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Sealed Air Corp  (NYSE:SEE)
Q2 2019 Earnings Call
Aug. 02, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. And welcome to the Sealed Air Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]

I would now like to turn the conference over to Lori Chaitman, Vice President of Investor Relations. You may begin.

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

We also discuss financial measures that do not conform to US GAAP. You will 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.

Before we begin, I want to note at this point, as you may have seen, we filed our second quarter Form 10-Q, which included some updated language around legal proceedings and risk factors related to the ongoing investigation by the SEC and the US Department of Justice. As I'm sure you can appreciate, we are not able to comment beyond what is disclosed in the Form 10-Q and will not take questions regarding these matters. We take financial reporting controls and compliance very seriously and are fully cooperating with the regulatory authorities.

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

Ted Doheny -- President & Chief Executive Officer

Thank you, Lori. Thank you for joining us for our second quarter's earnings conference call. On today's call, I'm going to start with a recap of our second quarter results and the continued success of our Reinvent SEE strategy. I'll discuss the exciting acquisition of Automated Packaging Systems or APS, which we closed yesterday and how this will be a key platform for us to accelerate our growth. Then, I'll provide an update on our sustainability. Jim will expand on our financial results for the quarter and provide an update on our outlook for 2019. We'll then open the call for your questions.

Now turn to our second quarter results on Slide 3. We had solid performance in the quarter and first half of the year, demonstrating strong execution on our Reinvent SEE transformation. In constant dollars, we delivered 12% adjusted EBITDA growth on 4% higher sales compared to last year. Our top line performance was largely attributable to higher volumes in North America and South America contribution from our recent acquisitions.

Adjusted EBITDA margin was up 160 basis points to 20.4%. We also delivered adjusted earnings per share of $0.80, a 25% increase over last year. We remain focused on profitable growth, and our results in the quarter reflect the high level of commitment and achievement by our entire global team at Sealed Air. As I mentioned, we completed the APS acquisition, which was valued at $510 million on a cash and debt-free basis. Keep in mind, cash paid at closing was closer to $450 million as about $60 million of the purchase price includes the assumption of legacy deferred compensation plan for certain APS employees, which will be paid out over the next three years. After considering synergies and tax benefits, the acquisition has an estimated enterprise value to 2018 adjusted EBITDA multiple of 8 times. Both Jim and I will provide more detail on APS in our discussion today.

Our business continues to face some macro headwinds in a global choppy environment. These headwinds -- despite these headwinds, our One Sealed Air culture is driving share gains with new products. We're focusing on incremental growth opportunities by market, by product and by geography. The progress we're making with Reinvent SEE, coupled with our efforts to overcome macro headwinds, is enabling us to raise our adjusted EBITDA and adjusted EPS guidance and strengthen our future earnings power.

Turning to Slide 4. Our journey to reinvent the Company is gaining traction and impacting our results. Acting as One Sealed Air is enabling us to move more rapidly around the world and grow faster in the markets we serve. With our Sealed Air Operational Excellence, we're reinventing the entire process from how we innovate to how we solve. We're accelerating our speed-to-market on new innovations through our own resources and through acquisitions. We're developing highly differentiated innovations with the goal of producing the best products at the right price and making them sustainable.

Our global go-to-market strategy is involving to a more centralized and targeted approach. To drive product cost efficiency, we're optimizing our network with selective asset upgrades and more automation. There's still significant opportunities to be delivered with our Reinvent SEE transformation, as more than half of the total projected benefits are either in progress or still being planned. Overall, we're very confident our global initiatives will deliver annualized benefits of greater than $250 million by the end of 2021, which will drive our 40% plus operating leverage target.

Let's now turn to Slide 5 and review our acquisition of Automated Packaging Systems in more detail. Known for its iconic Autobag brand, APS is a market leader that provides us with unique and innovative solutions, complete with automated equipment, advanced materials, best-in-class engineering and field service. APS aligns with Reinvent SEE and our goal of doubling the rate of our innovation. APS is highly complementary to our protective packaging solutions for e-commerce and fulfillment operation and offers us adjacent opportunities in the food packaging sector, including e-foods, produce, snack foods and portion-controlled meals. In 2018, APS generated $290 million in sales and $40 million in adjusted EBITDA.

The value creation of this acquisition is very compelling. We believe there are meaningful opportunities to leverage our global reach and customer breadth with their unique automation solutions. We expect to generate annual run rate productivity synergies of approximately $15 million by the end of 2021. These synergies will come from a larger combined company. We'll apply the same Reinvent SEE work streams to APS. This transaction includes expected tax benefits with a net present value of approximately $70 million.

Before I pass the call to Jim, I'd like to spend a few minutes on a topic that's top of mind with our people and our customers, sustainability highlighted on Slide 6. We believe that our sustainable offerings differentiate Sealed Air in the markets we serve today and will be a key differentiator going forward. At Sealed Air, we produce materials that are designed to protect and preserve whether it's food safety, food waste or product protection our solutions minimum -- minimize waste and prevent damage.

There's still a tremendous amount of work to be done around the world to create a circular economy. Given what we do and who we are in packaging, we have the responsibility to lead the way in our industry and achieve our mission to leave our world better than we found it. We're addressing sustainability head on with our innovations. We're working with several suppliers, partners and peers on the most environmentally efficient way to manufacture, recover and recycle essential packaging materials.

I want to share a few examples of how we're leading the industry toward a circular economy. We're advancing the use of our Food Care scrap as raw material for Product Care. For example, production of a new BubbleWrap formulation that runs on existing commercial equipment contain greater than 90% post-industrial recycled material. This is enabling us to create green BubbleWrap in 2020. We've commercialized post-consumer recycled application and offer solutions that contain recycled materials. Such solutions include our Darfresh or vacuum skin packaging, modified atmospheric packaging and conventional over-wrap. These solutions are meeting increased customer demand, particularly in Europe for more sustainable packaging. We are investing in multiple plant-based materials as well and have added manufacturing capacity through a partnership with Kuraray that is on track for production in 2020. Our scientists have demonstrated that many of our multiple-layer materials can be converted to petrochemical feedstocks for synthesis in new plastics. Discussions are under way with key suppliers to partner on accelerating commercial development of chemical recycling technology.

It's also important to highlight that we're expanding our engagement with the Alliance to End Plastic Waste. I had the opportunity to see firsthand the plastics waste challenge as part of a research expedition off the coast of Bermuda in June. I physically picked trash out of the ocean that's being dumped and mismanaged by multiple sources. In July, we had our first Alliance Board meeting and together with 20 CEO members, we approved 12 new projects to combat sources of ocean waste as well as a communication strategy to promote the work that's now under way. We have a lot of work to do, but we will lead in fixing this problem.

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

Jim Sullivan -- Senior Vice President & Chief Financial Officer

Thank you, Ted. On Slide 7, we'll start with the review of our net sales by region. In the second quarter, sales increased 1% as reported and 4% in constant dollars. North America, our largest region representing 59% of the Company sales, grew 4% year-over-year in constant dollars. South America, our smallest region where we have US dollar index pricing, was up 30%. Asia Pacific was up 1% due to the contribution from our Austin Foam acquisition, while sales in EMEA were essentially unchanged.

Slide 8 highlights our regional performance in the first half of the year. Our first half performance in constant dollars is very similar to the second quarter. One thing to note is that going forward with Automated Packaging Systems integrated into our financials, North America will account for roughly 65% of our net sales.

Turning to Slide 9. Here, we highlight our volume and price trends by business segment and by region. In the second quarter, overall volumes turned modestly positive despite continuing macro headwinds across our business. Improving volume trends in North and South America were partially offset by volume declines in Asia Pacific and EMEA. Favorable price of 1% was driven by the US Dollar Index pricing at South America. Price in North America was slightly unfavorable due to timing of our formula pass-throughs in Food Care.

On Slide 10, we present our year-over-year sales and adjusted EBITDA bridges for the second quarter. Excluding currency translation and acquisitions, organic sales were up $17 million or 1.5% year-over-year. Adjusted EBITDA of $237 million increased $19 million or 9% with margins up 160 basis points to 20.4%. This earnings increase was largely attributable to our Reinvent SEE initiatives.

In price/cost spread, we benefited from Reinvent actions around direct materials, grade optimization and value capture. We also benefited from lower input cost. Higher operating costs were largely due to labor inflation, increased non-material manufacturing cost and some incremental spending to support future growth, which was partially offset by Reinvent SEE productivity enhancements. These productivity enhancements include network optimization, manufacturing process changes that are improving yields and utilization rates and ongoing efficiencies resulting from our One Sealed Air operating model.

We also realized $17 million in savings from restructuring actions. Acquisitions contributed $30 million of sales in the quarter with $29 million related to Austin Foam. Adjusted EBITDA from acquisitions was only $1 million, Austin Foam's top and bottom line performance has been negatively impacted by the slowdown in the global industrial production and the trade dispute with China. We are moving quickly to integrate Austin Foam into our broader fabrication solutions business and shifting manufacturing to lower-cost regions to drive improved profitability. Currency in the quarter was $7 million unfavorable to adjusted EBITDA.

Adjusted EPS in the second quarter was $0.80 on average diluted shares outstanding of 155 million. This compares to $0.64 in the second quarter of 2018. Roughly $0.11 of the $0.16 year-over-year adjusted EPS improvement was from higher pre-tax income with the remaining $0.05 approximately evenly split between a lower tax rate and a lower share count from the share repurchase program. The adjusted tax rate in the quarter was 19.4% compared to 22.6% in the second quarter of 2018. This year-over-year improvement was primarily due to a release of the valuation allowance in South America that was triggered in the quarter by improved profitability in the region from Reinvent SEE initiatives.

On Slide 11, we present our sales and EBITDA bridges for the first half of the year. As illustrated on this slide, year-to-date, we have realized approximately $75 million of Reinvent SEE benefits, with $29 million coming from restructuring actions. In the back half of the year, we expect another roughly $60 million of Reinvent SEE benefits, of which about $40 million will come from restructuring savings. However, keep in mind our formula pricing in Food Care is expected to be more aligned with raw material cost, so we are assuming less contribution from price/cost spread in the third and fourth quarters.

Turning to our results by segment on Slide 12, we present second quarter results for Food Care. Food Care net sales of $711 million were up 4% in constant dollars, primarily driven by higher volumes of 2.4% and favorable price of 1.3%. Adjusted EBITDA increased 15% to $156 million and margins improved 290 basis points to 21.9% of sales. North America and South America Food Care volumes were up 4% and 7% respectively. Strength in North America was due to strong exports and increased consumer demand for fresh packaged proteins and continued adoption of our case-ready and fluids platforms.

South America performance was driven by 15% volume growth in Brazil where we benefited from higher equipment sales, a stronger export market and share gains. In EMEA, our volume was up 1% despite a softening economic environment and lower protein production. We experienced increased demand for our sustainable solutions that contain recycled materials and offer post-consumer recyclability. Volumes in Asia Pacific were down 2%. This is the only region in our Food Care segment with a declining volume trend and was primarily related to timing of equipment sales in Australia.

We continue to expect Food Care to outperform global protein markets. Global protein production is expected to be up slightly in 2019, which compares to our Food Care constant dollar sales growth outlook of 4%. As previously mentioned, increased consumer demand for fresh proteins is driving adoption of our case ready platform across all proteins, and we expect the export markets to remain strong in both North America and South America largely driven by the protein shortage in China.

On Slide 13, we highlight results from our Product Care segment. In the second quarter, Product Care net sales of $450 million were up 4% in constant dollars. Excluding the Austin Foam acquisition, Product Care net sales were down 2% driven by volume declines of 3%, partially offset by favorable price of less than 1%. The volume decline in the quarter was driven by industrial weakness in Europe and Asia, and lower sales of traditional BubbleWrap Mailers and void [Phonetic] fill.

Adjusted EBITDA of $84 million or 18.7% of sales was up 7% and margins expanded 90 basis points. Restructuring savings, favorable price/cost spread and other benefits from Reinvent SEE were partially offset by lower volumes and higher operating cost, including labor and indirect material inflation. In Product Care, we are evolving our go-to-market strategy to better align with changing end-market dynamics. We expect continued growth in our value-added solutions portfolio, which currently represents about 20% of the segment and includes inflatable BubbleWrap, automation, paper systems and temperature assurance. In the second quarter, this part of the business was up approximately 10% and going forward, will include the APS business. We continue to target pockets of strength in the industrial market where our B2B customers are looking to modify their packaging and ensure their products are parcel-ready versus pallet-ready. Industrial applications account for approximately 40% of our Product Care sales.

It is worth noting that our industrial applications in North America were flat year-over-year in the quarter. This compares to a decline of roughly 5% in the first quarter. And we saw this specifically in our Instapak business following strong equipment installations in March. For the remainder of the year, we expect Product Care organic volumes to be challenged by the decelerating global industrial market and the ongoing trade dispute with China.

With that said, we are excited to bring APS into Sealed Air and believe their complementary and differentiated portfolio will add significant value to our customers seeking sustainable solutions that provide automation and labor savings. As Ted mentioned, APS has a strong record of top line growth, but the results to date in 2019 reflect some of the macro challenges facing Sealed Air. As of the last 12 months ending June 30, APS sales were approximately $292 million and adjusted EBITDA was approximately $41 million, so modest gains so far this year versus 2018 results. However, we remain encouraged by the go-forward opportunities to leverage the dedicated people, technologies and capabilities across both organizations to better serve our customers and drive significant efficiencies over time.

Let's turn to our year-to-date free cash flow on Slide 14. In the first half of the year, we generated $75 million of free cash flow compared to a use of $37 million in the same period in 2018. $112 million year-over-year improvement was driven by higher adjusted EBITDA and lower cash tax payments, partially offset by increased CapEx spending and Reinvent SEE program investments. Additionally, one-time cash outflows related to Diversey and the buyout of a royalty license agreement with an outside engineering firm impacted 2018.

During the second quarter, the Company also invested $23 million in two small acquisitions in the Food Care segment. One of the acquisitions added a geographic footprint in the Philippines and the other added unique digital printing technologies and capabilities. Net debt at the end of the second quarter totaled $3.4 billion. Net debt to LTM adjusted EBITDA was 3.7 times. On a pro forma basis, including the APS acquisition, net debt to LTM adjusted EBITDA was 4x, which is at the high end of our targeted net leverage range. We do expect net leverage by year-end 2019 to drop to approximately 3.8 times with our cash generation and continued growth in adjusted EBITDA in the back half of the year.

Now turning to our updated 2019 outlook on Slide 15. We now anticipate net sales to be approximately $4.85 billion or about 2% growth for the year as reported. On a constant dollar basis, net sales are expected to increase approximately 5%. Food Care is on track to deliver 4% constant dollar growth, of which about $10 million will come from the previously mentioned small second quarter acquisitions. Product Care is now expected to deliver 7% constant dollar growth, which includes $180 million from acquisitions. APS is expected to contribute approximately $120 million over the next five months and the remaining $60 million is from Austin Foam. For Product Care organic sales growth, we have revised our forecast to be down approximately 3% compared to our previous expectation of up 1.5%. This revision is largely due to the slowdown we have been experiencing in the industrial sector, particularly in North America and China.

Adjusted EBITDA for the full year is now expected to be approximately $950 million to $960 million as compared to our previous guidance of $925 million to $945 million. Our revised outlook includes $10 million to $12 million from APS, but keep in mind that $10 million to $12 million includes a one-time inventory purchase accounting charge, which we are currently estimating at $6 million.

Adjusted EPS is now expected to be in the range of $2.70 to $2.80. This compares to our previous provided range of $2.65 to $2.75. Our guidance assumes approximately $0.07 of dilution from APS, which includes $0.09 of non-cash purchase accounting and tangible amortization and the one-time inventory step-up charge. The outlook for adjusted EPS is based on roughly 155 million shares outstanding and does not assume share repurchases for the remainder of the year.

For the full year 2019, we continue to anticipate an approximate 26% adjusted tax rate. We are reducing our forecast for free cash flow to $180 million from $250 million to reflect the $59 million Novipax settlement and the first installment payment of $20 million for the closed APS deferred incentive compensation plan. Our revised CapEx for the full year is $210 million, which includes $10 million for APS. We are now forecasting cash tax payments to be approximately $115 million, which compares to our previous forecast of $130 million. The $15 million reduction is primarily a result of estimated tax benefits from the Novipax settlement and the APS acquisition, partially offset by tax payments on higher earnings.

We expect to continue to spend $115 million on Reinvent SEE associated payments in 2019. For the full year, net interest payments are expected to be $190 million. To fund the APS acquisition, we secured a new three-year term loan A tranche to our existing credit facility. Strong lender demand for funded assets helped us lower the credit spread for this loan by 37.5 basis points versus the pricing of the existing loans in the facility.

Additional interest expense for five months from this term loan add-on of $7 million are expected to be offset by savings from increased cash flows in the first half of the year and a lower than previously anticipated interest rate environment.

Let me now pass the call back to Ted for closing remarks, and then we'll open up for question and answer. Ted?

Ted Doheny -- President & Chief Executive Officer

Thank you, Jim. We look forward to updating you on our continued progress throughout the year. Reinvent SEE is about accelerating profitable growth and increasing earnings power. As illustrated on the slide, you can see how we're reinventing our powerful brands and acting as one company. We're communicating our 4P's of Reinvent SEE, performance, people, products, processes and sustainability and how they're increasing efficiency, unleashing growth and creating value for our shareholders. We're excited for what's ahead, and we'll continue to focus on what's in our control to drive our success.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Ghansham Panjabi with Baird. Please proceed.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Thank you and Jim, welcome to the call.

Jim Sullivan -- Senior Vice President & Chief Financial Officer

Thank you.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Yeah. Thank you. Looking back at the second quarter relative to your initial plan, I guess, first off, what surprised you to the upside in context of a more benign brownfield backdrop, maybe the cadence of cost savings mix, et cetera, just some more color in terms of what drove this upside specific to 2Q and then related to that, Food Care volumes rebounded nicely in the second quarter relative to the first quarter, how should we think about segment volumes for the back half of this year and if you could break that down by sub-region, that would be helpful. I know Jim gave some comments on core sales, but wanted to focus specifically on volumes? Thanks so much.

Ted Doheny -- President & Chief Executive Officer

Okay. I'll give a high level and let Jim give you some of the bridge to go to detail. I don't want to say what surprised us, but our confidence in the quarter if we look at from how the business performed, we're definitely, as we highlighted in our prepared remarks, that our Reinvent SEE savings are coming through. We have a high level of confidence in our initiatives that we have in place, the cost actions we're going after as well as the growth opportunities. We have good line of sight, clarity; we saw that hit the bottom line.

The other part on the market. The -- we definitely know the market has been choppy. We're obviously looking at competitors, what's going on there. What surprised us actually on the upside is in the industrial space, we're seeing where some of our new products hit, that is good, but we still have the challenge and the headwinds. So the quick summary is the best benefit in the quarter was our Reinvent savings.

I'll let Jim go through some of the details that you asked on the bridges.

Jim Sullivan -- Senior Vice President & Chief Financial Officer

Well, I think looking at the original guidance, we clearly had contemplated more volume growth on Product Care, we didn't see it. Fortunately, we did have this Reinvent SEE engine going hard. For the full year, I think when the Company came into the year, they were expecting about $70 million of savings, and you'll note from the slide that we delivered $75 million. So we were more than able to offset that volume decline primarily in Product Care from the Reinvent savings. As we sit here today, as you know, we're looking at $135 million for the full year from Reinvent, another $60 million in total in the back half of the year, with $40 million of that being restructuring. So that's really the story is the Reinvent is delivering outstanding results.

In terms of the kind of profile first half, second half, I mean, we are expecting in the back half of the year on a consolidated basis, let's call it, roughly 1.5% organic. 4% organic would be kind of where we're at with Food Care, so really no surprise there. In Product Care, we would be seeing more like a negative 3% organic in the back half of the year, but again, over-delivering on the Reinvent benefits.

Ted Doheny -- President & Chief Executive Officer

Ghansham, just one other thing on the -- looking at the Food Care if we look at our business and as we shared with you and others that we're really trying to act as one company, so you'll see us talking more as one company. But specifically on Food Care, you'll see, though, that 4% that we see in the growth in the first half, we're planning on that, and we're driving that to continue through the second half of the year. So that is the good news on that business. And despite all the issues that we're facing, that's very important to driving our profitability for the business.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question, please.

Operator

And Our next question comes from George Staphos of Bank of America. Please proceed.

Molly Baum -- BofA Merrill Lynch -- Analyst

This is Molly Baum sitting in for George. I just wanted to ask kind of a high-level question on Product Care. So with Amazon shipping no-container initiatives and other moves we're seeing to optimize box size in e-commerce, is that initially a net negative for Product Care? And if so, how long before you can get some more benefit from your machinery from your Automated Packaging lines? Thank you.

Ted Doheny -- President & Chief Executive Officer

Yes. Hi, Molly. I hope George is doing better. If we look at the Product Care, as you highlighted, that work is in process. So with what's happening in e-commerce and that shift in our business and our portfolio, we are seeing the traditional business suite are still doing well with our BubbleWrap on demand, our Korrvu solutions, et cetera. But as they go to package zone's container, they're looking for less stuff in the package and also driving automation. So the issue is can we drive an automated solution that's actually loading the package automatically? So that transition will take over time -- will take time. But that's why we're excited where APS comes in with their Autobag. Even that's their iconic brand, that's exactly what it does. Rather than a person loading one bag at a time, they have their side pouch system that loads multiple units and increases what one person can do, six per minute in loading a package to 12 to even higher levels.

So we're seeing that change happen over time. What it means to our portfolio? We have some internal product development working in that space. We have some sustainable solutions that we think are quite interesting. And we also have some lower carbon footprint solutions because that's where the mailers come in as well by taking the box out of the process. So the transition is in place. It is showing up our business and what we've lost in the Product Care business. But we're pretty confident that over time, and hopefully sooner rather than later, we'll get some of that business back and more.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question, please.

Operator

Our next question comes from Mark Wilde with Bank of Montreal. Please proceed.

Mark Wilde -- Bank of Montreal -- Analyst

Good morning, Ted, Jim, Lori.

Ted Doheny -- President & Chief Executive Officer

Good morning, Mark.

Mark Wilde -- Bank of Montreal -- Analyst

I wondered, Ted, if you can give us a little more color on APS. And I guess I'm particularly focused on sort of the margin profile in that business because it looks like it's -- on an LTM basis, it's about a 14% EBITDA margin. So it's lower than the existing margins that you have in Product Care. I'm also kind of curious about what the margin progression has been over the last four or five years and how stable those margins tend to be across the cycle.

Ted Doheny -- President & Chief Executive Officer

Okay. Good question. We tried to put a slide out there, Mark, to kind of help. And if we actually refer to the slide is -- I'll try to lay that out. Well, first of all, what we're interested in this business -- and we've been signaling since I've been with the Company as well of how important automation is if you look at their percent of equipment, service parts and materials. So first of all, if you look at their equipment, there's 60% [Phonetic] equipment and 70% materials. If you look at what we call the solutions multiplier, and they actually use that language, their materials is at 9x to each piece of equipment. Also with their equipment -- and by the way, I'm describing this to get to that 15% profitability, that's higher, much higher level of equipment percentage, but they have dedicated materials to their equipment and their service and they're embedded in with the customer and they're roughly 60% a direct business. So yes, their overall profitability is lower than where we are with the -- our business, but what they do for that full system with a high level of equipment, that's quite interesting for us. We've been looking at them for well over a year. And actually, I probably need to give a shout out to the APS employees listening, welcome to Sealed Air. We had the first day of operations there yesterday. My management team was there. I was there via video. I'll be there personally, but I wanted to make sure I say hello to the team.

So we were -- announced SEE actually day one behind the curtain of how they do what they do from analyzing from the outside. So I think that's where we're excited about the opportunity, what they're doing with equipment, and then also on their profitability, looking at the materials. So that's something that we know very, very well. And so looking at those materials, looking at what they have on their sustainability side, we saw a very high sustainability content on their pillows, or if you look at that other piece of equipment, they have a patented easy tear, very interesting innovation on the air pillows. So looking at the business, we see products we like, the customer overlap is less than 10%. That's very exciting for us as we look at our complementary products. And then the third piece is their presence in food, which is roughly about 15%. So in the profitability side, we see opportunities to move that 15% north of 20%. On the pieces they have, we actually see opportunities that they may be able to help our larger organization to be more profitable and successful in the market as well.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question, please.

Operator

Our next question comes from Brian Maguire with Goldman Sachs. Please proceed.

Brian Maguire -- Goldman Sachs -- Analyst

Hi, good morning, everyone. And welcome -- I'll add my welcome, Jim. Just a question on the volumes in Food Care. It's nice to see the growth rate bounce back in 2Q. I think you -- last call, you talked about 1Q seeing some negative impact from Brexit and just wondered if you're experiencing some restocking benefits in the quarter, if you could comment on any impact from that. And just the outlook for the second half of the year seems pretty positive on Food Care. It does look like we're increasingly drifting toward a no-deal Brexit. Just wondering if you think that we could see sort of a repeat of the 1Q weakness in that -- in the eventuality that we did have something like that. And then just wondering also your comment on the protein deficit in China. Are you baking in any expectations or benefits from that in your guidance? And how, if any, do you think tariffs could factor into the ability, specifically from the US to kind of export into China? Thanks.

Ted Doheny -- President & Chief Executive Officer

Okay. I hope I get all those questions back. Jim, help me out. I'll pick a couple, and if you want to jump into a couple of those as well. First of all, looking at -- when we give you information about what's going on in the market, and I'll just share even how we manage internally, we don't want to use some of those things like Brexit as an excuse because we have to overcome that and we have to deal with that. So there are issues. What we're seeing with -- even the trade issues around the world. So looking at Europe in general, we are -- that's an issue that we have a heavy focus on, what we can do and get that growth. What we're seeing the change is on the sustainability side. This war on plastics and -- it is really, really everywhere. And that's why even I moved it upfront as our first slide on the presentation, especially strong in Europe. So with our Food Care business, it's -- what Brexit means is where the meat is being processed in the UK back and forth into Europe. But the food will get to the right place, it's having the right package at the right price and making it sustainable. So we've seen some actual gains, and we need more in our sustainable Food Care packaging that we're using more recycled content, so we have seen gains in that.

Different from quarter-to-quarter, we have seen in the North America still strong, and actually South America, as you saw, very strong. I actually was in Brazil twice in the last months, meeting with our top customers, and actually our largest customer is actually headquartered in Brazil. And so, they're using this shift in what's going on with this economic activity. And the other thing that's being highlighted is the African swine fever. How are those protein markets going to shift to enable to get the fresh meat into China. So we actually see that North America, fairly strong; South America, fairly strong; the good news is we have a very strong presence there. So I'll take a pause, Jim, if I might have missed a couple of those other questions that you had, if you want to add some color?

Jim Sullivan -- Senior Vice President & Chief Financial Officer

Yeah. I guess in terms of Food Care, as I look at the business over the last month, the first half of the year, we had organic growth, let's call it, just above 3.5%, but a fair amount of that was coming from pricing. As we look to the back half of the year, let's call it, at the midpoint of our new guide, we'd be looking for a similar level of organic growth in total but more on volume as these formula pricing pass-throughs kick in, in the back half of the year with food.

In terms of the overall effect of the protein deficiency in China that was asked, we looked at that over the last few weeks, and right now, it doesn't feel like we're being hurt, and there was probably a little bit of an argument that maybe we're being benefited because of the strong exports that we're seeing out of North America and Brazil. But clearly, with new tariffs that might come through as we go back and forth between China to the extent something were to effect that, we have ability to supply in other world areas, but that could be somewhat of a risk.

Ted Doheny -- President & Chief Executive Officer

Right. And probably not fair, Jim, being a one-month expert here on that good job. The other piece that we're hearing, the bottom line is we have to quantify, and that's where Jim has done a great job already. So what's the problem worth? Where do we need to go fix? We've assessed internally the African swine fever. Even though we think it will be a benefit, I asked directly our customers, they believe it will be a benefit to us because we're positioned where the proteins will shift and even proteins that are going to be part of our future like seafood. The number we put on it is roughly $3 million that we're going to have to go make up, and the reason for that is some of that short term is going to be shifting frozen carcasses into China. We don't get the same concentration as when it goes fresh. Our connection is to fresh. We are seeing the pickup though in Australia. We saw the equipment pickup in Australia, so we're feeling that. But overall, what we've got an issue. We're going after $3 million that's going to hit, and we're going to go cover that.

Lori C. Chaitman -- Vice President of Investor Relations

Operator. Next question.

Operator

Okay. Our next question is from Adam Josephson with KeyBanc. Please proceed.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Ted, Jim, Lori, good morning and thanks for taking my questions. I appreciate it. Just a two-parter on APS. Ted, you mentioned it's dilutive by $0.07. If you add back the inventory step-up, let's call it, neutral. So I guess what about that in your mind should be kind of exciting to shareholders that you're doing a neutral deal? Now I know by the end of '21, you're guiding to annualized synergies of $15 million, but obviously, that's a fair ways out from here. And then just also on APS, the $60 million of the $510 million purchase price that's going to APS's European employees over the next three years. It's just an accounting question. Why is that not -- why is that flowing through operating cash flow as opposed to being classified as part of the purchase price and, thus, going through cash from investing? Thank you.

Ted Doheny -- President & Chief Executive Officer

Well, I'll let Jim go through the accounting piece, and then I'll share with you again why we think it's good for investors.

Jim Sullivan -- Senior Vice President & Chief Financial Officer

Okay. Sure. So on the $60 million deferred incentive compensation, obviously, it's not great that we have $60 million post-closing running through our cash from operations, and this is really a legacy and however, we looked at the accounting closely, and the reason for it going to operations is that the payments coming out of that plan are going to be going to current employees. And so, the accounting rules are pretty straightforward there. If you have money going to -- that's benefiting, if you will, the current employee base, it goes through operations. So we'll have to just remind everyone, in the next few years, we're going to have about $20 million a year that's really related to the purchase price that sits -- unfortunately, we're not going to be able to overcome that from an accounting perspective.

Ted Doheny -- President & Chief Executive Officer

Okay. Good. And then, Adam, to your point of shareholders and the value here, I don't want to say trust us, but it's very similar to Reinvent SEE. Very challenging, but we see that opportunity just like Reinvent SEE. And by the way, we're going to be applying day one our Reinvent SEE work streams to APS, but really the whole focus on what they do and what we do. Looking at what they do in equipment, and equipment is an accelerator, that solutions multiplier that I shared with where they are for every dollar for equipment sale, they get 9x the materials. That is extremely compelling. If we can bring that to our business, very, very compelling.

The way they're entrenched with their customers because of the equipment, the stickiness there is very, very impressive on what they do and take care of those markets and how they serve. And that's why they're leading automation because that's what our customers are asking. Our customers are having a very difficult time with getting the right people in the right place and driving automation. They're a leader in that, so we're quite excited. What that's going to give us is a market growth opportunity. The performance, we're very comfortable. We can work together and improve that performance as part of our Reinvent SEE and get them to our profitability.

The numbers we gave you out there do reflect -- they've seen the slowdown in the market that we've had in the year-over-year, we're being very clear and very transparent. But the previous years, we looked at the last three years, in the same space where our Product Care is primarily, they do have 20% food, they've been growing at a significantly higher rate than we are. So we're excited that they have the market cap and the market potential, the complementary elements of what they do. We're excited that we can make this very good.

Jim Sullivan -- Senior Vice President & Chief Financial Officer

Okay. One other accounting-related question. So we did say $0.07 dilution. That's based on our best estimate right now of purchase accounting. And as everybody knows, we're going to have to go through a full fair value analysis, and that could change a little bit as we finish out the year. But keep in mind, I want to remind you that, that $0.07 does include the inventory step-up and the charge, and that's about what? $0.025, $0.03 of that $0.07. And then in addition, a couple of other things I would say is that if you just look at it on a cash basis, it's accretive right away. So if you exclude the non-cash purchase accounting, it's accretive right away. And then next year, even with the pretty heavy chunk of purchase accounting amortization flowing through, we look at that business being roughly neutral on an adjusted EPS basis.

Ted Doheny -- President & Chief Executive Officer

And internally, the -- our internal number for year one is higher than to make it accretive, OK?

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question, please.

Operator

Our next question comes from Gabe Hajde with Wells Fargo Securities. Please proceed.

Gabe Hajde -- Wells Fargo Securities -- Analyst

Good morning. I had a question around some of this alternative protein sources that we're hearing about, and I was curious if you've done some work, presumably the answer is yes. But talk about some of the barrier properties that might be required for the food packaging around, I don't know, plant-based protein, burgers and stuff like that and whether or not you see it as a long-term opportunity for that business.

Ted Doheny -- President & Chief Executive Officer

Yeah. The -- it's actually quite interesting for where the world is going with fresh meat. We are seeing -- the first answer to your question, we are connected, we are doing the packaging in that business. And they do need the same things to keep it fresh and protect it. And they need the barrier protection with what we do with our Cryovac material does apply to that, and so we are connected. We're also seeing in staying close to our customers in the QSR world, we're finding that it's actually helping the meat business. Looking at the QSRs where they go into restaurants and now they have an alternative, give me a protein that's from vegetables or the vegans. The whole family is going out to eat. So right now, we're actually seeing and projecting -- or our customers are projecting, this will help drive the protein market where we're very strong in. So first answer to the question, yes, we're connected to this with packaging. They need the Cryovac technology, which is exciting for us. And two, right now, it looks like it's actually going to help the protein market grow.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question, please.

Operator

Our next question comes from Chip Dillon with Vertical Research Partners. Please proceed.

Salvator Tiano -- Vertical Research Partners -- Analyst

Hi, guys. This is Salvator Tiano filling in for Chip, and Jim, welcome. So first, a little bit to go back to e-commerce, Amazon. I know you said overall you're working also with this acquisition to address some of these issues. But just a little bit in the short term, the next few quarters, a couple of years, how are you seeing demand for traditional e-commerce products you are selling, like your mailers, the void fill in terms of unit volumes? And how should that -- how that translate -- to what growth rate could that translate for your Product Care segment for 2019 and 2020?

Ted Doheny -- President & Chief Executive Officer

Well, right now, we're working aggressively on new designs, new products just on the mailers itself, again, sustainable design, as I've shared, that part of the green BubbleWrap of 2020, that's also connected to our mailers. On the automated solutions side, that's something we're going to look very quickly at APS to see do they have an automated solution that can help accelerate the gap in our portfolio that we lost out to that segment in. So we think we have some upside opportunity there.

We also need to get more efficient. Driving into our operations and what we're doing in that part of the business, we think we have some operational efficiencies that we can be more efficient to be -- and be more competitive in that business. So we think it's some upside opportunity. The year-over-year, that's part of the tough fix that we got to fix in the Food Care -- or the Product Care business.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, next question, please.

Operator

Next question comes from Neel Kumar with Morgan Stanley. Please proceed.

Neel Kumar -- Morgan Stanley -- Analyst

Thanks. Just had a question on Product Care. So you talked about your value-added solutions being up about 10% in the quarter. And I was wondering if you think this level of growth is sustainable. And how large can this get to the total percentage of your portfolio from the 20% currently?

Ted Doheny -- President & Chief Executive Officer

Probably not be able to give you the exact percentage on that, but that's where our focus is. The value-added word we're using, it's really to drive us also to think not just talking about the price, to get the product, to get the price. We're really focusing with our customers what can we eliminate in our process, what can we eliminate in the package and even what new material to drive that. So this is a part of our growth. We talked to this one well. So I think the continuation of the growth, what percentage of our portfolio? Don't have a direct answer for that, but this is our focus, and this will grow.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, I think we have time for two more questions.

Operator

No problem. Our next question comes from Arun Viswanathan with RBC Capital Markets. Please proceed.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks. Thanks for taking my question. Good morning. I just had a question about the growth rates that you're achieving. So if you think about the legacy guidance in that $935 million [Phonetic] range, it looks like you had previously guided to about 4% to 6% EBITDA growth. I guess is that kind of -- would be in your range of long-term expectations? So if we look out into fiscal 2020, you're going to be maybe starting from that base adding APS and then adding maybe a third of the synergies and then maybe put mid-single-digit growth on your legacy growth, we get something in the mid-$1 billion for EBITDA. Is that the right way to think about the earnings power of the new SEE, or is there more to that from Reinvent or recovery in volume or price or anything like that? Thanks.

Ted Doheny -- President & Chief Executive Officer

Well, Arun, that was a nice way to try to get us to tell you what our future guidance is going to be, but let me go back to the strategy. And we're trying to make it easy for you to understand where we're going. And so if we look at the metrics that we're guiding to, we're guiding to say we're going to beat the market. We're adjusting this year because the market has gotten choppy. And so, we've seen the volume get tamped down, but we want to beat the market. How you can get to what the EBITDA looks like is that we are passionate, we are managing, we are controlling what that leverage is going to be, and so that's why we gave you that 40% look. So you can look at that growth, then put the 40%. That's what we're driving to, that's what we're talking about, that's what we're paying our people on, and that's what we -- in our control that we're going to make happen.

Lori C. Chaitman -- Vice President of Investor Relations

Operator, we take our last question, please.

Operator

Okay. And our last question comes from Tyler Langton with JPMorgan. Please proceed.

Tyler Langton -- JPMorgan -- Analyst

Yeah. Good morning, Ted, Jim and Lori. Just had a question on Reinvent SEE. I guess you're saying the $135 million of benefits this year versus your initial estimate of $70 million, can you just talk a little bit about what's driving that better-than-expected performance? Are you achieving savings more quickly? Is there, I guess, potentially some upside to, I think, that $250 million of total savings that you expected over the three years?

Ted Doheny -- President & Chief Executive Officer

Okay. I'll go -- just give you a quick -- again, reminding of what's going well, and then if Jim wants to add some detail to that. Remember that Reinvent SEE, and I say it over and over again, it's about we're reinventing the Company, everything from how we innovate and solve. We're going after the complete process, and we have those -- we're now up to nine work streams. And we've given the top-down target, but we also have a bottoms-up that I must say has been pretty exciting for me traveling the world. We had the Board in here last week to actually see our largest facility in Simpsonville. So we're feeding up these initiatives that are actually -- we're tracking and have a very good accountability for.

To your specific question of the buckets that are moving, as we shared, we saw some inefficiencies when we did the diagnostic now a year ago, and we're seeing that hit the bottom line. We talked about -- this was three divisions. Now two divisions -- or was two divisions, now going to one, the acting as one company. So we see that initiative. And you see it on the SG&A line of what we're driving and how do we delayer the organization, and that part is measured and managed and we have that tracked and traced and we see it happening.

On the operational side, we're seeing some of the yield and the productivity come through. We got teams that are looking at our facilities on what we're -- how we're doing our extrusion, how we're -- the productivity, where is idle time, the metrics. If you go to one of our facilities now, you don't have to read a report, you see the visual board. So I'm not talking about really exciting stuff, but that stuff is being measured, it's being managed and it's flowing through the bottom line. And our confidence, the track-ability and traceability, feel really, really good about that. The productivity, we've seen some coming through in our direct material. Now I know the question has always come up of what's going on with resin, so we're breaking that into high-level detail of the different types of resins we buy, the SKUs. And we're going bit by bit, part number by part number and looking at where -- what makes sense, what doesn't make sense, put a project on it. And we're seeing that tracking very well.

Jim, I don't know if you want to add anything.

Jim Sullivan -- Senior Vice President & Chief Financial Officer

No. I would just say one of my first things coming to the Company was kind of eye-opening that I've been through these kind of processes before, and sometimes, there's a lot of consultant speak and that sort of thing, and that's a little bit puffy. But I have to say after being here for a month, I'm very impressed with how this -- the Reinvent has been done, this transformation is being redone -- I mean, being done. It's really very detailed. I think what? 2,000 specific initiatives throughout the Company that are being tracked. Just all kinds of great work going on here. And I think we're not leaving any stone unturned.

So yes, we are delivering a lot more than what I think the Company thought when it got into this. Company was prudent when it announced what it thought it could achieve coming into the year. We're seeing this come through really strong. Beating the full year in the first half and being able to commit now that $60 million in the back half of the year to really help us offset some of these volume-related challenges in Product Care is really great. And we do see good opportunities as we turn the calendar into next year. So I'm very impressed with what I see, and obviously, we'll continue to stay close to it. The team is doing a great job.

Lori C. Chaitman -- Vice President of Investor Relations

Great. Thank you, Jim. Thank you, Ted. We appreciate everyone's time this morning. Thank you for joining our call, and we look forward to speaking to you soon. Operator?

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Lori C. Chaitman -- Vice President of Investor Relations

Ted Doheny -- President & Chief Executive Officer

Jim Sullivan -- Senior Vice President & Chief Financial Officer

Ghansham Panjabi -- Robert W. Baird -- Analyst

Molly Baum -- BofA Merrill Lynch -- Analyst

Mark Wilde -- Bank of Montreal -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Gabe Hajde -- Wells Fargo Securities -- Analyst

Salvator Tiano -- Vertical Research Partners -- Analyst

Neel Kumar -- Morgan Stanley -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Tyler Langton -- JPMorgan -- Analyst

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