Silgan Holdings Inc.

Thank you for joining the Soudan Holdings Second Quarter 2021 Earnings Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kim Ulmer, Vice President, Finance and Treasurer. Please go ahead.

Thank you. Joining me from the company today, I have Tony Allitt, Chairman and CEO, Adam Greenlee, President and COO, 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 may be 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 2K for 2020 and other filings at the SEC. Thank you, Kim. Welcome, everyone, to our second quarter 2021 earnings conference call. We hope that everyone's doing well as we continue to navigate through the vagaries of this ever-changing pandemic world.

The good news from this call is our businesses continue to perform well as measured both against the record performance at the peak of pandemic levels last year and even more so as compared with the pre-pandemic levels. In addition, we've continued to advance our long-term succession plans as most recently announced in our July 1st, 2021 press release. I am pleased to be in the final stages of the transition to Adam's leadership as the new CEO. I'm looking forward to continuing to be a resource to Adam and his new position. Perhaps more importantly, the executive team that will continue to support Adam is the same team that has been core to the company culture, its missions and principles, and its investment disciplines. We feel confident that this team and the Silgan culture under Adam's leadership will continue to build on its past successes and continue to create value for our customers, employees, and shareholders alike. I've been asked quite a bit since the announcement to reflect on what we've accomplished over the last 15 years in my role as CEO and where I think Sylvan can go from here. From the beginning, we have focused on building strong, sustainable, cash-generative businesses. Our metal container business is the epitome of this. We've invested to make it the best in the world with a particular eye on markets where we see growth opportunities. In the custom container business, We recognized a decade ago that we were not the lowest cost, best answer to our customers, and we made the hard decision to significantly restructure that business. Many thought we should sell at the trough of this process, but we stuck to our plan, improved and backed a great team, and have emerged as an industry leader in terms of profitability and customer service. Finally, we recognized some time ago the need for more growth opportunities to deploy our strong free cash flow. We identified the closures and dispensing markets as great opportunities. Over the years, we focused our team on product development and customer support. We acquired businesses to further expand our products and footprint. And recently, we acquired and built superior dispensing capabilities. Today, that dispensing and specialty closure business is our largest profit contributor and offers significant opportunities for growth in a large array of attractive industries including food, beverage, healthcare, personal care, beauty, and household products. So we enter this next stage with an experienced leader in Adam, with a senior team familiar with accountability and success, and an organization built on a culture of winning. For these reasons, I'm proud of what our team has accomplished, but I'm even more confident that Sylvan's best days are ahead. With that, I will now quite literally turn it over to Adam.

Thanks, Tony. And let me start by saying that it has been a privilege to work so closely with Tony and the entire Silgan team for the last 16 years. Under Tony's leadership, Silgan has stayed true to the mission and principles that Phil and Greg founded the company upon as revenues have grown from $2.5 billion in 2005 to over $5 billion in 2020 on a pro forma basis. Our performance-based culture is Constancy of Purpose, and Discipline Capital Allocation Model will continue to be at the core of what we do every day, and we are very fortunate to continue to benefit from Tony's leadership and guidance as Executive Chairman. I'm humbled, honored, and excited for this next chapter in the Silgan story and believe the future is very bright for our customers, our employees, and our shareholders. As we like to say at Silgan, the past is prologue and our entire team remains committed and looking forward to delivering many more Silgan successes in the future. Speaking of Silgan successes, I'll now make a few comments about the performance of the business and then I'll turn it over to Bob to go into further detail regarding our second quarter financials and full year forecast. After that, we'll be happy to take any questions. As you saw in this morning's press release, we delivered another strong quarter with record earnings per share of 85 cents. Adjusted earnings per share were equal to the record prior year, which benefited from the impact of the early-stage pandemic pantry loading. As expected, each of our businesses continued to perform well in the face of a variety of challenges. Specifically, our dispensing and specialty closure segment saw improved performance related to the inclusion of the Albea business and the synergy capture we have achieved to date. In addition, segment volumes increased 10%, with organic volume up 7%. We continue to see volume recovery in the beauty and fragrance markets and strength in our beverage markets in the quarter. Segment operating performance continued at a high level and helped mitigate the impact of the unprecedented increases in raw materials experienced in the second quarter. Demand in our metal container segment remained at elevated levels after increasing 15% in the second quarter of 2020. While segment volume declined in the second quarter of 2021 by 2%, had it not been for supply chain and labor challenges, we would have surpassed the prior year record volumes. Operating performance and plant productivity were negatively impacted by steel supply chain and labor challenges across our operating network. In our custom container segment, We continue to improve profitability through outstanding operating performance and a more favorable product mix. As expected, the 14% increase in volume experienced in the second quarter of 2020, which was primarily due to increased pandemic-driven demand for cleaning and sanitizing products, normalized, resulting in second quarter 2021 volumes declining by 11%. In addition, the segment was negatively impacted by the lagged pass-through of the significant increases in raw materials experienced during the quarter. As a result of our performance for the first half of 2021 and our outlook for the remainder of the year, we are confirming our full-year earnings guidance in a range of $3.30 to $3.45 per share. This compares to the record performance in 2020 of $3.06 per share. With that, I'll turn it over to Bob.

Thanks, Adam. Good morning, everyone. We're pleased with the overall performance, noting each of our businesses face some unique challenges as we continue to navigate through the phases of the pandemic, in some cases leading to cumbersome year-over-year comparisons. These include changes in inventory levels, significant inflation in raw materials, disruption and other inefficiencies in the supply chain for raw materials, and challenges related to running our plants full out for 18 months. In the face of these challenges, we delivered adjusted earnings per diluted share of 85 cents for the second quarter of 2021 at the high end of our estimates and in line with the record prior year, which benefited significantly from pandemic-related volume surges. On a consolidated basis, net sales for the second quarter of 2021 increased 172.2 million, or 14.6% versus the prior year, to 1,350,000,000, as each of our segments delivered top-line improvement. These increases were largely the result of the pass-through of higher raw material costs, the inclusion of $66 million for the Albea dispensing acquisition for the non-comparative two months in the quarter, favorable foreign currency translation of approximately $27 million, and a favorable mix of products sold in the metal container and custom container segments, partially offset by lower volumes in these two segments. We converted these sales to adjusted income before interest and taxes for the quarter of $153.4 million after adjustments of $400,000 for rationalization charges versus $152.8 million after adjustments of $2 million for rationalization charges, $16.1 million for costs attributable to announced acquisitions, and $3.5 million for the purchase accounting write-up of inventory in the prior year quarter. The improvement was primarily the result of increases in our dispensing and specialty closures and custom container segments, offset by a decline in the metal container business. Highlights of the adjusted segment income for each of our segments is as follows. Adjusted segment income in the dispensing and specialty closure segment increased $11.1 million to a record of $73.9 million in the second quarter of 2021, after adjustments of $100,000 for rationalization charges in 2021 and adjustments of 4.2 million in 2020 for rationalization charges and the purchase accounting charge to write up inventory. The increase was primarily due to higher unit volumes, including from Albea dispensing acquisition, which contributed approximately $8.2 million to the top line, profit line for the two months of additional ownership in the quarter and strong operating performance. These benefits were partially offset by a significant unfavorable impact from the delayed pass-through of higher resin costs and foreign currency transaction losses in the quarter. Adjusted segment income in the metal container business was $58.8 million, down $14.2 million versus a record prior year after adjustments of $200,000 in 2021 and $1.2 million in 2020, each for rationalization charges. This decrease was primarily attributable to lower unit volumes of approximately 2%, as inefficiencies in the supply chain and production difficulties hampered our ability to meet customer demand in the quarter and in addition resulted in excess costs across the system. Adjusted segment income in the custom container segment increased $4.2 million to $27.3 million for the quarter after adjusting for rationalization charges of $100,000 in each year. This increase was largely attributable to more favorable product, mix of products sold, Strong operating performance and the inclusion in the prior year of a $2.8 million charge for a non-commercial legal settlement, partially offset by lower volumes of approximately 11%, and the unfavorable impact from the delayed pass-through of resin increases in the current period. Turning now to our outlook for 2021, as expected, we're off to a good start. We continue to anticipate strong full-year demand from our customers. As a result, we are confirming a full-year estimate in the range of $3.30 to $3.45, which at the midpoint represents a 10.3% increase over the prior year record 2020 performance. We're also providing third quarter 2021 estimate of adjusted earnings in the range of $0.95 to $1.10 per diluted share as compared to record adjusted net income per diluted share of $1.04 in the third quarter of 2020. Based on our current outlook for 2021, we're also increasing our free cash flow guidance to approximately 400 million, further improving our free cash flow yield to nearly 9.1% of the current share price. This compares to our previous estimate of approximately 380 million and prior year delivery of 383.5 million. That concludes our prepared comments. As a reminder, we'd like to ask you to limit your time to one question and one follow-up and then get back into the queue. I'll turn it over to Kian to provide for the Q&A session.

Kian?

Just knock on. I think this happened here. Hello?

I don't see any activity there. It never does. Kim, are you, I would have thought you'd hear from them.

He didn't have anything. I'm asking if he's on.

So they can't, we're muted right now, right? They can't ask questions without Kian, is that right?

Correct. Why don't we say something?

Yeah.

Hey, Kian, are you still with us? I'm just in there to help you. We'll now take the first question from Adam Josephson. Please go ahead.

Thank you. Thanks. Thanks. Good morning, everyone. Tony and Adam, congratulations. And, Tony, all the best to you in your future endeavors.

Thank you, Adam. Appreciate that.

Tony, I hope you're not going to miss dealing with us too much.

I really am. Is that your one question, Adam? I may hang out for a call or two just so I don't, you know. Okay.

Well, speaking of these wonderful questions that you've had the pleasure of dealing with, so the full year guidance implies a pretty big fourth quarter relative to the third quarter, relative to previous fourth quarters, including last year. So can you just talk about what is leading you to expect such growth year over year in the fourth quarter and and why the fourth quarter is much bigger relative to the third quarter than has been the case in years past.

Sure. Great question, Adam. As we look at the fourth quarter in 2021, we're expecting really continued good performance out of each of our operating segments. So we'll continue to see nice volume, growth and performance out of our dispensing and specialty closure segment. We'll see a bit of a recovery later in the year for our custom container segment. as well as we transition through some inventory challenges here in the summer months. And then really I think the biggest driver is going to be our metal container segment. So as you'll recall last year in Q4, we did say that we were going to take some downtime. We had some maintenance that we had pushed out throughout the year making sure that we could supply our customers with their needs through the beginning months of the pandemic and on through the course of Q2 and Q3 as well. So As we look at metal containers, we've also added some capacity. So we will be making more cans than we did in the prior year. We'll also be selling more cans than we did in the prior year is our expectation for Q4. So really, that is the simple answer in a nutshell.

Adam, I would add one thing to that, too, is that particularly in the food can business, remember that through the pandemic, the large institutional cans were kind of falling off last year as well. And we think that that's where some of that volume will come back this year. So adding to the story around containers.

Terrific. Thanks, Adam. And just one follow-up on somewhat similar lines. So can you just talk about what assumptions are embedded at the high and low end of the full-year range, as well as what are your assumptions for resin costs and availability, steel supply and labor supply, all the issues that you called out as affecting the second quarter as well as the third quarter for that matter.

Sure. I think we'll try to focus on the full year and give some guidance there. So as we think about resin in particular, we'll start there as it affects two of our operating segments. Resin continues to be challenging from an inflation standpoint. As we sat here three months ago on our last quarterly call, Thank you for joining us. As we hold our current run rate for resin firm through the balance of the year for forecasting purposes, we've actually allowed for a slight recovery in Q4. But we're going to continue to pass through the lagged increases that we've seen in resin in both custom containers and dispensing and specialty closures. As far as the raw material and labor challenges, we see first of all the labor challenges aren't unique to Silgan. Thank you very much. as the world and certainly the United States reopens a bit. Our employees are looking to participate in that reopening. So we've had some challenges on labor. It's not just us. Our customers and our suppliers are dealing with roughly the same challenges. So that's not something that will be solved immediately, but obviously we're working to manage through that situation and taking strong actions across each of our businesses. And then on the steel side, unfortunately, you know, the performance from our supply base on our raw materials related specifically to steel has been a challenge. In the quarter, in the second quarter, we were dealing with delivery performances between 30 and 50%. So you think about our efficient production model, it does depend to some degree on an efficient supply of product coming in. So we're continuing to work with our suppliers. Obviously, we're entering our peak quarter in Q3. And so we're not going to simply be able to snap our fingers and correct all the steel supply issues that we've had. But we are working to reward those that have performed well and move volume away from those that haven't. That will take us some time. But at this point, we anticipate that we can get all the raw materials required for our customers' forecasts and to meet our needs for the remainder of the year.

Terrific. Thanks, Adam.

We'll now take the next question from Salvatore Tiano. Please go ahead.

Yeah. Thanks, Tony, Adam, and both for taking my questions. And again, congratulations, Adam. Congratulations, Tony. So my first question is on the still supply quality that you mentioned, that unacceptable quality. If you can provide a little bit more color than you mentioned now about What happened and also the potential earnings and volume impact in Q2 and what do you assume for the rest of the year as well, whether that's continued challenges or potentially a recovering volumes, a slippage just later in the year?

Sure, Sal. Good morning. I do think that while it impacted us in Q2 from a volume standpoint, that volume will then shift to Q3 and Q4. Most of that will be realized in Q3. So we will be able to recover it. It's just incredibly difficult when the incoming supply to an efficient system is running between, call it 30 and 50 percent on a monthly basis. So it's a challenge. I would say in Q2 the impact of the productivity challenges both between labor and raw materials was something close to $5 million. So we're going to, again, continue to work very diligently with our customers to understand what their exact forecasts are and relate that back through the supply chain to make sure we can continue to meet all of those needs.

Okay, great. And the other thing I want to clarify was in your custom containers against the formerly plastic business. If you can provide a little bit more color about the volume outing for the remainder of the year, if you still think after that 11% decline, you can still be posted for the full year. And also, just clarify a little bit the components of earnings growth, because it's really impressive to have double-digit volume decline and yet still manage to grow earnings year on year.

Sure. Well, the business continues to perform really, really well. I think when you look at our custom container segment, a couple things come to mind. First of all, you have to remember that last year the segment saw 14% volume growth within the quarter. So as we cycle over our 11% decline in the second quarter of 21, we still feel really good about the business because we're sustaining it at a higher level than we had pre-pandemic. So as you listen to our discussions over the last several years on custom containers, what we have done is we've been winning in the marketplace. And what we've said about those new business wins is the profitability is going to be at kind of our new reset level. So our favorable mix is really driven in part by growth in core markets and growth in new business wins that are coming in at the profit expectations that we have going forward for the business. So... As far as the earnings growth, again, it's really strong operating performance, leveraging that new product mix that we're talking about. And then as I think about the volume decline, I mentioned previously that we're cycling through the summer months of an inventory correction in the marketplace, and that inventory correction really is related to products specific to cleaning and sanitizing. So if you turn the clock back 12 months, Thank you so much for joining us. That's just not occurring again at this point in 2021. It was more about what happened in 2020.

Okay, great. Thank you very much.

We'll now take the next question from George Saffer. Please go ahead.

Hi, everyone. Good morning. Thanks for the details. Tony and Adam, congratulations on everything in the next chapters. Tony, it's a long ways from applied extrusion. Thankfully. I wanted to, for both of us, I wanted to hit on food first and metal containers. Are you seeing any signs that the supply chain issues are actually creating any demand destruction. In other words, customers who would have been contemplating using the metal container because of all the good things that have arisen about the product or reemerged perhaps because of COVID are turned off by the supply chain, the concerns about tin supply out of Asia, et cetera. And related, if you're going to penalize the suppliers who have not been as efficient, Does that wind up being counterproductive at a time when you need metal to make cans? So kind of those two questions in one, if you will, to start.

Sure. Thanks, George. As far as demand destruction in the metal container segment, I don't think so. You know, I mean, we've spent a lot of time talking to our customers about their specific requirements for the year of 2021 and how that flow supports not only the supply chain but end user demand as well. and we're also looking at some consumer data and seeing really nice trends in continued consumption of food can products. And so we feel good about that. I think our customers don't feel like they're missing out on volume. We're just simply not able to run our production as efficiently as we would like. So I want to make it clear that we feel like we continue to support our customers and meet all of their requirements even with the challenge that that we're facing with our supply chain.

Okay, understood. And then I guess the other question that I had, back to custom containers, you went through a number of issues and it sounds like comparisons are the biggest factor here. But is there anything that you're gleaning from the consumer data that would make you more concerned about the demand outlook? There's an article in the journal today about some of the COVID-induced behavior now beginning to wane somewhat, including sanitizing and cleaning, and that obviously helps your custom containers business. Anything to worry about there? Has resin created demand destruction again, given how quickly it has accelerated? Thanks very much. I'll turn it over.

Great. Thanks, George. Again, I think you're right on the right marketplaces, and I think we at Silgan have a pretty unique view into the hand sanitizer market, the hard surface cleaner market, et cetera, because not only do, in many cases, we supply the bottle, we supply the dispensing element of that package as well. So what I tell you is we are actually on our hand sanitizer products and our pumps and sprayers and dispensing systems, More aligned with the branded products. And our bottle business in custom containers is more aligned with a private label component of the marketplace. And what we're clearly seeing is branded products are winning. So when you talk about, you know, what are you gleaning from the insights from the market data, it does seem as though the consumer is moving back into branded products. And that's true in custom containers. We see that also in our metal container segment as well. So I don't think it's demand destruction. I think it's a rebalancing of the inventory and then back to those trusted brands that people know and have used for many years.

Okay, very good. I'll turn it over. Thanks, guys. Thanks, sir.

We'll now take the next question from Mark Wild. Please go ahead.

Thanks. Good morning, everyone. I want to add my congratulations to both Tony and to Adam. and also to say, Tony, it's very nice to have this happen in a quarter when it looks like container EBITDA margins were above 20% because you did take a lot of heat if we go back several years. For my first question, I just want to go back a little bit to these cost issues. And I'm curious, Adam, about the impact of delayed pass-run resin in both containers and pumps and dispensers. but I also wonder if you could talk a little bit about the labor issues over in metal containers because a quarter ago you were talking about having hired like 100 new employees in the can business.

Good morning, Mark. You're right. We did hire 100 new employees in the first quarter for our container business to support the increased volume requirements that we saw coming throughout the year in metal containers. So to be clear, that The labor element that we're discussing, that is throughout our supply chain. So that includes our customers who, one of the reasons that we mentioned that we could have sold more in the quarter if we had not had these labor challenges as well, a customer missed a forecast because they couldn't get employees to staff a filling line that they had installed. So it's throughout the system. We think that we're managing it pretty effectively. It's not easy. and you think about our metal container segment in particular, you know, we're working through the planned retirements for several, you know, for a number of employees and it's just a normal turn that we have in our business. It's just that we've been running for 18 months consecutively as well and again, those overtime shifts that everyone rose to the occasion last year and took those overtime shifts, as things reopen, it becomes a challenging conversation. and then as we think about the lag pass-through of resin, I think what we said on the last call was that was going to be a negative impact in the quarter, something around $10 million and as it turns out, it was a little bit worse than that. The majority of that we experienced in our dispensing and specialty closure segment but to be clear, again, we feel really good about the business models that we employ, that we do have the ability contractually to pass those lagged cost increases on to the market and to our customers. So it's just a matter of time before we actually get those costs fully passed through to the marketplace.

Okay. And just as a follow-on, Adam, just briefly, I wondered if you could give us a sense as you go forward, whether you're at a point where you would be willing to grow in any of the three business lines or whether you want to focus on either dispensing or containers or both of them sort of over the metal can business?

Well, I think we're going to maintain our very disciplined approach to capital allocation. And I think I've heard Bob say it on this call many, many times that if it's related to packaging and if it's an available property, we're going to wind up taking a look. So we love all three of the segments in which we operate and the capital allocation will be directly related to the return available for that capital and so I feel really good as we go forward that we've got three segments that continue to perform very well in the space that they compete.

And there have been stories Adam about PE investors kind of backing away from plastic so I'm just curious about whether that creates a little Better Value Opportunity for you in looking at things that are plastics-related right now? Or are you not finding that to be the case?

Well, I think it's more about the substrate itself. So I think we firmly believe at Filgan that there is a place for plastic in the packaging world. I think I would agree with you. I think where it gets a little challenging for folks looking to make an investment is really where it's around a non-functional, single-use plastic package. from a sustainability standpoint, that gets to be quite a challenge. And I think if people are putting dollars to work, that's where maybe the reset on the thought process goes through. Our business really doesn't participate in non-functional, single-serve plastic packaging. And does it raise opportunities in the marketplace? Maybe. But again, I think we're also focused on the functional element of packaging and finding the right spots where plastic also is a viable and sustainable substrate for the packages we provide.

Okay, I'll turn it over. Thank you.

We'll now take the next question from Gabe Hajjadi. Please go ahead.

Hi, good morning. Tony, congrats and congrats.

Thanks, Gabe.

Thanks, Gabe. I'm trying to think through this lower inventory situation that you mentioned. and I guess since you held EPS kind of guidance and you mentioned that I'm assuming most of it is kind of working capital related but I'm assuming most of it is isolated to the metal containers business so A, can you confirm that and I think this would be maybe due to material availability and or the labor related issues that you called out and then B, and this is probably more important for us at least, if you're ending the year from a low starting point Would that imply anything in terms of carrying over inventory into 2022 and perhaps require you to produce at a higher level next year? Of course, somewhat demand-related or dependent. And would that be a positive for earnings and a negative for working capital when we look on to 2022?

Yeah, I think you got that pretty well right. Given some of the challenges that we've had and Adam has talked at length about, We're going to liquidate more inventory than we expected to from a budgetary standpoint. And so that is really the primary premise behind the raise in free cash flow. That as well as, you know, we'll probably end up with a little bit higher payable at the end of the year as well. But those two things will drive the free cash flow benefit. You're right, it will be largely in the container business. And the idea is obviously – to get back to a more normalized inventory level, assuming that the production and demand levels sort of coincide to allow us to do that. And we will certainly do that in 2022.

Okay. And I guess kind of sticking with metal containers, I think we've all read about water availability and drought conditions over on the West Coast. I know Through Vegetable has become an increasingly smaller portion of the mix for you in that business. So again, somewhat just thinking about the balance of the year and then into 2022, I think some of your customers are trying to replenish inventories this year. It sounds like to the extent crop yields are not where they want them to be, they won't be able to accomplish that. So perhaps, again, next year could look pretty good for you from a volume standpoint. And then with pet ownership and stuff like that. Can you remind us how big pet food cans are as a component and then sort of what the growth trajectory looks like for that over a medium-term time horizon?

Sure. Maybe just starting with the pack, again, you're right. Our customers last year, the pandemic, the early phase of the pandemic, hit at a point where our pack customers couldn't really respond with incremental pack volume. to support the needs of the marketplace. So all of our customers on the PAC side of the business have been planning since early February for increased contractual acreage and more volume this year. So you're right. We're expecting a large PAC. That is a part of our second half guidance. How that relates to 22, we don't know yet because We have to see where yields and finishing inventory comes through, but we are expecting a significant increase in the pack in 2021. As we look at pet food, pet food continues to perform well, continues to grow for us. You know, I think at our analyst day, we've given something like 40% of our unit volume was related to the pet food market. I'd say that's continued to grow a bit, and we see good growth going forward in pet food. I mentioned some additional capacity that we added for the 2021 year that we'll realize in the fourth quarter. A portion of that is for growth to support the pet food market as well.

All right. Thank you, Adam. Good luck, guys.

We'll now take the next question from Arun Viswanathan. Please go ahead.

Thanks for taking my question. Congrats on the results. I guess first off, just wanted to get your thoughts. Have you seen any impacts from competing substrates or any customer switching of preferences in the plastic container business? I guess I'm just curious. We've been hearing about some trials on the household product side and personal care market. for other types of plastic-based pouches. Is that something that you could potentially look at longer term as well?

Thanks, Arun. As far as particularly in our custom container segment, most of our products are around multi-use packaging. And when you think about our dispensing and specialty closures, then we add a function to that package as well. So as far as... Other substrates coming into that space, I've read most of the same articles probably that you have. We haven't really seen it impact our business at all on the custom container side. What I would tell you is on the dispensing and specialty closure side and our metal containers business, we are seeing opportunities for other products and other substrates coming back to those platforms. And it really is around sustainability. It really is around sustainability. where there's a non-functional product trying to find a more sustainable answer to provide the same performance. So we view it more as an opportunity than a risk across the platform.

Okay, great. And also just another question, I guess another topic. Maybe you could just remind us on the template inflation. Have you seen any, again, not necessarily demand destruction, but steel prices have continued to rise and got very high levels there. So how do your customers kind of react to that? Has there been any alternatives that they've been pursuing as far as packaging substrates? Or what's kind of the view that your customers have on metal prices?

Sure. Well, I think, unfortunately, inflation applies just about across all categories at this point. So, you know, we're feeling that in all of the substrates, not just our steel component. I think, as I would describe, our customers' focus right now is continuing to meet the needs of the marketplace. So, they are focused on filling product in existing platforms and getting product into the marketplace. So, We are anticipating additional inflation next year. Our customers are are not happy about that, neither are we, and we are continuing to fight on behalf of our customers, and we're still early in that process, so we'll see where things play out. I think the cyclicality of the steel market, they're at the absolute peak right now, and we'll see where the rest of the year takes us.

Okay, I'll turn it over, thanks.

We'll now take the next question from and Ganesh Panjali. Please go ahead.

Thanks. Hey, guys. Good morning. Adam, picking up on some of your previous comments, you know, it looks like you're embedding expectations for a pretty good harvest, you know, just based on your comments in the press release as well. Is there a risk that the labor shortages that you and the supply chain are dealing with at current, you know, start to impact the harvesting yields as well? And how are your customers sort of, I mean, what are they sharing with you as it relates to the labor issue there?

Great question, and I think we spend a lot of time talking to our customers about that very issue, and they're experiencing labor challenges. They're able to get the labor that they need to harvest their crops, so that's a great sign for us as we enter the pack season here. So we feel that they have confidence that they're going to be able to meet their pack requirements. We'll see how weather and other items impact the pack and the timing of the packs, but we think labor from a customer perspective is not the biggest challenge that we're going to face in the quarter. So we think our production profile for the balance of the year is predicated upon the performance that we have today. So we're going to continue to fight through the raw material and labor challenges and not expect a significant improvement versus where we are today.

And then in dispensing, you know, lots going on with some categories, obviously, mean reverting higher and then others normalizing. As we kind of net out these dynamics, how should we think about volumes in the back half of the year and also the timeline for margin recovery relative to raw material costs that keep, you know, pushing higher?

Sure. You know, again, the dispensing and specialty closure segment, it just really does continue to perform really well. The key markets like fragrance and beauty continue We've seen continued improvement throughout the year. So it's now recovering at a rate that was faster than we anticipated coming into the year. So we feel really good about that. Our beverage and food business continues to perform as well. So we think volumes are going to be strong again in Q3. So we're anticipating volumes kind of in the low to mid-single-digit improvement in Q3 versus prior year. We'll see how that plays out and how that impacts the rest of the year. And then on the lagged pass-through of resin, you know, again, unfortunately the indices, the accuracy of what those projections are continues to be challenged. So based upon what we know today, resin is peaking hopefully this month as we sit here today and will begin to decline. If that does indeed happen, we'll begin to experience Some of that lag passed through in Q4, which is what we've modeled. So it's not all the way back to the CDI projection, but you can figure something close to halfway there.

Thanks so much, and congrats to you and Tony as well. Thanks.

Thank you.

We can now take the next question from Anthony Pesaneri from Citi.

Good morning and congratulations to Tony and Adam. Hey, you know, just following up on Don's question and your comments on fragrance and beauty and the strength that you've seen and that you continue to expect in the second half. You know, we're obviously emerging from the pandemic and some of the reopening categories are doing better than expected. But, you know, some Asian markets and emerging markets are sort of back and walk down. And obviously there's the Delta variant. Is that at all a risk to the second half outlook for fragrance and beauty specifically? I think some of your closures go into products that end up getting sold in Asia or outside of North America and Europe. Any commentary there?

Sure. I mean, I think it's a risk for all businesses, to be perfectly honest with you. So it's hard to put a forecast together on what the impact will be. What I would tell you is really the new product launch is and I'm specifically focusing on fragrance and beauty, really are in the kind of Q3 timeframe. And that's when products getting staged and then placed out into the market. So I think the risk to our business is a little bit less because our customers are filling right now for their launches that will hit late in Q3 and through the holiday season. So we feel pretty good about the fragrance and beauty profile and the forecast that we have for the rest of the year.

I think the only other thing I'd add, Anthony, is you kind of look at the portfolio balance of everything we have. Unfortunately, if Delta gets worse, you've got a lot of parts of our business that did so well during a pandemic that will start to pick up on that. So I think I would just tell you what so far we're saying is that we've got a very balanced engine here, and it does well in pandemic, which hopefully we'll never have to prove again, and it seems to be doing very well in post-pandemic. So I think either way, we've got a pretty good diversity of solution to it.

Got it, got it. That's very helpful. And then in metal containers, your three largest competitors have moved in. Thank you for joining us. Dispensing is now your largest segment, your closest competitor in dispensing and closures trades at a pretty steep premium to you. Just how you think about, you know, would Sylvan consider that maybe in the longer term?

Anthony, I think I'll hit the competition point and pass over to Tony for the balance of the conversation. So we really haven't seen a lot of competitive activity. Again, you think about the metal industry. Container segment and the space in which we operate, it's been very challenging. We've all been running, I think, all out for about 18 months. So the competitive activity has not increased in any way. We're all just focused on getting our customers their requirements and the products they need to fill. So we feel pretty good that, again, we've built great lasting relationships, and I think we've only solidified them throughout Our performance in the pandemic and we feel really good about where we're going.

Great. And then I think on the, you asked a really good question. I think the, you know, you're right. I'll try to stay generic on this, but we are at a stage where the equity market and analysts seem to really want sole solution businesses. And so, which is great when it's growing and booming. It's not so good if you end up with a little bit of growth pullback and overcapacity, for an example. So, I think what we are giving you and shareholders a little more credit, that the idea that you can be two or three things within a packaging area is so closely focused. Everything we do, we aren't in wildly different things. But what we have is a great combination of a wonderful, sustainable, high-cash generative business and our canned business. that basically turbocharges our capability to grow in other areas that provide their own growth organically as well. And so all I can do is answer for us and say we think what we've got is a wonderful opportunity here for shareholders to basically have both of these. And I think just look over the last year, two year, decade, and look how these businesses have helped each other along the way. and I just don't think we'd be anywhere near as good today if we didn't have that so that's what's on our mind is the strategic value of the two but you're right we do need you and we do need the street to appreciate that there are different multiples for different kinds of businesses and I suppose if that never happens then you'll have to come back and continue evaluating but I just we don't give up that quickly that that can't work.

Okay that's super helpful I'll turn it over.

We can now take the next question from Alton Stump from Longbow Research.

Great. Thank you, Warren. And I will sort of pass along my congrats to you, Tony, and also, of course, as well. I just wanted to ask, I think most other questions have been asked already, but just on the share buyback front, Bob, of course, you guys bought back a decent amount of shares in 2020, I think the most you had in a couple of years prior to that, but haven't bought back any. Thank you for joining us.

between two and a half and three and a half times leverage. I think with the uptick in free cash flow, we think we'll be back closer to three times at the end of the year. We think that that's a pretty good place to be, particularly given that we think that the M&A market is fairly attractive right now, particularly in the measurement of how much activity there is out there to evaluate. Now, obviously, it is a bit of a seller's market, so we'll have to keep to our discipline and do our due diligence. But our view right now is it's in our interest to keep powder dry and evaluate those opportunities to be able to continue to build out some of the franchises that we have and where we see opportunities to take it further. The flip side of that is that if we don't find those opportunities, then we have the ability to be a little bit patient, but that three times is still in the Middle part of our range there, so we can be patient and see what next year brings as well. But you're right, where we've really bought back shares is at periods where we start to get to the low end of that, and M&A activity looks like it's more on a more delayed pace, and then that's when we've done larger share repurchases. So the short answer is our strategy hasn't changed. We would much rather deploy capital to throw out the footprint in the portfolio and continue to create value for shareholders.

Thanks for all that color. Very helpful, Bob. And then, you know, I guess just my follow-up, you know, you mentioned that if it were not for supply constraints that your food camp business would have been up year over year, which, you know, up against a plus 50, you know, percent comparison is certainly, you know, very impressive. And, you know, is it a sign that, you know, even now as we are starting to see consumers go back, you know, to eating out, that there's still an awful lot that, you know, are staying home and, you know, certainly nowhere, you know, can be where they were, you know, as effects pre-COVID. What's your thought on the consumer and what their appetite will be to eat and drink at home versus going out?

I think it's a great question, Alton. As we were talking a little bit earlier, we have taken a look at consumer data and really tried to dive into a couple of markets. One, I think pet ownership increased dramatically during the pandemic. Our pet food business continues to grow We look at scanner data, small dog and small cat, particularly in what categories continues to grow at a high single-digit to a low double-digit rate. And so the consumer engagement and the repeat purchasing patterns are there, and we feel really good about that. Our customers do as well. They're investing in capacity, and so are we. You move to some other segments, and I think a really interesting one is the soup segment. Again, go back 12 months ago. We were going in the United States anyway. We were going into a lockdown period, and people didn't know exactly how long they were going to be at home. So we did have a pretty sizable surge in scanner data for consumption retail of soup packaging, whether it's condensed or whether it's ready-to-eat products. So as we look at the data, we still see consumer retail activity increasing. that's in the high single to low double-digit activity versus pre-pandemic levels. So as we had talked on previous calls about engaging with new consumers and we were seeing repeat buying activity last year, it really has continued. And we and our customer base feel pretty good about the engagement with consumers right now. And we think it's a very good situation as we head into the second half of the year.

Great. Thank you so much. I will hop back in the queue.

We can now take the next question from Kyle White from Deutsche Bank.

Thanks for taking the questions. I also wanted to echo the sentiments expressed in terms of threats to both you, Adam, and Tony. It's now been a year with the LBA in your portfolio. Just curious where you're at in terms of the synergy target. I believe it was 20 million. And do you see further opportunities for synergies here or any potential revenue synergies on that business?

Sure. Thanks, Kyle. I think you're seeing the impact of the revenue synergies already flowing through. I think the combination of our business with Albea has been terrific, and we are achieving commercial synergies between the two businesses and have been for now some period of time as we've owned the business. As far as the synergies, what we had said, I think it was $20 million in Thank you so much for joining us. But what it was. And so our team and the Albea team have come together quickly and have come together really well in a wildly challenging integration environment through a global pandemic. And, you know, just hats off to the entire team and the performance that they've had.

Got it. And then I had a follow-on to the supply chain issue. Apologies to go back to it, but maybe I just missed this. I think you said it provided or had $5 million of added costs in the quarter for metal containers. Does your 3Q guidance assume some additional added costs from this as well, or is it resolved?

It does. Basically, we're holding kind of the production inefficiencies that we experienced in Q2 static for Q3.

Just one other point. Sorry. Just let me make one other point in Q2, which is what Adam was giving you is sort of the cost impact of the issues we're facing this year. What he didn't mention is that we had an incredibly great year, Q2 last year on production. You might recall our customers reduced SKUs dramatically. We had the benefit of selling off inventory. The gap between Q2 last year and Q2 this year operationally is greater than the 5 million, but a bigger chunk of that still is how great Q2 was last year. If you look kind of progressively, it was a major step up year. So I just want to clarify that one point.

Yeah, that makes sense. Just a quick follow-up. Would the cost be incrementally higher in 3Q just given seasonality, or is it going to be a similar amount?

It'll be a similar amount.

Got it. Thank you. I'll turn it over.

We can now take the next question from Daniel Rietel from Jefferies.

Hi. Thanks for squeezing me in. I was just wondering, given the expectation that resin prices could potentially drop Thank you for joining us today.

So unfortunately, I don't think it's a near-term opportunity.

Okay. And then you mentioned the beauty and personal care rebound that's exceeding expectations. I was wondering if we're near or expected to reach pre-pandemic levels possibly by the end of the year.

So specific to fragrance and beauty, we're not quite there yet. And what I would remind you is I think as we came into the year, our expectation was something close to a 50% recovery in those markets. of the pandemic-related volume decline. We're probably running something close to 70% right now. And again, it's ahead of our expectations, just to be clear, but we're not all the way back. So there still is room to go to get all the way back to pre-pandemic levels.

Okay. Thank you very much. We can now take the next question from Adam Josephson from KeyBank.

Thanks for taking my follow-ups. I appreciate it. Adam, just one more on the inventory situation. I think last call you talked about this year being a year in which your metal container customers would be able to replenish their inventories and get them back to normal. Just given that you yourself are going to end the year with lower inventories than you thought three months ago, I know some of this is predicated on the harvest in the U.S., but do you expect your customers to be able to fully replenish their inventories by year-end as You saw it perhaps three months ago.

Yeah, it's a great question. I think our own expectations would say that the retail data probably is a little bit stronger than where we came into the year from a volume perspective. So the repurchase activity for food cans is better than we anticipated. So it's a great question. I think we'll have a much better answer for you as we get through the peak part of our season. but it is something that our customers continue to work on the supply chain all the way through to their retail channels and again, we'll take that for the next call and have a better answer for you with more detail.

I appreciate it. In Europe, I think Europe is about 10% of your metal containers business and then tomatoes are about 5% of your U.S. business. Can you just provide updates on those two areas and Obviously, given that the water shortage is in California, et cetera.

Sure. Maybe starting in California first. Right. The water shortages have been a concern for pack-related harvests on the West Coast. What I would tell you, tomatoes specifically, most of our tomatoes that we supply cans to, are irrigated crops. So they've been able to maintain the water supply to those products. And again, as we usually talk about with tomatoes as well, they protect the can volume for tomatoes, for canned tomatoes. And usually there's not a whole lot of surge beyond that, but there's also not a lot of drop below that either because they are definitely protecting the canned volume. So we expect a good can pack on the West Coast for tomatoes this year, but it's going to be within a band of probably plus or minus in that kind of mid to upper single digit kind of range. And then Italy, all reports that we hear, Italy is going to have a bumper all-time tomato crop. We don't participate to a large degree in Italy for food cans, but we do have ancillary products that utilize tomatoes, and we understand that conditions are very good and volume expectations are good. are quite strong for the Italian tomato crop.

Thanks. Just two others. Back to the high-end, low-end of your full-year range, can you just talk about what would get you to the high-end, what would get you to the low-end? One or two most important factors.

Yeah, Adam, it's Bob. I guess probably the biggest one, or maybe the two biggest ones, are going to be on both sides of this. What happens with resin as an example? So if it stays elevated or continues to elevate, then that's obviously going to be a risk to our forecast. If we see a precipitous drop, then that's a benefit for us. And in some cases, I'll put that in the same one as the next topic, as potentially a weather-related issue. We start seeing a lot of hurricane activity that's going to put pressure on price. Likewise, if you just think about the pack and what we've got forecasted here, whether it could be friend or foe here to a little bit. So I think those are the two biggest risks. And then the last one is what happens with further lockdowns around the pandemic or not, right? So if all of those things break against us, we probably don't have it all covered. If it all goes favorably, then that'll be more favorably, right? So we think we've got it balanced with what we've pulled together here, but we're in some pretty interesting times right now. So we'll have to see how it plays out.

Yeah. Amen to that, Bob. And just one last one for Tony. Tony, I know you've been CEO of the company for quite some time, but can you just talk about why you think now is the right time for you to leave your post?

Sure. Great question. Really, it's two things. One, we've got such a great team and they're ready. I've always been a believer that when people are ready, you've got to move on that. Two, as you point out, 15 years as CEO, and we and the board have talked about this, every topic that comes up, you start to think of it the way you thought of it the last 15 times, and that's not good. I'm a believer that the team will be better in the new formation. So they'll still get a pearl or two of my thinking. But, you know, you have different people making decisions day in, day out. And I just believe it's a better answer for the company.

I appreciate it. All the best to you and to the company.

Thanks very much. Hey, Kian, I think we'll take one final question and then we'll wrap it up.

Of course. So we can now take the final question from Salvatore Tiano from Seaport Research Partners.

Yeah, hi, thanks, yeah, just for the last questions here. Just want to understand a little bit the, you know, going back to Adam's question on food can inventories and a little bit across the channel. Actually, I was under the impression that a lot of the restocking for the supply chain would happen next year because this year demand is still good. So just wanted to confirm what you see across the supply channel and food can inventories and whether next year, 2022, there will be a benefit from restocking regardless of where demand is.

Well, Sal, it's a good question. I think just for clarity, when we came into 2021, what we said is we feel really good about food can volume because it's either going to get consumed or it's going to replenish the supply chain. So that's why we had Such confidence that we could sustain the incredible growth that we experienced through the pandemic. So, you know, I think what you're hearing us say now is that demand pulled by the consumer has been a little better than we anticipated. So maybe the supply chain is not going to replenish as much as we thought it might have. So, again, unfortunately, we're halfway through the year and there's a long way to go to figure out what exactly happens with the full supply chain. But I would just tell you consumer demand and engagement is better than where we came into the year thinking it could be in the mid part of the year.

Great. Thank you very much.

This concludes today's question and answer session. At this time, I'd like to turn the call back over to Mr. Greenlee for any additional or closing remarks.

Thank you, Kian, and thank you all for your time today and for your continued interest in Silgan. We look forward to discussing our Q3 results at the end of October.