Q2 2021 Silgan Holdings Inc Earnings Call
There are currently on hold for the Silicon Holdings second quarter 2021earnings results conference call. At this time, we are assembling today's audience and plan to be underway shortly.
We appreciate your patience and please remain on the line.
[music].
Thank you for joining the surgeon the holdings second quarter of 2021earnings results Conference call Today's conference is.
Being recorded at this time I'd like to turn the conference over to Kim Ulmer, Vice President Finance and Treasurer. Please go ahead.
Thank you joining me on the company.
Chairman and CEO, Adam Greenlee, President and COO.
Yes.
Before we begin the call today.
To make it clear of that certain statements made today on this conference call maybe forward looking statements.
These forward looking statements are made based upon 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 described in the company's annual report on form 10-K for 2010.
And we would like 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 on.
Turn it over to Tony.
Thank you Kim welcome everyone to our second quarter of 2021 earnings Conference call.
We hope the everyone's doing well as we continue to navigate.
And the gain through the vagaries of this ever changing pandemic world.
The good news from this call as our businesses continue to perform well as measured both the against the record performance at the peak of the pandemic levels last year, and even more so as compared with the pre pandemic levels.
In addition, we continue to advance our long term succession.
<unk> 12 of most recently announced on our July 1.2021 press release.
I am pleased to be on the final stages of the transition to Adam's leadership as the new CEO I am.
Looking forward to continuing to be of resource Adam and his new position.
Perhaps more importantly, the executive team that will continue to support Adam is the same team.
And that has been core of the company culture, it's missions and principles and its investment disciplines.
We feel confident that this team and the silicon culture under Adam's leadership will continue to build on its past successes and continue to create value for our customers employees and shareholders alike.
I've been asked quite a bit.
And since the announcements reflect on what we've accomplished over the last 15 years.
And my role as CEO, and where I think Sylvia and can go from here.
And from the beginning we are focused on building strong sustainable cash generative businesses, our metal container business is the epitome of this and we've invested to make it the best and.
And the world with a particular eye on markets, where we see growth opportunities.
And the custom container business, we recognized a decade ago that we were not the lowest cost best answer to our customers and we made the hard decision to significantly restructure that business.
Many thought we should sell of the trough of this process, but we stopped.
Our plan.
Improved and back the great team and of emerge as an industry leader in terms of profitability and customer service.
Finally, we recognized some time ago, the need for more growth opportunities to deploy our strong free cash flow.
And we identified the closures and dispensing markets as great opportunities.
Over the years, we focused our team on product development.
And customer support we acquired businesses to further expand our products and footprint and recently, we acquired and built superior dispensing capabilities.
Today that dispensing and specialty closure business is our largest profit contributor.
And offer significant opportunities for growth and a larger array of attractive industries, including food beverage healthcare and personal care beauty and household products.
So we entered this next stage of an experienced leader and Adam with the senior team familiar with accountability and success and and organization built on.
<unk> culture of winning for.
For these reasons I'm proud of what our team has accomplished but I'm, even more confident that silver and the best days are ahead.
With that I will now quite literally turn it over and.
Thanks, Tony and let me start by saying that it hasnt been and privilege to work so closely with Tony and the inside of entire silicon team.
On a winning 16 years under Tony's leadership still going to stay true to the mission and principles that Phil and Greg founded the company upon as revenues have grown from $2.5 billion and 2005 to over $5 billion and 2020 on a pro forma basis, our performance based culture constancy.
<unk> of purpose and disciplined capital allocation model will the will continue to be at the core of what we do every day and we're very fortunate to continue to benefit from Tony's leadership and guidance as executive Chairman.
Humbled honored and excited for this next chapter and the Silicon story and believe the future is very bright for our customers our employees.
<unk> and our shareholders as we like to say, it's silicon and the past is prologue and our entire team remains committed and looking forward to delivering many more silica and successes and the future speaking of silicon successes I'll now make a few comments about the performance of the business and then I'll turn it over to Bob to go into further detail regarding our second quarter financials.
<unk> and full year forecast after that we'll be happy to take any questions. As you saw on this morning's press release, we delivered another strong quarter with record earnings per share of <unk> 85.
Adjusted earnings per share were equal to the record prior year, which benefited from the impact of the early stage pandemic pantry loading.
Expected each of our businesses continued to perform well and the face of a variety of challenges specifically.
Specifically, our dispensing and specialty closure segment saw improved performance related to the inclusion of the Albea business and the synergy capture we have achieved to date and addition segment volumes increased 10%.
With organic volume up and.
With organic volume up 7%, we continue to see volume recovery and the beauty and fragrance markets and.
Strength in our beverage markets and the quarter.
Segment operating performance continued at a high level and helped mitigate the impact of the unprecedented increases in raw.
<unk> experienced and the second quarter.
Demand and our metal container segment remained at elevated levels after increasing 15% and the second quarter of 2020, while segment volume declined and the second quarter of 2021 by 2% had it not been for supply chain and labor challenges.
<unk>, we would of surpassed the prior year record volumes and operating performance and plant productivity were negatively impacted by steel supply chain and labor challenges across our operating network.
And our custom container segment.
We continue to improve profitability through outstanding operating performance and a more.
Favorable product mix as expected the 14% increase and volume experienced in the second quarter of 2020, which was primarily due to increased pandemic pandemic driven demand for cleaning and sanitizing products normalized resulting in second quarter 2021 volumes declining.
And by 11%. In addition, the segment was negatively impacted by the lagged pass through of the significant increases in raw materials experienced during the quarter.
As a result of our performance for the first half of 2021 and our outlook for the remainder of the year, we are confirming our full year earnings guidance.
And a range of $3.30.
To $3.45 per share. This compares to the record performance in 2020 of $3 and <unk> per share with that ill turn it over to Bob.
Thanks, Adam Good morning, everyone. We're pleased with the overall performance, noting each of our businesses faced some.
The unique challenges as we continue to navigate through these phases of the pandemic and some cases, leading to commerce some year over year comparisons and these include changes in inventory levels significant inflation in raw materials disruption and other inefficiencies and the supply chain for raw materials and challenges related to running our plants full.
The out for 18 months.
And the face of these challenges we delivered adjusted earnings per diluted share of <unk> 85 for the second quarter of 2021 at the high end of our estimates and in line with the record prior year, which benefited significantly from pandemic related volume surges.
On a consolidated basis net sales.
Second quarter of 2021 increase of $172.2 million or 14, 6% versus the prior year to $1.350 million as each of our segments delivered top line improvement.
These increases were largely the result of the pass through of higher raw material costs. The inclusion of <unk> 66.
$6 million for the Albea dispensing acquisition for the non comparative 2 months in the quarter favorable foreign currency translation of approximately $27 million and a favorable mix of products sold and the metal container and custom container segments, partially offset by lower volumes and these 2 segments.
We.
We converted the sales to adjusted income before interest and taxes for the quarter of $153.4 million after adjustments of $400 per rationalization charges versus the $152.8 million after adjustments of $2 million for rationalization charges of $16.1 million for costs attributable to announced.
<unk> the acquisition and $3.5 million for the purchase accounting write up of inventory and the prior year quarter.
The improvement was primarily the result of increases and our dispensing and specialty closures and custom container segments offset by a decline and the metal container business.
Highlights of the adjusted segment income for each of.
Of our segments is as follows adjusted segment income and the dispensing and specialty closure segment increased $11.1 million to a record of $73.9 million and the second quarter of 2021 after adjustments of 100000 for rationalization charges and 2021 and adjustments of $4.2.002 million 20.
And for rationalization charges and the purchase accounting charge to write up inventories.
The increase was primarily due to higher unit volumes, including from the Albea dispensing acquisition, which contributed approximately $8.2 million to the topline.
Profit line for the 2 months of additional ownership in the quarter and <unk>.
Trading performance. These benefits were partially offset by a significant unfavorable impact from the delayed pass through of higher resin costs and foreign currency transaction losses and the quarter.
Adjusted segment income and the metal container business was $58.8 million down $14.2 million versus the record.
<unk> <unk> per year after adjustments of 200000, 2021, and $1.2 million and 2020 each for rationalization charges.
This decrease was primarily attributable to lower unit volumes of approximately 2% as inefficiencies and the supply chain and production difficulties Hampton hampered our ability.
<unk> to meet customer demand and the quarter and in addition resulted in excess cost across the system.
Adjusted segment income in the custom container segment increased $4.2 million to $27.3 million for the quarter after adjusting for rationalization charges of $100000 and each year.
This increase.
It was largely attributable to more favorable product mix of products sold strong operating performance and the inclusion and the prior year of a $2.8 million charge for a noncommercial legal settlement, partially offset by lower volumes of approximately 11% and the.
<unk> impact from the delayed pass through of resin increase.
Increases in the current period.
Turning now to our outlook for 2021 as expected we're off to a good start and we continue to anticipate strong full year demand from our customers. As a result, we are confirming a full year estimate and the range of $3.30 to $3.45.
Which at the midpoint represents a 10, 3% increase over the prior year record 2020 performance.
We're also providing third quarter of 2021 estimate of adjusted earnings and the range of <unk> 95.
The $1.10 per diluted share as compared to record adjusted net income per diluted share of $1 for.
And the third quarter of 2020.
Based on our current outlook for 2021, we're also increasing our free cash flow guidance to approximately 400 million further improving our free cash flow yield to nearly 9.1% of current share price. This compares to our previous estimate of approximately $380 million.
And prior year delivery of $383.5 million.
That concludes our prepared comments as a reminder, we'd like to ask you to limit your time to 1 question and 1 follow up and then get back into the queue.
Turn it over to Ken.
And to provide for the Q&A session.
And.
And on.
I think this app and here.
Hello.
Cute titled <unk>.
The activity there.
Wed never does GM of our U I wonder.
You'd hear from the meeting.
And have anything unmasking kingdom.
And you.
In the home.
Awesome.
So they can.
Bermuda and alright.
And we're making Blake and ask questions without Ken is that right correct. So.
But why don't we say something.
Hey, Ken are you still with us.
Yes.
Yeah.
Pardon the interruption the weed.
I'm just and that's a help you will now take the first question from Adam Josephson from please go ahead.
Thank you. Thanks, Thanks, and good morning, everyone, Tony and Adam Congratulations and Tony All the best for you and your future endeavors. Thank.
Thank you Adam.
Okay.
Tony I hope youre, not going to miss dealing with us too much.
I really am.
And <unk>.
[laughter] for that year 1.
Okay.
[laughter] hang out for a call or 2 Jessica and I don't.
[laughter].
[laughter].
Thanks.
Well speaking of these wonderful questions that you have had the pleasure of dealing with so you're the full year guidance implies.
Pretty big fourth quarter relative to the third quarter relative to previous fourth quarters, including last year. So can you just talk about what.
What is leading you to expect such growth year over year, and the fourth quarter and and why the fourth quarter is is much bigger relative to the third quarter. Then as has been the case in years past.
Sure Great question, Adam as we look at the fourth quarter and 2021, we're expecting really continued.
The performance out of each of our operating segments. So we'll continue to see nice volume growth and performance out of our dispensing and specialty closures segment will see a bit of a recovery later in the year for our custom container segment as well as we transition through some inventory challenges here.
And the summer.
And you had good and then really I think the biggest driver is going to be our metal container segment. So as you'll recall last year and Q4, we did say that we were going to take some downtime. We had some maintenance that we had pushed out throughout the year, making sure that we can supply our customers with their needs through the beginning of months of the pandemic and and on through.
Months of Q2, and Q3 as well so.
As we look and metal containers. We've also added some capacity so we will be making more cans and we did and the prior year will also be selling more cans and we did and the prior year as our expectation for Q4, so really that is the the.
The simple answer in a nutshell.
And Adam I would add 1 thing to that too is that particularly in the food can business remember that through the pandemic the.
And the large institutional cans were kind of falling off last year as well and.
And we think that Thats, where some of that volume will come back this year, so adding adding 2 of the story around containers.
And of course is a terrific thanks, Adam and and just 1 follow up on somewhat similar lines. So can you just talk about what what assumptions are embedded at the high and low end of the full year range and as well as what what are your assumptions for resin costs and availability.
Steel supply and labor supply all of the issues that you called out as.
The fact in the second quarter and as well as the third quarter for that matter.
Sure I think we'll we'll try to focus on the full year and give some guidance. There. So as we think about resin and particular will start their eyes. It affects 2 of our operating segments.
And continues to be challenging from a on inflation.
<unk> standpoint, as we sat here 3 months ago on our last quarterly call. The forecasts were pretty clear that resin had peaked in the early part of 2021 and as it turns out of the indices now I have revise those numbers and.
And who are calling for Q3 to be the peak so what were continuing.
<unk> to see as inflation and raw materials related to resin based products that will continue in Q3, we do anticipate some relief.
And Q4 and.
And what we typically do.
And we hold our current run rate for resin firm through the balance of the year for forecasting purposes.
We've actually allowed for a slight recovery and Q4.
But we're going to continue to pass through the lagged increases that we've seen and of resin and both custom containers and dispensing and specialty closures.
As far as the raw material.
And the labor challenges, we see first of all of the labor.
Aybar challenges aren't unique the silicon I think that the common refrain that you here with just about anyone and manufacturing or retail these days.
For us we're a little unique.
Only because we've been running all of our facilities essentially 24, 7% for the past 18 months, so our employees absolutely rose.
And as occasion and the ask to work the overtime shifts and to make sure that we were providing product out to the marketplace and.
And as the World and certainly in the United States of reopened as a beds.
Our employees are are looking to participate and that reopening. So we've had some challenges on labor.
Labor, it's not just us.
Our customers and our suppliers are dealing with with roughly the same challenges so.
And that's not something that will be solved immediately, but obviously, we're working to manage through that situation and and taking strong actions across each of our businesses and.
And then on the steel side.
And to the on.
Unfortunately the.
Performance from our supply base.
On a raw materials related specifically to steel has been a challenge.
In the quarter and the second quarter, we were dealing with delivery performances between 30 and 50%. So you think about our efficient production model.
Will it does depend to some degree on and efficient supply of product coming in.
And so we're continuing to work with our suppliers, obviously, we're entering our peak quarter and Q3, and so we're not going to simply be able to snap our fingers and correct all of the steel supply issues that we've had but.
<unk> and working to reward those that have performed well and move volume away from those of the talent that.
And that will take us some time, but at this point, we anticipate that we can get all of the raw materials required for our customers forecast and to meet our needs for the remainder of the year.
Terrific. Thanks, Adam.
Sure.
Yeah.
We will now take the next question from Salvator Tiano. Please go ahead.
Yeah. Thanks, Toni on them on books for taking my questions on the again congratulation Sabah and congratulations on me.
So my first question is on the.
We are still sort of like quality of people that you mentioned about the unacceptable lumpy EBIT can provide little bit more color on Monday, you mentioned now about what happened and also the port.
Ghansham earnings and volume impact in Q2, and what do you assume for the rest of the year as well, whether that's continued challenging sort of potentially and recovering.
And volume so some of the budget just later on the year.
Sure Sal good morning, I do think that while it is it impacted us in Q2 from a volume standpoint that volume will then shift to Q3 and Q4 most of that will be realized in Q3, So we will be able to recover.
I cover it it's just incredibly difficult when the incoming supply to and efficient system is running between call it 30% and 50% on a monthly basis. So.
The challenge.
And I would say in Q2 of the impact of the productivity challenges both between labor and raw materials with.
Something close to $5 million, so we're going to Oh.
And then continue to work very diligently with our customers to understand what their exact forecasts are and relate that back through the supply chain to make sure. We can continue to meet all of those needs.
Okay, great and.
And I.
The thing I wanted to clarify what's in your cost and containers I give the former and plastics business.
And if you can provide the open and Merck over about the volume outlook for the remainder of the year. If you still think answered about the 11% decline and you can still be positive for the full year and also just kind of clarify it would be the component.
And the earnings growth because it's really price seems to have double digit volume decline and then it gets filled minus to grow earnings.
Year on year.
Sure well the the business continues to perform really really well.
I think when you look at and are Accustom container segment, a couple of things come to mind first of all.
You have to remember that last year, the segments of 14% volume growth within the quarter. So as we cycle of our 11% decline.
And the second quarter of 'twenty, 1 we still feel really good about the business because of our sustaining and at a higher level than we had pre pandemic.
As you.
And listen to our discussions over the last several years on custom containers. What we have done is as we've been winning and the marketplace and what we've said about those new business wins of the profitability is going to be at kind of our our new reset level. So our favorable mix is really driven in part by growth in core markets and growth.
Both and new business wins that are coming in.
At the profit expectations that we have going forward for the business.
So.
As far as the earnings growth.
And again, it's really strong operating performance.
Leveraging that new product mix that we're talking about and.
And then as I think about the volume decline I mentioned previously that we're cycling through the summer months of of.
And the inventory correction and the marketplace and that inventory correction really is related to product specific to cleaning and sanitizing and so if you turn the clock back 12 months and think about what the.
And then the panic buys were right at the beginning of the pandemic hand Sanitizers Ham.
Hand soaps were.
Essentially people, we're filling those products and any container they would get or they could get excuse me and we were selling to all sorts of customers a year ago.
And that were.
Of making hand, sanitizer or they were putting the alcohol into containers to meet the needs of the marketplace. So that is just not occurring again at this point and 2021. It was more about what happened in 2020.
Okay, great. Thank you very much.
We will now take the next question from George Staphos. Please go ahead.
Hi, everyone. Good morning, Thanks for the details.
And Tony and Adam Congratulations on everything and the next chapters and Tony.
For a long ways from applied extrusion.
And I Wonder yes. It is.
Thankfully.
I wanted to for both of US I wanted to.
Hit on food first and metal containers and.
Okay.
Are you seeing any signs that the supply chain issues.
We're actually creating any demand destruction in other words customers, who would've been contemplating.
Using the metal container because of all of the good things that have arisen about the product or reemerge, perhaps because of COVID-19 are turned off by the feel of the supply chain the.
The concerns about 10 supply out of out of Asia et cetera, and.
And the related.
And if youre going to penalize the suppliers.
Who have not been as <unk>.
Efficient does that wind up being counterproductive at a time when you need metal to make cans, so kind of those.
2 questions and 1 of if you will to start.
Sure. Thanks George.
As far as demand destruction.
And the metal container segment I don't think.
So I mean, we spent a lot of time talking to our customers about their specific requirements for the year of 2021, and how that flow supports not only the supply chain, but but end user demand as well and we're also looking at and consumer data and seen really nice trends and continued.
<unk> of.
Of food and products and so we feel good about that I think our customers don't feel like they're missing out on volume and we're just simply not able to run our production as efficiently as we would like so I want to make it clear that we feel like we continue to support our customers and and.
And third of all of their requirements, even with the challenge that we're facing with our supply chain.
Okay.
Understood and then I guess the other question that I had back to custom containers.
And went through and a number of issues and it sounds like.
Parison.
And many of the biggest factor here.
But is there anything that you are gleaning from the consumer data that would make you more concerned about the demand outlook and others.
Article and the journal today about some of the Covid induced behavior and now beginning to wane somewhat including.
<unk>.
Sanitizing and cleaning and that obviously helps your costs and containers business anything to worry about there has resin created demand destruction again, given how how quickly. It has accelerated thanks very much and I'll turn it over.
Great. Thanks George.
And again, I think youre right on the right marketplaces, and I think we.
We are still going to of a pretty unique view into the hand sanitizer market, the hard surface cleaner and et cetera, because not only do in many cases, we supply the bottle we supply the dispensing element of that package as well so.
What I would tell you is we.
We are actually on our hand sanitizer products and.
And our pumps and sprayers and dispensing systems.
<unk> aligned with the branded products.
And our bottle business and custom containers is more aligned with a private label component of the marketplace and what we're clearly seeing is branded products are winning so when you talk about what are you waiting.
And from the insights from the the market data it does seem as though the consumer is moving back into branded products and that's true and custom containers, we see that also and our metal container segment as well. So I don't think it's demand destruction I think it's the rebalancing of the inventory and then back to those trusted brands that people.
People know and have used for many years.
Okay very good I'll turn it over thanks guys.
Thanks George.
Yeah.
We will now take the next question for Mark Wilde. Please go ahead.
Thanks, Good morning, everyone and I want to add my congratulations to the both Tony and.
1 of them.
And also the say Tony it's very nice to have this happened in the quarter when it looks like a container EBITDA margins were above 20% because you did take a lot of it and if we go back several years.
I wanted to do.
For my first question I, just wanted to go back a little bit to these cost issues and I'm I'm curious Adam.
About the impact of the late pasture on resin and both of them.
Containers and pumps and the sponsors but I also wonder if you could talk a little bit about the labor issues over and metal containers because of a quarter ago, you were talking about having hired 100, new employees and the can business.
And Uh huh.
Good morning, Mark Youre right, we did hire 100, new employees and the first quarter for our container business to support the increased volume requirements that we saw coming throughout the year and metal containers. So.
To be clear that the labor element that we're discussing that is throughout our supply chain so that income.
Includes our customers, who 1 of the reasons that we mentioned that we could have sold more in the quarter. If we had not had these labor challenges as well and customer missed a forecast because they couldnt get employees to staff the filling line.
And they had installed so.
It's throughout the system, we think that we're managing it.
And pretty effectively it's not easy.
And you think about our metal container segment in particular.
We're working through the planned retirements for several for a number of employees and adjustments and the normal churn that we have on our business.
Just that we've been running for 18 months and.
Secondly, as well.
And again those overtime shifts that everyone rose to the occasion last year and took those overtime shifts as things reopen it and it becomes a challenging conversation.
And then as we think about the lagged pass through of resin.
What we said on the last call was that was going to be of negative impact and the quarter something around 10 million.
As it turns out it was a little bit worse than that.
The majority of that we experienced and our dispensing and specialty closures segment, but to be clear again, and where we feel really good about the business models that we employ that we do have the ability contractually to pass those those lagged.
Cost increases on to the Mark.
And to our customers so.
It's just a matter of time before we actually get those costs fully pass through to the marketplace.
Okay and just as the.
And I'm just briefly I wondered if you could give us a sense.
As you as you go forward, whether you're at the point, where you would be willing to grow and any of.
Market and business lines of whether you want to focus on either dispensing or containers for for both of them sort of over the the metal can business.
Well I think you know we're going to maintain our very disciplined approach to capital allocation and I think I've I've heard Bob say it on this call and many many times the.
Of the <unk> related to packaging and.
And available property and we're going to wind up taking a look so we love all 3 of the segments and which we operate and the capital allocation will be directly related to the return of available for that capital and so I feel really good as we go forward and we've got 3 segments that.
And if any to perform very well on the space that they compete.
And there have been stories of Adam about P. E investors kind of backing away from plastics. So I'm just I'm curious about whether that creates a little better value opportunity for you and and looking at things like that of plastics for labor right now or are you not finding.
And that to be the case.
Well I think it's more about the substrate itself.
We firmly believe in silicon and that there is a place for plastics and the packaging World I think.
I would agree with you I think where it gets a little challenging for folks looking to make an investment is really where it's around a non functional.
Channel single use plastic package from a sustainability standpoint, and that gets to be quite a challenge and I think as people are putting dollars to work, that's where the maybe the the reset on the thought process goes through our business really doesn't participate in non functional single serve plastic packaging.
The gene and does it raise opportunities and the marketplace, maybe but again I think we're also focused on the functional element of packaging and finding the right spot for plastic also.
And the Avaya.
Viable and sustainable substrate for the packages we provide.
Okay I'll turn it over thank you.
For now Okay. The next question from Gabe.
Johnny Please go ahead.
Hi, good morning, Tony Congrats and congrats.
Thanks, Ken.
Hum I'm trying to think through the lower inventory situation that you mentioned and I guess since you held.
EPS kind of guidance and you mentioned that I'm, assuming most of it is kind of working capital related but.
I'm, assuming most of it is isolated to the metal containers business. So a can you confirm that.
And I think this would be maybe due to material availability and or the the labor related issues that you've called out and then the and thus.
More important for us at least if you're ending the year from a low starting point.
Would that imply anything in terms of carrying over inventory into 2022, and perhaps require you to produce at a higher level next year.
Of course of somewhat demand related or dependent but.
And would that be of positive earnings.
It's probably the negative for working capital and when we look on to 2022.
Yeah, I think you got that pretty pretty well right.
Even some of the challenges that we've had and and Adam has talked at length about we're going to liquidate more and more inventory than we expect it to.
From a from a budgetary standpoint.
Earnings and so that is really the primary premise behind the raise and free cash flow.
And that as well as we'll probably end up with.
A little bit higher payable at the at the end of the year as well, but those 2 things will drive the free cash flow benefits Youre right. It will be largely in the and the container business.
And the idea is obviously.
And to get back to a more normalized inventory level assuming that the.
Production and demand levels sort of coincide to allow us to do that then we will we will certainly do that in 2022.
Okay.
Okay, and I guess kind of sticking with metal containers.
And I think we've all read about.
Water availability and drought conditions over on the West coast and I know true.
True vegetable has become an increasingly smaller portion of the the mix for you and that business.
So again somewhat just thinking about the balance of the year and then.
And the 2022.
I think some of your customers are trying to replenish inventories this year it sounds like to the extent crop yields are not where they want them to be they won't be able to accomplish that so perhaps.
And next year it could cause look pretty good for me from a volume standpoint.
And then with pet ownership and stuff like that can you remind.
And just how big.
And that food cans or as a component and then sort of what the the growth trajectory looks like for that and you know over them.
On medium term time horizon.
Sure and maybe just starting with the pack and again.
Youre right our customers last year the pandemic the early phase of the pandemic hit at a point.
Our pack customers couldn't really respond with incremental pack volume to support the needs of the marketplace. So.
All of our customers on on the <unk> side of the business had been planning since early February for increased contractual acres acreage and more volume. This year. So you are right.
We're expecting a large back that is a part of our our second half guidance.
And how that relates to 'twenty, 2 we don't know yet because we have to see where heels and finishing inventories come through but we are expecting a significant increase and the pack and 2021 as we look at pet the pet food continues to perform.
Well continues to grow for us.
And our analyst day, we had given.
And something like 40% of our unit volume.
Was it related to the pet food market I'd say, that's continued to grow a bit.
And we see good growth going forward and pet food I mentioned, some additional capacity that.
For <unk> and.
In 2000 and for the 2021 year that we'll realize and the fourth quarter.
A portion of that is for growth to support the pet food market as well.
Alright, Thank you and good luck guys.
Okay.
Sure.
And we advertise the next question from Iran, and this 1 new song.
Please go ahead.
Thanks for taking my question Congrats on the results I guess first off just wanted to get your thoughts you know have.
Have you seen any impacts from.
So on the competing substrates or you know any customer switching of preferences and the plastic container.
Business I guess I'm just curious we've been hearing about some some trials on the household products side and personal care market and for.
For plastic other types of plastic based pouches.
Something that you.
You could potentially look at a longer term as well.
Hi, Thanks for room as far as.
Particularly and our customer container segment.
Most of our products are around multi use packaging.
And when you think about our dispensing and especially closures and.
And does that function to that package as well so as far as.
The other substrates coming into that space.
Read most of the same article is probably that you have we haven't really seen and impact our business at all on the custom container side, what I would tell you is on the dispensing and specialty closure side and our metal container.
And we out of the business, we are seeing opportunities for other products and other substrates coming back to those platforms and it really is around sustainability. It really is around.
Were they non functional product.
Trying to find a more sustainable answer to provide the same performance. So we.
<unk>, it's more of an opportunity and a risk across the platform.
Okay, great and.
Also just another question and I guess on another topic I'm, just maybe you could just remind.
Remind us on the tin plate inflation.
Have you seen any.
We view.
And then not necessarily demand destruction, but steel prices have continued to rise and got.
Very high levels, there so how do your customers kind of react to that.
Has there been any alternatives that they've been pursuing as far as packaging substrates are or what's.
Kind of the the the the view that your customers have on on.
Low prices.
Sure well I think unfortunately inflation applies just about across all categories. At this point, so we're feeling that and all of the substrates not just our steel component.
I think.
What I would describe our customers' focus right now is continuing to meet the needs of the marketplace. So they are focused on filling product and existing platforms and getting product into the marketplace. So we have not seen.
At this point a lot of risk around substitution and our metal.
And your segment I think as we look forward.
Youre right steel inflation is definitely there and we can all look at the hot rolled band charts, The Wall Street Journal publishers and make our own.
Assumptions based upon that chart. So we are anticipating additional inflation next year.
Our customers are not happy about that and neither are we and we are continuing to fight on behalf of our customers.
And.
We're still early and that process. So, we'll see where things play out I think the cyclicality of the steel market.
They are at the absolute peak right now and we'll see where the rest of the.
The year takes us.
Okay, Great I'll turn it over and thanks.
We will now take the next question from.
And awesome Panjabi. Please go ahead.
Thanks, Hey, guys good morning.
And I'm picking up on some of your previous comments.
It looks like you're embedding expectations for a pretty good harvest just based on your comments and the press release as well is there of rest of the labor shortages that you and the supply chain of dealing with that card and start to impact the harvesting yields as well and how.
How are your customers sort of I mean, what are they sharing with you as it relates to the labor issue there.
Great.
And I think we spend a lot of time talking to our customers about that very issue and they have they are experiencing labor challenges, they're able to get the labor that they need to harvest their crops. So that's a great sign.
For us as we enter the pack season here. So we feel that they have confidence that they're going to.
The meet their pack requirement.
See how weather and other items impact the pack and the timing of the bad, but we think labor from a customer perspective is not the biggest challenge that we're going to face in the quarter. So we think our production profile for the balance of the year.
It is.
And be able to predicated upon the performance that we have today. So we're going to continue to fight through.
The raw material and labor challenges and not expect a significant improvement versus where we are today.
Got it and then and dispensing you know what's going on with some categories, obviously mean reverting higher.
And then others normalizing.
As we kind of net out of these dynamics, how should we think about volumes and the back half of the year and also the timeline for margin recovery relative to raw material cost of keep pushing higher.
Sure.
On the dispensing and specialty closures segment.
It really does continue to perform really well.
Well, the key markets like fragrance and beauty.
We've seen continued improvement throughout the year. So it's now recovering at a rate that was faster than we anticipated coming into the year. So we feel really good about that our beverage and food business continues to perform as well.
We think volumes are going to be strong again.
And in Q3.
So were anticipating volume is kind of in the low to mid single digit improvement and Q3 versus prior year.
We will see how that plays out and how that impacts of the rest of the year and then on the the lagged pass through of resin.
And again unfortunately.
And the indices.
The accuracy of what those projections are continues to be challenged so based upon what we know today.
On resin is aching hopefully this month as we sit here today and will begin to decline if that does indeed happen we'll begin to experience.
Some of that lag pass through in Q4, which is what we've modeled so it's.
It's not all the way back to the CDI projections, but you can figure it's something close to halfway there.
Got it thanks, so much and congrats to you and Tony as well thanks Anthony.
Gotcha.
And I would take the next question from Anthony Pettinari from Citi.
Hi, good morning, and congratulations to Tony and Adam.
Just following up on <unk> question, and your comments on fragrance and beauty and the strength that you've seen and that you.
Continue to expect and the second half.
We're obviously emerging from the pandemic and some of the reopening categories are doing better than expected but.
Some Asian markets and emerging markets are sort of back and walk down and obviously, there's the delta variant is that at all of risk to the second half outlook for.
Mr. Eudy, specifically I think some of your closures go into products that end up getting sold in Asia or outside of North America and Europe.
And any commentary there.
Sure I mean, I think it's the risk for all businesses to be perfectly honest with you, though it is hard to to put a forecast together.
And some of the impact will be what I would tell you is really the the new product launches and I'm, specifically focusing on fragrance and beauty really are and the kind of Q3 timeframe.
And that's when products getting staged and and then placed out into the market. So I think the risk to our business is a little bit.
And on what the us because our customers are filling right now for their launches that will hit late in Q3 and through the holiday season. So we feel pretty good about the free.
The risks and beauty profile and and the forecast that we have for the rest of the year.
And the only other thing I'd add Anthony the kind of look at the portfolio of balance.
Lots of everything we have.
Unfortunately of Delta gets worse, you've got a lot of parts of our business that did so well during the pandemic that will start to pick up on that so I think I would just tell you. What so far we are saying is that we've got a very balanced engine here and it does well and pandemic, which hopefully will never happen again.
And it seems to be doing very well and post pandemic.
Less so I think either way, we've got a pretty good diversity of the solution to it.
Got it got it that's very helpful.
And then in and metal containers. Your 3 largest competitors have moved their assets into J vs or selling them or and the process of doing so.
On my first question have you seen any change in competitive behavior.
With those transactions ahead of them or after they were completed and then maybe the broader question I mean, I think some of those competitors pursued the pursued those sales to get a higher multiple dispensing is now your largest segment.
Segment your closest competitor in dispensing and closures trades at a pretty steep premium for you just how you think about it.
So and consider that maybe and the longer term.
Anthony I think I'll I'll hit the competition point of view and pass over to Tony for the balance of the conversation so.
I guess, we haven't seen a lot of competitive activity again, you think about the the metal.
Haner segment, and the space and which we.
Operator.
It's been very challenge and we've all been running I think all out for about 18 months. So the competitive activity has not increased.
We really.
And we're all just focused on getting our customers their requirements and the products they need to fill so.
And we feel pretty good that again, we've built great lasting relationships and I think we've we've only solidify them throughout our performance and the pandemic and.
And we feel really good about where we're going.
Great and then I think on the quality of the Astro. The good question I think the.
And.
Youre right and I'll try to stay of generic on this but but.
We are on a stage, where the equity market and analysts seem to really want sole solution businesses and so it is great when it's growing and booming it's not so good at the end up with a little bit.
The growth pullback and overcapacity for an example, so I think what what.
We are giving you and shareholders a little more of a credit that the idea that you can be 2 or 3 things within a packaging areas is so closely focus everything we do it in a very we arent.
Wildly different things and so but what we have is a great combination of a wonderful sustainable high cash generative business and our can business. The basically turbocharges, our capability to grow and other areas that provide their own growth organically as well and so on.
All I can do the answer for.
For Us and say, we think what we've got is a wonderful opportunity here for shareholders to basically have both of these and I think just look over the last year.
Year to year decade, and look how these businesses and help each other along the way and I just don't think we'd be anywhere near as good today.
If we didn't have that so that's what's on our mind is the strategic value of the 2 but youre right. We do need you and we do need the street to appreciate that there are different multiples for different kinds of businesses and I suppose of that never happens then youll have to come back and continue to evaluate it but I just we don't give up that quickly that that can't work.
Okay. That's super helpful I'll turn it over.
We can now take the next question from AST and stone from Longbow Research.
Great. Thank you for and I was sort of the pass along my congrats to Tony and Awesome.
Of course as well.
And just wanted to ask you and I think most of all the questions have been asked already but just you know.
On the share buyback front Bob.
Yeah of course, you guys bought back a decent my shares are.
And 2020, I think the most of you had and the.
The couple of years prior to that but we haven't bought back any year to date are we through the end of the first half what's your thoughts on buybacks, particularly now that you are.
And of course raising.
The free cash flow guidance as to how you think about allocating cash you know over the rest of the year and then it and into 2020.2.
Yes so.
I think the story hasn't changed there right I mean, our capital discipline has been in place for a long time now that debt.
We've said we'll run.
The balance sheet at between 2 and a half and 3.5 times leverage I think what the uptick and free cash flow, we think will be back closer to 3 times at the end of the year.
We think that debt thats, a pretty good place to be particularly given that.
We think that the M&A market is fairly attractive.
Tractive right now, particularly in the.
And the measurement of how much activity there is out there to evaluate and now obviously it is a bit of a seller's market. So and we will have to keep to our discipline and do our due diligence, but our view right now is that and our interest to keep powder dry and evaluate those opportunities.
He is to be able to continue to build out and some of the franchises that we have and where we see opportunities to take it further.
The the flipside of that is that.
If we don't find those opportunities then we have the ability to be a little bit patient, but that 3 times is still in the middle part of our <unk>.
And so we can be patient and see what next year brings as well, but you are right, where we've where we've really bought back shares as the periods, where we start to get to the low end of that and M&A activity looks like it's more on a on a more delayed pace.
And then that's when we've done larger share of share repurchases. So the short answer is our strategy.
<unk> Hasnt changed we would much rather deploy capital and grow out of the footprint and the portfolio and continue to create value for shareholders.
Okay that makes sense. Thanks for all of the color very helpful. Bob and then.
I guess just my follow up you mentioned that if it were not force and walking strength distribute camp business with an up year over year, which you're now up against the plus 50.
Range the secretary of certainly.
Impressive.
Is that a sign that you know even though as we are starting to see consumers go back to the eating out debt.
Still on an awful lot of debt.
And are staying home and sort of thing.
Nowhere.
The year, where the work.
The back to pre Covid kind of whats your thought on the consumer and you know and as you.
And that's what.
And the appetite would be to eat and drink and home versus going out.
And I think it's of Great question Alton.
As we were talking a little bit earlier, we have taken a look at consumer data and and really try to dive into a couple of markets 1.
The pet ownership increased dramatically during the pandemic so.
Our pet food business continues to grow when you look at scanner data.
Small dog and small cap, particularly and what categories continues to grow at a high single digit to a low double digit rate.
And so for the consumer engagement and the repeat purchasing patterns are there and we feel really good about that our customers do as well.
Well the.
They are investing in capacity and so are we.
Moving to some other segments and I think it really interesting 1 of the soup segment.
And again go back 12 months ago, we were going and the United States anyway, we're going into a lockdown period and people didn't know exactly how long they were going to be at home. So we did have a pretty sizeable.
And and scanner data for consumption of retail of pets, or I'm, sorry of soup packaging, whether it's condensed or whether it's ready to eat products. So.
As we look at the data.
We still see consumer retail activity and the high single to low double digit active.
<unk> versus pre pandemic levels. So as we had talked on previous calls about engaging with new consumers and we were seeing repeat buying activity last year. It really has continued and and we and our customer base feel pretty good about the engagement with consumers right now and we think it's a.
On a very.
Good situation as we head into the second half of the year.
Great. Thank you so much I'll hop back in the queue.
We can and I would take the next question from kind of waste from Deutsche Bank.
Thanks for taking the questions I also wanted to echo the sentiments expressed.
Expressed in terms of perhaps to both of you Adam and Tony.
It's not of any ear with the Albania and your portfolio I'm, just curious where you're at in terms of the synergy target and believe it was $20 million and do you see further opportunities for cerner and juice here or any potential revenue synergies on the.
And that business.
Sure. Thanks Kyle.
I.
We are seeing the impact of the revenue synergies already flowing through I think the combination of of our business without Bayer has been terrific and.
We are achieving commercial synergies between the 2 businesses and have been for now some period of time.
We've owned the business.
As far.
Thank you for synergies what we had said I think it was $20 million run rate at 18 months. So we believe we will be in excess of that by the end of the year. So our synergy captures a little bit ahead of schedule and we think we're going to overachieve here by the end of this year.
And then finally of the business itself again.
Or is it.
It's performing well we feel confident that we're we're getting back to really what the business was before the acquisition not what we think it can be and the future just for clarity.
But what it was and so our team and the <unk> team has come together quickly and have come together really well and a.
Wildly challenging integration of environment through a global pandemic and just hats off to the entire team and the performance that they've had.
Got it and then I heard of follow on to the supply chain issue apologies to go back to it but maybe I just missed this I think you said.
It or had a $5 million of.
Added cost and the quarter for metal containers and does your <unk> guidance assume for some additional added costs for mist as well or is it does it resolved.
It does it basically we're holding kind of the production and efficiencies that we experienced in Q2.
Static for Q3.
And just.
1 other point would it be.
Sorry, just let me make 1 of the point in Q2, which is what Adam will give you of sort of the cost impact of the issues. We're facing this year. What he didn't mention is that we had an incredibly great year Q2 last year on production and you might recall our customers reduced skus dramatically, we had all of the.
And we had the benefit of selling off inventory.
The GAAP between Q2 last 1 Q2 this you're operationally is greater than the $5 million, but a bigger chunk of that still is how great Q2 was last year. If you look kind of progressively it was a major step up year. So I just want to clarify that 1 point.
And that makes us just a quick follow up it would the cost be incrementally higher and <unk>, just given seasonality or they're gonna be of some of them out.
And it'll be a similar amount.
Got it thank you I'll turn it over.
We can now take the next question from Daniel <unk> from.
Okay.
Hi, Thanks, and thanks for squeezing me and I was just wondering given the expectation that resin prices could potentially peak here within the next few weeks of within the month, if theres a way to reduce or delay resin purchases until after potentially prices were to decline again.
Obviously, we work with our customers primarily.
Make sure we're meeting all of their requirements I think there is there's very little room at this point to me.
Move buys around particularly how tight the resin markets are.
So unfortunate I don't think its the near side of near term opportunity.
Okay, and then you mentioned the beauty and personal care rebounded.
Exceeding expectations I was wondering if were near or expected to reach pre pandemic levels, possibly by the end of the year.
So specific to fragrance and beauty and we're not quite there yet and what I would remind you of as I think as we came into the year, our expectation was something close.
Close to a 50% recovery and those market.
Of the pandemic related volume decline, we're probably running something close to 70% right now and again, it's ahead of our expectations just to be clear, but we're not all the way back so theres still has room to go.
To get all the way back to pre pandemic levels.
Okay. Thank you very much.
Yeah.
We can now take the next question from Adam Josephson from Keybanc.
Thanks for taking my follow ups I appreciate it and Adam just 1 more on the inventory situation I think last call you had talked about this year of being a year and what's.
Your metal.
And our customers would be able to replenish their inventories and getting back to normal just given the you yourself are going to end of the year with lower inventories than you thought 3 months ago do you I know some of this is predicated on the the harvest and the in the U S. But do you expect your customers to be able to fully replenish their inventories.
What's your kind of year and as you saw it perhaps 3 months ago.
Yes, that's of Great question, I think our own expectations would say that the retail data probably is a little bit stronger than where we came into the year from a volume perspective. So.
The repurchase activity for food cans.
Other than.
Tories dissipated so at the.
Great question I think we'll have a much better answer for you as we get through the peak part of our season, but it is something that our customers continue to work on the supply chain.
All the way through to the retail channel and we will again we.
And we will take that for the next call.
And we intend of better answer for you with more detail.
And I appreciate it in Europe, I think Europe is about 10% of your metal containers business and then Tomatoes are about 5% of your U S business can you just provide updates on those 2 areas and I hope.
Given that the water shortages, and California et cetera.
Sure, maybe starting to and California first.
Right the water shortages have been of concern for pack related.
Harvest on the West Coast, what I would tell you tomato specifically most of our tomatoes that we supply cans too.
Our irrigated crop so they've been able to maintain.
Pain, the water supply to those products and again as we usually talk about with tomatoes as well they protect the can volume for.
For Tomatoes for canned Tomatoes, and usually theres not a whole lot of surge of beyond that but there's also not of lot of drop below that either because they are are definitely protecting the can volume. So we expect the good can pack.
On the West West Coast for Tomatoes, this year, but it's going to be within a band of.
Plus or minus and that kind of mid to upper single digit kind of range and then Italy.
All reports that we hear Italy is going to have a bumper all time tomato crop.
We don't participate.
<unk> 2 of large degree and Italy for food cans, but we do have ancillary products that utilize tomatoes, and and we understand that conditions are very good and volume expectations. There are quite strong for the Italian tomato crop.
Thanks, Tom and just 2 others.
Just back to the high and low end of your full year range can you just talk about what would get you to the high and what would get you to the low end.
The 1 or 2 most important factors.
Yes, the out of its Bob I guess, probably the biggest 1 or maybe maybe the 2 biggest ones are going to be on.
On both sides of this.
What happens with rather than as an example, right so.
And it stays elevated and for continues to elevate and that's obviously going to be of risk to our forecast if it and we see a precipitous drop and Thats a benefit for US right now so and in some cases and I'll put that in the same 1 as.
Our topic as of weather related and potentially of weather related issue. We start seeing a lot of hurricane activity, that's going to put pressure on price and likewise, if you just think about the pack and what we've got forecasted here, whether it could be friend or foe here too a little bit. So I think those of the 2 biggest risks.
The net then the last 1 is and what happens with for further lockdowns around the pandemic.
Or not right. So if all of those things break against US we probably don't have it all covered if it all goes favorably then we could that'll be more favorably right. So so we think we've.
And that balanced with with what we've pulled together here, but we're in some pretty interesting times right now so we'll have to see how it plays out.
Yes.
And to that Bob and just 1 last 1 for Tony Tony I know you've been CEO of the company for quite some time, but.
But can you just talk about why you think now is the right time for you.
Got it to leave your post.
Sure Great question.
Really it's 2 things 1 we've got such a great team and they're ready and.
And I, just I'm always been a believer that when people are ready and got to move on that too as you pointed out 15 years as CEO and we and the board of talked about this you start.
Very topic that comes up you start to think of it the way you thought of at the last 15 times and that's not good.
And so I just I'm, a believer that the team will be better in the new formation, so they'll still get a pearl or 2 of my thinking.
But you have different people, making decisions day and day out and I just.
Believe it the better answer for the company.
And I appreciate it all the best for you and to the company.
Very much of anything.
Hey, Ken I think we'll take 1 final question and then we'll wrap it up.
Of course, so we should never take the final question from sort of tour channel from <unk> research.
Patterns.
Yes.
Thanks.
Just wanted to.
For the next questions here.
Just wanted to.
And to understand and that'll be the.
The 2 of them going back to Alan's question on the.
Food kind of inventories and it will be.
At the close of the channel actually I was wondering of the impression of that and.
Multiple of the restocking for the supply chain would happen next year because of this year do you mind me still good. So just wanted to confirm what you see across the supply channel and food kind of inventories and whether next year 2022, and they will be of benefit from resulting regardless of awarded the mandates.
So as the good question I think just for clarity when we came into 2021 and what we said is we feel really good about food can volume because it's either going to get consumed or its going to replenish the supply chain. So that's why we had such confidence that the we could sustain the.
Credible growth that we experienced through the pandemic so.
I think what Youre hearing US say now is the demand pulled by the consumer has been a little better than we anticipated. So maybe the supply chain is not going to replenish as much as we thought it might have so again. Unfortunately, we're halfway through the year and Theres a long way to go.
And as you're out what exactly happened with the full supply chain, but I would just tell you the consumer demand and engagement is.
Better than where we came into the year thinking and it could be and the mid part of the year.
Great. Thank you very much.
The.
This concludes todays.
The question and answer session at this time I would like to turn the call back over to Mr. Green Lee for any additional or closing remarks.
Thank you if you're on and thank you all for your time today and for your continued interest and Silicon and we look forward to discussing our Q3 results at the end of October.
Yeah.
The figures concludes todays call and thank you for your participation you may now disconnect.
[music].
And.
[music].