Silgan Holdings Inc Q2 FY2021 Earnings Call

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

Thank you. Joining me from the company today, I have Tony 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 2020 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 2021 earnings conference call. We hope everyone is doing well as we continue to navigate through the vagaries of this ever-changing pandemic world. The good news from this call is our businesses continue to perform well as measured both against the record performance at the peak of pandemic levels last year and even more so as compared with the pre-pandemic levels. In addition, we continue to advance our long-term succession plans as most recently announced in our July 1, 2021 press release. I am pleased to be in the final stages of the transition to Adam's leadership as a new CEO. I'm looking forward to continuing to be a resource to Adam in his new position. Perhaps more importantly, the executive team that will continue to support Adam is the same team that has been core to the company culture, its missions and principles and its investment disciplines. We feel confident that this team and the Silgan culture under Adam's leadership will continue to build on its past successes and continue to create value for our customers, employees and shareholders alike. I've been asked quite a bit since the announcement to reflect on what we've accomplished over the last 15 years in my role as CEO and where I think Silgan can go from here. From the beginning, we have focused on building strong, sustainable, cash-generative businesses. Our Metal Container business is the epitome of this. We've invested to make it the best in the world with a particular eye on markets where we see growth opportunities. In the Custom Container business, we recognized a decade ago that we were not the lowest cost best answer to our customers and we made the hard decision to significantly restructure that business. Many thought we should sell at the trough of this process but we stuck to our plan, improved and backed a great team and have emerged as an industry leader in terms of profitability and customer service. Finally, we recognized some time ago the need for more growth opportunities to deploy our strong free cash flow. We identified the closures and dispensing markets as great opportunities. Over the years, we focused our team on product development and customer support. We acquired businesses to further expand our products and footprint. And recently, we acquired and built superior dispensing capabilities. Today that Dispensing and Specialty Closures business is our largest profit contributor and offers significant opportunities for growth in a large array of attractive industries including food, beverage, health care, personal care, beauty and household products. So we enter this next stage with an experienced leader Adam with a senior team familiar with accountability and success and an organization built on a winning culture. For these reasons I'm proud of what our team has accomplished, but I'm even more confident that Silgan's best days are ahead. With that I will now quite literally turn it over to Adam.

Thanks Tony. And let me start by saying that it has been a privilege to work so closely with Tony and the entire Silgan team for the last 16 years. Under Tony's leadership, Silgan has stayed true to the mission and principles that Phil and Greg founded the company upon as revenues have grown from $2.5 billion in 2005 to over $5 billion in 2020 on a pro forma basis. Our performance-based culture, constancy of purpose and disciplined capital allocation model will continue to be at the core of what we do every day and we are very fortunate to continue to benefit from Tony's leadership and guidance as Executive Chairman. I'm humbled, honored and excited for this next chapter in the Silgan story and believe the future is very bright for our customers, our employees and our shareholders. As we like to say at Silgan, the past is prologue and our entire team remains committed and looking forward to delivering many more Silgan successes in the future. Speaking of Silgan's successes I'll now make a few comments about the performance of the business and then I'll turn it over to Bob to go into further detail regarding our second quarter financials and full year forecast. After that, we'll be happy to take any questions. As you saw in this morning's press release, we delivered another strong quarter with record earnings per share of $0.85. Adjusted earnings per share were equal to the record prior year, which benefited from the impact of the early-stage pandemic pantry loading. As expected, each of our businesses continue to perform well in the face of a variety of challenges. Specifically our Dispensing and Specialty Closures segment saw improved performance related to the inclusion of the Albea business and the synergy capture we have achieved to date. In addition, segment volumes increased 10% with organic volume up 7%. We continue to see volume recovery in the beauty and fragrance markets and strength in our beverage markets in the quarter. Segment operating performance continued at a high level and helped mitigate the impact of the unprecedented increases in raw materials experienced in the second quarter. Demand in our Metal Container segment remained at elevated levels after increasing 15% in the second quarter of 2020. While segment volume declined in the second quarter of 2021 by 2%. Had it not been for supply chain and labor challenges, we would have surpassed the prior year record volumes. Operating performance and plant productivity were negatively impacted by steel supply chain and labor challenges across our operating network. In our Custom Container segment, we continue to improve profitability through outstanding operating performance and a more favorable product mix. As expected the 14% increase in volume experienced in the second quarter of 2020 which was primarily due to increased pandemic-driven demand for cleaning and sanitizing products normalized resulting in second quarter 2021 volumes declining by 11%. In addition, the segment was negatively impacted by the lagged pass-through of the significant increases in raw materials experienced during the quarter. As a result of our performance for the first half of 2021 and our outlook for the remainder of the year we are confirming our full year earnings guidance in a range of $3.30 to $3.45 per share. This compares to the record performance in 2020 of $3.06 per share. With that I'll turn it over to Bob.

Thanks, Adam. Good morning, everyone. We're pleased with the overall performance noting each of our businesses faced some unique challenges as we continue to navigate through these phases of the pandemic in some cases leading to cumbersome year-over-year comparisons. These include changes in inventory levels, significant inflation in raw materials, disruption and other inefficiencies in the supply chain for raw materials and challenges related to running our plants full out for 18 months. In the face of these challenges we delivered adjusted earnings per diluted share of $0.85 for the second quarter of 2021 at the high end of our estimates and in line with the record prior year, which benefited significantly from pandemic-related volume surges. On a consolidated basis, net sales for the second quarter of 2021 increased $172.2 million or 14.6% versus the prior year to $1.350 billion as each of our segments delivered top-line improvement. These increases were largely the result of the pass-through of higher raw material costs, the inclusion of $66 million for the Albea Dispensing acquisition for the non-comparative two months in the quarter, favorable foreign currency translation of approximately $27 million and a favorable mix of products sold in the Metal Container and Custom Container segments partially offset by lower volumes in these two segments. We converted these sales to adjusted income before interest and taxes for the quarter of $153.4 million after adjustments of $400,000 for rationalization charges versus $152.8 million after adjustments of $2 million for rationalization charges, $16.1 million for costs attributable to announced acquisitions and $3.5 million for the purchase accounting write-up of inventory in the prior year quarter. The improvement was primarily the result of increases in our Dispensing and Specialty Closures and Custom Container segments offset by a decline in the Metal Container business. Highlights of the adjusted segment income for each of our segments is as follows: adjusted segment income in the Dispensing and Specialty Closures segment increased $11.1 million to a record of $73.9 million in the second quarter of 2021 after adjustments of $100,000 for rationalization charges in 2021 and adjustments of $4.2 million in 2020 for rationalization charges and the purchase accounting charge to write-up inventory. The increase was primarily due to higher unit volumes including from the Albea dispensing acquisition which contributed approximately $8.2 million to the profit line for the two months of additional ownership in the quarter and strong operating performance. These benefits were partially offset by a significant unfavorable impact from the delayed pass-through of higher resin costs and foreign currency transaction losses in the quarter. Adjusted segment income in the Metal Container business was $58.8 million down $14.2 million versus a record prior year after adjustments of $200,000 in 2021 and $1.2 million in 2020 each for rationalization charges. This decrease was primarily attributable to lower unit volumes of approximately 2% as inefficiencies in the supply chain and production difficulties hampered our ability to meet customer demand in the quarter and in addition resulted in excess costs across the system. Adjusted segment income in the Custom Container segment increased $4.2 million to $27.3 million for the quarter after adjusting for rationalization charges of $100,000 in each year. This increase was largely attributable to a more favorable product mix of products sold, strong operating performance and the inclusion in the prior year of a $2.8 million charge for a non-commercial legal settlement, partially offset by lower volumes of approximately 11% and the unfavorable impact from the delayed pass-through of resin increases in the current period. Turning now to our outlook for 2021. As expected we're off to a good start. We continue to anticipate strong full year demand from our customers. As a result, we are confirming a full year estimate in the range of $3.30 to $3.45, which at the midpoint represents a 10.3% increase over the prior year record 2020 performance. We're also providing third quarter 2021 estimate of adjusted earnings in the range of $0.95 to $1.10 per diluted share as compared to record adjusted net income per diluted share of $1.04 in the third quarter of 2020. Based on our current outlook for 2021, we're also increasing our free cash flow guidance to approximately $400 million further improving our free cash flow yield to nearly 9.1% of current share price. This compares to our previous estimate of approximately $380 million and prior year delivery of $383.5 million. That concludes our prepared comments. As a reminder, we’d like to ask you to limit your time to one question and one follow-up and then get back into the queue. I'll turn it over to Kian to provide for the Q&A session. Kian? Hello? Hey, Kian, are you still with us?

Sorry for the interruption. I’m just in there to help you. We will now take the first question from Adam Josephson. Please go ahead.

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

Thank you Adam. Appreciate that.

Thanks.

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

I really am. Is that your one question, Adam? I can't take no for caller too. Just so I don’t know...

The full year guidance suggests a significant increase in the fourth quarter compared to the third quarter and previous fourth quarters, including last year. Can you explain what factors are driving your expectations for such year-over-year growth in the fourth quarter? Additionally, why do you anticipate the fourth quarter to be much larger than the third quarter, unlike in previous years?

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

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

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

Sure. I think we'll try to focus on the full year and give some guidance there.

Yes. Yes.

As we consider resin, it impacts two of our operating segments. Resin continues to face inflation challenges. Three months ago during our last quarterly call, forecasts indicated that resin prices had peaked in early 2021. However, current indices have revised these predictions, suggesting that Q3 will be the peak. We are still experiencing inflation in raw materials related to resin products, which is expected to persist into Q3, though we do expect some relief in Q4. Typically, we maintain our current resin run rate for the rest of the year for forecasting purposes, and we have allowed for a slight recovery in Q4. We will continue to pass through the delayed increases we've observed in resin for both Custom Containers and Dispensing and Specialty Closures. Regarding raw material and labor challenges, our difficulties are not unique to Silgan; it's a common issue in manufacturing and retail nowadays. Our situation is somewhat distinct since we have been operating all our facilities nearly 24/7 for the past 18 months. Our employees have stepped up to work overtime to ensure product availability. As the world, particularly the United States, begins to reopen, our employees are eager to re-engage, which has brought some labor challenges. This is a widespread issue affecting our customers and suppliers as well, so it's not something that will resolve quickly. We are actively managing this situation and taking decisive actions across our businesses. Concerning steel, unfortunately, we have faced challenges with our suppliers in terms of raw material performance. In the second quarter, we dealt with delivery performance issues ranging from 30% to 50%. Our efficient production model relies partially on an effective supply of incoming products. We are continuing to collaborate with our suppliers as we approach our peak quarter in Q3, and resolving all the steel supply issues won't happen overnight. However, we are working to acknowledge those suppliers who have performed well while reallocating volume from those who haven’t. This process will take time, but we are confident that we will secure all necessary raw materials to meet our customers' forecasts and our needs for the rest of the year.

Terrific. Thanks, Adam.

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

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

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

Okay. Great. And the other thing I wanted to clarify was in your cost income channels, also get the former plastics business. If you can provide a little bit more color about the volume outlook for the remainder of the year, if you still think after that 11% decline, it can still be positive for the full year? And also, just clarify a little bit the components of earnings growth because it's really impressive to have double-digit volume decline and yet still manage to grow earnings year-on-year.

The business continues to perform exceptionally well. In our Custom Container segment, it's important to remember that last year we experienced a 14% volume growth in the quarter. As we look back on the 11% decline in the second quarter of 2021, we remain optimistic about the business as we are maintaining a higher level of operation than we had prior to the pandemic. Our discussions in recent years about Custom Containers highlight our success in the marketplace. We've mentioned that the profitability from new business wins represents our new baseline. This favorable mix comes from growth in our core markets and new business gains that align with our profit expectations moving forward. Regarding earnings growth, we are witnessing strong operating performance that leverages this new product mix. As for the volume decline, we are currently navigating through a summer inventory correction in the market, particularly related to cleaning and sanitizing products. Looking back 12 months, we recall the panic buying at the beginning of the pandemic when hand sanitizers and soaps were in high demand, leading customers to purchase various containers for those products. This surge is not repeating in 2021, as the situation is different from what we experienced in 2020.

Okay guys. Thank you very much.

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

Hi everyone. Good morning. Thanks for the details. Tony and Adam congratulations on everything the next chapters. And Tony it's a long way from applied extrusion.

Yes, it is.

I wanted to discuss food first and Metal Containers. Are you noticing any signs that the supply chain issues are leading to a decrease in demand? Specifically, are customers who were considering using the Metal Container, due to its positive aspects highlighted during COVID, now hesitant because of supply chain concerns, like tin supply issues from Asia? Additionally, if you're going to penalize suppliers that haven’t been efficient, could that end up being counterproductive when you need metal for can production? That's essentially two questions I have to begin with.

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

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

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

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

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

Thanks and good morning everyone. I want to extend my congratulations to both Tony and Adam. It's also great to see this happen in a quarter when container EBITDA margins exceeded 20%, especially considering the challenges you faced in the past. For my first question, I want to revisit the cost issues and ask Adam about the effects of delayed pass-through on resin in both containers and pumps and dispensers. Additionally, could you discuss the labor issues in Metal Containers? A quarter ago, you mentioned hiring about 100 new employees in the can business.

Good morning, Mark. You're correct. We hired 100 new employees in the first quarter for our Container business to meet the increased volume needs we anticipated for the year in Metal Container. To clarify, the labor issues we're discussing affect the entire supply chain, including our customers. This is one reason we mentioned we could have sold more in the quarter if we hadn't faced these labor challenges. For instance, a customer missed a forecast because they couldn't staff a new filling line due to employee shortages. This issue is widespread, but we believe we are managing it effectively despite the difficulties. In our Metal Container segment, we are navigating planned retirements of several employees, which is part of the normal turnover we've been experiencing, especially with 18 months of consistent operations. The overtime shifts that everyone stepped up for last year, as things reopened, have also created challenges in conversations. Regarding the delayed pass-through of resin costs, we had previously indicated that this would negatively impact the quarter by about $10 million, but it turned out to be slightly worse than expected. Most of this impact was seen in our Dispensing and Specialty Closures segment. Nevertheless, we remain confident in our business models, which allow us to contractually pass these lagging cost increases onto the market and our customers. It’s just a matter of time before we fully transfer those costs to the marketplace.

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

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

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

I believe the key issue lies with the substrate itself. At Silgan, we are confident that plastic has a role in the packaging industry. I agree with your point about the challenges investors face, particularly regarding nonfunctional single-use plastic packaging, which poses significant sustainability issues. When investors allocate funds, this might lead to a shift in how they think about these products. Our business does not engage in nonfunctional single-serve plastic packaging. While this may create market opportunities, our priority remains on the functional aspect of packaging, ensuring that plastic serves as a viable and sustainable option for the products we offer.

Okay. Perfect. I’ll turn it over. Thank you.

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

Hi, good morning. Tony congrats. Adam congrats.

Thanks, Gabe.

Thanks, Gabe.

I'm trying to understand the situation with lower inventory that you mentioned. Since you maintained your EPS guidance, I assume this is primarily related to working capital and mostly isolated to the Metal Containers business. Can you confirm that? I think this might be due to material availability and the labor-related issues you highlighted. Also, if you're ending the year from a low starting point, would that mean anything in terms of carrying over inventory into 2022, and would it require you to produce at a higher level next year? This may be somewhat dependent on demand, but would that lead to positive earnings and a negative impact on working capital as we look towards 2022?

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

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

Sure. To start with the pack, our customers faced challenges last year due to the early phase of the pandemic, which hindered their ability to provide additional pack volume to meet market demands. However, all our pack customers have been preparing since early February for greater contractual acreage and increased volume this year. We anticipate a significant pack as part of our guidance for the second half. The relationship to 2022 remains uncertain until we assess yields and inventory levels. Still, we expect a notable increase in the pack for 2021. Regarding pet food, it continues to perform well and is growing for us. At our Analyst Day, we indicated that around 40% of our unit volume is linked to the pet food market, and that growth trend is continuing. Additionally, we have added capacity this year that will be realized in the fourth quarter, partially to support the growth of the pet food market as well.

All right. Thank you and good luck, guys.

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

Thank you for taking my question and congratulations on the results. First, I wanted to get your thoughts on whether you've noticed any impacts from competing substrates or any shifts in customer preferences within the plastic container business. I'm curious, as we've heard about some trials in the household products and personal care markets regarding different types of plastic pouches. Is this something you might consider exploring longer term?

Thank you, Arun. In our Custom Container segment, most of our products focus on multi-use packaging. Additionally, when we consider our Dispensing and Specialty Closures, we incorporate extra functions into those packages. Regarding other substrates entering this space, I have read similar articles to what you may have seen, but we haven’t experienced any impact on our Custom Container business. As for Dispensing and Specialty Closures and our Metal Containers business, we are noticing opportunities for new products and substrates returning to those platforms. This trend is largely driven by sustainability, as we're seeking more eco-friendly solutions for products that don’t require specific functionalities but still deliver the same performance. Therefore, we see this as an opportunity rather than a risk across the platform.

Okay, great. I have another question on a different topic. Can you remind us about the tinplate inflation? Steel prices have continued to rise to very high levels. How have your customers responded to that? Are they exploring any alternatives regarding packaging materials? What is their perspective on metal prices?

Sure. Well, I think, unfortunately, inflation applies just about across all categories at this point. So we're feeling that in all of the substrate, not just our steel component. I think, as I would describe, our customers' focus right now is continuing to meet the needs of the marketplace. So they are focused on filling products in existing platforms and getting product into the marketplace. So we have not seen, at this point, a lot of risk around substitution in our Metal Container segment. I think, as we look forward, you're right, steel inflation is definitely there. We can all look at the hot-rolled band chart the Wall Street Journal publishes and make our own assumptions based upon that chart. So we are anticipating additional inflation next year. Our customers are not happy about that, neither are we. And we are continuing to fight on behalf of our customers. And we're still early in that process. So we'll see where things play out. I think the cyclicality of the steel market they're at the absolute peak right now. And we'll see where the rest of the year takes us.

Okay. I'll turn it over. Thanks.

We'll now take the next question from Ghansham Panjabi. Please go ahead.

Thanks. Good morning. Adam, following up on some of your earlier comments, it seems like you’re anticipating a fairly good harvest based on what you mentioned in the press release. Is there a possibility that the labor shortages you’re facing and the supply chain issues could start affecting the harvesting yields? Also, what feedback are you getting from your customers regarding the labor situation?

Great question. We spend a lot of time discussing this issue with our customers. They are facing labor challenges but are managing to secure the workforce needed for crop harvesting. This is a positive sign as we enter the packing season, and we believe they have confidence in meeting their packing requirements. We'll see how weather and other factors affect packing and timing. However, we don't anticipate labor to be a major challenge for us this quarter. Our production outlook for the remainder of the year relies on our current performance. We will continue to address raw material and labor challenges without expecting significant improvements from where we are now.

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

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

Got it. Thanks so much and congrats to you and Tony as well. Thanks.

Thanks a lot.

Thanks, Ghansham.

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

Hi. Good morning and congratulations to Tony and Adam.

Thanks Anthony.

Just following up on Ghansham's question and your comments on fragrance and beauty and the strength that you've seen and that you continue to expect in the second half. We're obviously emerging from the pandemic and some of the reopening categories are doing better than expected. But some Asian markets and emerging markets are sort of back in lockdown and obviously there's the Delta variant. Is that at all a risk to the second half outlook for fragrance and beauty specifically? I think some of your closures go into products that end up getting sold in Asia or outside of North America and Europe, any commentary there?

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

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

Got it, got it. That's very helpful. And then, in Metal Containers your three largest competitors have moved their assets into JVs or selling them or in the process of doing so. I guess first question have you seen any change in competitive behavior with those transactions ahead of them or after they were completed? And then, maybe the broader question, I mean, I think some of those competitors pursued those sales to get a higher multiple. Dispensing is now your largest segment. Your closest competitor in dispensing and closures trades at a pretty steep premium to you. Just how you think about would Silgan consider that maybe in the longer term?

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

Great. You raised an excellent question. You're correct that we're in a stage where the equity market and analysts seem to favor businesses that offer singular solutions. This is beneficial when conditions are favorable, but not when there's a pullback in growth or excess capacity. What we're providing to you and our shareholders is recognition that being involved in multiple areas within packaging can be very focused. We operate in diverse fields. However, we have a strong, sustainable cash-generating business in our can segment, which significantly enhances our ability to grow in other areas that also offer their own organic growth. All I can share is that we see a fantastic opportunity for our shareholders to benefit from both aspects. Just look at the past year, two years, or even the past decade and observe how these businesses have supported each other. I believe we would not be as successful today without that synergy. Our focus is on the strategic value of both segments. You are right; we need you and the market to understand that different types of businesses warrant different valuations. If that understanding doesn't emerge, you may need to revisit the situation. However, we won't easily dismiss the hope that it can work out.

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

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

Great. Thank you. Congratulations to you too, Tony, and also to Adam. I wanted to ask, as most other questions have already been covered, about the share buyback. Bob, you bought back my shares in 2020, and I think there was more activity in the previous couple of years, but there haven't been any buybacks year-to-date or through the end of the first half. What are your thoughts on buybacks, especially now that you are raising the free cash flow guidance? How do you plan to allocate cash for the remainder of the year and into 2022?

Yes. So I think the story hasn't changed there, right? I mean, our capital discipline has been in place for a long time now that we've said, we'll run the balance sheet at between 2.5 and 3.5 times leverage. I think with the uptick in free cash flow we think we'll be back closer to 3 times at the end of the year. We think that that's a pretty good place to be particularly given that we think that the M&A market is fairly attractive right now particularly in the measurement of how much activity there is out there to evaluate. Now, obviously, it is a bit of a seller's market. So we'll have to keep to our discipline and do our due diligence. But our view right now is it's in our interest to keep powder dry and evaluate those opportunities to be able to continue to build out some of the franchises that we have and where we see opportunities to take it further. The flip side of that is that, if we don't find those opportunities then we have the ability to be a little bit patient but that 3 times is still in the middle part of our range there. So we can be patient and see what next year brings as well. But you're right, where we've really bought back shares is the period where we start to get to the low end of that and M&A activity looks like, it's more on a more delayed pace. And then that's when we've done larger share repurchases. So the short answer is our strategy hasn't changed. We would much rather deploy capital to grow out the footprint in the portfolio and continue to create value for shareholders.

Thanks for all that color, very helpful Bob. And then I guess just my follow-up. I think you mentioned that there were not for lack constraints that you get can business been up year-over-year which up against a plus 15% compares is certainly very impressive. Is that a sign that even now as we are starting to see consumers go back to eating out that there's still an awful lot that are staying home and sort of know where they were as affected pre-COVID, but kind of what's your thought on consumer and as what the appetite will be to eat and drink at home versus going out?

That's a great question, Alton. Earlier, we discussed our analysis of consumer data, particularly focusing on certain markets. One significant trend we've observed is that pet ownership has surged during the pandemic, leading to continued growth in our pet food business. Scanner data indicates that small dog and cat foods, especially in white categories, are experiencing high single-digit to low double-digit growth. This consumer engagement and repeated purchasing trends are strong, which is reassuring for both us and our customers, who are also investing in capacity. Turning to other segments, the soup category is particularly noteworthy. Last year, as lockdowns began, there was a notable increase in scanner data for soup consumption, whether it was condensed or ready-to-eat products. Currently, we continue to see retail activity in this category trending high single to low double-digit compared to pre-pandemic levels. Our previous discussions highlighted our efforts to engage new consumers, and we observed ongoing repeat buying activity last year, which has persisted. Both we and our customers are optimistic about the current consumer engagement, which sets a positive tone as we approach the second half of the year.

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

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

I also want to echo the sentiments express in terms of perhaps to both you Adam and Tony. It's not been a year with Albea in your portfolio. Just curious where you're at in terms of the synergy target. I believe it was $20 million. And do you see further opportunities for synergies induced here or any potential revenue synergies on that business?

Thank you, Kyle. You're already seeing the effects of the revenue synergies coming through. The merger of our business with Albea has been excellent, and we have been realizing commercial synergies between the two companies for some time now. Regarding the synergies, we had indicated a $20 million run rate at the 18-month mark, and we believe we will exceed that by the end of the year. Our synergy capture is slightly ahead of schedule, and we expect to achieve more than our target by year-end. Additionally, the business is performing well. We feel confident that we are returning to the operational performance we had prior to the acquisition, not just what we envision for the future, but what it was. Our team and the Albea team have quickly and effectively come together during a challenging integration period marked by a global pandemic, and I commend the entire team for their outstanding performance.

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

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

Got it. That makes sense. And just a quick follow-up. Would the cost be incrementally higher in 3Q just given seasonality? Or is it going to be a similar amount?

It will be a similar amount.

Got it. Thank you. I’ll turn it over.

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

Hi. Thanks for squeezing me in. I was just wondering given the expectation that resin prices could potentially peak here within the next few weeks or within the month, if there's a way to reduce or delay resin purchases until after potentially prices were to decline again?

Obviously, we work with our customers, primarily to make sure we're meeting all of their requirements. I think there's very little room at this point to move buys around, particularly how tight the resin markets are. So unfortunately, I don't think it's a near-term opportunity.

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

In terms of fragrance and beauty, we are not quite there yet. At the start of the year, we anticipated around a 50% recovery from the pandemic-related volume decline. Currently, we are seeing approximately a 70% recovery, which exceeds our expectations, but we are still not fully back to pre-pandemic levels. There is still some progress to be made to reach those levels.

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

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

This concludes today's call. Thank you for your participation. You may now disconnect.