Sealed Air Corp

NYSE:SEE

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 Sealed Air Earnings Conference Call. At this time all participants lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. We ask that you please limit yourself to one question at that time. Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your host, Lori Chaitman, Vice President of Investor Relations.

[Lori Chaitman, VP of IR]

Thank you, and good morning, everyone. I hope you and your family are healthy and staying safe.

With me today are Ted Doheny, our CEO and Chris Stephens, our CFO. Before we begin our call today, I'd like to note, that we have provided a slide presentation to help guide our discussion. Please visit our website, where today's webcast and presentation 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 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 US GAAP. You will find important information on our use of these measures and their reconciliation to US GAAP in our earnings release. Included in the appendix of today's presentation, you will find US GAAP financial results that correspond to the non-US GAAP measures as we referenced throughout the presentation.

I will now turn the call over to Ted. Operator, please turn to the next slide. Ted?

[Ted Doheny, President and CEO]

Thank you, Lori, and thank all of you for joining our first quarter earnings call. We had a solid start to the year despite the ongoing pandemic and Winter Storm Uri impacting the global supply chain. Our team has been doing a great job leveraging our supply network to ensure business continuity. As you can see on Slide 3 our purpose, we are in the business to protect to solve critical packaging challenges, and to make our world better than we found it. Our purpose is clear and continues to guide us.

On today's call, I'll recap our first quarter 2021 performance. I'll share how we are managing through the current environment. How our global markets are evolving and the growth opportunities we see ahead. We're leading the way with automation, digital and sustainability. Chris will review our financial results and outlook in more detail. I will then will closing remarks before opening the call for Q&A.

Let's turn to Slide 4, for a review of our first quarter of 2021 results. Net sales increased 8% with strength in eCommerce, automated equipment, food retail and industrials. Adjusted EBITDA increased 6% volume growth and Reinvent SEE productivity improvements more than offset by material inflation and supply chain disruptions cost. EBITDA margins were 21.2% a modest decline compared to last year. Our operating leverage of 16% was impacted by the inflationary environment and timing of our price actions in formulas pass throughs. This near-term pressure is expected to continue through the second quarter.

Adjusted earnings per share was $0.78 up 7%. We generated free cash flow of $36 million which compares to the use of cash of $8 million in the first quarter last year. We raising our 2021 outlook across all key metrics to reflect our first quarter results, top line momentum and operating leverage improvement in the second half.

Looking beyond 2021 on Slide 5, we want to reiterate the objectives of our SEE operating model. Automation, digital and sustainability is expected to drive above market growth. Our organic sales target is 3% or 5% or approximately 200 basis points above our addressable market growth. We service stable market that historically has grown 1% to 3% a year with innovation and sustainability we expect to accelerate growth on our base business to 2% to 4% and add another 100 basis points of growth with automation.

Our operating leverage target is over 30% which translates into adjusted EBITDA growth of 5% to 7% per year. With our capital allocation strategy in place, we're targeting adjusted earnings per share growth of greater than 10% and free cash flow conversion greater than 50%. Let turn to Slide 6, our movie reel slide which pictorially shows some of our new solutions powered by our iconic brands. You can see a play button on the slide, which is to encourage you to visit our website. Where you will find exciting success stories.

Our automated and sustainable packaging solutions maximize food safety, protect goods, minimize waste and deliver savings to our customers through increased productivity. In the first quarter, we had strong growth across our protective end markets led by eCommerce retail and consumer goods, logistics, medical and life sciences and the recovery in industrials. We're leading a dramatic shift to a touchless, automated environment and fulfillment centers resulting in double-digit growth in our automated solutions portfolio further enabled by our APS acquisition.

In consumer goods and logistics, we're capitalizing on global eCommerce growth. In medical and life sciences, we're playing a key role in the global COVID-19 vaccine distribution and benefiting from growth in online shipments of medical equipment and pharmaceuticals. Our industrial markets including general manufacturing, electronics and transportation has gained momentum since year end particularly in Asia Pacific and Europe where we have a high exposure to electronics and automotive end markets.

In the Americas, we experienced favorable trends despite the winter storm supply disruptions. There continues to be an imbalance across the food industry with strong demand in the retail channel offset by softness in food service. We were encouraged by our performance given the end market environment and the tough year-over-year comparable particularly in North America. We saw strong growth in automated equipment and favorable trends in retail applications across all proteins including cheese and sea food. Going forward, we expect food service to recover at restaurants, sporting events, conferences and other large public venues reopen.

On a global basis, our meat packing customers are investing in automation in materials that improve productivity, enhance employee safety and address their sustainability goals. We're at the stable, staying connected online with our customers, demonstrating our new automated, Touchless and sustainable solutions. In Europe, we're gaining momentum with our industry leading Cryovac barrier bags optimized for recyclability. We're experiencing an increasing demand from quick service restaurants that are investing in new Cryovac Auto Pouch solutions for soups, sauces, condiments, wines and spirits. Our high performance sustainable materials are integrated with automated equipment and services disrupting the rigid container market.

Now turning to Slide 7 for an update on SEE Automation Touchless Solutions. Equipment, systems and services sales were up 18% in the quarter and accounted for 8% of our net sales. We're on track to achieve approximately $425 million or 12% growth in 2021, of which more than $250 million will come from equipment and systems. Our sales pipeline for automated equipment is strong and we're confident in our organic target of over $500 million by 2025. When you factor in a 3x plus solutions multiplier including growth in parts and service from the installed base and the flow through of materials this results in a $5 billion plus potential growth opportunity over the 10-year solutions lifecycle. We're working closely with our customers to prioritize projects that create less than a three-year payback. We're creating tremendous value for our customers and are excited to lead the way to more touchless digital environment.

Now let me turn to Slide 8 and share how we're leading through this pandemic. We're investing in our own eCommerce platform to drive our transformation to a digitally driven world class company. Our smart and intelligent packaging value proposition is enabled by a proprietary digital printing technology. This is enabling unique designs on high speed packaging systems in multiple colors, food grad ink and even invisible inks that with our unique SEE marks will enable blockchain tracking to billions of packages. Our vision is to digitally connect sustainable packages inside our facilities to our customers and to consumers homes through eCommerce.

I will now pass the call to Chris to review our results in more detail. Chris?

[Chris Stephens, SVP and CFO]

Thank you, Ted and good morning, everyone. Let's start on Slide 9 to review our quarterly net sales growth by segment and by region. In the first quarter net sales totaled $1.3 billion up 8% as reported, up 6% in constant dollars. Food was flat in constant dollars versus last year on a tough comp and Protective accelerated 14%. Our fastest growing region was Asia Pacific which delivered 12% constant dollar growth, EMEA increased 7% which is the highest organic growth rate for the region in the last four years and our largest region the Americas was up 4%.

On Slide 10, you see organic sales volume and pricing trends by segment and by region. In the first quarter, overall volume growth was up 5%. Volumes in Food were flat with favorable trends in Asia Pacific and EMEA offsetting a 2% decline in the Americas. Protective volumes were up 13% with double-digit volume growth in all region. As Ted indicated, on a global basis. Strength in eCommerce, automation and food retail and improving trends in industrials more than offset softness in food service. Q1 price was favorable 1% mainly due to US dollar-based index pricing in Latin America.

Most of the pricing actions corresponding to the current raw material and supply chain environment are taking hold in the second quarter and formulas pass throughs largely in Food North America are just beginning to turn. On Slide 11, we present our consolidated sales and adjusted EBITDA WAP [ph] for the first quarter. Having discussed sales results, let me comment on our adjusted EBITDA performance. We delivered adjusted EBITDA of $268 million up 6% compared to last year and margins of 21.2% down 40 basis points.

You can see on our EBITDA WAP [ph] that higher volume and operational benefits offset higher input costs. Adjusted EPS in Q1 was $0.78 compared to $0.73 in Q1, 2020. Our adjusted tax rate was 27.6% essentially in line with last year's adjusted rate in the same period. Our weighted average diluted shares outstanding in the quarter were $155 million.

Turning to Slide 12, here we provide an update on Reinvent SEE. In 2021, we remain on track to realize approximately $65 million of Reinvest SEE benefits with roughly 50% flow through from actions taken in 2020. Our commercial work stream is accelerating innovation and driving new customer wins in core and adjacent markets. As Ted noted, we're seeing strong growth in our equipment order pipeline in both Food and Protective.

Turning to segment results on Slide 13, starting with Food. In Q1, Food net sales of $702 million were flat on a constant dollar basis. Similar to the year-over-year trends we experienced in the fourth quarter Cryovac materials were down slightly due to low single-digit declines in barrier bags and pouches which combine represents nearly 50% of segment sales and have the highest exposure to food service. This was offset by modest growth in case ready and rollstock retail applications which represents just over 40% of this segment.

Equipment parts and service sales which accounts for approximately 7% of the segment were up approximately 10% in the quarter. Our customers around the world are investing in their processing plants to upgrade aged assets and drive productivity. We are also seeing equipment opportunities in Asia and Eastern Europe where emerging countries are focusing on domestic production of multiple types of proteins. Adjusted EBITDA in food of $157 million in Q1 was essentially flat compared to last year with margins at 22.3% down 30 basis points given higher input cost and timing of pricing.

On Slide 14, we highlight protective segment results. In constant dollars, net sales increased 14% to $565 million. Fulfillment which is largely driven by eCommerce growth was up approximately 20% on a global basis with similar growth trends across all regions. Industrial was up high single-digits driven by end market strength in general manufacturing, electronics and automotive. We leveraged our broad portfolio in global scale to meet increasing demand despite supply disruptions. I also want to highlight approximately 55% of our protective sales are derived from industrial end markets and the remaining 45% from fulfillment in eCommerce. Adjusted EBITDA of $110 million increased $17 million or $0.18 in Q1 with margins at 19.5% up 30 basis points.

Now let's turn to free cash flow on Slide 15. In the first three months of 2021, we generated $36 million of free cash flow compared to a use of cash of $8 million in the same period a year ago largely driven by higher adjusted EBITDA, lower restructuring payments and a $24 million tax refund, we received in the quarter associated with the retroactive application of the revised US [indiscernible] regulations.

On Slide 16, we outline our capital allocation strategy. We will maintain a strong balance sheet while driving attractive returns on invested capital and supporting our profitable growth initiatives. On this slide, I want to highlight our organic growth investments. We're focusing our CapEx on breakthrough processes, automation, digital and sustainability. With SEE ventures, we're investing in early stage disruptive technologies and business models that are expected to accelerate our strategy of innovation efforts across [indiscernible].

As it relates to returning capital to shareholders in Q1. We were an active buyer of our stock. We repurchased 4 million shares for $177 million reflecting confidence in our vision, strategy and execution. We have approximately $500 million for additional share buyback remaining under current board authorization. And you can see in the takeaway, we updated our financial policy of leverage ratio objective to be 3.5 times or below from previously communicated 3.5 to four times.

Let's turn to Slide 17 to review our updated 2021 outlook. We're raising our guidance across all key metrics reflecting strong Q1 performance and outlook for the remainder of the year. For net sales, we now estimate $5.25 billion to $5.35 billion or 7% to 9% as reported growth and 6% to 8% in constant dollars. This compares to our previous guidance of $5.1 billion to $5.2 billion or constant dollar growth of 2.5% to 4.5%. The higher sales guidance reflects increased volume growth in protective and additional price in both segments given the current supply chain environment.

In Food, we now expect constant dollars growth of 4% to 6% as compared to previous guidance of 2% to 4%. And in Protective, we now expect constant dollar growth of 8% to 10% which compares to previous guidance of 3% to 5%. On a reported basis, adjusted EBITDA is now expected to grow 7% to 9%. We anticipate adjusted EBITDA to be in the range of $1.12 billion to $1.15 billion, a $20 million increase at the midpoint from previously provided guidance. Higher sales from volume and price are expected to offset increased material and supply disruption costs.

In terms of currency, we now expect favorable FX translation on 2021 sales and adjusted EBITDA of approximately 1.5%. We are raising our 2021 outlook for adjusted EPS to $3.40 to $3.55 and we continue to expect approximately 45%, 55% first half, second half percentage split. Our outlook now assumes approximately 154 million average shares outstanding. A 3 million share reduction from our prior guidance reflecting our share repurchases in the first quarter. We continue to estimate an adjusted tax rate of 26% to 27%. And lastly, our revised free cash flow outlook of $520 million to $570 million reflects the higher range for adjusted EBITDA. There's no change to outlook for 2021 CapEx of approximately $210 million and Reinvent SEE restructuring associated payments of approximately $40 million.

As you can see on this slide, we wanted to provide a few variables as it relates to our 2021 guidance range. The low end of our range would suggest a slower recovery in food service and supply chain headwinds persisting longer than anticipated. The high end implies continued strength in equipment, eCommerce and food retail along with an acceleration of the industrial rebound and over performance of our SEE operating engine.

With that, let me now pass the call back to Ted for closing remarks. Ted?

[Ted Doheny, President and CEO]

Thanks Chris. Before we open up the call for questions. I want to emphasize how our ONE SEE operating engine is driving sustainable earnings power. We're capitalizing on growth opportunities in front us and investing in our future. Our broad and innovative portfolio, global scale and agility truly differentiates us in the markets we serve. Our focus on automation, digital and sustainability is accelerating our growth in our core business and enabling us to expand into new and adjacent markets.

We're making significant progress on our plastics pledge with nearly 50% of our solutions designed for recyclability. Our SEE operating excellence processes are driving productivity improvements, flawless quality and enhancing customer experiences. We're on a journey of transforming Sealed Air to a world class sustainable company automating global packaging. We're reinventing everything we do, from how we innovate, to solve our customers most critical packaging challenges. Our strategy is working. Our team is delivering and we're focused on creating sustainable, long-term value for our stakeholders and making our world better than we found it.

With that, I'll now open up the call for questions. Operator, we'd like to begin the Q&A session.

[Operator]

[Operator Instructions] our first question comes from the line of Josh Spector with UBS. Your line is now open.

[Josh Spector, UBS]

On your Protective organic results, they came in much stronger than we expected and my guess is stronger than you expected. So I guess, what surprised you positively in the quarter that you didn't expect a couple months ago? And looking at your full guide for Protective, you basically doubled your guidance. You can give us some context how much of that increase is better volumes versus higher pricing?

[Ted Doheny, President and CEO]

Hi Josh, I'll do part of it. Chris, do you want to go through the bridge, if we need to. As far as what surprised us, I actually have to say our European team - -what's going on eCommerce exceeded expectation. Extremely strong eCommerce it just continues to go, as we in the pandemic everybody is using eCommerce. And your packages are showing up at home and we continue to do quite well. Also we saw with our medical pick up with the vaccine, what we're doing on packaging, some really interesting solution, pick up that was stronger than anticipated.

On the industrial side, we saw the industrial pick up in Europe. We saw pick up in Asia it's still flat to slightly down in the US. So we didn't see the industrial so that might tie into the second part of your question on the second half of the year. And then the real issue in protective was automation really exciting, the penetration with APS and what that did. Our bookings are up significantly, with our equipment in APS which is in the Protective side, so quite strong.

And then for the second part of your question. We see that continuing for the second half of the year. We got some challenges there as you asked about pricing, we saw the pricing going up while we saw cost going up in the fourth quarter. We had price increased, we've already done three. So what happened in the first quarter with Uri and supply chain with our input cost going up definitely surprised us by kept going up. So we didn't get totally on top of all of the price on that. But we think we have opportunity to catch up in the second quarter though, still going to be tough on the resin side. But net-net quite pleased with how the protective is working and actually quite excited. We think we even have more opportunities in the second half especially with industrial coming back in the second half of the year. We think we see some strong growth continuing.

[Chris Stephens, SVP and CFO]

Maybe Josh to kind of elaborate on the full year comment. When we looked at the midpoint at what we communicated in February versus what we're communicating in May, taking up that midpoint at $150 million as you noted given the top line beat and Protective in Q1 and our confidence as Ted was commenting in terms of our full year that increase on the volume side is all driven on Protective. The other half of that increase of that $150 million reflects the pricing actions that has basically been already in place and some of that spot pricing in terms of what happened real time, a group portion of that come in through our formulas-based pricing which we're starting to see the beginning of that being the early part of the second quarter, in here in April going into May. So we're going to start seeing the benefits of that turn. However just specific to the second quarter. I wanted to think, that we wanted to highlight as we did last time was given the EPS range between first half and second half given that material dynamic and that said, we're still on track. Even though we've had a good beat feel very good about the first quarter in terms of our performance and we're raising our full year guidance that 45, 55 split between first half and second half is what we still anticipate.

[Ted Doheny, President and CEO]

Operator, next question.

[Operator]

Thank you. Our next question comes from the line of George Staphos with Bank of America. Your line is now open.

[George Staphos, Bank of America]

My question is going to be on general concept of flow through and leverage. So Ted, you have a talked a lot about all the things you're doing on the food side of the business and how the customer is excited about the automation solutions that you're bringing, yet we're not yet seeing the volume growth in that segment. When do you think we'll see the food volumes turned positively for Sealed Air over the course of 2021 and why haven't we've been seeing it so far? And then for both you and Chris, if we look at Slide 17 and we talk about the revenue guide increase which was $150 million. There's only about $120 million improvement in EBITDA which is a low relative incremental margin, why wouldn't we see an incremental pick up on $150 million that's more commensurate with the 30% plus that you typically target especially since you said the revenue growth was coming from protective where margins have been surprising on the upside and pricing which is pure margin. Thank you, guys.

[Ted Doheny, President and CEO]

Thanks George and we'll see, if we could unpack it. That was very clever. A bunch in there. But I'll try to unpack a piece and Chris you can work. First of all, let's talk about what we're seeing in Food and if you let me stay on Slide 17, where you asked. If we looked at the first quarter what's going on with food, we're still in this pandemic environment. Where the food service is down year-over-year. We're still in the stay-at-home environments with restaurants etc. being down and also the quick service. We're seeing a pick up there. But that's still down.

What that does to the portfolio onto the leverage, our largest product lines two of them and I'll explain most profitable are bags and pouches, that are effective. So actually in the quarter, the bags and pouches were actually slightly down. So it actually had a deleveraging effect. So to your question then on the second half of the business as we see this recovery coming back. We would expect that would leverage quite nicely into that 30% leverage as we look for that growth.

The top line question that you asked, where we increased our guidance. You're exactly right. We actually if you take the beat, that's a 13% leverage on the raise. So we got to get through the second quarter. We got input cost going up substantially that we're trying to manage on the price as you know on the food. We have that lag, going back with our formulas prices. So really Q2 is going to be see - can we get that catch up where you'll see that nice leverage coming through. But right now in the guidance, we don't have the leverage returning until the second half of the year on the food side.

[Chris Stephens, SVP and CFO]

Yes, and so maybe just only to add to that just for protective Q1 in terms of the growth, that contribution margin on the incremental volume. We're see a nice flow through 30% plus. It's really the dynamic of the material headwind that is impacting the overall PG ratio as we referred to in terms of the contribution of bottom line relative to the top line. And then as I mentioned before, in terms of the full year guidance of up $150 million on the midpoint of sales have been by volume half being on the price side, that price side is good because it's offsetting the material headwind. So we're hoping to get the price cost spread near zero by the end of year that's what our guidance reflects and so that's how we're looking the full year. The dynamic between us having our lowest quarter kind of in Q2 given the material headwinds and pricing starting to kick in, that's what kind of drives our 45%, 55% in terms of giving some color on first half second half.

[Ted Doheny, President and CEO]

Operator, next question?

[Operator]

Our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.

[Adam Samuelson, Goldman Sachs]

So I was hoping maybe two-part question. One, obviously a lot of channel and regional noise on a year-over-year basis as we go kind of March onwards given your end market and some of your key customers last year. So I was hoping just on a volume basis across food, protective and the major geographies. You could kind of help us think about volumes relative to 2019 levels as we think about how the company exists COVID. And the second part of the question is around the equipment side and just maybe talk about your sales pipeline and funnel just as you kind of working automation projects with customers and confidence levels on the $250 million of equipment sales this year which seemed to imply pretty meaningful acceleration in growth over the next three quarters.

[Ted Doheny, President and CEO]

Okay, how about - let me jump on my favorite subject of automation first and then Chris could help going through some of your volume questions, maybe add some color there. Good questions Adam. On the automation, it's definitely something we're quite excited about. So if you look at Slide 7, we're trying to lay out where we're taking automation as we're calling Touchless. So as you highlighted, we have $250 million there. We feel pretty confident that we're on track with that.

If you unpack the equipment, just in the equipment piece. In the first quarter that's almost up 30% on our equipment sales and just looking at APS which is the big driver of equipment. Our APS bookings are up 60%. So we're seeing a very healthy pipeline and we're seeing that through both food and protective. So we feel quite confident and to get to that 500 as you obviously see, we're expecting to double that business. So we think we're on track with that and the growth rate and we see that to continue through the second quarter and then the second half of the year.

I also want to highlight that's really connected to the automation is that large fleet. We actually have - it's an incredible number over 100,000 pieces of equipment out there in our fleet and as we're really changing the strategy to be an equipment company really focus on the automation. It's also taking care of that fleet. So that other part, is that parts and services out there and staying connected to that installed base. We think we have some more upside on that potential.

So automation and [indiscernible] final piece to your question. What does this mean to our customers? This is what the pandemic is really driving and this Touchless system that we're talking about. How do we make a meat packing plant safer? How do we take people out of harm's way? How do we bring a much higher level of automation and security to process? We had one of our largest meat packing customers with us in Simpsonville just last week. Where we're actually showing our automated systems and the largest meat packaging plant in the world, of how we're going to extend our Touchless system into their plant. So really excited about the opportunity we have in equipment to keep that going and growing and I'm very confident we're going to exceed the expectations of this chart.

[Chris Stephens, SVP and CFO]

Great and then Adam let me provide some color on your first part of your question, just talking about just the regional noise. I'll start off with food. Food as we mentioned on a constant dollar basis was flat. Americas was actually down 1% and EMEA we saw modest of growth 1% and Asia Pac at 5%. The big story for us for the quarter is on Protective. Double-digit growth across all regions in our protective segment for the total company being up 14%. So we see that continuing and again that gets back to our full year, that volume increase part of our $150 million of our midpoint increase, half being volume, half being price that volume is really driven by what's going on in protective.

[Ted Doheny, President and CEO]

Next question operator?

[Operator]

Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Your line is now open.

[Matt Krieger, Baird]

Good morning, everyone. This is actually Matt Krieger sitting in for Ghansham. How are you all doing today?

[Ted Doheny, President and CEO]

Good, how are you, Matt?

[Matt Krieger, Baird]

Great, thank you. So I guess I just wanted to dive a little bit on the cost basket. I was hoping that you could provide some added detail about what your assumptions are for your key raw material freight, labor and other cost inflation buckets for the remainder of the year including whether or not you're assuming any sort of reversal across any of these inflationary drivers during the second half? In addition to that, any kind of detail on quarterly cadence is helpful as well.

[Chris Stephens, SVP and CFO]

Sure Matt, pretty volatile environment just thinking of material inflation starting in the fourth quarter of last year really continuing through April. We're hopeful that we've seen little bit of steadiness in terms of how we're currently thinking about it. Our full year guidance assumes things start to level up. We ended the year anticipating raw materials being up roughly 5%. Our latest is now we're thinking it's going to be in the 10% category. Although what we all read about increases 20%, 30%, 40% even significantly a lot of what we buy especially resins which have not had as dramatic of an increase although we're seeing at air freight the other item, that we experienced in the quarter. We're doing everything we can to satisfy customer demand.

So air freight unfortunately has been driving not only getting product to us. But getting product to our customer mostly on the input side where we've incurred incremental roughly $3 million to $4 million of incremental cost to make sure we can satisfy the demand on whatever that's coming towards our way. But again, going back to the full year we're assuming it starts to level off. We reflected that in our updated guidance for the full year.

[Ted Doheny, President and CEO]

Operator, next question.

[Operator]

Our next question comes from the line of Jeff Zekauskas with JPMorgan. Your line is now open.

[Jeff Zekauskas, JPMorgan]

It is the price cost penalty in the second quarter going to be the same as in the first or worst or better? And in your equipment sales to the protective market, which regarding very, very quickly. Are you growing faster than market for equipment? And if you're, why are you growing faster? What is that, customers like about your machines versus other people's machines?

[Ted Doheny, President and CEO]

I'll let Chris do the better or worse and then I'll talk about what I think is why we're growing faster than the market.

[Chris Stephens, SVP and CFO]

Sure, so Jeff we do expect the challenges to be there in the second quarter kind of peaking in terms of the price increases that we've been again reading out and hearing about the impact on us typically lies about 30 to 45 days. So we're starting to feel. We have been actually feeling [indiscernible] which is coming into the second quarter. So we actually expect our price cost spread to be a little bit worse than the second quarter than the first. However, as we think about first half, second half we expect that to rebound as we have full-fledged pricing in place with formulas-based pricing as well as other price increases that we have announced and are starting to kick in. we expect that to turn in the second half of the year. And again that really just drives us, what we're trying to provide is just however how we're going into this year thinking as 45, 55 first half, second half split on EPS and just trying to provide investors kind of good view of how we're managing through it and I would suggest that, our ability to manage through Q1 to deliver these kind of results.

We know it's coming. It is coming and we've been planning for it in terms of what the impact is on Q2. Internally we're managing and measuring our ability from a price point of view, the stickiness of that price and the markets we serve as well as with the customer impact. So just staying very close to it. I can tell you, it's top of mind for us as a company across the entire company just talking about how to manage this dynamic. Doing the best we can to leverage [indiscernible] supply chain, global supply chain network and being able to satisfy demand as we move forward.

[Ted Doheny, President and CEO]

And I'll handle the second part of the growth. But Jeff, now you can't answer me, so I can speak to you about you answering, you did predict at your conference that these costs would peak able first. So I know that, that was your prediction or maybe your [indiscernible]. So we see going past a preferred on the cost side. But on the growth fund, on protective what we're excited about is just to highlight just a couple of things. What is our presence of where we are and how quickly we've been adapting the portfolio?

We're growing our paper products, in double-digit. We've introduced new paper products that are growing and doing quite well. Our equipment business where we highlighted. Equipment business is up, almost 30% just the equipment and then across the board food and protective. We're also seeing as we shifted. As I highlighted to the different markets and the movement with eCommerce. We're really being quite aggressive in getting the right product at the right price and then I also got to bring in sustainability.

We're definitely seeing the sustainable issue coming forward with, do you want paper, do you want plastics? Either one, how do we make that sustainable? So we're seeing some good opportunities. And the last one, that I think we even have more opportunity on the second half on the protective side with the return of the industrial market. We did not see that. It's strong in the US. We saw it stronger in Europe. So we think we still have some upside opportunity and that also ties in to keeping that leverage going because that's where leveraged. Both on the food getting the bags back and getting that instapak volume back will leverage quite nicely to get us back over that, our leverage targets at the back end of the year.

Operator next question?

[Operator]

Our next question comes from the line of Anojja Shah with BMO Capital Markets. Your line is now open.

[Anojja Shah, BMO Capital Markets]

I wanted to come back to this the automation and equipment and your strategic focus around that. Clearly, APS was a very successful acquisition. Are you open to more M&A here are there even attractive targets in this market? Or is it more of an internal growth type focus?

[Ted Doheny, President and CEO]

If you go to our capital allocation Slide on 16, so you can see just before we the acquisition of APS, we start communicating what we're thinking we're working. So we do have internal focus on organic on the equipment. We have a pretty strong portfolio of equipment that we're strengthening, working on. We're also looking at where we have gaps in our portfolio. So we do think we have some opportunities there. Where we're looking at very closely on how we can drive automation. So part of our capital allocation, we're looking at that area, so how do we keep that really strong growth going. That $500 million building equipment that's all internal. So we think there's additional opportunity to grow our equipment business above and beyond that $500 million target for 2025, which will require M&A.

Operator, next question.

[Operator]

Our next question comes from the line of Arun Viswanathan with RBC Capital. Your line is now open.

[Arun Viswanathan, RBC Capital]

I'm just curious about, if you think about resin cost inflation and pricing. I know that there's the formulas-based pricing in food. But when you think about protective, can you just discuss the environment there for pricing opportunities. Is it fairly competitive given a strength in volumes is it little bit more constructive as far as pricing goes?

[Ted Doheny, President and CEO]

Well first of all we've been putting pricing in protective since last year. So we do believe we're leader. So not cavalier on the pricing. We're working very carefully with the customers. We think this is a great opportunity actually - when we go and talk - just don't send an email. But working on the aggressive price increases we've already done three. So have we been out there as much has the resins have gone, as fast, no. we think we have an opportunity to get there to turn hopefully by the end of the second quarter? But as far as the opportunity. We're not looking lose share, actually gain share in this marketplace. So being the leader in the market and that's what we're challenging our team with, to go get the price and not to lose share by bringing our larger portfolio, bringing in automation, bringing in sustainability. But it's a very, very tough environment on the input cost right now. I don't know Chris, if you need to fill in.

[Chris Stephens, SVP and CFO]

No, it's good.

[Ted Doheny, President and CEO]

Operator, next question?

[Operator]

Our next question comes from the line of Phil Ng with Jefferies. Your line is now open.

[Unidentified Analyst]

This is John [indiscernible] on for Phil. I wanted to touch on the leverage that you took down to less than 3.5 times. Is that a factor of just a better operating leverage from your Reinvent till there initiatives that are clearly driving results or should we read into that the M&A pipeline might be not as robust [indiscernible] foreseeable future? And when do you think you can get below that 3.5 times target led, is that by the end of this year?

[Chris Stephens, SVP and CFO]

Let me take that one. Just [indiscernible] leverage ratio, ending year end last year 3.1. We ended this quarter at 3.2. Looking to 4, just getting to your point our ability to operate and execute in this environment, recognizing we're good cash generator and our cash flow generation being able to overtime reduce that debt. But at the same time, that lose sight of the investments we want to make which first of foremost is invest in ourselves in terms of where the organic growth opportunities are.

As you saw, we're an active buyers of our stock in the first quarter our average share prices roughly $44 per share, we felt that it was clearly a good opportunistic time to get back in the market ,given how we ended the year on the cash side of the equation. But definitely don't want to lose sight of the fact that we've got a pipeline of opportunities on the M&A front. Earlier comment was made in terms of the success of the APS acquisition which absolutely has been.

So the pipeline is that, we will continue to look at, just where we are for availability, the end markets, the environment we're in to deploy capital on M&A as we continue to grow. When we maybe above that leverage ratio potentially. But we want to work that back down to 3.5 or less over we call it reasonable period of time, call it 12 to 18 months and that's why we felt it was appropriate given the cash generation, all the benefits of Reinvent SEE and the progress being made over the past two or three years. We don't necessarily stay in this 3.5 to 4 times. We can stay below 3.5 and continue to have much - a lot of availability to reinvest in ourselves as well as look at opportunities for M&A.

[Ted Doheny, President and CEO]

The only thing to add, Chris. [Indiscernible] for John, is if you look at the cash generation. If you go to the Slide 5 of the mode because the second part of your question. This engine is delivering strong earnings power and we're putting that out there and show that. So just doing the math on that to 2024 that's closed to this engine generating $2 billion of cash. So we think we can be very prudent and but it's not a message at all, that we don't see a pretty strong robust pipeline to continue to fuel this business. So operator, next question.

[Operator]

Thank you. Our last question comes from the line of Anthony Pettinari with Citi. Your line is now open.

[Bryan Burgmeier, Citi]

This is Bryan Burgmeier sitting in for Anthony. Do you anticipate any impact on protective packaging from the chip shortage possibly impacting automotive or electronics demand in 2Q in second half?

[Ted Doheny, President and CEO]

It's good question. We're definitely seeing that impact of our customers especially in the automotive industry. We are seeing some pieces in the electronics. But actually electronics has been quite strong for us. So we're not seeing that. The chip shortage directly as much as others for the packaging.

Operator was that it on the questions. So with everyone. I want to thank everyone for your time. Really appreciate the interest in Sealed Air and we look forward to talking to all of you in the near future. Thank you very much operator.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.