Sealed Air Corp

NYSE:SEE

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Sealed Air First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. As I reminder, this conference call is being recorded.

I would now like to turn the conference over to Lori Chaitman, Vice President, Investor Relations. Ma'am, you may begin.

[Lori C. Chaitman, Sealed Air Corp.]

Thank you, Shannon. Thank you and good morning, everyone. Before we begin our call today, I would like to note that we have provided a slide presentation to help guide our discussion. This presentation can be found on today's webcast and can be downloaded from our IR website at sealedair.com.

I'd like to remind you that statements made during this call stating management's outlook or predictions for the future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled Forward-Looking Statements in our earnings release and slide presentation which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent Annual Report on Form 10-K and as revised and updated on our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which you can also find on our website 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 may find important information on our use of these measures and their reconciliations to U.S. GAAP in our earnings release. Included in the appendix of today's presentation, you will find U.S. GAAP financial results that correspond to some of the non-U.S. GAAP measures we reference throughout the presentation.

Now, I'll turn the call over to Ted Doheny, our President and CEO. Ted?

[Edward L. Doheny II, Sealed Air Corp.]

Thank you, Lori. I want to thank all of you for your interest in Sealed Air and welcome to our 2018 first quarter conference call. Before Bill and I discuss our first quarter results, business trends and 2018 outlook, I'd like to note a change to our reporting structure. Starting this quarter, we allocated more expenses from a corporate segment to our divisions. This change was implemented to accelerate productivity improvements, drive accountability and eliminate operational redundancies. For your convenience in modeling purposes, we provided 2017 results to reflect the revised allocation of these expenses. Please note that our decision to move expenses from the corporate segment to the divisions has no impact on our total adjusted EBITDA.

Now, let's move to our first quarter results. We had a solid start to the year. Operating leverage improved, we've reduced our fixed cost structure, and we invested in new innovations to drive profitable growth. Our first quarter net sales of $1.1 billion increased 10% over last year and adjusted EBITDA of $205 million was up 13% over the same period. Operating leverage, or what we define as our profit-to-growth ratio, was 23%, tracking above our full-year target of 20%. As a reminder, this ratio represents the year-over-year change in EBITDA over the change in sales. Earnings per share in the quarter was $0.51, a 19% increase over Q1 2017.

Our performance in the first three months of the year combined with favorable global business trends gives us confidence in our 2018 outlook. We are on track to achieve our full year 2018 guidance for net sales, adjusted EBITDA and free cash flow. To account for the 9 million shares we repurchased in January, we raised our earnings per share forecast to be in the range of $2.45 to $2.55. We announced today that the board approved a new share repurchase program of $1 billion, replacing the prior authorizations. This represents an increase of approximately $500 million from what was remaining under our previous program. Keep in mind, our guidance assumes no additional share repurchases.

To deliver our objectives for 2018, we're focused on opportunities that will create the most value. First, accelerate profitable sales of our innovative solutions in high-growth markets and geographies. We want to be top of mind when our customers are trying to solve their most critical packaging and fulfillment challenges. Second, take our operational excellence on how we innovate, buy, make and sell materials, systems and solutions to world class. We have good systems in place, but there's room for improvement, and these improvements will expand margins and increase our return on invested capital.

And third, reduce our cost structure and drive organizational productivity by operating as one Sealed Air. Our focus is to address stranded costs from the Diversey sale, but we are going beyond stranded costs with additional actions, some of which were taken in the first quarter. We delivered $10 million in incremental restructuring savings in Q1, primarily attributable to stranded cost reduction activities. For the full year, we expect restructuring savings to be approximately $30 million. Bill and I will discuss these actions and opportunities in more detail throughout the remainder of our prepared remarks.

With that, let me now turn the call over to Bill.

[William G. Stiehl, Sealed Air Corp.]

Thank you, Ted. Turning to slide 4, let's start with the review of our net sales by region. In the first quarter, we delivered $1.1 billion on net sales with all regions delivering constant dollar sales growth. Excluding the acquisition of Fagerdala, Latin America was our fastest-growing region at 8%. Strength in Latin America was primarily driven by Brazil, where we benefited from a stronger cattle market in addition to new customer wins. North America was up 5%, with 8% growth in Product Care and 4% in Food Care. Growth in Europe, Middle East and Africa, or EMEA, of 4% was led by positive sales trends in the UK, Germany, Spain and Russia. Asia Pacific increased 11%, including sales from Fagerdala. Excluding Fagerdala, Asia Pacific was down slightly, primarily due to continued market weakness in Australia and New Zealand in Food Care.

Turning to slide 5, let me walk you through our first quarter net sales and adjusted EBITDA on a year-over-year basis. Volume increased 2%, contributing $24 million to top line results. Price/mix was $18 million favorable or 2%. We delivered positive volume and price/mix trends in both Food Care and Product Care. Currency translation was favorable by $36 million. Adjusted EBITDA was $205 million or 18% of net sales. Growth in adjusted EBITDA was attributable to higher volumes, restructuring savings, and operating discipline and favorable currency. This was partially offset by unfavorable mix and price/cost spread.

Volume growth contributed $9 million. Restructuring savings were $10 million. Cost management and income from acquisitions contributed $2 million. Currency was favorable by $6 million. Unfavorable mix and price/cost spread of $4 million was due to higher input and freight costs as well as the timing of Food Care's contract pass-throughs. In addition, Product Care was also impacted by the timing of price realization.

As Ted noted earlier, we made a change to our reporting structure beginning this quarter. While this change does not impact our total EBITDA, I do want to provide some color on what this is expected to look like going forward. Our 2018 guidance for the corporate segment prior to this change was less than $100 million. We expect approximately $60 million of these expenses to be allocated to Food Care and $30 million of these expenses to be allocated to Product Care with the remaining reported as the new corporate.

Adjusted EPS was $0.51 on average diluted shares outstanding of 165 million. Our adjusted tax rate was 30% in the first quarter 2018. We continue to estimate our tax rate for the full-year 2018 to be approximately 29%. As we indicated on our last quarterly earnings call, we are currently evaluating opportunities to optimize our tax posture. Included in our GAAP earnings, we recorded at $290 million provisional tax expense related to the one-time mandatory tax on un-repatriated foreign earnings as a part of the U.S. tax reform.

Let's now turn to our free cash flow for the three months of the year on slide 6. Free cash flow for the three months ended March 31 was a use of cash of $63 million, which included the one-time payment in lieu of certain future royalty payments for patents to an outside engineering firm. As you may recall, in December 2017, we entered into an agreement to pay $50 million of which $5 million was paid in 2017, and the remainder was paid in January 2018. CapEx was $43 million. Interest payments, net of interest income were $38 million and cash tax payments were $19 million. For the year, we continue to expect CapEx to be $160 million, interest payments net of interest income to be $175 million, and cash tax payments to be $145 million.

Let me now pass the call back to Ted for more details on our divisions and our outlook. Ted?

[Edward L. Doheny II, Sealed Air Corp.]

Thank you, Bill. Turning to slide 7, which highlights volume and price/mix trends by division and by region, on a global basis, volume trends were up 2% in Food Care, with positive trends in all regions except Asia-Pacific due to declines in Australia and New Zealand. We expect the protein and dairy market conditions in Australia and New Zealand to improve this year.

Product Care, excluding the impact of Fagerdala, delivered 3% volume growth with 3% growth in North America, EMEA and Asia Pacific. Price/mix was favorable in Food Care and Product Care, due to our announced price increases and continued shift to value-added solutions, both of which partially offset higher input and freight costs. As we continue to work through our product portfolio and deliver new innovations, we're finding more ways to help our customers save money and solve their most critical packaging challenges. I want to highlight that we experienced some more favorable mix in our e-commerce and fulfillment business in the first quarter. This was a key contributor to the higher margins in Product Care.

Let's turn to slide 8 and review Food Care results. In the first quarter, Food Care delivered $696 million in net sales or 3% constant dollar sales growth due to positive volume and price/mix trends. Adjusted EBITDA increased 8% in constant dollars to $135 million or 19.3% of sales. EBITDA results include $10 million of expenses previously allocated to corporate. You can see in the sales and EBITDA bridge that despite favorable price/mix on the top line, our profitability was negatively impacted by an unfavorable mix in price/cost spread. This was due to timing of contract pass-throughs and higher input and freight costs. We expect this trend to improve for the remainder of the year.

Food Care has also benefited from our efforts to reduce costs. You can see these efforts in restructuring savings and operating costs in the bridge, which, combined, contributed a positive $9 million to adjusted EBITDA.

I want to highlight the trends that we experienced in Q1 that we expect to continue throughout the year. Our case-ready platform continues to grow globally at above market rates. In North America, case-ready was up double digits. We are seeing strong customer acceptance and increased adoption with the seafood and convenience segments.

Second, the momentum continued in high-growth geographies, such as Brazil, Russia, China and Southeast Asia in the first quarter. We expect this trend to continue going forward as demand increases for packaged proteins and convenience meals. And third, in North America and EMEA, the ongoing shift to fresh foods, combined with our sustainable, innovative packaging, is driving our above-market growth across all proteins. We're also excited to see our penetration into the rigid container market, with our flexible packaging systems for fluids such as condiments, sauces, and soups.

In Q1, North American beef production was muted due to weather and other factors. However, the industry forecast for the full year 2018 is still expected to be in the 3% to 4%, as demand for domestic and exports accelerate in Q2. Looking ahead, we're on track to achieve our 3% constant dollar sales growth for the full year 2018. We expect adjusted EBITDA to improve in the second half versus the first half, primarily due to seasonality and the timing of contract pass-throughs.

Moving to slide 9 where we highlight results from our Product Care division, in the first quarter, Product Care delivered $435 million in net sales or 11% constant dollar growth. Excluding Fagerdala, Product Care delivered 6% growth on higher volumes and favorable price/mix. Adjusted EBITDA increased 19% in constant dollars to $780 million or 18% of net sales. EBITDA results include $6 million of expenses previously allocated to corporate. You can see in Products Care (sic) [Product Care] EBITDA bridge that the year-over-year increase was driven by profitable volume, restructuring savings and cost management. We're seeing a more profitable mix of business, particularly in e-commerce and fulfillment segment, as our pricing actions are taking hold.

Our mix in price/cost spread was negative due to the timing of price realization and other higher input and freight costs. We expect our mix in price/cost spread to improve for the remainder of the year. Our e-commerce and fulfillment business represents 30% to 35% of Product Care sales and is growing 15%. Our innovative portfolio, which includes the next generation inflatable Bubble Wrap, automated systems such as I-Pack and StealthWrap, and our unique Korrvu packaging is delivering 15%-plus growth as well. We also had high single-digit growth in Instapak due to an improved industrial environment. Overall, our business has continued to gain momentum, and our top priority going forward is to drive higher profitable sales from our innovations.

The integration of Fagerdala is progressing well and has provided us with a platform for greater sales and cost synergies. For example, our specialty foam solutions increased 9% organically in the quarter, demonstrating the power of our enhanced offering and combined sales efforts. We're also leveraging their technical expertise to expand our portfolio of custom solutions targeting existing and adjacent markets. For the full year of 2018, we anticipate year-over-year constant dollar sales to increase approximately 7%. Fagerdala is on track to achieve nearly $100 million in sales of which $70 million is incremental since we closed the acquisition in early October 2017. Under the new reporting structure, Product Care adjusted EBITDA margins are expected to expand over last year.

Now, turning to our total company 2018 outlook on slide 10, net sales are expected to be in the range of $4.75 billion to $4.8 billion with constant dollar growth of approximately 4.5%. Adjusted EBITDA is expected to be in the range of $890 million to $910 million, improving in EBITDA margin of 19%. As I noted earlier, we're increasing a range for adjusted earnings per share to $2.45 to $2.55, reflecting our year-to-date share repurchases. We forecast free cash flow from continuing operations to be approximately $400 million.

To wrap up the call, I'd like to provide a brief discussion on our strategic directions, which you can see at a high level on slide 11. In my first 100 days-plus as CEO, I traveled around the world getting to know our people, operations, suppliers, and customers. I've been working closely with our senior leadership team to refine and pivot our long-term profitable growth strategy, while aggressively going after near-term opportunities to take Sealed Air's performance to the next level. We're focusing on growth opportunities from new innovations, driving operational excellence, recognizing and promoting talent, and targeting strategic investments that will create value.

We're building a solution model that starts with focusing on how we can solve our customers' most critical challenges and save them the most money. This is leading us to high-growth geographies, market adjacencies, and next-generation technologies, including digitalization and automation. We're using our market-leading brands in existing core competencies to penetrate these markets. We're accelerating our investments in proprietary and sustainable materials, including renewable and recycled content.

We recently introduced new metrics to manage our portfolio. Our profit-to-growth ratio is designed to improve our operating leverage. It has helped us to manage our portfolio, drive operational excellence, move the needle on innovation, and improve earnings quality. We're using ROIC as a guide to our investments in capital allocation strategy. We'll continue to focus on opportunities that are accretive to earnings and create long-term value for our shareholders. Our people around the world are making all of this happen. I'm excited to see our organization's high level of energy, integrity, and passion for our business and customers.

Before we open up the call for your questions, we ask that you please mark your calendars for Thursday, August 2, for our second quarter 2018 earnings call. Shannon, we'd like to begin the Q&A session.

[Operator]

Thank you. Our first question comes from George Staphos with Bank of America. You may begin.

[Molly Baum, Bank of America Merrill Lynch]

Hi. This is actually Molly Baum sitting in for George. He's on another call right now. But my first question I wanted to ask, if you could provide a bit more color on Asia Pacific volumes, specifically in Australia and New Zealand? I know you had mentioned in the prepared remarks that you expect the volumes to improve this year, but if you could maybe provide more color on timing of the shift and kind of what you're expecting for the full year? Thank you.

[Edward L. Doheny II, Sealed Air Corp.]

Okay. Looking at Asia-Pacific, just as quickly though around the world, Asia-Pacific is third in our volume as we look specifically, you're talking about the Food Care business. We're still seeing Australia in the quarter down. We're still seeing New Zealand down, primarily driven by what's going on in the meat cycle and dairy. We do hope to see it return by the second half. But right now, we still see it down in the area. We have seen China up, actually double digit, but it's a very, very small piece of our business.

[Lori C. Chaitman, Sealed Air Corp.]

Operator, next question, please?

[Operator]

Our next question comes from Lars Kjellberg with Credit Suisse. You may begin.

[Lars F. Kjellberg, Credit Suisse Securities Europe Ltd. (Sweden)]

Yeah. Thank you. Just on the mix price/cost improvement that you expect to have in the second half, can you provide us any visibility or your view on the visibility you have on that and what are the principal drivers do you expect to see in that guidance, and some sort of stabilization or downturn in resin cost would be one question of course. But any color you can give, that will be helpful.

[Edward L. Doheny II, Sealed Air Corp.]

Yeah. This is Ted, and I'll let Bill jump in as well. But focusing on the price/cost mix and we just talked about cost and obviously resin with being a leading piece of our cost, we were anticipating going in this year that we may see the resins move down in the quarter. We didn't see that, which we talked on the last call, we were late behind some of that pricing efforts there and our contracts on the Food Care could still take some time to catch up. Looking out to the second half of the year, we still see that choppy. We're seeing some of the forecasts that say that we should see resin drop. But in even talking to some of our leading suppliers, we're anticipating they might be still trying to get a price increase out there. So overall, we see the puts and takes, we see it choppy, flat, but we don't see a drop till the second half and maybe even late in the second half of the year.

Other input costs in there that really are hitting us in the quarter and hitting everyone is freight. So part of our price increases that we put out there and the most recent one on the Product Care, we didn't get that to take effect until April. So, we think we'll be ahead of that on the second half of the year, that's what we're planning for. But the choppiness in our cost structure, our input price is still out there, we think we'll be ahead of it though in the second half of the year.

[William G. Stiehl, Sealed Air Corp.]

So, you have noted that the first quarter of 2018, we were negative on mix and price/cost spread. We expect that to continue to improve as we move through 2018. We actually expect near the end of the second quarter of 2018 that that will actually turn positive, and continue to improve and be positive throughout the balance of 2018 for both Food Care and Product Care.

[Lori C. Chaitman, Sealed Air Corp.]

Operator, next question, please.

[Operator]

Our next question comes from Ghansham Panjabi with Baird. You may begin.

[Matthew T. Krueger, Robert W. Baird & Co., Inc.]

Hi. Good morning. This is actually Matt Krueger sitting in for Ghansham. Given the increasingly difficult comparisons for Food Care during the second half of the year, can you provide some added detail on the expected volume cadence for food packaging throughout 2018?

[Edward L. Doheny II, Sealed Air Corp.]

The first quarter, as we talked a little bit about what's going on, we're behind catching up on the contract price – our contract pricing coming through. We think we'll be catching up that on the second half. The North America, looking at the first half, North America being very strong last year. We still are seeing, I'll say, muted or tepid growth in the first quarter on meat. We think we have opportunities though in Asia in the meat cycle in the back end of the year.

Trying to think what else on there. On Europe, actually interesting because I was in Europe twice in the past quarter. We see some opportunities on the catch-up on the price, and we also see some pickup on some of our new products, in especially Darfresh. Darfresh on Tray was quite interesting, actually seeing a supermarket in Italy, in France, and then Holland. Definitely the pickup on some of our new products and innovations in Europe I think we should see an opportunity for some volume growth in the second half in Europe and plus getting ahead or getting caught up on the pricing side. So see opportunities in the second half.

The final piece, going around the world, looking at Latin America, Latin America having fairly strong growth in the first quarter. We see that could continue, especially the comparables in Latin America should be helping us on the second half of the year.

[Lori C. Chaitman, Sealed Air Corp.]

Thank you. Operator, next question please.

[Operator]

Our next question comes from Edlain Rodriguez with UBS. You may begin.

[Unknown Speaker]

Hi, guys. This is (27:08) for Edlain. Looking at your EPS guidance, do you have any additional share repurchase baked into that for 2018? And going forward, what are your priorities for cash?

[William G. Stiehl, Sealed Air Corp.]

So, as we've said, we don't model future share repurchases into our guidance. What we've said is we are going to be active in the market relative to share repurchases, but the guidance is basically calculating 162 million shares and would not contemplate any additional shares.

[Lori C. Chaitman, Sealed Air Corp.]

Ted, use of cash?

[Edward L. Doheny II, Sealed Air Corp.]

Yeah. We're not giving any guidance on the share repurchase. We are looking though on investments. As we've talked before on the strategic investments, both internally – we'll first talk about internally. Some of the investments in our facilities, investments in capacity, we're looking to. We have some opportunity there to debottleneck some of our facilities. We're also looking at some of our investments in the sustainability area. We're looking at some of – we have some interesting opportunities with some renewable-type resins we're looking for investments this year in.

And then on strategic investments, the M&A, we're still always comparing that with the share buyback. We now have some pretty good data on how we've been in the market. You saw how aggressive we were in the first quarter. We're comparing that investment to our acquisitions. We now have the data of what Fagerdala looks like. We put $100 million into Fagerdala. We're looking at the accretive power of that acquisition to buying the same $100 million worth of shares. And right now, Fagerdala is ahead of that on accretion, and we're being very disciplined. We're looking at the ROIC on potential acquisitions that are out there, and we're being very frugal and making sure that they meet our financial targets, so.

[Lori C. Chaitman, Sealed Air Corp.]

Thank you. Operator, next question please.

[Operator]

Our next question comes from Chip Dillon with Vertical Research. You may begin.

[Chip Dillon, Vertical Research Partners LLC]

Yes. And good morning, everyone. My question has to do with the future view toward your balance sheet. I know the previous CEO and under his regime, a leverage ratio of 3.5 to 4 times was what was viewed as sort of where Sealed Air would like to target. And I just wanted to know, as you look at all the opportunities, where you see that leverage? And as part of the question, if you could also let us know a little bit about what your thoughts are about future restructuring savings. You mentioned $30 million this year. Are we likely to see something similar in 2019 and 2020?

[William G. Stiehl, Sealed Air Corp.]

Sure. So on the leverage ratio, you'll know that at the end of Q3 after we sold Diversey, the transaction closed in September of 2017, we ended Q3 with a net debt to adjusted EBITDA ratio of 2.4 times. It went up a little bit at the end of the year to 3.2, and now we're at 3.6 times, and that's primarily because of our share repurchases. That's what's actually driving that.

And relative to the restructuring savings, we continue to drive those costs out of the business. We're very comfortable with a 3.5 to 4 times net debt to adjusted EBITDA ratio. We're confident that we've started the process of operational productivity and driving a lower level of stranded costs and realizing those savings.

[Edward L. Doheny II, Sealed Air Corp.]

Yeah. I'll comment compared to my predecessor on the capital allocation strategy and the comfort level with that net debt to EBITDA ratio. As we stated early, the business has been comfortable at 3.5 to 4, and testing that and looking at we have pretty strong and stable markets that allow for us to do that. We generate strong cash. I believe we have even more opportunities to improve not only just our cash flow, but our cash conversion, so feel comfortable with that with what's out there.

Also, putting the targets into the organization, I think have really helped. We've seen that very quickly on the leverage ratio, managing what's coming into the business with our portfolio. I think we can pivot on that quickly as a guide. And that also leads in for us to look – as we do look at potential M&A, that it's got to be accretive to those metrics as well as accretive to the ROIC metric. That's really a great test. We already analyze what our competitors have bought. We looked at were they accretive to their cost of capital.

And so we're being very careful with that. And we want to be very opportunistic, and using the share buyback as our guide. If we can invest in the business and buy our own shares back and be opportunistic and generate and create value, that's what we'd like to do. With that guide of the 3.5 to 4, I think we have some pretty exciting opportunities with our capital allocation, looking internally, looking externally, and letting the numbers and letting these guides guide us to do the right thing.

[Lori C. Chaitman, Sealed Air Corp.]

Operator, next question please.

[Operator]

Our next question comes from Arun Viswanathan with RBC Capital Markets. You may begin.

[Tom Narayan, RBC Capital Markets LLC]

Hi. Thanks. This is actually Tom for Arun. I had a question on Product Care. You guys mentioned in the prepared remarks that 35% of the segment is e-Commerce and that was growing at 15%. I guess the question is where could this go, the 35%? Could that be the lion's share of the business? What's the competitive landscape there? It just seems like this could be a tremendous opportunity for you guys.

[Edward L. Doheny II, Sealed Air Corp.]

Yeah. This is Ted. Everybody's got a backup. There must be another call going on right now. Yeah, the e-Commerce is a tremendous opportunity for us, but as I'm using the language on the strategy of pivoting and refining our strategy, e-Commerce is a key one to look at because when you look at e-Commerce, who's not into e-Commerce right now. If we're not ready for what's going on in e-Commerce, we're not going to get this lift that's really out there for us in packaging.

So if you look at the difference in the quarter, you saw a pretty sharp pivot, and that is managing what goes through that portfolio. And we have the right – we have the ability to do that by – we can look at the margin, the products that are going in, where we could add value, but also it's really focusing on us to be in front of the customer and solving those problems.

This past week I was with one of the world's largest freight packaging companies, and I was at their logistics headquarters. We are now fully embedded with them with our own innovation center into their facility. I was able to see – it's unbelievable, 416,000 packages an hour going through that facility. So that's touching all of our customers that are going through there, even the Food Care business. So we have to be prepared that our portfolio fits into this very high growth market that we make money on it.

So, again, that's why those guides are there to do that. But it's forcing, asking – I was there with my counterpart and got to ask very directly, what are your biggest problems that you're solving, and it was quite interesting, similar, freight. How do they manage the freight going back? What can we do on our packaging to make it lighter? And then his next one was damage. Great, what can we do to get in there and with not only you as the freight supply logistics expert, but the packages that are coming through. We can solve those problems. We have some really interesting innovations to do that.

The other interesting piece in the data point in listening is in the e-Commerce market was returns. What can we do to help returns? Just a huge percentage that people – the home is becoming the new store. People are sending stuff to their home so that consumer experience. We have some pretty exciting innovations. We're working on some augmented reality that actually can tell you what's inside the package, tell you what you bought, and how interesting it is. And so we could help that e-Commerce market with some pretty exciting solutions and behind that, though, use our financial metrics to guide us into profitable growth in this market.

Just as you said, it's not going away and it will be a bigger part of our business, and we need to make it a bigger profitable part of our business. So we're exciting what e-Commerce can do. And not just Product Care, Food Care. Food Care is also extending the shelf life, but we're working with the same customers, how do we extend it from shelf life to truck life, the plane life, and we even had some interesting talks about drone life. So we think the opportunity there is for us, but we're going to have to manage that. It won't be our existing portfolio. We've got to look at our portfolio that matches this new high-growth market. So it's an exciting opportunity for us.

[Lori C. Chaitman, Sealed Air Corp.]

Thank you. Operator, next question please.

[Operator]

Our next question comes from Scott Gaffner with Barclays. You may begin.

[John Dunigan, Barclays Capital, Inc.]

Hi. Good morning. This is John Dunigan on for Scott. Unfortunately, Scott's on that other call. I just wanted to go back to price/mix for a second. Ted, I may have heard you wrong, but if you had said that the latest price increase in Product Care was in April, I think you might have said late April

(37:51).

[Edward L. Doheny II, Sealed Air Corp.]

No. Yeah, it was April 1. I apologize...

[John Dunigan, Barclays Capital, Inc.]

Okay. No problem. But just I guess overall, how are the conversations going with clients? Are you seeing them push back more because some of the resin prices are declining at this point? And then maybe you can give us some color on how you're thinking. If they do decline or continue declining throughout the rest of the year, how much Sealed Air can actually hold on to by the end of the year to be able to hit some of the targets that you've talked about?

[Edward L. Doheny II, Sealed Air Corp.]

Okay. Well, you've got a bunch of questions in there. I'll go through the first one and if I miss a couple of the other questions, you'll have to remind me. The first one was how are our customers reacting to price increases. Well, you could probably answer that yourself. Not well. But it's an excuse for us to be at the table at all levels and figure out how do we handle this. And it's forcing us into the solutions conversation, can we save you money in other places, but it's a question that the price increase will come.

It's interesting on the price/cost spread, though, on the timing of the price increase, just to give a little bit of color that was April 1. So we had pretty strong growth in Product Care in the first quarter. So one of the buying behaviors you get because we announced early, so we're anticipating some of our bump in Product Care in the first quarter was to pull product forward before the price increase. So that's I think a little bit of color to the first question.

The second part, where do we think it's going forward? Well, our team internally, there is no question on that decision. We have to find a way to manage our portfolio and get price in the marketplace. But really, as we're shifting that is how do we get value. So the same conversation is we have to look at our portfolio.

One of the most – this is another interesting anecdote, but meeting with customers in the e-Commerce market, we have shifted our mailers. We do a ton of mailers in e-Commerce. I think it's roughly around 1.2 billion mailers. So, we're looking now to do more than mailers and we have some pretty exciting new products. Well, before we even introduce the products, if we're dealing with the purchasing team, we had an interesting story that we introduced a brand-new product that I talked to you before about, TVs. Well, the first comment back from the customers purchasing that our price was too high, and they hadn't even seen the product. No one else has it.

So, again, to the story, pricing is very difficult. The only way we can get pricing through the market is if we find ways to help save them money. The TV saving opportunities that over 52% of those flat screens now are going through the Internet, their number one issue is damage. We have a unique solution that dramatically reduces damage, is sustainable, doesn't have Styrofoam in it, significantly lower weight, doesn't have to be repackaged, and that's what we got to focus on. What comes through is a better price/cost mix in the portfolio.

[Lori C. Chaitman, Sealed Air Corp.]

Okay. Great. Operator, next question please.

[Operator]

Our next question comes from Brian Maguire with Goldman Sachs. You may begin.

[Brian Maguire, Goldman Sachs & Co. LLC]

Hi. This is actually Brian Maguire on for Brian Maguire. Ted, a question on your comments about Diversey stranded cost, maybe going beyond just the Diversey stranded costs with your restructuring. There's a couple of elements to the question, but Sealed Air has been restructuring for a number of years. One of the critiques we often get is that there's always restructuring going on, there's always some cash being consumed by the restructuring activities. So I guess some elements of my question, should we expect that cash need for restructuring to continue into 2019 and to be at a similar level to where you're at 2018 or maybe even higher? And maybe you can go into detail a little bit on where you're finding opportunities for restructuring after a number of years of it happening.

And then sort of related to that. Just trying to understand the decision to fold the corporate expense into the segments, just wondering if that's related to it, and if your goal there is to try and drive greater accountability to the segment leaders for those expense buckets. But, yeah, if you could just kind of comment in general around your restructuring comments?

[Edward L. Doheny II, Sealed Air Corp.]

Yeah. No. Great questions, lots in there, but let's try. We'll give you a three part answer. I'll open it up on the why, I'll turn it over to Bill so he can give you some historical precedence because I can't answer the history, Bill can, and then I want to close to where you left it, how we're doing at the strategy of what we're trying to accomplish here.

So, the first piece on the restructuring in moving it, acting as one company, we did this to drive the productivity. Diversey was real. There was commitment out there. That's what I inherited. We're going to make the commitment. There was a dilution effect going and selling of Diversey. We had to cover $0.70. And to do that, we're going to buy back the shares or find an accretive acquisition. So, our job is to create value for shareholders.

But then, the other piece was take out the corporate cost when you're three divisions in one corporate and now you don't have that division. So, we said, let's take a look at the strategy of acting as one company and let's not take out the stranded cost because you have to. How do we be more efficient acting as one company? And looking at some of the costs that were in there, the corporate is not going to drive the engine. The divisions are driving the engine. Corporate is there for guidance and, obviously, they don't want to pay corporate expenses. So, corporate is going to have to justify the value. So, it's a strategic piece in there.

But I got to give Bill credit before I turn it over to Bill. Bill led this effort with the team and did a really nice job of getting this done with the team, and I'll let him explain the details on where the actual money is going and how we're doing that.

[William G. Stiehl, Sealed Air Corp.]

So, first of all, on the cash restructuring spend itself, our free cash flow guidance of the $400 million includes cash restructuring payments for all of 2018 of $20 million, and that's deducted to arrive at the free cash flow. Not included in that calculation is an additional $30 million of that are going to be spent to address the stranded costs.

So basically $50 million this year and basically to answer your question, maybe another $20 million to $25 million in 2019 to address those restructuring and stranded cost needs. But relative to the stranded cost themselves, as we said, we have $10 million of restructuring savings in first quarter 2018. We're anticipating $30 million for the full year.

Ted and the leadership team are coming together and we all own the issue of organizational productivity and the resulting reduction of stranded costs. We understand that driving those costs out earlier than what was originally planned and earlier than what we had said in the third quarter of 2017's earnings release is very, very positive and will have a positive impact on our profit growth ratio.

And we also, to your question about disbanding the larger corporate segment and rolling those costs into our Food Care division and our Product Care division, what we said was $60 million of cost in full year 2018 would go to Food Care, $30 million to Product Care. That is having a total leadership team ownership of the stranded cost reductions and it contributes to a one Sealed Air focus that Ted continues to drive.

[Edward L. Doheny II, Sealed Air Corp.]

Right. And let's talk about the strategy, your comment. Are we going to be a serial restructuring company? No. What we're going to do is we're going to be driving organizational productivity. So we're actually giving definition on that. We're going to do more for less by investing in working smarter. And so we're going to put that speed into the organization to drive those returns.

Second is we are focused on the long term, and that's what at corporate and that's where we made the change in moving innovation. We are here for the long run. So, we are going to invest in things that don't have a three-year return. We are going to invest things that could fundamentally change the structure of the company. So, that's a corporate expense, corporate function, the divisions need to pay for that. We have some pretty exciting things.

And if you come to our innovation center here, in my six months, we have some exciting technology that we're working on that can change the game. We're not a private equity firm. A private equity firm has got a three-year window. We're different. We can invest in that, and we want to be productive because we want to beat the private equity in the short term, and we want to beat them in the long term. We think if we do those two things, we can beat the private equity because we're competing with them. And long term, we can add significant value for our shareholders, but we've got to incubate that. So, that's part of the strategy that's behind this change.

[Lori C. Chaitman, Sealed Air Corp.]

Operator?

[Operator]

Our next question comes from Anojja Shah with BMO Capital Markets. You may begin.

[Anojja Shah, BMO Capital Markets (United States)]

Hi, good morning. I just wanted to see if we could get an update on your CFO search, and maybe just a couple of comments on how you're thinking about that right now?

[Edward L. Doheny II, Sealed Air Corp.]

That's a great question because he's listening. Actually, what we shared and what I've been sharing with people when asked, I gave myself that like to look at this for six months. We have a good guy, our lead candidate, I get to work with all the time, which is Bill. We have a outside search going on and looking at candidates in the marketplace. Since I've had two other companies and dealt with a lot of the banks, we've got a lot of candidates that we're looking at, both formally and informally. But it's probably toughest on Bill listening right now to ask the question. I owe it to the business, I owe it to our people, that make sure that we look for the best candidates out there. With Bill listening right now, and as I already gave a shout out on what he's doing to actually lead some of these changes, he's been a pleasure to work with in sending that message.

So I don't want him to listen to his early assessment, but so far, I think this is an exciting company to be a part of. We're pivoting this strategy. This is a pretty cool place to work, so we have a lot of interest. So now that I'm saying this publicly, I'll probably get more, but that's where we are; gave myself six months to go get it done.

[Lori C. Chaitman, Sealed Air Corp.]

Operator?

[Operator]

Thank you. Our next question comes from George Staphos with Bank of America. You may begin.

[Molly Baum, Bank of America Merrill Lynch]

Hi. Thanks for taking my follow up. Just two quick things, the first was a follow-up to my question about the cattle cycle. So in terms of looking at Latin America and Brazil, when do you expect the cattle cycle to turn over? And then my second unrelated question, could you provide a bit more color on what the $12.7 million legal settlement gain was in the non-operating items? Thank you.

[Edward L. Doheny II, Sealed Air Corp.]

Okay. I'll take the cattle and I'll turn the second question over to Bill. If we look at cattle in the U.S., as I shared, the U.S. has been somewhat muted. We think we have some opportunity. We had some weather-related issues, but the herd, I'm learning this, is there and ready, so it could be an opportunity in the second half. The one that's turned for us for two reasons: one, it's been down in Latin America, and we've had some share gain there, so we feel good that we could have some continued upside opportunity in Latin America. The other one, though, in Asia Pacific which is Australia and New Zealand is still on the down cycle, but we're anticipating a second half, but that could be as late as the end of the year. So, we do see that turning.

Bill, you want to answer the second?

[William G. Stiehl, Sealed Air Corp.]

Relative to the class action settlement, it relates to urethane purchases. This particular settlement arises from a 2004 class action lawsuit that relates to urethane purchases in 2000 through 2003, so quite some time ago. The defendant in this case lost the jury trial and agreed to settle. So, we have a share of the settlement income of $15 million, and we did record the $12.8 million in this quarter as a special item income and we'll record the rest when the rest of the cash is received.

[Lori C. Chaitman, Sealed Air Corp.]

Operator, that was our last question. Thank you, everybody, for joining our call today.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.