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Sealed Air Corp  (NYSE:SEE)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Q4 Earnings Conference Call. Currently 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. (Operator Instructions) Also as a reminder, this conference call is being recorded.

At this time, I'd like to turn the call over to your host to Lori Chaitman, Vice President, Investor Relations. Please go ahead.

Lori C. Chaitman -- Vice President of Investor Relations

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 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 website or on the SEC's website at sec.gov.

We also discuss financial measures that do not conform to US GAAP. You may find important information on our use of these measures and their reconciliation to US GAAP in our earnings release. Included in the appendix of today's presentation, you will find US GAAP financial results that correspond to some of the non-US GAAP measures we reference throughout the presentation.

Now I'd like to turn the call over to Ted Doheny, our President and CEO, Ted?

Ted Doheny -- President and Chief Executive Officer

Thank you, Lori. Thank you for joining us for our fourth quarter and year-end conference call. I'm going to begin with a recap of our 2018 results. I will then go into more detail about our progress on Reinvent SEE. I'll also highlight our commitment to lead the packaging industry to more sustainable future and our recent commitment to join the Alliance to End Plastic Waste. Bill will then expand on the financial results for the quarter and the year. I'll provide our outlook for 2019, then we'll conduct a question-and-answer session.

As we headed into year-end, we focused on executing stranded cost savings initiatives and implementing our new Reinvent SEE vision, which we announced in December. These efforts enabled us to deliver on our 20% operating leverage commitment for 2018 and even higher leverage in the fourth quarter at 31% despite currency headwinds and higher input cost. For the full-year, adjusted EBITDA increased 7% on sales growth of 6%. Higher adjusted EBITDA, a lower tax rate and share repurchases resulted in earnings per share of $2.50, an increase of 38% over 2017. As Bill will discuss shortly, free cash flow was lower than expected due to working capital performance. Overall, we're making progress and we will build on this momentum by continuing to execute on Reinvent SEE.

We are reinventing the Company to take us to world-class performance. Reinvent SEE is the transformation catalyst that will drive growth above the markets we serve. We will embed our Sealed Air Operational Excellence across the entire Company. We'll improve how we innovate, buy, make and sell. To ensure our successful execution, we are addressing the following key areas. First, speed to market on innovations. We're investing in technology and resources focusing on high-growth markets with sustainable solutions. We expect to double our innovation rate over the next five years and that will reward us with profitable growth in new and existing markets.

Next, drive channel optimization while improving customer experience. We'll implement value capture pricing to reduce margin leakage and improved sales productivity. We will leverage our extensive distributor network to better align with our growth strategy in changing end-market dynamics. We are investing in digital customer service systems and processes to enhance customer experience and reduce cycle time making every customer a reference. Another area, product cost efficiency. We're going after opportunities in procurement, conversion cost productivity, materials yield, SKU rationalization and network efficiency. And finally, drive SG&A productivity by simplifying our structure and operating as one Sealed Air.

We're creating a more nimble, efficient and productive organization that will drive higher speed for new innovations, enable more effective global go-to-market strategy and further enhance customers' experience. A critical step to making this happen is moving to one commercial team for our two divisions under Karl Deily, who I'm excited to have serve as our Chief Commercial Officer for one Sealed Air. Our strategy for Sealed Air is to grow faster than the markets we serve, deliver earnings power with operating leverage above 40% and have a disciplined capital allocation strategy to drive economic value.

Let me now shift to an important topic embedded in our strategy, sustainability and how we're making a positive impact on our society. Last quarter, I spoke to you about our new sustainability and plastics pledge, committing to deliver 100% recyclable or reusable offerings and 50% recycled content by 2025. We're accelerating our innovations that enable us to achieve this commitment. We're also collaborating with partners around the world to increase recycling and reuse rates. Since then, we've aligned our innovation and sustainability teams to drive actions necessary to exceed our goals.

We recently became a member of the Alliance to End Plastic Waste that was first introduced in January. This alliance has a goal to help end plastic waste in the environment over the next five years. We will collaborate with members across the value chain from material suppliers to waste management companies to jointly develop solutions that minimize and manage plastic waste as well as promote means to use the power of plastics more effectively in the circular economy.

I'll now pass the call to Bill to review our results in more detail. Bill?

Bill Stiehl -- Senior Vice President and Chief Financial Officer

Thank you, Ted. Let's start with a review of our net sales by region on Slide 6. In the fourth quarter, sales increased 3% as reported and 7% in constant dollars. We delivered constant dollar growth across all regions with 7% growth in North America, 2% in EMEA and 4% in Asia-Pacific. In Latin America, constant dollar growth of 17% was largely driven by US-based dollar pricing. Volumes in Latin America declined slightly for the first time in five (ph) quarters primarily due to a tough year-over-year comp in Food Care.

North America Food Care was up 4% in constant dollars as a result of 2% volume growth and 2% favorable price mix trends. Product Care was up 12% in North America largely driven by the AFP acquisition. Excluding the acquisition and currency, Product Care North America was up 4% and volume growth of 3%. In EMEA, we experienced positive sales trends in Germany, France and in Russia. Strength in Asia-Pacific was largely driven by growth in Australia, New Zealand and Japan.

Slide 7 illustrates net sales by region for the full-year. North America increased 6% in constant dollars with Food Care up 3% and Product Care up 9%. Excluding acquisitions, Product Care North America was up 5%. EMEA increased 3% led by favorable trends in the UK, Italy, Germany and Russia. Asia-Pacific was up 12% due to Product Care acquisitions, increased demand in Asia for packaged proteins and higher slaughter rates in Australia related to weather conditions. In Latin America, constant dollar growth of 17% was due to positive price realization to offset currency devaluation and 6% volume growth. Higher volumes in the first nine months of the year were related to a recovery in the protein market and ramp-up of new customer wins.

Slide 8 highlights volume and price mix trends by division and by region. In the fourth quarter and for the full-year, on a global basis, we delivered favorable price mix of 3% and volume growth of 2%. Price mix was favorable in Food Care and Product Care due to previously announced price increases, formula pass-throughs and continued shift to value added solutions. Food Care delivered 2% to 3% volume growth throughout the year. Product Care ended the year with relatively stable volumes as growth in value-added e-commerce solutions were offset by declines in our non-differentiated product offerings. Beginning in the first quarter 2019, we will report pricing as a stand-alone metric, we will move mix into volume. This change will provide us with more insight on business demand trends as well as how our pricing strategies are progressing.

On Slide 9, we present our sales and EBITDA bridges for the fourth quarter. I covered sales trends in the last two slides. So my comments will focus on EBITDA performance. Adjusted EBITDA of $248 million increased 9% on a constant dollar basis. Margins were up 30 basis points and 19.7%. We delivered favorable mix and price cost spread of $15 million and volume growth of $5 million. We realized $13 million of restructuring savings which offset $11 million of higher operating costs. Our efforts to eliminate stranded costs are largely behind us now and Reinvent SEE initiatives are under way to drive productivity improvements. Unfavorable currency was $12 million. Despite currency headwinds and higher input costs relative to last year, we delivered 31% operating leverage or what we define as our profit to growth ratio. Adjusted EPS was $0.75 on average diluted shares outstanding of 156 million shares. Our adjusted tax rate was 29% in the fourth quarter.

Slide 10 displays our sales and EBITDA bridge for the full-year. As illustrated on the net sales bridge, our top line growth was driven by favorable volume and price mix trends and Product Care acquisitions. This was offset by $44 million in currency headwinds that weighed in on our second half performance. EBITDA results were driven by higher volumes, favorable mix and price cost spread as well as restructuring savings partially offset by higher operating costs as well as currency. Adjusted earnings per share was $2.50 based upon average diluted shares outstanding of 160 million shares. We repurchased 15 million shares in 2018 valued at $651 million through a combination of open market and the completion of an accelerated share repurchase program. There is $775 million remaining under the current Board of Directors authorization. Our adjusted tax rate in 2018 was 27.5%. This compares to our adjusted tax rate of 30% in 2017. For 2019, we expect a 150 basis point reduction in our adjusted tax rate to 26%. The anticipated decline in our adjusted tax rate is related to optimization of our post-Diversey domestic and foreign legal entity structure.

Now let's turn to our results by division. On Slide 11, we present Q4 and full-year results for Food Care. We were very pleased with Food Care's results in the fourth quarter in light of currency headwinds. Sales of $772 million were up 6% in constant dollars due to 2% higher volumes and 4% favorable price mix. Adjusted EBITDA increased 18% in constant dollars to $162 million. Margins improved 210 basis points to 21% of net sales. For the full-year in constant dollars, Food Care delivered 10% adjusted EBITDA growth on 5% sales growth. Margins improved 80 basis points to 20% of sales. Food Care delivered strong operating leverage in the quarter and in the year due to higher sales growth, our efforts to eliminate stranded costs and Reinvent SEE actions that are already under way.

The global protein markets were up in the low-single digits in the fourth quarter and for the full-year. Food Care volume was up in all regions with global volume growth of 2% to 3% throughout the year due to increasing demand across our core product portfolio and continued market penetration of our new innovations. By region in 2018, it's impressive to see volumes in North America increase 1% off a 9% (ph) growth rate that was experienced in 2017. We also delivered volume growth of 6% in Latin America, 4% in Asia-Pacific and 2% in EMEA. We continue to benefit from increased global penetration of our case-ready platform in all proteins and incremental sales in the fluids market where we are replacing rigid containers with sustainable flexible materials.

Throughout Europe and most recently North America and Asia, we are experiencing increased demand for our Darfresh eco portfolio which is designed to a provide sustainable solution for all proteins including seafood. This offering complements continued growth in our sustainable trays and lids that offer extended shelf life and higher consumer appeal. We expect this trend to continue well into the future. Our successful penetration into the fluids market is directly related to our innovative and vertical pouch packaging platforms, which includes our FlexPrep solutions that integrates equipment, materials and dispensing technologies. We are confident Food Care will continue to deliver above market growth rates on the top line while driving strong operating leverage.

On Slide 12, we highlight results from our Product Care division. In the fourth quarter, Product Care net sales of $489 million increased 7% in constant dollars. Excluding acquisitions, Product Care sales were up 1% on stable volumes and favorable price mix. We were pleased to see that North America volumes were up 3% driven by strong growth in our inflatable bubble wrap platform, paper offerings and automated system. While volumes were up in North America, the UK and China declined primarily due to macroeconomic factors. The UK is managing through an uncertain economic environment and China is facing challenges from Trade Wars as well as decelerated (ph) production rates.

Adjusted EBITDA of $85 million or 17.5% of sales increased 6% in constant dollars compared to last year due to restructuring savings as well as contributions from the AFP acquisition. For the full-year in constant dollars, Product Care delivered 8% adjusted EBITDA growth on 10% sales growth. As mentioned, our top line growth was driven by acquisitions as well as favorable price mix. Margins were essentially in line with last year at 17.5%. The business benefited from favorable mix and price cost spread, restructuring savings as well as contributions from acquisitions. In e-commerce fulfillment, we continue to see increased demand for our Inflatable Bubble Wrap, paper, Korrvu and automated solutions, all of which are designed to minimize waste, reduce damage as well as help our customers meet their sustainability goals.

We are accelerating our investment to reinvent our mailer, void fill and box elimination solutions that are 100% recyclable and automated. We are working with our B2B customers to modify their packaging to meet new industry expectations that their products are parcel ready. This trend will accelerate growth in our specialty industrial applications portfolio, which includes our integrated fabrication, specialty foam as well as Instapak offerings. We see opportunities to expand Product Care margins by optimizing our go-to-market strategy and simplifying our business to better align with our changing end market dynamics.

Let's now turn to our free cash flow for 2018 on Slide 13. We generated $311 million in free cash flow in 2018, which was indeed below our most recent forecast of $350 million. As many of you know, our seasonality in working capital is heavily weighted toward our year-end. In the last few weeks of the year, our performance in working capital did fall short of our expectations, particularly in accounts payable and while inventory levels did decline from the third to the fourth quarter of 2018, that decline was not enough to offset our results in accounts payable. Capital expenditures were $169 million or 3.5% of net sales. Interest payments, net of interest income was $176 million. Cash tax payments were $155 million. Restructuring payments dedicated to our core operations were $12 million.

At this time, I will turn the call back over to Ted to discuss our outlook for 2019.

Ted Doheny -- President and Chief Executive Officer

Thank you, Bill. Turning to our total Company 2019 outlook. Net sales are expected to be approximately $4.8 billion or 2% growth as reported. Unfavorable currency is expected to negatively impact sales by $130 million. On a constant dollar basis, net sales are expected to increase 5% with Food Care up 4% and Product Care up 5.5%. Excluding the AFP acquisition, net sales on an organic basis are expected to be up 3% with 1% growth in Product Care.

Adjusted EBITDA for the full-year is expected to be approximately $925 million to $945 million, an increase of approximately 4% to 6%. Our operating leverage is expected to reach our 40% target in 2019. Currency is estimated to have unfavorable impact on EBITDA of $25 million. We estimate $70 million in restructuring savings, which will help offset currency and inflationary headwinds. Adjusted EPS is expected to be in the range of $2.65 to $2.75, an increase of approximately 6% to 10% compared to the prior year. This forecast assumes no additional shares repurchases in 2019.

For the full-year, our outlook for free cash flow is approximately $250 million, net of $115 million in restructuring payments and $200 million in CapEx. As part of Reinvent SEE planning, we identified and prioritized high return investments that align with our growth strategy and productivity initiatives. Cash tax payments are estimated to be $130 million and interest payments, net of interest income is expected to be $190 million. Once our restructuring efforts are behind us, we expect our EBITDA to free cash flow conversion to increase over 40% with CapEx of approximately 4% of net sales and an improvement in working capital velocity.

On Slide 15, we provide more detail on our restructuring programs. Our existing program is focused on completing our efforts to eliminate stranded costs. This is on track to be largely completed in the first half of 2019. Our new program announced as part of our Reinvent SEE strategy is already under way and is expected to be completed by the end of 2021. In 2019, as I previously mentioned, we expect savings from our existing and new program to be approximately $70 million. Cash restructuring payments are anticipated to be $115 (ph) million. In 2020 and 2021, we anticipate additional savings of approximately $100 million and cash restructuring benefits to be in the range of $110 million to $140 million. These payments will be incurred primarily in 2020.

As we begin a new year and executed our Reinvent SEE strategy, you'll see us reach new levels of performance continuing on our journey to world-class. We are expecting to double our operating leverage or our profit to growth ratio again to 40% and accelerate CapEx investments to improve manufacturing efficiencies and unleash long-term growth opportunities. With Reinvent SEE, we are confident Sealed Air will achieve organic growth above the markets we serve, drive margin expansion and produce industry-leading returns for shareholders. We look forward to updating you on our progress to reinvent SEE throughout the year.

With that, I'll now open the call for questions.

Questions and Answers:

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Scott Gaffner from Barclays. Please go ahead.

Scott Gaffner -- Barclays -- Analyst

Thanks. Good morning Bill, Ted, Lori.

Ted Doheny -- President and Chief Executive Officer

Good morning, Scott.

Scott Gaffner -- Barclays -- Analyst

Ted, I just wanted to talk about some of the SG&A productivity initiatives that you've put in place, just trying to frame the productivity initiatives relative to some of your peers. I'm sure you've done some benchmarking in regards to that. Is there anything, whether it's R&D or the way the Company was sort of a separate -- the entities were, the segments were headquartered at different locations before that sort of kept the Company historically from achieving SG&A productivity in line with peers. And also as part of that, can you talk about the opportunity in Food Care versus Product Care side? Thanks.

Ted Doheny -- President and Chief Executive Officer

Sure, I'll try to frame it up Scott. If you look at historically where we were, it's three divisions, now it's two divisions. Part of that was the focus of looking at each one individually versus where we think we have more opportunities if we look collectively as one. So part of the one Sealed Air approach that we announced and having one Sealed Air commercial organization, we think that's going to allow us to simplify some of the redundancies that we have out there as we go to market, definitely being more focused on the markets we serve, having less divisional, functional, regional overlaps. So we think we have some opportunity.

To your question about comparing it and benchmarking, yes, we looked at that, we looked at where our SG&A ratios were compared to our peers. In the comparatives, we keep using the theme of world-class, where do we think it should be. We also went back and looked historically and we were tough on ourselves and we said over the last five years, pull Diversey away and we saw that there was -- the sales had been fairly flat and we added (ph) 100 basis points of SG&A. So we had a lot of data there to say, we know we can be more efficient and so let's look at it as one and see what we can do to be more effective. Also there's new tools today. You know, we've been working on some digital systems on the back office to see how we can be more effective, how we work with each other, but also work and access the channel market. So we think we have some significant opportunity there.

I am excited to have Karl there to help bring this together, to bring the sales teams around the world to act as one. And we also are seeing our customers coming together as one. We're seeing the push on e-groceries with our customers. In five to eight years, the grocery store that we all shop in is to be extremely different. We're going to be putting food and dry goods in the same packaging and so we're seeing that example around the world. So, our customers can see the value of us acting as one. So it's going to show up in the SG&A.

On the innovation side, it's pretty interesting as well. We package materials, whether to put a Turkey into a bag or a technological product into a Bubble Wrap pouch and how do we do that efficiently, what materials, do we use plastic, paper, foam et cetera. So we see our innovations coming together, how do we automate that process and I'll give you an example that relates to our plastics pledge. We could pretty quickly take the waste that we're getting from our Food Care and that be the feedstock for Product Care and if we can crack that code and take that scrap and turn it into a recyclable product, which I think we can conquer, it's pretty good synergy. That's just one example of working together as one company. I think we have some significant opportunities ahead of us.

Bill Stiehl -- Senior Vice President and Chief Financial Officer

So as you noticed, on the SG&A, a lot of our activities in 2017 and '18 Scott were focused on getting our stranded costs reduced because of the Diversey Care separation and we focused a lot on our corporate overhead to get down to be a smaller company. Now we're looking at the functional support necessary in the SG&A area to support the consolidation of Food Care and Product Care and we're looking at things like spans and layers, number of direct reports and we're already putting those actions in place in January.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question please?

Operator

Thank you. Our next question question comes from Ghansham Panjabi from Baird. Please go ahead.

Ghansham Panjabi -- Robert W. Baird and Company -- Analyst

I guess, first off, just kind of going back to the fourth quarter. On the 3Q earnings report, you basically rebased guidance for 4Q. So I guess, first off, what surprised you to the upside relative to your initial guidance specific to the fourth quarter? And then second, related to that, how will the restructuring savings flow through by segment during 2019? Anything you can share in terms of the cadence of the savings on a quarterly basis would be really helpful. Thanks.

Bill Stiehl -- Senior Vice President and Chief Financial Officer

Yes, so, thanks very much for the question and as you know, we came up with a profit warning as a result of our expectation of third quarter results and we were happy to be able to exceed that and I will say that, congratulations to Ted and the management team for looking at the results, looking at our current forecast and taking the actions necessary to drive cost reductions in the business in order to achieve the fourth quarter results that we were able to get, to get to the $890 million.

And we were actually able to quickly put in place a lot of the actions on Reinvent SEE and we saw some lift in the P&L because some of those actions reflected in our results for Q4 of 2018. Going forward, we will continue with respect to reportable segments, keep Product Care and Food Care separate. We have no immediate plans to change that either in our 10-K for 2018 that will be filed in two weeks or in our quarterly financials that will be issued in 2019 and we would anticipate speaking about the operating results of both Food Care and Product Care to external parties much in the way that we've done in the past.

Operator

Thank you. Our next question comes from George Staphos from Bank of America. Please go ahead.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Hi, everyone, good morning. Thanks for the details. I had two questions, guys. First of all, congratulations to Karl on his additional role. What are the learnings so far that you're finding from combining all the commercial activities under Karl and how do you apply them to combining R&D and what's the, if you will, the synergy or leverage between the two? And then on sustainability, Ted, you talked about all of the opportunity and initiatives that you have under way of your most important products and I realize that's a little bit subjective, which of your products you think would be most able to be made more sustainable toward your goals and which might be more challenging? You know, I'm thinking about Instapak, maybe that is a little bit more difficult to get under the sustainability umbrella. Thank you.

Ted Doheny -- President and Chief Executive Officer

Okay. George, you're always pretty good with two questions. I think there is multiple, but I'll try to break it to two.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thank you.

Ted Doheny -- President and Chief Executive Officer

First, and we'll begin with Karl, excited about Karl and his job to help accelerate that. On the -- it's tied back into the SG&A, but the learnings were is we go to market in different countries is probably the biggest one. When we were set up by divisions, we went into these countries with a full force of a company, we went in with all our finance, we went in all the different functions and we built the functional structure for the country before what was the business opportunity and how we're going to go best get that.

And our analysis of the country analysis and looking as one company, where is the business, where are the resources, how do we take care of customers, how do we get our service capability, how do we get the lowest most -- not the lowest, most efficient cost and so that learning has been good and we've got more to do on that.

On the R&D side, it is really looking at the process of what we do, as I mentioned before. We package things and where the industry is going is automation. So how do we have our packaging that can answer some of those automated questions for our customers and how do we look at that together with one lens going across the divisions. It ties into the third point where you said about the most challenging. Let me talk about the opportunity again is if we look at the film that we put in what are ubiquitous Bubble Wrap, why can't we make that fully recycled. We challenged our research team, we said, look, we want to get to that fully recycled by 2025. So we turned the equation up, and we said, how do you get there now? What do we need to do to get a fully recycled material going into Bubble Wrap?

We think we have the technical solution now, we have a proprietary solution. Now, we got to go make that happen and we are surely going to do that faster than 2025, but that was a cross-functional research team getting that action done. So the process internally is we look at the opportunities with one lens versus a part goes to Product Care, a part goes to Food Care, a part goes to Diversey in the past and I think it's going to add better acceleration to taking care of the biggest opportunities the fastest.

To your comment about Instapak, where -- that's part of our -- it's a tremendous solution for us and so that's in the sustainability. So our research folks are going to have to figure that one out. Don't have that answer yet, but we're going to go after that.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question please?

Operator

Thank you. Our next question comes from Mark Wilde from Bank of Montreal. Please go ahead.

Mark Wilde -- Bank of Montreal -- Analyst

Yes, good morning, Ted.

Ted Doheny -- President and Chief Executive Officer

Hi, Mark.

Mark Wilde -- Bank of Montreal -- Analyst

Ted, I wondered if you could just put a little more color on some of the shifts that you're making in terms of the channels to market?

Ted Doheny -- President and Chief Executive Officer

Well, how about if we talk about first looking at our channels to market. We go to market direct and through our distributor base. One of the kind -- actually we're introducing and talking more about, we want to have an e-commerce portal to the market. So let's say, if we use those three ways to market. Part of our -- it's been tremendous for me being in the business now for a year is having that direct access to our customers so we can truly solve their problems, know what they need, know how we can help. So that direct access is very important.

When we go the distributors, it's still important to use that efficiency, but where we're working on is how can we drive a stronger loyalty base with our distribution network. So the teams have been working at, looking at our distributors, looking where we are most effective and adding value to our distributors, where they are loyal to us, and loyal means exclusivity. So we put a program in place, a loyalty program for our distributors and rewarded that loyalty with the full access and power of Sealed Air. So that's in process. We think we'll see even more of that going into 2019.

So on the direct side, it's thinking about how can we be more effective and efficient for our customers. Now what's interesting, we go to market and we cover both the end-user which could be a food processor. So we're in there with the packaging, how do the major meat producers package in our large bag, but then we're also connected to the retail market to make sure we understand where -- how is that package then repackaged at the store, what the presentation of the package looks like. So how do we do that effectively and efficiently to give -- serving both of those customer segments as effective as possible.

And also doing that simply around the world, I think we sometimes duplicate effort across regions as I mentioned before. So I think we have some opportunity for efficiency, probably too long of an answer that we can follow-up on later.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question please?

Operator

Thank you. Our next question comes from Anthony Pettinari from Citi. Please go ahead.

Anthony Pettinari -- Citigroup -- Analyst

Hi, good morning. Ted, in your opening remarks, you talked about pursuing value capture pricing and I was wondering if you could provide any detail in terms of categories or end-markets that might be right for that. I think this is something Sealed Air has talked about in the past, how would you compare what's already been done versus the opportunity in front of you?

Ted Doheny -- President and Chief Executive Officer

Well, the first is I used the term value capture because I don't like calling it pricing because our customers are always listening and our customers will pay us for value and we can get great price. We got to have the right cost and -- but if we can take care of solving their problems, we will get paid. So I don't like to use to put the price in your face, so that's why I called value. So, it's our burden to go save their money. I'll give you a tactical example that we just put in place. We're rewarding the top two sales professionals that have saved our customers the most money. So, we are showing them that how much money can you save a customer, we're going to recognize you as the best of the best and that's what I mean.

So, it's going to be forcing us to continue to look at how we save their money. Well, behind the scenes, there are some tactical stuff and by the way, the theme is, this is a good business, we're going to go take it to world-class. Well, let's look at our pricing schemes by what are the real margins of the products and that's the detailed analysis we've gone through. We found that we had some SKUs that we were selling at the wrong price. We had some SKUs that where we could have done it differently with either higher or lower. So it's putting more of an automated discipline to that and putting some tools in place in front of our deal desk so they have that information. One tactical example we've just put in place, we found if a customer isn't calling us back, why? And we found that if we call the customer back within 30 days just to check in and we did have a problem, we can recover that customer. If we don't call that customer back, the data that we benchmark against, if you wait six months, you've got a lost customer. So two (ph) tactical examples.

Bill Stiehl -- Senior Vice President and Chief Financial Officer

Part of this also, we're looking at optimizing our sales and incentive structures for our sales people, looking at that price leakage, trying to eliminate some of the lower margin SKUs as Ted has indicated. Another piece of this price leakage analysis is establishing firmer customer discount guidelines and not granting exceptions to those pre-established guidelines.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question please?

Operator

Thank you. Our next question comes from Brian Maguire from Goldman Sachs. Please go ahead.

Brian Maguire -- Goldman Sachs -- Analyst

Hey, good morning, guys.

Ted Doheny -- President and Chief Executive Officer

Good morning.

Brian Maguire -- Goldman Sachs -- Analyst

Two questions from me, one, on the restructuring savings. Obviously, they are significant any way you slice them as a percentage of revenue or percentage of EBIT. Just wondering if you could provide some more details around the buckets. You know maybe, I know it's a sensitive topic but maybe around headcount reductions, what you're expecting there? Or plant rationalizations or just any more concrete metrics that we could be expecting to kind of figure out whether those cost savings are reasonable or not?

And then, sort of the second question which is related is, the last couple of years, most of the restructuring benefits have been offset by OpEx inflation and I think that's been running around $50 (ph) million a year of inflation on average, some years a little bit more, some years a little bit less but if you pull out the acquisition contributions in there, it seems like that's been around the right number. As you think about it going forward, is that about the right number we should be thinking of, such that over the three-year life of this program you've maybe got $150 million of OpEx to offset the $250 million roughly of restructuring savings?

Ted Doheny -- President and Chief Executive Officer

Okay, well, how about we'll tag team that. This is Ted, I'll go first and we'll go back and forth with Bill. Some of the tangible things on the restructuring, we do have some facilities that we are in the process of closing and that will be there. We did have a voluntary separation program that we initiated in the fourth quarter, it's roughly 200 people. So tactically, we have buckets we -- when we look at our restructuring, we actually have the four buckets that I described to you. We actually have nine internal work streams that we're working. I don't know, Bill if you want to go through?

Bill Stiehl -- Senior Vice President and Chief Financial Officer

Yes, so as we look through this, there's several work streams. We've got the I&D productivity, the buy piece which looks at direct materials, indirect materials to make, we looked at yield improvement, operating productivity and the SG&A as we mentioned, and then the pricing and the channel efficiencies. On some of the reorganization that we've already looked at, we announced that we closed a facility in Chile and we're rolling that into our operations in both Brazil and Argentina. We announced a closure of our Norway Product Care plant merging that into Sweden and we're looking at Product Care plants in Texas as well.

The first phase of headcount reduction as Ted indicates was the voluntary separation plan and the P&L does reflect some savings relative to that and we've not announced at this point any additional headcount reductions by way of involuntary. There was an earlier question about the split of the restructuring savings that we had in 2019 and we're identifying estimated restructuring savings of $70 million and that's going to be split about 60% Food Care and 40% Product Care. And again, those savings actions are going to be really spread over all parts of the P&L.

There is looks (ph) at pricing, SKUs, procurement, operations, not just traditional restructuring plans that hit G&A and we're tracking the savings very, very closely that will give us higher confidence in our quarterly forecasting process and we're managing any possible reinvestment with a vengeance and we're looking at salary inflation at around $35 million per year and we anticipate that those restructuring savings will go a long way to offset those headwinds.

Lori C. Chaitman -- Vice President of Investor Relations

Operator (multiple speakers).

Ted Doheny -- President and Chief Executive Officer

Yes, Lori, just can I have just one follow-up to that with Bill and going forward, we'll be communicating in the seven work streams that Bill described, we're going to be adding two more work streams. And then also just to give you the vision of what our operational excellence means post this restructuring is develop this productivity engine that, that salary inflation is covered. So that we have a productivity in place that can handle that $35 million to $40 million year-over-year and that's what the goal of the Reinvent SEE is about.

Lori C. Chaitman -- Vice President of Investor Relations

And I'll just add real quick that I&D that Bill mentioned is, Innovation and Development. Operator, next question please.

Operator

Thank you. Our next question comes from Edlain Rodriguez from UBS. Please go ahead.

Edlain Rodriguez -- UBS -- Analyst

Thank you. Ted, congratulations. In terms of, it's been like almost 45 minutes and no questions on resin costs which is good. So quick one for you on the cost savings, especially, like in terms of the operating ratio, again 40% you have achieved that pretty quickly. Can this ratio improve as we get into 2020, 2021 as the cost savings accelerate?

Ted Doheny -- President and Chief Executive Officer

Yes, first of all, thank you for the resin comment. So we're moving from being considered a chemical company or a converter of resin, but yes, the 40% we have out there is a target. As you'll do the math and you'll see is what we're driving these savings to come through and Bill and I are holding this restructuring bucket really tight. So you will see that come through, but you'll also see the savings come through. So, we'll be 40% plus as we go through this program. So definitely you'll see that.

But we will have as we go through it, this inflationary period that we talked about previously, this $35 million that will overnight -- we're not to make that go away but that's part of the process. So with all those (ph) through the 40% plus, that what we'll been working on, but I do want to highlight again, we put the discipline guard rails into the business. We have the PG ratio, you see we hold it out, we stay committed to that, but we also have the ROIC behind the scenes and we've had that as a shadow metric that we've been running hard. That is going to keep our eyes on the prize and so, we're watching that very carefully with our CapEx.

One of the reasons why we've increased the CapEx, we've seen some ROIC opportunities that will drive some significant improvement in our operating performance, specifically in the automation area of our facilities. So I believe the discipline will keep us on path to make sure that we're delivering the value that we're promising.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question please.

Operator

Thank you. Our next question comes from Daniel Rizzo from Jefferies. Please go ahead.

Daniel Rizzo -- Jefferies -- Analyst

Good morning. You're mentioning -- we talked a lot about innovation and how the focus -- would that suggest that you are going to be using a vitality index? And if you are, is there a goal in mind for that?

Ted Doheny -- President and Chief Executive Officer

Yes, we've had the vitality index for a while. The definition of the vitality index is that new products that show up in our sales that have been developed in the last five years and so it's rolling off after five years. So what -- the modification to the vitality index is we're also including our M&A. If we can buy the innovation and that's the pressure we're putting on the team. We set up some collaboration with some major technical university so we can have access to what's going on with some incubating technology we can take a look at. So the vitality index would get credit for that.

So where has it been? It's been in that 10% to 11%, and so we declared as a team to grow this engine, we want to double that to take that from 10%, 11% to 20% in the next five years and that's what we're focusing on, but part of the assessment on our Reinvent SEE is we reinvent the development again looking at it as one company, but what projects that are out there that aren't moving. We do have a long-term lens, we are focused on sustainability, but we also have to put pressure in velocity on the development. So if it is not moving those projects will be replaced by something that has -- that we can see in the next five years that's going to drive our bottom line.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question please.

Operator

Thank you. Our next question comes from Neel Kumar from Morgan Stanley. Please go ahead.

Neel Kumar -- Morgan Stanley -- Analyst

Hi, good morning. Of the (ph) 1% organic growth in Product Care that expect for 2019, can you talk about what type of growth you expect in your utility portfolio versus your, more automated solutions?

Bill Stiehl -- Senior Vice President and Chief Financial Officer

We're expecting the Product Care volume growth for 2019 to be relatively flat compared to '18. We'll see some pricing that we'll able to go after because of increases in freight and labor cost. And Ted already talked about some of our channel optimization and the opportunities that we have to incorporate value (ph) captured, value creation pricing in our of both Oroduct Care and our Food Care business. But again, we're looking at very, very flat volume in Product Care year-over-year.

Neel Kumar -- Morgan Stanley -- Analyst

Thanks.

Lori C. Chaitman -- Vice President of Investor Relations

Operator go ahead, next question please.

Operator

Thank you. Our next question comes from Chip Dillon from Vertical Research. Please go ahead.

Salvator Tiano -- Vertical Research -- Analyst

Hi, guys. This is Salvator Tiano filling in for Chip. How are you?

Ted Doheny -- President and Chief Executive Officer

Good.

Salvator Tiano -- Vertical Research -- Analyst

Great. So, my first question is on capital allocation for 2019. If I understand correctly, you didn't do any buybacks and in 4Q and if you can confirm whether that was related to the restructuring initiatives that were announced. And also as we look into last year, do you think that the pace of buybacks will slow significantly because of all the elevated restructuring costs? Or could we still see significant buybacks inside of deleveraging?

Bill Stiehl -- Senior Vice President and Chief Financial Officer

Yeah. So, we don't actually guide to the level of share buybacks that we plan on the next year. We've taken an opportunistic approach to our buybacks in the past, we would anticipate continuing to do that. But I don't think a discussion of share buybacks is complete by looking at -- without looking at the entire capital allocation factors as it relates to both M&A, our internal CapEx, the payments of dividends et cetera. So again, we wouldn't anticipate any particular guidance modifications relative to share buybacks compared to what we've done in the past at this point in the year.

Salvator Tiano -- Vertical Research -- Analyst

Okay, perfect. And (inaudible) on working capital, what kind of assumptions are you making in the free cash flow guidance. And versus that $250 million, is there something -- resins were brought up but the question been actually happened, so what kind of upside could we see from you the resin prices going down recently?

Bill Stiehl -- Senior Vice President and Chief Financial Officer

Yeah. So resins is -- obviously an issue that we talk about a lot, it's very, very difficult to predict. I'll give you an example. We saw a (inaudible) drop in resins in October of 2018, again in December of 2018, but then we've already heard and we've been told about announced price increases in the first quarter of 2019. So we really are using from a guidance perspective for 2019, a very, very flat approach. We expect the resin prices to stay flat throughout 2019. Relative to free cash and how we came up with that $250 million, the increase as you will see. Ted and I are very excited along with Emile Chammas, our Senior VP of Supply Chain to increase our capital expenditures in 2019 from a $159 million at '18 to $200 million in '19 as we focus on solving customers problems and creating value and implementing our Reinvent SEE initiatives.

Ted Doheny -- President and Chief Executive Officer

Okay, just -- I want make sure (inaudible). I don't want to scare people we're excited to spend CapEx, maybe we put it to work. So we have had (inaudible) with my finance team that, if we notice some working capital, we put to work velocity there. And that's what it's about the velocity. And the velocity is one that we did highlight that we think we have an opportunity on is inventory. And it's velocity because we think we could actually improve our on-time delivery and reduce our inventory. Inventory has been flat days on hand for the last three years.

I think we have an opportunity as we reinvent our processes, our four piece that I talked about. As we go to automation and improve our process efficiency, improve our cycle time, I think on the working capital, we have an opportunity there and you'll see that in the working capital as we go to a higher level of automation, another cash generation for the business -- cash generator business.

Bill Stiehl -- Senior Vice President and Chief Financial Officer

On the inventory, inventory did actually go down from the third quarter of '18 till fourth quarter of '18. They did go up slightly year-over-year as we look at our AFP acquisition and also looked at improving our on-time delivery statistics in the first half of 2018. We anticipate inventory to be a source of working capital in 2019.

Ted Doheny -- President and Chief Executive Officer

I think we're not happy with that.

We want to do better.

Lori C. Chaitman -- Vice President of Investor Relations

Yes. Operator, I think we have time for one last question, please.

Operator

Okay. Our last question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Hi, guys. Good morning. Just a quick question on Food Care, maybe can you just your outlook on the beef cycle and I guess how transpires in North America for the next year and then if you could touch on Brazil and Australia, New Zealand trends as well? Thanks.

Bill Stiehl -- Senior Vice President and Chief Financial Officer

So with respect to Food Care, in the beef cycle, I mean, the futures indicate that the herd expansion that we've experienced in the past is beginning to decelerate but it'll still be positive throughout 2021. And our Food Care as we look at our 2018 outlook, our sales guidance is having a 4% increase in our Food Care sales and that's primarily coming out from volume. We have seen some strong results in several of the countries that are the major beef producers, but US and Brazil are leading that. We have seen some decreases in Australia.

Lori C. Chaitman -- Vice President of Investor Relations

The export market has remained strong and we expect to strong in Australia. It's interesting what's there in Australia. They did have some weather issues, the pasture conditions were poor and it did end up pushing them to slaughter far some their herds. So they will be in rebuilding heard mode as we head into '19 and that's kind of what we're expecting out of Australia. But we do think that in the rest of the world beef production is going to be up and we'll benefit from that and then we continued penetration of our core products in some of our newer markets.

So again, we are seeing in Asia some opportunity where a lot of unpacked meat is moving to packed meat, so we're benefiting from that and again, we continue to see some opportunity in our case ready platform, our sustainability films are during really nicely in the UK particularly and throughout Europe and that has been moving into North America and also in part Asia. So we're very pleased with that.

Ted, do you have any closing remarks?

No, I want to thank everyone for their time and stay tuned as we reinvent Sealed Air. Thank you.

Thanks to everybody. Operator?

Operator

Thank you. Thank you, ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.

Duration: 58 minutes

Call participants:

Lori C. Chaitman -- Vice President of Investor Relations

Ted Doheny -- President and Chief Executive Officer

Bill Stiehl -- Senior Vice President and Chief Financial Officer

Scott Gaffner -- Barclays -- Analyst

Ghansham Panjabi -- Robert W. Baird and Company -- Analyst

George Staphos -- Bank of America Merrill Lynch -- Analyst

Mark Wilde -- Bank of Montreal -- Analyst

Anthony Pettinari -- Citigroup -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

Edlain Rodriguez -- UBS -- Analyst

Daniel Rizzo -- Jefferies -- Analyst

Neel Kumar -- Morgan Stanley -- Analyst

Salvator Tiano -- Vertical Research -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

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