Sealed Air Corp

NYSE:SEE

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Sealed Air Q4 Earnings Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Lori Chaitman. Thank you. Please go ahead, ma'am.

[Lori Chaitman, Head of Investor Relations]

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

Before we begin our call today, I'd like to note that, we have provided a slide presentation to help guide our discussion. Please visit our website, where today's webcast and presentation can be downloaded from our IR website at sealedair.com.

I'd like to remind you that statements made during this call stating management's outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled Forward-looking Statements in our earnings release and slide presentation, which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on quarterly reports on Form 10-Q, and current reports on Form 8-K, which you can also find on our website at sealedair.com or on the SEC's website at sec.gov.

We also discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. Included in the appendix of today's presentation, you will find U.S. GAAP financial results that correspond to the non-U.S. GAAP measures we reference throughout the presentation.

I will now turn the call over to Ted Doheny, our President and CEO. Ted?

[Ted Doheny, President & Chief Executive Officer]

Thank you, Lori, and thank all of you for joining our fourth quarter and year-end 2020 earnings call. I hope you and your families are staying healthy and safe. I want to welcome Chris Stephens to his first Sealed Air conference call. Chris, we're excited to have you on our team.

Throughout, 2020 the pandemic presented new challenges for all of us around the world. Our purpose, which you can see here on slide 3 is guiding us in the pandemic and become even more clear, we are in the business to protect to solve critical packaging challenges and to leave our world better than we found it. Our employees delivered, and I'm proud of our team's tremendous commitment to our customers, and our business throughout this pandemic.

On today's call, I'll recap our performance in 2020. I'll share how we're accelerating growth in an uncertain environment and the exciting opportunities we see ahead. Our global markets are evolving, and we're leading the way with automation, digital and sustainability. Jim will review our financial results in more detail and Chris will provide our 2021 outlook. I'll close the call and we'll end with Q&A.

Let's turn to slide 4 for a recap of our 2020 results. Our strong sales performance in the fourth quarter coupled with continued execution of Reinvent SEE, allowed us to exceed our 2020 commitments. In 2020, we delivered adjusted EBITDA growth of 9% on 2% sales growth resulting in 130 basis points of margin expansion and an operating leverage of 77%.

Adjusted earnings per share was $3.19, and we generated strong free cash flow of $556 million, which is 73% above last year. Automation digital and sustainability are driving growth in 2021 and beyond. This is being fueled by our Reinvent SEE business transformation.

We want to point out on slide 4 that we are sharing with you the long-term direction that we are taking our business and the performance we expect to deliver. As we shared before, we're serving a stable market that grows at 1% to 3% a year. We're looking to accelerate this growth to 2% to 4% on our base business and another 100 basis points with automation. With our Reinvent SEE operating system, on 3% to 5% organic sales growth, we expect to deliver over 30% operating leverage and create world-class returns.

Let's turn to slide 5, our movie-reel slide, which pictorially shows some new solutions powered by our iconic brands. You can see a play button on this slide, which is to encourage you to visit our website, where you will find current new stories with more to come.

In 2020, approximately 63% of our sales were derived from packaging proteins, other foods, liquids and fluids, medical and life sciences. Since March 2020, there's been an imbalance across the food industry, with strong demand in the retail channel offset by continued softness in food service from the stay-at-home pandemic environment.

Food processors are working hard to meet increased retail demand, but they're still challenged with labor shortages. Our customers are focused on safety productivity and labor shortages and we are responding with automated solutions to solve those challenges. This has resulted in another strong quarter in food packaging equipment and volume growth in our retail formats.

In the fourth quarter, growth in retail formats and equipment was largely offset by continued declines in products with high exposure to food service. We expect this market segment to recover later this year and believe we are well positioned to take advantage of that recovery with new sustainable innovations.

For example, for proteins, we've optimized materials and processes for our Cryovac barrier bags to make them recyclable, while maintaining our industry-leading standards for food preservation and food safety.

For liquids and fluids, we have automated solutions that disrupt rigid containers and expand our bag and box offerings for soups, sauces, condiments and beverages. The combination of our automated equipment, service, barrier bags and pouches and packaging process extend shelf life, minimizes material waste and lowers total cost of ownership.

Approximately 37% of our sales serve e-commerce, retail, logistics, electronics and industrials. Sales to e-commerce retail and logistics were up double-digits in the second half of 2020.

Automated equipment, including the portfolio, acquired from automated packaging systems, mailers, Bubble Wrap inflatables and our new paper-based solutions, were our fastest-growing portfolios in 2020. In Q4, we also experienced increased demand for our temperature assurance packaging solution that ensures the safe and secure distribution of COVID-19 vaccines.

In 2021, we expect continued growth from our e-commerce and fulfillment solutions, particularly the offerings designed to automate the packaging process, minimize waste and increase throughput. It was encouraging to see in the fourth quarter, our sales to the industrial sector were up modestly, largely due to strength in consumer electronics and a rebound in automotive.

Now turning to slide 9 for an update on our SEE automated solutions strategy, which is driving growth for the next phase of our Reinvent SEE business transformation. You can see on this chart that we expect equipment sales to grow more than 15% in 2021 to over $250 million. Our pipeline for automated equipment continues to strengthen, and we are confident in our organic target of over $500 million by 2025.

When you factor in a 3x-plus solutions multiplier, including growth in parts and service from the installed base and the flow-through of materials, these results in a $5 billion-plus potential opportunity over the 10-year equipment life cycle. As I mentioned before, we are solving our customers' most critical needs for safety productivity and labor scarcity with our touchless automated solutions. We are prioritizing these projects to those that create less than a three-year payback for our customers.

With SEE automation, we're taking an integrated solutions approach by eliminating waste, simplifying the process, removing people from harm's way and automating. Our customers are recognizing the tremendous value we are creating by integrating our full system. We brought new solutions to market and we'll continue to do that for our customers and our own operations as we lead the way to a more touchless digital environment.

Let me now turn to slide 7, and share how we are successfully navigating through this pandemic. Our local, regional and corporate crisis management teams remain active and business continuity plans are still in effect. We've been proactive with our zero-harm mentality. And thanks to the dedication of our people we've had minimal disruption to our operations.

We are investing in digital capabilities and finding new ways to do business online. Our investments in smart packaging and digital printing are unlocking new growth opportunities by enabling our customers to increase their brand equity, enhance consumer experiences and create significant supply chain efficiencies.

I'll now pass the call to Jim to review our results in more detail.

[Jim Sullivan, Senior Vice President & Chief Financial Officer]

Thank you Ted. Let's turn to slide 8 for a review of our year-over-year net sales growth by region. In the fourth quarter, net sales totaled $1.3 billion, up 3% as reported and 3% in constant dollars. In constant dollars, North America our largest region representing 58% of our sales increased 3%. South America was up 13% largely due to US dollar index pricing and volume growth of 4%. Constant dollar sales in Asia Pacific were up 4% and EMEA was up 1%.

On slide 9, you can see our full year 2020 results. Net sales totaled $4.9 billion, up 2% as reported and 4% in constant dollars. Similar to the quarterly results, we delivered constant dollar sales growth across all regions and exceeded our most recent outlook by approximately $50 million, most of which was driven by volume growth in protective.

Starting in the first quarter 2021 for reporting purposes, we will be consolidating North America and South America into one region, the Americas. This will align with our new one Sealed Air regional structure and organizational changes that went into effect in January.

On Slide 10, here you see our organic sales volume and pricing trends by segment and region. In the fourth quarter, overall, volume increased 3%. Protective volumes accelerated into year-end delivering 7% growth, up from 4% growth last quarter. As expected, we also saw modest volume growth in food after a couple of quarters of low single-digit percent declines.

By region, volumes in North America, South America and APAC were up 4%. Protective volumes were up across all regions due to e-commerce and fulfillment strength and growth in our industrial portfolios in North America and APAC. Food delivered volume growth in North America and South America due to strength in retail formats and equipment. This volume growth in food was offset by declines in EMEA and APAC where food service softness and COVID-related restrictions outweighed solid retail demand.

On Slide 11, we present our year-over-year consolidated sales and adjusted EBITDA bridges for the fourth quarter and full year. As mentioned, sales in the quarter were up 3%, with volume contributing $42 million to the top line. For the full year, sales were up 2%, including $22 million in volume growth and $172 million contribution from acquisitions of which $166 million was from Automated Packaging Systems that closed in August 2019. Currency translation negatively impacted 2020 sales by $82 million, or about 2% mostly due to year-over-year declines in Latin American currencies and the euro.

Fourth quarter adjusted EBITDA of $279 million increased $8 million or 3% compared to last year with margin down 10 basis points to 20.8%. For the full year, adjusted EBITDA of $1.051 billion increased $86 million or 9% compared to 2019 with margin increasing 130 basis points to 21.4%.

Higher volume contributed $12 million to adjusted EBITDA in the fourth quarter. For the year, volume had a negative $14 million impact on adjusted EBITDA due to unfavorable product mix in both reporting segments.

Reinvent SEE benefits totaled $17 million in the quarter and $118 million in 2020. We've had a positive impact on price/cost spread and operating costs throughout the year. In the quarter as anticipated, price/cost spread was $7 million unfavorable due to higher input costs. For the full year, price/cost spread contributed $28 million to adjusted EBITDA. Half of this favorability was driven by Reinvent SEE actions.

Operating costs included labor and other non-raw material cost inflation of about $13 million in the quarter and $53 million for the full year. We incurred $3 million of year-over-year incremental spending related to COVID-19 in the fourth quarter and $16 million for the year. These impacts were mostly offset by lower travel spending with the remote work environment. In addition, Reinvent SEE productivity benefits totaled $15 million in the quarter and $104 million for the year.

Adjusted EPS in the fourth quarter was $0.89. This compared to $0.78 in the fourth quarter of 2019. For the full year, adjusted EPS was $3.19, an increase of 13% over 2019. The adjusted tax rate in 2020 was 24.5% down from 26% in 2019. This year's lower tax rate was favorably impacted by the new US GILTI regulations, which were issued in the third quarter.

Turning to slide 12. Here we provide an update on Reinvent SEE, which continues to progress and is driving structural operating leverage in the business. Our Reinvent commercial work stream is robust and providing a solid platform for driving revenue growth in the markets we serve. As Ted mentioned, we are seeing strong growth in our automated equipment order pipeline and look forward to capturing those opportunities in 2021.

In 2020 as mentioned, we realized $118 million of year-over-year overall Reinvent SEE benefits to adjusted EBITDA. In 2021, we now expect $65 million of additional benefits with roughly 50% flow-through from actions taken in 2020. Reinvent SEE benefits realized since late 2018 when the transformation was launched are now expected to be approximately $355 million $105 million higher than originally targeted.

Cash restructuring payments associated with Reinvent SEE were $74 million in 2020 with an estimated $40 million remaining in 2021 as Reinvent SEE transitions from a restructuring phase to the company's continuous improvement business operating system. The total cash cost of Reinvent SEE is now expected to be approximately $205 million, which is $10 million less than what we originally expected.

Turning to segment results on slide 13, starting with food. In the fourth quarter, food net sales increased modestly on a constant dollar basis to $757 million. Net sales for the year were up 1% in constant dollars to just over $2.8 billion. This performance was in line with our guidance.

Equipment, parts and service sales, which currently represent about 8% of the food segment were up 11% in the quarter and 8% for the year. Across the globe, our meat processing customers are upgrading aged assets to improve efficiency, enhance employee safety and reduce labor dependency in their plants.

We are seeing meaningful capacity expansions to support market growth, particularly in South America for exports and in Asia and Eastern Europe where countries are increasing domestic production of multiple types of proteins.

Cryovac materials, which comprise the remainder of the food segment sales were down approximately 1% in the quarter. While the trend was still below prior year levels it improved 200 basis points from the third quarter.

Growth in retail applications, which accounted for just over 40% of food sales in the fourth quarter was largely offset by continued declines in barrier bags and pouches. Adjusted EBITDA in food of $170 million in the quarter was essentially flat compared to last year. For the full year, adjusted EBITDA increased $18 million to $648 million with margins up 110 basis points to 22.9%.

Our full year performance was attributable to Reinvent SEE productivity benefits and favorable price/cost spread. This was partially offset by unfavorable product mix and currency translation.

On slide 14, we highlight results from our protective segment. In constant dollars, protective net sales increased 7% to $584 million in the quarter and 9% to $2.1 billion for the full year. This performance exceeded the guidance we've provided on our third quarter earnings call.

In the fourth quarter, volume trends in both North America and APAC accelerated to 8% and 11% respectively. EMEA volume turned positive for the first time in 2020 delivering 2% growth. The segment's growth was largely driven by double-digit increases in e-commerce and fulfillment. It was also encouraging to see favorable volume trends in industrials in both North America and APAC.

Keep in mind, approximately 55% of our protective sales are derived from industrial end markets and the remaining 45% is coming from e-commerce and fulfillment. Adjusted EBITDA of $115 million increased $8 million or 8% in the quarter. For the full year adjusted EBITDA of $408 million was up $58 million or 17%.

In 2020, margin was up 130 basis points to 19.6%. Protective's full year performance was attributable to Reinvent SEE benefits and contribution from the Automated Packaging Systems acquisition partially offset by unfavorable product mix.

Now let's turn to free cash flow on slide 15. In 2020, we generated $556 million of free cash flow compared to $321 million in 2019 and our previously provided guidance of approximately $450 million. The significant year-over-year improvement was mainly driven by higher adjusted EBITDA, the impact of the Novipax settlement last year, lower Reinvent SEE restructuring and associated payments and lower CapEx due to pandemic-related project delays.

Trade working capital was a source of cash at $14 million in 2020 relatively consistent with 2019. Our trade working capital, which includes advance payments, the conversion cycle for this was better than anticipated and improved approximately two days compared to 2019. This was largely attributable to an improvement in days sales outstanding. Our adjusted EBITDA to free cash flow for the year was very strong at 53%.

Slide 16 highlights, our net leverage, liquidity and debt maturity profile. We ended the year with leverage at 3.1x on a net debt to adjusted EBITDA basis. This is down from 3.6x at the end of 2019. With a strong balance sheet $1.7 billion of liquidity and no debt maturities until August 2022, we have good financial flexibility to support growth of the business.

On slide 17, we outlined our capital allocation strategy. We ended 2020 with an ROIC of approximately 15% which is top quartile in the packaging industry and well above our weighted average cost of capital. We will continue to take a disciplined approach to maintain a strong balance sheet while driving continued attractive returns on invested capital.

We are investing in capacity to support growth initiatives and we're accelerating innovation with disruptive products and technologies. Approximately 40% of our organic CapEx is currently focused on growth including breakthrough, production processes, automation, and digital.

SEE ventures includes selective minority investments in early-stage technologies focused on automation digital and sustainability. These investments will help accelerate our strategy and will complement our internal innovation efforts across Sealed Air.

For example, in the fourth quarter, we increased our investment to $8 million in Plastic Energy an industry-leading start-up company with advanced recycling technology. And in early 2018, we invested a similar amount in Pharmapacks, a leading e-commerce enablement platform. We recorded a $15 million gain on this investment in the fourth quarter. This gain was treated as a special item and excluded from adjusted EBITDA in the quarter.

Regarding shareholder returns, we paid cash dividends in 2020 of $100 million which represented a dividend payout ratio of 20%. And starting in the third quarter, we reinitiated share repurchases with 821,000 shares acquired in the second half of 2020 at a cost of $33 million.

Let me now turn the call over to Chris to provide our outlook for 2020. Welcome Chris, it's great to have you on board.

[Chris Stephens, Chief Financial Officer]

Thanks Jim. It's an exciting time to join the Sealed Air team and I'm happy to be here. Since joining in early January, I have spent a great deal of time working with Ted and the team executing my 100-day game plan focused on people process and results. I have met virtually with many of our leaders and teams around the world and had the opportunity to tour a few of our facilities in a safe way.

There is more to learn and many more people to meet and places to visit. But in my short time, you could see the passion and commitment by the Sealed Air team to drive success and continue to execute to exceed customer expectations.

So, let's turn to slide 18 to review our 2021 outlook. We anticipate net sales to increase 4.5% to 6.5% as reported or $5.1 billion to $5.2 billion. On a constant dollar basis, net sales are expected to increase 2.5% to 4.5%, driven by favorable volume and price in both food and protected. We expect food to deliver 2% to 4% constant dollar growth and protected to deliver 3% to 5%.

Automated equipment and sustainable solutions are expected to drive growth in food and protected in 2021. In food, we expect the retail channel and protein exports to remain strong. We also expect the food service industry to recover as we progress through the year.

In protective, we expect continued growth in e-commerce and fulfillment and the industrial end markets to gradually improve. We expect favorable currency translation in 2021 sales and adjusted EBITDA of approximately 2%, mainly due to the euro and the Australian and New Zealand dollars.

Adjusted EBITDA is expected to be $1.1 billion to $1.13 billion. At the midpoint, this would imply a modest increase in adjusted EBITDA margin compared to 2020. Margins are being impacted by higher input costs and continued COVID-related expenses. To help alleviate higher raw material and freight costs, we initiated market price increases in Q4 with more actions going into effect this quarter.

Also keep in mind that our formulas in food North America are typically on a six-month lag and are expected to turn favorable midyear. We expect adjusted EPS to be $3.25 to $3.40. Given the current impact of higher material costs and the timing of pricing actions many driven by formulas, we expect 2021 adjusted EPS to be split approximately 45% first half 55% second half versus what we realized in 2020, which was a split of 47% first half, 53% second half.

Our outlook assumes approximately 157 million average shares outstanding and an adjusted tax rate of 26% to 27%. The higher adjusted tax rate is primarily due to the absence of a valuation reserve release that benefited the rate in 2020. For free cash flow, we expect to generate $500 million to $550 million. This is net of capital expenditures approximately $210 million or 4% of sales and Reinvent SEE restructuring associated payments of approximately $40 million. The year-over-year anticipated decline in free cash flow is largely attributable to higher trade working capital from sales growth and higher employee bonus payments in 2021 given the strong performance in 2020.

Let me now pass the call to Ted for closing remarks.

[Ted Doheny, President & Chief Executive Officer]

Thanks, Chris. Before we open up the call for questions, turning to slide 19, I wanted to reiterate our 4Ps of Reinvent SEE. We start with a purpose statement. We are in the business to protect to solve critical packaging challenges and to leave our world better than we found it. Our performance continues to improve. We are keeping people out of harm's way while strengthening our business. We're enabling fast decision-making by operating under a One SEE culture. Our strategy to deliver the best solutions at the right price and make them sustainable is working. Our broad and innovative product portfolio, global scale and agility has enabled us to address the evolving customer needs across our diverse, end markets and geographies.

Our One SEE operational excellence processes are focused on flawless quality, world-class productivity and yield improvement as well as customer service enhancements that are creating customer references. Reinvent SEE is our operating engine that is driving profitable growth. Sustainability and ESG are strategic imperatives, embedded in our purpose and fueling our growth. Our most recent sustainability report, which you can find on our website, includes progress on environmental and social initiatives including climate, our 2025 sustainability pledge in diversity equity and inclusion. We exceeded nearly every one of our 2020 sustainability goals and we'll be releasing our new 2025 and beyond goal shortly.

We delivered exceptional results in a very challenging and unpredictable environment. I want to thank all of our employees in our plants, in our innovation centers, out in the field and working remotely for their dedication and commitment to business continuity. We recently shared that Jim Sullivan is planning to retire at the end of March 2021. Jim joined our team at a critical time and provided tremendous leadership throughout his tenure. He's contributed an incredible amount of value and I'm personally so appreciative for Jim's support and leadership. I along with his colleagues here at Sealed Air want to thank Jim for his contributions.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Ghansham Panjabi from Baird. Your line is now open.

[Ghansham Panjabi, Baird]

Hey, guys good morning. Jim, you will be missed. And Chris, congrats on your new role.

[Jim Sullivan, Senior Vice President & Chief Financial Officer]

Thank you.

[Chris Stephens, Chief Financial Officer]

Thanks.

[Lori Chaitman, Head of Investor Relations]

Ghansham.

[Ghansham Panjabi, Baird]

Yeah. I guess first off maybe on the food segment, growth in the grocery channel has been elevated through the course of the pandemic. There's some theorization that consumption in packaged food will just be at a higher volume baseline relative to pre-COVID levels. I guess the question is, is there an opportunity here for Sealed Air to better balance channel exposure against that backdrop versus the current weighting towards fresher food? And if so how will your automation platform play into that dynamic?

[Ted Doheny, President & Chief Executive Officer]

Sure. Hi, Ghansham.

[Ghansham Panjabi, Baird]

Good morning.

[Ted Doheny, President & Chief Executive Officer]

Yeah, if we look at where we are with food and just to recap, basically the food service side that is getting hit with us and reproduces the bags and tying into the restaurants as we all know what's happening there. But on the retail format, that's changing dramatically. And so what we're seeing is we look – if you look at our movie reel slide on Slide 5, we see that shift. We have e-commerce actually on the right side where we talk about protective. That's the shift that we see happening very, very quickly in the retail formats to your question.

If you go to a grocery store, we all see it you see people packing next to you. And those packers we're already working with customers and some of the start-ups on where e-groceries is going. So what is that doing to the packaging format to your question. Bringing our Darfresh line, Darfresh On Tray, how do we actually package that that's now by a pick and pack but actually that's going to be going into cobots and robots. So we actually see that format moving quite aggressively.

Also we see the market still moving on to sustainability. Those secular trends of automation, fresh food and food safety is going to even drive harder as we go into those formats in the grocery stores. So our Cryovac leading barrier bag right now, we're working on new barrier materials that not only are lighter in weight. We're looking with recyclability with our investment with Plastic Energy. They want the PVdC out. So we've actually new designs already coming in that we're going to use chlorine-free material because the chemical recycling plants don't want that.

We had an announcement with Plastic Energy and Tesco. And so we're leading the way in that. So these new formats we think we're well positioned for. In the fourth quarter and going next year we're dealing with still the pandemic so that shift is happening as we speak, but we definitely think there's an opportunity.

The other part of our protein side as we talk about that bag and the box and pouches. We are definitely seeing that slowed with the QSRs. But we are – that's where we're seeing a lot of opportunity to actually go into the liquids and fluids business. So actually excited. We think we have a lot of opportunity. We've got to get through some of these headwinds with our markets in the pandemic but we think we're well positioned in the food side of our business for that new format that just seeing in The Wall Street Journal today, it's heartening saying that they think this pandemic will be with us forever. So once again, we're planning for the worst hoping for the best. But we think our portfolio is well positioned to take advantage of that new normal that's coming in 2021 and beyond. Operator, next question?

[Operator]

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

[Jeff Zekauskas, JPMorgan]

Thanks very much. I was puzzled about your EBITDA guidance in that your EBITDA in 2020 was 10 50 and you thought that you would get $65 million and benefits from your cost synergy program, which would get you to 11 15, which is the midpoint of your guidance for 2021. So is the meaning of the guidance that there's no real benefit from the growth in sales in 2021, or why isn't the guidance higher?

[Jim Sullivan, Senior Vice President & Chief Financial Officer]

Hi, Jeff, this is Jim Sullivan. Let me clarify. I know you're new to the name. When we talk about Reinvent benefits, we're talking about those productivity actions that we're driving within our factories. And we talked in the call about how we delivered $118 million last year. And this year we're coming down to $65 million.

Our plan is to continue to drive those benefits at a level higher than our inflation. If you look at our wage inflation across the enterprise, it's roughly $50 million. So what you're seeing that kind of offsets part of those Reinvent benefits is that. So the flow-through, if you look at the benefits and the inflation it's about $15 million not the full $65 million.

Now having said that, I've been around now Sealed Air for 1.5 years. And I continue to be very encouraged by the continuous improvement culture, the high-performance culture that we have here in Sealed Air. And I think we thought after the three-year restructuring transition that we would just kind of be on par. It would be an inflation fighter not add value if you will above inflation. I think that we're well positioned. The pipeline for Reinvent is very strong.

We're saying $65 million next year. Hopefully, we beat that. We've got – 50% of that is flow-through from actions we've already taken in 2020. So, we're well positioned to deliver that. And we'll continue to drive actions that will allow us to add more to it in 2022 and beyond. Hopefully, that helps clarify a little bit of the math.

[Operator]

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

[George Staphos, Bank of America]

Hi everyone. Good morning. Thanks for all the details. Chris and Jim, congratulations, and congratulations on the progress. I guess my question is around volume growth and translating that into your operating leverage target and return on capital if you could give us a target there. So, Ted, if you could talk about some of the key platforms that you're working on. Darfresh On Tray, you're mentioning to Ghansham some of the sustainability-driven products. What would you say, you're expecting in terms of growth for those products in 2021?

And how does the growth in these products and e-commerce factor into your operating leverage target, which is now 30% plus? I think, a couple of years ago, last time you talked about, it was more like a 40%. And in turn, we like the return on capital discussion that you have in the deck and how you calculated it. What kind of target, if you have 30% plus in terms of ROI -- in terms of margin what kind of ROIC target should we expect over the next two to three to four years? Thank you.

[Ted Doheny, President & Chief Executive Officer]

Thanks, George. A lot in that question, but very thoughtful. So I'll try to unpack it and actually build off of Jeff's question that Jim went through the financials because, it ties into the operating model that we talked about on slide 4. So, what we're going into and we're looking at very current state of what happened in the fourth quarter, the operating leverage in the fourth quarter was actually below the target of where we've been driving, less than 20% operating leverage, but for the year 77%. So, well what's going on with our portfolio in this tumultuous market, we've had huge spikes, but then we've also had parts of the portfolio go down.

So now, if we look at operating leverage, take a look at our top three product lines. So, if we look at food, what's going on with bags? What's going on with bags is affected by all those restaurants being shut down. Bags are flat to down. Our highest-margin product, so there's actually a deleverage on the portfolio. There's a lot of things that are going on. Great progress with Darfresh On Tray. Great progress with some of the sustainable products. But if you look at net-net in the fourth quarter and then we had some rising input costs. Did we get ahead on the pricing that we talked about?

So if you look at that in the quarter then you play that through to 2021, you say huh that leverage in the midpoint, is below that 30%. It's at 25% because we've got to get through this first half by what we know in the pandemic. So, we look on the protective side. Wow how many -- I've been here three years now and seeing that growth can you grow that protective? Yes we can. Yes we will. Well, we're dealing with our largest product line in that portfolio. It's dependent on the industrial rebound with our Instapak.

So deleveraging really heavy. So we have all these ups and with that major down on both sides of the business is delevering. So, is it where we want to be for the year 70% -- 7%, that's good? So what we wanted to give you was where we're taking the business and where this engine is gone. So we left out a three-year plan. And that's what we're going to do. We're going to put it with very stable markets. Though even in the pandemic, some go way up and some go down. So net-net, we think we can beat that stable market that we serve. We think with our innovations and sustainability, we can take that to two to four. And the excitement is, where we're taking automation to take that to three to five.

Well, then to the second part of your question, you asked about leverage. Hey Ted, when you came in, you did your assessment of this business. Hey you thought you could leverage at 40%. Well, we did pretty well. We actually -- if you look at our last three-year average, we leveraged way over that 40% to 50%, but we also had restructuring in that number.

So we're now building off a base of almost 260 basis points higher than we started. And there is a greater sign next to the 30%, but that's where we think the model is going.

And then to your last part of your question was on ROIC. We shared with you day one when we got here we are going to change the guardrails on this business. We are going to measure leverage. And I believe it. And this is part of the mantra, you get what you measure. So we put operating leverage in there. It's all the way through. But we also put in ROIC day one all of our investments, the capital. We look at a return on investment and you can now see you get what you measure. Through this tumultuous market our ROIC has moved up.

But George the last part of your question, where are you going to take your ROIC? Our investors know that we're way over our cost of capital want to put assets on this engine and generate value. And that's where we mentioned in there. That's what we're driving. This high-powered value creation engine is going to be driving these assets that we put on place far above our cost of capital. But it's not about taking that to 15 to 17. It's driving growth on this engine and that's where we're taking it.

So again why on slide 3, we feel confident. The engine is in place. It's moving despite the tumultuous markets that we face. We feel confident and we wanted our investors to know this is where we're going. And we're quite confident we're going to get there despite the market that we're dealing with really hard in the first half of 2021.

Next question, sorry, operator?

[Operator]

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

[Anthony Pettinari, Citi]

Hi, good morning. You talked about the price initiatives you're taking to recover higher resin costs. And I'm just wondering, if your guidance assumes resin basically remaining at current levels or maybe some relief or incremental inflation over the course of the year. And then with other cost categories maybe things like freight corrugated, we've seen some sharp inflation. Can you talk a little bit about the inflation that you're seeing in non-resin raws? Is that an issue? And are there any initiatives or actions that you're taking there?

[Ted Doheny, President & Chief Executive Officer]

Sure. Thanks Anthony. Well, I'll give you a view and then Jim can maybe give you more detail if you'd like. But basically you're exactly right. It's more than just resin. As we've -- since I've been here, we've been talking about resin. Our team does an excellent job and part of our Reinvent is to really focus with multiple different suppliers on the resin. And we have specialty resins. So how can we beat the market and we think we will do that. But what has happened with resins there's no secret. It has gone up significantly with what the chemical industry is doing. So we've been ahead of that on the price especially with protective. We went out with price in the fourth quarter.

But the second part of your -- and also the formulas are coming. We have that six-month lag there. But we believe we're ahead of it. We are the leader in the market. We can lead with price. We don't talk to our customers about price. We are actually embedded with our customers and actually bringing automation in on how we can solve this problem together. So I just want to highlight that.

But the second part of your question, you're exactly right. We're seeing it beyond. It's the freight costs that have gone up significantly and other input costs. So we're managing that. Again we're using price to stay ahead of it. But the issue that we have to really work with our customers is look at maybe different product portfolio and look at automation. But the other piece that we're not giving up with this rising input cost is the sustainability side.

So we're also continuously looking at our material change on recycled content. Is it more challenging? Absolutely. But believe on the price side we're going to lead. We're going to get our costs right and we're going to be driving automation. And by the way automation internally as well as externally we think we're going to be ahead get through this. It's tough though. Right now fourth quarter first half of 2021, you're exactly right. It's a tough market on there on input costs.

I don't know Jim if you want to add anything to that, or…

[Jim Sullivan, Senior Vice President & Chief Financial Officer]

No that was good. I mean, I think the other piece of the question was, what are we expecting in terms of the back half of the year, the current environment, or are we expecting relief? As everyone knows the cost curve on inputs, across 2020 was increasing across the year. So as we plan the business, we're certainly planning for the materials, the resins to be at a high level that they are now. And we're initiating the price actions that Ted talked about.

We're very comfortable, even in this environment we can manage the spread, the price/cost spread very well. Over the course of our range of guidance, certainly on the low-end you could see, input cost exceeding our ability to price. And a big part of that is timing.

How is the timing of the raw materials coming in. And how quickly can we get the price in place? Many of our pricing -- much of our pricing in North America is formula-based on the food side. So we won't get that right away. But certainly we have mechanisms to deal with it. And then, the final piece of the question was on, other raw materials.

So think about resin, polyethylene, representing about, 50% of our overall resin buy and resins in total are about half of our total input cost. The other half is only inflating in low-single digits. So again, the takeaway I think Ted is what you said, we're managing both the input side and the price side very well.

[Anthony Pettinari, Citi]

Perfect.

[Ted Doheny, President & Chief Executive Officer]

I was waiting for Jim to say, he's going to take care of the hard part. Chris has the easy part of the second half of the year. Operator, next question.

[Operator]

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

[Phil Ng, Jefferies]

Hey, digging into that price/cost question a little bit. Well, I first of all, thanks, Jim for all the help. Really appreciate it and looking forward to working with you Chris. But just digging in a little more …

[Chris Stephens, Chief Financial Officer]

Thanks, Phil.

[Phil Ng, Jefferies]

…digging in a little more into that question that Anthony asked about resin, it seems like you're managing it pretty well. Any handholding you could provide, in terms of price/cost in the next few quarters? How material it would be relative, let's say, fourth quarter? How are you tackling this headwind between, like price versus cost? And just lastly, have you seen some of your competitors take a similar approach on pricing? Thanks a lot.

[Jim Sullivan, Senior Vice President & Chief Financial Officer]

So the last question first. Yeah, So I think the whole industry is looking at price and doing what it can to recover materials. As you noted Phil, we did have negative price/cost spread in the fourth quarter. Year-over-year it was about $7 million.

And we would expect that, the first half of the year will continue to be a little bit challenged that way, which is why when Chris talked about the, adjusted EPS guidance for the full year, he said kind of expect 45% coming in the first half of the year and 55% in the back half of the year.

We're thinking about that cadence of price/cost spread being a little bit more challenged in the first half, as we get pricing into the business. Right now volumes are very robust. We feel good about our ability to get price. We're not doing anything than anyone else isn't doing.

And as Ted said, we're focused on doing what we can to differentiate ourselves. And really be more value sellers than just pass-through resin. And then, the only other thing I would say is, we continue to drive Reinvent above our inflation. We got $15 million spread as we talked about earlier. We're going to continue to drive that. And I think there's some upside there that will help us mitigate some of the raw material pressures that we see.

[Ted Doheny, President & Chief Executive Officer]

Yeah. And Phil, I just want to add one thing, because I want to make sure that we've spent a lot of time with changing the model about, how we handle price with customers. And so we are going directly with our customers. We are not sending price increases over the transom. We're there with them. How can we work together?

I was personally at one of our factories one of our largest customers on the protective side, just last week. And the conversation they're seeing it, what can we do together to handle this? I just want to make sure, because our customers are listening right now. We are going to handle this together with them.

And if we even have to move the portfolio, so I do think we're very different than our competitors. We have a very unique portfolio that we can respond, in a much better way on this pricing situation with resins, than we've ever done before. And I really think we're going to come out on the other side, well ahead of the competition. Okay, next question Operator.

[Operator]

Thank you. Our next question comes from the line of Adam Josephson from KeyBanc. Your line is now open.

[Adam Josephson, KeyBanc]

Thanks. Good morning, everyone and congrats on a really good end of the year. Question on, just the organizational shift seemingly from Reinvent SEE to looking for a significant organic sales growth in the 2022 to 2024 period. In the last two years, obviously, you've saved about $300 million of costs. During which time your organic sales have been flat. And I know there's been a pandemic and a weak global economy even before the pandemic. But nonetheless, you had flat organic sales while you're saving a significant amount on cost via Reinvent SEE.

So, I think, you're talking about a major organizational shift in terms of focusing on cost reductions, to focusing on top line. I'm just wondering how difficult you think that transition may be to pull off or it's perhaps not much at all. But we'd like to hear your thoughts about how you accelerate sales growth so dramatically. And will you -- will there be any more restructuring required over that period? Thank you.

[Ted Doheny, President & Chief Executive Officer]

Well, it's good. I wanted to listen carefully to your question. So my answer to that would be, we're reinventing on how we grow the business. So the restructuring side on the cost, you're exactly right. But the portfolio change is a big part of this difference that where we're going.

We're moving from being a product-driven business to be a market-driven business. So 2020 was a pivotal year for us. That portfolio shifted dramatically. So we're pointing that portfolio to the secular trends in the industry that we believe are going to be there post-pandemic. What does that mean? Automation.

How do you put more stuff in a package more effectively, more efficiently, safely, securely, that is what we're focused on. So we think that can drive our portfolio across food product, across the region significantly and that's what we're focused on. But we have to do it more efficiently.

So we've invested -- part of our investments have been in innovation and our R&D. And as Jim even mentioned, we're giving visibility what we're doing with SEE ventures. If we can't develop it fast enough, we have that innovation rate on top of the team and we're going to move. We're going to move this portfolio faster to innovate faster, to satisfy those secular trends.

And that's what the exciting part of this packaging business, it's a stable market. It's up to us to move the organization, because you use the word organization a lot, to move this organization to where the growth is. And I think 2020 was a pivotal year to show us that we can do it.

It takes time. And by the way, I'm dealing with our scientists and all the time and getting FDA approval. Our products are unique. We're testing. If you came to our innovation center, we're testing things, but we're doing it now virtually. But we've got to move faster. So the innovations is one of the keys that I believe is that next phase that's happening in 2020, but we got to drive it even faster to support that 3% to 5% growth that we're going after. I definitely believe we're going to get it.

And the final piece that I will mention, it's got to be sustainable. So some of the churn and that's a term we use internally, why are you seeing some of the growth for the innovations? And this is where our team says that I'm too tough on them. It's because the churn is, we're now actually bringing sustainable solutions like Bubble Wrap on demand.

The Bubble Wrap if you looked at our facilities, the dramatic shift on that is, now we have Bubble Wrap in our portfolio with 90% recycled content. We did that in less than a year. So that's part of our Bubble Wrap portfolio, but it's fully redesigned with recycled content. So I'm quite excited about that 3% to 5% growth that we can make and leverage it at over 30%.

So, operator, we have time for one more question.

[Operator]

Thank you. Our next question comes from the line of Neel Kumar from Morgan Stanley. Your line is now open.

[Neel Kumar, Morgan Stanley]

Great. Thank you. In protective, e-commerce has been a clear driver of segment performance in the past two quarters. How are you thinking about the end market exposure of protective longer term?

Is that 55% segment exposure to industrials versus 45% from e-commerce in sales mix, the right mix going forward, or do you see opportunity to meaningfully increase e-commerce exposure from there?

[Ted Doheny, President & Chief Executive Officer]

Yes. Hi, Neel, and by the way Neel, I have to recognize you, when I did my fireside chat with you at your Laguna Conference, you asked me about changing CFOs on the spot. And I shared with you with Jim a friend in need is a friend indeed. So I'd like to use this as an opportunity to thank Jim, again, when you put me on the spot there on your conference.

So if we look at that portfolio in protective, in e-commerce we talked about. I just want to say it, again, e-commerce is affecting food too. But for right now, let's go to your question. So the industrial piece as you highlighted the 55% that said, negative deleverage that we've had. We had slight growth in the fourth quarter, which is good. I have the example on here, if we look at our movie reel slide. What's going on with industrial? We saw automotive. We have seen automotive turn. We haven't seen it turn at the same levels, but we did see positive.

So here's an example of what does automation mean and this is actually a tire solution. So what are we going to do? We're going to go package tires. We're going to be working with the customers, which by the way they get huge penalties because those tires roll off e-commerce conveyor systems. So we designed a shrink tunnel. We're going to put the tires in the shrink tunnel.

By the way, it's a few hundred thousand dollars. But we were going to do even more. We're going to put the full system in for a couple of million dollars. So we're going to wrap those tires. By the way, they're going to have paper and plastic so they don't roll off. We're going to shrink them and we're going to wrap them, so they won't – they don't want to have anybody who know it's inside. And so the materials they're going to flow through that are going to be at 2x, the cost of the system.

So that's a solution that we're bringing right now as we speak into that industrial automotive segment. So we see that picking back up. And boy does that leverage nicely. Just like our bags business that's the industrial side of our business leverages quite nicely. So that's a link of industrial with e-commerce et cetera. So the industrial piece is beyond that. We've also seen a pickup on the electronics that's in the industrial side. Also, on the protective you see that we're kind of merging on the market.

As we do with our Autobag system, we're actually using the Autobag system now to package food. So it's in our protective versus food portfolio. But again, it's – I'm talking about where that automation is coming in. And by the way on the top of the slide, it's personal. We have pet care up there. For all of you in staying at home that is an area that really had a pickup in the business with pet care. Pet food, pet accessories that's going. We're packaging that stuff that you're getting at home right now. But that's going through our side pouch Autobag system. So, just giving you a little color and flavor. We're going after that industrial piece. It's coming back. But right now in 2020, it was a wait on 2020, an opportunity in 2021.

[Ted Doheny, President & Chief Executive Officer]

So with that, operator that's the close for our call today. I want to thank everyone. I hope everyone stays safe and healthy. And thanks again, Jim. I know, you'll be watching. And Chris, really excited to have you on board. So, thanks everyone. And we'll see you next quarter. Take care.

[Operator]

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