Q2 2022 Silgan Holdings Inc Earnings Call
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Thank you for joining the silicone holdings second quarter 2022 earnings results Conference call today's call is being recorded.
I'd like to turn the call over to Kim Ulmer Senior Vice President Finance and Treasurer still getting holdings. Please go ahead.
Thank you joining me from the company today, I have Adam Greenlee, President and CEO and Bob Lewis EVP and CFO before we begin the call today, we would like to make it clear that certain statements made today on this conference call maybe forward looking statements.
Forward looking statements are made based 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 2021 and other filings with the SEC.
Therefore, the actual results of operations.
The company could differ materially from those expressed or implied in the forward looking statements.
John I'll turn it over to Adam Thank you, Kevin and welcome everyone to our second quarter 2022 earnings call. We will make a few comments about the second quarter and share our thoughts regarding the remainder of the year.
Rob will then review our financial performance and provide more detail about our 2022 outlook and then we'll be happy to answer any questions at that point, we delivered yet another quarter of record earnings driven by the strength of our operational performance and the power of our diverse portfolio.
Alrighty to perform in the face of ongoing and evolving economic uncertainty it gives us great confidence in delivering another year of significant earnings growth in 2022.
We look forward to discussing our strong quarterly results and more importantly, our favorable operational outlook for the remainder of the year and beyond.
<unk> seen in this morning's press release, we delivered an all time record adjusted earnings of $1.08 per diluted share.
Which exceeded the high end of our earnings estimate and represents a 27% increase versus the 85 per diluted share reported in the second quarter of 2021, each of our business segments proactively and successfully managed to mitigate the ongoing impact of inflation and supply chain disruptions, while leveraging outstanding APA.
A rational performance as expected certain areas of our business faced challenging year over year volume comparisons and we executed our plan to more efficiently manage inventory and to further drive down operating costs. In addition, our exceptional service levels allowed us to continue to meet our customers' needs and our strong commercial relationships.
Ensured our ability to successfully pass through the significant inflation. We are experiencing together. These combined actions drove outstanding financial results as we manage through the expected complex volume backdrop.
Given our record first half performance and our outlook for the remainder of the year, which now includes a sizable FX and interest headwind we are confirming our full year earnings estimate in the range of $3 90.
The $4.05 per diluted share representing a 17% increase at the midpoint over our record 2021 levels with that I'll turn it over to Bob.
Thank you Adam good morning, everyone.
We're very pleased with our overall performance now to each of our businesses successfully recovered their cost inflation and worked hard to eliminate previous manufacturing disruptions and inefficiencies related to running our plants full out for 18 months, allowing them to reduce cost and improved performance as.
As expected volume concur comparisons versus the prior year were tough, but allowed us to reach our operating efficiency targets earlier than expected.
The result was a strong quarter delivering adjusted earnings per diluted share of $1 eight for the second quarter of 22.
Which was above the high end of our estimates for the quarter. I'll also note the quarter was negatively impacted by four as a result of unfavorable foreign currency translation.
On a consolidated basis net sales for the second quarter 2022 increased to $195 1 million or 14 at a 5% versus the prior year to $1 540 million as each of our segments delivered top line improvement.
These increases were largely the result of higher average selling prices due to the pass through of higher raw material and other manufacturing costs and the inclusion of $56 million for the quarter from the recent acquisitions, which were partly offset by lower volumes in the metal container and custom container segments and unfavorable foreign currency translation.
Of approximately $45 million.
We converted these sales to adjusted income before interest and taxes for the quarter of $186 6 million after adjustments of $3 4 million for rationalization charges and $25 2 million for the charge related to the settlement with the European Commission versus $153 4 million after adjust.
It's a 400000 per rationalization charges in the prior year quarter.
This improvement was a result of increases in each of the each of the segments.
Highlights for our individual segments are as follows adjusted segment income in the dispatching and specialty closures segment increased $17 4 million to a record $91 3 million in the second quarter of 2022 after adjustments of $100000 for rationalization charges in 2021.
The increase was primarily due to favorable cost pass throughs strong operating performance and higher volumes, including from the recent acquisitions, which contributed approximately $5 $5 million for the quarter. These benefits were partially offset by inflation in manufacturing costs and unfavorable foreign currency translation of approximately 5 million.
In the current period.
Adjusted segment income in the metal container segment was $69 8 million up $11 million versus the prior year after adjustments of $3 4 million in 2022 and 200000 in 2021 each for rationalization charges.
This increase was primarily attributable to favorable price pass throughs, particularly for non contract customers and strong operating performance, including from our inventory management program, partially offset by inflation in manufacturing costs. The expected unit volume decline of 10% and unfavorable mix of canceled.
Unfavorable foreign currency translation of approximately $2 million.
Adjusted segment income in the costume container segment increased $3 6 million to $39 million for the quarter after adjusting for rationalization charges of $100000 in 2021.
This increase was largely attributable to higher average selling prices due to the pass through of inflation strong operating performance and the benefit from the lagged pass through of lower resin costs as compared to the lag pass through of higher resin costs in the prior year, partially offset by inflation in manufacturing costs and lower volumes.
Turning now to our outlook for 2022, we have delivered record performance through the first half of 2022 and our outstanding operational performance in each of our businesses did you expect it to continue through the remainder of the year.
As discussed we continue to have inflationary headwinds rising interest rates and unfavorable foreign currency outlook as the dollar continues to strengthen as a result, we are confirming our full year earnings estimates in the range of $3 90.
$4.05, which at the midpoint represents 17% increase over the record 2021 performance. This estimate assumes current exchange rates for a euro to dollar which will unfavorably impact earnings per diluted share by approximately <unk> <unk> in the second half of 2022 versus our previous estimate and <unk>.
And assuming the current forward curve for interest rates, we anticipate an additional unfavorable impact of <unk> as a result of higher interest expense.
Also providing a third quarter 2022 estimate of adjusted earnings in the range of $1 15 to $1 30 per diluted share, which at the midpoint represents a 20% increase over the record 2021 performance of $1 two per diluted share in the third quarter of 2021.
This estimate assumes current exchange rates for euro to dollar, which will unfavorably impact earnings per diluted share by approximately two cents in the third quarter of 2022 and then in addition, assuming current forward curve for interest rates, we anticipate an additional unfavorable impact of two sites in the quarter as a result of higher interest expense.
Based on our current outlook for 'twenty. Two we're also maintaining our free cash flow guidance of approximately $350 million as improvements in cash from operations will be offset by the inclusion of the payment for the $25 $2 million settlement with the European Commission.
That concludes our prepared comments, so Justin ill now turn it over to you and ask you to provide directions for the Q&A.
Well. Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone if you're joining us today use a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that'll be star one.
If you would like to signal with question Star one.
The first question will come from George Staphos with Bank of America.
Hi, guys. Good morning, Thanks for the details and for taking my question.
Two questions to start and I'll turn it over the first one a little bit of a multipart on dispensing. So can you talk about your observations on the cyclicality of this.
Fencing, especially as we may be going into a slowdown and how your views on dispensing sick of clat cyclicality or lack thereof have evolved since you first sort of grew the business largely.
With the acquisitions over the last couple of years.
And related to dispensing on page three of your release, you mentioned a number of things that contributed to earnings are.
Strong operating performance selling prices inventory management cost recovery is there a way that you can sort of size those for us to some degree so that we can bridge youre.
Your EBIT performance in that segment and then the second question unrelated and I'll turn it over.
There's been a lot discussed about can sheet aluminum can sheet supply given recent news. Your press release says your guidance assumes youre able to obtain raw materials.
Clearly includes aluminum, but can you update us on your ability to source and.
Yet can sheet and your exposure there. Thank you aluminum can sheet. Thank you.
Sure. Thanks, George I think Bob in IL Ham and egg. The first question and then I'll come back to the aluminum afterwards.
I think as we look at our our dispensing and specialty closure segment I mean, it has evolved certainly over time and I think one of the really interesting things to talk about Georges is what happened right at the time that we acquired the Albea business, primarily focused in and beauty and fragrance right at the beginning of the.
<unk> and that volumes suffered dramatically at the beginning of the pandemic and what we call the power of the portfolio the balance of our dispensing, especially closure segment more than offset the volume declines of.
Time, with what we would call a discretionary spend item I think as we fast forward to today youre seeing a little bit of a reversal of that.
Fragrance and beauty have recovered incredibly well certainly.
Well in advance of where we were at the time of the acquisition and what we suffered through the early parts of the pandemic. So feel really good about the balance of that portfolio. Obviously, we've got a large food and beverage business, that's inside of dispensing and specialty closures, that's very resilient and at any time.
For us historically.
And I believe our forecast is solid on the food and beverage side as well. So I think it's a very balanced business. When we talk about power of the portfolio. We're talking about all of silicon, but certainly in our dispensing, especially closure segment the diversity of that segment itself.
Breadth and depth of the products, we had the markets. We serve provide for a very balanced performance and kind of what we continue to call any economic circumstance. So hopefully.
Hopefully that answers that question, George and then Bob I'll throw it over to you on the earnings piece of DSC.
So George I think I'll try and bucket. It for you. So obviously I called out in the in the prepared remarks that acquisitions contributed about $5 5 million to that to that segment.
The other two big piece, it really a bucket it into two pieces, one is our ability to pass through price and.
And I think that's a testament to the service levels that we have in that in that business.
Across the board both both in the U S and in Europe , We did a really nice job of communicating with customers in getting that price pass through going through I think the operational performance and the inventory adjustment kind of goes hand in hand, because it's our ability.
To really get through and past some of the inefficiencies that we've seen.
Over time that really allowed us to kind of proactively go after the inventory levels. There. So I would say the remaining difference there is probably split between between price and then the operation improvement in the inventory.
And then George your second question on aluminum supply, yes, I think Hal.
How we would characterize as Georges we've been aware of the magnesium situation and supply situation for many months back into 2021, and we've been proactively working not only with our suppliers that without throughout the supply chain to mitigate any of the impacts to sell good already are our customers. So therefore really for US there was no <unk>.
<unk> in the second quarter due to the active management of the situation and then between inventory management in a more diversified supply chain, we expect no impact in the third quarter as well.
We think that force majeure situation, mostly is going to be resolved early in the fourth quarter. So we're certainly aware of it it's something we've been managing for for quite a while now and it has no impact on the bottom line to our business and we don't think it's going to have any impact in Q3, or four hey, Adam fair to say that most.
Aluminum and pet.
That would be right.
Yes in the metal container.
Got the metal closures that are also utilize aluminum metal substrate, but thats. The majority understood. Thank you I'll turn it over.
Thank you. Our next question will come from Adam Josephson with Keybanc.
Adam Bob Good morning.
Thanks for your thanks for taking my questions. Bob You mentioned I think that FX will be a <unk> <unk> drag full year compare to what you were thinking three months ago interests will be a five cent drag so eight cents right. There obviously, you're maintaining your guidance range. It's a 15 cent range is there anything that you could point to.
That's offsetting those or are you thinking you might be at the lower end of the range can you help me with that.
The issue of what if anything is offsetting those drags that you called out in your prepared remarks.
Well you know obviously, we've got over performance in the front front part of the year right. So so with and which we think will continue.
But I guess you do have those things that are relative to the backdrop of already performing well.
We're not necessarily forecasting improvements from where we are right now.
In the near term I may ask the question slightly differently and just as I as I think about sort of the opportunities and the risks against the forecast on the risk side, obviously, there could be further FX moves right. So every every five cents of change in FX rate is worth about.
<unk> <unk>.
To the EPS line for the full year, so roughly a penny a quarter.
Who knows where interest rates are going to go right. We were pegged at the at the current spot rate right now.
Obviously as Adam just said.
Raw materials, we think we're fine but that could cut either way.
And then obviously, we're we're feeling like we're pretty well through some of our customer supply chain issues, but that if they were to recur that would those are all things that would lead us to the lower end and then to the operation opportunities you know you got.
The opportunity to get more efficiencies.
Resin costs right now looks like it could be an opportunity for us on a go forward basis.
And I think theres some opportunity around pack volume that sits there. So that's kind of the puts and takes against that the forecast that yeah. Thanks. So just on the volumes in the quarter were they much if any different than what you were expecting can you just talk about.
Any surprises in terms of your volumes into Q and then any changes in terms of your full year volume expectations in any of your segments compared to where you SAP three months ago.
Sure Adam I think I will start with dispensing and specialty closures I think.
The surprise that occurred during the quarter was major retailers coming out and talking about an inventory correction that they were doing within their four walls. So that the inventory correction, we had been talking about relating to kind of hard surface cleaners.
Our home and hygiene products really that was between ourselves and our customers and the supply chain amongst us.
When the retail folks came out and stated they were going to reduce their inventories that did impact our second quarter volume.
Those products again, we're talking in garden.
Home hygiene, primarily with our triggers sprayer volume.
Our trigger sprayers were down 32% versus prior year and that's that.
Thats, a surprising number to us that we hadn't seen before the good news is that volume recovers within the year. So.
Transfer out to the full year of dispensing and specialty.
That one quarter change.
And the impact to Q3 will reduce our full year outlook for volume and dispensing and specialty.
Hey.
Our organic volume is going to be down slightly.
But when you consider the acquisitions, we are going to be up mid single digits. So that's the updated outlook for dispensing and specialty most of that also applies to our custom container business because of the similar markets that they're dealing with and garden and home and hygiene. What I'd also say Adam is that none.
Thinking about this temporary further inventory reduction changes our long term outlook. So as we turn the page to 23 nothing about what has happened here has changed our outlook for volume in either one of those two businesses.
And then I'll transition to the metal container business really no surprise.
The years played out essentially as we had expected I think Bob did a very good job explaining the operational impacts that we've been able to achieve on the lower volume that we've had but as we roll forward into Q3, we're expecting our second highest all time shipment level in Q3 for a metal contain.
Intersegment only to the Q3 of prior year, so that volume was up kind of mid double digits, 15% last year.
We think the full year volume has settled in metal containers at a rate that is approximately 10% above pre pandemic levels. So that has not changed for us versus our last forecast and I think as we roll metal containers into 2023, nothing has changed there either.
Pet food continues to grow continues to grow as our share of of our metal container business and continues to grow at a good clip.
As we go forward. So we're we're feeling good about the volume story at all of our businesses. The real benefit in 2022 is that we're getting back to the operational efficiencies and low cost platform that we had experienced for many many years pre pandemic.
No that's terrific and just one follow up to that your answer and then one other question was just so Walmart just came out and said what two days ago that that they expect further pressure on general merchandise because inflation.
In on consumables is so substantial that it is crimping people's ability to buy apparel general merchandise et cetera is that something that could further.
Cause further supply chain corrections, if you will or is that already something you've taken it into account.
I think that's definitely included in our in our updated guidance for the year I think.
That most recent announcement, which was either this week or late last week and to your point out them that was more about apparel and some other discretionary spend items. The original inventory reduction that the big box retailers announced I think it was late April or May.
That's the one that actually impacted our products. So we think we've fully factored in to the year.
For the most part as I kind of alluded to earlier, our products are very resilient and and have a good share of that dollar that's being spent in very uncertain economic times.
I really appreciate it and just one last one Adam I think you said in your prepared comments that your favorable operational outlook relates not only to this year, but also beyond and that I think you were going to touch on that further.
Any preliminary thoughts on next year that that you would care to share with us at this point just based on what you've seen midway through the year do you think these are normalized volume levels across the board any thoughts about.
The baseline for next year would be helpful. Thank you very much sure sure. It's a great question and I think as we sit here and we talk about 23 I'll be very clear and say were before our budgeting our budget process with our businesses at this point so.
We're very early days and having those conversations but.
I think the Best example, I can give you Adam is related to our metal container business. If you go back to pre pandemic levels, what I would tell you as we get the best food can business in the world we were highly efficient.
We have the right mix of technology between two piece and three piece, we had the right operational footprint to support our customers in a cost advantaged and competitively advantaged manner and what I would tell you is we are using that same operational footprint and operational focus to supply roughly.
10% more volume today.
And that's you dropped 10% additional volume into a fixed cost footprint. That's a very that's a meaningful change to the metal containers business and as we roll forward into 2023 for clarity, we expect <unk> growth to continue next year and it will continue to be.
Some are bigger part of our total.
Containers business.
And with that growth, where we're expecting growth in metal containers. As one example, so I just think it's really leveraging the operational performance that we've driven cost out of our system, yet again, this year and putting the incremental volumes back in on an already efficient system, we're expecting growth next year.
Thanks, so much.
And our next question will come from Mark Willoughby with bank of Montreal.
Thanks, Good morning, Adam Good morning, Bob.
Adam just to.
Drill a little bit deeper on the can business through a lot of the 2000 and teams we had an oversupply oversupply situation in the food can business in North America and then we have this big jump in not in volume in the in.
In the pandemic.
If we take the sort of 10% or partial correction that we're seeing right now and you factor in the increases in supply.
That we've seen.
In the market, how would you kind of characterize the overall sort of operating.
Environment and Coke cans right now from just a supply demand standpoint.
Sure. It's a great question I think that as we look at the capacity that's being added just for clarity.
2021, we wanted to be very supportive of the market. We actually did increase our sales volumes to those that could not secure their cans elsewhere. So as the market was very tight last year.
We're able to execute to create more capacity within our system to support the market and thats. Other customers. That's other can makers. It's it's broadly speaking, we believe the food cans and essential product and it was important to get those products into the market. So what youre seeing some of these capacity additions.
Is essentially those producers being able to self make the products that we provided last year that made our system incredibly inefficient. So again as we enter 2022 I think we were pretty clear, saying down volume is going to be okay for us because it has got to let us get back to operating our foot.
Brennan network as Silicon has traditionally done in a very efficient manner. So we think it's pretty well in balance.
We think the new sustained kind of a normalized rate of food cans is certainly at a much higher rate than it was pre pandemic and we feel great about the footprint that we have to support our customers and they're continuing to do very well in the market retail data does absolutely support the fact that that food.
And canned food in particular is doing well in these kind of an uncertain economic times.
Okay and then you just you mentioned in the release this morning, our big customer renewals could you put any color around that.
Well sure.
The release did say that it was a contract renewal in our metal containers business than it is for our largest steel food container customer.
We arent really going to go into any of the details to talk the specifics of any customer agreement, but this renewals consistent sort of mark with what we've done with prior renewals of long term contracts.
To me. It's just another example of our commercial success in the market and how our very intimate customer relationships and partnerships create values for both parties. So we're excited to have have renewed that contract at this for a long term.
Like we would typically do in our container business.
And then just one last one from me just a rent custom containers I know in that business you move a fair amount of volume through.
Brokers and distributors and I, just I wonder does that have any impact on sort of when you see these inventory swings going on in the market does that.
More complicated or more multi step.
Distribution does that have any effect in terms of making those inventory swings sharper.
Sure I think it's it's muted, but it certainly has an impact when you bring someone else into that supply chain. There inherently is going to be a little bit more inventory that you have to work through so it's an important part of our business. We've got good relationships through distribution, we think theres, a real value where they are providing.
A set of solutions to customers at the end of the day, but.
For clarity it does create a little bit more time to resolve some of the inventory issues that we're working through particularly on these home and hygiene products.
Okay very good I'll turn it over thanks Adam.
<unk>.
And our next question comes from Arun Vishwanathan with RBC capital markets.
Great. Thanks for taking my questions I apologize for that.
So I guess first off if we just think about Q3 and <unk>.
The vegetable and fruit pack.
I guess.
Theres been some are up some some reports of winter.
Winter weather earlier in the year, what are you kind of expecting I guess as we go into that period right now thanks.
Hey, Arun, we do expect a good pack. So he as we came into the year, we were expecting a more normalized pack just as a reminder, last year, our metal container volumes were up 15% in Q3.
In large part the vegetable pack was quite strong last year.
We're anticipating a very good back so our volumes reflect that in metal containers and so far we're off to a very good start.
The Pea pack in particular.
As expected to be at sort of record levels for us at a reasonable percent of our overall Pac business corn looks to be very good tomatoes on the west coast are good and remember most of our products.
Our core advantages upper Midwest, so a little bit out of the range of some of that 100 degree weather that the Midwest was was working through last week and then on the West coast. The vast majority if not all of our tomato crops are actually irrigated so water. While it is an issue in California, we're able to get.
For the irrigation of our crop so as we sit here today and we're one month into the quarter feeling pretty good about the vegetable pack.
Okay. Thanks for that and then if I can just ask about resin costs, which last year were definitely a negative.
Have seen some.
Rolling over and spot polyethylene recently, though how should we think about your.
You know exposure, there and potential price cost gap, if there is any in and margin recovery.
Sure. So resin as you said, it's been volatile really for the first six months of the year and for US. It's been inflationary. So we have really good mechanism for for passing those costs on to the market and to customers.
Eagle across our businesses, we talked about custom containers a lot they've got very tight pass through mechanism mechanism. So their exposure is pretty limited to the moves of resin.
<unk> seen a specialty closures business.
<unk> has a more more of a mix of pass through mechanisms a little more exposure.
Our forecast right now for the balance of the year, we essentially take what we have what we know about resident we hold it flat for the year. So as Bob alluded to I think there's some upside to our forecast if if resin.
Lays out the way the indices are forecasting it to at this point, we've got a probably a couple of million dollars of favorability built into our forecast theres, probably a couple of million more.
As we go forward if the indices are correct I'll just remind you that we sit here essentially sort of at the start of hurricane season, and I am pretty sure on the entities are not forecasting a hurricane.
To create supply chain challenges for us.
I think that's really where we are with resin at this point.
Thanks.
And our next question will come from Gabe Poggi with Wells Fargo.
And Bob Good morning, Thanks for taking the question.
I wanted to revisit flash piggyback off of kind of what George was asking.
I appreciate it and I know that you guys are asleep at the switch.
But maybe play a little bit of a Devil's advocate here I mean, I think to summarize your response, Adam you said, Hey, we've got a fairly diversified portfolio within dispensing.
During the pandemic when when some of the semi discretionary the discretionary items took a hit.
We have this offset from surface cleaners et cetera, but there was also again I. Appreciate the fact that there was a pandemic right. So.
If we go into this slowdown and it feels like a lot of your customers are kind of locked and loaded.
For the holiday selling season, and then it'll be about product launches for 2023.
In the fragrance beauty cosmetics area.
How are you feeling about kind of innovation pipeline, new product introductions things like that.
And do you feel like.
Should there be a downturn again, I appreciate food and beverage component, which $300 million of that segment will do fine.
But there's maybe some cost out initiatives you guys be proactive there to to maintain profit levels are met.
More acquired piece of the business.
Yeah I'll start at the end there Gabe.
We've done a heck of a job of driving out cost across all three of our businesses and that's a hallmark of silicon. We are good operators, we do operate low cost facilities and we do find ways to provide continuous improvement throughout our operations. So none of that's changed I think.
Maybe the debt.
Point I'll focus on and your commentary was really our innovation pipeline.
As I sit here today, our innovation pipeline for dispensing and specialty closures is as strong as it's ever been so just for clarity we are winning in really all of the markets that we participate in whether it be fragrance, whether it be food beverage.
Got terrific teams in place our pipeline for innovation is fall.
And we've got products that our customers are.
Recognizing the attributes and the favorable attributes that we bring to the market. So.
You know I, just I think the diversified portfolio speaks for itself.
Just trying to get the one example that you know.
During the pandemic, you're right it was a pandemic but.
Something happened that that impacted one segment of R. R.
<unk> seen especially closure segment negatively it also would have a favorable impact to another side of that business.
I think we can probably hypothetically play a bunch of game with what happens next and what part of your diversified portfolio is impacted by that we feel like we've got a very balanced portfolio that will withstand any economic uncertainty that comes at us.
No I appreciate that.
It sounds like I mean, I kind of got what I was looking for which is you guys. It sounds like you're winning some.
Some business in the marketplace second question quickly. If you can comment at all I know I appreciate its not a very big business, but.
Food cans in Europe .
On hand, we could say hey, they're again, they're under pressure they consume over there.
And maybe if we can do better on the other hand, obviously, there's this ongoing conflict.
Just curious any color there.
Yeah, I mean, our European business in food cans in particular has done quite well this year.
You know I'd say the European consumer is a little different than the consumer that we have here in North America. They did not have the pantry loading event because they really don't have the same level of pantries to load in Europe broadly speaking that we have here in the states and in North America. So that business has been consistent from a <unk>.
<unk> standpoint, and we're seeing continuing to see very good demand across multiple categories, including pet food again, that's been a growing market for us.
The impact of of Russia in our volume in Russia is obviously the negative piece of what's happened there in 2022, and we're continuing to supply from inventory to the market some essential humanitarian products, particularly vegetable cans for the vegetable pack, but outside.
Of that it's a very favorable.
Year for us in our European food can business this year.
Thank you guys and good luck.
Thank you and our next question will come from grandson Punjabi with Baird.
Hi, Good morning, everyone. This is actually Matt sitting in for Ghansham.
You know I just wanted to touch on some of the significant price increases that are flowing through across your businesses and really focus in on how that might impact.
Consumer elasticity moving forward, how might that be the case across your various businesses.
And have you seen any kind of consumer customer elasticity impact on the business so far.
Great question, Matt I think.
Starting with our dispensing, especially closure segment I think the real impact of of of some of that inflation is very current right now and I think some of the commentary you see about consumers and consumer activity hasn't quite made its way into our data.
What I can tell you is in Q2.
Tumor was really resilient as it relates to our products. So our products did quite well in an inflationary environment, it's clear to us that the cpg's are passing through the inflation that they've incurred from their supply base onto consumers.
You move over to our metal container business and that's the one again, where I would say, it's a very resilient segment for us and the consumers continue to.
Procure metal containers at a higher rate than they did pre pandemic. So we're feeling really good about that at the retail level and I think as the dollars get a little tighter.
The real benefit there are food and beverage packaging and we've got a significant.
A portion of our overall business portfolio, that's in food and beverage packaging and I think as you get to accustom containers are our third business.
I do think that there's a segment there thats food as well that has done quite well through this inflationary environment.
I think that the inventory correction that we talked about at retail from.
At home from a garden and from a hygiene perspective, those are a little bit of discretionary spending right now that the consumer seems to be moving those dollars and putting them more towards food and beverage again. That's just that's current information, but I don't know that the data has caught up to just yet.
Got it that's really helpful that makes a lot of sense and then.
I just wanted to focus in on the raw material situation in price cost a little bit we touched on resin already but what's your budgeted level of raw material inflation across your business for 2022 overall, how does it compare first half versus second half across your businesses and then maybe if you could kind of roll that into what the price cost.
Scenarios might look like what what is the tailwind look like as we move throughout the year versus the headwind that we like we saw the beginning of the year.
Well, so maybe I'll give that a shot and Bob can can help me with anything I. Miss here. So you think about raw materials in our metal container segment, we talked about resin already so.
In the metal container segment, we had come into the year, essentially saying the cost of steel roughly got home.
That's kind of settle in kind of the high eighty's low 90% increase year over year and as you very well know we have I'll say bulletproof pass through mechanisms.
To pass those increases onto our customers, we fight like crazy for our customers and work to offset and mitigate that inflation, but unfortunately.
They are bearing the brunt of that which has been passed onto the consumer so that's.
That's roughly in line with what our budget expectation was and there hasn't been a whole lot of change I think from an aluminum perspective, staying in metal containers, you had seen some pressure on commodities certainly on aluminum ingot itself.
That has come down through the course of the year. So again, that's a almost a direct pass through for us with our customers in many cases and so we think that you know the price cost benefit is is pretty tightly connected as far as what we experience is what we're passing through to our customers from a raw material perspective.
I'll pause and say I want to repeat what Bob said in his prepared remarks, we have done a fantastic job from an operational standpoint, driving cost out of our system and that's getting all the inefficiencies of supplying everyone with a variety of products last year back to a more efficient operation this year of <unk>.
All three of our businesses, that's where the cost benefit has really.
Benefited our bottom line year to date, and we'll continue to do so for the balance of the year Yeah, Matt. The other thing I would add to that is that obviously, a big part of our metal business is under long term contracts and Adam touched on on those contractual pass throughs right.
And look we do that for a very specific reason, we enjoy the benefit of consistent.
Volume through the system, which allows us to leverage our fixed costs.
Benefit because they get the scale of our purchase power.
It's a little bit different story in the components of that business that are not.
Contracted and that's where we have a little more price cost favorability there.
And so we are on it our businesses are on it from the perspective of making sure that we're capturing that inflation, particularly in non contract.
Parts of the business.
There is the.
Dispensing and custom containers is it is it basically any price cost tailwind would basically be centered around the resin impact. There's there's nothing added on top of there.
Well I think it is.
As Bob just alluded to there's a portion of that business that is non contract is well known long term contract that there is.
Certain pockets of dispensing, especially exposures, we do have some pricing power and we have recovered price in those market spots, where we were able to and again, we've got our metal closures.
Component that fits into our dispensing and specialty closures segment that has very similar pass throughs to what we just described on the metal container side of our business.
Okay, Great. That's helpful. Thank you.
And our next question will come from Kyle White with Deutsche Bank.
Hey, good morning, Thanks for taking the question just wanted to focus on metal containers and the volumes. There you initially targeted I think mid single digit declines this year and it's trending quite a bit below that yet your commentary seemed to remain relatively unchanged since last quarter when.
What do you point to volumes relative to pre pandemic levels. So I'm just trying to better understand do you have a new target for what you think volumes will be this year and then maybe what's kind of the difference relative to that initial target.
Sure I think we feel roughly the same about metal containers that we did coming into the year. So maybe two things to think about there. One obviously, we had known about the pre buy impact on the year and that was factored into our guidance as well.
Frank maybe the learning that we've had through the first half of the year Kyle is that our customers and pet food, who had invested in additional capacity who have installed additional capacity continue to struggle with the supply side of ingredients and of labor and other packaging materials, our cans are ready to go.
Our capacity is ready for them when they're able to sell more volume. The reality is there are still stock outs and pet food at the retail level and we believe that and they continue to communicate with us that they could sell more if they could sell more so we had a greater pet food assumption.
Volume growth in the first half and what has been delivered by our customers.
Because they cannot find the labor and secure the ingredients and other packaging materials. So.
How does that translate into the full year you know our Q3 volumes are we always know Q3 was going to be a very strong volume quarter for 2022. So nothing has changed from that perspective, we think that pack is gonna be a really good pack as I mentioned this our anticipation for the <unk>.
Third quarters there'll be the second highest shipment level that we've had in our company history compared to the prior year third quarter and then.
How that plays out through the course of the year with fourth quarter.
We'll wait and see what happens with steel pricing as we go into 2023, but you know.
We were expecting down kind of mid single digits coming into the air Kyle We're probably just a couple of points beyond that right now because of the lack of our our pet food customers ability to.
Secured against the higher volume that they've invested for.
And we think that will resolve itself.
You know certainly in the back half and we're planning on being fully resolved as we go into next year.
Got it and then just two quick follow ups on metal containers, you had a small closure during the court order. It can you just talk about the reasoning for it in any cost savings related to it and then on the new on the contract not new the contract renewal does that present any kind of margin headwind next year.
Typically historically you started a lower point and you work your work your way up through productivity on the life of the contract.
Yeah, I'll take the I'll take the rationalization and then Adam can comment on the contract.
Yeah, we did announce a closure in our in our Lions facility.
It's not really anything new right at it.
It's back to kind of one of the plants that we had talked about previously and the footprint restructuring and that one in particular is not a reduction of capacity in totality.
That's a plant that's been around for a long time customers have have continued to migrate their filling locations to other other geographies. So this is just sort of a move of capacity. If you will to align ourselves with where our customers are feeling so as to avoid that.
Kind of incidents that we experienced a few years ago, where we were out of orbit with freight and cost structure. So nothing nothing more than that and then somewhere along the line you probably noticed that there was a.
Some some layoffs in the in the Sacramento plant, that's just routine seasonality.
That happens year in and year out just given the seasonality of that particular plant.
And then Kyle over to the contract renewal.
The typical long term contract renewals so as we've talked about over time typically you know over time, as we make operational improvements and and gain a little bit of.
Of margin through the contract and operational improvements that's been kind of revisit it with the customer during the negotiation. So it's just a very typical contract renewal.
Sounds good I appreciate it.
Okay.
And our next question will come from Daniel Rizzo with Jefferies.
Hi, everyone. Thank you for fitting me in.
Could you.
Thought about what the effect of energy could comment would be on your production in Europe or on the production of your customers.
So good question Dan.
As we look at again kind of our products. We believe our products are essential humanitarian products, you know a lot of food products that we manufacture in Europe beverage products that we manufacture in Europe . So we feel very good about maintaining our operations.
Throughout the European community there are.
Some of our facilities, particularly on the dispensing and specialty closure side that are focused on fragrance. We have spent a lot of time talking to our customers with our customers about plans to mitigate any.
The impact from tight.
Tightening supply of energy and just how we would work through that but at this point, we don't have a sensitivity to what those plans what would mean in 2023, we feel really good about where we are through the end of the year now and we'll continue those conversations and if there's something to report as we go forward related to 'twenty.
Three we will be happy to talk about it then.
That's great. Thank you for the color and then just my second question you mentioned <unk>.
In food cans in the expansions I was just wondering what your current capacity utilization is and.
What's your goal is or if there is a target.
Well, if you think about again, where we were through the pandemic I would say we were fully utilized through the pandemic, but we were not operating in an efficient manner. So while our volume for greater.
Kind of our internal dialogue here, we were we take great pride in making the right can and the right plant, which is right next to our customers and given the demands on the business, we were making hands in a different plan and you know not necessarily next to a customer so the way we want to run our facilities we're very.
Efficient were highly utilized there is incremental capacity.
On the shoulders of our calendar year that we typically talk about but.
It's it's volume that would have to travel quite a ways you know almost to the point that Bob was just making about the closure of our Lions facility.
To reach consumers. So we just don't think that's a very viable option.
Under normal circumstances so.
The way, we want to want to run our plants were very efficient we're highly utilized I don't want to give you a utilization number because its different by each one of our facilities and each one of our businesses. So I'll just tell you. It's it's the most efficient footprint and the food can manufacturing industry and I'm going to say.
Yeah, Dan I think you can also think about utilization rates in two very different forms right and as Adam said the way we want to run our plants is important and that sort of historically, where we've where we've been where the rates have been relatively high against the staffing of those plants, which allows us to get to.
<unk> see gains in those plants during the pandemic. We were we had shift differential changes that gave us the ability at least for a short period of time, albeit we ran them that way for 18 months.
But thats not sustainable right. So this is really getting us back to a sustainable rate of utilization, where where the plants are at their most efficient point.
Alright, Thank you very much.
And our next question will come from Alex Lorenzo with Truth Securities.
Hey, Yeah, Hey, Rob Congrats.
Congrats on the quarter, great tough looking forward more actually all my questions were just answered so I don't have any more at this time.
Great. Thanks, Alright, great. Thanks, Alex.
And our next question will come from George Staphos with Bank of America.
Hi, guys. Thanks for taking the follow ons.
On metal.
To the extent that you can comment the last time, we had a third quarter that was.
In the $100 million range of EBIT.
To be fair was 2015 2016.
Now on the one hand volumes will be down off of.
A record three Q.
It's going to be very pack, driven which tends to be lower mix. However.
If youre going to be more efficient operationally.
Is this a quarter, where you get back over $100 million in the metal business. After a few years, where you haven't been that range. During <unk>, how should we think about that if you can comment.
Well I think it's a great question and maybe instead of giving you exact.
Numbers, whether it's a 100 million above or below what I would tell you is that.
You know we are into a very efficient operating.
Window of time to volume is 10% greater than it was pre pandemic level. So you know.
I would just say George we're thinking about a really good third quarter. If you look at the totality of our guidance. Our Q3 is up 27% at the midpoint for EPS.
Versus the prior year record and so a big chunk of that is going to come from our metal container business and the leverage of that volume on the fixed cost base.
Okay.
We appreciate the thoughts there.
I guess related to metal and maybe something you don't really want to get into too much disk.
A discussion on but could you just remind us for posterity maybe.
The background again on the European Commission investigation.
And how ultimately the evolution in the settlement.
Round up relative to what your expectations would have been going into it.
Yeah. George This is this is Bob at this dates back to you know obviously.
Well into the prior periods.
Is it essentially deals with one employee.
And in Germany.
That was accused of of sharing some information.
Amongst the trade group on.
On sales volume.
And I'll remind everybody that that kind of coincides with a period of time, where we were doing a lot of work around BPA.
Non intent in particular.
So there there was you know sort of an industry wide.
Desire to make sure we the industry was able to convert and protect volume for that for the food can be that as it may.
The German commission raised it spend a number of years trying to find some activity there it ultimately didn't come to fruition.
And we had we had been applied for leniency in Germany.
Ultimately the German authority has dropped it it got picked up by the European Commission based on everything that we knew at the time, we didn't believe that there was much there fast forward.
Five years plus.
Spending a fair bit of money on on proceeding.
Ultimately, we felt it best to just.
Get it off our shoe.
And and move on and so that's the that's the settlement.
What transpired, obviously is that we didn't get the leniency.
Because we didn't think there was much to.
So worry about and ultimately that's that's why the differential there.
Understood I appreciate you've gone through that Bob.
Last thing I think there've been a lot of questions understandably on inflation.
Into the second half into next year, and obviously, you're only to manage against that on the raw side.
Can you talk to us not that fixed cost and labor are the biggest portion of your cost structure certainly not in metal, but nonetheless can you talk a little bit about the inflation we're seeing.
Some of the fixed line item.
And your cost structure.
And how that might look in particular in 'twenty three and if you have any specific.
We are different ways of approaching it or maybe it's the same playbook in terms of managing against that enter into next year. Thanks, and good luck on the quarter.
Sure George.
Probably the biggest inflationary item other than perhaps energy.
He is going to be on the on the wage line.
And obviously contractually we passed that through again it gets pass through on a on a lagged basis as part of the index. So there there's recovery coming at least in the in the contractual part of the business.
Generally it's it's large enough that we and everyone else are gonna have to.
Pass it through so unfortunately, it's just another element of inflationary consequence that the consumers ultimately going to feel.
So obviously you can just look around and see the order of magnitude of what's happening in the world. It's it's sizable inflation. So that combined with energy is going to go to add up to a fairly sizeable pass through again next year.
Yeah.
And where it's not pass through how are you.
Handel.
Yeah look I think it comes right back to the discipline that all of the teams have been sort of laser focused on through this year that in particular, where we don't have contracts.
And then the customer.
This is bearing the brunt of that right now we are passing it through.
And I think look let's face it when when inflation is as high as it is.
Everybody sort of understands that it has to get pass that along because it's too big for one party to absorb.
Understood. Thank you guys. Thank you, Bob Hey, George I'll, just I'll come back to your to your other question about about Q3, I look I think go back and look at Q3 last year, and we were pretty close to that benchmark.
Obviously, we had some inefficiencies in that quarter, so given everything that we're expecting about Q3 this year.
You're you're well within and balance to be thinking that this is a quarter that could.
Could break the 100, that's what I was getting at I appreciate it thanks guys.
And our next question will come from Adam Josephson with Keybanc.
Thanks, very much for taking my follow up this is for Adam or Bob just on on cap allocation and leverage.
It seems like you'll end the year about three times, which is smack Dab in the middle of your range. Obviously, you can carry a lot more than that if you need to but just given the economic environment. We're in.
How are you thinking about the potential for large acquisitions repurchases, where you want to be within your leverage target range et cetera.
Yeah. Good question, Adam look I think you had it right in terms of where well and what I would add to that is you know obviously, we're looking forward into next year thinking that free cash flow improves from from the $3 50 this year.
And so that's you know if you think about it 18 months from now we'll be sort of headed towards the low end of the range. So I think what that does for us it gives us.
Perfect flexibility that if the markets really start to rattle because of leverage then obviously, we've taken that off the table.
If and I agree with you that this business with its cash flow generation can handle the leverage for sure. So I think we still keep a keen eye on the M&A markets and for the right transaction. We would we would do it I think what are one or the other arrows that we have in our quiver so to speak is that.
We've got some incremental capacity through our bank facility. So we don't necessarily have to go to the credit markets, which are right now a little bit disruptive in order to do a deal.
Not suggesting we could handle.
Very large transaction that way, but for small to modest tuck ins, we absolutely could do that so I think we'll continue to keep ourselves abreast of the M&A market and pull the trigger where it makes sense.
And then ultimately.
We look at sort of share repurchases as the benchmark for any of those activities right. So what's in it for the shareholder for us to do an acquisition versus.
Return of capital so to speak.
So I think that's certainly out there for us to consider.
You probably saw that we got reauthorization for up to $300 million from the board more recently, that's just sort of a <unk>.
<unk> of our previous authorization.
Tell you that given a and you can see it in the financial statements given some of the dislocation we saw in the stock during the quarter.
We bought back about $26 million worth of shares so that's utilization of about 10% of that authorization.
So I think we will be very opportunistic about how we which levers we pull around the capital allocation. Obviously, our preference is to continue to try to find ways to continue to grow the portfolio.
I really appreciate that but I mean, just my last one for Adam which is at your I mentioned this I think on the last call, but your last Investor day three years ago, you were trying to combat the perception of yourself does.
A recession stock if you will.
And so now here we are it looks like we're heading into a recession. So obviously there are.
Garrett for owning silver going in that type of environment, but I know that's not necessarily the reception do you want investors to have of the company is just you own it going into recession. So Adam what do you think of the Investor perception of the company at this point versus what you.
Do you think perhaps the reality is.
Okay Great question.
I think that.
From my perspective.
Investors do and even on today's call what I would tell you a lot of questions about are our second largest business from a profit standpoint in metal containers. So.
There is still a perception that we are I can business in a defensive business just by its very nature.
Our Cam business is wonderful.
I guess, a cash generating powerhouse.
And we love our can business I think that you know when you think about the evolution that we've been making over the last you know call. It five to seven years, we have more growth aspects to our business today than we did five or seven years ago and we're in categories that do provide.
Beyond GDP beyond them kind of.
Some other lower.
Growth rate product categories, and that's exciting for us, but it's a blend and it's the power of the portfolio.
Is the message that we're trying to deliver to the investor into the market that we actually provide the best of both worlds. We've got an incredibly stable business, that's focused on core products and food and beverage we've got a strong competitively advantage growing business.
In categories that are growing at a much faster rate and then when you take our operational performance in our commercial relationships. Adam We believe we're positioned to grow in those markets at a faster rate than the market itself is growing and I think that.
For us we liked that point backwards and talk about what we've actually delivered and I would just say when you look at what we've delivered from a performance perspective, we're very proud of the results and what our teams have done and the growth that we have provided and we think that translates to the go forward as well. So we're excited.
And about the portfolio that we have and the products that we take the market every day.
Absolutely. Thanks, so much and best of luck.
Thank you.
Thank you that does conclude the question and answer session I'll now turn the conference back over to you.
Additional or closing remarks.
Thank you Justin and thanks, everyone for your interest in Silicon and we look forward to discussing our Q3 results in late October .
Thank you. Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.