Sealed Air - Earnings Call - Q4 2016

Transcript

Speaker 0

Day, ladies and gentlemen, and welcome to the Sil Air Fourth Quarter twenty sixteen Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Lori Chapman, Vice President of Investor Relations.

Please begin.

Speaker 1

Thank you, and good morning, everyone. Before we begin our call today, I would 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 in our most recent annual report on Form 10 ks and as revised and updated on our quarterly reports on Form 10 Q and current reports on Form eight ks, which you can also find on our website at sealedair.com. We also discuss financial measures that do not conform to U. S.

GAAP. You may find important information on our use of these measures and their reconciliation to U. S. GAAP in the financial tables that we've included in our earnings press release. Including 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 Periver, our President and CEO.

Jerome?

Speaker 2

Thank you, Laurie. Good morning, everyone. You can see from our results, free cash flow and earnings per share performance were the highlights for the quarter and the year. We generated $631,000,000 in free cash flow in 2016 and this was net of $276,000,000 in CapEx and $66,000,000 in restructuring. The significant upside relative to our guidance was primarily driven by our continuous strong focus on working capital.

We also delivered $0.76 in adjusted EPS in the fourth quarter and $2.66 per share in 2016 after repurchasing only 5,000,000 shares in the first nine months of the year. In the fourth quarter, both Food Care and Diversity Care delivered organic sales growth of approximately 3% and adjusted EPS growth of 16%. In Food Care, protein packaging volumes in North America increased more than 6%. Our hygiene business increased sales in constant by 5% in constant dollars and we delivered favorable price mix on a global basis. Diversicare's growth was primarily driven by favorable price mix of over 2% and volume increases of 73% in Asia Pacific and North America respectively.

Where we fell short in the quarter was our top line constant dollar growth in Product Care, which weighed on our adjusted EBITDA performance. We knew December would be critical month for us with most of our global growth depending on our e commerce business. And we were happy with our e commerce volume growth of 15% in the quarter, but this was offset by weakness in global industrial GDP and our product rationalization efforts. And despite the shortfall in sales, adjusted EBITA margins increased 80 basis points over the last year to 22.3%. So as I'm sure you all know, I am not happy with our overall organic growth of 1.3% in 2016.

We underestimated the impact of the economic and geopolitical environment in Latin America and The Middle East, the depth of the down cycle in the Australian beef market and the weakness in the industrial world. But at the same time, I'm very pleased with the agility of our organization, its ability to deliver bottom line results and properly prioritize. I'm also extremely pleased with the innovation pipelines and the number of new disruptive products that we are gradually introducing and launching across the three divisions. Our total net sales outlook for 2017 of 2.5% constant dollar growth reflects approximately 3% of growth from for Food Care and Product Care and 1% for Diversicare, which accounts for the short term impact of the expiration of the brand licensing agreement with AC Johnson. Internally, the actions that we're taking to drive growth in 2017 are purposeful.

We will leverage our strong global presence in Food Care and continue growing at a faster pace than the protein packaging markets. We will capitalize on the e commerce opportunity with our disruptive technologies. And the underlying constant dollar sales growth for Diversicare, excluding SCJ, is expected to be at an all time high in 2017 and our plans to rebuild our Consumer Brands business is very well underway. We recognize that 2017 will prove to be a critical year for Sildaire, particularly as we proceed with our plans for the separation of new Diversey. As you know, we disclosed back in October that we are pursuing a tax free spin off.

And today we announced that we are also exploring all the strategic alternatives including the potential sale of new Diversey. And we're confident that the separation is the appropriate next step in our company's transformation and will enable us to unlock meaningful value for customers and shareholders. At this point, we are very limited on what we can share about the separation process and thank you in advance for respecting our need to significantly limit our comments. So now let me turn back on the fourth quarter and year end performance. On Slides five and six of our presentation, you can see our performance by region for the fourth quarter and the full year.

In Q4, organic sales growth was 2% with positive trends across all regions. Organic growth in North America was driven by an increase of approximately 4% in volume. Constant dollar growth in Latin America was a result of our pricing efforts to offset currency devaluations. And in EMEA, positive trends in Food Care and Diversicare were partially offset by declines in Product Care. And performance in Asia was very strong in Diversicare at 7% constant dollar growth, but the total company's results were impacted by a 10% decline in Australia due to the beef market down cycle.

Australia accounted for approximately 7% of Food Care net sales in the fourth quarter. And for the full year 2016, net sales increased 1.3% as compared to 2015 on an organic basis. Constant dollar growth in Latin America was 9% and organic growth in EMEA was 2%. North America and Asia Pacific were essentially unchanged as compared to last year. Turning to Slide seven, which highlights volume and price mix trends by division and by region.

You can see that from this slide that on a global basis, trends were flat to up 2% throughout the year. Let me highlight that our volume in North America has accelerated throughout the year with 4.2% growth in the fourth quarter on the heels of 3.8% in the third quarter. We delivered favorable pricemix in each quarter throughout 2016 as a result of positive trends in Food Care and Diversicare. Now let me turn to Slide eight and review Food Care results. Positive volume trends in North America and EMEA, favorable price mix and disciplined cost management were key contributors to our fourth quarter organic sales growth of 3% and adjusted EBITDA margin of 21%, an increase of two fifty basis points over last year.

We are seeing the benefits of higher peak volume and market share gains through the continued global adoption of our new products. Similar to the third quarter, these positive trends were offset by volume declines in Australia and Latin America. For the full year 2016, Food Care delivered $3,200,000,000 in net sales or 2% organic sales growth. Packaging Solutions were $2,600,000,000 and Hygiene Solutions were 600,000,000 In adjusted EBITDA, Food Care reported $661,000,000 or 20.5% of net sales. Packaging Solutions delivered adjusted EBITDA of $593,000,000 or 22.7% of net sales and Hygiene delivered the remaining EUR 68,000,000 of EBITDA or 11.3% of net sales.

I'd like to highlight that the Hygiene business has improved its margins by over 400 basis points on an as reported basis since 2013 and has a very bright future as part of new diversity by providing market leading solutions and technology advancements enhanced by acquisitions of Drylube and CipTek. For the full 2017, Food Care sales are forecasted to increase approximately 3% in constant dollars. Our core business is expected to continue growing faster than the market with more contribution from our Change the Game initiatives, particularly OptiDure and Darkraesch. Latin America is starting to stabilize and Australia will continue to be impacted by declines in the beef market, also to a lesser degree as compared to 2016. Adjusted EBITDA is expected to increase at a faster pace than sales and similar to 2016, we expect the Q1 to be our low point for sales and EBITDA.

Turning to Diversicare's results on Slide nine, you can see that net sales were up 3% in constant dollars in the fourth quarter and up 2% for the full year. Adjusted EBITDA margins of 13% increased 180 basis points in the quarter and for the full year, margins increased 120 basis points to 12.8%. Sales growth in the quarter and throughout the year was driven by increased sales from existing and new customers in North America, Europe and Asia Pacific. In Western Europe, most of our largest countries experienced positive constant sales growth. And in Asia Pacific, was led by strength in China, India and Southeast Asia.

Throughout The Middle East and parts of Europe, the hospitality sector struggled in the second half as a result of declines in tourism and occupancy rates due to terrorist attacks. In 2017, Diversity sales are expected to increase approximately 1% on a constant dollar basis with adjusted EBITDA margins in line with 2016 results. And as I noted earlier, our plans are well underway to mitigate the impact of STJ and sales from the core business excluding STJ is growing at an accelerated pace. This growth is a direct result of the investments that we have made in our product portfolio, go to market strategy and sales organization. Slide 10 highlights the results from our Product Care division.

In the fourth quarter and full year, Product Care net sales on a constant dollar basis were essentially unchanged as compared to with 2015. Adjusted EBITDA margins increased 80 basis points to 22.3% in the quarter and 90 basis points to 21.8% in 2016. In the fourth quarter, Product Care delivered strong volume trends in North America, which were partially offset by declines in Europe. Adjusting for product rationalization, North America volume were up approximately 5% driven by strength in our e commerce segment. And similar to the third quarter, our performance in Europe was negatively impacted by the industrial environment.

And in the latter 2016, we have been introducing an unprecedented number of new technologies and solutions. And as a result, we are experiencing significant interest from our customers, which mainly you saw firsthand at PACT EXPO in many of you saw at PACT EXPO in early November. Sales for these products, including iPAK, FloWrap, StealthWrap, inflatable, bubbling, automailers are expected to ramp up in 2017 and contribute to both our top and bottom line growth. We will continue to invest heavily in the business to support new product launches and global growth opportunities. But for our industrial based business, we are planning for sales to be relatively in line with 2016.

And also keep in mind that our rationalization efforts are behind us, but that you will not see a true apples to apples constant dollar sales growth rate until the 2017. For the full year 2017, we anticipate year over year constant dollar sales to increase approximately 3% and similar to Food Care, adjusted EBITDA is expected to increase at a faster pace than sales. And now let me pass the call to Carol to review our net sales and adjusted EBITDA, free cash flow and our more details on our outlook for 2017. Carol?

Speaker 1

Thank you, Jerome. 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 net sales in the fourth quarter and $6,800,000,000 for the full year 2016. Volume contributed $26,000,000 and $50,000,000 to top line growth in the quarter and for the full year respectively. Favorable price mix was $9,000,000 in Q4 and $41,000,000 for the year.

Unfavorable currency translation was $40,000,000 in the quarter and $243,000,000 in 2016. Food Care divestitures impacted sales by $5,000,000 in Q4 and $102,000,000 for the full year. On Slide 12, you can see that our adjusted EBITDA was $3.00 $4,000,000 or 17.5% of net sales in the fourth quarter and $1,160,000,000 or 17.1% for the full year. Mix and price cost spread was 13,000,000 favorable in Q4 and $46,000,000 in 2016. Volume growth contributed $9,000,000 to the quarter and $19,000,000 for the year.

Restructuring savings were $10,000,000 and $43,000,000 in Q4 and 2016 respectively. Operating expenses increased 6,000,000 in the quarter. For the full year, expenses increased $69,000,000 most of which is related to compensation inflation. Currency was a negative $4,000,000 in Q4 and a negative $35,000,000 in 2016. For the full year, divestitures had a negative impact of $21,000,000 on adjusted EBITDA.

Adjusted gross margins improved 60 basis points in the fourth quarter and in the full year resulting in 36.8% margin and 37.4% margin respectively. We were pleased with this performance in light of the volatility of input costs and timing of raw material cost pass throughs in Food Care. Adjusted earnings per share were $0.76 in the fourth quarter and $2.66 for the full year. Currency translation reduced EPS by $01 in the quarter and by $0.11 for the full year. Our adjusted tax rate in the quarter was 18% and for the full year 21.6%.

We repurchased 4,700,000.0 shares for approximately $217,000,000 in 2016. We still have approximately $667,000,000 available under the Board approved share repurchase plan and expect to return to share buybacks following the new diversity separation. Turning to Slide 13. Free cash flow was a source of cash of $631,000,000 Working capital and other assets and liabilities were a source of cash of $151,000,000 CapEx increased to $276,000,000 which includes $100,000,000 related to the investment in our Charlotte campus and $30,000,000 related to other CapEx restructuring activities. CapEx in 2015 was $184,000,000 As Jerome commented, the strong free cash flow performance was driven by optimization of our working capital, including the implementation of our new supply chain financing program.

Our procurement team and our credit and collections team exceeded their targets for the fourth quarter, generating more than $80,000,000 improvement above our prior guidance for free cash flow. Now turning to outlook on Slide 14. In constant dollars, net sales are expected to increase approximately 2.5% for the full year 2017. This forecast assumes approximately 1% constant dollar growth for DiversityCare and approximately 3% growth for both Food Care and Product Care. While both volume and price mix are expected to be contributors to 2017 growth, we expect more growth to come from accelerated volume trends throughout the year.

We estimate that currency translation will reduce net sales by approximately $220,000,000 or 3%. Our major currency exposures in 2016 included the euro which was approximately 18% of net sales, the British pound which was 5%, Australian dollar was 4% and the Brazilian real, Mexican peso and Canadian dollar were each approximately 3% of net sales. 2017 adjusted EBITDA is expected to be approximately $1,180,000,000 Please note that contrary to last year, interest income of $10,000,000 is excluded from our EBITDA guidance. Unfavorable currency translation is estimated to be approximately $40,000,000 As a reminder, a 5% swing in the euro has an impact of approximately $10,000,000 on adjusted EBITDA. Our medical and corporate expenses are expected to be a net expense of $90,000,000 for the full year 2017.

Our net interest expense for 2017 is estimated at $215,000,000 Depreciation and amortization is forecast to be approximately $275,000,000 Adjusted earnings per share is expected to be approximately $2.7 assuming unfavorable currency translation of $0.14 We expect our adjusted tax rate to increase to approximately 23%, which will negatively impact year over year EPS by $05 Our forecast for EPS is based on a weighted average 197,000,000 diluted shares. We are forecasting free cash flow to be approximately $600,000,000 in 2017. We expect working capital and other current assets and liabilities to be a source of cash as we continue to progress on inventory management and our supply chain financing program. Cash restructuring payments are estimated to be approximately 85,000,000 to $100,000,000 depending on the pace of addressing stranded costs. We expect to realize restructuring savings of approximately $40,000,000 in 2017 with additional savings in 2018.

Cash interest payments are expected to be $210,000,000 Cash tax payments are estimated to increase to 175,000,000 and CapEx is expected to return to a more normalized level of approximately $185,000,000 Our outlook for free cash flow in 2017 does not include any material fees associated with the separation efforts of new diversity. The cost associated with the separation is expected to be managed within existing programs and funds generated as a result of the separation. That concludes our prepared remarks. Before I open the call to questions, I would like to remind you our first quarter twenty seventeen earnings call is tentatively scheduled for Thursday, April 27. With that, operator, can you please open up the call for questions?

Speaker 0

Thank you. The first question is from Ghansham Pajabi of Baird. Your line is open.

Speaker 3

Hey guys, good morning.

Speaker 2

Good morning, Ghansham. Hey,

Speaker 3

I guess, know, kind of looking back at 2016 and core sales growth, it was almost fifty-fifty divided between price mix and volume. Is that the right way to think about 2017 as it relates to Food and Product Care growth of 3%? And off the volume bucket for Food and Product Care, those two businesses, how much do you think will come from new products, Optidoor, Dart Fresh on trend, all the many new products, Jerome, that you introduced in Product Care late last year? Thanks.

Speaker 2

So good question. And no, I don't think that it's going to be the growth is going to be fifty-fifty. I think that the growth is going to actually the way we're seeing the growth is definitely more towards volume growth than price mix. That's mainly how we see it happen. We are dealing with resin prices price, which is flattish.

It's coming up in the first quarter and so but we believe that those are going to come down during the year. So it really is volume growth that we're looking at.

Speaker 0

Thank you. The next question is from George Staphos of Bank of America. Your line is open.

Speaker 4

Hi everyone. Good morning. I appreciate all the details. I guess if you could go back to the prior quarter and what your internal views might have been for 2017. And as we then fast forward to the current time, Jerome, what if anything has changed the most for you either positively or negatively in terms of the outlook for 2017?

Recognizing volume is going to be in your view an important contributor to top line growth, are there any other elements to your strategy that you might be working a little bit more aggressively this year given that you said that you weren't entirely happy with the performance in 2016 as well? Thanks.

Speaker 2

Okay. Thanks, George. Good question again. And no, I'm not happy. I'm not happy with the growth that we had.

And I am disappointed. Why? Because we didn't have a very strong or we didn't have much growth in the first half, a little bit in the third quarter. It's improving somewhat in the fourth quarter, but it is not at the levels that I was expecting. And yes indeed, we have been surprised by a few things.

Number one is the global GDP. You go to Bloomberg on February 2016 and you see that global GDP was forecasted at 2.4% and it ended up global, ended up at 1.9% with The U. S. At 2.4% also, which ended up also at 1.9% and Europe, which was forecasted at 1.9% and it is at 1.6%. And for 2017, the trend seems to be the same.

Last year 2017 was seen to have a global GDP forecast for 2017 a year ago at 2.6% and today's projection is 2.3%. So we can't ignore those kind of things and what has disappointed me is the lack of industrial GDP growth. In a world economy, which had 1.9% global GDP growth, this is probably one of the worst years that we have experienced in many years actually. And it's always next year, which is supposed to be better, but you know what, we're not counting on it. And in our forecast at this point in time, we are considering that the industrial world is not going to be better.

And if it comes as a good surprise, well, be it would love that. Back in June 2015, during Analyst Day, almost two years ago now or eighteen months ago, we were seeing macro world which was going to be better. The reality is that in 2016, LATAM is much worse than, has been much worse than we thought it was going to be. And again, industrial market has been much softer. So that's how we plan.

What am I happy with? Very frankly, we have invested a lot of money in new products and in R and D and marketing to position new products. At PATRIC EXPO late October, we have shown and we have announced quite a few innovation, which disruptive and are going to make an impact. But what you had seen at that time for several of those equipment are products which it was the first production. So we did not launch we launched it at that time and now in 2017 we have to ramp up those things.

The thing that we all need to understand is that we're doing very different things than we were doing a few years ago. A few years ago, we were launching just simple products. Today, we're launching solutions. We're launching equipment razor razor blade. Those are higher margin products, but the issue of this is that it takes a little bit of the sales cycle is a little bit longer.

When you work with meat processors and retail chains in Europe, in North America to establish door fresh entree or those kinds of extraordinary solutions, which have a very, very clear mega trend, it just takes time. And we have talked about that. We have talked that with some of those regulators, the cycle between the first time we talk about that, about such a product or a solution and the production or the go let's produce after ordering the equipment. This is two years. And it's the same on Product Care.

One thing was to sell a little inflatable machine. Another thing is to do operational excellence with our e commerce partners and improve all the organization and show them how much value they can create out of Telwrap, Flowrrap and IPAC and those kind of things. So I'm disappointed with the overall world economy support. Extraordinarily excited, which is why during the year 2016, we have invested so much money in R and D and in marketing to position those newer solutions because I really believe that this is disruptive and our expected growth is probably delayed just has probably been delayed by a few quarters. But I'll conclude because this is very key that we've seen an acceleration of the volume growth in Sildair in the fourth quarter.

We had the highest volume growth in Food Care of each of all the quarters in '20 in the fourth quarter, Same for DIVERSI and almost the same. We had a very strong third quarter in Product Care, but almost the same in Product Care. So it's absolutely not doom and gloom, but we have to be realistic. And 2017 is gonna be mostly about volume. And talking about diversity, let me remind you what I said earlier.

It is going to be our fastest growth business, fastest growth year if you exclude the short term impact of the STJ. And we told you why this agreement did not get renewed is that it was not fitting either company. We wanted access to wider markets, to consumer markets, to all kinds of do it yourself type of market and SDG didn't want that. And therefore, we agreed to disagree. Yes, it does have a short term impact, but this was really the right thing to do for the company.

We have lots of great plans in place and you're going to see outside of this SJ business, we're to have the highest growth that we ever had in Diversicare.

Speaker 5

Operator, next question please.

Speaker 0

The next question is from Scott Kaffner of Barclays. Your line is open.

Speaker 6

Thanks. Good morning, Jerome. Good morning, Carol.

Speaker 2

Good morning. Good

Speaker 6

looking back at the presentation from late last year when you talked about the spend transaction for the Diversey business and obviously it was a tax free spend. And you mentioned in the release you're including possibly doing a potential sale. I mean, are you okay potentially realizing the lower proceeds simply due to tax leakage for the business now just because it does maybe get you to your goal of simplifying the operating structure? How should we think about that?

Speaker 2

Well, the way you should think about this is that we're going to be counting properly and that we're going to do what is the best for our shareholders. And I'm not announcing a sale. I'm saying that we are pursuing a dual track here.

Speaker 5

Operator, next question please.

Speaker 0

Yes the next question is from of UBS. Your line is open.

Speaker 7

Thank you. Good morning guys.

Speaker 2

Good morning.

Speaker 7

Just one quick question on resin cost. I mean what expectations are for 2017? I mean, they seem to be staying higher than expected and the case is going to be what oil prices do or whether we'll see a decline in the second half of the year. So how are you combating those rising resin costs?

Speaker 2

So the market is choppy. You've seen that there's been increases in September, which were given back two months later. You see that the $05 in February is going through. We'll have to see whether the $06 is going through. You have ethylene prices, which are high.

You have Turner's rounds, which are fabulously orchestrated. And at the very same time, you have some high capacity or lots of capacity which is coming later in the year. So our view on the full year is that prices are going to be flattish and formula prices have a little bit of lag. Is this going to impact the first half a little bit with those price increases announced? Yes.

But for the whole year, we are counting on flat sales, which is why by the way, we are not going to we are not having a lot of price in our growth forecast. We have price mix, but we don't have very much of that. What you have to know is that we're very diligent. We have announced a price increase effective March 1 in our Product Care business. We're looking at systematic price product line by line.

It's not going to apply across the board because it's going to apply to polyethylene based products and we don't have only polyethylene based products in Product Care. We're looking at similar things where we don't have formulas in other divisions. And by definition, we're in the business of absorbing those cost increases.

Speaker 1

Operator, next question please.

Speaker 0

Next question is from Adam Josephson of KeyBanc Capital Markets. Your line is open.

Speaker 4

Thanks. Good morning, everyone. Just one on the S. C. Johnson agreement.

Can you just talk about what the adverse impact on Diversey's EBITDA is from the termination of that relationship and how the new Diversey pro form a EBITDA now compares to the $3.00 $5,000,000 that you laid out when you announced the spin? Thank you.

Speaker 2

So we have never given and we're not going to be giving the specific detail on this contract, but I have said that we are expecting 1% sales growth and flattish EBITDA in 2017 out of Diversicare as a result of this, given that we are having on the non Diversity Care, non S. C. Johnson business we're having a higher growth than what we had in total in 2017 in 2016.

Speaker 0

The next question is from Brian Maguire of Goldman Sachs. Your line is open.

Speaker 8

Hey, good morning. Thanks for taking my question. Just wanted to clarify a couple of things on the 2017 outlook. Carol, first I think I heard you mention there's probably a $10,000,000 basis adjustment in the way that you're calculating EBITDA for 2017 that's a negative on there. Then why not give a range on it given some of the uncertainty out there?

Historically, I think you'd given maybe a $20,000,000 range. Is it appropriate to think about it as a $10,000,000 range around the point estimate? And then just finally, on the first quarter, usually, at least in 2016, you saw about a $40,000,000 drop in EBITDA from 4Q to 1Q. Are you thinking about a similar amount of seasonality this year?

Speaker 1

Thank you, Brian. Yes, we highlighted that if you looked at it apples to apples and how interest income would be treated, the $1,180,000,000 would be $10,000,000 higher including interest income. So we've made that change in our guidance and we'll reflect that in our actual results as we move forward. If you want to have a number for comparison purposes, the interest income that was included in the adjusted EBITDA reported for 2016 is $13,000,000 of positive interest income. And we'll reflect that change in Q1.

With respect to providing a range, we just felt that it was probably cleaner to pick a point of the $1,180,000,000 and work towards that. It helps with our modeling as well as yours and our investors to do that. So that's what we've done. And then we highlighted and called out the various moving pieces. And I think one of the changes versus maybe what you were looking at before is definitely on the share count and the currency in FCJ.

All three of those are causing a bit of headwind if you look at probably street expectations versus the numbers that we reported this morning as our outlook. So what

Speaker 2

having here is in 17, we have included basically $50,000,000 of negative and it's 40 from currency and it is 10, actually it's more, it's 13 on the interest income. So you have $53,000,000 right there. And then next to that, you have a very transparent explanation of a flat Diversicare in terms of EBITDA for the simple reason constant current flat EBITDA, for the simple reason that we have a temporary situation with this consumer goods contract. And this compared to a double digit EBITDA growth in constant currency every single year in the last four years in Diversity Care. So that's what's going on.

And should currency be better than the $40,000,000 impact, we're going be obviously happy about this. It is pretty choppy. Remember the Euro was at 103, four weeks ago or three point five weeks ago, it is at 107 and those kinds of things. You have quite a few movements of currency at this point in time. But you have $53,000,000 of negatives right away as I just compare those two things on interest income and currency.

Speaker 1

And Brian, with respect to your question about Q1 twenty seventeen, we did highlight in our comments that we do expect it to be the low point in terms of EBITDA earnings in 2017 and we will accelerate as we move throughout the year. Operator, next question please.

Speaker 0

The next question is from Tyler Langton of JPMorgan. Your line is open.

Speaker 9

Good morning. Thank you. Just had a question on the currencies. I don't if I missed it, but could you just give some details on I guess what rates you are assuming in your guidance? Then I think, Hal, you mentioned the euro sensitivity, but could you give any sensitivity around your exposure to the other currencies?

Yes.

Speaker 1

So if we look at for 2017, we have assumed the Euro at $1.05 and the Great British Pound at $1.25 Those would be two of the major currencies. And I called out the percentages in my comments that the Euro represents about 18% of net sales and the British Pound was 5%. The next highest currency that reflects that impacts us is the Australian dollar at 4% of our net sales and we are assuming a rate of 133 for 2017.

Speaker 5

Operator, next question please.

Speaker 0

Yes. The next question is from Phil Ng of Jefferies. Your line is open.

Speaker 10

Hey guys. Just a quick clarification question. I assume the comment around looking at strategic alternatives is just limited to diversity rather than the entire company. And I guess separately just given the growth you're seeing in 2017 from new products, the beef cycle turning and just being done with pruning on the industrial side, would have thought mix would have contributed more in 2017. Can you talk about how

Speaker 8

you think about mix the next few years? Thanks.

Speaker 1

Could you

Speaker 2

just give a little bit of more color to the question, specific question? Mix, what kind of mix are you referring to?

Speaker 1

Referring to change the game drum in terms of price mix in 2017.

Speaker 2

Okay. So we're not giving those kind of details of price mix for existing products or new products, etcetera. Generally speaking, what you have to consider is that our solution based offering is having higher margins because as we are creating with some of our solutions extraordinary value for our customers, we are in a mode of sharing those. And we have growing examples of those. And when you take products like Optidura where you have less leakers at the production level, where you have more additional sales because of the shine of the product and tightness in the vacuum, when you have the upper chantere, which reduces dramatically the shrink at the retailer level and it improves the shelf life and therefore the supply chain.

When you have products like FloWrap and StealthWrap whose number one benefit are, and IPAC number one benefit are to reduce the shipping costs because they have less, they generate less cube, which is by the way in e commerce, the number one cost when you take the whole packaging operation, the number one cost is freight, is shipping cost. So when you can improve all of those kind of things, you are in a position to obviously enjoy better margins if you can demonstrate those values. So that's how we're going. But having said that, we're not giving details on the margins of existing products versus the new products. Although during our Investor Day in September, we'll be able to give an update of how we're progressing and with our Change the Game offering.

Speaker 5

Operator, next question please.

Speaker 0

The next question is from Anthony Pettinari of Citi. Your line is open.

Speaker 11

Hey, good morning. Good morning, Anthony. Just a question on Product Care. A third of that business is e commerce, third party logistics that's presumably growing double digits, can you help us square that with the 1.5% overall volume growth in the queue? And then maybe just following up on Phil's question, if I look at the three businesses for the year, Product Care had the best volume growth, but the weakest price mix.

Is that a case where some of the new sales gains in e commerce are coming from lower margin products? Or any color you can give there would be helpful.

Speaker 2

So yes, you're correct that the volume growth in Product Care total year has been 1.4% in 2016 versus 1% in Food Care. It's not that like this in the fourth quarter because it was Food Care which had the highest growth. Having said that, the price mix has also been different and the price mix has been more unfavorable every single quarter during 2016. And this is because we don't have price formula. So we depending on the mix and also depending on the type of products or raising prices, we have to adapt our pricing in a very different way because those are very different businesses with our customers there.

Speaker 5

Operator, next question please.

Speaker 2

The next

Speaker 0

question is from Chris Manuel of Wells Fargo Securities. Your line is open.

Speaker 10

Good morning. I had just one question on diversity, but there's a couple of little pieces to it. I mean, first, the $250,000,000 or so you did this year, remind us because I forget what the corporate allocation element is in there. What should I think of the real kind of EBITDA number is? And then if I heard you correctly earlier in the call, you said that share repurchase would be sort of on hold until you made a decision or got some clarity there, whether it's a spin or sale?

I guess then the last piece is timing. Has anything changed from it being a kind of third quarter event?

Speaker 1

Okay. So Chris, I'll start with respect to allocation. The costs that sit within the businesses that you see within our segment reporting, they primarily represent the cost to operate that business. And that's true for all three of the businesses. So I would not think about it having a huge amount or even a mid sized amount of allocation that's not needed to support the business.

We've made a decision all along that we keep a lot of the more corporate type costs. They sit in that other category where we have corporate and the other medical and new ventures small business. So what sits there within the segment is largely what it requires for that business to operate within Field Air. And then with respect to the separation itself, you know, we've referenced the second half and there's really not a lot more we can say on that separation. It's proceeding as Jerome has described.

Speaker 5

Operator, next question please.

Speaker 0

Yes, the next question is from Jason Fertel of SunTrust. Your line is open.

Speaker 4

Hi, good morning. Good morning. In terms of your free cash flow guidance, I think total cash restructuring expectations over the course of 'sixteen and 'seventeen came down relative to what you previously indicated. Is the difference primarily being driven by the separation of DiversityCare? And will restructuring payments go away in 'eighteen?

And then additionally for CapEx, is $185,000,000 an appropriate level to assume going forward for just the Food Care and Product Care segments?

Speaker 1

Okay. So Jason, thank you. With respect to the restructuring, you're correct. The amounts are lower than what we had originally forecast even as late as Q3. And you're also correct that it is largely driven by the separation plans.

I made the comment on our Q3 earnings call that we would manage initial costs within the existing programs as it related to starting to address some of the stranded costs. And that's what we've looked at. We've also been very diligent about going through the program and prioritizing based on what could give near term return and also recognizing that the separation of a business of this size for new to FERSI also takes commitment and focus. And we want to make sure we optimize value for the shareholder and we continue great service for our customers. So that's also caused a prioritization and it decreased the amount we spent in 2016.

And shifting to 2017, in total, the amount for restructuring is not changing. We would expect to have some spend in 2018, but also savings in 2018 based on this shift. But we will be taking a hard look as we move throughout the first half at those programs and what will add the most value for Sealed Air. With respect to the CapEx, we'll provide more color on forecasted CapEx for Food Care and for Product Care post identification of the separation.

Speaker 5

Operator, next question please.

Speaker 0

The next question is from Mark Watt of Bank of Montreal. Your line is open.

Speaker 4

Yes. Good morning Jerome. Good morning Carol and Lori.

Speaker 2

Good

Speaker 4

Good Just wanted to swing back to the Product Care business. And can we get some sense of whether in general the e commerce business right now has lower margins than the segment overall? And then also, I'm just kind of curious why volume isn't a little bit better given that we're seeing things like the ISM index for manufacturing pick up, we're seeing some pick up in other forms of industrial packaging. So maybe your thoughts there.

Speaker 2

Okay. So what we do, what ProvidCare has clearly suffered from is from the mix between industrial and e commerce and 3PL. Let me address the second part of your question first, is the index. Yeah, in general speaking, we can see some ratios which are hanging in there. The reality is that we have the bulk of our business, about 85% of our business is in North America and is in Europe.

And when you look at those two parts of the world and when you talk with our customers and very frankly on the industrial part, their exports and their business is suffering and it's just sluggish. When you have The U. S. With a GDP of 1.9% all driven by consumers, you can call this an industrial GDP boom or these kind of things. And the bulk, as I said, the bulk of our Product Care business is in North America and in Europe.

So that's the way it is. Unfortunately, we have a large part of our Product Care business in there. Fortunately, we're growing very fast in the 3PL and e commerce business. And the solutions that we have are absolutely second to none disruptive and revolutionary. That every time we are engaged with new customers, we are going through a whole process of new value being created and working on how we can go and get these kind of things done.

So if you and now addressing your first question, which was related to the margins of e commerce versus industrial. Yes indeed with our current portfolio, they are slightly lower. But with the solutions that we have shown at PACK EXPO, they are going to be definitely improving and not lagging our industrial business.

Speaker 1

Operator, I think we have time for one more question.

Speaker 0

Okay. The final question will come from Arun Viswanathan of RBC Capital Markets. Your line is open.

Speaker 12

Great, thank you. I just wanted to get back to the volume side. You seem somewhat confident in there. Maybe you can just discuss how that works out by region. You know, America and Europe have seen decent gains in both Food Care and Product Care.

But non U. S. Is still pretty concerning. How do you see that playing out next year? Do you see continued drags in Latin America and Australia and then also in Europe and Product Care?

Thanks.

Speaker 2

You it seems that your question started with Food Care and so.

Speaker 10

So Yes,

Speaker 9

just wanted to see if

Speaker 2

you can go through both, if possible. Sure. In Food Care, we're seeing a continuous strong growth out of North America. We see we had negative volume in Latin America, actually very negative in Brazil, positive in some other parts of Latin America, but for a total being negative. We believe that this is going to be stabilizing.

When we look at the herd and the cattle cycle, we are seeing that specifically in Brazil, we're seeing that it has hit the trough in 2016. We believe that the first half of the year is going to be towards flattish and that it is going to start to improve in the 2017. When you look at Australia, 2017 is gonna be lower than 2016. Again, we are following very closely the herd size. The herd size is being rebuilt in 2017.

It has dramatically come down in 2016 for all the reasons that we talked about. And when you think about the herd in 2014, it was 29,000,000 head and in 2016, it was about 26,200,000. And this has been a huge reduction and the slaughter rate has dramatically decreased. We believe that it's going to continue in 2017 at a lower pace, but it's going to continue. And that definitely as the herd is being rebuilt from 2016 in 2017 and onwards towards 2021, we believe that the business in Australia, the slaughter rate is going to increase.

And as you know, it's a positive from 2018. So what we see is that from 2018, we're gonna have the three big parts of the world which are exporting etcetera, which are Latin America, Australia and North America be on an up cycle. And that's going to be definitely very positive of that. To be noted also is that the exports out of Brazil are improving, but you have to remember that about 88% of the Brazilian beef exports are frozen and 12% are fresh. The good news is that fresh is expanding with the approval to export to The U.

S. And will open to Asian markets as well. So on Product Care, we're seeing we have a huge momentum on 3PL and e commerce. We are going to be showing more of the partnership agreements that we have during in the second quarter with very important ones. And so we're doing great things, it's going great.

And we are going to be showing nice we believe nice growth in the 3PL e commerce in North America. The European business has been negative in the fourth quarter, disappointing, definitely led by our industrial business in Europe. And but we the whole question is how do we mitigate with e commerce and 3PL the flattish trend in industrial. And our view is that we shouldn't count on industrial increase in the second in 2017 and preserve our position there at the very same time continue aggressively grow the businesses where which have momentum and in which we're very disruptive.

Speaker 1

Operator, that ends our conference call for today. Thank you everyone for joining.

Speaker 0

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Good day.