Nov 2, 2012
Executives
Amanda H. Butler - Executive Director of Investor Relations William V.
Hickey - Chairman and Chief Executive Officer Jerome A. Peribere - President, Chief Operating Officer and Director Carol P.
Lowe - Chief Financial Officer and Senior Vice President
Analysts
Ghansham Panjabi - Robert W. Baird & Co.
Incorporated, Research Division Scott Gaffner - Barclays Capital, Research Division George L. Staphos - BofA Merrill Lynch, Research Division Rosemarie J.
Morbelli - Gabelli & Company, Inc. Gabe S.
Hajde - Wells Fargo Securities, LLC, Research Division Phil M. Gresh - JP Morgan Chase & Co, Research Division Albert T.
Kabili - Crédit Suisse AG, Research Division
Operator
Good morning, everyone, and welcome to the Sealed Air conference call discussing the company's third quarter 2012 results. This call is being recorded.
Leading the call today we have William V. Hickey, Chairman and Chief Executive Officer; 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 Amanda Butler, Executive Director of Investor Relations.
Please go ahead, Ms. Butler.
Amanda H. Butler
Thank you, and good morning, everyone. Before we begin our call today, I'd like to note that we've provided a slide presentation to help guide our discussion.
This presentation can be found on today's webcast, as well it can also be downloaded from our IR website at sealedair.com. I would like to remind you that statements made during this call stating management's outlook or predictions for the future are forward-looking statements.
These statements are made solely on information that is now available to us. And we encourage you to review the information in the section entitled forward-looking statements in our earnings release, which are provided with this call.
Additionally, our future performance may be different due to a number of factors and many of these factors are listed in our most recent annual report on Form 10-K, which you can find also 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've included in our earnings release. Lastly, we have used pro forma results for certain metrics in the quarter to aid in the comparison of our performance to historical combining metrics of Sealed Air and Diversey.
These pro forma results are available as supplements on our website. Now I'll turn the call over to Bill Hickey.
Bill?
William V. Hickey
Thank you, Amanda, and good morning to everyone. Before we begin our discussion on the quarter, I would like to really thank everyone for their flexibility in participating in our call today, which as you know, is outside of our normally scheduled date and time.
In the wake of Hurricane Sandy and the aftermath that has disrupted a lot of people around the New York metro area, we felt it was prudent to delay the release and earnings call for everyone's safety. Additionally, it is with great pleasure that I welcome and introduce Jerome Peribere, as Sealed Air's new President and Chief Operating Officer.
As we previously announced, Jerome will succeed me as Sealed Air's Chief Executive Officer in March of next year. Jerome brings to us a wealth of international experience gained from 35 years at the Dow Chemical Company.
He has significant global experience, which is particularly important to Sealed Air today, where we have 60-plus percent of our business outside the United States. Interesting, he also brings packaging experience as his first job at Dow Chemical in France was selling Ethafoam polyethylene foam, which is one of the products that we still sell today.
And most importantly, he brings recent acquisition-integration experience from Dow's Rohm and Haas acquisition where he led the integration of Rohm and Haas into the Dow Chemical Company. Jerome has been a quick understudy and in his first 2 months, he has met our key managers, met with employees on 3 continents and met with numerous customers of our food, protective and Diversey businesses.
He's off to a great start. On today's call, I will give a few opening comments, then Jerome will highlight our business unit performance.
Carol Lowe, our CFO, will follow with a more detailed discussion on our consolidated results, liquidity, other key matters outlined in our press release as well as our updated guidance. Following our prepared remarks, we will provide time for your questions.
I plan to have Jerome and Carol address your questions. But of course, I will be available as needed.
As a reminder, all of our results outlined here today reflect the announced sale of Diversey Japan and its classification as a discontinued operation. Getting started on Slide 2 of our presentation.
The third quarter paced well with our assumptions and guidance for the second half of the year, despite uneven recovery in our end markets and a fair amount of caution expressed by our consumers and our customers during the quarter. We stayed focused on the goals we established at the beginning of this year: integrating Diversey; generating our synergies; and accelerating our growth programs to increase market presence, EBITDA and free cash flow.
We did a solid job in the third quarter, which I will dive into a bit more in the next slide. We improved our profitability performance significantly over the second quarter, giving us good momentum going into the fourth quarter.
I do want to point out that our Food Packaging business operating margin recovered in the third quarter and improved 390 basis points by restarting up our production at our new plant in Brazil. As we indicated earlier, during the second quarter, we shut down one of the production lines in Brazil to move it to our new facility, 120 kilometers away.
As a result of higher-than-projected customer demand, we had to import products from the U.S. at a high freight and duty cost to continue to supply customers.
I am pleased to tell you that last week when Jerome and I were in Brazil, I saw the production line installed and running salable product. Imports have stopped, and you can see the effect in our third quarter operating results.
Additionally, early this week, we announced the sale of Diversey Japan, an asset that was identified as part of our strategic review, and we expect to close that transaction in the fourth quarter. We plan to use the net proceeds to prepay debt, which will enable us to exceed our 2012 net debt goal of $4.95 billion.
Strategically this allows us to invest in higher growth areas such as Asia and Latin America, where we're making strong inroads with Diversey constant dollar sales growth rates in those 2 areas at 13% and 9%, respectively. Let's move to Slide 3.
You will see a snapshot of our consolidated trends. And you can see how we've achieved good year-over-year and sequential momentum across a number of key metrics, including sales, profitability, margins and synergies.
We continue to make strong inroads toward meeting our strategic objectives: achieving net sales gains through [indiscernible] graphic expansion, achieving sales gains through ongoing and adoption of our new inventive solutions, sales gains through incremental $10 million of annualized synergy sales and sales gains through new customer wins around the world. Our profitability metrics improved on greater operational execution, lower raw material cost, increasing cost, synergy benefits and seasonality.
If I move to Slide 4, although Jerome and Carol will provide more detail into the components of these results, I will highlight the growth we have achieved leveraging our extensive 62-country footprint, which continues to give us leading reach and greater opportunity for international growth than our peers. Looking at the map on this Slide 4, you can see that we maintained or grew our organic growth rates in the third quarter compared with trending in the second quarter, largely led by unit volume growth in Food and Protective Packaging business and through solid price generation in our Diversey segment.
North America was the only exception, with a modest decline to steady year-over-year performance due to lower price/mix in Protective Packaging. This lower price/mix resulted from products mix shifts to more sustainable but more profitable film structures, which yielded improved margins for this segment.
Of course, the key drivers of our momentum in the quarter came through solid execution among our businesses, which Jerome will now highlight. Jerome?
Jerome A. Peribere
Well, thank you, Bill, and good morning, everyone. It's really great to be here with you today.
As Bill mentioned, I'd like to start by discussing some of the key drivers we saw over the quarter and highlight a few areas I'm most excited about as I took the future of Sealed Air -- as I look at the future of Sealed Air. Turning to Slide 5 first.
The key takeaway for Food Packaging is that the business is back on track. This is most evidenced by how we reestablished our third quarter adjusted operating profit margin back to 13.6%.
This compares to the 9.7% margin we reported in the second quarter. So let's look first at the left side of the slide, and you'll see that a component of that margin improvement was volume growth.
Food Packaging did a solid job, driving 2% volume growth in the quarter versus last year, with volumes up across all regions. Our growth was led by an 8% volume increase in Latin America, where our established footprint and strong market presence in Brazil allows us to benefit from the rising beef production rate in that country.
Additionally, we saw 2% higher volume in Europe, Middle East, Africa on the strength of new customer wins in the Middle East, strength in Central and Eastern Europe, as well as benefits from mix shifts in Western Europe that favors Food Packaging segment products. These areas of strength offset the weak North American protein industry, which continued to face supply constraints in the quarter, with weighted average industry production rate down 2% versus last year.
So I'm pleased to report that we try to evolve industry production rates. Generating this slight increase in volumes in North America, primarily from new customer wins and customer adoptions of new solution, like our Cryovac Multi-Seal FoldLOK reclosable package for retailized shredded cheese pack.
This new solution has just rolled out and -- by a new specialty grocery retailer in the quarter and has triggered a second phase of development with a sponsor in cheese processor. Innovation and new solutions are at the core of our competitive advantage and remain the key factor in our ability to face above-industry production rate, this is especially the case in Food Packaging, where 25% of our sales come from new solutions.
Looking now to the right of the Slide to profitability. Food Packaging margins were generally resilient year-over-year, but improved almost 400 points basis sequentially as we eliminated the unusual one item -- onetime item that we identified in the second quarter, and Bill mentioned -- made some comments a few minutes ago about that.
And we significantly reduced our start-up cost in North America and Brazil related to facility consolidations, as he also did mention. In Brazil, we accelerated this relocation, and we achieved altogether this move a few months ahead of schedule, which will benefit fourth quarter margin results.
Let's look at Food Solutions on Slide 6 now. Although many of our customers, especially in Europe and North America, are dealing with constrained protein supplies and price-sensitive consumers at retail, Food Solutions achieved 2% volume growth in the quarter, which outpaces protein industry production rate.
Our volume performance was largely driven, in fact, by a 21% volume increase in our vertical pouch packaging solutions for fluid and semi-fluid product in North America, due to a record tomato crop this year and the right solutions to capitalize on these favorable trends. And last but not least, I'd like to highlight which is the 10% increase in volumes in Latin America due to the strength of local protein production, as well as new customer wins.
This solid volume performance, combined with our lower raw material cost and solid management of expenses, yielded a very strong 12.8% adjusted operating profit margin, which is up 170 basis points versus last year. And now looking to the Protective Packaging segment on Slide 11.
As you can see on the left of the slide, Protective is doing a good job at holding on its 0.4% volume growth rate, consistent with the second quarter trend. We achieved this despite a softening in the rate of global economic and ongoing weakness in Southern Europe and in China's export sector.
A key area of growth for the business was the 20%-plus global volume increase in e-commerce and fulfillment-oriented applications that we issued globally. This strong growth rate reflects both the rising usage of e-commerce as well as customer wins in this sector.
Additionally, Protective achieved a 2% volume growth in North America, reflecting modest growth in the industrial sector, as well as new customer wins in the region. Europe, Middle East and Africa remains the weakest region for Protective, with 2% lower volume, largely offsetting some persistent weakness in Southern Europe as customers continue to reduce their production volumes.
And despite the modest volume improvement overall and the lower price/mix in the quarter, adjusted operating margin performance improved year-over-year and on a sequential basis, which you can see to the right of this slide, which reflects tight control of expenses and the benefit of our most sustainable film structures, which record less resin contents. And finally, to the Diversey segment on Slide 8.
Looking to the left of the slide, on a pro forma basis, this segment generated 2% higher organic sales from 2% higher price/mix and a modest 0.5% decline in volumes. This volume performance is considerably improved compared to the negative 3% to 4% rate noted in prior quarters.
The key drivers for this improvement are 7% higher volume in developing regions, the apparent stabilization of demand in Northern Europe, which has 70% of Diversey's European mix revenue, net gains in new customers and the ongoing expansion adoption -- and adoption of best-in-class solutions, like our TASKI floor care equipment systems among new and existing customers. As you can see by our slide, 2/3 of Diversey's revenue increased on a year-over-year basis with food and beverage, distributors and lodging achieving over 4% organic growth.
The areas of greatest weakness continued to persist in the same sector noted in prior quarters due to lower reorder rate or cautious allocation of capital investment in equipments due -- in equipment systems due to the economy. The key area of weakness unique to Diversey is the consumer brands business, which accounts for approximately 1/4 of the year-to-year sales decline.
So overall, we are demonstrating resilience in making good progress -- and making good progress in expanding our market presence. Innovation remains at the core of our growth strategy and there is a real momentum here.
At the recent ISSA/INTERCLEAN conference in North America, which was 2 weeks ago in Chicago, the team launched Crystal Shield which is an innovating floor care system that combines a diamond abrasion and coating technology that offers more durability and requires less maintenance in a much improved sustainable way. Additionally, the team continues to expand the launch of Suma Combi, which is a combined detergent and rinse base for mechanical wear -- washing that can clean, rinse and dry, now replacing what took 3 different products before.
This makes your version easier, faster and more sustainable for commercial kitchen uses. And additionally, we're poised for more system launches in the fourth quarter.
All of these innovations will drive enhanced growth in 2013. And now looking to the right of this slide -- right side of this slide, profitability in the Diversey segment declined 17% on a reported basis against a challenging prior year comparison as the 2011 profitability benefited from $10 million of reversed bonus accruals.
We, additionally, have an unfavorable foreign exchange effect this year -- this quarter. But on a constant dollar basis and excluding an unfavorable foreign exchange effect and the benefit of the lower bonus payments in 2011 and looking at the business on an apples-to-apples operational basis, profitability, in fact, rose a solid 42%.
And as you can see, by the operating profit bridge on this slide, the only real unfavorable year-on-year impact is our investment in headcount in high-growth regions, which is yielding strong top line growth in developing regions and is expanding our presence in targeted areas in North America. We expect these investments to become accretive within 12 to 18 months.
And now we will turn to Carol -- the call over to Carol, our CFO, to discuss third quarter financial results in more detail and highlight our outlook for the balance of the year.
Carol P. Lowe
Thank you, Jerome, and good morning, everyone. Following along with your presentation, Slide 9 highlights our integration and optimization program.
Q3 benefited from $29 million in cost synergy, a $6 million increase over quarter 2. Our year-to-date cost synergies total $67 million.
Our full year 2012 benefit is now estimated at $97 million, $7 million higher than previously expected, due to timing of benefits. I should note that in addition, our cash costs for 2012 have declined $20 million to $105 million.
We have moved this cash cost savings into 2013, and we'll continue to update you in future quarters on the amount and anticipated timing of our spending. We continue to hold the total program benefit at an estimated $195 million to $200 million through 2014 and total cash cost at $235 million over the life of the program.
Slide 10 summarizes our consolidated and adjusted EBITDA performance on both a pro forma and constant dollar basis. Year-over-year, constant dollar adjusted EBITDA accrued 2% on cost synergies and a favorable price cost spread of $18 million, with Food Packaging representing more than 1/3 of the favorable spread.
These impacts were partially offset by the resource investments in high-growth developing regions that Jerome just mentioned, as well as some unfavorable mix. While the year-over-year increase is meaningful in light of the economic headwinds we continue to face, the real improvement story is the 19% improvement in adjusted EBITDA from the second quarter.
Adjusted EBITDA margin of 14.3% for Q3 improved from 11.4% in Q2 on seasonality, cost synergies, price cost spread, elimination of onetime items and reduction of other charges that negatively impacted Q2, as both Bill and Jerome have highlighted so far in their comments. To bridge from the 2011 pro forma adjusted EBITDA including the effect of currency, you need to first revise the 2011 amount down from the $281 million to $271 million to reflect the benefit of the bonus and other compensation reductions previously mentioned that were recorded by Diversey in 2011.
Now if you bridge from the $271 million, you add the $29 million in cost synergies and $18 million positive price cost spread. These benefits were offset by negative currency of $14 million, approximately $17 million in mix and under absorption and $15 million higher SG&A, again, on the increased resources to support growth in the developing regions.
Turning to Slide 11. Free cash flow for the quarter was $28 million and $139 million year-to-date.
Changes in working capital items for Q3 resulted in a net use of $75 million in the quarter. The increase in receivables of $58 million is largely due to an increase in exchange rates used to value quarter end receivable.
For example, the euro was approximately $1.26 at the end of June versus $1.29 at the end of September. Also the seasonality of our Diversey institutional and laundry business impacted receivables balance as Diversey's Q3 sales are seasonally higher than Q2.
And the payment terms for the Diversey institutional and laundry customers is slightly longer than our other businesses. Cash and cash equivalents were $541 million at September 30, which is an increase of $37 million from the balance at June 30.
During Q3, we paid $121 million of interest, which is more than 1/3 of the total $320 million that we anticipate paying during the year. Cash payments in the quarter also included $23 million for income taxes, $30 million in 2013 term loan payments, $18 million related to our integration and optimization program and $25 million for our quarterly dividend.
Turning to Slide 12. As of September 30, we had total cash and committed liquidity of $1.4 billion and our net debt was $5.26 billion.
Our net debt at year end is estimated to be approximately $4.8 billion. The estimated $500 million reduction from Q3 net debt balance will be funded by free cash flow plus approximately $300 million in proceeds from the sale of Diversey Japan.
Achieving the $4.8 billion and net debt exceeds our stated goal of $4.95 billion by year end. We were also well within our covenant compliance at the end of Q3.
As noted in our earnings release this morning, the company has recorded a noncash pretax charge of $1.2 billion for the impairment of goodwill and certain intangible assets. The impairment on Diversey's segment resulted from lower growth rate and margin performance than anticipated a year ago, with the lower performance significantly impacted by negative macroeconomic conditions and primarily in Europe.
The goodwill impairment is subject to finalization as we complete step 2 of the analysis during the fourth quarter. Slide 13 notes our full year 2012 updated outlook that reflects the effect of discontinued operations from our Diversey Japan transaction, as well as the implied fourth quarter estimates for our 4 key guidance metrics.
We expect reported or actual net sales of $7.7 billion with our business segment continuing to demonstrate sequential and year-over-year top line growth from seasonality and new customer wins; adjusted EBITDA to be in the range of $995 million to $1.01 billion; adjusted EPS in the range of $0.90 to $1; and free cash flow of $375 million to $400 million. Our free cash flow estimate reflects traditionally high seasonal contribution in the fourth quarter from inventory reductions.
During Q4, we expect to complete the sale of Diversey Japan, finalize our impairment analysis and move our financial reporting to reflect our new operating segments. For Q4 in the full year 2012 reporting, our new segmentation will include Food and Beverage, Institutional and Laundry, Protective Packaging and Other, which is mainly comprised of our medical applications business.
And now I'll turn the call back to Bill to lead the Q&A session.
William V. Hickey
Okay, thank you. Thank you, Carol, and thank you, Jerome.
As I indicated earlier, as your questions come in, I'll ask Carol and Jerome to field them. And of course, based on historical knowledge, I'm here to help the 2 of them.
So operator, can we open up the call to any questions?
Operator
[Operator Instructions] Your first question comes from the line of Ghansham Panjabi of Robert W. Baird.
Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division
Just on Diversey Japan, it seemed like a very, very profitable business compared to the rest of Diversey and it seems like a pretty strong franchise just judging by the margins. Can you take us through the logic of selling this business versus any other part of the portfolio, perhaps on the legacy Sealed Air side?
William V. Hickey
Yes, sure. And this is the first one, I think we said we're reviewing our portfolio of both Sealed Air, legacy Sealed Air and legacy Diversey.
The Japan situation is -- it is a profitable business. It's the #1 franchise in Japan.
But we looked at it as a very slow growth business. The Japanese economy, although strong, continues to have very, very slow growth.
We have a leading market share, so we see very little opportunity to gain additional growth through share gains, as well as the Japanese economy, which we expect to continue to be -- Ghansham, we did a forecast out for Japan that discounted cash flow and looked at it and said, if someone is willing to give us that value today or higher, it makes sense. And it was -- and actually it had been run pretty autonomously from the Diversey business.
It had its own separate product offering for the Japanese market. It had a number of products that were not consistent with our global portfolio.
And when you looked at it, all considered, if we could monetize the discounted cash flow, it made sense to do it.
Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division
Okay. And then perhaps a question for Jerome.
Jerome, you're inheriting some very, very strong franchises but also some very big challenges, particularly the financial leverage at Sealed Air. Can you sort of outline some early thoughts on how you see the strategy at Sealed Air evolving under your leadership?
Jerome A. Peribere
Thank you, Ghansham, for the question. Now as I arrived 2 months ago, I have, by definition, traveled around the world, sometimes with Bill, sometimes without, and there are some very key highlights that I want to take out at this point in time.
2012 has been a year of transition very, very clearly. In my previous life, I had led the integration of the largest acquisition that Dow ever had made.
And in reality, the word, "Who moved my cheese?" has to be present in everybody's mind because you have a lot of employees who have been unsettled by this kind of acquisition -- by any kind of acquisition.
My approach is that I want to rally employees around our project, and our project is a growth project, is a growth project leveraging the equipment and the products we have into solutions, which are absolutely unique. And the commonality between the Diversey business that we have and the Sealed Air 2 business units that we have is that we have equipment which complements products when they're with solutions.
It is very true in our Diversey industrial and laundry business, for example, we have all kinds of machinery and equipment like the TASKI machines themselves which make us the global leader in floor polishing [ph] and this kind of things. And you -- when you look at our Cryovac business, it is the same.
When you look at our product packaging business, it is the same. So that's one commonality.
The second thing is that I want to accelerate the new Sealed Air into -- and put our investment where population needs more packaged foods, more consumer -- or where consumers consume more proteins, where there is a need for more food safety and sanitization and hospitality improvements and where product production needs to be packaged in higher quality. So it really tells you where we are going to be investing.
And actually, if there is one thing which has been surprising me at -- already is the amount of technology that we have in the pipeline. So that's where I'm going to be focusing my attention into.
Operator
Your next question comes from the line of Scott Gaffner at Barclays.
Scott Gaffner - Barclays Capital, Research Division
Can you just talk a little bit about the trends in Food Packaging throughout the quarter? I think you had a slide out there, middle of the quarter talking about July up 6% to 7%, maybe it was 5% to 6%.
But looks like Food Packaging came in at plus 2% organic and Food Solutions plus 1%. Can you just sort of walk us through what sort of happened then during the quarter?
Carol P. Lowe
Scott, just one thing before -- and then Jerome will follow on with the trend, but what you're looking at was Food Packaging and Food Solutions together. Whereas for our quarterly, we -- it is broken apart.
I just wanted to highlight that for you.
Jerome A. Peribere
Okay, so what have we observed in Food Packaging? First of all is that when you exclude currency, our sales have been going up 2% and our operating income has been going up slightly less than 1%.
We had, in fact, an unfavorable geographical mix. But we have some very interesting things happening.
We had volume increase overall 2%, with 8% volume growth in Latin America, double-digit growth in Asia and a stable North America, with a negative product mix there. But we have also growth in Europe.
That is for our Food Packaging business. Sequentially, we had suffered from quarter -- Q1 also in the second quarter, so no surprise that we're back on track with our kind of historical profitability in that segment.
On Food Solutions, we've been doing quite well and we had our volume grow in North America by over 7% or almost 8%; Latin America, double digit; Europe, slightly negative; but Asia, Middle East, Turkey has been growing 20%. So how did that happen?
Let me remind you that the Food Packaging is our traditional protein industrial packaging and our Food Solution is mostly [indiscernible] ready, our fluid high-barrier voucher that were microwavable type of products, so more consumer-driven. In North America, we have benefited from a very good growth in our pouches business for an exceptionally -- added by an exceptionally favorable tomato crop.
But this is a very good new solution, which is a very strong alternative with lots of customer benefits versus can and for tomato, for example. So that's a very good type of new growth, which has been accelerated by a good agriculture tomato crop.
But it's just a solution which is imposing itself. In Latin America, we try -- we're taking pricing actions in Brazil and in Argentina.
The only negative spot is in Australia and New Zealand. Actually in Australia where we had a lot of rigid turbo foaming tubs [ph] and we lost to it on price also against competition.
So generally speaking, this Food Packaging sector is starting to -- is somewhat tied to what's going on in the meat market. And again, we'd go on and talk about red fresh meat versus poultry and versus pork, but also we have innovation in different sectors, and this goes to a 50 [ph] type of products, which we are working strongly on, freshness, case-ready, multiple bags.
The new consumer benefit packaging, which is our FoldLOK, as I mentioned earlier in -- as it were, specialty retail, which is actually pretty successful, and high-powered protein. So I think that this is going well.
And what I'd like to mention is that our people internally are now working by leveraging this food packaging presence with our hygiene solutions where we have growth synergies and we're starting to see some benefits there of the former Diversey business in sanitation.
Scott Gaffner - Barclays Capital, Research Division
Okay. I appreciate all the color.
So did growth actually slow in the quarter though, on the combined businesses?
Jerome A. Peribere
I didn't hear you well.
Carol P. Lowe
First, where we reported -- at the conference slide that you're referring to for the combined businesses, we were reporting kind of year-over-year on an average daily sales basis, and they weren't quite as strong through the balance 2 months versus August.
Jerome A. Peribere
Yes. Having said that, there's something, which is interesting.
If you look at the Q3 volume, in Food Packaging and Food Solutions versus the year-to-date volume, the pace is accelerating. The Q3 volume in Food Packaging has been 2%.
The Q3 volume in Food Solutions has been 2.3%. And when you look at the year-to-date, with just likely 1% on Food Packaging and just likely around 0.5% in the Food Solutions.
So when I look at Q3 volume compared to the year-to-date, I'm seeing a positive trend there.
Operator
And the next question comes from the line of Phil Gresh, JPMorgan. The next question comes from the line of George Staphos at Bank of America.
George L. Staphos - BofA Merrill Lynch, Research Division
I guess I had 2 -- actually 3 questions, I'll try to make it brief. First of all -- and I joined the call late, so I apologize.
First of all, there were a number of operating issues within Food Packaging back in the last quarter. Do you feel comfortable that you are on the path to resolving those by the end of the year, which is what I remember being the last [indiscernible]
Carol P. Lowe
George, I'll go ahead and respond to that and Bill can add a little bit of color because he was recently in Brazil, which is where a lot of the operating issues were highlighted for Q2. But yes, we feel like definitely the onetime items were onetime.
And we have seen significant operational improvement, which is noted in the operating -- the adjusted operating margin for the Food Packaging. So I'll let Bill -- he can comment specifically with the bag line and what he saw in Brazil.
William V. Hickey
George, I think as we mentioned, one of the big items in Q2 was we moved the production line from our downtown São Paulo plant out to our new plant, which is about 120 kilometers away, which has a lower cost structure and more room for expansion. And we took down one of our major extrusion lines and we believe we've built up enough inventory because we've tried to pick a slow time of the year.
Customer demand just picked up. That line was down.
I think as we mentioned on Q2, we had to bring in products from the U.S., freight and duty. That line has moved.
As I said earlier, Jerome and I were in Brazil last week. I actually said I wanted to see this line operating.
It's up. It's installed in the new plant.
It's producing product at a lower cost. And we put the 390 basis points back on the Food Packaging operating margin.
We're not completely moved. There will be a Phase 2 sometime either early next year with the ultimate goal of moving the second and third extrusion lines out.
But right now, we're back on track.
Carol P. Lowe
And, George, we would expect our exit rate out of Q4 for Food Packaging to be around 13% margin as opposed to the 12% that we discussed in our Q2 call.
George L. Staphos - BofA Merrill Lynch, Research Division
Okay, that's great. Let me ask one more question because I remember you typically have a 2-question limit, and this is a bigger picture question.
I realize maybe a bit more difficult to answer. But this quarter, you took a $1.2 billion goodwill impairment for Diversey.
You have to do what you have to do. That's on top of what's been $100 million or so of restructuring charges for the business this year.
So one could argue that in terms of the relative level of investment, perhaps the value of -- ascribed to Diversey initially was maybe $1.3 billion too high. And as you look back at Diversey, where do you think the miscalibration, if you'd agree with that, came from?
And did it -- has that anything to do with, perhaps?
William V. Hickey
Yes. No, George, I wouldn't call it a [indiscernible] in time.
I mean, if you remember the numbers we were looking at 18 months ago when we went through the acquisition analysis, the euro was in the high $1.40s. That filters to the earnings model, into the valuation.
And also the European economy until March of '11 was holding up reasonably well. So we were looking at one, continued growth; and two, bringing those euros back to dollars at $1.48.
I think when we updated our model that the accountants require us to do once a year, is you now take a lower earnings stream and you reduce the currency effect and you end up with a different value than you did a year ago. That's not an out-of-line situation.
And I would venture to say that 2 years from now, you come up with a different number, it's -- probably be higher, but the accountants won't let you put it back.
George L. Staphos - BofA Merrill Lynch, Research Division
Well, we look forward to that, but what you're saying is it's more the market, not the actual underlying performance or as it was presented to you?
William V. Hickey
Right, we do say -- I mean, the performance is less than our initial analysis showed 18 months ago, but they've been primarily from factors outside the business.
Jerome A. Peribere
You see, let me add a little bit of flavor there. You can imagine that I'm spending a lot of time looking at this part of the business.
And when you look at the overall numbers for Europe in the first quarter, they are not very impressive. Having said that, you need to remember that we have some components of the business, which are equipment driven.
And what we have observed for our company in Europe -- in Southern Europe is that our equipment sales are dramatically low. Well, who in Italy, in Spain or in Portugal today would be buying equipment?
So that shop segment has suffered to a certain extent. Another segment, which has suffered is a little bit in our retail brands of business, generally speaking.
And that's one other thing. When I -- what is important to me to see are we retreating in the core of our businesses in chemicals in various countries, et cetera, et cetera?
And actually, I am quite pleased with the fact that we are starting to see a few very interesting things coming up. I'm pleased to see that our French business is doing quite well or is not retreating.
I am pleased to see that our East European business is growing double digits. I'm pleased to see that our Asian business and our Latin American business is going double digits.
And this is not only on the quarter but it is year-to-date. So you take our Chinese business, which has been growing 22% in this quarter and year-to-date, very nice additional number.
So what is important to me is, where are the pockets of softness? And when I look at this quarter, for example, for the European Union business, more than 80% of our negative growth is coming from, guess where, Italy, Portugal and Spain.
So am I pleased that this is -- that we're retreating? Absolutely not.
But I can understand that this is not market share losses and on the contrary versus what is the local situation, fairly negative.
Operator
It comes from Rosemarie Morbelli at Gabelli.
Rosemarie J. Morbelli - Gabelli & Company, Inc.
Could you give us a little more detail on the Diversey business both in Europe and North America? I mean, you have focus on a couple of areas.
But if you look at Diversey overall, do you see any changes in market trends, in your market share? Do you have and could you give us some -- an update actually on the progress on the F&B category?
Jerome A. Peribere
Okay. Well, you've got F&B and then you've got our I&L or Diversey in general.
I just talked quite a lot about it. We are growing faster than competition in where we really are seeing the future of our business.
And that is extremely reassuring to me. When I see that we're growing double digit in Turkey, I'm pleased.
When I see that we're growing in South Asia double digits, I'm pleased. When I'm seeing that Hong Kong -- that in India we're growing over 15%, and I'm not talking necessarily only in the quarter but also year-to-date.
I'm saying that in the areas where there's a very deep crisis, we are coming down. When there is a very specific investment issue, equipment I just mentioned, we're coming down.
Where there is potential for growth, we are flagging [ph]. On our North European business, it has had troughs and it is stable.
On -- the good -- I'm going to give you just one country, which is Greece, where you would expect that there is 0 business. Well, you know what?
Year-to-date, we've been 11% down. Quarter -- the third quarter, 1% down.
So things are stabilizing here. And North America, which in some subsegments has been a weak spot, is improving.
We're making good inroads in health care. We're making good inroads in hospitality, and you're going to hear some more about it pretty soon.
Rosemarie J. Morbelli - Gabelli & Company, Inc.
And if I may, raw material costs have come down in general, and they have helped your margins to a certain degree. Do you feel that as of next quarter you are going to have to start giving back pricing?
William V. Hickey
Carol?
Carol P. Lowe
No. So Rosemarie, we actually -- we expect the raw materials on hold to kind of stay flat.
We're not expecting to give up much in terms of pricing. There may be some modest offset based on the decline we've seen so far in raw material costs, especially as we have some customers on contract, but not a significant impact.
Operator
The next question comes from Chris Manuel at Wells Fargo Securities.
Gabe S. Hajde - Wells Fargo Securities, LLC, Research Division
This is actually Gabe Hajde on for Chris. You guys have referenced lower equipment sales, I think, once in a press release or the presentation and your remarks.
Just talk about the relationship with the consumable, I guess, products for that business. And maybe looking out in 2013, could that have a negative impact on that business?
William V. Hickey
Yes. Let me just give you a little background here.
Usually, as Jerome very eloquently indicated earlier, so our business is built on the solution where the equipment provides the vehicle for the customers to use our consumables. And that historically, it's about $10 of equipment sales for $100 of consumer sales.
So it's a little about 10% of the mix. But it does generate a fair amount of consumer sales.
We have looked at equipment placement as an indicator of future consumable sales, but I wouldn't necessarily make any particular conclusion about the comments that we made on the Diversey side. Because equipment placements on protective business are still holding up quite well.
And on the food business, they're holding up reasonably well. So I wouldn't necessarily draw a conclusion.
But I think it's a good point to keep in mind that positive equipment sales generally drive future consumer sales. And slower equipment sales generally means slower consumer sales growth.
But remember the ones that are installed out there become an annuity year-after-year.
Gabe S. Hajde - Wells Fargo Securities, LLC, Research Division
That's helpful. And I think there's commentary about $500 million of asset sales or potential asset sales.
Can you comment around the portfolio evaluation, whether or not you guys are done or are still looking?
Carol P. Lowe
I'll respond to that. Yes, there are additional assets that we're looking at and it's across geographies, across the businesses.
So we'll continue to work that through the balance of the year and into 2013. Because our comment on the up to $500 million was over a 12-month period, so we're still looking for opportunities where we have certain either lines of business or product models and things that just don't fit for the long-term strategy.
Jerome A. Peribere
Having said that, we just went through the big start.
Carol P. Lowe
Right. absolutely.
Operator
This should come from Phil Gresh.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
I guess, the first question is just on the asset sales as a follow-up, and I apologize if someone already asked this, just tell me. But would you say that a sale of the size you just completed was contemplated in the $500 million target that you gave before or was that kind of...
Carol P. Lowe
No. Yes, it was.
William V. Hickey
It was.
Phil M. Gresh - JP Morgan Chase & Co, Research Division
Okay, got it. And then if you've talked about this, the outlook for the food businesses in 2013, how you're thinking about volume trends there given the lower slaughter rate potential?
Jerome A. Peribere
Well, when you look at the trends, the fresh red meat market in North America is trending negatively. The Latin America across various type of meat, the fresh meats or the smoke and processed meat, the poultry, all of this is trending positively and also slightly negatively in Europe.
Having said that, altogether, we're seeing a slight positive trend, call it 1% or so. That's the way we see it at this point in time.
Operator
Next question is from Al Kabili at Crédit Suisse.
Albert T. Kabili - Crédit Suisse AG, Research Division
Just a question on the free cash flow reduction in the guidance, if you could just address what drove that. And also the working capital seasonally just seems to be performing less -- there was a bigger use of cash seasonally than what we're used to, and if you could address that as well.
Carol P. Lowe
Well, in my comments, originally, I talked about the working capital, that the biggest impact was the increase in receivables. And the biggest portion of that $59 million increase as we move forward in the quarter was because of the exchange rate.
So a higher exchange rate primarily on our European receivables at the end of September versus the end of June and how they're valued on the balance sheet, that accounted for approximately $30 million of the $59 million increase in receivable. Also, seasonally, we have higher sales within our Diversey institutional and laundry business.
And in Q3 versus Q2, that also utilized receivables, extended them because those customers tend to have longer payment terms than the rest of our businesses. So that's the biggest driver on working capital.
And I also commented about the cash flow for the quarter, we had a large portion of the interest payment that we anticipate making for the full year, was made in Q3, so more than half of it. So that was a big drain on the cash flow as well.
Albert T. Kabili - Crédit Suisse AG, Research Division
And the reduction in the outlook, is that largely working cap and currency or in this divestiture or is there anything else that drives that reduction versus your [indiscernible]
Carol P. Lowe
The reduction is that we're not performing quite at the level we had estimated previously. Some of it is currency, actually a big portion of it is, as well as just managing the overall working capital.
We do expect a meaningful reduction in inventory in Q4, but we just haven't hit the levels that we were originally planning.
Albert T. Kabili - Crédit Suisse AG, Research Division
Okay. All right, that helps.
And just a follow-up on just that Diversey sale. How will you handle this from a branding perspective?
There's a lot of established brands, but how are you going to handle this globally now that you've got an outside party in Japan with those brands? And can you comment if the portfolio review would include additional pieces of Diversey?
William V. Hickey
This is Bill. Let me comment on the branding because I know it was an item that came up during the negotiations.
We have entered into a brand license agreement with the buyers for the Japan business, which runs for a number of years, and they will pay us an ongoing royalty. They will be a distributor for our TASKI systems as well as license the Diversey brand, and they will even keep the Diversey name for a period of time.
So those matters are all being worked out as part of the sale process. And the second part of your question is, as Carol indicated earlier, the portfolio review covers our entire business, not just Diversey but as legacy Sealed Air.
And I really am not in a position to comment what, if any, pieces of what businesses are being discussed until we have an opportunity to say it at the right time.
Operator
We have another question now from George Staphos at Bank of America.
George L. Staphos - BofA Merrill Lynch, Research Division
One more question. Jerome, what are your initial impressions of Sealed Air prior to [indiscernible] and what, if any, experience from your time at Dow with Rohm and Haas is relevant to [indiscernible]
Jerome A. Peribere
So you might -- my first impression is that this is a company, which is in transition in 2012, as I said earlier, and it has potential. And that's the main reason.
You might wonder why an EVP of Dow would just come and take the lead at Sealed Air. And the reason is exactly that, is that after the due diligence I have done is that I believe that this company has great potential.
As a result of that, I jumped. So the similarity between Dow Rohm and Haas or call it Dow Advanced Materials and Sealed Air are many and more than one might think.
Number one, any integration is a delicate process. It's a process where on one side, you go for the cost synergies because you have to; and on the other side, you need to look at the growth synergies and you -- and all of this is enabled by employees.
So either you go and build a project or you don't. If you build a project, you're going to engage employees.
And if you don't, you're going to have them look somewhere else and away from what you're trying to build. That's what I have done for 3 years at Dow Advanced Materials, and that's what I am spending most of my efforts -- not most of my efforts -- but a lot of efforts right now.
I want to federate our employee population. We have 26,500 employees.
Those are people who look for the projects of Sealed Air. And I'll tell you, I very, very strongly believe that the right people are the ones that the company needs to build a company and build a project.
So the other similarity with Dow Advanced Materials is that this is a specialty business. And any specialty business is built stone-by-stone, brick-by-brick and it takes time.
So it takes time, it takes efforts, it takes persistence and it takes employee engagements. That's what I'm really looking at and working.
So I'm not miracle man. It's going to take time, but I do believe this company has some potential.
William V. Hickey
Operator, we kind of run out of our allotted time. And I know today is a busy day for other calls, and we've moved everyone to Friday.
So I would like to thank everyone for your participation. I think you see that our third quarter results set the right tone and momentum going into the fourth quarter.
Our pending sale of Diversey Japan accelerates our debt reduction and help us to exceed our annual debt targets. Innovation and new solutions continue to be a key factor in our ability to differentiate Sealed Air from our competitors.
And we have a number of new products that Jerome indicated we're truly excited about. In the meantime, we're going to continue to focus on executing our plan, integrating Diversey and maximizing free cash flow.
Thank you again, and have a great day.
Operator
Thank you very much. Ladies and gentlemen, that concludes your conference call for today.
So you may now disconnect. Thanks for joining.
Have a very good day.