Q2 2023 Silgan Holdings Inc Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Silicon Holdings second quarter 2023 earnings call I would now like to turn the call over to Alex Hutter, Vice President of Investor Relations of Silicon.

Please go ahead.

Thank you and good morning, joining me on the call today are Adam Greenlee, President and CEO , Bob Lewis EVP, corporate development and administration, and Kim Ulmer, SVP CFO and treasurer 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. 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 2022 and others.

Bilings with the Securities and Exchange Commission.

Therefore, actual results of operations or financial condition of the company could differ materially from those expressed or implied in forward looking statements. In addition commentary on today's call may contain references to certain non-GAAP financial metrics, including adjusted EBIT adjusted EBITDA free cash flow and adjusted net income per diluted share.

A reconciliation of these metrics, which should not be considered substitutes for similar GAAP metrics can be found in today's press release available in the Investor Relations section of our website at Silicon Holdings Dot com with that let me turn it over to Adam.

Thank you, Alex and we'd like to welcome everyone to Silicon <unk> second quarter 2023 earnings call.

Make a few comments about the second quarter and share our thoughts regarding the remainder of the year. Kevin will then review our financial performance and provide more details around our 2023 outlet and then Bob Kevin and I will be happy to answer any questions.

Second quarter presented a challenging comparative versus the prior year's record performance and as market conditions evolve late in the quarter. Our businesses took quick actions to adapt to those changes we continue.

To advance our strategic initiatives and once again the company benefited from a balanced portfolio of businesses.

Strong operating performance in our metal container segment helped drive double digit adjusted EBIT growth in the segment. While we also continued to experience increased demand and volume growth in our high value dispensing products as.

As we exited the first quarter and early in the second quarter consumer demand for our products and our customer demand forecast remains strong as the quarter progressed, we began to see what appeared to be a broad based volume shifts with many of our large customers as we worked with our customers to better understand the drivers of this dynamic and give it.

How closely integrated we are with many of them we came to understand that while consumer demand remained resilient several of our customers, we're initiating internal working capital and inventory management initiatives for the second half of 2023.

These initiatives are separate from the prior destocking activities related to the products that had seen a significant surge in COVID-19 related volumes as.

As expected except for lawn and garden products that Destocking is now complete as those products have returned to a normalized level of demand.

Our targeted growth markets in each of our businesses continue to perform well growth in 2020 three is being overshadowed by these inventory management programs in the second half of the year.

Due to our customers changed priorities for the second half. We are also shifting our focus to align our operational footprint and business activities to the revised second half projections, and we will be driving out cost from each of our businesses.

As always we have an intense focus on understanding and meeting the unique needs of our customers and supporting any of their initiatives.

Turning to our second quarter results strong performance in metal containers and inline performance in custom containers were offset by two primary items in our dispensing and specialty closures segment.

The largest item was the result of a skilled labor challenge at one of our U S closures food and beverage facilities, which limited the output of that facility and created significant incremental cost in our overall system to serve those customers as always still going to work diligently to insulate our customers from any operational.

Issues, we may face as we work to mitigate these impacts but we.

We will continue to incur incremental costs to serve our customers in the second half, but have already taken aggressive actions that will result in those cost reducing through the end of the year and the issue itself being resolved as we transition into 2024.

The second item that developed late in the quarter was a softening of demand for food and beverage closures, primarily in our European markets. As we said earlier, we believe the consumer has largely been resilient through this time of significant retail inflation.

That is supported by the fact that retail receipts indicate that consumers are indeed spending the same dollar or euro amount when shopping but they are clearly getting less for the amount spent.

In certain products in certain regions, we have seen evidence of consumers trading down to lower cost packaged products we.

A long history that clearly shows that silicones products tend to do well in challenging economic times and we continue to believe that our broad portfolio of products is well positioned to once again be a preferred vehicle of nutrition and at home use for consumers who are seeking value at retail.

As we now turn to our updated earnings expectations for the remainder of 2023. There are three primary drivers that are impacting our outlook number one the impact of our customer inventory management programs, which includes the delayed commercialization of new business wins in our custom container segment.

<unk> to be ongoing but diminished impact of the U S closures food and beverage facility Labor challenge and number three the incremental interest cost expected for the second half due to higher interest rates.

As a result of these items, we now expect adjusted EBIT for both the dispensing and specialty closures and metal container segment to be comparable to the prior year record level. Despite our customers inventory management programs. We have also revised our expectations for custom containers adjusted EBIT lower.

As the commercialization of the new contractual business awards has been delayed into 2024 in conjunction with those customers inventory management programs.

That Kim will take you through the financials for the quarter and our estimates for the third quarter and full year. Thank.

Thank you Adam net sales for the second quarter of 2023 were approximately $1 $4 billion, excluding nonrecurring sales associated with Russia in the second quarter of 2022 second quarter of 2023 sales declined 6% from the record prior year period, driven primarily by lower volumes in each of our segments, partially offset by improved mix and the pass through.

Raw material and other cost inflation.

Total adjusted EBIT for the quarter of $160 $8 million decreased by 14% on a year over year basis with record adjusted EBIT in the metal container segment offset by lower adjusted EBIT in the dispensing and specialty closures and custom container segment.

Adjusted net income per diluted share declined 26 cents from the record achieved in the second quarter of 2022 with higher interest expense of eight.

Nonrecurring sales associated with Russia of <unk>, and lower volumes driving the year over year decline.

During the quarter, we wrote off a tax indemnity and related tax reserves from our historical acquisition as the statute of limitation expired.

Write offs of these items adversely impacted corporate expense by approximately $2 million and interest expense by approximately $3 5 million and benefited our tax expense by approximately $5 million in the quarter.

Net impact of these tax related items as neutral to adjusted earnings per diluted share and our effective tax rate. Excluding these impacts would have been approximately 23%.

Turning to our segments dispensing, especially closure segment sales declined 6% versus the prior year, excluding a 1% impact from Russia sales, primarily as a result of lower volume mix of 6% with.

The decline in volumes driven by double digit declines for higher volume closures for food and beverage markets, primarily in Europe , which more than offset high single digit volume growth and higher value dispensing product.

Second quarter, 2023, dispensing, especially closures adjusted EBIT decreased $23 $4 million versus the record achieved in the prior year period as a result of the benefits from the prior year from an inventory management program and cost recovery for customer project expenditures and lower volume mix.

Relative to our expectations entering the quarter the shortfall in adjusted EBIT was driven primarily by skilled labor challenges and associated costs at a U S food and beverage closures facility, which impacted the quarter by approximately $10 million and lower volume for food and beverage products primarily in Europe .

And our metal container segment, our teams continued to perform at a very high level again in the quarter, while volume was below prior year levels due to prior year post pandemic restocking activity in soup pet volumes remained strong in the quarter.

Metal containers adjusted EBIT was a new record for the second quarter and increased nearly 20% from the prior year quarter as the business continued to successfully pass through labor and other manufacturing costs, while actively managing our cost extra.

And cut some containers are previously discussed non renewal contractual business in this segment and lower food and personal care volume drove volume, 14% below the second quarter of 2022, which coupled with lower resin costs on a year over year basis.

<unk> and sales, 17% below the prior year period as.

As expected custom containers, adjusted EBIT declined $11 million as compared to the record achieved in the second quarter of 2022, primarily as a result of lower volumes.

With customer inventory management programs impacting volume and the timing and the commercialization of new business being deferred to 2024, we anticipate third quarter volume to decline approximately 10% from the prior year third quarter adjusted EBIT to be below second quarter levels.

Looking ahead to the third quarter, we are estimating adjusted net income per diluted share in the range of $1 10 to $1 20, which includes higher interest expense of <unk> <unk> per share.

<unk> per share impact associated with nonrecurring sales for Russia on.

On a segment level with adjusted EBIT comparable to the prior year record levels in dispensing, especially closures in metal containers and below the prior year and custom containers.

For the full year 2023, we now expect total adjusted EBIT decreased by a low single digit percentages compared to the record prior year with adjusted EBIT comparable to the prior year record levels in dispensing, especially closures in metal containers and below the prior year and custom containers.

As a result, we are revising our outlook of adjusted net income per diluted share from a range of $3 95.

To $4 15 to a range of $3 40 to $3 60.

Which includes a year over year headwind of <unk> 30 per share for interest expense, which we now expect to be approximately $170 million and a tax rate of approximately 24%.

These estimates exclude the impact from certain adjustments outlined in table C of our press release.

As we bridge, our revised expectations for the full year to our prior estimates we are now expecting approximately 55 lower adjusted net income per diluted share in 2023, which is comprised primarily of the following items.

Approximately <unk> 30 per share primarily due to the customer inventory management programs across all the segments with roughly half of that impact being in custom containers due to the inclusion of the delay in commercializing the new business Awards.

Approximately <unk> 15 per share for the full year from the labor challenges and associated costs in our U S food and beverage closures facility and approximately <unk> 10 per share higher interest expense as a result of higher interest rates on our variable rate debt.

Based on our current earnings outlook for 2023, we are also revising our estimate of free cash flow to $375 million with Capex now expected to be approximately $230 million.

That concludes our prepared remarks, and we'll open the call for questions. Operator would you kindly provide the directions for the question and answer session.

Okay.

The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if any point you'd like to withdraw from the queue. Please press star one again.

We will now take a moment to compile a roster.

Okay.

Our first question comes from the line of Anthony Pettinari from Citi. Please go ahead.

Hi, good morning.

Adam in terms of Hey.

In terms of customer inventory management programs. It seems like a lot of cpg's have been destocking.

For close to a year now and it sounds like we have kind of a new round of Destocking initiatives is it possible to talk a little bit more maybe qualitatively about how these inventory management programs are maybe different than what was initiated late last year.

Is it possible to quantify you know maybe days on hand are customers going back to pre pandemic levels or is there sort of a way to frame what this new inventory level might be versus history for you for your customers.

And sure and Anthony maybe before I get into those details I just want to make it really clear to everybody that the team here at Silicon is very disappointed with our performance in the second quarter and our revised outlook for the remainder of the year. We believe the current issues. We're facing are transitory in nature and will be contained to the year of 2020.

Three what I can also tell you is that the silicon team collectively understands the challenge that's right in front of us and we remain confident in the earnings power and the outlook for each of our franchise businesses.

As we think about what's different about this inventory situation Anthony versus the what I'm going to call. The COVID-19 related destocking that we were experiencing in certain products last year. This is much more broad based so in fairness. The destocking, we talked about previously related to COVID-19 items again items.

Had a surge during COVID-19 like hard surface cleaners, and sanitizers those types of products.

We have essentially cleared that destocking and we are now seeing growth again in those products. So Unfortunately this is an entirely new program and I think this is really centered around the fact that there has been significant inflation that has been not only pass through to consumers, but to our customers as well.

Not just in the products that we sell but in ingredients and other packaging raw materials et cetera, and the reality is I don't think the days of of units on hand as of finished goods are terribly different.

Dollar value of that inventory is significantly higher than its been at any time in recent past and you take into account the interest rates that.

We're now paying collectively that we're all dealing with the interest expense of holding that inventory is really what I think is driving our customers to make a broader base decision on how they are thinking about working capital and inventory management and again, it's across all of our businesses. So we view this as something much different than.

The COVID-19 related COVID-19 related destocking activities from last year.

Okay. That's very helpful. And then you talked about aligning cost structures with the new volume outlook in terms of.

The benefits of restructuring programs on a dollar basis are there any numbers you can give us for 23 or 24 in terms of.

And what you expect those programs to deliver.

In fairness to our team's Anthony.

Our revised forecast that we got in from our customers really we're in the very late days of June and into early July . So this is a very recent.

Phenomenon that we're dealing with as far as the inventory management program. So we have instituted a few of those activities already.

And we've got a lot more activities that we're going to be talking about on the next call that we have in October , but I think just given the sensitivity to some of the changes that we're going to make we're going to hold off having those conversations until.

Our teams are fully informed of all of those actions that we're taking.

Okay understood I'll turn it over.

Thank you.

Our next question comes from the line of Gabe <unk> from Wells Fargo. Please go ahead.

Adam Bob Kim.

Morning, all.

Thank you.

I had a question I think our I suspect I know the answer to this but there was also a reference of I want to say $5 million or so.

Of incremental corporate development costs in the quarter.

I'm just curious maybe Bob if you can speak to that.

Sort of calibrate, what maybe timing or things that we should be expecting I mean, I know you guys have talked about being active but.

Else would be helpful.

Yes sure Gabe.

This is not anything thats out of the ordinary rate, we maintain an active posture.

The M&A corporate development.

Markets.

I think what you just see as what's happening in the quarter as kind of the timing of some when some of those costs came through I wouldn't read a whole lot into it because it is ongoing activity that happens pretty regularly through our P&L.

It may be a little more visible in this quarter.

But that's that's really it.

I would take that as kind of no change to our posture around capital allocation and corporate development activity.

So nothing there should be no read through there one way or the other around how we're feeling about the M&A side of the business.

Okay and then the other one as it relates to the skilled labor issue that you guys are dealing with right now.

I guess, the natural extension or the question would be.

To the extent you look across the remainder of the platform are there any upcoming contract negotiations union or otherwise.

That you guys are kind of preemptively going after at this point.

To avoid that R. R.

Could something go wrong with with whats youre dealing with now.

So that bleeds into 2024.

Great confidence there that its 15th.

And we can kind of look past as being transitory.

Sure.

We just have our normal course union contract negotiations nothing outside of the ordinary from that perspective for the the first part of your question Gabe that really wasn't what happened at the facility that we're talking about with the labor challenge that we have I think what I'd say is that we're very proud of all of our <unk> employees.

And really how everyone stepped up through the pandemic and.

Took it very personally to meet the.

Significantly elevated.

Demand levels that we saw for our products through the pandemic.

And Unfortunately, I think what we've gotten to is just weak.

We've got one facility in kind of a rural location, where we are having some absenteeism problems and we are addressing those very clearly and very quickly.

And it is absolutely our opinion that we will resolve those issues within the year for sure.

Some of the aggressive actions that we've taken we've we've got a broad network and our food and beverage closures manufacturing platform around the world.

To utilize and we are doing that so we've moved a significant amount of volume out of that facility.

We have also moved one production line to another facility within the United States.

All of which is really why the expenses. So large in the quarter is all the actions that we've taken to mitigate it and insulate our customer at the exact same time so.

I think we've got a really good degree of confidence that the situation is going to be resolved one way or the other with all of the actions we've taken and actions that we can continue to move forward with as well.

Understood. Thank you.

I'm back in.

Right.

Our next question comes from the line of George Staphos from Bank of America. Please go ahead.

Yes, hi, good morning. This is actually <unk> sitting in for George you had a conflict this morning.

So just on dispensing and specialty closures, obviously volumes have been challenged for several quarters now and I understand that youre guiding to low single digit growth for three Q, but ultimately what does this say about kind of the intermediate and long term growth outlook for that business and when can we expect.

To get back to sort of sustained growth.

Sure Great question and really it's the markets that we're talking about.

That are impacting the overall volume trend in the business. So our dispensing products again had been growing at kind of the double digit percentage growth rates year over year I think in the quarter, we were up high single digits and our dispensing products. So the conversation for today's conversation is about the food and beverage.

Market and it's really about our European food and beverage customers that we're talking about so we've seen softness in Q2.

Really as a reminder.

Our metal closures in Europe are part of our premium package in the marketplace.

And what we are seeing to some degree in the European economy is the consumers struggling a bit.

And they are in fact trading down in some cases.

We have the benefit of having a metal food can business in Europe as well that we are seeing some benefit in volume as consumers trade down, but it's been a very tough year, thus far for consumers, particularly for food and beverage products in Europe . So look we think that's going to ultimately resolve itself.

We think that the dispensing platform continues to grow delivers high single digit growth.

And then we've got really as we move to the second half of the year relatively <unk>.

Fair comps versus the prior year, where we had seen softer food and beverage.

Volumes in the second half of last year and then we also talked about the Covid related destocking activities last year that we've already cleared so we feel confident about the back half forecast that we have for dispensing of specialty closures and maybe more importantly, we feel really good about the long term growth rate that we've.

<unk> to the business.

Nothing has changed from our perspective due to this short term transitory issue.

Okay got it got it and then just on customer containers with the delay of the commercialization of that new business I.

I guess can you just expand on that a little bit and I guess when.

How is the timing shift Scott shifted on that front.

Yes, a good question and when we.

We came into the year, we were looking for commercialization in the second half of the year as it turns out.

Many of our customers that we have these new business awards with have had labor challenges of their own and we were having difficulty in and having the right teams at our customers to work on these projects and as it turns out.

As part of the inventory management working capital management, those positions or have been pushed off to re hire until the early part of next year. So the contracts are signed the capital is being spent and we are preparing for commercialization, but our customers' teams will be ready to begin those commercially.

<unk> commercialization early in 2020 for our products will be ready to ship in early 2024, as well and we're confident that we have a full year of of those volumes as we turn the page.

Yeah.

Great. Thanks.

Okay.

Okay.

Our next question comes from the line of Mike <unk> from tourists security. Please go ahead.

Thank you Adam Bob Kim analogy for taking my questions.

First one just on the cost actions I understand your reluctance to discuss.

Relatively new but would it be fair to assume Adam.

Since these cost.

The actions that you're taking are going to be temporary.

As you indicated that the destocking headwinds themselves should be temporary and we can also give you the opportunity to maybe go through your portfolio more holistically to meet more permanent types of moves.

So actually I would say that the actions that we're going to be taking a more permanent we are right sizing our capacities our footprint our business activities too.

Projections from our customers for the second half of the year and Mike I think the interesting piece of that as we look forward into 2024, what silicon has historically done it's been able to flex our our capacity up to meet our customers' increased needs.

That's how we're viewing.

Our first look at 2024 at this point, we're going to make sure we get the cost out this year and we will be able to flex up to meet those needs next year.

Maybe just a quick follow up.

You for the color would you say that you bought.

As your customers have grown maybe you've got a little bit more relative to your customers. Since you can actually close facilities permanently flex up to meet their needs.

I don't think were going further than our customers. I think we are we are going to right size, our footprint and our capacity to the demand that we see.

And we're in the intimate conversations with our customers daily on what that looks like not only for the remainder of the year, but going forward and again I think what I'll just reiterate Mike is that we have a long history of having a very low cost platform that we're able to flex up and thats the entirety of our our fifth.

Cost system that that incremental margin.

Fully utilized in our facility in and stressing the assets.

<unk> made a lot of money for our shareholders over time.

Mike just to add some color to that I think if you look back as we came through the whole pandemic related volume surge right. We we all sort of.

Cap capacity available to meet that peak demand and I think part of this is just getting back to the roots of what silicon dies and being able to take costs out and doing that in a time, where we're seeing some softness coming from our customers at least in a transitory way, but what we've always been able to do over time is take those kind of fixed.

Cost out and flex up when we need which is exactly Adam's point, so I wouldn't view this as where we are permanently.

Right sizing or downsizing, we're just getting maybe I'll use the reverse terminology, we're not permanently downsizing, we're right sizing with the ability to flex back up when we need to.

Got it very clear and then just one quick additional question just can you talk about the benefit if any do you expect to have lower resin costs, particularly around polypropylene.

Obviously I was it was a headwind of <unk> those costs will decline significantly in <unk> and <unk> wasn't really you didn't guide you had mentioned it at all so I'm just wondering if you do expect some tailwind from lower resin costs.

Yes, maybe just as a quick reminder, we are right at the beginning of hurricane season, So any commentary will be subject to whatever happens with the.

The weather along the Gulf Coast, and the East coast, but as we sit here today, you're right polypropylene is expected to decline in the back half of the year, we will see what happens we typically take a conservative view on resin in our forecasting models and as you'll recall from the last earnings call that we had resident in polypropylene specifically.

Had increased dramatically I think in excess of 10% on CDI in both February and March and ultimately it wound up falling I will say just as fast in the second quarter. So we didn't mention it much Mike simply because it didn't have much of an impact versus our expectation that we had in the quarter and again.

We're just going to be conservative in how we look at it is as the remainder of the year plays out.

Thanks very much.

Yeah.

Our next question comes from the line of Erin vis Washington from RBC capital markets. Please go ahead.

Great. Thanks for taking my question.

Just wanted to ask a little bit about the demand environment.

You talked a lot about inflation impacts and or we've seen that with in many categories.

Do you think that that.

The main issue going on here I know that there is obviously the customer loss, but aside from that you think.

Demand is really being impacted by inflationary aspects historically I mean, many of these smaller kind of food beverage categories have been a little bit more stable I know theres, a whipsaw effect with COVID-19 and so on but.

Maybe what are you hearing from your customers as far as.

Inflationary impacts on consumer demand levels.

Sure. Thanks, Arun and I, you know I think it's important to differentiate the geographies in which we deal with so maybe the tougher one to start with is Europe , and we think the consumer has been weaker in Europe and that is reflected in our dispensing specialty closures food and beverage business and also trans.

Plates to our metal food container business in Europe , where we are seeing some of the benefits.

The trade down that seems to be occurring I think broadly what I would say again is that the consumer seems to be spending.

Same amount of money at retail on a monthly basis, maybe there theyre, taking more trips to the store.

But theyre roughly spending the same dollars we are very clear they are getting less for the money that they're spending so inflation is having an impact and I think.

Oh not.

Not speaking for any customer in particular, but you look at CPG companies.

And what they've been reporting they are talking a lot about the price recovery that they've gotten and price ahead of cost and shrink fallacious again all of that does fall down to the consumer so in the U S market I think the consumer has been very resilient. Thus far we have not seen a significant impact from the consumer.

And I would say that in all of our businesses, including we haven't seen necessarily a trade down to the food can in the U S market at this point.

Look we've got a long history of dealing with different economic cycles throughout our businesses Dogan typically does well when economic.

Circumstances are challenging and so we're ready for this if it happens if not we think our businesses are continue continuing to perform pretty well at this point, even with the transitory issue that where we're dealing with with the inventory management programs our customers have initiated.

Okay, Thanks for that and given that backdrop then.

When you look into the next couple of years I guess.

Is it mainly.

You know maybe some deflation that would return you to maybe low single digit volume growth there.

I know that you have a number of different.

End markets in fragrance for examples maybe holding up pretty well as is pet food, but.

Is that really the main driver here that we need to see some.

Deflation and relief for the consumer.

Before silicon kind of returns to a more consistent positive volume growth or.

Are there other levers you can pull.

No I actually don't think that's that's what we're waiting for them and again, taking a half a step back I'd say, we're cycling over all time record volumes and record profits in our business from last year. So our comps are very difficult. That's fine we expect to continue to grow from there. So once we pass this.

Transitory issue I mean, I would say nothing has changed about our near term or long term outlook for the businesses, So dispensing and in our dispensing, especially closure segment dispensing is going to continue to grow at kind of a high single digit rate from a volume perspective, we think food and beverage markets will normalize.

And provide kind of GDP ish kind of growth, but the DSA segment, we're expecting nice growth from it you move over to metal containers nothing's changed really.

What's happening in 2023 is exactly what we expected to have happen, we have nice growth in pet food, we have stability in vegetable and really soups returning to kind of a normal suite pattern and so that is going to drive.

50% roughly of our volume in wet pet food that will drive growth in metal containers as well can.

<unk> moved a custom containers, we do have this this mismatch of of business wins versus the piece of business that we chose not to renew a contract on and if you go back several years, we've been talking about the wins in and what we decided not to renew is going to be a little bit lumpy. That's what we're writing through right now.

So.

We're excited about the new business that we've won that we have signed contracts for that we'll return more profit than what we walked away from and the other agreement in 2024, so margins in that business remains strong we had set a 15% EBITDA margin four for custom containers many years ago.

We've operated well above that for several years, the new business awards, we're talking about will be at or above that level.

And those are long term contracts. So we feel really good about all three of our franchise businesses for the near term and the long term outlook. We're just riding through this transitory issue for the next six months.

Got it thanks a lot.

Okay.

Our next question comes from the line of Gamesome Panjabi from Baird. Please go ahead.

Hey, guys good morning, Mr. <unk>.

I think you've covered this but on.

Dispensing closures, Adam you talked about some of the weakness in Europe .

Is it.

How do you sort of see that playing out right because the classic CPG strategies to raise prices when inflation goes up and then as inflation sort of moderate adjust on a promotional activity basis and stuff like that.

That's been true in the U S. Historically, how do you sort of see that playing out for Europe .

Well I think the issue in Europe , specifically for this business in food and beverage is again, the the glass package with a metal closure as it is considered the premium package in the marketplace. So it is we are seeing the trade down to private label.

I would say fairly well represented we're probably a little more weighted to brand versus private label, but we're seeing that trade down. We're also seeing the trade down from private label into food cans.

Yeah look the consumers in a tough spot in Europe , and and we think they've taken specific actions to trade down.

Really its more of a question about the inflation on our package, which is driven in large part by what the glass manufacturers are doing in the marketplace.

And that's I think the biggest component that our customers are thinking about and as we think about the premium position of that package.

Yes.

And then on the same token.

Back in May of last year, where are the big box stores, and we're talking about too much inventory and destocking.

Now Theyre, starting to report and talk about promotional activity in <unk>.

Partnering with our suppliers and so on.

Could you just sort of a lag that you have in the supply chain as it relates to you're seeing incremental weakness now versus maybe a forward looking trajectory that's actually more favorable for the market.

Back half onward into 2024.

Well I do think that.

I agree with you that I think what needs to happen is promotional activity and some of that price versus cost that we've talked about for the large CPG and retail.

Collapsing a little bit and getting back to where consumers are engaged in and procuring those products and an inflation is going to match what is happening in the market. So.

I think I've read the same reports ghansham from retail partnering with some CPG I would tell you I think for the most part what we're seeing right now with our customers as they are liking the price points that they're out in the marketplace and they've been willing to forego a little bit of volume.

To retain that price I think that has to change at some point and we're in those conversations all the time that we will see what happens here as we work through this inventory management program for the end of the year as we head into 2024.

It has to be addressed I think that will drive volume in the future periods.

I wouldn't I wouldn't work too quickly passed Adams prior comments as well just that.

Some of our customers are getting after the carrying cost of this high value inventory.

And looking to land with lower cost inventory as that promotional activity comes back. So that's that's kind of what gives us. Some some confidence that this is a bit transitory right. It's just getting after cost that they're carrying particularly in these high high interest rate environment.

And looking to position themselves well for.

Moving into 2024.

Okay awesome. Thanks, so much.

Yeah.

Our next question comes from the line of Daniel Rizzo from Jefferies. Please go ahead.

Thank you for taking my call.

So I think you mentioned that the issues with labor were $10 million headwind in the quarter. I was just wondering how we should think about it for the next two quarters I know there were some one time stuff here, where some transitory stuff, but how how will it what was the cadence be in Q3 and Q4 those costs.

Thanks, Dan Yeah, it'll it'll mitigate throughout the quarter. So you know I mean I think.

If it was $10 million in the quarter.

Q2, I think Q3 is let's call it $6 million and kind of Q4 were kind of ending the year at.

Three ish million.

And then having it fully resolved by the end of the year to be clear. Our objective is to beat all of those numbers I. Just gave you but that's what's included in our forecast.

Would you say its can resolve by the end of the year.

Are you assuming that.

I guess your labor.

Resolves itself or just kind of working around them. If you know what I'm, saying, regardless of what they do this will be resolved by the end of the year.

Thanks, that's what I tried to say earlier is regardless it'll be resolved. So yes, it's a little bit of both so in fairness Dan.

Look with our with our manufacturing footprint around the world. We have sent hundreds of millions of units to other facilities to support our customers. We have as I said picked up one operating line and moved it to another facility in the U S. A.

That has labor that is able to manufacture the parts that line is already up and running in the other plant. That's how quickly we've moved and our team actually did a great job in coordinating all of those activities. So one way or another this is going to get resolved.

Okay, Great. Thank you and then you mentioned trading down in Europe with some of your higher end products, but.

Beauty wasn't mentioned in I think in the past you said thats fairly resilient, even though you are in high end products. There I was wondering if thats something thats still intact or if.

If you could potentially see some some trade down within that end market as well.

Sure. It's a great question and I was trying to be very specific the food and beverage when I was talking about the premium products on the retail shelf. So when you move over to kind of our dispensing products again, we're seeing high single digit growth across the board some of our higher value items or even growing at a greater rate than that so you think.

About beauty and fragrance.

It's Ben.

A wonderful growth engine for the entirety of the business. The future is also very bright for those products. We really have seen at this point no slowdown in the European market for those premium products and fragrance and beauty at this point.

Okay, and then and then one final question just on your own inventories in terms of your own I guess Destocking could we expect some I guess some cash relief as you kind of just yourselves as well too what kind of a new dynamic is within some of the the closures end market.

Yeah, So I think thats, what youre seeing.

Is embedded in our in our free cash flow our revised free cash flow guide is that.

We've taken a hard look at return rates on Capex.

We're looking at our inventory levels to get those right sized as well.

Yes.

That's part of the DNA of what we do in this in this scenario.

Thank you very much.

Yeah.

Our next question comes from the line of Kyle White from Deutsche Bank. Please go ahead.

Hey, good morning, Thanks for taking the question a couple of questions on the outlook just starting with dispensing you're targeting for segment income to be flat for the year.

Kind of implies a pretty meaningful step up on a sequential basis as well as year over year I'm, just trying to understand whats kind of driving that uptick given it seems like volumes are still a bit challenged and then you have the labor issue and then longer term, what's the right margin profile for this segment just given the moving parts related to mix with the higher value products relative to the legacy closures.

Sure Great questions. Kyle So look when we look at the back half of dispensing and specialty closures.

Really its more about what happened last year and again the.

The significant impact of Covid related Destocking and this particular segment occurred in the second half of last year. So we're cycling over that.

Those products again to be clear.

I keep using the example on this call of our trigger sprayers for hard surface cleaners. They were up double digit percentage in Q2, and we anticipate that continuing on through the remainder of the year as we have fully cycled through that destocking activity.

As I mentioned earlier, we also had some softer volumes last year in the U S market for food and beverage.

In the second half of the year are our current outlook is for a normal.

Third and fourth quarter for food and beverage in the U S market, so our cycling a little bit against a softer comp there and then at the end of the day, we continue to grow in our core markets for this segment. So we'll continue to see growth in those high value dispensing systems and dispensers.

All of that is sort of offset a little bit by the challenge of the European market, We've got a relatively conservative food and beverage forecast for the back half of the year and then obviously working with our customers through this inventory management program in the last six months of this year all of that nets to low <unk>.

Signal digit kind of growth.

For the back half of the year in the segment. So we feel pretty good that we've got that captured correctly.

And are pulling all the levers to execute and make that happen.

From a margin profile standpoint, again, I think what youre seeing in this businesses is accelerated and outsized growth in the high value dispensing applications. So margins will continue to trend upward as we go forward.

<unk> talked a lot about mix I, probably will spare everyone. On this call again from going through the next conversation with our food and beverage closures, but look this business will continue to trend favorably and margins as we continue to grow the dispensing side of the segment.

Yes, I think Carlo.

There's not much that's changed around the <unk>.

Margin profile between those those categories right. So if you think about what I'll call. The legacy dispensing side of our business that's kind of a.

Call it mid to high teens margin profile and the dispensing side, which is where the growth is coming is in the low to mid twenty's kind of profile on a margin basis. So as we continue to see growth there that should accrete to margins assuming.

Neutral raw material write the pass through mechanisms will have some important there, but the underlying margins should be accretive.

As we continue to grow in the in the dispensing side of the business and just to tie a terminology. Your legacy that Bob just mentioned is the food and beverage that I was talking about earlier. So it works Okay. Bob has got it exactly right.

Got it that's very helpful. Similar type of question on metal containers. I mean, this business has been exceeding expectations for the first half of the year I think that comes up 33% and now you're forecasting for income to be flat.

For the full year, so I'm, just kind of trying to understand the second half dynamics, there isn't anything related to the car versus to y.

We should see year over year decline in income.

Well, Hey look the pack in the U S market in particular, the Pac is running a little bit late so that is reflected in our forecast.

There was a little bit of slippage from Q2 into Q3 and then we'll also see some push from Q3 into Q4, all of which is relatively normal for us, but I would say the Pax running call. It maybe three to four weeks late at this point. So we are expecting some path to get into Q4.

Do you think about it being flat it was really about again, what we did last year as far as our inventory management programs late in the year last year that created significant benefit for the company.

It's just not repeatable so we're cycling against.

A significant benefit from the prior year.

Got it that makes sense I'll turn it over.

Yeah.

Yeah.

Our next question comes from Gabe <unk> from Wells Fargo. Please go ahead.

Thanks for taking the follow up just a quick one and Adam.

I don't feel like maybe got a clear answer.

Back to economics class.

You are talking about higher cost to carry inventory for your customers has there been anything in the discussions in terms of.

Maybe them delaying purchases are wanting to destock in anticipation of lower cost products from yourselves or maybe lower ingredient costs going into 2024, just trying to understand like to the extent there could be a restocking event or something like that.

In 'twenty, four and they draw things down too far.

Yes, I think look we're early in that conversation right now I think that's the most significant item I can give you. There Gabe is that there are trade cases for tin plate steel that are in front of the government right now, which we're expecting to hear resolution one way or the other call. It in.

Late August early September .

And we don't know how that we don't know what the decision is going to look like and it creates a really wide.

Disparity of outcomes. So I think we and our customers have both elected to wait to make that decision. Once we have more information. So I genuinely don't believe that that is what's driving any of the conversation that we're having with our customers I just would say.

When you look at their unit volumes and inventory I don't think its terribly different than what they have historically held in unit volumes I think the dollar value associated with that inventory is so significantly higher because of inflation in raw materials, because of inflation and ingredients and their labor costs.

And their logistic costs, that's what's driving the inventory management programs that we've been talking about with our customers.

Thank you.

Sure.

Yeah.

I would now like to turn the call over to Adam Greenlee for closing remarks.

Great. Thank you very much and thank you all for your interest in the company. We look forward to talking about our third quarter earnings results in late October . Thank you and have a great day.

Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.

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