Sealed Air (SEE): A Melting Ice Cube Hiding In Plain Sight
Sealed Air (SEE) is a disaster in motion: its entire business is facing extinction as customers move away from the thin-film plastics the company makes. Sealed Air’s e-Commerce business has collapsed as Amazon has moved away from the single-use plastics, formerly ever present in its packaging.
California just passed two recycling and labeling bills that we think will make Sealed Air’s products unlikely to be used in the State and possibly in the US as a whole. Amazon employees have openly discussed moving permanently away from Sealed Air’s protective products, and we think that CryoVac (the food business) will soon be facing similar headwinds. Organic growth and volumes are collapsing, and we believe these changes are structural and existential in nature.
Today, Sealed Air is a $5 billion market cap company with $4.8 billion in debt that has collapsing organic growth and volumes. It has a poor history of capital allocation, and its primary business is almost universally being phased out. In addition to CryoVac, the company’s legacy brands include Bubble-Wrap, and the plastic pouches of air in Amazon (and other e-commerce) packaging.
Amazon has already begun its shift away from Sealed Air products as part of its initiative to remove single-use plastics from its packaging. This has already happened in Europe and Amazon is targeting the rest of its markets, including the US, next. Two California laws threaten Sealed Air’s packaging business further, and a new bill introduced this February could cripple its food business.
On a basic level, plastic film products are toast. Grocery bags, bubble wrap, plastic padded mailers and that terrible shrink wrap that comes on every boxed product you’ve ever bought. The stretchy, crinkly, omnipresent thin sheen type of plastic that is everywhere will likely become largely a thing of the past; we suspect sooner than anyone expects.
We’ve been following this sector closely for some time and have found ourselves in shock that investors haven’t taken a closer look at regulatory shifts that are currently underway, in Europe by the EU, in the US by the FTC, and most notably in California, where a series of laws are about to change state AND national plastic buying habits.
Disclosure: Bleecker Street Capital is short Sealed Air (SEE), please see full disclosure at the end of this story.
Sealed Air is a Debt-laden No-Growth Company Facing Existential Crisis
Sealed Air is a plastic company whose primary product, thin film plastics for packaging, is facing a three pronged assault from regulatory promulgation, scrutiny from the public, and its own mega-corp customers (who are content to kill off Sealed Air’s product to satisfy their own regulatory requirements and ESG mandates). In particular, our analysis of upcoming California Recycling implementation shows only 22% of the company’s current product line will not face significant regulatory control or restriction in the coming years.
Sealed Air’s two business segments are protective (packaging products) and food (food preservation products). The protective business has been struggling since Covid demand has ended, and while the company has blamed “destocking,” it is clear this weakness is a permanent trend in the business.
We’ve had conversations with those in the e-commerce supply chain, who confirm that everything is moving to paper based packaging, and away from the wasteful packing that long benefited Sealed Air. This downward trend in the protective business is just the beginning. As one Amazon representative said: “Plastics are over.”
AKA your Amazon packages won’t look like this anymore. And as goes Amazon, so goes the rest of eCommerce.
The 65% of revenue Sealed Air generates from its Food business is also under fire. A recently introduced California bill bans the use of chlorine-containing PVDC in the state, which is present in most Cryovac products currently sold. Sealed Air’s competitors have been selling and innovating on Chlorine free barrier plastics for years, as pressure stepped up in Europe among food companies and grocers.
We contend that Sealed Air could have seen the writing on the wall, but has stubbornly doubled down on its business. The world is moving away from plastic, and that is the majority of what Sealed Air makes. Not just any plastic, but specifically thin film, flexible, single-use plastics that represent the vast majority of Sealed Air’s business.
Sealed Air Management Hyped e-Commerce Growth until it started to collapse
Sealed Air’s e-Commerce business was a large reason it commanded a premium valuation in the packaging space in the post-Covid era. The company’s plastic pouches filled Amazon packages, often to the point of turning into a meme online.
In its Q1 2020 investor presentation, Sealed Air highlighted singled-out e-Commerce sales for the first time. It’s not a surprise why management would want to highlight this; Sealed Air’s growth in sales of packaging materials used in shipping from retail distribution centers was a notable winner of the rise of direct shipping boom during COVID.
In subsequent quarters, Sealed Air broke down sales by the industry/sector of the end buyer. These industry contributions were not presented as discreet line items on 10-K or 10-Qs, but rather presented in varying formats and time periods in investor decks.
We extracted the data by sector using investor slide decks and audited financials. Looking at e-Commerce, we can see that business peaked in 2021 and then rapidly fell off after. Most recently, annual e-Commerce sales are down 32 percent from the end of 2022.
During the surge of e-commerce sales, management used commentary to net revenues in the protective (non-food) business segment in the 10-K/10-Q to specifically note “strength,” “growth,” and “continued momentum” in the e-Commerce sector.
However, after Q3 2021 as sales for e-commerce began to fall apart, management stopped mentioning that at all. Quarterly e-commerce had collapsed by 51% year over year in the fourth quarter of 2021, yet pointed to strength in the industrial segment demand and continued momentum in fulfillment.
During 2023, 10-K/Q revenue contribution commentary did not contain a single mention of e-Commerce. The company blamed weakness in the Protective division on “recessionary pressures throughout the value chain” or “destocking in the industrial and fulfillment sectors”
When we look at e-Commerce compared with the other major contributors to Sealed Air’s non-food sales (Transportation, Industrial, and electronics), we can see that e-Commerce was uniquely impacted, countering management description of declines as broad in nature. A big part of that has been Amazon’s shift away from single-use plastics.
Amazon and Regulatory Changes Have Gutted E-Commerce Sales
We find management’s description of the falling protective sales as “destocking” to be inadequate. During 2022, Amazon reduced its global consumption of bubble mailers and air pillows (the bread and butter of Sealed Air’s non-food product lines) by over 11 thousand tons. This was part of a final push by Amazon to make all of its European distribution centers “100% single-use plastic free” in 2021. We contend this wasn’t recessionary at all, nor was it destocking. This was a permanent loss of business from the global e-Commerce giant in Sealed Air’s second-largest geographical market (Europe).
What should be even more shocking to Sealed Air investors is that the 2021 push by Amazon only represented 10% of its global distribution center disposable plastic consumption. Amazon still has much more of Sealed Air's business to hamper going forward.
“In Europe, we replaced our single-use plastic delivery packaging with 100% recyclable paper and cardboard packaging in our fulfillment network.” - Amazon, December 2023 blog post
It isn’t just happening in Europe.
Amazon has been attempting to phase out single-use plastics in favor of more recycling, with other internet retailers globally following. One current Amazon executive in a role that oversees packaging said “Everything we are doing is with the goal of getting plastic out of our packaging, everything is moving to paper.” Despite management promotion of its paper product lines, Sealed Air is a plastics company, with no meaningful traction in paper packaging; it represented just 5.5% of 2022 revenues.
An Amazon employee described it as, “We are shipping more things with less packaging, less waste, more paper, we cannot continue like this.” Another, speaking directly about Sealed Air, said “they make everything you wouldn’t want to make.”
Amazon isn’t an outlier either, they just moved first and fast; As Amazon goes, so goes the rest of e-Commerce. Other fulfillment and retail shipment giants in Europe launched broad sustainability goals that included no single-use plastic in retail shipments in 2020 and 2021. Otto.de, Germany’s second largest e-Commerce company (after Amazon) is committed to zero plastics in its packaging. From 2020-2022, Otto cut its plastic consumption for retail packaging by 50%.
We’d contend that this is not a cyclical business going through a lull; rather, this is a business facing permanent changes away from its core product by its key customers.Taken in context of the company’s failure to mention e-Commerce as the major source of non-food business loss, it appears Sealed Air has intentionally mislead investors, by blaming “destocking” and other cyclical macroeconomic factors out of their control. We’d agree but only if describing the destocking as permanent in nature.
Sealed Air’s Food Business: In The Crosshairs
Studious bulls of Sealed Air would look at the collapse in Sealed Air’s shipping and protective businesses and point out that ~65% of sales are through the company’s CryoVac brand for food protection. It’s easy to imagine replacing plastic wrap and bubble mailers with recyclable paper substitutes. But plastics undoubtedly play a critical role in food storage and preservation in a way that isn’t easily substituted.
Proprietary layered plastic is the key to CryoVac’s use in the market. The physical and chemical properties in CryoVac plastics that are critical to breathability and moisture blocking are why the company’s products are widely used in meat and cheese packaging. The favored polymer used in nearly every CryoVac wrap and bag is a thin layer of Polyvinylidene chloride (PVDC) coated on other polyfin plastics. PVDC is more stable than the chemically similar plastic PVC but only marginally so. At high temperatures or high levels of mechanical stress, PVDC will degrade, releasing free chlorine.
This chlorine is considered both an environmental and human safety risk, but its presence in film plastic effectively prevents it from being recycled as the chemical reaction of even low concentrations of PVDC plastics in recycling streams will ruin the process.
In 2021, the packaging division of food giant Nestle published a memo on the Golden Rules for developing food packaging. PVC and Styrofoam (Expanded PS) have long since been considered problem chemicals. PVDC was a better solution for food preservation than PVC due to it’s superior stability but has come under heightened scrutiny in recent years.
Nestle considering PVDC a “never” chemical in its own packaging rules is a new development; this mantra is becoming increasingly common in activist and corporate sustainability circles.
There are alternatives to PVDC. Ethyl vinyl alcohol (EVOH) co-extruded films are an alternative, as are monoPET films. Sealed Air’s competitor Amcor, and one of the largest flexible packaging producers in the world, has been making EVOH and other chlorine-free (PVDC-free) wraps for food use since 2017. Winpak, another competitor, has been making predominantly EVOH barrier films for over a decade.
Sealed Air, meanwhile, stuck with PVDC. This industry report on Sealed Air from 2012 highlights this dynamic, as the company took exception to industry peers criticizing the use of chlorine based PVDC as a long term sustainable solution.
Sealed Air did not release a chlorine-free meat package until 2020, years after its largest competitors were starting to hedge for the PVDC bans expected to accelerate in the near future.
To highlight the importance of this “problem plastic:” every major food brand that submitted data to the Ellen Macarthur Foundation (a highly influential NGO with a significant pull on EU regulation) for plastic consumption included a PVDC reduction as part of its pledge.
The World Against Sealed Air: The World Launches an All-Out Assault On Thin-Film Plastics
The regulatory environment is not conducive to Sealed Air’s dominant source of revenue. Last month, the EU Approved a Provisional regulation that had an extensive focus on hard to recycle single-use plastics, which is predominantly Film/Flexible plastics.
“certain single-use plastic packaging would be banned as of Jan. 1, 2030. These materials include packaging for unprocessed fresh fruits and vegetables; packaging for food and beverages consumed in restaurants; individual portion packaging for condiments, sauces, cream and sugar; miniaturing packaging for toiletry products; and shrink-wrap film for suitcases in airports.”
This proposed law follows two landmark California regulations, about to go into effect, passed during the 2021 and 2022 state legislative sessions.
SB 54 was signed into law in 2022, and is focused on reducing the amount of single-use plastics in California. Per CalRecycle, the law requires producers to ensure that by 2032:
100% of single-use packaging and plastic food service sold in the state is recyclable or compostable;
65% of single-use plastic packaging and food service is recycled; and
25% less single-use plastic packaging and food service is sold.”
SB 54 limits the overall sale of single-use plastics in the state of California but most importantly bans the sale of non-recyclable plastics by 2032.
The second law is SB 343, which directly impacts the bans and goals outlined in SB 54. SB 343 prohibits certain materials from being labeled as “recyclable” if the materials aren’t actually recyclable in practice in the state.
Those Amazon mailers and air cushions from Sealed Air may currently have a recycling “chasing arrows” logo on them:
But if these products are determined to be “not recyclable” under SB 343, they will be banned for sale under SB 54.
That decision for the SB 54 mandated plastic ban will be based on a report that was released by CalRecycle at the end of last year. We took a look at the technical report and the answer is clear: all thin film plastics, from food wrap to bubble wrap and mailers will lose the ability to be labeled as recyclable in California and will face forced market elimination under SB 54. Almost every other rigid plastic, on the other hand, will continue to be labeled as “recyclable” going forward.
This is a catastrophic outcome for SealedAir’s US business. While these regulations are nominally limited to California, due to the nature of shipping logistics in the US, we expect this to become the de facto law of the land. Much as California sets emissions standards for cars in the US, so too will the Golden State determine the fate of so many plastics shipped across the US.
Investors might look at the implementation date of 2023, and say “that’s not going to impact Q2’24 EPS,” (and we agree, it won’t). Rather, this further sets in motion a fundamental and unstoppable move away from the use and sale of Sealed Air’s products.
As if this wasn’t enough uncertainty, a recent bill proposed in the California House in February mulls the outright ban of any PVDC products in the state as soon as January 2026. This could effectively be a CryoVac ban given SealedAir’s reliance on it.
Perhaps this is why Sealed Air’s management included a brand new risk factor in the FY 2023 10-K specifically mentioning, for the first time, a PVDC ban as a material and adverse risk:
Wrapping it Up
We are bearish on Sealed Air’s business in the near term as news about these expanding bans and product avoidance is absorbed by the market. The risks to the company in the medium term and long term, however, are existential in nature. We think any investors citing “value” metrics, such as EV/EBITDA, cash flow or PE are fundamentally missing the wide range of forces, in industry, in government, and in activist spaces aligned in the fundamental destruction of Sealed Air’s entire business: making thin plastic that is designed to go into the trash (feel good recycling label or not). As such, we are short Sealed Air.
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