Sealed Air Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the First Quarter 2024 Sealed Air Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Sullivan. Please go ahead.

[Brian Sullivan, Executive Director, Investor Relations and Assistant Treasurer at Sealed Air]

Thank you, and good morning, everyone. With me today are Emile Chammas, interim co-CEO and COO; and Dustin Semach, interim co-CEO and CFO. Before we begin our call, I would like to note that we have provided a slide presentation to supplement the call. Please visit sealedair.com, where today's webcast and presentation can be downloaded from our Investor Relations page. Statements made during this call stating management's outlook or estimates 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 as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K. We discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and the 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 Emile and Dustin.

Operator, please turn to slide three. Emile?

[Emile Chammas, Interim Co-Chief Executive Officer and Chief Operating Officer at Sealed Air]

Thank you, Brian, and thank you for joining our first quarter earnings call. Today, Dustin and I will review SEE's financial performance, provide updates on the markets we serve, discuss relevant trends and highlight the significant progress made on the transformational actions discussed on our previous calls. Lastly, we will conclude with our 2024 outlook before opening the call for questions. We closed the quarter with sales of $1.33 billion and adjusted EBITDA of $278 million, delivering strong results despite the continued challenging market dynamics in the Protective segment. Our first quarter results reflected for the first time since quarter four 2021 year-over-year volume growth across all regions of our Food business, continued volume stabilization in Protective and strong execution related to our CTO2Grow initiatives.

Through the focused efforts of our teams around the world, we delivered positive free cash flow of $78 million in the first quarter compared with a negative $13 million in the same period a year ago. Dustin will provide a more comprehensive overview of our financial performance shortly. Now let us move on to our market and business update. During the first quarter, our Food segment delivered low single-digit volume growth across all regions, primarily driven by our shrink bag business, which benefited from the carryover momentum of enhanced holiday demand and new customer wins from the fourth quarter. In the U.S., beef production was down low single digits year-over-year for the first quarter. For the rest of 2024, U.S. slaughter rates are expected to decline at a more rapid pace in the outlining quarters.

In South America and Australia, cattle cycles are at their peaks, driven by a robust domestic consumption and heightened export activities. Against a flat global proteins market in the first quarter, we drove volume growth, gained share and delivered double-digit growth in automation. Following its successful launch last quarter, our new compostable tray continues to gain traction in the market. Additionally, we are actively engaged in the development and introduction of more sustainable packaging solutions, such as recycle-ready barrier display films, poultry bags and post-consumer-recycled trays to address evolving market needs and support food processors and retailers in meeting their sustainability goals and regulatory requirements.

The regulatory landscape concerning plastics continues to evolve rapidly with recent legislative attention being directed towards polyvinylidene chloride or PVdC due to chemical similarity to PVC. PVdC is used as a very thin barrier layer in multilayer films within our protein shrink bags. Our shrink bag business that contains PVdC is approximately 1/3 of our Food segment. This barrier material plays a vital role in preserving the quality of fresh proteins, extending shelf life, enabling global distribution and minimizing food waste and its environmental impact on greenhouse gas emissions. Currently, there is no alternative to PVdC that matches its performance level. Through close collaboration with our suppliers, customers, industry associations and government agencies, we actively advocate for the essential role packaging plays in mitigating food waste and ensuring safe, affordable food on a global scale.

For decades, we've been assisting our customers in adapting to the changing regulatory environment and safeguarding their food supply chains. We already provide alternative barrier layers to PVdC, such as EVOH among others, particularly for applications with lower performance requirements. As the market leader in shrink bags, we continue to be best positioned to help food processors navigate the evolving regulatory landscape and deliver market-leading solutions that combine world-class material science, equipment and technical services. Transitioning to Protective. Revenue performance in the first quarter was in line with expectations. Industrial portfolios continued to be under pressure across all regions, contributing to a low to mid-single-digit year-over-year volume decline for the segment.

As discussed on our last quarter's call, the pricing environment remains pressured as we compete in a low volume, low visibility environment. In the Americas, volume growth was less than 1% as growth in box rightsizing solutions and recovery in retailer fulfillment sectors were offset by industrial weakness. EMEA experienced continued double-digit volume decline, primarily driven by intensified sustainability pressures across all portfolios and destocking from our APS product line. The electronics sector in Asia is improving from last year. However, uncertainties around China's economic recovery continue to temper short-term regional growth expectations. Consistent with our previous discussions, we still anticipate an L-shaped recovery across the Protective segment. The organizational changes implemented in February, which established dedicated commercial teams for both Food and Protective, are beginning to gain traction.

The renewed focus on our Protective channel and direct customers has created positive momentum internally and has well been received by our customers. Similar to Food, we strive to protect products in transit in a sustainable way. Our strategy entails a dual-pronged approach. First, within our flexibles portfolio, we are continuously increasing the level of recycled content in our product lines. Second, we are in the process of adding more fiber solutions to our portfolio, which will enable us to fully serve our channel partners in all segments within our markets. As an example, we are expanding our paper mailer offerings with various sizes to match the versatility traditionally associated with plastic and hybrid mailers. Moreover, we've developed more resilient paper coilers as a sustainable fishing solution to address demands of protecting high-value heavyweight products.

Additionally, we are introducing fiber alternatives within our APS solutions, enabling substrate-agnostic capabilities for our automation portfolios. This approach ensures that existing equipment installations can accommodate both substrates, providing our customers with enhanced flexibility in their distribution processes. The transformation outlined in previous quarters continues at SEE. We are focused on improving underlying business fundamentals by improving our commercial effectiveness, innovation processes and overall talent. Overall portfolio and footprint optimization continues to progress with three plant closures last year and another four in process in 2024.

Throughout the first quarter, we continued to wind down pieces of the portfolio announced last year. And we continue to evaluate the rest of the portfolio and footprint for further opportunities. As mentioned earlier, we continue to accelerate our cost takeout initiatives. And it is driving improvements to our bottom line. With the actions implemented so far, we have achieved an annual run rate savings of $78 million. Continuing with this momentum, we are confident in our ability to achieve approximately $90 million in year-over-year cost savings in 2024. Finally, we are in the process of pivoting our digital and automation strategies. And we'll have more to share in subsequent calls.

Now I'd like to turn it over to Dustin to review our financial results. Dustin?

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Thank you, Emile, and good morning, everyone. Moving to first quarter results, let's turn to slide four. Net sales were $1.3 billion in the quarter, down 1% on a constant currency basis. Adjusted EBITDA in the quarter was $278 million, up 4% compared to last year. Volumes were flat year-over-year for the quarter with growth in the Food segment across all regions offset by declines in Protective, primarily in EMEA. As reported, adjusted earnings per share in the quarter of $0.78 were up 5% compared to a year ago. Our adjusted tax rate was 25.9% compared to 24% in the same period last year. The increase in the tax rate year-over-year was driven by discrete impacts related to our share-based compensation. Our weighted average diluted shares outstanding in the first quarter of 2024 was 145.4 million. Turning to slide five. In Q1, inorganic growth from Liquibox contributed 2% to total company sales or approximately $23 million.

As anticipated, we saw lower pricing across both the Food and Protective segments, primarily in the Americas and EMEA regions, following the reduction of resin costs from the post-COVID peak in 2022 to the middle of 2023. Year-over-year volume improved in the Food segment across all regions through carryover momentum from last year's holiday season and new customer wins. Protective volumes were down 4% year-over-year, driven by a rebound in Americas, more than offset by declines primarily in EMEA. First quarter adjusted EBITDA of $278 million, which included $4 million inorganic contribution from Liquibox, increased $11 million or approximately 4% compared to last year with margins of 20.9%, up 110 basis points. This performance was mainly driven by accelerated savings from our CTO2Grow and productivity efficiencies, partially offset by unfavorable net price realization.

Moving to slide six. In the first quarter, Food net sales of $868 million were down 1% on an organic basis, primarily due to declines in price, partially offset by positive volumes led by carryover holiday benefits within our Food business, solid equipment performance, cattle cycle tailwinds in Asia Pac and Latin America, along with share gains of our case-ready solutions in the poultry market. Food adjusted EBITDA of $190 million in the first quarter was down 3% with margins at 21.8%, down 100 basis points compared to last year. The decrease in adjusted EBITDA was mainly driven by unfavorable net price realization of $10 million, partially offset by higher volumes. Protective first quarter net sales of $461 million were down 7% organically, driven by lower pricing in Americas and EMEA and volume declines primarily in EMEA, where both industrial and fulfillment end markets remain soft and sustainability pressures are accelerating.

Americas volume rebounded with strong automation solutions offsetting continued industrial weakness. Protective adjusted EBITDA of approximately $90 million was up 11% in the first quarter with margins at 19.4%, up 320 basis points. The increase in adjusted EBITDA was driven by cost control actions, which included CTO2Grow savings, partially offset by unfavorable net price realization of approximately $10 million in lower volumes. On slide seven, we review our first quarter net sales by region. On an organic basis, Americas was down 2% primarily due to lower pricing. Volume turned positive year-over-year for both segments for the first time since the end of 2021 with robust equipment placements in both businesses and strong volume within Food. EMEA declined 7% organically on lower pricing, persisting market softness and sustainability challenges in the Protective segment while Food volumes grew mid-single digit.

Asia Pac was flat organically as tailwinds from Australian cattle cycle and improving electronic performance were offset by continued weakness in the industrial markets. Now let's turn to free cash flow and leverage on slide eight. Through the first quarter, we generated strong free cash flow of $78 million compared to $13 million use of cash in the same period a year ago. The primary driver of this improvement was higher earnings, lower incentive compensation payments and better working capital management, partially offset by higher interest costs. During the first quarter, we further reduced our total debt by $28 million, ending the quarter with a net leverage ratio of 3.9 times, flat from the end of 2023. Our total liquidity position was $1.4 billion, including $353 million in cash and the remaining amount in committed and fully undrawn revolver.

We continue to focus on driving net debt to adjusted EBITDA to below 3.5 times by the end of 2025. Let's turn to slide nine to review our 2024 outlook. We are pleased with the strong finish to the first quarter and encouraged by the momentum that is building in parts of the business. The strength of the first quarter is giving us more confidence in our full year guidance. We continue to operate in a low visibility environment, especially in Protective. And we'll have better visibility into how this momentum translates into the second half during our next call. For now, we are reaffirming our full year 2024 outlook. Looking ahead to the second quarter, we anticipate a slight sequential decline in sales, reflecting the dynamic low visibility environment and subsiding holiday demand from last year.

As a result, second quarter net sales, adjusted EBITDA and adjusted earnings per share are expected to be ranging around $1.3 billion, $260 million and $0.64, respectively. Turning to slide 10. We remain committed to restoring underlying fundamentals by executing in the market, progressing our transformation, delivering CTO2Grow savings and deleveraging the balance sheet. Lastly, I'd like to close by thanking the global SEE team, who are at the center of our transformation, for their efforts in solving our customers' most critical packaging challenges day in, day out. With that, Emile and I look forward to your questions.

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

Questions and Answers

[Operator]

[Operator Instructions] Our first question is going to come from the line of Ghansham Panjabi with Baird. your line is open. Please go ahead.

[Ghansham Panjabi, Analyst at Robert W. Baird]

Hey, guys. Good morning. Hey, Gantham. Emile, I guess, on your characterization of the Food segment as it relates to the various trends across your geographies as you look out for the rest of the year, is that pretty much in line with your initial view coming into the year, especially as it relates to the North American cattle cycle?

And then related to that, what drove the upside specific to Food in the first quarter? A lot of companies have called out -- at the customer level, called out timing of Easter, etc. Do you think that played a role as well?

[Emile Chammas, Interim Co-Chief Executive Officer and Chief Operating Officer at Sealed Air]

Thank you, Ghansham. Thanks for your question. I mean, overall, in terms of the underlying market trends, they are more or less in line with our initial expectations. Although the -- if you look at the North American cattle cycle, even though it's down year-on-year, it is slightly better than initially thought.

We have strength in the other two regions, in Latin America in terms of their cycle as well as in Australia and New Zealand, where the market is up double digits. And as in our prepared remarks, we did highlight the strength in Q1 came from a couple of pieces, one is carryover in terms of the holiday demand but also in terms of new customer wins across several sectors. And so we're very encouraged in terms of the momentum of that business.

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

And Ghansham, the only thing I would follow on there, too, it was a broad base, as Emile alluded to in terms of overall regions, but also across many of our portfolios, right, which was well received, obviously, for the first quarter and demonstrating some of the strength in not just our shrink bags business but across the board with rollstock as well.

[Operator]

Thank you. And our next question is going to come from the line of Adam Samuelson with Goldman Sachs. your line is open. Please go ahead.

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Adam, are you on mute?

[Operator]

We can move to our next question. And our next question is going to come from the line of George Staphos with Bank of America Securities.your line is open. Please go ahead.

[George Staphos, Analyst at Bank of America Securities]

Thanks. Hi, everyone. Good morning. Thanks for the details. I guess, my question centers around sustainability, the transition that you're trying to achieve, particularly within Protective. So I guess, the question is this, Sealed Air has always had fiber-based solutions in protective packaging. What factors, to the extent relevant in terms of the going-forward model, allowed you to, to some degree, maybe fall behind in terms of share and lose share in fiber-based?

What's it going to cost to bring out these new programs and new SKUs? And what's the uptake been as you've been talking about this with your customers? Said differently, how much is it going to cost? And how much volume do you think you can regain as you bring out these new products? And are you seeing more demand for this from your larger or smaller customers in protective packaging?

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

George, this is Dustin. And again, appreciate the question. So a couple of comments I would make, starting with why haven't we been able to kind of gain share with the lost share of fiber, considering our portfolio? So you're correct that in many cases, we already have a very strong portfolio in fiber. And the statements that Emile alluded to earlier today is that our intention is to really round that out, complete it and to make it more fulsome across the board. He alluded to the paper coiler as an example as well as continue to extend our fiber-based mailers in terms of sizes, etc.

So going back to the past, we talked about this a little bit on the -- kind of towards end of last year around this commercial reorganization. So if you go back three or four years ago, we really consolidated our sales teams into regional teams and, as a part of that, lost some focus on our overall Protective business, right, being roughly 35% versus Food being more dominant in terms of the total portfolio. And so part of that reorganization was really to drive that focus, that intentional focus on the Protective business holistically. And so right now, our customers as well as our internal teams, because for them, they're really excited about the dedicated marketing teams, a rededicated focus on I&D. And so just being more intentional about driving that business forward.

The second piece is from a customer reception, they're noticing it as well. So Emile and I have had an opportunity to sit down with some of our distributors, direct customers. And they're noticing the difference in terms of just focus. And they're very excited about kind of our recommitment on some of these different offerings and again to advance that portfolio. And it's more of a timing for us in terms when we bring it up to market. In terms of cost, think of it as right now in terms of our guidance, our capital allocation from capex, etc, that's all really today fully baked into our overall guidance and encapsulated in our kind of total top line and bottom line.

[Operator]

Thank you. And our next question is going to come from the line of Matt Roberts with Raymond James. your line is open. Please go ahead.

[Matt Roberts, Analyst at Raymond James]

Hey. Good morning, Emil. Dustin, thank you for the time. I think last quarter, you previously expected EBITDA to sequentially improve throughout the year, I believe. Now I know 1Q impressively came in higher partially due to some holiday carryover. Could you quantify that holiday carryover or any of the cost takeout acceleration? And the decline now expected again in 2Q, is that more volume-related? Or have any of the price flow-through expectations changed? And any put and takes there would be helpful.

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Yes, Matt, this is Dustin. I'll take this one. And so a couple of comments I want to make. One is we are continuing to accelerate our CTO2Grow program. We're really excited about obviously the improvements we've made. We talked about the $78 million in terms of run rate we're already on and the confidence that gives us at this point in time really being at the end of Q1 and being able to achieve the full $90 million.

And candidly, we're not going to stop there, right? I mean, in general, I think driving that cost-conscious mindset into the organization is driving benefits to the bottom line and you're seeing some of that. A lot of that is going to be continued momentum, right? So that's kind of baked into the forward-looking guidance.

But when you go to Q2, right, there's really two impacts, I would say, more broadly overall. One is you have FX coming down roughly -- the U.S. dollar strengthening, so some of that decline is just purely FX or probably roughly about $10 million. The rest of them, there's a little bit of price in terms of sequential pressure. But it's relatively small. Think of it as roughly $5 million. And then on volume, it's about $15 million. And that's really the subsidization of -- the holiday demand kind of subsiding from Q1, which was stronger than we originally expected.

However, baked in that is also the momentum of the gains that you saw. So if you go back to Q1, it was a mix of that carryover but also a number of gains, particularly in poultry, that we're really excited about that continue to ramp throughout the rest of the year, which is again going to continue to drive some of that. As you kind of get beyond Q2, then you get into Q3 and Q4, you're going to see Food continue to ramp and kind of be in this low single-digit range from a volume perspective with pricing subsiding as we go throughout the year in terms of an impact.

[Operator]

Thank you. And our next question comes from the line of Jeff Zekauskas with JPMorgan. Your line is open. Please go ahead.

[Jeff Zekauskas, Analyst at JPMorgan Chase & Co.]

Thanks very much. You were talking earlier in the call about the risks connected with PVdC. Is the issue the bill in California that's being weighed? Or is it a European issue? Have your competitors already changed over to a different material, that is, do you feel like you're lagging behind in technology? Are there particular dates that it may be good to be aware of in terms of when this packaging may or may not be used?

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

All right, Jeff. Thank you for that question. I'll try to be as comprehensive as possible. So addressing PVdC, there's a couple of comments I'd make. We've talked about 1/3 of the overall business, in Food specifically, being PVdC. But another point is about 1/3 is also EVOH, right? And to hit your question directly, are we lagging behind? Absolutely not, right? The intent of the conversation is to really demonstrate, one is that our offerings, because these really -- PVdC specifically in our shrink bag business is really around three pieces, right?

It's the strength of the material science. And that can be whether it's PVdC or EVOH, we offer both today as well as the technical services capability. And then you combine that with our automation. That's really the strength of what's driven us to become the market leader in that segment and we'll continue to be. And so we're continuing to navigate that landscape and make sure that whether it's our manufacturing footprint or other aspects, we're able to candidly do both. And that's generally the way you would update the technology across our manufacturing footprint.

And as it relates to your specific question around California itself, at this point in time, there's no specific dates. California recently in roughly Q1 of this year, earlier in Q1, kind of announced what's called AB 2761, which is a bill related to -- it's really a toxins bill broadly that speaks to both PFAS, which we've already eliminated within our food packaging, and then as well as PVdC.

And the broader comment is we're continue to work. At this point in time, that bill is not in a place where it's enacted. And we're continuing to make sure that we advocate with agencies and our coalition to make sure people understand the impact that you have more broadly with how PVdC plays an important role in mitigating food waste across the globe.

[Emile Chammas, Interim Co-Chief Executive Officer and Chief Operating Officer at Sealed Air]

And maybe I'll just jump in to add a couple of pieces. So one is, ultimately, we offer our customers what they would like. And in many cases, we help them in terms of coming up with different solutions to address any potential regulation. So we approach it multi-front, right, one, in terms of working with industry associations to make sure the legislators understand the benefits of the different packaging. PVdC, in this example, it is the best barrier layer out there.

Two is within our portfolio, we are offering multiple solutions both on the food and the nonfood side. We talked earlier about the fiber part of the portfolio. And then finally, in some cases, customers are reaching out to us to solve problems that were not in our portfolio. And we gave the example of the compostable fiber tray that we launched last quarter. So again, this was in response to specific customer coming to us and asking us to help them solve that problem with the EPS challenge, so really approaching it from end-to-end and tackling those issues.

[Operator]

Thank you. And our next question is going to come from the line of Michael Roxland with Truist Securities. Your line is open. Please go ahead.

[Michael Roxland, Analyst at Truist Securities]

Thank you, Dustin, Emile, and Brian and Louise, for taking my questions. You already touched it a little bit in terms of momentum building in the business. You already spoke about Food in terms of new customer wins, especially around poultry. Any other pieces that you can comment on that have inflected or that are doing better?

And then secondly, Emile, you mentioned pivoting your digital and automation strategies. And you said you comment -- you have more comments later on, on future quarters. But can you give us a sense of what's happening there? What are you reevaluating? Any color you can provide about what the strategy around digital and automation.

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Yes, thank you. And I'll take the first part and then Emile is going to take the second part of that question. So just in terms of kind of what's doing better and underlying, I would tell you, in general, across the business, particularly within Food, bags specifically, right? So if you think about despite some of the issues that you're having in the overall protein cycles that we talked about holistically, our bags business, so think of it as poultry is more on the overwrap and then think of it as in our rollstock portfolio. If you think about our bag business, we're really firing on all cylinders across all three regions.

And so that's really the momentum. And I think what's happening is, what you've seen is it's often no surprise to anybody in terms of where protein cycle is around -- particularly around beef are. But what you're still seeing is strong retail demand. And so you're seeing a lot more exporting activity right now happening across the globe as a result of that as you think about the major industrial food processors trying to make sure that they're getting the right supply to where the strongest demand is. And so we're obviously helping them through that. So I would say that's the biggest area.

And as you go back to Protective, I'm talking about some of the areas that were better in Q1 with really strong around our APS offerings, where we talked about a lot during 2023 some of the destocking activities that happened. There's still some of that in EMEA. But in general, we talk about strength in Americas as well as Asia Pac. Again, APS plays a part in that. Our box rightsizing solutions performed very well. But we also have pockets of green shoots. And think of these as shrink foams, inflatables and a couple of the areas that were inflecting back to positive volume.

So again, we're remaining cautiously optimistic. If you look at kind of the outlying periods for Protective, you're going to see volume kind of improve. Q2 will be very similar to Q1. But then Q3 and Q4, our expectation right now is that business will continue to inflect. And on Food, Q2, you're looking at a little bit of flattish volume, going back to the reasons we discussed earlier. But then that Q3 and Q4 will be strong, kind of low single-digit volume growth, driven off the back of those wins and just the momentum that's building in our broader business.

[Emile Chammas, Interim Co-Chief Executive Officer and Chief Operating Officer at Sealed Air]

And jumping in on the digital automation, again as we said, we will talk more about this in future calls, but let me just hit a couple of those highlight points to you, the things that we already started discussing in the last quarters. So first one on automation, so if you think about our business, where we build strength is where we have superior materials, technology to offer to our customers, accompanied by strong automation solutions as well as service. And that's been the driver.

And we mentioned at the last call that a big -- where we have gaps in that portfolio is in a couple of areas. One, if you think on the Protective side, we've announced partnerships around getting the 3D right box solution. And we are starting to get some gains from that partnership. Second, we announced recently in one part of our rollstock portfolio, where we've announced a partnership around trays and overwrap. And we are working there with more partnerships to come to complete that offering.

But also on the fluid side, the Liquibox automation sales are a very small percentage in terms of the overall portfolio. And there, we're working on a couple of partnerships, which we hope to announce in the next couple of quarters, around being able to offer full automation solutions. So again, if you think about it, our approach to the market is superior materials, automation, accompanied with service.

Then jumping in on digital, again two pieces there that we're going to be exploring further in the next upcoming calls. One is on the digital commerce. So today, we have about 22% of our sales that are going through that channel. And as we talked in the past, we pivoted from just continuing to investing in more capabilities in terms of using the investments we've made to drive into commercial success both from the top and bottom line.

And then the second piece that we've talked about, which will come to market in the back half of the year is around our digital printing technology, where we're introducing for flexible shrinkable materials, the first commercial-scale digital printing capabilities with water-based inks. So again, more to come, but those are two key pillars in terms of our growth strategies.

[Operator]

Thank you. Our next question is going to come from the line of Edlain Rodriguez with Mizuho Securities. Your line is open. Please go ahead.

[Edlain Rodriguez, Analyst at Mizuho Securities]

Thank you. Good morning, everyone. So Dustin and Emile, so I'm just kind of looking ahead like the next two, three years, just wanted to get a sense of what keeps you awake at night? Like what do you see that has like the most opportunities and what concerns you the most? Like when you're thinking about the business portfolios, what keeps you awake at night? Or do you sleep like a baby?

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

I appreciate the question. So I would say a couple of things. It's what we're really talking about in our call today, a lot of things that we're working on as part of our overall transformation is really to address those -- really maximize the opportunities we have and minimize the risk that we see ahead of us. And if you really think about that and break it down in a number of different areas, one is we recognize kind of coming off the volume losses in '22 and '23 that there was work to be done in the overall cost structure. We feel that we have that well underway. And the $78 million going to the $90 million.

The second piece is around the commercial reorganization, where there was a sense that we had lost some focus on the overall Protective business. We completed that reorganization in the first quarter of the year in February. We're really excited about the traction that's gaining. But that work will be ongoing in terms of us continuing to drive commercial execution, commercial excellence. And so those areas, it's too early to call in terms of the intangible benefit that we'll get relative to driving overall growth. But we're quite optimistic already as we sit here in April, just a few months away from that initial organization.

The second piece is around the overall portfolio, right? And I think that area, as we talked about, we're excited about some of the things we're building to drive in 2024. But that work will be ongoing. As you think about completing the portfolio from overall fiber, it's not just the fiber piece. Going back to the earlier question, I believe, George had, it's also about making sure that we can commercially execute well in that area, not just across our direct customers but our channel partners.

And we're continuing on that work. And then we feel incredibly well positioned, as we mentioned earlier, about some of the sustainability challenges that we're facing on Food and Protective, the fiber on Protective, and on Food, as we talked about earlier today, around PVdC and focus on certain plastics. But we feel incredibly well positioned. But we'll have to also continue to manage through that transition and -- from here on.

[Operator]

Thank you. And our next question is going to come from the line of Gabe Hajde with Wells Fargo. Your line is open. Please go ahead.

[Gabe Hajde, Analyst at Wells Fargo & Company]

Good morning, Emile and Dustin. I have one confirming question for us nonmaterial scientists on the call. So this PVdC discussion, to be clear, it's a middle layer within a multilayer 9-, 11-layer film with no direct food contact. And more importantly -- yes, prevents contamination, food waste. And you can today change the formulation at your customer request, although it may compromise some of these again extended shelf-life attributes.

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Yes. So thanks for that question. The answer is yes. It's a thin barrier level that manages oxygen transmission rate within our multilayer films. To be clarifying, we already offer both today, right? And it's really based on customer preference, market need. And so at any point, if something changes from a regulatory environment, we'll be well positioned to manage that transition. But it's already offered today. It is that there's no food contact associated with it. It is obviously fully FDA-compliant.

[Operator]

Thank you. And our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open. Please go ahead.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

Yes. Thank you. I appreciate you guys getting back in the queue. I guess, wanted to just get an update on price/cost. Certainly, there is still pricing pressure in Protective as well as well as Food. But just price -- if I'm looking at the business for the quarter, price/cost seems like it was a much smaller drag on the business year-on-year than maybe had been previously contemplated.

And maybe put another way, can you help us bridge some of the year-on-year margin expansion in the Protective business and just help us think about where -- I mean, volumes are still -- were still negative. Help us think about how you got that much kind of leverage and EBITDA expansion in the -- on the Protective side.

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Adam, great question. And I'll start with just kind of giving you a bridge holistically around net price realization, so appreciate the question. And just to start there, we expect net price realization to be in the order of magnitude of around $80 million negative year-over-year, right? That's about $140 million of price offset by a benefit in direct materials of about $100 million and then offset by some of that inflationary, albeit much smaller than prior years, around think of it as labor and nonmaterial cost as well, so it's about negative $40 million. That gets you to that negative $80 million.

That's actually about $15 million worse than we had originally anticipated. And a lot of that's coming from a little bit of, let's say, increased price pressure that we see overall. And that's being offset by the productivity benefits more broadly in the business. Now just keep in mind, while we're driving our CTO2Grow program, which is restructuring the holistic business, we're always continuously driving productivity in underlying business.

And a lot of what you're seeing in Protective, if you go back to that cost takeout program and you go back to Q1, which, keep in mind, was a very low quarter in 2023 for Q1, specifically for Protective, that a lot of the actions that we've been taking in terms of cost control, productivity, footprint rationalization, SG&A optimization have all really been targeted in that Protective business. And that's why you're seeing some of the benefits you're seeing today.

[Operator]

Thank you. Our next question is going to come from the line of Christopher Parkinson with Wolfe Research. Your line is open. Please go ahead.

[Christopher Parkinson, Analyst at Wolfe Research]

Great. Thank you so much. Can you just take a step back and just looking at some of the businesses that you're referencing, the movement in Food and improvements? Can you just take a step back and talk about a little bit more how you are thinking about your product portfolio, what you're seeing by geography?

Obviously, there's been a lot of noise across protein markets the last few years. It seems like things are turning generally for the positive. But I'd love to hear your perspective on how confident you are to fully benefit from these improvements, or at least stabilization, let's say, for the balance of '24.

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Yes, thank you, Chris. And so I'll start with Food, then I'll move to Protective. And so we feel really strong about Food holistically. Going back to where our strength is, we continue to be the market leader in our overall bags business. We're continue to gain share. We're really good about that, outside of kind of the market ebb and flows on kind of global proteins, particularly as it relates to fresh red meat, specifically beef.

And in this note, we've talked about the fact that this year is obviously a down year in the cattle cycle and is going to take a couple of years to work through that. But we feel really good about our placement and from a portfolio perspective. And again, it's that combination that drives it around material science, automation as well as technical service.

When you think about it, what we talked about in Q1 -- or excuse me, during Q4 earnings call and what we're still focused on, and Emile alluded to it a little bit earlier, is really rounding out our rollstock portfolio. We see that as an area of continued growth. We're not the market leader in that space today. And that's part of what creates -- it's a much larger market as well, much more fragmented.

And so we feel our focus from a portfolio perspective is continuing to round out that offering set and make sure it's competitive in the marketplace. And so we're targeting specific applications that we're going after. And an example would be today, the strength of our poultry business by extending that into other areas.

And then when you move to -- and then the third piece is just from a category perspective is the trays, right? We see a huge opportunity, think about sustainability themes around EPS, kind of the bans coming in place for that, the compostable tray we launched. But there's many other formats from a tray perspective that we're working on that we're excited about. And so we continue to see that as a potential opportunity for true net new growth going forward. And think of that as multiyear beyond just 2024 but into '25 and '26, right?

And then as you shift gears and you go to Protective and you think about the portfolio there, it really is that completion and completing the overall fiber-based portfolio and continue to extend some of the automation capabilities that we have. And the focus there, Emile alluded to it earlier, around the paper mailers, which is a huge opportunity as you think about the e-commerce trends around a shift away from boxes into mailers more broadly.

If you think about, when you talk about 2D rightsizing that we already have today, 3D that we're beginning to generate sales on that will come into play in the second half of the year, it's those areas that gives optimism. The area that we're still looking at and cautiously optimistic about is the rest of that broader portfolio. Think of it as utility, this is classically BUBBLE WRAP, foam, etc, where you still see kind of weakness in Q1.

And a lot of the channel checks we're doing in talking to our distributors kind of as you think about the rest of the back half of the year, they continue to be no different than we talked about in Q4, optimistic about the second half. But no one at this point in time has true line of sight, right? So that's the area that we're continuing to work and gain momentum. And I'm going to turn it to Emile.

[Emile Chammas, Interim Co-Chief Executive Officer and Chief Operating Officer at Sealed Air]

Yes. Just going to add one area that we haven't talked a lot about the last months, but it's on the fluids segment as well. We continue to be excited about the fluids segment and the growth there, be it through some of our innovations around FlexPrep for the foodservice area.

But also, if you think about it holistically with all the sustainability and recycling pressures out there, there's going to be more and more pressure for people who are in rigids business, be it plastic or nonplastic, to go towards flexibles. So we're well positioned in terms of not only driving growth through our own innovations, but also how do we take advantage of those sustainability trends to penetrate further in terms of rigids to flexibles conversion.

[Operator]

Thank you. And our next question is going to come from the line of Anthony Pettinari with Citi. your line is open. Please go ahead.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Good morning. Dustin, on the last call, you talked through the net pricing outlook for '24. And I'm just wondering if there's any update on those items. I think you talked about $60 million negative net price and with some moving pieces from raw material prices and the bonus pool restoration. So I'm just wondering if there's any material changes there. And then the $20 million EBITDA drag from net price in 1Q, was that in line with your estimates, better or worse? Any thoughts there?

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Yes, great question. So I mentioned this a little bit earlier, and I'll break down kind of where we're at today. We're about $15 million worse, $15 million to $20 million. Year-over-year, our net price realization has driven primarily the increase in pressure a little bit from a pricing standpoint. We're roughly negative $140 million of price offset by $100 million of benefits of direct material cost. And then that's being offset by inflationary pressure in nonmaterial, nonlabor costs as well as labor cost. And that kind of brings you back down to roughly a net $80 million number for the full year.

Q1 was really driven by -- so that's net price realization. We feel good about that for the remainder of the year as we kind of manage throughout this. And again, we're obviously really focused on cost control right now. When you think about Q1, the benefit in a lot of ways was kind of the performance from a volume perspective, the leverage that drives the business. We've talked about it but not enough in the sense of that as volume comes back and is restored, particularly you've seen in Food in Q1, but you're seeing it even somewhat in Protective as that business has stabilized, is that you're seeing the ability of that business to drive leverage in it, operating leverage.

And then that's also benefiting from just continued focus on CTO2Grow, being cost-conscious, broader productivity benefits in the business. And you saw that materialize in Q1, right? And so from a bonus restoration perspective, it's really just in line right now for the full year. So we're still driving towards -- you still have that impact. That impact is already embedded in everything that we just talked about in our guidance as well.

[Operator]

Thank you. And our next question comes from the line of Arun Viswanathan with RBC Capital Markets. lines open. Please go ahead.

[Arun Viswanathan, Analyst at RBC Capital Markets]

Great. Thanks for taking my question.I guess, I just wanted to come back to a similar line of questioning around the bridge. So my understanding was you're expecting about plus $90 million from CTO2Grow. And it sounds like you're now expecting minus $80 million for net price/cost. So that's a plus $10 million net. And then you have the minus $60 million for incentive comp. And so that's a minus $70 million net.

And so when you think about volume, it looks like if you think about flat volume, really it would be kind of negative volume that would get you to that kind of flattish EBITDA year-on-year outlook. So could you just update on how you guys think volume should progress from here? I know Food outperformed a little bit, but Protective is still down. It looks like it's down about 22% on a 2-year stack. So does that kind of flatten out as you move forward? Or how do you think about volume and relate that to the bridge?

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Sure. Yes, so I'll come back to the bridge as a last point. But just talking about volume progression throughout the year, if you look at the total company level, right, and you think about how volume is going to continue to progress, if you think about right now, today, we drove about 0.5 point of growth in Q1. And then if you think about as you go to Q2, where we're down about 1.5 points, and then you're going to expect the rest of the second half of the year really in this -- think of it as total around 2%, 2.5% per quarter. That drives you to about one point of volume growth in the full year. It's really being driven all by Food.

So if you break it down by overall businesses and you go back to Food for a second, Food volume, you're looking at 3%. And that's the strength that we talked about earlier today at length. And if you think about Q2, it's flattish for the reasons that we've already outlined. And then those wins coming through in the broader business, you're looking at low single-digit growth that gets you to about 2% to 3% for the full year. And then if you go to Protective, Q2 is going to be a similar result. It's improved year-over-year from Q4. So think of it as down 5%, now you're down 4%, we'll continue to be down 4% in Q2.

Then as you get to the second half of the year, it begins to improve, right? And we talked about that to where we think it will inflect kind of during the Q4 time frame, right? So if you think about bridging for the full year holistically, that net price realization of about negative $80 million that we talked about, the plus $90 million, then you have a negative $40 million roughly related to the bonus restoration and a positive $20 million related to volume. And these are all again rough numbers.

[Operator]

Thank you. Our next question comes from the line of Phil Ng with Jefferies. Is your line of open please go ahead.

[Phil Ng, Analyst at Jefferies Financial Group]

Hey, guys. Congrats on a strong quarter in a choppy environment. I guess, my question is on Protective. It looks like volumes have stabilized. But you did call out perhaps EMEA is a little weaker. You're seeing some destocking and sustainability pressure. Is that a material risk in how to think about your demand profile this year?

Appreciating comments around being refocused on the commercial team on Protective and kind of driving fiber on the Protective side, how does that margin profile look, an aspiration when we think about 2025? Give us some perspective as how big this could be. And when we look at the recovery next year, are some of these headwinds that you've called out limiting your ability to grow? Or we should see a typical cyclical recovery in that business like we've seen in past cycles?

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Yes, so a great question. And I'll start with the EMEA comment. And you're right, we did rightly call that out, it was down significantly in Q1. And really, that's an extension coming out of 2023, where I would say, if you go back to '22, where the volume really came down that business, EMEA was -- came a little bit later in that cycle in terms of actual volume decline. And it's kind of -- kind of think of it as last in and last out relative to this.

So as we progress, we see Q1, we see that business to substantially improve as we go to Q2, Q3 and Q4. The sustainability pressures are still being overall -- or we did make the comment around the acceleration. And acceleration is that shift to fiber, where you see it more quickly happening within the EMEA business than you do you see it relative to our Asia Pac or obviously our U.S. and North American business or Latin American business.

And right now, we don't see that. Because keep in mind, our EMEA Protective business is, I want to say, roughly 20% of the total Protective business that we see, one, the work that we're doing from an overall portfolio perspective will allow us to begin to participate in a more meaningful way in the growth in that transition, which will help offset some of the sustainability pressures that we just discussed. And then more broadly, we still believe that business is set up for a cyclical rebound. I go back to we're anticipating an L-shaped recovery. We're still expecting that throughout this year. A lot of that will be dependent on how we perform in the second half.

And as we mentioned on the kind of prepared remarks, we're obviously looking forward to come back in that discussion in August to give you more clarity. Because again, we still are operating in a low visibility dynamic environment. But there's nothing from our point of view as we think about the underlying market growth trends that come with a rebound that we should be able to participate in that, albeit in EMEA, as an example, maybe at a slightly lower rate until we get our portfolio exactly where we need it to be.

[Operator]

Thank you. Our next question is a follow-up question from George Staphos with Bank of America Securities. Your line is open, please go ahead.

[George Staphos, Analyst at Bank of America Securities]

Thanks so much. Hi, guys. I just want to come back to my earlier question. And it's really around what are your customers asking you in particular in both segments relative to your product offerings? I know it's kind of a broad question. But within Protective, do you see any difference between what your smaller distributor customers are asking for from Sealed Air relative to the larger ones?

So for example, are the larger ones really more focused on fiber and the smaller guys are really more focused on pricing or service? Is there a way to differentiate and, in turn, kind of -- I know it's in your guidance, but what's it costing you? And then when you get that fixed, maybe piggybacking a little bit on what Phil was getting at, what's the uplift? When you get that resolved, what does that mean in terms of revenue and earnings?

Similarly in Food, we know you have the product offering that you think you need. We know that customers basically dictate whether they want PVdC or EVOH or any other barrier layer in their bags or whatever. Do you have, given your portfolio right now, basically offer whatever the customer needs, if they want to pivot to some other structure, you are not constrained from a supply chain standpoint, you can offer whatever they want and not have it impact your earnings? Or would it?

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Yes, thank you, George. So to come back to the point about Protective, I would say that, keep in mind, when you think about our distribution footprint, your larger distributors tend to kind of offer the full breadth and depth of the entire portfolio, where you could have regional distributors offering different pieces of it, not holistically. So some of the needs are dictated by, obviously, the pieces of the portfolio that they all collectively sell.

And I would tell you, in general, there is a desire to have a broader fiber footprint, which is what's leading to us -- I mean, it's obviously that customer feedback, whether it's direct or within our distribution that are leading us to kind of think about and shape our overall portfolio, where they're seeing demand where we don't have it right now more broadly. And so I think that, that's really been the focus area.

And going back to your question around the intangibility, well, I just want to come back to that one point. So you also made a comment about is service different, etc, it depends. It really depends again on the portfolios they sell because the service models that you have are really structured around those individual areas, where if somebody is selling a lot more of automation portfolio, you also have a lot more technical services and related services on those machines. But it's really dependent on that portfolio mix.

So what we're focused on is getting that optimum mix in each individual distributor and then the rest of it will kind of follow suit. I mean, again, our technical service has always been a bright spot in terms of competitive differentiation and it continues to be. And our distribution as well as direct customers recognize that.

When you think about our overall Food business more broadly, I think that a couple of comments I would make. The answer is yes. We obviously offer both. Today, our customers dictate what they want in that portfolio. We feel really good about -- because specifically, the question you asked about really relates to our shrink bag business. And we feel well positioned to continue to offer either type of materials or bags that they would like at any given point in time.

And so we're in constant dialogue. No different when our distributors, we're in constant dialogue, Emile and myself, with our direct customers, our largest customers to really understand what their needs are, how sustainability pressures are shaping their thinking around their overall needs in terms of what's also important for their supply chain. Because I'll tell you that's the most important part.

A lot of those discussions are less about sustainability and more about performance. And we continue to be well positioned there. It's rollstock that we mentioned that we need to continue to do more work. And then again, we're really excited about the play that we have with our fluids and liquids business and the opportunity that presents to continue to displace rigids from an application perspective.

And so I feel really well positioned there. Right now, going back to your question about cost, it is embedded and there's nothing in our portfolio. Just think about it, over time, this isn't the first time that we've had some type of pressure or we've shifted our portfolio or navigated these types of scenarios. It's embedded in our current capital outlay for 2024 and is part of our broader kind of -- as we think about kind of getting to where we need to from a deleveraging standpoint in '25, it's embedded in that as well.

[Operator]

Thank you. Our next question is a follow-up question from Gab Hajde with Wells Fargo. Your line? Is open. Please go ahead.

[Gabe Hajde, Analyst at Wells Fargo & Company]

Thank you for taking a follow up. We didn't spend a whole lot of time talking about automation. Emile, you kind of teased out that you guys will be, I guess, updating us in the second half in terms of strategy or resources there. But just was that a drag here in the first half. We're reading a lot about delayed capex projects from just industrial companies', in general, lack of visibility, higher costs, financing costs, etc?

And then just kind of what the book-to-bill ratio has been trending like. And then could that be -- if things normalize in 2025, I think, on the Food side, your customers are pretty well incented to use your equipment. Could that be kind of an incremental tailwind for you in '25?

[Emile Chammas, Interim Co-Chief Executive Officer and Chief Operating Officer at Sealed Air]

Yes, thanks for that question. So actually, we did say in our prepared remarks, actually in the first quarter, we saw in the Food business, our automation sales is up double digits. But for the year, we're still in line in terms of where we guided. It is going to be flattish, driven by all those factors that you highlighted. In terms of book-to-bill ratio, we're at one, right? So some of that is burning through some of the backlog.

So again, there are hesitations out there in terms of triggering investments from our customers. But if you look at our customers' profitability profile, that is significantly improving. So we are still optimistic about the future. But this business, as you can imagine, is lumpy in terms of when exactly it comes, when you install, when you can recognize the revenue. So again, our outlook on automation for this year has not changed. We're off to a good start. And we do believe that cyclicality will come back and we're going to be ready to take advantage of that.

[Operator]

Thank you. I would now like to hand the conference back to Emile Chammas for closing remarks.

[Emile Chammas, Interim Co-Chief Executive Officer and Chief Operating Officer at Sealed Air]

I'd like to thank everyone for their time today. And just to reiterate, we are pleased with the first quarter results, and we're excited about the momentum building in the business and the progress we are making in our transformation. And we look forward to speaking to all of you again in August. Thank you.

[Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer at Sealed Air]

Yes, thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Brian Sullivan, Executive Director, Investor Relations and Assistant Treasurer
• Emile Chammas, Interim Co-Chief Executive Officer and Chief Operating Officer
• Dustin Semach, Interim Co Chief Executive Officer and Chief Financial Officer

Analysts

• Ghansham Panjabi, Robert W. Baird
• George Staphos, Bank of America Securities
• Matt Roberts, Raymond James
• Jeff Zekauskas, JPMorgan Chase & Co.
• Michael Roxland, Truist Securities
• Edlain Rodriguez, Mizuho Securities
• Gabe Hajde, Wells Fargo & Company
• Adam Samuelson, The Goldman Sachs Group, Inc.
• Christopher Parkinson, Wolfe Research
• Anthony Pettinari, Smith Barney Citigroup
• Arun Viswanathan, RBC Capital Markets
• Phil Ng, Jefferies Financial Group Inc.