Sealed Air Corp (SEE) — Q2 2022 Earnings Call Transcript

Thank you, and good morning, everyone. With me today are Ted Doheny, our CEO; and Chris Stevens, our CFO. Before we begin our call, I would like to note that we have provided a slide presentation to help guide our discussion. In addition to our results and outlook, Ted will go through a deep dive on sustainability for SEE. Please visit our website where today's webcast and presentation can be downloaded from our IR website at sealedair.com. 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 titled 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 report on Form 8-K, which you can also find on our website or on the SEC website. We 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 are US GAAP financial results that correspond to the non-US GAAP measures we reference throughout this presentation. I will now turn the call over to Ted. Operator, please turn to slide three. Ted?

Thank you, Brian, and thank all of you for joining our second quarter 2022 earnings call. Starting on slide three, the graphic is showing where we are taking packaging with automation, digital and sustainable solutions. We start with our purpose. We are in business to protect, to solve critical packaging challenges and to make our world better than we find it. This enables our vision to become a world-class digitally driven company, automating sustainable packaging solutions. Our purpose and vision drive value creation for our people, customers and shareholders. On today's call, Chris and I will discuss our Q2 results and 2022 outlook. I'll first recap our quarterly performance and provide a deep dive into our SEE sustainability strategy. After that, Chris will review in more detail our financial results and our 2022 outlook. On slide four, you can see we delivered strong sales and earnings, despite sustained inflationary pressures and a challenging global operating environment. Our SEE operating engine continues to perform. In the quarter, net sales were up 7% to $1.4 billion and adjusted EBITDA was up 12% to $293 million. Adjusted earnings per share of $1.01 was up 28% compared to a year ago. Free cash flow through Q2 was a source of cash of $94 million. We continue to invest in our global operations to drive growth and increase productivity. On slide five, we share our SEE operating model where we highlight our growth targets driven by automation, digital and sustainability, which are fueling our SEE operating engine. We leverage all three into our innovative solutions to create customer value with attractive returns. Our SEE operating model highlights our growth targets through 2025, as well as our actual performance over the past four years. We aim to deliver 5% to 7% annual sales growth over the next three years. We're targeting adjusted EBITDA growth at 7% to 9% and adjusted EPS growth of greater than 10%. We've updated our SEE operating model for free cash flow conversion, defined as free cash flow divided by adjusted net earnings to be greater than 90%. We will continue to accelerate investments, expecting capital expenditures of approximately 5% of sales each year. Let's turn to slide six to take a look at our market-driven solutions and how they create value for our customers using automation, digital and sustainability to drive growth faster than the markets we serve. We experienced solid sales performance across our diversified portfolio despite persistent supply constraints, as well as inflationary and macroeconomic headwinds. Our strongest growth in the quarter was with Liquids & Fluids, which was up over 30%, driven by food service recovery and our new flexible pouch solutions. Our auto pouch system, coupled with prismiq digital printing technology is creating an ecosystem that helps customers automate food safety, streamline inventory management, unlock new capacity and improve product yield. In consumer retail and fulfillment markets, we experienced a reduction in volume as our customers are quickly throttling back their own inventory levels. I'd like to highlight the launch of our Bubble Wrap paper bubble mailer. You can see the illustration of this product on the right side of this slide. The product is made with recycled and renewable materials and is curbside recyclable, while living up to the Bubble Wrap brand promise. It is also smaller and lighter than boxes, which reduces shipping costs and dimensional weight. Our paper Bubble Wrap mailers will include innovative digital packaging features and will be expanding globally by early 2023. We are relentless in designing and delivering solutions that maximize food safety, minimize waste, protect goods and create productivity savings for our customers. In Q2, automation sales were up 5% year-over-year in constant dollars, driven by Auto Box and Autobag. Customers continue to embrace our value proposition of automation to address labor scarcity, productivity, quality and employee safety. We're on track to achieve approximately $500 million in automation revenue for the year. Though food placements in the second half will continue to be pressured due to various supply constraints and impacts from economic sanctions imposed on Russia. Our digital business continues to grow at an accelerated pace. In Q2, we saw almost 400 customers come online. We more than doubled online revenues in Q1 and we continue to be on pace to have more than 15% of our global business transacting globally by the end of this year. Digital packaging is creating customer demand after our launch of prismiq last quarter. Let's turn to slide seven for an update on SEE Automation. As we continue to share with our SEE operating growth model and in our previous earnings calls, we are looking to double our equipment business in the next three years with increased investments internally and through strategic acquisitions. As you can see in our updated SEE Automation strategy, we're looking to take SEE Automation to over $1 billion in the next three years with both organic and inorganic investments. Our strategy to allocate capital is purpose-driven. We have a pipeline of potential acquisition opportunities to accelerate our journey to a digitally driven company automating sustainable packaging solutions. We have our own SEE proprietary playbook to take acquisitions to successful outcomes. The playbook has proven its value during the last three years with the APS acquisition, where we created significant value for our shareholders. We continue refining it with real-world experience and searching for targets with win-win value creation potential. There are several potential acquisitions within our space where M&A can create meaningful synergies and drive our profitable growth. Turning to slide eight, we'll now take you through a deep dive on how we see ourselves as a sustainable company. We are focused and determined to be a world-class digitally driven company automating sustainable packaging solutions. Our approach combines automation, digital and sustainability, which positions us to drive efficiency within the operations of our own business and our customers. We're enabling product identification and traceability from product source to the consumer home, reducing resource waste across the value chain, accelerating circularity through recovery and recycling, and decreasing greenhouse gas emissions in our own operations and at our customers to mitigate climate change. We call this the SEE net positive circular ecosystem, designing, developing and deploying automation and digital packaging solutions that have a positive impact on our stakeholders and society. One of the key components of this circular ecosystem is collaboration. We lead and engage in partnerships that are reshaping the future of the industry. By collaborating with organizations such as the Alliance to End Plastic Waste, Closed Loop Partners and SEE Venture Investments like Plastic Energy, we are creating our circular future where packaging never becomes waste. Last year, we collaborated with a key resin supplier, SABIC on a circular demonstration of flexible plastic packaging with the leading UK retailer for cheese. We are expanding the use of certified circular materials in our product solutions globally. Earlier this year, we partnered with ExxonMobil advanced recycling solutions about a key collaboration with a major grocery retailer in the US to drive circularity of flexible plastic packaging used for fresh proteins. Now let's turn to slide nine. Why do we call it net positive? As you can see, the integration of our solutions generates economic, environmental, and social benefits. Our solutions create a multiplying effect where the beneficial impacts far exceed the investments in those solutions. Our customers benefit from materials efficiency, productive packaging processes and more effective distribution of their products. Society benefits from essential packaging that enables access to safe and fresh food with less waste and spoilage. The producer benefits from preventing damage to products during transport, retailing, e-commerce or storage. Our ecosystem allows for recovery materials after use driving the circular economy for packaging. SEE benefits by getting recyclable and reusable material so that we can offer the best solutions at the right price and make them sustainable. Our SEE net positive circular ecosystem will make our world better than we find it. Moving to slide 10. Let's talk about some of our sustainable solutions that underpin our net positive circular ecosystem. Our packaging solutions are designed to meet the current and anticipated needs of our customers and position them to achieve their sustainability goals. We are material agnostic in our solutions. We integrate materials and equipment with advanced technologies to drive customer benefits. We offer a wide range of fiber, plant-based and plastic material solutions that minimize waste, reduce resource use and overcome labor challenges. By enabling circularity, we lessen reliance on virgin materials for both packaging and equipment, expanding advanced recycling capabilities like we have proven through partnerships with Exxon, SABIC and Plastic Energy allows essential packaging to be recovered and reused for demanding applications such as food packaging, while enhancing safety and performance. We are intensely focused on reducing our own greenhouse gas emissions and working hand in hand to reduce those of our customers while avoiding emissions associated with wasted or damaged products. For example, our ability to extend the quality of life of foods such as fresh meats from days to weeks while ensuring package integrity through distribution allows customers and retailers to avoid significant waste. By eliminating waste, our customers reduce their greenhouse gas Scope 3 emissions. Let me now turn to slide 11. To effectively design, develop, and deploy integrated solutions that have a positive circular impact on our stakeholders and society, it starts with us and how we operate. Here are some of the metrics we are using to track our progress on our journey to creating and transforming to SEE net positive circular ecosystem. We pledge that by 2025, 100% of our solutions would be designed to be recycled or reused and contain an average of 50% recycled or renewable content. We are on track to meet that pledge. We have ambitious internal goals to improve our operational efficiency by 2030 in key areas such as energy, water, greenhouse gas emissions and landfill diversion of our manufacturing waste. We're making steady progress against all these goals. SEE is leading our industry to net zero in our CO2 emissions from our operations by 2040. For example, we have a picture of our Madera, California manufacturing facility where we have installed more than 10 acres of solar panels and battery storage. The panels will provide 99% of the electricity for that facility. This is the first plant in SEE that is powered with on-site renewable energy. We are a sustainability company. I will now pass the call to Chris to review our financial results in more detail.

Thank you, Ted and good morning everyone. Let's start on slide 12 to review our second quarter net sales growth by segment and by region. In Q2, net sales were up 7% to $1.4 billion. In constant dollars, net sales were up 11% with 13% growth in food and 7% growth in protective. By region, Americas was up 13%, EMEA up 7% and APAC up 5%. On slide 13, you can see organic sales volume and pricing trends by segment and by region. In Q2, price was up 16% overall, while volumes were down 5%. Q2 price was favorable 15% in food and 17% in protective, primarily reflecting price realization both from actions in 2021 and 2022, as well as formula pass-throughs to help mitigate continued inflationary pressures. We are working directly with our customers in a disciplined manner to price with care to gain share. Food volumes were down 2% with Americas down 3% and EMEA down 2%, partially offset with APAC up 1%. Lower volumes are primarily attributed to continued supply disruptions across all regions. If you exclude these constraints, we would have been in line with volumes reported in Q2 last year. Protective volumes were down 8%, with declines in all regions given tougher comps relative to Q2 '21 COVID-related economic recovery and vaccine distribution tailwinds. We also experienced lower volumes due to the COVID-related lockdowns in China during the quarter. On slide 14, we present our consolidated sales and adjusted EBITDA loss. Having already discussed sales, let me comment on our Q2 adjusted EBITDA performance. Q2 adjusted EBITDA of $293 million increased $30 million or 12% compared to last year, with margins up 20.7%, up 90 basis points. Strong price realization and favorable mix have limited the margin impact of lower volumes and higher operating costs. Unfavorable operating costs of approximately $58 million were driven by higher non-material inflation and the impact of continued supply disruptions. Productivity gains totaled $7 million in Q2 and we now expect approximately $45 million for the full year, down from previous expectations of approximately $60 million due to continued supply disruptions and labor challenges. Adjusted earnings per diluted share in Q2 of $1.01 compares to $0.79 in Q2 '21, primarily driven by strong earnings growth. Our adjusted tax rate was 24.7% compared to 25.6% in the same period last year. We were an active buyer of our stock in the quarter, with approximately 871,000 shares repurchased at a cost of approximately $50 million. Our weighted average diluted shares outstanding in Q2 '22 was 147.5 million compared to 152.7 million in Q2 '21. At quarter end, we had $646 million remaining under our authorized share repurchase program. Turning to segment results on slide 15, starting with food. In Q2, food net sales of $806 million were up 13%, both in constant dollars and on an organic basis. Price was up 15% year-over-year, with all regions contributing to favorable price, while volume was down 2%. The volume decline in the quarter was primarily driven by supply constraints across all regions and the impact of economic sanctions related to automation sales in Russia. Automation sales, which include equipment, systems, parts and service accounted for approximately 7% of the segment sales and were down mid-single digits. Adjusted EBITDA of $168 million in Q2 increased 9% in constant dollars compared to last year, with margins at 20.8%, down 70 basis points. On slide 16, Protective net sales of $612 million increased 7% in constant dollars or 9% on an organic basis. Price was up 17% in the quarter, again, with all regions contributing to favorable price, while volume saw a decline of 8% in the quarter. We see general concerns in the market related to the economic outlook, particularly in retail, where customers are adjusting their inventory levels. Additionally, we had a tough comparison from last year. As a reminder, volumes in Protective were up 15% in the second quarter last year, fueled by the strong growth in fulfillment, e-commerce and the rebound of industrial end markets following COVID shutdown in 2020. As for automation sales in the quarter, which accounts for approximately 9% of the segment sales, they were up double digits in the quarter, fueled by Auto Box and AUTOBAG placements. Adjusted EBITDA of $126 million increased 18% in Q2 with margins at 20.6%, up 250 basis points. Now let's turn to free cash flow on slide 17. In the first half of 2022, free cash flow was a source of cash of $94 million compared to $102 million in the same period a year ago. The $8 million difference was mainly driven by higher adjusted EBITDA, offset by increased inventory given higher material costs and strategic stock builds to help mitigate global supply disruptions. On slide 18, we outlined our purpose-driven capital allocation strategy, focused on maximizing value for our shareholders. We maintain a strong balance sheet while driving attractive returns on invested capital and supporting profitable growth initiatives. We continue to focus on strong cash generation. And going forward, as Ted noted, we plan to measure cash conversion on an adjusted net earnings basis, specifically calculating free cash flow, which we define as cash flow from operations less capital expenditures divided by adjusted net earnings. We are focusing our investment activities such as CapEx, innovation and M&A on touchless automation, digital and sustainability. We take a disciplined approach on these activities across segments, applications and geographies. As Ted highlighted, on the SEE Automation slide seven, we are planning to double our equipment business in the next three years through organic and inorganic investments. Let's turn to slide 19 to review our 2022 outlook. Despite headwinds from selected end markets we serve and FX, we are maintaining our full year sales and EBITDA guidance range, given our focus to drive pricing carefully to gain share. Our net sales guidance of $5.85 billion to $6.05 billion assumes a 6% to 9% growth on a reported basis and organic growth of 10% to 13%, which assumes flat volume and approximately 11% growth from price at the midpoint. Full year adjusted EBITDA range remains at $1.22 billion to $1.25 billion and assumes adjusted EBITDA margin of approximately 21%. Full year adjusted EPS of $4.05 to $4.20 assumes depreciation and amortization of approximately $245 million and adjusted effective tax rate of approximately 26%, net interest of approximately $165 million and 148 million shares outstanding. Lastly, we are reiterating our outlook for free cash flow, which is in the range of $510 million to $550 million. To summarize, we had a strong quarter and we continue to work through the challenges within our control. This is a testament to the SEE team as we are focused on executing our growth strategy, driving productivity, generating world-class cash flow performance and executing our SEE operating model. With that, let me now pass the call back to Ted for closing remarks.

Thanks, Chris. And let's move to slide 20. Before we open up the call to questions, I want to emphasize how our SEE operating engine continues to perform. We are determined to make the world better than we find it by generating net positive results for our people, customers, shareholders and society. We are a sustainable company. With that, I'll open up the call for questions. Operator?

Hi. Thanks. Good morning everyone. I wanted to revisit two points. First, regarding the negative 2% Food-Tech volume comparison, can you provide more insight into what factors are contributing to that? Is this a trend that raises concerns as we consider the outlook for protein consumption potentially declining next year? How worried are you about this? Secondly, it appears that automation orders have decreased, possibly following some prior pent-up demand. Is there ongoing weakness in that area or any other factors at play? You've mentioned supply chain issues, so any additional details on that would be appreciated. Thank you.

Good morning, Larry, it's Chris. Let me address the first part of your question, and then I'll let Ted elaborate. Regarding the food side, the volumes for the quarter were primarily impacted by the supply disruptions we encountered. As I mentioned in my prepared remarks, if we exclude these disruptions, we believe our volumes would have been more in line with last year, essentially flat. As we move into the second half of this year, we are working to resolve those supply constraints, and some are starting to ease, which is encouraging. For the second half, specifically related to food, we anticipate low single-digit growth, considering seasonality and other factors. However, Ted may have additional insights regarding more accounts.

Yes, Larry, those are good questions. As Chris mentioned, our specialty materials are really contributing a couple of percentage points. Without the supply constraints, we would have experienced positive volume growth this quarter. This also relates to the equipment aspect of your question. If we refer to slide seven, which covers automation, we've invested significantly, but we faced sales shortfalls this quarter. We have a substantial backlog of equipment orders, yet we’re dealing with supply issues that hinder progress. Regarding demand, we are witnessing an increase in automation needs, particularly in the food sector. Recently, I was in Japan focusing on our suppliers. Two of our key equipment suppliers and a major specialty supplier are located there, and we're exploring ways to improve our material supply. During my trip, we aimed to enhance our automation capabilities, as we want to excel in that area. We met with major clients and implemented a new system in pork processing that aligns with the graphic in the appendix, introducing robotics into our offerings. We are excited about three additional systems being installed. Although our backlog is growing, we need to fulfill these orders. For the second half of the year, automation remains crucial for driving food growth, and we are enthusiastic about the prospects. In Japan, we also had a great meeting with our new leader, Alessandra, who has wonderful opportunities ahead for us. We conducted a non-deal roadshow with Japanese investors who are keenly interested in our automation and sustainability projects. In summary, the sales miss can be attributed to supply constraints, but we see potential for upside in the second half and are increasing our automation investments to address the backlog.

Thank you very, very much. Yeah. Thanks.

Hey, guys. Thanks for taking my question. Ted, I guess, in a more uneven macro backdrop and just given the amount of inflation. I'm just curious, have you seen any shift in customer behavior in terms of the uptick of your higher-value products focused on automation, digital and just the service component? And then I understand how the growth algorithm looks in past cycles; just given your pivot into some of these value-added automation digital end markets, do you see your business holding up materially different, whether it's Food or Protective in a potential recession? Thanks a lot.

Yes, it's a good question. And it's a big question out there. Are we in a recession, yes or no. And the simple answer for us is, we definitely feel it. So what's different with our customers right now through using our automation, digital, and sustainability, two things are happening. So as they're in a crunch with; hey, could their markets be softening, the situation is still the same. They still have significant labor issues and how can we help them on the cost side with automation, and that is key. The digital side is quite interesting because what digital is doing for us, it's actually making us more cost-effective so we can actually work with the smaller customers, especially on the protein side, where we do extremely well with the large customers who were in their plans. With digital, we're actually now being able to give solutions for those smaller markets and smaller customers. So we think on the recession side of the equation, we can help all. So actually quite excited for that opportunity. So the debate, I don't want to debate the question, is the recession coming. We definitely feel it with our customers with this tremendous inflationary pressures. But we think the strategy is going to really open up some growth opportunities for us in a recessionary environment as well.

Ted, have you seen any shift in order patterns from your customers, call it, over the last few months given your point saying you're feeling it a little more?

I believe that when considering the supply constraints related to delivery, the order activity, particularly in automation, remains very strong. We need to navigate through these supply issues. In terms of order behavior, the shorter-cycle business, especially in Food and Protected, is noteworthy. If we disregard the supply constraints, we expected food volumes for the quarter to remain relatively flat. As for the Protective segment, we are facing tougher comparisons to last year due to vaccine distribution, and we are aware of the challenges. Nevertheless, we anticipate stability for the second half of the year in the Protective segment.

Yes, order patterns in the sense of maybe, Chris, if you could elaborate.

Yes. Let me provide some specific examples. If you look at slide six, we can see what has changed in the end market. Starting with the Protective side, we mentioned the paper bubble wrap and its connection to sustainability. Last year, during the COVID surge, our mailer business performed very well. However, we've noticed that this has weakened as e-commerce has slowed down, which is reflected in the retail market. The significant demand for this paper bubble mailer is evident, and while it may only contribute a couple of million in the second half, we project a $100 million opportunity over the next three years. There is definitely a noticeable shift. On the food side, we have observed changes primarily related to the cattle cycle. Automation has influenced this as well. Fresh red meat experienced strong demand in the first half, but there is now a shortage in pork. We are seeing a transition towards more pork and poultry in the marketplace for the second half of the year. Despite this, demand remains strong, but we anticipate some differences moving forward.

Thank you. Great color, guys.

Next question. Operator?

Yeah, thanks. Good morning, everyone.

Good morning, Adam.

Good morning. Ted, I wanted to hear more about your previous comments on e-commerce and how protective packaging might be impacted as consumer spending shifts towards other categories, which could require less packaging. What other challenges do you foresee for the business as we adapt to a slower e-commerce environment? Additionally, I noticed the chart on equipment orders on slide seven for Auto Box, which shows a significant decline from previous highs. Could this decline in orders create challenges for equipment shipments next year?

Good question, Adam. Regarding the first part of your question about changes in e-commerce, I’d like to refer to slide six. Last year, we experienced a significant surge in the Protective segment related to medical packaging for COVID, but that business has declined. However, we are noticing a rise in industrial and transportation sectors, particularly with our Instapak product line. Instapak's performance, which had struggled during the pandemic, saw an increase in volume and margins this quarter, making it one of our most profitable areas in the Protective portfolio. For the second part of your question related to automation, we are actively enhancing automation across our entire range. Auto Box has shown variable performance; we've experienced larger orders that come in sporadically due to the nature of our equipment business. This quarter, Auto Box performed strongly as we anticipate continued growth, particularly with AUTOBAG, which is a strong indicator of our success in automated packaging solutions. Despite facing significant supply constraints, as we are increasing our capital expenditures in this area, we need to address our long lead times, which are currently impacting bookings. Overall, the markets we serve remain robust on both sides of the business. I hope that answers your question. Next question, operator?

Good morning. On the full year outlook, understanding you don't give quarterly guidance, but any thoughts on the kind of the split or the cadence between 3Q and 4Q? I think historically, you've seen a little bit of a $0.10, $0.15 step-up from 3Q to 4Q. Can you just kind of remind us the comps in the two businesses from 3Q to 4Q? And anything that you can kind of say on that cadence.

Sure, Anthony. As you mentioned, we don't necessarily specifically provide quarterly guidance. But I can tell you that when we look at the most recent outlook for the second half when we were preparing for the call, we kind of look at Q3 as pretty much being consistent or in line with Q2 performance with fourth quarter being stronger of the two, mainly because of the expected seasonality side of our business. To your point earlier, when you comment on the fourth quarter it is usually a stronger quarter. That's what we anticipate and that's what is assumed in our full year guidance. Okay. Operator, next question.

Hi, everyone. Good morning. Thank you for the details. I hope you can hear me well. I wanted to ask about the growth outlook. In previous years, Sealed Air mentioned that indicators for the cattle cycle and future production were influenced by short-term trends and drought conditions. What is your perspective on the cattle cycle, which has been slowing down over the past couple of years? Do you think the current situation could lead to reduced production and a less favorable outlook for next year? Additionally, referring to slide seven, Ted, can you discuss whether the double-digit revenue growth you experienced in automation sales in Protective was influenced by volume versus price? Also, is the book-to-bill ratio, sitting at about one, accelerating or decelerating compared to recent trends? Thank you very much, and best of luck in the upcoming quarter.

Thanks, George. I'll try to explain. First, let's discuss the cattle cycles. We're definitely examining this, and it's interesting to compare our current strategy with past actions. We've looked back to 2015 and analyzed the cattle cycle in the US, Latin America, and Australia, focusing on our three major markets and the various issues that have emerged. After peaking in 2015, the cycle declined, reaching a low point in 2019 while we encountered several challenges, including droughts and early herd reductions during COVID. As we reflect on the cattle cycle, we assessed the impact on our business. We observed steady growth despite the ups and downs of the cycle, leading us to our advancements in automation and the development of our products that cater to the protein market. Our strong position in fresh red meat has evolved, largely driven by automation and the success of our new products. We're performing well with fresh red meat in bags, but we’re experiencing significant growth in our case-ready products available in supermarkets. From past trends, we've managed to grow through the cycles, and moving forward we note that beef performed well in the first half, albeit with some supply constraints. Currently, we see growth in the protein sector, particularly in pork and poultry, where we are focusing our efforts. Our customers are seeking our help in automation in these segments, which excites us as we anticipate gaining significant market share. Additionally, we’re leveraging digital solutions to assist smaller operators. Regarding the equipment side of our business, the book-to-bill rate is declining due to supply constraints; in fact, we could take more orders if our lead times were shorter. We're actively investing in our capital expenditures and working with major suppliers to enhance our equipment. We're also exploring potential merger and acquisition opportunities to meet demand. We believe that automation is vital, and despite the fluctuations in the cattle cycle, we're excited about the possibility of expanding our market share and introducing automated, digital, and sustainable solutions. There's work to be done, but we believe we can grow significantly through the cycle, regardless of how the cattle cycle evolves. Next question, operator?

Thank you, Ted and Chris. I hope you are doing well. Chris, regarding your volume guidance, you initially anticipated around 3% growth for the year, but now it seems you are projecting flat volume. Looking at the comparisons, you had about 4.5% growth in the second half of last year. Thus, flat volume for the year would suggest a significant growth in the second half. Please correct me if I'm mistaken. I believe you mentioned you expect volumes in Protective to be relatively flat in the second half. If that's the case, then it seems likely that Food volumes would need to increase significantly. Could you clarify what's included in your full year volume expectations by segment and what makes you confident that you can manage what appears to be a tough comparison in the second half?

Sure. We encountered more challenging comparisons on the Protective side in the first half of this year compared to the first half of last year. Looking ahead to our guidance for the second half, we anticipate flat year-over-year volume growth, around 1% to 2%, which represents a low single-digit change. For the full year, we expect Protective volumes to decrease by about 2%, or low single digits. When it comes to the Food segment, we have confidence not only in the material side but also regarding the equipment aspect, as we aim to address the supply challenges and constraints we have discussed. Therefore, we are assuming low single-digit growth for Food in the second half of the year for both the third and fourth quarters, leading to an estimated 2% growth in Food volumes for the entire year. We do not have any major concerns for either segment in the second half. We analyze risks and opportunities, and we have discussions with our team. Although our performance in July was somewhat slower than we anticipated, we have reasons for this, which relate back to the supply constraints we are addressing. That summarizes our approach for the second half of the year. Operator, please proceed with the next question.

Hi. Thanks for taking my question. So maybe just a quick one, just to follow up on your comments there about the volume growth in the second half. Just curious on the supply constraints that you've been having. You mentioned a little bit of easing. I was wondering if you could tell us maybe what you're seeing that perhaps in terms of timeline of when that can kind of normalize so that you can have, again, more visibility into this growth in the second half? And if I could, just a little bit more broadly on pricing, also how you see that in the second half? And how is that kind of continuing given that price cost that has been a strong kind of contributor to the growth so far? So how are trends there? How is customer activity, et cetera?

I'll go first. On the volume side, building on what Chris mentioned, we're looking at low single-digit growth in the second half. The visibility we have supports this, and it connects to our automation strategy. We have a backlog, although we are facing supply constraints, particularly on the Food side. As we work on our sustainable solution, we've noticed that 50% of our resins are specialty types, which is currently impacting our supply. We need to address this issue, and we anticipate improvements in the second half compared to the first half. This is a positive sign for volume growth in Food, which is crucial. Additionally, regarding automation, we have a backlog and existing orders, and although we still face challenges, we have a clear plan to tackle them. This gives us confidence in achieving positive single-digit volume growth in Food. With that, I'll turn it over to Chris.

Sure. On the price realization side, I want to connect our expectations regarding EBITDA from our first quarter call to where we stand today. We're anticipating over $600 million from pricing, although we now expect volume to be more flat than the 1% or 2% growth we previously forecasted. On the cost side, both material and non-material costs have risen compared to our earlier expectations. For materials, we're looking at around $350 million for the full year, while non-material inflation is now expected to be about $110 million, up from our previous estimate of $100 million. We're aiming to provide transparency as we navigate this, focusing on productivity initiatives and price realization to help alleviate those costs, which supports our confidence in maintaining full year guidance. While we still have a broader range, we will refine it after the third quarter. Currently, we are facing slightly softer top-line volume, but we also have favorable pricing and foreign exchange impacts. Many companies with European operations are experiencing headwinds due to higher FX rates. These factors have allowed us to uphold our full year guidance.

I want to comment on pricing as we have our customers listening. We are focused on gaining market share and I am personally involved in many of these orders, particularly in automation with our major clients. Our main goal is to help them save money and address their challenges related to labor disruptions and sustainability. The focus isn’t just on the cost of our solutions, but rather on the savings we can provide. I want to communicate openly with our customers about our price realization in relation to our costs. We believe there is still more opportunity ahead, but we need to work hard to achieve that. We aim to save our customers more money while capturing market share in the process. I want to emphasize that we are dedicated to this effort and we believe there is still room for improvement on the pricing front, but we must earn it.

Good morning. This is Kieran on for Chris. I'm wondering if we can just kind of put it all together, can you discuss any productivity initiatives you have ongoing? And then when we think about kind of the cost price, volume, and productivity equation, how we think about margins trending over the course of the year and the second half?

Sure. So what's assumed in our full year guidance is to maintain approximately 21% EBITDA margin. In my prepared remarks, I talked about how on the productivity side, some of it driven by just the labor challenges we're faced with as well as just the inefficiencies given the supply disruptions, a little bit lower on the gross productivity. We expected roughly $60 million in our previous guide. Right now, we're expecting roughly $45 million. So we continue to work through that. However, those initiatives are very much built off what we have created over the past several years with the great success of Reinvent in our SEE operating engine is the opportunities that we have to continue to drive productivity are out there. Unfortunately, they're being a little bit offset this year, unfortunately, given some of the supply constraints and just the inefficiencies we've had to work ourselves through. But again, I'd just go back, the EBITDA margin profile for the full year is to hit approximately 21%, and we're committed to deliver that.

Yes. I'd like to acknowledge Mizuho for their support during my recent visit to Japan, where they hosted us along with some Japanese investors. Looking at our operating model, which relates to our productivity, both past and future, it's evident that the consistency of our performance, especially in earnings per share, captured their attention. We are exceeding our goal of over 10% growth and achieving a 20% compound annual growth rate over the last four years, which reflects our confidence in our outlook. There were numerous questions about how we will accomplish this, leading us to discuss our operational excellence and our longstanding target for operating leverage. Despite existing challenges, our operating leverage for the first half of the year stands at 37%, surpassing our target. We are mindful of inflation and other issues, but we also discussed how we plan to adapt in light of potential recession concerns by enhancing our digital capabilities. In meetings with two of our largest customers, we explored how to make our processes more efficient through digital means and how they can design products with us remotely. Our digital printing capabilities will enable them to offer unique products at competitive costs. Despite the challenges we face, we are optimistic about achieving our goals. As we wrap up, I want to thank everyone for joining the call today. We are enthusiastic about SEE as a sustainability-focused company, and we recognize the importance of our ESG commitments to our performance and success. We appreciate your interest in SEE and look forward to connecting with you next quarter. Thank you.