Sealed Air - Earnings Call - Q3 2016
October 27, 2016
Transcript
Speaker 0
Ladies and gentlemen, and welcome to the Q3 twenty sixteen Sealed Air Earnings Conference Call. My name is Matthew, and I'll be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes.
And now I'd like to turn the call over to Ms. Lori Chapman, Vice President, Investor Relations. Please proceed, ma'am.
Speaker 1
Thank you, and good morning, everyone. Sorry for the delayed start. There were technical difficulties. Before we begin our call today, I'd like to note that we have provided a slide presentation to help guide our discussion. This presentation can be found on today's webcast and can be downloaded from our IR website at sealedair.com.
I would 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 based solely on information that is now available to us. We encourage you to review the information in the section entitled Forward Looking Statements in our earnings release, which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed on our most recent annual report on Form 10 ks and as revised and updated on our quarterly reports on Form 10 Q, which you can also find on our website at sealedair.com.
We discuss financial measures that do not conform to U. S. GAAP. You may find important information on our use of these measures and the reconciliation to U. S.
GAAP in the financial tables that we have included in our earnings release. Included in today's presentation on Slide three, you will find U. S. GAAP financial results that complement some of the non U. S.
GAAP measures used throughout the presentation. Now, I'll turn the call over to Jerome Perraver, our President and CEO. Jerome?
Speaker 2
Thank you, Laurie. Thank you, and good morning, everyone. We have definitely a lot to cover on our call today. And in addition to a review of our third quarter results and outlook, we will be discussing the announcement that we made on October 17 to pursue a tax free spin off of Diversicare and our related hygiene business. As planned, we have Ken Christmann, President of our Product Care Division joining Carol for our third quarter discussion.
And I also invited Doctor. Ilham Cadbury, President of Diversicare and Karl Diley, President of Food Care to join us during this important Q and A session. So let me get started. In the third quarter, we reported $3.00 $4,000,000 of adjusted EBITDA on sales of $1,700,000,000 Our margin and free cash flow performance in the quarter is a testament to our strong operational discipline and working capital management despite soft organic sales growth of 1%. We are pleased to report adjusted EBITDA margins of 17.7%, a 50 basis point improvement over last year.
And we generated $212,000,000 of free cash flow during Q3 as compared with $191,000,000 for the same quarter last year. I will provide a few comments and leave the details to Carol and Ken. Our price mix discipline came through in the quarter with all regions delivering favorable trends except North America, primarily due to timing of raw materials cost pass through in Food Care. Let me highlight volume growth, which was largely driven by our execution of our Change the Game strategy. Product Care volumes in North America were up 7%, if you exclude the 100 basis points of rationalization.
Diversicare delivered positive volume in North America, Europe and Asia Pacific as a result of customer wins and Food Care Protein Packaging volumes were led by more than 5% growth in North America and positive trends in the EMEA region. These positive volume trends are very important to us as they are strong indications of what's to come into year end and in 2017. Unfortunately, our business suffered from some softness in Latin America, Mid East and Australia and continued weakness in the general industrial GDP. You can see that we have and will continue to take corrective actions to preserve our bottom line guidance and commit to our free cash flow in 2017. Such agility is now in our DNA.
With that said, let me turn back to our decision to pursue a tax free spin of Diversey. By separating our Food Care, Product Care and Medical business from our Diversity Care and related hygiene business, we create two pure play industry leading companies with strong financial profile, each with its own unique and compelling investment opportunity. We believe that this is the appropriate next step in our company's transformation and will accelerate profitable growth for both entities. Before I get into the rationale, I will quickly highlight the structure of the transaction on Slide five. Following completion of the tax free spin, Cindere shareholders will own 100% of the common stock of what I would call new Diversi.
Both new Stilldair and new Diversi will be well capitalized with disciplined return based approaches to capital allocation. We anticipate a similar credit rating to existing Stilldair at both companies. The transaction is expected to be completed in the 2017 and we anticipate filing of the Form 10 as early as the 2017, which will provide you with independent standalone financials for new diversity. So now let's turn into Slide six, where we highlight the strategic rationale for the separation. This separation will give both entities the ability to tailor their strategic objectives and capitalize on global growth opportunities, both at the core of their businesses and with respect to innovative and disruptive technology.
New and New Diversey will have leaner and more streamlined operations and will become even more entrepreneurial. I want to spend a few minutes highlighting both New Steel Steel Dare and New Diversey. First, new field there on Slide seven. Many of you have heard me say this before, but I will say it again. We believe that our Food Care and Product Care divisions are by far the most innovative leaders in their respective industries with unmatched global scale and reach.
In short, we are market makers. Over the last three plus years, we extended this leadership globally with new innovative product offering and consultative services. Adjusted EBITDA for our Food Care division, excluding the Hygiene business and our Product Care division has reported a three year compounded annual growth rate of approximately 11% in constant dollars. To give you a sense of the size and the margin profile on an as reported basis, the adjusted EBITDA margin for NewSealDear reported approximately 20% adjusted EBITDA margins in the last twelve months ended September 3036. UCildare will continue to generate strong free cash flow, which will support future growth initiatives and value added M and A, and consistently return value to shareholders.
Let me turn to Slide eight on new Diversity. Under the Silver umbrella, both Diversicare and our Hygiene business streamlined their organizations, revamped their product portfolio and go to market strategy, reenergized energy with a renewed focus on disruptive solutions and embraced a truly entrepreneurial culture, which makes them be the most innovative player in the industry. All of which have contributed to consistent top line growth, what will make the new diversity and has generated a three year compounded annual growth rate of approximately 15% in adjusted EBITDA on a constant dollar basis. Our innovative platforms, including the Internet of Things, Intellibot Robotics, Clean in Place Solutions, Biodegradable Chemistry, Drylube and others are enabling us to win new customers around the world. And in a separate announcement, you saw that our branded licensing agreement with STJ will expire in May 2017.
We have already started working on developing new partnerships as announced yesterday morning with Spectrum and Nakoma. We will also look for opportunities to expand existing relationship and grow our own brand into new channels. Given the low capital requirements and free cash flow generation, new Diversey will have the flexibility to invest in growth and return value to shareholders. In short, you had instilled there what the renowned industry analyst once called the ATM you want to own. Now you will have two ATM machines.
With that, let me now turn the call to Carol for a look at the financial results for the third quarter. Carol?
Speaker 3
Thank you, Jerome. On Slide nine of our presentation, you can see our performance by region for the third quarter. The two regions that delivered constant dollar sales growth were North America and Latin America. Growth in North America was driven by an increase of approximately 4% in volume with positive trends across our three divisions. In Latin America, constant dollar growth was a result of our pricing efforts to offset currency devaluation.
In EMEA, positive trends in Food Care were offset by declines in Diversity Care and Product Care. Performance in Asia Pacific was primarily impacted by a 14% decline in Australia. The Australian beef market is significantly depressed with slaughter rates at their lowest levels in twenty years. Australia accounts for approximately 6% of Food Care's net sales. Turning to Slide 10, we highlight volume and price mix trends by division and by region.
We have already highlighted key volume trends, so I will focus my comments on price mix. You can see from this slide that with the exception of North America, we have had positive price mix in all regions for three consecutive quarters. Food Care's price mix was positive on a global basis despite North America being negatively impacted by the timing of raw material pass through. Diversity Care delivered favorable price mix across all regions, which has been consistent throughout the year. In Product Care, strong e commerce volumes are currently having a negative impact on mix.
Turning to Slide 11. Let me walk you through our net sales performance on a year over year basis. We delivered $1,700,000,000 in sales on essentially flat volume. Price mix contributed $15,000,000 to top line growth. Unfavorable currency translation was $31,000,000 and the impact from divestitures was $15,000,000 Now turning to Slide 12.
We present our adjusted EBITDA bridge. I would like to note that our adjusted gross margin improved 90 basis points from 36.4% in Q3 twenty fifteen to thirty seven point three percent in Q3 twenty sixteen. Our adjusted EBITDA was $3.00 $4,000,000 or 17.7% of net sales. Mix and price cost spread was $22,000,000 favorable. And we realized $10,000,000 in restructuring savings.
Operating expenses had an impact of $21,000,000 of which salary and wage inflation was 17,000,000 Currency was a negative $4,000,000 and divestitures were $3,000,000 Adjusted earnings per share was $0.71 in the third quarter. Our adjusted tax rate in the quarter was 23. For the full year, we continue to expect our tax rate to be approximately 24%. We repurchased 3,500,000.0 shares for approximately $165,000,000 and exited the third quarter with 194,000,000 shares outstanding. Let me now turn the call over to Ken to go through our results by division.
Speaker 4
Thank you, Carol. Slide 13 highlights the results from our Product Care division. Product Care net sales on a constant dollar basis were unchanged on a year over year basis. Rationalization efforts in North America and Europe had a negative impact on constant dollar sales of approximately 200 basis points. We reported a record level of EBITDA margin of nearly 23%, an increase of 160 basis points, which is notable given the raw material environment and a soft industrial sector.
As you heard from both Jerome and Carol, our third quarter sales performance was due to strength in e commerce and fulfillment. We delivered nearly 4% sales growth in North America adjusted for rationalization. North America accounts for approximately 60% of Product Care's total sales. Volume accelerated throughout the quarter and we continue to see good growth in October. Our thought leadership in providing solutions to e commerce and fulfillment sectors is resulting in accelerated adoption of our more profitable differentiated innovations including inflatable bubble, CorVu and B plus equipment complemented by record levels of equipment installations.
We are also seeing expanded adoption of our protective mailers as customers respond to dimensional weight pricing challenges. Heading into year end, we expect growth in e commerce and fulfillment to accelerate and drive top and bottom line performance. Our robust equipment installations, fueled by our new offerings, gives us confidence in achieving accelerated growth. While we are not seeing much of a rebound from the industrial sector, our customers in this sector are expressing increased interest in our new offerings as they address the impact of dimensional weight pricing. Let's turn now to Slide 14 and review Food Care results.
Favorable pricemix, positive volume trends in North America and Europe and disciplined cost management were key contributors to sales and EBITDA performance in the third quarter. On an organic basis, adjusted EBITDA increased 7% on 1% sales growth. EBITDA margins increased 110 basis points to just over 21%. Production of all proteins in North America and Europe were up in the third quarter. On one hand, our business is reaping the benefits of higher beef volumes and continued global adoption of our new products.
On the other hand, these positive trends are being offset by the challenging business environments in Asia Pacific, particularly in Australia, as Carol mentioned, and Latin America, which took a turn for the worse in September after trends appeared to be stabilizing. In the fourth quarter, we expect sequential improvement in sales and adjusted EBITDA with accelerating volume trends in North America and Europe offsetting continued weakness in Australia and Latin America. Let's turn to Diversity Care results on slide 15. Diversicare net sales were up 1.5% in constant dollars and adjusted EBITDA margins were 13%. Growth in the quarter was driven by new customer rollouts in North America and Europe and positive trends in Asia Pacific.
We were pleased to see North America delivered growth in light of a tough comparable. In Western Europe, most of our largest countries experienced positive constant dollar sales growth. And in Asia Pacific, growth was led by strength in China and India. These positive trends were partially offset by declines in The Middle East. As we anticipated, the hospitality sector, particularly in Turkey, continues to struggle as a result of significant declines in tourism and occupancy rates.
For the fourth quarter, we expect the positive trends in North America, Europe and Asia Pacific to continue and more than offset challenges in Latin America and Middle East. Customer rollouts are on schedule and our list of strategic wins across all sectors continues to grow. Now let me pass the call back to Carol to review our free cash flow and our outlook for 2016. Carol?
Speaker 3
Thank you, Ken. Turning to Slide 16. Free cash flow was a source of cash of $280,000,000 Working capital and other assets and liabilities were a use of cash of $82,000,000 for the nine months ended September 30. CapEx increased to $190,000,000 which includes $71,000,000 related to the investment we are making in our Charlotte campus and $23,000,000 related to other CapEx restructuring activities. CapEx during the same period last year was 112,000,000 Now turning to our outlook on Slide 17.
Net sales are expected to be approximately $6,800,000,000 The impact from the Food Care divestitures on 2016 net sales is $102,000,000 Currency is expected to have an unfavorable impact on sales of approximately $225,000,000 Our outlook for adjusted EBITDA is now at 1,170,000,000.00 Impact from the Food Care divestitures on 2016 EBITDA is $21,000,000 Currency is expected to have an unfavorable impact on EBITDA of approximately 35,000,000 We continue to anticipate that the fourth quarter will be our strongest quarter of the year with organic sales growth of approximately 3%. As Jerome and Ken highlighted, our growth in the fourth quarter will be primarily driven by accelerated volume in both Food Care and Product Care. Our medical and corporate expenses are expected to be a net expense of $90,000,000 for the full year 2016. Our interest expense for 2016 is estimated at $218,000,000 Depreciation and amortization is forecast to be approximately $275,000,000 Adjusted earnings per share is expected to be approximately $2.6 We are maintaining our free cash flow target of approximately $550,000,000 CapEx is expected to be $275,000,000 which includes approximately $125,000,000 related to the investment we are making in our Charlotte campus and other capital restructuring activities. Excluding these items, maintenance and growth CapEx combined is estimated at $150,000,000 For the full year, we expect working capital and other current assets and liabilities to be a source of cash of approximately $80,000,000 Cash restructuring payments are estimated at $90,000,000 and we expect to realize restructuring savings of approximately 40,000,000 Cash interest payments are expected to be $210,000,000 and cash tax payments are estimated at $125,000,000 That concludes our prepared remarks.
Before I open the call to questions, I would like to remind you our fourth quarter earnings call is tentatively scheduled for Thursday, February 9. With that, operator, can you please open the call for questions?
Speaker 0
Thank you. And your first question comes from the line of George Staphos of Bank of America. Please go ahead.
Speaker 5
Hi, everyone. Thanks for the details and good luck with the transaction. I guess I'll try to ask a two part question, not to cheat too much. In food and beverage, is there a way to parse how the drag that you're seeing in emerging markets may lessen in the fourth quarter such that we might be able to peg what the broader food volume might look like in the quarter? And then the related question would be, in the past and understandably the portfolio decision previously wasn't your decision, the company has talked about the benefits of having the hygiene business in conjunction with food packaging.
Explain to us why whatever synergy there might have been isn't as important on a going forward basis. Thank you, guys.
Speaker 4
Okay. So this is Karl. So let's I'll start with your second question first, if that's okay. And we have had synergies with the hygiene business. However, the natural fit is to keep the hygiene business with the Diversity Care business due to the synergies of supply chain and a number of other things.
And obviously, our ability to partner going forward will still be there. But they are two different businesses with two different sales processes and sales cycles and we feel it's the most prudent thing to do to include them in the spin. Now on your first question, I wish I could answer Latin America. We thought that Brazil had bottomed out and Argentina was going along relatively well. And they both took a turn for the worst at the end of the quarter, which had an impact.
We still have very good positive growth going in the Northern Cone of Latin America. So we obviously are keeping our pulse on the market and our key customers and having very good introduction of new products and value added products in Latin America. So as soon as the market does start to turn positive, we expect to get an accelerated growth. But we just have to stay close to that market because it is volatile.
Speaker 1
George, you have a follow-up or you're good?
Speaker 5
You know what, I'll turn it over and try to come back just to be fair. Thanks.
Speaker 1
Great. Thank you, George. Operator, next question please. Thank
Speaker 0
you. Our next question comes from the line of Scott Kaffner of Barclays Capital. Please go ahead.
Speaker 6
Thanks. Good morning.
Speaker 3
Morning, Jerome,
Speaker 2
I just you made a
Speaker 7
comment in your opening remarks. You said the separation between Diversey and Legacy Sealed Air would create a leaner and more entrepreneurial environment, think you said for both businesses. But I'm just trying to square that with the move to Charlotte. You spent tens of millions, almost $100,000,000 maybe on a new headquarters to create a larger, more centralized organization. So is there something that changed along the way where diversity didn't fit within that more centralized model?
Can you just flush those divergent comments out?
Speaker 2
So for those who know me well, I hate centralization. But what I want to do is to make sure that we have centers of excellence. And this is what we've been creating and that's what we are creating in our new campus. Having said that, it is not because I don't like the diversity business, it is because we believe by having those two entities separated will create a better shareholder value for both entities. You have to realize that the old diversity was a faint shadow of what it is now.
And it really woke up a very traditional industry. We're not seeing this yet in sales growth, we're seeing sales growth, but it's nothing compared to what this new diversity business is going to be over the years to come. Think about the Internet of Clean, 100% biodegradable products, Trico Sanfi products, robotics by the way, at the ISSA this week, we're announcing a new alliance on robotics with Discovery Robotics and that's going to even increase the pace of our differentiation with our potential competitors. Think about dry lube and C Tech, this is a very strong self standing entity. And when you think about what we have done in the past three years, we had an improvement of product profitability of the what is now to be called the new diversity of over 15% EBITDA improvement on a compound annual growth rates in the last three years.
Very frankly, it's ready to fly from its own wings. It is going to enable an even more entrepreneurial approach. So I really believe it is the right time.
Speaker 7
So just a quick follow-up on the capital allocation there. You said you were going to have the same capital structure at each business, but you said Diversey has lower capital requirements and relatively high free cash flow. Is there a reason why you wouldn't maybe have a higher leverage ratio at the Diversey spend versus the legacy business? Thanks.
Speaker 2
We're working on all of these, Scott, and you're going to see all of that in our Form 10. We have preliminary numbers at this point in time. Yes, you will be able to own two ATM machines now.
Speaker 8
Operator, next question please.
Speaker 0
Thank you. Your next question comes from
Speaker 6
the line
Speaker 0
of Adam Josephine of KeyBanc. Please go ahead.
Speaker 8
Hi, Adam.
Speaker 1
Operator, we can't hear Adam.
Speaker 9
Can you hear me now?
Speaker 1
Yes. Yes. Now we can.
Speaker 9
Laurie. Jerome, Carol, good morning. Just a question on volume trends. You're up about 1% in the first quarter, up 05% in the second quarter. You were flattish this quarter.
Can you just big picture talk about what's changed as the year has unfolded? What you expect to happen next year with respect to volume? I know you talked at the Analyst Day Jerome about expecting a pretty significant acceleration in volume growth in the years to come. Do you still think that's a reasonable expectation just in light of what's unfolded this year? And if so, why?
Thank you.
Speaker 2
So very good question, Adam. Let me be very transparent as I like to always be. I have been a little bit disappointed with my with our 1% growth in Q3. But this is two different stories. At that time, I did not anticipate the severity of the Australian reduction in the beef market.
At that time, I was coming at that time being in July, when I announced the second quarter results, we were coming from a strong Latin America and Brazilian recovery on the beef market, because it was volume was growth was there, etcetera, and it didn't continue. It has been just a little positive blip. And as Carl said, by the way on Food Care, Northern LATAM is very much strong and Southern LATAM is bad. At that time, I was fearing that we would be hurt as Ilham had clearly said, it was that we were going to be impacted by the instability of The Middle East and by the hospitality business in markets like France, Belgium and Germany, and we have been a little bit more. Having said that, and to come to your question, it is I am very pleased with what we are seeing in some very key markets where we are executing on Change the Game strategy.
North American Food Care has had a 3.5% volume growth in the third quarter. North American Product Care has had, which is a very key market for us, very big for us in Product Care has had a 7% volume growth when you exclude the 100 basis points from the divestitures or from the portfolio rationalization. And Diversicare has a very tough comparable in the first quarter and yet has been positive. That tells me that we should be confident on Q4 and I am confident on Q4 and what is going to be really the barometer for me is going to be how are we going to grow volume in Q4 and in each of those three divisions. And I can assure you that we are projecting volume growth in Q4 in each of those divisions and solid volume growth and that definitely in our mind is showing the cutoff between the trends in 2015 and 2016 into 2017.
Speaker 1
Thank you, Adam. Do you
Speaker 10
have a follow-up?
Speaker 9
Laurie, thank you. Carol, just a quick one on cash flow. Just in light of some of the changes you made to your projections on cash restructuring, interest, etcetera. Carol, can you just remind us what you talked about as far as 2017, the CapEx, cash restructuring, working cap, cash taxes, etcetera, just so we have some early bridge to 2017 on the cash flow line, Carol? Thanks very much.
Speaker 3
So Adam, what we had referenced for CapEx for 2017 was that we would be at approximately 200,000,000 And actually I said that would be the number going forward. Obviously, with all of our numbers, we'll have to update post spin. As we look at our working capital for the consolidated Sealed Air, it was estimated to be positive cash flow of approximately $50,000,000 for 2017. We have not given specific guidance relative to tax payments for 2015. We're projecting $125,000,000 for 2016.
They will be slightly higher than that as we move forward. If we look at restructuring payments, we had originally said cash payments for restructuring would be approximately $100,000,000 excluding CapEx restructuring. As we've reduced the amount that we anticipate to spend in 2016 to 90,000,000 that difference, because we were previously at $110,000,000 we would increase 2017 by $20,000,000 So in total, between 2016 and 2017, we would stay at the $210,000,000 but we will have a shift into 2017.
Speaker 1
You, Hal. Operator, next question please.
Speaker 0
Thank you. Your next question comes from the line of Brian Maguire of Goldman Sachs. Please proceed.
Speaker 6
Hi, good morning everyone.
Speaker 3
Hi, good morning Brian.
Speaker 11
Jerome, I had a couple of questions about Diversey, kind of along all along the same lines. But first, I was just wondering before announcing the spin if you considered trying to find a strategic partner for it or if there was any thought about ever trying to sell the business. Just kind of related to that, wondering if that were to be an option, if you'd have any significant tax leakage? And then just the third part of that, just wondering if after you spin it, if you'd expect any restrictions on anybody being able to buy new Diversey, any tax implications that could come back to NuSeal there? Thanks.
Speaker 2
Okay. So again, good question. The spin is a tax free operation as you know, and the potential sale would be a taxable operation. And my responsibility is to ensure maximum shareholder value. We are reviewing the tax basis as we merging many legal entities, but the Board has then authorized to evaluate a spin based on the information it has and therefore supported the spin.
So that's what I can say. Once again, as a standalone company, it's going to thrive over time.
Speaker 1
Operator, next question please.
Speaker 3
Brian, do you have a follow-up? Sorry about that, Brian.
Speaker 11
Yes. Just one if I could sneak one in. I think, Jerome, at one point you talked about diversity getting to a 15% margin. I recognize there'll be some incremental corporate expense and hygiene part of the food care will be in there a little bit. But just wondering if that's still an aspirational target for diversity that's reasonable?
Speaker 2
Well, it's not an aspiration. It is what I really believe it can deliver. So you heard two things. You heard me say for a long time and Doctor. Cadbury said also that we are on our way and we have been improving double digit the EBITDA of the Diversicare business by about 12% per year in the last three years, all right, on a constant currency basis.
What you heard me also say a few minutes ago in my prepared remarks is that when you take the new diversity, which includes in the Hygiene business, over the last three years, we had a 15% compound annual growth rate in EBITDA. And this is the result of innovation, of rationalization, of new way go to market, etcetera, etcetera. The separation of diversity has got nothing to do with any disappointment of the situation. I'm actually bullish about the prospect of that. So the 15% target by 2018 is still here strong and standing.
And when you compare 2016 with 2015, you'll continue to see the progress and compared again with 2014, we're seeing that on and on and very solid.
Speaker 1
You very much. Next question please.
Speaker 0
Thank you for your question. Your next question, we don't have any details recorded for the next question unfortunately, but please go ahead and state your name and company name. You're live in the call now. Don't know who you are. No, we have no response there.
So your next question comes from the line of Jason Please go ahead and state your company name. Thank you.
Speaker 5
Hi, good morning. This is Jason Fertel from SunTrust.
Speaker 3
Jason. Hi,
Speaker 5
guys repurchased an impressive 3,500,000.0 shares in the quarter and it looks like you still have a little bit of room to increase your leverage within your targeted range. Do you want to maintain some cushion in your leverage ratio given the current macro environment? Or are there any other planned uses of cash in the near term that would prevent you from being equally or more aggressive in repurchasing shares in the near term?
Speaker 3
So thank you, Jason. As we've stated before, our leverage target is 3.5 to four times. We came out of Q3 at approximately 3.8 times or about flat with where we were at the June this year. We are very cognizant of some of the macroeconomic challenges that are out there on a global basis. And as we've always said, based on indications from the economy and how our various markets are performing, we would move between that 3.5% to 4%.
Right now, if we see some good points and some conservatism, we have been active in the market and we have still a lot outstanding in the approved program from the Board of Directors. We actually have $884,000,000 that's still available under that Board authorization. So management will take the action that's appropriate given the leverage and given the performance of the business, which we see as continuing to improve and get stronger as Jerome noted in his remarks headed into Q4 and into 2017.
Speaker 2
In fact, we have $670,000,000 left in the authorization. The 800,000,000 was the first. So we have $670,000,000 left and what we will have to review is our leverage ratio band in the as we separate the twenty days. What I can assure you, and actually this is led by Carrie, that we're not going to increase the leverage, because we don't feel that it is appropriate. But we'll review all of those and we'll guide over in the future about those.
Speaker 1
Thank you. Operator, could we take the next question please?
Speaker 0
Thank you. Your next question comes from the line of Mark Wilde. Please state your company name.
Speaker 12
Hi, it's Mark Wilde from BMO. Good morning, Jerome. Good morning, Carol.
Speaker 3
Good morning.
Speaker 12
A couple of questions. First, is it possible, Carol, to quantify the cost to Diversey of being a separate public company?
Speaker 3
So we're still in the process of preparing the standalone financials and they will be available when we file the Form 10. So we are not prepared to comment on those at this time.
Speaker 4
Bear with us.
Speaker 12
All right. No ballpark estimates or anything?
Speaker 2
No speculation.
Speaker 12
Okay. All right. That's fine. And then I wondered if either Jerome or Carol could talk with us a little bit about how you see the impact of resin prices in the fourth quarter just in terms of lags between when resin moves and when your product pricing might move?
Speaker 2
So the PEEE situation polyethylene situation right now is a little bit slushy. And you have CDI and IHS, which are projecting slight reduction over time. Some are saying that the $05 will be given back. You know that the October increase didn't go through, etcetera. So as you say, as you know, we have had fast tools that take a little bit of time.
And so that is there's been an impact on our cost and all of this is included in our Q4 EBITDA projection.
Speaker 12
Can you give us any sense of what the size of that might be?
Speaker 2
No, that's too much detail here. But as we say, as you know, we are an agile organization. We make sure that our pricing discipline is staying intact. And when you look at the gross profit of Steel Dare, you have seen that in the third quarter, we have increased our gross profit by about 70 basis points, which just shows that we're very focused on those kind of things and it is as valid same thing for the Food Care division.
Speaker 12
Okay. And finally, if I could Jerome, your margins are kind of back in both of the packaging businesses where the company had margins in the late 90s and early 2000s. What's the kind of additional runway that you see in both businesses?
Speaker 2
Well, as we introduce our knowledge base solutions, as I hope you're going to be coming to Pack Expo and you're going to be your joy is going to fall if you do. And you will see that we do have margin expansion opportunities for both in product I'm talking the new team there, both in Product Care and in Food Care by the way, Packet X for you will also see our innovation in Food Care, which is why I'm taking that opportunity to once again invite everybody to come and see the new scene there and scene there at PACK EXPO and to come and visit to go and visit the potential new diversity at the ISSA this week and also we're going to have some robotics at Pack Expo week of November 7. By working that booth, you will either this week at ISSA or at PADD PACK EXPO week of November 7, you will be able to realize that it's not necessary for me to highlight the Change the Game strategies because they're there and a visit is worth a thousand words.
Speaker 8
Thank you. Operator, next question please.
Speaker 0
Thank you. Your next question comes from line of Edlain Rodriguez of UBS. Please go ahead.
Speaker 13
Thank you. Good morning, Just one quick question. I mean this is a follow-up to the resin costs going up. I mean Jerome, can you talk about the levers you have to offset those costs for the customers that don't have formula based pricing? I mean, that's how quickly can you go to those other customers to raise prices to offset higher costs?
Speaker 2
Okay. Well, first of all, we have, for a long time moved from a cost plus based company to a value creating company. And we're seeing this all the time. When you look at it, if I just tell you that for a meat processor packaging is less than 1% of their cost, it's nothing compared to the value that we create to them. And we create value to the meat processes, we create value to retailers by reducing food waste, meat waste, etcetera, etcetera.
So we're just not pricing based on our costs. So this concept that the tide goes up when resin prices go up and the tide goes down when the resin prices go down is not the right concept. With some customers, we do have formula and we apply those formulas. But I think it's very important to see that we like every company, we do have a commodity business and we make sure that we are competitive in the commodity business. And in the solutions business, we just don't price according to our costs.
Speaker 8
Elaine, do have a follow-up question?
Speaker 13
Actually, yes, I do. I mean, one quick one on the spin off decision. When you look at the two companies, now they're going to be separate. And was there any reason, I mean, why you wanted to do the separation? For example, I mean, can you give any examples of any constraints that you had between diversity and your seal there by being together in terms of transactions you wanted to do, but you couldn't do because it didn't make sense for one part of the portfolio or other investments that you had to forego by being together?
Speaker 2
So look at, Carla has talked to you about the synergies between food packaging and food hygiene and they are very small. And so that's point number one. Then you go and look at whether the R and D is similar. Well, it is not. In one case you deal with chemicals and you deal with basically with chemicals on the other side, you deal with specialty, highly specialized plastic extrusion, etcetera.
Then you look at the customer base and the overlap is not very strong. Then actually it is weak. Then you look at supply chain and you see the same. So when you really think about it, the synergies are low. So from then on, you've got to go and wonder whether you go and wonder whether there are things which what is the best solution?
The best solution for us was to really look at how we can improve this business. And as I said, the old diversity is a fan shadow of what it is now. We now have a winning company in the marketplace. We have value added solution for our customers. And when we switch a customer to us, it is because they see the differential advantage of our solution and this is why it is.
So it was not so much a question of, if it would be a question of when and the reason why we decided to do it now is because no kidding, under the leadership of Doctor. Cadre, this new diversity is going to fly very nicely under renowned by its own wing. If there was one thing which has been the positive is the creation of a one culture. And this is why we have leveraged all of those kinds of things. And the decision on the campus by the way has been taken in the 2014, time at which we did not think that we would do what we do now.
But we're doing actually we're doing it now because we do believe that the recovery of the new diversity has been faster than what we think it could be.
Speaker 8
Operator, next question please.
Speaker 0
Thank you. Your next question comes from the line of Ghansham Panjabi of Robert W. Baird. Please go ahead.
Speaker 14
Hey guys, good morning.
Speaker 1
Good morning, Ghansham.
Speaker 5
So first off, how should we
Speaker 14
think about the termination of the SC Johnson relationship? It looks like they're returning to the institutional cleaning business as they announced a couple of days ago. And in your 10 ks, you highlighted that a loss of the license could have a material impact on Diversey and especially so since they're now competitors as well. So how should we think about those what offsets you have towards that?
Speaker 2
So in fact, you've got to go back to the genesis of this agreement. This agreement had been signed between SC Johnson and its diversity division when Diversity was part of SC Johnson. And between you and me, it was not a good long term fit for Diversity. Diversity under still there or for new diversity as it is going to be. And what you have to look there for is about the long term.
And very frankly, there are some very strong long term opportunities. So in the short term, it might be a short term downside, but that is not the most important things. We have new agreements in place with Spectrum Brands. We're working nicely with Nakoma. We are going to have more of those.
We're going to be launching our Cryovacs, better bags. This is by the way, we have verified that this Cryovac brand, which will stay with Diversey is a very strong brand and we are going to be continuing to announcing more partnerships. These agreements signed under the long ago when STJ was owning Diversey was limiting the potential for Diversey.
Speaker 14
Okay. Can I ask another question?
Speaker 1
Go Yes.
Speaker 5
So for new Sealed Air, which
Speaker 14
would be Food and Product Care, I guess, Jerome, what do you envision the strategy will be longer term apart from some of the growth initiatives you have in place? Does it make sense to sort of think about another vertical in the portfolio to complement the remaining segments? You called out farm to fork in your slide deck and hopefully you're not going to acquire farms, but what is your strategic view on the residual portfolio?
Speaker 2
My strategic view is that focus is a very strong strength of a company and that this is going to enable us to do exactly that. So we do have two divisions, which are formidable competitors in their space. And what I can assure you is that we are going to be working on reinforcing those two divisions to make them even stronger, we might add another strategic pillar, which will have either commonality on technology to leverage our technology, very unique technologies or our commonality on our customer base. We're here to add value to our customers. And I really believe that we're going to be able to do that better.
So what you should expect over time is us to reward our shareholders to accelerate our innovation and to increase and to do M and A.
Speaker 8
Thanks, Gatra.
Speaker 14
And thank you so much.
Speaker 1
Operator, we have time for one last question.
Speaker 0
Thank you. Our next question comes from line of Anthony Pettinari of Citi. Please go ahead.
Speaker 6
Good morning. Jerome, at your Analyst Day, you laid out detailed targets for the segments and then a free cash flow goal for the combined company for 2018. And my question is when you look at the 2018 free cash flow goal, do you still feel you can achieve that? Do you have some levers that you can offset the slower organic growth you've seen this year? And then in the Form 10, can we expect that you'll break out or update the 2018 free cash flow goal between new Ciel d'Aire and new Diversey?
Speaker 2
I don't think that Form 10 will highlight the new Ciel d'Aire free cash flow goal. But your point is very valid. When we were talking about this free cash flow goal of 2018, it was the result of some organic growth that we were seeing. Let me remind you that because we have that in mind and I'm reminding that to all of my division presidents every single day as they started there. We said 4% to 5% in Food Care, 4% to 5% in Product Care and three percent to 4% in Diversity Care.
We and this was for the period of 2016 to 2018. We as I told you, I also told you that the 2016 was going to be muted and that we were going to see the growth coming up in the second half. I'm not pleased, I told you earlier that I was a little bit disappointed with the third quarter, but I am optimistic about the fourth quarter, as I indicated 3% growth and about 2017. So we will update you all of this. The $775 has $775,000,000 at the time was taking a given assumption on currencies and on a world stage, which is not exactly that one.
Having said that, we will update you in due time with our 2018 goals and you always should look for opportunities to expand the margins and maximizing this free cash flow. And as you have seen, in an environment which has not been really good this year because of lack of growth, we have been confirming our guidance on free cash flow for 2016. So we're very, very focused on those things.
Speaker 1
Thank you, Jerome. Anthony, do you
Speaker 10
have a follow-up?
Speaker 6
Yes, just maybe one follow-up. With the lower organic growth that you've seen year to date, do you think that you're tracking end market demand in Food Care and Product Care? Or do you feel that have you do you feel that you've lost any share? Or are you seeing any real changes in the competitive dynamics in Food Care and Product Care?
Speaker 2
Let me be very, very clear. We are increasing our share. And there's not a shadow of a doubt.
Speaker 1
It. By
Speaker 2
way, we're increasing the share, thanks to our very powerful innovation. See you week of November 7 in Package, or I hope.
Speaker 1
Thank you, Jerome. And thank you, Anthony. And thanks everybody for all your questions. Operator, that concludes our call.
Speaker 0
Thank you very much indeed. Ladies and gentlemen, thank you for joining today's conference. You may now disconnect. Thank you, Anthony, very much. Have a great day.