Silgan Holdings Inc Q1 FY2020 Earnings Call

Thank you for joining the Silgan Holdings First Quarter 2020 Earnings Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Kim Ulmer, Vice President, Finance and Treasurer. Please go ahead.

Thank you. Joining me from the company today, I have Tony Allott, 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 10-K for 2019 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements. With that, I'll turn it over to Tony.

Thank you, Kim. Thank you all for being with us today. We'd like to start by offering our sincere hope that you are all well and successfully weathering this unprecedented health and economic crisis. It's a bit strange for us today to be telling you how well our company is doing in the middle of these trying times. However, we're consoled by the knowledge that so many of our products are desperately needed in these times and proud of the work our employees have done to ensure our continued delivery on these demands. As indicated in our press release, despite having factories in many hotspots around the world, we continue to run all of our facilities and have seen record output in many. We are committed to continue to keep our employees safe to deliver for our customers and our communities and to continue to stay proactively ahead of this ever-changing crisis. We are proud to have been designated as an essential business in all of the geographies in which we operate, including by the Department of Homeland Security. We took several proactive steps in light of the pandemic during the quarter. Fortunately, as we later learned, the timing of when you responded was almost as important as the manner in which you responded. We were characteristically conservative in our COVID-19 actions. As the initial outbreak was impacting China in January and into February, we began sharing our employee distancing and facility sanitizing protocols across our businesses. Then, as contaminations began to be reported in Western markets, we severely restricted non-Silgan visitation to any of our locations and banned international travel weeks before Western governments began to do so. Later as the credit markets began to tighten, we proactively drew upon our revolving credit facility even though we have no near-term maturities. As a result, our businesses are running well. We have significant liquidity and believe we're in a good position to weather the current storm. Through the dedication of our employees, we are truly Silgan Strong. With that said, I'll make a few comments about the first quarter and our thoughts about the remainder of the year. Bob will then provide some further details. And then Bob, Adam, and I will be pleased to take any questions. As you've seen in this morning's press release, we reported earnings of $0.57 per diluted share, well ahead of our expectations and significantly better than the previous record first quarter 2019 of $0.46 per diluted share. Each of our businesses posted record first quarter volume gains and strong segment income. While the consumer pantry stocking in March did have a positive impact on each of our businesses, it is important to note our sales lift from these purchases lagged the retail outlet sales, impacting us only when our customers begin rebuilding depleted stock levels. Therefore, more of the impact of the initial consumer buying is expected to occur in the first part of our second quarter, which we are currently experiencing in April. Each of our businesses also operated very well despite the challenges of the COVID-19 situation, resulting in strong profit levels for each. We did incur some additional costs associated with COVID-19, including one-time incentive payments to our plant employees. While there are many uncertainties for the remainder of this year, we have some indication of demand levels at this stage for many of our core products and our ability to meet those needs at this point. As a result, we have provided guidance of $0.55 to $0.70 in the second quarter as compared to $0.55 in the second quarter of 2019. This increase of nearly 14% at midpoint reflects the current demand we're seeing in many of our products, due to the replenishment of products purchased during the pantry stocking in March in most Western markets. This demand is particularly strong for food, beverage, and consumer health products, such as soap and sanitizer bottles and dispensing systems. Certain other products generally not intended for stay-at-home use, such as gallon food cans for restaurants, sports drinks, and some beauty products will likely see volume declines. This unprecedented shift in demand is one of the reasons for the larger than normal range in our estimates. For the full year, we've raised our guidance from $2.28 to $2.38 to $2.35 to $2.50 per diluted share. This estimate reflects an improved first quarter of the year and considers that some of that volume may have been temporary pantry stocking that will reduce demand in later periods. However, we do believe that the increase in demand for some of our products such as food and consumer health products for in-home use should experience a sustained increase in volume as more people continue to eat and entertain in small groups in their homes. Additionally, many new or returning customers are using our product formats such as food cans. And we're working hard to help them understand the nutritional benefits and convenience of cooking with them, so they feel comfortable staying with these products once this crisis has passed. With that, I'll turn over to Bob.

Thank you, Tony. Good morning, everyone. I trust you're all staying safe and adjusting to the new normal as we all do our part to stem the spread of COVID-19. Overall, our results for the first quarter 2020 compared favorably to the prior year and our estimates. We delivered adjusted earnings per diluted share of $0.57, an increase of nearly 24% versus the prior year period and significantly outpaced our estimates of $0.45 to $0.50 as each of our businesses delivered strong results. On a consolidated basis, net sales for the first quarter of 2020 increased $3.3 million versus the prior year, totaling $1.030 billion, as each of our businesses delivered top line improvement. These increases were largely the result of higher volumes in each business and the inclusion of the newly acquired Cobra Plastics business, which contributed $4.7 million, partially offset by unfavorable foreign currency translation of approximately $8 million primarily related to declines in the euro. We converted these sales to income before interest and taxes for the quarter of $102.1 million versus $86.7 million in the prior year quarter primarily as a result of higher income in each of our businesses, including lower rationalization charges, partially offset by higher corporate expenses. The higher corporate expenses were primarily a result of an increase in incentive compensation, largely due to one-time plant incentive payments of approximately $4 million, costs associated with announced acquisitions of $2.3 million, inflation, and foreign currency transaction losses of approximately $1 million. Interest and other debt expense declined $3.7 million versus the prior year quarter. The decrease was primarily due to lower weighted average interest rates and lower weighted average outstanding borrowings as we used free cash flow to repay outstanding debt at the end of 2019. Our weighted average interest rates were lower as a result of the third quarter 2019 redemption of all of the outstanding 5.5% senior notes due 2022 and lower market rates during the quarter. We did proactively borrow approximately $500 million on our revolving credit facility late in the quarter to ensure adequate liquidity throughout the crisis. We also issued €500 million denominated 2.25% senior notes maturing June 2028 and a $200 million add-on to the 4.125% notes due 2028, the proceeds of which were used to prepay outstanding term loan A. As a consequence, we recognized the loss on early extinguishment of debt of $1.5 million in the first quarter. Our first quarter 2020 effective tax rate was 25.4% as compared to the 2019 rate of 21.6%. The 2019 rate benefited from the timing of certain tax deductions recognized in the quarter and certain changes in state tax rates. Capital expenditures for the first quarter of 2020 totaled $65.1 million as compared to $61.7 million in the prior year. And on a full year basis, we expect capital expenditures to be approximately $200 million in 2020, which compares to $231 million in the prior year. Additionally, we paid a quarterly dividend of $0.12 per share in March. The total cash cost of that dividend was $13.8 million. And details for each of the business follows. The metal container business recorded net sales of $508.5 million, up $1.5 million versus the prior year. This increase was primarily due to higher unit volumes of approximately 8%, partially offset by the pass-through of lower raw material costs, less favorable mix of products sold, and unfavorable foreign currency translation of approximately $2 million. The growth in unit volumes was primarily a result of the impact from customer pre-buy activity in the fourth quarter of 2018 in advance of significant 2019 steel inflation and the benefit in the first quarter of 2020 from the higher volumes in March as a result of a spike in consumer demand in response to the coronavirus crisis. Segment income in metal containers was a record $47.5 million, an increase of $8.6 million versus the prior year. This increase was primarily attributable to higher unit volumes, stronger operating performance, and higher pension income, partially offset by a less favorable mix of products sold, higher rationalization charges, and foreign currency transaction losses. Net sales in the closures business were $357.2 million, an increase of $1 million primarily due to increased unit volumes of approximately 5%, partially offset by the pass-through of lower raw material costs, a less favorable mix of products sold, and unfavorable foreign currency translation of $5 million. The unit volume increase was primarily due to strong demand for food and beverage products and certain consumer health and personal care products beginning in March due to the spike in demand in response to the coronavirus crisis. Lower volumes in the first quarter of 2019 as a result of the 2018 pre-buy in anticipation of the 2019 steel inflation contributed to these results. Segment income in the closures business increased $5 million to $45.2 million in the first quarter of 2020, primarily due to the higher unit volumes, lower rationalization costs, and higher pension income, partially offset by less favorable mix of products sold and the benefit in the prior year from the delayed pass-through of lower resin costs. Net sales in the plastic container business increased $800,000 to $164.7 million in 2020, principally due to higher volumes of approximately 6%, partially offset by the pass-through of lower raw material costs and a less favorable mix of products sold. Volumes improved primarily as a result of the demand for certain food and consumer health products starting in March due to the coronavirus crisis. Segment income increased $9.9 million to $22 million for the quarter, largely attributable to the higher volumes, lower manufacturing costs including for raw materials, and higher pension income. Turning now to our outlook for 2020. There is no question that we are in unprecedented times. We remain committed to doing everything we can to keep our employees safe, meet the unique needs of our customers, and to deliver safe quality products to our communities. Based on these commitments, the results of our first quarter, and our outlook for the remainder of the year including increased demand for certain food and consumer health products, partially offset by declines for certain other products, we're providing full year earnings estimates in the range of $2.30 to $2.50, an increase from our initial 2020 guidance of $2.28 to $2.38. We're also providing a second quarter 2020 estimate of adjusted earnings in the range of $0.55 to $0.70 per diluted share as compared to adjusted net income per diluted share of $0.55 in the second quarter of 2019. The quarter and full year estimates of adjusted net income per diluted share for 2020 exclude the impact from the announced pending acquisition of the dispensing business of Albea Group, rationalization charges, costs attributable to the announced acquisitions, and loss on early extinguishment of debt. Based on our current outlook for 2020, we are also maintaining our free cash flow guidance of approximately $275 million as compared to $272 million in 2019. Notwithstanding the anticipated improvement in earnings we are prepared for liquidity to remain tight globally driving increased volatility around working capital. Therefore, we are maintaining our free cash flow guidance at this time. That concludes our prepared comments. As we turn it over for Q&A, I'll remind everyone to please limit it to one question and one follow-up please. With that, I'll turn it over to Cassidy to provide Q&A directions.

Thank you. The first question comes from George Staphos of Bank of America.

Hi everyone. Good morning. Thanks for all the detail – and thanks for all you're doing for COVID-19 and for your employees, guys. My two questions, I want to go back and you touched on this in your prepared remarks that it was a record first quarter. We haven't seen a metal container quarter like this since I think 2010. And then, we saw a drop-off in earnings in subsequent periods. How do you convey – what movement are you having in terms of moving the football down the field and convincing your customers that this is a – the can is a better, a more viable product in a post-COVID or intra-COVID world? And then relatedly, can you talk about – your mix seemed to be negative across all the businesses in the quarter. Given what we're seeing in consumer demand for the can right now recognizing some of this might be just stocking up, what kind of mix changes should we expect across the portfolio over the rest of the year? Thanks guys.

Hey, George, good morning, it's Adam. I'll touch on your questions and Tony will jump in with any corrections to what I say too. So a couple of things, one, obviously demand for food cans was strong in the quarter. As you heard Bob and Tony both say, part of that was due to the pre-buy impact that we had from 2018, but a good portion was increased demand as we went through the quarter. So the coronavirus impact of that is meaningful. It will definitely impact our second quarter; in fact, it drives our second quarter. I'd tell you in the near term for our can business we're full. Our order books are full. And demand is pretty consistent through the second quarter. So we're looking at something like probably mid- to upper single-digits volume growth in the second quarter. I think your question was bigger than that though. So let me touch on that for a second. So how do you make that sustainable for the future? I really think that it's more around engaging with consumers at this point. We've got a lot of activities that we've launched through social media outlets and through the CMI, which is the Can Manufacturing Institute to try to reach those consumers, because there are a vast number of consumers that now have cans in their pantry for the first time. And it's what we think is part of our job to teach them how to use those cans and understand the nutritious value that those cans can provide for them and their families. So we're working on that. We've been working on that for some time now. I think the outcome of that is still going to play out over several quarters. But we're encouraged because our customers understand the value proposition, the nutrition proposition that the can provides to the consumer, and are behind that right now. The second part of your question over to mix for a second. I think Tony highlighted this really well. I mean there's a portion of our business that goes to support restaurants. And you think about the number 10 can, a gallon can as I think we described earlier of tomato sauce or tomatoes that are used in restaurants; that volume is not strong right now, as you can imagine. And we're a little unsure what's going to happen through the course of the year. The good news is we are able to hopefully convert some of the crops and harvest associated with those products to more shelf sizes that reach consumers in a different way for use at home with their families as we have a new set of circumstances that we're dealing with in the country. So I'll actually ask Tony now is there anything you'd like to add to that?

No. I think that's it. It's just really – and mix is often we're talking – almost on a selling price point. So as Adam said, a gallon can is much more per unit. So we're really just trying to reconcile as far as the unit movement versus the revenue.

Understood. Thanks. Adam and Tony, I will turn over on to that. Thank you.

Hey, thanks, George.

Our next question comes from Mark Wilde of Bank of Montreal.

Good morning, Tony, sorry, Adam, Bob.

Hey, Mark.

Hey, Mark.

I wondered Tony, if you can just help us or maybe Adam can help us with the cadence of the pickup you saw in all three businesses as you moved through the quarter and then how that has carried over so far in the first three weeks of April?

Sure. Mark, it's Adam again. I'll just go through each of our businesses. We'll start with the food can business. As we talked about, obviously, as we’ll go through January, February, and March, we were already expecting an increase in January and February due to the pre-buy activity from 2018. So we did have good year-over-year volume growth, but I would say that was as expected. As we moved past that into March, that is when we actually saw the spike in demand related to the coronavirus activity. So cadence was good all through the quarter. But for clarity, the coronavirus impact really was about March for our food can business. As we move to closures, you're going to get a little bit of a similar story; kind of, our flat cap closures business that we utilized for food and beverage products. Really that was good cadence throughout the quarter, a definite spike in March as our dairy products, for example, for our fresh fluid milk picked up, some of our red sauces with metal closures picked up as well. So I think a good distribution of products. I would say this on the dispensing side of our closures business, we saw a pretty sizable ramp-up earlier in the quarter, call it February, for products supporting say hand soaps, hand sanitizers, personal hygiene those kinds of products. So cadence was pretty consistent through the quarter in our closures business. In the plastics business, a little bit of the same really good growth at 6% as we talked about. And you think about the products that specifically benefited, it was our food products. It was our personal and hygiene and consumer health products, hand sanitizer bottles, containers for wipes, etc. So cadence was pretty consistent picking up in February for our plastics business. As we turn forward to Q2, again, as I just said on the can side we're essentially full in metal cans and feel really good about a good Q2 with the guidance we just provided. On the closure side of the business, again, I think we'll have a really nice Q2. I think the idea for Q2 in closures is that we'll expect our normal growth in our food and beverage products. We'll have a continued mix of products as well and dispensing pumps and sprayers for personal hygiene, consumer health products offset by what I think will be a little bit of a sharper decline in some of our beauty product lines, as we only started to experience that really kind of late in March. And then finally, our plastics business, again good solid cadence throughout the quarter. And as we look forward into Q2, what we think will happen in our plastics business is Q1 we had our normal volume that we anticipated some growth with and then we have the impact from the coronavirus. Some of that normal volume is for things like personal care products and beauty products. I think those will be negatively impacted in Q2, but those are going to be offset by bottles and containers and food products associated with coronavirus. And we're expecting good growth back to our expected volume level trajectory for our plastics business in Q2.

That's helpful. And just as a follow-on Adam, is it possible to get any sense of the benefit you might have had from resin coming down in the first quarter across the whole portfolio?

Sure. Across the whole portfolio, it was a couple of million dollars unfavorable. And I'll just say most of that was in our closures business.

Unfavorable or favorable?

Unfavorable. And again I think the reason why is because of the specific resins that we use in our closures business. So, maybe if I take a half a step back, not much impact to our plastic container business, a couple of million unfavorable in our closures business.

Okay. All right. That’s helpful. I’ll turn it over.

Our next question comes from Anthony Pettinari of Citi.

Good morning. You indicated your plants ran without disruption in the quarter, which is great to hear. I'm just wondering if you saw any disruptions on the part of your customers or suppliers. We've seen some disruptions from protein producers. As you talk to your big food customers, maybe think about the pack availability of agricultural labor, etc. How are you thinking about the supply chain outside of Silgan's walls?

Good question. Anthony, it's Adam again. So maybe I'll try to clarify it. We did have disruption in our plants. So all of our plants continued to run through the quarter, but as you would expect it was not necessarily smooth sailing. I think our teams did an outstanding job of maintaining our facilities, of keeping them operational and meeting the needs of our customers in a very, very trying time. So our plants are all open. Our offices are all open. We continue to execute very well. So with that being said we have had certain instances where our customers have been impacted. Several on the food side, some on the personal care side. Really it depends upon the hotspots in which they are filling their products. There's not a situation where a customer's been shut down and not been able to restart their operations, that is one of our customers at this point. So while there have been some outages all of our customers have come back up that have been shut down for one reason or another. And again our facilities we've had some minor disruptions, but I think with the strong protocols that we've put in place we have a playbook that we employ, and we execute very well to get that facility back up and running.

Yes. Just to reiterate what Adam mentioned, this is an ongoing challenge for us, our suppliers, and our customers. No one wants to claim success until the situation is resolved. It's surprising how things can change when you think you have everything under control. We believe we have been proactive and continue to push ourselves in this area. We will keep evaluating, thinking critically, and striving for improvement as we move forward.

Okay. Thanks for the detail and all the clarification. Just on metal containers you indicated you're running full out. I mean this is an industry that's been sort of flat to maybe shrinking slightly over the last decade. When you think about the demand that you're seeing now and you think about the footprint rationalization plan that you outlined last quarter is there any kind of color you can give us on the timeline of that plan maybe potentially pushing some things out or just how you think about it in the current environment?

Sure, let me address this. Regarding the metal container segment, particularly cans, we're currently witnessing a shift in volumes due to pantry stocking and subsequent replacements. We anticipate that as people spend more time at home, restaurants will remain under pressure, which will positively impact food can sales. In the short term, food cans are expected to perform well, and we are fully committed to maximizing production in that area. Looking at the midterm, we expect restaurants to continue facing challenges, leading to increased home consumption of nutritious and easy-to-cook products like food cans. We believe that this trend will benefit food cans for an unknown period. Additionally, as more individuals, including millennials, become reacquainted with or discover food cans for the first time, we hope they will appreciate the quality and convenience, resulting in lasting demand. We're currently operating at full capacity, and if you were to ask us now about shutting down any lines as previously planned, we would have to say we can't do that at this moment. We will evaluate the situation as we move through these phases. It's possible adjustments might be made later this year, but we haven't made any decisions against continuing our path forward. In the long run, we are confident that we have sufficient capacity to support expected growth in consumer interest in cans, and our rationalization plans will still make sense for us.

Okay. That’s helpful. I will turn it over.

Thank you. Our next question comes from Ghansham Panjabi of Baird.

Hey, guys. Good morning.

Hi.

Obviously, big chunks of the portfolio are benefiting from the pantry stuffing trend if you will. Can you just sort of size some of the pieces of the portfolio that could be impacted on the flip side? Tony, restaurants, fast food service maybe discretionary beauty and some of the other categories that are being impacted by a shift in consumer demand patterns right now?

Sure. If you examine the food can segment, there is an estimated impact of around 10% to 15% in terms of units. The overall impact on profit and loss might be slightly greater due to higher dollar drop-throughs. However, as I mentioned, there are surges in other areas, making it complex to assess the situation. Some customers, who typically supply restaurants, may consider adapting to sell larger shelf-size cans instead. Therefore, the relationship isn't straightforward, and we can't assume a one-for-one correlation. In our Dispensing Systems, beauty represents the largest portion, amounting to about 25% to 30% of that business. For Albea, beauty constitutes an even bigger share. Currently, it seems that the beauty segment might experience some downtime. On a positive note, as people in China began to go out after lockdowns, there has been a notable increase in beauty demand that we are observing in our business, leading to optimism that the market will return to a healthy state as conditions improve.

Okay. Adam, you provided some insights regarding the volumes for the second quarter, but could you clarify the full year guidance by segment? I apologize if I missed that, but I wanted to ask regardless.

Yes, for the full year, we expect to see the impact of the coronavirus on volume primarily in the first half. In the second half, we anticipate aligning more closely with our original expectations for the year. For food cans, we project low to mid-single-digit growth overall. Our closures business is also expected to fall within the mid-single-digit growth range, while plastic containers are anticipated to experience low to mid-single-digit growth as well.

Our next question comes from Kyle White of Deutsche Bank.

Hey guys. Hope there all are doing well. Thanks for taking the question. Just a follow-up on some of the questions. Given the uptick in demand are your customers telling you right now that they're looking to enable to increase the production levels for the pack season? And then related to this do you foresee any constraints on meeting this just given how your production schedule works and how you typically build inventory going into this pack season while I assume a lot of the inventory is kind of being used right now?

Sure. Kyle, it's Adam. A couple of things. One, maybe in the current environment what we're looking at, at the end of Q1 and Q2 we are seeing customers I'll say, limit the SKUs they run through their plants and we'll talk to so specifically to increase the throughput by decreasing changeovers on their lines. So they're trying to set up their lines with their biggest moving SKUs and run those for extended periods of time, which will allow for additional filling capacity in their operations. We're able to meet that demand. We've been working very closely with our customers. We are also talking to our pack customers now as well. And we feel like we're in a very good position to support the pack need. So as we talked about at the year-end call, we're expecting another normal pack for the year. And as we think about the filling capacity for our customers there's some surge capacity there that they have and we feel confident that we'll be able to meet that demand should it arise.

And just a follow-up on soup in particular. It looks like you had another good quarter from the industry data. I know maybe just with the parts out, but how much do you believe was driven by kind of a consumer shift gravitating towards soup given the efforts being made by some of the brand owners in that category versus any surge in demand related to coronavirus in March?

It's a good question, Kyle. Soup has shown improved performance for three consecutive quarters compared to the previous year. While I won't say it's a definitive trend yet, it's clear that soup has benefited from the impact of the coronavirus. We'll have to wait and see what happens in Q2, but soup has certainly been one of the advantages in the current market situation.

Our next question comes from Arun Viswanathan of RBC Capital Markets.

Thanks, good morning. And thanks for everything you're doing on the COVID front. I guess, I just wanted to ask about free cash flow first. I don't know if you've mentioned this, but I guess the previous guidance was $275 million for 2020. Did you provide an updated number for that?

Arun, yeah, this is Bob. We did in the prepared remarks, but I'll sort of review it again. So, we are holding our estimate of free cash flow at $275 million for the year. Obviously, we've got some opportunity for potential upside on the earnings side, but likewise we are taking a keen eye to what's happening around the world from a liquidity standpoint. And so if that continues to be tight, which we expect it might for at least the foreseeable future then that could create some volatility around working capital. And so we're kind of factoring that into our guidance at least until we get a better read on what may be happening around the credit markets and the like.

Okay. Thanks. And then I guess on Albea, are you still targeting the $20 million of synergies over 18 months? And I guess maybe you can just review how you're looking at leverage where you want to be maybe at the end of this year after consummating this merger as well and through next year? Thanks.

Sure. We still maintain our view on synergies. We are confident about the alignment of the business and the opportunities that lie ahead. While the current demand situation is unexpected, it doesn't alter our outlook on the market and the potential there. Regarding leverage, we aim to operate within a multiple of 2.5 to 3.5 times. Following the completion of the deal, especially if it closes by the end of the first half, leverage will be temporarily higher due to seasonal demand. On a pro forma basis at year-end after the deal, it may be slightly above our target, likely in the low four times range. We believe this is manageable, similar to our situation during the WestRock deal in 2017. Given the strong and stable free cash flow of the business, we anticipate returning to our target range quickly, as we did with WestRock.

Okay. Thanks. I’ll just turn over. Bob, thanks.

Our next question comes from Adam Josephson of KeyBanc.

Thanks. Good morning, everyone. Hope you and your families are well. A couple of questions on Albea. Tony, I think you mentioned that beauty is more than 25% to 30% of that business. I think you said 25% to 30% of Dispensing Systems and more than that for Albea. So would you mind just going through the end market exposures of beauty, fragrances, any travel, retail, skin care, etc.?

Sure. So yeah, for sure the dispensing business of Albea that we're acquiring is predominantly a beauty business. So it is predominantly fragrance. It is – or it is fine lotion pumps for the beauty market are the – kind of the two main areas. Now actually in fragrance, there's a subset of that which is samples, so sprayers that go on samples, which has an e-commerce element to it. So that's sort of an interesting one in that in the current world that could be actually something that you could imagine benefiting here over time, as these brands will want to find other outlets to sell to people who are at home more than they used to be. And so that could be an upside on it, but to answer your question, it is predominantly a beauty business.

It's been growing at pretty high rates, typically 3% to 5% across most categories, indicating some economic sensitivity. Can you discuss what you anticipate the growth or decline of that business might be in this recession? Additionally, what do you believe the growth rate will be through the cycle, especially considering we're currently in a downward phase?

Sure, I understand your question. I'm not entirely certain that I can fully answer it. What we're currently experiencing is quite extraordinary. If you analyze the situation based on our extensive research over a significant period, including normal recessions, the fragrance and beauty markets have shown considerable resilience. Regions like South America and Asia have been growing quickly, offsetting downturns in certain markets. However, the current situation is different. We are now dealing with a market influenced heavily by French customers, and France has closed many plants, which has had a significant impact. I can only say that this area is likely to be strongly affected by the present circumstances. We believe that during a typical recession, which I can't predict in terms of timing, performance would probably be decent. But that's not our reality right now, and we anticipate a noticeable negative impact on our top line in the short term. We are already observing this in our business; our beauty products were performing well until March, but we are beginning to see a decline. Our beauty sector is indeed experiencing a more significant downturn as we approach April.

Thanks, Tony.

Our next question comes from Daniel Rizzo of Jefferies.

Hi, everyone. Good morning. I was curious if there will be any additional incentive payments considering the ongoing crisis.

No. I understood the question. We made a one-time incentive payment to our plant employees during the quarter. This was an acknowledgment of their efforts to keep us running and to show up diligently every day. It served as symbolic support for their work, but it was a one-time payment, and we do not anticipate additional payments.

Okay. You're mentioning changes in consumer habits or thinking about the use of food cans and their nutritional value. Has this ever happened before? I'm curious about how long it might take, as it seems like a very difficult journey to me.

Yes, it has happened before. You may remember that about two years ago, we were working on a program called Cans Get You Cooking, which was a communication initiative using cooking channels on social media to highlight the benefits of cooking with cans. Fortunately, the infrastructure for that was established through the CMI, the industry association, so many of those channels are still available for us to reopen communication. Additionally, we have customers who are actively promoting similar messages about recipes and the nutritional benefits of canned goods. You're correct that there's no quick fix to suddenly increase the sales of cans. However, there are effective ways to communicate with consumers, letting them know that the cans in their pantry are beneficial for their families, and providing numerous recipes they can try. The goal is to gradually make progress in this area, which will yield benefits over time.

Thank you very much.

Our next question comes from Brian Maguire of Goldman Sachs.

Hi. Good morning, guys. Just sort of a follow-up again on the operational impacts from this and specifically really just on your capacity levels in metal food cans these days. I guess, I understand you're probably running 100% utilization in April and the guidance for volumes in 2Q up, I guess, mid- to high single digits it sounds like. Some of the retail scanner data seems to be a little bit in excess of that. So just wondering, if there's a disconnect there. If it's just the fact that you're kind of capacity constrained. It's limiting that. And I guess kind of the question is, if you had more capacity, is there enough demand for it now? And then sort of related why you wouldn't expect some of this positive demand to continue into the second half of the year as the whole supply chain sort of tries to restock and adjust to all of this?

We are expecting significant growth in demand in the second quarter, which we believe is a suitable timeframe to restock the products that can be replenished. It's important to note that with food cans, the timing of harvesting cannot be altered; vegetables grown in one season cannot be harvested until the next. Therefore, the vegetable market cannot restock in the second quarter due to the timing of the harvest, which will occur in the third quarter. Our customers have limitations within their systems, affected by contracted acreage and filling capacity. The system is actively working to replenish during this period. However, our guidance reflects uncertainty about whether the surge in pantry stocking will be a one-time event. We anticipate that consumers will continue to eat and consume more at home, but we don't expect them to sustain the same rate of purchasing seen in March. Nonetheless, we are on track to catch up to the demand surge from March during the second quarter as we restock.

Okay. So, maybe a little conservatism in there just depending on how you want to look at the continued trends in at home consumption. And then just on the regional trends, I was hoping you could just kind of talk about how you're seeing trends in the different businesses in the U.S. versus in Europe just if consumer behavior is a little bit different from one region to the other these days?

Sure, Brian, it's Adam. I think we should start in Asia first since that's where our business was initially affected by the coronavirus. They are several months ahead of the rest of the world in dealing with it. Consequently, we've seen good demand for our products as they begin to emerge from their shelter-in-place orders. However, there was a period in the first quarter where demand was limited in that region. Moving over to Europe, we observed something similar to the U.S., with an earlier spike in activity during the quarter. This was due to when countries like Italy, France, Spain, and Germany started addressing the coronavirus. We noticed demand increases in February. However, unlike the U.S., there wasn't a panic buying situation in Europe for certain products, so the spike in demand for the products we sell there was more measured. Of course, we spent a considerable amount of time discussing the demand spikes and the surge we experienced in March in the U.S. markets.

Okay. Thanks very much. I'll turn it over.

Our next question comes from Gabe Hajde of Wells Fargo Securities.

Good morning, gentlemen. Glad to hear everyone is doing well and hope to stay that way. I don't know if I missed it in your prepared remarks and I don't think anyone has asked about it. This is the first time and I think you guys made more money in the first quarter in plastics than you did the entire year of 2015 and 2016. Can you comment at all? I mean I know what you said and again in the prepared remarks Bob, but anything odd going on there that boosted profitability? And/or does this change expectations for that 15% EBITDA target?

Hey Gabe, it's Adam. Maybe just talk to a little bit about the performance in plastics. Look, it was a really good first quarter for the plastics business. And I would almost call it about as perfect a quarter from an execution standpoint as we could get to. So, what we've been talking about for some time now is really lowering our operating costs, getting our footprint rightsized to the cost structure that we wanted for that business. And at some point, we were going to turn the corner and start filling those assets and filling those facilities to leverage that lower operating cost and lower footprint for the business. And really with 6% volume growth in the quarter that happened in the first quarter. So it was more volume than we anticipated for Q1. But that's where you see kind of the operating leverage that we've been trying to create really manifested itself in Q1. So, we feel really good about it. It does not reset our expectations for the rest of the year to that level. But we've got our footprint in place. We've got our cost structure in place and we'll see what happens with demand. But again we're not expecting Q2 to be in that same kind of 6% level that we saw in Q1. It was extraordinary in Q1.

Okay. Maybe as a follow-up I guess if demand reverts back to call it 2% or something in the low single-digit range it sounds like 15% EBITDA margins then should sort of – I don't want to call it slam dunk but be something that you guys can consistently deliver? Is that a fair way to think about it?

Yes. And thank you for the follow-up because that's an excellent question. So if you go back to Q4 when you adjust out the negative impact from our pension income from last year, we were at the 15% EBITDA margins in Q4 really for the full year if you look at our plastics business. So we think we've achieved that 15%. We're not done. We're going to continue to fight and claw and try to continue to improve that business. But yes, we're above the 15% margins as we sit here today and we have a business plan that has us ahead of that as we head into Q2.

Okay. A quick one for Bob. Any concerns and maybe this is the reason why you're not raising free cash flow. But in terms of collectibility from some of these restaurant customers, is that meaningful enough to give you pause?

Well, look it's – obviously, we pay attention to where our collections and receivables are, right? I think that coupled with my commentary around liquidity broadly across the globe sort of has us with a critical eye there. I think more importantly as we think about the receivables side and the increasing demand function. We are looking at that every day and making sure that we're allocating our capacity to customers that are paying us timely. So yes, we keep an eye on that. And I think we're doing the prudent thing. That doesn't mean that there's no risk there but we definitely keep an eye on it and try to allocate the capacity to where we understand we're going to get paid and have been getting paid.

Got it. Thank you. Good luck.

Our next question comes from George Staphos of Bank of America.

Hi, guys. Thanks for taking the follow-up question. So recognizing that ultimately what you do and what all the companies that we track to really resolves around what the consumer thinks and not necessarily what the customers or the processors think, are you seeing any advantages for the can in a COVID world relative to form, fill, and seal or aseptic, is can filling any better, any more sanitary or not really? And if you could just comment on that? And then I had a question on leverage.

Sure. I think that's a great question. So I think there are at least two. One is the shelf life it's the obvious one, right? It's packed at the peak of its nutritional value and it stays just like that as long as you need it to. But I would think secondly is the one we've always talked about, which is food cans are probably one of the lowest-cost ways to get high nutritional value foods. And so when you think about a recessionary world ahead of us, there's – there unfortunately could be a lot of people who are going to be looking for a low-cost way to get nutrition. And none of the things you talk about are anywhere near the same economic prospect and opportunity that food can is.

Are your customers beginning to lean that way Tony? Or it's – I would imagine it's probably too early to say one way or another?

Yes. I think it's a little early. I mean you can see some of our customers are out pretty hard, promoting their products, etc., but they would have been anyhow. So, whether that particular issue, I don't know that's forming their strategies. But I think our customers know this is a really low-cost way to get very nutritional food. And I think that's always been part of the prospect of the food can and the value of the food can.

Okay. On leverage and weaving it in with Albea at some degree, I think your covenant from what I recall just for seasonal working capital over the course of the year. But nonetheless, as you say, the cash flow comes in later in the year and your headroom relative to your covenant limits tends to get tighter 2Q and 3Q and obviously then gets a lot looser in a good way in the fourth quarter. With Albea coming in and adding leverage, how do you feel about the headroom that you'll have on your covenants? Again from our analysis, it looks like you've got pretty good head space but anything that you would do again, because Silgan is always hyper conservative maybe on a pre-emptive or proactive basis to give yourself even more room there? Thanks and good luck for the quarter guys.

Sure. Thanks George. It's Bob. Yeah look, we don't have any restrictions at all even with the Albea business coming in against the covenant. So we feel very comfortable that we're not at any risk of violating a covenant. I think the more important fact is that we think we've got plenty of liquidity, both in terms of what our capacity is on our remaining revolver capacity, coupled with what we've got sitting on the balance sheet by way of cash because we pre-emptively borrowed against that revolver. And we're pretty well along the way to our peak from a working capital standpoint. It may inch a little bit higher here. But I would say that, we've got round numbers about $1 billion of capacity today. And as we start to generate the free cash flow and thereby our seasonal borrowings come down that probably moves up to $1.5 billion or so. So no real risk at all. And like we mentioned and you pointed out the stability of the free cash flow here is paramount to that ability.

Okay. I appreciate the comments. Thank you, guys.

Thanks, George.

Our next question comes from Adam Josephson of KeyBanc.

Sorry about that. Can you hear me okay?

Perfect.

I apologize for that. This is Tony speaking about the food can business. In the case of a sustained increase, I am curious about how dependent the vegetable and, to a lesser degree, the soup businesses are on crop yields. Essentially, since this is an annual cycle, their performance relies on weather conditions and the harvest outcomes. What does the supply chain look like for canned vegetables and soups in terms of managing a prolonged increase in demand given their reliance on the annual harvest?

Yeah. So, I mean, I would say, on soup you've got very little exposure to that. I mean yes there are veggies going, etc. but the quantity there is just small against what's available out in the world. So, on the fruit and vegetable side, vegetable primarily you are dependent on the crop. Now usually what happens is that as crops start to weaken your yields go down and the economics are what stopped you for packing. And so, if you really want to pack you can go further than you might in a normal year. So there's flexibility around the edge of that. And so there's some room. But yes, how your growing season ends up turning out and how the harvest season does matter to it. And by the way one thing that didn't come up in the call, you also have to mention is you do need labor out in the field to harvest all of this. And so I do think one thing that we need to keep an eye on is being sure that there are workers who are able to go out and do harvest both here and in Europe. And that's an important part as well. We think it will happen. We think every government is going to see the importance of getting food so our expectation is that that will work out but that's just another item that we've got to stay focused on.

And then, in addition to that, Adam I would say that, you think about surges in soup we've got a footprint that supports the soup market. You think about surges and pet foods we've got a footprint that supports the pet food market and same thing with fruits and vegetables as well. So we're prepared for that kind of vertical market segment, to take a surge in each of those markets.

I appreciate that, and I have one last question about Albea. Considering that demand can fluctuate and beauty demand typically offsets other areas of your portfolio, especially with food cans and the Albea business being heavily focused on beauty, are you viewing it in such a way that if the beauty business rebounds, the food can sector would drop, or do you not really see the two as interrelated?

I believe you may have overstated that. Our perspective is that while food cans may be experiencing growth in these extraordinary circumstances, we generally see them as stable over time. Therefore, I wouldn't consider them countercyclical if that’s what you’re suggesting. What we’re focused on is that the dispensing business and beauty present growth opportunities that differ from food cans. Food cans provide great stability and cash flow, and we value that segment. However, we recognize that some long-term growth is beneficial for the overall business. That’s the thought process regarding beauty. Furthermore, we view the short-term challenges as not particularly significant; what truly matters is the long-term development of the business.

Sure. And thanks, Tony.

Our next question comes from Daniel Rizzo of Jefferies.

Hi, good morning. I was curious if there will be any additional plant incentive payments considering the ongoing crisis.

We did make a one-time incentive payment to our plant employees during the quarter as recognition of their dedication and hard work in keeping operations running smoothly. This payment was intended as a symbolic gesture to show our support for their efforts. However, we do not plan to make any additional payments of this kind.

Thank you very much.

And at this time, we have no further questions in queue.

All right, thank you everyone. Cassidy, thank you. We're all set. Yes, we want to just hope once again that everyone stays safe during these trying times. And we look forward to talking to you about our second quarter in July. And hope that everything is normalized a little bit more for us by then. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.