Ladies and gentlemen, thank you for standing-by, and welcome to the First Quarter 2020 Sealed Air Earnings Conference Call. At this time all participants are in a listen-only mode, after the speakers' presentation there will be a question-and-answer session. [Operator Instructions] As a reminder today's program maybe recorded.

And now, I would like to introduce your host for today's program Lori Chaitman, Vice President of Investor Relations. Please go ahead..

Thank you, and good morning, everyone. I hope you and your family are healthy and staying safe. 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 Web site at sealedair.com.

I would like to remind you that statements made during this call stating management’s outlook or predictions for future periods 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 and slide presentation, 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-K and as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K, which you can also find on our Web site at sealedair.com or on the SEC Web site at sec.gov. We also discuss financial measures that do not conform to U.S. GAAP.

You will find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. Included in the appendix of today’s presentation, you will find U.S. GAAP financial results that correspond to some of the non-U.S. GAAP measures we reference throughout the presentation.

With that, I’ll turn the call over to Ted Doheny, our President and CEO.

Ted?.

Thank you, Lori. And thank all of you for joining our first quarter 2020 earnings call. I want to begin by saying that I hope you and your families are staying healthy and safe during these unprecedented times.

I believe how we overcome adversity defines us and like challenges we have faced before, we will manage through this pandemic, learn from the experience and come out of this stronger on the other side and even more resilient.

Many of our customers are responsible for supplying food, consumer staples, medical equipment and supplies, pharmaceuticals and other necessary goods. Most governments and authorities have designated these industries, including our global packaging operations is critical and essential.

I want to say a special thank you to our dedicated people working hard in our operations and those working remotely. I also want to thank those in our supplier and customer organizations.

It's a testament to our business and our relationships that we are at the table with our customers and suppliers to ensure goods are delivered in a timely and safe manner to consumers around the world. On today's call, I'll recap our first quarter results and our experiences since the outbreak.

I'll share how we're navigating this crisis and leveraging our four P's of Reinvent SEE. I'll discuss how we see our company and markets emerging and how we'll lead in this new normal. Jim will review our financial results in more detail and we'll end the call with Q&A. We invited Karl Deily, our Chief Commercial Officer to join us during the Q&A.

Let's turn to Slide 3 for a recap of our first quarter. We delivered 6% net sales growth, 17% adjusted EBITDA growth and 24% adjusted EPS growth. Adjusted EBITDA margins expanded 220 basis points to 21.6%.

Our first quarter results reflect the critical nature of our product portfolio and the agility of our people to respond to this unprecedented environment. Our results also reflect the continued execution of our strategy and demonstrate how Reinvent SEE is improving operating leverage on higher sales.

We're suspending our full year 2020 guidance due to the demand swings and the uncertainty on how long the current situation will last.

Again, we are at the table with our customers and suppliers managing the demand volatility, which is changing daily to ensure our supply is uninterrupted, I'm confident we'll continue to execute at a high level regardless of the market volatility.

On Slide 4, our purpose statement to solve critical packaging challenges and to leave our world better than we found it is driving us now more than ever during the crisis.

We introduced our four P's of Reinvent See performance, people, products, processes and sustainability over a year ago and have been using them as a guide to ensure employee safety, business continuity and make our business stronger. I'm impressed how our teams around the world have taken our performance to the next level.

Our people have done a tremendous job responding to customers and our communities to deliver the best service possible. By operating as one Sealed Air culture, we're maximizing productivity across our business segments, regions and function, enabling fast, coordinated decision-making.

Our product strategy is resonating with our customers in this time of crisis, delivering the best products at the right price and making them sustainable. Practicing social distancing and implementing automation, to do more with less by investing and working smarter, has become even more important to both our operations and our customers.

We're accelerating our innovations to support a more touchless digital world. Our one Sealed Air operational excellence process starts with zero harm by creating new ways to keep people out of harms way in our own facilities and for our customers, we're driving value by eliminating waste, simplifying and then automating.

Sustainability is still top of mind in everything we do. Our core competencies in food safety, automation, and protecting goods with innovative, sustainable solutions will be even more critical and a key driver to our profitable growth.

Let me now turn to Slide 5 and give you more details about the actions we have taken, how we expect our transformation to accelerate into the recovery and how we're leading to a new normal.

To protect our employees, we've enhanced cleaning procedures at all sites by performing employee temperature checks upon entrance and requiring personal protective equipment for location dependent essential workers.

We've implemented social distancing measures within these operating sites and our non-location dependent employees continue to work remotely. We've implemented visitor access restrictions in suspended non-essential travel. We're also finding new virtual ways to stay connected to each other and our customers.

We have created flexibility with our teams and our supply chain and product portfolio to support rapidly changing circumstances in our end markets. I joined numerous calls with our crisis management teams, regional sales, customers, suppliers and industry leaders. Our service levels have remained strong.

Our teams are well organized and we have adapted quickly despite the difficult environment. As the global economy slowly reopen the actions we are taking today will accelerate our transformation into the recovery phase. We have prioritized our innovation pipeline, while strengthening our partnerships with customers and suppliers.

On this Slide, we're showing a few examples of our product offering that we have quickly adapted to support customer demand swings. We will be stronger post crisis. We are adopting more flexible workplace practices. We're taking advantage of our digital tools to stay connected with our colleagues, supply chain partners and customers.

We remain committed to our 2025 sustainability pledge and are on track achieving 100% recyclable or reusable materials with 50% average recycled content. Let's now turn to Slide Six, which summarizes the early impact of COVID-19 and our one Sealed Air end markets.

Approximately 65% of our sales are derived from packaging fresh and frozen proteins, as well as other foods, fluids and goods for the medical and life sciences industries. In March, coinciding with the implementation of stay at home or lock down orders, the food industry experienced a dramatic shift to retail and a dramatic slowdown in food service.

For Sealed Air the shift resulting in a surge in demand for retailed applications, including case ready, shrink bags and prepackaged meals and snacks designed for home consumption.

In mid-April throughout North America, some of our food customers faced COVID-19 outbreaks in their meat processing plants and have been forced to temporarily shut down production. We've not seen any significant closures outside of North America, and demand for retail protein packaging has remained strong on a global basis.

The situation in North America is very fluid and we're working closely with our customers to support their needs.

Within our medical and life sciences portfolio, which is approximately 4% of our net sales, we're seeing new business in our protected packaging solutions for medical supplies, pharmaceuticals, and personal protective equipment, such as monitoring systems, ventilators, mask and COVID-19 test kits.

The remaining 35% of our sales serve consumer and industrial segments. Many of these end markets including general manufacturing, transportation, and non essential goods, are suffering from government and for shutdowns and a significant reduction in discretionary spending.

Partially offsetting these declines or increases in demand for goods that support the stay at home environment and are shipped through ecommerce as retail channels have rapidly shifted away from brick and mortar stores.

Across our global business, we estimate that approximately 75% of our end markets are experiencing increased demand for food, medical supplies and consumer staples. The remaining 25% are facing slowdowns or been forced to temporarily suspend production.

Recognizing we are immersed in an extremely unpredictable environment, our experiences would tell us that we will return to a more balanced supply and demand in due time. Longer term, we expect the learnings from the pandemic will drive secular global demand increases for automation and packaged proteins.

Producers will invest in more automation for efficiency and safety and consumers around the world will demand packaging formats that maximize food safety, minimize food waste and are sustainable.

For now, our top priorities are the safety of our people, managing the business continuity for our customers and making our business stronger for the future. I'll now pass the call to Jim to review our results in more detail.

Jim?.

Thank you, Ted. Let's turn to Slide 7 for a review of our net sales by region. In the first quarter, sales were 1.2 billion, an increase of 6% as reported and 8% in constant dollars.

In constant dollars, North America, our largest region representing 61% of the company sales grew 10% year-over-year; EMEA was up 7% and Asia Pacific was down 1%; South America, where we have U.S. dollar index pricing was up 24%, of which 7% was volume growth.

Turning to Slide 8, here, we highlight our organic sales volume and pricing trends by segment and region. In the first quarter, volume excluding acquisitions rebounded to 2% growth, driven by 5% growth in food care, partially offset by a 2% decline in product care.

Due to increased demand and protein packaging for retail markets, food care experienced volume growth across all regions except for Asia Pacific, which declined 3% in the quarter, largely due to depressed dairy market conditions and herd rebuilding in Australia and New Zealand. Product care volumes declined across all regions.

However, the business performed better than we anticipated that declines in industrial markets were partially offset by an increase in ecommerce demand for consumer staples and medical supplies. Overall volume growth in the quarter was partially offset by a decline in net selling prices.

Lower resin base formula pricing mostly in North America food care was the primary contributor of the price decline partially offset by U.S. dollar index pricing mainly in South America. On Slide 9, we present our year-over-year consolidated sales and adjusted EBITDA bridges for the first quarter.

Organic sales in the quarter were up 1.5%, acquisitions contributed 75 million of which 69 million was from automated packaging systems. Currency translation negatively impacted sales in the quarter by 30 million, or about 3%, mostly due to year-over-year declines in the Argentinean peso, Brazilian real, the euro and the Australian dollar.

Based on where exchange rates are today, the negative translation impact on sales for the year versus 2019 would be approximately 140 million. Adjusted EBITDA of 253 million increased 37 million or 17% compared to last year, with margin up to 120 basis points to 21.6%.

Reinvent SEE benefits totaled 30 million in the quarter, 25 million in operating costs inclusive of 14 million of restructuring savings and 5 million in price cost spread. Adjusted EBITDA also benefited from higher volumes and contribution from automated packaging systems.

Currency translation was 7 million unfavorable to adjusted EBITDA in the first quarter. Operating cost in the quarter included over 2 million of incremental spending related to COVID-19. But these expenses were partially offset by lower employee travel activity.

Adjusted EPS in the first quarter was $0.73, compared to $0.59 in the first quarter of 2019, primarily due to higher adjusted EBITDA partially offset by increased appreciation and amortization expense. About two-thirds of the D&A increase was from the Automated Packaging Systems acquisition.

The adjusted tax rate in the first quarter was 27.9% as compared to 29.5% last year.

Turning to Slide 10, here we provide an update on our Reinvent SEE transformation, which continues to progress in earnest and is driving significant structural operating leverage in the business as evidenced by the greater than 60% profit to growth ratio in the quarter.

We have added a new work stream to Reinvent SEE in our commercial organization to accelerate innovation and growth in core and adjacent markets. The new capabilities and processes that underlie the success of Reinvent on our cost structure will help us reinvigorate and drive targeted top-line growth in the business.

In 2020, we are on track to realize 110 million of incremental benefits to adjusted EBITDA compared to last year of which roughly half is related to actions taken in 2019 and the other half is coming from new actions.

We are prudently accelerating 2020 Reinvent actions where possible and have been successful to-date given our operations have been largely intact, despite challenges with the virus. Cash restructuring payments associated with Reinvent SEE were 26 million in the first quarter.

We continue to estimate approximately 100 million in cash payments for the year. Turning to segment results on Slide 11, starting with food care, in the first quarter, food care net sales of 690 million were up 10 million or 2%. In constant dollars, sales were up 35 million or 5% primarily driven by higher volumes.

Adjusted EBITDA in food care increased 13 million or 9% to 156 million, with margin improving 160 basis points to 22.6%. This performance was primarily driven by higher volumes in Reinvent SEE actions. Our food care business benefited from the shift in retail demand for cryovac packaged proteins.

Shrink bags, roll stock and case ready applications, which account for more than 80% of food care sales were up 4% to 5% in the first quarter. Sales in fluids, which accounted for 6% of food care in the first quarter, were essentially flat compared to last year.

Over the next few quarters, our fluids portfolio, which consists of innovative vertical pouch packaging, for condiments, soups and sauces will be negatively impacted by the slowdown in the food service industry. Equipment sales, which also accounted for 6% of food care increased mid-teens percent in the first quarter.

However, since mid-March, plants around the world have instituted visitor restriction policies, which has led to a shutdown of installations. With some of our North American food customer temporarily suspending production, our orders have moderated since peak levels in March.

Our customers are doing everything they can to reopen their facilities as soon as possible and we are there to support them. On Slide 12, we highlight results from our product care segment. In the first quarter product care net sales of 484 million were up 51 million or 12% as reported.

Organic sales were down 3%, adjusted EBITDA of 93 million increased 18 million or 24% including a 13 million contribution from Automated Packaging Systems. Product cares adjusted EBITDA margin of 19.2% expanded 190 basis points year-over-year.

Reinvent SEE benefits and lower input cost more than offset the negative impact from the organic sales decline.

Product cares value-added solutions portfolio, which represents about a third of the segment sales and has the most exposure to ecommerce distribution, the essential and non-essential consumer goods delivered 10% organic volume growth in the quarter.

The performance across value-added solutions was largely driven by increased demands on ecommerce fulfillment centers to automate packaging processes, increase the speed to pack and optimize the cube size for efficient shipping. These solutions are designed to handle the high level of cushioning required to ship critical goods.

As a reminder, Automated Packaging Systems is included in value-added solutions, along with bubble wrap on demand, paper systems, core view, temperature control packaging and automated equipment such as our I-Pack and shrink wrap systems. The remaining two-thirds of product care consist of industrial applications and traditional packaging.

In the first quarter, volume declined 7% in industrials and 3% in traditional. We expect industrial applications to be hit the hardest through the pandemic. Demand trends in North America in January and February began to stabilize.

However, March sales dropped in the high single-digit percent area, as many of our customers and distributors were forced to temporarily shut down. Traditional packaging performed better than we anticipated in the first quarter. We experienced low-single digit growth in mailer volume as a result of the surge in ecommerce distribution.

But this was more than offset by declines in traditional bubble wrap, void fill applications and shrink film.

Based on what we experienced in April and given the level of exposure we have to industrials, we think product care volume in total could decline 15% to 20% in the second quarter, with improvement in the second half of the year as the economy reopens, industrial manufacturing resumes and we continue to help our customers automate their packaging processes.

Now, let's turn to free cash flow on Slide 13. First quarter cash generation is typically lower as a result of seasonality of sales and working capital and timing of certain annual payments, in particular incentive compensation and customer volume rebates.

Despite higher adjusted EBITDA in the first quarter of 2020, free cash flow declined 24 million year-over-year, primarily due to higher incentive compensation payments based on improved 2019 performance and a higher quarter-end accounts receivable balance from significantly increased sales in the back half of March, related to COVID-19 demand across many of our end markets.

We expect trade working capital overall to be a source of cash in the back half of the year from normal seasonality and proactive management of underlying working capital metrics. Additionally, we are reducing our CapEx target for the year from $200 million to $175 million in light of current economic conditions.

This level of spending will bolster near-term cash generation, but will also allow key strategic growth investments to advance without delay. Overall, we remain confident in our ability to generate free cash flow in these uncertain times and plan on maintaining our dividend at current levels.

As initially disclosed in the third quarter of 2019, Diversey submitted a claim that Sealed Air it owed approximately 50 million pursuant to a clawback agreement that we entered into a connection with Sealed Air sale of the Diversey business in 2017.

Under this clawback agreement, Sealed Air was contingently obligated to return to Diversey, a portion of the purchase price we received in the sale if Diversey fail to achieve specified financial metrics following a successful renewal of certain commercial contracts post closing.

As noted in our Form 10-Q filed this morning, we have resolved this matter with Diversey and will not be required to make any payment under the clawback agreement. Accordingly, we have recorded an $0.08 per share gain in the quarter from discontinued operations. Slide 14 highlights our leverage, liquidity and debt maturity profile.

We ended the quarter with pro forma net debt to trailing 12 months adjusted EBITDA of 3.5, which is down from 3.6 at the end of 2019. We will continue to take a disciplined approach to capital allocation to maintain a healthy balance sheet. And based on what we now see expect further leverage reduction by the end of the year.

As of the end of March, we had over 1.2 billion of liquidity from a combination of cash on hand and undrawn committed revolving credit facilities. We have a leverage covenant in our credit facility, with a maximum ratio of five through the third quarter of 2020, reducing back to 4.5 at the end of 2020.

The increase in the covenant maximum to 5 was triggered in the fourth quarter of 2019, with the Automated Packaging Systems acquisition. The covenant calculation as of the first quarter is estimated to be 3.2 which is lower than our reported pro forma net debt to adjusted EBITDA ratio due to certain allowed EBITDA adjustments in the credit agreement.

So, we have significant cushion with our financial covenants and do not expect any issues accessing the liquidity under the credit facility. Additionally, we do not have any debt maturities until August 2022, which gives us good financial flexibility to operate and support the business. I will now turn the call back over to Ted.

Ted?.

Thanks, Jim. We are confident that our ability to maximize food safety, minimize food waste and protect goods that are shipped around the world will continue to create significant value for our customers.

Our capabilities and automation and digital technologies will emerge as a differentiator and enable us to become an even more critical partner to our customers we already are today.

I'm confident that our four P's of Reinvent SEE and our strategy to deliver the best product at the right price and make them sustainable will deliver exceptional long-term results. Before we open up call to questions, I want to thank our employees for their dedication and commitment to business continuity. Their efforts have been remarkable.

And it could not be more proud to lead Sealed Air during this unprecedented and unforgettable period in our history. Together, we will emerge from this crisis, a better, stronger company. With that, I'll now open up the call for questions. Jonathan, we'd like to begin the Q&A..

[Operator Instructions] Our first question comes from the line of George Staphos from Bank of America. Your question please..

Hi, everyone. Good morning. Thanks for the details. And thanks for what you are doing one COVID. My question is around volume and its relation to Reinvent and kind of a two part.

So, Ted, can you go through a bit more detail in terms of how you're seeing the product care growth drop to a 15% to 20% decline, given the scale, it sounded like very good benefit you're getting from ecommerce, which would be a partial offset and related how long dependent Reinvent savings are? I would expect at some point, those numbers maybe get hard to hit if you keep seeing this kind of revenue or volume drop, but please add color where you would.

Thank you..

Okay. Thanks, George. Actually, probably be helpful. George, if I point to your question, if we look at Slide 6, and then Slide 5, while we're trying to answer that question.

And if we break up Reinvent SEE, so if you look at the volume is focusing on product care, whereas Jim had in the prepared marks, we're looking in the quarter, we think we could have a 15% to 20% reduction. If you look at those three sectors, if you look at what's happening on the food side, industrial side and then the ecommerce.

In the quarter, this is Q1. But if we look at Q2, we are seeing as you highlighted the ecommerce business pickup significantly. We saw some gain with our mailer business, we definitely saw some gain with APS with our automated systems. The other side also in the protective side, some of the protective is in that food, medical and life sciences.

If you look at Slide 5, you'll see something quite interesting in the crisis going through Q1 now going into Q2, we're actually doing some of the packaging both on the mask is everybody's reading the economy's going to need 300 million mask just in the U.S. alone. We're into that we're bringing actually our APS or auto bank systems connected to that.

And also you see the other example there and our product care with our Korrvu package for ventilators. So that's going to flow through from Q1 to Q2. Now to the downside of that 15% to 20%.

What really is hit is the industrial piece, and if we look at our product care that's in that instapack, where the industrial economy has been shut down and we're feeling that and that's in that 22% of the slide. So with that will recover.

We just don't know when is the businesses come back? But we think the portfolio, what we were impressed with the quarter is how quickly we're moving our portfolio in this crisis to those growth areas and being prepared when that industrial economy comes back..

Thank you. Our next question comes from line of Ghansham Panjabi from Baird. Your question please..

I guess there's a follow up to George's question that said, just give us a sense as to April volumes specific to that 75:25 split that you call that at the bottom of Slide 6. And then a question on North American foods specifically, I mean, obviously there's a lot going on with new plant recent shutdown calling up [indiscernible] in some cases.

And then you have a big shift towards retail versus food service and I think Tyson yesterday mentioned, call it a 40% increase in retail food service in some cases.

How do you think all these dynamics nets out for North American food both in 2Q and then also as the year unfolds?.

Ghansham, actually, we have Karl here. So I'm going to let Karl take a piece of it. But if we look at the volumes, just what's flowing in through the second quarter. On the food side, we're definitely seeing going into April, this rapid spike that we saw in the first quarter, we're definitely seeing in April.

We're seeing that tempered so we're seeing that business slightly down.

But then to your specific question of what's going on with the food industry, we've got Karl here and if Karl, if you want to tackle that one?.

Absolutely. Thank you. And Ghansham, I think, if you reference back to Slide 6 and the net positive, especially in the proteins, we saw a definite global trend of a sequential improvement in our business with the transition from food service to retail, again around the globe.

And that's held up very well even in Europe as recently as last week retail, sales were still up in the mid teens year-over-year, which was accretive to our business. What changed, and if you listen to Tyson's call yesterday, it's obviously highlighted there was a significant disruption in the North American food market.

And that has been obviously going away on the industry going in to the second quarter. It was also a significant up tick in the first quarter as that shift occurred, it was a very favorable impact to us not only just on the increase of production, but our ability to be nimble and very fluid and how our customers pivoted from one market to the other.

We were able to accommodate area where other competitors may have not been able to supply. We were also able to provide products and increased level of volumes. You mentioned 40% we actually had some products that were up over 90%. And we were able to respond due to our global network and our breadth of portfolio.

So we provided that opportunity I think we had extremely good customer intimacy, daily conversations to drive what was obviously very unchartered waters, just as that was extremely favorable, they're in a down cycle with the employee situation they're working through, but again, we're connected at the hip and we're working through these significant swings in volume.

And also the conversation has definitely changed to what's life going to look like post COVID-19 and we're working very closely with them on automated solutions.

How can we drive additional versatility and flexibility into their operations in a less labor intense manner? So, obviously very good, first quarter, second quarter less easy to predict, but we believe the future will be a net positive..

Ghansham to the last part of your question referencing the Tyson call, if we can point to Slide 5, where we look at our portfolio as Karl described what we're doing through the crisis and accelerating. They did talk about automation and they were followed up on the automation question and we've talked to you about what that means.

This is a part though in our numbers, the equipment business is it's tough to get the equipment installed because of the situation with the crisis. But this is where the conversation is moving into the automation.

We have two of our pictures there showing that if you look at on television, you see these plants where these people are so close to each other, what our automation is allowing, we're working with these customers, how do we automatically pack in the bags and keep people out of harms way? The other thing they mentioned on their call is the automation being able to look at the foreign option, object detection.

We have the ability and we're working with the customers to actually see inside to help identify is it a bone in the bag? Is it the marbling? And learning with our equipment, so we have some significant opportunities, post crisis, to help on the automation and make the business better together and we're at the table.

And that's an exciting part of the future..

Our next question comes from the line of Anthony Pettinari from Citi. Your question please..

Hi, this actually Bryan Burgmeier sitting in for Anthony.

Just in terms of the volume declines in product care in 2Q, how should we think about detrimental margins just given the restructuring you've been doing and the ongoing changes to mix?.

Okay. I'll take a shot at that maybe tag team that with Jim. If we look at the decrementals that we look at the business, as we've been talking to you on incrementals that we're designing to this 40% upside. When we have a downside, we're thinking right now it should probably be decremental in that 40% everything being the same.

Right now with the shift in portfolio, we're not seeing that, even as you saw with we have so many cost actions going in place.

Right now, I don't know if you want to get more detail on that Jim, but designing decremental we would think 40%, we're actually beating that in the first quarter, I think we should, because of reinvent in some of the cost actions that we have working, we should be able to beat that decremental, but that's what the design would say, with losing the volume, you should lose 40% on the downside..

Yes. That 40% would be kind of the direct margin loss that you would have. But of course, we're going to review the responding to that volume decline with cost reductions that are above and beyond the reinvest structural program that we have going on. So I do [indiscernible] that the decremental will be below that 40% level.

I feel like, we're going to do what we need to do to respond to these volumes and the organization is very agile that way and I think our first quarter results reflect that on the upside.

I think we'll see a little bit of the challenge in product care in the second quarter on the downside and I think we're prepared to respond to that in the right way.

If I could come back while we're talking about this, because George has asked about reinvent, and how we see reinvent progressing across the year, as we indicated, we are confident in our ability to drive the 110 million reinvent benefits incrementally in '20 versus '19.

We got 30 in the first quarter, probably a level comparable to that in the second quarter. And as I said, we're doing what we can to prudently accelerate. Keep in mind that 50% of that benefit is coming from actions we took in '19. So those are fully done.

And the remainder is coming from 2020 actions and it is somewhat dependent on the volume profile in our factories. To George's comment, we have been fortunate that we have been running our facilities fairly well through the situation, we've had some shutdowns but got back pretty quickly.

So I think even with the decline that we see in product here in the second quarter, I do think that we'll be able to continue to drive forward with the structural improvements in the business..

Our next question comes from line of Neel Kumar from Morgan Stanley. Your question please..

In terms of comparing North American protein production to your food care volumes, we haven't seen a great quarterly correlation historically. I know we don't believe it plays a role.

But is there any type of a lag or any other things we should keep in mind when comparing the relationship between the two? And what apparently will allow you to continue to outperform underlying protein volume?.

Neel, it came in a little bit rough.

Karl, did you get?.

If I'm responding to your question correctly from what we heard you were a little broken up is that, our volumes do tend to be very in line with market performance. There's not a real delay in the protein market in North America. We have very integrated supply chain dynamics with our customers and are a key part of their order fulfillment.

So we do tend to track without a lag. We also tend to perform above the market. So sometimes when you have a significant swing in the market the way it was from food service to retail, there's a positive shift in our business as well.

So is the market dynamics are there especially as you go from food service which may be larger packages to retail case ready packaging, that shift is a net positive. So we get accretion of our performance while that's occurring.

What we also seen during this, times is a change in product formats for our customers, they've gone to larger packages at retail, fewer cuts, selections. So there's a lot of dynamics in there that kind of would change any typical model of exactly what we should see.

Producers actually went to herculean efforts to try to meet retail demand during the March timeframe. Now, obviously, they have other issues that they're dealing with, but no, I think our performance mirrors the industry pretty well.

There were other things, there were some shared gains and some things of that nature that we were able to pick up with our global footprint and dealing with the global market..

Our next question comes from the line of Mark Wilde from Bank of Montreal. Your question please..

Ted is possible to get a sense of what kind of underlying growth we're seeing in the APS business. And whether that's just has been floated off just in the near term, from the difficulty of getting technicians in plants to do installations, things like that..

Good question, Mark. If I could point again to Slide 5 on the answer there where as you see APS coming in. So if we look at APS growth, 50% of APS growth is on that 22% bucket on back to Slide 6. So I'll go back and forth a little bit.

So if you look at APS profile that's where they have half their business at that 22%, where their growth profile is showing up they do a lot of work in the ready meals, in the food, fresh produce, pet care if you see we have that on there. That's where we've seen some growth.

And then if you flip to slide back to Slide 5, this is where -- the APS is where we got the mass business that's coming in. APS is also helping us with the automation on ecommerce. So the net answer to your question through the crisis, their businesses actually been slightly down to flat compared to year-over-year.

Going in their equipment side of the business, though, is really strong. And that's where with the auto bag, the side pouch system, and that's feeding in that transition. So we're actually excited about that. And then talking about the financials, Jim showed the bridge.

And you saw very clearly where APS performance showed up, that we've moved the margins pretty quickly from where we purchased APS to where they are today. If you could do the math on that, you'll see that's moving all the way up to an 18% margin from 14%. So the growth is coming.

The efficiencies are there, you see the reinvent coming into helping APS and as a shout out to our APS folks listening to the call, really excited to have them on board. They are definitely helping us become a better stronger company through the crisis and beyond..

Our next question comes in the line of Arun Viswanathan from RBC. Your question please..

I guess I was just curious, you addressed the decremental margin question in the near-term. I guess.

I'm just kind of curious when you look at food care as well looking at a couple years, do you still think that 40% to 45% decremental margin is achievable, or incremental margin is achievable? And then, as a follow up, I guess maybe could you address where we are in kind of the proteins cycle in North America and maybe in other geographies as well? Thanks..

Yes, good question. I'll do the first part and Karl, if you can handle the second.

So if we look at our incremental margins and you see really the power of changing structurally with the reinvent, if you look at our performance in the quarter and if you're looking at food specifically to your question, we had gains in the quarter, we had some pricing issue that question will probably come up what's going on with resins.

So we did have a resin benefit of roughly 8 million. But we also had a pricing issue, as you're well aware with food, we have -- we give that price back in the marketplace. So that was a wash. So net on that you can see the power of reinvent structurally helping that business underneath.

But also what you really see is the leverage of a different structural cost on incremental volume. And that's where we're designing the engine. So those incremental margins and as we've described, that 40% feels real, and we saw it with the growth in the quarter.

The 60% growth is for other issues that are going on the quarter, which is very, very strong with that high volume coming through. So to short answer your question, incremental margin on our food business, getting the structural cost, right. Yes, very confident going forward that that will happen.

And Karl, if you want to?.

Let me just take a quick walk around the world and touch on that. Obviously, with the disarray currently in the North American protein market, the positives are, is that there's significant demand and demand has held up, consumption continues to increase.

And there's long-term positives for demand in North America, as well as demand in the export markets. So obviously, their issues and the market dynamics right now, but we assume a stable to slightly increasing animal availability in the North American market. Obviously, Latin America has a large herd and they're typically very inefficient.

They have great opportunity to continue to grow as they continue to add the blots and improve their market efficiency.

They're well poised to help feed the world and give to the -- and contribute to the export market growth, they're installing equipment and we believe that they'll will continue to penetrate that market and it'll be accretive long-term. Australia, as you've well aware is rebuilding their herd.

They're obviously dividing their herd between domestic supply and going after value-added opportunities globally. And so that will be stable to down slightly. And then, Asia continues to evolve.

And to evolve to a more modern, I think the positive you'll see, the COVID-19 post pandemic is a more -- market in Asia with more pre-packaged products and more retail and more ecommerce channels developing..

Thanks Karl. It's great having Karl on the call for the handling to herd..

Our next question comes from the line of Rosemarie Morbelli from Gabelli Research. Your question please..

Ted, I was wondering if you could talk on this trend.

So the trend of the recovery in China since they reopened own facilities, and then if you could give us some details in terms of the adjacent markets you are targeting?.

What markets?.

The adjacent markets you are targeting..

Okay. Good question. So if we look in China and what's going on in China is we're going back to our call in February 11. When we first talked about the Coronavirus, we saw China hitting first. So we got to see those dynamics very quickly how China took care of the issue. We saw our operations. We have eight facilities there.

We worked quickly and made those safe and still supported not only the local market, but the end market. We're also seeing with China, that they're changing their market. And that is happening as we speak going to the wet market is changing. If you just visualize meat hanging in markets, they're unprotected.

It's creating a need for what we do really well is protected packaging and fresh meat. We're also seeing the frozen side coming into China as well. So net-net on the markets. we think this disruption is a one-time event we think long-term China's going to be stronger for us we're positioned.

Again, we're at the table especially with the major meat producers that are looking to go after the China market, we're with them bringing automation and other opportunities. So China is -- we think net-net that's a good positive going forward.

Karl?.

Government is definitely looking at what markets to transition will be slow, it won't be overnight, but their target is by 2025 as less than 30% of their protein production through small local farmers and a more modernized meat industry. So the long-term net positive is good. More short-term, all indications are in the market.

There has been increased volume of meat through alternate shipping channels online sales of meat have been skyrocketing in China. We have benefited from that with our case ready options. We have a strong booking -- forward booking of systems to further that.

We've also seen a significant trend towards away from wet markets by especially middle and upper income Chinese to more modern and retail. And interestingly enough, the Australian meat board did a survey and post COVID-19, they're looking for larger volumes to consumers, more packaged product and more chilled products more often at home.

So a lot of positive upward dynamics in that market..

Our final question for today comes from the line of Brian MaGuire from Goldman Sachs. Your question, please..

Just wanted to follow-up on a couple of questions that have already kind of come up. One, I think we talked about Tyson, maybe more on this call than we have in a long time that I can remember. And I think they've sort of talked about roughly 40% of their volume going to food service applications.

And I know you gave some color on that breakout for you guys, I wonder if you could more specifically kind of just talk about your own mixing exposure to foodservice.

And then, just thinking about the guidance, you gave explicit guidance and product care for food care, yes, I think you said 6% of the business is negatively impacted from machine installations and other six from liquid that seems like it's sort of food service related.

So are we kind of thinking that 2Q volumes could be temporarily down mid-single digits in food care as we deal with some of the manufacturing plants being down and some of the lockdown impacts? Thanks..

Yes, Brian, you did a nice job there with us not trying to give you guidance your math is pretty good. And the reason we're not trying to be cheeky on the guidance, we just don't know. And it's dramatic week-to-week, we saw it ramp up the last two weeks of March were incredible. But then, we've seen this choppiness go the other way.

Our portfolio is shifting dramatically, both on the product care side and the food care side that we talked about. So without giving a guidance, I think your math is kind of where we're seeing it. But that will change next week. What the message we're giving to the market is that we will outperform the market. We are moving our portfolio really fast.

The high volume role stock, what we're doing, the penetration of that just in a matter of weeks has been dramatic. So we're going to shift, we're not going to give up that the market is doing some interesting things. We're going to grow our portfolio and move, but short answer, your math is pretty good on what we're thinking.

So on the food care side, but if you want to give more detail on food service versus retail, I think we talked about it.

But Karl, if you want to add any?.

One thing I would add is, I think there's some fundamental pivots in the market places that react to this dynamic thing. You've seen service cases in Europe basically shut down. I don't think retailers will bring those back because it's a cost advantage. So that increase in penetration and packaging those products will live on.

I think you've seen a significant shift in surface seafood cases a question earlier on adjacent markets, I think we'll see a net positive as you see a shift and pivot to prepackaged seafood. So as food service comes back, I see it as a net multiplier.

We'll get some of that business back that is very specific to food service that will come back and some of the positive benefits that we've seen in the shift to retail will live, it will have legs. So and then, when equipment returns, I think that'll be an additional multipliers to go to more automation, more touchless.

And, we can get the equipment back to where it needs to be. I think those are all net positives..

And actually I want to give a shout out to all our sell side analysts. We're very fortunate, very thoughtful questions we really appreciate. Just like good tough customers make us better, good analysts make us better. So really appreciate very thoughtful. And I also want to share each one of you ask that we're safe.

And I just want to make sure that everyone is safe in this environment. And feel really good about our company and what we're doing to make this world a better place in we're letting this crisis help show how we can make that happen.

So with that, I want to thank everyone again for the call and we look forward to speaking with you in the near future and stay safe. And Jonathan that's it. Thank you for your help on the call..

Thank you. And thank you ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..