indirect material inflation. In product care, we are evolving our go-to-market strategy to better align with changing market dynamics. We expect continued growth in our value-added solutions portfolio, which currently represents about 20% of the segment and includes inflatable bubble wrap, automation, paper systems, and temperature assurance. In the second quarter, this part of the business was up approximately 10%, and going forward, we will include the APS business. We continue to target pockets of strength in the industrial market where our B2B customers are looking to modify their packaging and ensure their products are parcel ready versus pallet ready. Industrial application accounts for approximately 40% of our product care sales. It is worth noting that our industrial applications in North America were flat year-over-year in the quarter. This compares to a decline of roughly 5% in the first quarter. We saw this specifically in our instant back business following strong equipment installations in March. For the remainder of the year, we expect product care organic volumes to be challenged by the decelerating global industrial market and the ongoing trade dispute with China. With that said, we're excited to bring APS into Sealed Air and believe their complementary and differentiated portfolio will add significant value to our customers seeking sustainable solutions that provide automation and labor savings. As Ted mentioned, APS has a strong record of line growth, but the results today in 2019 reflect some of the macro challenges facing Sealed Air. As of the last 12 months ending June 30, APS sales were approximately $292 million and adjusted EBITDA was approximately $41 million. So modest gains so far this year versus 2018 results. However, we remain encouraged by the go-forward opportunities to leverage the dedicated people, technologies, and capabilities across both organizations to better serve our customers and drive significant efficiencies over time. Let’s turn to our year-to-date free cash flow on slide 14. In the first half of the year, we generated $75 million of free cash flow compared to the use of $37 million in the same period in 2018. A $112 million year-over-year improvement was driven by higher adjusted EBITDA and lower cash tax payments, partially offset by increased CapEx spending and program investments. Additionally, one-time cash outflows related to deferred fees and the buyout of a royalty license agreement with an outside engineering firm impacted 2018. During the second quarter, the company also invested $23 million in two small acquisitions in the food care segment. One of the acquisitions had a geographic footprint in the Philippines, and the other added unique digital printing technologies and capabilities. Net debt at the end of the second quarter totaled $3.4 billion; net debt to LTM adjusted EBITDA was 3.7 times. On a pro forma basis, including the APS acquisition, net debt to LTM adjusted EBITDA was 4 times, which is at the high end of our targeted net leverage range. We do expect net leverage by year-end 2019 to drop to approximately 3.8 times with our cash generation and continued growth in adjusted EBITDA in the back half of the year. Now turning to our updated 2019 outlook on slide 15. We now anticipate net sales to be approximately $4.85 billion or about 2% growth for the year as reported. On a constant dollar basis, net sales are expected to increase approximately 5%. Food care is on track to deliver 4% constant dollar growth, of which about $10 million will come from the previously mentioned small second quarter acquisitions. Product care is now expected to deliver 7% constant dollar growth, which includes $180 million from acquisitions. APS is expected to contribute approximately $120 million over the next five months and the remaining $60 million is from loss in firm. For product care, organic sales growth, we have revised our forecast to be down approximately 3% compared to our previous expectation of up 1.5%. This revision is largely due to the slowdown we’ve been experiencing in the industrial sector, particularly in North America and China. Adjusted EBITDA for the full year is now expected to be approximately $950 million to $960 million. That’s compared to our previous guidance of $925 million to $945 million. Our revised outlook includes $10 million to $12 million from APS, but keep in mind that this includes a one-time inventory purchase accounting charge which we are currently estimating at $6 million. Adjusted EPS is now expected to be in the range of $2.70 to $2.80, compared to our previously provided range of $2.65 to $2.75. Our guidance assumes approximately $0.07 of dilution from APS, which includes $0.09 of non-cash purchase accounting, tangible amortization, and the one-time inventory step-up charge. The outlook for adjusted EPS is based on our roughly 155 million shares outstanding and does not assume share repurchases for the remainder of the year. For the full year 2019, we continue to anticipate an approximate 26% adjusted tax rate. We are reducing our cash flow forecast for free cash flow to $180 million from $250 million to reflect the $59 million noble tax settlement and the first installment payment of $20 million for the closed APS deferred incentive compensation plan. Our revised CapEx for the full year is $210 million, which includes $10 million for APS. We are now forecasting cash tax payments to be approximately $115 million, which compares to our previous forecasts of $130 million. The $15 million reduction is primarily the result of estimated tax benefits from the Novipax settlement and the APS acquisition, partially offset by tax payments on higher earnings. We expect to continue to spend $115 million on Reinvent SEE associated payments in 2019. For the full year, net interest payments are expected to be $190 million. To fund the APS acquisition, we secured a new 3-year term loan A tranche to our existing credit facility. Strong lender demand for funded assets helped us lower the credit spread for this loan by 37.5 basis points versus the pricing of the existing loans in the facility. Additional interest expense for 5 months from this term loan is expected to be $7 million, which are expected to be offset by savings from increased cash flows in the first half of the year and a lower than previously anticipated interest rate environment. Let me now pass the call back to Ted for closing remarks, and then we'll open up for questions.

Thank you, Jim. We look forward to updating you on our continued progress throughout the year. Reinvent SEE is about accelerating profitable growth and increasing earnings power. It's illustrated on this slide; you can see how we're reinventing our powerful brands and acting as one company. We're communicating our 4 pieces of Reinvent SEE: performance, people, products, processes, and sustainability and how they're increasing efficiency, unleashing growth and creating value for our shareholders. We're excited for what's ahead and will continue to focus on what's in our control to drive our success. With that, I'll now open up the call for questions.

Thank you and Jim, welcome to the call.

Thank you.

Yes. Thank you. Looking back at the second quarter on relativity initial plan. I guess first off what surprised you to the upside in context of a more benign raw material backdrop, maybe the cadence of cost savings mixes etc. Just some more color in terms of what drove this upside specific to 2Q. And then related to that Food Care volumes grew nicely in the second quarter relative to the first quarter. How should we think about segment volumes for the back half of this year and if you can break that down by sub-region that would be helpful? I know Jim gave some comments on core sales, but wanted to focus specifically on volumes? Thanks so much.

Okay. I'll give a high level and let Jim give you some of the bridge to go into detail. I don't want to say what surprised us, but our confidence in the quarter, if we look at how the business performed. We're definitely highlighting in our prepared remarks that our Reinvent SEE savings are coming through. We have a high level of confidence in our initiatives that we have in place, the cost actions we're going after, as well as the growth opportunities. We have good line of sight clarity; we saw that hit the bottom line. The other part regarding the markets is that we know the markets have been choppy. We are obviously looking at the competitors and what's going on there. What surprised us actually on the upside is in the industrial space, where we're seeing some of our new products hit, and that is good. But we still have challenges with headwinds. A quick summary is the best benefit in the quarter was our Reinvent savings. I'll let Jim go through some of the details that you asked on the bridges.

Well, I think looking at the original guidance, we clearly had contemplated more volume growth on product care, where we didn't see it. Fortunately, we did have this Reinvent SEE engine going hard. For the full year, when the company came into the year, we were expecting about $70 million of savings. You'll note from the slide that we delivered $75 million. So, we were more than able to offset that volume decline, primarily in product care from the Reinvent savings. As we sit here today, as you know, we're looking at $135 million for the full year from Reinvent, another $60 million in total in the back half of the year, with $40 million of that being restructuring. So, that's really the story; the reinvention is delivering outstanding results. In terms of the kind of profile first half, second half, we are expecting in the back half of the year on a consolidated basis, let's call it roughly 1.5% organic, 4% organic would be kind of where we're at with Food Care, so really no surprise there. In Product Care, we would be same more like a negative three organic in the back half of the year. But again, over delivering on the reinvest benefits.

Just one other thing on looking at the Food Care. If we look at our business, and as we share with you and others that we're really trying to act as one company, you'll see us talking more as one company but specifically on Food Care, you'll see that 4% that we see in the growth in the first half; we're planning on that, and we're driving that to continue through the second half of the year. So that is good news in that business, and despite all the issues that we're facing, that's very important to driving our profitability for the business.

Operator, next question, please.

Hi, this is Mark sitting in for George. I just want to ask kind of a high-level question on Product Care. So, with Amazon's shipping and container initiatives, and other moves we're seeing to optimize box size and e-commerce, is that initially negative for Product Care? And if so, how long before you can get some more benefit from the machinery from your automated packaging lines? Thank you.

Hi, Molly. And I hope George is doing better. If we look at the Product Care, as you highlighted, that work is in process. With what's happening in e-commerce and that shift in our business and our portfolio, we are seeing the traditional business; we are still doing well with our Bubble Wrap on demand, or core view solutions etc. But as they go to package zones container, they're looking for less stuff in the package, and also driving automation. So, the issue is, can we drive an automated solution that's actually loading the package automatically? So, that transition will take over time; it will take time. But what's exciting is when APS comes in with their auto bag, that's exactly what it does; rather than a person loading one bag at a time, they have their side pouch system that loads multiple units and increases what one person can do from six per minute in loading a package to twelve or even higher levels. So, we're seeing that change happen over time; what it means to our portfolio, we have some internal product development working in that space. We have some sustainable solutions that we think are quite interesting. And we also have some lower carbon footprint solutions because that's where the mailers come in as well, by taking the box out of the process. So, the transition's in place, it's showing up in our business, and what we've lost in the Product Care business. But we feel pretty confident that over time, and hopefully sooner rather than later, we'll get some of that business back and more.

Operator, next question please.

Good morning, Ted, Jim, Lori.

Good morning, Mark.

I wondered, Ted, if you can give us a little more color on APS. And I, I guess I'm particularly focused on sort of the margin profile in that business because it looks like it's on an LTM basis. It's about a 14% EBITDA margin. So, it's lower than the existing margins that you have in Product Care? I'm also curious about what the margin progression has been over the last four or five years and how stable do margins tend to be across the cycle?

Okay, good question. We try to put the slide out there, Mark to kind of help this business; we actually refer to the slide in order to lay that out. Well first of all, what we're interested in this business, and we've been signaling since I've been with the company how important automation is and to look at their percent of equipment, service parts, and materials. First of all, if you look at their equipment, they're 16% equipment and 70% materials. If you look at what we call the solutions multiplier, and they actually use that language, their materials are 9 times to each piece of equipment. Also, with their equipment and by the way, I’m describing this to get to that 15% profitability that’s much higher in terms of the level of equipment percentage, but there have dedicated materials to their equipment and their service, and they're embedded with the customer and their roughly 60% of direct business. Yes, the overall profitability is lower than where we are with our business, but what they do for that full system with a high level of equipment is quite interesting for us. We've been looking at this for well over a year, and actually I probably need to give a shout to the APS employees listening. Welcome to Sealed Air! We had our first day of operations there yesterday, and my management team was there. I was there via; I will be there personally, but I want to make sure I say hello to the team. So now I see actually day 1 behind the curtain of how they do what they do from analyzing from the outside. I think that’s where we're excited about the opportunities, what they were doing with the equipment, and then also on their profitability looking at their materials so that’s something that we know very, very well. Looking at those materials and looking at what they have under the sustainability side, we saw a very high sustainability content on their pillows; if you look at other pieces of equipment, they have a patented easy care that is very interesting in innovation on the air pillows. Looking at the business we see products we like, but the customer overlap is less than 10%; that’s very exciting for us as we look at our complementary products. Then the third piece is their presence in food, which is roughly about 15%. In terms of the profitability side, we see opportunities to move that 15% north of 20% on this piece they have; we actually see opportunities that they need our help to become more profitable and successful in the market as well.

Operator, next question please.

Good morning everyone and welcome Jim. Just a question on the volume and food care. It's nice to see the growth rate bounce back in 2Q, I think last call, you talked about 1Q seeing some negative impact from Brexit and just wanted if you experienced maybe some restocking benefit in the quarter. If you could comment on any impact from that and outlook for the second half of the year seems pretty positive on food care. It does look like we're increasingly drifting towards a new deal Brexit, just wondering if you think that we could see sort of repeat of the 1Q weaknesses in the eventuality that we had something like that. And then just wondering also your comments on the protein deficit in China; are you baking in the expectation benefits from that in your guidance, and how if anything tariffs could factor into the ability specifically from the U.S. to export into China? Thanks.

Okay. I hope I get all those questions back; Jim help me out if I miss a few. First of all, looking at when we give you information about what's going on in the market, I will just share even how we manage internally; we do want to use some of those things like Brexit as an excuse because we have to overcome that and deal with that. So, there are issues; what we're seeing is even the trade issues around the world. So, looking at Europe in general, we are focusing on what we can do to achieve growth. What we're seeing change is on the sustainability side; this war on plastics is really, really everywhere, and that’s why I moved it to the front as our first slide in the presentation, especially strong in Europe. So, with our food care business, it’s where Brexit means is where the process UK, back and forth into Europe, but the food will get to the right place in the right package at the right price and making it sustainable. So, we see some actual gains; we need more support with our sustainable care packaging in using more recycled content. We have seen gains in North America, and South America is doing quite strong. I was actually in Brazil twice in the last month meeting with our largest customers, and we're seeing economic activity shift in their favor. The other thing that’s being highlighted is the African swine fever and how those protein markets will shift. We see fresh meat coming into China. We actually see North America being fairly strong, and South America remains strong with a good presence. So, I'll take a pause here and Jim, I might have missed a couple of those other questions we have if you want to add some color.

Yeah, I guess in terms of Food Care, as I look at the business over the last month, the first half of the year we had organic growth let’s call it just above 3.5%. A fair amount of that was coming from pricing; as we look at the back half of the year, let’s call it the midpoint of our new guide; we’ve been looking for a similar level of organic growth in total with more on volume as these formula pricing pass-throughs kick in in the back half of the year with food. In terms of the overall effect of the protein deficiency in China that was there, we look at that over the last few weeks and right now it doesn’t feel like we’re being hurt from an exports perspective, and there’s probably a little bit of an argument that maybe we’re benefitting because of the strong exports that we’re seeing out in North America and Brazil. But clearly with new tariffs that might come through as we go back and forth between China, it’s to the extent something that could affect that. We have the ability to supply another world there, but that could be somewhat of a risk.

And coming from Jim being the one-month expert here on that great job. The other piece we’re hearing the bottom line is that we have to quantify and that’s where Jim’s done a great job already; so what’s the problem where we need to go fix? We’ve assessed internally the African swine fever; even though we think it will be a benefit, I ask directly our customers if they believe it will be a benefit, and they do because we’re positioned where the proteins will shift. Even proteins that are going to be part of our future; the number we put on it is roughly $3 million that we’re going to have to make up, and the reason for that is some of that short term is going to be shipping frozen carcasses into China; we don’t get the same concentration as when it goes fresh. Our connection is to fresh. We’re seeing the pickup build in Australia, so all the equipment there is even picking up in Australia. We’re feeling that, but overall we’ve got an issue we’re going after $3 million that’s going to hit, and we’re going to go cover that.

Operator, next question please.

Hey Jim and Lori, good morning and thanks for taking my questions, I appreciate it. Just two-part around APS. Ted, you mentioned it stood at about $0.07 if you add back the inventory step-up, it’s call neutral. So I guess what about that in your mind should be kind of exciting to shareholders that you’re doing neutral? The $0.90 by the end of ’21 you’re guiding to annualized synergies of 15, but I would say that’s a fair way to have from here. And just also on the APS, the $60 million of the $510 million purchase price; that’s going to APS as European employees on that share, just an accounting question why is that not - why is that furniture operating cash flow supposed to being classified as part of the purchase price and that’s going to cash from investing?

I’ll let Jim go to the accounting piece and then I’ll share with you again why we think it’s good for investors.

Okay sure; on the $60 million deferred in kind of compensation, obviously it’s not great that we have $60 million post-closing running through our cash from operations, and this is really a legacy, and however we looked at the accounting closely, the reason for it is going through operations is that the payments coming out of that plan are going to the current employees. The accounting rules are pretty straightforward there. If you have money going to benefit the current employee base, those run through operations, so we’ll have to just remind everyone in the next few years we’re going to have about $20 million a year that’s really related to the purchase price; it’s just unfortunately we’re not going to be able to overcome that from an accounting perspective.

Good point, and then Adam to your point shareholders and the value here, I don’t want to say trust but we've been trying some of the reinvention; it’s been very challenging, but we see that opportunity just like Reinvent SEE, and by the way, we're going to be applying day one our Reinvent SEE work streamed to APS. The focus is what they do and what we do, and looking at what they do with their equipment is an accelerator; that solutions multiplier that I shared with where they are for every dollar of equipment sales; they get 9 times the materials that is extremely compelling. If we can bring that to our business, very, very compelling. Their way they're entrenched with their customers because of the equipment, the stickiness there is impressive. Their leading automation because that's what our customers are asking for; our customers have a very difficult time with getting the right people in the right place for driving automation. They are the leaders in that, so we're quite excited. What that's going to give us is a market growth opportunity. The performance, we're very comfortable; we can work together and prove that performance is part of our Reinvent SEE and get them to our profitability. The numbers we gave you out there reflect the slow down in the market that we've had in the year-over-year; we're being very clear and transparent. The previous years that we've looked at, the last three years in the same space where Product Care, primarily they do have 20% food, they've been growing at a significantly higher rate than we are. So, we're excited that they have the market capacity, the market potential, to capitalize on the complementary elements of what they do.

Okay, one other accounting related question. We did say $0.07 dilution; that's based on our best estimate right now for purchase accounting, and as everybody knows, we're going to have to go through a full fair value analysis and that could change a little bit as we finish out the year. But keep in mind I want to remind you that that $0.07 does include the inventory step up and that charge. That's about what, $0.025 to $0.03 of that $0.07? And then additionally a couple of other things I would say is if you just look at it on a cash basis, it's accretive right away. So, if you exclude the non-cash purchase accounting, it's accretive right away and then next year, even with a pretty heavy chunk of purchase accounting amortization flowing through, we look at that business being roughly neutron and adjusted EPS basis.

And internally, they -- the internal number for year one is higher than to make it agree. Okay.

Operator, next question please.

Good morning. I have a question around some of these alternative protein sources that we're hearing about. And I was curious if you've done some work? Presumably the answer is yes. But talk about some of the barrier properties that might be required for the food packaging around, I don't know, plant-based protein burgers and stuff like that. And whether or not you see it as a long-term opportunity for that business.

Yeah, it's actually quite interesting for where the world is going with fresh meat. We are seeing, but first to answer your question, we are connected; we are doing the packaging for that business and they do need the same thing to keep it fresh and protected. They need the barrier protection with what we do with our Cryovac material which does apply to that, so we are connected. We're also seeing an interest in staying close to our customers in the QSR world; we're finding that it's actually helping the meat business. Looking at the QSR restaurants, and now they have an alternative that gives the family the ability to go out to eat; so right now, we're actually seeing the projections from our customers that this will help drive the protein market, where we’re very strong. So first, the answer to the question is yes, we're connected to this with packaging; they need the Cryovac technology which is exciting for us. And two, right now, it looks like it's actually going to help the protein market growth.

Operator, next question please.

Hi guys, this is [indiscernible] filing in for Chip and Jim, welcome. First little bit goes back to e-commerce and Amazon. I know you said overall, you're working also on this acquisition to address some of these issues but just a little bit in the short-term, the next few quarters couple of years. How are you seeing demand for traditional e-commerce products you're selling like your mailers, the board feel, in terms of the unit volumes and how should that translate to what growth rate could that translate for your product segment for 2019 and 2020?

Well right now, we're working aggressively on new designs; new products just on the mailers itself. Again sustainable design, as I shared that part of the green bubble wrap of 2020, that’s also connected to our mailers. On the automated solution side that’s something we’re going to look very quickly at APS to see do they have an automated solution that can help accelerate the gap in our portfolio that we lost out to that segment. We think we have some upside opportunity there. We also need to be more efficient driving into our operations and what we're doing in that part of the business; we think we have some operational efficiency that we can do to be more competitive. We think it’s some upside opportunity in the year-over-year; that part of the tough fix that we got to sort out in the food care or product care business.

Operator, next question please.

Thanks just a question on product care, so you talked about your value-added solutions being about 10% in the quarter and I was wondering if you think this level of growth is sustainable and how large this can become as a percentage of your portfolio from 20% currently?

Probably not able to give you an exact percentage on that, but that’s where our focus is. The value-added word we're using to really drive us also just not just talking about the price; you get the product, you get the prize. We're really focusing with our customers, what can we eliminate in our products, as what can we eliminate in our package and even what new material can drive that. So, this is a part of our growth. We talked about this one well. I think the continuation of the growth, what percentage of our portfolio? I don't have a direct answer, but this is our focus and this will grow.

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

Thanks for taking my question good morning. I just had a question about the growth rates that you're achieving. So, if you think about the legacy guidance in the $935 range, it looks like you previously guided to about 4% to 6% EBITDA growth. I guess is that kind of in your range of long-term expectations? So, if we look at to fiscal 2020, you're going to be maybe starting from that base, adding EPS and then adding maybe a third of the synergies, and then maybe you put mid-single digit growth on your legacy growth. We get something in the mid-$1 billion for EBITDA. Is that the right way to think about the earnings power of the company or is there more to that from the inventor recovery in volume or price or anything like that? Thanks.

Well Arun, that was a nice way to try to get us to tell you what our future guidance is going to be, but let me come back to the strategy and how we're trying to make it easy for you to understand where we're going. If we look at the metrics that we're guiding, we're guiding to say we're going to beat the market. We are adjusting this because the market has gotten choppy and so we see to get tapped down, but we want to beat the market. How you can get to what the EBITDA looks like is that we are passionate, we are managing, we are controlling what leverage is going to be and that’s why we gave you that 40% look. So, you can look at that and grow; then put the 40% that’s what we're driving to, that’s what the pay for and that's in our control that we're going to make happen.

Operator, we will take our last question please.

Good morning, Jim and Lori. Just had a question on Reinvent fee. I guess just saying the $135 million benefit this year versus your initial estimate of $70 million. Can you just talk a little bit about what’s driving that better than expected performance? Are you achieving savings more quickly? I guess there’s some upside to, I think that the $250 million of total savings that you are expecting over three years?

Okay, I’ll go, just give you quick again reminding of what’s going well and then Jim wants to add some detail there. Remember the Reinvent fee and like I’d say it over and over again; it’s about we’re reinventing the company; everything from how we innovate and sell. We’re going after the complete process and we have those; we’re now up to nine work stream and we’ve given the top-down target; but we’ve also had a bottoms-up. I must say it’s been pretty exciting for me traveling the world; we had the boarding here last week. We actually see the largest facility; so we’re feeding up these initiatives that actually track; we’re tracking and have very good accountability for. To your specific question of the buckets that are moving, as we shared, we saw some inefficiencies when we gave the diagnostic a year ago, and we’re seeing that hit the bottom line. We talked about three divisions; now two divisions or was two divisions; now going to one. Acting as one company, we see that initiative, and you see it on the SG&A line of what we’re driving and how do we delayer the organization. That part is being measured and managed and we have that track and trace. We see it happening. On the operational side, we’re seeing some of the yield in the productivity come through. We’ve got teams that are looking for facilities on what we’re doing, how we’re doing our extrusion, what is productivity, where’s idle time, the metrics. If you go to one of our facilities now you don’t have to read a report; you see the visual board. I’m not talking about really exciting stuff, but that stuff is being measured, it’s being managed, and it’s flowing through the bottom line. Our confidence in the trackability and traceability feels really, really good about that. The productivity we’ve seen is coming through our direct material; now I know the questions always come up about what's going on with resin, so we’re breaking that into high-level detail on the different types of resins we buy, the SKUs, and we’re going bit by bit, part number by part number and looking at it to see what makes sense, what doesn’t make sense; we put a project on it and we’re seeing that tracking very well. Jim, you also want to add in?

No, I would just say one of my first things coming to the company was eye-opening that I’ve been through these processes before and sometimes there’s a lot of consultant speak in that sort of thing, and it’s a little bit of - but I have to say after being here for a month, I'm very impressed with how this reinvention is being done; this transformation is being done. It’s really very detailed. I think there are 2000 specific initiatives throughout the company, and they’re being tracked. It's all kinds of great work going on here, and I think we’re not leaving any stone unturned. So, yes, we are delivering a lot more than what I think the company thought when I got into this company was prudent when it announced what it thought it could achieve at the end of the year. We’re seeing this come through really strong for the full year and the first half and being able to commit now that $60 million in the back half of the year really helps us offset some of these volume-related challenges in product care; it’s really great. We do see good opportunities as we turn the calendar into the next year . So, I'm very impressed with what I see and obviously we’ll continue to stay close to the teams doing a great job.

Great thank you Jim, thank you Ted. We appreciate everyone’s time this morning. Thank you for joining our call and we look forward to speaking to you soon. Operator?