sealed air management discusses q3 2012 results - earnings call transcript
At 9: 00 a. m. on November 2, 2012, etexecuesamanda H. third quarter 2012 earnings callButler -
Executive Director of Investor RelationsHickey -
Jerome A, chairman and chief executive officer. Peribere -
Carol P. , president, chief operating officer and director ·Lowe -
Chief Financial Officer and Senior Vice President Panjabi-Robert W. Baird & Co.
Scott Gaffner Research Division
Barclays Capital, Research DepartmentStaphos -
Bank of America Merrill Lynch, Research Department RosemaryMorbelli -
Gabelli & Company, Inc. Gabe S. Hajde -
Research Department of Wells Fargo Securities Co. , Ltd. Gresh -
Research Department, JPMorgan ChaseKabili -
Good Morning, everyone. welcome to The Sealed Air conference to discuss the company\'s 2012 performance in the third quarter.
The phone is being recorded.
Today we have William V.
Mr. Hickey, chairman and chief executive; Jerome A.
Peribere, president and chief operating officer; and Carol P.
Lowe, senior vice president and chief financial officer.
They will answer questions after the management has prepared their opinions. [
At this time, I want to transfer the call to Amanda Butler, executive director of investor relations.
Madam, please continue. Butler. Amanda H.
Thank you all. good morning, everyone.
Before we start our conference call today, I would like to point out that we have provided a slide presentation to help guide our discussion.
This demo can be found on today\'s webcast, or it can be downloaded from our IR site in sealedair. com.
I would like to remind you that at this conference call, management\'s outlook or forecast for the future is moving forward --
Look at the report.
These statements are made entirely on the basis of the information we have now.
We encourage you to review the information in the section entitled \"forwarding\"
A lookup report is provided in our earnings release, which is provided with this call.
In addition, our future performance may vary due to many factors, many of which are listed in our most recent table 10 annual report
K, you can also find it on our website in sealedair. com.
We also discussed financial measures that are not in line with the United States. S. GAAP.
You may find important information about our use of these measures and their reconciliation with the United States. S.
We have GAAP in the financial form included in the earnings release.
Finally, we used the formal results of certain indicators in this quarter to help compare our performance with the historical composite indicators of Sealed Air and Diversey.
The results of these forms can be supplemented on our website.
Now I\'m transferring the phone to Bill Hickey. Bill? William V.
Thank you, Amanda. good morning.
Before we start our discussion on this quarter, I would like to thank you very much for your flexibility to attend our conference call today, which, as you know, is beyond our usual scheduled date and time.
After the consequences of Hurricane Sandy and the destruction of many people in the New York metro area, we believe that delaying the release and revenue call is prudent for everyone\'s safety.
In addition, I am very pleased to welcome and introduce Jerome Peribere, the new president and chief operating officer of Jerome Air.
As we announced earlier, Jerome will take over as chief executive of Sealed Air in next March.
Jerome brings us 35 years of international experience at Dow Chemical.
He has extensive global experience, which is especially important for today\'s Sealed Air, we have 60-
Plus the percentage of our business outside the US.
Interestingly, he also brought in packaging experience as his first job in Dow chemistry in France was to sell Ethafoam polyethylene foam, one of the products we still sell today.
Most importantly, he brought the latest acquisition.
From Dow\'s integration experience in acquiring romenhaas, he led the integration of romenhaas with Dow Chemical.
Jerome was a quick substitute and during his first two months he met with our main manager, with staff from three continents and with our food, Conservation and Diversity
He started well.
I will make some opening remarks at today\'s conference call, and then Jerome will highlight the performance of our business unit.
Our CFO Carol Lowe will then have a more detailed discussion on our merger results, liquidity, other key matters outlined in the press release, and our latest guidance.
After the comments we have prepared, we will provide time for your questions.
I intend to have Jerome and Carol answer your question.
Of course, I will also appear when I need it.
As a reminder, all the results we outlined here today reflect the announcement of the sale of Diversey Japan and its classification as discontinued operations.
Start slide 2 of our presentation.
The third quarter progressed well with our assumptions and guidance for the second half of the year, and despite the uneven recovery in our end market, consumers and customers expressed considerable caution during the quarter.
We focus on the goals set at the beginning of this year: integrating diversity;
Accelerate our growth plan to increase market share, EBITDA and free cash flow.
We did a solid job in the third quarter and I will go into it in the next slide.
In the second quarter, our profitability improved significantly, giving us a good momentum to enter the fourth quarter.
I would like to point out that our food packaging business operating profit margins have recovered in the third quarter, with an increase of 390 basis points by restarting our production at our new plant in Brazil.
As we pointed out earlier, in the second quarter, we closed a production line in Brazil and moved it to a new factory 120 kilometers away.
Because of the higher-than-
We have to import products from the US according to the expected customer needs. S.
Continue to provide customers with high freight and tariffs.
I am pleased to inform you that while I was in Brazil with Jerome last week, I saw the production line install and run the saleable products.
Imports have stopped and you can see the results in our third quarter operating results.
Also, earlier this week we announced the sale of Diversey Japan, which is part of our strategic review and we expect to complete this deal in the fourth quarter.
We plan to use net income to advance our debt, which will enable us to exceed the net debt target of $2012. 95 billion.
Strategically, this has enabled us to invest in higher-growth regions such as Asia and Latin America, in both regions, we are achieving strong growth rates of $ 13% and $ 9% in continuing sales of Diversey.
Let\'s move to slide 3.
You will see a snapshot of our consolidation trend.
You can see how we spent the year of our year. over-
Annual and continuous momentum of many key indicators including sales, profitability, profit margins and synergies.
We continue to make significant progress towards achieving our strategic objectives: achieving net sales growth through [indiscernible]
Graphic expansion to achieve sales revenue through continuous and adoption of our new creative solutions, revenue from sales through incremental collaborative sales of $10 million per year, and revenue from sales around the world through new customers.
Our profitability indicators have improved in terms of greater operational execution, lower raw material costs, increased costs, synergies and seasonality.
If I go to slide 4, although Jerome and Carol will cover the components of these results in more detail, I will emphasize that we take advantage of our extensive 62-
Compared to our peers, the national footprint continues to provide us with leading influence and greater opportunities for international growth.
Take a look at the map on this slide 4 and you can see that we maintain or grow organic growth rates in the third quarter compared to the trend in the second quarter, to a large extent, the growth in the number of units in the food and protective packaging business and the solid price creation in our diversified field have led this trend.
North America is the only exception, from a mild drop to a stable year --over-
Due to the low price/combination of protective packaging, it has annual performance.
As the portfolio shifts to a more sustainable but profitable thin film structure, this has led to higher profit margins in this segment.
Of course, the main driver of our momentum this quarter is from the solid execution of our business, which Jerome will now emphasize. Jerome? Jerome A.
Thank you, Bill. good morning, everyone.
It\'s really great to be with you today.
As Bill mentioned, I would like to start by talking about some of the key drivers we \'ve seen this quarter and highlighting several areas I\'m most excited about as I look forward to the future of Sealed Air ---
When I look at the future of Sealed Air.
Turn to slide 5 first.
The key to food packaging is that companies are back on track.
How we restore our adjusted operating margin for the third quarter to 13 proves this. 6%.
This is compared to 9.
We reported a profit margin of 7% in the second quarter.
So let\'s take a look at the left side of the slide first, and you\'ll find that one part of the increase in profit margins is sales growth.
Food packaging did a good job, and sales rose 2% in the quarter compared to last year, with sales in all regions growing.
Our growth is driven by a 8% growth in Latin America, and our established footprint and strong market position in Brazil allow us to benefit from the growth in the country\'s beef production.
In addition, we have seen 2% sales growth in Europe, the Middle East and Africa, thanks to the advantages of new customers in the Middle East, Central and Eastern Europe, as well as the benefits of the mixed changes in food packaging products in Western Europe.
These advantageous areas offset the weakness of the North American protein industry, which continued to face supply constraints this quarter, with weighted average industry productivity down 2% from last year.
So I am happy to tell you that we are working to improve industrial productivity.
In North America, it is mainly due to the customer adoption of new customers and new solutions, such as our Cryovac more
Sealed FoldLOK recyclable packaging for retail shredded cheese packaging.
This new solution has just been launched,-
During the quarter, a new professional grocery retailer, along with the sponsors of the cheese processor, launched the second phase of development.
Innovation and new solutions are at the heart of our competitive advantage and remain a key factor in our ability to face the above problems
Industry productivity, especially for food packaging, 25% of our sales come from new solutions.
Now look to the right side of the decline in earnings.
Food packaging profits are generally flexible. over-
Years, but as we eliminated an unusual project, nearly 400 points of continuous improvement-
The one-off project we identified in the second quarter, Bill mentioned--
Some comments were made a few minutes ago on the matter.
We have greatly reduced our start.
He also mentioned the increased cost of facilities integration in North America and Brazil.
In Brazil, we have accelerated the relocation and completed the relocation a few months in advance, which will benefit the profit results of the fourth quarter.
Now let\'s take a look at the food solution on slide 6.
Although many of our customers, especially in Europe and North America, are dealing with the problem of limited protein supply and price --
Sensitive retail consumers, food solutions achieved 2% sales growth this quarter, surpassing the production rate of the protein industry.
In fact, our volume performance is mainly increased by 21% by the volume of our vertical bag packaging solution for fluid and semi-fluid
As tomato production hit a record high this year and the right solution to take advantage of these favourable trends, fluid products in North America.
Last but not least, I want to stress that Latin American production has increased by 10% due to the strength of local protein production and the victory of new customers.
This sturdy volume performance, coupled with our lower cost of raw materials and reliable management of costs, produces a very powerful 12.
The adjusted operating profit margin was 8%, up 170 basis points from last year.
Now look at the protective packaging section on slide 11.
As you can see on the left side of the slide, protetive does a good job of keeping 0.
Volume growth of 4%, consistent with the second quarter trend.
Despite a slowdown in global growth and continued weakness in the export sector in South Europe and China, we have achieved this goal.
A key area of business growth is 20%-
Plus the increase in global e-commerce
Business and fulfillment
The app we publish globally.
This strong growth rate reflects the growing use of e-commerce
Business and customers are winners in this area.
In addition, protetive achieved 2% sales growth in North America, reflecting moderate growth in the industrial sector and the victory of new customers in the region.
Europe, the Middle East and Africa remain the weakest areas in protection, with sales falling by 2%, largely offsetting some of the continued weakness in southern Europe as customers continue to reduce production.
Although the overall volume of transactions improved slightly during the quarter and the price/mix also declined, the adjusted operating margin performance improved --over-
Year after year, in order, you can see on the right side of this slide, which reflects the strict control of costs and the benefits of our most sustainable membrane structure, which records the resin content
Finally, go to the Diversey clip on slide 8.
From the left side of the slide, formally, this segment has achieved 2% organic sales from 2% of the price/mix and moderate 0.
Volume fell 5%.
Compared with the negative 3% to 4% in the previous quarters, this number of performance has been significantly improved.
The main driving force for this improvement is a 7% increase in sales in developing regions, a significantly stable demand in northern Europe, which accounts for 70% of Diversey\'s European mixed income, net income from new customers and ongoing expansion adoption--
And adopt the bestin-
First-class solutions such as our TASKI floor care equipment system for new and existing customers.
As you can see from our slides, 2/3 of Diversey\'s revenue has increased in a year --over-
Annual sales of food and beverages, distributors and accommodation achieved an organic growth of more than 4%.
Due to low re-order rates or cautious allocation of capital investment in equipment, the biggest weakness in the same industry identified in the previous quarters continues to exist ---
In the equipment system for economic reasons.
Diversey\'s only weakness is the consumer brand business, which accounts for about 1/4 of the yearto-
Annual sales fell.
So, in general, we have shown resilience in terms of making good progress ---
Good progress has been made in expanding our market share.
Innovation remains at the heart of our growth strategy, where there is a real momentum of development.
At the North American ISSA/INTERCLEAN conference in Chicago two weeks ago, the team launched Crystal Shield, an innovative floor care system that combines Diamond wear and coating technology, provides more durability in a much more improved and sustainable way, and
In addition, the team continues to expand the launch of Suma Combi, a combined detergent and flushing base for mechanical wear and tear-
Washing that can be cleaned, rinsed and dried, now replace the wash that has been taken 3 different products before.
This makes your version easier, faster, and more sustainable for commercial kitchens.
In addition, we are ready to launch more systems in the fourth quarter.
All these innovations will drive economic growth in 2013.
Now look at the right side of this slide. -
On the right side of this slide, the profitability of the Diversey division is down 17% from the challenging comparison of the previous year, as 2011 of the profitability benefits from a $10 million reverse bonus accrued profit.
In addition, our foreign exchange effect this year is also very unfavorable. -this quarter.
But on the basis of the constant dollar, excluding the adverse foreign exchange effect and the benefits of lower bonus payments in 2011, as well as looking at the business on Apple --to-
Apple\'s operating base and profitability actually increased by 42% year on year.
As you can see, through the operating profit bridge on this slide, this is the only really bad year --on-
The annual impact is our investment in top management.
Growth Area, which generated strong top-level growth in developing areas and expanded our business in target areas in North America.
We expect these investments to grow in 12 to 18 months.
Let\'s see Carol now. -
Carol, our CFO, called for a more detailed discussion of third-quarter financial results and highlighted our outlook for the rest of the year. Carol P.
Thank you, Jerome. good morning, everyone.
Slide 9 shows our integration and optimization program.
The third quarter benefited from the cost synergies of $29 million, an increase of $6 million over the second quarter. Our year-to-
A total of $67 million.
Due to the timing of benefits, our benefits for the full year of 2012 are estimated at $97 million, which is $7 million higher than previously expected.
In addition, our cash cost of 2012 fell by $20 million to $0. 105 billion.
We have transferred this cash cost savings to 2013 and we will continue to introduce you to the amount and expected time of our expenses in the coming quarters.
By 2014, we continue to estimate the total project revenue of $0. 195 billion to $0. 2 billion, with a total cash cost of $0. 235 billion over the project life cycle.
Slide 10 summarizes our combined and adjusted EBITDA performance on a formal and fixed dollar basis. Year-over-
This year, the dollar-adjusted EBITDA has accumulated 2% in terms of cost synergies and the $18 million favorable price cost distribution, and food packaging accounts for more than 1/3 of the favorable distribution.
These impacts are partially offset by high-tech resource investments
The growth and development areas that Jerome has just mentioned, as well as some adverse combinations. While the year-over-
Given the economic headwinds that we continue to face, this year\'s growth is meaningful, and the real improvement is that the adjusted EBITDA is 19% from the second quarter.
The adjusted EBITDA deposit is 14.
Q3\'s 3% is higher than 11.
4% in the second quarter, with respect to seasonality, cost synergies, price cost distribution, cancellation of one-time projects and other costs that negatively impact the second quarter, Bill and Jerome in their comments
From the 2011 projected adjusted EBITDA, including monetary impact, you need to first change the amount of 2011 from $0. 281 billion to $0. 271 billion, to reflect the benefits of Diversey\'s bonus and other compensation cuts recorded in 2011.
Now, if you start with $0. 271 billion, you will increase the cost synergies of $29 million and the positive price cost distribution of $18 million.
These benefits are offset by A negative currency of $14 million, A mix and absorption of about $17 million, and A higher SG & A of $15 million, increasing resources to support growth in developing regions.
Turn to slide 11.
Free cash flow for the quarter was $28 million and $0. 139 billion for the whole year. to-date.
Changes in working capital projects in the third quarter led to a net use of $75 million in the quarter.
Accounts receivable increased by $58 million, mainly due to an increase in the exchange rate used to assess accounts receivable at the end of the quarter.
For example, the euro is about $1.
The price at the end of June was $1.
29 at the end of September.
In addition, as Diversey\'s third-quarter sales are seasonally higher than the second quarter, the seasonality of our Diversey institutions and laundry business affects the balance of accounts receivable.
Payment terms for Diversey institutions and laundry customers are slightly longer than for our other businesses.
As at September 30, cash and cash equivalents amounted to $0. 541 billion, an increase of $37 million over the balance in June 30.
In the third quarter, we paid $0. 121 billion in interest, which is more than 1/3 of the $0. 32 billion total we expect to pay this year.
Cash payments for the quarter also included income tax of $23 million, regular loan payments of $30 million in 2013, $18 million related to our integration and optimization plan, and a quarterly dividend of $25 million.
Steering slide 12.
Our total cash and committed liquidity as at September 30 was $1.
Our net debt is $4 billion. 26 billion.
It is estimated that our net debt at the end of the year is about $4. 8 billion.
The net debt balance for the third quarter is expected to decrease by $0. 5 billion, which will be funded by free cash flow plus the proceeds from the sale of Diversey Japan of approximately $0. 3 billion.
8 billion and net debt exceeded our target of $4.
The end before 95 billion
At the end of the third quarter, we followed our contract well.
As noted in our earnings report released this morning, the company has recorded a non-cash pre-tax fee of $1.
2 billion of impairment of goodwill and certain intangible assets.
Diversey division\'s impairment was due to lower growth rates and profit performance than expected a year ago, and the decline in performance was significantly affected by negative macroeconomic conditions, mainly in Europe.
When we complete the second step of the analysis in the fourth quarter, goodwill impairment may be finalized.
Slide 13 points out the prospects for our annual update in 2012, reflecting the impact of the suspension of operations in our Diversey Japan transaction, and the implicit fourth-quarter estimates of our 4 key guidance indicators.
We expect reported or actual net sales to be $7.
7 billion our business unit continues to present continuous and annual-over-
Win annual top growth from seasonal and new customers;
The adjusted EBITDA is between $0. 995 billion and $1. 01 billion;
Adjusted earnings per share are within $0. 90 to $1;
Free cash flow is between $0. 375 billion and $0. 4 billion.
Our free cash flow estimates reflect the traditional high seasonal contribution of reduced inventory to the fourth quarter.
In the fourth quarter, we would like to complete sales of Diversey Japan, complete our impairment analysis and move our financial reports to reflect our new operations.
In the fourth quarter of the full-year report in 2012, our new breakdown will include food and beverages, institutional and laundry, protective packaging, etc, which are mainly made up of our medical application business.
Now, I will turn the phone back to Bill and lead the Q & A session. William V.
Okay, thank you.
Thank you, Carol. thank you, Jerome.
As I pointed out earlier, I will ask Carol and Jerome to answer your question when it comes up.
Of course, I am here to help both of them according to historical knowledge.
So operator, what\'s the problem? can we get through the phone? Question-and-
Your first question comes from the route of Robert W. Gansham PanjabiBaird.
Panjabi-Robert W. Baird & Co.
The Research division on inincorporated sey Research, compared to other companies in Diversey, seems to be a very, very profitable business, and it seems to be a very strong franchise in terms of profit margins.
Can you tell us the logic of selling this business with any other part of the portfolio, perhaps in terms of conventional sealed air? William V.
This is the first one, and I think we have said that we are reviewing our combination of Sealed Air, conventional sealed air and conventional diverter.
The situation in Japan is-
This is a profitable business.
This is the franchise of Japan.
But we think it\'s a very slow-growing business.
Although Japan\'s economy is strong, growth is still very, very slow.
We have a leading market share, so we believe that there are very few opportunities for additional growth through share growth and the Japanese economy, and we expect that the Japanese economy will continue to grow ---
Ghansham, we made a forecast of discounted cash flow for Japan, looked at it and said that it makes sense if someone is willing to give us this value or higher value today. And it was --
In fact, it has been running independently from the Diversey business.
It provides its own independent products for the Japanese market.
It has many products that are inconsistent with our global portfolio.
When you see it, everyone is thinking about it. if we can monetize discounted cash flow, it makes sense to do so.
Panjabi-Robert W. Baird & Co.
The research department was established.
Maybe it\'s Jerome\'s problem.
Jerome, you have inherited some very, very powerful franchises, but there are also some very big challenges, especially the financial leverage of Sealed Air.
Can you give an overview of some of your early ideas on how you view the strategy of developing in sealed air under your leadership? Jerome A.
Thank you for your question, Ghansham.
I just got here 2 months ago, as far as my definition goes, I travel around the world, sometimes with Bill, sometimes without, at this time, I have some very critical highlights to take out.
2012 was a very, very clear year of transition.
In my previous life, I led the largest acquisition consolidation in Dow Jones\'s history.
In fact, \"Who Moved My Cheese?
\"It has to be in everyone\'s mind because you have a lot of employees who are upset about this acquisition ---
Through any form of acquisition.
My approach is that I want employees to be around our project, our project is a growth project, a growth project that takes advantage of the equipment and products we have for the solution, this is absolutely unique.
The common ground between the Diversey business we have and the Sealed Air 2 business unit we have is that we have equipment that can complement the product when the product has a solution.
This is very real in our diversified industrial and laundry business, for example, we have a wide range of machines and equipment such as TASKI machines themselves that make us floorsph]
And this kind of thing. And you --
The same is true when you see our Cryovac business.
The same is true when you look at our product packaging business.
This is a commonality.
The second thing is, I want to speed up the new Sealed Air--
Put our investments where more packaged food and consumers are needed-
Or where consumers consume more protein, where more food safety, disinfection and hotel improvements are needed, and where product production needs to be packaged with higher quality.
So it really tells you where we\'re going to invest.
In fact, if there was one thing that surprised me ---
We already have a lot of technology.
So this is where I want to focus.
The next question comes from Scott Gaffner at Barclays. Scott Gaffner -
Barclays Capital, research, can you talk about trends in food packaging throughout the quarter?
I think you have a slide, in the middle of the quarter, talking about 6% to 7% growth in July, maybe 5% to 6%.
But it looks like the price of food packaging is 2% organic food and food solutions plus 1%.
Can you tell us what happened this quarter? Carol P.
Loiscott, there was only one thing before. -
Jerome will then continue the trend, but what you see is food packaging and food solutions.
And for our quarter, we--
It is separate.
I just wanted to highlight it to you. Jerome A.
What do we observe on food packaging?
First of all, when you exclude money, our sales grew by 2% and our operating income grew by less than 1%.
In fact, our geographical combination is not ideal.
But something very interesting happened to us.
Our overall sales increased by 2%, and sales in Latin America increased by 8%, doubling.
Economic growth in Asia and North America is rapid, with negative product structure.
But we are also growing in Europe.
This is our food packaging business.
Next, we suffered a quarter. -
The first quarter is also in the second quarter, so it\'s no surprise that our historical profitability in this area is back on track.
We did a great job in Food Solutions, and our sales in North America grew by more than 7%, close to 8%;
Latin America, double digits;
Europe, slightly negative;
But economic growth in Asia, the Middle East and Turkey was 20%.
How did this happen?
Let me remind you that food packaging is our traditional protein industrial packaging, and our food solutions are mainly [indiscernible]
Ready. our fluid is high.
Microwave-type products, so more consumers-driven.
In North America we benefit from a good growth in the pouch business, which is a very--
A particularly favorable tomato crop.
But this is a very good new solution, a very powerful alternative that has a lot of customer benefits compared to canned and tomato.
Therefore, this is a very good new way of growing, and a good agricultural tomato crop accelerates this way of growing.
But it\'s just a solution that\'s imposed on itself.
In Latin America, we try-
We are taking pricing action in Brazil and Argentina.
The only negative is Australia and New Zealand.
We actually have a lot of rigid turbine foam barrels in Australia [ph]
We also lost to our competitors in price.
So in general, this food packaging industry started-
In a way related to what is happening in the meat market.
Again, we will continue to talk about red meat with poultry and pork, but we also have innovations in different areas, which will reach 50 [ph]
Product Type, freshness, case we are working hard on
Ready, multiple bags.
As I mentioned earlier, the new consumer benefits package is our FoldLOK-
It can be said that professional retail and high-end retail are actually very successfulPower Protein.
So I think it\'s all going well.
What I would like to mention is that our internal staff are now using this food packaging presence by using our hygiene solutions, in this solution, we have a growing synergy with the diverse businesses of the former sanitation industry. Scott Gaffner -
Barclays Capital, research.
I like all the colors.
So, did the growth really slow in the quarter in the merged businesses? Jerome A.
PeribereI didn\'t hear you. Carol P.
Where we reported--
On the conference slide of the consolidated business you mentioned, we reported the situation for one yearover-
The average daily sales are one year, and for the remaining two months they are not as strong as August. Jerome A. PeribereYes.
That being said, there are still some interesting things.
If you look at sales in the third quarter, sales in food packaging and food solutionsto-
The pace is accelerating.
Sales of food packaging in the third quarter were 2%.
The Q3 volume of food solutions is 2. 3%.
When you look at this yearto-
Date, there may be only 1% on the food package, which may be around 0.
5% of food solutions.
So when I look at sales in the third quarterto-
I saw a positive trend.
The next question comes from Phil Gresh of JPMorgan Chase.
The next question comes from George Staphos, Bank of America. George L. Staphos -
I think my research department is Bank of America Merrill Lynch. -
In fact, there are three questions. I will try my best to be brief. First of all --
I\'m late, so I apologize.
First of all, there were some operational problems with food packaging in the last quarter.
Do you feel comfortable on your way to solving these problems before the end of the year, I remember this is the last one [indiscernible]Carol P.
LoweGeorge, I will continue to respond and Bill can add a little color as he was recently in Brazil, where a lot of operational issues were highlighted in the second quarter.
But, yes, we feel that one-off items are definitely one-off.
We have seen significant operational improvements which have been noted in operations-
Adjusted operating profit margin for food packaging.
So I will let Bill-
He can comment specifically with the bag line and what he saw in Brazil. William V.
HickeyGeorge, I think as we mentioned, one of the big things in the second quarter was that we moved the production line from our factory in downtown São Paulo to a new factory about 120 kilometres away, with a lower cost structure, more room for expansion.
We removed a major extrusion line and we believe we have built up enough inventory as we try to pick a slow time in the year.
Customer demand has just picked up.
The line stopped.
I think as we mentioned in the second quarter, we have to introduce products from the USS.
Freight and tariffs.
The line moved.
As I said before, Jerome and I were in Brazil last week.
I said I wanted to see this line running. It\'s up.
It is installed in the new factory.
It produces products at a lower cost.
We put back 390 basis points of profit from food packaging operations.
We were not completely moved.
There will be a phase 2 sometime early next year, with the ultimate goal of moving the second and third extrusion lines out.
But now we\'re back on track. Carol P.
George, we expect the exit rate for food packaging to be around 13% in the fourth quarter, not the 12% we discussed on the second quarter call. George L. Staphos -
Bank of America Merrill Lynch, Research Department, very good.
Let me ask one more question because I remember you usually have a 2-
This is a bigger problem.
I realized it might be a little difficult to answer.
But you took $1 this quarter.
Diversey\'s goodwill impairment was 2 billion.
What you have to do.
This is based on the cost of restructuring the business for about $100 million this year.
So one can argue that, from the relative level of investment, perhaps--
Originally considered $1.
3 billion too high.
When you look back at Diversey, if you agree, where do you think the calibration error came from? And did it --
Maybe what does this have to do? William V. HickeyYes.
No, George, I don\'t call it [indiscernible]in time.
I mean, if you remember the numbers we saw 18 months ago when we conducted the acquisition analysis, the euro was at a $1 high. 40s.
It filters the profit model into valuation.
And, until the \"11-year\" March, the European economy has performed quite well.
So we\'re looking at a sustained growth,
Second, exchange the euro back to the dollar for $1. 48.
I think when we update the model that accounting requires us to do once a year, your current income stream is low, the monetary effect is reduced, and ultimately your value is different from a year ago.
This is not an out-of-line situation.
I take the liberty of saying that in two years you will come up with a different number that is--
It may be higher, but the accountants won\'t let you go back. George L. Staphos -
Bank of America Merrill Lynch, Research Department, we look forward to this, but are you talking about the market more than the actual potential performance or the performance that is shown to you? William V.
We did say--
I mean, we performed less than the initial analysis 18 months ago, but mainly from factors outside the business. Jerome A.
Look, let me add some flavor there.
As you can imagine, I spent a lot of time looking at this part of the business.
When you see the overall number of Europe in the first quarter, they are not impressed.
Having said that, you need to remember that some components of our business are device-driven.
We observed it for our company in Europe. -
Our equipment sales are very low in southern Europe.
So, who is going to buy equipment in Italy, Spain or Portugal today?
Therefore, this part of the store has been affected to a certain extent.
In general, another segment that has been affected is our retail brand business.
This is another thing. When I --
For me, it is important to see if we are retreating in core areas such as chemicals operations in various countries?
In fact, I am very happy that we are starting to see something very interesting coming up.
I am happy to see that our French business is doing well or that there is no retreat.
I am pleased to see that our Eastern European business is growing at double-digit rates.
I am pleased to see double digits in our Asian and Latin American businesses.
It\'s not just a quarter, it\'s a year --to-date.
So you look at our China business, it\'s up 22% this quarter and this year. to-
Date, very nice extra number.
So what\'s important to me is where is the soft pocket?
For example, when I look at the EU business this quarter, our negative growth of more than 80% comes from Italy, Portugal and Spain.
I\'m glad it was--
Shall we retreat? Absolutely not.
But I can understand that this is not a loss of market share, rather it is quite negative compared to the local situation.
OperatorIt was from the Commonwealth Secretariat, Morbelli Gabelli. Rosemarie J. Morbelli -
Gabelli & Company, Inc.
Could you please tell us more details about the diversified business in Europe and North America?
I mean, there are a few areas that you\'re looking.
But if you look at it as a whole, do you see a change in market trends, market share?
Do you have one? Can we have some? -
About the latest progress in food and beverage category? Jerome A. PeribereOkay.
Well, you have catering and then you have our I & L or Diversey.
I just talked a lot.
Where we really see the future of our business, we are growing faster than competition.
This is very reassuring to me.
I was happy when I saw our double digit growth in Turkey.
I was happy when I saw our double-digit growth in South Asia.
When I saw Hong Kong-
In India, our growth rate is over 15%, and what I\'m talking about is not necessarily only quarterly, it\'s not necessarily annual --to-date.
What I want to say is that we are falling in areas where the crisis is very serious.
When I just mentioned a very specific investment problem, equipment, we came down.
Where there is potential for growth, we will let [be] depressed. ph].
In our Nordic business, it has gone through a low point and is stable. On --the good --
I\'ll give you only one country, Greece, where you can expect to have 0 deals.
Do you know? Year-to-
We\'re down 11%. Quarter --
In the third quarter, it fell by 1%.
So the situation here is stable.
North America has always been a weakness in some market segments and it is improving.
We have made good progress in health care.
We have made good progress in the hotel and you will hear more about it soon. Rosemarie J. Morbelli -
Gabelli & Company, Inc.
If you can, in general, the cost of raw materials has fallen and has helped your profit margin to a certain extent.
Do you feel you have to start giving back the price from next quarter? William V. HickeyCarol? Carol P. LoweNo.
Rosemary, we actually-
We hope that the raw materials will remain the same.
We don\'t want to give up too much on pricing.
Depending on the decline we have seen so far in the cost of raw materials, there may be some modest set-off, especially since we have some contract customers but have no significant impact.
The next question comes from Chris Manuel of Wells Fargo Securities. Gabe S. Hajde -
This is actually Chris\'s Gabe Hajde in the research department of Wells Fargo Securities Co. , Ltd.
I think you guys mentioned lower equipment sales in the press release or in the presentation and in your comments.
I think, just talk about the relationship with consumer goods in the industry.
Maybe in 2013, will this have a negative impact on the business? William V. HickeyYes.
Let me introduce you to the background here.
Often, as Jerome has previously said very eloquently, our business is built on the solution that equipment provides customers with vehicles that use our consumables.
Historically, in terms of consumer sales of $100, equipment sales were about $10.
So it\'s about 10% mixed.
But it does generate a fair amount of consumer sales.
We have seen equipment placement as an indicator of future consumables sales, but I don\'t necessarily make any particular conclusions about our comments on Diversey.
Because the device placement on the protection business is still very good.
They are doing pretty well in the food industry.
So I don\'t have to come to a conclusion.
But I think it\'s a good point to keep in mind that positive device sales usually drive consumer sales in the future.
A slowdown in equipment sales usually means a slowdown in consumer sales.
But keep in mind that those devices installed outside will be golden years --after-year. Gabe S. Hajde -
The research department of Wells Fargo Securities Co. , Ltd. is very helpful.
I think there are comments about $0. 5 billion in asset sales or potential asset sales.
Could you please comment on the portfolio assessment, whether or not you guys have completed or are still looking for it? Carol P.
LoweI will respond.
Yes, we are looking for more assets across regions and businesses.
So for the rest of the year, we will continue to work towards 2013.
Because we have more than 12 Comments on up to $0. 5 billion-
A month so we are still looking for opportunities where we have certain business or product models and things that are not suitable for long-term developmentterm strategy. Jerome A.
We just had a big start. Carol P. LoweRight. absolutely.
This is supposed to be Phil Gray\'s work. Phil M. Gresh -
The first question, I think, is just about asset sales as a follow-up
I\'m sorry if someone has already asked, let me know.
But would you say that the $0. 5 billion target you gave previously considered selling the size you just finished? . . Carol P. LoweNo. Yes, it was. William V. HickeyIt was. Phil M. Gresh -
J. P. Morgan, research.
Then, if you \'ve talked about this, the outlook for the food industry in 2013, how do you see the quantitative trends there, given the lower slaughter rate potential? Jerome A.
PeribereWell, when you look at the trend, there is a negative trend in the fresh red meat market in North America.
In Latin America, all kinds of meat, fresh meat or smoke and processed meat, poultry, all of which are positive and slightly negative trends in Europe.
Still, in general, we see a slight positive trend called around 1%.
That\'s how we see it at this point in time.
The next question comes from Al Kabili of Credit Suisse. Albert T. Kabili -
The Credit Suisse bank research department is just a question in the guide about the reduction of free cash flow, if you can address the reasons that drive this.
Also, seasonal working capital appears to be performing poorly-
Use cash more seasonally than we are used to, if you can solve the problem as well. Carol P.
LoweWell, in my comments, I was talking about working capital, and the biggest impact was the increase in accounts receivable.
As we move forward this quarter, the biggest part of the $59 million growth is due to the exchange rate.
Therefore, at the end of September, our European Accounts receivable had a higher exchange rate with the end of June, and how valuable they were on the balance sheet, this represents approximately $30 million of the $59 million increase in accounts receivable.
In addition, seasonally, our Diversey agency and laundry business have higher sales.
Accounts receivable were also used in the third and second quarters, as these customers tend to have longer payment terms than those in our other business.
This is the biggest driver of working capital.
I also commented on the cash flow for the quarter, and we expect a large part of the interest paid throughout the year to be paid in the third quarter, so more than half.
So this is also a big drain on cash flow. Albert T. Kabili -
The reduction in the research sector and outlook, mainly the effective cap and currency, or is this divestiture, or is there anything more to drive this reduction than your [indiscernible]Carol P.
The reason for the reduction is that our performance has not reached the level we previously estimated.
Some are currencies, in fact, a large part are currencies, and the whole working capital is managed.
We do expect a significant reduction in inventory in the fourth quarter, but we just didn\'t reach the level originally planned. Albert T. Kabili -
Research Department of Credit Suisse bank.
Okay, that helps.
Just a follow-up-
At the Diversey auction.
From a brand perspective, how will you deal with this?
There are a lot of well-known brands, but since you have external parties for these brands in Japan, how are you going to deal with this on a global scale?
Could you please comment on whether the portfolio review will include additional Diversey? William V.
This is Bill.
Let me comment on the brand as I know this is a project that appears in the negotiations.
We have entered into a brand licensing agreement with buyers of the Japanese business, which has been in operation for several years and they will pay us ongoing royalties.
They will be the distributor of our TASKI system and get permission from the Diversey brand and they will even keep Diversey\'s name for a while.
As a result, these issues are being addressed as part of the sales process.
As Carol pointed out earlier, the second part of your question is that the portfolio review covers our entire business, not just the diversity, but the traditional Sealed Air.
I can\'t really comment on the business being discussed, if any, until we have a chance to say it at the right time.
We now have another question from George Staphos of Bank of America. George L. Staphos -
Bank of America Merrill Lynch research department has another problem.
Jerome, what was your first impression of Sealed Air before [indiscernible]
If any, your experience with Roma and Haas in Dow has something to do [indiscernible]Jerome A.
My first impression is that this is a company that, as I said before, is in a transitional phase in 2012 and has potential.
This is the main reason.
You may wonder why the EVP of The Dow is leading in the sealed air.
The reason is precisely that, after my due diligence, I believe this company has great potential.
As a result, I jumped.
Therefore, the similarities between Dow Rohm and Haas, or known as Dow advanced materials and Sealed Air, are much more than one would imagine.
First, any integration is a delicate process.
On the one hand, this is a process where you will seek cost synergies because you have to do so;
On the other hand, you need to look at the synergy of growth and you--
All of this is done by employees.
So either you do a project or you don\'t do it.
If you do a project, you will involve the staff.
If you don\'t, you\'ll let them look elsewhere, away from what you\'re trying to build.
That\'s what I \'ve been working for 3 years at Dow Chemical advanced materials, and that\'s what I \'ve spent most of my energy doing ---
Not most of my efforts. -
But there is a lot of effort now.
I want to make our Employees Federal.
We have 26,500 employees.
Those people are looking for items to seal the air.
I will tell you that I am very, very confident that the company needs the right people to build the company and the project.
So another similarity to the Dow advanced material is that it is a professional business.
Any professional business is made of stone. by-stone, brick-by-
It takes time.
Therefore, it takes time, effort, persistence and participation of employees.
That\'s what I really focus on and work on.
So I\'m not a magic man.
It will take time, but I believe there is some potential for this company. William V.
HickeyOperator, we are running out of time.
I know today is a busy day for other calls and we have moved everyone to Friday.
So I want to thank you for your participation.
I think you see that our third quarter results set the right tone and momentum for moving into the fourth quarter.
Our upcoming Diversey Japan has accelerated our debt reduction and helped us to exceed our annual debt target.
Innovation and new solutions remain key factors in our separation of Sealed Air from our competitors.
We have a lot of new products. Jerome said we are very excited.
At the same time, we will continue to focus on implementing our plans, integrating diversity and maximizing free cash flow.
Thank you again and wish you a wonderful day.
Thank you very much.
Ladies and gentlemen, this is the end of today\'s conference call.
So you can disconnect now.
Thank you for joining us.
Have a good day.