Sealed Air Corp

NYSE:SEE

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Sealed Air Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference may being recorded.

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

[Lori Chaitman, Vice President of Investor Relations.]

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

I would like to remind you that statements made during this call, stating management's outlook or predictions for the future period 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 at the SEC's website at sec.gov.

We will also discuss financial measures that do not conform to U.S. GAAP. You may find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. Included in today’s presentation on slide three, you will find U.S. GAAP financial results that correspond to some of the non-U.S. GAAP measures we referenced through the presentation.

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

[Ted Doheny, President and CEO.]

Thanks, Lori. I want to thank all of you for your interest in Sealed Air and welcome to our 2017 fourth quarter and year-end conference call. I’ll begin the call with a few brief comments and then ask Bill to expand upon our press release and provide additional background on our financial results for the quarter and the year.

I’ll then provide you with our strategy and outlook for 2018 with a discussion around end market growth and how we plan to further leverage our innovations. I’ll also discuss actions we are taking to improve operational productivity across the globe.

After our prepared remarks, we’ll conduct a question and answer session. To recap 2017 results, let’s start with what went well. Our sales accelerated into yearend resulting in a 9% constant dollar growth in the fourth quarter and 5% for the full year. Throughout the year, we capitalized on strong end market trends within the protein and e-commerce sectors.

We reported adjusted EBITDA and EPS of $833 million and $1.81 per share respectively, slightly higher than guidance we provided on our last conference call. Free cash flow was above our expectations at $420 million due to working capital management. We executed on our share repurchase program returning 1.3 billion of capital since January 2017 through the use of open market and accelerated share repurchase programs.

We have more than $860 million currently remaining under our authorised share repurchase program. What we would like to improve is our operating leverage, meaning how our year-over-year sales growth translates in to earnings growth.

In 2017, our operating leverage or what we call our profit to growth ratio was only 10%. We expect this ratio to double in 2018 with planned cost reductions and higher sales of our market leading solutions offsetting the expected rise of our input costs.

Today, we are the premier specially packaging company in the world. I’m excited to see the potential that we have within Sealed Air and our ability to take our performance to the next level. I’ve been working closely with their leadership team to accelerate our strategy. We’ll focus on growth from new innovations, drive operational excellence, recognize and promote talent and target strategic M&A all of which will produce higher returns on invested capital and maximise free cash flow, taking us to world class performance.

Let me now pass the call to Bill to provide more detail on our fourth quarter and year-end results. Bill?

[William Stiehl, CFO]

Thank you Ted. Turning to slide five, let’s start with the review of our net sales by region. In the fourth quarter, we delivered $1.2 billion in net sales, an increase of 11% on our reported basis and 9% on a constant basis. All regions delivered constant dollar sales growth. Asia Pacific was our fastest growing region at 17% growth, which includes sale from our recent Fagerdala acquisition in the integrated fabrication solutions space.

Sales in North America were up 10% with Food Care delivering 10% and Product Care delivering 9%. Latin America was up 6% led by a strong rebound in the fresh meat markets coupled with new customer wins in Brazil.

Europe, Middle-East and Africa increased 5% with positive trends in France, the U.K. and Italy.

Slide six illustrates net sales by region for the full year. North America was our fastest growing region followed by Asia Pacific. We are pleased to report that sales improved in EMEA and Latin America in the second half of the year resulting in favourable sales trend in both regions.

Turning to slide seven, let me walk you through our fourth quarter net sales and adjusted EBITDA on a year-over-year basis. We delivered $1.2 billion in net sales. Volume contributed $55 million, price mix was $23 million favourable and we reported $24 million in incremental sales from our Fagerdala acquisition.

Currency translation was favourable $25 million. Adjusted EBITDA was $238 million or 19.4% of net sales. Volume growth contributed $21 million and mix and price/cost spread was $2 million favourable.

The fourth quarter represents the first time in 2017 that we reported a positive mix and price /cost spread. Restructuring savings were $4 million. Operating costs including acquisitions increased $10 million. Currency was a favourable $5 million.

Adjusted earnings per share was $0.58 on an average diluted shares outstanding of $176 million. Our adjusted tax rate was 34% in the fourth quarter.

On slide eight, we illustrate the same bridge for the full year. Our topline growth in 2017 was primarily driven by strong volume. Adjusted EBITDA performance was attributable to volume growth partially offset by higher raw material costs, stranded cost related to the divestiture of the Diversey business and salary and wage inflation.

Adjusted earnings per share were $1.81 on an average diluted shares outstanding of $189 million. We exited the year with 168 million shares outstanding. Our adjusted tax rate for the full year 2017 was 30% in line with our forecast.

Turning to slide nine, we highlight the impact of the U.S. tax reform. In the fourth quarter, we reported a $36 million tax expense to the revaluation of our net deferred tax assets from 35% to 21%.

The actual impact of the transition tax is still being evaluated and we will record this in the first quarter of 2018. For 2018, we estimate that our effective income tax rate will be approximately 29%. The benefit of the U.S. corporate rate reduction is largely offset for us by the base broadening provisions. Going forward, we will absolutely continue to evaluate opportunities to optimize our tax posture.

Let’s turn to our free cash flow for the full year on slide 10. 2017 free cash flow on a consolidated basis was a source of cash of $421 million. This compares to the guidance we provided on our last earnings call of approximately $400 million. The upside and consolidated free cash flow was driven by great working capital management.

CapEx was $184 million which includes $23 million related to other CapEx restructuring activities. In those payments, net of interest income were $186 million and cash tax payments were $152 million.

Let me now pass the call back to Ted for more details on our revisions as well as our outlook.

[Ted Doheny, President and CEO.]

Thank you, Bill. Turning to slide 11 which highlights volume and price mix trends by division and by region. On a global basis, volume trends were up 4% to 5% throughout the year. This compares to volume trends of 1% to 2% throughout 2016.

In the fourth quarter of 2017, we delivered favourable price mix which helped offset higher material cost. Our pricing actions in Product Care went into effect September 1 and in Food Care for a non-formula customers effective October 1.

As we move forward, we’ll continue to take price actions on a rising input cost. We recognize the success of our value capture pricing strategy is dependent on our ability to save our customers money and solve their most critical packaging challenges, through a highly differentiated products, services and solution we’ll do just that, save money and solve problems.

Let’s turn to slide 12 and review Food Care results. For the full year of 2017, Food Care delivered $2.8 billion in net sales or 4% constant dollar sales growth. Adjusted EBITDA was $608 million or 21.6% of net sales.

On the top line our business benefit from the continued adoption of our market leading portfolio and the growing protein market particularly in North America. However, the timing of formula pricing and rapidly increasing raw material cost put some pressure on our margins throughout the year.

As we look forward, I want to highlight the trends driving our profitable growth strategy in 2018. First, our case ready platform including both materials and systems accounted for nearly 20% of our Food Care sales in 2017, and delivered high single digit growth. We expect this level of growth to continue as we further penetrate global market and introduce new, sustainable solutions for the seafood in convenient segments.

Second, in high growth geographies, such as Brazil, Russia, China and Southeast Asia we are well-positioned to serve the increased demand for package protein, and drive the adaption of applications that extend shelf life and reduce shrink.

And third, we expect continued growth in North America, yet at a more moderated rate as compared to 2017. For the full year of 2018, we expect Food Care sales to increase 3% in constant dollars and adjusted EBITDA margins to be relatively in line with 2017.

Similar to last year, we expect Q1, 2018 to be a low point for EBITDA, primarily due to the timing of our contract pass-through and higher input cost.

Moving to slide 13 where we highlight results from our Product Care division. For the full year 2017, Product Care delivered $1.6 billion in net sales for a 8% constant dollar growth. Adjusted EBITDA was $332 million or 20.2% of sales.

We will continue to work our portfolio towards a higher mix of solutions and services that eliminate waste. These solutions include our growing portfolio of inflatables, our automated systems such as I-Pack, StealthWrap in our unique Korrvu platform.

Inflatables, Automated Systems in Korrvu increased in excess of 15% and accounted for approximately 20% of our total sales in 2017. Another highlight in 2017 is the positive trend we are seeing in Instapak business.

Our business-to-business customers are under increasing pressures to modify their packaging for the small parcel e-commerce fulfilment network, a trend called ship in own container or SIOC. This aligns well with our pallet-to-parcel strategy. Sales of Instapak were up in the mid single digits and we expect this to continue into 2018.

With the addition of Fagerdala in the fourth quarter, we are now a leading provider of packaging solution serving the electronics market. We keep finding additional synergies from these acquisitions where we can lever a broad leverage, a broad solutions portfolio and global reach.

For the full year 2018, we anticipate year-over-year constant dollar sales to increase approximately 7%. We are seeing profitable growth from our recent acquisition of Fagerdala and expect it to contribute $95 million in Product Care sales.

Even with the integration of cost associated with Fagerdala acquisition and resilient raw material environment, we expect Product Care margins to be close to 20% level in 2018.

Turning to our Total Company 2018 outlook on slide 14, net sales are expected to be in the range of $4.75 billion to $4.8 billion with constant dollar growth of approximately 4.5%. Adjusted EBITD is expected to be in a range of $890 million to $910 million, implying an EBITDA margin of 19%.

I would like to highlight that we are taking actions to realign our corporate function. In 2018, we expect corporate cost to be below $100 million compared to the $107 million in 2017. Adjusted earnings per share is expected to be in a range of $2.35 to $2.45. This forecast assumes no additional share repurchases in 2018.

We forecast free cash flow from continuing operations to be approximately $400 million, net of capital expenditures of $160 million. Our free cash flow forecast also includes a $45 million payment in lieu of certain royalty payments for patents to an outside engineering firm.

Just before year-end, we entered into an agreement to pay $50 million of which $5 million was paid in 2017 and the remaining was paid in late January. By taking design ownership in-house or expediting our organizational productivity initiatives.

Keep in mind that cash flow of $421 million we recorded in 2017 is on a consolidated basis. If you exclude the cash generated from Diversity in 2017, our free cash flow outlook in 2018 reflects a year-over-year.

To wrap up this call, I’d like to provide a brief discussion on our strategic directions which you can see at a high level on slide 15. First, we will focus on increasing sales from a highly differentiated, innovative, sustainable and profitable solutions that are in high demand in the market. We’ll target incremental, profitable growth opportunities in adjacent markets and expand our presence in high-growth geographies. In the end to reiterate what I said on our last earnings call, regarding M&A, we are looking for technology, equipment and automation opportunities that enhance our business and are accretive to earnings.

Second, we’ll optimize our cost structure by doing more with less and by investing in working smarter. This goes beyond our efforts to eliminate stranded costs related to the Diversey sale. We’re creating a one Sealed Air culture that will drive productivity gains and eliminate redundancy.

For instance, in January, we had expanded the responsibility of some of the most talented leaders to attack our biggest challenges. Karl Deily, in addition to his role as President of our Food Care business is now also leading our innovation’s team for all of Sealed Air.

We moved sustainability under innovation to accelerate our efforts as sustainability is critical to our customer’s success. Ken Chrisman, President of our Product Care division is now also leading commercial action to strengthen the partnership with our Global Sales team to simplify our processes, lower our cost structure and offer exceptional customer service globally.

And Mark Hammer, our CIO and Chief Digital Officer, is taking on additional responsibility to lead our customer service team. This is in addition to the exciting digital work that Mark is already leading with their team on our smartly connected products and enabling our automated solutions. With Mark leading customer service, we’ll invest in tools and technologies that better connects our team with our internal and external systems, so that we get the right product and the right place at the right time.

Third, we’ll maximize our operating leverage with the successful implementation of the Sealed Air operating excellence culture. We already had big systems in place, but we clearly had opportunities for improvement.

For instance, we are upgrading assets to the latest technologies investing in breakthrough production processes. We’ll continue our efforts on SKU rationalization simplify our supply chain and improve quality.

Our operational discipline will apply not only internally, but also externally with our customers, in future acquisition to quickly capture synergies. And lastly, we’ll continue to develop sustainable solutions that leave our world, environment and communities better than we found them.

We are always finding new ways to reduce our resource intensity and waste for ourselves and our customers. Addressing foodwaste, product damage in our environment are all priorities for us. By moving sustainability under innovation, it will be at the core of what we do and how we operate.

Accelerating our efforts and sustainability will not only make us more profitable, it’s the right thing to do. We are committed to creating value for our customer’s shareholders in the communities where we live and work. Before I open up the call for your questions, we ask that you please mark your calendars for Thursday, May 3 for our first quarter 2018 earnings call.

Sabrina, we would like to begin the Q&A session.

[Operator]

Thank you. [Operator Instructions] And our first question will come from the line of Ghansham Panjabi with Baird. Your line is now open.

[Ghansham Panjabi, Baird]

Hey guys good morning.

[Ted Doheny, President and CEO.]

Good morning.

[Ghansham Panjabi, Baird]

So first off you’ve seen a very nice acceleration in Food volumes during the back half of 2017 at up 5%, pricing is also starting to flow through in that segment, I know you have tougher comps, but were you expecting a particular region to see a moderation in volumes in 2018, I guess in front to reconcile a momentum you saw in the backhalf 2017 versus your 3% core sales guidance for that segment for 2018?

[Ted Doheny, President and CEO.]

This is Ted. Hi Ghansham, what we are looking at basically continuing the volume of the fourth quarter but if we break it up by region, continued strength of North America, but that will be tampered year-over-year as we highlight it. We do think some opportunity in Europe moving that up basically due to our equipment. Latin America was a pickup, we had some strong equipment sales but we do think the pickup year-over-year will probably be tampered from what we saw in the fourth quarter.

[Ghansham Panjabi, Baird]

Got it. And just as a follow up question, on your EBITDA waterfall slide for fiscal year 2017 and the 49 million in unfavorable price cost, Ted how should we sort of think about the recovery timeline associated with that? Thanks so much.

[Ted Doheny, President and CEO.]

So the EBITDA on the bridge?

[Ghansham Panjabi, Baird]

Hmm.

[Ted Doheny, President and CEO.]

Well first of all as you’ve highlighted the pricing issue that we were chasing all of 2017, we saw some catch up in the fourth quarter, but we are still behind on the catch-up up with a price cost mix. We think in the first quarter, we still have residents that we could be working against us. We don’t think we’ll probably get ahead of that until maybe the second year of the year, so it looks like continued discipline on the pricing should help us stay ahead of it. Bill if you want to ask anything more on this

[William Stiehl, CFO]

No I think we are very happy about the – for the fourth quarter of 2017 we saw a very positive price cost spread. I mean, we did not have that luxury in the earlier part of 2017 and we are very excited to have this go positive and we think this is a good momentum going forward into 2018, although as we indicated our adjusted EBITDA as a percentage of sale is flat in total Food Care from 2017 to 2018.

[Lori Chaitman, Vice President of Investor Relations.]

Operator, next question please. Thanks Ghansham

[Operator]

Thank you. And the next question will come from the line of Scott Gaffner with Barclay. Your line is now open.

[Scott Gaffner, Barclay]

Thanks. Good morning. Just a follow up on that real quick, on the increased raw material pricing. I know it’s early in your tenure with the company, but anything that you see so far around the ability for Sealed Air to maybe move more towards automatic pass through of resins on a go forward basis, are you comfortable with where the company stands today from a pricing perspective?

[Ted Doheny, President and CEO.]

Yes, good question as being a price zealot in my past and building off of the good work that Jerome has done. If you look at that, what I’ve been looking understanding how the formula pricing works with our Food Care business. And I think that it works out well, the danger with that is the shock that hit looking at what happened with Harvey is how quickly can recover. So don’t like the fact that we can’t catch up to that quickly, it does catch up over time to lead lag on that.

On the Product Care side though when we are connected to our customers, we should be able to respond more quickly and effectively on price. I think if we analyze last year on the pricing, I think we could have got ahead of that sooner, quicker and the team recognized and understand that. I think we’re on top of that pricing billing in to 2018.

I think the real issue that like to accelerate, I see it in the business and it’s exciting, and you hear us talk about value capture is what we are doing in the marketplace. It’s really saving our customers significant amount of money with some of these new solutions.

And then really how do we share that savings? So I think we have some opportunity on value capture going forward. I think the discipline in the business is there. Shocks hurt us, so we got to find a way to get ahead of that quicker, but I think on the pricing side, there’s some good things there. The opportunity as we drive more solutions and especially as we bring equipment, becoming a larger part of our portfolio as our customers drive to automation, I think we have some pricing or value capture opportunity going forward.

[Scott Gaffner, Barclay]

Okay and you mentioned -- the follow-up to that. You mentioned that you expected some drag from rising raw material prices in the first half of 2018. And Bill I think you mentioned 20% EBITDA margin in product care. Where should we – are we going to see that more -- the rising raw material, lingering raw material increase more in food care or more in product care as we move through 2018? Thanks.

[Ted Doheny, President and CEO.]

I’ll go first and let’s see if Bill wants to add some color to that. As we mentioned we see that the raw material going up and as we look it that’s going into the fourth quarter we saw more pressure for lots of different reasons, oil etcetera putting pressure on the raw material environment. So we think it’s still going to be a resilient environment that we’re going to have to manage through probably the whole first half of the year, so if we do see improvement it’ll be in the second half but not to the first half. Our guidance is based on the resin environment being flat. So slightly up for the full year and so if we see a benefit we don’t see it – we don’t see any in our guidance until a little bit potentially in the second half of the year.

[William Stiehl, CFO]

I think the original assumptions that a lot of folks have relative to 2018 would've been that we would've seen some quicker decreases in resin prices in 2018 because of Harvey and the other factors that Ted has indicated we haven’t enjoy that decrease and we’re actually planning on an increase in the resin cost as we go year-over-year moving forward. But it is something that we watch and we’re in constant communication with our supply chain team to assess the current impact of any changes in resin prices on our total P&L give our understanding of what percentage of our customer and food care versus product care are on formula pricing versus those that are not on formula prices.

[Lori Chaitman, Vice President of Investor Relations.]

Operator, next question please.

[Operator]

Thank you. And the next question will come from line of George Staphos with Bank of America. Your line is now open.

[George Staphos, Bank of America]

Hi, everyone. Good morning. Thanks for all of the detail and congratulation on the year and good luck going forward Bill and Ted. I guess the first question I had just piggybacking on the last couple of questions from Scott and Ghansham on food. So, on the one hand your price increases in food and non-contract came little bit later than product care and that might be one of the reasons that you had less price cost mix positive, it was a negative in the last quarter versus positive in product care. Question one, are you out with any additional non-formula price increase in food or for that matter in product care. And should we assume for the time being that price mix cost for food care is at least as negative if not worst for the first half, and then had a question on operational excellence.

[Ted Doheny, President and CEO.]

So, the answer is yes. We were out there with price increase, but as you know George we got the lead lag there seeing the effect of that. So, we’re out there with the price increase where the formulas will have to wait. Where we don’t have formulas, yes, we’re out there with the price.

[George Staphos, Bank of America]

And we should assume at least a similar negative if not worst in price cost mix for food for the first half as what you saw in the fourth quarter?

[Ted Doheny, President and CEO.]

I would say, slowly seeing that recover through the year and we just not anticipating the gain till the second half.

[George Staphos, Bank of America]

Okay. Thank you for that. And then the other question I had on operational excellence and some of the other initiatives that you’re going to be building in to Sealed Air, I mean, traditionally Sealed Air at least from our observations was a pretty asset like business to begin with, it tends to have a greater number of smaller facilities that was one of the things that made it such a good cash generator, but that kind of disparate business model might not lend itself to benchmarking and the sorts of things that are usually involved in operational excellence. So tell me where I’m wrong there if you can quantify what kind of uptake you see from this down the road and maybe one or two kind of for instances in terms of what some of the practice that you’ll bring in? Thank you very much.

[Ted Doheny, President and CEO.]

Well, let me unpack a little bit here, if I can correct one word, because the team and working closely, tremendous team. And so I don’t want to call it an initiative and the team is already working on the word, what we’re going to call it a culture, because there’s a lot of good things going on here and I think you understand it’s not the program of the month, how do we drive this culture, so good question is look at the business and is been impacting and traveling the world, looking at our facilities, talking to our customers. Now being on the inside, I see a lot of manufacturing that from the outside looking and I do realize.

So we have a lot of manufacturing opportunities to bring this network together. But its quite interestingly, we buy close to a 1 billion tons of this thing called resin and then we converted into this really, really special products that we sell literally in millions. In our customers, so you want to have a very concentrated huge extrusion lines to do that very effectively and efficiently, but we’re so market focus and so customer focused, they want to buy those specialized bags a 100 at a time.

So how do you do that mixed model being connected around the world, we can't be everywhere at once, so that’s the part of the operational excellence that I think we can do make some impact. So let me unpack that a little bit. Let’s talk about how we buy our resin. The supply chain team has done a really, really nice job of not being dependent on one. Now we haven’t gotten totally where we need to be but diversifying the supply base, so getting through having multiple suppliers that we can work with, so we can get the most effective cost and definitely the most cost compared to our competitors that we serve that market.

The next linking that to our facilities and our engine -- not engineering I apologize. I can’t use engineering now that I came from this company because I’m dealing with scientist. Connecting the scientist on this very, very specialized product, how can we alter our formulas, alter what the facilities are actually producing and converting can do it in with the different process. So, on the operational excellence side linking those too tighter I think we have some significant opportunities.

Then also on the supply chain side connecting how we buy it, how we convert it and then its how we sell it. So operational excellence on just a number of SKUs, there's a lot of working going on there, but can we really analyze, do we need all these different products and if we had the right product in front of our customer we’re able sell quickly and efficiently, maybe they would buy that versus asking for a specialized product for those 10 bags to put in their turkey.

So those are top-three highlights that I’ve seen, I'm sure you'll have or that we follow questions on the capital allocation what work we do with and with respect to operational excellence, but there’s another piece here that’s pretty exciting for me coming in as the new guy taking over Jerome. There was a huge divestiture of this thing called Diversey. So one of the fundamental things were changing is this one seal they look as we had three fairly large divisions and one corporate. So we’re kind of looking at it differently saying let's have one corporate serving two divisions and acting as one company. So there is – I think there is a lot of opportunity there with the resources focus on serving those two markets as one company.

[George Staphos, Bank of America]

Thank you, Ted.

[Lori Chaitman, Vice President of Investor Relations.]

Operator, next question please.

[Operator]

Thank you. And the next question comes from the line of Lars Kjellberg with Credit Suisse. Your line is open.

[Lars Kjellberg, Credit Suisse]

Thank you and good morning. I just wanted to come back to costs. Could you share where you are on addressing this stranded costs and also if you want to progress through a bit about your thoughts about equipment installations and how that can drive your growth going forward if that's going to be an incremental focus to drive that stronger growth and in particular that profit-to-growth doubling that just discussed in 2018?

[William Stiehl, CFO]

So, I’ll address the stranded cost piece and what we had said during last quarter’s earnings call is that we have $20 million of unallocated cost that we were going to address throughout 2018 and if those unallocated cost would be offset by a transition services revenue that we were getting beginning September 6th associated with the Diversey separation. And as we look at our fourth quarter results we saw just this occur that that transition services revenue was able to offset those cost.

And we also pick that momentum in terms of addressing our stranded cost. We’re going to continue to have that transition services agreement revenue for 12 to 18 months after the close of the Diversey Care transaction, but we’ve definitely picked up momentum in addressing stranded cost. You’ll see that relative to our performance in the corporate bucket in the fourth quarter of 2017 being at 107 million versus what we had originally estimated at a 115.

And we also up here to have a increased momentum in the reduction of those stranded cost going forward and we’re highly motivated to make the decisions necessary to get our stranded costs under control and to be a new Sealed Air terms of the corporate cost structure that Ted indicates.

[Ted Doheny, President and CEO.]

And if I can piggyback on that with the corporate costs and you mentioned PG ratios equipment. But to segue those two together, first of all on the corporate cost, we will returning that stranded cost into the phrase of driving organizational productivity. How do we do more with less by investing and working smarter? We will hit and exceed that stranded cost target. And your question in the equipment sales and PG ratio we’re using the PG ratios as a guide to the team. So as we get growth we’re looking to qualify growth, good growth for us is means that we’re call it profitable growth and drive that through our business not just straight growth.

So equipment sales less than 10% of our business in equipment sales, but so what do we do we solve problems. So if you look at both markets its quite interesting if you look at food care and product care. What they do is solve problems. Now food care maybe extending the way the shelf life of the product, but it was quite interesting I’ve gotten and now visit two customers that I was at the Food Show with Karl, just last week and I got the CR booth when we talk about automation. So I got to see chickens being loaded and setup and ready to go into our exclusive bag, but I saw automation on the front side but then there is a lot of people around actually then have to adjust it, getting it ready for the automation where we seal it and protect it and use some of our exclusive processes.

I was listening to customers, watch this process and I heard just incredible data going out. One of our largest customers shared – I couldn’t believe the number, but they have 42% absenteeism. So the more we can work on automation with our equipment help solve that problem significant opportunity, so when we’re looking at capturing the saving, we’re going to slowdown little bit and say, hey, we get a lot of things to sell you, we’re going to say what can we save you and that huge of waste automation is a big deal taking people out of harms way, but another part of way they just don’t have the people right now to talk the manufacturers all over the world, getting the talent to go do this and also taking them out of harms way is a big element of waste.

So how do we then bring that to profitable growth equipment now when we bring those solutions how do we share those saving and bring our exclusive solution to the customer. I think we can drive some significant margin opportunity going forward.

[Lori Chaitman, Vice President of Investor Relations.]

Operator next question please.

[Operator]

Thank you and the next question will come of the line of Anojja Shah with BMO Capital Markets. Your line is now open.

[Anojja Shah, BMO Capital Markets]

Hey, good morning. I wanted to go back to the two bridges of the segments. It’s a pretty significant headway in each segment from operating cost. Is that a reallocation of some of the unallocated cost back to the segment or some explanation of what's going on in there and what the outlook is for that line in 2018?

[William Stiehl, CFO]

Thank you very much for the question. And we’ve included our stranded cost and any sort of corporate cost not in our food care, in our product care resolve, but your question relates to the food care and product care operating expense item on the bridge and the strong driver of that negative item when you compare Q4 of 2016 compared to Q4 of 2017 is basically incentive compensation and other compensation related costs. Remember that we’re comparing what our compensation expense would be in the fourth quarter of 2017 with the same period at year ago.

The other point I would make is that Ted and I have certainly positioned ourselves well for our 2018 performance as we will look at expediting certain actions and those have already occurred in the fourth quarter of 2017.

[Anojja Shah, BMO Capital Markets]

Okay. Thank you for that. And thank you for all the detail on the operational excellence program, but is that going to require any capital spending, and if so how much?

[Ted Doheny, President and CEO.]

Well, how about we talk about yes in certain places, but part of our CapEx spending that we have we will need some operational excellence if we have a new process in place to improve our facility. There will definitely some CapEx associated with that. We’re guiding to $160 million of CapEx. We believe that’s enough to accomplish it. We can use about operational excellence, some of its process change and won’t be as capital intensive. Basically simple and this is internally and externally eliminate the waste, simplify the process and then automate.

But before we do the automation we got to do those first steps and there’s a lot of money be save there. So, but yes, we are looking at some interesting capital to solve some problems. Can we solve some of the tough problems like even on the resin with our large extrusion lines to be more effective and efficient, so we’re looking at that, can we even work with our innovation team and different resins that we actually producing for our products. Again as we’re driven to be more sustainable organization can we invest in capital that could change the resins that we use and drive to higher sustainable business for us and for our customer. So there’ll be capital we can deploy in that area as well.

[Lori Chaitman, Vice President of Investor Relations.]

Thank you, operator, next question please.

[Operator]

Thank you. The next question comes from the line of Brian Maguire with Goldman Sachs. Your line is now open.

[Brian Maguire, Goldman Sachs]

Ted, I want to come back to that profit-to-growth ratio you mentioned earlier, I think you said it was at 10% last year. You hope to double it to 20%, I’m assuming you're talking about sort of incremental margins there on the business and the current margins are in each segment already little bit above 20%, so sort of consistent with the guidance you’ve got for segment margins that they maybe down a little bit, but just wondering where you think that that number can go to over time recognizing that you probably have some resin headwinds in 2018 and all these operational improvements won’t really be kicking in yet, but is there a number or a target that you sort of have in mind for where you can get that to over time and how quickly do you think we can get there?

[Ted Doheny, President and CEO.]

Now, it’s a great question. And so, again the profit-to-growth target incremental is we – I said that we should be able to double that, but long-term what we would be looking, we were pointing to 25% on that. So basically the incremental volume that we bring in, we want to see 25% of that drop to the bottom line. So that’s going to take a little time. So, but to do it in the first year I think clearly we can double it. How we can there faster, we’re going to focus on the cost pretty hard as Bill highlighted. So that cost is we’re going to take care of that.

But the reason why it’s important to put it out there not for you and our investors to understand, but it’s also for our people. So we’re already changing the metrics internally, lots of work with our teams changing our incentive systems, so to be fully aligned that incremental business that we bring in is going to be targeting that 25%. So then the second part of your question of the 25% of where we’re going; if we’re 20% business that showing you that we’re pointing to at 25, so what do we do? We benchmark our peers. We look to what else is out there. But it also gave the teams had a lot of good at work. What is world-class? And that's where I use that subtlety in the phrase of the team that let’s -- we’re pretty good in packaging arguably the premier packaging business I don't argue with the team, but the team positive and says, are we world-class.

So, are we going to point higher than the 25 over time, yes, but right now our sites are, let’s go take this business to where it needs to be. And so that’s going to be the guidelines if the growth coming in and that’s we’re going to commit to, get to. First year, 20%, and we doubling it from where we were, I think we have clear line of sight to do that. Second part of your question, 25 is the internal target if we’re going after.

[Lori Chaitman, Vice President of Investor Relations.]

Operator, next question please. Sorry about that.

[Brian Maguire, Goldman Sachs]

Sorry. Just at the – the EPS guide not including any more share repo. Just wondering if there’s any change in the strategy there to pivot towards M&A or is that just for conservatism?

[Ted Doheny, President and CEO.]

Yes. But its part of our capital allocation. As we look at share repurchase if we just want to be very transparent we want to have share that we could pivot off that if we see a better opportunity, a better return for the company both for the first question or the questions were asked about operational excellence, if we see capital we can deploy internally more valuable than buying our shares back then yes, if we see an M&A opportunity it is more valuable than buying our own shares then the answer is yes.

But the other metric that would really drive and trying to inculcate into the whole organization is return on invested capital. So that we’re looking at all of our internal investments whether its CapEx, whether its new products, new innovations, looking even for share repurchase, and that’s we’re going to be focus on the PG ratio on checking out what’s coming in on the sales line and return on invested capital. So we’re talking to you in the same language. We’re talking internally in the same language and that’s we’re designing to. So yes, we have the ability to pivot on that share repurchase.

[Brian Maguire, Goldman Sachs]

Okay. Thanks.

[Lori Chaitman, Vice President of Investor Relations.]

Operator, next question please.

[Operator]

Thank you. The next question comes from the line of Tyler Langton with JP Morgan Your line is now open.

[Tyler Langton, JP Morgan]

Good morning, thank you. Just had a question, I guess the clarification on the growth outlook in 2018 for product care. I think in the slides you mentioned constant dollar growth of 7% including Fagerdala and I think the acquisition I think that would contribute $95 million which seems to be 5% to 6% or that 7%, I’m just trying to get a sense of your thought on organic volume growth for product care in 2018?

[Ted Doheny, President and CEO.]

If you pull the – and by the way just highlighting the 95 million we had -- I think we reported 24 million last year. So it’s not incremental, it could be 95 a year, so we’re looking at Fagerdala to do that. So underneath that with the product care we think we’ll still have reasonable volume in that less than 5% organically if you pull out the Fagerdala and net 3% range just in guidance. So there’s opportunity there but we see year-over-year decent growth for the market. We’re going to go have to create it, but we’re looking for profitable growth and that’s we’re actually guiding and guiding team as well bringing profitable growth and let’s get that 3% on top of the acquisitions that we made for the Fagerdala.

[Tyler Langton, JP Morgan]

Okay. That’s helpful. And then Bill, I guess the operating costs were kind of I think in total like a 10 million headwind in 4Q and I know you talk about it before, but I guess in 2018, mean that something where sort of given asset which you’re taking and now the total really shouldn’t be drag in 2018 or should we expect some of the drag in the first quarter or two?

[William Stiehl, CFO]

No. We think that the year-over-year comparison that we’re seeing in Q4 of 2017 compared to Q4 of 2016 is the most significant negative comparison we’re going to have. We don’t feel like we’ll have those negative comps going forward relative to our operating expenses and I have -- you also indicate that we’re going to continue to focus on having the right amount of cost for the new Sealed Air, continue to reduce our stranded cost as we go forward and also to be totally dedicated to as Ted indicates the profitable growth ratio and that concept.

And I will say that that mindset has really about change behaviors here at Sealed Air already, I mean we had an executive committee meeting last week and a large portion of that meeting was spent with the executive leaders speaking about what our specific actions in the first quarter and the second quarter are going to be and the impact on the PG ratio. So it does change behavior and it does translate to the P&L and we were very optimistic in terms of that comp going forward in 2018.

[Lori Chaitman, Vice President of Investor Relations.]

Thanks, Bill. Operator, next question please.

[Operator]

Thank you. And the next question will come from the line of Anthony Pettinari with Citi. Your line is now open.

[Anthony Pettinari, Citi]

Good morning. Ted, in your comments on M&A I think you indicated technology and automation were areas of focus. Is it fair to say that might lend itself to kind of smaller bolt on acquisitions that are kind of maybe more consistent with what Sealed Air has done recently. And then just some of your public peers have done large acquisitions and have argued that boosting their purchase, their resin purchase scale is a competitive advantage not sure if you subscribe to that, but just wonder if you give more color on M&A?

[William Stiehl, CFO]

No. I think its good question and I’ll just build off the guidance that was out there from Jerome even back in back in 2015 looking in that we were in that $400 million look, so building off of that size. The danger for just seeing you buying a company because you can make a cost synergy to me doesn’t sound strategic because that’s one year-over-year, we can have tremendous – I think that’s an adder if we find a strategic acquisition that fits in our space and we could leverage our supply chain excellence there. Yes. But buying it just because we see a resin advantage, we really are probably looking more is there a strategic advantage that we can have some technology, some competitive advantage to win in the marketplace.

That said, the size we are looking at in our space is something is an opportunity for us about 400 million that fits in to our businesses can drive our food care business, can drive product care business and has a differentiating technology and definitely that would be something that would be interesting to us. I think bringing our operation of excellence capability to those within just be an exciting synergy that we could make that accretive quicker.

So we’re looking at it. Yes, we think there are some purchasing power on resin if we were bigger, but our first look is, is it a strategic fit for us and that’s what we would be excited to go after.

[Anthony Pettinari, Citi]

Okay. That’s helpful. I’ll turn it over.

[Lori Chaitman, Vice President of Investor Relations.]

Thanks, Operator?

[Operator]

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

[Arun Viswanathan, RBC Capital Markets]

Great. Thanks. Good morning. Just wanted to get your thoughts on your confidence level on the volume outlook, you face some tough comps in North America food and Europe food as well. And Brazil, New Zealand, Australia there has been some fits and starts there, maybe there's some stabilization, but what your confidence that you will see some nice organic growth in food care?

[William Stiehl, CFO]

We put that into our guidance. We did – the North America has been strong, North America has been leading part of food care. We had that tempered gross rate into her guidance on North America. We don’t see that continuing at that rate, but last year's problem is this year's opportunity, so could we get some correction in Latin American and could we get some correction in Europe. So to the guidance just roughly we see tempered volume for us, and tempered on the acceleration of the volume of the fourth quarter and guidance, but we still think we’ll have nice growth from the product lines and specifically food care going into 2018.

[Arun Viswanathan, RBC Capital Markets]

And just follow-up on price, what’s your customers level of acceptance on price increases, are you getting push back, we’re hearing price input cost pressure throughout the chain, so how willing are your customers except that price and has it improved since resin hasn’t gone down as much as you thought? Thanks.

[William Stiehl, CFO]

Okay. Well, I’m a couple months expert in the new industry, but I think since our customers are probably listening to the call right now. I don’t think customers are really excited about raising prices. Matter of fact I’ve already had experiences with -- directly with customers now. So that’s partly why we have to really move and the business does a great job on the value capture. Can we save them more money that simply then is not an issue of price to go cash with that.

Now, as we mentioned that was our input price that our cost were going up, we will raise price. So how I would serve it for the customers living is that we are going to be let down and we want to be at the table. What might be a little bit different going forward is we are going to ask him other questions, because they are going to say for your bag to load our turkey, what’s the price per bag? We might say is there something else in your facility that we can help and save you money. They might be asking us on our Product Care as they would be packaging a product we might say, what are you re-packaging. Can we take some of that cost out and crawl into it?

So we'll be getting price in a little different area. But the direct question with our customers raising price in this environment of course it’s very difficult. We’ll do it on rising cost but we are going to be much more aggressive and creative on helping them to save money and we think we have opportunities to increase our margins in that value capture strategy and that’s what we are going to be going after.

[Lori Chaitman, Vice President of Investor Relations.]

Operator, we have time for one last question please.

[Operator]

Thank you. And our final question will come from the line of Edlain Rodriguez with UBS. Your line is now open.

[Edlain Rodriguez, UBS.]

Thank you. Good morning. Just one follow up on in terms of acquisitions. I mean, are there any regions in the world that’s most attractive to you, like where would you be reinvest in?

[Ted Doheny, President and CEO.]

Good question. We are looking at the regions where we do business. The part of the Fagerdala acquisition that really helped us giving us some presence in the Asia market and that’s because it’s—to help with our cost structure having presence there, that would be attractive to us.

So, but again we want to be the presence where – in the markets where our customer are, close to our customers does have attractiveness to us. So there is a geographic play and we just have to look at it, specifically don’t want to give any more clarity at things we are looking at, but we want to be next to our customers, we want to be also in adjacencies that we have some new technology that would help us get into markets. So what would the example be?

We are pretty strong in the fresh meat market. We are exploring and getting into more of the seafood market. So, those are some adjacencies that make sense. We had some pretty interesting technology in rigid containers. Can we get more into that space? So we are looking for adjacencies where we have an opportunity that if we can’t make it fast enough, maybe there might be a player or a technology in those attractive spaces, we can buy our way in quicker. But the divining rod that we are using is staying really connected to our technologist. And we are looking at all of our product development, can we accelerate that internally or is there a way to accelerate that faster with an M&A opportunity?

[Edlain Rodriguez, UBS.]

And one quick clarification of the share buybacks. Is there a timeframe that you want to complete, what’s left or is it like open-ended?

[Ted Doheny, President and CEO.]

No we typically don’t disclose that as we indicated the guidance assumed 159 million share. We will continue to be active in the market throughout 2018 with our typical methodology that accelerated share repurchase and open market repurchases. But we haven’t indicated a specific timeline at this stage.

[Edlain Rodriguez, UBS.]

Okay, thank you.

[Lori Chaitman, Vice President of Investor Relations.]

Operator that concludes our call today. Thank you everybody for joining. And we look forward to speaking to you again in the near future. Sabrina

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.