Sealed Air Corp (SEE) — Q1 2023 Earnings Call Transcript

Thank you, and good morning, everyone. With me today are Ted Doheny, our CEO; Dustin Semach, our CFO; and Susan Yang, our VP of Automation Finance and Treasurer. Before we begin our call, I would like to note that we have provided a slide presentation with enhanced visuals to illustrate who we are, what we do and where we're going. Please visit sealedair.com where today's webcast and presentation can be downloaded from our Investors page. Statements made during this call stating 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 or on the SEC website. We 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 the non-U.S. GAAP measures we reference throughout the presentation. I will now turn the call over to Ted. Operator, please turn to Slide 3.

Thank you, Brian, and thank you for joining our call. Today, we'll discuss our first quarter results, provide an update on Liquibox integration, our new corporate brand and our continuous journey to reinvent SEE. After that, we'll open up the call for your questions. Starting with Slide 3, I'm excited to share that as part of our Reinvent journey, we are changing our corporate brand to SEE. Our new SEE brand brings clarity to our markets, customers and people regarding who we are, what we do and where we are going. We are a market-driven, customer-first solutions company. The new logo unites automation, digital and packaging, with the full circle representing SEE's Net Positive Circular Ecosystem and our purpose to make our world better than we find it. We enter a new phase in our journey to lead the industry by redefining what packaging does and can do. The new brand positions SEE as a world-class, high-quality growth company solving critical packaging challenges unlike anyone else. Whenever our customers have a packaging issue or opportunity, we will be at the table in their minds. Now moving to Slide 4. We'd like to share how we are creating high quality growth. We break down our growth by geography, market, product and MySEE, our online digital platform. In the first quarter, our digital online sales grew to 14% of total company sales, representing a sequential increase from 5% in Q3 and 10% in Q4 of 2022. This rapid growth reflects the speed of our digital transformation and our ability to adapt to the changing needs of our customers. You can see our top 13 markets. We continue to reinvent the company from product-based to a market-driven, customer-first solutions company. The fastest-growing market was Fluids and Liquids, which grew double digits in the quarter before counting Liquibox. With Liquibox, this market represents close to 10% of company sales in the quarter. Our Consumer Ready solutions are designed to meet the evolving needs of food processors, retailers and brand owners as they seek to respond to shifting consumer preferences and changing shopping patterns. Through our innovative solutions, we integrate high-performance, sustainable materials, state-of-the-art trays and pouches and advanced automation technologies to deliver versatile packaging formats that can be tailored to a wide range of products. We leveraged digital packaging capabilities to enhance the overall impact and appeal of our customers' products. This vertical space represents one of our largest growth markets with more than $10 billion in addressable opportunities. Drawing on our market-leading CRYOVAC material science and SEE automation expertise, we are able to expand our reach deeper into the proteins market, encompassing fresh red meat, smoked and processed meats, poultry and seafood. Our capabilities also extend to other food markets, allowing us to offer an unparalleled level of flexibility and customization to our valued customers. We are driving continued innovation and growth in this space with our highly differentiated products and packaging solutions. The next vertical, Fluids and Liquids, now representing 10% of our company sales, is our highest margin, fastest growing product line. With CRYOVAC and Liquibox technologies converging, we are well positioned to capitalize on new opportunities in areas such as ready-to-drink liquids, consumer packaged goods, sauces and condiments, wine and spirits, and many more. We're disrupting the rigid container market, providing customers with lower cost, higher value and more sustainable solutions. Our goal is to exceed $1 billion in revenue from this vertical by 2027. We are now driving internally to achieve this by 2025. The third growth vertical for us is our Automated Protective Solutions, which represents approximately 35% of our business today, focusing on a variety of markets and customers ranging from industrial to e-commerce fulfillment. I will describe shortly how we are working to broaden and optimize our existing portfolio while expanding market penetration. Now moving to Slide 5 for a visual depiction of a fully automated form fill-and-seal system that is currently being commissioned by one of our large wine customers, targeting the fast-growing $100 million wine and box market. Compared with traditional bottling operations, our automated solution requires less than one-tenth of the footprint and half the cost. Our innovative Bag-in-Box solutions reduce waste and preserve the freshness of the product longer than any of the traditional packaging options without affecting its flavor or quality. This automated system combines our high-performance barrier CRYOVAC materials, fitment capabilities and our engineering expertise to bring the full solution into the box. Starting on the left of this slide, we show the critical process steps of the system, including bag forming, fitment attaching, wine filling and bag sealing. I'd like to highlight the fitment attachment process on the bottom left of the picture. Our engineers have developed a novel high-speed method of attaching the fitment while the bag is being formed, eliminating leakage and oxygen content by avoiding punching a hole. Moving across the slide, you can see an automated box-making operation. The filled bags are placed in the digitally-printed fabricated box in a touchless process. On the upper right corner, we show our end product in a restaurant environment where wine boxes are available for single-serve uses. The single pour of the wine from the bag enables extending the shelf life from hours to weeks, reducing waste and spoilage, which can represent over 30% of our restaurants' wine cost. This cutting-edge system solution, valued at $3 million, provides our customers with less than a three-year payback. This also represents the highest solution multiplier in our portfolio, exceeding 25 times. We are well positioned to drive widespread adoption of the system. By integrating SEE automation, CRYOVAC materials and Liquibox innovations, we are driving powerful synergies. Moving to Slide 6, we outline what we are doing to turn around our Automated Protective Solutions platform with an estimated addressable market of $15 billion. By leveraging SEE automation and our industry-leading materials, we solve our customers' pressing packaging challenges such as safety, labor and productivity. Our portfolio of brand solutions including BUBBLE WRAP, Instapak, AUTOBAG, Auto Boxing, among others, is the widest in the industry. We're actively working to broaden our portfolio by bringing our total solution strategy across our platforms, aggressively expanding our fiber-based solutions as well as our equipment-agnostic systems. This is opening new opportunities for customer engagement and growth. Our MySEE platform allows us to expand our customer reach into new segments while lowering our sales and service costs and making it easier to do business with us. Our online studios create new ways to interact with our customers, providing digital printing, packaging design and services. On Slide 7, we can see a solution to a major challenge we were asked to fix by Continental and our 3PL partner, UPS. In the last quarter, we generated $2 million in revenue from an Auto Wrap tire packaging system, which addressed the issue of shipping individual tires with conveyable solutions for common carriers. With this innovative tire packaging solution, we were able to eliminate safety concerns for the carrier to achieve a greater than fivefold improvement in throughput, reduced labor by 50% and create an entirely new revenue stream that was previously unattainable. Each individual tire is marked with an RFID mark, allowing for track and trace. The tires are wrapped in CRYOVAC technology film that is fully recyclable, highly durable and 65% wider than the previous packaging materials. This solution represents an opportunity to capture more than $50 million in the individual tire packaging market. Moving to Slide 8, showing our SEE operating model. Fueled by Reinvent SEE 2.0, together with the Liquibox acquisition, our growth trajectory remains the same despite 2023's near-term recessionary challenges. For this year, we anticipated a very challenging first half. With the first quarter in line with our expectations, we continue to execute our plan to drive profitable growth in the second half of the year on the back of a broad market recovery. In Q1, we completed the acquisition of Liquibox. Our traditional Fluids and Liquids business was up double digits year-over-year in the first quarter. Liquibox is performing on track with expectations thus far and we expect to realize the cost synergies laid out in our deal thesis. Reinvent SEE 2.0 cost reduction efforts are on track to reduce expenses in line with our $35 million to $45 million target within 12 to 18 months. SEE automation revenue continues to fuel our growth. Automation sales were up 5% in constant dollars for the quarter driven by automated protein solutions. We are on track to deliver more than $525 million sales for the year. In a tough quarter, Fluids and Automation continue to drive growth in a recessionary environment. Now, I'd like to turn it over to Dustin to review our financial results. But before I do that, I'd like to give him an official welcome and share that we're really excited to have Dustin on board.

Thank you, Ted, and good morning, everyone. Today, I will go over a couple of opening remarks before moving to the first quarter results and our outlook for 2023. First, I'm really excited to be joining SEE at a pivotal time during its transformation. I'm impressed by what Ted and the rest of the management team have been able to accomplish over the past few years. I see the market opportunity ahead of us and look forward to leveraging my background in digital to help accelerate our journey to becoming a world-class market-driven automation, digital and sustainable packaging solutions company. Now moving to first quarter results. Let's turn to Slide 9. In the quarter, on a constant currency basis, net sales were down 2% and adjusted EBITDA of $267 million was down 17% compared to a very strong first quarter last year. Adjusted earnings per share in the quarter of $0.74 were down 33% compared to a year ago on a constant currency basis. On Slide 10, we review our first quarter net sales by segment and by region. In constant dollars, net sales were down 2%, with 9% growth in Food while Protective was down 17%. By region, we grew EMEA by 4%, offset by declines in Americas of 4% and APAC of 1%. On Slide 11, we summarized the first quarter performance. Liquibox contributed 4% to top line sales or approximately $57 million, but was more than offset by organic declines driven by the recessionary market backdrop and continued destocking in Protective as well as some weakness in food retail end markets. First quarter adjusted EBITDA of $267 million, which included $13 million contribution from Liquibox, decreased $60 million or 18% compared to last year with margins of 19.8%, down 330 basis points. This performance was mainly driven by lower volumes and the resulting unfavorable operating leverage primarily within Protective. As it relates to adjusted earnings per diluted share in the first quarter of $0.74, our adjusted tax rate was 24% compared to 25.2% in the same period last year. We repurchased approximately $80 million or 1.5 million shares in the first quarter. Our weighted average diluted shares outstanding in the first quarter of 2023 was $144.8 million. At quarter end, we had approximately $537 million remaining under our authorized share repurchase program. Turning to quarterly segment results on Slide 12, starting with Food. In the first quarter, Food net sales of $853 million were up 1% on an organic basis which consisted of 4% from price realization offset by volume declines of 2%, primarily from food retail softness, partially offset by strong volumes in Automation, Fluids and Liquids. Diluted adjusted EBITDA of $195 million in the first quarter was relatively flat in constant dollars compared to last year with margins at 22.8%, down 200 basis points, mainly due to unfavorable year-over-year impact from net price realization, lower volumes and related unfavorable operating leverage. Protective first quarter net sales of $496 million were down 17% in constant dollars, driven by volume declines from recessionary pressures in the industrial fulfillment markets and continued destocking activities from our channel partners. We see these headwinds continuing in the second quarter but expect an inflection point in the second half with more favorable market conditions, easier comparables and recovery from areas such as China as they normalize from recent reopenings from lockdowns. Protective adjusted EBITDA of $80 million was down 35% in constant dollars in the first quarter with margins of 15.2%, down 470 basis points due to lower volumes and associated operational leverage. Now let's turn to free cash flow on Slide 13. In the first quarter, free cash flow was a use of cash of $13 million compared to a $9 million use of cash in the same period a year ago. Slight improvement in free cash flow was driven primarily by improved working capital performance. On Slide 14, we outline our purpose-driven capital allocation strategy focused on maximizing value for our shareholders. As anticipated, we closed out the first quarter with a pro forma net leverage ratio of 3.7 times. We expect to use free cash flow generation to delever throughout the year, estimating approximately 3.5 times or below by the end of 2023 and approximately 3 times by the end of 2024. Let's turn to Slide 15 to review our 2023 outlook. We are reiterating our full year guidance, which includes the following. We expect net sales to be in the range of $5.85 billion to $6.1 billion, which at the midpoint assumes mid-single-digit growth on a reported basis and low-single-digit growth organically. We expect Liquibox to contribute between approximately $340 million and $360 million in sales for 2023, given 11 months under our ownership. We expect full year adjusted EBITDA to be in the range of $1.25 billion to $1.3 billion, which assumes adjusted EBITDA margins of approximately 21%. Full year adjusted EPS is expected to be in the range of $3.50 to $3.80. Lastly, we expect full year 2023 free cash flow in the range of $475 million to $525 million, which implies a free cash flow conversion of greater than 90%. This range excludes a $175 million tax deposit to the IRS in April with respect to a settlement agreement reached in December of 2022. As we look ahead to the rest of 2023, we expect the second quarter to be a slight improvement from the first quarter impacted by ongoing destocking activities that we expect to ease by the end of the first half. As Ted mentioned earlier, we remain focused on driving growth in the second half, driven by accelerating momentum within our Automation, Fluids and liquids businesses, coupled with a broader market recovery, especially within Protective. With that, let me now pass the call back to Ted for closing remarks. Ted, over to you.

Thanks, Dustin. In summary, we had a tough quarter and expect market softness to continue through the first half. We're staying the course on our strategy, driving automation, digital and sustainable packaging solutions now under SEE, our new corporate brand. For the year, we have strong growth and cost actions in place to deal with the current recessionary environment. Our Liquibox performance is on track to exceed expectations to drive growth for the business in 2023. With that, I'll open up the call for questions. Operator, we'd like to begin the Q&A.

I would like to get more insight on the volume trends by region and end market as we look towards the remainder of the year. I understand that the comparisons will become significantly easier in the second half, but can you share your current visibility from backlog, orders, and customer activity that suggests an improvement in acceleration and volumes? This ultimately impacts profitability, which is a key factor in driving a significant increase in profits.

Let me first give you some numbers that we outlined in our guidance there, then Ted can jump in to give some color on the business side. You specifically ask for volume and wanted the color on the region-wise. Q1, we definitely see a very tough quarter there with Food overall volume down 3% and the volume down is driven by the weak retail markets, which we see across the board globally. EMEA particularly is harder than the rest of the region there. In APAC, we all know China through the lockdown and opening up has been chaotic. There's also an impact there. On the Protective side, our volume for Q1 is negative 18% compared with the negative 20% in Q4. This was also in line with the end market performance we're seeing. Of course, destocking is a big part of it. And the destocking, very heavy in Americas for the e-commerce fulfillment segment, but overall, the weak overall market is across the board in all regions as well. So Ted, maybe you wanted to talk a little bit on the results.

To provide additional insights into the numbers, let's begin with Food. As noted, when comparing the first half to the second half, we anticipate Food to be flat initially, but we're projecting a slight increase in the second half. This expectation is influenced by our ongoing efforts to regain market share in specialty resins. We've made some progress, but we anticipate that a significant portion of the recovery will occur in the first half, with additional improvements expected in the second half. In the Food sector, we experienced a double-digit increase in Automation during the first quarter, indicating continued growth and market share advancement. Furthermore, we expect Liquibox to have a more pronounced positive effect on our performance in the second half. Regarding Protective products, I've previously discussed the turnaround, which has been challenged by significant destocking. This trend began last year, particularly evident in the volumes from the third and fourth quarters, and we are working through that. Key markets experiencing these impacts include China and the electronics sector. We foresee a recovery in these areas in the second half as the year-over-year comparisons will be more favorable, and the automation initiatives should also bolster our performance then. Reviewing five years of data, particularly pre-COVID volumes for Protective products, we found that achieving our 2019 performance levels would inform our guidance. With the anticipated improvements from automation and our new product introductions, we are confident in achieving double-digit growth in the second half, although Protective products may still show a slight decline for the full year. What’s the next question?

This is actually someone filling in for George this morning. We had conflicting conference calls. I appreciate that you covered this in the prepared remarks and touched on it in the last question. In terms of automation, what marginal trends are you observing, especially considering the weak macro environment? Are there any differences in trends related to Food or Protective in automation?

The automation is definitely the main focus for our business. On the Food side, as I mentioned, we saw a 13% increase this quarter. We have many projects underway. However, on the Protective side, the first quarter remained flat due to challenges with our APS business, which was performing well last year, as well as issues related to destocking. We anticipate growth in automation on the Protective side to recover in the second half of the year. Currently, we're facing some struggles due to customers in a recessionary environment holding back on capital expenditures, but we are working through it. We believe we can significantly assist our customers in the realm of automation. We are confident that automation growth for the year will remain strong. Additionally, regarding Liquibox, we see potential in the Liquids business, especially with the traditional CRYOVAC liquid side, and we are noticing an uptick in orders this quarter with more expected in the second quarter and later. Overall, automation in the Liquid segment is a strong positive for us.

Just to add on, even though Ted talks about seeing some customers are pulling back on CapEx projects, in Q1, we continue to see bookings over pacing the revenue, and we are on track to hit the $525 million for the full year.

Thank you, Susan. Next question, please.

This is actually Matt Krueger sitting in for Ghansham. I guess I just wanted to expand on the prior question. So given the shift in the operating backdrop towards a more recessionary outlook, can you talk a little bit more about how this has impacted equipment sales, customer willingness to invest? I know you mentioned kind of a hold off in CapEx spending. Maybe can you quantify the impact there on the quarter? And then does it have any impact on premium product sales across your portfolio or any trade-down impact? That detail would be helpful.

Matt, there are a couple of conflicting points here, so let me summarize the situation regarding automation. We can also discuss the market dynamics related to trade-down, particularly in the meat sector. Concerning our capital expenditures, we are not experiencing a slowdown because our automation solutions are delivering substantial savings for our customers, who are dealing with cost and labor challenges. Therefore, the demand for automation remains robust. Some of the slowdown is due to our previous high backlogs in the Protective segment. For example, our Auto Boxing had a nearly 50-week lead time, and AUTOBAG faced lead times of several months. These lead times are now decreasing as part of the destocking process, which may have resulted from overbuying, yet we continue to see very strong demand for our automation. Regarding your second question about market trends, we have noticed a shift towards lower-cost cuts in the meat market due to inflationary pressures. However, our poultry business is actually seeing an uptick, which we believe is indicative of the recessionary environment. Nonetheless, we observe strong demand for automation in the meat and protein sectors, and we anticipate it will be even stronger in the second half of the year. Next question, operator?

I want to address customer destocking, particularly in the Protective sector, which has notably impacted our first-quarter numbers. Despite that, it appears you remain confident in achieving the $350 million to $380 million target for the year. Could you share your thoughts on the destocking trends and whether they are fully resolved? Additionally, please outline a few key factors that support your confidence in improved performance for the remainder of the year, aiming for the midpoint of your guidance.

I'll answer the question on the destocking, and then Ted can add comments on the second half confidence there. In the destocking in Q1, we certainly have seen a very fair amount very similar to Q4. I would estimate out of the 18% volume decline in Q1 in Protective, about one-third is roughly destocking. And at this point, we're in close contact with our major channel partners. The channel partners destocking is largely over. We are anticipating still other parts of the business, smaller customers and then APS portfolio, in particular, having destocking continue into Q2. Similar situation as Q1. But those fulfillment segments, while destocking should be over around mid-year.

And then to add to that, then the confidence on the second half. So part of what we've been doing also is working on and directly talking to our customers and our channel partners. And as I mentioned earlier in the prepared remarks, moving our business online is really giving us better visibility. And as we move the business online, we're getting visibility to smaller customers, broader reach. So we actually think in the recovery, we can actually come out stronger, also on the cost side. So going through this, we definitely think as we talked about Reinvent 2, we looked at our leverage and actually our deleverage in the quarter on the Protective side. We think that's actually an upside opportunity as we continue to get more cost efficient, get the system in line, get our businesses in line, become more online, available to our customers and our channel partners, we can be more effective and efficient. And that our upside leverage on that positive volume in the second half, that's what's giving us the confidence to hold our guidance for the year. Next question, please.

This is actually Bryan Burgmeier sitting in for Anthony. Two questions on the full year outlook. On the last quarter's call, you talked about maybe 46%, 47% of total company earnings landing in the first half and then you also guided to kind of low single digit volume growth in Food. Are either of those still intact? And if not, what are the offsets that you found to sort of make up for those in the second half potentially?

We're maintaining our full-year guidance, so we expect to remain in the same range. For EBITDA, we project approximately 43% to 45% for Q1, based on the midpoint of our full-year guidance. In terms of volume growth, we anticipate about a 1% increase in overall volume for Food for the full year, while for Protective, we expect a decline of 2% to 3%.

Just curious if you could talk about Fluids broadly, including Liquibox. What was organic growth in those combined businesses for the quarter? And is that playing out generally as you expected? I think some of those markets might be more consumer sensitive. Are you seeing any declines there or new wins offsetting that?

Josh, I'll break it up into our organic business, what we had in Fluids and Liquids, and then separate conversation on what we're seeing on Liquibox with two months. So on the Fluids and Liquids business for us in the quarter, we actually were up double digit. And we are seeing that business move especially as we're offering, where I gave the example, in the fluid space. It's a significant cost advantage for us because we're converting the rigid container market. So in the quarter, we had strong growth on the equipment side of the Liquids business as well as the pull-through for the existing business, and we expect that to continue through the year. On the Liquibox side, and it's been two months as we've worked with the teams together, it's actually been quite good, seeing the two cultures come together; their business is heavy on the food service side. They are seeing pressure from a recessionary environment, but we are seeing growth there. Our first piece is on the synergy side. We think we're well ahead on the synergies that we committed to and we said $30 million in the next three years; we think if you broke that down, $10 million, $10 million, $10 million, we think we're well on our way to hit that synergy side in year one. So, so far after two months, we're excited about what that Liquibox can be, Fluids and Liquids. And as I highlighted, Fluids and Liquids is our fastest-growing higher margin business. It's also part of the EBITDA story for the second half. This business leverages higher than our existing business, leveraging it actually 40% versus 30% in our model. So it's also part of our second half recovery.

I was just hoping we could dive in a little bit deeper into the Protective segment margins. It seems like the decremental or the operating leverage hit a little bit of a tipping point in terms of how much weaker the quarter was. So could you just break that down a little bit more, give us a bit of a sense for exactly, I guess, what some of the factors were in the first quarter? And then as you look at the second half, I'm curious what the type of incremental margins you would kind of anticipate or kind of the margin trajectory based on what's kind of assumed? And in particular, I'm just, I guess, a little bit surprised just given that digital seems to be a little bit of a margin-enhancing strategy that you were just seeing a little bit more benefit, given that that went to 14%. So comments on that would be helpful as well.

Angel, I'll talk a little bit of the Q1 margin and then Ted can jump into the Q2 part of it. Q1 EBITDA margin of Protective is around 16.2%, certainly is on the low end. And if we dive into detail, really, it's a volume story. For the volume, we have been down 18%. It's been down for a while. And then overall, the decremental leverage for volume is roughly between 40% to 45%, so you can see the magnitude of that from the overall margin profile there. And we do believe this is a transient move. It's not permanent. It's not a reflection of the business fundamentals as volume turns back on in the second half, the leverage will definitely improve.

And building on what Susan said on the second half, the incrementals being at 30% with us getting our costs and even on the Protective side on the turnaround, we anticipate to have strong, incremental margins north of 30%. To your second part of your question where you would expect to see more of the cost improvement on digital, that's in the transitory phase right now on lower markets. Right now, we're moving business online but we're doing that very carefully with our customers. So seeing the cost benefit of that, that's going to take time. But on the second half, that should be a benefit and for sure, a benefit going into '24 and '25. So again, higher incrementals going forward with increased volume as we move more and more of the business online.

Can you talk about the trends in the industrial market in Protective, what you expect for the first half, what you expect for the second? And can you talk about your overall price, raw material balances?

We'll go first on the industrial side, which touches our products and our portfolio on Protective; that's our Instapak, that's our shrink, the BUBBLE WRAP on demand. The markets on the industrial side that actually got hit the most, and we saw this actually started at the end of last year was actually in the electronics industry, so we're seeing the significant market pressure there. We saw third-quarter again, fourth-quarter, first-quarter, second-quarter. We see that turning in the second half and be more than double-digit actually for growth on the comps as well as penetration with actually some share gains because we have some new products going in there into that space. The second part of the question, I'll let Susan go.

Yes, I'll talk about the second part of the question on price and costs, etc. So on the full year guidance, we are expecting roughly 1% up on pricing, and that's coming from the carryover pricing from the prior year. And from a year-over-year perspective, it's primarily hitting this first half. On the full year guidance of net price realization, which includes not only the resin cost but also labor and non-labor inflation, we're anticipating a negative $40 million to $50 million in total, which is primarily driven by the high labor and non-labor costs of approximately $150 million. On the direct material side, we do anticipate resin on a year-over-year basis to be favorable, particularly on the commodity resin side. We're thinking commodity resin is a 10% down year-over-year with especially resin up 5%. Overall, from a dollar perspective, roughly, say $45 million to $50 million is favorable on the direct materials for the full year.

Having the necessary materials available will positively impact our performance in the second half of the year compared to last year. In the past, we struggled because we did not have the materials needed to secure business. While we are seeing some declines in material costs, the key advantage for us is that we will have the availability of materials to pursue business opportunities in the second half.

Dustin, looking forward to working with you and appreciate the help going forward. I guess for me on the questions I guess…

Phil, you got to give a direct question to Dustin.

I'll leave that for you, Ted. But maybe this is for Dustin. My question is really about the margin side for Food. It was lighter than I would have expected; volumes were not significantly different from the last few quarters. Typically, you see margins remain fairly stable quarter-over-quarter, so I'm surprised by the declines. Can you help us understand what caused that shortfall? Does that dynamic change a bit in the second quarter? Additionally, you mentioned recapturing market share in Food now that material availability has improved. How does that affect your mix? Is it neutral, or is that a positive indicator moving forward?

If I jump in for Dustin there, that's not fair, Phil, on that first one. If we look at Food and what's going on in the quarter, let's talk first about the share gain. There are two elements of the share gain which were share loss in the past because we just didn't have the materials, so we see that playing out in the quarter. So actually, we think we got a percent of it back. But the real issue in share gain is we had a major customer engagement that came back for us on a share gain. Also, we talked about in the fourth quarter, but we also saw it coming in the first quarter, and that also showed up in automation. So that's in Food being up double digit. So the second part of your question, how do we see that playing back in the second half of the year. We think we could get more and actually, it's going to show up in the margin where we get volume. Having Food being down, you would actually have decrementals. But as we bring the volume in on that business, we leverage on Food very, very nicely, actually much higher than our 30% target. So that's an opportunity for the second half. We got to go get the business, we got to get the share back. We're still going to have some of those issues where we were short of those materials, because once the customers made a decision, it's more difficult to go get it back but that's what we're focused on. And again, automation is how we're going to get it back quicker.

And just a quick follow-on point. When you look at Q1, it's 22.8%. When you look at the prior year, you're coming off a very tough comparable where last year, we benefited from net price realization and you see some volume declines. So you see that our Q1 is very much in line with the full year and you'll see that nicely steadily increase from here and show favorable comps year-over-year going forward.

I just wanted to ask again on the volume outlook for the rest of the year, especially in Protective. I know there's been some persistent destocking. And I guess, what are you hearing from your customers as far as their inventory levels, have you kind of reached a level where that should start to subside maybe in Q3 and that's what drives your back half?

From the inventory level of customer, we've been in direct dialog with our major channel partners, and they have started destocking actually last year. And at this point in Q1, they are largely over through destocking at their target level. The piece of the business, APS and also some smaller customers, the destocking continues. We do anticipate that to go through Q2 and will be more or less over around mid-year.

Arun, just to add a little bit of color on that. Just the same question you're asking, what's going on with the destocking, are you losing share? We're actually highly engaged and use this as an opportunity to meet with our customers, meet with our channel partners. And actually, our major channel partners now are in process to go fully online with us with MySEE. So it's given us great visibility to see what they have, where the inventory is, what are they overstocked in, how do we work that out better. But it's also giving us the opportunity, how can we help? How we not just help our channel partners but in there directly with our customers, and are there new solution opportunities for us? So it's been a net positive and that's what's also giving us our confidence on that second half recovery to go get it on the Protective side.

It's Larry De Maria. I think I jumped down the wrong one there. So obviously, you're already seeing recessionary conditions and volume, especially in Protective, and benefiting from price, which is sort of decelerating of tough comps. So can you discuss your ability and thoughts and expectations around the ability to drive both price and volume as we head to '24 in both segments and potentially, obviously, a broader recession? In other words, why is price not going to be under more pressure into '24 and what confidence do you have to keep it positive while also driving volume? And obviously, automation is part of that, but curious your thoughts.

So Larry, the question obviously is out there with price, with our customers right now. But I just want to highlight, the inflation is still out there and the conversations that we're having with our customers, we're still not through the total inflation. As Susan highlighted, even what's going on with our commodities, we still have inflationary pressures out there and so do our customers. So we're addressing this head on with our customers on what can we do to help them reduce their total cost, and that's opening the door for us to talk about automation. How can we go in there and save them actually millions in their operations through an automated system and solutions but also on the per product base, looking at our different alternatives, what do we have in the product line. So right now, we're using this as an opportunity to address it head on. So right now, we don't see that as an issue in the conversations. And the ones even that I've been directly involved with our customers, they're still under major pressure right now in what's going on in their operations, and automation continues to be the number one answer to help. Also, I just want to highlight the digital. How can we be easier to do business with? Moving our customers online, not just our distributors but the direct customers online is how can we lower their costs to do business with us and with the marketplace. So we're still very aggressive on how we can lower their costs, which will pull through our products and we think that's still an opportunity. And what we're looking for is just a net slight positive price realization. We're not looking to bring too much price over our cost. One of the big cost drivers that went away was the freight surcharges, that's the big deal right now in the quarter, that going away. But net-net, it's all about automation. Next question? Operator, I think this will be the last question or no more questions…

Okay. Well, thank you then. We'll bring the call to a close. And I would like to thank everybody, especially our SEE employees for their tireless efforts in really a tough market. And I'd like to also thank our investors for their time today. We're excited about the opportunities we have ahead and how we will accelerate our growth for the future, and we look forward to speaking again in August. Thank you.