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Sealed Air (NYSE:SEE)

Q4 2012 Earnings Call

February 19, 2013 11:00 am ET

Executives

Bill Thomas

Jerome A. Peribere - President, Chief Operating Officer and Director

Carol P. Lowe - Chief Financial Officer and Senior Vice President

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Scott Gaffner - Barclays Capital, Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Philip Ng - Jefferies & Company, Inc., Research Division

Operator

Good morning, everyone, and welcome to the Sealed Air conference call discussing the company's fourth quarter 2012 results. This call is being recorded. Leading the call today, Jerome A. Peribere, President and Chief Operating Officer; and Carol P. Lowe, Senior Vice President and Chief Financial Officer. After management's prepared comments, they will be taking questions. [Operator Instructions]

And now at this time, I'd like to turn the call over to Bill Thomas, Assistant Treasurer and Interim Director of Investor Relations. Please go ahead, Mr. Thomas.

Bill Thomas

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 today. 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 the statements made during this call stating management's outlook or predictions for the future are forward-looking statement. These statements are made 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, which applies to this call.

Additionally, our future performance may be different due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K, as updated by our quarterly reports on Form 10-Q, which you can find on our website at sealedair.com. We also discuss financial measures that do not conform to U.S. GAAP. You may find important information on our use of these measures and their reconciliation to U.S. GAAP in the financial tables that we have included in our earnings release.

Lastly, we have used pro forma results for certain metrics related to the full year to aid in the comparison of our performance to historical combined metrics of Sealed Air and Diversey. These pro forma results are available as supplements on our website.

Please note that we will end our call by noon today with Q&A wrapping up by 11:55 a.m.

Now I'll turn the call over to Jerome Peribere. Jerome?

Jerome A. Peribere

Thank you, Bill. Good morning, everyone. I would like you to note that for personal reasons I had to travel to France, and this was not planned. So therefore, I am taking this call from France and Carol is in Riverfront, New Jersey with her team. So we ask for your patience as we address your questions during the Q&A section of our call.

I would also like to note that Bill Hickey, Sealed Air's Chief Executive Officer for the past 13 years, will be retiring effective March 1. And on behalf of all the employees of Sealed Air, I would like to personally thank Bill for his 33 years of service at Sealed Air.

Getting started now, and on Slide 2 of our presentation. Today marks the first time that we publicly report on our new business segment structure. This change corresponds to how we are managing the business and is an important next step in the direct -- in the Diversey integration. We have filed an 8-K, which will provide you with information on which businesses have been combined to form our new reporting segment.

Our Food & Beverage division represents about 49% of our total sales; Institutional & Laundry, 28%; and Protective Packaging, 21%. Additionally, our regions are grouped to correspond with how we view the regions internally. Our regions are: North America, which are 39% of our sales; Europe, 33%; Latin America, 11%; AMAT, Asia, Middle East, Africa and Turkey, 10%, which is, as I just said, composing of these regions; and finally, Japan, Australia and New Zealand, which accounts for 7% of our sales. We finished 2012 with $7.65 billion in revenue, with developing regions comprising 24% of our net sales.

And moving on to Slide 3 of our presentation. I am pleased to report that our adjusted EBITDA was up 17% for the quarter versus the prior year. All of our divisions have had year-over-year improvement in adjusted EBITDA and margin. This improvement was achieved in the face of continuing challenges in Europe and particularly in Southern Europe. Sales in Europe were down 4% and down almost 1% on a constant dollar basis for the quarter. France was down 13%, and in fact, 5% excluding -- are related to foreign exchange and Germany declined 3%, but this was all on unfavorable currency.

Let me also give you some flavor in the challenges in Southern Europe: Italy was down 7%, 6% FX related; Spain was down 11%, 5% FX related; Portugal declined 21%, 5% FX related; Greece declined 11%, 5% is currency. And we also noticed higher levels of de-stocking at many of our North America customers during the latter half of the quarter. Fortunately, that trend has not continued and sales in January support our de-stocking observation. Tight put-in supplies in North America also continue to pose a challenge, and these challenges are partially offset by continuing growth in developing markets, specifically Latin America, where we achieved 13% constant dollar sales growth and AMAT with a 9% constant dollar sales growth. And more importantly than just growth, these regions are giving us profitable growth. We completed the sale of Diversey Japan in November and used the net proceeds of $313 million to accelerate progress toward net debt reduction. For the quarter, we reduced net debt by over $480 million.

Our Slide 4 summarizes our year-over-year and sequential performance versus the third quarter of 2012. We continue to achieve positive momentum across a number of key metrics. We are making progress in achieving net sales growth with geographic expansion, developing new and expanded customer relationship and demonstrating the strength of our sustainability, value proposition to customers, which I will talk a little more about shortly. We continue to recognize strong cost synergy. For the quarter, we benefited from $35 million in cost synergies and full year cost synergies totaled over $100 million. These synergies resulted from a mix of headcount reduction, elimination of redundant costs, plant consolidations and procurement and logistics savings. Additionally, we have initiated a range of initiative affecting our pricing structure and policies across all our divisions, and these initiatives will gain momentum as we go forward in 2013. Although demand increased in Q4 versus Q3, adjusted EBITDA and margin declined sequentially. We incurred approximately $10 million in SAR expense in Q4. We also incurred greater advertising and promotion expenses that are seasonally higher in Q4 and also expenses in Europe tend to be lower in the third quarter as this is a heavy vacation season.

Let's move now to Slide 5. This slide reflects our regions, which cover our 62-country footprint, which continues to give us leading reach and greater opportunity for internal growth than our peers, and we sell into 175 countries. We had very strong growth in Latin America and AMAT, which helped offset some weaknesses in Europe and Japan, Australia and New Zealand.

Turning to Slide 6. Food & Beverage sales increased 2.4% on a constant dollar basis, with 5.6% organic growth in hygiene solutions and 1.7% in Food Packaging and Food Solutions. Regionally, we have double-digit growth in AMAT and Latin America, where our established footprint and strong market presence in Brazil allowed us to benefit from the rising beef production rate in that country. And while supplies -- protein supplies in North America have negatively impacted our year-over-year performance, we continue to outperform the industry growth rate. For the fourth quarter, our North America fresh red meat packaging product increased sales by approximately 2% compared with an almost 5% decline in beef supply in North America. The gain was partially offset by a 0.7% lower price mix due to pricing pressures in Europe and the impact of contract pricing in North America, causing us some -- to lag some raw materials cost increases in our pricing. Adjusted EBITDA increased by 10.4% and reached a margin of 15.6%, compared with 14.3% in Q4 2011. And the adjusted EBITDA margin benefited from higher volume, cost synergies, expense control and a multi-year network optimization program for legacy Sealed Air.

I would like to comment on some of our new product sales for the F&B division during the past year. In 2012, we commercialized over a dozen products that drove new sales across multiple regions. Many of our innovations were driven by customer and consumer demand for greater convenience features on packaging, such as our Grip & Tear feature on bags, easy open/reclose on rollstock, including our new FoldLOK pouch system and ovenable materials. Among the products we are most excited about are the Grip & Tear bags. This barrier bag is designed to provide a convenient feature for opening a vacuum package. This product is typically used for the -- for in-the-bag merchandising of products that benefits from extended shelf life. And in most cases, the easy opening feature is accompanied by printed instruction for promotional cooking of the product.

One of the biggest drivers for our Food & Beverage business is the global demand for food safety and security. For example, we eat more meals outside the home and more food and ingredients come from all over the world. Our Freshness Plus films combined with our Vertical Pouch Packaging program not only keep food safe as it travels longer distance, it extends shelf life and maintains the integrity of the ingredient. Our Vertical Pouch Packaging program has expanded by near double-digit rate.

When you combine programs such as these with the sustainability hygiene solutions of Diversey such as clean in place and PET bottle track cleaning, we bring a very compelling value proposition to our customers, providing safety, operational efficiency, shelf life extension and product brand protection.

On to Slide 7. The I&L division has the largest exposure to Europe of any of our divisions, with almost half of the I&L sales coming from that part of the world. Obviously, the economic situation in Europe, particularly Southern Europe, is offsetting the good news that we had in other parts of the world. Consumer brand sales have declined 31% for the quarter, with Southern Europe declining 21%. Machine sales in Europe declined 4.3%, but 17.1% in Southern Europe. Overall, net sales increased 2.4% on a constant dollar basis, with 0.7% higher volume and 1.6% higher price mix, but were flat on a reported basis due to unfavorable currency translation. Volume growth was more significant in Latin America, with new customers in Brazil and Mexico and AMAT, particularly in China and India. North America had a very strong Q4 '11 due to a major consumer brand push, making for a difficult year overall comparison. Even so, North America had some new business in the health care sector, business that we won from some of our larger competitors. On that note, I'm very happy today to announce that we have an agreement in principle, with one of the largest global hospitality chain with a few thousand hotels to be their nominated hygiene solutions supplier globally. The majority of the hotel rooms for this new customer are in the U.S. And this agreement demonstrates our commitment to the growing global hospitality industry and exemplifies our agility to meet our customer needs no matter where they are in the world. Most importantly, I believe it demonstrates the strength of our sustainability value proposition, providing solutions that among other things, deliver consumers higher operational efficiency and reduce waste. This is clearly just one of many examples of the potential we have in this company and shows how sustainability can be a great competitive advantage when you can demonstrate cost and performance on top of sustainability.

And finally, let's talk about the Protective Packaging division on the Slide 8. Sales increased 1.5% on a constant dollar basis with higher volume, partially offset by lower price mix and unfavorable currency translation. Volume growth was 4.8% in Latin America and expanded market presence and strength in e-commerce application, which showed solid performance during the holiday shopping season, resulting in 4.4% growth in North America. Our packaging system products like Fill-Air inflatable void fill and inflatable bubble cushioning and mailer solutions are ideally suited for faster growing e-commerce and third party logistics application. We also have new products such as Opti shrink film, a micro layer technology enabling higher performance films. This product results in lower total cost for our customer and an improved environmental footprint. We experienced volume challenges, particularly in Australia and New Zealand, were largely due to the impact of a stronger Australian dollar on exports out of that region, as well as lower demand out of China. Competitive pricing pressures also negatively impacted the performance of Protective Packaging in Q4 as many of our competitors did not move to recover raw material cost increase. We are taking action to recover our material cost increases and all of the Sealed Air businesses understand that I consider it unacceptable not to cover these cost increases.

And now, I will turn the call over to Carol Lowe, our CFO, to discuss fourth quarter financial results in more detail and highlight our outlook for 2013. Carol?

Carol P. Lowe

Thank you, Jerome, and good morning, everyone. Before we review the remaining slides in our earnings call presentation, I would like to note that we will make available a quarterly summary for 2012 of net sales and adjusted EBITDA by our new segment structure. This information will be made available by the end of this week on our website.

If you are following along with our presentation, Slide 9 summarizes our consolidated adjusted EBITDA performance. Q4 year-over-year constant dollar adjusted EBITDA improved 17% on $51 million in volume increases, which contributed $17 million to adjusted EBITDA and $35 million in cost synergies as previously highlighted by Jerome. These year-over-year favorable impacts were partially offset by a negative price cost spread of $11 million, higher operating expenses and additional resource investment in high-growth developing regions. While we achieved volume growth and favorable currency impact in Q4 as compared with the third quarter 2012, our adjusted EBITDA and related margin declined modestly on a sequential basis. Jerome noted the $10 million in additional SARs expense in Q4, resulting from the increase in our company stock price during the quarter. The additional sales and marketing expenses were also approximately $10 million in the fourth quarter. I would like to note that $10 million increase from Q3 to Q4. I'd also like to note that Q4 and our full year benefited from a reduction in our core effective tax rate. Full year 2012 adjusted earnings per share benefited by approximately $0.04. The core tax rate was reduced by some year end transactions, which will also lower our core effective tax rate in the current year.

Turning to Slide 10. You will note that Q4 continues to be a strong cash flow quarter. Adjusted free cash flow from continuing operations was $266 million for the quarter and $405 million for the full year. Full year 2011 adjusted free cash flow was $318 million. A reduction in net working capital was the primary source of cash for the quarter, with inventory reductions accounting for approximately $125 million, partially offset by a reduction in accounts payable. Working capital improvement resulted from targeted programs to reduce inventory and normal seasonal patterns in receivables. Accounts payable balances declined during the quarter in concert with our inventory reduction. Working capital was a use of cash for the full year, with a modest increase in receivables and a decrease in accounts payable more than offsetting the $41 million decline in inventory.

Foreign-exchange translation had a $14 million unfavorable effect on full year 2012 performance. We have programs in place to achieve working capital improvements in the current year as part of our focus on improving cash flow. Capital expenditures of $124 million in 2012 were roughly equal to those in 2011. With capital investments representing 2% or less of sales in both years. Our capital expenditures have been less than our depreciation expense of $170 million in 2012 and $147 million in 2011. I will speak to our need for slightly higher investment in 2013 when we cover our outlook.

Moving on to Slide 11. Cash and cash equivalents were $680 million at the end of the year, an increase of $140 million from September 30. As of December 31, we had total cash and committed liquidity of $1.5 billion, and our net debt was $4.8 billion. Net proceeds from the sale of Diversey Japan of $313 million were used along with the cash flow from operations to reduce our net debt in Q4 by $483 million. As you think about 2013, please remember that we tend to use cash during the first half of the year and generate cash in the second half of the year. In the fourth quarter, we refinanced a portion of our term loan, resulting in annualized cash interest savings of $6 million. We also refinanced our 5 5/8% senior notes, which were scheduled to mature this July, with $425 million of 6.5% senior notes that mature in 2020. Thus reducing our near-term funding requirement, and it's moving our debt maturity schedule. We have included our new debt maturity ladder as an appendix to the presentation. We will continue to look to the market to opportunistically extend our maturities and/or reduce our interest rate. We continue to plan to use our excess cash flow to pay our dividend, reduce debt and prudently invest in the business.

Slide 13 highlights our outlook for the current year. While our top line growth outlook is tempered by flat to negative GDP growth projection for Europe and low single-digit growth estimates for the United States, we are estimating 2013 net sales in the range of $7.7 billion to $7.9 billion, which compares with the $7.65 billion net sales for 2012. Our focus on quality of earnings improvement is estimated to realize adjusted EBITDA in the range of $1.01 billion to $1.03 billion. Adjusted earnings per share is estimated in the range of $1.10 to $1.20.

We continue to estimate the total restructuring program benefit will be between $195 million and $200 million through 2014, an incremental benefit of approximately $90 million in 2013 compared with 2012. I would like to remind you that we have a heavy employee base and part of this $90 million in savings over 2012 from the restructuring program will be used to fund inflationary cost for that employee base of approximately $50 million to $60 million. Our free cash flow, defined as cash flow from operating activities less capital expenditures, is estimated at approximately $300 million to $350 million in 2013. This estimate is net of approximately $70 million in restructuring payment. You should compare the $300 million and $350 million with free cash flow of $280 million in 2012.

The $405 million of adjusted free cash flow presented on Slide 10 excluded approximately $80 million of restructuring charges and other balance sheet changes of approximately $40 million. 2013 estimated free cash flow will also be impacted by higher capital expenditures as compared with 2012. As I previously noted, our capital investments have been 2% or less of sales for several years, and our spend has been less than depreciation expense. In 2013, we estimate capital spending of approximately $160 million, which will include investments for targeted strategic growth, as well as cost-reduction projects. Our capital spending will also include approximately $20 million related to the rollout of our ERP system to certain legacy Diversey operation. This rollout will be a multi-year project, with completion estimated for 2015. Our interest payments are estimated at $320 million, and our core effective tax rate is estimated at 26% for the current year.

I would like to also briefly comment on the potential impact of the recent devaluation in Venezuela. We estimate the 32% devaluation announced by the Venezuelan government on February 8 will result in a loss of approximately $10 million to $15 million in the first quarter, and that is a pretax loss. And that's mostly due to trapped cash balances that are held in local currency. The outlook I just described does not include this potential loss as it would be an add back as a not normal operations in the way we present adjusted EBITDA and adjusted earnings per share. We would like -- we, like other companies with business in Venezuela, have been challenged in ways to minimize our exposure to the fluctuations in that economy, particularly with cash balances. We could have operational losses related to the currency devaluation, but that impact is unknown at this time. Our total annual sales in Venezuela are less than $50 million and that was prior to the currency devaluation. I'd also want to highlight though that they are profitable sales with a double-digit margin.

Before turning the call back to Jerome to lead the Q&A, I would like to note that we have included in the appendix of the presentation a summary of our 2012 adjusted earnings per share calculation for your reference to assist in how we go from our adjusted EBITDA to our adjusted earnings per share number.

And now, I'll turn the call back to Jerome. Jerome?

Jerome A. Peribere

Thank you, Carol. Operator, I would like to open the call up to any questions from the participants.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of George Staphos from the Bank of America.

George L. Staphos - BofA Merrill Lynch, Research Division

I guess, first question I had, you mentioned in the press release, you're going to be aggressively managing the cost structure and also paraphrasing here, you're going to be even more decisive in taking action on pricing. Directionally, we know what you mean by that, but could you give us perhaps a bit more color where you need to do the most work on both areas relative to your various segments and then I have a follow-on.

Jerome A. Peribere

So 2 questions. The first one is on the cost. The second one on the pricing. With regards to the cost, we are not done with our cost synergies, and you have noted or in the document it is written that we have approximately another $90 million of cost synergies to grow, so that's one. The second on -- and continuing on this, you know Europe is going to have around 0 GDP growth in 2013. I don't know what you think 2014 is going to be, but I think it's going to be many years before Europe comes back and enjoys a 2% GDP growth. As a result of that, and given our employee base in our structure, we need to make sure that we remain cost competitive, which means that we will need to make sure that our cost don't overinflate compared to the size of our growth potential, which by definition is going to be limited. So with regards to pricing, my observation is that we -- still there has not been a price champion and has not necessarily been paid for its IQ and if you allow me a second here, we are not a bag, a food protein bag seller. We are not only a protective packaging product seller. We have a lot of IQ. Our people design plan with our customers. They apply Lean Sigma technology to help shape the plant, the equipment and finally commercialize products because we produce equipment also. We're not rewarded for this. So that's one side of our pricing, which I think that we need to understand better. And the reason why I say that is that either the customer values those kind of IQ, and we need to be paid for it, or they don't. In that case, we need to stop serving them with this kind of service. And then next to that you have the inflation or the volatility of raw material. And here I come from an industry where -- and that I know pretty well, which was more basic integrated and where the ethylene prices and the propylene prices at the beginning of the year 2000, they were slowly moving up and down. That's not the case anymore. Now raw materials, ethylene, ethane, propylene, propane, et cetera, benzene, et cetera, they move very quickly. We can't leave the price protection that we were having. We need to be very diligent in passing those because we just simply don't have the margin to absorb them for a period of time. So my motto in Sealed Air is, the leader leads, we need to be prepared to lead in pricing when we lead in the market.

George L. Staphos - BofA Merrill Lynch, Research Division

My follow-on would be, do you feel you have enough intelligence at this juncture in terms of your competitive positioning, the value add that your products are bringing to your various customers and their verticals to go at pricing and not disadvantage your business, not lose market share that you ultimately wouldn't want to lose? Ultimately, there'll be some mistakes in the process, but how do you feel about your intelligence at this juncture?

Jerome A. Peribere

I will conclude by saying that there are tools. There are -- there is technology to assess pricing and by definition nobody wants to make a stupid mistakes, but things are -- we want to be prudent, but again, if the leader doesn't lead then there are issues, and I believe that -- it's called isoprofit curve, and those are models that we need to work on, et cetera, but I don't think it needs to be necessarily a confrontation. We are entitled to get reinvestment to have reinvestment economics. This is no more. And everybody wants strong supplier. And in some segments, we don't have reinvestment economics, and we need to be better at that.

Operator

Your next question comes from the line of Ghansham Panjabi of Robert W. Baird.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Can you give us some parameters on this new operating structure, operating segment structure you have per unit on how we should think about volumes as we look at '13 versus '12? And I guess, there's a lot of -- you touched on the protein supply, for example, in the food side, but there's also a meat contamination scare in Europe. I wonder if that's also factoring into your outlook there.

Jerome A. Peribere

Why don't you start, Carol, and I'll talk about Europe meat contamination.

Carol P. Lowe

Okay. So Ghansham, if you're asking about a breakdown by region for 2013, we're not providing that specificity. What we will say is that, for the European region, we expect, as Jerome commented, kind of flat growth. The economy there will be flat to negative as been published for North America and specifically with the United States, less than 2% growth there. We think we'll slightly outperform what the GDP growth will be for North America. We are projecting that we will have nice growth within the developing region, within the Latin America countries, specifically with Brazil, and then with what we classify as AMAT, which is Asia, Middle East, Africa and Turkey, that we will have solid growth rates there. Typically, within the developing regions, we'll see high single-digit to lower double-digit, we -- so those would be our expectations. Does that answer, address your question?

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Yes, and then the contamination issue, Jerome?

Jerome A. Peribere

So the contamination, you can imagine that we are following this from very close. We are constantly talking with our leading customers. And at this minute, it looks like the most affected food segment is the prepared food. Luckily enough, we are small in the prepared food packaging segment. So we are not that worried about an immediate impact. There is some potential speculation that there might be an increase in the fresh meat and in the freshly packed meat in supermarkets. But we're not anticipating this at this point in time, but I hope this gives you some help.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Yes, and just a follow-up, kind of piggybacking on George's question, so if you kind of think about the EBITDA bridge '13 versus '12, you gave us some parameters, right, volume, synergies. If you look at price cost specifically, do you expect that to be positive, neutral or negative for 2013 versus '12?

Jerome A. Peribere

Well our objective is to recoup at least our cost increases.

Operator

Next question comes from line of Phil Gresh of JPM.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

The first question is just, as we think about the resegmentation of the businesses, and I look at the EBITDA margins of Institutional & Laundry versus Food & Beverage and Protective Packaging, and George was kind of asking about the cost versus the pricing elements, I'm just kind of wondering how you feel about what levers you have available within that business to improve your margins. Do you feel like pricing needs to be a big element of that or do you feel like it's cost savings or is it a business that's structurally going to be lower than these other businesses, just some color on how you're thinking about it?

Jerome A. Peribere

So I&L. I&L is having clearly unacceptable EBITDA margins at this point in time. And therefore, we are working on several fronts. Number one, we're working on our cost structure. Specifically, in the geographies where we're most exposed, which is the European region. And as a result of that and given the cost of delayering in Europe, you know that this is something that we are taking, that we are making, but we're making it carefully. Second, we are accentuated our growth in emerging countries. We are very satisfied with the progress that we're making in Asia, Middle East, Africa and Eastern Europe. With our growth in I&L, including also in Latin America. We're doing very well. We have double-digit growth in most of the places where we are operating. And most of the time, we are gaining market share. And this is where you're going to see us continuing to make this proportional investment. And finally, no I do not expect to be aggressive on price because I don't think pricing is the solution. I think that we are going to be making a lot of progress as soon as we can convince our customers that we have critical mass and that we are a credible alternative to what their current solution is. And when we have them, that we can continue offering them improved better solutions than the ones we are currently offering them. This is therefore going to convince them that we have critical mass everywhere and that we have improved and better sustainable technology because we do have compared to our -- their alternative, we believe better and improved sustainability solution. And as a result of that, we expect that we are going to be growing. So it's not cost, cost, cost reduction. It is specifically more of that in the places where we believe we unfortunately cannot count on growth to help us. It is this proportional investment where we believe that we have the competitive advantage and where there is growth, and it is also sustainability, which we count as being our enhanced value proposition.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

My follow-up question is just on the red meat side. There's significant outperformance there in the fourth quarter. And is that something you see as sustainable in 2013 and what would you say are the key drivers of why Sealed Air is doing so well in this area?

Jerome A. Peribere

So a mix of several things. Number one, we're coming back -- you have negatively reacted to our second quarter, and this might have been an overreaction. We believe that our product stewardship, our innovation and those kind of things are enabling us to more of the kind of margins that your have seen in the third and in the fourth quarter than the ones that you have in the second. That's one. So back to normal, I would say. Second, we have introduced new products, which have a lot of traction. Third, we are not only red meat dependent in our Food Packaging business, but we are also have providing Vertical Pouches, which are very good solutions for our customers. Third, we have in our Food & Beverage division that you see now, we have nicely grown in hygiene solution, which is an important business, of which we are actually working strongly in improving its quality, and we're making good inroads in several parts of the world.

Operator

Your next question comes from the line of Scott Gaffner from Barclays.

Scott Gaffner - Barclays Capital, Research Division

As part of your discussion around being able to push for price because you do offer a total solution to your customers, one of the things that you've been known for, for quite some time is your spend on R&D. I think about 2 percentage points, 2% of sales going towards R&D, do you think that's a sustainable level going forward? Do you need to spend that much in order to create these products and maybe you could kind of talk about that in the future where we could see that level of R&D spend go?

Jerome A. Peribere

We will tell you much more about this when we have our Investor Day. We haven't picked the date, but it is going to be end of second quarter or some time in the third quarter. So you will have a full exposure to this. Now, level of R&D is -- we're not going to give justice to it right now in a few -- in a minute or so. My view is that innovation, successful innovation makes -- ensures your future in order to decommoditize. My view of a specialty product is that it is simply a product on its way to commoditization, which means that you need to renew your portfolio with successful innovation. We do have some amazing, amazing innovation in Sealed Air, which we are introducing, which we're pushing, and I could name several, but I'm not going to start that journey because of lack of time. We're spending about $140 million in R&D in Sealed Air this year. Is it too little? Is it too much? I haven't decided. What I want to first measure is the productivity of our R&D. And it's not necessarily a question of dollars, it's a question of quality. I want to make sure that in every single segment, which means in every single of our division, we have best-in-class R&D, which allows us to bring the solutions that our customers need. And they are in product or they are in systems, and they are here in order to surprise our customers with those, which makes them win. So we have to add value, and I am constantly hammering on this trilogy, which is the three-legged stool of sustainability, cost competitiveness and performance. And the new innovation is a great innovation if it answers those 3 questions favorably. So stay tuned and we'll talk more about that.

Scott Gaffner - Barclays Capital, Research Division

Yes, I look forward to the Analyst Day. The other question is around the growth investments, I think mostly in Institutional & Laundry, you added a number of salespeople in 2012, can you talk about how much you spend on new sales, on those growth investments in 2012 and how much we should expect you to spend in 2013 and then maybe when we should see the benefits?

Jerome A. Peribere

I don't have exact numbers, and as I'm going to make some comments, maybe Carol can add that, but yes, we are adding some salespeople in some parts of the world because we do believe that we have critical mass and a competitive advantage. We are adding some in the U.S. because of the contract that I just announced, and we are going to execute flawlessly. And as a result of that, we are going to be able to again, to price positively our customers in I&L on this specific contract. But we are also adding in some parts, some other parts of the world where we are seeing growth, and as I said, we are expecting double-digit growth in some, in most of the emerging countries.

Carol P. Lowe

So as a follow-on to that, Jerome, the EBITDA bridge that we included in the earnings slide deck, the $22 million negative as you do the EBITDA bridge for SG&A, that includes a little less than $10 million in additional resource investment and most of those resource investment have been made within developing regions, and primarily within AMAT. We have also for the I&L business added some number of resources to support growth within North America for specific market factors.

Operator

Your next question comes from the line of Anthony Pettinari from Citigroup.

Anthony Pettinari - Citigroup Inc, Research Division

When we look at your EBITDA and sales guidance for 2013 versus your results in 2012, the midpoint of your outlook appears to assume very little margin improvement and given the pricing actions you're taking and some of the cost reduction, is this potentially conservative? And then looking at I&L specifically, given your view that margins there are unacceptable, but understanding restructuring can take time, should we think about margin improvement in I&L as more of a 2014 event or can you talk about the potential to improve I&L margins in 2013?

Jerome A. Peribere

Well you have noted that we have changed our President of I&L. She is assessing the whole situation and already starting to take some decisions. So this is a business which has been suffering from probably too many changes in ownership over the past few years. So step one is to stabilize, step two is to turn it around. I am optimistic, but I'm not going to go and say that it's going to happen in 6 months. I think your 2014 is a good timing, Anthony. Generally speaking, I would say that the reason why I want to take some very firm positions on pricing is that I have observed that over time, Sealed Air has lost EBITDA, including through lack of pricing momentum. My view is that, we need to be firm on this because we are adding a lot of value to our customers, including from the aspects that I talked about earlier, helping in some engineering, selling the best-in-class equipment, including in vacuum chambers and vacuum equipment, et cetera, best-in-class. We have huge market shares on those, and we are potentially not valuing all of these properly. At the very same time -- and you'll understand that those kind of things are some kind of cultural changes that take also a little bit of time. The reason why I'm so emphatic on pricing at this minute is that some of our colleagues in the polyethylene industry and polypropylene industry and polystyrene industry have been jacking prices in a quite substantial way in January and wanted to do the same in February. And this can -- these are big increases that we need to pass on. And before getting margin expansion, you need to prevent having margin contraction. And this is why I'm saying that this is very important.

Anthony Pettinari - Citigroup Inc, Research Division

Okay. That's very helpful. And then maybe just a quick question for Carol. Carol, you referenced the ERP spend $20 million in '13, and that the project ends in 2015. Do those ERP costs ramp down through 2015 or how should we think about CapEx potentially in 2014, 2015 from an ERP perspective?

Carol P. Lowe

So they would be about consistent to potentially slightly larger in 2014 with not as much spend in 2015 because we will be wrapping up the implementation at that time. We are also benefiting from the fact that we have a significantly trained, well-trained workforce internally that implemented this ERP in prior years across Sealed Air, so we're able to leverage our internal IS team as opposed to having to rely a lot on external resources for the implementation. So we feel like we'll be able to tightly control the spend for the total implementation of the project.

Operator

Your next question comes from the line of Adam Josephson KeyBanc.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

In terms of the EBITDA bridge from '12 to '13, of the improvement you're assuming, can you give some sense of how much is coming from FX, how much is coming from synergies and volume growth and what some of the offsets are to the $25 million-ish of improvement that you're guiding to?

Carol P. Lowe

Well, I guess, Adam, we had commented that we will have about $90 million in synergies, and I also noted that based on our current workforce size, that we spend about $50 million to $60 million on an inflationary basis representing compensation increases as well as benefit cost increases. So that's utilizing a good bit of those synergy savings. We haven't really commented specifically about volume, let's say, low to mid -- low single-digits. If you want to think about it in total, I previously gave comments on one of the questions how we were looking at it relative to each of the regions. So from a currency perspective, what we have estimated or what we used, if you want to use the euro as a proxy, we're using 1.27 euro/U.S. dollar comparison as the rate. And then for the full year, we -- I'll check my notes to see where we ended up. I know for Q4, we were slightly, I think we were about $1.29 before we would have ended the year, and that was about the average a little bit less from that for Q4, so you could use that just to -- as an estimate from a currency impact.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Got it. Just one follow-on. You have the $90 million of incremental synergies, partly offset by the higher labor, are there -- is there anything that would enable you to offset that labor inflation in subsequent years post the synergies?

Carol P. Lowe

Well, I think, as Jerome commented, that we do have a focus on Lean Six Sigma, continuous improvement. So we'll always be looking at cost structure, and I think -- and he also provided color specific to the I&L business. So there, we will always look that a way to make sure we're covering our inflationary cost as best we can.

Jerome A. Peribere

The answer here is that we have to. We are a manpower-intensive company. 25 -- over 25,000 employees with $8 billion of sales. This is very clearly a manpower-intensive company. Some are in manufacturing and supply-chain, and that line is just normal to produce what we produce. The others are in the service business. And when you have, when you're in the service business, you need to get paid for the service. And therefore, it is very key that through expanded margin, we get paid for the improvement of productivity that we need to get.

Operator

Your next question comes from the line of Philip Ng of Jefferies.

Philip Ng - Jefferies & Company, Inc., Research Division

Your volumes in protective was actually noticeably stronger than the last 2 quarters, I know Q4 is a big e-commerce quarter, so was that most of the strength coming from and when you look out to Q -- 2013, do you see some of that flowing through?

Jerome A. Peribere

There is a seasonality in this business. We are making good inroads in our e-commerce business. And we also have been launching some new shrink films, which are absolutely revolutionary. They are -- have higher clarity. They have lower gauge and extremely performing decent. They have great value proposition for our customers, and we are having good initial success out of those.

Philip Ng - Jefferies & Company, Inc., Research Division

Okay. So it sounds like there's some momentum heading into 2013. And then, I guess, a follow-up, on the free cash flow guidance for 2013, the $300 million to $350 million, if I heard you correctly, Carol, there's about $80 million in restructuring cash cost, so when we look out to 2014, should we expect most of that fading and how should we be thinking about CapEx?

Carol P. Lowe

Yes, there won't be much in the way of restructuring charges under the current program that you'll see in 2014. It would be less than $20 million and probably even less than may -- maybe potentially less than $15 million. It's largely depending on timing of severance since a lot of the synergy cost savings are related to resource reduction. From a CapEx standpoint, as I noted for 2013, we're estimating $160 million in spend. For 2014, provided we perform in 2013 and are able to continue to reduce our debt, we would expect to not have any less than that investment. And hope that we'll be able to have the improvement in the profit of the business to provide not only cash for that restructuring, but also investments. And also just to clarify the $80 million that you referenced, the 2013 restructuring payments are actually $70 million.

Philip Ng - Jefferies & Company, Inc., Research Division

Okay. So is that a good way to think about normalized free cash flow going forward when you account for less restructuring cost and CapEx for 2014 and forward?

Carol P. Lowe

So what we're doing is, we want to make it more simple for everyone to understand the free cash flow and be able to look at the GAAP financial statement. The cash flow from operations and deduct CapEx. That is a standard definition of free cash flow, and what we will do is call out the unusual items that we are spending cash on, such as restructuring charges. We think that will make it easier. We've had some confusion with some of the nonstandard operating add backs that we do, and we think this will provide better clarity. So yes, you can just follow from the GAAP financial, and we will call out the specific items for you to treat in your models the way you best -- that you decide are best to handle.

Operator

That is all the time we have for questions. Mr. Peribere, I will now turn the conference back over to you for any additional or closing remarks.

Jerome A. Peribere

Well, I want to thank you for attending today. We have published those results and our guidance for 2013. We are -- we have had the month of January, which we would qualify as being satisfactory. It confirms that there's been some destocking in December, and at the very same time, we are looking forward for achieving the guidance that we have given to you during the pre-call and during this earnings call. We look forward to talk to you in the second quarter. And with this, I'd like to close this conference. Thank you.

Operator

Thank you very much for your participation in today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.

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