Q1 2020 Earnings Call
[music].
Thank you for joining the Silgan Holdings first quarter 2020, <unk> earnings results Conference call. Today's call is being recorded at this time unless you're trying to call of Richard Kim <unk>, Vice President Finance and Treasurer. Please go ahead.
Thank you.
Joining me from the company today, they have Tony Allott, Chairman and CEO, Adam Greeley, President and COO and Bob Louis ABTS CFO.
We begin the call today, we would like to make it clear that certain statements made today on this conference call. Maybe forward looking statements. These forward looking statements are made based on management's expectations and beliefs concerning future events in time.
The company and therefore involve a number of uncertainties and risks, including but not limited to those described in the company reports on form 10-K for 29 team [laughter] filings with the as you see.
Well the actual results of operations or financial condition for the company could differ materially from those expressed or implied in the forward looking statements, but that I'll turn it over time.
Thank you Jim Thank you all for being with us today.
We'd like to start by offering our sincere hope that you were all well and successfully weathering this unprecedented health and economic crisis.
It's a bit strange for us today to be telling you how well our company is doing in the middle of these trying times. However, we're console by the knowledge that.
So many of our products are desperately needed to these times and proud of the work our employees have done to ensure our continued deliberately as demand.
As indicated in our press release, despite having factories and many hot spots around the world. We continue to run all of our facilities that have seen record output in many.
We're committed to continue to keep our.
Employees say to deliver for our customers and our communities and should continue to stay proactively how does it ever changing prices.
We're proud to have been doesn't need is an essential business than all of the geography, which we operate including by the department of Homeland Security.
We took several proactive steps in light of the pandemic.
During the quarter.
Fortunately as we later learn the when you responded it was almost as important as to how you responded we were characteristically conservative in our coal that 19 actions.
The initial up rate was impacting China in January and into February we began sharing our employee Justin sang silly sanitizing protocols across.
Our businesses.
That is contaminations began to be reported western markets, we severely restricted non silicon visitation to any of our location band International travel weeks before western governments began to do so.
Later, that's a credit markets began to tighten we proactively drew upon a revolving credit facility even.
No we have no near term matures.
As a result, our businesses are running well.
We have significant liquidity I believe weren't a good position to whether the current storm.
Through the dedication of our employees, we're truly silgan strong.
With that said I'll make a few comments about the first quarter and our thoughts about the remainder of the year.
Bob will then provide some further details and then Bob Adam I'll be pleased to take any questions.
Have you seen in this mornings press release, we reported earnings of 57 cents per diluted share well ahead of our expectations and significantly better than the previous record first quarter 2019 of 46 cents per diluted share.
Each of our businesses posted record first quarter volume gains and strong segment income.
Well the consumer pantry stocking in March did have a positive impact on each of our businesses. It is important to note our sales lift from these purchases labs, the retail outlet sales impacting us only when our.
Let's begin rebuilding depleted stock levels.
Therefore more of the impact of the initial consumer buying is expected to occur in the first part of our second quarter, which we are currently experiencing in April.
Each of our businesses also operated very well despite the challenges of the cobot 19 situation.
Faulting in strong profit levels bridge.
We did incur some additional costs associated cobot 19, including one time incentive payments to our plants employees.
While there are many uncertainties for the remainder of this year, we have some indication of demand levels at this stage for many of our core products and our.
Ability to meet those needs at this point.
As a result, we have provided guidance of 55 cents to 70 cents in the first quarter as compared to 55 cents in the second quarter 2019.
This increase nearly 14% at midpoint reflects the current demand we're seeing in many of our products due to the replenishment.
Products purchased during the pantry stopping in March and most western markets.
This demand is particularly strong for food beverage and consumer health products, such as soap and sanitizer bottles and dispensing systems.
Certain other products generally not intended for stay at home use such as.
Gallon food cans for restaurants sports drinks and some beauty products, we'll likely see volume declines.
This unprecedented shifted demand is one of the reasons for the larger than normal range in our estimates.
For the full year, we've raised our guidance from $2 into 2038 cents to $2 30.
35 to $2, a 50 cents per diluted share.
Yes estimate reflects an improved first quarter of the year and consider the some of that volume may have been temporary pantry stocking that will reduce demand and later periods.
However, we do believe that the increasing demand for some of our products such as food and consumer.
I was products for in home use should experience the sustained increase of volumes as more people continue to eat and entertain and small groups in their homes. Additionally, many new are returning customers are using our product formats, such as food cans, and we're working hard to help them understand the nutritional benefits and convenience for cooking.
So they feel comfortable staying with these products once this crisis as pass without I'll turn over to Bob.
Thank you Tony Good morning, everyone I Trust, your all staying safe and adjusting to the new normal as we all do our park to stem the spread of Cobot Nike.
Overall, our results for the first quarter 2020, compared favorably to the prior year.
Sure and our estimates we delivered adjusted earnings per diluted share of 57 cents, an increase of nearly 24% versus the prior year period and significantly outpaced our estimates of 45 to 50 cents.
As each of our businesses delivered strong results.
On a consolidated basis net sales for the first quarter.
After 2020 increased 3.3 million versus the prior year 1.030 billion as each of our businesses delivered top line improvement.
These increases were largely the result of higher volumes in each business and the inclusion of the newly acquired Cobra Classics business, which contributed 4.7 million.
Actually offset by unfavorable foreign currency translation of approximately 8 million primarily related to declines in the euro.
We converted these sales to income before interest and taxes for the quarter of 102.1 million versus 86.7 million in the prior year quarter, primarily as a result of higher income and.
Each of our businesses, including lower rationalization charges, partially offset by higher corporate expenses.
The higher corporate expenses were primarily result of an increase in incentive compensation largely due to onetime plant.
Incentive payments of approximately 4 million costs associated with announced acquisitions.
2.3 million inflation and foreign currency transaction losses.
Definitely one mill.
[noise] interest and other debt expense declined 3.7 million versus the prior year quarter. The decrease was primarily due to lower weighted average interest rate and lower weighted average outstanding borrowings as we use free.
Cash flow to repay outstanding debt at the end of 2019.
Our weighted average interest rates were lower as a result of the third quarter 2018 redemption of all of the outstanding 5.5% Senior notes due 2022 and lower market rates during the quarter.
We did proactively borrow approximately 500 million.
And on our revolving credit facility late in the quarter to ensure adequate liquidity throughout the crisis. We also issued 500 million Euro denominated 2.25% senior notes maturing June 2028.
And a 200 million dollar add on to the for an eight notes due 2028.
The proceeds of which were used to.
Prepay outstanding term loan Hey, as a consequence, we recognize the loss on early extinguishment of debt of 1.5 million in the first quarter [noise].
Our first quarter 2020 effective tax rate was 25.4% as compared to the 2019 rate 21.6.
For.
The 2019 rate benefited from the timing of certain tax deductions recognized in the quarter and certain changes in test state tax rates.
Capital expenditures for the first quarter 2020 totaled 65.1 million as compared to 61.7 million in the prior year.
Full year.
Yes, we expect capital expenditures to be approximately 200 million in 2020, and this compares to 231 million in the prior year.
Additionally, we paid a quarterly dividend of 12 cents per share in March the total cash cost of that dividend was 13.8 million.
And details for each of the business follows.
The metal container business recorded net sales of 508.5 million up a million and a half versus the prior year. This increase was primarily due to higher unit volumes of approximately 8%, partially offset by the pass through of lower raw material cost less favorable mix of products sold an unfavorable foreign currency translation loss.
Approximately 2 million.
The growth in unit volumes is primarily a result of the impact from customer pre buy activity in the fourth quarter of 28 20 team in advance of significant 2019 steel inflation and the benefit in the first quarter of 2020 from the higher volumes in March as a result of a spiking.
Or demand in response to the Corona virus Bryce.
Segment income in metal containers was a record 47, and a half million an increase of 8.6 million versus the prior year. This increase was primarily attributable to higher unit volumes stronger operating performance and higher pension income partially offset by.
Less favorable mix of products sold higher rationalization charges and foreign currency transaction losses.
Net sales in the closures business were 357.2 million an increase of $1 million, primarily due to increased unit volumes of approximately 5%, partially offset by the pass through a lower.
All material costs, a less favorable mix of product sold an unfavorable foreign currency translation of $5 million.
The unit volume increase was primarily due to strong demand for food and beverage products and certain consumer health and personal care products beginning in March due to the spike in demand in response to the Corona virus crisis.
Lower volumes in the first quarter of 2019 as a result of the 2018 prebuy in anticipation of the 2019th steel inflation and volumes from the recently acquired Cobra plastics business.
Segment income in the closures business increased 5 million to 45.2 million in the first quarter of 2020, primarily due to the higher.
Our unit volumes lower rationalization cost and higher pension income, partially offset by less favorable mix of products sold and the benefit in the prior year from the delayed pass through of lower resin costs.
[noise] net sales in the plastic container business increased 800000 to 160.
4.7 million in 2020, principally due to higher volumes of approximately 6%, partially offset by the task for a lower raw material costs and a less favorable mix of products sold.
Volumes improved primarily as a result of the demand for certain foods and customer consumer health products starting in March as a result.
Corona buyers prices.
Segment income increased $9.9 million to $22 million for the quarter largely attributable to the higher volumes lower manufacturing costs, including for raw materials and higher pension income.
Turning now to our outlook for 2020, there's no question, where an unprecedented times.
Times, we remain committed to doing everything we can to keep our employees safe meet the unique needs of our customers and to deliver safe quality products to our community.
Based on these commitments the results of our first quarter and our outlook for the remainder of the year, including increased demand for certain food and consumer health.
Products, partially offset by declines for certain other products, we're providing full year earnings estimates in the range of $2.30 $2.50, an increase from our initial 2020 guidance of $2.28 to $2.38.
We're also providing a second quarter 2020 estimate.
Adjusted earnings in the range of 55 cents to 70 cents per diluted share as compared to adjusted net income per diluted share of 55 cents in the second quarter of 2019.
The quarter and full year estimates of adjusted net income per diluted share for 2020 exclude the impact from the announced pending acquisition other.
Business about bad group rationalization charges cost attributable to the announced acquisitions and loss on early extinguishment of debt.
Based on our current outlook for 2020, we're also maintaining our free cash flow guidance of approximately 275 million as compared to 272 million in 2019.
Notwithstanding the anticipated improvement in earnings we're prepared for liquidity to remain tight globally driving increased volatility around working capital. Therefore, we are maintaining our free cash flow guidance at this time.
That concludes our prepared comments I'm as we try to turn it over for Q and a I'll remind everyone.
Please limit it to one question and one follow up please with that I'll turn it over to Cassidy to provide una directions.
At this time, we will open the floor for questions. If you would like to ask a question. Please press the star key followed that on one key that was star one.
To asking audio question, if you're using a speaker phone. Please make sure to pick up the handset for a lot to allow your signal to reach our equipment again that was star one to asking a question.
[noise] first question comes from George Staphos. Thanks America.
Hi, everyone.
Good morning, Thanks for all the details and thanks for all you're doing for Kogut and for your employees poisonous My my two questions.
I want to go back and you touched on this in your prepared remarks that was a record first quarter.
We haven't seen a metal container quarter like this since I think two.
And then 10.
And then you know we saw a drop off in earnings in subsequent periods. How do you convey what movement are you having in terms of moving the football downfield and convincing your customers that this is a so they can is a a.
That are a more viable product in a.
Post Colgate or intra co good world and then related Lee.
Can you talk about mix seemed to be negative across all the businesses in the quarter.
Given what we're seeing and consumer demand for the can right now recognizing some of this might be.
He just stocking up what kind of mix changes should we expect across the portfolio over the rest of your thanks guys.
Hey, George Good morning, this out [noise].
I'll touch on a your questions and Tony ill jump in with any corrections to what I say too. So a couple of things one obviously it.
Demand for food cans was strong in the quarter is as you heard Bob and Tony both say part of that was.
To the pre buy impact that we added from 2018, but a good portion.
It was increased demand as we went through the quarter. So the corona virus impact of that is.
Meaningful will definitely impact our second quarter in fact drives our second quarter I tell you what in the near term for our can business.
Waterfall, our order books are full and and demand is pretty consistent through the second quarter. So we're looking at something like.
Probably mid to upper single digits volume growth in the second quarter. I think your question was bigger than that so so let me touch on that for a second so how do you make that's sustainable for the future correct I really think that it's more around.
Gauging with consumers at this point.
We've got a lot of.
Activity that we've launched through social media outlets and you know through the CMO, which if they can't manufacturing Institute to try to reach those consumers because there are a vast number of consumers. They now have cans in their pantry for the first time and it's it's what we think it's part of our job to teach them how to.
Here's those can and understand the nutritious value that those can can provide for them and their families. So.
We're working on that we've been working on that for sometime now I think the outcome of that is still going to play out over several quarters, but we're encouraged because our.
Numbers or understand the value proposition that nutrition proposition that they can't provides to the consumer and are behind that right now.
The second part of your question over to mix for a second I think Tony highlighted this really well I mean, there's a portion of our business that it goes to support restaurants.
And you think about the number 10 can a gallon can as what I think we described earlier of tomato sauce for a tomatoes that are used in restaurants that that volume is not strong right now as you could imagine there were a little lunch or what's going to happen through the course of the year. The good news as we are able to hopefully can.
Some of that the crops at harvest associated with those products to more shelf sizes that reach consumers on a different way for you sat home with their families. Those as we have a new set of circumstances that we're dealing with in the country. So I'll actually yes, Tony now is there anything like that did not that it's just really.
Really and mix is often without almost on a selling price points on data set a gallon can is much more per unit. So we're really just trying to reconcile or the unit movement versus the the revenue.
Understood. Thanks, Adam as Tony I'll turn it over and I'll be back. Thank you.
Thanks.
Our next question comes from Michael <unk>. Thank <unk>.
Good morning, Tom.
Sorry, [laughter], Tony a Adam Bob.
Hey, I Wonder I wondered Ah Tony if you can just help us or maybe Adam can help us with the cadence of the pick up you saw in all three.
Three businesses as you move through the quarter and that's how that tier has carried over so far in the first three weeks of April.
Well sure markets out them again I'll just go through each of our businesses will start with the food can business as we talked about obviously you know as will go through.
Annually in February and March we were already expecting an increase in January and February due to the pre buy activity from 2018. So we did have good year over year volume growth, but I would say that was as expected as we moved past that into March a that is when we actually saw that the spike in demand related to the Corona.
This activity so cadence was good all through the quarter, but for clarity the Corona virus. In fact really was about March for our food can business.
As we move to closure is going to get a little bit of a similar story kind of our flat cap closures business that we utilize more food and beverage.
Product really that was good cadence throughout the quarter a definite spike in March.
As our dairy products for example for fresh fluid milk picked up.
Some of our red sauces with metal closures picked up as well so I think a good distribution of products I would say that.
On the dispensing side of our closures business.
We saw a pretty sizable ramp up earlier in the quarter call. Its February.
For products supporting say handsets hand, sanitizers personal hygiene those kinds of products.
So cadence was pretty consistent through the quarter.
In our closures business in the plastics business.
Little bit on the same.
Really good growth at 6% as we talked about and you know you're thinking about the products that specifically benefit. It. It was our food products. It was our personal hygiene and consumer health products hand sanitizer bottles.
Containers for a wipes et cetera, so cadence was pretty consistent picking up and February if our plastics business as we turn forward to Q2 I cannot I just sat on the can side, we're essentially fall a entitled can and feel really good about a good.
<unk> Q2 with the guidance, we just provided on the closure side of the business again, I think we'll have a really.
Nice Q2, I think the the idea for Q2 and closures that will expect our normal growth at our our food and beverage products will have a continued.
Mexico products and in dispensing with.
Pumps, and and sprayers for personal hygiene consumer health products offset by I think what will be a little bit of a sharper decline in some of our unique product lines.
We only started to experience that really kind of late in March.
And then finally, our plastics business again, good solid cadence throughout the quarter and as we look forward into Q2, what we think what happened in our plastics businesses Q1, we had our normal volume that we anticipated some growth wet and then we had any impact from the Corona virus.
Some of that normal volume is for things like personal care products beauty products I think those will be negatively impacted in Q2, but those are gonna be offset by bottles and containers and third products associated with Corona virus.
Yeah, we're expecting good growth kind of back to our expected volume.
Level trajectory for plastic business in Q2.
Okay. That's helpful and just as a follow on Adam is it possible to get any sense of the benefit you might have had from kind of resin coming down in the first quarter across the whole loan portfolio.
Sure across the whole portfolio. It it was a couple of million.
Collars unfavorable and I'll just say most of that was in our closures business.
On favorable are favorable.
Unfavorable and again I think the reason why because of the specific resins that we use in our closures business. So maybe if I take a habit that back not much impact.
To our plastic container business.
<unk> million a favorable at our closures business.
Okay, all right that's helpful I'll turn it over.
Our next question comes from Anthony Pettinari.
City.
Good morning.
HM.
You indicated your plants ran without disruption in the quarter, which is great to hear I'm. Just wondering if you saw any disruptions on the part of your customers are suppliers. You know we've seen some disruptions from protein producers you know as you talk to your big food customers, maybe think about the pack the availability of agriculture labor et cetera, you know how are you thinking about the.
The supply chain.
Outside of Silgans walls.
Hi, Good question, Anthony It's Adam again, so maybe I'll try to clarify it we did have disruption in our plan. It's hard to all of our plans continue to run through the quarter, but as you would expect it was not necessarily smooth sailing I.
Our team did an outstanding job of maintaining our facilities, that's keeping them operational and and meeting the needs of our customers in a very very trying times. So our plants are all opened our offices are all open a we continue to to execute very well so with that being said.
We have had certain instances, where our customers have been impacted.
Several on on the food side, some on the personal care side really it depends upon the hot spots.
In which they are filling their products, there's not a situation where customers have been shut down.
Not been able to restart their operations, but it's one of our customers at this point. So you know while there have been some outage at all of our customers have to come back up that have been shut down for one reason or another and again, our our facilities. We've had some minor disruption, but I think what does the strong protocols that we put in place we have a.
Playbook that we employ and we we execute very well to get that facility back up and running.
Yeah, just come back around random started I. Matt. This is it's a fight all the time if it is for US it is for our suppliers and as for our customers.
And you had obviously no one wants to declare victory until this things over with.
So it's just it's amazing the surprises when you think you've got something under control what changes here. So I think we're up we feel like we've been proactive we continue to challenge ourselves on it and we're going to continue to do that keep assessing and thinking and trying to improve as we go here.
Okay, then the thanks.
The detail on the clarification.
Just on metal container you know you indicated you are running full out I mean this is a you know when industry, that's been sort of flat to maybe shrinking slightly over the last decade. When you think about the demand that you're seeing now and you think about the footprint rationalization plan that you outlined last quarter is there any.
Of color you can give us on the timeline.
Of that plan, maybe potentially pushing some things out or just how you think about it in the current environment.
Sure I'll well, let me take a stab at this now so I think what we're thinking about the metal container side just on the Cam sides of the volumes clearly, what we're saying right.
Now is you had pantry stuff thing and we've got replacement that going on.
The second wave that we believe will happen here is that people going to have longer periods of time in home restaurants. When we finally got out there are going to be week for a period time. So our thinking is if you break the world to short term.
Clearly the food can is gonna do well during that.
And that's what we're running as far as we kept right I'll get rationalization that Matt. If you look at mid term. Our feeling is that restaurants are going to continue to be week. Unfortunately, a and so that will be positive for food cans, because there's more home consumption and then it's a high nutrition easy to Cook product and so our thinking is that for some interim period of time, which none of us.
How long that will be the food cans in our mind is clearly going to benefit from that then as Adam talk about as you look further out you know a lot of people aren't getting exposed again to the food can or for the first time for some millennials and where our hope for lack of a better where does that they will realize how good that food is and frankly how.
How convenient it is to cope with it etcetera and that that a lot more lasting permanence to it. So that's as I talk to you about what we do a capacity that's the lens. We're looking through on what we're seeing right now as Adam said, we're running all out. So if you asked us today would we shut down the things. We said this year, we were going to shut down the answer is right. This moment.
We can't we'll see what happens that wave one goes through when we get into the way. The second phase of this at some point it may be possible for us yet to do that this year and so we've made no decision not to continue to move on it.
In the longer term, we had enough capacity in the system that even if long term, we get some growth and.
Silver desires for Canada, et cetera, probably much of that rationalization will continue to make sense for us. So that's the so long answer to your question.
Okay. That's helpful I'll turn it over.
[laughter].
Our next question comes from Grand Champagne shopping there.
Hi, guys good.
Earnings.
Gotcha.
You know, obviously big chunks of the portfolio benefiting from.
Entry something trying to trend if you will get it can you sort of size.
Some of the pieces of the portfolio that could be impacted on the flipside.
Tony restaurants flush foodservice.
Maybe discretionary beauty and somebody other kind of.
Breeze that are being impacted by shifting consumer demand patterns right now.
Sure. So I think if you look at the I'm again, we don't get into the profit of the individual components, but you're talking about on the food cans side, there's something the range of units in that 10% to 15% ish range I couldn't be negatively impact on that now they're higher.
All are higher dollar drop through and so it's probably a little more than that in terms of the overall PNM will impact, but again, you're also getting as I said, you're getting surge another area. So it's not as easy as taking that element of it you know you're getting a bit of given a take and frankly, a lot of those customers who wouldn't normally.
Well that restaurant can probably we'll think about if they have ways to sell a shell side can pack into the more shelf size can't so if you don't necessarily know that that's a one for one give away even on that side.
If you look into our dispensing systems, you know you're going to that the personal care is largest.
Sorry, the beauty is largest NR dispensing systems business.
So it's going to be somewhere in the 25% to 30% of that business. If you look at Albania is gonna be even a larger piece of the target business.
And that right now beauty certainly seems like it will go through a period of downtime here, what's good to see.
He is when you look at China people came back out of.
They're shelter in place there was that he had been sizable spike and beauty demand, we're seeing in our business. We're reading it. So I think there's pretty good hope that once people start to emerge a the that that market ought to come back in a fairly healthy manner.
Okay, and then you know Adam you mentioned, you give us some indication for volumes for the second quarter, but it just in terms of the full year guidance. What do you have embedded by the segments I'm, sorry, I missed that but just thought I'd ask anyway.
Yeah. So I think what we're looking out for the full year gone from it but you know we're going to get the benefit of the quantify.
Chris volume impact really in the first half of the year and then the back half a year, we're expecting essentially kind of as we add back inline with our original expectations for the year. So if you think about food cans.
For the year I think we're talking about kind of low to mid single digit growth for the entire year.
Sure I'd say, our closures business will be in that kind of mid single digit growth category and that on the plastic container side or kind of low to mid single digits as well.
Perfect. Thanks, so much stay safe.
Thank you too.
Our next question comes from called <unk> After she bank.
Hi, guys hope everyone do well, there's taking the question I'll just follow up on some of the questions given the the uptick in demand or your customers, telling your right now that they're looking to enable to increase their production levels for the pack season, and then related to this do you foresee any constraints on meeting this I'm just given how your production schedule works and how you typically build.
Inventory going into this tax season.
While I assume a law that inventory is kind of being use right now.
Sure Kyle it's out of a couple of things one and maybe in the current environment. What we're looking at at the end of Q1 in Q2, we are seeing customers Allstate limit the SK his they run through.
Their plants that I will talk soon specifically to increase a the throughput by decreasing changeovers on their line. So they're trying to set up airlines with their biggest moving S.K. you and run those for extended period of time, which will allow for additional filling capacity in their operations were able to meet that demand.
The man, we've been working very closely with our customers. We're also talking to our pack customers now as well and we feel like we're in a very good position I'm just support the pack need so.
We talked about at the yearend call you know we're expecting another normal pack for the here and you know as we think about a that the filling.
Capacity for our customers, there's some surge capacity there that they have and we feel confident that we'll be able to meet that demand I shouldn't arise.
Just a follow up on soup in particular, it looks like it had another good corridor from the industry data I know, maybe a little bit parts Phelps, but.
How much you need to be it was driven by kind of a consumer shift gravitating toward soup given to efforts being made by some of the brand owners in that category versus any surge in demand related to grow to buyers in March.
It's a good question Kyle they soup in particular now is on its third quarter of.
It's kind of pretty good improve performance versus prior years, so I'm not going to say that quite make the trend line, yet, but clearly soup was a beneficiary of the corona virus impact so well wait and see what happens here in Q2, but soup is definitely one of the beneficiaries of what.
Happened in the market.
Hi, My hand, it over if you look in there.
Our next question comes from Aaron This one on the sum of RBC capital markets.
Great. Thanks, good morning, and Ah Thanks for everything you're doing.
On the Kobin front.
Yes, I just wanted to ask about free cash flow first I'm wondering if you've mentioned this but I guess the previous guidance is 275 million for 2020 did you provide enough. They did a number for that.
Yeah. This is Bob we did and they and their prepared remarks, but all sort of a view it again so.
We are we are holding our estimate of free cash flow at 275 million for for the for the year.
Obviously, we've got some opportunity for potential upside on the on the earnings side, but likewise you know we we are taking you know a keen eye to what.
Happening around the world from a liquidity standpoint, and so you know that continues to be tight, which we expect it might for for at least the foreseeable future then that that could create some volatility around working capital and so we're kind of factoring that into our guidance.
At least until we get a better read on on.
What may be happening around the credit markets and alike.
Okay. Thanks, and then I guess on I'll be a.
Are you still targeting the 20 million of synergies over 18 months.
And I guess, maybe you can just review you know how you're looking at leverage where are you want to be.
You know maybe at the end of this year a after consummating this merger as well and and through next year. Thanks.
Sure Yeah. So no change at all in our view of synergies. So nothing really we still feel really good about the fit of the business than the opportunities ahead of US obviously the current demand issue is it.
Abnormality that we did not expect but doesn't change our view at all about ER, our desire for that market space and the opportunities ahead of us on it.
So that's.
Yeah as that to the the leverage you know, we still think that the longer term a benchmark for where we want to operate the.
Business, it's kind of in that two and a half the three and a half times multiple.
Obviously, when we consummate the deal I'm, particularly if you know if it were to close toward the end of of the first half leverage will be a bit higher than that because of our seasonal demand on a on a year end basis pro forma for the for the deal it'll it'll.
Still be a bit above our leverage it will be kind of in the in the for low for kind of level, which is just fine that's kinda commensurate with where we were when we did the U.S. rock deal back in 2017, and given the strength of the free cash flow in the stability of the cash flow. This business. We think we can pretty quickly get it.
Back into that range very much the way we did.
When we executed the westrock yet.
So no okay fair enough.
[noise]. Thanks.
Our next question comes from Adam Josephson of Keybanc.
Thanks, Good morning, everyone Hope you in your families are well.
A couple of questions on on out by Ah Ah Tony I think he mentioned that beauty is more than 25% to 30% of that business.
I know you think you said, 25% to 30% of dispensing systems in more than natural Bassett would you mind, just going through the end market exposure or so.
I'd.
Fragrances, any travel retail skincare et cetera.
Sure. So yeah for sure the a the dispensing business of Albania that we're acquiring is predominantly beauty business. So it is predominantly fragrance a it it or it is Ah.
So fine lotion pump spore the beauty market or the kind of the two main areas.
No actually in fragrance Theres, a subset of that which is samples. So sprayers that go on samples, which has an E commerce element to it. So that's what an interesting one in that in the current world that could be actually something bad that you could imagine benefiting your overtime.
As these brands will want to find other outlets to sell to people who are at home more than they used to be and so that could be an upside on it but to answer. Your question. It is predominantly a beauty business.
And so it's been into that and Tony it's been growing at pretty high rates, you you have 3% to 5% across most of those.
Category. So it would seem that there are some obvious economic sensitivity. There can you just talked about what what you think you in a recession like this one what do you think the growth about business or declines.
Are likely to be and you just through what the through the through the cycle growth.
Do you think is just bearing in mind that obviously, we're in the down we're heading in the down phase now.
Sure I'm not sure I get your question I'm not sure I can answer your question completely I think what we're saying now is is pretty extraordinary and so if if you looked at that over when we did all or get will decide we look over a.
Long period of time, covering normal recessions and it was actually quite resilient through normal recession.
Fragrance market for an example, or that you know the beauty market because you had parts of the world that we're growing so fast South America Asia et cetera that would make up for some economic turned in a particular market were another that's different.
Where we are right now where you are right. Now is for example, this is the heavy French customer markets, France shut down a lot of plant. So you've got plants that are that are fully shut down or at this point or last month in France is having more severe impact. So I think all I can tell you that this is an area that is.
Got to be fairly heavily impacted by the current situation.
But I our view is that in a normal recession wish I don't know what that means or when will get to somebody it looks that good.
But it would probably perform pretty well, but that's not where we are right now it'll definitely take a you know I would say meaningful negative hit on top line in the near term at least we.
I see that in our own business Ah. So our beauty products are they were fine remarks, but beginning to slow up but our beauty business is definitely down more significantly as we look in April.
Thanks, Tony.
Yeah.
Our next question comes from Daniel Rizzo of Jefferies.
Hi, Good morning, I just was wondering if I mean, the pension payments was was.
Nice so I was wondering if there's going be additional payments just given the ongoing crisis.
[noise] and wouldn't that no matter what.
I understood. The question. So it is it is so that.
We made a Ah I, one time, a incentive payment to our plants employees during the quarter and really that was just an acknowledgement of all that they were doing to keep us running into to show up diligently every day and perform Ah, but it was it was really meant as a.
Support for what they were doing as a onetime payment. So we're not anticipating further versions of that.
Okay, and then you mentioned kind of changing consumer habits, I guess or just thought process around.
Okay and use of who can't truthful value one is that never happened before and I'm just wondering how.
Well, we take I. It just seems like a really arduous journey.
Oh, yes. It has happened before so you may recall, but we are overlap.
Two years ago up until.
A year ago, we work on that program called camp kitchen, cooking, which was a communication.
Jack through cooking channel through a social media et cetera that was trying to convey all the benefits that.
Came from cooking with cans et cetera, so that the good news that infrastructure is already in place that was done through the semi the industry Association. So lot of that was in place. So some of those.
Those are vehicles that are being used today to open up the communication channels again equally we have customers that are working hard to push the same issue in terms of getting recipes out a and nutritional the benefit of what is in Kansas and so you're right that you don't just one day wake up turn a light switch and everybody's out buying.
Time more can but there are good ways right now to communicate to individuals say you've got these cancer pantry you should know how good they are for your family and by the way here as a whole bunch recipes you can use and so I think we will you know so the idea that you slowly make headway on that.
And that has benefit overtime.
Thank you very much.
Our next question, Brian Maguire of Goldman Sachs.
Hi, good morning, guys.
Just a follow up again on the operational you know it impacts from this specifically really just on your capacity.
Levels and in metal food can these days I guess I understand you're probably running 100% utilization in April and the guidance for volumes into queue up I guess mid high single digits. It sounds like some of the retail scanner data seems to be a little bit in excess of that so wondering if there's a disconnect there.
It's just the fact that you're kind of capacity constrained its limiting that and I guess you know kind of question is if you have more capacity is there enough demand for it now and then sort of related why you wouldn't expect some of this positive demand to continue into the second half of the year as whole supply chains.
Sort of tries to restocking and adjust all this.
Well, we are I mean, so so let's be clear our expectation is sizable growth in demand in the second quarter.
That to watch is a reasonable period to restock those products that can restock in that time period, So remember food.
Can't one of the trick says that that which is grown and harvested you can't change when you have that right. It's not until it's finally gets grown it can be harvest. It. So the vegetable market can't refill itself in the second quarter be that doesn't have that that'll happen in the third quarter and all of our customers have a certain amount limits to their systems. There's so many farms that were worth.
Contracted for acreage, there's so much filling capacity et cetera. So what you're hearing is basically the system. What we see isn't the system is doing everything you can replenish over this time period.
Guidance is saying, okay, but behind that we don't know if there was some amount of debt that was at one time pantry surge that won't continue so the one thing thats.
Not in our guidance as the people continue to stop there pantry all through the year, we do assume they'll continue to be eating at home more and consuming more at home, but we don't assume that they're going to keep buying out the stores at a that the same pace. They did in March.
But yes, we're gonna be catching up to that mark surge over the second.
Quarter as we've replaced.
Okay. So maybe a little conservativism in there just depending on how you want to look at the continue trending at home consumption.
And I guess I'm I'm, a regional trends just hoping you could just kinda talk about how you know you're seeing trends in the different businesses in the U.S. surgeons in Europe.
[laughter] consumer behavior is a little bit different from one region to the other these days.
Sure Brian It's Adam I think is you know maybe we'll start in Europe and.
Actually let's go even further east will start in Asia first because that's where our business was first impacted by the Corona virus. So I think you know.
They are several months ahead of the rest of the world as far as dealing with the like Corona virus. So you know what we have seen as Tony alluded to as demand for our product and they kind of but they got to emerge from their shelter in place orders has been good and it has picked up nicely but.
There was a wedge of time in the first quarter, where the demand was limited in that region certainly as we move over to Europe, what we saw with something similar to the U.S.. We did see a spike in activity. It was a little bit earlier in the quarter than we saw the U.S. because again, you think about win [laughter] countries, like Italy, and France and Spain.
And in Germany to some extent, where the gun to deal with the Corona virus. You know we saw those those demand increases in February what we did not see in Europe was kind of be the panic buying that took place in the U.S. on certain products. So it was much more.
Measured as far as what that Spike was for the products that we sell into the European market and that obviously I think we spent quite a bit of time talking about the spikes in demand and and the surge that we saw really beginning in March in the U.S. markets.
Okay. Thanks, very much on turnover.
And.
Yes, I imagine it feels like to ask a question. Please press star can you qualify them one key Oh sorry.
Our next question comes from cancers shot of Wells Fargo Securities.
Good morning, gentlemen, I'm glad to hear everyone's doing well and hope it seems that way.
It too.
I don't know if I missed it in your prepared remarks, I don't think anyone's asked about it a this is the first time and I think he has made more money in the first quarter and plastics than you did the entire year of 15 and 16.
Can you tell me at all I mean, I know, what he said and again in the prepared remarks, Bob but.
Anything odd going on there that that goose profitability and or does this change expectations for that 15% EBITDA target.
Hey game, it's Adam maybe just talk a little bit about the performance and plastics like it was a really good first quarter for the plastics business and I.
It almost call it a.
Perfect a corner from an execution standpoint, and we could get too so well we've been talking about for sometime now is really lowering our operating cost getting our footprint you know rightsized to or the cost structure that we want it for that business and at some point, we were going to turn the corner and.
Our filling those assets in filling those facilities to leverage that lower operating costs and lower footprint for the business and really what 6% volume growth in the quarter that happened in the first quarter. So it was more volume than we anticipated for Q1, but.
That's where do you see kind of the operating leverage that we've been trying to create really manifested itself in Q1. So we feel really good about it I doubt it does not reset our expectation.
For the rest of the here to that level, but you know we've got our footprint in place we've got our cost structure in place and we'll see what happens with the.
Yeah.
But again, we're not expecting Q2 to be at that same kind of 6% level that we talk Q1. It was extraordinary in Q1.
Okay, maybe as a follow up and I guess, if demand revert back to call, a 2% or or something in the low single digit range.
It sounds like 15% EBITDA margins, then should sort of.
I don't want called Slam dunk, but be something that you guys can consistently deliver because that was that a for when think about it.
Yeah, Ben Thank you for the follow up because I guess, an excellent question. So if you go back to Q4, when you when you adjust out though the negative impact from our pension.
Income from last year, we were at the 15% EBITDA margins and in Q4 really for the the full year. If you look at our plastic business. So we think we've achieved that 15%. We're not done we're going to continue to the fight and call I'm and try to continuing to improve that business, but yes. We're we're above this.
15% margins.
As we sit here today and we have a business plan that has US ahead of that as we head into Q2.
Okay quick one for Bob any concerns and maybe this is the reason why you're not raising free cash flow, but in terms of collectability from some of these restaurant customers.
Is that meaningful enough to give you pause.
Well look at obviously, we pay attention to where our collections in receivables are right I think that coupled with my commentary around liquidity broadly across the globe.
I'm sort of has us with a with a critical.
Hi, there I think more importantly, as we think about you know the receivable side and that the increasing demand function. We're looking at that every day and making sure that we're allocating our capacity to customers that are paying us. Finally, so yes, we keep an eye on that in a way I think we're.
And the prudent thing that doesn't mean that that theres no risk there, but we definitely keep an eye on it and try and allocate capacity to where we understand we're gonna get paid and have been getting paid.
Got it. Thank you good luck.
Our next question comes from George.
Deficit think of America.
Hi, guys. Thanks for taking the a the following question.
So yes, recognizing that ultimately you know what you do and what all the companies are we track to really resolves around what the consumer thing. So that's really what the customers when the processors thing.
Are you seeing any advantages for the can in a in a kobin world.
Relative to form filled and see ill or aseptic. You know is can't filling you know any better any more sanitary, we're not really and if you could just comment on that and then a question on.
<unk>.
Sure I think that's a great question. So I think there or at least two one is a shelf likes the obvious one right. It did [noise].
Actually the peak of others nutritional value when it stays just like that as long as you need it too.
I would think secondly is the one we've always talked about which is food cans are probably one of.
The lowest cost ways to get high nutritional value foods and so when you think about a recessionary world ahead of us.
There's got to you know there unfortunately could be a lot of people who would be looking for a low cost way to get a nutrition and none of the things you talk about or anywhere near the same economic prospects an opportunity of food cans.
Yeah.
[laughter] are your customers you know beginning to lean that we Tony Rich, it's I would imagine it's probably too early to say one way or another.
Yeah, I think it's a little early I'm not yet you can see some of our customers are out pretty hard promoting their products et cetera, but they would have been anyhow. So you know whether that particular issue.
Oh, I don't know that forming their strategies, but I think our customers know this is a really low cost way to get very nutritional food and I think that's that's always been part of the Oh prospect of the food counted the value that weekend.
[laughter] on leverage and yeah, we.
Beginning with all day and some degree.
I think your covenant from one to recall adjusts for seasonal working capital over the course of the year you know, but nonetheless as you say you know the cash flow comes in later in the year and your headroom relative to your covenant limits tends to get tighter to Q3, Q and obviously then.
A lot looser and a good way in the fourth quarter.
With Albania coming in and adding leverage a you know how do you feel about you know the headroom that you'll have on your covenants again from our analysis. It looks like you've got pretty good head space, but anything that you would do again 'cause silgan as always hyper conservative.
Maybe on a on a.
Preemptive War proactive basis are you or something more a room there thanks and good luck in the quarter guys.
Sure. Thanks, George its Bob I'm, you know look we don't we don't have any any constrictions at all even with with you all bad business coming in against the covenants. So we feel very comfortable that were.
Not at any risk of a violating a covenant Oh I think the more important factors that we think we've got plenty of liquidity.
Both in terms of what our capacity is on our remaining revolver capacity.
Coupled with what we've got.
I'm sitting on the balance sheet by way of cash because we preemptively borrowed.
Yes that revolver.
You know and we're pretty well along the way to our peak from a working capital standpoint made it may into a little bit higher here, but I would say that we've got you know round numbers about a billion dollars of of capacity today and as we start to generate that the free cash flow.
And thereby our seasonal borrowing some down that probably moves up to a billion and a half dollars or so so no no real risk at all I like it like we mentioned than you pointed out the stability of the free cash flow here.
It is paramount to to that ability.
Okay.
I appreciate the comments or take care guys.
That's true.
Our next question comes from Adam just Sen of Keybanc.
[laughter], Please make sure line Tommy.
[noise].
Sorry about that can you hear me, okay, [laughter], sorry about that I just Tony on the on the food can business in the event of a sustained surge I'm just wondering on that veggie side, and then I guess to a lesser extent I'm a super side, how crop dependent those businesses are in other words, obviously you get its once a year and your.
On the whether and how the harvest turns out is that what is the supply chain like on the food cans side in terms of accommodating a sustained surge and.
Yeah.
Vegetables in Kansas, and then soup in cans for that matter just given how dependent they are on the annual harvest.
Yeah. So I mean, I would say on so you've got very little exposure to that I mean, yes. There are veggies go et cetera, but that the quantity. There is so small against what's available out in the world. So on the on the fruit and vegetable side, that's primarily or you are dependent on the crop now usually what happens is that ask crops.
Start to weekend your yields go down in the economics or what stop you from packing and so if you really want an app you can go further than you might in a normal year. So there's there's flexibility around to the edge of that and so you know the there's some room, but but yet how you're growing season ends up turning.
And how the harvest season or does matter to it by the way one thing that Didnt come up the call. You also have to mention as you do need labor out in the fields too.
Harvest all of this and so I just had one thing that we need to keep an eye on is being sure that there are workers, who are able to go out and do harvests, both here and in Europe, and that's an important.
Part as well, we think it'll happen. We think every government is going to see the importance of getting food or so our expectations that that will work out but that's just another item that we got to pay stay focused on and then in addition to that Adam I would say that you know you think about surges in Sue you know we've got a footprint that supports the supermarket you think about surges in pet food they've got a footprint.
It supports the pet food market and same thing with fruits and vegetables as well. So we're prepared for those kind of vertical market segments.
Take a surge in each of those markets.
No I appreciate that and just one last one on on El pen again, so to the extent that in a situation like this can demand surges and beauty demand.
Tax basically you you'd be kind of have natural offsets in your portfolio now with food cans and they all bad business. It's heavily beauty <unk> are you thinking about it kind of that way that.
If the beauty business gets back to normal are good than you would think the food can business would go on the opposite direction or do you know are you not really thinking about them that way.
Well I wouldn't you overstated that our feeling is that food cans, while they may be growing now in these extraordinary circumstances, we would still generally call food can kind of stable all the time, so I wouldn't call them counter cyclical with each other if that's what you're thinking but what was on her mind is that the dispensing business in beauty gives us some.
Growth opportunities in the future that are different than food cans, but can't gives us great stability, great cash flow, we love that business, but certainly we understand that a little bit more growth long term is good for the business as well and so that's sort of what the thought was romp beauty and again, the fact that when I go through this short term challenge with it to.
It is not that meaningful with matters as long term building of the business sure. Thanks Tony.
Okay. Thanks.
At this time Weve no further questions. Thank you.
Alright, Thank you everyone Cathy thank God we.
We're also.
Yeah, we want to just hope a once again everyone to stay safe. During these trying time and we look forward to talking to you about our second quarter in July and hope that everything is normalize a little bit more for us, but thank you.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.