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

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

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

Thanks Tony. And let me start by saying that it has been a privilege to work so closely with Tony and the entire Silgan team for the last 16 years. Under Tony's leadership, Silgan has stayed true to the mission and principles that Phil and Greg founded the company upon as revenues have grown from $2.5 billion in 2005 to over $5 billion in 2020 on a pro forma basis. Our performance-based culture, constancy of purpose and disciplined capital allocation model will continue to be at the core of what we do every day and we are very fortunate to continue to benefit from Tony's leadership and guidance as Executive Chairman. I'm humbled, honored and excited for this next chapter in the Silgan story and believe the future is very bright for our customers, our employees and our shareholders. As we like to say at Silgan, the past is prologue and our entire team remains committed and looking forward to delivering many more Silgan successes in the future. Speaking of Silgan's successes I'll now make a few comments about the performance of the business and then I'll turn it over to Bob to go into further detail regarding our second quarter financials and full year forecast. After that we'll be happy to take any questions. As you saw in this morning's press release, we delivered another strong quarter with record earnings per share of $0.85. Adjusted earnings per share were equal to the record prior year, which benefited from the impact of the early-stage pandemic pantry loading. As expected, each of our businesses continue to perform well in the face of a variety of challenges. Specifically our Dispensing and Specialty Closures segment saw improved performance related to the inclusion of the Albea business and the synergy capture we have achieved…

Thanks, Adam. Good morning, everyone. We're pleased with the overall performance noting each of our businesses faced some unique challenges as we continue to navigate through these phases of the pandemic in some cases leading to cumbersome year-over-year comparisons. These include changes in inventory levels, significant inflation in raw materials, disruption and other inefficiencies in the supply chain for raw materials and challenges related to running our plants full out for 18 months. In the face of these challenges we delivered adjusted earnings per diluted share of $0.85 for the second quarter of 2021 at the high end of our estimates and in line with the record prior year, which benefited significantly from pandemic-related volume surges. On a consolidated basis net sales for the second quarter of 2021 increased $172.2 million or 14.6% versus the prior year to $1.350 billion as each of our segments delivered top-line improvement. These increases were largely the result of the pass-through of higher raw material costs the inclusion of $66 million for the Albea Dispensing acquisition for the non-comparative two months in the quarter favorable foreign currency translation of approximately $27 million and a favorable mix of products sold in the Metal Container and Custom Container segments partially offset by lower volumes in these two segments. We converted these sales to adjusted income before interest and taxes for the quarter of $153.4 million after adjustments of $400,000 for rationalization charges versus $152.8 million after adjustments of $2 million for rationalization charges $16.1 million for costs attributable to announced acquisitions and $3.5 million for the purchase accounting write-up of inventory in the prior year quarter. The improvement was primarily the result of increases in our Dispensing and Specialty Closures and Custom Container segments offset by a decline in the Metal Container business. Highlights of the…

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

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

Thank you Adam. Appreciate that.

Thanks.

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

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

Well, so speaking of these wonderful questions that you've had the pleasure of dealing with. So your -- the full year guidance implies a pretty big fourth quarter relative to the third quarter, relative to previous fourth quarters including last year. So can you just talk about what is leading you to expect such growth year-over-year in the fourth quarter? And why the fourth quarter is much bigger relative to the third quarter than has been the case in years past?

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

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

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

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

Yes. Yes.

So as we think about resin in particular, we'll start there as it affects two of our operating segments. Resin continues to be challenging from an inflation standpoint. As we sat here three months ago on our last quarterly call, the forecasts were pretty clear that resin had peaked in the early part of 2021. And as it turns out the indices now have revised those numbers and are calling for Q3 to be the peak. So what we're continuing to see is inflation and raw materials related to resin-based products. That will continue in Q3. We do anticipate some relief in Q4. And what we typically do is, we hold our current run rate for resin firm through the balance of the year for forecasting purposes. We've actually allowed for a slight recovery in Q4. But we're going to continue to pass through the lagged increases that we've seen in resin in both Custom Containers and Dispensing and Specialty Closures. As far as the raw material and the labor challenges we see -- first of all, the labor challenges aren't unique to Silgan. I think that's a common refrain that you hear with just about anyone in manufacturing or retail these days. For us, we're a little unique only, because we've been running all of our facilities essentially 24/7 for the past 18 months. So, our employees absolutely rose to the occasion and be asked to work the overtime shifts and to make sure that we are providing products out to the marketplace. And as the world and certainly the United States reopened a bit, our employees are looking to participate in that reopening. So, we've had some challenges on labor. It's not just us our customers and our suppliers are dealing with roughly the same challenges. So, that's not something that will be solved immediately. But obviously, we're working to manage through that situation and taking strong actions across each of our businesses. And then on the steel side, unfortunately, the performance from our supply base, on our raw materials related specifically to steel has been a challenge. In the quarter -- in the second quarter, we were dealing with delivery performances between 30% and 50%. So you think about our efficient production model, it does depend to some degree on an efficient supply of products coming in. So we're continuing to work with our suppliers. Obviously, we're entering our peak quarter in Q3. And so, we're not going to simply be able to snap our fingers and correct all the steel supply issues that we've had. But we are working to reward those that have performed well and move volume away from those that happened. That will take us some time. But at this point, we anticipate that we can get all the raw materials required for our customers' forecast and to meet our needs for the remainder of the year.

Terrific. Thanks, Adam.

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

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

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

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

Sure. Well, the business continues to perform really, really well. I think, when you look at our Custom Container segment, a couple of things come to mind. First of all, you have to remember that last year the segment saw a 14% volume growth within the quarter. So, as we cycle over our 11% decline in the second quarter of 2021, we still feel really good about the business because we're sustaining it at a higher level than we had pre pandemic. So, as you listen to our discussions over the last several years on Custom Containers, what we have done is, we've been winning in the marketplace. And what we've said about those new business wins is, the profitability is going to be a kind of our new reset level. So, our favorable mix is really driven in part by growth in core markets and growth in new business wins that are coming in at the profit expectations that we have going forward for the business. So, as far as the earnings growth, again, it's really strong operating performance leveraging that new product mix that we're talking about. And then as I think about the volume decline, I mentioned previously that we're cycling through the summer months of an inventory correction in the marketplace. And that inventory correction really is related to products specific to cleaning and sanitizing. So, if you turn the clock back 12 months and think about what the pandemic panic buys were right at the beginning of pandemic, hand sanitizers, hand soaps were -- essentially people were filling those products in any container they would get -- or they could get excuse me. And we were selling to all sorts of customers a year ago that were making hand sanitizer or they were putting alcohol into containers to meet the needs of the marketplace. So, that's just not occurring again at this point in 2021. It was more about what happened in 2020.

Okay guys. Thank you very much.

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

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

Yes, it is.

Thankfully. I wanted to -- for both of us. I wanted to hit on food first and Metal Containers. And are you seeing any signs that the supply chain issues are actually creating any demand destruction? In other words customers who would have been contemplating using the Metal Container because of all the good things that have arisen about the product reemerge perhaps because of COVID are turned off by the supply chain, the concerns about tin supply out of Asia, et cetera. And related if you're going to penalize the suppliers who have not been as efficient, does that wind up being counterproductive at a time when you need metal to make cans? So, kind of those two questions in one if you will to start.

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

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

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

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

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

Thanks. Good morning everyone. I want to add my congratulations to for both Tony and Adam. And also to say Tony it's very nice to have this happen in a quarter when it looks like container EBITDA margins were above 20% because you did take a lot of heat if we go back several years. I want to -- for my first question I just want to go back a little bit to these cost issues and I'm curious Adam about the impacts of delayed pass-through on resin in both containers and pumps and dispensers. But I also wonder if you could talk a little bit about the labor issues over in Metal Containers, because a quarter ago you were talking about having hired like 100 new employees in the can business.

Good morning, Mark. You're right. We did hire 100 new employees in the first quarter for our Container business to support the increased volume requirements that we saw coming throughout the year in Metal Container. So, to be clear that, the labor element that we're discussing that is throughout our supply chain. So that includes our customers, who are one of the reasons that we mentioned that we could have sold more in the quarter, if we had not had these labor challenges as well. A customer missed a forecast because they couldn't get employees to staff a filling line that they had installed. So, it's throughout the system. We think that we're managing it pretty effectively. It's not easy. And when you think about our Metal Container segment, in particular, we're working through the planned retirements for several -- for a number of employees. And it's just the normal churn that we have in our business. It's just that we've been running for 18 months consecutively as well. And again, those overtime shifts that everyone rose to the occasion last year and took those overtime shifts as things reopen, it becomes a challenging conversation. And then, as we think about the lagged pass-through of resin, I think what we said on the last call was that was going to be a negative impact in the quarter something around $10 million. And as it turned out it was a little bit worse than that. The majority of that we experienced in our Dispensing and Specialty Closures segment. But to be clear, again, we're -- we feel really good about the business models that we employ that we do have the ability contractually to pass those lag, cost increases on to the market and to our customers. So, it's just a matter of time before we actually get those costs fully passed through to the marketplace.

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

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

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

Well, I think it's more about the substrate itself. So, I think we firmly believe at Silgan that there is a place for plastic in the packaging world. I think I would agree with you. I think where it gets a little challenging for folks looking to make an investment, is really where it's around a nonfunctional single-use plastic package. From a sustainability standpoint that gets to be quite a challenge. And I think if people are putting dollars to work that's where the -- maybe the reset on the thought process goes through. Our business really doesn't participate in nonfunctional single-serve plastic packaging. And does it raise opportunities in the marketplace? Maybe. But again, I think we're also focused on the functional element of packaging and finding the right spot for plastic also is a viable and sustainable substrate for the packages we provide.

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

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

Hi, good morning. Tony congrats. Adam congrats.

Thanks, Gabe.

Thanks, Gabe.

I'm trying to think through this lower inventory situation that you mentioned. And I guess since you held EPS kind of guidance and you mentioned that I'm assuming most of these kind of working capital-related. But, I'm assuming most of it is isolated to the Metal Containers business. So, A, can you confirm that? And I think this would be maybe due to material availability and/or the labor-related issues that you called out. And then B -- and this is probably more important for us at least. If you're ending the year from a low starting point would that imply anything in terms of carrying over inventory into 2022 and perhaps require you to produce at a higher level next year? Of course, somewhat demand-related or dependent. But would that be a positive earnings and then negative for working capital when we look out to 2022?

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

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

Sure. Maybe, just starting with the pack. Again, you're right, our customers last year, the pandemic -- the early phase of the pandemic hit at a point where our pack customers couldn't really respond with incremental pack volume to support the needs of the marketplace. So all of our customers on the pack side of the business have been planning since early February for increased contractual acreage and more volume this year. So, you're right, we're expecting a large pack that is a part of our second half guidance. How that relates to 2022? We don't know yet, because we have to see where yields and finishing inventory coming through. But we are expecting a significant increase in the pack in 2021. As we look at pet food, pet food continues to perform well, continues to grow for us. I think at our Analyst Day we've given something like 40% of our unit volume was related to the pet food market. I'd say, that's continued to grow a bit. And we see good growth going forward in pet food. I mentioned some additional capacity that we added in -- for the 2021 year that we'll realize in the fourth quarter. A portion of that is for growth to support the pet food market as well.

All right. Thank you and good luck, guys.

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

Thanks for taking my question. Congrats on the results. I guess, first off, I just wanted to get your thoughts. Have you seen any impacts from competing substrates or any customer switching of preferences in the plastic container business? I guess I'm just curious we've been hearing about some trials on the household product side and personal care market for plastic -- other types of plastic-based pouches. Is that something that you could potentially look at longer term as well?

Thanks, Arun. As far as -- particularly in our Custom Container segment, most of our products are around multi-use packaging. And when you think about our Dispensing and Specialty Closures, then we add a function to that package as well. So, as far as other substrates coming into that space, I've read most of the same articles probably that you have. We haven't really seen it impact our business at all on the Custom Container side. What I would tell you is, on the Dispensing and Specialty Closures side and our Metal Containers business we are seeing opportunities for other products and other substrates coming back to those platforms. And it really is around sustainability. It really is around where there's a nonfunctional product, trying to find a more sustainable answer to provide the same performance. So we view it more as an opportunity than a risk across the platform.

Okay, great. And also, just another question, I guess, another topic. Maybe you could just remind us on the tinplate inflation. Have you seen any -- again not necessarily demand destruction, but steel prices have continued to rise and got at very high levels there. So how do your customers kind of react to that? Has there been any alternatives that they've been pursuing, as far as packaging substrates? Or what's kind of the view that your customers have on metal prices?

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

Okay. I'll turn it over. Thanks.

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

Thanks. Hey guys. Good morning. Adam, picking up on some of your previous comments, it looks like you're embedding expectations for a pretty good harvest just based on your comments in the press release as well. Is there a risk that the labor shortages that you and the supply chain are dealing with that current start to impact the harvesting yields as well? And how are your customers sort of, -- I mean what are they sharing with you as it relates to the labor issue there?

Great question. And I think we spend a lot of time talking to our customers about that very issue. And they have -- they're experiencing labor challenges they're able to get the labor that they need to harvest their crops. So that's a great sign for us, as we enter the pack season here. So we feel that they have confidence that they're going to be able to meet their pack requirements. We'll see how weather and other items impact the pack and the timing of the bat. But we think labor from a customer perspective, is not the biggest challenge that we're going to face in the quarter. So, we think our production profile for the balance of the year is predicated upon the performance that we have today. So we're going to continue to fight through the raw material and labor challenges, and not expect a significant improvement versus where we are today.

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

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

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

Thanks a lot.

Thanks, Ghansham.

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

Hi. Good morning and congratulations to Tony and Adam.

Thanks Anthony.

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

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

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

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

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

Great. And then I think on the -- you ask really good question. I think the -- you're right. I'll try to stay generic on this. But we are at a stage where the equity market and analyst seem to really want sole solution businesses. And so it's just great when it's growing and booming. It's not so good, if you end up with a little bit of growth pullback and overcapacity for an example. So I think what we are giving you and shareholders a little more credit that the idea that you can be two or three things within a packaging area is so closely focused. Everything we do is in -- we are in wildly different things. And so -- but what we have is a great combination of a wonderful sustainable high-cash generative business in our can business that basically turbocharges our capability to grow in other areas that provide their own growth organically as well. And so all I can do is answer for us and say, we think what we've got is a wonderful opportunity here for shareholders to basically have both of these. And I think just look over the last year, two year, decade and look how these businesses have helped each other along the way. And I just don't think we'd be anywhere near as good today, if we didn't have that. So that's what's on our mind is the strategic value of the two. But you're right we do need you and we do need the Street to appreciate that there are different multiples for different kinds of businesses. And I suppose, if that never happens then you'll have to come back and continue to evaluate it. But I just -- we don't give up that quickly that that can't work.

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

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

Great. Thank you. And I'll sort of pass Congrats to you too Tony, and also Adam of course as well. I just wanted to ask -- I think most other questions have been asked already. But just on the share buyback front Bob you guys bought back at least my shares in 2020. I think the most you had in a couple of years prior to that but I haven't bought back any year-to-date or through the end of the first half, what's your thoughts on buybacks particularly now that you are of course raising the free cash flow guidance as to how you think about allocating cash over the rest of the year and into 2022?

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

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

I think it's a great question, Alton. As we were talking a little bit earlier, we have taken a look at consumer data and really try to dive into a couple of markets. One, I think pet ownership increased dramatically during the pandemic. So our pet food business continues to grow. When we look at scanner data, small dog and small cat, particularly in white categories continues to grow at a high single-digit to a low double-digit rate. And so with the consumer engagement and the repeat purchasing patterns are there and we feel really good about that. Our customers do as well. They're investing in capacity. And so are we. You move to some other segments. And I think a really interesting one is the soup segment. Again, go back 12 months ago we were going in -- in the United States, anyway we're going into a lockdown period and people didn't know exactly how long they were going to be at home. So we did have a pretty sizable surge in scanner data for consumption a retail of pet -- I'm sorry, of soup packaging, whether it's condensed or whether it's ready-to-eat product. So as we look at the data, we still see consumer retail activity that's in the high single to low double-digit activity versus pre-pandemic levels. So as we had talked on previous calls about engaging with new consumers and we were seeing repeat buying activity last year, it really has continued. And we and our customer they feel pretty good about the engagement with consumers right now. And we think it's a very good situation as we head into the second half of the year.

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

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

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

Sure. Thanks, Kyle. I think you're seeing the impact of the revenue synergies already flowing through. I think the combination of our business with Albea has been terrific. And we are achieving commercial synergies between the two businesses and have been for now some period of time as we've owned the business. As far as the synergies, what we have said I think it was $20 million run rate at 18 months. So we believe we will be in excess of that by the end of the year. So our synergy capture is a little bit ahead of schedule and we think we're going to overachieve here by the end of this year. And then finally the business itself again it just -- it's performing well. We feel confident that we're getting back to really what the business was before the acquisition, not what we think it can be in the future just for clarity but what it was. And so our team and the Albea team has come together quickly and have come together really well in a wildly challenging integration environment through a global pandemic and just hats off to the entire team and the performance that they've had.

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

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

And just one other point -- sorry. Just let me make one other point in Q2, which is what Adam was give you is sort of the cost impact of the issues we're facing this year. What he didn't mention is that we had an incredibly great year Q2 last year on production. You might recall our customers reduced SKUs dramatically. We had all the -- we had the benefit of selling up inventory. I mean so the gap between Q2 last year and Q2 this year operationally is greater than the $5 million but a bigger chunk of that still is how great Q2 was last year. If you look kind of progressively, it was a major step-up year. So I just want to clarify that one point.

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

It will be a similar amount.

Got it. Thank you. I’ll turn it over.

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

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

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

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

So specific to fragrance and beauty, we're not quite there yet. And what I would remind you is I think as we came into the year, our expectation was something close to a 50% recovery in those markets of the pandemic-related volume decline. We're probably running something close to 70% right now. And again, it's ahead of our expectations just to be clear but we're not all the way back. So there still is room to go -- to get all the way back to pre-pandemic levels.

Okay. Thank you very much.

We can now take the next question from Adam Josephson from KeyBanc.

Thanks for taking my follow-up . I appreciate it. And Adam, just one more on the inventory situation. I think last call you talked about this year being a year in, which you Metal Container customers would be able to replenish their inventories and get them back to normal. Just given that you yourself are going to end the year with lower inventories than you thought three months ago do you -- I know some of this is predicated on the harvest in the US But do you expect your customers to be able to fully replenish their inventories by year-end as you thought perhaps three months ago?

Yes it's a great question. I think our own expectations would say that the retail data probably is a little bit stronger than where we came into the year from a volume perspective. So the repurchase activity for food cans is better than we anticipated. So it's a great question. I think we'll have a much better answer for you as we get through the peak part of our season. But it is something that our customers continue to work on the supply chain all the way through to the retail channels. And we'll -- again we'll take that for the next call and have a better answer for you with more detail.

I appreciate it. In Europe, I think Europe is about 10% of your Metal Containers business and then tomatoes are about 5% of your US business. Can you just provide updates on those two areas and obviously given that the water shortages in California et cetera?

Sure. Maybe starting in California first. Right. The water sources have been a concern for pack related harvest on the West Coast. What I would tell you tomato specifically most of our tomatoes that we supply cans to are irrigated crop. So they've been able to maintain the water supply to those products. And again as we usually talk about with tomatoes as well. They protect the can volume for tomatoes, for canned tomatoes. And usually, there's not a whole lot of surge beyond that. But there's also not a lot of drop below that either because they are definitely protecting the can volume. So we expect a good can pack on the West Coast for tomatoes this year but it's going to be within a band of probably plus or minus in that kind of mid- to upper single-digit kind of range. And then Italy, all reports that we hear Italy is going to have a bumper all-time tomato crop. We don't participate to a large degree in Italy for food cans but we do have ancillary products that utilize tomatoes and we understand that conditions are very good and volume expectations are quite strong for the Italian tomato crop.

Thanks. And just two others. Just back to the high and low end of your full year range can you just talk about what would get you to the high end? What would get you to the low end? One or two most important factors.

Yes. Adam, it's Bob. I guess probably the biggest one or maybe the two biggest ones are going to be on both sides of this what happens with resin as an example, right? So if it stays elevated and -- or continues to elevate then that's obviously going to be a risk to our forecast. If it -- if we see a precipitous drop then that's a benefit for us right? So -- and in some cases, I'll put that in the same one as the next topic as a weather-related -- potentially a weather-related issue. We start seeing a lot of hurricane activity that's going to put pressure on price. Likewise, if you just think about the pack and what we've got forecasted here whether it could be friend or foe here to a little bit. So I think those are the two biggest risks and then the last one is what happens with further lockdowns around the pandemic or not right? So if all of those things break against us we probably don't have it all covered. If it all goes favorably then we could -- that will be more favorably, right? So we think we've got it balanced with what we've pulled together here, but we're in some pretty interesting times right now. So, we'll have to see how it plays out.

Yes. Amen to that Bob. And just one last one for Tony. Tony, I know you've been CEO of the company for quite some time. But can you just talk about why you think now is the right time for you to leave your post?

Sure. Great question. Really it's two things. One we've got such a great team and they're ready. And I just am always been a believer that when people are ready you got to move on that. Two, as you point out 15 years as CEO and we and the Board have talked about this. You start -- every topic comes up you start to think of it the way you thought of it the last 15 times and that's not good. And so, I just -- I'm a believer that the team will be better in the new formation. So, they'll still get a pearl or two of my thinking but you have different people making decisions day in day out. And I just believe it's a better answer for the company.

I appreciate it. All the best to you and to the company. Thanks very much.

Kian, I think we'll take one final question and then we'll wrap it up.

Of course. So we can now take the final question from Salvator Tiano from Seaport Research Partners.

Thanks. Yes. I just want to -- for the last question here. Just want to understand a little bit to add on -- going by Adam's question on food can inventories and a little bit across the channel. Actually, I was under the impression that a lot of the restocking for the supply chain would happen next year because this year demand is still good. So just want to confirm, what you see across the supply channel and food can inventories and whether next year 2022 there will be a benefit from restocking regardless of where demand is?

Right, Sal. Well it's a good question. I think just for clarity when we came into 2021 what we said is we feel really good about food chain volume because it's either going to get consumed or it's going to replenish the supply chain. So that's why we had such confidence that we could sustain the incredible growth that we experienced through the pandemic. So I think what you're hearing us say now is that, demand pull by the consumer has been a little better than we anticipated. So maybe the supply chain is not going to replenish as much as we thought it might have. So again, unfortunately we're halfway through the year. And there's a long way to go to figure out what exactly happens with the full supply chain. But I would just tell you consumer demand and engagement is better than where we came into the year thinking it could be in the mid part of the year.

Great. Thank you very much.

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

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

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