Sealed Air Earnings Call INSIGHTS: Diversey, Portfolio Review

On Thursday, Sealed Air Corporation (NYSE:SEE) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.


George Staphos – Bank of America Merrill Lynch: Appreciate the slide deck, good touches there. A couple of questions on Diversey. So, am I to understand that if not for the $23 million variable comp recorded in the second quarter of ’11 that the pro forma reduction in EBIT of $36 million would have been a greater amount 2Q versus 2Q or would you treat it differently? The related question by my estimate, Diversey was dilutive to your earnings this year and just in the quarter by $0.15 to $0.20 when I include the share count, would you agree with that treatment or would you have a different figure? Then I had follow-up question.

A Closer Look: Sealed Air Earnings: Misses Profit Estimate, Shares Fall.

William V. Hickey – President and CEO: Let me answer your first question first. The Diversey $23 million is a credit that was taken in Q2 ’11 by the prior owners. That represented – I believe it was a 50% reduction in their incentive comp. The 2012 numbers do not include such a reduction. So, the $36 million shortfall that you were referring actually becomes less on a comparable basis if you kind of normalize the variable compensation. If you take seven exchange out it, you essentially end up with a balance closer to six, because there’s seven exchange in that number, George. As far as your EPS calculation, I have not done that, but we will do it and we can compare notes offline.

George Staphos – Bank of America Merrill Lynch: My related follow-on is on free cash flow what do you think the normalized level of free cash flow is from the Diversey alone on an ongoing basis? My calculation would be this year that it’s maybe $40 million or $50 million including the investment and the cash restructuring, if you will? Thanks. I’ll turn it over.

William V. Hickey – President and CEO: We haven’t looked at it that way. I don’t know, Tod, do you have an observation, because essentially it’s fungible. We’ve essentially consolidated the back office, George. So what you see is, as the Diversey is down to a contribution margin on a standalone basis and then allocations. So, I’m not sure that I could back and look precisely at what the Diversey numbers are, but again, maybe that’s another exercise we can take offline. But by the way, I’d say, we’ve kind of scrambled the eggs a bit.

George Staphos – Bank of America Merrill Lynch: Just as a comment, it would helpful just so that you can track the progress because obviously you’ve put a lot of capital into Diversey.

William V. Hickey – President and CEO: Okay.

Portfolio Review

Scott Gaffner – Barclays: Bill you made a comment there near the end of your presentation. You said you’re reviewing the portfolio looking at strategic option. I was wondering if you could maybe comment and how often have you reviewed the portfolio maybe over the last year and just historically how often you do that? Are you just looking at potentially underperforming assets or is this something more meaningful that we should be anticipating?

William V. Hickey – President and CEO: I think this is reasonably consistent with what I have said. This is now the second quarter I have said and I’ll also say that shortly after the Diversey acquisition, I think that given the size of the Company and the asset base as well as our debt, we are really evaluating and I think I have used actually in my commentary products, geography and businesses. So, we are looking for what in our portfolio may not meet our criteria in any one of those categories whether it’s a operation in a particular part of the world, whether it’s a product line in one of our core businesses that doesn’t carry its weight or whether it’s one of our smaller sub businesses that we just might feel that those assets could be better put to use in the core business. So, that’s what we have in mind, any one of those three, and I will keep people up-to-date, but obviously I cannot say anything right now because we haven’t got anything to report.

Scott Gaffner – Barclays: Then just going to the you mentioned that on a comparable basis, on a pro forma basis, you expect sales to essentially be flat on a constant dollar basis, and yet the COGS, you have a COGS now you said they are going to be 66% of sales up from 65% before. Can you just talk about where that deleverage is coming from in the business to cause that slip in the gross margin line?

William V. Hickey – President and CEO: Yeah. Carol?

Carol P. Lowe – SVP and CFO: Well, I just –I am not certain by what you mean by delveraging but obviously under absorption is going to be a challenge for us throughout the balance of the year and that’s partly what you see hitting the operating margin and the cost of sales as a percent.

Scott Gaffner – Barclays: Right, and so what’s driving that under absorption?

Carol P. Lowe – SVP and CFO: Volume, the challenges that we’re seeing especially with Europe and other economies as Bill discussed.

William V. Hickey – President and CEO: Right, I think in the under absorption in a lot of parts of the world not the United States but Europe and Australia particularly, I think, Carol mentioned during her comments. As the business experiences a slowdown in volume, most of your labor essentially is a reasonably fixed cost because it’s not possible in many of these economies in Europe or Australia to flex your work force as quickly as you’re able to do it in the U.S., and I think, as Carol said in Australia that resulted in several million dollars of un absorbed overhead as Australia production ran below plan. So that has the impact on COGS.

Scott Gaffner – Barclays: But you did mention that you thoughts volumes would pick up a little bit in the second half, is that from the first half?

William V. Hickey – President and CEO: Right. And the business typically does. The business is typically 48-52 or 47-53 on a seasonal basis and that will happen ordinarily and we also expect to give that a little extra pinch with some of the things we are we are doing.