Sealed Air Management Discusses Q2 2012 Results - Earnings Call Transcript

Sealed Air (SEE)

Q2 2012 Earnings Call

August 02, 2012 11:00 am ET

Executives

Amanda H. Butler - Director of Investor Relations

William V. Hickey - Chief Executive Officer, President and Director

Carol P. Lowe - Chief Financial Officer and Senior Vice President

Tod S. Christie - Treasurer

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Philip Ng - Jefferies & Company, Inc., Research Division

Chip A. Dillon - Vertical Research Partners Inc.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Mark Wilde - Deutsche Bank AG, Research Division

Claudia K. Shank Hueston - JP Morgan Chase & Co, Research Division

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Albert T. Kabili - Crédit Suisse AG, Research Division

Todd Wenning - Morningstar Inc., Research Division

Michael Rybak

Presentation

Operator

Good morning, everyone, and welcome to the Sealed Air Conference Call discussing the company's second quarter 2012 results. This call is being recorded.

Leading the call today, we have William V. Hickey, President and Chief Executive Officer; and Carol P. Lowe, Senior Vice President and Chief Financial Officer. Also participating on the call today is Tod S. Christie, Treasurer. [Operator Instructions] And now at this time, I'd like to turn the call over to Amanda Butler, Executive Director of Investor Relations. Please go ahead, Ms. Butler.

Amanda H. Butler

Thank you, and good morning, everyone. Before we begin our call today, I'd like to note that we have provided a slide presentation to help guide our discussion today. This presentation can be found on today's webcast, as well, it can also be downloaded from our IR website at sealedair.com. I'd like to remind you that statements made during this call stating management's outlook or predictions for the future are forward-looking statements. These statements are made solely on the information that is now available to us. And we encourage you to review the information in the section entitled Forward-Looking Statements in our earnings release, which applies to this call. Additionally, our future performance may be different due to a number of factors, and many of these factors are listed in our most recent annual report on Form 10-K, which you can find on our website at sealedair.com.

We also discussed financial measures that do not conform to U.S. GAAP. And you may find important information on our use of these measures and the reconciliation to U.S. GAAP in the financial tables that we've included in our earnings release. Lastly, we have also used pro forma results for certain metrics in the quarter to aid in the comparison of our performance to historical combined metrics of Sealed Air and Diversey.

Now, I'll turn the call over to Bill Hickey, our CEO. Bill?

William V. Hickey

Good morning. Thank you, Amanda, and good morning to, everyone. Before we begin our discussions on the quarter, I'd like to welcome Carol Lowe as our new Chief Financial Officer, and I'm also pleased that Tod Christie, our Treasurer, is able to join us today, as well as to complete the transition.

During today's call, I will lead the discussion on our top line performance, our expanded integration and optimization program and our outlook for the balance of the year. Carol will focus on our financial results, our liquidity measures and key balance sheet items. We will then open up the call to questions and answers and text-in questions.

Getting started on Page 2 of our slide presentation. As we noted in our press release earlier today, our second quarter results fell far short of our expectations. Like many, we experienced increasing challenges in the quarter from macroeconomic conditions, which noticeably weakened in the latter part of the quarter in Europe and in export out of China. We also saw a challenging protein production trends. For example, USB production down approximately 4% to 5% in the second quarter, and lower consumer demand prompted a slowdown in our more defensive food segments.

While we are clearly disappointed, we are accomplishing a great deal against the key objectives we outlined at the beginning of the year. Namely, integrating the Diversey business, achieving our synergy targets and generating cash flow to reduce debt. Some of our accomplishments include -- we further penetrated markets with net gains. We are seeing good results from new products, targeted account penetration, and we grew solidly in the developing regions of the world. We are exceeding our targeted cost synergy benefits by aggressively accelerating and expanding our integration and optimization program in the quarter, with new cost-cutting measures that will align our cost structure to an expected lower rate of economic recovery and improved returns. And we generate over $100 million of free cash flow and continue to prepay our bank debt.

Despite making this strong progress in our priorities, volume weakness and unfavorable foreign exchange impacted our profitability in the quarter, resulting in a more cautious outlook for 2012 and a revision to our full year guidance, which we will cover in more detail later in the call.

Focusing on sales performance on Slide 3. On a pro forma basis, reported sales declined 4% to $2 billion. Excluding the negative impact of currency, our organic sales increased 1% in the quarter. This was driven by 2% higher price and 1% lower volume, which was largely due to weakness in Europe.

Looking at price. Overall, all of our segments held or increased price benefits in the quarter versus last year due to the benefits of our prior pricing actions that went into effect either in the first or early second quarter. These benefits combined with modestly easing raw material costs late in the quarter did allow us to achieve a positive price cost spread of approximately $35 million in the second quarter.

Looking at Slide #4, you can see that all regions reported positive organic sales growth in the quarter except EMEA. The EMEA region was impacted by the weak European economy resulting in 3% lower volumes in that region on a pro forma basis. This decline reflected greater weakness in Europe across all of our business segments and was predominantly in Southern Europe, which was a disappointment as early quarter trending had suggested sequential stabilization.

Looking at the remaining regions, North America generated 1% organic growth on a pro forma basis, including 1% lower volumes. The volume decline was largely attributed to our Food Packaging and Diversey businesses. Weaknesses in our customers' protein production levels impacted our Food Packaging segment's demand. In the Diversey segment, volumes were negatively impacted by the effect of customer destocking and a bankruptcy related to the pink slime incident that we reported in the first quarter. I am pleased to report that July trends for Diversey North America did show a marked improvement, reaffirming the expectations for more normalized customer order patterns.

Latin America and Asia were real areas of strength for the business in the second quarter. Latin America organic sales rose 11% on a pro forma basis, led by 19% higher organic sales in food packaging due to customer protein production strength both in the Northern Cone of Latin America and in Brazil. Additionally, we achieved 6% higher organic sales in the Diversey business, with the food and beverage sector up 5% and the retail sector up 23% in Latin America.

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