Silgan Holdings Inc Q2 FY2020 Earnings Call

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

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. Welcome, everyone to our second quarter 2020 earnings conference call. We trust that everyone continues to safely navigate the ongoing COVID-19 pandemic. We continue to be grateful for our customers who continue to produce desperately needed products, particularly for home-prepared food and health and hygiene products. We're proud of the many Silgan team members that have adapted to the new normal working environment and unselfishly come to work and perform at the highest levels, so that we're able to meet the increased demands of our customers and consumers. We take the safety of our employees and continued supply of these vital products very seriously. With that, I'll make a few comments about the second quarter and provide a few thoughts on the full year. Bob will provide further details about the quarter and then Bob, Adam, and I will be happy to take any questions. As you saw in the press release, we delivered an incredibly strong quarter with record adjusted earnings per share of $0.85, a 55% increase over the prior quarter. These results were well ahead of our range of expectations for the quarter due to the sustained nature of the demand levels throughout the quarter, and the truly remarkable operating performance across the board. Each of our businesses posted strong second quarter volume gains and delivered record segment income. While the consumer pantry stocking favorably impacted volumes early in the quarter, it is important to also note that double-digit volume growth was sustained throughout the quarter in several key markets, indicating repeat consumption patterns for home food and hygiene products. Demand levels remain high in July, and we expect continued strong volume gains even in geographies where stay-at-home requirements have been eased. Just as importantly, each of our businesses operated at peak productivity levels during the quarter. We also closed on the acquisition of the dispensing business Albéa Group on June 1. While the demand levels for the fragrance portion of this business are negatively impacted by the on-premise retail pullback from COVID-19, we are pleased with the integration and synergy progress thus far. We remain convinced of the long-term fit of this business and our position on what we believe will be a strong market as COVID-19 restrictions are eased. As a result of our performance for the first half of 2020, and continued strong volume outlook for the remainder of the year, we are increasing our full year earnings guidance to a range of $2.70 to $2.85 per share, up from the previous range of $2.30 to $2.50. This compares to a $2.16 in the previous year and represents a 28% increase at the midpoint. We're also increasing our free cash flow guidance to approximately $330 million, up from approximately $275 million. At the current share price that represents a free cash flow yield of nearly 8.5%. With that, I'll turn it over to Bob to review the financial results in more detail and to provide additional explanation around earnings estimates for 2020.

Thank you, Tony. Good morning, everyone. As Tony highlighted, our results for the quarter exceeded the high end of our expectations, as we benefited from sustained improvement in volumes in key markets of our businesses, strong operating performance across the board, and higher pension income. As a result, our adjusted earnings per diluted share were $0.85 for the quarter, up 55% as compared to $0.55 in the second quarter of 2019. On a consolidated basis, net sales for the quarter of 2020 were $1,180 billion, an increase of $83.3 million or 7.6%, largely as a result of improved volumes in all businesses, partially offset by the pass-through of lower raw material costs and unfavorable foreign currency translation. Results for the second quarter of 2020 included rationalization charges of $2 million, costs attributable to announced acquisitions of $16.1 million and the purchase accounting write-up of inventory of $3.5 million, which had an aggregate impact of $0.15 per diluted share, while the prior year quarter included rationalization charges of $39.3 million, primarily for the announced shutdown of two metal container facilities in the US, and the recognition of the withdrawal liability associated with the withdrawal from the Central States Pension Fund, which had an aggregate impact of $0.27 per diluted share. Therefore, we delivered adjusted income per diluted share of $0.85 in 2020 versus $0.55 in 2019. Interest and other debt expense decreased $2.6 million to $25.8 million due to lower average rates, partially offset by higher average outstanding borrowings related to the acquisition of the dispensing operations from Albéa and the incremental revolver borrowings outstanding during the quarter, as we proactively held cash and cash equivalents to ensure access to liquidity in the midst of the potential credit market disruptions as the consequences of the COVID-19 pandemic. Given the improvements in the credit markets later in the quarter, we did repay our incremental outstanding revolver in June, but maintain available revolver capacity that could be borrowed again at any time. The tax rate for the second quarter of 2020 was 25.8%, higher than expected as a result of certain non-deductible deal costs. The 2019 tax rate of 23% benefited from the resolution of a prior year tax audit. Capital expenditures for the second quarter of 2020 totaled $41.3 million compared with $54.4 million in the prior year quarter. Year-to-date capital spending totaled $106.4 million this year compared to $116.2 million in 2019. We anticipate capital spending for the full year to be approximately $220 million, which now includes the recent acquisitions. This compares to $231 million in the prior year. Additionally, we paid a quarterly dividend of $0.12 per share in June, with a total cash cost of $13.3 million. On a year-to-date basis, cash dividend payments totaled $27.1 million. I’ll now review some of the financial performance of each of our three business franchises. The metal container business recorded net sales of $597.2 million for the second quarter of 2020, an increase of $21.6 million versus the prior year quarter. This increase was primarily the result of higher unit volumes of approximately 15%, partially offset by the pass-through of lower raw material costs, a less favorable mix of products sold and the impact of unfavorable foreign currency translation of approximately $2 million. The unit volume improvement resulted from continued higher demand for products consumed in the home and were partially offset by the volume benefits in the prior year from a customer who had been destocking inventory in previous periods. Segment income in the metal container business increased $57.8 million to $71.8 million for the second quarter of 2020 versus $14 million in the same period a year ago. The increase in segment income was primarily attributable to lower rationalization charges, the impact from higher unit volumes and increased pension income, partially offset by a less favorable mix of products sold. Net sales in the closures business were $410.5 million for the quarter versus $363.4 million in the prior year quarter. This increase was primarily the result of higher unit volumes of approximately 3% and a more favorable mix of products sold, partially offset by unfavorable foreign currency translation of about $7 million and the pass-through of lower raw material costs. The increase in unit volumes was principally the result of strong volumes for consumer health, hygiene, personal care, and food products, as well as the inclusion of recent acquisitions. These volume gains were partially offset by weak demand for certain beauty and beverage products. Segment income in the closures business for the second quarter of 2020 increased $11.7 million to $58.6 million primarily due to higher unit volumes, a more favorable mix of products sold and higher pension income, partially offset by the negative impact of $3.5 million for the purchase accounting write-up of inventory of the dispensing operations acquired from Albéa. Net sales in the plastic container business increased $14.6 million to $168.8 million in the second quarter of 2020, primarily as a result of higher volumes of 14%, partially offset by a less favorable mix of products sold, the pass-through of lower raw material costs, and an unfavorable foreign currency translation of approximately $1 million. Segment income increased $9.6 million to $23 million for the second quarter of 2020, primarily as a result of higher volumes, lower manufacturing costs, and higher pension income, partially offset by a $2.8 million charge for a non-commercial legal dispute relating to prior periods. Turning now to our outlook for 2020. As you've seen in the press release, we are increasing our full year estimate of adjusted earnings per diluted share to a range of $2.70 to $2.85, up from the previous range of $2.30 to $2.50. The midpoint of the revised range of earnings represents a 28% increase compared to the prior year adjusted net income per diluted share of $2.16. We're also providing a third quarter 2020 estimate of adjusted earnings in the range of $0.85 to $1, which at the midpoint represents a 22% increase versus the prior year record adjusted earnings per diluted share of $0.76. Given the uncertainties around the timing of the fruit and vegetable harvest in the US and Europe, results for the back half of the year could shift between the third and fourth quarters. Given the improved earnings outlook, we are also increasing our estimate of free cash flow generation to approximately $330 million, up from our previous estimate of approximately $275 million. That concludes our prepared comments, so we can open it up for Q&A. And once again, I'd like to remind everyone to limit their time to one question and one follow-up. And we're happy to take follow-up questions as time permits. So David, I'll turn it back to you to provide direction for the Q&A session.

Thank you. Our first question comes from Mr. Anthony Pettinari with Citi.

Hi. This is actually Bryan Burgmeier sitting in for Anthony. Is it possible to say how much of the EPS and free cash flow guidance revision was driven by the inclusion of Albéa versus strength in the base business? And then are there any changes to the working capital expectations versus the slight drag that you had indicated on the 4Q call?

Sure, Bryan. It's Tony, I'll give you the first one. I'll let Bob take the second part. So Albéa, I'll give a slightly longer answer to that, and just start by saying that we're very happy to have the business joining us. We have been nothing but impressed by the team that came over, really a very solid organization with experience in the dispensing markets, and so we feel really good about that, making good headway on synergies. So all that we feel very good about. If you look at the month, it basically had no meaningful impact; it was slightly dilutive, but that was primarily because of the purchase accounting. If you look for the remainder of the year, as we said in the press release, our forecast has that being not meaningful on either side. So not meaningfully accretive and not meaningfully dilutive. The reason for that, which we talked about last call, is roughly half the business is in the fragrance market. The fragrance market is, of course, heavily retail-based and travel-based. So that market was off on volumes. Really, since the pandemic began, somewhere between 25% and 30%, maybe a little over 30%. That continues to be true. Right now, until we see kind of the world get back to more normal retail, while e-commerce will grow somewhat, it's a small enough part of it, it's not going to change that much. And so, our expectation would be those kind of declines year-on-year through that. So therefore, really, the numbers you're seeing have everything to do with the base legacy business and really nothing at this stage to do with Albéa, which we think will be really a strong performer once those markets come back. Working capital, Bob?

Yeah, just to take the second part of that, on the working capital side, we do see a slight benefit in working capital. Obviously, we're running at very high capacity levels, selling everything through. So we would expect that, particularly on the inventory side, we'd start to see a benefit as we come through the year. That obviously will be highly dependent upon the collection side of that, as well. We've been monitoring collections very closely and have not had any problems moving through the COVID pandemic so far, and we'll continue to watch that to the back half of the year. So that should be a benefit for us on the working capital line.

Great, thanks. Yeah, that's really helpful. And then, you know, some food producers cited capacity constraints in soup in the second quarter. As you guys move more into soup season in the second half of the year. You know, do you expect that you and your customers will be able to meet all the demand? And did you suffer from any stock outs in the second quarter?

Hey, Bryan. It's Adam. Good question. We actually faced all the challenges that were thrown our way through Q2. And our operating teams did a terrific job as Tony alluded to in the prepared remarks, meeting the demand of our customers. So no, we did not have any stock outs, really, in any of our businesses, but specifically in the can business, we were able to support a pretty dramatic increase in the soup side of our volume as well. And you know, at this point, as we go forward, we've got a pretty clear understanding of our customers' forecast, our ability to meet their forecast, and that's going to be embedded in the guidance that we provided for Q3.

Great. That’s really helpful. I’ll turn it over.

Thank you. Our next question comes from Mr. George Staphos with Bank of America.

Hi, everyone. Good morning. Thanks for all the details and congratulations on the quarter. My two questions, Tony, Bob, team, Adam, can you talk a bit more about the growth you're seeing in your end markets within metal containers? And, you know, second question, you know, from what you're hearing from your customers, what do you think is sustainable versus relatively one-off? And what are your customers doing, based on the windfalls that they're getting, to reinvest in their brands to take advantage of this and hopefully perpetuate? Or should we assume this is kind of a one-off benefit and, you know, in ‘21, and ‘22, can growth goes back to what had been the normal level? Thank you.

Good question, George. I'll take the first part and let Tony take the second. So just focusing on Q2 and the markets we serve, particularly in the metal container business. Look, it was a good quarter all the way around. Everyone saw the CMI data. And you know, you really focus on, for us really three key markets in Q2 and that's our soup market, our pet food market, and our protein market, all of which saw substantial increases. You know, I think soup was up a little over 50% in the CMI data. We're overweight to soup, so our soup number was actually a little bit greater than that. So what I think is really interesting, you go to a category like vegetable, which seems to be the outlier in the CMI data, the market data at limited growth of 7%. Really, that's because of us. As we've talked before, we had one pack customer who we had planned to have volume shift from Q2 to Q3 during the year and that indeed happened. So there were several hundred million units of volume that we’ll realize in Q3, as we had planned to. So that's one example where, you know, I think the market was a little different than our experience. And then finally, pet food we've talked a lot about pet food and are overweight to that category. We again, we're above the market data for pet food from a volume standpoint. And what's been really interesting, we've had, again, it's been challenging meeting all of the volume requirements of our customers, but we've done it successfully. And, you know, there's been so much growth in pet food one of our large customers did have some difficulty sourcing protein for their products. So, our volumes were a little muted in pet food because they were not able to get all the ingredients that they had planned. And then thus prioritized their ingredients to their, you know, core markets that they serve. But I think from a market standpoint, that's what I’d tell you, George, and I’ll pass it to Tony.

Yeah, I think George on your second part of the question, we definitely do not view all of this as one-off, there obviously was a pantry stuffing; if we look at the numbers, you can see a spike in that March-April period. I think what's really telling, as Adam went through, is you didn't see the destocking of pantries against that, and you saw continued double-digit growth. To us, it seems pretty clear that that consumption pattern is continuing on. And if logical, right, people are eating at home more, this is a great means to do that. What makes us think this could be stickier is that everything that we've been saying all along about the can is it’s by far, the lowest price point way to get these foods, it’s the most sustainable means to deliver these food products that exist. All those values are there and people are being now exposed to the fact that it tastes good—that soup is good; it's got value. And so, you know, sort of new consumers are being exposed to food cans, and we think there'll be some continuation of that as we go forward. So as to what our customers are doing about that? Obviously, they see the same. I think for them, you know, two main drivers, one, they're seeing more cans through their thermal processing. And that's really good for them in terms of financial returns. As I said, it's a more sustainable choice than anything else out there that they could be doing. And so our customers, by and large, are lined up and doing a lot on the marketing side, trying to educate consumers about how to cook with these foods. Use them more, doing that through e-commerce and other ways. And so, we're really pleased to see the kind of focus and dedication customers are putting into it. We're doing the same; we're spending more on marketing the value of the can, and we are all lined up to try to make sure that we can have this one opportunity to re-expose the value of the can to consumers, and we're all trying to take advantage of that. Last thing, I'll just say is recall over the years, George, I know you and I've talked a lot about alternative packages and things that are shifting; for us again, it was always restaurants were our main competition, as we always said—it's more about people not eating at home. And so this is a fundamental shift to that question. We'll see how long that shift goes on, but as long as economies are tough, we think there will be kind of a sustained level of more at-home consumption, which of course, Americans do less than really anywhere else in the world.

And maybe just one more point, Tony, I'd add that, you know, if you look at our volume for cans over the course of 2020, thus far, we've had increasing monthly volume every month since February, with June being our largest volume month here to date. So it fully supports the idea that, you know, there was some initial pantry loading, but there has been repurchase of canned goods in the market, and we're benefiting from that.

Sounds good. We just need some canned food restaurants. I’ll turn it over. Thanks, guys.

Great thought.

Thank you. Our next question comes from Mr. Mark Wilde with the Bank of Montreal.

Good morning, Tony. Morning, Bob. Adam.

Hey, Mark.

I wonder just to start off, Adam can you talk with us about kind of any type of capacity constraints or kind of capacity issues you might be running into with these big gains in both food cans and as well as over in plastics? And along with that, just any issues, kind of through the supply chain? Can you get enough tinplate, kind of transportation issues, things like that?

Sure. Mark, look, we've been, you know, I don't want to say this was luck because there's a lot of effort and discipline that goes into the supply in our requirements contract, both in our food canned business and elsewhere throughout the Silgan companies. You know, being a requirement supplier, we are expected to be able to take surges to some degree. Now, I think the volume increases we've seen kind of exceed that, but our teams have done a terrific job in working with customers and understanding what their needs are and what their demand patterns are. And we've met those needs literally without fail on any occasion. So, you think about the capacity constraints, for the most part, our capacity is pretty well aligned with our customers filling capacity. So, you know, from my perspective, I would say we're not really a bottleneck in the capacity or supply of capacity to our customers. Our customers, particularly in food, throughout this period of time have sort of consolidated their SKUs that they run on their filling lines, to limit changeovers, to increase productivity. And we've been able to walk, you know, stride for stride with them in that supply model. So that happened in our plastics business; it's happening in our closures businesses as well. So it's been a really interesting process. I think one very interesting component here in our plastic businesses, our service and supply model is being rewarded on a pretty significant level right now, we're winning in the market. I think we are exceeding expectations. And it's showing through into the bottom line of the business and does have some sustainable effects to it. As far as our supply chain, now back to kind of our resin supply and our metal supply. Again, it's kind of the same thing. We've worked very closely with our suppliers. We're managing it on a daily basis, and while maybe it's not always perfect, we've not had any issues getting the products that we need to supply the significant increase of volume that we're seeing across the board.

Okay. That's helpful. And just one other little nit, that $2.8 million legal charge in plastics, is that issue completely resolved at this point or is there any potential tail there?

You know, there's a potential small tail, I suppose, but nothing of meaning.

Okay, that's good. I'll turn it over. Thanks, guys.

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

Hi, guys. Good morning. Just going back to George's question on the volume outlook for the back half of the year. What's embedded in your guidance in terms of metal food and plastics? And then also within closures how much came from legacy Silgan for the second quarter versus Albéa from a volume standpoint?

Okay, great. Hey, Ghansham, this is Adam. So I'll start with metal containers. Obviously, we're heading into our seasonally strongest quarter with the harvest and pack volumes coming through. So we're expecting a very strong Q3, so volumes, well into double digits, so kind of strong double-digit volumes year-over-year in our metal container business. On the plastics business, you know, we'll see another quarter have double-digit year-on-year volume growth. And then over to our closures business, again, I think it's important to remember, we've said a couple times now, closure isn't necessarily a closure as a closure here because of the mix of the product; you think about our dispensing products, and I'll just say that the selling value of those products is something like 10 to 1 versus kind of our standard flat cap that we utilize and produce for food and beverage markets. So, you know, when you think our Q3, we'll see continued strength in dispensing, we'll see continued strength in food. And then our beverage markets continue to be a little bit challenged, given the nature of what those beverage products are. So you think about the US market for beverage, we're largely talking about things like sports drinks, dairy products, like gallon jugs of milk, etc. Those have underperformed other parts of our business thus far in Q2 and we think while there will be some recovery, they are likely to be down a bit versus prior year. And then you think about our European closure segment as well with, you know, a high volume of product going to what we'll call the hotel, catering, and kind of recreation business that is largely single-serve premium products, and that model is under pressure as tourism has subsided, particularly in Europe. So, I think with all that being said, you know, dispensing is going to be up significantly. And so, you know, we're looking at low double digits for the third quarter, I think food's going to be up low double digits for the third quarter and beverage, like I said, is likely to be down just a little bit versus the prior year.

So just want to add to that, Adam answered everything compared to the prior year on that, the one point I'd want to make is that it's not quite as strong sequentially, if you will look at plastic or at the closures business in aggregate. Because in Q2, we liquidated inventory as well during that time that we don't have to do that. That's not as true for the food can businesses; in the food can business we have to reserve some of our capacity for Q3. So sequentially will go up in metal containers, but that'll be a tougher comparison if you will for plastic than for the closure business.

Sure. And then Ghansham on Albéa. Sorry, I was just going to say, Tony spent some time talking about the fragrance portion of the Albéa business; that's by far the biggest driver. But our legacy dispensing business again will be up strong-double-digit percentage year-over-year. And you know, we'll deal with the fragrance portion of Albéa. The balance of their business is quite strong, just fragrance is a large part of it.

Okay, that's great. And then just as my second question on the metal food segment, you know, per second quarter $20 million increase in operating income on a near comparable increase in sales, can just help us reconcile the magnitude of that improvement? Was there anything apart from operating leverage that's in there?

No really, it's just the power of our fixed cost assets and a lot of volume running across those fixed cost base and pension, which you're aware of.

Pension, okay. Thanks so much, guys.

Thanks.

Thank you. Our next question comes from Mr. Brian Maguire with Goldman Sachs.

Hey. Good morning, guys. Just a question on the mix in metal cans, wondered if you could talk about the volume trends in the US versus Europe. If there were any big differences there. I know Europe's a little bit less of a pantry stocking, but with everybody kind of eating at home, wondering if things may be even accelerated a little bit in Europe. And then similarly, I think in last quarter, you talked about some headwind in the foodservice part of the portfolio. Are you seeing any signs of improvement per cans into the food service market?

Hey, Brian, it's Adam. Europe for us actually, the volumes in Europe were quite good for us. So we're very pleased with our European can business. I think that Q3 is setting up for a nice pack as well, so, you know, we can continue to feel strong that that's going to be a net contributor for us. So, you know, I think the rest of the comments, I would say, you know, do apply to the US market that we talked about earlier. And then I think the food service question, you know, that that's kind of our large cans, number 10 cans for the restaurant world, for the most part, you know, nothing's changed from that perspective. You know, I think restaurants are under pressure right now, as there is more in-home consumption. But, you know, I think those are for the most part, those are pack related products. I think there is an idea that the pack being a very strong pack, particularly in the US this year, that a lot of products that are lined up in cans regardless to take advantage of a good pack.

Just to clarify that, you know, the 15% volume growth in Kansas, that was pretty similar between the US and Europe, no real meaningful difference there.

Yeah, roughly the same; actually Europe was a little bit ahead of the 15%, but not meaningfully.

Okay. And then just for my follow-up, I think earlier, I think it was Mark's question, you talked about some customer changes, just wondering if you did see customers rationalized SKUs for cans, and if that was a contributor to increased productivity and throughput anyway to sort of quantify what benefit that might have had for margins?

Honestly, very difficult for us to quantify that, but it did indeed happen. And, you know, again, I think, you know, there's a lot of moving parts to meeting the forecasts for our customers. We were working very closely with them throughout the quarter as we always do. But you know, it increased their throughput, and you know, it's just hard for us to quantify what the bottom-line impact to us was.

But to be clear, customers didn't do it so that we could get more cans to them; customers did it because it took cost out of their own system as part of their process to make it easier for them to run less SKUs. So if you're thinking we revert back, I don't know if that's the case or not. But you know, over time, you probably will see more SKU development. But I think everyone saw a good reason at this time to kind of limit SKU.

So limit costs and increase capacity to get.

Is it fair to say that, you know, the only reason to proliferate SKUs is to try and drive some growth into a stagnant market, and now that the consumer has kind of rediscovered the can, you just don't need that? So it's a cost-saving mechanism. And it makes sense to just do it as long as you've got this, you know, period of outsized growth.

I think that's right. And I think you're right that over time, you will, you know, the marketing group will want to do more of that. And they should; I mean, I think that's the right way to continue the growth curve over time. So like I said, there will be proliferation. But it's, I think, given everybody saw the value of what happened here, right, my guess it'll be slow. And it had been extreme for the couple years leading into the situation.

Yeah. Okay. Thanks very much.

Thank you. Our next question comes from Mr. Adam Josephson with KeyBanc.

Thanks. Good morning, everyone. Congrats on a really good quarter. Tony, just one more on food can demand, to the questions that George and others were asking earlier. If this level of demand is sustainable, is it reasonable to think that come next year when we're looking at your volumes and CMI data that volumes would actually be flat or maybe even up? Mean, do you think that's a reasonable scenario to expect or do you think a level of demand is so outsized this year that even if demand stays better than it's been historically, it would be reasonable to expect some declines next year?

Yeah, good question. I thought I was trying to be clear, I think without doubt there is some pantry stuff—there were some one-time bill that happened here, that will be a hard comp to go up against next year. Then there's some level of, you know, there was a period of time here where restaurants were basically almost completely out of the game. That won't be the case a year from now. And so I think without doubt, you'll have some volume negative comp on this to compare on that issue alone. But as our main point is, that doesn't go all the way back to where we were. At least the data we see right now does not lead us to conclude it goes all the way back to where we were before. I think it’s, you know, somewhere in between. I think the fact we're seeing strong double digits four months after customers are continuing to see that they're going to pack everything they can so that is their expectation. So all of that just leads us to think that, you know, something like that double-digit is sustainable. But, you know, at some point, you know, things were up 23%, 24%, I mean, that can be a tough comp next year for sure. Where the 10 to 13 is not, you don't feel quite as bad about that one. So that's our basic feel on it that a big chunk of that, though, ought to be sustainable if we can continue to keep the story out there.

You know, appreciate that, Tony. And just one on Albéa, the TTM EBITDA when you announced the deal was 77. Could you give us an update on just where that TTM EBITDA was at the end of 2Q and or kind of what level of quarterly EBITDA you're expecting for the balance of the year?

Well, I think you could backwork this pretty well. We're basically saying that we're not expecting to be accretive nor dilutive for the remainder of the year. So I think if you do that, you're going to find that there's some, you know, $20 million off that number right now. Which makes sense when you think about, you know, 25% to 30% decline on the top line. So, those are rough numbers for you. And frankly, we're early days on this. We've owned it, you know, for not even two months yet. So, you know, for the first time now we're in there figuring out what costs come out, given that, you know, that kind of volume production. More importantly, we're working really hard for the customers try to help them figure out how do they get back into a selling mode, and what's the best way to do that? How do they take greater advantage of e-commerce, which we have really good answers for them on that? So there is a lot of things that are going to take time for us to work out but we think long-term will be really good for the business. But the short-term impact is a little less clear, and frankly, a little less important to us than the long-term opportunity.

I totally get it. Thank you, Tony.

Thank you. Our next question comes from Mr. Gabe Hajde with Wells Fargo Securities.

Good morning, gentlemen, and congratulations on a solid quarter.

Thanks, Gabe.

You guys didn't define the police where you're at, so anyways, I know you guys don't necessarily look at kind of sequential moves and EPS, but I'm trying to bridge a little bit, you know, kind of the implied $0.92 give or take of your Q3 guide versus on a sequential basis. You guys have historically seen on average over the past five years on $0.27 of incremental earnings from Q2 to Q3. I'm just curious if there's something you're seeing in the business; you mentioned a little bit of a sequential slowdown in volumes enclosures and plastics, but anything on the profitability side, manufacturing costs or otherwise that you're seeing that kind of gives you pause, or is it possible that you guys beat by $0.10 again on the top end of your guidance range, when we're talking in October?

It's a good question. So it really has a lot to do with Q2 in that case and not about Q3 at all. That normally Q2 is not a sold-out quarter for us, right? We're running capacity for Q3. So you've got just a surge in Q2 of the higher volume through liquidating anything you could on the inventory side; that's particularly true in the plastic and closure businesses. So what happens is you have such an elevated Q2, you come into Q3, which is just you're essentially seasonally sold out. You don't have that same opportunity to step it up to that same degree. So nonetheless, we're going to be up, as you see, solidly from prior year, but sequentially you just wouldn't be a typical year for Q2 was so strong.

Understood. And maybe a follow-up on Albéa. I don't know if Adam, you answered the Albéa question, I guess contribution, but specifically in Q2, would closure organic volumes have been down, excluding the Cobra and Albéa acquisitions? And can you tell us what acquisitions added even on the revenue line enclosures?

Sure, so the answer is yes, closure total closure volume would have been down in Q2 without the acquired volume. So, again, I'll just go back a little bit what I said; when you think about the three big markets that we serve, dispensing, food and beverage, you know, dispensing for the legacy business was up, you know, 16%. You think about our food business was up around 11%, our beverage business which you know, is our highest volume segment from a unit volume standpoint was down about 8%. So that's how the quarter played out. So mix was incredibly favorable because we had so much growth in our dispensing systems products. So that's the legacy business and then from an acquired, the acquisitions were about $36 million, $37 million of revenue.

Got it. Thank you, guys. Good luck.

Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets.

Great. Thanks, good morning and congratulations on the quarter. I guess, first off, I had some questions on the sequential move as well, so you answered that. I guess, looking out, maybe medium-term, last couple of years you’ve talked about footprint rationalization as it relates to certain customers and possibilities of that in North America. Have you kind of re-contemplated your footprint at this point, just given the change in the market and maybe even just comment on food can capacity, maybe we can start with North American, where you could also talk about a little bit Europe? Thanks.

Sure, Arun. Good question. On the footprint optimization plan that we kind of announced at the end of last year for our metal food container business, clearly obviously we’ve had a sizable jump in demand for the full year of 2020. So we continue to evaluate all of those plans. I tell you that our number one focus is meeting demand requirements of our customers, so we wouldn’t do anything that would put our supply chain in jeopardy. So we’ll make that crystal clear. Therefore, we have delayed the implementation a portion of that optimization plan and we’ll continue to evaluate that; I think to the earlier conversation, as we get a clear understanding of the stickiness of all the volume and really what is sustainable going forward, we’ll re-evaluate those plans and see how we want to move forward. There is a portion of those plans that would be unaffected by this volume, that we’d anticipate moving forward later in the year as we had originally planned, but again all of that is subject to us meeting the needs of our customers.

And then as far as capacity is concerned, again, as Tony said, we’ve got quite a bit of our volumes as related to requirement contracts. And we’ve done a really nice job pairing our capacity with our customers, our customer's filling capacity and capabilities, and feel very good about where we stand from a capacity standpoint. Obviously, we’ve been able to meet the increased demand in not only the US market, but also the European market we serve as well. So at this point, no need for additional capacity on our side, and we’ll just continue to evaluate how our capacity fits the market demand going forward.

And then also I guess, just some questions on uses of cash, so obviously completed the transaction on congrats on that, so maybe you can just discuss how you see free cash flow, you’ve guided for this year, and then next year if there are any large step changes, even in working capital, you got more CapEx, how that would materially change that free cash number outside of growth?

Yeah, Arun. This is Bob. So as we talked about when we did the acquisition we thought we’d be kind of in the low to mid fours on a leverage standpoint, post-acquisition, with this free cash flow generation we’ll probably accelerate our deleveraging a bit from where what the original plan was, and that’s just a strength of the free cash flow. I think the question of what we do with it really will be contingent upon what the overall credit markets look like as we come through the end of the year. As we said in our commentary, we did proactively borrow against a revolver just to protect our liquidity. If we see another kind of go-around have that tightness around liquidity, which is possible if things get tough again, then we would probably sit on cash for a short period of time. If we don't see that, then obviously we think deleveraging is the right opportunity here. So we have a couple of choices in terms of how to pay down debt to deliver. And then from there, you know, we will continue to look opportunistically at the M&A front and see what comes our way, but the priorities are to protect our existing business from a liquidity standpoint, first and foremost. And then to get our leverage back into the range of what our typical ongoing appetite is.

And then just lastly, on M&A and consolidation goes, do you think the food can market needs any more consolidation? It looks like it's pretty concentrated to us. And, you know, it looks like the dynamics have improved here. So is the market in a position that you would see any consolidation or rationalization or, you know, do you think that's unlikely at this point?

It's Tony, you know, it's a little hard to gauge whether anybody in the market would do a transaction. I don't think it's a market that necessarily needs consolidations; as you said, it's a pretty consolidated market already. So I don't—we don't sit here waiting and finding for that to happen. It could happen, I suppose.

Well, I just I was more curious if that's something that you could potentially participate in.

Yeah, we look at every opportunity and we always have; we haven't done a meaningful food can deal in some period of time. So I don't know if we could come up, but it is again, it hasn't happened in some time.

Thank you. Our next question comes from Daniel Rizzo with Jefferies.

Hey, guys. Just one question you mentioned that mixes a headwind in metal containers, and I was wondering how we should think about that going forward, as you know, the pandemic kind of eases and economy recover, how we should think about mixing metal containers and really for all the segments, for the rest of the year?

Let me try to pivot; you're right, we have got mix that sort of riddled through here, and it sounds like a negative. That's not necessarily the case. So things that drive mix in food cans are we've been talking for years now about pet food being growing, how protein has been growing. Those are—they had been growing before the pandemic and they really grew during the pandemic, so those just have smaller cans; it’s not definitely a margin issue right now. But when you get into mix and driving volume, etc., you need to explain that. So it was not intended as a negative point. You will see in Q3 when we will experience, as Adam alluded to, is you may see laps restaurant-sized cans which are much bigger, so you could be a little further negative in Q3, which actually would have profit, in fact, just because of the dollar scale of that per can down to the bottom line is larger. So that's sort of the mix story in the can. Then you talked about mix in closures, as I said, it's really—a it's a great news story when dispensing grows, against you know, what really happened to the beverage was off because of the pandemic and people went outside, we feel strongly that we'll come back at some point. It'll get hot or the pandemic will fade away. And so that'll settle itself out. But what's really important there is, we like the dispensing system; we've been making investments there. We think that's a great spot for the future. And that's an area where you saw sizeable growth in product lines. And that's really important—a valuable mix point. And the plastic is just a little bit more of kind of what you know, food up, or you know, what's going on the, you know, decide to package, etc. So it's really meant as a negative mix is just the way we describe it.

Okay, so that's very helpful. Thank you. And then just one other question. And just with soup, I mean, I know some of this is pandemic related, but it seems like it's been rebounding for, I think I mentioned in the past, like three or four quarters now, I'm just wondering, what has changed? Like, how has the business changed and take, I don't know, the last year I over— I miss remembering that the best while not so good for about a year now?

And maybe not quite a year, but yes, it's been several quarters in a row now and where it's been outpacing, certainly prior year, but maybe other aspects of the market as well. So, you know, I think what I would say Dan, is that our customers have spent a lot of time talking to consumers and trying to reach consumers and, and reach new consumers with the message that Tony consistently kind of conveyed on this call that there is real value in canned soup. And, you know, the other aspect, I think, given what's happened, they do realize the benefit of leveraging their thermal systems and utilizing the can as a vehicle to sell more product. So, yeah, it's been a good story. Obviously, you know, you look at kind of our monthly progression into—and it's a very good story year-to-date. And, you know, they're bullish on the rest of the year. We've got a good deal for Q3 and we'll see nice growth again in Q3; it should continue to be a good story for us.

Thank you very much.

Thank you. Our next question comes from George Staphos with Bank of America.

Just a quick here to finish up for me. Just when we look at the SG&A numbers year-on-year, I think they're up something like $20 million. Obviously, a good chunk of that's probably going to be Albéa. But is there a way to parse what the source of that was? And again, really what I'm driving at is within the number that would be legacy, what is, you know, around development, marketing investment, if you will, to perpetuate the growth that you're seeing across your business? Thanks. And good luck in the quarter.

George, you’re right. The majority of the increases is all on the deal-related costs. So it's everything from, you know, diligence costs, and financing costs. Like that drove that. I think the base business on an SG&A level is down across the board quite frankly, and in large part because you know, all travel has been restricted. So that, you know, we're communicating with customers in other ways, being creative. We don't have people, you know, flying around on airplanes and alive. So that's kind of what you're seeing there. And offsetting that a little bit on the year-over-year increase side is obviously we've got some inflation and wages there, and that kind of makes up the difference.

So should we expect that to ultimately pick up at some point, beyond it kind of the rebound and travel and expand entertainment, but again, on development, marketing, the sorts of things that you'll need to reinvest in or know, hold that level? Thank you, guys.

No, we should be able to hold that level; that is more or less embedded, the one that would most certainly all the R&D, those are all resources that are embedded in our costs. So there'd be no meaningful change there. The marketing effort around cans would be one that's already embedded in the current number, but we've been doing that, so no meaningful to others.

Thank you. Our next question comes from Adam Josephson with KeyBanc.

Thanks, everyone. Appreciate it. Bob on cash flow, just to follow up on some of the previous questions. Is there any Albéa contribution to the $330 of cash flow to what you got it for the year? And then how much do you expect free cash to be up next year based on whatever incremental contribution from Albéa you're expecting? And just relatedly, is there any working capital impact on this year's number?

Yeah, the working capital number I talked about earlier on the call that we originally were thinking that it would be little to no benefit, maybe even a bit of a consumption. I think now we're seeing the opportunity to bring a little bit of working capital out. So that's part of the benefit that we're seeing in this year's free cash flow. Albéa, I think Albéa can cut either way depending upon where the fragrance market goes from here forward. So I would say a fair guess is to consider it neutral to plus or minus a little bit for the back half of the year. And in terms of given free cash flow guidance for next year, I think we got a long way to go between, you know, here and when we can provide guidance that would be meaningful for next year around free cash flow.

One of the hard ones for Bob to answer that is, you know, one of the things you might assume from this is, we've done a really spectacular job of supporting our customers through this time. Really, we don't tend to brag on our operating team, but if ever there's a moment, it's now. So we're hearing from a lot of customers about long-term future opportunities, given how well we performed and how well we've supported the market. So I just think capital is going to be a little tricky for us to answer right now because we could have some really nice opportunities before us, as we think for.

Got it, I appreciate that. Just one on steel tinplate. Can you just talk about how much those costs have fallen, whether that's been beneficial to you, and then what your expectation is for the balance of the year in that regard?

Sure, Adam. You know, I think obviously the biggest market that we play in is going to be the North American market. And, you know, I think steel and tinplate have kind of progress through the year as we had thought they would. So we're kind of seeing a high single-digit kind of reduction versus prior year, as far as the annual cost change that we've experienced thus far and expect that to continue to the end of the year.

Thanks.

Thank you. Our next question comes from Mark Wilde with the Bank of Montreal.

Thanks. I've got just a couple of follow-ons. One, I'd like to get some thoughts just on margin targets by segment and it seems to me particularly in plastics you are doing much better right now than we would have ever expected? And then the second issue is the potential for some margin recovery in the food can business if demand remains relatively elevated; it seems like the industry lost some margin five or six years ago and new capacity came into the market. So I'm just curious, you know, thoughts about the potential to now recover some of that?

Great, Mark. Regarding margins and what we can expect moving forward, Q2 benefited significantly from inventory liquidation, and those benefits can't continue indefinitely. When looking at margins across the company, Q2 likely marked the peak for the year in terms of our GAAP figures. We anticipate a sequential decline in margins from this point, which is acceptable since we will still be considerably above prior years. The can business is expected to maintain higher volume, so this isn't a negative outlook; it's simply how we believe things will progress. Specifically for plastics, Q2 was exceptional, primarily driven by operational improvements rather than volume increases or COVID-related factors. We’ve seen consistent progress in this area, and our team is performing excellently. Customers are beginning to recognize the value we bring to them in this market. While Q2 results were outstanding, we expect a return to more typical levels afterward. We have aimed for around a 15% EBITDA margin, which we are on track to surpass slightly, although not to the extent of Q2 figures. Regarding the food cans, we prioritize long-term relationships and contracts with our customers. Silgan achieves success by thoroughly supporting our customers and enabling them to succeed in the market, which is where our long-term profitability lies. We are not seeking immediate margin recovery or price increases; however, as conditions improve, we expect to benefit from a strengthening position gradually.

Yeah, that's what I would have assumed. But just thanks for the thoughts on that, Tony, and good luck in the second half of the year.

Thanks, Mark.

Thank you. At this time, we have no other questions in the queue. So I'll turn it back to Mr. Tony Allott for closing comments.

Great. Thank you, David. Thank you, everyone. We appreciate your time, and we look forward to talking to you in late October about our third quarter. And good day.

Thank you. Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and thank you for joining us this afternoon.