Sealed Air Corporation
Moat: 3/5
Understandability: 2/5
Balance Sheet Health: 3/5
Sealed Air Corporation is a global provider of packaging solutions integrating innovative materials, automation, equipment, and services. SEE designs and delivers packaging that helps its customers improve supply chain and sustainability.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
SEE is in the packaging business, but with a unique specialization in automated, smart, and sustainable packaging solutions. They help clients with food, protected and industrial packaging. They describe themselves as a “knowledge-based solutions company”.
Business Overview
Sealed Air Corporation (SEE) operates through two main segments:
- Food: Provides flexible and rigid packaging solutions, primarily for food, beverage, and health products.
- Protective: Focuses on protective packaging solutions for industrial, e-commerce, and other applications.
While the packaging business may seem simple on the surface, Sealed Air is not just a commodity provider. They focus on creating complex, high-value-added packaging. They also provide value-add through automation, materials science, and proprietary equipment.
Geographically, SEE has a broad reach with sales in:
- Americas: Primarily the United States, Canada, and Latin America.
- EMEA: Europe, the Middle East, and Africa.
- APAC: Asia-Pacific.
Industry Trends
- Growing demand for sustainable packaging: Customers and regulators increasingly prefer packaging that is recyclable, compostable, or made from recycled materials.
- E-commerce boom: The fast growth of e-commerce has led to more packaging requirements for shipment of goods.
- Food safety & freshness: Increased consumer interest in food safety and freshness is making specialized and protective packaging that extends shelf life or prevents contamination more relevant.
- Automation: A trend towards more efficient and automated packing lines is driven by a desire to reduce costs and improve efficiency.
- Shift to plastic alternatives: The pressure on plastic packaging has led to a need for more paper, fiber, and compostable options.
- Increased costs and complexity of supply chains: Raw material and supply chain costs have increased globally, making efficiency key.
Competitive Landscape
SEE competes in a fragmented market with many different competitors.
- Diverse competitors: They compete against companies with more narrow specialization in areas of food, protection, or even a specific material like foam. They also face competition from larger material science giants that are able to provide low cost commodities
- Customer and geographic fragmentation: The needs of the customers change according to the type of business and geographic location.
- High competition in some areas: In areas like industrial, cost competition is usually quite high
- Need for innovation: As a company that tries to stay on the cutting edge, SEE faces pressure to provide new innovations.
Given the fragmented nature of the industry and their unique focus on solutions instead of just materials, Sealed Air faces intense competition but is also well positioned to grow within its niche.
What Makes SEE Different
- Focus on Solutions: They don’t just sell packaging but rather packaging “solutions”, with the goal to improve efficiency of the packaging process for their clients.
- Innovation in Materials Science: They develop proprietary new materials for packaging such as food-grade, sustainable and barrier materials.
- Automation & Equipment: They also manufacture and sell complex automated systems for food and industrial packing, with data analytics to monitor and analyze their performance.
- Sustainability Commitments: They have public goals regarding their social and environment commitments, like using recycled material in production, and improving their customers’ carbon footprints.
- Global presence: They have a diversified portfolio of businesses, allowing them to have revenue streams across different countries and areas of operations, limiting their reliance on a single source of income.
Financials
Here are the financials for Sealed Air Corporation, broken down by fiscal years ending December 31st, and reported in millions of USD:
| 2020 | 2021 | 2022 | |
|---|---|---|---|
| Net Sales | $4,861 | $5,531 | $5,642 |
| Cost of Sales | $3,575 | $4,020 | $4,115 |
| Gross Profit | $1,286 | $1,511 | $1,527 |
| Selling, General and Administrative Expenses | $1,008 | $1,098 | $1,160 |
| Operating Profit | $278 | $413 | $367 |
| Net Interest Expense | $(160) | $(154) | $(146) |
| Other Income and Expenses | $(103) | $(40) | $(22) |
| Income Before Taxes | $165 | $219 | $199 |
| Income Taxes | $45 | $30 | $38 |
| Net Income | $120 | $189 | $161 |
| Dec 31, 2021 | Dec 31, 2022 | |
|---|---|---|
| Cash and cash equivalents | $ 377 | $405 |
| Total current assets | $ 2,276 | $ 2,237 |
| Net property, plant, and equipment | $ 1,379 | $ 1,273 |
| Goodwill and intangibles | $ 3,466 | $ 3,182 |
| Total assets | $ 8,636 | $8,294 |
| Short-term debt | $ 1,018 | $756 |
| Long-term debt | $ 3,179 | $ 3,096 |
| Total Liabilities | $6,102 | $5,631 |
| Total equity | $ 2,534 | $2,663 |
Key observations from the financials:
- Revenue Growth: Revenue has seen modest growth over the past 3 years. The most recent growth comes mostly from prices instead of volume.
- Declining profits: Operating profit has declined in the latest year, despite increased revenues.
- Cost of Sales & SG&A: The cost of goods sold and the selling, general and administrative expenses have decreased YoY, and in line with revenues growth, suggesting management has control over spending.
- Positive income: They are generally a profitable business and the net income is positive for the company, but the increase in net income YoY seems to be slowing down.
- Leverage: They are highly leveraged with high total debt relative to their net worth, which could be worrisome in times of economic hardship.
- Debt: Debt has decreased slightly from 2021 to 2022, but still makes up a significant portion of liabilities.
Moat Analysis: Rating 3 / 5
SEE’s moat is moderate due to a combination of factors:
- Intangible assets: While the brand isn’t incredibly well-known, SEE patents and products are hard to replicate, giving them pricing power in several niches. Their expertise in material science, along with the innovation capability also provides some moat power.
- Switching costs: Their customers have high switching costs due to the integrated nature of the systems and the customizations required.
- Network effects: None present
- Cost advantages: They benefit from scale economies in niche market presence and high volume distribution networks. However, they don’t possess unique resources with a sustainable cost advantage for them to generate significant cost-moats in certain areas.
Overall, the combination of patented technologies and high switching costs in core niches makes SEE a company with a narrow economic moat. The company has limited pricing power in some industries because it does not operate as a monopoly and therefore cannot dictate high prices.
Risks to the Moat and Business Resilience
- Technological Disruption: If newer packaging technology appears and can bypass SEE patents or products, the company’s revenue and profitability can suffer.
- Changes in regulations: Changes in government regulations might make their packaging uncompetitive.
- Rising Raw Material Costs: Increased costs of oil, resin, etc., could dramatically harm their margins. This is especially true in a more commodity market where they sell more undifferentiated products.
- Dependence on key clients: Loss of a few major clients might create large dips in sales.
- High Debt and Interest Rates: The higher debt levels might increase costs for a company if the interest rates rise, which could negatively impact their profitability.
- Geopolitical Instability: Because their operations are globally dispersed, they are exposed to risks like conflict and supply chain disruptions.
SEE is a well-established company, but may face increased risk because its revenue and production are so spread across different countries with a variety of different regulatory and economical structures, so problems in any given country may spill over to the other countries.
Understandability: Rating 2 / 5
SEE’s business is complex and hard to understand and value because of several reasons. While the idea of selling packaging is pretty easy to understand, SEE’s technical aspects make it more difficult. This include things like:
- Proprietary tech and materials, and how they are created
- Complex and niche markets that they participate in
- Complexities stemming from M&A and business restructuring activities, and integration of subsidiaries
Balance Sheet Health: Rating 3 / 5
SEE’s Balance sheet is currently decent but could be better.
- Debt is high, which limits financial flexibility.
- They have a reasonable amount of cash.
- The debt-to-equity ratio of the business has a value of > 2.
- Good liquidity ratio and a consistent current ratio for the business.
Recent Concerns and Controversies
- Supply chain issues: SEE has recently reported struggling with supply chain disruptions and high material and transportation costs, impacting profit and revenues. The company expects the supply chains issues to linger for the first half of 2023, but it expects to start normalizing in the second half.
- Earnings Growth: The company’s earnings growth has been relatively slow and lower than their peers over the past few years, as the company has seen several headwinds that are hard to control. These include, fluctuating input costs, global economic uncertainty, and the changing demand landscape.
- Reorganization Costs: SEE is currently reorganizing operations, which the company is referring to as their “Simplify to Grow” strategy, so they are undergoing transitionary restructuring costs.
- Forex Volatility: The company is seeing higher exposure to foreign exchange volatility given it is a global company. As the currency fluctuates between different reporting regions, this poses additional challenges.
The biggest management talking point has been regarding their Simplify to Grow strategy, which they are hoping will create value through efficiency gains and operational improvements. They aim to “right-size” the business and implement measures that will have better long term value.
Overall
While Sealed Air has a solid business with a clear focus on sustainable and value-added packaging solutions, it also faces tough competition and other challenges that may impact future returns. Their recent restructuring efforts should be evaluated to see whether the company can create better financial results in the future. However, the complex nature of the business model, combined with a high leverage ratio, and poor guidance, makes it hard to see this company generating significant value at this moment in time.