希悅爾 (SEE) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2018 Sealed Air Earnings Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the call over to your host, Ms. Lori Chaitman, Vice President of Investor Relations. You may begin, ma'am.

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

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

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

Thank you, Lori. Welcome to Sealed Air's third quarter conference call. First, I'll recap our third quarter results; second, I will share actions we're taking to improve our performance; and lastly, I'll provide an update on our profitable growth strategy and how our focus on operational excellence will drive a step change in our future results.

In the third quarter, net sales were $1.2 billion, adjusted EBITDA was $219 million, and adjusted EPS was $0.61. We increased sales on a constant dollar basis by 8%, yet EBITDA was only up 4%. This lack of operating leverage was disappointing. As soon as we were aware of the shortfall, we wanted to be transparent, which is why we preannounced on October 17. Given our global footprint, we've recognized we were facing unfavorable currency, higher input and freight costs and geographic challenges stemming from tariffs. Food Care managed through these headwinds in the quarter while the impact on Product Care was more pronounced.

Let me briefly unpack the quarter by division. We delivered a strong third quarter in Food Care, despite currency headwinds and higher input and freight costs. Constant dollar sales were up 6%, and adjusted EBITDA was up 10%. Operating leverage improved sequentially, and it was encouraging to see some of the actions we took just last quarter had an impact on our results. There's still more work to do on productivity and efficiency in Food Care, and that work is currently underway.

Product Care, on the other hand, fell short of expectations. Constant dollar sales growth was up 12%, yet adjusted EBITDA was essentially flat compared to last year and operating leverage was negative. We're not satisfied with this performance, and we're addressing the issues head-on. Global volumes were down 2% in the quarter with a 7% drop in our utility business. This business accounts for 30% of Product Care sales. Competition across our utility portfolio intensified in North America and the U.K., and we experienced a slowdown in China due to tariff uncertainties. We're making process (sic) [progress] on upgrading many of our customers to more sustainable and automated solutions, but this shift is not happening fast enough. We're accelerating our actions in Product Care to take cost out of the business while at the same time, strengthening our sustainability and automated solutions portfolio.

The actions currently underway are being funded by our existing restructuring program. We expect our efforts to eliminate stranded costs from the Diversey sale to be largely complete by year-end, which is 6 to 9 months ahead of plan. This accelerated effort will result in $40 million of annualized savings realized in 2018 as compared to our prior expectation of $30 million. In 2019, we expect to realize another $25 million of annualized savings from these efforts. The projects remaining are being prioritized to address Product Care as quickly as possible.

To achieve operational excellence across our entire organization, we're redesigning our operating model. This encompasses how we innovate, buy, make and sell. We expect to announce a more detailed company-wide plan before year-end to enhance efficiency and productivity in 4 areas: SG&A, product cost, speed-to-market on innovations and channel optimizations.

Taking a step back, I'd like to spend a few minutes on our market opportunities. With respect to Food Care, we delivered 6% constant dollar growth while the protein markets we serve were essentially flat. We benefited from both an increase in our core products and continued market penetration of our new innovations. Sales of our case-ready platform have continued to increase in all regions. Within this platform, we're seeing incremental sales from our sustainable trays and lids that offer extended shelf life, higher consumer appeal and already meet our 2025 sustainability and plastics pledge.

The pipeline for our FlexPrep solution for the fluids market continues to expand, and we're investing in capacity to support future growth. This solution, which integrates equipment, materials and dispensing technologies, provides significant savings to the food processor as well as to the quick service restaurant industry. We are confident Food Care will continue to deliver above-market growth rates on the top line while driving strong operating leverage.

Moving now to Product Care. We're focusing on growth areas that are top of mind with our customers: sustainability and automation. As a result, we're seeing growth in our Bubble Wrap on-demand platform; automated systems, excluding I-Pack, FloWrap, StealthWrap, paper systems and Korrvu, all of which are designed to minimize waste, reduce damage and/or eliminate the need for a box. Today, these value-added e-commerce and fulfillment solutions combined make up 20% of our Product Care sales and year-to-date have grown 10%. The highest growth is coming from our Bubble Wrap on-demand platform. We're driving more growth from automated packaging solutions.

Another growth area we see in 2019 is within our B2B offerings or our specialty industrial applications, which today accounts for approximately 40% of our sales and has been growing in the low single digits. Our B2B customers are increasing pressure to modify their packaging for the small parcel e-commerce fulfillment network, a trend you've heard us talk about called Ship In Own Container or SIOC. With the integration of Fagerdala and AFP acquisitions, we now have an advanced end-to-end offering with integrated fabrication capabilities in our specialty foam and Instapak solutions. Focusing our efforts on our differentiated portfolio and streamlining our utility business will lead to improved EBITDA margins in Product Care.

Let me now shift to an important topic embedded in our strategy, sustainability. I'm excited to share that we've announced a bold new sustainability and plastics pledge, committing to delivering 100% recyclable and reusable offerings by 2025. In addition to accelerating our sustainability efforts within our organization, we will collaborate with partners around the world to increase recycling and reusable rates. This commitment aligns with our mission as a company to lead the industry to a more sustainable future.

I will now pass the call to Bill to review the second quarter results and our outlook. Bill?

Thank you, Ted. Let's start with a review of our net sales by region on Slide 6. In the third quarter, sales increased 5% as reported and 8% in constant dollars. We delivered constant dollar growth across all regions. North America was up 6% and 3% on an organic basis or excluding currency and acquisitions.

Food Care North America was up 4%. Product Care North America increased 9%, including acquisitions, and 2% on an organic basis. EMEA was up 2%, with positive trends in the U.K., Italy, Germany and Russia. Asia Pacific increased 18% in constant dollars and 2% on an organic basis. Food Care Asia Pacific was up 4%, driven by growth in Australia and in New Zealand. Latin America was up 1% as reported and 24% in constant dollars. Volume was up 7% due to increased demand in Brazil and Mexico, where we benefited from new business and a stronger export market within our Food Care customers.

On Slide 7, we present our year-to-date performance. Sales were up 7% on an as-reported basis and in constant dollars, with positive trends across all regions.

Slide 8 highlights volume and price/mix trends by division and by region. In the third quarter, on a global basis, we delivered favorable price/mix of 4%. 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. We were able to get positive price realization in Latin America to offset the currency devaluation.

Volume was up 1% globally. Food Care volumes were up 3%, with positive trends in all regions. Product Care volumes, excluding acquisitions, declined 2% globally due to a 3% decline in North America, primarily related to our utility business.

On Slide 9, we present our sales and EBITDA bridges for the third quarter. I covered sales trends in the last 2 slides, so my comments now will focus on EBITDA performance. Adjusted EBITDA of $219 million increased 4% on a constant dollar basis. Margins were down 70 basis points to 18.5%. Favorable mix and price/cost spread of $17 million, restructuring savings of $11 million and volume of $3 million were offset by higher operating costs of $22 million. Higher operating costs were related to salary and wage inflation, rising nonmaterial manufacturing costs and investments to support our growth programs. Unfavorable currency was $7 million.

Adjusted EPS was $0.61 on average diluted shares outstanding of 158 million shares. Our adjusted tax rate was 28% in the third quarter. We now estimate that our full year adjusted tax rate is going to be 27%, which is in line with our year-to-date adjusted rate.

Slide 10 displays our year-to-date sales and EBITDA bridges. Focusing on our year-to-date EBITDA performance, higher volumes, favorable mix and price/cost spread and restructuring savings were offset by higher operating costs.

Turning to our results by division. On Slide 11, we present Q3 and year-to-date results for our Food Care division. We were pleased with Food Care's results in the third quarter, especially in light of the currency headwinds. Sales were up 6% in constant dollars to $727 million due to higher volumes and favorable price/mix. As we anticipated, equipment sales returned to growth in the quarter, and we expect this trend to continue into year-end. Adjusted EBITDA increased 10% in constant dollars to $145 million or 20% of net sales. Food Care delivered strong operating leverage, and you can see from this bridge that we continue to invest in our operations to support future growth and improve manufacturing efficiencies.

On Slide 12, we highlight results from our Product Care division. In the third quarter, Product Care net sales increased 12% in constant dollars to $459 million. Excluding acquisitions, Product Care sales were up 1%. Adjusted EBITDA of $76 million was essentially flat compared to last year. As indicated in the EBITDA bridge, margin was under pressure as favorable mix and price/cost spread was more than offset by lower sales volumes and higher operating costs.

Let's now turn to our free cash flow for the 9 months on Slide 13. Free cash flow for the 9 months ended September 30 was a source of cash of $80 million, and that includes $42 million of a onetime payment we made in January of 2018 to an outside engineering firm in lieu of certain future royalties. To date, capital expenditures were $115 million, interest payments net of interest income were $125 million, and cash tax payments were $137 million. Restructuring payments dedicated to our core operations were $7 million.

Turning to our total company 2018 outlook on Slide 14. I want to reiterate our 2018 guidance that we outlined on October 17. Full year net sales are now expected to be $4.7 billion or a 5% growth as reported and 6% growth in constant dollars. By division, we continue to anticipate 4% constant dollar growth in Food Care. For Product Care, we now forecast 9% constant dollar growth as compared to our previous 11% expectation. Adjusted EPS is expected to be in the range of $2.40 to $2.45, and I would like to highlight that this represents an increase of approximately 35% compared to the prior year. Adjusted EBITDA for the full year is expected to be approximately $870 million to $880 million, which is an increase of 6%. Currency is expected to have a negative impact on full year 2018 net sales and adjusted EBITDA of $40 million and $10 million, respectively. Unfavorable currency will impact our Food Care results due to its exposure to Europe, to Latin America and Australia. For the full year, our outlook for free cash flow is $350 million. Cash tax payments are now expected to be $165 million. CapEx is on track to be $160 million, and interest net of interest income is expected to be $175 million. Cash restructuring payments dedicated to our core operations are expected to be $15 million. Stranded cost restructuring payments, which are excluded from our $350 million free cash flow outlook, are expected to be $25 million. Our efforts to eliminate stranded costs will be largely complete by the end of 2018.

Heading into 2019, we will incur the remaining $35 million in restructuring payments under our existing program, most of which will be directed towards our core operations. The cumulative restructuring payments incurred in 2018 and '19 of $75 million are in line with our prior expectations.

At this point, I will turn the call back over to Ted so he can conclude our prepared remarks.

Thank you, Bill. In summary, we know we have a lot of work to do. We're redesigning our operating model with a focus on efficiency and productivity improvements and look forward to sharing our plan before year-end. We clearly see the power of our iconic brand, differentiated technology, leading market position and deep customer relationships with more value to be captured in existing and adjacent markets. We look forward to discussing our efforts to achieve higher and accelerated returns on our innovations and become a more efficient organization. Our focus is to drive profitable growth at Sealed Air and enhance value for our customers, our people and our shareholders.

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

(Operator Instructions) Our first question comes from George Staphos with Bank of America Merrill Lynch.

This is actually Molly sitting in for George. We had a few other calls overlapping today. But could you just give some more detail on where competition is gaining on you in the utility areas of Protective Packaging? And kind of more detail on how you're combating this with your automated system.

Sure. First of all, on the Product Care, the issue that we had there was, we talked about our rising cost we had from currency, et cetera, et cetera. But as far as the competition on the price, on the volume where we don't have an automated solution, we would lose out. We think we do need to work, continue to take our cost out of the product and also to drive more of our automated solutions.

Our next question comes from Ghansham Panjabi with Baird.

I guess just following up on the last question on Product Care. Looking back over time, Ted, I mean, significant price increases have been instituted in the past for the segment, including the utility subsegment, I would presume. What was different this particular time around? You still have the same number of competitors, it seems like. Was there any sort of element of destocking of inventory at the end market? And also on your comments on tariffs, can you just expand on that in terms of the impact?

Yes. And I apologize, I didn't do a good job in the first question because I was moving my papers around. On the Product Care, what's moving in the market as we drive to the automated solution, we've got to get our cost down on our products. And so that's what we're fighting with. The issue is raising price on rising cost is not sustainable. We have to take the cost out of those products. What we call as a commodity product is actually the materials that are going into the packaging solution. We have to take that cost down, and we have to take significant action on it. Our productivity has not gained, and we need to work on that. The second piece where the market is going, for instance, in Product Care, where one person would load it - load a package, that's moving now to a semi-automated state where I shared with our Bubble Wrap on-demand system, where instead of a person who can load 4, 5 a minute, with now Bubble Wrap on-demand, we can double that. But where the market is going, how do we go to a lights out warehouse? How do we go to fully automated into systems like our FloWrap or our StealthWrap? Those are actually taking our shrink film materials and driving to a much, much higher level of automation. So we need to do 2 things. We've got to take the cost out of our materials and we've got to accelerate our equipment side of the business on the automation. So I want to answer both questions the second time. The issue on the tariffs. The tariffs are choppy for us around the world. We did see we've had more of an impact on that on the Food Care as the market is moving. We saw the U.S. with the tariffs going back and forth to Canada and then to China. We saw some leveling of that out. We think, over time, that will take place. The tariffs hit us harder on Product Care with the Brexit. But even with some of the announcements we saw this morning, we think, over time, the tariffs will play out because we do have a global footprint. In the quarter, though, it did have an impact to our business. But I think, going forward, I think we'll be able to balance that out.

Our next question comes from Brian Maguire with Goldman Sachs.

Just a question on the portfolio in general. Obviously, really strong results from Food Care to not quite offset the really weak results in Product Care there. And they strike me as 2 very different businesses fundamentally. I know you guys lead through technology in both. But in terms of like what each business is serving and market-wise, quite a bit different. Just wondering, as you're going through the process of taking a hard look at the cost structure, taking a hard look at where restructuring savings can be found, would you consider a strategic review of that Product Care business? And given private transaction multiples are pretty high for plastic packaging companies and some of the good growth in the e-commerce part of it, just wondering if you -- how you would think about potential to monetize that in the given environment and maybe free up the strong Food Care trends from what's been a little bit of a weaker Product Care story in the last couple of quarters.

Sure. We definitely see -- we're always analyzing our portfolio, first of all, so we're looking at that. We're actually analyzing that all the way down to the SKU level on this entire business. We actually do see many synergies in the Food Care and Product Care. And I'm seeing that even clearly now as we pulled Diversey off of the business. If you look at the process of Food Care and Product Care, they both have materials. The materials go through equipment, loading on a process, and we see the channels actually coming in together as well. Our largest customer buying, a food company. We see the biothermal markets coming together using products to load food. So we see the markets coming together. Really, on the Product Care side, it's really a cost issue that we've got to get ahead of. And again, pulling Diversey out, looking at our SG&A, looking at our product cost together as a whole, we see opportunities on the SG&A, opportunities on the product -- on the cost, as well as how we go to market with our innovation in our channels. So we actually see those synergies across the company.

Our next question comes from Scott Gaffner with Barclays.

Just, Ted, going back to the 4 buckets you outlined: SG&A, product cost, speed-to-market and channel optimization. Can you talk about or rank order those buckets? Which one do you think can drive the most step change in ROIC? And why do you think now is different than maybe the last 4 years for those buckets of cost?

Sure. I'll go through each one. First, looking at the SG&A. We analyzed SG&A top-down, looking at us compared our peers. We've also now looked at it bottoms-up. But just to highlight the SG&A, again, pulling out Diversey, if you look at our SG&A as a percent of sales before Diversey, we actually had a gain of 100 basis points on that SG&A. Definitely, we think we have an opportunity with our layers and the complexity of our business on the whole company. I think the SG&A piece, we can go after pretty hard and we think that's an opportunity to go after. The second piece is going after the product cost or the product efficiency or productivity. Again, looking at our business, we've done a nice job of being the price leader. But if you look at the productivity of the business, we've been raising price on higher cost. We think we have a significant opportunity to go aggressive at our cost structure and drive our productivity to a higher level and actually get year-over-year productivity. The third area, on speed-to-market innovation, we are an innovative company. So how do we measure that? Well, we measure by our vitality index, and we say, 10% today of our new products that we're introducing have been developed in the last 5 years. We need to double that. We should be an innovative company that should have 20% of its portfolio from products that were developed in the last 5 years. We have a significant opportunity to improve our innovation. And the last one is the channel optimization. Again, the Food Care business goes highly direct. The Product Care goes through distribution. We think we have an opportunity to do a much better job at our channel optimization. A 100% dedicated distribution team can do significantly more for our profitability than where we are today. All of this is what we're building to see, we shared with you before that 20% -- 25% productivity on the leverage that we need going forward. We have to focus on these 4 elements to go and to take that well north of that 25% year-over-year leverage. And that's what we're designing into our new model going forward.

Our next question comes from Anthony Pettinari with Citi.

This is actually Bryan Burgmeier sitting in for Anthony. Just thinking longer term, is there any reason why Product Care can't get back to its legacy margins in the 20% range? And what would you consider to be normalized volume growth for this business now?

For the first question, absolutely. The Product Care business, we think, we can get there. And as I outlined those 4 buckets we're going after on the productivity, on the cost, we want to get there faster. On the second piece, on long term, we think we have a great business here because we -- the markets we serve are basically GDP. What we have to do is beat the market through our innovations, and so drive a higher level of growth in GDP. So going forward, we think we have a business that we should be beating -- marginally above GDP.

Our next question comes from Chip Dillon with Vertical Research.

This is Salvator Tiano, filling in for Chip. My question is on Latin America. You noted that things went well in Mexico and Brazil. Can you give us some more color in terms of volumes for these 2 countries? And how are things expected to shape up there over the course of 2019, given what seems to be very good performance so far in 2018?

I'm sorry, can you repeat that? I think you're talking about Latin America. Did you ask specifically about Brazil and Mexico? I just -- I didn't hear your question.

Yes. Yes, I'm sorry. So how are volumes shaping up in Mexico and Brazil? You noted things are looking well. How should we think about these regions as we go into 2019?

Bill, do you want to take that?

Yes. So definitely, from a volume perspective, very happy with our results in Latin America. Excluding acquisitions, from a total company perspective, we had a 7% increase in volume. We were very happy, especially in our Food Care Latin America business because in the face of a very, very unfavorable FX environment, we were able to pass those FX increases on to customers and have a very, very strong performance there in our Latin America business. So we're highly pleased with our results in Brazil, relative to the strength of the Food Care business, the expansion of sales of existing customers, of new customers. And we're happy with Mexico as well. We're very optimistic for that Latin America business as we go looking through the balance of 2018. We've not, at this point, highlighted any guidance for 2019, but our optimism relative to our Latin America business continues.

Just one other piece on that. The Latin America and our global presence has helped with the tariffs and some of the trade issues. Having a strong base in Brazil and in Mexico, specifically in the fresh red meat market, has opened us up where we've had some tariff issues going back and forth to Asia Pacific and the U.S. Our presence in Brazil has helped on that growth, and that should help us going forward.

Our next question comes from Daniel Rizzo with Jefferies.

You mentioned improvement in the vitality index, I think over the next 5 years -- sorry, over the next couple of years, doubling it. I was just wondering what segment or subsegment do you see the most opportunity for that.

We see it actually in both. If we look at our pipeline of innovations, some pretty exciting things are going on. And both of them are focused on the automation. On the Product Care side, as we are moving, our customers are struggling with labor, cost of labor, scarcity of labor. So how can they actually load more cases into their packages? So some of our innovations, such as our FloWrap, our StealthWrap, how do we bring some automated equipment, automated solutions? We're pretty excited about that. On the Food Care side, we see some exciting opportunities that are actually moving this year as we move our flexible packaging into the rigid container market. I have mentioned in my prepared remarks, our FlexPrep that we're going after in the condiments market. We're seeing great traction there. We're investing in more capacity. So we just need to pull those innovations where we can really solve some significant problems in the market quicker and faster.

Our next question comes from Anojja Shah with BMO Capital Markets.

I just wanted to ask about M&A and how you're thinking about it right now. Are you sort of putting a pause on that while you focus on taking costs out of Product Care and on share repurchases? Or are you parallel processing? Or just generally how you're thinking about M&A.

On the M&A side, we're, as part of our capital allocation, we're looking for that to be opportunistic, obviously, with our share price on the buyback. The M&A that we've done so far has been accretive looking for -- in the Product Care. Part of the Product Care is the fixed part of our portfolio where we can grow faster. So we have been looking in the integrated solutions and in the automation space, so we can go faster in that area. Also, we're looking at the opportunities in our Food Care business, as we can drive an accelerated rate in bringing flexible packaging to the rigid container market, looking at liquids, et cetera. So we're comparing those with our capital allocation structure to be opportunistic where we can.

Our next question comes from Rosemarie Morbelli with Gabelli & Company.

I was wondering if you could talk about the beef cycle in North America, Australia and then Latin America. And looking at your vitality index target of 20%, that is kind of low versus a lot of companies. So is that the first step, and then you can move forward to a higher level like 30%, 35%?

Yes. The first question, on the meat market. Looking around the world, we definitely see the -- it was actually flat in the quarter for us, where we think still for the year, it's going to be positive, looking at the market being a little less than 2%. We think we'll actually be ahead of that. We're seeing still fairly strong in the U.S. and Brazil. I was actually in Russia this quarter, and I got to see our largest customer in Russia doing quite well. So Australia continued to see growth. As far as the vitality index being low, going to 20%, we're at 10% today. So doubling that is quite good. Now our business, though, if we look at Food Care and Product Care, we just need to accelerate. We have a very stable business, so we don't have that same vitality index of an Apple or a software company. But we also have the great -- the materials that go through all that. So moving from 10% to 20%, I think, is a pretty aggressive target. And we're putting plans in place to make that happen.

Our next question comes from Tyler Langton with JPMorgan.

Just had a follow-up on Product Care volumes. I guess you mentioned, I think, utility volumes were down 7%. And I guess, that's, I think, around 30% of the business. So is that just kind of saying sort of the rest of the business is kind of, I guess, flat to maybe modestly up? Just kind of any details on sort of volumes and sort of outside the utility business.

Yes. The -- if we look at -- we break it up, on the utility business to be down, we're actually -- I think I've put in our prepared remarks, our specialty business is up in low single digits. And actually, our value-added in the automated space, we're actually up in the double digits. So we got hit by what we've called the commodity in our utility business and the shrink is we actually had a year-over-year decline.

So our value-added e-commerce business is actually, on the year-to-date business, up 10%, and that includes our automated systems, our inflatable Bubble Wrap, Korrvu, et cetera. So we're very excited about the year-to-date performance of that business. We do see our shrink business a little bit on the decline. We saw that in Q3. We saw that in Q2. We talked to you about the nature of those particular products relative to shrink that goes around magazines, CDs, DVDs. And so some of that is just the dynamics of the purchasing marketplace there. But we're definitely focusing on our value-added solutions.

And that shrink business is still roughly 10% of Product Care and is outside of that utility piece, which is 30%. Hope that clarifies that.

Our next question comes from Edlain Rodriguez with UBS.

Just maybe I missed it, but if I did, apologies for that. Clearly, there's been a shift in strategy in Product Care. Now you're focusing more on mix price over volume. Like what's behind that shift? Is it a question of returns not high enough, not acceptable? Just trying to get a sense of exactly what you're trying to achieve in there and why that major shift in strategy?

Yes, I wouldn't say it's a shift in strategy. Raising price on rising cost, that is not the strategy. We need to get the value for what we deliver. And we have to work harder on the cost out. I really want to separate those 2, and that's part of the operational excellence we need to do in the Product Care. We do think we have an issue with the portfolio, where the SKUs that we have, a very large portfolio in the product line, where we need to take more significant cost out, but we also think we have margin opportunities where we have some extremely highly differentiated products. So really want to separate that. It's not a price volume strategy. It's just the maximum value we can for how we differentiate products, but we need to do a better job in taking the costs out of that business. And we need to be more aggressive to make that happen.

It is very true that you've seen a high price/cost spread and mix and a low volume for several quarters. And I think a lot of that can be explained by the strong pricing discipline that we have in both our Product Care business and our Food Care business. And because we have had such a strong discipline, we have seen some weakness on the volume side.

Our next question comes from Gabrial Hajde with Wells Fargo Securities.

I guess I was intrigued by the comment about focusing on the channel in which your Product Care, I guess, sales are sold through, kind of going direct to customers as opposed to using a distribution channel that's been there for a long time. Can you talk about sort of just what's speaking to you there, Ted, in terms of whether its costs or more opportunity to deeper penetrate customers or what have you?

Yes, I think I was talking about both businesses' sales just for clarity. The Product Care business is 70-30 going to our distribution channel to direct. Food Care is the opposite, even higher going fully direct. What I was focusing on, when we go through our distribution network, we think we have an opportunity to drive that and really segment that very clearly. Where we have loyal, dedicated distribution base, we should be able to get a higher penetration and a higher value for our products. We think putting some discipline, more discipline into how we serve our distribution channel, we think we can add value and actually get better margin and provide better service for our customers. The direct side of the business, on the Product Care, that's where the solutions come through. As we're working with our customers, we're talking to different people that are driving the automation. If we're talking to the top level of the business, where they want to transform their operations, reduce their labor costs, there -- when they're looking for an automated solution, that's a capital-intensive decision, and that's the part that we need to get a -- do a better job of -- to drive our automated solutions in Product Care. But the same thing works in Food Care. Where we're selling our highly automated solutions to the B2B and to the end-user is focusing on that capital-intensive decision to put in one of our systems, but then still maintaining the account where the materials are coming through. So for both businesses, but for the -- working on our discipline on the distribution is more of a Product Care situation.

Our next question comes from Arun Viswanathan with RBC Capital Markets.

Yes, you guys, I guess, have had some headwinds in the form of input cost and FX and freight as well. I guess, I just wanted to understand, in the utility area as well, why your competitors may not necessarily be seeing as much pressure in those areas? Or if they are, what gives them a little bit more ability to be more competitive on price? And do you see any changes there over the next year or 2? Or do you think that's still going to be a challenge for you?

I think it's a little -- it's more than saying that it's the competitors, it's really focusing on the market. If we look at our shrink film, which is the one that we've talked about if you pull that in the utility business, the primary markets for shrink film have been markets that have actually been contracting. Selling shrink film to the DVD, CD, magazine wrapping market have been declining. So it's not necessarily losing it to the competition, it's that we've got to direct that to a growing market. For instance, anybody who has a box, we can wrap it and shrink -- and use our shrink film to do that significantly at a lower cost. Also, the shrink film is what goes into our FloWrap. As we drive our automated solution, we need to go faster with our automated packaging that actually pull through that shrink film. So it's not necessarily that we're losing it to competition, we've got to be pointing at the growing markets for those products.

And on the FX, I mean, we have definitely seen some headwinds there. When we rolled out our guidance for the full year of '18 from a total company basis, we saw that we were going to have tailwinds in FX at the adjusted EBITDA level of $20 million. Now it's headwinds of $10 million. So that's basically a $30 million swing from a total company perspective that we've seen on FX alone. We've basically seen the market applying some increases in resin prices as well. And one significant cost for us has been our freight cost. And even though we did go out with a price increase in April of 2018 in our Product Care business, freight cost has continued to increase for both Food Care and Product Care, and we've had a much more pronounced impact as far as the increase on freight cost within our Product Care business than we have in our Food Care.

And we have a follow-up question from George Staphos of Bank of America Merrill Lynch.

And we have another follow-up question from Scott Gaffner with Barclays.

Just 2 quick things. One, Ted, if I look back at 2011, your new product vitality for the company was something closer to 17%. You're saying, today, it's now 10%. So can you sort of bridge what's happened? I know you weren't there the whole time, but what led us to 17% -- from 17% down to 10%? And then within Product Care, it seems like there's been significant consolidation on that commodity utility side of the business. How has the overall competitive landscape really changed within Product Care?

Okay, so we probably need to go off-line on the -- when I went back to 2010, I took it out of Diversey. So we've got to be careful what's in there for Diversey and what's in there for the rest of the company. The 2010 is where I was taking some of the analytics before. But the current state of where we are, right or wrong, is in that 10%, what we have for the vitality index. So I can't comment to what was in the previous years you had, just what we're dealing with right now and what we've got to go fix. And the second part of your question, Scott?

Sure. It's really on Product Care and the level of consolidation that we've seen away from Sealed Air? I think there's been a lot of consolidation in the some of the more commodity utility players within the industry. Has that significantly changed the competitive landscape within Product Care?

I think so, yes. And that's, again, why we've got to get our cost right so we can compete. If we can't get the differentiated value for our products, we've got to take the cost out to go get that in that part of the space. But also, we need to work with -- we have a pretty strong channel with our distributors. We need to work to make sure that we find out what we need to do to get that business. If it is a cost-based business, we're going to take our cost and be competitive there. But also, I truly believe it's part of that automation side, and we have some opportunities today.

Thank you. Ladies and gentlemen, thank you for attending today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.