Earnings Call Transcript - SEE Q4 2023

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Sealed Air Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please note that today's conference may be recorded. I would now like to hand our conference over to your speaker host, Brian Sullivan, Head of Investor Relations. Please go ahead.

Brian Sullivan, Head of Investor Relations

Thank you, and good morning, everyone. With me today are Emile Chammas, Interim Co-CEO and COO; as well as Dustin Semach, Interim Co-CEO and CFO. Before we begin, I would like to note that we have provided a slide presentation to supplement the call. Please visit sealedair.com where today's webcast and presentation can be downloaded from our Investor Relations page. Statements made during this call regarding management's outlook or estimates 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 which are listed in our most recent annual report on Form 10-K filed or to be filed with the SEC, and revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K. We discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and the 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 Emile and Dustin. Operator, please turn to Slide 3. Emile?

Emile Chammas, Interim Co-CEO and COO

Thank you, Brian. And thank you for joining our fourth quarter and year-end earnings call. Today, Dustin and I will review Sealed Air's financial performance, provide updates on the markets we serve, discuss relevant trends, and highlight the significant progress made on the transformational actions discussed on our previous call. Lastly, we will conclude with our 2024 outlook before opening the call for questions. We closed the quarter with sales of $1.4 billion and delivered $274 million in adjusted EBITDA in line with our expectations. Our fourth quarter results reflected the continued impact of challenging protein cycles and trade downs in our food business as well as a muted fourth-quarter seasonal pickup in our protective segment. For the full year, we finished with $5.5 billion in sales and $1.1 billion of adjusted EBITDA, slightly above the midpoint of our guidance. Through the focused efforts of our global team, excluding payments and deposits related to the resolution of certain prior year's tax matters, we delivered $467 million of free cash flow, well above our guided estimate. Dustin will provide a more comprehensive overview of our financial performance shortly. Now, let us move on to our 2024 market and business update. While our end markets in 2024 should be better than in 2023, we expect the best in an L-shaped recovery with no near-term growth catalyst. We are continuing the transformational actions that we detailed during our third-quarter call. We will focus on our core business and customers, restore underlying fundamentals, and position ourselves for accelerated growth in 2025 and beyond. I will now share some updates across our transformational initiatives. First, as we previously mentioned, we recognize the need to reallocate global resources back into our regions to enhance customer proximity and improve commercial effectiveness. As part of our reorganization efforts, we also determined that blending the protective and food commercial teams contributed to a loss of customer centricity and reduced commercial rigor. Consequently, we have reorganized our commercial teams by reestablishing food and protective operating units within each region and shifting global resources to our regional teams. This is an initial step in our broader transformation to improve our commercial execution and capture incremental market share as conditions improve. Second, with sustainability as an accelerating mega trend in both food and protective, now more than ever, innovation will play a critical role in driving outside market growth. To maximize our opportunity, we are shifting our innovation focus from the laboratory to the field. What does this mean? We have a strong material science research and development capability, but we need to take the next step forward by better leveraging the voice of the customer to help prioritize and shape our innovation pipeline. Making this shift combined with our scale will allow us to outpace our competition, ultimately improving time to market and the commercial success of our new products. Throughout 2024, we will be introducing new recyclable-ready products at an accelerating rate, bringing to market full automation solutions within case-ready, and expanding applications within our fluids and liquids businesses. Moving to Slide 4. You can see a practical example of where sustainability pressures, driven by new regulations and consumer preferences, are driving unprecedented shifts in the protein trays market. In response, we recently introduced the first bio-based, industrially compostable tray for protein packaging. These trays provide comparable performance and stability to traditionally expanded polystyrene trays, allowing us to gain share in an estimated $5 billion tray market while supporting our customer sustainability goals. Next, we have continued our portfolio optimization efforts, investing in core growth products while deprioritizing those that no longer align with our strategic objectives. We have made significant progress in redefining the long-term strategy for our portfolio of solutions, in large part getting back to Sealed Air's differentiated material science, automation, and service expertise. As our transformation takes hold, end markets recover, and financing environment improves, we will be in a much stronger position to take actions to drive further shareholder value. Meanwhile, our primary focus remains on making improvements we can drive regardless of the operating environment. Finally, our cost reduction initiatives within CTO2Grow are progressing as planned. In 2023, we drove actions culminating in an annual run rate savings largely in 2024 of $50 million, up from $40 million at the end of the third quarter. As part of the effort, we have completed three plant closures in 2023, and are in the process of closing four additional sites as part of our footprint rationalization efforts with more sites under review. In addition, we are rightsizing our Argentina operation given recent regulatory and economic instability. With the actions we have driven so far, we are currently at a total of $65 million in annual run rate savings. Building upon this momentum, we are confident in our ability to achieve $90 million in year-over-year cost savings in 2024. Moving on to updates on our Food and Protective segments. We observed ongoing challenges in the Food segment, where volumes declined year-over-year. However, sequential performance improved in Q4 due to increased holiday demand. The challenges we faced in the fourth quarter stemmed from multiple factors, including the rebuilding of the cattle herd in North America, shifts in European protein production and consumption, and consumer trade-down in retail food. The depressed capital cycle, coupled with higher interest rates, negatively impacted our equipment business as customers scaled back their capital expenditures to preserve cash. We expect these trends to continue into 2024. For Protective, 2023 was a turbulent year. Real industrial production contracted year-over-year in most advanced economies. High inflation and the subsequent drag on real income continued to squeeze household spending power and reduce demand for consumer goods. Additionally, sustainability and new business models like shipping your own container and buy online, pick up in store continue to reshape e-commerce packaging choices and demand. Pricing pressures have intensified as competitors step up to address weak market demand. On a positive note, the destocking of downstream inventories is largely complete. Different from previously expected, while market indicators are signaling an improving 2024, we have not yet seen this translate into improving demand for our customers' businesses and subsequent restocking or uptick in volumes for our packaging solutions. While we do not see an immediate near-term market catalyst, we are anticipating a gradual recovery in our end markets throughout 2024 with volume lift towards the end of the year and continuing into 2025. As our markets recover, our focus on innovation and sustainability, coupled with our CTO2Grow and strategic commercial initiatives, gives us confidence in Sealed Air's continued recovery. Now I'd like to turn it over to Dustin to review our financial results. Dustin?

Dustin Semach, Interim Co-CEO and CFO

Thank you, Emile, and good morning, everyone. Moving to the fourth quarter and full year results. Let's turn to Slide 5. Net sales were $1.4 billion in the quarter, flat on a constant currency basis, and were $5.5 billion for the full year of 2023, down 1% at constant currency. Adjusted EBITDA in the quarter was $274 million, down 8% compared to last year. For the year, adjusted EBITDA was approximately $1.1 billion, down 9%. Volumes have improved sequentially in Q4 as holiday demand drove a low single-digit seasonality pickup. As reported, adjusted earnings per share in the quarter of $0.88 were down 11% compared to a year ago. Our adjusted tax rate was 18% compared to 26.1% in the same period last year, driven by a one-time benefit due to the reversal of liabilities related to uncertain tax positions. We did not repurchase any shares in the quarter. Our weighted average diluted shares outstanding in the fourth quarter of 2023 was $144.9 million. For the year, adjusted earnings per share of $3.18 was down 22%, primarily driven by lower adjusted EBITDA and higher interest expense, partially offset by lower tax expense. Turning to Slide 6. In Q4, Liquibox contributed 5% to total company sales or approximately $70 million, but was offset by lower pricing in Protective and lower volume in both businesses. The volume declines were driven by continued market pressures in Protective, lower automation sales as well as continued weakness in food retail end markets. Fourth quarter adjusted EBITDA of $274 million, which included a $50 million contribution from Liquibox, decreased $23 million or approximately 8% compared to last year with margins of 19.9% and down 120 basis points. This performance was mainly driven by lower volumes within both segments, offset by contributions from Liquibox. Moving to Slide 7. In the fourth quarter, Food net sales of $893 million were down 3% on an organic basis, primarily due to the volume declines driven by lower automation sales as customers enforce tighter controls on capital expenditures and by continued weakness in retail demand. Food adjusted EBITDA of $195 million in the fourth quarter was down 3%, with margins at 21.8%, down 130 basis points compared to last year. The decrease in adjusted EBITDA was mainly driven by higher operating costs and lower volumes, partially offset by contributions from Liquibox and favorable net price realization of $10 million. Protective fourth quarter net sales of $485 million were down 10% organically, driven by lower pricing and volume declines in Americas and EMEA from continued market pressures in the industrial fulfillment markets. Protective adjusted EBITDA of approximately $90 million was down 12% in the fourth quarter, with margins at 18.7%, down 50 basis points. The decrease in adjusted EBITDA was driven by unfavorable net price realization and lower volumes, partially offset by favorable productivity benefits. On Slide 8, we review our fourth quarter net sales by segment and by region. In constant dollars, net sales were flat with 5% growth in Food, mainly driven by the Liquibox acquisition, while Protective was down 10% due to weak end market demand. By region, Asia Pac grew 5% organically driven by a strong Australian cattle cycle. Americas was down 6% due to lower automation sales, a weak U.S. cattle cycle, and lower pricing in Protective. EMEA declined 11% on challenging market conditions across both segments and continued destocking within Protective. In constant dollars, full year net sales were up 9% in food, while Protective was down 15%. By region, we were up 3% in Asia Pac, offset by declines of 2% in Americas and 1% in EMEA. Now let's turn to free cash flow and leverage on Slide 9. Through the fourth quarter, excluding the impact of the payments and deposits related to the resolution of certain prior year tax matters, free cash flow was $467 million compared to $376 million in the same period a year ago, representing an increase of 24% year-over-year. The primary driver of this improvement was significant inventory reduction, partially offset by lower earnings and higher interest costs. Since the peak in the second quarter of 2023, we have reduced total debt by approximately $280 million, exiting the year with a net leverage ratio of 3.9x, down from 4.1x in the third quarter. Our total liquidity position was $1.3 billion, including $346 million in cash and the remaining amount in committed and fully undrawn revolver. We will continue to focus on driving net debt to adjusted EBITDA to below 3.5x over the next two years. Let's turn to Slide 10 to review our 2024 outlook. We expect an L-shaped recovery through 2024 and into 2025. As a result, we expect net sales to be in the range of $5.2 billion to $5.6 billion, which at the midpoint assumes a 2% decline in organic growth with flat volume growth offset by negative pricing. Portfolio exits represent 0.5% lower volume in both segments. While the global protein end markets continue to be challenged, our food volume is expected to grow approximately 1%, driven by competitive wins in our core businesses, momentum in our fluids and liquids businesses, including Liquibox, and our new product launches, offset by pricing declines of 2%. Our work on integration and operational momentum at Liquibox is taking hold, and we expect the business to continue to improve across 2024, further supported by a positive outlook for the food service end markets. We see a slower market recovery in Protective than previously anticipated with a full-year volume decline of approximately 1%. Pricing pressures have increased, further reducing the top line by 3% as the competitive landscape has intensified in a lower volume environment. Protective volumes are expected to recover towards the end of 2024 as our new commercial model gains traction and market dynamics improve. We expect full-year adjusted EBITDA to be in the range of $1.05 billion to $1.15 billion, which assumes adjusted EBITDA margin of approximately 20% at the midpoint. This outlook is lower than our soft guide provided during our Q3 earnings call, mainly driven by lower volume expectations. We anticipate continued softness in the first half of 2024 as volume reaches the trough and gradually improves as the market conditions and seasonality improve in the second half. We remain disciplined in driving the necessary cost actions to offset further volume weakness. The midpoint of our adjusted EBITDA guidance is in line with 2023, with $90 million year-over-year cost savings offsetting flattish overall volumes, negative net price realization, and restoring bonus pools. Full-year adjusted EPS is expected to be in the range of $2.65 to $3.05 per share. The lower 2024 adjusted EPS is largely driven by higher depreciation, interest, and tax expense with an assumed tax rate of 26% to 27%. We expect full-year 2024 free cash flow in the range of $325 million to $425 million. At the midpoint, our free cash flow conversion as a percent of adjusted net earnings is expected to be 90%. We are assuming approximately $80 million in restructuring charges, and approximately $20 million incremental cash interest payments, offset by favorable working capital of roughly $30 million. Lastly, for the first quarter of 2024, we expect net sales and adjusted EBITDA to be ranged around $1.3 billion and $240 million, respectively, with earnings per share between $0.50 and $0.60. Our ranges and outlook reflect the dynamic environment we continue to operate in. As we gain more visibility throughout the year, we will be able to adjust and update expectations accordingly. Turning to Slide 11. We closed out the year in line with our expectations and remain committed to executing against our growth efforts. While our expectation for 2024 has reduced to a weaker and longer recovery period for our end markets, we are encouraged by the feedback from our customers and our distributors that destocking is largely behind us and are more confident in a second-half modest recovery in volumes. We are focused on driving a transformation at Sealed Air in 2024, improving commercial execution and restoring business fundamentals. We expect 2025 to be the year we return to a normal growth trajectory and where our cost reduction and operational excellence initiatives will position us well to return to adjusted EBITDA growth in 2025 and beyond. Lastly, I would like to close by thanking the global Sealed Air team, who are at the center of our transformation for their efforts solving our customers' most critical packaging challenges day in and day out. With that, Emile and I look forward to your questions.

Operator, Operator

Our first question comes from Phil Ng with Jefferies.

Philip Ng, Analyst

Hey, guys. Dustin, if I hear you correctly, you're guiding to $240 million of EBITDA for Q1. That implies a pretty steep year-over-year decline. So help us kind of think through what's driving perhaps a bigger hit to start the year? Certainly, volumes are an element of it. And the shape of the year, do you expect EBITDA to inflect positively by one, would be helpful. And any color by segments would be helpful in terms of the shape of the year.

Dustin Semach, Interim Co-CEO and CFO

Phil, this is Dustin. Thank you for your question on Q1. I want to make a couple of points. First, you accurately identified that volume is expected to decline a couple of points in Q1, which is negatively affecting our EBITDA for the quarter. This impact is being somewhat mitigated by our cost reduction program, but that program will see increased implementation over the upcoming quarters. This will drive sequential improvement as we progress through Q1, Q2, Q3, and Q4. Additionally, the pricing actions we discussed, which include some pricing adjustments from the previous year rolling into 2024, will also affect Q1. Our expectation is that EBITDA will improve sequentially from quarter to quarter, starting from the $240 million we projected for Q1. By Q3 and Q4, with the anticipated recovery in volumes during the second half, we expect to reach an inflection point leading to EBITDA growth.

Operator, Operator

And our next question coming from the line of Ghansham Panjabi, Baird.

Unidentified Analyst, Analyst

Hi, good morning, everyone. This is Mac Rigor sitting in for Ghansham this morning. So I was just hoping that you could provide us with some added detail on how volumes trended throughout the quarter on a monthly basis? And then given that we're essentially finished with the first two months of the first quarter here, how has 2024 kicked off for each segment from a monthly volume cadence as well? Any details there would be super helpful.

Dustin Semach, Interim Co-CEO and CFO

Matt, this is Dustin speaking. I'll start by thanking you for the question. If we look back at the fourth quarter, particularly in Food, we noticed that underlying volumes have been consistently trending slightly low, in the single digits, throughout the year. Q4 followed this trend, with the exception of our automation sales. We had anticipated that the impact of lower bookings earlier in the year, due to our customers' capital constraints, would affect our equipment sales in the fourth quarter. Nevertheless, we surpassed $500 million in sales, exceeding our own expectations. Moving to Protective, it concluded at around mid-single digit growth, which is a significant improvement compared to the previous three quarters that were in the teens and nearly 20% growth starting in Q1. Throughout 2023, volumes in that segment saw slight sequential improvements compared to the prior year. It's crucial to note that in Q4 '23, unlike '22, we actually experienced a seasonal increase in volumes for both Food and Protective. As we transition into Q1, January is showing slightly better results than expected, and this applies to both segments, as they have both performed well. February appears to be in line with our expectations, which is already factored into our current guidance for Q1.

Operator, Operator

Our next question coming from the line of George Staphos with Bank of America Securities.

Unidentified Analyst, Analyst

Yes, good morning. I'm stepping in for George, who is currently attending a conference. Dustin and Emile, you touched on this in your opening remarks, but could you elaborate on the specific commercial and sales strategies you've implemented in each segment since taking over? Also, what has been the competitive response in each business at this stage?

Emile Chammas, Interim Co-CEO and COO

Hi, good morning. Thank you for the question. This is Emile speaking. So in terms of the commercial transformation that we've undertaken and recently announced, we recognize that in the old structure that we had, combining both Food and Protective commercial teams really contributed to a loss of customer centricity and reduced our commercial rigor. So to solve this, we've recently announced that we've reorganized our commercial teams within Food and Protective operating units within each region. Now these units are not just sales units, but they combine sales, marketing, and dedicated support functions, including R&D representation, finance, and operations. The other pieces that we talked about in terms of our plans and that we've now implemented is the old structure really have shifted the resources from the regions into the global centers. And really, that put the voice of the customer even further away from the decision-making process. So as part of this reorganization that we've announced, we've reallocated those resources from the global teams back to these operating units. So inherently, the new design is better in terms of us being faster in the market, in terms of being closer to the customers. But just as importantly around that, we're driving a culture of discipline and performance in terms to better execute in the marketplace. And to support that, we've realigned the incentives of everybody to be more localized, closer to the markets as well as in terms of our global goal alignment.

Dustin Semach, Interim Co-CEO and CFO

And the only two points I'll add on to what Emile said, which was, if you go back to the why, the why in terms of both Food and Protective is that those end markets and those customers are very different in terms of needs from a packaging solution, service capability, right? So that one is recognizing that those are two very unique segments, end markets, customers, etc., is one of the primary motivations in terms of making that overall decision.

Operator, Operator

And our next question coming from the line Jeff Zekauskas from JPMorgan.

Jeff Zekauskas, Analyst

Thanks very much. Can you talk about how your Industrial Packaging business did in 2023, and how it's beginning the year in 2024? And can you talk about what your expectation for automation volumes are this year? And then lastly, in your compostable products that you feature in your slides, it has 54% biobased content, what's the other 46%?

Dustin Semach, Interim Co-CEO and CFO

I'm going to address the overall industrial situation. In 2023, one key point Emile mentioned is significant. If you examine PMI or its equivalent across advanced economies, you'll notice a decline in industrial activity. Consequently, our industrial packaging sector, which includes products like Instapak and industrial inflatables, underperformed. For 2023, we experienced volume decreases in the low teens, aligning with expectations of double-digit contractions in industrials. On a positive note, as we move into 2024, there are indications of modest growth, particularly in the second half of the year. We've already observed improved performance in these businesses, and for Q4, we saw a mid-single-digit decline in volumes. The beginning of the first quarter also shows positive signs, which gives us hope for stabilization.

Emile Chammas, Interim Co-CEO and COO

Let me maybe jump in, Dustin, on some of these other points on the biobased, right?

Dustin Semach, Interim Co-CEO and CFO

Sure. We've recently launched a new biobased tray to meet the market's shift away from expanded polystyrene. Fifty-four percent of the tray is made from renewable cellulose sources, with the remainder consisting of acetic acid and other processing aids. Not only is the tray made from renewable materials, but it is also certified as industrially compostable, making it suitable for industrial recycling streams where it can decompose into natural components. On the automation front, despite external challenges causing some customers to delay new capital expenditures due to inflation and muted market conditions, we expect it to remain flat year-on-year. We are also expanding our offerings in this area; automation is a crucial part of our total solution sales. Recently, we signed partnership agreements in the protective sector to enhance our box rightsizing capability, and we have received orders in the Asia Pacific region as a result. Additionally, we have formed a new partnership aimed at expanding our automation capabilities in the consumer-ready space, which we will announce publicly soon. Automation remains a key aspect of our offerings, and we are dedicated to providing total solutions through materials, equipment, and services, while also filling portfolio gaps through these partnerships. And then one other final point on that question. I'll just say that as a reminder, we kind of closed the year at around $500 million, $0.5 billion in automation sales in 2023, which is a peak for us. And to Emile's point, we expect it to be flat next year despite the challenges.

Operator, Operator

And our next question coming from the line of Anthony Pettinari from Citi.

Anthony Pettinari, Analyst

Good morning. Looking at the '24 guidance, can you just help us quantify the impact to EBITDA from lower net pricing for the year? I think you talked about that on the bridge, but I just want to make sure I got that right. And then when you think about pricing, potentially stabilizing maybe in the back half of the year, I mean, is that just a function of volume recovery, volume stabilization? Or is there sort of anything else going on in the market or what you're doing internally that you would expect to help out?

Dustin Semach, Interim Co-CEO and CFO

Yes, that's a great question. This is Dustin speaking. Regarding net price realization for fiscal year 2024, we anticipate it to be approximately down $60 million. In the context of a flat EBITDA guidance year-over-year, this $90 million in cost savings we are implementing offsets the negative net price realization of $60 million along with the restoration of our overall bonus pools, which supports the flat guidance. Specifically, the price component shows a net negative of about $120 million, which is being counterbalanced by benefits in direct materials. Additionally, labor and non-labor inflation have been more subdued lately and are expected to continue normalizing after the high levels experienced in 2023. Overall, when we assess the pricing situation from last year, there are three key components impacting us. First, concessions made last year during contract renewals have influenced pricing. Second, formula pricing is also a factor; with resin costs decreasing in the second half of 2023, formula pricing, which aligns with indices, began to take effect in early 2024. The third component is the pricing environment itself, which is why we break down the $120 million in this manner. Looking ahead to the second half of the year, there is potential for improvement; our resin prices have stabilized and may show slight inflationary trends as the year progresses, though they will still be lower than in 2023.

Operator, Operator

And our next question coming from the line of Matt Roberts with Raymond James.

Matthew Roberts, Analyst

Hi, Dustin. Good morning. Discuss the new product focus. So could you maybe quantify a little bit, what type of addressable market do you think these new products represent? And which segments are they prioritized? And in that regard, how much of this is a new opportunity versus substitution of some of your existing sales?

Dustin Semach, Interim Co-CEO and CFO

Matt, thank you for the question. I'll start, and then Emile will add to it. Referring to our earlier remarks, we discussed the compostable tray. In the past, we used to manufacture trays, but for the last few years, we have not. We now offer them as part of a package that includes our overwrap film and the equipment. I consider these three components together as a poultry application. As we re-enter the tray market with compostable trays, the total addressable market is approximately $5 million. What's particularly exciting is that we are not just entering a stagnant market; rather, we are witnessing a significant transformation. Consumer preferences are shifting away from expanded polystyrene, and new regulations are being implemented in several U.S. states and across Europe, presenting an opportunity for new alternatives. This allows us to capture a substantial market share, and we are making significant investments in this area. Now, I'll turn it over to Emile to discuss some other focus areas.

Emile Chammas, Interim Co-CEO and COO

Thank you for the question. It allows us to discuss growth opportunities across various segments. Let me highlight some key areas. In the Protective segment, we've established a new partnership to enhance our capabilities and address portfolio gaps related to 3D box rightsizing. We have received our first orders and have a sales pipeline in place. While the impact will be small this year, we previously mentioned that the transition to fiber in the Protective market has been slow. We are also introducing a paper AUTOBAG solution this year, and we are focusing on sustainability initiatives, including increasing the recycled content in our protective products. Moving on to fluids, this sector is crucial for our growth this year, particularly with our fluid business and Liquibox. We are working on increasing penetration with our CRYOVAC liquids and our FlexPrep solution. Later this year, we plan to expand our capabilities further into the rigid squeeze bottle market, with plans to present this to an initial customer soon. In the protein segment, we have launched a compostable tray based on customer feedback and have introduced new capabilities with our chill tunnels, which are currently available in the market. Additionally, we're rolling out a range of second-generation recyclable flexible materials in response to customer demand. Lastly, regarding innovation, our tray launch has been a significant achievement, responding effectively to market needs. We accomplished this in record time through strong partnerships with our key suppliers and customers. This collaborative approach exemplifies our commercial transformation, where we aim to expedite the market introduction of relevant innovations to achieve commercial success.

Operator, Operator

Our next question comes from the line of an analyst from Mizuho Group.

Unidentified Analyst, Analyst

Thank you. Good morning, everyone. So as you look past 2024 and into '25, how do you see the volume power of the portfolio? If you no longer have destocking going on and demand is gradually picking up, what does volume look like on a normalized basis in 2025, 2026?

Dustin Semach, Interim Co-CEO and CFO

It's a good question, and I have a few comments to make. First, we are still operating in an environment with limited visibility, which is reflected in our guidance. This uncertainty is something to keep in mind. As demand begins to recover, there may be opportunities for restocking, potentially leading to a temporary increase in overall volumes. On a normalized basis, considering the end markets we serve, I categorize them into three areas. In our Food markets, when we're not gaining more business than we're losing, we expect low single-digit volume growth, with opportunities for growth around GDP trends if we perform well. The Protective segment is similar, showing low single-digit volume growth but slightly better than Food. In our fluids and liquids business, however, we have greater potential, anticipating mid to high single-digit growth as we shift other applications into that area. The food service sector, while showing low single-digit growth, may experience an increase due to the shift from rigid to flexible packaging, which should benefit the fluids and liquids market for a significant time as this transition continues.

Operator, Operator

And our next question coming from the line of Kurt Woodberg with UBS.

Unidentified Analyst, Analyst

Yes. Thank you. Good morning. Could you elaborate on the structural dynamics in fulfillment? You mentioned fiber gaining market share and companies looking to optimize pack types or change their market approach. How significant do you see these trends? Additionally, what opportunities do you have to shift more towards fiber-based solutions?

Dustin Semach, Interim Co-CEO and CFO

I will begin by discussing some market trends, and then Emile will elaborate on the fiber-based aspects from a portfolio angle. Starting with the trend, it's clear that when I refer to this, I'm specifically talking about a segment of our Protective business that caters to fulfillment and e-commerce markets. In 2023, it's interesting to note that the behavior of these sectors is quite similar, even though industrials typically operate differently. When considering fulfillment in e-commerce, there's a significant positive trend followed by a net decline. This net decline pertains to aspects we have discussed, particularly as the overall e-commerce sector has returned to a normalized growth trajectory. After a period of dramatic growth during COVID, e-commerce is now aligning with historical growth rates while still experiencing mid-single-digit to high single-digit structural growth, which, of course, fuels more consumption of our packaging solutions. This includes void fill products like air pillows for boxes, flexibles, fiber-based solutions, and mailers. However, the overall growth rate is impacted by the shift towards fiber, which we haven't effectively captured in the past but aim to accelerate participation in moving forward. Additionally, there's a trend towards shipping containers and options like buy online and pick up in-store. Although both of these trends reflect a net decline, we still anticipate low single-digit growth when accounting for these factors. This presents an opportunity for us, especially regarding the necessary adjustments we need to make in the fiber domain to ensure our participation.

Emile Chammas, Interim Co-CEO and COO

Yes, I'd like to add a few more points. Fiber is an important aspect for us. Although we arrived a bit late to this sector, we are now making strides with our paper bubble mailer and the AUTOBAG platform. This platform not only meets shipping demands but also offers automation advantages. We are introducing our first generation of paper AUTOBAG, and in response to sustainability trends, we are also launching high recycled content for void fill and cushioning solutions. These initiatives are in the early stages of our R&D pipeline, focusing on new paper forming capabilities. Additionally, we are enhancing our automation capabilities through a partnership for box rightsizing. Currently, we have a 2D box rightsizing feature in our B Plus platform, and we have engaged in a partnership to develop 3D rightsizing. Different customers and markets have varied requirements, and we are dedicated to meeting those needs through recycled materials, recyclability, and advancing our fiber and automation capabilities.

Operator, Operator

And our next question coming from the line of Michael Roxland with Truist Securities.

Michael Roxland, Analyst

Hi, everyone. Thank you, Dustin, Emile, and Brian, for answering my questions. Congratulations on a strong finish to the year. My question is about your competitive advantage in protein. While your competitors may struggle to compete as effectively, is this due to equipment, service, or is it mainly in roll stock where there's less differentiation? Are there other areas of your business where you also have a competitive edge compared to your peers?

Dustin Semach, Interim Co-CEO and CFO

Mike, this is Dustin. I’ll begin and then let Emile chime in. First, thank you for your comment about finishing the year. Addressing your question on our competitive differentiation in the protein sector, you've already identified two key factors. The foundation really lies in our material differentiation, as we believe we excel compared to our competitors in terms of our advanced material science and our capacity to produce films that enhance the shelf life of the proteins they contain. The second factor you mentioned is our automation capabilities, and the third is service. These three elements are each top-tier individually, but when combined, they create a unique solution that establishes a competitive advantage for our business. Specifically, I’m referring to fresh red meat, but this also applies to other areas like poultry and various roll stock applications. We are focused on continuing to strengthen these three components. As Emile mentioned in our previous discussion, we are committed to developing a comprehensive solution set.

Emile Chammas, Interim Co-CEO and COO

Yes, you articulated that very well, Dustin. To add to that, on the roll stock side, we are focused on the consumer-ready segment, particularly in a niche market with high added value, where we are currently only selling the materials science aspect. In targeting this market, which is significantly larger than our current operations, we aim to introduce more materials innovation, with the compostable tray being one example. Additionally, we are exploring equipment partnerships to leverage both the equipment and our services. Furthermore, we have not yet discussed our work on digital printing for consumer-ready products, which, while it won't greatly impact us in 2024, positions us ahead in the market for high-speed, cost-effective digital printing capabilities aimed at the consumer-ready sector, with expected effects more noticeable by late 2024 or 2025.

Operator, Operator

Our next question coming from the line of Lawrence De Maria from William Blair.

Lawrence De Maria, Analyst

Thanks. Good morning, everybody. I know you discussed some of these things, but I just wanted to dial down on where are we really with on the e-commerce side on paper mailers and the ability to drive some more specifically with e-commerce? And secondly, there's a lot of pressure with Amazon and Walmart to reduce void fill. I know you have some automation there. Is there any traction with that automation? Or is that more later '24, '25? Can you just talk about some of the commercial opportunities in those specific lines?

Dustin Semach, Interim Co-CEO and CFO

Larry, this is Dustin speaking. We started focusing on paper mailers last year in 2023, and while we've introduced some of our fiber solutions, our main goal for 2024 is scaling up. This means that even though we’re bringing in paper mailers, it involves how we manage the equipment, the variety of sizes we can offer, and the printing quality. We're working to enhance these elements on a larger scale in 2024, but it's still a minor part of our overall offerings. The significant impact on our business will be more apparent in 2025 and 2026. On another note, as Emile mentioned about our partnership in 3D box rightsizing and automation, we see opportunities in that area, especially with larger boxes like those used by Walmart. We're experiencing positive momentum, and the backlog for that business remains strong. Despite some capital constraints, customers continue to invest in our solutions. One factor is the cost of the solutions, which tend to increase with more sophisticated equipment.

Operator, Operator

And our next question coming from the line of Adam Samuelson with Goldman Sachs.

Adam Samuelson, Analyst

Thank you, good morning, everyone. I have a question regarding the 50 basis points of lower volumes in each segment related to product exits that Dustin mentioned in his remarks. I would appreciate more context on this, particularly in Protective, where there are some shifts in substrates that you're struggling to adapt to. Additionally, you're experiencing increased pricing pressure in certain areas of that portfolio. How would you assess the size of the Protective portfolio and the portion of the business that has become more commoditized in the past couple of years, resulting in reduced growth prospects compared to five years ago or pre-COVID?

Dustin Semach, Interim Co-CEO and CFO

It's a great question. If you go back to just the first part of the question, that piece didn't come through clearly.

Adam Samuelson, Analyst

Sure. Can you provide any insights on the product line exits that you mentioned, specifically regarding the 50 basis points in each segment and how it impacts volumes? What are you actually moving out of?

Dustin Semach, Interim Co-CEO and CFO

Yes, absolutely. I'm really glad you raised that question because it relates to things we've already announced. We discussed exiting our chemothermal temperature assurance business in 2023, which involved refrigerated panels used to maintain temperature for items like COVID vaccines. This business performed well during COVID but declined afterward, leading to our exit from that sector. This has had a significant impact on volume, especially since many of these exits occurred towards the end of 2020 and even at the start of 2021. In Protective, this is the most substantial factor. Additionally, there are some smaller reductions in our fabrication business in the EMEA region that we are beginning to restart, but it’s very regionally focused since we’ve noticed a permanent drop in demand for certain solutions. Moving to our Food business, we are also talking about the plant-based roll stock we decided to exit during Q3. That business is currently winding down, and we expect the full-year impact on Food volumes will be felt as this process concludes around January or February. We also discussed our Argentinian operations for the first time today, which is seeing a low double-digit revenue impact due to specific business challenges related to imports caused by foreign exchange issues and economic instability, primarily affecting Food. Regarding pricing pressures in Protective, we consistently mention that 30% to 40% of our overall portfolio is affected. The most significant pricing pressure is in our utility business, including lightweight foam and bubble wrap. As for substrate transfer, we see these shifts in the market resulting from prior questions. The movement is particularly noticeable in void fill applications. We are transitioning from air pillows to paper and facing competition from shipping in our own containers, which eliminates secondary packaging. When there isn’t an overwrap box, secondary packaging is often turned into mailers, leading to a notable shift from flexible or hybrid solutions to pure fiber-based mailers. While we have products available, scaling this offering and collaborating with various businesses is key. 2024 will be a year focused on introducing and scaling these areas.

Operator, Operator

And our next question coming from the line of Arun Viswanathan from RBC Capital Markets.

Arun Viswanathan, Analyst

Great. Thanks for taking my question. And congrats on finishing the '23 year. So yes, just following up on that last point, I guess, I can appreciate that you are pursuing the fiber-based solutions and the compostable tray now. We did see a little bit of a reduction on the automation side. So I guess, another way to think about the volume growth opportunity is exiting these businesses that continue to be a drag. If you look over the last couple of years, you've had kind of minus 20% volumes when you stack the last couple of years in Protective. So with these product exits, would you say that you've somehow or at least addressed maybe the larger pieces of those volume drags? Or is there more to do there? And is there any timeline on maybe exiting some of those lingering negative headwinds?

Dustin Semach, Interim Co-CEO and CFO

I appreciate the question and understand your point about multi-stacking Protective and its net decline. We are fully aware of the current state of the business, but I want to emphasize that a significant decrease has occurred over the past 18 months regarding the entire portfolio. Looking at Q4, however, shows a positive sign with volumes beginning to stabilize and experiencing a mid-single-digit decline. Throughout this year, we have identified areas within the portfolio that may not align with our long-term strategy. While we still have some pieces in that portfolio, now is not the right time to take action on those businesses. Our focus is on a couple of key factors that will become clearer this year. We believe we are reaching a low point and starting to emerge from this cycle, gaining better insight into how these businesses will perform in the long run. As the financing markets improve and the overall outlook brightens, we will further understand the fundamentals of this business and continue to reassess our strategy. For now, however, our main focus is on transforming the business and enhancing commercial effectiveness, which is where we are directing our energy and efforts.

Operator, Operator

And our next question coming from the line of Gabe Hajde from Wells Fargo.

Gabe Hajde, Analyst

Emile, Dustin, thanks. I'll try to be brief here. The protective L-shape recovery, and maybe a little bit worse than what you were expecting, can you kind of bifurcate for us between market-related and competitive landscape? I know it's sort of tough. And then, I guess, key learnings that you've had thus far in evaluating? You alluded to it here in the last question. But just reviewing some parts of the portfolio and strategic optionality there. It sounds like the timeline may be pushed out a little bit, but still a lot of work being done. I just want to make sure we're clear there. And then reinstituting the incentive compensation, I think it's $30 million that you talked about, is it more pronounced in any specific quarter? Just curious if that's depressing Q1 at all relative to the rest of the year?

Dustin Semach, Interim Co-CEO and CFO

Gabe, I just missed the first part of that question. If you don't mind, if you can come back to the first part?

Gabe Hajde, Analyst

You talked about an L-shaped recovery in Protective. And I'm just curious if you can describe more of that weakness to market conditions or giving more competitive landscape more recently?

Dustin Semach, Interim Co-CEO and CFO

Yes, I understand. That's a great question. I would say that Q4 showed a mid-single-digit improvement in volume. We remain optimistic about a stronger seasonal performance for the quarter, which is a positive sign for the year ahead. From our viewpoint, competition doesn't appear to negatively impact our ability to attract customers or manage churn. While we've experienced some fluctuations over the past two years, there has been a normalization throughout 2023. The Protective segment showed a consistent trend in 2023, despite facing challenging comparisons, especially with Q1 down nearly 20%, then mid-teens declines in Q2 and Q3, and finally mid-single digits. Overall, we feel quite positive about our profitability outlook. A stronger Q4 would have suggested a better full-year forecast. Additionally, we are being cautious due to limited visibility in the current environment. Regarding the bonuses, we faced a tough year in 2023, which affected our incentive compensation. Moving into this year, the impact on bonuses will be more significant in the second half than in the first, as the reduction in compensation affected the second half more noticeably when our guidance and internal plans were adjusted. This means we have a greater challenge ahead as we progress through the year.

Emile Chammas, Interim Co-CEO and COO

Okay. And with that, we're on top of the hour. And I would like to thank everyone for their time today. We are excited about the opportunities ahead for Sealed Air, and we look forward to updating you on the progress of our transformation when we speak together in May. Thank you.

Operator, Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.