Sealed Air: FY23 Guidance Is Dependent On 2H23 Performance, Which Is Uncertain

Thesis

Sealed Air Corporation (NYSE:SEE) manufactures packaging and performance-based materials and equipment systems that serve food, industrial, medical, and consumer applications. However, like many other companies, SEE has been adversely affected by the challenging macro environment characterized by rising inflation and interest rates, which have dampened demand. The recent significant drop in SEE’s share price can be attributed to the company missing EPS estimates, along with market expectations of weaker performance in the upcoming quarters. Consequently, I believe investors are choosing to sell their shares to mitigate potential losses. While the management has maintained its guidance, the negative impact has already been felt, leading to increased skepticism among investors regarding SEE’s ability to achieve an acceleration in the 2H23 to meet its full-year guidance. In my opinion, even if investors remain confident in SEE’s prospects, the prevailing risk of potential further disappointments may discourage them from holding onto the stock. Therefore, it would be wise to avoid the stock for now and await SEE management’s comments during the 2Q23 earnings call (should be scheduled sometime during the early 3Q). These remarks will provide more insight into the company’s progress during the third quarter, serving as an indication of whether SEE is on track to achieve its full-year targets. Overall, I recommend adopting a neutral stance at this time. The current valuation of 8.2x forward EBITDA (2x below average) seems to also suggests that the market does not expect SEE to meet its FY23 guidance.

1Q23 Results review

In 1Q23, SEE experienced a decline in revenues and adjusted EBITDA compared to the same period last year. Revenues for the quarter amounted to $1.35 billion, representing a 5% year-over-year decrease. Additionally, adj. EBITDA declined by 18% to $267 million. This decline in profitability was reflected in the margins, which decreased by 130bps sequentially and 330bps year-over-year. Despite the overall decline, there were some positive signs within specific business segments. The Food division reported a 6% year-over-year growth in sales during the first quarter. However, the corresponding EBITDA for this segment declined by 3% to $195 million. On the other hand, the Protective division faced significant challenges during the same period. Sales in this segment were down by 19% compared to the previous year, reflecting the impact of recessionary pressures in the industrial and fulfillment markets. Furthermore, the adjusted EBITDA for the Protective division decreased by 37% to $80 million. These declines were attributed to the continued destocking of inventory throughout the value chain.

Outlook

Management has reaffirmed their guidance, stating that net sales are expected to fall within the range of $5.85 billion to $6.1 billion, representing a growth rate of 4% to 8%. This guidance takes into account the positive impact of the Liquibox acquisition, which is estimated to contribute a growth rate of 6%. However, there is also an anticipated unfavorable currency impact of 1% on net sales. In addition to net sales, management has provided guidance for adj EBITDA, which is expected to be in the range of $1.25 billion to $1.3 billion. Furthermore, the company expects FCF to remain within the range of $475 million to $525 million. It is important to note that this FCF range excludes a $175 million tax deposit, which is related to a tentative agreement to settle with the Internal Revenue Service. Given that 2Q23 is also anticipated to be weak, I believe that the guidance places a heavy emphasis on 2H23 performance. I anticipate volumes to remain soft throughout 2Q23 due to the persistence of destocking and the Food division’s (ex-Liquibox) continued weakness (volume has contracted 4 consecutive quarters). Consequently, the drop in volume will put additional stress on the bottom line. In addition, comparing the 1Q23 volume decline of 18% to the FY23 guidance of a decline in the low to mid single digits, I believe the heavier burden lies in the Protective division. That said, I should point out that achieving the guidance is not an impossible feat. SEE could see a reacceleration in earnings in 2H23 as Liquibox increase its contribution to the Food division P&L and synergies are realized. The 600bps destocking headwind in 1Q23 is also not likely to be repeated in subsequent quarters, and SEE is going to face an easier comp compared to last year’s weak performance, so growth will appear better. The latter, however, is the main concern, as growth in SEE is required, and this recovery of the market is currently uncertain. Nobody knows when things will start to improve. I think investors want to avoid this kind of uncertainty.

Conclusion

SEE has faced challenges due to rising inflation and interest rates, resulting in a drop in share price and skepticism from investors. SEE experienced a decline in Q1 revenues and adjusted EBITDA, with the Protective division facing significant challenges. While management maintains guidance, it is wise to avoid the stock and await management comments during the upcoming earnings call to gain more insights.