Sealed Air Corp
NYSE:SEE
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Sealed Air Corp
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Thank you for standing by, and welcome to the Q3 2022 Sealed Air Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Mr. Brian Sullivan, Executive Director, Investor Relations and Assistant Treasurer. Sir, you may begin.
Thank you, and good morning, everyone. With me today are Ted Doheny, our CEO; Chris Stephens, our CFO; Sergio Pupkin, our Chief Growth and Strategy Officer; and Susan Yang, our Automation Finance Leader and Treasurer.
Before we begin our call, I would 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.
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 or on the SEC's website.
We discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. 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.
Before we start the call, I would like to highlight our press release on our exciting new acquisition of Liquibox, along with a separate press release for our Q3 earnings. For today's call, we'll include a summary of the Liquibox transaction and will have an extended call.
I will now turn the call over to Ted. Operator, please turn to Slide 3. Ted?
Thank you, Brian, and thank you for joining our third quarter 2022 earnings call. Starting on Slide 3. The graphic is showing where we are taking packaging with automation, digital and sustainable solutions. We start with our purpose. We are in business to protect, to solve critical packaging challenges and to make our world better than we find it. This enables our vision to become a world-class digitally driven company, automating sustainable packaging solutions. Our purpose and vision lay solid foundations to drive value creation for our people, customers and shareholders.
Moving to Slide 4. Today, we announced that we have entered into a definitive agreement to acquire Liquibox, a global leader in sustainable packaging for the fluids and liquids industry and the pioneer innovator of bag-in-box solutions. We're truly excited about this transaction. This highly strategic acquisition resonates deeply in the core of our transformation journey to provide market-driven solutions. Fluids and liquids have been the fastest-growing and most profitable area for CRYOVAC, growing more than 30% year-to-date.
We are going to combine Liquibox development, innovation and converting capabilities, fitments and dispensers' technology and strengthen it with CRYOVAC's broad portfolio of performance films, global operations and barrier bag technology to partner with customers and create savings through innovative world-class solutions. During our call today, Chris and I will discuss the details of the transaction. Afterwards, we'll discuss our Q3 results and our updated 2022 outlook and initial thoughts for 2023.
On Slide 5, we illustrate Liquibox business, its pioneering bag-in-box technology and broad solutions portfolio. Liquibox is a leader in the fast-growing fluids and liquid space, partnering with diverse customer base by providing a full range of integrated solutions and systems. Its track record of innovation and sustainability has supported strong revenue and earnings growth, while solidifying long-term loyal customers.
Liquibox brings us valuable new capabilities with its expertise in fitments and dispensers' portfolio that are highly complementary to SEE Automation and CRYOVAC fluids and liquids business.
On Slide 6, we outlined how this highly strategic acquisition fits into our vision of becoming a world-class digitally-driven company, automating sustainable packaging solutions. This combination brings together 2 leading innovators in sustainable packaging, disrupting rigid containers for the global fluids and liquids industry.
Liquibox's expected 2022 full year revenue is $362 million and adjusted EBITDA of $85 million, representing a margin of 23.5%. Secular trends in the fluids and liquid space like e-commerce and sustainability provide compelling new growth opportunities. Liquibox increases our exposure to attractive end markets like consumer packaging goods, wine and spirits, quick service restaurants and enables us to create a new platform when combined with CRYOVAC.
With the acquisition, SEE advances its commitment to sustainability and circularity, including key growth drivers with disruptive technologies like Liquibox's new innovation branded Liquipure. This is the first recycle-ready bag-in-box format. Liquibox's solutions and technologies are well aligned with SEE's net positive circular ecosystem strategy.
Moving to Slide 7. With complementary operations and technologies, CRYOVAC's food packaging enters a new competitive arena, while creating an economic value through strong cost and growth synergies. CRYOVAC and Liquibox combined solutions will comprise automated selling equipment, best-in-class bag-in-box and highly engineered fitments and dispensers. This will enable profitable growth into fast-growing categories, such as food service, fluids and consumer goods.
Liquibox's e-commerce-ready solutions will benefit from SEE's integrated approach to digital in the advancement of prismiq digital packaging and printing solutions. By expanding our fluids and liquids capabilities, we're broadening the scope of CRYOVAC solutions and making it more resilient to grow in a recessionary environment.
Quick service restaurant customers will benefit from reduced waste and productivity benefits through CRYOVAC and Liquibox's automation and high-performance barrier bag solutions. When adding Liquibox blue-chip customer base to CRYOVAC's global footprint, we will unlock geographic and cross-selling synergies to address a potential $7 billion in revenue opportunities.
Now Chris will walk through the attractive financial case.
Great. Thanks, Ted. Turning to Slide 8. We outlined the transaction details. The purchase price for Liquibox is $1.15 billion on a cash-free, debt-free basis, representing an estimated enterprise value over 2022 adjusted EBITDA multiple of 13.5x at a multiple of 10x after including only cost synergies. We plan to execute cost synergies of at least $30 million on an annual run rate basis to be fully realized within 3 years, driven by our CRYOVAC footprint, joint resin purchases and SEE operational excellence.
At closing, we anticipate pro forma net leverage to be about 3.5x and expect to utilize our strong cash flow generation to quickly delever post-closing within 12 to 18 months. Subject to the receipt of applicable regulatory approvals, reviews and other customary closing conditions, we expect closing to occur in the first quarter of 2023. We do not anticipate any changes to our corporate family ratings. While we acknowledge a challenging economic environment, we believe the opportunity presented to seize this transaction is unique and worth pursuing given the prospects of value creation outlined.
Moving to Slide 9. Similar to our automated packaging systems transaction where we've reduced our purchase multiple by 6x the adjusted EBITDA in 3 years, we plan to reduce the purchase multiple of the Liquibox acquisition by at least 5x over a similar period. The significant growth synergies are likely going to bring this multiple down even further over time. This transaction checks all internal financial hurdles that we use to evaluate any investment. We expect the transaction to be immediately accretive to SEE earnings per share on an operational basis, excluding impacts of purchase accounting.
The Liquibox acquisition brings a strong strategic business into the CRYOVAC portfolio. When combined with SEE, it creates significant top and bottom line synergies, helping raise SEE's valuation. We expect the acquisition to create a potential of over $1 billion in net incremental enterprise value by 2027. We are deploying our proprietary M&A playbook, developed and enhanced through several transactions in recent years, including the successful APS acquisition and integration. We are planning a seamless integration processing, welcoming the Liquibox team, while driving the SEE operating engine to create significant economic value for our shareholders. Ted?
Thanks, Chris. Now turning to Slide 10. Our SEE operating model highlights our sales, earnings and cash profile for what we have done and where we are going. The model shows our specific financial targets built on our internal principle, you get what you measure. Subject to receipt of regulatory approvals in the first quarter of 2023, Liquibox will be contributing 4% plus sales growth next year at a greater than 30% operating leverage. Chris will provide more color regarding 2023 later in the call.
Let's turn to Slide 11, which highlights how we are moving to be a market-driven company, fueled by our iconic brands. Our solutions create value for our customers, focusing on automation, digital and sustainability, which will deliver growth faster than the markets we serve. We would like to highlight a change this quarter that we're leading with digital.
Digital online sales are embedded in our 3 regions and will help streamline order processing, improving costs and creating growth by reaching new markets and customers. Our online sales now represent almost 5% for the quarter. Digital sales more than doubled versus Q2 and we're making this happen by bringing online some of our largest customers and distributors. Despite numerous headwinds, we continue to perform and serve our customers across our diversified portfolio.
We experienced very strong growth again in fluids and liquids this quarter. In fulfillment and industrial markets, we experienced reductions in wine as destocking efforts continued all along the value chain. Our diversified geographic footprint and portfolio allows us to adapt to changes in market conditions. At a global level, we have demonstrated our ability to grow through varying cycles.
In food, we expect our business to be resilient to market conditions. Our largest market, fresh red meat, which was up -- which makes up 22% of our sales, is expected to be stable. The softening of the cattle cycle in North America is expected to be balanced with the improvements of the cattle cycle in Australia and the continued drive of automation globally. As we enter the fourth quarter, normalization of supply chain shortages will represent an opportunity to regain share in our roll stock case-ready business and drive automation growth further.
Our strategy is to create growth regardless of the headwinds by innovating with new products and expanding into new end markets and geographies as demonstrated with Liquibox through strategic M&A. I would like to highlight that with Liquibox, the pro forma impact between the 2 segments of Food and Protective would move to 60% food, with fluids and liquids becoming roughly 10% of the portfolio.
Now let's turn to Slide 12 to discuss Q3 results. We delivered strong earnings in the quarter, exceeding our SEE operating model despite the impact of recessionary pressures on top line and a challenging global operating environment. Our SEE Operating Engine continues to perform. In the quarter, on a constant currency basis, net sales were up 5% and adjusted EBITDA was up 12%.
Adjusted earnings per share of $0.98 was up 14% compared to a year ago and up 19% on constant currency. Free cash flow through Q1 was a source of cash of $137 million. We continue to invest in our people and our business as we accelerate our journey to world class.
Now Chris will review our financial results in more detail. Chris?
Great. Let's start on Slide 13 to review our third quarter net sales of $1.4 billion by segment and by region. In constant dollars, net sales were up 5%, with 9% growth in Food, while Protective was down 2%. By region, all grew: EMEA, up 7%; APAC, up 5%; and Americas, up 4%.
On Slide 14, I'd like to highlight a strong improvement in profitability with Q3 adjusted EBITDA of $293 million, increased $22 million or 8% compared to last year, with margins of 20.9%, up 170 basis points. This performance was driven by positive net price realization, which we define as year-over-year price realization, less inflation on direct material, nonmaterial and labor costs, as well as productivity gains, which more than offset lower volumes and FX impacts in the quarter.
Productivity gains of $6 million in Q3, and we had -- that was total, and $6 million in the quarter, and we now expect approximately $30 million for the full year, down from previous expectations of approximately $45 million due to supply disruptions, labor challenges and lower volumes.
As it relates to adjusted net earnings in Q3, our adjusted tax rate was 25.6% compared to 24.9% in the same period last year. In the quarter, we were an active buyer of our stock with approximately 114,000 shares repurchased at a cost of approximately $30 million. Our weighted average diluted shares outstanding in Q3 '22 was 146.6 million, compared to 151.4 million in Q3 '21. At quarter end, we had $616 million remaining under our authorized share repurchase program.
Turning to segment results on Slide 15, starting with Food. In Q3, Food net sales of $830 million were up 9% on an organic basis, which consisted of 13% price realization to help offset inflationary pressures across all cost categories and volume declines of 4%. Volume declines of 5% in Americas, 2% in EMEA were partially offset by 3% volume growth in APAC, led by strong demand for our automated solutions and share gains in that region.
In Americas and EMEA, the volume decline was primarily attributable to customers seeking to dual source our case-ready roll stock products as a result of supply constraints we experienced in late 2021 and early 2022. We estimate this impact represents a sales decline of approximately 3% compared to prior year. So excluding this 3%, our Food business was slightly better than the low single-digit overall Food retail market decline.
Our team has worked tirelessly to navigate through the shortages, obtain additional supply and reformulate, where necessary, to meet customer needs. Thanks to the efforts of our teams, we are working through the sales cycle and now we've the product and inventory to get this business back.
Food automation sales, which include equipment, systems, parts and services, account for approximately 7% of segment sales and were up mid-single digits. Food adjusted EBITDA of $185 million in Q3 increased 14% in constant dollars compared to last year, with margins at 22.3%, up 110 basis points.
Protective net sales of $571 million were flat organically, with positive price realization being offset by 12% volume declines in the quarter. Market contractions and the negative economic outlook has and will continue to put pressure across fulfillment in industrial end markets.
As for Protective automation sales in the quarter, which account for approximately 9% of the segment sales, they were up mid-single digits, fueled by Auto Box placements. Despite end market weakness in the quarter, Protective adjusted EBITDA of $109 million increased 12% in constant dollars in Q3, with margins at 19.2%, up 230 basis points.
Now let's turn to free cash flow on Slide 16. September year-to-date free cash flow was $137 million, compared to $223 million in the same period a year ago. The $86 million decline was mainly driven by higher use of cash for inventory as compared to 2021, given raw material cost inflation and stock builds to mitigate potential future supply disruptions. We are expecting inventory levels to normalize over time as we win by gaining share and growing our business globally.
On Slide 17, we outline our purpose-driven capital allocation strategy, focused on maximizing value for our shareholders. We maintain a strong balance sheet, while driving attractive returns on invested capital and supporting portfolio growth initiatives. We have highlighted fluids and liquids on the slide in the past as an attractive opportunity. We are now actioning with the Liquibox transaction.
Let's turn to Slide 18 to review our updated 2022 outlook and our initial thoughts for 2023. We now expect our 2022 net sales to be $5.65 billion to $5.75 billion, down from $5.85 billion to $6.05 billion previously. At the midpoint, this assumes a 3% growth on a reported basis and an organic growth of 8%, driven by 13% growth from positive price realization, partially offset by 5% volume declines. Full year adjusted EBITDA is now expected to be $1.21 billion to $1.23 billion, down from $1.22 billion to $1.25 million, and assumes adjusted EBITDA margin of approximately 21%, in line with prior estimates despite the top line pressures.
Full year adjusted EPS of $4.10 at the midpoint assumes depreciation and amortization of approximately $245 million and adjusted effective tax rate of approximately 25.5%, net interest expense of approximately $165 million and 147 million shares outstanding. And lastly, we now expect full year free cash flow in the range of $460 million to $500 million, down from $510 million to $550 million. This represents a cash conversion range between 77% and 82%.
As we look ahead to 2023, with the anticipated addition of the Liquibox transaction, we expect to be in line with our SEE Operating Model despite headwinds we faced in several of the end markets we serve. So to summarize, we had a solid quarter from a profitability perspective, working through the challenges and opportunities in our control. This is a testament to the SEE team as we are focused on executing our growth strategy, driving productivity and generating world-class cash performance and executing our SEE Operating Model as we go.
With that, let me pass the call back to Ted for some closing remarks.
Thanks, Chris. And let's move to Slide 19. Before we open up the call to questions, I would like to highlight our 2021 Global Impact Report was published last week and can be found on sealedair.com. I'm very excited about the report because we've expanded the breadth and quality of our disclosures by referencing global standards and frameworks, and illustrated this with powerful examples of how our people are leading the way in sustainability.
These are exciting times for SEE. The Liquibox acquisition is highly complementary to the SEE Operating Model. Together, we're determined to drive value for our people, customers, shareholders and society. As is customary, we plan to provide our full 2023 financial outlook during our Q4 call in February next year.
With that, I'll open up the call for questions. Operator, we'd like to begin the Q&A session.
[Operator Instructions]. Our first question comes from George Staphos of Bank of America.
My question is going to be on the longer-term outlook and how Liquibox fits in, Ted and Chris, and thanks for taking my question. So Liquibox has been around for a number of years. Obviously, you have a box, you have a flexible bag within the box and you have fitments, which would -- from an outward look -- or look from outside, I should say, would tend to look like maybe not the most sustainable package.
Tell me how you see this fitting into the sustainability story. Tell me about Liquipure and how that's leveraging the growth. And then relatedly, as we look at the automation chart that you have later in your deck, it looks like you've taken those expectations down this year. What's going on there? How does that affect the longer-term outlook on automation?
Thanks, George. And I'll try to see if we can go through those, break that up into 3 parts of the question. So the first part, let's talk about Liquibox and what it is and how that ties into your question about sustainability and how that fits in. So if you look at Slide 6. So if you look at the picture of what we have with CRYOVAC where we have, you're familiar with our FlexPrep and we lead in tomato paste, and we do condiments, et cetera, especially in the QR space, which is rapidly growing. So if you look at the Liquibox, what do they do? They put bag in a box, and one of their leading products is actually QSRs as well, with the bag, putting that in for syrups, et cetera.
So the sustainability side of a bag in a box is, first of all, the productivity of putting a flexible package versus a rigid container, much lighter, and actually the sustainability side versus on the CO2, significantly better actually on the CO2 footprint side. So if we look at the business side, if you look -- so you have a bag, you have a box and you have a fitting. So we do on the bags on the fluid side, we do roughly 1.5 billion bags. We do less than 10 million fitments.
We actually get the fluid, get the liquid out of the bag. Liquibox is inverted. They do hundreds of millions of bags, but they do over 1 billion fitness. Their secret sauce is those fitments on how you actually dispense the liquid from the box. And in the industrial application, they actually have quick disconnects to that. So the Liquipure product on the sustainability, which was the second part of your question, is replacing -- in this business right now, there's a lot of metallized containers on the bag.
So they actually, for the barrier protection, use metal, which is not something that's good for the recyclability. So that the Liquipure product has no metal, but that's very similar to what we do with CRYOVAC, so we also have a highly recycled content bag, so trying to connect the dots there. So I'll link the equipment question together here, which is really what's exciting about this for both businesses.
As we mentioned, the Fluids business is growing. It's our fastest-growing business in our portfolio is that how we do that is we have the equipment that actually fills those pouches. And then we do millions of pouches for that, so we form, fill and seal. Liquibox has the same equipment, their real technology is how do you attach that fitment, so they do have filling equipment. Their filling equipment is less than 3% of their portfolio. Our filling equipment is around 5% to 8%. So we see that as a significant growth potential for us.
So flipping it, I hope that was clear enough, if we go to Slide 30, if you look at the equipment, which we put in the appendix this time because we had so much information, our enthusiasm for automation is still there just in the quarter right now, and we still think this is our highest growth. And by the way, this is the major pull we're getting from our customers due to labor shortages, et cetera. So in the quarter, you did highlight we've had still supply disruptions out there, and it's really on the electronics piece. The backlog is still strong, we had -- we were hoping to break $0.5 billion this year. Right now, we're forecasting, it looks like it's at 4.75%.
So to your long-term question, actually our enthusiasm in the automation is even higher, especially with the fresh red meat, our largest market, the automation is the fastest-growing piece of that business. And actually to put a quote, this is a direct quote at the bottom from one of our largest customers, actually converted customer, coming back to CRYOVAC. And the quote is pretty powerful, "We're moving the business to you because of where you're taking the business and what this will mean for us." Automation is the key for packaging right now. And so very excited about the potentials and the investments that we're making in our automation to drive growth further. And it does big, big play on the liquid space as well. Okay? Next question.
Our next question comes from Ghansham Panjabi of RW Baird.
Congrats on the transaction. I guess, first off, on the 23% plus or so EBITDA margins for Liquibox based on the numbers you shared with us, how has that progressed over time, especially during periods of incremental economic weakness? I know it's a relatively small asset. And then just given that it increases the proportionate EBITDA percentage for Food to over 60%, is the acquisition part of an initiative to sort of lower portfolio cyclicality? Or is it just more opportunistic just like APS was?
If we can go to Slide 9, and Slide 9 is -- this is really why we're so excited about Liquibox, and where it fits in and it ties to your question. So if you look at where this fits into our model, we're acquiring a business that's -- right now into our portfolio that last year was 3%. This year, it's at 5%. It's been growing, very profitable, much more profitable than the portfolio and actually the most profitable piece of our CRYOVAC. So with that said, we're putting a 23% operating profit business of $362 million into that pro forma, and that's what you see. And now that's making that 10% of SEE.
So the second part of your question was the growth profile, where it is and where was it. So the growth last year was north of double digit. The profile has been in that greater than roughly 7% historically. And then the third part of your question was the markets that it serves, it's large -- one of the large markets is the quick service restaurants. So we're seeing the bag in the box is a real productivity, environmental play, so we see it serving markets that are very sensitive to a recessionary environment, just like we saw our liquid business during COVID. When the QSR shut down, we felt that.
But when COVID is coming back and now you see those long lines at many of these QSRs, we're there behind the scenes, and so is Liquibox on what they can do on the productivity on those beverages. So we think this is a really strong growth for us right now in the tough recessionary markets, but even higher growth going forward. And as you look as our -- what we're looking at the business all the way out to 2027, taking this segment to be over $1 billion into the portfolio. So quite excited about the target.
And I have to just mention again. So it's really, really important that this is an opportunistic right now. We recognize the markets are tough. We recognize financial markets are tough. But we looked at the payback and where this fit in right now having this available and compared it to APS. APS, we said that we would get that pay down, that reduction of 6, and we said we would get that leverage down in 3 years, and we actually did it in 1.5 years. Our plan is to beat those targets you see right there on Liquibox, and very excited about what this means for not only the short term, but the long-term growth of the SEE business, especially in our Food and CRYOVAC.
Our next question comes from the line of Lawrence De Maria of William Blair.
Congratulations to everybody. So first, you made some comments around 2023 in the SEE Operating Model, which obviously implies 10% EPS growth. It may seem a bit stretched going into recession and a softer exit run rate aside from the easier comps from this year. So what gives you confidence to hit those kinds of numbers, 10% EPS, the incrementals, et cetera? What are you doing to give people on the call the confidence?
And secondly, obviously, this puts you at #1 or #2 in the bag-in-box technology, a big asset already earlier this year, which you didn't execute on. Why does this fit better? Or what does this give you that maybe surely get into? Or what does this, in other words, fit in with -- fill there better than the previous acquisition?
Thanks, Larry. And Chris, I'll jump in and help me if I forget to go over your second question. So if you go to Slide 18, and we tried to lay this out, Larry, which I appreciate you asking, referencing to the model. As I mentioned before, we introduced the operating model, it's really important to show what we did and show where we're going. And as I mentioned in my prepared remarks, you get what you measure. So the operating model states what we plan to do and compare it to what we did on sales and earnings and how we turn that into cash.
So if we look at 2023, to answer your question, in the model, we say that we want to beat the markets we serve. So our model says that, hey, we're in a very stable environment, the markets, the GDP of 1% to 3% is what we should be beating. Well, going into next year, as you highlighted, there's a lot of challenge on what the GDP, what the global markets are going to be. So in our model, we actually said that actually next year, it could go down minus 2% to 1%. So we put that in our model.
We already have -- we know we have the 4% acquisition with Liquibox in place. So we see that will be a positive to go against that. We also do believe that with our innovations coming, with some of the sustainability solutions, we think we can get that 1% to 2% growth into next year. We also think we can get share gain. As Chris highlighted in his remarks, part of -- especially the Food business, with these shortages, especially on that specialty resin, that causes business, as Chris highlighted, 3%. We now have that material. We have it in place and we're going to go get -- we're going to go get that business back.
Also just highlighting the Food segment, we think is resilient through these recycles. So flat, how do we create growth? Even beyond what we just talked about in the acquisition, we think we could create growth, especially with our automation play. And then how do we drive all that to earnings? We've done for 5 years now, well, for almost 5, our operating engine drives a greater than 30% leverage. We've proven that. We can get our price realization. We've proven that. We can get more.
The negative, just to highlight again, industrial and fulfillment market pressures, we'll see them in the third quarter. We'll see it in the fourth quarter, and we think, for sure, we'll see it in the first half of 2023. But when that turns, will be a more efficient company with better products to serve in. So with that said, we think the model -- we can drive the model and what we did in the past, we think for '23, we can make that happen. Did I get the second part of this question?
Yes, pretty much. I would just add maybe to Ted's comments, just to kind of talk about the value creation. Within this portfolio, we identified the cost synergies kind of within our control, very specific to what we've been able to do, building off the APS success, as we mentioned in our prepared remarks, as well as in the Q&A. But the opportunity for us to just grow on a global scale given the CRYOVAC footprint and capability and the opportunities for the end market where as we see it move to bag-in-box is tremendous, and that's where we're really excited. So on Slide 9, we lay out that financial profile.
Why don't you go back -- now I remember, he asked me how does this compare to other bag-in-box opportunities and without mentioning names. So if we look at this, what we're excited about this business versus other technologies, if you look at that fitment and, again, doing well over 1 billion fitments, there's -- just like CRYOVAC, the CRYOVAC secret sauce is how do you put these layered materials together to protect the product like no other. So that is the CRYOVAC secret sauce. The barrier protection that we have from fresh red meats to fluids or wherever we put it. Even now as we're penetrating the wine market, we can protect wine in a bag as well as a bottle.
Well, if you think about the bottle of wine, that's now going bag-in-the-box. That's where the markets are going. So if you pull a cork off a bottle of wine, the wine starts getting bad, how long do you have? So if you have a fitting and you have it, you turn the fitting and you get one glass at a time. Many restaurants waste significant amount of their wine because they throw those bottles away.
Also, with our CRYOVAC technology and also the Liquipure technology that we can protect as well as a bottle. How do you know if the wine is good? You smell the cork. That's not good enough in the markets that we serve. Our barrier protection protects that. And now with the fitting offer a really unique advantage to the market. So to compare to other players that are out there, barrier protection, CRYOVAC, the leader in the world. Fitments, Liquibox, the leader in that. Putting that solution model together, we're excited for what we can mean -- what this could mean for our customers and our business going forward.
Our next question comes from the line of Adam Samuelson of Goldman Sachs.
I guess, maybe digging into some of the just end market considerations in the short term. Ted, you talked about economic pressures certainly impacting the protective segment. Can you talk about maybe customer inventories as you see them and channel inventories as you see them? How much is potential destocking impacting your outlook in the -- impact in the third quarter and into the fourth quarter?
And then just a clarification question, because you talked about a view that your red meat business can be pretty stable moving forward despite the contraction in U.S. cattle. Can you maybe just frame exactly the U.S. red meat, beef part, how much of the total 22% that's red meat? How much is actually U.S. beef versus international beef versus pork? And I think it just helps dimensionalize kind of that part of the business relative to the observable declines we see in the cattle part?
If I can take that exact question first, So I don't forget that. So North America is roughly -- Susan is going to answer it for me.
Yes. Sorry, Ted, for jumping in. I can answer that. You see on the slide on the market sectors. We talked about 22% is fresh red meat of the total company. And fresh red meat is actually made up of both beef and also pork. The split is roughly 55 to 45. And the U.S. certainly is a fairly large part, we would say, about 2/3 of it. So if you really look at the U.S. cattle cycle impact, it's really impacting about a little less than 10% of the total company revenue there. So to think through, it's kind of cycle, just to say, it was 5% down on an overall total company, that will be less than 0.5% of the impact there.
And also, on the other side, with all the different proteins that we're projecting for next year is Australian sales cycles is behind [indiscernible] and also the OpEx side of it is going to have recovery, 2023, probably bird flu were experienced this year. In addition, in the protein market the case-ready solutions where the retail market is also improving solution there. So we'll be expecting all those offsetting the positive factors to alleviate the cattle cycle impact.
Good. Did you put a number on that booming, Susan? Well, Adam, I'm actually being exposed here live that you see one of my management principles that I'd like to surround myself with people smarter than me. So I'm actually very excited to have Susan with us on the call.
The other part that you had there, you talked about this destocking, which is real, and it's showing up more in the protective side of business. So your direct question was, are we seeing it in the third quarter, fourth quarter and then what it goes into? There's no question that destocking is out there as we've seen it with our inventory, and you could look at what our customers' inventories are, et cetera. So there is a destocking play.
How long will that take to work out? Don't know. We definitely think probably part of the fourth quarter, you're seeing that in implied guidance. But that too will change. I would like to highlight, though, as I keep mentioning, digital, digital, digital, as we're putting our customers and distributors online, we're getting just such better visibility. And so part of that inventory, we do not want distributors to have. We want to take care of that for them. We want our distributors and our sales teams to be totally servicing our customers. And so we think we have an opportunity to get better at that going into next year.
But the direct answer to the question, the destocking is into the fourth quarter, probably in the first half of the next year. But as Chris highlighted, we have the inventory, and we have the preferred products. And as I highlighted specifically on Food, so we're actually using that inventory right now to be very aggressive out there, and we want the business. We have the inventory and we have the marching orders to go get it.
Our next question comes from John Dunigan of Jefferies.
I just wanted to touch on the CapEx. It pulled down a little bit in the updated guide. Is that more driven by, maybe pointing back a little bit on the growth opportunities that you now have Liquibox coming into the operations? Or is it just getting pushed out to the right because of supply disruptions?
It's the second. We actually see many investments in which the CapEx obviously competes with the -- our capital allocation. We have some really significant productivity opportunities on CapEx. And it's just getting it done with the other supply constraints that are out there in that part of the business. But -- yes.
Sure. I'd just add that, that's all really is, is just thinking through timing. We were guiding roughly $250 million for the full year as we kind of close out the third quarter to taking a look at what we could execute on here in the fourth quarter, working with the equipment suppliers, if you will, on the CapEx needs, it's been reduced. It doesn't change our priority. We definitely are not starving our capital needs from a business point of view. We talk about traditionally being roughly 4% of sales, actually moving more towards 5% of sales as we move forward given the opportunities around our strategic direction around automation, digital and sustainability. So it was nothing more than timing. It doesn't reflect anything different than that.
Our next question comes from the line of Angel Castillo of Morgan Stanley.
So it's just a two-part. First, I guess, on Liquibox, I was wondering if you could give us a little bit more color on what the CapEx, D&A and interest expense that will come along with that deal. And then separately, there's a lot of opportunity for growth here, both from a regional and end market penetration that you indicated. Can you talk a little bit about the time line of achieving maybe some of these revenue synergies and how should we think about in terms of CapEx and cost? As a follow-up on the last question, what that might be in the coming years as you think about taking advantage of those opportunities and what investments you might need to make?
Actually, I'll let Sergio answer that. Sergio has led this process and he's going to exceed all those targets set out. Sergio, do you want to take that?
So in terms of CapEx in Liquibox has been quite stable with 3% of the revenues, and we built that into our model looking forward. And from our side, there are certain synergies that may require CapEx to execute the growth. And those are also factored into the model, you can say that all of those sort of fit within the SEE CapEx projection.
When it comes to realization of the growth synergies, we have a model in how do we integrate to execute as fast as possible. We have geographic opportunities and cross-selling opportunities. And the same that we've done with automated packaging system, we distribute those targets among our sales force and go after that. And we know that there is a very interesting base of customers where those can be realized seamlessly.
And the other part, which is the cost synergies, I think that I've mentioned before, we are planning within 3 years, and those are factored within the 3 years. In the case of APS, we executed 3 years and 18 months, and we see here a lot of opportunity to accelerate, but in principle, you should count that the $30 million can be executed in the .
Or less.
Or less.
Our next question comes from the line of Anthony Pettinari.
I was wondering if it's possible to talk about kind of the volumes that are implied in the 4Q guide in Food and Protective and maybe how that tied into kind of the trends you saw in October.
Sure. So let me take that one, Anthony. So on fourth quarter, as we just profile out the quarter-over-quarter performance, let me focus on the positive in terms of just that price realization, we expect to see the benefit in Q4, recognizing we started to go positive on net price realization fourth quarter last year. So that's going to start to diminish. But we do expect that favorability to continue into the first half of next year.
And then you get to the overall volume side of the equation, we still anticipate Protective is going to be under pressure, kind of that mid-teens, down mid-teens, if you will, in Q4. We're doing several things to see if we can work that and improve that number. But right now, we're conservatively kind of forecasting that.
And then Food, relatively stable, maybe up low-single digits as we work through the inventory challenges, we mentioned before there's the supply challenges and looking to win back that business in the case-ready roll stock. So that's the implied assumptions around that.
So for total SEE, we would still expect our volumes to be down mid-single digits. Get favorable net price realization. And that's what's reflected in our updated full year guidance. And then we wanted to provide, just like we committed to doing on the last quarter call, give some color to our investors as it relates to 2023. We've commented on Liquibox and then you get into what we anticipate to see in '23. So kind of we're able to cover that as well.
Our next question comes from Christopher Parkinson of Mizuho Group.
Just a quick corollary of where you're just seeing Protective. Could you just quickly parse out what you're seeing from the various geographies in Protective. It seems like Europe is still difficult broadly from a macro perspective. Asia is sluggish now, but perhaps could be a little bit better on a sequential basis. And then the U.S., we're getting mixed signals, but more negative as of late. So if you could just give your own opinions on what you're hearing from your customer base? That would be incredibly helpful.
Yes, sure. So specific to the Protective side, and I'll talk specifically around the fourth quarter and maybe just break it down by region. So APAC, clearly, is feeling the effects of just overall reductions in PC shipments. You're hearing the noise and the news just around the electronics side being significantly down coming out of Asia. We're feeling the effects of that without a doubt. I also want to comment, as it relates to China, on the Protective side, I just think that the zero COVID policy is also impacting our business.
When you get to EMEA, the e-commerce space is down 20%-plus, and we're feeling it. Americas, to your point, down, but not as bad as what we've seen or what we're hearing out of our businesses on the APAC and EMEA side. But overall, the Protective end markets, the industrial fulfillment is clearly under pressure. And that's what we see here in the fourth -- anticipate that in that in the fourth quarter.
Yes. The only other color to add to that is what we're driving against is what we're doing on automation. We think we have some opportunities, especially on the Protective side. We talk a lot about the food, but we think we have an opportunity. Also, what's interesting on Asia Pacific, where we did have a penetration and actually growth different, is we are seeing penetration as the world because of, as Chris highlighted, the China condition, we're seeing the markets outside of China growing and we're there locally with them, the Philippines, Vietnam, Thailand, these are small numbers and our second largest region, Australia, and we're seeing that -- those as bright spots as we drive through on the Protective side.
Our next question comes from the line of Adam Josephson of Key.
Just a two part question on Liquibox, Ted and Chris. So I think Ghansham asked what the historical margin profile has been compared to the implied 23.5% margin this year. And forgive me, I didn't catch your answer. So any help you could give me on what margins for this business have been historically? And just relatedly, can you just talk about the recent history of this business? What Olympus did with it? I know Liquibox was forced to divest assets in order to proceed with its acquisition of DS Smith's Plastics business in 2020. Any difficulties you anticipate with getting Justice Department approval, et cetera, would be helpful.
Good question. And Adam, I think it also, we got Sergio on the call here who's led this process. Just the high-level piece before Sergio will give you some of the details. What we liked was their historical growth and their historical profitability. We looked at what they did in a tough market where you can test the business and what they do with price and how they did that. So we looked at that very carefully. So we -- as the question that Larry asked earlier, we've been looking at this space for years now. So we know others in this space and how they performed and their profitability. Having a higher-than-average profitability was sending message to us as the quality of the business behind it.
Also having our friends at Olympus, a private equity running business, so we do have experience with family-owned business, private equity run business and, of course, public business. So we did look carefully at what Olympus did with the business, not as carefully as we are now that we have a deal. But we like that part of the business, how they performed, what their profitability was and how they executed in this market that, again, the market is what we were extremely attracted to. So I'll turn it over to Sergio to give you more details to your question.
Absolutely. So Liquibox has been on a steady profitability increase trajectory. We look back at -- starting at 2014, and we founded now in 23%. There are a number of drivers to that 23% is, like Ted said, what came with pricing, but also the efficiencies they drove into their converting process. I may highlight that in 2020, they acquired, Maverick which is the best technology for the bag-in-box converting and now it's proprietary. And also out of the DS Smith acquisition, once they clear all the different regulatory and started to put that, they were extremely good in the integration and extracting synergies of that.
They've been very effective at consolidating the manufacturing assets, and now they have a modernized locations where they are very, very productive. So really steady trajectory since 2014 as we look at double-digit growth in EBITDA line. And I would also highlight that their ability to innovate, like, for example, with Liquipure is driving margin because not only reducing that laminate metallic film drives a much better sustainable products in terms of recyclability.
It also improved its margin profile. So as you replace a very large part of the portfolio from the metallized laminate to the PET and [indiscernible] waste different films, you improve the margin profile looking forward. In terms of DS Smith, like I said, I think that the integration has been a very good job. And I'll also highlight that we are acquiring the flexible part of that acquisition comes with Liquibox. The other part of DS Smith is retained by Olympus.
And Sergio, maybe just a little bit more color because the question a couple of times on how significant the fitments are adding to this full solution, their technology is separating from others in the market with, as you mentioned, Maverick, I think the fitments is really important. We all talk about bags because we -- of our CRYOVAC world, the fitments is something that they really have some innovation on.
Yes, absolutely. So Liquibox has a very broad portfolio, and a lot of intellectual property around fitments and dispensing. So you combine the fitments with the top bags or the bags for like [indiscernible] or the ones for wine, that gives them a lot of scope to do many things in the bags from bags that we connect into the -- so many the [indiscernible] times at QSR from the ones that will be dispensing dairy, from the ones that we'll do in the wine, from the ones that, for example, turn the product into be ready to be shipping on container and compatible with e-commerce. Those kind of things are tailwinds as you go replacing and disrupting rigid containers and driving plastic savings versus a plastic bottle of 90%. I mean, the sustainability benefits and what you can do with all those dispensing technologies added to the bag is a very significant contribution.
We have a sustainability slide in the deck, and we'll probably -- I'm sure there'll be more follow-up questions. You'll see the sustainability of bag in the box is a significant conversion driver of the rigid containers. So we have a slide highlighting that, but I'm sure we can follow up later on with questions.
Our next question comes from the line of Jeffrey Zekauskas of JPMorgan.
Just a few small questions. Why is the free cash flow $50 million lower for this year and that your EBITDA changes are pretty small? What's your cost of debt with Liquibox? And have you fixed it or this will be floating rate that, that will depend on LIBOR? And lastly, can you talk about the geographic distribution of Liquibox's revenues? And what's their market share in fluids and liquids?
All right, Jeff. So let me -- so multiple questions in there. Let's go one at a time. So free cash flow, the main driver in terms of change of our outlook is on the working capital side. We mentioned before, the inventory levels that we have based on not only the raw material inflation that's reflected in our numbers, but also the prebuys to make sure we had the inventory in place, coupled that with some of the headwinds that we've experienced on the Protective side given the volumes.
So we're in a situation where we are looking to adjust our free cash flow down, not so much because of EBITDA, but because of the working capital performance in the business. As it relates to the transaction itself, I'll ask us Susan, obviously leading up on the treasury side, taking through the financing for this deal, thinking about the debt as well as the cash on hand that we use to fund.
Yes. Thanks, Chris. For the acquisition here, the purchase price is $1.15 billion. We have secured a $1 billion bridge loan to finance. The rest of it will be coming from cash on hand. So as of now, we're going to be working toward a takeout option with a combination of bank loans and high-yield bond there. So it's a mixture of both the floating and the fixed rate. At this point, our estimate is the average interest rate is around about 6.5%. So we will see -- we'll be working with our banking group there to execute the deal here.
Got it. And then last question, Jeff, you just talked about just the geographical sales footprint for Liquibox. Roughly 76% of their sales is what we would consider the Americas in terms of just on an equivalent, just kind of comparing them to how we regionally split our business, 13% on EMEA and 11% -- the remaining balance, 11%, in APAC. So very much a good -- a nice overlap as it relates to our overall global positioning. And again, it gets back into our global footprint with CRYOVAC is the opportunity for us to work those cost synergies on a quick basis, which is reflected in our financials, but the opportunity, the upside opportunity are those sales synergies, which we're reflecting as an opportunity, not reflected in the financials to justify this deal. But we're very much excited about both top line and bottom line improvements.
Our next question comes from the line of Joshua Spector of UBS.
Thanks for taking my questions, squeezing this in. I just wanted to follow up on the Food volume impact. So the 3% loss due to dual sourcing. Is that typical that you would win that back that quickly? That's not a longer-term decision by that customer in terms of how they source supply? And as you've talked about regaining share multiple times through the call, how do you do that and protect your profitability and assuming competitors also have more supply available as well?
Well, in the Food business, it was a special to barrier and the problem was the markets were actually rationing supply. So we didn't lose it because one product was better. We just didn't have the product. So that was the tough situation there. So as far as the second part of the question, can we get it back? We feel pretty confident in the Food business that we would be first choice. And so as far as the pricing of doing that, that also ties in very, very well with our automation right now. And again, the strategy to have the best product, which we believe we have, at the right price, where we got to have the product. But the price to make that right.
And then also the sustainability piece, part of the challenge that we had when we lost that product source, we are engineers redesigned, downgauged, redesigned materials. So they did that in an amazing amount of time because we were literally without product. So we think getting that share back is a matter of time. As I put the quote in the slide on the automation slide, we already have the customers coming back. The Food business, of course, is very sticky. It's hard to change. So you don't want to lose it. But losing it because we didn't have a product, that part we feel we can get that back, and we're going to be going after that aggressively now in the fourth quarter and into 2023.
Our next question comes from the line of Mike Roxland of Truist.
Appreciate you squeezing me in here. Just hoping to get a little bit more color around the e-commerce moderation and maybe any impact on your mailers, especially around Instapak, which is your most profitable piece in the Protective portfolio. I think, Ted, you mentioned some that you're going to continue to aggressively addressing the decline there. But I wonder if you could just provide some additional color as to what specific things you're doing to address the weakness in e-commerce especially with your forecast of volumes being down mid-teens in 4Q?
Okay. Well, let me just make sure that the mailers aren't the largest piece of Protective on e-commerce. See, if we look at our Protective business, actually, our Instapak is the largest, most profitable piece. That one was hit within the industrial right now. But as far as the e-commerce piece is, if you look at Slide 11, the mailers piece going plastic versus paper, that's the sustainability play there. So part of our mailer downturn and e-commerce was the market wanting to have a paper product.
What we have been in development is our paper bubble, we have introduced that. The reason to your question why we have confidence, we've already up to 1 million. We're looking to take that to 10 million in the next 12 months. and we want to recapture over 100 million mailers. So why is that important? That competes with the plastic bubble mailer that we have as well.
Right now, though, the paper is actually 30% more costly as you go sustainable. So we're bringing automation in again. How do we do that in an automated fashion to put it in the warehouses, et cetera? So we think we could get that business back, it does with e-commerce going down, so it's a double hit. We actually think when we get through this, hopefully, short term on the e-commerce side, we'll have a new product in place to gain some share.
Our next question comes from the line of Arun Viswanathan of RBC.
I wanted to go to Slide 18 and ask a couple of questions about the image you have for the SEE Operating Model. It looks like you have guidance this year, obviously, of $1.22 billion on EBITDA for the midpoint. And then it looks like you're highlighting a bar that's maybe around $1.5 billion for 2025. So just wanted to understand that trajectory. It looks like what would it imply is maybe some contribution from Liquibox, maybe 3 quarters next year, plus maybe $15 million of synergies, and then in 2024, you'd get the rest $15 million synergies and set maybe 7% to 9% EBITDA growth, which would put you at $1.4 billion. And then another 7% in '25 would get you to that $1.5 billion. Is that the right way to think about it? And if so, is it the right assumption that essentially most of the growth in '23 is from the acquisition?
Very well said, Arun. So --yes. Just to add on to that. I mean that's very much driving what we do. And again, this is over time, just thinking through the operating model with the levers we're going to pull on organic growth. Clearly, going into next year, the opportunity for us is to add Liquibox into the portfolio is helping us to get back into that sales range, as we mentioned that 5% to 7%. But EBITDA, the earnings profile over time, every year can be some variations of good to the bad of that. But over time, that average to be 7% to 9%. And you can see the elements of what we were driving on from an operating engine point of view in terms of executing to fit within our model. But Ted, maybe you want to add some color.
Yes. So you stated -- again, so behind the model, and I apologize on Slide 18, you have to look at the shrunk-down model. But we had it earlier in the presentation, you could see it. So again, just what's in the model, and that's what we're running the business to. As we say, again, the markets we are designed to, should be stable. We have a very diversified market of 1% to 3%.
In the short term, we've said that we think 2022 -- the end of 2022 and going to '23, we actually have markets under pressure. So that 1% to 3% could be negative 2% to plus 1%. So that's what we're having to work against. And exactly, as you said, the M&A coming in at 4%, our model says 2% to 4%. We didn't have any acquisitions of size over the last 2 years, we actually had divestitures.
So as you can see the model down below with of how we performed over the last 4 years and see projecting that going forward. But I do want to highlight as we continue to talk about the innovations coming through in automation and digital and the share gain, et cetera, are how we see that curve going as you highlighted all the way to 2025. So we're telling you where we're going. And again, I want to highlight, we believe you get what you measure, and that's what we're designing.
To Chris' comment where you mentioned on the earnings, we expect margin expansion. And so we're showing you how we're doing that, that operating leverage of greater than 30%. We spent a lot of time on the call talking about our fluids and liquids. That business is north of the average of 30%. That business has been leveraging closer to 40%. So when we put that operating engine, that's for the whole portfolio, but certain parts of the portfolio are actually moving at a higher rate.
The other part of the margin expansion is price realization. Through this tremendous inflationary period, that is what's been giving the lift and margin expansion for us. So going forward, the same issue. We want to make sure that we, again, have the best products at the right price, and we're going to make them sustainable. The only 2 other things to highlight is on the top side of where we're going on digital and what digital does for us on growth. And then also, as we get more efficient on our operating leverage and showing up and why we're going to have margin expansion. So your numbers were right, that follows the model. Okay? One more question, operator?
Our final question comes from the line of Gabe Hajde of Wells Fargo.
Just one quick one, I guess, on M&A with Liquibox. Does this take you out of the market for other transactions? Or do you feel like there's still more opportunity out there or assets coming to the market that you guys would be looking at?
Yes. If you go to your capital allocation, we'll show you what we've been looking at and what we're quite interested in. We are very serious about it. So our capital allocation, where the leverage ratios are, and Susan highlighted that, that we're 3.5x and we want to take that down very fast. The model is generating, as you heard on the last question, if you plug that into cash over the next 2 to 3 years, the model will be generating well over $2 billion of cash.
So where do we put that? Right now, short term, it's going to be paid down debt, getting that leverage ratio down. But as far as what else are we looking for, are we out of the market? We're looking -- we've looked at well over 100 different deals over the last 4 years. We've done 14, and some of those have been divestitures as well, of which APS being the largest until now we have Liquibox. So we are looking, but we want to be fiscally prudent, financially prudent and watching that very carefully.
So we think the cash generation of the business will have us in the market for those other things that we identified that we think would make the business significantly stronger going forward. So with that, I want to thank everyone for their time today on the call. We are excited about the opportunities of Liquibox. I hope you felt that in the call, and how we think it's going to accelerate our growth for the future. In February. Thank you.
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating, and have a great day. You may now disconnect.