Q3 2020 Silgan Holdings Inc Earnings Call
This call is being recorded at this time I would like to turn the call over to Kim.
President of Finance and Treasurer. Please go ahead.
Thank you joining me from the company today, I have Tony Allott, Chairman and CEO, Adam Bailey, President and CEO Bob Lewis.
CFO before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward looking statements. These forward looking statements are made based upon management's expectations and beliefs concerning future events since I joined 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 2019 and other filings with the SEC.
Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward looking statements.
With that I'll turn it over to Tony Thanks, Kim welcome everyone to our third quarter 2020 earnings conference call are Jeff.
Our agenda for this morning will focus on the financial performance for the third quarter.
And then to review the outlook for remainder of the year after their remarks, Bob and I will be pleased to answer any questions you might have.
As you saw in the press release, we delivered record record adjusted earnings per diluted share of a dollar and four cents for the third quarter, a 37% increase versus the prior year record results.
This exceptional performance was a direct result of continued strong demand for our products across our business segments and the success of the entire Silgan team to meet these demands in a very challenging environment.
Since the beginning of this pandemic our employees have continued working extended hours, followed rigorous safety protocols and insured supply of essential products to consumers all over the world through these.
Through these efforts we've had an excellent opportunity to showcase to work customers just exactly why they do business with so.
During the quarter or metal food container business benefited from 17% growth in unit volumes, primarily as a result of the increase at home food consumption and growing consumer awareness of the value and benefit the canned foods as well as a shift in timing of certain tax related volumes from the front half of the year to the third quarter.
We were pleased to see the strong demand continue even though restaurant activity picked up over the summer.
Supporting the idea the new consumers are discovering these products and our customers are re energize in marketing and promoting them.
Our closures business had great demand across most of our product range, but particularly for dispensing systems, where demand for surface cleaners pumps and farmers drove a 22% increase in these products.
This continued strong demand was partly offset by continued weaker demand for certain beauty products, which as expected resulted in the recently acquired dispensing operations from L. bedroom, having a neutral impact on earnings per share in the quarter.
Our plastics business continued to demonstrate its market leading service model driving further volume growth of 14% and nearly doubling segment income versus the third quarter of 2019 just.
This growth has been driven by strength in certain food hygiene markets as well as continued success in securing new customer awards in light of our strong operational performance.
We expect market demand levels remain strong and our operating teams continue to deliver on behalf of our customers leading us to once again increase our outlook for adjusted earnings per share for 2020.
From $2.70 to $2.85 to a range of $2, a 92 cents to $2 a 97 so.
Which at the midpoint represents a 36% increase versus the prior year and a 10 year compound annual growth rate of earnings of over 10%.
Finally, given our Android customers view, that's a stronger demand levels are holding we expect overall performance for the company remains strong at the strong level in 2021.
With that I'll now turn over to Bob to review the financial results in more detail and provide additional explanation around our earnings estimates for 2020.
Thank you Tony Good morning, everyone as Tony highlighted we delivered an exceptionally strong quarter across the board, including New all time volume Records outstanding operating performance and the ongoing integration of two acquisitions, leading to record income in each of our businesses. As a result, we delivered adjusted earnings per diluted share for the quarter.
Sure.
Dollar for outpacing expectations, and 37% better than the prior year.
On a consolidated basis net sales for the third quarter of 2000 $21.490 billion, an increase of $167.2 million or 12.7%, primarily due to record volumes in each business, partially offset by the pass through of lower raw material costs.
Results for the third quarter of 2020 included three cents per diluted share for rationalization charges and costs attributable to announced acquisitions. While 2019 included three cents per diluted share attributable to the shutdown of two metal container facilities and a loss on early extinguishment of debt.
Therefore adjusted earnings per share was one dollar for in the third quarter of 2020 versus 76 cents in the third quarter of 2019.
Interest and other debt expense before the loss on early extinguishment of debt for the third quarter of 2020 increased $1 million to 27.7 million, primarily due to higher average outstanding borrowings largely as a result of the second quarter acquisition of the dispensing systems operations from Albania growth, partly offset by lower.
Weighted average interest rates.
Capital expenditures for the third quarter of 2020 totaled $58.8 million compared to $50.6 million in the prior year quarter year to.
Year to date capital expenditures totaled $165.2 million versus $166.8 million in the prior year.
Additionally, we paid a quarterly dividend of 12 cents per share in September with a total cash costs of $13.3 million.
Year to date basis cash dividends totaled 40.4 million.
We'll now get into the specifics regarding financial performance of each of the three businesses.
The metal container business recorded net sales of $856.7 million for the third quarter of 2020, an increase of 34.4 million or 4.2% versus the prior year quarter.
This increase was primarily the result of higher unit volumes of approximately 17% and favorable foreign currency of approximately $4 million, partially offset by the pass through of lower raw material costs and a higher percentage of smaller cans sold a new.
A new all time record in unit volumes in the quarter was primarily the result of the continued consumer demand for at home can food consumption and the timing of certain pack related volumes that moves from the front half of the year into the third quarter.
Segment income in the metal container business was $94.5 million for the third quarter of 2020 versus $81.1 million for the same period a year ago.
The increase in segment income was primarily due to higher unit volumes strong operating performance higher pension income and lower rationalization costs, partially offset by the impact from the renewal of certain significant customer contracts at the end of 2019, and a higher percentage of smaller canceled.
Net sales in the closures business increased $121.7 million to $475.1 million for the quarter, primarily due to strong unit volume increases of approximately 10% a more favorable mix of products sold as dispensing volumes grew by 22% in the legacy business and favorable.
Foreign currency translation of approximately 2 million, partially offset by the pass through of lower raw material costs.
Unit volumes in the quarter increased primarily a result of the inclusion of the acquisition of Albania, and Cobra plastics and the continued strong demand for certain cost consumer health hygiene personal care and food products. These gains were partially offset by weak demand for certain beauty products.
Net income in the closures business for the third quarter of 2020 was an all time record of $64.2 million up $19.4 million versus the prior year quarter.
This increase was primarily due to record unit volumes, including recent acquisitions, a more favorable mix of products sold strong operating performance and higher pension income.
Net sales in the plastic container business were $156.7 million for the third quarter of 2020, an increase of $11.1 million versus the prior year quarter. This.
This increase was largely due to higher volumes of approximately 14%, partially offset by the pass through of lower raw material costs and.
Less favorable mix of products sold.
The volume improvement was due primarily due to higher demand for certain food and consumer health and hygiene products and continued new business Awards segment.
Segment income increased 10.5 million to a record of $21.9 million for the third quarter of 2020. This.
This increase was primarily attributable to higher volumes strong operating performance and lower manufacturing costs as well as higher pension income.
Turning now to our outlook for 2020.
As is typical for the seasonally smaller fourth quarter, we are tightening our range of estimates to a range of five cents.
As a result and based on our year to date performance continued strong demand and a strong operating outlook for the remainder of the year. We are providing an estimate of adjusted net income per diluted share for 2020 in the range of $202.92 to $2.97 increase from the previous range of $2 and 70.
The $2.85 the midpoint of the revised range represents a 36% year over year increase this estimate excludes the impact from certain adjustments outlined in table B of our press release.
We're also providing a fourth quarter 2020 estimate of adjusted earnings in the range of 47 cents to 52 cents per diluted share a 30% increase at the midpoint of the range as compared to adjusted net income per diluted share of 38 cents in the prior year.
In addition, we continue to estimate free cash flow to be approximately $330 million for the year as we expect slightly higher capital expenditures and a modest increase in working capital to fuel future growth.
That concludes our prepared comments. So we can open it up for Q1 and I'll turn it back to Emma so that she can provide directions for the Q and a session.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question for Paul.
We'll pause for just a moment to allow everyone an opportunity to signal for questions.
Well take our first question from Anthony Pettinari with Citi.
Hi, This is actually Brian Bird Meyer sitting in for Anthony.
Is it possible to quantify the impact of the business wins on Threeq volumes in plastics and.
To the extent to which you can comment can you add any detail on the product lines of the margin profile those wins.
Sure Brian It's Adam.
Look at our plastics business. They have had a lot of success as we've discussed on previous calls with the new business Awards. So some of that is playing out through the course of 2020, but I don't have a specific number for you. It is a a portion of their volume. The reality is their volume increase I should say the reality is that.
We're seeing increased demand across the board. So I would say the higher volume related to the consumer products and the health and hygiene products that Bob outlined really are the majority of the volume increases we've seen in the quarter.
And then as far as the margin profile of New business Awards.
Very consistent you know as we've talked over time, we've had our 15% EBITDA margin kind of target for this business.
I would say its current margin.
Current margins or better for the new business awards that we not only have already brought in but that will continue to bring in and phase through the business over the next several quarters as well and the growth is in some markets stay within the same kind of markets that we have to typically serving food health care home. It's.
It's what it essentially is what we've been talking about for classes for some period of time is that we've been waiting for someone to emerge as kind of the premier provider of service to customers et cetera for a long time. We said we didn't think that was a player at that spot today. We tell you. We think absolutely silgan plastic is the player and so they are beginning to get rewarded for.
Consistent strong performance for customers.
Got it. Thanks I appreciate the detail and then I understand the markets are still pretty weak, but did you see any sequential improvement in old bay of volumes throughout the quarter or was it pretty consistent throughout.
It was fairly consistent throughout the quarter I would say, we're starting to hear some positive momentum potentially building and specific to the fragrance market.
Look at areas or geographies around the world like China like Brazil, those markets have actually done better than our European or the U.S. market for fragrance in particular, so yes. It was consistent through the quarter, but I think the dialogue with our customers has been positive one of the challenges. They have is a location at which.
The transaction occurs so whether it's travel or retail very little of fragrance was going through an E. Commerce channel. So they spend a lot of time with us and we're working with them talking about how to reach their consumers, whether it's through samplers through E commerce through a variety of means all of which will be good.
For us in the long term because again, if you think about a sampler.
Fragrance item that you're you're talking about getting multiple samples for you know what would essentially be the sale of one bottle of perfume or fragrance. So.
Assistance through the quarter, but we're feeling that there might be some positive momentum going forward.
Yes, Brian the other the other point I would add there too.
There was no surprise here that business operated both on a volume basis on an operational basis very much the way we anticipated.
[music].
Got it thank you.
We'll take our next question from Mark Wilde with bank of Montreal.
Good morning, Tony Adam Bob.
Hi, Mark.
Tony I wanted to touch on sheet, we hear you talk about sort of being in businesses, where you have a sustainable competitive advantage I wondered given the performance in plastics that now fit that description are you confident that you've got that sustainable advantage and I'd also like to know if you think you could ever.
That bar.
In the beverage can business.
[laughter] beverage can okay. So.
I'll come back to your second question. So it's a great question is exactly what we have always said about all of our businesses that we have to believe that we are the best in our markets and that we provide something unique for our customers and that's kind of the standard we hold everything to after many years, we said in plastics, we just weren't sure of that I did say earlier in this call I will say again that I can hold.
We are holding our had the pie we provide the best service the best solution for customers and plastic bottles in the North American market space. So yes.
Is that enough I think several still we got to keep pushing I don't want to it was in no way are we at the point, where we can drop.
Drop the football and move on we got to we've got to do more we've got to continue to provide the value equation for our customers, but we've we've helped a lot out through this pandemic situation, we are delivering on new products, which is what those customers need.
So yeah I think we're we're we definitely crossed an important milestone here.
Oh, Yeah. Your second best So did you really mean bev cans.
Yeah, I did actually really need both [laughter].
[laughter].
Well as you know were I mean, I know you don't like businesses, where there is a lot of capital being thrown around but I'm just I'm curious about this business I mean, you you.
Very good kind of bending battle and making containers.
Sure. So I think I imagine, it's no secret that Bev cans to us is if it's.
Just another cam another two piece can.
Another two piece cans in that case, we make a lot of them today. So should we think we could participate in that market space yes.
Yes, we do.
I think you you've known us want to know what we're going to focus on our can we bring something unique to the customer.
And in that case, it would have to be we're not going to we would not have to scale. So unique is happy more specific to a particular customers need that might be geographic or something else and so you'd have to answer that question before you would make that move.
And then it really comes down to where do you see the returns and I think for us.
We've always talked about where you see a lot of organic growth in packaging you tend to not see the return on capital that you want and so if you look at the level. We will show. This PC bottles. They were the great booming thing in fact, they're taking it from Bev cans interestingly.
And then everyone invested capital there and you didn't get the return so I think a real question for us to make that kind of movement that can would be do we feel like the capacity and the growth, we're well aligned and there was a good long term opportunity there.
Okay, and then I wanted to just as a follow on can we just turn to the food can business.
If you could give us sort of some sense of the contribution in the quarter.
The food can business versus the you know the pet food business and then what the drag might have banned from kind of the institutional business. The big number 10 cans.
And then also just little over time, Tony you can help us think about the impact on earnings in this business from the shift toward more pet food cans and.
Smaller size cans.
Hey lot, they're all out maybe what together out of my work through that so I think first of all we have talked about the shift.
The shift has has been.
So we're actually very good day.
Able consumption Uh huh.
Human food, particularly in areas like vegetable soup had been consistent for some period of time.
I think there's a long way to go in this answer the first thing I'd say about that is that that the U.S. market with different than other markets like Europe et cetera, we had a lower consumption of some of those products and part of the reason for the U.S. market was a much more eating out market. So one thing that's happened even though it wasn't your question one thing that's happened lately as you're seeing some reversion to a more normal.
Global level of eating at home versus out at restaurants, and that's one of the things that we think may be more of a lasting trend is that maybe the U.S. market just revert more to a normal amount of eating out, but that's sort of what had led that flat for a while so for many years, we talked about the fact that against that pet food certain proteins were growing that trend continues.
So we've seen very nice solid growth through pet food. This year, even though you would say there was really no cobot reason to speak up for that and yet we've seen that continue to grow so that trend continues to progress.
I can't really break the profit for you in our business because it all comes out of the same plants et cetera, but I would say that theyre going up on a contribution margin basis there.
They're they're comparable so there is not a meaningful difference in terms of the profit of the finally, you asked about the institutional hands. It is true that the one of the areas in cans that we have lost this year to some degree our big number 10 gallon cans two restaurants.
That that is a more dollar a lot more contribution per can out a bit.
Because it's a much more expensive package and southern.
So there has been some impact of that and you can see that a bit larger those typically sell in third quarter. So that's one of the points about the canned margin in the third quarter is that you had that piece on it.
Let's hope that helped pretty comprehensive yet at all so that's pretty comprehensive I'll I'll turn it over thanks guys. Okay. Thanks Mark.
We'll take our next question from Adam Josephson with Keybanc.
Thanks, Good morning, everyone I Hope you and your families are well.
Okay.
And congrats on another really good quarter, Bob just to start on all back can you just.
Tell us what the sales and EBIT or EBITDA contribution was in the quarter and just how the business is tracking on a full year basis versus what it was first the TTM number and related Lee.
What.
Realistically how much growth do you think you could get from that business next year in the event.
Travel retail attach rate of returns to some semblance of normalcy.
Yeah. So so you know as I made earlier comments the business. It really is tracking right along what we expected it to deliver for the quarter. So there's roughly I'm, a little more than $80 million of revenue and.
And then on on the bottom line basis. It was it was neutral to earnings. So it's you know basically it's contributing enough.
Enough to offset the interest carry on the business, which is exactly where we where we expected it to be for the quarter. Obviously, it's below where we expected it to be from the acquisition standpoint, but that's you know.
That's largely due to the fragrance shortfall that we're we're experiencing not only us, but our customers and our competitors as well and so that business, we expected it to be off some $20 million.
On the bottom so that's kind of what we're what we're seeing so.
You know who.
Who knows you know what and what the timing for recovery around Cove. It is going to be moving into next year, but I think you know our view is that the fragrance business will recover and it will get back to some more normalized kind of left levels. So whether it's fully there next year or not we'll wait.
See but but our anticipation is that can you get back to the kind of levels that we sure we were expecting when we bought the business yeah. No. Thanks, a lot. Tony also on 21, I mean, you had commentary in the release about remaining at these elevated profit levels and.
I don't remember you're normally commenting on next year in the third quarter I could be mistaken there, but can you talk about what prompted you to make that comment how much visibility you have into demand trends next year across your businesses and.
Again, just what prompted that comment.
Sure actually your memory is correct, we usually at this quarter say that we have not completed our budgets, yet and that we're not going to talk about it.
We did mention that we have not completed our budgets yet. So that's true. The reason you will also recall that when cove. It yet most companies dropped guidance and we told you that we weren't going to do that that we felt like we had more knowledge than you. All did there were too many things issues changes afoot that it would be very hard for an outsider being.
Analysts or shareholder to really know how its all going to impact that we felt that we had an obligation to share what we knew and understood and so similarly right now it would be very hard for you all to know all the different things, we're hearing from customers, saying in our markets understanding about out there so.
So we felt obliged to share with you what we knew then so what we've said is that we expect that well 2020 was really.
Medical year for US 30, some percent improvement whatever that number ends up being.
That we believe that we can hold that and so that is a put and take a lot of things that we're taking on account. So I I've seen some reports since then we're not necessarily saying we sell exactly the same amount of cans next year that you know again, we had a prebuy surge that happened early in this and so I, we don't know.
We don't know that that'll be the case and we're not assuming that will be the case, we are assuming that some of the strong demand we are saying is laughing.
Certainly lasting through 2021, we actually think further than that but that's not part of the commentary that we're getting right now.
And so similarly, we look at the wins that Adam was talking about in some of our other businesses because of the performance. We've done we tally those wins in we know there was pre buy in some of the hygiene products as well, but against that we also know a lot of customers want to be more domestically sourced than they were before so we're trying to take all that in and when we calculate that right now we're saying.
Rather than thinking there's a big.
Come back from this great profit year, we don't believe that we think the sum of all that plus improvement you asked about Bob and I will pay us the sum of all that has us thinking that it's it ought to be at least as good as the strong year.
Thank you Tony and just last one on the the food can supply demand situation. So can you talk about the status of the six plants that you were contemplating closing you know pre pandemic and related Lee how would you characterize supply demand in the U.S. food can market now obviously I had it been in.
Pretty significant state of oversupply pre pandemic and that that did that obviously has changed to some degree. So how would you characterize it now is it balanced as it still oversupplied is it.
Maybe even in short somebody just talk about that and and in the context of the six plants that you were initially planning to shot.
Sure Oh, well, Adam will do that and then I think we'll move on to the next questioner. Thank Scott. Thanks.
Thanks, Adam so as far as the rationalization of the six plants as we talked about on the last call. Obviously, you know we were dealing with a pretty sizeable volume increased across our metal container platform right now so we pause.
Those plans to rationalize additional plants and we're constantly evaluating those and part of this is what Tony just alluded to our you know we're digging deep into 2021 expectations right now and again, we've got a relentless focus on taking cost out of our system and that will never change, but what we are all.
So and incredibly focused on meeting our customer needs and their requirements. Many of our contracts as you know our requirements space. So we're we're finalizing.
2021 expectations and commitment and we'll evaluate and see where we are at that point.
As far as the supply and demand in the marketplace.
Been an interesting a six to nine months here.
You know I would just say I think basically every can they got made over the last two quarters got sold as well. So you know you think about the seasonality of the food can business a lot of volume goes through certainly the third quarter, but also the second quarter as well.
Our capacity available in the first and fourth quarter, probably yeah. That's how we run our business. So we'll see how our Q4 plays out and then as we go into next year, but certainly on the shoulder has got to be some capacity and we'll see how that that's impacting the volume expectations.
Thanks, Adam.
We'll take our next question from George Staphos with Bank of America.
Hi, everyone. Good morning, thanks for the detail.
I guess I wanted to try to if possible draw a finer point on Albania and the.
Expected improvement in earnings you expect from it for next year because for you to say that you expect earnings to be at least as good as this year's levels and we do appreciate you, giving us that got it you have to have some sort of view recognize is maybe a wide range on that view, but if you were in our seat.
What should we be thinking about in terms of L. bas met increment to EBIT or EBITDA as were building up our models 21 versus 20 could you give us any kind of view on that.
Sure I can try a Bob gave you a lot of it so I mean first off what we've said and as exactly how it's performing it's based on Companys interest costs are no earnings contribution for the six months of this year that will happen.
Yeah, so and that in order to do that you're off some 20 to 25 ish million on an EBITDA. If you will so if we got back to where it was when we bought it or you would expect on an annual basis, something like that $20 million to $25 million.
Now that would be all the way back where it was the fragrance market, which is about 60% of that business is off something like 30%. So we are not assuming and what we've said to you that we will get all fragrance back starting January one that won't surprise you. So the thinking is more that you will see some recovery there something like half of what we saw in the decline.
Would be the kind of recovery that we are thinking into that so you get part of kind of half of what I. Just said you don't get the full year impact and then half of that improvement as I was talking about is our thinking on it right now, okay and related point on the synergy front.
How much of the 20, if you could remind us do you get.
Next year do you are you all in by by 21 on that front.
Hey, George its out am I getting that 20 million was a run rate that we were going to achieve kind of at the 18 month.
[noise] timeline, so what will be at or above that run rate at 18 months. We just know that some of those synergies are going to take a little longer than normal as far as our other acquisitions and transpired.
Thanks for going through that next question I had you talked about having you know anecdotal and other evidence that the food can growth rate, maybe pet food aside for a minute looks better than it would have been prior to Cove. It now those are my words decide exactly how you you for.
Raised it can you talk about what gives you confidence and what freezing you would use for it.
For describing the volume outlook longer term because of what's happened with coated and what evidence what data. What studies you have that that drive that and then I have one last question.
George It's Adam again, I want to give you. One example of just kind of what we're dealing with Oh mix a little bit of seeing it my data with what Silgan data as well. So our supermarket you know we spent a lot of time over the years talking about soup and.
Q2, senior my data had soup up approximately 50% versus the prior year, so tremendous increase in volume and as we look at Q3, it's a 5% year over year growth. The reality is we shipped the exact same amounts of suit volume in Q3 that we did in Q2. So you had that increase.
That occurred in Q2, and our whole point is that elevated demand and that demand has maintained at that very high rate. Our Q4 actually is calling for a soon to be up.
Even another increment above Q3, and Q2, so you know talking about soup again to the suits filling season, usually starts in Q3, but our customers we're able to take advantage of their capacity available to them in Q2, and we've seen an elevated demand rate that.
As we sit here today is going to continue at least for some period of time.
No I would just add that charge theres a couple of other kind of more macro trends that we look at our thinking about you saw on the macro side you've got.
I'm not sure this is macro somewhere in between but firstly, you've got Campbell doing some interesting work on new customers and so I think the first thing we have pretty good data that said there are new customers to cans and that's new exposure.
On the macro side you also have you obviously now we have a lot more at home work at home eat at home etcetera, I think most of US would probably agree that even coming out of coal that there's probably going to be an enhanced amount of work at home or certainly the real estate market is implying that so work at home means more eating at home personally got lunch at home. So start there than you are.
Also you are launching into dinner, you're already home, so you're not out in the city et cetera. So I think there's some global trends that would lead us to conclude there will be more at home consumption over time, and then you predict what the economy going to look like and when it's going to recover but down economies tend to be good for lower price food cans.
I'll spare you my whole litany, I cant, but by far the lowest cost way to get good valuable calories.
And so down economies tend to be good for that and I think a lot of people by the way through this pandemic I've been surprised how much money. They save those continue have a paycheck by not going out et cetera. So we also think that you know.
Your opinion I guess, if you will but there's more visibility to how much was being spent eating out by Americans.
By American consumers.
Okay, Oh, you know what I had another question, but you know what I'll turn it over for fairness I'm trying to get back in queue. Thanks, guys. Okay background. Thanks.
Well take our next question from Cape Cod, Steve with Wells Fargo Securities.
Tony Bob and good morning.
Take care.
Tony I was curious there are a couple of a flexible pouch manufacturers out there that have discussed going into some of these fast casual restaurants with.
Some vertical fed pouches and I'm, assuming some of that you know for fluid applications and its part in a way to automate restaurants et cetera. I was curious if you kind of heard any of that from your restaurant customers as it relates to the to the number 10 can.
You know and maybe view that as a threat as things do in fact to reopen and then maybe just a data point if you could tell us directionally how much of your business is in fact, you know kind of.
In a restaurant or or large number 10 cans.
Oh, So we you know the the pouch has always been there. So there could be some enhanced but I think you're right that most of that is rough fluid et cetera.
The things that come in at number 10 to restaurants are a pretty stable demand good product for restaurants like it. So I don't I would be very surprised we are not seeing any trend of shift away from.
Alan cans for that so they get.
So they get.
The larger cans are a relatively small percentage I'm not sure I really have the exact percentage for you here I'm not sure how much would help you, but it's relatively small but as I said on a per unit basis. It's a lot of drop through so it does it matters to kind of margins and in a given period.
Okay, and then Bob I know its early blocking happening and a couple of months, but any preliminary view and what pension might look like or at least as the income statement impact next year I think it was a 20 million in aggregate benefit this year.
Yeah, you're right. It is it is early we got to finish out the year with with returns and ultimately it's the year end discount rate that will be the big determining factor and right now I think.
The the evidence would suggest that there is some pressure there so it could be a.
I'm. This is a swag, but it could be $10 million to $15 million of a headwind.
Again thats.
That's cheap TBD.
I would point out that all of that either way is a noncash impact.
To to earnings, but that's the way we would see it shake out right now.
Excellent. Thank you.
Well take our next question from Kyle White with Deutsche Bank.
Hey, good morning, Thanks for taking my question, Bob what is the what's the new Capex level and I'm curious is it isn't related to any acceleration of projects. There's some pull forward of projects or is it new type of investments as a result of all the growth you're seeing.
Yeah. That's that's essentially why we held our free cash flow guidance constant versus what we put out in the prior quarter.
Obviously, we've seen some improvement in earnings and we think that you know as we invest in some of those projects for customers that will provide growth on a go forward basis as.
As well as you know provide for for the volume that that our existing customers have we're going to see an increased rate of capex versus the 220 that we had.
And we're also going to see.
A little bit higher working capital, which which really means we're not going to see as much of a reduction as we were anticipating coming into the year and that probably has more to do with the with the thought process that given that we're expecting elevated volumes across the board, we're going to try and build as much inventory as we can in Q4 to.
Are you ready to support our customers going into next year. So those two things combined will offset the earnings. So I think the capex side, you're probably talking about something that's in the 10 or $15 million range.
All that said the free cash flow, we're talking about is something like an 8% yield on current stock price.
Okay that makes sense. Thanks, that's helpful. We've talked about a little bit on soup and you referenced Campbell's, they're obviously doing a lot more work and marketability and promoting sue can but they also talked about for this next coming fiscal year in terms of adding supply or I'm. Just curious in terms of your capacity situation. If they do go ahead of some of those.
Capacity increases on their side, how what does that mean for your your capacity would you be able to fulfill that or do you need to make investments.
Sure. Kyle you know you think about our supermarket in particular you know we're we're in touch with all of our customers and talking about 2021. So we we believe were in a very good position to be able to supply those requirements in 2021 out of the current footprint of our current capacity that we have available it might be.
To the comment I made earlier about utilizing the shoulders of the year, a little bit more to support their increased.
Their increase volume, but we're obviously more than willing to do that.
Okay. Thank you I'll turn it over.
Well take our next question from gone Champ, Punjabi with Baird.
I guess, you know going back to the to the metal food segment. Tony can you just give us a sense of supply chain inventory or you know how would you characterize it I mean, there's a lot of different nodes in there you know retailers customers and in trade your end as well and then related.
Do you have confidence on grow 2021 and onwards, you know how should we think about some of these unfavorable contract renewals you called out in the past I mean, I would assume that's oh theres less excess capacity in the industry. Just just your thoughts on that as well.
Hey, guys you Miss out on most jump and I'll, let Tony clean up behind me here with whatever right I mess, but.
Just looking at the supply chain for metal food cans, you know what I would tell you is with the surge that happened you know you got to think about the retail point of sales distribution centers regional warehouses, our customers inventory you know.
That entire supply chain was very taxed and really regardless of the product that goes into the Cannes I think all products, where tax by what happened earlier in the year. So you know we've been working with our customers very closely we're very focused on meeting their demand, which is really focused on meeting the consumer demand.
Increased demand for food cans so.
The first point of or the first point of business for US is meeting the consumer demand and the second will be replenishing the supply chain whenever that happens. So I would just tell you at this point, we're not really focused on right.
Honestly in the supply chain at this point and we're just trying to get food out to consumers as best we can.
Tony any other thoughts on that I did go out you are kind of setting so what's the market look like and can that I contracts et cetera. So I think the as Adam said the market is pretty full I would not say sold out are desperate for capacity, but I think it's pretty fully thought that the shoulder seasons as we do so do our competitors so I would call the.
Market Kinda competitively stable right now because they're trying to service our customers are asked to contracts and the impact of that specifically as you know that kind of comes in the big one coming way. So you may recall beginning this year, we did some 40% of our contracted can business was renegotiated long term seven year average.
Leave a term contract so that's kind of behind us. So if you look at the next year or two there is no expectation that we would need to do anything of that nature and a major win.
And coming into the year, and we were 65% over four years left in their contract life.
Got it.
That's that's super helpful. And then is that I mean, the inventory replenishment aspect is that what gives you that you know sort of adds to that confidence in terms of 2021 earnings they're going back to George's question earlier, and then second you know for plastics, just given the growth that you're seeing there is that we had.
Is that are we at a point that we need more capacity to just sort of business with existing customers and then also for <unk> for the new business wins that you reference thanks, so much.
Good question. Thanks sounds from for the 2021 confidence I do think the inventory plays a role in that I think we're going to be.
Really.
Running at full capacity next year, and whether those cans make it all the way to the consumer or replenish the supply chain I think that will absolutely be occurring in 21. So it does provide some level of confidence in the volume projections. So then moving over to plastics, a you know it's.
Bob just mentioned, we've had several wins and new business awards, both in our and all three businesses, but particularly in plastics. So there is more capital going into plastic adding capacity, but that's all contractual volume with kind of multi year agreements associated with it and really we're talking about adding a lie.
Looking for a custom solution for our customers. So we feel very good about where that business is I think some of the increased capital about talk about again the specific to the plastics business as well you got to my I would point out here, where we've got we've got really nice opportunities to grow the business at good return rates through.
Uhhuh through organic Capex.
But we're not talking about capex that so outsized that it that it impairs our free cash flow.
Just one thing.
Contracts I think we've said this I'm to be clear that said, what we're talking about is we think the food can volumes will have strength, we have not given you a direction on food can volumes. So we are cycling against a pantry stuff in the first part of the pandemic so to be clear our language and our confidence is that we think can volumes will remain strong we haven't necessarily said.
Plus over this current year, we're saying the net of all of our earnings impact, including all day and everything else is as well just to be clear.
Perfect. Thank you.
We'll take our next question from Jeff.
Cost guess with J.P. Morgan.
Got it thanks very much.
Your S. today expense was about 92 million was there something unusual in that number or is that a more normalized level of your spend.
Yeah. So the big issue. There is you you've got the inclusion of the acquisitions in there so on a on a comparative basis. It's it's all acquisitions I think well, it's the best DNA of the acquired business and then you've got some acquisition costs that we strip out of the adjusted earnings.
Per share but are included in the in the piano.
Okay and.
Have you had any difficulties getting all of the resin that you want in the United States and that polypropylene and polyethylene have been very tight and many customers have to know.
I have been on allocation or can you get all the rest and that you want.
Well I think the resin market is very tight and we know certainly of certain suppliers to to the packaging companies that they are on allocation. There have been some force majeure declared Fortunately for us.
Fortunately for us and the folks that we purchase our our resin materials from a we've been able to get all of our requirements even at the elevated levels that we've been talking about and so we feel very good about the supply chain for our business as it relates to revenue.
And then lastly in in metal containers.
What utilization rate did you run out on average this year, you know, but both the last nine months and the forward quarter.
Oh, it's a great question, it's not a metric that we typically discuss on this call I would say we were fully utilized so whatever percentage you'd like to a a portion to fully utilize it was an incredibly high number year to date and we'll continue to do that through the end of the year.
Okay, great. Thank you so much.
Well take our next question from Iran. Just want us on research analyst.
Great. Thanks, Good morning, Congratulations on a strong performance I guess I just wanted to ask again eat you mentioned you know really a relentless focus on cost reduction. So could you kind of help us understand what kind of opportunity you have there or is it. The case that you had some transitory cost reductions that you can make more.
Permanent.
Or is it something more structural that you're going to undertake a over the next year or two.
Well I think it's an everyday exercises silicon that we're focused on on cost and eliminating or reducing costs. So it truly is an everyday part of our culture I think specifically what we were talking about was the previously announced rationalization plan that we have for our metal container business and really you know as we talked about.
When we announced that plan, we were taking capacity out of the market because we were sort of right sizing.
Our operational capacity with our customers and our commitment.
Obviously, that's changed now with what's happened in 2020, and we got a a much higher rate of volume that we're dealing with today that we think will be here for some extended period of time and we're going to make sure number one that we meet our customer requirements and their needs and their growth strategies. So I'll just say again.
Pause that program, specifically and really when you go across all of our businesses were running at a very high rate of utilization and they'll say, there's nothing significant right now other than meeting our customer requirements.
We are focused on operationally.
Thanks, and I guess I was just kind of curious looking at the margin levels you know obviously understanding it's.
It's difficult with the metal pass through but you know definitely you had nice margin performance and metal container and especially in plastic containers.
So maybe could you just characterize the margins that you achieved in Q3, whether some of it was due to you know if any of it was due to outsized volume that maybe shouldn't you know continue I'm is there any level normal level of margin that you'd want to have as you know think about preach business.
Well I would say there were puts and takes in the margin I. If you looked at the second quarter I would say you had outsized margin in the second quarter of Virginia and the campus is primarily because you had a case, where you were building inventory and selling everything you you moved a lot of costs out in the second quarter that's not.
Second third quarter had a little bit the reverse of that where you sold off inventory you took in some of those costs the third.
The third quarter also had we did do those contract renewals I referred to before there was some pricing impact of that and we as we've said beginning the year that will primarily hit the third quarter. So yes. After a couple of things that that Rob.
Process third quarter, Mark kicking the can business down from the second quarter, but if we look at the third quarter I, there's nothing about it when all that blended in the price is laughing. So it'll be there I would say that it seem sort of a reasonable level in Q2.
Q2 was a little more elevated.
And then just on on Albania, you know given that it has been impacted by Covanta, you know a little bit, but you are keeping a relatively neutral contribution.
Have you been able to discover a little bit more synergy progress or maybe could you just provide an update on the integration and if there's been any challenges there may be some tailwinds even in doing this in a co good world.
Sure a road.
It's a good question I mean, you think about trying to integrate an acquisition during a global pandemic you know what we like to do is go in and get boots on the ground on day, one and meet with team looks at look in the whites of the eyes and really get into the details of that business because that's the first chance to really get to do it.
After the due diligence period, so we've been utilizing all sorts of new tools to be able to do that whether its zone, where teams or any other technology, you're talking about so it's been a challenge you know kind of coming out of the gate and an acquisition and I'll say our teams have done a terrific job not only our legacy dispensing team but.
The Albania team that came with the business has just been outstanding trying to work together working through a global pandemic and also a global pandemic that.
Significantly impacting one of their primary product lines. So.
That what I tell you is you know what I said earlier about synergies, we're right, where we thought we'd be at this point I think if you go to the end of the 18 month period, where we were targeting that kind of $20 million I think we'll be at that run rate or probably slightly above it and feel really good about what we're dealing with the business. It's a market that's very.
Challenged right now.
Great and electrical if okay, we'll move down the list.
Well take our next question from Brian Maguire with Goldman Sachs.
Hey, good morning, Thanks for taking the question.
Just wanted to kind of follow up.
And then question on margins just in the food can business is obviously, a really strong growth year over year, but trying to put the 10% volume growth sort of into context with and 14% earnings grows you know it was just wondering if you could kind of bridge the why why more of the volume growth getting trends.
Late into Ah EBIT growth and I guess, you know the margin improvement there was ER was good but maybe not as as much as well might have expected given that level of volume growth and the normal fixed cost absorption. We're used to seeing in those businesses. So just you know was there some incentive comp or other.
You know sort of accruals or or true ups that occurred at the end of it we should be thinking about.
So good question. So they just to cover off the container volumes were up 17% in the third quarter, a and the margin was fairly consistent with previous time period, not as elevated as Q2, perhaps not as elevated you might have expected considering you had that strong volumes. So just I think.
That's the basic question and the reason for that basically had really great strong operating performance, but as I said, we were basically we built inventory in the first half of the year. As we had said we were going to do and liquidated in the third quarter. So you have all of the overhead costs that you've got to take out of Q2, you had to suffer in Q3 as you liquidated that image.
So its now obviously sold more so it's a good thing, but it's on a margin basis, what we call volume benefit is less drop through because of that margin coming in at that cost coming in.
So that's a big piece of it the other piece is what I said, we had price concessions under a contract that we renewed and we talked at the beginning of the year that was roughly 1% of total price of the contract revenue and contract so relatively modest price, but then it was because of the customer and when they're going to take product. It was going to be predominantly in the third quarter. So you have that.
Also impacting what was happening in the quarter. So all that said when you net all together, we said that margins seems a normal level to us not elevated for the volume it has but not the prep season, we would view that as a reasonable margin level for the business and what we expected as we came into the quarter correct.
Okay. No. That's helpful. Thank you and then just lastly on closures I think you can see the volumes were up 10%, including acquisitions wondering if you could just kind of break out what they were on a on an organic basis and then just any outlook for the fourth quarter in that segment.
Sure and Brian as you know Weve talked a couple times about you know the different products that are kinda comprised in our closures segment and so the first thing you have to just to acknowledge quite white right up front is the fact that you know our dispensing closures or about 17% of our unit volume and a little over half of the revenue so as we've said.
Before you know a closure is not a closure or is that a closure from a mix standpoint. So now to get to your question you know our legacy dispensing business had a fantastic quarter they were up 22%.
Versus the prior year and that's our legacy business, that's not with acquisitions, so terrific performance there for.
For all the product lines that we've talked about for a former sprayers trigger sprayers.
Our dispensing group in total and then you move over to kind of our flat cat business. If you will and we had good volume growth and food. The U.S. market in particular was strong for food was up almost 20%.
And then you think about another market that we've talked about quite a bit as our plastic hot fill closure business or our market I should say, that's kind of sports drinks and other beverage.
Other beverages that that business was up 14% in the quarter. So really it's the legacy Silgan businesses did fantastic in the quarter and saw really nice volume growth literally across the board, we saw a little bit of softness outside of the U.S. and in some international markets, but.
It really did focus was from.
Tremendous in the U.S. market.
Okay. So just to just to confirm your is there a way to quantify what the acquisition contribution was to the tune of volumes in that segment.
Sure so tow.
Total legacy closures were up a little over 3%.
If you just go straight on unit volume again.
And our our addition of the two acquisitions made up the other 7%.
Got it okay perfect thanks to everyone.
Well take our next question from Salvatore Siano with Seaport Global.
Yeah, Hi, Tony Kinda Bocom. So my first question is a little bit about price cost and Twentytwenty. One what are your thoughts about some key components like a freight some residents.
Sure Hey, maybe we'll start with with resin and just say that you know with kind of the commentary we had earlier in the call you know during the hurricane season, we didn't see tightness in the resin market that led to producers announcing price increases for the back half of 2020.
At this point as we look into 21, we think those.
We think those are are still on the table. So we're talking through those as we speak but it's likely resin would be somewhat of a headwind for 21 freight availability is difficult right now, but again, there's a lot of products. It certainly we are putting out over the road and others as well so freight rates.
Then a slightly inflationary trends here for the back half of the year as well and then when do you Didnt ask specifically about steel, but I'll just make a quick comment on another major input for us.
The steel industry is hurting you know we had a deflationary year in 2020, I think the steel entries looking for increases we're fighting everyday for our customers to mitigate any.
Mitigate any increase they comes through but the app.
The ask is out there at this point and we're in the early processes of negotiating for steel going forward, just because I think as a general rule, we pass all those costs through so some of that is just give you some idea of what's going to happen on the raw material side.
And then you may on resin or freight you might have some lag issues et cetera, but as a general rule that will pass.
Yeah, perfect and I'm just.
Then last question on on M&A I know you just double back about a deep and how strong. This year has been you seem like you're you should then dropping to you you should end up the year wrapping up the high Rendell's your leverage targets already when do you think you would be ready to be both from a leverage standpoint given season.
Good work you got some about social operationally to undertake another a large I made.
Yeah sounds good. Good question you know I think you hit on the right points, we are in the midst of a.
The Alabama acquisition integration, right, which is which is mission critical for us to get it.
Get it fully integrated and wring out the synergies and you know that's where our focus.
Lies and we feel really good about being able to accomplish both of those as we exit the back half of the year here.
And then you know given our forecast we should be kind of right right on that high end of the range, which I'll remind everybody is two and a half to three and a half times net debt.
Net debt to EBITDA.
So I think that says from a financial metric, we'd be we'd be ready for that.
For the right opportunity now obviously, that's a there's a lot to that right and to reiterate how we think about that we're looking for businesses that have competitive positions in their markets, we'd be looking for something that free cash flow accretive.
And that has a reasonable return on on that M&A targets. So you know.
Again, we're opportunistic and you have to be you know fleet footed. If you will to take advantage of those opportunities. All that said, we don't necessarily feel compelled to have to do anything we think we've got.
Good growth catalyst in the business that we have that.
Starts to turn the corner around the particularly the fragrance side, we think theres good growth opportunity for our business.
From that standpoint, so we'd be equally as happy just to run out 2021 focused on bringing out that value in the business.
Thank you very much.
[laughter].
Well take our next question from Adam Josephson with Keybanc.
Thanks for taking my follow up Tony at your Analyst day, little under a year and a half ago. One of the things you talked about was the valuation disk.
Discrepancy between yourselves and some of your packaging peers and I think you mentioned earlier on the call that you were at an 8% free cash flow you a little bit you consider pretty attractive and since that analyst day. Your multiple stayed about.
About the same at about 10 times EBITDA, while those for your your beverage can peers have have gone skywards as you know and I'm. Just wondering I think Mark asked you earlier in the call about your willingness to your interest in getting it back I'm just wondering how you're thinking about your relative valuation now compared to what you were thinking at the analyst.
Okay.
And does that called <unk> co your thinking at all in terms of your desire to get into say Oh.
That sounds like beverage cans or something else, just how you're thinking about just that that overarching situation.
That's a great question, obviously, we and every company are asking themselves that question every day and and scratch our head to a certain degree I think that you know we look for and I've always look for strong sustainable positions. A we think a lot about free cash generation and so I think where we land on that ultimately is.
You can't ignore that the equity market wants gross and that we've got to be growth driven and so part of what we've done with that is built out a phenomenal dispensing closure franchise that as we talked about on that Investor day is soon to be 50% of the EBITDA of our business.
And as Bob just said, we've got you know I would answer the other question and that's popped yet we've got a catalyst already in our business, which is the Albania as it comes back on fragrance.
We feel very good will recover.
And so we feel great. There's already one catalyst there and we've been de levering at such a fast pace as Bob pointed out we are able to do another deal coming forward, which is exactly the type of analyst day is that our view is you have strong sustainable cash generative businesses, you take that cash you deploy it and over time, you will generate better growth than.
That growth be sexy thing whatever it might be and I think if you look back at us against any of those companies are the same multiples overtime, you'll find we've outperformed a and so with all that said I. All I can do is say, we we we've.
We play long ball.
We we know what we're about and we're really clear about it in the best or is it like that and want to be get that kind of reward will stay with us and those that want to get a very quick high growth and again I want to be clear, we've delivered growth, but if you.
But if you want to be able to see it organically than that you know a little less our interest because and packaging, we've not seen that organic growth yet the rewards that some of my thinking we'll get.
Got it thanks, so much Tony.
Thank you.
Once again, if you would like to ask a question. Please signal by pressing star one well take our next question from George Staphos with Bank of America.
Hi, guys. Thanks.
Thanks for taking my follow on I think you already answered the question with some of the other queuing it but I just want to go through and if I, if I look at Threeq versus Twoq two in metal food containers.
Due to I think we had something around 15% organic growth revenue grew about 4%.
This quarter the or in your view.
Volume growth was 17% and yet revenue grew again about 4% and you had a little bit of an FX benefit as well from remember from what I remember in the end the discussion so that.
Sort of lack of lift in revenue relative to the improvement and you're on your volume or was that more the mix effect from the smaller cans or was that more of the impact of the contract renewals showing up in third quarter. As you discussed I realize it's probably all the above but if you had.
To think about it what's your <unk> was the predominant effect and then going forward are there any implications from that in terms of how we should project out price mix for you in the call.
In the quarter and 21 I had thank you guys. Good luck in the quarter. Thanks.
By far the biggest of that is the lower.
Cost of raw materials being pass through that's your biggest driver of that and so you know when you take the price is meaningful but against the entirety of revenue its not that meaningful so I wouldn't say the price is a very big part of it there is some mix shift, but again I want to be clear that the same mix shift we've been taco, we use slightly different language in the press releases have been like our language but.
It's the exact same thing we just the things that we've been type of growing pet food protein tend to be smaller cans and then yes. It is so that some of the gallon cans are out there there is little bit more of a mix this quarter, but mostly it but that's really about the raw material pass through.
Appreciate the nuances there Tony Thanks, and have a good quarter. Thank you.
At this time, we have no further questions in queue.
All right. Thank you very much and we appreciate everyone's time and we look forward to talking to at the end of January for our year end results.
This concludes our teleconference. Thank you for your participation.
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