Silgan Holdings Inc (SLGN) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for joining the Silgan Holdings Second Quarter 2020 Earnings Results Conference Call. Today's call is being recorded.

At this time, I'd like to turn the conference over to Ms. Kim Ulmer, Vice President, Finance and Treasurer. Please go ahead, ma'am.

Thank you. Joining me from the company today, I have Tony Allott, Chairman and CEO; Adam Greenlee, President and COO; and Bob Lewis, EVP and CFO. Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore, involve a number of uncertainties and risks including, but not limited to, those described in the company's annual report on Form 10-K for 2019 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements. With that, I'll turn it over to Tony.

Thanks, Kim. Welcome, everyone, to our second quarter 2020 earnings conference call. We trust that everyone continues to safely navigate the ongoing COVID-19 pandemic. We continue to be grateful for our customers who continue to produce desperately needed products, particularly for home prepared food and health and hygiene products. We're proud of the many Silgan team members that have adapted to the new normal working environment and unselfishly come to work and performed at the highest levels, so that we're able to meet the increased demands of our customers and consumers. We take the safety of our employees and the continued supply of these vital products very seriously.

With that, I'll make a few comments about the second quarter and provide a few thoughts on the full year. Bob will provide further details about the quarter and then Bob, Adam and I will be happy to take any questions.

As you saw in the press release, we delivered an incredibly strong quarter with record adjusted earnings per share of $0.85, a 55% increase over the prior quarter. These results were well ahead of our range of expectations for the quarter due to the sustained nature of the demand levels throughout the quarter and the truly remarkable operating performance across the board. Each of our businesses posted strong second quarter volume gains and delivered record segment income. While the consumer pantry stocking favorably impacted volumes early in the quarter, it is important to also note that double-digit volume growth was sustained throughout the quarter in several key markets, indicating repeat consumption patterns for home, food and for Hygiene products. Demand levels remain high in July, and we expect continued strong volume gains, even in geographies where stay-at-home requirements have been eased. Just as importantly, each of our businesses operated at peak productivity levels during the quarter. We also closed on the acquisition of the dispensing business of Albea Group on June 1. While the demand levels for the fragrance portion of this business are negatively impacted by the on-premise retail pullback from COVID-19, we are pleased with the integration and synergy progress thus far. We remain convinced of the long-term fit of this business and our position of what we believe will be a strong market as COVID-19 restrictions are eased.

As a result of our performance for the first half of 2020 and continued strong volume outlook for the remainder of the year, we are increasing our full year earnings guidance to a range of $2.70 to $2.85 per share, up from the previous range of $2.30 to $2.50. This compares to a $2.16 in the previous year and represents a 28% increase at the midpoint. We are also increasing our free cash flow guidance to approximately $330 million, up from approximately $275 million. At the current share price that represents a free cash flow yield of nearly 8.5%.

With that, I'll turn it over to Bob review the financial results in more detail and to provide additional explanation around our earnings estimates for 2020.

Thank you, Tony. Good morning, everyone. As Tony highlighted, our results for the quarter exceeded the high end of our expectations as we benefited from sustained improvement in volumes in key markets of our businesses, strong operating performance across the board and higher pension income. As a result, our adjusted earnings per diluted share were $0.85 for the quarter, up 55% as compared to $0.55 in the second quarter of 2019.

On a consolidated basis, net sales for the quarter of 2020 were $1.180 billion, an increase of $83.3 million or 7.6%, largely as a result of improved volumes in all businesses, partially offset by the pass-through of lower raw material costs and unfavorable foreign currency translation. Results for the second quarter of 2020 included rationalization charges of $2 million, costs attributable to announced acquisitions of $16.1 million and the purchase accounting write-up of inventory of $3.5 million, which had an aggregate impact of $0.15 per diluted share while the prior year quarter included rationalization charges of $39.3 million, primarily for the announced shutdown of 2 metal container facilities in the U.S. and the recognition of the withdrawal liability associated with the withdrawal from the Central States Pension Fund, which had an aggregate impact of $0.27 per diluted share. Therefore, we delivered adjusted income per diluted share of $0.85 in 2020 versus $0.55 in 2019. Interest and other debt expense decreased $2.6 million to $25.8 million due to lower average rates, partially offset by higher average outstanding borrowings related to the acquisition of the dispensing operations from Albea, and the incremental revolver borrowings outstanding during the quarter as we proactively held cash and cash equivalents to ensure access to liquidity in the midst of the potential credit market disruptions as a consequence of the COVID-19 pandemic. Given the improvements in the credit markets later in the quarter, we did repay our incremental outstanding revolver in June, but maintain available revolver capacity that could be borrowed again at any time.

The tax rate for the second quarter of 2020 was 25.8%, higher-than-expected as a result of certain nondeductible deal costs. The 2019 tax rate of 23% benefited from the resolution of a prior year tax line.

Capital expenditures for the second quarter of 2020 totaled $41.3 million compared with $54.4 million in the prior year quarter. Year-to-date capital spending totaled $106.4 million this year compared to $116.2 million in 2019. We anticipate capital spending for the full year to be approximately $220 million, which now includes the recent acquisitions. This compares to $231 million in the prior year. Additionally, we paid a quarterly dividend of $0.12 per share in June with a total cash cost of $13.3 million. On a year-to-date basis, cash dividend payments totaled $27.1 million.

I'll now review some of the financial performance of each of our 3 business franchises. The metal container business recorded net sales of $597.2 million for the second quarter of 2020, an increase of $21.6 million versus the prior year quarter. This increase was primarily a result of higher unit volumes of approximately 15%, partially offset by the pass-through of lower raw material costs, a less favorable mix of products sold and the impact of unfavorable foreign currency translation of approximately $2 million. The unit volume improvement resulted from continued higher demand for products consumed in home, and were partially offset by the volume benefits in the prior year from a customer who had been destocking inventory in previous periods.

Segment income in the metal container business increased $57.8 million to $71.8 million for the second quarter of 2020 versus $14 million in the same period a year ago. The increase in segment income was primarily attributable to lower rationalization charges, the impact from higher unit volumes and increased pension income, partially offset by a less favorable mix of products sold.

Net sales in the closures business were $410.5 million for the quarter versus $363.4 million in the prior year quarter. This increase was primarily the result of higher unit volumes of approximately 3% and a more favorable mix of products sold, partially offset by unfavorable foreign currency translation of about $7 million and the pass-through of lower raw material costs. The increase in unit volumes was principally the result of strong volumes for consumer health, hygiene, personal care and food products as well as the inclusion of recent acquisitions. These volume gains were partially offset by a weak demand for certain beauty and beverage products.

Segment income in the closures business for the second quarter of 2020 increased $11.7 million to $58.6 million, primarily due to higher unit volumes, a more favorable mix of products sold and higher pension income, partially offset by the negative impact of $3.5 million for the purchase accounting write-up of inventory of the dispensing operations acquired from Albea.

Net sales in the plastic container business increased $14.6 million to $168.8 million in the second quarter of 2020, primarily as a result of higher volumes of 14%, partially offset by a less favorable mix of products sold, the pass-through of lower raw material costs and an unfavorable foreign currency translation of approximately $1 million.

Segment income increased $9.6 million to $23 million for the second quarter of 2020, primarily as a result of higher volumes, lower manufacturing costs and higher pension income, partially offset by a $2.8 million charge for a noncommercial legal dispute relating to prior periods.

Turning now to our outlook for 2020. As you've seen in the press release, we are increasing our full year estimate of adjusted earnings per diluted share to a range of $2.70 to $2.85, up from the previous range of $2.30 to $2.50. The midpoint of the revised range of earnings represents a 28% increase as compared to the prior year adjusted net income per diluted share of $2.16. We're also providing a third quarter 2020 estimate of adjusted earnings in the range of $0.85 to $1, which at the midpoint represents a 22% increase versus the prior year record adjusted earnings per diluted share of $0.76. Given the uncertainties around the timing of the fruit and vegetable harvest in the U.S. and Europe, results for the back half of the year could shift between the third and fourth quarters. Given the improved earnings outlook, we are also increasing our estimate of free cash flow generation to approximately $330 million, up from our previous estimate of approximately $275 million.

That concludes our prepared comments, so we can open it up for Q&A. And once again, I'd like to remind everyone to limit their time to one question and one follow-up, and we're happy to take follow-up questions if time permits. So David, I'll turn it back to you to provide directions for the Q&A session.

(Operator Instructions) Our first question comes from Mr. Anthony Pettinari with Citi.

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

Sure, Bryan, it's Tony. I'll give you the first one. I'll let Bob take the second part. So Albea, I'll give a slightly longer answer to that, and just start by saying that we're very happy to have the business joining us June 1. We have been nothing but impressed by the team that came over, really very solid organization experienced in the dispensing markets. So we feel really good about that. We're making good headway on synergies. So all that, we feel very good about. If you look at the month, it basically had no meaningful impact, it was slightly dilutive, but that was primarily because of the purchase accounting. If you look for the remainder of the year, as we said in the press release, our forecast has that being not meaningful on either side. So not meaningfully accretive and not meaningfully dilutive. The reason for that, which we talked about last call is roughly half of the business is in the fragrance market. The fragrance market is, of course, heavily retail-based and travel-based so that market was off on volumes really since the pandemic began somewhere between 25% and 30%, maybe a little over 30%. That continues to be true. Right now until we see kind of the world get back to a more normal retail, while e-commerce will grow somewhat, it's a small enough part of it, it's not going to change that much. And so our expectation would be those kind of declines year-on-year through that. So therefore, really, the numbers you're seeing have everything to do with the base legacy business and really nothing at this stage to do with Albea, which we think will be really a strong performer once those markets come back. Working capital, Bob?

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

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

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

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

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

Great. Good question, George. I'll take the first part and let Tony take the second. So yes, just focusing on Q2 and the markets we serve, particularly in the metal container business. Look, it was a good quarter all the way around. Everyone saw the CMI data. And you really focus on, for us, really the 3 key markets in Q2, and that's our soup market, our pet food market and our protein market, all of which saw substantial increases. I think soup was up a little over 50% in the CMI data. We're overweight to soup. So our soup number was actually a little bit greater than that. So what I think is really interesting, you go to a category like vegetable, which it seems to be the outlier in the CMI data, the market data, limited growth of 7%. Really, that's because of us. As we've talked before, we had one pack customer who we plan to have volume shift from Q2 to Q3 during the year, and that indeed happened. So there were several hundred million units of volume that we'll realize in Q3 as we had planned to. So that's one example where I think the market was a little different than our experience.

And then finally, pet foods, we've talked a lot about pet food and our overweight to that category. We -- again, we're above the market data for pet food from a volume standpoint. And what's been really interesting, we've had, again, it's been challenging meeting all of the volume requirements of our customers, but we've done it successfully. And there's been so much growth in pet foods that one of our large customers did have some difficulties sourcing protein for their products. So our volumes were a little muted in pet foods because they were not able to get all the ingredients that they had planned and then they've prioritized their ingredients to their core markets that they serve.

So I think from a market standpoint, that's what I'd tell you, George, and I'll pass it to Tony.

Yes. I think, George, on your second part of the question, we definitely do not view all of this as one off. There obviously was a pantry stuff. If we look at the numbers, you can see a spike in that March-April period. I think what's really telling, as Adam went through, is you didn't see the destocking of pantries against that, that you saw continued double-digit growth. And so to us, it seems pretty clear that, that consumption pattern is continuing on and it's logical, right? People eating at home more. This is a great means to do that. And what makes us think this could be stickier is that everything that we've been saying all along about the can, it's, by far, the lowest price point way to get these foods, it's the most sustainable means to deliver these food products that exist. All those values are there and people are being now exposed to the fact that it tastes good, that soup is good, it's got value. And so it's sort of a new consumer is being exposed to food cans. And we think there will be some continuation of that as we go forward. So as what are our customers doing about that? Obviously, they see the same. I think for them, 2 main drivers, one, they're seeing more cans through their thermal processing, and that's really good for them in terms of financial. And as I said, it's a more sustainable choice than anything else that's out there that they could be doing.

And so our customers, by and large, are lined up and doing a lot on the marketing side, trying to educate consumers about how to couple with these foods, use them more, doing that through e-commerce and other ways. And so we're really pleased to see the kind of the focus and dedication customers are putting into it. And we're doing the same. We're spending more on marketing, the value of can and we are all lined up to try to make sure that we have this one opportunity to re-expose the value of the can to consumers, and we're all trying to take advantage of that.

The last thing I'll just say is -- recall over the years, George, I know you and I have talked a lot about alternative packages and things that are shifting. For us, again, it was always restaurants who were our main competition. We always said is it's more about people not eating at home. And so this is a fundamental shift to that question. And we'll all see how long that shift goes on. But as long as economies are tough, we think there'll be kind of a sustained level of more at home consumption which, of course, Americans do less than really anywhere else in the world.

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

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

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

Sure. Mark, look, we've been I don't want to say this was luck because there's a lot of effort and discipline that goes into supplying our requirements contracts, both in our food can business and elsewhere throughout the Silgan companies. Being a requirement supplier, we are expected to be able to take surges to some degree. Now I think the volume increases we've seen kind of exceed that. But our teams have done a terrific job in working with customers and understanding what their needs are and what their demand patterns are. And we've met those needs literally without fail on any occasion. So when you think about the capacity constraints, for the most part, our capacity is pretty well aligned with our customers' filling capacity. So from my perspective, I would say, we're not really a bottleneck in the capacity or supply of capacity to our customers. So I think our customers, particularly in food throughout this period of time have sort of consolidated their SKUs that they run on their filling lines to limit changeovers to increase productivity. And we've been able to walk stride for stride with them in that supply model. So that happened in our plastics business. It's happening in our closures businesses as well. So it's been a really interesting process. I think one very interesting component here in our plastics business is our service and supply model is being rewarded on a pretty significant level right now. We're winning in the market. And I think we are exceeding expectations, and it's showing through into the bottom line of the business and does have some sustainable effects to it.

As far as our supply chain, now back to kind of our resin supply and our metal supply, again, it's kind of the same thing. We worked very closely with our suppliers we're managing it on a daily basis, and while maybe it's not always perfect, we've not had any issues getting the products that we need to supply the significant increase of volume that we're seeing across the board.

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

There is -- there's a potential small tail, I suppose, but nothing of meaning.

Our next question comes from Ghansham Panjabi with Baird.

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

Okay. Great. Ghansham, it's Adam. So I'll start with metal containers. Obviously, we're heading into our seasonally strongest quarter with the harvest and pack volumes coming through. So we're expecting a very strong Q3 for volumes well in the double digits, with kind of strong double-digit volumes year-over-year in our metal container business. On the plastics business, we'll see another quarter of double-digit year-on-year volume growth. And then over to our closures business, again, I think it's important to remember as we've said a couple of times now, closure isn't necessarily a closure, it's a closure here because of the mix of the product. You think about our dispensing products, and I'll just say that the selling value of those products is something like 10:1 versus kind of our standard flat cap that we utilize and produce for our food and beverage market.

So when you think about our Q3, we'll see continued strength in dispensing. We'll see continued strength in food. And then our beverage markets continue to be a little bit challenged given the nature of what those beverage products are. So you think about the U.S. market for beverage, we're largely talking about things like sports drinks, dairy products like gallon jugs of milk, et cetera. Those have underperformed other parts of our business, thus far, in Q2. And we think while there will be some recovery, they are likely to be down a bit versus prior year. And then you think about our European closure segment as well with a high-volume of product going to what we'll call the hotel catering and kind of recreation business that is largely single-serve premium products, and that model is under pressure as tourism is subsided, particularly in Europe. So I think with all that being said, dispensing is going to be up significantly. And so we're looking at low double digits for the third quarter. I think food is going to be up low double digits for the third quarter. And beverage, like I said, is likely to be down just a little bit versus the prior year.

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

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

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

No. Really, it's just the power of our fixed cost assets and a lot of volume running across those -- that fixed cost base...

And the pension, which you're aware of.

Pension, right.

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

Just a question on the mix in metal cans. Just wondering if you could talk about the volume trends in the U.S. versus Europe, if there were any big differences there? I know Europe's a little bit less of a pantry stocking, but with everybody kind of eating at home, wondering if things maybe even accelerated a little bit in Europe? And then similarly, I think in last quarter, you talked about some headwinds in the foodservice part of the portfolio. Are you seeing any signs of improvement for food cans into the foodservice market?

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

Just to clarify, the 15% volume growth in cans, that was pretty similar between the U.S. and Europe, no real meaningful difference there?

Yes. They're roughly the same. Actually, Europe was a little bit ahead of the 15%, but not meaningfully, yes.

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

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

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

So limit cost and increased capacity too.

Yes.

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

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

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

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

Yes. Good question. And I thought I was trying to be clear. I think without doubt, there is some pantry stuff they have. There's some onetime fill that happen here. That will be a hard comp to go up against next year. And then there's some level of -- there was a period of time, there were restaurants were based with almost completely out of the game. That won't be the case a year from now. And so I think without doubt, you'll have some volume negative comp on this to compare on that issue alone. But our main point is that it doesn't go all the way back to where we were. At least the data we see right now does not lead us to conclude it goes all the way back to where we were before. I think it's somewhere in between -- I think the fact we're seeing strong double digits 4 months after customers are continuing to see that. They're going to pack everything they can. So that is their expectation. So all of that leads us to think that something like that double-digit is sustainable. But at some point, yes, things were up 23%, 24%. That's going to be a tough comp next year for sure. If that were 10% to 13%, if not -- you don't feel quite as bad about that one. So that's our basic feel on it. That's a big chunk of that, though ought to be sustainable if we can continue to keep the story out there to our customers.

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

Well, I think you could back work this pretty well. We're basically saying that we're not expecting to be accretive nor dilutive for the remainder of the year. So I think if you do that, you're going to find that there's some $20-ish million of that number right now which makes sense when you think about a 25% to 30% decline on the top line. So that's -- those are rough numbers for you. And frankly, we're early days on this. We've owned it for not even 2 months yet. So for the first time now, we're in there figuring out what cost ought to come out given that kind of a volume reduction. More importantly, we're working really hard with the customers, try to help them figure out how do they get back into a selling mode and what's the best way to do that. How do they take greater advantage of e-commerce, which we have really good answers for them on that. So there's a lot of things that are going to take the time for us to work out that we think long-term will be really good for the business. But the short-term impact is a little less clear and frankly, a little less important to us than the long-term opportunity.

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

Congratulations on a solid quarter. Anyways, I know you guys don't necessarily look at kind of sequential moves in EPS. But I'm trying to bridge a little bit kind of the implied $0.92, give or take, of your Q3 guide versus on a sequential basis, you guys have historically seen on average over the past 5 years, I don't know, $0.27 of incremental earnings from Q2 to Q3. And I'm just curious, is there something you're seeing in the business? You mentioned a little bit of a sequential slowdown in volumes and closures and plastics, but anything on the profitability side, manufacturing costs or otherwise that you're seeing that kind of gives you pause? Or is it possible that you guys beat by $0.10, again, on the top end of your guidance range when we're talking in October?

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

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

Sure. So the answer is yes. Closure -- total closure volume would have been down in Q2 without the acquired volume. So again, I'll just go back a little bit to what I said. When you think about the 3 big markets that we serve, dispensing, food and beverage. Dispensing for the legacy business was up 16%. You'd think about our food business was up around 11%. Our beverage business, which is our highest volume segment from a unit volume standpoint, was down about 8%. So that's how the quarter played out. So mix was incredibly favorable because we had so much growth in our dispensing systems products, so that's the legacy business. And then from an acquired...

The acquisitions were about $37 million -- $36 million, $37 million of revenue.

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

I guess, first off, I had some questions on the sequential move as well. I guess, looking out maybe medium term, last couple of years, you've talked about footprint rationalization and as it relates to certain customers and possibilities of that in North America, have you kind of re-contemplated your footprint at this point, just given the change in the market? And maybe even just comment just generally on food can capacity, maybe start with North America, but you could also talk a little bit about Europe?

Sure, Arun. Good question. On the footprint optimization plan that we kind of announced at the end of last year for our metal food container business, clearly, obviously, we've had a sizable jump in demand for the full year of 2020. So we continue to evaluate all of those plans. I'd tell you that our #1 focus is meeting the demand requirements of our customers. So we wouldn't do anything that would put that supply chain in jeopardy. So we'll make that crystal cleaner. Therefore, we have delayed the implementation of a portion of that optimization plan. And we'll continue to evaluate that. I think to the earlier conversation as we get a clearer understanding of the stickiness of all the volume and really what is sustainable going forward. We'll reevaluate those plans and see how we want to move forward. There is a portion of those plans that would be unaffected by this volume that we'd anticipate moving forward later in the year as we had originally planned. But again, all of that is subject to us meeting the needs of our customers.

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

And then also, I guess, just some questions on uses of cash. So you obviously completed the transaction and congrats on that. So maybe you can just discuss how you see deploying that free cash flow that you've guided to for this year. And then next year, if there's any large step changes, either in working capital or CapEx that would materially change that free cash flow number outside of growth?

Yes, Arun, this is Bob. So as we talked about -- when we did the acquisition, we thought we'd be kind of in the low-to-mid 4s on a leverage standpoint post acquisition. With this free cash flow generation, we'll probably accelerate our deleveraging a bit from where -- what the original plan was, and that's just the strength of the free cash flow. I think the question of what we do with it really will be contingent upon what the overall credit markets look like as we come through the end of the year. As we said in our commentary, we did proactively borrow against the revolver just to protect our liquidity. If we see another kind of go round of that tightness around liquidity, which is possible if things get tough again. Then we would probably sit on cash for a short period of time. If we don't see that, then obviously, we think delevering is the right opportunity here. So we have a couple of choices in terms of how to pay down debt to delever. And then from there, we will continue to look opportunistically at the M&A front and see what comes our way. But the priorities are to protect our existing business from a liquidity standpoint, first and foremost, and then to get our leverage back into the range of what our typical ongoing appetite is.

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

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

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

Yes. It's -- we look at any great opportunity and we always have. We haven't done a meaningful food can deal in some period of time. So I don't -- it could come up, but again, it hasn't happened in some time now.

Our next question comes from Daniel Rizzo with Jefferies.

Just one question. You mentioned the mix as a headwind in metal containers. And I was just wondering how we should think about that going forward as the pandemic kind of eases and economy recovers, how we should think about mix in metal containers and really for all the segments for the rest of the year?

Let me try this because it -- because you're right, we got mix that sort of riddled through here and it sounds like a negative. That's not necessarily the case. So things that drive mix in food cans are -- we've been talking for years now about how pet food has been growing, how protein has been growing. Those are -- they had been growing before the pandemic and they really grew during the pandemic. So those just have any smaller cans. It's not necessarily a margin issue or anything else, but when you get into mix, and driving volume, et cetera, you need to explain that. So it was not intended as a negative point. You will see in Q3, one of the things we will experience, as Adam alluded to, is you may see less restaurant size cans, which are much bigger. So you could see a little further negative mix in Q3, which actually would have profit impact just because the dollar scale of that per can down to the bottom line is larger. So that's sort of the mix story in the can.

Then you can talk about the mix in closures, as I said, it really -- it's a great news story when dispensing grows. The -- against what really happened, their beverage was off because of the -- what was lapping a pandemic that people weren't outside we feel strongly that will come back at some point in time, it will get hot or the pandemic will fade away. And so that will settle itself out. But what's really important there is we like the dispensing system. We've been spending investment there. We think that's a great spot for the future, and that's an area where you saw sizable growth in the product line. And that's really important and valuable mix point. And then plastics is just a little bit more kind of what food up or what's going on the size of package, et cetera. So it's really not negative on mix, it's just the way we described it.

Okay. That's very helpful. And then just -- sorry, just one other question. And just with soup -- -- I mean, I know some of this is pandemic related, but it seems like it's been rebounding for, I think I mentioned in the past, like 3 or 4 quarters now. I'm just wondering what has changed? Like how has the business changed in say, I don't know, the last year? I mean am I over -- am I misremembering that I mean the (inaudible) been good for about a year now.

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

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

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

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

So should we expect that to ultimately pick up at some point? Beyond kind of the rebound in travel and expense, entertainment, but again, on development, marketing, the sorts of things that you'll need to reinvest in or you're thinking you can hold that level?

No. No. Yes, George, we should be able to hold that level. That is more or less embedded. The one that was most logical -- certainly all the R&D, those are all resources that are embedded in our costs. So there'd be no meaningful change there. The marketing effort around cans would be one, but that's already embedded in the current number. We've been doing that. So no meaningful change. Others will go...

Our next question comes from Adam Josephson with KeyBanc.

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

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

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

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

Sure, Adam. I think, obviously, the biggest market that we play in is going to be the North American market. And I think it's steel and tinplate has kind of progressed through the year as we had but they would. So we're kind of seeing a high single-digit kind of reduction versus prior year as part of the annual cost changes. That we've experienced thus far, and expect that to continue to the end of the year.

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

I've got just a couple of follow-ons. One, I'd like to get some thoughts just on margin targets by segment. It seems to me, particularly in plastics, you're doing much better right now than we would have ever expected. And then the second issue is just the potential for some margin recovery in the food can business, if demand remains relatively elevated. I mean, it seems like the industry lost some margin 5 or 6 years ago. And new capacity came into the market. I'm just curious, thoughts about the potential to now recover some of that?

Great, Mark. So I would say margins and what you expect from your -- what I would say is Q2, that at least 1 tier, it had a lot of benefit of liquidating inventory, et cetera. So there's -- without doubt, there is benefits in Q2 that can't be sustained. So if you think about margins across the company, really in each of our business as a rate, you've probably seen the peak for the year would be our guess. You're going to see on a rate basis, it's going to decline sequentially from here which is fine. We're still going to be way above prior years. We're still going to have in the can business, higher volume through. So I don't mean that to be a negative. It's just what's going to happen to it. And that's the way I would think about it.

So you're right, if you want to talk plastics specifically, it was a really a great quarter. A lot of that is operational driven and not around volume or COVID. And so that's the inherent improvement we've seen for Adam, can tell me how many quarters, but years in a row of improvement. We've got a great team doing great things in there, and that's one of the areas where I would tell you that the customers are waking up to the power of what we have to offer them in that market, for one, specifically. So that it's really good. And yes, you're right. It's too good in Q2. And so it will settle back from there. What we had been looking for is something what we have said is sort of a 15% EBITDA margin. I think that is clearly in the bag now. And so I think we're beyond that and starting to push past that a bit. But again, not necessarily as the Q2 levels.

Then your question on food cans, and is there an opportunity given the increase year. What I would say is you know us that we focus a lot on -- we've got long-term customer contracts. We've got long-term relationship with those customers. Our view is Silgan wins by supporting the hell out of our customers and letting them win in the market. And that's where we make our money over time, and we're a consistency to them in terms of pricing, supply, et cetera. So we are not looking for short-term benefits from that in terms of margin recovery and like price but that doesn't mean that over time, as they come around that our position might not be strengthened, that we would expect to get our share of that strengthening position in better returns. But I think in our case, given our model, that's going to be more of a gradual process.

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

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

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