Sealed Air Corp (SEE) — Q1 2021 Earnings Call Transcript

Thank you, and good morning, everyone. I hope you and your family are healthy and staying safe. With me today are Ted Doheny, our CEO and Chris Stephens, our CFO. Before we begin our call today, I'd like to note that we have provided a slide presentation to help guide our discussion. Please visit our website, where today's webcast and presentation can be downloaded from our IR website at sealedair.com. I'd 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 US GAAP. You will find important information on our use of these measures and their reconciliation to US GAAP in our earnings release. Included in the appendix of today's presentation, you will find US GAAP financial results that correspond to the non-US GAAP measures, as we referenced throughout the presentation. I will now turn the call over to Ted. Operator, please turn to the next slide.

Thank you, Lori, and thank all of you for joining our first quarter earnings call. We had a solid start to the year despite the ongoing pandemic and Winter Storm Uri impacting the global supply chain. Our team has been doing a great job leveraging our supply network to ensure business continuity. As you can see on Slide 3, our purpose is clear; we are in the business to protect, to solve critical packaging challenges, and to make our world better than we found it. On today's call, I'll recap our first quarter 2021 performance. I'll share how we are managing through the current environment, how our global markets are evolving, and the growth opportunities we see ahead. We're leading the way with automation, digital, and sustainability. Chris will review our financial results and outlook in more detail. Let's turn to Slide 4 for a review of our first quarter of 2021 results. Net sales increased 8% with strength in eCommerce, automated equipment, food retail, and industrials. Adjusted EBITDA increased 6% with volume growth and Reinvent SEE productivity improvements more than offset by material inflation and supply chain disruptions costs. EBITDA margins were 21.2%, a modest decline compared to last year. Our operating leverage of 16% was impacted by the inflationary environment and timing of our price actions in formulas pass-throughs. This near-term pressure is expected to continue through the second quarter. Adjusted earnings per share was $0.78, up 7%. We generated free cash flow of $36 million, which compares to the use of cash of $8 million in the first quarter last year. We're raising our 2021 outlook across all key metrics to reflect our first quarter results, top-line momentum, and operating leverage improvement in the second half. Looking beyond 2021 on Slide 5, we want to reiterate the objectives of our SEE operating model. Automation, digital, and sustainability are expected to drive above-market growth. Our organic sales target is 3% to 5%, approximately 200 basis points above our addressable market growth. We service a stable market that historically has grown 1% to 3% a year; with innovation and sustainability, we expect to accelerate growth in our base business to 2% to 4% and add another 100 basis points of growth with automation. Our operating leverage target is over 30%, which translates into adjusted EBITDA growth of 5% to 7% per year. With our capital allocation strategy in place, we're targeting adjusted earnings per share growth of greater than 10% and free cash flow conversion greater than 50%. Let's turn to Slide 6, our movie reel slide which pictorially shows some of our new solutions powered by our iconic brands. You can see a play button on the slide, which is to encourage you to visit our website, where you will find exciting success stories. Our automated and sustainable packaging solutions maximize food safety, protect goods, minimize waste, and deliver savings to our customers through increased productivity. In the first quarter, we had strong growth across our protective end markets, led by eCommerce retail and consumer goods, logistics, medical and life sciences, and the recovery in industrials. We're leading a dramatic shift to a touchless, automated environment in fulfillment centers resulting in double-digit growth in our automated solutions portfolio, further enabled by our APS acquisition. In consumer goods and logistics, we're capitalizing on global eCommerce growth. In medical and life sciences, we're playing a key role in the global COVID-19 vaccine distribution and benefiting from growth in online shipments of medical equipment and pharmaceuticals. Our industrial markets, including general manufacturing, electronics, and transportation, have gained momentum since year-end, particularly in Asia Pacific and Europe, where we have a high exposure to electronics and automotive end markets. In the Americas, we experienced favorable trends despite the winter storm supply disruptions. There continues to be an imbalance across the food industry, with strong demand in the retail channel offset by softness in food service. We were encouraged by our performance given the end market environment and the tough year-over-year comparable, particularly in North America. We saw strong growth in automated equipment and favorable trends in retail applications across all proteins, including cheese and seafood. Going forward, we expect food service to recover as restaurants, sporting events, conferences, and other large public venues reopen. On a global basis, our meat packing customers are investing in automation in materials that improve productivity, enhance employee safety, and address their sustainability goals. We're at the stable, staying connected online with our customers, demonstrating our new automated, touchless, and sustainable solutions. In Europe, we're gaining momentum with our industry-leading Cryovac barrier bags optimized for recyclability. We're experiencing an increasing demand from quick service restaurants that are investing in new Cryovac Auto Pouch solutions for soups, sauces, condiments, wines, and spirits. Our high performance sustainable materials are integrated with automated equipment and services, disrupting the rigid container market. Now turning to Slide 7 for an update on SEE Automation Touchless Solutions. Equipment, systems, and services sales were up 18% in the quarter and accounted for 8% of our net sales. We're on track to achieve approximately $425 million or 12% growth in 2021, of which more than $250 million will come from equipment and systems. Our sales pipeline for automated equipment is strong, and we're confident in our organic target of over $500 million by 2025. When you factor in a 3x solutions multiplier, including growth in parts and service from the installed base and the flow-through of materials, this results in a $5 billion plus potential growth opportunity over the 10-year solutions lifecycle. We're working closely with our customers to prioritize projects that create less than a three-year payback. We're creating tremendous value for our customers, and we are excited to lead the way to a more touchless digital environment. Now let me turn to Slide 8 and share how we're leading through this pandemic. We're investing in our own eCommerce platform to drive our transformation to a digitally driven world-class company. Our smart and intelligent packaging value proposition is enabled by a proprietary digital printing technology. This is enabling unique designs on high-speed packaging systems in multiple colors, food-grade ink, and even invisible inks that with our unique SEE marks, will enable blockchain tracking to billions of packages. Our vision is to digitally connect sustainable packages inside our facilities to our customers and to consumers' homes through eCommerce. I will now pass the call to Chris to review our results in more detail.

Thank you, Ted, and good morning, everyone. Let's start on Slide 9 to review our quarterly net sales growth by segment and by region. In the first quarter, net sales totaled $1.3 billion, up 8% as reported, and up 6% in constant dollars. Food was flat in constant dollars versus last year on a tough comp and Protective accelerated 14%. Our fastest-growing region was Asia Pacific, which delivered 12% constant dollar growth; EMEA increased 7%, which is the highest organic growth rate for the region in the last four years, and our largest region, the Americas, was up 4%. On Slide 10, you see organic sales volume and pricing trends by segment and by region. In the first quarter, overall volume growth was up 5%. Volumes in Food were flat, with favorable trends in Asia Pacific and EMEA offsetting a 2% decline in the Americas. Protective volumes were up 13%, with double-digit volume growth in all regions. As Ted indicated, on a global basis, strength in eCommerce, automation, and food retail, as well as improving trends in industrials, more than offset softness in food service. Q1 price was favorable 1%, mainly due to US dollar-based index pricing in Latin America. Most of the pricing actions corresponding to the current raw material and supply chain environment are taking hold in the second quarter, and formulas pass-throughs, largely in Food North America, are just beginning to turn. On Slide 11, we present our consolidated sales and adjusted EBITDA for the first quarter. Having discussed sales results, let me comment on our adjusted EBITDA performance. We delivered adjusted EBITDA of $268 million, up 6% compared to last year and margins of 21.2%, down 40 basis points. You can see on our EBITDA that higher volume and operational benefits offset higher input costs. Adjusted EPS in Q1 was $0.78 compared to $0.73 in Q1, 2020. Our adjusted tax rate was 27.6%, essentially in line with last year's adjusted rate in the same period. Our weighted average diluted shares outstanding in the quarter were $155 million. Turning to Slide 12, here we provide an update on Reinvent SEE. In 2021, we remain on track to realize approximately $65 million of Reinvent SEE benefits, with roughly 50% flow-through from actions taken in 2020. Our commercial workstream is accelerating innovation and driving new customer wins in core and adjacent markets. As Ted noted, we're seeing strong growth in our equipment order pipeline in both Food and Protective. Turning to segment results on Slide 13, starting with Food. In Q1, Food net sales of $702 million were flat on a constant dollar basis. Similar to the year-over-year trends we experienced in the fourth quarter, Cryovac materials were down slightly due to low single-digit declines in barrier bags and pouches, which combine represent nearly 50% of segment sales and have the highest exposure to food service. This was offset by modest growth in case-ready and rollstock retail applications, which represent just over 40% of this segment. Equipment, parts, and service sales, which accounts for approximately 7% of the segment, were up approximately 10% in the quarter. Our customers around the world are investing in their processing plants to upgrade aged assets and drive productivity. We are also seeing equipment opportunities in Asia and Eastern Europe, where emerging countries are focusing on domestic production of multiple types of proteins. Adjusted EBITDA in food of $157 million in Q1 was essentially flat compared to last year, with margins at 22.3%, down 30 basis points, given higher input costs and timing of pricing. On Slide 14, we highlight the protective segment results. In constant dollars, net sales increased 14% to $565 million. Fulfillment, which is largely driven by eCommerce growth, was up approximately 20% on a global basis, with similar growth trends across all regions. Industrial was up high single digits, driven by end market strength in general manufacturing, electronics, and automotive. We leveraged our broad portfolio and global scale to meet increasing demand despite supply disruptions. I also want to highlight that approximately 55% of our protective sales are derived from industrial end markets and the remaining 45% from fulfillment and eCommerce. Adjusted EBITDA of $110 million increased by $17 million or $0.18 in Q1, with margins at 19.5%, up 30 basis points. Now let's turn to free cash flow on Slide 15. In the first three months of 2021, we generated $36 million of free cash flow compared to a use of cash of $8 million in the same period a year ago, largely driven by higher adjusted EBITDA, lower restructuring payments, and a $24 million tax refund we received in the quarter associated with the retroactive application of the revised US regulations. On Slide 16, we outline our capital allocation strategy. We will maintain a strong balance sheet while driving attractive returns on invested capital and supporting our profitable growth initiatives. On this slide, I want to highlight our organic growth investments. We're focusing our CapEx on breakthrough processes, automation, digital, and sustainability. With SEE ventures, we're investing in early-stage disruptive technologies and business models that are expected to accelerate our strategy of innovation efforts across our segments. As it relates to returning capital to shareholders in Q1, we were an active buyer of our stock. We repurchased 4 million shares for $177 million, reflecting confidence in our vision, strategy, and execution. We have approximately $500 million for additional share buybacks remaining under current board authorization. And you can see in the takeaway, we updated our financial policy of leverage ratio objective to be 3.5 times or below from previously communicated 3.5 to four times. Let's turn to Slide 17 to review our updated 2021 outlook. We're raising our guidance across all key metrics reflecting strong Q1 performance and outlook for the remainder of the year. For net sales, we now estimate $5.25 billion to $5.35 billion or 7% to 9% as reported growth and 6% to 8% in constant dollars. This compares to our previous guidance of $5.1 billion to $5.2 billion or constant dollar growth of 2.5% to 4.5%. The higher sales guidance reflects increased volume growth in protective and additional pricing in both segments, given the current supply chain environment. In Food, we now expect constant dollar growth of 4% to 6% as compared to previous guidance of 2% to 4%. And in Protective, we now expect constant dollar growth of 8% to 10%, which compares to the previous guidance of 3% to 5%. On a reported basis, adjusted EBITDA is now expected to grow 7% to 9%. We anticipate adjusted EBITDA to be in the range of $1.12 billion to $1.15 billion, a $20 million increase at the midpoint from previously provided guidance. Higher sales from volume and price are expected to offset increased material and supply disruption costs. In terms of currency, we now expect favorable FX translation on 2021 sales and adjusted EBITDA of approximately 1.5%. We are raising our 2021 outlook for adjusted EPS to $3.40 to $3.55, and we continue to expect approximately 45% to 55% first-half, second-half percentage split. Our outlook now assumes approximately 154 million average shares outstanding, a 3 million share reduction from our prior guidance reflecting our share repurchases in the first quarter. We continue to estimate an adjusted tax rate of 26% to 27%. And lastly, our revised free cash flow outlook of $520 million to $570 million reflects the higher range for adjusted EBITDA. There's no change to the outlook for 2021 CapEx of approximately $210 million and Reinvent SEE restructuring associated payments of approximately $40 million. As you can see on this slide, we wanted to provide a few variables as it relates to our 2021 guidance range. The low end of our range would suggest a slower recovery in food service and supply chain headwinds persisting longer than anticipated. The high end implies continued strength in equipment, eCommerce, and food retail, along with an acceleration of the industrial rebound and overperformance of our SEE operating engine. With that, let me now pass the call back to Ted for closing remarks.

Thanks, Chris. Before we open up the call for questions, I want to emphasize how our ONE SEE operating engine is driving sustainable earnings power. We're capitalizing on growth opportunities in front of us and investing in our future. Our broad and innovative portfolio, global scale, and agility truly differentiate us in the markets we serve. Our focus on automation, digital, and sustainability is accelerating our growth in our core business and enabling us to expand into new and adjacent markets. We're making significant progress on our plastics pledge with nearly 50% of our solutions designed for recyclability. Our SEE operating excellence processes are driving productivity improvements, flawless quality, and enhancing customer experiences. We're on a journey of transforming Sealed Air into a world-class sustainable company automating global packaging. We're reinventing everything we do, from how we innovate to solve our customers’ most critical packaging challenges. Our strategy is working, our team is delivering, and we're focused on creating sustainable, long-term value for our stakeholders and making our world better than we found it. With that, I'll now open up the call for questions. Operator, we'd like to begin the Q&A session.

On your Protective organic results, they came in much stronger than we expected, and my guess is stronger than you expected. So I guess, what surprised you positively in the quarter that you didn't expect a couple of months ago? And looking at your full guide for Protective, you basically doubled your guidance. Can you give us some context on how much of that increase is better volumes versus higher pricing?

Hi Josh, I'll do part of it. Chris, do you want to go through the bridge if we need to? As far as what surprised us, I actually have to say our European team - what's going on in eCommerce exceeded expectations. Extremely strong eCommerce continues to grow, as we know during the pandemic, everybody is using eCommerce. Your packages are showing up at home, and we continue to do quite well. Also, we saw a strong pickup in our medical business with the vaccine, particularly with what we're doing in packaging. Some really interesting solutions showed stronger than anticipated pick-up. On the industrial side, we saw a pickup in Europe and a strong pickup in Asia; it's still flat to slightly down in the US. We didn't see the industrial so that might tie into the second part of your question regarding the second half of the year. The real issue in Protective was automation, which was really exciting, particularly with the penetration of APS and what that did. Our bookings are up significantly with our equipment in APS, which is in the Protective side, so quite strong. And for the second part of your question, we see that continuing through the second half of the year. We have some challenges there, as you asked about pricing. We saw the pricing going up while we saw costs going up in the fourth quarter. We had price increases; we've already done three. So what happened in the first quarter with Uri and supply chain with our input cost going up definitely surprised us, but we think we have the opportunity to catch up in the second quarter; it's still going to be tough on the resin side. But net-net, quite pleased with how Protective is working, and actually quite excited. We think we even have more opportunities in the second half, especially with industrial coming back in the second half of the year. We expect to see some strong growth continuing.

Maybe Josh, to kind of elaborate on the full year comment, when we looked at the midpoint at what we communicated in February versus what we're communicating in May, taking up that midpoint at $150 million as you noted. Given the top-line beat and Protective in Q1, and our confidence, as Ted was commenting, in terms of our full year, that increase on the volume side is all driven on Protective. The other half of that increase of that $150 million reflects the pricing actions that have basically already been in place and some of that spot pricing in terms of what happened in real time, a good portion of that coming through our formulas-based pricing, which we're starting to see the beginning of that in the early part of the second quarter, in April going into May. So we're going to start seeing the benefits of that turn. However, just specific to the second quarter, I wanted to think that we highlighted as we did last time, was given the EPS range between first half and second half. Given that material dynamic and that said, we're still on track. Even though we've had a good beat, we feel very good about the first quarter in terms of our performance, and we're raising our full year guidance to that 45%-55% split between first half and second half that we still anticipate.

Operator, next question.

My question is going to be on general concept of flow through and leverage. So Ted, you have talked a lot about all the things you're doing on the food side of the business and how the customer is excited about the automation solutions that you're bringing, yet we're not yet seeing the volume growth in that segment. When do you think we'll see the food volumes turn positively for Sealed Air over the course of 2021 and why haven't we been seeing it so far? And then for both you and Chris, if we look at Slide 17 and we talk about the revenue guide increase, which was $150 million. There's only about $120 million improvement in EBITDA, which is a low relative incremental margin. Why wouldn't we see an incremental pickup on $150 million that's more commensurate with the 30% plus that you typically target, especially since you said the revenue growth was coming from Protective, where margins have been surprising on the upside and pricing which is pure margin? Thank you, guys.

Thanks, George, and we'll see if we could unpack it. That was very clever, a bunch in there, but I'll try to unpack a piece and Chris you can work through it. First of all, let's talk about what we're seeing in Food. If we looked at the first quarter, what's going on with food, we're still in this pandemic environment where food service is down year-over-year. We're still in the stay-at-home environments with restaurants, etc., being down and also quick service. We're seeing a pickup there, but that's still down. What that does to the portfolio is that our largest product lines, two of them, are bags and pouches, which are affected. In the quarter, the bags and pouches were actually slightly down. So it actually had a deleveraging effect. To your question then on the second half of the business as we see this recovery coming back, we would expect that it would leverage quite nicely into that 30% leverage as we look for that growth. The top line question, that you asked, where we increased our guidance. You're exactly right. If you take the beat, that's a 13% leverage on the raise. We have to get through the second quarter. We got input costs going up substantially that we're trying to manage on the price, as you know on the food side. We have that lag, going back with our formulas prices. So really Q2 is going to be seen - can we get that catch up where you'll see that nice leverage coming through. But right now, in the guidance, we don't have the leverage returning until the second half of the year on the food side.

Yes, and so maybe just only to add to that just for protective: Q1 in terms of the growth, that contribution margin on the incremental volume, we're seeing a nice flow-through 30% plus. It's really the dynamic of the material headwind that is impacting the overall margin ratio as we referred to in terms of the contribution of bottom line relative to the top line. And then as I mentioned before, in terms of the full year guidance of up $150 million on the midpoint, sales have been by volume half being on the price side. That price side is good because it's offsetting the material headwind. So we're hoping to get the price-cost spread near zero by the end of the year; that's what our guidance reflects. The dynamic between us having our lowest quarter in Q2 given the material headwinds and pricing starting to kick in, is what drives our 45% to 55% in terms of giving some color on first half second half.

Operator, next question?

So I was hoping for maybe a two-part question. One, obviously a lot of channel and regional noise on a year-over-year basis as we go kind of March onwards given your end market and some of your key customers last year. So I was hoping just on a volume basis across food, protective, and the major geographies, you could help us think about volumes relative to 2019 levels as we think about how the company exists COVID. And the second part of the question is around the equipment side and just maybe talk about your sales pipeline and funnel just as you kind of work on automation projects with customers and confidence levels on the $250 million of equipment sales this year, which seems to imply pretty meaningful acceleration in growth over the next three quarters.

Okay, how about - let me jump on my favorite subject of automation first, and then Chris could help going through some of your volume questions, maybe add some color there. Good questions, Adam. On the automation, it's definitely something we're quite excited about. So if you look at Slide 7, we're trying to lay out where we're taking automation as we're calling Touchless. As you highlighted, we have $250 million there. We feel pretty confident that we're on track with that. If you unpack the equipment, just in the equipment piece, in the first quarter, that's almost up 30% on our equipment sales. Looking at APS, which is the big driver of equipment, our APS bookings are up 60%. So we're seeing a very healthy pipeline and we're seeing that through both food and protective. We feel quite confident, and to get to that $500 million target by 2025, we expect to double that business. So we think we're on track with that and the growth rate, and we see that to continue through the second quarter and then the second half of the year. I also want to highlight that's really connected to automation, which has a large fleet; we actually have over 100,000 pieces of equipment out there in our fleet, and as we're changing the strategy to be an equipment company focused on automation, it's also taking care of that fleet. So that other part is that parts and services are out there, and staying connected to that installed base, we think we have more upside potential. Automation and sustainability are key to your customers; this pandemic is really driving a Touchless system. How do we make a meat packing plant safer? How do we take people out of harm's way? We had one of our largest meat packing customers with us in Simpsonville just last week, showing our automated systems in the largest meat packaging plant in the world of how we're going to extend our Touchless system into their plant. So really excited about the opportunity we have in equipment to keep that going and growing; I'm very confident we're going to exceed the expectations of this chart.

Great, and then Adam let me provide some color on your first part of your question just talking about the regional noise. I'll start off with food. Food, as we mentioned, on a constant dollar basis, was flat. Americas was actually down 1%, and EMEA we saw modest growth, 1%, and Asia Pac at 5%. The big story for us for the quarter is on Protective: double-digit growth across all regions in our protective segment for the total company, being up 14%. So we see that continuing, and again, that gets back to our full year. That volume increase part of our $150 million of our midpoint increase, half being volume, half being price, that volume is really driven by what's going on in protective.

Operator, next question?

Good morning, everyone. This is actually Matt Krieger sitting in for Ghansham. How are you all doing today?

Good, how are you, Matt?

Great, thank you. So I guess I just wanted to dive a little bit on the cost basket. I was hoping that you could provide some added detail about what your assumptions are for your key raw material freight, labor, and other cost inflation buckets for the remainder of the year, including whether or not you're assuming any sort of reversal across any of these inflationary drivers during the second half. In addition to that, any kind of detail on quarterly cadence is helpful as well.

Sure, Matt, pretty volatile environment. Just thinking of material inflation starting in the fourth quarter of last year really continuing through April. We're hopeful that we've seen a little bit of steadiness in terms of how we're currently thinking about it. Our full year guidance assumes things start to level up. We ended the year anticipating raw materials being up roughly 5%. Our latest is now we're thinking it's going to be in the 10% category. Although what we all read about increases 20%, 30%, 40%, even significantly, a lot of what we buy, especially resins, which have not had as dramatic of an increase. We're seeing air freight as another item that has been driving not only getting product to us but getting product to our customer, mostly on the input side, where we've incurred incremental costs, roughly $3 million to $4 million of incremental costs to satisfy the demand. But again, going back to the full year, we're assuming it starts to level off, and we reflected that in our updated guidance for the full year.

Operator, next question.

Is the price-cost penalty in the second quarter going to be the same as in the first, or worse, or better? And in your equipment sales to the protective market, which is regarding very, very quickly. Are you growing faster than the market for equipment? And if you are, why are you growing faster? What is that customers like about your machines versus other people's machines?

I'll let Chris do the better or worse; and then I'll talk about what I think is why we're growing faster than the market.

Sure, so Jeff, we do expect the challenges to be there in the second quarter, kind of peaking in terms of the price increases that we've been reading out and hearing about the impact on us typically lies about 30 to 45 days. We're starting to feel; we have been actually feeling the impact, which is coming into the second quarter. So we actually expect our price-cost spread to be a little bit worse in the second quarter than the first. However, as we think about first half, second half, we expect that to rebound as we have full-fledged pricing in place with formulas-based pricing, as well as other price increases that we have announced and are starting to kick in. We expect that to turn in the second half of the year. This drives us to what we're trying to provide is how we're going into this year, thinking of a 45%-55% first half, second half split on EPS, and just trying to provide investors a good view of how we're managing through it. I can tell you it's top of mind for us as a company across the entire company just talking about how to manage this dynamic. We're doing the best we can to leverage the global supply chain network and meet customer demand.

And I'll handle the second part of the growth. Jeff, now you can't answer me, so I can speak to you about you answering, you did predict at your conference that these costs would peak by the first. I know that was your prediction or maybe your colleagues’. So we see going past the preferred on the cost side. But on the growth fund, on Protective what we're excited about is just to highlight what is our presence of where we are and how quickly we've been adapting the portfolio? We're growing our paper products in double digits. We've introduced new paper products that are growing and doing quite well. Our equipment business, where we highlighted, is up almost 30% just in equipment and across the board, food and protective. We're also seeing as we shifted. As I highlighted to the different markets and the movement with eCommerce, we're really being quite aggressive in getting the right product at the right price and then I also got to bring in sustainability. We're definitely seeing the sustainable issue coming forward with, do you want paper or do you want plastics? Either one, how do we make that sustainable? So we're seeing some good opportunities. The last one that I think we even have more opportunity on the second half on the protective side with the return of the industrial market. We did not see strong growth in the US; we saw it stronger in Europe. So we think we still have some upside opportunity, and that also ties in to keeping that leverage going because that's where leveraged growth, on food getting the bags back and getting that instapak volume back will leverage quite nicely to get us back over our leverage targets at the back end of the year.

I wanted to come back to the automation and equipment and your strategic focus around that. Clearly, APS was a very successful acquisition. Are you open to more M&A here, or are there even attractive targets in this market? Or is it more of an internal growth type focus?

If you go to our capital allocation slide on 16, you can see just before we made the acquisition of APS, we started communicating what we're thinking we're working on. So we do have internal focus on organic equipment growth. We have a pretty strong portfolio of equipment that we're strengthening and working on. We're also looking at where we have gaps in our portfolio. So we do think we have some opportunities there where we're looking very closely at how we can drive automation. Part of our capital allocation, we're looking at that area, so how do we keep that really strong growth going? That $500 million building equipment target, that's all internal, so we think there's additional opportunity to grow our equipment business above and beyond that $500 million target for 2025, which will require M&A.

I'm just curious about, if you think about resin cost inflation and pricing. I know that there's the formulas-based pricing in food. But when you think about Protective, can you just discuss the environment there for pricing opportunities? Is it fairly competitive given the strength in volumes? Is it a little bit more constructive as far as pricing goes?

Well, first of all, we've been putting pricing in protective since last year. So we do believe we're the leader there. Not cavalier on the pricing; we're working very carefully with the customers. We think this is a great opportunity actually - when we go and talk - just don't send an email, but working on the aggressive price increases we've already done three. So have we been out there as much as the resins have gone as fast? No, we think we have an opportunity to get there to turn hopefully by the end of the second quarter. But as far as the opportunity, we're not looking to lose share, actually gain share in this marketplace. We're being the leader in the market and that's what we're challenging our team to do, to go get the price and not to lose share by bringing in our larger portfolio, bringing in automation, and bringing in sustainability. But it's a very, very tough environment on the input cost right now. I don't know if Chris, you need to fill in.

No, it's good.

This is John on for Phil. I wanted to discuss the reduction in leverage to less than 3.5 times. Is this mainly due to improved operating leverage from your Reinvent SEE initiatives that are clearly yielding results? Or should we interpret this as an indication that the M&A pipeline may not be very strong in the near future? Additionally, when do you anticipate reaching your target below 3.5 times? Is that expected by the end of this year?

Let me take that one. Just leverage ratio, ending year end last year 3.1. We ended this quarter at 3.2. Looking ahead, just getting to your point—our ability to operate and execute in this environment, recognizing we're a good cash generator and our cash flow generation being able to overtime reduce that debt. But at the same time, let's not lose sight of the investments we want to make, which first and foremost is investing in ourselves in terms of where the organic growth opportunities are. As you saw, we're an active buyer of our stock in the first quarter; our average share price is roughly $44 per share. We felt that it was clearly a good opportunistic time to get back in the market, given how we ended the year on the cash side of the equation. But definitely don't want to lose sight of the fact that we've got a pipeline of opportunities on the M&A front. An earlier comment was made about the success of the APS acquisition which has been successful. The pipeline is there, and we will continue to look at just where we are for availability, the end markets, and the environment we're in to deploy capital on M&A as we continue to grow. When will we get below that leverage ratio potentially? But we want to work it back down to 3.5 or less over a reasonable period of time. Call it 12 to 18 months, and that’s why we felt it was appropriate, given the cash generation, all the benefits of Reinvent SEE and the progress being made over the past two or three years. We don't necessarily want to stay in this 3.5 to 4 times. We can stay below 3.5 and continue to have a lot of availability to reinvest in ourselves as well as look at opportunities for M&A.

The only thing to add, Chris, for John, is if you look at the cash generation. If you go to Slide 5 of the mode, because the second part of your question, this engine is delivering strong earnings power and we're putting that out there and showing that. Doing the math on that to 2024, that's close to this engine generating $2 billion of cash. We think we can be very prudent; it's not a message that we don't see a strong robust pipeline to continue to fuel this business. So operator, next question?

This is Bryan Burgmeier sitting in for Anthony. Do you anticipate any impact on protective packaging from the chip shortage possibly impacting automotive or electronics demand in Q2 and the second half?

It's a good question. We're definitely seeing that impact of our customers, especially in the automotive industry. We are seeing some pieces in electronics. But actually, electronics have been quite strong for us. So we're not seeing that. The chip shortage is not impacting us directly as much as others for the packaging.