Earnings Call Transcript - SEE Q3 2021

Operator, Operator

Good day, and thank you for standing-by. And welcome to the Third Quarter 2021, Sealed Air Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lori Chaitman, Vice President of Investor Relations.

Lori Chaitman, Vice President of Investor Relations

Thank you and good morning, everyone. With me today are Ted Doheny, our CEO, and Chris Stephens, our CFO. Before we begin our call today, I would like to note that we have provided a slide presentation to help guide our discussion. Please visit our website for today's webcast and presentation can be found and downloaded from our IR website at sealedair.com. I would like to remind you that 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 is revised and updated on our quarterly reports on Form 10-Q, and current reports on Form 8-K, which you can also find on our website at sealedair.com or on the SEC's website at sec.gov. We also discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. Including the appendix of today's presentation, you will find U.S. GAAP financial results that correspond to the non-U.S. GAAP measures we referenced throughout the presentation. I will now turn the call over to Ted. Operator, please turn to Slide 3. Ted.

Ted Doheny, CEO

Thank you, Lori. And thank you for joining our Third Quarter earnings call. We appreciate your interest in SEE and hope you and your families are staying safe and healthy. We're working through very exciting and challenging times as we continue to transform SEE. You can see on Slide 3, our strategy to become a world-class, digitally driven company, automating sustainable packaging solutions. On today's call, I'll recap our Third Quarter 2021 performance. I'll share our strategy for growth and automation, digital and sustainability within our global core markets. Chris will review our financial results and outlook in more detail. I will end with closing remarks before opening the call for Q&A. Let's turn to Slide 4, for a review of our third quarter 2021 results. Net sales increased 13% in constant dollars, with volume growth of 5% and price realization of 8%. Adjusted EBITDA increased 4%, higher volumes and pricing efforts helped mitigate inflationary pressures and supply disruptions, yet our industry-leading margins were still under pressure at 19.2% compared to 21% last year. On a per-share basis, adjusted earnings at $0.86 were up $0.04 compared to last year. We generated free cash flow of $223 million in the first nine months of the year, which compared with $292 million in the first nine months of last year. Our SEE operating engine is performing. SEE Touchless automation and sustainable packaging solutions are generating demand, growth in delivering productivity savings. I want to highlight our SEE operating model on Slide 5, which defines where we're taking SEE and what you should expect us to deliver. Our innovations in automation, digital, and sustainability continue to gain momentum and are driving our growth above our traditional packaging markets. We're targeting adjusted earnings per share growth of greater than 10% and free cash flow conversion of more than 50%. Our SEE operating model generates significant cash from our purpose-driven approach to capital allocation. To fuel our growth, we're increasing our CapEx investments for innovation and touchless automation. Through SEE ventures investments, we're using our balance sheet to incubate disruptive technologies and new business models to accelerate our pace of innovation and speed to market. We continue to return value to our shareholders through share repurchases and dividends. We further strengthened our capital structure with a $600 million new bond issuance in the third quarter. For SEE, this is our first secured investment-grade bond in the Company's history. The proceeds were used to pay down existing debt. Let's turn to Slide 6, which highlights our market-driven solutions powered by our iconic brands. We encourage you to visit our website where you can read about our innovation and customer success stories. We create measurable value for our customers through automated and sustainable solutions that are designed to maximize food safety, minimize waste, protect goods, and deliver productivity savings. Sales in our automation portfolio, which includes equipment, services, and spare parts, have increased approximately 20% year-to-date, accounting for 8% of our total sales. AUTOBAG Systems are our fastest-growing automated solution with year-to-date sales up more than 25% in bookings, up approximately 50%. For our equipment, spare parts, and service sales are up double digits year-to-date. Our protein automation pipeline continues to grow across all regions with major food producers committing to our SEE Touchless Automation future. Our automated equipment and service sales have a strong pull-through for our high-performance sustainable materials. Our unique approach to automation is strengthened with our digital solutions. Through our SEE Mark Smart Packaging, enabled with our patented digital printing, we're creating touchless digital connectivity from our operations to our customers and to consumers’ homes. This level of connectivity is transformational for our customers and enables us to be embedded into our customers operations, where we can drive significant savings to their bottom line. Our customers are buying into our automation future. In addition to growth in automation, the recovery in food service and our innovations in fluids are driving increased demand for high-performance sustainable Cryovac barrier bags, pouches, and case-ready applications across all regions. In the quarter, our fastest-growing food solution was our Cryovac pouches designed for fluids and liquids, with double-digit sales growth. We continue to benefit from the industrial recovery in strength and automation designed for e-commerce fulfillment. We're seeing a significant shift in our fulfillment portfolio towards automation and sustainable solutions. In industrials, we delivered mid to high single-digit volume growth. In fulfillment, we experienced double-digit volume growth in automation, paper systems, and temperature assurance solutions. Although we face global supply challenges across our business, our team is doing a nice job of minimizing disruption in delivering on increased demands. I also want to highlight that we recently launched a new innovative BUBBLE WRAP on-demand inflator system, designed for industrial and fulfillment customers. You can see the illustration of this system on the right side of the slide. It features smart technology that recognizes the type of film that's loaded and easily switches between material types, whether it's inflatable cushioning, pouches, or air pillows. SEE is becoming an automation company. On Slide 7, you can see how we're making this happen. For the full year, we expect to exceed our $425 million sales target, or over 12% growth in equipment system and service. We're confident in our ability to exceed our 2025 target of over $750 million, which is more than $500 million that will come from equipment and systems. Over the last 12 months, our bookings are up significantly, even though supply disruptions persist. The pandemic accelerated demand for automation. As I noted earlier, we're highlighting the success of our AUTOBAG Systems portfolio with bookings up approximately 50% year-to-date, and more than 60% since the start of the pandemic. This accelerated systems demand will drive up to 7 times future pull-through for materials and services over the equipment life cycle. We are currently experiencing a significant increase in AUTOBAG material orders. And we're investing in innovation and capacity expansions to meet this increased demand. Our year-over-year bookings growth in AUTOBAGs is also notable. Our touchless automation value proposition resonates with customers as we're generating significant operational savings and taking our strategic partnerships to the next level. Let me now turn to Slide 8 and talk about sustainability. Sustainability is in everything we do, and it starts with our purpose-driven culture and values to how we innovate and invest to generate growth. Sustainability is core to our responsible sourcing of raw materials, our carbon footprint, as well as our efforts to advance circularity of packaging materials with our customers and suppliers. You can see on this slide our environmental goals and our sustainability pledge. Our long-term targets are ambitious and lead the industry towards a better future. As it relates to climate change, we are doing our part with an ambitious plan to achieve net-zero carbon emissions across our operations by 2040. We continue to take actions in our own facilities to reduce energy consumption with incremental investments in touchless automation and renewable energy sources. We are making significant progress on our 2025 Sustainability Pledge, with approximately 50% of our solutions already designed for recyclability, which have reached approximately 20% recycled indoor renewable content in those solutions. We designed our high-performance materials with recyclability in mind to make sustainability more affordable, and to create a pathway for a circular economy. You can see on this slide how touchless automation is transforming our operations, our customer's operations, and enabling a circular economy. We're innovating in smart packaging, incorporating digital technology in delivering supply chain efficiency, sustainability, and brand engagement with our customers. We are excited to share that in early October, we published our global impact report that highlights our ESG priorities and commitments, related initiatives, our progress, and performance. We highlight how SEE is shaping the future of the packaging industry and progressing towards our bold environmental targets. I'll now pass the call to Chris to review our results in more detail. Chris?

Chris Stephens, CFO

Thank you, Ted. And good morning, everyone. Let's start on Slide 9 to review our quarterly net sales growth by segment and by region. In Q3, net sales totaled $1.4 billion, up 14% as reported, and up 13% in constant dollars. Food was up 12% in constant dollars versus last year and protective increased 13%. The Americas and EMEA were both up double digits, with America up 14% and EMEA up 13%. APAC was up 6% versus last year. On Slide 10, you see organic sales volume and pricing trends by segment and by region. In Q3, overall volume growth was up 5% with favorable price of 8%. Let's start with volumes. Food volumes were up 6% with growth across all regions. America is up 5%, EMEA 6%, and APAC 7%. Protective volumes were up 4%, led by EMEA with 16% growth. Followed by APAC up 4% and America is essentially flat to the prior year. Q3 price was favorable 8% with protective at 10% and food at 7%. Formula-based pass-throughs, primarily in food North America, are now better aligned with input costs. For the full-year 2021, we now expect to realize more than $275 million in price, given additional pricing announcements since our last call, as well as timing of formula-based pricing. As we head into 2022, we will be announcing additional price increases effective December 1st, in response to continued inflationary pressures. This increase will vary based on region and product offering and will average between 5% and 10%. We are engaging directly with our customers to meet increased demand with automation and alternative solutions that drive productivity savings. On slide 11, we present our consolidated sales and adjusted EBITDA walks. Having already discussed sales, let me comment on our Q3 adjusted EBITDA performance of $271 million, which was up 4% compared to last year. Margins of 19.2% were down 180 basis points. Despite favorable pricing in the quarter, you can see how the inflationary environment and supply challenges weighed on our results with an unfavorable price cost spread of $18 million. Operational costs decreased approximately $3 million relative to last year with Reinvent SEE productivity gains and a $5 million benefit related to an indirect tax recovery in Brazil. Our SEE Operating Engine is performing with 40% leverage on higher volumes. In the month of September, the price cost spread turned favorable. In Q4, we expect this favorable trend to continue. Adjusted earnings per diluted share in Q3 was $0.86 compared to $0.82 in Q3 2020. Our adjusted tax rate was 24.9% compared to 20.6% in Q3 2020. The prior-year tax rate included the benefit of U.S. guilty regulations issued in 2020. Our weighted average diluted shares outstanding in the quarter were 151 million. Turning to Slide 12, here we provide an update on Reinvent SEE, which is now the foundation of our SEE Operating Engine. We achieved $43 million of benefits in the first 9 months of the year and remain on track to realize approximately $65 million in 2021. Turning to segment results on Slide 13, starting with food. In Q3, food net sales of $797 million were up 12% in constant dollars. Cryovac barrier bags and pouches were up for the second consecutive quarter versus last year and combined accounted for nearly 50% of the segment sales. Sales in case-ready and roll stock applications were also up as food service recovers and retail demand remains strong. Equipment, parts, and service sales, which account for 7% of this segment, were up low single digits in the quarter. As Ted noted, we are experiencing strong demand in protein automation and continue to build our pipeline. Adjusted EBITDA of $169 million in Q3 increased 11% compared to last year with margins at 21.2%, down 40 basis points. Higher volumes, favorable pricing, and productivity gains offset elevated costs. On Slide 14, we've highlighted protective segment results in constant dollars net sales increased 13% to $609 million. Relative to last year, industrial was up more than 15%, and fulfillment up approximately 7%. We faced supply chain disruptions throughout the quarter and leveraged our broad portfolio and global footprint to meet customer demands as best as possible. As a reminder, approximately 55% of our protective sales are derived from industrial end markets, and the remaining 45% from fulfillment and e-commerce. Adjusted EBITDA of $103 million decreased 5.5% in Q3 with margins at 16.9%, down 350 basis points versus last year. We faced transitory headwinds, including non-material inflation and labor challenges that more than offset higher volumes and pricing actions. Let's turn to Free Cash Flow on Slide 15. In the first 9 months of 2021, we generated $223 million of Free Cash Flow. Relative to the same period last year, higher earnings and lower restructuring payments were offset by the impact of higher employee-related costs, cash tax payments, and CapEx investments to support growth and innovation. On Slide 16, we outlined our purpose-driven capital allocation strategy focused on creating economic value. We maintain a strong balance sheet while driving attractive returns on invested capital and supporting profitable growth initiatives. As Ted mentioned, I want to highlight that during Q3 we executed a $600 million 5-year tenure secured bond at 1.573%. The proceeds of this offering were used to pay down $425 million senior unsecured notes at 4.875% due in 2022, and $175 million pre-payable term-loan debt. To support our growth initiatives, we are focusing our CapEx on touchless automation, digital, and sustainability. We are expanding our capacity and equipment to align with customer demands and support continued growth. We are investing in smart packaging and digital printing and see opportunities to expand our presence in attractive growth markets and geographies. We are managing our product portfolio with discipline to ensure alignment with our growth strategy. As it relates to returning capital to shareholders, we have repurchased 6.6 million shares, totaling $329 million year-to-date September, reflecting confidence in our future growth. At quarter-end, we have approximately $970 million remaining under our authorized repurchase program. Let's turn to Slide 17 to review our updated 2021 outlook, given our performance year-to-date through September. For net sales, we now estimate approximately $5.5 billion or up approximately 12% as-reported growth to reflect the favorable demand environment and pricing actions. This compares to our previous range of $5.4 billion to $5.5 billion. We expect a favorable currency impact of approximately 1.5%. Given the current environment, we now anticipate adjusted EBITDA to be in the range of $1.12 billion to $1.14 billion. On a reported basis, adjusted EBITDA is expected to grow 6.5% to 8.5%. This compares to our previous guide of $1.12 billion to $1.15 billion. For adjusted EPS, we expect to be in the range of $3.50 to $3.60, at the higher end of our previous guidance. This assumes depreciation and amortization of $230 million, and an adjusted effective tax rate of approximately 26% at approximately 152.5 million average shares outstanding. And lastly, our outlook for Free Cash Flow is expected to be in the range of $520 to $540 million. There is no change to our outlook for 2021 CapEx of approximately $210 million and Reinvent SEE restructuring and associated payments of approximately $40 million. For cash taxes, we anticipate approximately $110 million, which is net of a $24 million tax refund associated with the retroactive application of the revised U.S. guilty regulations. As we close out the year and enter 2022, we are executing on our growth strategy, driving productivity and aligning our business with our SEE Operating Model. With that, let me now pass the call back to Ted for closing remarks.

Ted Doheny, CEO

Thanks, Chris. Let's turn to Slide 18, where we have our purpose statement, which is how we will make our vision a reality. Before we open up the call for questions, I want to thank our people for their tireless efforts to take care of our business in this difficult environment. Demonstrating our ability to grow and expand our presence globally, considering the inflationary pressures and global supply disruptions, is a true reflection of the talent we have at SEE. We are differentiating ourselves in the markets we serve with a can-do, get-it-done culture. We're reinventing where we're taking SEE and driving our performance to world-class. We're at the table with our customers, solving their most critical packaging challenges with automated and sustainable solutions. Our strategy is working and continues to gain momentum. We are purpose-driven to create long-term value for our stakeholders and making our world better than we found it. But with that, I'll now open the call for questions. Operator.

Operator, Operator

Thank you. And as a reminder, we ask that you please limit yourself to one question. Our first question is from George Staphos with Bank of America. Your line is open.

George Staphos, Analyst

Hi, thanks, Operator. Hi, everyone, good morning. Thanks for all the details. I wanted to ask a question on growth, framed with some of your strategic initiatives, Ted. Within automation, I think as of the second quarter sales were up around 26% year-on-year, year-to-date. And if I'm remembering correctly, you're up approximately 20% as of the 9-month period. We recognize there's a lot of good things going on in automation. If I'm remembering the numbers correctly, you're seeing the deceleration? And relatedly, within protective, you called out supply chain headwinds. It's notable that EBITDA was down in the quarter, even though you did a really good job relative to Q2 and Q1 on price costs. Can you quantify what was going on in protective relative to growth rate there? Thank you very much.

Ted Doheny, CEO

Thank you, George. I'll collaborate with Chris on this. Looking at our equipment, as shown on Slide 7, we've experienced over a 20% increase year-to-date, particularly in the recent quarter. However, there was a slight decline in actual sales shipments, which was in the high single digits. This slowdown can be attributed to last year's comparisons and supply chain disruptions affecting other equipment companies. While I won’t go into all the details, we are addressing installation challenges and are actively supporting our customers. Our primary focus as we transition into an equipment company is to monitor our bookings, which remain very strong across the board. We’re not concerned about that, even as we navigate various challenges. We are leveraging the equipment narrative to assist our customers, especially regarding their critical labor shortages. This aligns with the positive outlook we discussed for 2022, indicating ongoing momentum. For the second part of your question, I'll have Chris provide some insight on what’s happening with the bridge and the protective segment.

Chris Stephens, CFO

Sure. Yes. Let me highlight around protective, and you highlighted the fact that we had good growth in the quarter, but saw the margin pressure, and unfortunately, are going to hear a consistent theme given the supply chain disruptions that we faced during the quarter that we continue to manage through. Good in terms of the growth for those incremental costs are impacting our margin. So those transitory impacts, higher freight costs, think about the labor challenges, etc. to get that volume out, we have experienced some headwinds. So although we felt good about the growth, the conversion, if you will, or the margin profile in protective, unfortunately was negatively impacted in the quarter. And that's what you see in our results.

Lori Chaitman, Vice President of Investor Relations

Operator, next question please.

Operator, Operator

Thank you. Next question is from Ghansham Panjabi with Baird. Your line is open.

Ghansham Panjabi, Analyst

Hi, good morning. Just on your comment Chris about price costs inflecting positively in September. I just want to check in to see if it's on both segments or is it just skewed towards one? And then with protective comparisons get quite a bit more difficult from a volume standpoint Q4 onwards. Obviously, there's considerable supply chain constraints, auto OEM, and just industrial markets in general. How do you sort of see that playing out? And then related to that, how does that impact your ability to deliver and it's all machines pretty nearly? just given all the constraints that Ted cited in terms of shortages, etc. on parts?

Chris Stephens, CFO

Sure, Ghansham, thank you. Regarding the price-cost spread, in my remarks, I mentioned that in September we saw a favorable shift. We're finally seeing prices catch up with the input cost increases that we've faced throughout the year. It's a fairly balanced situation, and while it's not a significant amount, we're pleased to see a positive outcome, which is reflected in both food and protective. We anticipate that this momentum will continue, and our guidance assumes incremental improvement from Q3, expecting about $40 million to potentially $50 million in additional pricing to reach the midpoint of our full-year guidance and relate that to the fourth quarter. Specifically about protective, volumes remain strong, and I've previously mentioned the margin profile. We're doing everything we can to meet demand as we head into Q4. While we appreciate the volume, we are aiming for better margin improvement as we understand these challenges are temporary. Our supply chain team is working hard to ensure products reach our facilities to satisfy demand, which addresses your delivery question regarding fulfilling customer needs.

Lori Chaitman, Vice President of Investor Relations

Operator, next question, please.

Operator, Operator

Thank you. Our next question is from Anthony Pettinari with Citi. Your line is open.

Bryan Brokmeier, Analyst

This is actually Bryan Brokmeier sitting in for Anthony. You guided to $275 million in price increases for this year, which is the same number you gave on the last call. Is the raise to organic growth guidance entirely driven by volume? And based on what you've already said publicly, how much will prices be up in 2022?

Chris Stephens, CFO

Sure, Brian. So you're right, I mean, our midpoint last quarter's call-in terms of the topline, and then as we move forward in terms of adjusting, and tightening that range specifically around $5.5 billion for the full year is driven by volume. So it's our expectation of volume, although we're hopeful to be able to achieve better than $275 million, as I mentioned, on recurring marks, that's hopefully what we'll see. We're counting on it, in terms of our EBITDA range guidance for the full-year. But we would expect to be at or better than that $275 million. The teams have done a nice job working that, literally partnering with our customers to make sure that demand is satisfied. Everyone recognizes the environment we're in relative to these inflationary pressures, and we're working our best with customers to be able to satisfy their demand at the same time, as we commented, help their operations from a productivity point of view.

Ted Doheny, CEO

Brian, let me just add on one thing as you were alluding to. If you go to our Slide 5 with what's happening in the fourth quarter and on price which has been a big issue for us. After 3 quarters, we've been chasing those input costs. So as Chris highlighted in prepared remarks, we saw it turn in September. So that's what's giving us confidence to hit our fourth-quarter and really build momentum into 2022. If you look at our slide on you could see where we're giving you, this is where the model is driving. To unpack that a little bit for you, if you look at our organic sales that's been strong this year, we're looking to that momentum to continue to be strong and actually exceed that going into next year. And then you have price on top of that, so you see some strong volumes into 2022. And then the conversion on that, on the earnings is going to be with the price now going positive in the quarter, you're going to see a pretty significant change in our profitability in the fourth quarter compared to the first three quarters being ahead of the price. You'll see not only our operating leverage on the volume that we've consistently hitting well over that 30%, you're going to see the price coming in as well. Going into 2022, we're still going to have some supply constraints and we still expect we're going to have those inflationary pressures. It's going to be a little bit different than the past because we do think that it will be starting to flatten but just to catch up on all the other inflationary costs. But we still think we're going to be ahead and we think our EBITDA growth percentage is going to outweigh our sales. We're going to have some margin expansion going into next year and then net flows will get over 10% on EPS and our cash generation. We're seeing this momentum in the fourth quarter being led by price, taking us into a strong 2022.

Lori Chaitman, Vice President of Investor Relations

Operator, next question please?

Operator, Operator

From Larry De Maria with William Blair. Your line is open.

Larry De Maria, Analyst

Thanks. Good morning. Just changing gears a little bit. Ted, you mentioned disruptive technology. Any examples, obviously, except for the automation, just around alternative to plastics and commercial wins you may be seeing there? And then secondly, on the Reinvent SEE, obviously way ahead of schedule, any updates there and how should we conceptualize that going forward into next year?

Ted Doheny, CEO

Sure. It's great to have someone with an equipment background join us. I'll start the discussion by highlighting some of our disruptive technologies, and then Chris will cover the progress on Reinvent SEE. Looking at our slide regarding sustainability and automation, we handle roughly a billion pounds of resin and 250 million pounds of paper to produce 30 billion packages. This gives a clear picture of our operations. In terms of disruptive technology, we are incorporating automation into our facilities, creating innovative touchless systems that transform our production processes. For instance, in our food division, instead of producing bags, we are now folding them into boxes and fully automating this process, enabling us to produce a high-density roll. In one example, we can now finish bag production at our customers' locations, eliminating 87,000 boxes a year, which greatly reduces our carbon footprint and enhances productivity, while also saving our customers on labor costs — a truly disruptive shift. Furthermore, we are integrating high-performance materials and digital technologies directly into customer facilities, allowing us to print on-site rather than in our plants. This represents the direction of our future. We are also working on bringing digital technology to consumers at home, letting them see through packages to understand their materials and contents. We're excited to bring this to fruition, especially in the protein market. Now, addressing your question about Reinvent SEE.

Chris Stephens, CFO

Larry, regarding your question on Reinvent SEE, we're nearing the completion of the program in 2021. I don't foresee significant carryover into 2022, but I want to emphasize that this program has laid the groundwork for our SEE Operating Engine. Our aim each year is to generate productivity that surpasses inflation. We're currently in the planning phase for 2022, and while we plan to remain consistent with our SEE Operating Model, we will update investors in February after we conclude 2021 and provide detailed guidance for 2022. I want to reassure you that we don't see any major concerns as we head into 2022. We are addressing these temporary costs and benefiting from pricing strategies, which are enhancing our operational productivity. There is still work to be done, but we are optimistic about our current standing. We will finalize our plans soon and provide further insights in February, particularly regarding productivity and inflation for 2022.

Lori Chaitman, Vice President of Investor Relations

Operator, next question please.

Operator, Operator

Thank you. It's from Chris Parkinson with Mizuho. Your line is open.

Chris Parkinson, Analyst

Hi, good morning. Just cheering on for Chris. I'm just wondering if you can provide a little bit more color on kind of the volume trends that you saw in the quarter in Protective and food but specifically by region. It seems like EMEA was particularly strong, if you can just parse that out and talk about what you see into the fourth quarter and maybe a little bit into 2022, that would be helpful. Thank you.

Chris Stephens, CFO

Sure. As you can see in our supplemental slide, specifically around the growth in protective and food given our segments as well as in regions. But we're really strong performance across the board, EMEA specifically that we highlighted, given the volume growth of 10%. Just very strong. So we look at it, that's continuing. Despite the supply challenge as well as the price increases that we're introducing, being able to retain that business and look to grow it. And that's what we see, the favorability of industrial, our fulfillment has been very strong. There are some tougher comps when you compare quarter-over-quarter but the volume we're feeling really good about.

Ted Doheny, CEO

We have been analyzing the business and, as we mentioned, we are focused on the protective segment. Although we saw significant volume gains in our European, Middle East, and Africa region, we lagged behind on pricing. We view this as an opportunity moving forward in the protective area, which is reflected in our numbers. We anticipate catching up on pricing in the fourth quarter and into 2022.

Lori Chaitman, Vice President of Investor Relations

Operator next question, please?

Operator, Operator

Thank you. From Josh Spector with UBS. Your line is open.

Josh Spector, Analyst

Hey, guys. Thanks for taking my question. I guess, just to dig into food volume a little bit more. If I look at your performance in the second quarter and third quarter, somewhat consistent on a 2-year stack. When I look at your fourth quarter guide, it seems to imply a bit of a slowdown. And I don't know if there's something from a reopening or mix that's impacting that or if there's something else that I'm missing or if my interpretation is wrong. So any comments there in what you're seeing in Q4 and early thoughts perhaps on how you're thinking about volume growth there to '22 here would be helpful? Thanks.

Ted Doheny, CEO

Hi, Josh. At a high level, we're looking at the fourth quarter, and as indicated in the implied guidance, it appears to be relatively flat, and we continue to face ongoing labor challenges. However, we see potential in the food service sector where we expect increased volume. While the current guidance indicates flat performance, we are optimistic about 2022 as we anticipate a recovery in food service and strong automation advancements in that area, which should lead to growth. For the fourth quarter, we're seeing flat or slightly positive trends, but we believe there are opportunities as we move into 2022, especially in terms of volume and pricing for food.

Lori Chaitman, Vice President of Investor Relations

Operator, next question please.

Operator, Operator

Thank you. It's from Mark Wilde with Bank of Montreal. Your line is open.

Mark Wilde, Analyst

Hi, Ted. Hi, Chris.

Chris Stephens, CFO

Hey, Mark.

Ted Doheny, CEO

Hey, Mark.

Mark Wilde, Analyst

Ted, I wanted to just talk a little bit more about automation in the timing roll through as you can imagine. I guess, after COVID last Spring and all the issues in the meat-packing plants that these manufacturers are keen to reduce the amount of labor. But in practical terms, how long does it take them to work this through the budget and then the re-engineering of all of these facilities? So how long could this reconfiguration and increased automation trend, how long could it take for this to play out in your view? And what would be the kind of the cadence?

Ted Doheny, CEO

Great question, Mark. It really depends on the specifics, but for the larger systems, we’re looking at a timeline of about 2 to 3 years. We're excited because we've been working on this for a while, and in this quarter, we secured some significant long-term automation contracts in the protein sector. These developments will unfold over the next 1 to 2 years. Regarding the rest of our portfolio, we provided some details on our automation efforts concerning AUTOBAG. We’re currently behaving more like an equipment company by tracking our bookings closely. About 9 months ago, I instructed the team to double our capacity for AUTOBAG. We are seeing progress, although we were a bit behind due to a higher book-to-bill ratio and extended lead times than we’d prefer. We've publicly announced a CapEx of over $30 million to catch up, and as we move into 2022, we anticipate that this will support our strong growth in equipment. I believe we will surpass our goal of reaching over $750 million in the next 3 to 5 years, as you noted that these long-term projects are exciting; we are deeply integrated with our customers, working on their layouts to effectively implement our equipment. To summarize, the larger multi-million-dollar systems will generally require 2 to 3 years for planning and execution, while the AUTOBAG systems can be operational in less than 3 months, ideally within just weeks, which is what we are focusing on.

Lori Chaitman, Vice President of Investor Relations

Operator, next question please.

Operator, Operator

Thank you. From Mike Roxland with Truist Securities. Your line is open.

Mike Roxland, Analyst

Thanks. Good morning, Ted, Chris, Lori. Appreciate you taking my questions. Just wanted to follow up on the machinery and automation bookings. Obviously, this has been stressed a lot during the call. As the labor shortage continues to persist, and I would argue has gotten worse over the last few months, what has been the cadence in your machinery booking? Have you seen an acceleration in those sales bookings corresponding to the deteriorating labor situation? And then relatedly, you mentioned the machinery sales have been impacted by a shortage of materials. Can you just provide some more color around, what some of the gaining factors are there that worsened in during the quarter? And what are you seeing regarding that shortage does for in Q4? Thank you.

Ted Doheny, CEO

Okay. So if we look at the slide discussing the equipment business, you'll notice that the numbers are quite large and come in at different times, which might seem inconsistent. However, as our pipeline expands, we expect this to stabilize. During this quarter, we encountered some delays with equipment installations on a sales basis, and while we anticipate recovery by the fourth quarter, the situation remains strong. Our bookings have increased significantly, and there's potential for even higher bookings, which is why we need to increase capacity as lead times are extending. Currently, labor shortages are a major concern in the market, and automation is key to addressing these shortages. We are investing to assist our customers in managing their supply challenges. It's important to differentiate our excitement about our equipment strategy; equipment is just one part, while the integration of materials is equally crucial. Specifically in AUTOBAG, we've invested in materials, and we're seeing a faster turnover in sales. Additionally, when we discuss Equipment Plus Systems, we are not only offering traditional equipment but also comprehensive systems that include robotics, conveyance, and WMS systems. This approach raises the overall dollar amount, and our margins benefit from optimizing the entire system rather than focusing solely on individual equipment. We will provide improved visibility on our measurement and forecasting methods moving forward.

Lori Chaitman, Vice President of Investor Relations

Operator, next question please.

Operator, Operator

Thank you. It's from Philip Ng with Jefferies. Your line is open.

Philip Ng, Analyst

Hey, guys. Ted congrats on a good quarter in a choppy environment. UPS and the container-board manufacturers actually called out a strong underlying demand, but their customers have been constrained by supply chain labor. And it sounds like you're seeing some of that. So just curious as you head into the holiday shopping season, what are your customers signaling to you? Particularly in Protective as you lapse on these tougher comps. And when we look out to perhaps 2022, how are you thinking about volumes in that mixed dynamic evolving next year?

Ted Doheny, CEO

I'll handle the first part. It's a good question. As we aim to grow the business, we need to consider how to expand by product, geography, and market. We've been thinking about the overarching trends that we're focused on, primarily automation, which impacts our entire portfolio due to labor shortages. As we package our 30 billion packages a year across all markets, this labor challenge is pervasive. Regarding the markets or geographies where we may be slightly lagging this year, we are optimistic about the turnaround in the Europe, Middle East, and Africa region. We faced difficulties with rising costs, but we believe we can overcome that. We have some innovative products entering the European market, particularly in sustainability, by introducing paper products for e-commerce. Our bubble wrap and pillows perform well, and we are investing in promising technology in paper that will also cater to e-commerce. This trend is gaining traction in European markets but will be global in scope, which is encouraging for our growth in 2022. On the food side, we are expanding beyond proteins, notably fresh red meat, where we excel. The growth in that segment, which represents 22% of our portfolio, will come from automation, and we are excited about the big automation opportunities that are emerging. Some of the equipment is expected to be implemented in 2022. We have developed a site pouch system for food packaging, which in the past we wouldn't have classified as a protective business, but we are becoming more market-driven with our innovative products and systems. We foresee expansion into areas of the food business where we haven't participated before, particularly in equipment. While we've previously provided pouches, we can now offer complete equipment solutions, helping our customers save significantly on productivity amidst current labor shortages. Looking ahead to 2022, we believe many opportunities await us. To conclude, we are building momentum heading into 2022 and are excited about the future. Thank you all for your time in this call. Operator, that wraps up our discussion for today, and we look forward to our next conversation. Thank you.

Lori Chaitman, Vice President of Investor Relations

Operator, we're ready to close out the call. Thank you.

Operator, Operator

Thank you, everyone, for joining us and for participating. You may now disconnect. Have a wonderful day.