Q2 2020 Silgan Holdings Inc Earnings Call
Thank you joining me from the company today.
Chairman and CEO, and really president and chief.
Yes, yes, though.
So 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.
Forward looking statements are made based on management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those describing the company's in a report on form 10-K for 29 team and other filings with the FCC. Therefore, the actual results of operations financial condition of the company.
Could differ materially from those expressed or implied in the forward looking statements.
I'll turn it over to Tony Thanks, Kim welcome everyone to our second quarter 2020 earnings Conference call.
We trust that I mean continues to safely navigate the ongoing overnight and we.
We continue to be grateful for our customers continue to produce desperately need a product, particularly for home prepared food and health and hygiene products.
We're proud of the many silgan team members that have adapted to the new normal working environment and unselfishly come to work performed at the highest levels. So that we're able to meet the increased demands of our customers consumers.
We take the safety of our employees and the continued supply if he's vital product very serious.
With that I'll make a few comments about the second quarter or provide a few thoughts on the full year, Bob will provide further detail about the quarter and then Bob Adam I'll be happy to take any questions.
And you saw the press release, we delivered an incredibly strong quarter with record adjusted earnings per share 85 cents, a 55% increase over the prior for.
These results were well ahead of our range of expectations for the quarter due to the sustain nature of the demand levels throughout the quarter and the truly remarkable operating performance across the board.
Each of our businesses posted strong second quarter volume gains and delivered record segment income.
While the consumer pantry stocking favorably impacted volumes early in the quarter. It is important to also note that double digit volume growth was sustained throughout the quarter in several key markets, indicating repeat consumer consumption pattern for home food and for hygiene products.
Man levels remain high in July we expect continued strong volume gains even in geographies, where stay at home requirements have been use.
Just as importantly, each of our businesses operate at peak productivity levels during the quarter.
We also closed on the acquisition of the dispensing business of a bad group on June one.
While the demand levels for the fragrance portion of this business are negatively impacted by the on premise resale pullback from covert 19, we're pleased with the integration and synergy progress. Thus far we remain convinced of the long term fit of this business and our position what we believe will be a strong market as cold in 19 restrictions or east.
As a result, as our performance for the first half 2020 and continued strong volume outlook for the remainder of the year, we're increasing our full year earnings guidance to a range of $2.70 to $2, an 85 cents per share up from the previous range of $2.30 to two hours at 50 cents.
This compares to a two dollar in 16 cents in the previous year and represents a 20% increase at the midpoint.
We're also increasing our free cash flow guidance to approximately $330 million up from approximately 275 million.
Our current share price that represents a free cash flow yield of nearly in half percent.
With that I'll turn over to Bob's review the financial results in more detail and it provides additional information on our earnings estimates for 2020.
Thank you Tony Good morning, everyone as Tony highlighted our results for the quarter exceeded the high end of our expectations as we benefited from sustained improvement in volumes in key markets of our businesses strong operating performance across the board and higher pension income.
As a result or adjusted earnings per diluted share were 85 cents for the quarter up 55% as compared to 55 cents and the second quarter of 2019.
On a consolidated basis net sales for the quarter.
2020 were $1.180 billion, an increase of 83.3 million or 7.6% largely as a result of improved volumes and all businesses, partially offset by the pass through of lower raw material costs, an unfavorable foreign currency translation.
Results for the second quarter of 2020 included rationalization charges of 2 million cost attributable to announced acquisitions of 16.1 million and the purchase accounting write up of inventory of 3.5 million, which had an aggregate impact of 15 cents per diluted share while the prior year quarter included rationalization charges.
$39.3 million, primarily for the announce shutdown of two metal container facilities in the U.S. and the recognition of the withdrawal liability associated with the withdraw from the Central States pension funds, which had an aggregate impact of 27 cents per diluted share. Therefore, we delivered adjusted income per diluted share of 85 cents.
In 2020 versus 55 cents in 2019.
[noise] interest and other debt expense decreased 2.6 million to 25.8 million due to lower average rates, partially offset by higher average outstanding borrowings related to the acquisition of the dispensing operations from Albania, and the incremental revolver borrowings outstanding during the quarter as we proactively held cash.
Cash equivalent to ensure access to liquidity in the mid or the potential credit market disruptions as a consequence of the Cobas 19 pandemic.
Given the improvements in the credit markets later in the quarter, we did repay our incremental outstanding revolver in June but maintain available revolver capacity that could be borrowed again at any time.
The tax rate for the second quarter of 2020 was 25.8% higher than expected as a result of certain nondeductible deal costs. The 2019 tax rate of 23% benefited from the resolution of a prior year tax on it.
Capital expenditures for the second quarter of 2020 totaled 41.3 million compared with 54.4 million in the prior year quarter.
Year to date capital spending totaled 106.4 million this year compared to 116.2 million in 29 key.
We anticipate capital spending for the full year to be approximately $220 million, which now includes the recent acquisitions. This compares to 231 million in the prior year.
Additionally, we paid a quarterly dividend of 12 cents per share in June with a total cash cost of 13.3 million.
On a year to date basis cash dividend payments totaled 27.1 million.
I'll now review some of the financial performance of each for our three business franchises.
Metal container business recorded net sales of 597.2 million for the second quarter of 2020, an increase of 21.6 million versus the prior year quarter.
This increase was primarily result of higher unit volumes of approximately 15%, partially offset by the pass through of lower raw material costs less favorable mix of products sold and the impact of unfavorable foreign currency translation of approximately $2 million.
The unit volume improvement resulted from continued higher demand for products consumed in home and were partially offset by the volume benefits in the prior year from a customer who had been de stocking inventory in previous periods.
Segment income in the metal container business increased 57.8 million to 71.8 million for the second quarter 2020 versus 14 million in the same period a year ago.
The increase in segment income was primarily attributable to lower rationalization charges the impact from higher unit volumes and increased pension income, partially offset by less favorable mix product sold.
Net sales in the closures business were 410.5 million for the quarter versus 363.4 million in the prior year quarter. This increase was primarily the result of higher unit volumes of approximately 3% and a more favorable mix of products sold partially offset by unfavorable foreign currency translation of about seven.
1 million and the pass through of lower raw material costs.
The increase in unit volumes was principally the result of strong volumes for consumer health hygiene personal care and food products as well as the inclusion of recent acquisitions.
He is volume gains were partially offset by a weak demand for certain beauty in beverage products.
Segment income in the closures business for the second quarter of 2020 increased 11.7 million to 58.6 million, primarily due to higher unit volumes, a more favorable mix of products sold and higher pension income, partially offset by the negative impact of $3.5 million for the purchase accounting write up of inventory.
For the dispensing operations acquired from L. bad.
Net sales in the plastic container business increased 14.6 million to 168.8 million in the second quarter of 2020, primarily as a result of higher volumes of 14%, partially offset by a less favorable mix of products sold.
The pass through of lower raw material costs, and an unfavorable foreign currency translation of approximately $1 million.
Segment income increased 9.6 million to $23 million for the second quarter of 2020, primarily as a result of higher volumes lower manufacturing costs and higher pension income, partially offset by a $2.8 million charge for a non commercial legal dispute relating to prior periods.
Turning now to our outlook for 2020.
As you've seen in the press release, we are increasing our full year estimate of adjusted earnings per diluted share to a range of $2 and $72.85.
From the rain previous range of $2.30 to $2.50. The midpoint of the revised range of earnings represents a 28% increase as compared to the prior year adjusted net income per diluted share of $2.16.
We're also providing a third quarter 2020 estimate of adjusted earnings in the range of 85 cents to one dollar which has a midpoint represents a 22% increase versus the prior year record adjusted earnings per diluted share of 76 cents.
Given the uncertainties around the timing of the fruit and vegetable harvest in the U.S. in Europe results for the back half of the year could shift between the third and fourth quarters.
Given the improved earnings outlook, we're also increasing our estimate of free cash flow generation to approximately 330 million up from our previous estimate of approximately 275 million.
That concludes our prepared comments. So we can open it up for Q in a and once again I'd like to remind everyone to limit their time to one question and one follow up and we're happy to take follow up questions as time permits so David I'll turn it back to you that provide direction for the Q and a session.
Thank you, ladies and gentlemen that at this time the floor is open for questions. If he would like to ask your question. Please do so at any time by pressing star one.
If you are using a speakerphone. Please make sure that your mute function as this able to allow your signal to reach our equipment again, if you would like to ask a question. Please press star one now.
Our first question comes from Mr., Anthony Pettinari with Citi.
Hi, This is actually Bryan brokmeier sitting in for Anthony is.
Possible to say, how much of the EPS and free cash flow guidance revision was driven by the inclusion of L. Bay of versus strengths in the base business and then are there any changes to the working capital expectations versus the slight drag that you would indeed.
I think on the Fourq you call.
Sure, Brian It's Tony I'll give you the personal let Bob take the second part so.
Albedo I'll give a slightly longer answer to that just start by saying that we're very happy to have the business joining us June one.
We have been nothing but impressed by the team that came over really very solid organization experience in the dispensing markets than we so we feel really good about that making good headway on synergies. So all that we feel very good about if you look at a month it basically had no meeting.
The impact was slightly dilutive, but that was primarily because of the.
The purchase county.
If you look for the remainder of the year as we said in the press release, our forecast has that being not meaningful on either side, so not meaningfully accretive and not meaningfully dilutive. The reason for that which we talk about last call is roughly half the businesses in the fragrance market the fragrance market.
As of course heavily retail base and travel base.
So that market was off on volumes really since the pandemic began somewhere between 25 30, maybe a little over 30% that continues to be true right now until we see kind of we'll get back to more normal retail while E. Commerce will grow somewhat it's a small part of it it's not going to change that much. So.
I would be those kind of declined year on year through that so therefore really the numbers, you're saying have everything to do with the base legacy business and really nothing at this stage to do with Albania, which we think will be really a strong performer once those markets come back.
Working capital Yeah, just to take the second part of that on the working capital side, we do see a slight benefit in working capital, obviously, where we're running at a very high capacity levels selling everything through so we would expect that particularly on the inventory side, we'd start to see a benefit as we come through the year.
Obviously.
We will be highly dependent upon the collection side of that as well.
We've been monitoring collections very closely and have not had any problems moving through.
The Kobe depend a bit so far.
And we'll continue to watch that through the back half of the year, so that should be a benefit for us on the working capital one.
Great. Thanks, So that's really helpful and then.
Some food producers cited capacity constraints in soup into second quarter.
As you guys moves more until like soup season in the second half the year.
Do you expect that you and your customers to be able to meet.
All the demand and did you anticipated did you suffer from a stock outs in the second quarter.
Hey, Brian It's Adam Good question, we actually were you know we faced all the challenges that we're kind of thrown our way through Q2, and our operating teams did a terrific job as kind of Tony alluded to in the prepared remarks.
Meeting the demand of our customers saw no we did not have any stock outs.
Really in any of our businesses, but specifically in the can business, we were able to support a pretty dramatic increase in assume side of our volume as well and you know at this point as we go forward. We've we've got a pretty clear understanding of our customers forecast our ability to meet their forecast and thats kind of be embedded in the guidance that we.
Provided for Q3.
Great that's really helpful I'll turn it over.
Thank you. Our next question comes from Mr., George Staphos with Bank of America.
Hi, everyone. Good morning, Thanks for all the details and.
Congratulations on the quarter.
My two questions Tony.
Bob team, Adam can you talk a bit more about the growth you're seeing.
And your end markets within metal container.
And.
Second question.
From what you're hearing from your customers.
What do you think is sustainable horses.
Relatively one off and what are your customers doing based on the windfall that they're getting.
To reinvest in their brands to take advantage of business and hopefully perpetuate or should we assume this is kind of a one off benefit and a you know in 21 in 22 can growth goes back to what had been the normal level. Thank you.
Great. Good good question George I'll take the first part in let Tony take the second so you know just focusing on Q2 and the markets we serve particularly in the metal container business look it was a it was a good quarter all the way around everyone saw the CEO My data and you really focus on for US really three key mark.
Cuts in Q2, and that's our suit market, our pets as market and our protein market all of which saw substantial increases.
Thanks soup was up a little over 50% in the CMO My data were overweight to sue so our suit number was actually a little bit greater than that.
So what I think it's really interesting you go to a category like vegetable which you know it seems to be the outlier in the CMS days the market data.
Limited growth of 7% really that's that's because of us as we've talked before we had one pack customer too. We had planned to have volume shift from Q2 to Q3 during the year and that indeed happen. So there were several hundred million units a volume that will realize in Q3 as we had planned to.
So.
That's that's one example, where.
I think the market was a little different than our experience and then finally pet foods you know we've talked a lot about pet food and and are overweight to that category. We again were above the market data.
Our pet food from a volume standpoint, and what's been really interesting. We've had again, it's been challenging meeting all of the volume requirements of our customers, but we've done it successfully and there has been so much frozen peptide that are one of our large customers did have some.
Some difficulty sourcing protein for their products. So you know our volumes were a little muted in pet food because they were not able to get all the ingredients that they had planned and that they have house prioritize their ingredients to to there.
You know core markets that they serve.
So I think from a market standpoint, Thats, what I'd tell you George and I'll pass it to Tony I think George on your second part of question that we definitely do not you. All of this is one off a there obviously was a pantry stuff. If we look at the numbers you can see a spike in that March April period, I think what's really telling us that went through as you didnt see the de stocking of pantries it.
That said you saw continued double digit growth and so to us it seems pretty clear that that consumption pattern is continuing on.
And it's logical right people eating at home or this is a great needs to do that.
And what makes US think this could be stickier is that.
Everything that we've been thank all along about the can if the by far the lowest price point way to get these food if the most to sustainable means to deliver these food products that exists.
All those values are there and people are being now close to the fact that pace. Good that soup is good it's got value and so I'm sort of a new consumers being exposed to food cans, and we think there'll be some continuation of that as we go forward. So as what our customers going about that obviously they see the same I think for them to main dry.
Divers, one they're seeing more cam through their thermal processing and that's really good for them in terms of financial and as I said. This is a more sustainable choice than anything else that's out there that they could be doing and so our customers.
And larger lined up and doing a lot on the marketing side trying to educate consumers about how to cook with these food.
Use them more doing that through E commerce and other ways and so we're really pleased to see kind of the focus and dedication customers are putting into it and we're doing the same we're spending more on marketing the value of the can.
And we're we're all lined up to try to make sure that we have this one opportunity to re expose the value of the can to consumers and we're all trying to take.
Advantage of that lasting I'll, just say is recall over the years, George I know you and I've talked a lot about alternative packages and things that are shifting for US again, it was always restaurants, where our main competition. We always said is it more about people not eating at home.
So this is a fundamental shift to that question and we'll see how long that shift goes on but as long as economies are top.
We think there will be kind of a sustained level of more at home consumption, which of course Americans do less than really anywhere else in the world. So and maybe just one more point Tony I'd add that you know if you look at our volume for cans over the course of 2020, thus far we've had increasing monthly volume every month since February.
With June being our largest volume month year to date. So fully supports the idea that there was some initial pantry loading, but there has been repurchase of canned goods in the market and we're benefiting from that.
Sounds good we just need some canned food restaurants, I'll turn it over thanks, [laughter] Gray thought.
Yes.
Our next question comes from Mr., Mark Wilde with the bank of Montreal.
Good morning, Tony morning, Bob Adam.
Mark.
I Wonder just to start off Adam can you talk with us about kind of any type of capacity constraints are kind of capacity issues you might be running into with these big gains in both food cans and its wells over in plastics and on along with that just any issues or kind of through the supply chain can you get enough tin plate.
Kind of transportation issues things like that.
Sure Mark It look we've been you know I don't want to say this was lost because there's a lot of effort and discipline that goes into it to supply in our requirements contract both in our food can business and elsewhere throughout the Silgan companies.
Being a requirement supplier, we are expected to be able to take surges to some degree now I think the volume increases we've seen kind of exceed that but our teams have done a terrific job in working with customers and.
Understanding what their needs are and what their demand patterns are and we have met those needs literally without fail on on any occasion. So.
You think about the capacity constraints for the most part our capacity is pretty well aligned with our customers filling capacity. So from my perspective, I would say, we're not really a bottleneck and the that capacity our supply its capacity to our customers. So I think you know our customers, particularly in food.
Throughout this period of time have have sort of consolidated their SK use that they run on their filling lines to limit changeovers to increase productivity and we've been able to to walk stride for stride with them and that supply model. So that happened in our plastics business that's happening in our close.
Your businesses as well so it's been a really interesting process I think one very interesting component here in our plastics businesses, our service and supply model is being rewarded on a pretty significant level right now we're winning in the market and I think we are.
Seeding expectations, and it's showing through into the bottom line of business and.
Does have some sustainable effects to it.
As far as our supply chain now back to kind of our resin supply in our metal supply again kind of the same thing we've worked very closely with our suppliers, we're managing it on a daily basis and while maybe it's not always perfect. We've not had any issues getting the products that we need to supply the significant in.
Price of volume that we're seeing across the board.
Okay. That's helpful and just one other little that that.
2.8 million dollar legal charge and plastics is that issue completely resolved at this point or is there any potential tail there.
If there's a potential small tail I suppose but nothing of me.
Okay. That's good I'll turn it over thanks guys.
Thank you. Our next question comes from Gabelli <unk> Punjabi with Baird.
Hi, guys. Good morning, I'm, just going back to a George's question on on a.
The volume outlook for the back half the year, what's embedded in your guidance in terms of metal food and plastics and then also within closures how much came from legacy still again for the second quarter and versus L band from a volume standpoint.
Okay, Great I got you Miss Adams I'll, just I'll start with metal containers, obviously, we're heading into our seasonally strongest quarter with the harvest and and pack volumes coming through so.
We're expecting a very strong Q3, so volumes.
Well into double digits, so kind of strong double digit volumes year over year, and our metal container business.
On the plastics business.
We'll see another quarter of double digit year on year volume growth and then over to our closures business again I think it's it's important to remember as we've said a couple of times, our closure isn't necessarily a closure as a closure here because of the mix of the product to think about our our distancing products and I'll just say, though.
The selling value of those products in something like 10 to one versus kind of our standard slack half that we.
Utilize and produce for for food and beverage market. So when you think about our Q3.
We'll see continued strengthen dispensing well see can continued strength in food and that our beverage markets continue to be a little bit challenge given the nature of what those beverage products are so you think about the U.S. market for beverage were largely talking about things like sports drinks.
Dairy products like gallon jugs of milk et cetera, those those have underperformed other parts of our business. Thus far in Q2, and we think while there will be some recovery they are likely to be down a bit versus prior year and then you think about our European.
Closure segment as well with.
Hi.
Hi volume of product going to what we'll call the hotel.
Catering and head of recreation business that is largely single serve premium products and that that model was under pressure as tourism and subsided, particularly in Europe. So I think with all that being said.
Dispensing kind of the up significantly and so we're looking at at low double digits for the third quarter I think foods got to be up low double digits for the third quarter and beverage like I said, it's likely to be down just a little bit versus the prior year.
So just wanted to add to that Adam answered everything compared to the prior year on that the one point I'd want to make is that it's not quite as strong sequentially. If you look at plastics or at the closures business in aggregate.
Because in Q2, we we basically liquidated inventory as well during that time that we don't have to do that that's not as true for the food can business is in the food can business, we have to reserve some of our capacity for the Q3 feet, So Q either sequentially or go up and metal containers.
But that'll be a tougher.
Comparison, if you will for plastic them for the closure business trip and then Ghansham on Albania.
Sorry, I, just can't say and Tony.
I spent some time talking about the fragrance portion of the how bad business that's by far the biggest driver.
But our legacy dispensing business again will be up strong double digit percentage year over year, and we'll deal with the fragrance portion of Albania. The balance of their business is quite strong.
Fragrances, a large part of it.
Okay. That's great and then just says my second question on the metal food segment for second quarter 20 million increase in operating income on a near comparable increasing sales can you just help us reconciled the magnitude of good improvement. It was there anything apart from operating leverage that's in there.
No really it's just the power of our fixed cost assets and a lot of volume running across those those that fixed cost base and the pension, which you're aware pension right.
Okay. Thanks, so much guys.
Okay.
[noise] like your next question comes from Mr., Brian Maguire with Goldman Sachs.
Hey, good morning, guys.
Hi, just a question on the the mix in metal can just wonder if you could talk about the ER volume trends in the U.S. versus your up that there are any big differences, there I know Europe's little bit less of the pantry stocking, but with everybody kind of eating at home wondering if things, maybe then accelerate a little bit in Europe, and then similarly, I think in last quarter you talked about.
Some headwind into foodservice part of the a portfolio are you seeing any any signs of improvement for us the cans into the school food service market.
Hey, Brian it's out of Europe for Us actually the volumes in Europe are quite good for us. So we're very pleased with our European can business I think they Q3 is setting up for a nice pack as well in Europe. So we can continue to feel strong that that's going to be head contributor for us. So.
I think the rest of the comments I would say you know do apply to the U.S. market that we talked about earlier and then I think that foodservice question that that's kind of our large cans number 10 cans for the restaurant world for the most part you know nothing's changed from that perspective, I think restaurants are under pressure right now.
As there is more in home consumption, but I think those are for the most part of those are pack related products and I think there is a.
And idea the pack being a very strong pack, particularly in the he less this year that a lot of products and a wind up in cans regardless.
Take advantage of attack.
[laughter].
Just to clarify that 15% volume growth in Kansas that was pretty similar between the U.S. in Europe, no real meaningful difference there.
Yes, roughly the same actually Europe was a little bit ahead of the 15%, but not not meaningfully yep.
Okay and then just for my follow up I think earlier I think it was marks question you talked about.
Some customer change is just wondering if you did see.
Customers rationalized skews for cans and it that was a contributor who increased productivity in throughput anyway to sort of quantify what benefit that might have had for margins.
Honestly very difficult for us to quantify that but it did indeed happen and again I think there's a lot of moving parts to two meeting the forecast for our customers and we were we're working very closely with them throughout the quarter as we always do but you know increased their throughput and you know it's just hard for us.
As to quantify what the bottom line impact to us legs, but to be clear customers didn't do it so that we could get more cans to him customers did it because it's tough costs out of their own system.
As part of their so it's easier for them to run Lasecki you saw it.
If you're thinking we revert back I don't know if that's the case or not but over time, you probably we'll see more as to you.
Development, but I think I think everyone saw good reason at this time kind of limited scale, so when that cost and increased capacity Yep yep.
And is it fair to say like you know the only reason to proliferate skews is to try and drive some growth into a stagnant market and now that yeah. The consumer has kind of rediscover. The can you just don't need that so it's a cost saving mechanism. It it makes sense to just do it as long as you've got this period of outsize growth.
I think that's right and I think you're right that over time, you will the marketing group, who want to do more of that and they should I mean, I think that's the right way to continue growth curve overtime. So like I said, there will be proliferation, but it I think given everybody saw the value of what happened here right and my guess it will be slow and it had been extreme for the couple of.
Years, leading into the situation.
Yes, okay. Thanks very much.
Thank you. Our next question comes from Mr., Adam Josephson with Keybanc.
Thanks, Good morning, everyone. Congrats on a really good corridor.
Tony just one more on on food can demand to to the questions of George another for us in earlier.
If this if you think this level demand is sustainable is it reasonable to think that come next year. When we're looking at your volumes on the C. I my data that.
Volumes would actually be flat or maybe even hop may do you think that's a reasonable scenario to expect or or do you think the level is demand is so outsized this year that even if demand stays better than it's been historically it would be reasonable to expect some declines next year.
Good question I thought I was trying to clear I think without doubt there is some pantry stuff that theres. Some one time fill that happened here that will be a hard comp to go up against next year.
And then there's some level of you know there was a period time here were restaurants were basically almost completely out of the game.
That won't be the case, a year from now and so I think without doubt. These you'll have some volume negative comp on this to compare on that issue alone.
But as our main point is that doesn't go all the way back to where we were at least the data we see right now does not lead us to conclude it goes all the way back where we were before I think it's somewhere in between I think the fact, we're seeing strong double digits for months after customers are continuing to see that they're going to pack everything they can so that as their expectation. So all that just Lisa.
The thing that something like that double digit is sustainable but at some point yet you know things were up 23, 24% I use that can be a tough comp next year for sure.
Where are they tend to 13 as not feel quite as bad about that one.
So thats so thats our basic feel on is that a big chunk of that though ought to be sustainable.
We can continue to keep the story out there.
Our customers.
Yep, Yeah, I appreciate that Tony I, just want to know pay up the TTM EBITDA when you announced the deal was 77.
Could you give us an update on just where that TTM EBITDA was.
At the end of two Q wearable band or kind of what level of quarterly EBITDA, you're expecting to the balance of a year.
Well I think I think you get back work this pretty well, we're basically saying that we're not expecting to be accretive or dilutive for the remainder of the year. So I think you. If you if you do that you're going to find that theres. Some.
Twentyish million off that number right now.
Make sense when you think about a.
25% to 30% decline on the topline so that there's a rough numbers for you and frankly were deli days on that we've owned it.
Or not even two months yet so for the first time now we're in there are figuring out what costs are going to come out given that that kind of volume production.
More importantly, we're working really hard to the customers try to help them figure out how do they get back into a selling mode and what's the best way to do that how do they take greater advantage of ecommerce, which we have really good answers for them on that.
So there's a lot of things that are going to take time for us to work out that we think long term will be really good for the business.
But the the short term impact is a little less clear and frankly, a little less important to us in the long term opportunity.
Totally got it thank you Tony.
[noise]. Thank you. Our next question comes from Mr. gave a husky with Wells Fargo Securities.
Good morning, gentlemen, congratulations on a solid quarter.
Yes. Thanks.
You guys Didnt to fund the police where you're at.
So [laughter].
Anyway, I know you guys don't necessarily look it at kind of sequential moves and EPS, but I'm trying to bridge a little bit you know kind of the implied 92 cents give or take.
Of your Q3 guide versus on a sequential basis, you guys have historically seen on average over the past five years only 27 cents of incremental earnings from Q2 to Q3 I'm just curious if theres something you're seeing in the business you mentioned, a little bit of a sequential slowdown and.
Volume's enclosures and plastics, but anything on the profitability side.
Manufacturing costs or otherwise that you're seeing.
That kind of gives you pause or or is it possible that you guys beat by 10 cents again on the top end of your guidance range.
When we're talking October.
Yeah. It's a good question. So the it's really has a lot to do with Q2 in that case and not about Q3 at all that's normally Q2 was not a sold out quarter for us right, where we're running capacity for Q3.
So you've got just a surge in Q2 of the higher volume through liquidating anything you could on the inventory side, that's particularly true in the plastic and closure businesses. So what happens you have such elevated Q2, you came into Q3, which is your Sears essentially seasonally sold out you just don't have that same opportunity a step.
It up to that same degree so nonetheless wouldn't be up as you see solidly from prior year, but sequentially you just wouldn't be a typical year for Q2 was so strong.
Understood.
And maybe a follow up on all Bay I don't know if Adam you yeah.
The answer they'll be a question I guess contribution, but specifically in Q2 would closure organic volumes have been down.
Excluding the Cobra and I'll be acquisitions, and can you tell us what acquisitions added even on the revenue line.
Enclosures.
Sure. So so the answer is yes closure total closure volume would have been down.
In Q2 without the acquired volume so again I'll just go back a little bit when I said you know when you think about the three big markets that we serve dispensing food and beverage dispensing for the legacy business was up.
16%, you think about our food business was up around 11%, our beverage business, which is our.
Highest volume segment from a unit volume standpoint was down about 8% so.
That's that's how the quarter played out so mix was incredibly favorable because we had so much growth in our dispensing systems products. So.
Thats the legacy business and then from an acquired the acquisitions were up about 37 30 to 37 million of revenue.
Got it. Thank you guys. Good luck.
[laughter].
Thank you. Our next question comes from a room is one of <unk> with RBC capital markets.
Great. Thanks, good morning, and congratulations on the quarter.
I guess I guess first off I had some questions on the on the sequential move as well. So you answered that I guess, you know looking out maybe medium term last couple of years, you've talked about footprint rationalization and as it relates to certain customers and.
No possibilities of that in North America.
Have you kind of re contemplated your footprint at this point just given the change in the market and and maybe even just comment just generally on a on food cans capacity, maybe we can start with North America, but you could also talk little bit about Europe.
Sure Rone good question on the on the footprint optimization plan that we kind of announced at the end of last year for our metal food container business. Clearly, obviously, we've had a sizable jump in demand for the full year of 2020. So you know we continue to evaluate.
All of those plans I'd tell you that our number one focus is meeting.
The demand requirements of our customers. So we wouldn't do anything that would put that supply chain in jeopardy. So we'll make that crystal clear.
Therefore, we have delayed the the implementation of a portion of that optimization plan and well continue to evaluate that I think to the earlier conversation as we get a clear understanding of the stickiness of all the volume and and really what is sustainable going forward.
Well reevaluate those plans and see how we want to move forward. There is a portion of those plans that would be unaffected by this volume.
That we'd anticipate moving forward with later in the year as we had originally planned but again all of that is subject to us meeting the needs of our customers.
And then as far as capacity is concerned.
Yes, I think as Tony said, we've got quite a bit of our volume is related to requirements contracts and you know we've done a really nice job covering our capacity with our customers are customers filling capacity and capabilities and feel very good about where we stand from a capacity standpoint obvious.
We've been able to meet the the increased demand and not only the U.S. market, but also the European markets, we serve as well. So at this point no no need for additional capacity on our side and we'll just continue to evaluate how our capacity fits the market demand going forward.
And then.
Also I guess just some questions on uses of cash. So obviously completed the transaction and congrats on that so maybe just discuss how you see deploying our free cash flow like you've guided to for this year and then next year I'm. If there's any large step changes either and working capital or Capex that would.
You know materially changed that free cash flow number outside of growth.
Yeah I run. This is this is Bob so as we talked about with when we did the acquisition we thought we'd be kind of in the low to mid fours on the leverage standpoint post acquisition.
With this free cash flow generation will probably accelerate our de leveraging.
A bit from where what the original plan was.
And that's just the strength of the of the free cash flow I.
I think the the question of what we do it it really will be contingent upon what the overall credit markets look like as we come through the end of the year as we said in our in our commentary we did.
Proactively borrow against the revolver just to protect our liquidity.
If we see another kind of go round of that tightness around liquidity, which as possible as things get get tough again, then we would probably sit on cash for a short period of time.
If we don't see that then obviously, we think delevering is the right opportunity here.
So we have a couple of choices in terms of how to pay down debt to de lever.
And then from their you know we will continue to look opportunistically at the M&A front.
And see what comes our way, but the priorities are to protect our existing business from a liquidity standpoint first and foremost.
And then to get our leverage back into the to the range of what our typical ongoing appetite is.
And then just lastly on that like ours, M&A and consolidation goes.
Do you think the food can market needs any any more consolidation I mean, it looks like it's pretty concentrated to us and.
No. It looks like that said the dynamics have improved here so as the market in a position or you can see any consolidation or rationalization or.
Do you think that's unlikely at this point.
Its Tony I, you know its little hard to gauge whether anybody in the market would would do a transaction I don't I don't think it's a market that necessarily needs consolidations. As you said, it's a pretty consolidated market already so I don't we don't sit here waiting and planning for that to happen it could happen I suppose.
Well I got thousands more curious if that's something that you could potentially participate in.
Yeah.
We look at every opportunity and we always have we haven't.
On a meaningful food can deal in some period of time, so I don't know it could come up but it.
It's again, it's hadnt happened and sometimes that.
Okay. Thanks <unk>.
Thanks.
Thank you. Our next question comes from Daniel Rizzo with Jefferies.
Hey, guys. Just one question you mentioned that mix is a headwind in metal containers and I'm. Just wondering how we should think about that going forward. As you know depends I mean can easily economies recover how we should think about mix in metal containers and really for all the segments, let's see here.
Let me try to us because if you're right. We have we've got miss it sort of rattled through here and it sounds like a negative that's not necessarily the case, so things that drive mix and food cans are where we've been talking for years now, but how pet foods. The growing how proteins has been growing those are they had been growing before the pandemic and they really grew.
During the pandemic. So those just how many smaller kansas not not necessary margin issue or anything else, but when you get into mix and driving volume et cetera, you need to explain that so it was not intended as a negative point.
You will see in Q3, why don't we will experience as Adam alluded to it you may see last restaurant five cans, which are much bigger so you could see a little further negative mix.
In Q3, which actually would have profit impact just because of the dollar scale that for can down to the bottom line is larger.
So that's sort of the mix story and the can then you can you talk mixing closures as I said it it's really it's a great news story when dispensing grows. The again you know what really happened there beverage was off because of the you know what was having a pandemic people weren't outside we feel strongly that will come back at some point in time, it'll get hot or the pandemic will fade.
It away and so that will settle itself out, but what's really important there is we like to dispensing system. We've been spending investment there. We think that's a great spot for the future and that's an area, where you saw sizable growth in product line and that that really important a valuable Nick's point and the plastics is just a little bit more of kind of what.
Yes.
Or you know what's going on the on the you know just sides package et cetera. So.
It really meant as a negative on mix, it's just the way we describe it.
Okay. That's very helpful. Thank you and then just switched one other question then just with Sue I mean, I know someone to send them, who later, but it seems like it's been rebound before I think I mentioned this in the past three or four quarters now I'm just wondering if what does change like how is that this is changed and say I don't know less year over I mean, I mean, just remembering that the.
Bezel, while no it's been good for about a year now.
Hey, guys, maybe not quite a year, but yes, it's been several quarters in a row now and where it's been outpacing certainly prior year, but maybe other aspects of the market as well so.
I think what I would say Dan is that our customers have spent a lot of time talking to consumers and trying to reach consumers and and reach new consumers with the message that Tony consistently kind of conveyed on this call too that there is real value and can sue and.
The other aspect I think given what's happened they do realize the benefit of leveraging their thermal systems.
And utilizing the can as a vehicle to sell more product. So yes. Its benefits story, obviously, you look at kind of our monthly progression into and it's a very good story year to date as you know there. They are bullish on the rest of the year. We've got a good deal for Q3, and we'll see nice growth again in Q3 should continue to.
We had good story for us.
Thank you very much.
Thank you. Our next question comes from George Staphos with Bank of America.
Hi, guys just a quick here to finish up for me just when we look at the yesterday numbers year on year think they're up.
Or something like $20 million, obviously, a good chunk of that's probably going to be out they have but is there way to parse.
What the source of that was and again really what I'm driving at is within the number that would be legacy what is you know.
Around development marketing.
Investment if you will too.
Perpetuate the growth that you're seeing across your businesses. Thanks, and good luck in the quarter.
Sure Yeah, George you're right. The majority of of the increases is all on the deal related costs. So, it's it's everything from diligence costs and and financing costs and the like that that drove that.
I think the base business on an associate SGN a level is down across the board quite frankly and in large part because you know all travel has been restricted.
So so that you know, we're communicating with customers in other ways in being creative calm, but we don't have people flying around airplanes and alike. So.
Kind of what you're seeing there and offsetting that a little bit on the on the year over year increase side is obviously, we've got some inflation and wages there and that kind of makes up the difference. So should we expect that to ultimately pick up at some point beyond kind of the rebound and travel expense entertainment, but again on development.
Marketing.
So things are told me to reinvest in or no hold that level. Thank you guys know we have charge, we should be able hold that level that is more or less embedded the one that would most logical certainly all the R&D. Those are all resources that are embedded in our cost so there'd be no meaningful change there the.
Marketing effort around Cam would be one, but that's already bedded in the current not but we thought we'd been coming that so no no meaningful.
Others Berman Blake thanks, Thanks, Tony.
Thank you were next question comes from Adam Josephson with Keybanc.
Thanks, everyone. Appreciate it Bob on cash flow just to follow ups on some of the previous questions is there any albania contribution to the threethirty of cash flow to which you guided for the year and then how much.
Do you expect free cash flow to be up next year based on whatever incremental contribution from Alabama, you're expecting on just related lease there any working capital impact on this year's number.
Yeah. Those are working capital number I talked about earlier on on the call that we originally were thinking that it would be little to no benefit maybe even a bit of a consumption.
I think now where we're seeing the opportunity to ring, a little bit of working capital out.
So that's that's part of the benefit that we're seeing in this year's free cash flow.
How bad I think I'll back you can either way, depending upon where where the fragrance market goes from here forward.
So I would say a fair guesses to consider it neutral.
Plus or minus a little bit for them for their back half of the year.
In terms of given free cash flow guidance for next year I think we got a long way to go between you know here and when we can provide guidance that that would be meaningful for next year around free cash flow what one of the hard ones for Bob to answer that is one of the things you might assume from this is we've done a really spectacular job with supporting our customers through this time.
<unk> really we don't we don't tend to brag on our operating team, but but if ever there is a moment. It's now so we're hearing from a lot of customers about long term future opportunities given how well we performed and how well we supported the market. So I just ask any capital is going to be a little tricky breast cancer right now because we could have some really nice opportunities for before.
For us.
As we think work.
Got it and I appreciate that and just one on steel Tinplate can you just talk about how much those costs have fallen whether that's been beneficial to you and then what your expectation is for the balance of the or in that regard.
Sure Adam I, you know I think you know obviously, our does the biggest market that we plan is going to be the north American market and I think it's.
Steal a template of as kind of progress for the year as we had thought they would so we're we're kind of seeing a high.
Single digit kind of reduction versus prior year as far as annual cost change that we've experienced thus far and expect that to continue to the end of the year.
Okay. Thanks.
Thank you. Our next question comes from Mark Wilde with the bank of Montreal.
Thanks, I've got just a couple of follow ons.
I'd like to get some thoughts just on the on margin targets by segment and it seems to me, particularly in plastics, you're doing much better right. Now then than we would have ever expected.
The second issue, it's just the potential for some margin recovery in the food can business if if demand.
Remains relatively elevated I mean, it seems like the industry lost some margin five or six years ago and a new capacity came in other markets. I'm. Just curious you know thoughts about a potential the now recover some of that.
Great Mark So I would say.
Margins and what to expect from here I, what I would say is.
Q2, as as I said at least once your it had a lot of benefit of liquidating inventory et cetera, So a theres without doubt there as benefits in Q2 that can't be sustained so do you think about margins across the company really need to our business as a rate.
You've probably seen the peak for the year would be our gas that you're going to see on rate basis, it's going to declined sequentially from here, which is fine we're still going the way above prior years, we're still going out and they can business higher volume through so its I don't mean that'd be a negative it's just what's going to happen to it.
And that's the way we think MISO. So you're right. If you want to talk classic specifically was a really.
Great quarter, a lot of that is operational driven and not around volume or cold it and so that's the inherent improvement we've seen for Adam could tell me, how many quarters, but years in a row of improvement you've got a great team doing great things in there and that's one of the areas where I would tell you that I think customers are are waking up to the power of what we have to.
Offer them in that market for one specifically so that it it's really good and yes, you're right. It's too good in Q2, and so it will settle back from there.
What we had been looking for something what we've said is sort of a 15% EBITDA margin I think that clearly in the back now and so I think we're we're beyond that and starting to push past that debt, but but again not necessarily the Q2 levels.
That is it your question on food cans and is there an opportunity given the increases here what I would say is.
You know us that we focus a lot on we've got long term customer contracts. We've got long term relationship with those customers. Our view is silgan wins by supporting the Hell lot of our customers and letting them when in the market and that's where we make our money overtime and we are worth consistency to them in terms of pricing supply et cetera. So.
We are not looking for short term benefits from that in terms of margin recovery and I.
Like price.
But that doesn't mean that over time as they come round that our position might not be strengthen that we would expect to get our share of that strengthening position at better return, but I think it arcade given our model that's going to be a more of a gradual process.
Yeah, that's what I would assume but just the thanks for the thoughts on that Tony and good luck in the second half a year.
Thanks.
[laughter].
Thank you at this time, we have no other questioners in the queue. So I'll turn it back to Mr. told me a lot for closing comments right. Thank you David. Thank you everyone. We appreciate your time and we look forward to talking to you in late October about our third quarter.
Good day.
Thank you ladies and gentlemen that concludes today's presentation. You may disconnect. Your full line tend to thank you for joining us this afternoon.
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