Silgan Holdings Inc Q2 FY2025 Earnings Call

Good day, and welcome to the Silgan Holdings Second Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alex Hutter, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. Joining me on the call today are Adam Greenlee, President and CEO; Philippe Chevrier, EVP and COO; Bob Lewis, EVP, Corporate Development and Administration; and Kim Ulmer, SVP and CFO. Before we begin the call today, we would like to make it clear that certain statements made 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 2024, and other filings with the Securities and Exchange Commission. 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. In addition, commentary on today's call may contain references to certain non-GAAP financial metrics, including adjusted EBIT, adjusted EBITDA, free cash flow and adjusted net income per diluted share, or adjusted EPS. Reconciliation of these metrics, which should not be considered substitutes for similar GAAP metrics, can be found in today's press release and under the non-GAAP financial information portion of the Investor Relations section of our website at silganholdings.com. With that, let me turn it over to Adam.

Thank you, Alex, and we'd like to welcome everyone to Silgan's second quarter earnings call. Our second quarter results showcase the structural changes that have been taking shape in our business over the past decade. As our teams continue to build upon the momentum in our business, we delivered 15% adjusted EPS growth and record adjusted EBIT, driven by the success of our strategic initiatives, the strong operational execution of our teams, and the benefit of our capital deployment model. Our second quarter and first half results have shown significant organic growth in Dispensing and pet food markets, the integration of the Weener acquisition, and the success of our cost reduction initiatives that have resulted in first half adjusted EPS that is 17% above the prior year period. We achieved record first half adjusted EBIT and record first half adjusted EBITDA. Our Dispensing and Specialty Closures segment showed significant year-over-year growth and delivered another quarter of record adjusted EBIT, with over 40% growth in dispensing products and continued success in the markets we serve. Our market-leading innovation and design capabilities, the strength of our long-term customer relationships, and the execution and focus of our teams continue to set us apart in the market and drive organic growth that outpaces our peers and the end markets we serve. We have made meaningful progress in the integration of the Weener acquisition from a cultural, synergy and product portfolio perspective. And we have been very pleased with the incremental opportunities our teams are continuing to uncover to leverage both our global commercial presence and our expanded product offering to drive accelerated growth well into the future as a result of this combination. We continue to have success with new and existing customers in our core high-end fragrance and beauty, personal care and home care markets, and are seeing incremental opportunities in health care and pharma markets as well. Our Dispensing momentum remained strong into the second half of the year as we execute on our near- and long-term priorities in this rapidly growing high-value portion of our business. Volumes for our North American Beverage Specialty Closure products, particularly in the hot fill markets, fell short of our expectations entering the quarter due mostly to cool wet weather experienced in much of the country during the second quarter. Additionally, with weather impacting consumption patterns in the first half, our customers have adjusted their promotional spending plans to reflect the lower consumption patterns during this period, which further impacted our volumes. While weather conditions have improved as we enter the third quarter, our expectation is that the hot fill consumption occasions for these beverages in the first half of the year will not be recovered in the balance of the year, as our customers work through the inventory they built for the peak season. In Metal Containers, we continue to see strong demand for our pet food products, which grew by a mid-single-digit percentage in the second quarter, driven by our strong presence in the fastest-growing portions of the pet food market. As expected, our total volumes in the second quarter were comparable to prior year levels, mostly as a result of the timing of orders for containers for soup markets in the first half. Our adjusted EBIT performance in Metal Containers during the second quarter was 21% above the prior year period, driven by a more normalized production environment relative to the prior year. In Custom Containers, our business delivered strong operating performance and experienced continued success in the marketplace, as comparable volumes grew 2% after adjusting for the impact of lower margin business exited as a result of our cost savings initiatives. As expected, our adjusted EBIT margins expanded 190 basis points as a result of our cost reduction activities. With our strong start to the year, we remain confident in our ability to deliver on our strategic objectives and achieve significant earnings growth in 2025. Our expectations for continued growth in Dispensing and pet food products remain unchanged. We continue to expect Dispensing organic volume to deliver another year of high single-digit growth, but we now expect the adverse weather impact on our hot fill beverage Specialty Closures volumes in North America in the second and third quarters to impact segment adjusted EBIT by approximately $10 million for the year. Our Metal Containers volumes are on track to grow by a mid-single-digit percentage, driven primarily by mid- to high single-digit growth in pet food and a partial recovery in prudent vegetable pack volumes. Unfortunately, a recent customer bankruptcy in North America that has resulted in that customer exiting certain markets is expected to impact Metal Containers adjusted EBIT by approximately $10 million in the second half of 2025. In Custom Containers, with the annualization of the new business that ramped up in 2024, as well as additional new business awards in 2025, we continue to expect comparable volumes to grow by a mid-single-digit percentage this year. We remain focused on the opportunities that lie ahead for the company, and are confident in our ability to execute on our plan as the structural changes and evolution in our portfolio have positioned us to drive significant growth in our business in the near term and long term. Our financial performance remains strong, and we are pleased that we are positioned to achieve a 9% increase in adjusted EPS, exceeding $1 billion in adjusted EBITDA at the midpoint of our estimated adjusted EPS range in 2025. With that, Kim will take you through the financials for the quarter, and our estimates for the third quarter and the full year of 2025.

Thank you, Adam. As Adam highlighted, we reported another quarter of strong financial results in the second quarter, driven by the continued success of our dispensing business, more normalized production of Metal Containers, and the execution of our cost reduction plan. Net sales of approximately $1.5 billion increased 11% from the prior year period, driven primarily by growth in dispensing products, including the addition of the banner business, and the pass-through of higher raw material and other manufacturing costs in Metal Containers. Record total adjusted EBIT for the quarter of $193 million increased by 17% on a year-over-year basis driven by strong growth in dispensing products, including from the acquisition of Weener, improved price cost in Metal Containers, and the benefits of our cost reduction efforts, resulting in higher adjusted EBIT in all segments, and record adjusted EBIT in the Dispensing and Specialty Closure segment. Adjusted EPS of $1.01 increased $0.13, or 15%, from the prior year quarter. Turning to our segments. Second quarter sales in our Dispensing and Specialty Closures segment increased 24% versus the prior year period primarily as a result of the inclusion of the sales from Weener, and higher organic volumes of dispensing products. Due to the rapid integration of Weener and the overlapping customers and products, organic volume mix calculations have become less meaningful for the segment and for Dispensing products in particular. Volumes for Food and Beverage Specialty Closures declined 3% during the quarter, driven by a mid-single-digit decline in North American beverage products, predominantly in hot fill markets. The decline in North American beverage volume was a result of cool wet weather in the second quarter, which drove lower overall consumption of these products and as a result, lower promotional activity. Record second quarter 2025 Dispensing and Specialty Closures adjusted EBIT increased $15 million, or 16%, versus the prior year period as a result of the contribution from Weener and higher organic volumes of dispensing products. The previously discussed decrease in North American beverage volumes resulted in an approximately $5 million year-over-year headwind to adjusted EBIT in the second quarter. In our Metal Container segment, sales increased 4% versus the prior year period as a result of favorable price/mix due to the contractual pass-through of higher raw material and other costs, and a 1% benefit from foreign currency translation. As expected, unit volumes during the quarter were comparable due to mid-single-digit volume growth in pet food and higher volume for fruit and vegetable markets, partially offset by lower volumes for supermarkets, primarily related to the timing of orders during the first half of the year. Metal Container adjusted EBIT increased 21%, primarily as a result of favorable price cost due to a more normalized production schedule and better fixed cost absorption relative to the prior year quarter which was impacted by a customer's reduction of their fruit and vegetable pack plans midyear. In Custom Containers, sales decreased 3% compared to the prior year quarter, driven by a 2% decrease in volumes due to the exit of lower margin business as a result of a planned footprint reduction to achieve the previously announced cost reduction goals. Excluding the lower-margin business exited to achieve cost reduction plans, volumes increased 2%. Custom Containers adjusted EBIT increased 11% as compared to the second quarter of 2024, primarily due to favorable price/cost, including mix as a result of cost savings initiatives. Looking ahead to the full year of 2025, we are revising our estimate of adjusted EPS from a range of $4 to $4.20, to a range of $3.85 to $4.05, a 9% increase at the midpoint of the range as compared to $3.62 in 2024. The revision in our estimate of adjusted EPS is the result of lower volume expectations for Specialty Closures in the North American beverage market, which we expect to impact dispensing and Specialty Closures adjusted EBIT by approximately $10 million, and the impact associated with certain changes in the market due to a customer bankruptcy in Metal Containers, which is also expected to impact the second half and full year by approximately $10 million. This estimate includes interest expense of approximately $185 million, a tax rate of approximately 24%, corporate expense of approximately $45 million, and a weighted average share count of approximately 107 million shares. At the midpoint of our estimated 2025 adjusted EPS range, we will exceed the prior record levels of adjusted EBIT and adjusted EBITDA, and exceed $1 billion of adjusted EBITDA for the first time in the company's history. From a segment perspective, we now expect a low teen percentage increase in total adjusted EBIT in 2025, driven primarily by an approximately 20% increase in Dispensing and Specialty Closures adjusted EBIT, a mid-teen percentage increase in Custom Container segment adjusted EBIT, and a mid-single-digit percentage increase in Metal Containers adjusted EBIT. Based on our current earnings outlook for 2025, we are revising our estimate of free cash flow from approximately $450 million to approximately $430 million, a 10% increase from the prior year as earnings growth will be partly offset by higher cash interest and CapEx of approximately $300 million. This estimate also includes approximately $20 million of cash costs to support our cost reduction programs. Turning to our outlook for the third quarter of 2025. We are providing an estimate of adjusted earnings in the range of $1.18 to $1.28 per diluted share. Third quarter earnings are expected to benefit from the inclusion of Weener, higher organic volumes of dispensing products, and the ongoing benefits of our cost reduction programs. These benefits are expected to be partially offset by the reduction in Specialty Closures volumes in the North American beverage markets and the impact of a recent customer bankruptcy in Metal Containers. Dispensing and Specialty Closures third quarter net sales are expected to grow by a mid- to high 20s percentage rate, driven by strong volumes for dispensing products, including the results of Weener. Metal Containers and Custom Containers third quarter volume is expected to increase by a mid-single-digit percentage. Third quarter adjusted EBIT in the dispensing and Specialty Closures and Custom Container segments are expected to be above prior year levels. Metal Containers third quarter adjusted EBIT is expected to be slightly below prior year levels as a result of a $5 million to $10 million impact related to the previously discussed recent customer bankruptcy. That concludes our prepared comments, and we'll open the call for questions. Rachel, would you kindly provide the directions for the question-and-answer session?

And we will take our first question from Matt Roberts with Raymond James.

First, on Metal. Maybe you could help me understand that customer. I believe they used to be 3% of revenue. They cut 30% last year, so called about 2% of revenue now, if my math is right there. How much of a hit to volume was that in '25 and what categories that expand to versus '24? Or maybe longer term, thinking out to '26? What's a worst-case scenario? A 2% revenue goes away? I mean, how much would EBIT be down in '26? Are there any assets or facilities that are co-located or dedicated to this customer? What is a more likely scenario for '26? Any additional color would be great there.

Thanks, Matt. Recently, one of our major customers has entered bankruptcy proceedings, and we have been addressing that situation for some time. I want to emphasize that our company and teams have effectively managed the financial risks associated with this filing. They have worked diligently to ensure there was no financial fallout from it. Moving forward, we need to consider a few factors. It's true that this is a significant customer, and you can likely guess who it is. We have strategically located on-site facilities that provide us a competitive advantage in any alternative supply considerations by this customer. We continue to operate under our contracts as usual, and we are committed to assisting them in achieving a successful 2025 season. As they transitioned into bankruptcy, they adopted an asset-light strategy, shedding some operational facilities and transferring a portion of their volume to co-pack locations. This shift is where we are experiencing the impact this year, as they have closed several facilities. I won't specify which markets these closures affected, but most of the volume has shifted, and they've lost some market share. The remaining volume has mostly gone to co-pack locations, and in some cases, we supply those locations, while in others, we do not. For the instances where we are not the supplier, we anticipate a potential shortfall in volume, which we have factored into our forecast for the rest of the year. The bankruptcy process is expected to wrap up in the first quarter of next year, and as I mentioned earlier, we are focused on supporting them for a successful 2025 season. Anything beyond that is speculative, but I want to reiterate that we have strategically advantageous facilities close to the filling locations, which has proven to be a successful business model for nearly 38 years. Lastly, if the volume does not return or is reduced, we have a strong history of adjusting our capacity to align with the demand from our customers, and we will certainly do that in this case. While it may be too early to make definitive statements, that approach is central to our strategy, and we will explore cost-reduction opportunities if necessary.

Okay. certainly. Really appreciate all the color there, Adam. And maybe if I may ask another one on the Dispensing side. Kim, I believe you said mid-teens EBIT increase, where I think last quarter, you were expecting 20%. So my math says that's about a $20 million shortfall, and beverage was $10 million of that? Am I missing anything there? Or maybe my math is wrong? And on the Dispensing side, I think you still said you expect high single-digit volume and mix, but hard to parse that out with Weener now. So is that high single-digit volume mix inclusive of Weener? Could you discuss how Weener has done versus '24, and your legacy dispensing volumes in '25? And just any color on end markets and dispensing, how that's performing amid tariffs, or whether it's fragrance, beauty and the likes? Any additional color there would be great.

Sure, no problem. And I think maybe you were a little high on your increase.

Yes. Matt, expect a mid- to high teens percentage increase. The impact from the hot-filled beverage is about $10 million, which will reduce the balance of the business.

And that's the important point. The only thing we're dealing with here in this conversation are the two discrete items that we outlined in the comments earlier. The balance of the prospects and forecasts for the business remain. And then I think, Matt, you think about Dispensing volume. Yes, we're seeing significant growth. I mean, it's really interesting. We've acquired 42 companies in our history at Silgan, and we've done a pretty good job of integrating all of those businesses, and it should be no surprise to anyone that Weener is already not fully integrated, but we've made significant progress. So the synergies are right on track where we expected. What's really interesting is some of the growth opportunities when you think about the global footprint, you think about the broadening of our basket of products we take to our customers, we're finding more opportunities than what we had initially identified. And as a reminder, we don't include those commercial synergies and our estimates when we set our synergy estimates at the beginning of the announcement of the acquisition. So we're feeling really good about it. It gets harder and harder to parse out our legacy volume from Weener because we are making investments into Weener facilities. And one thing I would say is, remember, those facilities are very well capitalized and carry with them a slightly higher depreciation. So if you think of EBIT margin, maybe the incremental EBIT margin didn't appear to be as robust as you would have thought. But when you get to the EBITDA margin level, we're delivering exactly what we would have expected from the Weener acquisition. And then the last point I'd make in DSC is you've got this powerhouse in fragrance and beauty, for our products that continues to perform. And what we've seen a good indicator of future market needs is our sampler platform. I'll just say we continue to essentially be sold out in samplers and volume has been very, very strong. Our fragrance and beauty volumes are accelerating in the second half of the year. So we're expecting significant growth in the back half of the year with new product launches. And I think many of our customers in the prestige and high end of this market segment have been talking about new product launches on their public call, and talking about how these products continue to perform versus some of the other portfolio of products they have in their company. And we feel really good about fragrance and beauty, and our customers do too, and they continue to invest, and we're right there with them to support them for their growth.

And we will take our next question from George Staphos with Bank of America.

Adam, I know you've already said you don't really want to get into the organic sort of legacy growth question on Dispensing. But I want to give it one more shot if you can answer the question this way. I mean, clearly, you know the number of parts, the number of units you're shipping, and you probably knew what Weener was doing at the time you acquired it. If we sort of stop the clock at that point with Weener's units being what they were, and you measured all the other incremental growth from here as growth in legacy. What kind of growth would that show ex beverage? Is there any way you can talk to that?

Sure. George, you're right. We can certainly achieve that, and we have done so. However, it involves some calculations and certain assumptions. To clarify, our legacy Dispensing products saw mid- to high single-digit growth in the quarter, which aligns with our expectations. The business is performing well without any issues. Regarding the beverage segment, due to the wet and cool weather we mentioned earlier, our customers reduced their promotional spending in the second quarter because there were limited opportunities for consumers to enjoy products like sports drinks, especially with so much rain. One customer even noted they didn’t account for 25 consecutive weekends of rain in their forecast for a specific market. These are the types of challenges we're facing. Although we addressed food and beverage in the press release, this primarily pertains to North America's hot fill beverages, including on-the-go sports drinks. These are the products that consumers typically enjoy outside their homes while engaged in activities.

Certainly. Ultimately, the customer is the customer, and you cannot dictate their actions. They will seek your assistance in the market. However, it's important to note that this won't remain stable throughout the entire year. It is likely they will need to focus on maintaining their market share in the third and fourth quarters, especially during the football season. What are their current promotional strategies, and why have they not increased efforts to regain that market segment? Additionally, what implications might this have for your business moving forward? Lastly, regarding the soup category, you noted it was affected by timing. What is the forecast for the third and fourth quarters, and how has that been accounted for? I'll turn the discussion over after this point and will return later.

Okay. Thanks, George. Back to the hot-fill segment for just a second. So it's a great question, one that obviously we're working really hard to understand what our customers do. So there's a couple of things. The pre-season filling for hot-fill beverages typically starts in February and March. So they're building inventory to support the demand of the season, call it late in the first quarter through the second quarter and through the summer. The reality is with the lower consumer demand that we've seen, they've actually built a little bit of inventory. Nothing to be worried about, but they're going to burn off their inventory. And then the reality of that market is there's a summer season for sports drinks, and the shoulders is just less demand. There is going to be a recovery; it's highly unlikely that's in '25. It will be in '26. And again, we're not going to try to forecast weather for '26 at this point, but there's nothing about the underlying demand and our customers' position. They are very focused on maintaining or growing their market share. And usually, that plays out pretty well for the packaging suppliers. So we feel good that there's a recovery. It's just unfortunate that it's going to be beyond the current calendar year. And then when you think about soup, it's very stable in the second half. We just had a little bit of timing issue in the first half. There was a little bit of pull into Q1. And then we had a really strong Q2 last year. So outside of that, soup volumes are really consistent. We've got super close relationships with those customers in those markets and understand what their programs are for the back half, and feel like we're in a very good spot. And soup continues to perform well. Again, underlying demand at the consumer level to be very consistent and our customers are confident in their second half forecast.

And just a point of clarification. You said that you expect stable second half of the year on soup? Did I hear that right?

Yes. Yes.

We will take our next question from Ghansham Panjabi with Baird.

I guess as you step back a bit, Adam, coming into the year, I think your initial view was that volumes would be up mid-single digits across the three operating segments, if I remember that correctly. And so the adjustment for EPS for 2025 specific as of this morning, is that specific to the weakness in specialty closures in North American beverage and then the bankruptcy impact at the customer level? Or is there anything else we should consider?

I know, I think you've got it exactly right. I mean I think it's two incredibly discrete items. The hot-fill beverage item in North America and the customer bankruptcy in Metal Containers, and everything else about our message and our story remains exactly the same as we came into the year. So I mean, we actually feel very confident that, A, we had it right with the exception of those two discrete items; and B, our businesses continue to perform. And maybe the last item I'll tell you is our key strategic markets of Dispensing and pet food continue to accelerate in the second half of the year, and we will see that acceleration in both of those product categories.

And that statement is true even with the mixed consumer across the U.S. and Europe? Just to be clear on some of your discretionary categories and so on, right?

Yes. And fair enough, literally 100% of our products being consumer staples, we feel like we fall very much into the category that consumers use and need the products that we manufacture.

Got it. And then just as a clarification. So the weakness in Specialty Closures in North American beverage. When did you start seeing that during the quarter relative to when you reported last and you had visibility in the first month end of the quarter at that time?

Yes. It was really around the middle of the quarter when we noticed the weather impact. We kept inquiring, but our customers did not adjust their forecasts until the middle to the end of the quarter, unfortunately.

We will take our next question from Jeff Zekauskas with JPMorgan.

For 2026, should we think as a base case of the effect of the customer bankruptcy as an additional $10 million, versus 2025?

So I think, Jeff, we haven't fully completed the bankruptcy filing process. Right now, we anticipate a $10 million impact in the latter half of 2025. Some of this is due to a customer exiting the market in specific areas, and that volume has shifted to co-packers we don't work with. There's a possibility that some of that volume returns next year. To be clear, my main expectation is that it remains stable in the second half of the year. The fate of the remaining assets and volumes will mainly depend on who ends up acquiring the business out of bankruptcy and their plans for those assets.

Okay. You mentioned two $10 million pretax items and reduced your free cash flow by $20 million. I would expect currencies to positively impact you in the second half. Does the reduction in free cash flow account for anything beyond these two items?

No, it's primarily the two items that we talked about on the EBITDA line.

And there's a lot of moving parts on currency, foreign currency too. We've got some favorability with the euro. We've got some unfavorable impacts in other jurisdictions. So all of that is factored in, and really came out at the net zero. And the $20 million impact is directly attributed to the two discrete items that we're talking about. So from an earnings and free cash flow perspective, those are the only things that have changed as far as our outlook for the year.

We will take our next question from Gabe Hajde with Wells Fargo Securities.

Considering the stock's current movement, I'll attempt to answer the question again. I believe you inquired about the potential for an additional $10 million next year. As it stands now, you noted that you're assuming the business that has shifted to co-packers for the bankrupt customer will remain consistent for the rest of the year. I arrived at the same revenue figure as Matt. In a worst-case scenario, which appears to be suggested, and assuming the stock fluctuates, would the total impact still be in the $20 million to $25 million range in terms of EBITDA? Is there anything else we should be aware of or consider?

I think that's a very large number, one that's larger than what we're considering, to be honest with you, Gabe. So I really don't think there's anything else to consider. The remaining facilities that we supply, we are on-site, or near site, and it doesn't really matter who the owner of the filling asset is. We are going to be significantly competitively advantaged versus any other supply option they have. So the question I have Gabe, and just full disclosure here is, what is the new owner going to do with those assets? In fairness, again, under the asset-light strategy, they exited a couple of facilities, they still own several facilities. And those facilities are some of the best in the world. And anybody who buys them, I think it will be a very interesting set of conversations as to whether they want to run them or not. I think they're advantage versus others in the market, and we feel really good about our position right next door to them.

Understood. It appears that the working capital fluctuations have been increasing annually. Adam mentioned the team's proactive measures to safeguard Silgan from any accounts receivable or inventory risks associated with another customer. The outflow, including changes in outstanding check balances, amounted to $1.325 billion. Are there any operational changes, possibly involving Weener or new asset additions, that explain why the working capital outflow is so significant at this moment? Additionally, is there any concern regarding the $430 million of free cash flow that won't be realized in the second half?

Gabe, it's Adam. I'm just going to jump in before Kim goes. And really, the biggest change in working capital was the ability that we were able to execute to secure additional raw materials in advance of the tariffs being implemented. And really, I think as you understand, it has no impact on a full year basis for Silgan. So we don't benefit from that. The cash that went out the door will come in by the end of the year and the receivable. But what it does do, it helps us mitigate the cost increase that gets passed on to our customers in 2025. So this was great execution by our team. Yes, in a certain quarter, it's going to look like maybe working capital was a little out of whack. We're incredibly confident as we are every year that, that all comes back and is cleansed by the end of the year. So I just wanted to say that really the biggest difference is that we took advantage of that opportunity to provide even more value to our customers in the metal containers market.

Right. And Adam on the right, it's just timing. So as we move through the year, that will go back to our normalized level, and we are still expecting to be at our regular free cash flow level.

And I know you're probably tired of me saying this Gabe, but everything else remains exactly as it was before. So the Weener acquisition, working capital is exactly what we expected. The balance of the business is exactly what we expected. It was this one item that will have no impact on the full year.

We will take our next question from Anthony Pettinari with Citi.

Regarding tariffs on steel and aluminum, a few weeks ago, a major can buyer mentioned the possibility of changing their can portfolio. Can you provide insights on how tariffs are affecting your customers or the competitive landscape? Additionally, with the recent trade deal with Europe, how has the situation evolved, or what impact are you observing?

Yes. We've discussed the impact of tariffs, and I want to reiterate that the company has not experienced any financial exposure from tariffs related to our product acquisition costs, which we are passing on to our customers. Our long-term agreements allow us to pass through these costs, and this will continue. This is particularly relevant because we're helping our customers mitigate these costs within the year. We believe the purpose of the food can is multifaceted; it serves as an economical way to provide nutrition to those in need. Most of our customers currently cook their products in our cans, which are essential to their filling operations and how they deliver nutrition to the market. Replacing or replicating this is not straightforward, and we believe the barriers to entering this market remain. A food can today largely requires specific preparations and processes. With tariffs around 50% on steel, the impact on the food can itself is roughly $0.05 per can. In our largest business segment, the wet pet food category, we primarily use aluminum cans. As we’ve mentioned, we prefer to source raw materials in the regions where we manufacture and sell, and most of our aluminum products are sourced domestically and not affected by tariffs. While there are slight price adjustments due to components like the Midwest premium, this amounts to around $0.01 per can for wet pet food. It’s crucial to note that we don’t believe these cost increases will influence consumer purchasing decisions for their families or pets. We have a solid mechanism to pass these costs through, our customers know how to manage it, and while consumers are paying slightly higher prices, it doesn’t represent a material change in the cost of finished goods.

That's very helpful. I have two quick follow-ups on hot-fill closures. Regarding the $10 million impact from customers reducing their inventories, do you believe it's unlikely that this challenge will continue into 2026? I don't want to assume your answer, but perhaps not. Additionally, there is some scanner data indicating that PET may have lagged behind beverage cans in the first half of the year. While sports drinks and juices don't correspond directly with beverage cans, I'm curious if you think there may be a substrate share shift or certain containers performing better that could explain the weaker volumes you experienced in the first half.

Sure. Great question. Let me address the second point first regarding the substrate. The best can is not a substitute for our sports strength package or on-the-go packages, which are not only reclosable but also resealable. We believe this product is differentiated, and we haven't discussed any potential shift with our customers. When considering the niche isotonic markets we support compared to the high volume carbonated soft drink and canned water markets, they are fundamentally different. The good news is our customers are focused on maintaining market share in the hot-fill segment, which we believe will drive recovery in 2026. The inventory levels our customers have should meet the demand for the remaining peak season of sports drinks in 2025. They cannot enter the summer season of 2026 without inventory, so we are confident that it will normalize. We have a clear understanding of their inventory levels and projections for next year and feel comfortable that recovery will occur next year. We are disappointed it isn't happening this year, but all indicators suggest that there will be a return to normalized levels in 2026.

We'll take our next question from Mike Roxland with Truist Securities.

Just one quick one on Metal Containers. Are you aware of any other customers who may be facing similar headwinds in their food can businesses? Or this particular customer that you mentioned in terms of bankruptcy, the only one that you're aware of that has these issues?

Well, it's a very discrete item to one customer that did file for bankruptcy that has been a required customer for us since we acquired their assets 25 or 30 years ago. So it really is very simple. We are the only one dealing with us in the industry because we're a requirement supplier, and we continue to operate under that contract. I would say the balance of our pack business is actually doing pretty well. No one's asked about the weather for the pack yet. But for the most part, the pack, we're expecting a normal season. And thus far, so far, the reports from the field have been pretty good. So the balance of our pack business is right in line with our expectations for the year.

Got it. Since you are so close to your customers, is there any way you could have anticipated this situation? Given your proximity, do you think there was something you could have done ahead of time to prevent it?

It's a great question, and I want to address it directly because we were prepared for this situation. Although we hadn't discussed it publicly, we have been anticipating this day for several years. I take pride in the fact that our largest supplier had no financial exposure or losses due to this bankruptcy filing, which speaks volumes about our close relationship with that customer. We understood the challenges they faced and anticipated various possible outcomes. When this situation arose, we were ready. We will continue to operate under our contract and will do our best to support them during the upcoming packing season in 2025.

Got it. And one last question I had is whether this situation is structural. If the company proceeds with bankruptcy and closes more plants, is Metal Containers now operating at a lower base in terms of both revenue and EBITDA? Or is there a possibility for you to attract other customers and return to your previous levels with this customer?

Sure. I think it's an interesting question. In the markets we serve and through our strong customer relationships, the first thing we would do is ensure we understand the landscape. If the right opportunities arise that align with our operational profile, we would certainly consider taking on additional volume. Additionally, we have cost-reduction measures ready to implement in case of a worst-case scenario. Therefore, I don't view it as a rebasing of the business's EBITDA since we can either utilize those assets, which are very low-cost, or we can exit facilities and remove higher-cost operations.

We will take our next question from Arun Viswanathan with RBC Capital.

I apologize for repeating myself, but this seems to be the second or third instance we've encountered in recent years, not necessarily bankruptcies but significant disruptions from major customers on the Metal Container side. Can you discuss any expected impacts on inventory as a result? Additionally, I'm curious if these discussions have led you to believe that there are underlying structural issues in the food can market or changes in consumer preferences. What would you attribute some of these disruptions to, if anything?

Sure, that's a good question, Arun. A couple of things to note. Last year, we had a customer reduce their pack volume by about 30% at the start of the year, and unfortunately, it's the same customer we’re discussing now. We treat these situations as distinct, and it does relate to the same customer. As we've mentioned, we have been preparing for a range of possible scenarios over a longer timeframe. This conversation remains quite similar. On the bright side, there is nothing concerning about the structural aspects of the food can market or the fruit and vegetable sector. Our other business areas are performing well; pet food is a rapidly growing category for us, soup remains stable, and our overall fruit and vegetable packing business is strong this year. Despite this particular issue, we are on track to achieve mid-single-digit growth in the Metal Container segment this year, which is encouraging. While it is unfortunate that this issue involves the same customer, we are optimistic about our food cans, which are a vital part of our portfolio. With our diverse product lineup and the markets we serve, we feel well-positioned for the future. The growth rate is promising and will accelerate in the second half of the year, potentially representing about 50% of our total volume. This aligns with our strategic growth plans for the company, particularly in the wet pet food segment, which continues to drive our growth.

Okay. Appreciate that. And then I did have a related question, which is you mentioned redirecting some of these volumes, which are very low-cost assets elsewhere. So it sounds like you may have a strategy to offset some of this loss. Is that a fair characterization? And then I guess similar question for closures. Given the weakness that we've seen in isotonics now for quite a while, does that also appear to be structural? Are there any customer concerns there that we should be aware of? And if something like that happens, can you redirect your volumes elsewhere? And could you potentially even do that in an anticipatory fashion, just given the last few quarters of weakness?

Sure. A couple of things. One, on the metal container side, first of all, we're continuing to operate under a requirements contract. So there's no shifting of volume anywhere else at this point. I think what I'd like to give our team a lot of credit for is, again, planning for a whole series of potential outcomes and not being surprised by any of them. So as this bankruptcy proceeding continues on and hopefully gets to conclusion sometime in the maybe first quarter, early second quarter of next year, we'll be prepared for any of those eventual outcomes. I can't tell you which one will be the actual outcome. We'll be ready for a whole variety of them with specific actions to take. And then actually, I do feel differently on the closures volume. So yes, it's that segment in hostility that is a challenge for us right now. It was a little challenged last year. But it goes with the territory of being kind of the leader in the market. We had a disruptor brand that we supply a requirements contract to that provided significant volume growth in that particular market, late '23. Or actually, I'm sorry, through '23, and that disruptor brand all that went away in '24. So we were the only ones that experienced that volume lift and the volume decline because of our presence in that market and our market share. So I think the good news, Arun, is that there continue to be disruptive brands, and we're actively engaged with many at this point that we hope will become a billion-unit franchises, but we'll see what happens. So nothing structural about the business. And we think the underlying market continues to grow. And with our low-cost, long-term customer relationship and leading market share in that business, we think we're positioned for success on the long term and certainly in '26 moving forward.

Great. And if I may, just one quick one. So given that you're reducing guidance only by about 4% at the midpoint here and then your stock is off quite a bit more than that, maybe triple. So can you pivot and change your strategy maybe to focus more on share buyback and be opportunistic here rather than deleveraging? Or maybe you can just comment on how you view that?

Yes. So you're right. I think we view this guide as something like a 4% change for two specific items on a full year basis with the entirety of the rest of the thesis intact. So there is no change to strategy. There's no change to really anything else in the business outside of these two items. And I think Bob can talk about capital deployment and how we think about share repurchases in the grand scheme of what else we do here.

Sure. Yes, Arun, I think we've been clear over the years that this aspect is a crucial part of our capital allocation strategy. We will pursue M&A opportunities where they align with the returns we expect and that our shareholders expect. In the near term, we will continue to conduct share repurchases when the market becomes dislocated, similar to what we've done in the past. Our strategy remains unchanged, and we will keep looking for opportunities in the M&A market.

We will take our next question from Daniel Rizzo with Jefferies.

Given the bankruptcy of the customer, does your contract now provide more flexibility as this situation is resolved, allowing you to avoid the same commitments you had since acquiring the asset?

The contract continues on in the bankruptcy filing. So we are operating. They are operating and we are operating under the same requirements contract that we have been operating under for many, many years that has been renewed multiple times since we originally acquired those assets. So there is no flexibility beyond that. We'll honor the contract as they are.

Okay. And then I mean the weather issue was, I guess, a little bit unique with the wet spring we had, at least here in the Northeast. But I was wondering if weather has ever been an issue before, or it's something that I mean just with the global warming, the kind of more extreme weather patterns, if it's something that could crop up from time to time as we move forward?

I have been here for 20 years, and I believe Bob has been here a bit longer. This year marks the first instance where cold and wet weather has impacted a sports drink product and market for a specific time during the peak season. It has been a unique experience compared to anything I've encountered before. I don't expect this situation to recur in the future, and we are planning for a return to normal conditions by 2026. Our customers are discussing this and making their own plans. We'll see what happens, but if I attempted to predict the weather, I wouldn't be very successful.

We will take our next question from George Staphos with Bank of America.

It's late in the call. I'll try to ask these quickly. Just for posterity, for the next couple of quarters, what should we expect as your volume outlook for the segment for 2025 after the second quarter? I believe you mentioned that Metal is still in the mid-single digits; please correct me if I'm wrong. Is Custom also still in the mid-single digits? And for DSC excluding beverage, is it still expected to be in the mid-single digits or better? Would that be accurate?

Yes, you got it exactly right.

Regarding working capital and the efforts you've made for your customers to help manage their cost increases, is there a possibility of being compensated for that additional working capital effort, or is it simply a standard part of being an excellent supplier in the market? How can you potentially be reimbursed for that effort, if at all, or is it considered just a part of the business?

Yes, that's an interesting question, George. My answer is that we do get compensated for that. We receive payment throughout the system via our contractual pass-throughs, which cover all costs associated with procuring the raw materials, including freight and carrying costs. Ultimately, we are compensated for that. Our customers are on board with us in this discussion, and they recognize that these costs will be passed through. We believe it was a great opportunity to help them gain an edge over their competition in the marketplace.

I appreciate that. Regarding the last question, which has been raised a few times, let's consider a scenario where the customer is acquired or some of their operations are acquired. How does the contract function in that situation? Are you still the supplier, and are you still covered? Also, you have mentioned that your operations are positioned to be lower cost and logistically well placed. However, with some volumes potentially moving to co-pack operations, does your position still remain as the most logistically advantageous and lowest cost, especially if those volumes aren't operating at previous levels? How would you address those concerns? Best of luck for the remainder of the year.

Sure, thanks, George. While I can't disclose specific details about our contracts, I can say that our long-term agreements in Metal Containers include a follow-the-liquid provision, which we consider when assessing volumes in Metal Containers during any change of control. Additionally, we support these filling assets with the most cost-effective, near-site and on-site production models available. Even when factoring in potential freight disadvantages, these sites are likely still favorable in the North American can-making market, and we are confident in that position. Lastly, we have opportunities to reduce costs if needed, whether it involves these assets or other higher-cost assets within our system, allowing us to respond effectively to market changes and owner preferences. Regarding co-pack locations, we currently do not supply them as we primarily focus on our brands and their success in the market, but we could consider a pivot using our low-cost capabilities.

We will take our next question from Arun Viswanathan with RBC Capital.

I apologize for reiterating this, but this seems to be the second or third occurrence we've observed in recent years, not just bankruptcies, but significant disruptions with major customers on the Metal Container side. Could you discuss any additional impacts on inventory that you foresee? Additionally, I’m curious if this reflects deeper structural issues within the food can market or possibly shifts in consumer preferences. What do you think is causing these disruptions, if anything?

Sure, that's a great question, Arun. A couple of points to mention. You're correct that last year, we saw one customer reduce their pack volume by about 30% at the beginning of the year. Unfortunately, this is the same customer we're discussing now. We consider these issues to be separate but related to the same client. As we've noted, we were preparing for various potential outcomes over an extended period, so this situation is disappointing and reflects a similar discussion we've had before. The positive aspect is that there's nothing fundamentally wrong with the structural components of the food can market or the fruit and vegetable market, nor with our overall business. The pet food category continues to grow well for us, and soup remains stable. Overall, our fruit and vegetable pack business is performing well this year. Despite this isolated issue, we are on track for mid-single-digit growth in the Metal Container segment this year, which is encouraging. While it is the same customer causing the issue, we have strong confidence in our food cans, which are a vital part of our portfolio. With our diverse product offering and the markets we serve, we believe we are positioned well for the future. We anticipate growth will ramp up in the second half of the year, likely making up around 50% of our total volume. This aligns with our strategic growth plan for the company, particularly in wet pet food, where we are seeing significant progress.

Okay. Appreciate that. And then I did have a related question, which is you mentioned redirecting some of these volumes, which are very low-cost assets elsewhere. So it sounds like you may have a strategy to offset some of this loss. Is that a fair characterization? And then I guess similar question for closures. Given the weakness that we've seen in isotonics now for quite a while, does that also appear to be structural? Are there any customer concerns there that we should be aware of? And if something like that happens, can you redirect your volumes elsewhere? And could you potentially even do that in an anticipatory fashion, just given the last few quarters of weakness?

Sure. A couple of things. One, on the metal container side, first of all, we're continuing to operate under a requirements contract. So there's no shifting of volume anywhere else at this point. I think what I'd like to give our team a lot of credit for is, again, planning for a whole series of potential outcomes and not being surprised by any of them. So as this bankruptcy proceeding continues on and hopefully gets to conclusion sometime in the maybe first quarter, early second quarter of next year, we'll be prepared for any of those eventual outcomes. I can't tell you which one will be the actual outcome. We'll be ready for a whole variety of them with specific actions to take. And then actually, I do feel differently on the closures volume. So yes, it's that segment in hostility that is a challenge for us right now. It was a little challenged last year. But it goes with the territory of being kind of the leader in the market. We had a disruptor brand that we supply a requirements contract to that provided significant volume growth in that particular market, late '23. Or actually, I'm sorry, through '23, and that disruptor brand all that went away in '24. So we were the only ones that experienced that volume lift and the volume decline because of our presence in that market and our market share. So I think the good news, Arun, is that there continue to be disruptive brands, and we're actively engaged with many at this point that we hope will become a billion-unit franchises, but we'll see what happens. So nothing structural about the business. And we think the underlying market continues to grow. And with our low-cost, long-term customer relationship and leading market share in that business, we think we're positioned for success on the long term and certainly in '26 moving forward.

We will take our next question from George Staphos with Bank of America.

For the next couple of quarters, what should we expect regarding your volume outlook for the segment in 2025 after the second quarter? I believe you mentioned that Metal is still mid-single digits; please correct me if I'm mistaken. Is Custom still mid-single digits as well? And for DSC excluding beverage, is it legacy mid- to high mid-single digits or better? Would that be accurate?

Yes, you got it exactly right.

Okay. Regarding the working capital and the efforts you made for your customers to manage their cost increases, is there a way for you to be compensated for that additional working capital effort, or is it simply part of being a good supplier in the market? How would you go about getting paid for that, if it's even possible, or is it just a standard expectation?

Yes, that's an interesting question, George. We do get compensated for that throughout the system due to our contractual pass-throughs. All costs associated with acquiring that raw material, including freight and carry costs, are ultimately covered. Our customers are aligned with us in this discussion, and it's beneficial for them as they understand that these costs will be passed through. We see it as a significant opportunity to help them gain an advantage over their competition in the market.

Thank you. This does conclude today's question-and-answer session. I would now like to turn the call back for any additional or closing remarks.

Great. Thanks, Rachel, and thanks, everyone, for their interest in Silgan. We look forward to sharing our third quarter results later in the year.

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