Sealed Air Corp (SEE) — Q2 2023 Earnings Call Transcript

Thank you, and good morning, everyone. With me today are Ted Doheny, our CEO; and Dustin Semach, our CFO. 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 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. Any 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's 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 reconciliations 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 will discuss our second quarter results and provide updates on our 2023 outlook and our continuous journey to reinvent SEE from the best in packaging to a world-class company, automating sustainable packaging solutions. We're introducing a new program called Cost Take-Out to Grow as part of our Reinvent SEE 2.0 to return to growth and take out our costs in this challenging post-COVID environment. After that, we'll open up the call for your questions. Starting with Slide 3. On this chart, we show our adjusted EBITDA performance since 2017 through the lens of major episodic events. The chart recaps where we are today, but most importantly, where we are going and how we're repositioning for future growth. We'd like to give you visibility to what we see for 2024 through 2025 and set the stage for a Cost Take-Out to Grow program. As we entered 2018, we were faced with major challenges such as the start of the War on Plastics and remaining stranded costs after the Diversey sale. The company's operating leverage and earnings power were not where we wanted to be, and our stock price had been stagnant for the previous three years. That was the case for action to launch our Reinvent SEE program based on our 4P'S. We established the SEE operating model, setting the tone for a transformation to world-class. The Reinvent SEE growth strategy centered on the pillars of automation, digital, and sustainability. Through Reinvent SEE, we realized annual savings over $300 million, margin expansion greater than 270 basis points, and 5% top-line growth, including M&A. In early 2020, COVID shook the world and profoundly impacted the way of life globally. COVID brought demand surges in e-commerce and food retail, caused wide supply chain disruptions, rapid inflation, product shortages, and overstocking. We built Reinvent SEE aiming to become world-class based on our 4P'S: people, performance, products, processes, and sustainability. Last quarter, we introduced our new SEE Corporate Brand, highlighting our transformation into an automation, digital, and sustainability packaging solutions company. We are now evolving Reinvent SEE 2.0 to growth and expand the Cost Take-Out and productivity program to $140 million to $160 million of annual savings to be fully realized by the end of 2025. This Cost Take-Out to Grow program will redirect SEE resources from crisis problem-solving to focus on driving major growth opportunities. We are transforming the SEE go-to-market team to an efficient and effective solutions-focused organization, accelerating automation across our business verticals and launching new product innovations enabled by sustainable materials and digital solutions. We will increase the operating leverage and earnings power in the business by further optimizing our supply chain footprint and driving digitally enabled SG&A productivity improvements. Bringing it all together, with our Cost Take-Out to Grow, we are targeting low single-digit growth, fueling our SEE operating engine, which will result in margin expansion in our journey to world class. Now moving to Slide 4. We'd like to showcase how we are creating high-quality growth. We break down our growth by geography, market, product mix, and our online digital platform. In the second quarter, our digital online transactions grew to 16% of total company sales, representing a sequential increase from approximately 10% in Q4 of 2022 and approximately 14% in Q1 of 2023. This rapid growth reflects the speed of our digital transformation, our ability to adapt to changing needs of our customers, enabling us to serve customers we are not efficiently reaching today. Towards the bottom of the slide, you can see the current percent of online transactions for each of our business verticals. Our largest penetration is in our automated Protective Solutions business. Starting with Consumer Ready solutions, representing over 50% of total revenue. These 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 to create an at-home experience. In the second quarter, Consumer Ready Solutions declined low single-digit in volume, primarily driven by softer demand in our processors in food and retail end markets. The rapid increase in inflation over the past several quarters has impacted discretionary spending, resulting in decelerating market demand. Consumers are trading down from premium to lower-priced proteins. This dynamic impacted all regions, with EMEA being hit the hardest. SEE Automation solutions for proteins continue to be a bright spot and grew approximately 40% from strong share gains with major meat processors in the quarter. Despite the softer global protein market, Automation grew double digits in all regions with APAC showing the strongest momentum, growing greater than 50%. Throughout 2023 and into 2024, we expect the retail softness to continue. The U.S. cattle cycle will be a headwind for the business, partially offset by tailwinds from the Australian herd cycle, which already positively impacted our business. Automation will continue to be a secular driver across all these markets. The next business vertical, Fluids and Liquids now representing greater than 10% of company sales in the quarter, experienced mid-single-digit growth before counting Liquibox. We continue to see the modest food service recovery and strong growth in Automation. We're bringing medical into this business vertical, further capturing the synergy between CRYOVAC Material Science and Liquibox fitment and attachment technologies. Our third business vertical is our Automated Protective Solutions, which represents approximately 35% of our business today, focusing on a variety of markets and customers ranging from industrials to e-commerce fulfillment. Weak end market demand and channel destocking continued to impact volume performance in the quarter. We're focusing our efforts on turning around this vertical by expanding SEE Automation capabilities and fiber-based solutions. We're increasing engagement and reaching more customers through our MySEE digital platform, now representing approximately 35% of this vertical's revenue. We're actively performing a strategic review of our protective portfolio for further areas to optimize and unlock value. As a small example, we recently announced the closure of our Thermal Temperature Assurance business. Transitioning now to Slide 5. We delve into SEE's growth pillars, namely Automation, Digital, and Sustainability, all crucial in addressing our customers' most pressing packaging challenges. During the second quarter, we reached new significant milestones, demonstrating our commitment to our customers in delivering incremental value-add capabilities to enable profitable growth for SEE. Automation exhibited robust growth for the quarter, increasing by approximately 20%. Food automation was particularly strong, up approximately 40% year-over-year from continued market share gains at major protein producers. We anticipate delivering over $525 million, up 10% in annual revenue this year. With regards to Digital solutions, we achieved several significant milestones. As an example of how digital printing is fueling SEE Automation, we introduced a new prismiq digital printer unit to print protein bags at our customers' facilities, enabling them to customize their products at the point of packaging. Transactions on MySEE platform surpassed a $1 billion annual run rate in the second quarter, demonstrating robust digital engagement. Following the successful introduction of our Online Design Studio, onboarded customers experienced high-speed web-to-print solutions, streamlined graphics processes, and reduced print lead times. As we move more of the company online, we continue to unlock operational efficiencies, reach new customers, and make it easier to do business with SEE. On the Sustainability front, we're proud to share that our MSCI and Sustainalytics ratings have improved, recognizing our ESG progress. Back in July, together with ExxonMobil Australia, we announced a unique circularity initiative for protein trace. The collaboration will divert more than 900 tons of plastic waste annually from landfills or incineration. We take great pride in the industry partnerships we've created to deliver scalable and sustainable solutions, making our world better than we find it. Turning to Slide 6. This is another example of how the combination of best-in-class CRYOVAC auto pouch equipment and film, Liquibox dispensing technologies, and prismiq digital connectivity bring value and create customer returns. On the top right-hand side of the slide, you see the use of CRYOVAC technology barrier bags filling lemonade within a quick service restaurant environment. This automated form fill and seal solution enables greater than 2x operational efficiency and over 30% waste reduction compared with traditional back-of-the-store lemons, slicing, and squeezing. Improved speed of service reduces storage requirements, enhances safety while offering a seamless source of fresh lemonade throughout a given day. In this example, the operational savings were over $10 million for the customer. We're introducing a new solution designed not only to bring additional operational savings but also create new revenue sources for QSR brand owners, a prefilled fresh lemonade, bag-in-the-box can replace carryout rigid plastic jugs for quick service restaurants. This growth opportunity for our customers extends shelf life from hours to days, enables in-store retail carryout formats and digital marketing opportunities to enhance the consumer experience. This application will disrupt rigid containers with an improved sustainability profile through less and more efficient packaging. Now I'd like to turn the call over to Dustin to review our financial results. Dustin?

Thank you, Ted, and good morning, everyone. Now moving to second quarter's results. Let's turn to Slide 7. In the quarter, on a constant currency basis, net sales were down 1% and adjusted EBITDA of $280 million was down 5% compared to last year. Volumes were relatively flat sequentially, excluding M&A effects, reflecting volume stabilization since the beginning of the year. Sequentially, EBITDA improved about 5% from $267 million in the first quarter of 2023, partially driven by improved sequential volumes and cost reduction. Adjusted earnings per share in the quarter of $0.80 was down 22% compared to a year ago on a constant currency basis but increased 8% sequentially from $0.74 in the first quarter of 2023. Turning to Slide 8. Liquibox contributed 5% to top-line sales of approximately $75 million, which was more than offset by organic declines driven by continued market pressures and customer destocking in Protective as well as continued weakness in food. Second quarter adjusted EBITDA of $280 million, which included $19 million contribution from Liquibox, decreased $13 million or 4% compared to last year with margins of 20.3%, down 40 basis points. This performance was mainly driven by lower volumes within Protective. As it relates to adjusted earnings per diluted share in the second quarter of $0.80, our adjusted tax rate was 26.9% compared to 24.7% in the same period last year. We did not repurchase any shares in the second quarter. Our weighted average diluted shares outstanding in the second quarter of 2023 was $144.8 million. Moving to Slide 9. In the second quarter, food net sales of $881 million were up 3% on an organic basis, primarily driven by price realization. Volume was flat year-over-year with growth in Automation in our organic Fluids and Liquids business offset by continued weakness in retail demand. Volume was slightly up versus the first quarter. Food adjusted EBITDA of $191 million in the second quarter was up 16% in constant dollars compared to last year, with margins at 21.7%, up 90 basis points, mainly due to the contribution from Liquibox and lower operating costs, partially offset by unfavorable net price realization of $10 million. Protective second quarter net sales of $500 million were down 18%, driven by volume declines in all regions from continued market pressures in industrial, electronics, and fulfillment markets, and continued customer destocking activities. While we expect destocking activities to moderate, headwinds in end market demand are projected to continue in the second half. Protective adjusted EBITDA of $96 million was down 24% in constant dollars in the second quarter with margins at 19.2%, down 140 basis points due to lower volumes and associated operational leverage, partially offset by favorable net price realization of $11 million. Sequentially, Protective EBITDA margins improved 300 basis points, primarily driven by favorable net price realization and cost control. On Slide 10, we review our second quarter net sales by segment and by region. In constant dollars, net sales were down 1%, with 12% growth in Food, while Protective was down 18%. By region, we grew APAC by 6%, offset by a decline of 2% in Americas and EMEA being flat. Now let's turn to free cash flow on Slide 11. Through the second quarter, free cash flow was a use of cash of $130 million compared to $94 million source of cash in the same period a year ago. Working capital has improved through our continued efforts to reduce inventory. However, benefits were offset by the previously disclosed deposit to the internal revenue service of $175 million. Excluding the impact of the IRS deposit, free cash flow would have been a source of cash of $45 million. On Slide 12, we outlined our purpose-driven capital allocation strategy focused on maximizing value for our shareholders. As anticipated, we closed out the second quarter with a net leverage ratio of approximately 4.1x. We expect to use free cash flow generation to de-lever throughout the year and into 2024. We are working to optimize our portfolio and actively addressing opportunities to unlock value. Let's turn to Slide 13 to review our 2023 outlook. Our guidance at the beginning of the year anticipated a V-shaped recovery in the second half of full-year 2023. Based on continued end market demand weakness, compounded by destocking, we expect an L-shaped recovery through 2023 and into 2024, reflecting a post-COVID lower growth environment. As a result, we are revising our full-year guidance, which includes the following: We expect net sales to be in the range of $5.4 billion to $5.6 billion, which at the midpoint is down 3% on a reported basis and down 7% organically. We now expect Liquibox to contribute approximately $300 million in sales for 2023. The second half will be similar to the first half of 2023, reflecting volume stabilization throughout the year, the slight uptick in volumes in the fourth quarter. We expect full-year adjusted EBITDA to be in the range of $1.075 billion to $1.125 billion, which assumes an adjusted EBITDA margin of approximately 20%. Full-year adjusted EPS is expected to be in the range of $2.75 to $2.95. We expect full-year 2023 free cash flow, excluding the previously disclosed tentative tax settlement, to be in the range of $325 million to $375 million, which implies a free cash flow conversion of approximately 85% at the midpoint. Lastly, for the third quarter of 2023, we expect net sales to be in the range of $1.360 billion to $1.380 billion and adjusted EBITDA to be $260 million to $270 million with an earnings per share of between $0.60 and $0.64 per share. As Ted mentioned earlier, due to the current environment, we launched Cost Take-Out to Grow as part of Reinvent 2.0 to restore earnings and volume growth in 2024 and beyond. I look forward to giving you more details and updating you on the progress to the $140 million to $160 million of annual savings targeted by the end of 2025 and our growth initiatives on subsequent earnings calls. With that, let me now pass the call back to Ted for closing remarks. Ted, over to you.

Thanks, Dustin. As we look to the remainder of 2023 and into 2024, the combination of Reinvent SEE 2.0 initiatives and new product introductions will help us revert to low single-digit growth. We continue to be cautious on the global economic outlook and the lingering impact of inflation. We are confident that our Cost Take-Out to Grow program will put us back on the earnings growth path and position us to address significant opportunities in our end markets. I also want to take a moment to recognize our people. Their hard work and dedication to relentlessly drive our company to world-class performance. With that, I open the call for questions. Operator?

Hi, good morning. This is Matt Krueger sitting in for Ghansham. Thanks for all the details. I was hoping that you could provide some added detail on your volume expectations by segment for the second half of 2023. Your guidance appears to imply a slowdown in food in addition to the weakness in Packaging. Why would this be the case versus the second quarter? And what were the volume run rates for each of the businesses during July? And if you even want to break out some of those details by sub-segment, that would be great?

Hey, Matt, this is Dustin. That's a great question. I want to highlight a couple of points. We noted earlier in our prepared remarks regarding Food. If you look at the second half of the year, it's really about a shift in the U.S. cattle cycle that began earlier this year in Q2 and will continue through the rest of the year. This is being somewhat mitigated by the situation in the Australian herd cycle, but not completely. Therefore, the market impact is leading to increased volume in the second half for Food. Overall, if you consider the business from the first half to the second half in Food and Protective, there is a general stabilization in volume. Turning to Protective, we're still observing weak demand in the end markets for the second half. This is further complicated by destocking. As demand in our end markets remains weak and combined with the destocking cycle, we anticipate that these issues will carry over into Q3, contributing to high single-digit volume declines for Protective in the second half. Next question?

Thanks. Good morning, everybody. As much as I want to ask about some of the growth opportunities, I would like to understand some of the volume declines in terms of market declines versus, let's say, switching share losses and some of the trade downs. So can you kind of discuss the volume of market declines versus destocking in the second half? And what kind of share losses there potentially are and have you lost any share due to pricing actions? Thank you.

Sure. This is Dustin Semach. I'll start and then Ted can add. Regarding the previous question, I'll break it down by segment. In Food, we're seeing overall volume down by approximately 4% in the second half of the year. There is a slight increase in price as we consider it in terms of year-over-year comparisons. Overall market volume is also down by about 4%. We're experiencing a share loss of about one point, which is being somewhat compensated by growth in other areas. Now shifting to Protective, in the second half of the year, we're facing more pricing pressures. Prices are down about 3% overall in the second half due to commodity resin costs from the first half. Volume is decreasing in the high single digits, with around half attributed to market decline, approximately 25 to 30 points due to destocking, and the remaining portion related to share loss offset by some growth. I'll turn it over to Ted to discuss growth in more detail regarding each area.

Sure. Regarding the share loss, let’s start with Food. We mentioned the situation with resins. We believe we are stabilizing, but there was some carryover impact from resin with customers we lost due to not having sufficient resin, which they are now trying to clear from their inventory. The slowing market is also contributing to this delay heading into the third quarter. We are optimistic about regaining that share by the end of the year. In terms of share gain, Automation is contributing to our growth. We have a solid backlog on the Food side and have seen some improvements, although we still face shortages affecting Food, which is currently up 40%. We are aiming for a 10% growth this year and into next year. We are developing new products in Automation and, despite customers reducing their capital expenditures due to pressures, we are working with them to address productivity challenges. We still see Automation as a promising avenue in Food in the latter half of the year and into next year. On the Protective side, we are experiencing pressure from destocking, but performance remains strong in the quarter. We anticipate further improvements in the second half, with ongoing efforts in fiber and plastic solutions. We expect stabilization in the Protective area. We believe that expanding our e-commerce platform and improving customer reach, along with advancements in fiber-based solutions and Automation, will create significant opportunities in Protective in the second half. The first half of the year has been challenging, but we expect stabilization and growth as we head into next year. What’s the next question?

Hi, good morning, everyone. I appreciate the information provided. I have a two-part question regarding the volume outlook and the savings related to CTO2Grow. Specifically, what is the expected timeline for the $140 million to $160 million in savings mentioned on Slide 3? How well are these savings aligned with the volume outlook? The reason I ask is that some challenges you've mentioned for the latter half of the year, such as the cattle cycle and slower growth in Automation due to your customers reducing their capital expenditures, have been discussed in previous quarters, with the company stating they wouldn't have a significant impact. So, does Sealed Air need to engage more closely with its customers to gain a clearer understanding of the volume outlook and how it relates to the expected savings? Thank you, and best of luck this quarter.

Hi, George, good question. Let me let Dustin start with just unpacking some of those numbers, and then I will answer the question about how close we are to our customers and why we had that demand shift from the first quarter to the second quarter.

Thank you, Ted, and thank you, George. To quickly address your question, I want to take a step back and discuss Reinvent SEE. As a reminder, we are projecting an outlook of $140 million to $160 million over the next couple of years through 2025. Looking back at Reinvent SEE 1.0, our initial commitment was around $225 million, which resulted in over $370 million in savings. The key point here is that as we progress beyond 2023 into 2024, we will continue to focus on reducing costs and achieving the savings needed to restore our earnings power. Regarding the $140 million to $160 million, you can expect to see this begin to unfold in Q3 and Q4. We're already underway, with teams actively engaged and executing. You'll observe that 60% to 70% of the $150 million at the midpoint will materialize in 2024, with the remainder in 2025. Now I’ll turn it back to you, Ted.

Yes. And then so George, to the second part of the question about being close to our customers. Going through this right now, extremely close to our customers right now with the pressure especially in the Food side, where they've seen the demand change. You can hear with some of our larger customers are announcing publicly what's going on with their demand reduction for the year, so we are side by side. We're seeing that feeling that or look one quarter later, we have much greater visibility to what we see, and that's where you see the adjustment in the second half. To the second part of your question, the Automation has been part one, releasing what we had in the backlog, getting that strong growth in the first half; we filled the pipeline and it's still strong. We've been reducing the bookings. The pipeline is still quite strong to get and we have to get those converted. What we're fighting with is with their reduction in demand and the reduction of their heavy intense focus on cost reduction is how can we come in and help them take their cost out through Automation. That's the issue that we're going through right now to build up our backlog for the end of this year and going strong into 2024. We feel pretty good about that on the Automation side that we can hit. We have some work to do, but we think the Automation is really strong; a bright spot for us going forward. Next question?

Thank you, everyone, for taking my question. Ted, in Fluids, you mentioned last quarter in the park. What is your confidence level in regaining lost food volumes from last year? How much additional progress have you made in the second quarter? Additionally, can you discuss your future approach in the food sector? One of your larger competitors has recently acquired a food packaging business that focuses on modular vacuum packaging solutions for protein and dairy, aiming to increase its food packaging volumes to capture more market share. I would like to know how you plan to respond to this rise in competition. Thank you.

So the first part, how we're feeling comfortable building on what I just said before, we are with our customers directly. So again, feel pretty confident on the Automation on what we're doing with the customers in the Food space. On the resin piece, which is a different subject as we regain where we didn't have that resin in the past, we feel very good with our customers, with our brand, with our service that we can get that business back. Again, we have to get them to deplete the inventory they have with someone else. So feel really good about that at one, even myself personally being engaged with those customers, let's go get that business. The second part of your question with what our competitors doing in Automation, part of our growth in Automation being well above the market has been taking share. So we feel really good about that. We talked about in the fourth quarter, we had a major conversion with one of our largest customers, actually taking that business back that we lost over five years ago. We got that back, making gains. We have some of that equipment in place, actually have it on one of the slides of the new equipment that we brought in. So we feel very good about that. We feel like we have the best products. We feel like we have the best equipment. We have new designs coming in place, so feel really good about it. We'll always have competition, but I feel very good with our CRYOVAC incredible brand with our customers; we have the product; we can go get the business. We have a tremendous sales and service team. So we feel quite confident giving the team better tools, I think we're in a good place despite what the competition is doing. Next question?

Dustin did a great job in talking about the cost element of your restructuring effort. So Ted, help us kind of think through perhaps the growth side of things. How long do you think these initiatives will take hold? We'll see it on the bottom line? And some of the challenges you're calling out on volumes seem like it could linger into 2024. So curious, what's your level of confidence in getting back to growth from a top-line and earnings perspective when we look out to 2024?

Great question. I want to share that Dustin has effectively addressed the cost aspect, and I've seen the impact of his fresh perspective. To build on the success of our Reinvent initiative, we have a clear vision for our Cost Take-Out efforts. It's important to note that we will continue to under-promise and over-deliver on those savings. Regarding growth, as illustrated on Slide 3, we devoted significant resources to managing the COVID period. We called out the COVID crisis early on, and our scientists, engineers, and service technicians have worked hard to address the challenges posed by it. We have redirected resources to ensure business continuity, and we even redesigned existing products to adapt. In terms of confidence in returning to growth, our internal plans predict growth rates above low single digits, which we are committed to. This includes inorganic growth through Liquibox, where we anticipate 5.5% growth as we focus on our fastest-growing, highest-margin segment, giving us a strong outlook. As for Automation, we are on track for above double-digit growth this year, which is encouraging. Our Digital Solutions are also starting to show promising results as we move past the COVID crisis and focus our engineers on this area. Additionally, we are introducing new products, including new trays and fiber-based items, which are designed to surpass the low single-digit volume growth expectations. I am confident we will exceed our growth targets in the future.

Hey, Dustin. Good morning. Maybe I'll ask the question a little bit differently. I'm honing in on Slide #3, where you talk about CTO2Grow enabling you to get low single-digit volume growth. And then further on the right-hand side of the slide, you talk about sales growth of 5% to 7%. So I'm assuming implied in there is some gross price as well as acquisition-related growth. So I guess in the near term, given that you're focused on deleveraging, M&A tends to be fairly lumpy, is it safe to say that you're assuming that you'll get back to some sort of contribution from net or gross price in that algorithm? And I guess just to clarify on the guidance, you're calling down, I think Liquibox to be $50 million lower in revenue. What's driving that? And does that come back in 2024 and beyond?

Okay. So great question. I'll comment first on net price. And then the comments you made around Cost Take-Out to Grow and you see on this chart on Slide 3, that kind of course correction. So what we're calling right now is the $140 million to $160 million of annual savings through 2025. And if you think about that line, that dotted line, that's what it represents, okay? And then low single-digit growth during that period. And to your point, if you call it, you look at capital allocation, we are focused in the short term on deleveraging, right? So that's an organic number when we're pointing it out. In general, we can see net price realization somewhat, I would say, negative, excluding Cost Take-Out to Grow for the next couple of years, and we talked about that in terms of where resin pricing is at today, where end market demand is, that holistically was driving that kind of short-term view on pricing. An idea is that when we get through that curve into 2025, that will enable us to get back on over to the right-hand side because our balance sheet will be much further leveraged. Pricing environment and markets will be in a different place, and then we're able to get back on to our SEE operating model, which you can see on the bottom right-hand corner.

Yes. The second part, Gabe, this is Ted, where you mentioned about the Liquibox. Liquibox being right now a step down from what we talked about before, the short issues coming in a quarter into the business. We've had operational issues right now into the quarter. We had some quality issues. We feel like we're on top of that. We brought the CRYOVAC team in there to fix it. We've even had some personnel issues in the plants. We've adjusted rates. I believe we have that fixed and on top of it. We've also, with our customers, they've seen the slowdown in the market, so we've been face-to-face with our team, our CRYOVAC team with the Liquibox team, and we think we have some significant opportunities. Right now in the short term there, those are issues, and that's why we took that number down for the year. But the last one on the cost synergy, though, we're actually ahead. Even though the volumes are down, we are ahead on the cost synergies there in the model. And so we get the volumes back up, where you think we'll far exceed the cost synergies on the Liquibox. Going into '24, '25, and '26, that is definitely part of getting back to the growth algorithm with the growth in Liquids and Fluids business, so we're still quite confident about that.

Yes, thanks for taking my question. I guess one thing I wanted to ask about was more on the cost side, specifically margins within Protective. You had a pretty nice step up in 2Q on flat sales sequentially. So just wondering kind of on your expectations for the second half. I think you talked about pricing down, but price net of cost, I guess, could that be up? And if margins improve, do you think you could actually see Protective earnings up year-over-year in the fourth quarter? Or is that too aggressive?

Great question, Josh. As we mentioned earlier, I want to highlight a couple of dynamics. First, regarding the second half of the year, we expect volume stabilization. This sequential stabilization from the first half creates an opportunity for us to think about cost control, which benefited us in Q2 along with our Cost Take-Out to Grow initiative. Additionally, I want to mention that we anticipate $140 million to $160 million in cost savings, particularly focused on our Protective segment, especially given its strong performance in the first half of the year and the best half of 2022. Looking at the second half, you're likely to see margins in the high teens for Q3, and by Q4, on a dollar basis, we expect them to be similar to where Protective was in Q4 of 2022.

The only point to add regarding growth in the Protective segment is the portfolio we mentioned in our prepared remarks. We are engaged in an ongoing review of the portfolio and plan to achieve margin expansion through a change in the product mix as we move into the second half of the year. Additionally, the introduction of new products and advancements in Automation will lead to a different volume mix. Therefore, we anticipate margin expansion in the second half, which is our plan.

Thank you for addressing my questions. If we consider the midpoint of the guidance, it indicates $1.1 billion for this year, translating to approximately $553 million for the second half. You're essentially concluding at a $1.1 billion rate. Next year in Protective, you should encounter relatively easy comparisons. Additionally, Food seems to be positioned better for the latter half of the year. What are your thoughts on growth for next year? Do you foresee returning to the EBITDA growth level in the mid- to upper single-digit range? What potential risks should we be aware of that might hinder reaching that growth range? Thank you.

How about if we take that on in the answer because we have the new CFO with readjusting with the CTO2Grow, and then I'll add some color on how it gets back to the model.

Absolutely. So Arun, again, I really appreciate the question. A couple of comments I would make. As we think about next year, right, volume growth is critical. If you think about restoring earnings, and that's part of the reason we talk about CTO2Grow is really both sides of the coin, getting back to low single-digit volume growth and then restoring our earnings. If we get back to low single-digit volume growth, we believe the Cost Take-Out to Grow program will run earnings growth ahead of overall top-line growth. At that point, it won't get back to quite, say, mid- to high single digits for 2024, but anticipating kind of mid-single-digit-ish relative to 2024 earnings growth. So going back to your point, what are the kind of pluses and minuses as we think about that. One is, we're obviously coming off a down year. If you think about next year, I made a comment earlier in one of the questions around net price realization and that being slightly negative. That, to some degree, is what's putting pressure on our point of view at this point in time, which could shift as the market develops, is putting pressure on what we see as that 60%, 70% of the $150 million coming into play next year, right? And again, what plus that up or plus that down from that point of view really comes in how you perform on volume and how those end markets get to look and do they shift or change from our point of view today as we progress out the next six months of the year. I'll turn it to Ted.

Yes, Arun. To build on that, as we've included the CTO2Grow number, our aim is to under-promise and over-deliver on costs. This is reflected in our plan, and we intend to exceed that. We need to return to growth, as I mentioned, which aligns with what you see in the model. However, the current projections indicate lower growth for '24, '25, and '26. It's crucial that we turn this trend around to achieve our growth initiatives and add a percentage or two to align with the model. At the moment, the forecasts are below our expectations for the outlook years, and it's essential for us to outperform those figures. Additionally, with market conditions improving, we believe this will support our growth. Our experience with Reinvent demonstrates our ability to leverage growth effectively, but we need to focus on achieving that now. Therefore, we are addressing a growth challenge, and the entire team is dedicated to this effort. We will capitalize on growth opportunities, which is our primary focus to surpass the current projections. Next question?

Yes, thank you. Good morning, everyone. Maybe continuing on the discussion in Protective, and I appreciate that you're doing some portfolio review. Is there an element here of you have the strength to grow in terms of some parts of the business that are more commoditized that you have to functionally exit those business lines and trying to replace those with newer higher-margin business? And is there a time lag when that transition happens that might be impacting your shipments and kind of your confidence in the growth cadence going into next year?

Yes, Adam, that's an interesting point. I need to take a moment to reflect on your comment about our strength to grow. As part of our portfolio review, we're assessing how well each piece fits into our future direction. You'll notice we rebranded what used to be called Product Care to now be Automated Protective Solutions. We're focusing on whether this business aligns with our strategy centered around Automation, Digital, and Sustainable Solutions for our customers. If certain areas, like our reflective business or Kevothermal, do not fit within our Automation strategy, we may need to part ways with them. These are valuable products, but they don't align with our vision for growth. On the other hand, as we concentrate on strengthening our Protective portfolio, we aim to optimize costs to support growth more effectively. Our digital transformation will enable us to reach customers more efficiently than before, including those we previously thought were unreachable. With our extensive Automated Protective Solutions portfolio and upcoming product launches, we believe there’s potential for growth, but we have work ahead of us.

Hi, this is John on for Chris. Can you dig deeper on your current Automation strategy? It appears that your clients have been pretty receptive recently. And so if you could provide more detail on your current backlog and how that's been trending versus your initial expectations? And then also, if you could just touch on digital and MySEE and how you see that growing in the intermediate term? Thank you.

Sure, I'm glad to provide some clarity on our Automation efforts. We're feeling optimistic about our progress. When we review our bookings from last year, we noticed that certain product lines within Automation were held back due to shipping constraints, particularly in the Protective and Food sectors. As a result, we've been able to reduce our booking backlog significantly in the first half of the year. Looking ahead to the second half, we're still addressing that backlog, but our primary focus is on converting our pipeline into bookings. As I mentioned earlier, we need to balance this with the current market challenges, as customers are facing difficulties with their capital expenditures. This means we have to demonstrate substantial savings and improve their productivity, which is our key challenge moving into the latter half of the year and into next year. We're also introducing new automated solutions and products, which we feel positive about. If you could provide more details on your inquiries, Dustin?

Go back through MySEE and...

Our Digital solution is progressing as we work on MySEE to simplify business operations for our customers. We are making quick advancements, particularly with Protective, where we are experiencing the most conversions. Our largest distributors are collaborating effectively, recognizing that we can enhance our interactions. We are not limited to just touchpoints in our factories; we are also focusing on how we can establish better communication with operations, customer service, and order entry. We are seeing rapid progress but need over half the company onboard to reach a tipping point. We are also excited about the gradual development of the second part of MySEE, which involves our Online Design Studios that will enable customers to design their products online more efficiently, contributing to scalability. This area is still in progress, and we anticipate more positive developments ahead.

Right. I would like to thank everyone for their time today. We are definitely excited about the opportunities ahead for SEE, and we look forward to speaking again in November. Thank you very much.