Good day and thank you for standing by. Welcome to the First Quarter 2022 Sealed Air Corporation Earnings Conference Call. At this time, all participant lines are in listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Louise Lagache, Please go ahead.

Thank you, and good morning, everyone. With me today are Ted Doheny, our CEO; and Chris Stephens, our CFO. Before we begin our call, I would like to note that we have provided a slide presentation to guide our discussion. In addition to our results and outlook, Ted will go through a deep dive on SEE Digital Packaging features. Please visit our website where today's webcast and presentation can be downloaded from IR website at sealedair.com. Statements made during this call stating management's outlook or predictions for future periods are forward-looking statements. These statements are based only on information that is now available to us. We encourage you to review the information in the section entitled forward-looking statements in our earnings release and slide presentation, which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on our quarterly reports on Form 10-Q and current report on Form 8-K, which you can also find on our website or on the SEC website. We discuss final 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 corresponds to the non-U.S. GAAP measures we reference throughout this presentation. I will now turn the call over to Ted. Operator, please turn to Slide 3. Ted?

Thank you, Louise, and thank all of you for our first quarter 2022 earnings call. Chris and I will discuss our Q1 results and our 2022 outlook. I will first recap our quarter performance and then provide a deep dive into our digital transformation. After that, Chris will review in more detail our financial results and our revised 2022 outlook. On Slide 3, you can see we delivered strong sales and earnings despite sustained inflationary pressure and the volatility caused by numerous disruptions around the world. Our SEE operating engine is performing. In the quarter, net sales were up 12% to $1.4 billion, and adjusted EBITDA was up 22% to $327 million. Adjusted earnings per share was up $1.12, up 43% compared to a year ago. Free cash flow for Q1 was a use of cash of $19 million as we continue to invest in our operations to support growth and productivity. On Slide 4, you can see our SEE operating model. As presented last quarter, we aim to achieve 5% to 7% annual sales growth over the next three years. We are targeting to have more than 1% of this growth to be digitally generated by 2025. We're also targeting to have 50% of our total sales to be generated online by 2025. We are targeting adjusted EBITDA growth at 7% to 9%. We've updated our SEE operating model for free cash flow conversion to greater than $0.45 to align with our increased capital expenditures in our operations to approximately 5% of sales. Finally, we are raising our 2022 sales and earnings guidance, and Chris will talk about this in more detail later. Let's turn to Slide 5 to take a look at our markets. We're transitioning to a market and customer-centric company, creating value and delivering savings through…

Thank you, Ted, and good morning, everyone. Let's start on Slide 11 to review our first quarter net sales growth by segment and by region. In Q1, net sales were up 12% to $1.4 billion. In constant dollars, net sales were up 15% with 18% growth in Food and 10% growth in Protective. By region, Americas was up 18%, EMEA up 11% and APAC up 4%. On Slide 12, you can see organic sales volume and pricing trends by segment and by region. In Q1, price was up 16% overall, while volumes were down 1%. Q1 price was favorable 17% for Food and 15% in Protective. Most of the price realized in Q1 was a result of prior actions and formula pass-throughs. These actions to increase price with care to gain share are in response to ongoing inflationary pressures. As always, we are working directly with our customers to meet their needs, save their money and drive productivity. Food volumes were up 2%, driven by EMEA up 7% and APAC up 3%, while Americas was down 1%. Protective volumes were down 3% with declines in all regions, mainly driven by normalized demand trends given the strong demand in Q1 '21. On Slide 13, we present our consolidated sales and adjusted EBITDA loss. Having already discussed sales, let me comment on our Q1 adjusted EBITDA performance. Q1 adjusted EBITDA of $327 million increased $59 million or 22% compared to last year with margins of 23.1%, up 190 basis points. We achieved positive price realization this quarter. However, labor and non-material inflation continues to rise at a rapid rate, impacting year-over-year earnings by $24 million compared to $13 million a year ago. In addition, operating costs of negative $30 million includes incremental investments to support future growth. Productivity gains totaled $10 million…

Thanks, Chris. Let's turn to Slide 18, where we have our purpose statement. As an ESG centered company, our purpose guides everything we do. This is how we are making our vision a reality. Our SEE operating engine is performing and maintained momentum despite considerable disruptions and sustained inflation. I'm proud of our team's efforts and perseverance operating in challenging times. We continue to invest in automation, digital and sustainability to deliver savings and productivity for our customers. Please visit our website to see our full prismiq, Digital Packaging Made Brilliant launch out more about where we are going. We are creating long-term value for our stakeholders and making our world better than we find it. Continuing with the theme of providing investors deep dives into our growth drivers of automation, digital and sustainability, next quarter, we plan to provide a deep dive into sustainability. With that, I'll now open the call for questions. Operator, we'd like to begin the Q&A session.

[Operator Instructions] Our first question comes from the line of George Staphos with Bank of America. Your line is open. Please go ahead.

I wanted to dig into digital and prismiq. And I guess, one, and a couple of parts to the question, but I just want to reaffirm, you said that you ultimately want to double your investment in digital to over $100 million. You've already put in $50 million in presses like the 5540, and you said you want to get to 100% digital, if I heard you correctly. One, how -- when would we expect for you to be at 100%? And then relatedly, what is proprietary, what could be replicated by somebody within your whole prismiq value proposition to customers? Or is it totally proprietary, and you have a very large moat around that?

Great. Thanks, George. And I'm excited that you opened up with prismiq is the question. So I'll use the slide to try to give some color. A couple of points I just want to play back that you said a little bit differently. But if you -- we highlighted on the operating model, we actually are looking for digital to bring an additional 1% growth in 2025. But actually 50% of our sales were looking to go online on digital, so by 2025. So back to your specific question, if we look at prismiq and you see one of the press there of the picture on Slide 9, it's -- this is the actually the largest print we've already deployed. And the $50 million that we talked about is a little bit more than $50 million is just on the digital printing investments that we've made since we actually bought the proprietary technology now about three years ago. The other part of our digital investment is beyond just the digital printing, so just to clarify those numbers there. But back -- looking at the press, this is what's extremely exciting. This is an actual picture of the press. It's right now under operations in our Simpsonville facility, the largest food packaging plant in the world. This press is reducing the footprint of the current printing operation by a factor 10. And what's exciting about this, we have smaller versions of this and actually single color that we've already deployed. We've deployed some of those in our Illinois facility. We're actually doing mailers, and I could talk a little bit about what that's enabled for us, which is pretty exciting. We could turn mailers now with single color printing really by phone calls and have unique printing capabilities per mailer, which is pretty exciting. But for the whole footprint, it's going to probably in the next three years, changing out our printing to the digital. This is the actual biggest one. This one we're excited about. Full 10 color printing, also metallic printing, and actually, we've had customers in looking at this, especially the color that's been most requested from the press is actually invisible ink. And so that we can work with that track and traceability, so pretty exciting. Great question, really excited, much more coming on digital that we can follow up with, but really excited. Next question please.

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

So I was hoping to just maybe dig in a little bit on the performance in the quarter and the expectations over the balance of the year, thinking about kind of how positive price cost spread was in the first quarter. It seems like that you're expecting that to moderate pretty notably over the balance of the year, maybe offset a little bit by some better year-on-year volume trends as we go forward. Could you just help us think about kind of some of the key puts and takes around that, both second quarter and back half?

Yes, very good. Yes, a good question. So maybe just a comment on Q1, just that price realization coming off of favorable price cost spread in Q4 that momentum continued into Q1. So, we were pleased with that performance in the first quarter in terms of contribution to our overall results. But to your point, we do see Q1 as being a very strong price cost spread. We'll continue to benefit that going into Q2. The second half of the year really, the moderation, I think, on the material inflation side, since we're seeing the material inflation, at least anticipating most of that to be 2/3 of which to occur more in the first half of the year than the second half. So, as we work through literally quarter-by-quarter, just managing that expectation around price cost spread, that's how we're working through it. So to your point, there will be some moderation in the second half of the year in terms of our guidance implies, but strong performance for Q1 out of the back. So, we're in a position to basically look at overall full year guidance. And given the strong Q1 performance, we wanted to provide some updated commentary around our full year guidance to reflect some of the favorability into the full year. Ted, anything to add?

Yes. And Adam, just a shout out to you in the Goldman Sachs conference be there next week, and actually, I'm going to bring with me, our Chief Operating Officer, and talk about some of the cool things we're doing in the industrial space. As we look at the volumes, I do want to highlight just something that's really important to us. If you look at Slide 13, you'll notice that we use the term price realization. The pricing here, and we're very explicit with care to gain share. And so this was the first quarter we actually give you the formula how we look at price realization internally. This was the first quarter that we actually had a positive price realization, which is tremendous inflationary pressures going beyond resins to pretty much everything. So I just want to highlight that. But beneath that, if we look at the volumes, just to give you some color of what's going on with our markets, as Chris highlighted, in the first quarter on the Protective side, we're dealing with the comparable last year that was up significantly. So missing that on the volume side, if we take a look at what we had in the constraints with some of the materials and really the constraints on our automation, and I'm sure I'll get another question on. With that shortage, we still had a backlog we didn't ship. And so we still see the volume coming from the year on the Protective side. The biggest drop was actually in our mailers. The biggest year-over-year when we had the surge from a quarter ago, but where -- if you looked at Slide 5, we're actually introducing a new mailer really excited about we'll hit on the second half of the year, a paper bubble…

And our next question comes from the line of Adam Josephson with KeyBanc. Your line is open. Please go ahead.

Congrats on a really good quarter. Chris, one question on your volume guidance. Can you just walk me through the change from three months ago? So I think three months ago, you were expecting about 3% volume growth for the year. Now you're expecting about one. How much of that is the raw material and automation constraints that you mentioned? How much is any demand elasticity from these higher prices? How much is the just global industrial economy slowing, e-commerce slowing. Obviously, we saw Amazon's report on Thursday. Can you walk us through the buckets and what changed from three months ago?

Sure. And really, to your point, we did have a slight change on the volume assumption and has reflected. So still in this low single digits, kind of in that 2% to 3% as we first came out with full year guidance more into the 1% right now. I wouldn't say there's any one thing. It's -- as Ted just kind of went through the portfolio of our end markets, it's a combination of a number of things as we're looking at. The supply constraints are clearly impacting us here in the first half. How quickly does that resolve itself as we execute the year maybe give us some more momentum on the organic side, especially as we think through the automation part of our portfolio. Then you get into individual end markets, the industrial strength as things start to continue to open up. Clearly, the industrial and the automotive side is still somewhat muted as we all hear about. And so, no one particular answer to that question. I think as we just look to the full year, this 2% to 3% volume growth, we felt more like in this 1% range is how we see it today. Of course, we will update that each quarter as we evolve. But it's a combination of a host of items, not any one item for sure.

Thank you. And our next question comes from the line of Larry De Maria with William Blair. Your line is open. Please go ahead.

Nice job, everybody. Thanks to have for the update on prismiq and the digital transformation can see the obvious utility new offering. Can you provide some perspective as how advanced versus competition this is? How much differentiated it is? What kind of ROI do you think it will provide and be needed in the market? Obviously, you said it's over footprint, et cetera. But can you just give a little bit further color on the competitive position and the ROI?

Yes. Larry, the competitive position, we have proprietary technology we actually bought three years ago. The digital printing technology that we have, I'll describe it in my non-technical way. We have the ability for digital printing with actually floating heads that can go over actually flexible materials. And why that's really unique is our materials, they shrink, they change formats at high speed. And having the ability to print that on multiple different formats, multiple different layers and at high speed, we think we're in a unique position. So, we think we are ahead of the competition on that. And so we think we have something that right now we're ahead, and that's why we have to go faster, and that's why we got to invest faster. That's why we actually are partnering. You saw the announcement last quarter in investing with Foxpak, another digital printing capability so that we can take this and go globally very quick. Our initial phase is with our internal operations. But already dealing with customers is we're putting automation into their facilities. They'll want this digital printing to be into the automation we actually put in their packaging plants. So we think we're ahead. The scalability on the background, as I shared, we're working with world-class suppliers, especially on the software side, so we can scale very, very quickly. So, we think we're ahead, and we're going to be driving it much faster. That ramp-up number that I gave we're measuring that actually daily with our teams internally on what our digital sales are. So pretty excited what that's going to mean and start affecting our business this year.

Thank you. And our next question comes from the line of Ghansham Panjabi with Baird. Your line is open. Please go ahead.

Maybe you could just touch on some of the topical events at this point just in terms of China COVID and the impact potentially on your industrial business, maybe even the food business in Europe. And then going back to prismiq, just from a high-level standpoint, is it designed to be additive to your sales growth? Is it a productivity boost along the supply chain, mix benefit? How would you sort of have us think about the specific impact on Sealed Air?

Let me go step first, Ghansham. So I remember that before I go through some of the issues. So, it's actually on the top line as we put it in a model, we think we're going to add additional growth with that. So, we'll see that added to our business. And also, it's also a cost side. We think and the customers we've shown the capability of what we can do in printing. If you can visualize our case ready, what does digital printing mean, you see labels on top of everything. Even if you look at our meat, they slap a big piece of paper label on the meat when you see in the store. We're now going to be able to digitally print all that information right there on the marking and your smartphone will be able to tell you everything about the package, what's inside, all that material. So, the first part of your question, it's going to drive additional sales. But the second part of your question, there's a huge cost opportunity for us and our customers as we digitize the printing capability. So it's going to help us on both. How we're putting that into our modeling? We just put that high-level number there, but we think it's going to help us drive our top line and the bottom line. Other issues, I'll take a just a deep breath when you talk about some of the constraints that are out there, Ghansham, as you know, quite well, the resins piece is still out there. It's still the constraints. We are anticipating it should be some time the other side of that curve. But right now the inflation on our resins and materials is still quite strong. We use special stuff. So we're feeling that. We're…

Yes. And maybe to add to Ted's comments, just thinking about just Q1, as we do evaluate, given these we do evaluate what potentially was the lost opportunity for us in the quarter, recognizing we still see the demand, but it's just moving to the right. Probably 1% to 2% is how we kind of viewed that organic volume, could have been better if these constraints weren't there. So that 1% to 2% is putting -- put pressure on the quarter in terms of organic growth. And then also going back to an earlier question, just thinking about our change in the assumptions going from roughly 3% down to 1% kind of shifting in terms of our ability to execute on that, things continue to move to the right somewhat. I also wanted to comment that as we think about the earnings for the year, the profile when we first established guidance for the full year in February was more than 48-52. And right now, as we look at our outlook, we're more in a 51-49. So we're going to continue to obviously manage it accordingly. And things could get better and obviously provide some upside. So, on our Page 17, when we give guidance, we do want to provide those negatives potentially in the downside of our guidance as well as the potential positives that would provide the higher end of our range.

Our next question comes from the line of Mike Roxland with Truist Securities. Your line is open. Please go ahead.

Congrats on a very good quarter. Just two quick questions. I just want to get your sense about the on-demand elasticity, and the Company's ability to continue to increase prices given the inflationary environment. And then just the second part of the question is recognizing that you're material agnostic, any thoughts around expanding in fiber based. I think last quarter and even this quarter, you mentioned in the slides that 15% of your material was in fiber, any desire to expand that? And if so, like why would that be a focus?

Yes. So if you look at that slide, let me take the last one, and Chris can come in to some of the volumes. So if you look at our ecosystem there, we have the 15% fiber based. And yes, we used the term that we're materially agnostic. If you go to the example that we talked about with mailers before, traditionally, our mailer had been a film-based plastic mailer, the bubble wrap mailer. As you -- we described earlier, we're moving that to a paper bubble wrap. So we see the strong push for fiber-based solutions. On the food side, we're working quite aggressively with our customers that are asking us, can you help us with the trays, can you take -- bring that into a compostable recyclable product, a fiber-based product coming in the food side. So, we have some really exciting developments in that area. So the short answer to the question, internally, we're looking to take that number up to be over 20%. And so you'll see that. And I mentioned in the -- my opening comments about the AutoBox sales going up. AutoBox is actually our fastest growing on the equipment side. Well, AutoBox is pulling through paper, cardboard, fiber-based solutions into our AutoBox solution. So that's going to help move that number up. So to share with you targeted, will we get there by the end of the year? I don't know, but that number is moving to north of 15%, should be at 20%, hopefully, by the end of the year. Chris, if you...

None.

Our next question comes from the line of Anthony Pettinari with Citigroup. Your line is open. Please go ahead.

Just following up on resin. Can you talk about underlying assumptions for resin costs in the updated full year guide? You basically assume PE is sort of flat from here on out? Or do you anticipate further inflation? And then just maybe to clarify on your earlier comments, do you assume some improved availability of specialty resins maybe in the second half that are currently scarce? Or are you just sort of assuming more of the same?

Yes. So good question. So Anthony, I think the underlying assumption around our full year guide, the updated guide reflects that we are going to continue and are anticipating to continue roughly an incremental $100 million on the raw material costs given the change in price or at least anticipated change in pricing that we all see. Relative to the specialty resins continues to be elevated, getting better, not only hopefully getting better from a price point of view as well as just the availability side, as we mentioned earlier in the commentary. But if you look at the assumptions for the full year guide, what we said in February and what we're saying here in May, we anticipated that material inflation to be roughly $200 million, and now we're looking more like $300 million for the full year.

And Anthony, just a little bit more color on the pieces with the resins. We do use specialty resins and you understand that pretty clearly. There are some of those resins right now that you just can't get. They're actually rationed. And we -- our team has done some incredible redesign of our resin and our barrier, especially with our CRYOVAC brand. So you don't see that in volume, but redesigning what we have to meet some of that demand, we think we'll have an opportunity actually in the second half of the year to gain share when share when we see some of that material coming back into the market. So we think some potentially upside on the second half. The paper is now also part of our issue. We're seeing the inflationary side on the paper side, especially with energy. And in Europe, we've had some significant market share with our paper products in Europe, but we're seeing that inflationary pressure. And right now, we are working with our teams. We see that continuing through the second half of the year. So again, our price realization, we want to keep that positive, but we see inflationary pressures, for sure, moving through the first half of the year, and we're still planning to see it through the entire year.

Our next question comes from the line of Christopher Parkinson with Mizuho. Your line is open. Please go ahead.

This is Kieran on for Chris. I was just wondering if briefly, you can just walk me through some of the productivity initiatives that you've been working on. It seems like you're well on track to achieve that target for 2022. But -- are there any areas where you may have been executing quicker than expected or where you're seeing additional opportunities? And it seems like there's even a greater opportunity here over time when we look out past '22. And while I understand you're probably going to quantify that at this time, just preliminary thoughts in terms of how you view those trending through the portfolio over the year and then further out?

Yes, it's a great question. If you go to Slide 10, if you look at our ecosystem slide, what we've been working on internally. And right now, we've been talking about price realization a lot because just dramatic inflationary pressure. But if we look at the SEE operating engine, what's producing underneath that, is the productivity of our operations around the world as we're driving to touchless operations. When we talked about automation last quarter, I shared that we're going from right now our network, where we're talking about currently today, we have in the of hundreds of robots and cobots in our facilities around the world. Over the next three years, we're going to take that number to the thousands. So we're making some significant process in the productivity that's underlying our business. And if you look at our performance today, we're looking at what is that productivity that's driving underneath the engine right now. Though it's in the inflationary environment, it's about that price realization, but we're seeing the productivity actually doing quite well. So, we're actually going faster on that. Digital printing can even help even more that we can actually simplify our production both internally and bring some of those production savings to our customer. So your question about the long term, absolutely. That's where we think our productivity in the outward years is going to continue to increase and drive our margin expansion once we get through this really dramatic inflationary pressure.

Our next question comes from the line of Joshua Spector with UBS. Your line is open. Please go ahead.

This is Lucas Beaumont on for Josh. So I just wanted to go back to your equipment backlog in the AutoBox products. You've had a pretty big increase there in the backlog. So, I was just wondering if you could talk a bit more about what gives Sealed Air the edge there. So I think some of the paper focused companies also have competing kind of box sizing systems. So, I was wondering if you could talk a bit about sort of what makes your products different and sort of where your edge is.

Good question. So to help on that for the automation, not the deep dive focus, but we're keeping the slides in the appendix. So if you go to Slide 21, if we want to unpack our equipment and our automation, you can see in the quarter, the equipment was only up 8% year-over-year. But behind that, the bookings continued to be at double digit, so just a huge amount of constraints. And as you see on the slide, we've got component shortages, we got the sanction in Russia. Actually Russia on the food side, where we have quite a bit of success both in fresh red meat and in cheese automation in Russia, and then we got some FX and also the China lockdown is affecting some of our equipment business. What we're doing is we're actually spending right now, and we've had this underway of how do we actually double our equipment capacity over the next three years. The other piece that might be a little bit different than some of the other people in the automation space is we're using multiple suppliers to help drive our equipment growth. So we think we have a potential to continue this. We want this to be well in the high double digits for growth on sales to match our bookings trends. So I'll just go to one slide. If you go to the next slide, just so you can see what this means. Here's the example of the solutions multiplier and two of examples that I talked about in the last quarter. First of all, just on the cheese one, it's done quite well. If you look at the cheese systems right now, since we launched this just a couple of years ago on automation, on cheese, which is almost a…

Our last question comes from the line of Arun Viswanathan with RBC Capital Markets. Your line is open. Please go ahead.

I guess I had a question on the pricing strategy. So very robust pricing in Q1 with care to preserve share. So mid-teens and then you lost, say, 1% of volume. But when you look out into the future, it looks like you still have this model of pricing off of inflation and formula-based pricing within food. Would it be possible for you to consider more of a value-based pricing strategy? And I guess, would that be more representative of where the Company is heading and kind of removing that raw material side so that you could preserve some of this price action once raw materials recede? Or how should we think about kind of the pricing strategy you guys are thinking about internally?

Actually, it's a great question because it's -- the pricing strategy is a value-based and I've been personally involved with this with our largest customers around the world. So, it will take very carefully how we described it. We have disciplined pricing to take care of our customers to gain share. So with our customers, and that's where we bring automation and we bring digital in, we bring sustainability how we present this to our customers is it's not how much our materials or how much our solutions cost, it's how much we can save even in this highly inflationary market right now where customers can't get people. They have tremendous supply constraints and also have inflation like we do. So our pricing strategy, it's not a pricing strategies to raise price, it's to gain share. So how do we sell it? We do it on payback. And if you want to see customers that are using our equipment services, you'll see them talk about payback. We're targeting on our automation a three-year payback. So it's not how expensive our systems are, our materials are, it's how we can save them money. And we're focusing on that three-year payback that's actually pulling through the materials. The good news is there's so much waste out there that we think just like we're looking at our own facilities and how we bring touchless with some of our large customers were actually sending our operations team to help them and how we can help them automate and drive touchless operations through their facilities. So, it is a value-based selling process. It's price realization more than go raise price. So, it's price above our cost. And this is our first quarter of positive price realization. So, we are very careful on how we share this with our customers. Our strategy is to save them money, as we put in our prepared remarks. Our strategy is that we are going to find a way to help save them money, that's going to pull through our automation, our service and our materials. Great question. So, operator that closes us for the call. We are right on the hour. I do want to thank everybody for the call and I hope everybody stays safe, and we look forward to talking to you again next quarter, and we will be talking and deep diving sustainability. So, operator, thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.