Thank you for joining the Silgan Holdings First Quarter 2021 Earnings Results Conference. Today’s call is being recorded. At this time, I would like to turn the conference call over to Ms. Kim Ulmer, Vice President, Finance and Treasurer. Please go ahead, ma’am.

Thank you. Joining me from the company today, I have Tony Allott, Chairman and CEO; Adam Greenlee, President and COO; and Bob Lewis, EVP and CFO. Before we begin the call today, we would like to make it clear that certain statements made today on this conference call may be forward-looking statements. These forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting the company and, therefore, involve a number of uncertainties and risks, including, but not limited to, those described in the company’s Annual Report on Form 10-K for 2020 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in the forward-looking statements. With that, I’ll turn it over to Tony.

Thank you, Kim. Welcome, everyone, to our first quarter earnings conference call. We trust that you are safe and healthy as we enter the second year of the COVID-19 pandemic. Like many of you, we’re eager for this difficult situation to come to an end, but we’re also committed to remaining diligent until it does so. In light of the significant changes at Silgan over the past several years and culminating with the recent addition of Albea Dispensing. We thought 2021 would be a good time to rename two of our operating segments to better capture the evolving nature of their products and align with our ongoing strategic focus. The closures segment has been renamed to Dispensing and Specialty Closures to better reflect the importance of the wide variety of dispensing technologies offered by this segment in addition to the specially designed performance attributes of our entire closures line. Our Custom Container segment, formerly Plastics has been increasing its focus and investments targeted to customers and containers requiring custom design and elevated customer support. With that said, I’ll make a few comments about the first quarter, our thoughts about the remainder of the year. And then Bob will provide more details, and Bob – will be happy to take any questions that you have. As you’ve seen in this morning’s press release, we reported another strong quarter with adjusted earnings of $0.75 per diluted share, at the high end of our estimates and 32% ahead of the record first quarter 2020 results of $0.57 per diluted share. On an adjusted basis, each of our businesses exceeded a very strong prior year quarter that benefited from the initial pantry stocking in response to the global COVID-19 pandemic. And earnings grew solidly despite significant headwinds from severe winter weather throughout the Southern…

Thank you, Tony. Good morning, everyone. I hope everyone is doing well. As expected, results for the first quarter of 2021 significantly exceeded the prior year and were at the high end of our estimates. We delivered adjusted earnings per diluted share of $0.75, an increase of 32% versus the prior year period as each of the segments delivered favorable results. On a consolidated basis, net sales for the first quarter of 2021 increased $207.7 million or 20.2% versus the prior year to $1.240 billion as each of our businesses delivered top line improvement. These increases were largely the result of higher volumes in the Dispensing and Specialty Closures and Metal Container segments and the inclusion of a full quarter of the Albea Dispensing business, which contributed $91.8 million to the top line. The pass-through of raw – higher raw material costs, favorable foreign currency translation of approximately $18 million and a more favorable mix of products sold in the Dispensing and Specialty Closures and Custom Container segments. We converted these sales to adjusted income before interest and taxes for the quarter of $136.9 million after adjustments of $10.3 million for rationalization charges versus $107.2 million after adjustments of $5.1 million for rationalization charges and costs attributable to announced acquisitions in the prior year quarter. The improvement was primarily a result of increases in each of our segments and lower corporate expenses. The first quarter 2021 incurred incremental costs associated with the Winter Storm Uri, with crippled parts of the Southern U.S., shutting down certain facilities, significantly increasing the cost of power and other facilities, disrupting logistics and transportation and impacting the cost and availability of certain raw materials. Highlights of adjusted segment income for each of our segments is as follows: adjusted segment income in the Dispensing and Specialty…

Sure. [Operator Instructions] Hey so we’ll now take our first question from George Staphos from Bank of America.

Hi, guys, Good morning.

Please go ahead.

A quick question to start. Can you talk to us about the – put some additional numbers around the employment increases you’re seeing in Metal Containers and what that implies in terms of your longer-term outlook for the business? And then a couple of follow-ons.

Good morning, George, it’s Adam. Good question. And when you think about what we did in Metal Containers from the hiring and training of new employees, as you know us very well, George, we’ve spent a lot of time about right – talking about rightsizing our operational footprint and our headcount to the businesses as we see it for the future. So I think investments that we made in the first quarter and in new employees, and we’re talking about something like 100 new employees. And these are not packers. These are full line operating employees for our manufacturing lines in Metal Containers. So those are significant training, timing and expense that we’re investing. So it does take a matter of three or four months for new employees to get trained in that business. And I think again, going back to my first comment, I would say we spent a lot of time making sure we’ve got the right cost structure. And we’ve talked about the expectation for volume growth in 2021 over the record 2020 volume. This is another kind of confirmation that that’s what we’re expecting. And this is our investment into what we believe we need to manufacture for our customers to support their business plans.

And just one further clarification. We’re not talking about incremental ongoing costs. What we have in the quarter, the cost of hiring and training. And really what you’re doing for the future is offsetting what we’ve been making up with overtime since the demand levels came up. So this is really about the ramping up of those people in the first quarter rather than an ongoing conversation.

That makes sense, Tony. But ultimately, it affirms what you’ve been saying, which is, you expect more growth. We get that. I appreciate the clarification. I guess second question I had, I know it’s a little bit challenging to talk about something like this necessarily on a live mic broadcast, but does the recent transaction that occurred in Europe present any operating or commercial opportunities for Silgan, recognizing you’re a smaller company there than you are in North America? And if you could provide some whys or why nots around that, and I had one last question.

Sure. I’m going to ask a favor to have the last question go to the end just because we try to keep everything to two, but we’ll definitely come back now.

Oh two, then I miss that, I’ll go back to queue.

Okay. But we’ll – definitely, we’ll get you back through. So I assume you’re alluding to the sale in Europe of Crown’s metal packaging businesses.

Lucky guess here, Tony, yes.

Yes. Okay, good. Yes. So we – obviously, we are aware of that. It’s looks like we’re not the only ones that think metal packaging is a really good business, and so that makes sense to us. I don’t think – as to the dynamics of our markets, et cetera. I don’t think it will change a lot. I mean it’s not a change in terms of consolidation or deconsolidation in the industry. I assume that anybody paying that kind of price for a business is going to be very concerned about protecting and taking care of that business. So I don’t think it creates a risk to us. On the opportunity side, I think it’s the same opportunity we always had. We think we’ve got a really good business there, much more focused East today and stronger position on the East side. But we’ve seen opportunities from time to time a little more West, and we’ll look at those. But I don’t think it’s a major change to our strategies.

But you don’t think you might be able to pick up a bit of customers who might have been served who might be looking to someone who’s been in the market for a longer period of time relative to the transition that’s occurring at the other company?

There could be some of it on the edge. That’s not – generally, that’s not the way we think. We think long-term customer opportunities and long-term trends. And so I think for us, we would view it as not a meaningful change to the situation.

Thanks, Tony. I’ll go back in queue.

Thank you. So we will now take our next question from Adam Josephson at KeyBanc. Please go ahead.

Thanks. Good morning, everyone. I hope you and your families are well. Tony or Adam, just on volume, it sounds like your volume expectations are comparable to what they were three months ago and that you expect flat to up volumes. Can you just talk about with the reopening, with the well-publicized declines in soup in March, albeit on a tremendously difficult year ago comp, with the pantry stocking, why investors should think that underlying demand is not going to deteriorate anytime soon? I know that you’ve got the inventory rebuilding among your customers for the balance of this year. But perhaps thereafter, can you just address that potential concern that soup is going to go down and the reopening is going to cause food can demand to revert to more normal levels, if not this year, then next year?

Sure, Adam. It’s – maybe just to clarify one thing, we are expecting food can volumes to be up this year in 2021 over the record 2020 volume level. So we were a bit above your flat to slight increase. So I just want to make sure that’s crystal clear. And what gives us a lot of comfort, first of all, we have a 9% growth in the first quarter. So we had a really strong first quarter. I think our trends in our business would tell you that our volumes were consistent through the quarter. And March is typically the end of the soup season. So now soup is moving to kind of their off-season, and we’ll come back and talk a lot more about soup in probably Q3. As we now ramp from now until then, we’ve got really strong markets in pet food that we continue to talk about that we’re seeing very nice growth. I think the single largest component of our confidence is going to relate to what our customers are doing for the pack. And what we know now is there is something close to a double-digit increase in the contracted acreage for our pack and vegetable fruit harvest-type products that will occur throughout the course of 2021. We’re expecting an earlier pack according to our customers. We’re also expecting a later pack, because they say they’re trying to pack everything they possibly can into a metal package for this harvest season. So that feels really good to us. And we’ve spent a lot of time working with them and preparing to support their volume requirements. So that is what gives us a lot of confidence, and it’s more than just soup. Soup was a terrific story last year. I think we can discuss what you want to talk about as far as the reports of how well soup’s doing. I think there are certain reports out there that would say soup is also winning through the pandemic. And with all the new consumers that have tried to, the repurchase rate is exceptionally high, maybe one of the higher repurchase rates of any of the products out there to the pandemic. So a long answer to your question, but we’ve got really good confidence in what we’re looking at in 2021.

That’s great. Thank you, Adam. And Bob, just a two-parter for you. Can you quantify the earnings hit you’re expecting in the second quarter from the lagged pass-through of input cost inflation and when you expect to get that back, whether in three or 4Q? And then just – I just want to confirm that you confirmed your free cash flow guidance of $380 million? Thanks very much.

So Adam, I’m going to jump in with the resin question, and Bob will answer your free cash flow. So as we look at Q2, we’re looking at more than a $10 million negative impact from the contractual lagged pass-through of resin. So we saw the peak in resin in Q1. And just to maybe just talk quickly about some of the materials we’re talking about, we had upwards of anywhere from 40% to 2 times the cost of raw materials. So polypropylene is a great example. In November, polypropylene was roughly $0.60 a pound on the indices. And in February, it peaked out at over $1.26 a pound. So that’s the kind of magnitude of inflation we’re talking about. The good news is, as I said, it did peak in Q1. And we’ve seen kind of the tip, if you will, where we’re going back down on polypropylene prices. And both indices, IHS and CDI, are projecting further decreases. But to be crystal clear, it’s going to be a net negative on the year. And then maybe, Bob is with the free cash flow?

Yes, thank you.

Yes. Adam, we are confirming our free cash flow estimate at $380 million. And that’s essentially in line with exactly what we delivered in the prior year.

Got it. Thanks so much, Bob.

Thank you. So we will now take our next question from Mark Wilde at the Bank of Montreal. Please go ahead.

Thanks. Good morning, Tony, Bob, Adam.

Hey Mark.

Hey Mark.

I wondered, just to start out, Tony, just a little bit of a kind of return to George’s question about the transaction in Europe. I’m just less curious about just that transaction and just interested in your thoughts about the fact that much of the North America and European food can business has moved into private equity hands over the last three years, kind of the same place Silgan started. What impact do you think this will have on the sector over time, if any?

Yes. I think it’s a good question. I don’t think it’s – our view is we want to have big changes to the market. A lot of it’s already happened, of course. As I said in the answer to George, there’s no real change in terms of the scale of the players involved. It’s just a bit about on them, et cetera. I think the – what you had before was corporate entities that did not necessarily view that as their primary or core business. And so it moved from them to smaller interest and sponsors in. But everything we’ve seen so far is that those are all responsible players who are thinking long-term for the market, et cetera. So we really have not traditionally seen much change, and I don’t really think we would expect to from here. Again, I’ll repeat, but I think it is another strong affirmation of the strong cash flow characteristics of these businesses that the interest is there for these kinds of investments.

I guess I’m kind of curious, Tony, whether you think it leads to more consolidation on either side of the Atlantic and also whether it might lead to some capacity rationalization.

Well, it could. I don’t – you know us. We don’t tend to try to overly speculate on the positive aspects until they happen. So sure, I mean there is some logic you see consolidation, and that would certainly be a good thing. Like I said, if you’re making the kind of investments that have been made in that market space, a certain amount of consolidation to be sure that’s not oversupplied is important, and there are some spaces that have been oversupplied in recent years. So I think the – maybe the balance is a little bit favorable on that side but not enough that it’s really made any major changes yet.

Okay, all right. The other question I wanted to ask is just kind of longer-term about Silgan. The company is clearly in transition. You’re growing in new business areas now. And I’m just curious, the company was founded over 35 years ago by a couple of entrepreneurs. They still own about 1/4 of the equity. You worked for them for, I think, much of that time. Can you just give us, as best you can, some perspective on where you think those large shareholders are headed with their equity stake in the company over time? And it’s a large position in the company. I think it’s a fair question for other public shareholders.

Sure. I think – I mean I think we’ve talked about before. Obviously, ultimately, I don’t control it, and I can’t say a lot on it. I think that – I think you’re talking about individuals who have had a long-term interest in this business, who have slowly done, as I understand it, certain transitions in terms of to their foundations of states, et cetera. So I don’t – as far as I can see it, I don’t see any major shifts that I’d expect that haven’t already occurred. A lot of the ownership of that has already moved to next generation, et cetera. So I think that’s part of the answer to your question. I’m not sure if this is where you’re going, but I’m going to go there, which is the second part is sort of, of that 35 years, what’s that mean as you go through that transition. In a lot of ways, we’ve been through it, because as these changes have happened and we have new management in place, et cetera. I think what’s so special about Silgan that’s hard for us to convey in these calls is that we are a culturally driven organization. And those founders embedded in us a culture, and it’s a culture believing in the importance of customer service and customer first all the time. It’s rigor around numbers. And it’s not your title. It’s the value of the ideas you have that wins the day. And so I think what’s really important and what I spend and we all in this room spend a lot of time thinking about is how do we protect that. And that’s the important special sauce of Silgan, and that’s why we hit our numbers so often. That’s why we make, I think, better decisions daily than others, frankly, over a long period of time. And now you come back to your transition point and you say, that’s why we’ve grown. Taking the last decade, our EPS has grown at almost 11%, over 10%, twice the average of our peers over that time. And it’s because of all that. It’s the way we deploy the cash. It’s the way we get growth, both organic and through the investments. And all of that really does flow originally from our funders.

Okay. That’s good answer. Thanks, Tony. Good luck on the rest of the year.

Thanks, Mark.

Thank you. So we’ll now take our next question from Gabe at Wells Fargo. Please go ahead.

Hi, Good moring, Tony, Bob, Adam. I wanted to not to belabor at the point but kind of revisit the hiring discussion really quick. If you brought these folks on, presumably kind of FTEs, if I heard you right, you were kind of replacing some overtime that was kind of being incurred across the business. Is that, I guess, to the tune of $10 million? So that’s question number one. And then I guess, question number two is, again, bringing these folks on kind of full-time commitment, that would suggest, kind of some longer-term visibility into some potential, I don’t know, business that you might be looking at. Is that fair?

Gabe, it’s Adam. Just a couple of things, I guess. The 100 employees that we were talking about earlier, really, that’s about a $2.5 million cost. The balance that Bob was talking about earlier up to the $6 million was really the impact of Winter Storm Uri. So those were the two specific items that impacted our Metal Container segment. So you’re right in that those new employees are replacing overtime costs that we utilized last year. Again, thinking about the global pandemic and the impact on our business, we went literally from a day of normal operations to the very next day making every possible can we could make and squeezing out every ounce of capacity from our system. And we did that for all of last year. As we came into this year, again, as we’ve said, we clearly thought that we’d see some additional volume growth in 2021. We’re seeing that. We have a lot of confidence in it. I think we believe that is for the longer-term. One pack typically does not recover the inventory and supply chain system of the entire retail segment for fruits and vegetables. So we do think there’s runway beyond 2021, but we’re really early to talk about that right now. But this was a longer-term investment for us very clearly.

Hey Gabe, maybe just one cleanup there is that – we should make it clear that, that $2.3 million is incremental onetime costs, right. Because they came in, in the quarter, they’re being trained and retained in the quarter. We have not yet started to see the benefit of offsetting the overtime. That’s the point. That’s why it’s a call out for the quarter. But as we go through the year, we’ll start to see the benefit offsetting the overtime. And it does speak to the confidence in the ongoing volume.

Understood. Thank you, guys. And then one of the things I thought was encouraging that you mentioned in the press release was kind of an early return of some of these more discretionary kind of fragrance/beauty markets. I was hoping if you can build on that a little bit and sort of maybe decompose for us the, I think the organic volumes in the Dispensing and Specialty Closure segment. And then kind of what’s expected maybe going forward or embedded in your guidance?

Sure. So very pleased with the early recovery of fragrance that we saw in the first quarter. And again, when you think about what we talked about last year, we said something like 25% to 30% negative impacts from the pandemic on our beauty and fragrance markets. And our expectation coming into the year is that we would recover roughly half of that. So kind of in that low-double digit kind of year-on-year growth in 2021 is what we were expecting. The impact in Q1 was essentially at that same rate that we were expecting for the full year. And so what’s really interesting is we’re expecting that now to hold. So it will be a little bit more favorable in the beauty and fragrance markets and I think what we came into the year. But it’s still early. What I’d tell you also is lockdowns have gone away. They’re back now in Europe, so some of our core markets still have some uncertainty around them regarding the pandemic. So then as we go out to the balance of the business in our Dispensing and Specialty Closures segment, the organic dispensing products, we had a really good first quarter. We were up 10% in our Dispensing products in the quarter. So I think that’s a really important number to understand. The balance of our business in food and beverage and other products also saw nice growth as well, kind of in the lower single digits. So organically, prior to the acquisition, the segment itself saw something like 2.5% volume growth versus prior year. So a really good start to the year for the segment, and we’re excited about the remainder of the year.

Thank you.

Thank you. We will now take our next question from Salvator at Seaport Global. Please go ahead.

Yes. Hi Tony, Adam and Bob. So my first question is a little bit on Plastic Containers or, I guess, Custom Containers as you call them now. The volumes were flat, but I think for the full year, my understanding is that you still expected to see some additional growth here as well. Correct me if I’m wrong. And I would have thought that Q1 had albeit the easier comps, and also you have the new business wins throughout last year. So I’m a little bit surprised that you didn’t grow more of the volumes in Q1. Was there any specific explanation for that? And does this mean that it’s going to be a little bit harder for the full year volumes to be up this year?

Great question, Sal. But, no, actually, Q1 was a terrific quarter for our Plastics business. And it was a very difficult comp as well. If you think about Q1 of last year, first of all, we literally doubled the segment income in Q1 of 2020. We posted another 11% growth on top of the segment income in Q1 of 2021. So from a bottom line perspective, the business is performing exceptionally well. From a unit volume perspective, the Q1 in 2020 was again a record for the business – or for the operating segment, and we maintained that. And if you think about what we talked about in Custom Containers, we spent several years getting our footprint and our capacity rightsized to the market. We executed that, and we performed very well against that plan. And then we said the next step in the growth profile for Custom Containers is filling those assets in that low-cost footprint. The pandemic presented the opportunity to essentially do that. So we’re filling our low-cost operating footprint. And the final piece of it is we’re winning in the market. And I think Bob is talked about in the last couple of calls, our new business wins in our Custom Container segment are coming in at higher margin rate than business that we’ve transitioned away from. So Custom Containers, again, terrific quarter, has – was our most profitable operating segment in Q1 as well. So we feel really good about it. We’re – as we invest with our customers and add capacity throughout the year on new contractual commitments, we will see growth year-over-year. I’d say it’s probably going to be in the lower single-digit range but the operating segment income is going to be nicely enhanced versus 2020.

Yes. Let me go to a different – just listening to this call, there’s – for all of our businesses, let me tell you what I think the volume – our view of volume story has been all along, which is starting late in Q1 of 2020 and through most of Q2 of 2020, there was a pantry stuff, which we said at the time. We’ve never argued that. And so there’s – that’s what we’re now going to cycle against. You see a little bit of that, Adam just said, in Q1. We’re going to see a lot more of that in Q2. Then we have what we would call sustained higher levels of demand, which we’re seeing across our businesses and we continue to see. We never thought that we were going to cycle easily against the pantry stuffing. What we’ve been talking about is elevated over time. And so that’s why over the course of the year, we believe we’ll be up in volumes across most of our businesses. And that’s why you get some of these confusing questions about, look, I see soup numbers a little weaker. Well, soup definitely has pantry stuff. There’s a settled volume to soup that was unique to those three or four months’ time period. But over the course of – we still think there is a sustained benefit that we are seeing in the soup category, for example, and across other categories as well. That is because people are home more, because new consumers have experienced these products again. And that’s – so I just want to cover that again, that that’s how volume works, and that’s why we might be – the comp is tough in Q2, but that doesn’t mean that the sustained benefit isn’t still there. It’s just against the pantry stuffing period, so…

Perfect. And just my second question, and firstly, it’s great to hear that the new business in the Custom Container is coming at higher margins. I guess the second related to that is that you highlighted the strong operating performance both in Custom Containers and in Dispensing and Closures. Clearly, margins were very strong for both. I think in Custom Containers, EBITDA margins could have been 20% or something like that now. How – what drove the strong operating performance, especially because I would assume there were still some issues from the bad weather for these businesses? And how sustainable is this?

Again, good question, Sal. So I think that, really the driver in the margin performance for the quarter is we’re running all out. So our businesses – our order books are very full. They’re solid. And we’re executing very well. So it’s almost a perfect operational playbook. We’re performing well at the plant level. We are full in our capacity, and we’re getting that absorption across all of our businesses.

Yes. And on the Dispensing and Specialty Closures side, we’re getting better mix as things like fragrances are coming up. And so that’s helping improve margins there. And the expectation, of course, is that that’s going to continue to grow. And that’s sort of the storyline of that element of our business is that it is higher-margin, higher-value added. And there’s more to go in that as it continues to recover on the fragrance side.

Perfect. Thank you very much.

Thank you. So we will now take our next question from Arun at RBC Capital Markets.

Great. Thanks for taking my question. I guess a similar question on the volume front. We’ve noticed some pretty steep declines in the IRI data in the month ending March as well as in April. What do you make of those numbers? I mean is it just up against the pantry stuffing periods of last year? Or maybe on an absolute basis, is there any comment you can give on potentially like velocity or some of your larger categories?

Sure, Arun. And I think Tony just hit on it. If you turn the clock back 12 months ago, March, there was absolutely a pantry stuffing that occurred. And IRI data would have shown that because everybody was at the grocery store buying products to lock down in their homes. So it was a onetime event for certain aspects of our product portfolio. And what’s really important is we’ve then seen for the remainder of the year and through the first quarter of our 2021, a very high level of the ongoing demand. And I would say that’s a broad-based statement across many, many of our markets in our categories and our products. So I’m not troubled by that at all. I think that collectively here in this room, we all see our data as far as what’s being transacted with our customers and what their plans are as far as their systems are concerned and their filling rates. And we feel really good about it. So unfortunately, I think the IRI data is again something that is – it’s a onetime very unique global pandemic event that occurred 12 months ago in the data sets that we’re talking about.

And then also if I could ask a question just on new product development. One of the other trends that we did see is maybe some of the CPG companies favoring their highest-velocity products during the pandemic and maybe delaying some new product development. So have you noticed that some of your customers are actually introducing new products? Is there a pipeline or a backlog of new products that could drive continued growth, maybe a little structural growth for the next little while?

Sure. I think, again, going back to kind of the height of the pandemic in 2020, we definitely saw our customers as well as ourselves trying to maximize their capacity. So they did limit SKUs that they were running through their filling locations, et cetera, trying to maximize the output. I think that has kind of trended back to a more normal SKU proliferation as far as what they’re running in their operating facilities. And then I’m going to shift your question a little bit more to a sustainability question and just say, during that time, a lot of the sustainability projects we were working on with customers from a new product development standpoint did get put on hold. Those are now back, front and center. And so our new product development activities have increased actually, I’d say, significantly over prior year period. And as we sit here today and talked about sustainability and how advantaged metal packaging is, we actually have line trials. I think Tony and I actually in either last call or the call before that said, we usually talk about the results of our businesses, not the things that we’re working on or what may happen in the future. We’re running line trials right now with metal packaging from a sustainability product standpoint – project standpoint with customers that we think, are going to be commercialized within the year. So we think there’s a lot of activity in new product development and a very much a slant on sustainability in metal packaging.

Great. Thanks.

Thank you. So we will now take our next question from Anthony at Citi. Please go ahead.

Hello, good morning. Your CapEx as a percentage of sales, I think, has been 4.5% to 5% in recent years. Given the kind of unprecedented growth that you’ve seen, I think, in all three segments over the last 12 months, do you see incremental opportunities for maybe discretionary CapEx going forward? And I think you reaffirmed your CapEx guidance as part of the free cash flow guidance. Maybe I can confirm that for 2021. But just wondering if you had any kind of broad thoughts on CapEx going forward.

Yes. Anthony, this is Bob. We did reconfirm our free cash flow, which, by definition, implies the CapEx as well. I would point out to you, though, that we are constantly looking for opportunities where we’ve got good returns on capital, and particularly where they’re aligned with customers that are key or core customers for us. So where we find those opportunities, we certainly will not be shy about making those investments. But I think there is something to that, that has – particularly the point that Adam was just making, as some of the sustainability projects come to fruition, we will certainly be happy to make those investments. And that’s the way we’ve operated from day one, quite frankly.

Okay. That’s helpful. And then I’m wondering if you could talk maybe about the M&A environment, and specifically which segments you’re maybe seeing the most opportunities, if there’s anything you could generally say about valuations that you’re seeing in the market, kind of the – or maybe just broadly the attractiveness of inorganic versus organic growth here?

Yes. Look, I think we’re at a point here where we’re in the catbird seat, if you will, where you’ve got both happening, right? We’ve got growth in our business organically. And our leverage is back to a point where we can really take advantage of those opportunities as they come to fruition. We will be selective, of course, and we’ll be disciplined about what we do. But we feel really good about where our balance sheet is right now relative to the opportunities that might come in front of us. Obviously, we’ve had good success around the Dispensing and Specialty Closures side of the business. We’d be happy to continue to build out that segment. We would also look at other portions of the business if the opportunities were right, meaning do they have the right kind of returns and the right kind of customer profile with them. All you have to do is look at the press releases and recognize that valuations are at a high level. For us, that’s not the way we look at it. Obviously, you got to take into account what – not only what price you’re paying but what’s the growth rate, what kind of CapEx goes into it. So it’s really – again, sound like a broken record, but it’s really about the cash-on-cash returns. So we feel good about where we are. And hopefully, we can find opportunities to take advantage of that.

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

Thank you. So we will now take our next question from Ghansham from Baird. Please go ahead.

Yes. Thanks. Good morning, everybody. Just going back to maybe Adam’s question earlier. Obviously, costs are much higher than you probably thought going into the year just based on inflation and the winter storm impact, et cetera. And then you’re sort of reiterating guidance for the full year. I know there’s a range. But what would you point toward as it relates to some of the upside that you’re seeing this early in the year? Is it sort of the mix effect you were talking about specific to Dispensing/Closures? Or anything else that we should think about?

Sure, Ghansham. I think the mix impact of Dispensing/Closures and the volume impact of Dispensing/Closures is a big part of our success thus far in the year and the expectation for 2021. So as markets in beauty and fragrance continue to recover, not only this year and beyond, that will be a favorable mix to the overall segment. I think Custom Containers, what we talked about earlier is that we do have new business wins that we’re commercializing throughout the course of the year. So again, those are our strong profit contributors and volume contributors well. And then in the Metal Container business, as we’ve talked, it’s a very large planned pack with our customers expected to start early, expected to finish late. So as that translates into volumes by quarter, obviously, we always talk about how quarters may shift – or volumes may shift between quarters. Certainly, that’s the case in 2021 as well.

Thanks, Adam. And then in terms of the name change for Plastic Containers to now Custom Containers, how should we interpret this? Could this entail another substrate as part of that segment as well? Are you going to try and target new product categories? And also, are you trialing alternative resins for your customers just given your comments on reprioritization, if you will, sustainability you fall on a brief pause last year?

Yes. So definitely in the last question, we’re looking at all kinds of different resin solutions, post-consumer, biodegradable, everything was on the table in that regard. I think, really the name change is just to say that this is more about the custom nature of the business than it is about the substrate. So does it necessarily mean we would do a different substrate in there? Not necessarily. This kind of custom container is more suited to plastic. Part of the reason that we are in plastics is there are markets that need them. I mean, let’s be honest, we’re not going to go back to glass in our kitchens and our bathrooms. And so you really – there just is a need for plastic. But that isn’t – what we’ve kind of looked and said is that a differentiating element of our business? The answer is no. There are a lot of plastic business out there that are not as customer-focused, that are not as solutions-based focus as our business is becoming. And so really, the name change is more to highlight what we think is unique about the business rather than the substrate.

Okay. Thanks so much.

Thank you. So we’re going to take our next question from Kyle at Deutsche Bank. Please go ahead.

Good morning. Thanks for taking the questions. On the inflation, I know you have the raw material pass-throughs for metal and resin, but are you offsetting other inflation that you’re experiencing such as freight, coatings, labor with your typical contractual arrangements for these and other items within your business?

Kyle, yes, we do, typically on a lagged basis. But yes, we typically have the pass-through provisions for the other costs that you laid out, including freight and logistics and other labor costs, et cetera, with our customers.

So if it’s on a lagged basis, are you incurring any kind of risk if you’re in the near term related to those costs?

No. We don’t believe so. It’s – this is how we’ve always run the business, and the business model is pretty clear. So the pass-through is what the pass-through is, and we don’t think there’s much risk to that.

Got it. And then on Metal Containers, in regards to mix, should we expect the mix to continue to move toward smaller cans even after the pandemic and people return back to restaurants? Or should we see more of these numbers of big tin cans coming back and sway the mix to bigger cans?

Yes. I think it’s a really good question. I think when you think about the growth in Metal Containers and as we’ve been talking about for several years, the pet food containers have continued to grow. The expectation is they will continue to grow in the future. We’re cycling over a year where those large number tin cans were down in volume. So the expectation is there is some recovery to number of tin cans in 2021 and probably back to normal in 2022. So we’ll see how the mix plays out. But I think the expectation that you should have is that we’ll continue to see a transition to smaller cans in the Metal Container segment.

Got it. Thank you.

Thank you. So we will now take our next question from Jeff at JPMorgan.

Thanks very much. In your 10-K, you still had $41 million in charges where you’ve not made the outlays. Will you work that number down? And what do you think it might be at the end.

Yes. So I think a big portion of that is the charge we took for the Central states, which was really just recognizing the ongoing payments as a liability on the balance sheet. So that will sort of a trip over a very lengthy period of time. It’s probably 20 years or so. And that was now roughly $36 million of the total.

Yes. And in terms of your statement about your resin costs, so polypropylene has collapsed, right? And that you talked about going to $1.25, maybe it’s $0.53 a pound now. Like under those circumstances, what happens? Can you get back the extra monies you paid even though the resin has already fallen? And what was the resin penalty in the first quarter?

Jeff, just – maybe just to clarify the polypropylene price point. So again, the peak in February, I’m just looking right now in front of me – yes was $1.26 for CDI. The April price was $1.07. So I wouldn’t say it’s collapsed because it was back in the $0.60 range in Q3-Q4 of 2020. It’s falling. Like I said earlier in the comments, it peaked in February, and we started to see that decline. It’s not projected to get back to those levels of $0.60, if you will, that we experienced in the middle part of last year. The CDI forecast, say, in the mid to upper 90s. So I just wanted to clarify that price point just so we’re talking about the same kind of numbers. And then the contractual pass-throughs, again, it just lagged. And our lags, depending upon the business and the customer arrangement, are between 30. We’ve got some at 60. We’ve got as far as 90 is the outlier for us. And most of the quarterly pass-throughs on 90 days would relate to our Dispensing and Specialty Closures business because that’s our most recent acquisition. We’ve done a really good job across our resin-based businesses, shortening the lag for the pass-through both up and down with our customers. And we’re starting to see that improvement in the dispensing portion of our Dispensing and Specialty Closures segment.

What was the penalty in the first quarter?

So total penalty in the first quarter was something close to $7 million. Again, what I would say is, well, we expected part of that in our guidance because, again, that piece in February, we knew that there was some inflation coming out of. And so yes, I do think for the Q1 inflation, we will recover that in the second half of the year. The question is the pass-through and the timing of what’s happening in Q2 and Q3.

So as a base case, does it all come back this year?

I don’t think it’s all going to come back this year. I think – as I said earlier, I think the net impact of resin is going to be a negative for us across the operating segment. We’re going to largely recover the inflation, the peak that we saw. So we’re not – I don’t believe we’re getting back to the $0.60 that we saw in Q3 of 2020.

Okay. Thank you so much.

Thank you. So we will now take our next question from Daniel from Jefferies. Please go ahead.

Hi, guys. Thanks for taking our questions. Just coming back to what you talked about labor with hiring – with the new hirings. I was just wondering, given the current environment, is finding the suitable labor tougher just with what everything is going on now?

Broadly speaking, absolutely. It’s difficult to find folks that want to come in and work in our operating facilities across the board. The good news for us is that we’ve already hired these 100 employees that we’re talking about. So they are a part of our network, and they are working for us.

So – but there’s not going to be any significant demand for additional hirings besides this original 100? I’m sorry if I missed that.

No. I think you’re right. I think we’re set with that with the incremental add, the onetime add, as Bob had talked about, to our labor force to support our customers’ needs for the rest of the year for Metal Containers.

Okay. Thanks. And then I don’t know if I missed this or not. But – so I think when you first made the Albea acquisition, you said $20 million in synergies within 18 months. Is that still the case? How much has kind of already been realized? What’s left? And then I wonder if any revenue synergies have kind of been identified or if there’s any color around that?

Sure. So synergies, you’re right. It was $20 million in approximately 18 months. I think what we said on our last call is: a, we feel really good about it; b, we’re probably getting there a little bit faster; and we’re going to achieve a little bit more than the $20 million. So we’re inside of 18 months. We’re going to be a little more than $20 million. I think we’re right on track as we sit here now seven months through the acquisition. And Bob, I don’t know if you have anything to add.

No. I think that pretty much nails it down. And that’s very consistent with what we’ve said for the last couple of quarters as we’ve come through it. So no real change to where we are.

Yes. Revenue synergies – hang on. Our revenue synergies, I would say that the – we’ve been very impressed by, kind of, the power of the two businesses together, the ability to kind of communicate our strength to market, et cetera. So there has been some kind of joint product development that’s already occurred. And I think – so know that was really factored into our initial thinking. But I think the answer is yes, that there’s more there than we had originally thought of.

Thank you for the color, guys.

Thank you. So we will now take our next question from George at Bank of America. Please go ahead.

Thanks very much. Thanks for taking the follow-ons. So I wanted to first dig into the innovation, sustainability comments you were making earlier really in relation to the growth outlook, specifically when we’ve tended to see a lot of focus on sustainability for pack types, frequently because of where the products are ultimately disposed, these are packages that are used on the go, beverage, can, a plastic bottle, that sort of thing. Are you seeing any kind of increased interest for using a tinplate can, food can, on more of an on-the-go type of application, some sort of beverage product like a juice or dairy or anything else? And related to the comments you’re making about soup, are you seeing any kind of innovation from your customers that would be focused on convenience, ease of preparation, again, to some degree on-the-go, which in turn, might mean that the growth outlook is actually even improving relative to what we’ve talked about today? So that’s question number one. And then question number two, and I think Mark was kind of hitting on this. As we look at your opportunity set for capital allocation, you always have opportunities in M&A. You have opportunities clearly for organic growth. In aggregate, where would the best capital allocation opportunity occur right now for Silgan to most improve its return on capital given all the things that you’re looking at today, if there’s a weighted average answer? Thanks, guys. And good luck on the quarter.

Thanks, George. That way, we were definitely making you wait.

That’s right. No good deed goes unpunished, Tony.

So I would – first of all, I’d say that their – sustainability, like many, is taken up in a lot of directions, more so that I think we would have – certainly I would have said a year ago, et cetera. So there’s a lot we’re looking at that we never thought we would have before. And so even the word can is confusing at some point, so which is – by the way, it’s metal containers, and it really is it’s more than cans. Today, not so much, but maybe in the future. And so I think the answer is yes, there are – among the things, there are a few more on-the-go possibilities that are happening that we are looking at. But there’s a lot – in the metal world, you’re right that, that is not quite a bit. So I think more of the ongoing solutions are probably going to be in other substrates like plastic, but there are some.

And maybe just to add to that, Tony. I think some of the focus that we’ve certainly seen with our customers is taking a metal package to replace a single-use plastic package. So not necessarily on-the-go but that single-use kind of component of plastic packaging. The other thing I would add is where there’s packaging that doesn’t really add value to the overall package that may be in a non-desirable substrate that we can put a metal component onto an existing package and create the value add for our customers. And it also checks the box for sustainability because it’s a fully recyclable product. So I think that’s more of the focus, George, are those two areas and maybe on-the-go for what we’re looking at specifically right now.

So I think what you heard really is across the board. I definitely agree with Adam. So I think the bigger point then – I mean, I think single-serve is probably a stronger point than on-the-go. And Adam, I think you’ve said that well. But there are a lot of areas. And so I think we are – we’re stretching our mind like everybody else and saying it’s more about metals and work in metals do things that others can’t. And so that’s actually been good for us. I think it’s going to be good for the planet ultimately. So your second one is opportunity for capital. I think – I mean we look all over for best place for capital. I think Bob said exactly right. We look for where is the growth needed, where is the opportunity, what are the returns on it. I think we are skewed a little bit more toward growth than maybe we were at one time on just cash generation, and that’s really because the equity market seems to be sending us a pretty strong signal right now that growth’s important. So that means that probably on balance, Dispensing and Specialty Closures is going to get the earlier nod for things. And there’s plenty of opportunities there. But I wouldn’t go so far to say that Metal Containers came up with a really good – let’s come back to our sustainability answer as an example, that we wouldn’t fund it. We would. So I think, ultimately, back to Bob’s point, which is anything that’s going to get us a strong return. Cash is pretty cheap. And so we’re going to make investments where we need to. But to your very direct question, on balance, if everything else were equal, probably Dispensing and Specialty Closures will get it first just because it’s probably a growthier, long-term answer, and that seems to be more valued today.

And in DSC, is it more organic or M&A in terms of the opportunity set, recognizing there’s no yes or no, black-and-white answer? Thanks again, guys.

No yes or no, black and white. There’s plenty of organic opportunities. First of all, just what I have already said, there’s embedded in what we bought, there’s still opportunity. But there’s also a lot of wet edges to what we do. There’s a lot of direction. I mean there’s a – we’re in healthcare with really good stuff. We’re in all kinds of skin care, which is a booming market in certain parts of the world. So what’s great about the Dispensing and Specialty Closure business uniquely is it touches a lot of really interesting market opportunities. And so there’s plenty of organic but then also if you can do acquisitive with it. And really, one of the strengths that we always talk about in Silgan is you’ve got so much of this cash generation that comes from some of our other businesses that kind of gives us a turbocharger to go after these growth areas when we want to.

Thank you, guys. I really appreciate it.

Thanks, George.

Thank you. So we’ll now take our next question from Adam at KeyBanc. Please go ahead.

Thanks, everyone. I really appreciate it. Tony, just following up on that last question in your response about what the equity markets are rewarding. You had an Analyst Day a couple of years ago, when at – which time you made the case that you thought you were undervalued versus peers. And obviously, since then, we’ve had a pandemic that no one saw coming that’s been quite beneficial for your business for however long it lasts. So one would think that, all else equal, the gap versus peers would have narrowed as a consequence of the pandemic. But I’m guessing you would agree that, that has not been the case. Can you just kind of revisit those sentiments you expressed two years ago? And what, if anything, has changed in your mind since? And do you think the current gap is appropriate or unwarranted for any particular reason?

Sure. I’ll try and get. There’s a lot to it. So first of all, the basic thesis we put out then, which I think is still true as true today, although things have changed a bit. But the point we made is exactly what I just said, which is to look at Silgan, one needs to look at the organic growth and the free cash flow and the deployment of that free cash flow. And if you look at that over time, we have outgrown most. I gave a stat earlier. I’ll give it again, which is we’re 10.7 times EPS growth over the last decade. And there were very few other packaging companies that can say that. And so – and by the way, I’ll deviate for a second on something you said, which is, yes, COVID has had some positives for us. But like everybody else, it has some negatives too. What’s really happening in our numbers to a large degree is we’ve done some really good acquisitions. Dispensing and Specialty Closure business is a great franchise for us now and is generating a lot of opportunity. And again, I’ll highlight, we just went to the high end of the range in the first quarter despite having $6 million of onetime costs and $7 million of resin costs in the quarter. So I mean why do we feel comfortable with the numbers? Just look at the first quarter or the second quarter, what we’re saying, and deal with those adjustments. And you see that the business is just firing on all cylinders right now. And so that’s for that deviation. So that is the theme. The question is the market. And so what we have been doing, of course, over a long period of time but more lately…

I really appreciate that, Tony. And just one last one, Adam or Bob, just to put a fine point on the full year guidance. So would it be fair to assume that resin/raws have been, relative to three months ago, a few cent hit in terms of your full year expectation and then offsetting that has been better Albea results/accretion than what you were thinking? Or am I missing something there?

No. I think that’s probably right. Although I might argue it’s more than a few cents for the full year, right? Because you’ve got – as Adam said earlier, you’ve got another $10 million or so of headwind coming from resin in Q2 that we’re only talking about getting a part of that back. So it’s maybe a little steeper than you were suggesting. But yes, certainly, the performance of the overall businesses, and particularly some of the recovery in fragrance in the Dispensing and Specialty Closures market is helping us kind of offset that headwind. And look, that’s – quite frankly, that’s the Silgan story. That’s how we operate, right? That’s the beauty of having a balanced portfolio across the board. And so your – you can offset some of your children, so to speak.

Got it. Thanks so much, Bob. Best of luck in the quarter.

Thank you. So that is all the questions we have for today. I would now like to turn the conference back over to Tony Allott for any additional or closing remarks.

Great. Thank you, Sean, and thank you, everyone, for your time today. We look forward to talking about our second quarter late in July. Thank you.

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